Louisiana-Pacific Corp (LPX) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Louisiana-Pacific earnings release conference call. At this time, all lines are on a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during this call, please press zero, then star. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, chief financial officer, Mr. Curt Stevens. Please go ahead, sir.

Thank you very much and thank all of you for joining us on the call this morning. With me today are Mark Suwyn, L-P's chairman and CEO and Bill Hebert, our VP of business development and the primary investor relations contact.

As usual, I want to remind all the participants about the forward looking statements language that is included in our earning release. I'm not going to reread this statement but I am going to incorporate the comments into this discussion with this reference. In addition, as we have done for the last several quarters, this earnings call has been opened up to the public and we are also doing a Web cast. This can be accessed through our Web site www.lpcorp.com.

Before we start, I'll review the numbers for the quarter, I'd like to just ask Mark to make a few comments. Mark?

Thanks, . Before we discuss the detail of the second quarter, I just wanted to cover a couple of items.

First, we announced during the quarter a significant shift if the direction of the company. We announced we are selling those businesses where we do not believe we can build a sustainable competitive advantage, and focus our efforts on reducing debt and investing in those businesses where we have or can build such an advantage long term.

will remind you in some detail what we are retaining and what we are divesting. will bring you up to date on the sales process.

I simply want to make two points. Compared to last year, earnings from continuing operations have improved significantly despite a relatively poor commodity pricing environment. Those improvements were driven lower costs in our OSB business to essentially offset much lower prices and strong growth in our composite wood business segment, which involves our sighting and trim businesses.

Second, as a result of tight capital discipline, we reduced our net debt and liabilities by over $150 million during the quarter. Both of these accomplishments are early demonstrations of our ability to deliver on the fundamental strategies that we've outlined.

And finally, I want to comment on the integrity and accuracy of the financial results we are reporting today. Over the past several years we have installed excellent systems and extensively trained our people on their use, such that we have strong confidence in our reported results. We have a very strong independent audit committee, who review the results as well as the processes used to capture them. They have regular reviews with our internal and external auditors to ensure practices and procedures are first rate.

Fortunately, particularly with our new reporting systems - segments, we are an extremely transparent company with very straightforward segments and reporting. Like most other public companies, we are reviewing all of the SEC New York Stock Exchange and Congressional proposals for enhanced reporting in corporate governments. We generally meet most of these recommendations already, and we'll be able to comply with the most stringent guidelines with little chance.

With that, let me turn it back to to go into the details.

Thanks, Mark. As Mark discussed, this has been a very significant restructuring of LP as well as our financial reporting. I'm going to spend just a few minutes providing an overview of the changes to put the financial review in perspective.

I'll review the operating results of the quarter and provide a few comments on the balance sheet. , as Mark mentioned, will provide you an update on the asset sale program, and then we'll conclude with Mark providing a spot on the market outlook and discussing our priorities for the next quarter. And then we will open up the discussion for questions.

On the new segment reporting, our financial statements had been retooled to reflect the new continuing operating segments and discontinued operations treatment, given to the assets that we intend to sell. I'm going to give you some details on the continuing segments.

The first segment is Oriented Strand Board or OSB. This includes our commodity in North America.

The composite wood segment includes our OSB based smart system exterior siding, hardboard siding, interior hardboard products and our specialty mill in Chile.

Plastic building products include vinyl siding, plastic molding, and our composite decking business.

Engineer wood products is our and LVL operation.

The pulp segment, we are winding up the operations with the transfer of the Samoa mill and the curtailment of operations in , and that one will disappear in the near future. The other segment has our miscellaneous operations, but it also does include our timberlands, and the reason it includes the timberlands is that you must identify for discontinued operations a plan to dispose of the assets within 12 months, and we believe that timberlands may take a little longer than that.

LP's business management and our internal reporting has now been realigned with these new segments. In the discontinued operations, I mentioned you must have a plan to sell within 12 months, and otherwise we do not sell within 12 months, you run the risk of restatement. In our discontinued operations, this includes lumber, plywood, our commodity industrial panels, our wholesale operations, and distribution.

As to the accounting treatment, the results are shown as a single number, operating results less tax provision. This means that in the face of the income statement, sales do not show up, but they will be disclosed in the footnotes. One other anomaly is that individual mills that are in discontinued businesses that were closed prior to the announcement, will show up as continuing operations on a historic basis.

Now to the results for the quarter. For the second quarter, we are reporting a net loss of 13.2 million, or 13 cents a share, on sales of 453 million. This compares to a net loss of 9.7 million, or nine cents a share, on comparable sales in the same quarter of last year. For the first six months of 2002, we're reporting a net loss of 22.7 million, or 22 cents a share, on sales of 865 million, compared to a loss of 99 million, or 95 cents a share, on sale of 856 during the first six months of last year.

For continuing operations for the quarter, LP had income of about $8 million, or seven cents a share, compared to a loss of 11 million, or ten cents share during Q2 of 2001. For the first six months, income from continuing operations was eight and a half million, or eight cents a share, compared to a loss of 86 million, or 82 cents a share during the same period last year. This significant turnaround was drive primarily by cost reductions across the system, and improved results in our composite wood and plastic segment, as commodity pricing was relatively constant.

In OSB, sales and profits were down only slightly from the same quarter last year, even though market pricing was off almost 17 percent. We had an improved cost position in our production volumes. In addition our sales price realization compared to random lengths improved over last year, due to a higher mix of value added products, like high-performance top-notch flooring, and tech shield, a radiant barrier panel. Finally, between the 2002 and 2001 quarters, there was a swing of around seven million, related to currency exchange, primarily the Canadian dollar and profit included in in-transit sales.

For the six-month results, sales were about the same, but our improved cost position allowed earnings to increase more than triple, to $49 million. Composite wood had a very good quarter, as sales were higher by 20 percent, and profits up 45 percent, to 19 million. This is due to a combination of a richer product mix, lower costs, and more volume. On the year to date basis, earnings are more than double at 30.8 million. Plastic buildings products segment was profitable in the quarter, and showed a good improvement over the prior year.

Within this segment however, ongoing difficulties in our emerging and deck and product line masked an excellent performance in vinyl siding and moldings, where sales increased by 15 percent. For the six months, we made $2 million in the segment, compared to a $3 million loss during the same period last year. For the quarter, engineered wood products was relatively flat at the sales line, but showed an improvement in operating profits to 2.7 million. Pricing was under pressure but was more than offset by cost reductions in the operation. For the first half of the year EWP earned about $5 million.

The pulp segment had a loss of 2.2, principally related to the ongoing shutdown costs at . The other segment had a slight loss, but showed a significant improvement over the same period last. For the first half, this segment earned 3 million versus a loss of 8 million during the same period last year.

Discontinued operations before taking into account $29 million and other operating charges and credits related to asset impairments and the restructuring charges had a loss of 4.8 million. Our lumber business and the wholesale distribution operations all made money while plywood and commodity industrial panels were in the red due to low commodity pricing.

During the second quarter, LP did complete the implementation of FASB 142 related to the treatment of goodwill. This review resulted in the charge of 6.3 million that was recorded as accumulative effect of change in accounting principle as of January 1st, 2002. This entry also reduced the carrying value of goodwill on the balance sheet.

Selling and administration expenses for the quarter were 38 million compared to 45 million last year, a reduction of 15 percent. Any other operating charges and credits which are detailed in our release -- we had to split these into two segments or two pieces: one, for continuing operations and the second for discontinued operations.

For the continuing operations there was a $6 million gain related to the sale of assets offset by a $1.3 million impairment and a $1.5 million charge for severance related to the restructuring. The net was a pre-tax gain of 3.2 million or 2 million after tax.

Most of the $29 million is largely non-cash taken at discontinued operations during the second quarter or necessitated by the actions related to the pursuit of the assets sale program. We took asset impairments of around $20 million related to our plywood and commodity industrial panels operations.

There was a non-cash pension adjustment of about 6.4 million related plan curtailment as a result of a significant number of the employees plan to be divested. Severance related to discontinued operations was around 4 million. A partial offset -- about a million dollar gain -- was the final payment on an insurance recovery and the mark to market on several energy contracts.

On the balance sheet working capital is around 215 million and book value per share was over $10.00 at $10.14. Our cash balance has increased by 50 million and our debt was reduced by 75 million. In addition, operations other source of cash in Q2 included an inventory reduction of 50 million and an income tax refund of around 40 million.

As part of the reporting for the discontinuing operations it is also necessary to separate the assets directly associated with these mills. In the balance sheet you will see two new line items: current assets of discontinued operations and long-term assets of discontinued operations.

In addition, our contingency reserves were lower by 24 million in the quarter largely due to the beginning -- the implementations of an alternative payment program under the auspices of a national class action settlement. Let me just take a few minutes and talk about that.

Over the last several years we have been discussing the various options opened to LP as we approach the end of the class action. As a reminder, the National Class Action settlement was a seven year program under which L-P agreed to wave all defenses and pay a stipulated amount into a fund that provided for payment directly to homeowners based upon a court supervised protocol. L-P has met or exceeded all funding obligations under the settlement.

Voluntarily, L-P created 125 million or a second fund in 1998 and liquidated on a discounted basis a significant portion of claims that have been submitted, inspected, and accepted. Currently homeowners have until the end of this year to file a claim under the settlement. During the first half of next year there will be a final accounting of the claim and in August of 2003 L-P must decide on the future course of action.

Options at that time include, continuing to pay claims under the settlement, ask claimants to prove that the damage was caused by L-P under an appropriate theory of law, this is a valid option as L-P will have the right to all their defenses, come up with some other option or for litigate individually.

As a part of our planning for the ending of the settlement, L-P class council and the courts agreed to a voluntary, alternative payment program. Under this program, L-P sent checks in mid June for a discounted amount, the same percentage that was actually paid under the second fund, to all approved claimants as of March 15th of 2002. As of last Friday, 46 percent of those 44 million in checks had been cashed. So, therefore, this 22 million liquidated about $56 million in potential claims. We do believe strongly that if homeowners had truly understood the settlement and the options available to L-P, there will be even a higher participation. In the upcoming 10-Q we will be providing updated numbers on this process. At this time, we feel that our remaining reserves are adequate to extinguish the remaining liabilities.

As a heads up, because I know we've made quite a significant number of changes in our financial statements, we are planning, in the next few days, to file an with the that will provide more detail on our historic income statement and segment performance based on the recently adopted new segment reporting. The purpose of this filing is to provide sufficient details to analysts and investors so that they can develop their ongoing models with publicly available information.

With that, let me ask Bill to give you an update on the sales programs.

Thanks Curt. As you might imagine, it's been a very busy time for L-P since the announcement. As I'm sure you'll understand, many of the discussions we're having are at a preliminary stage and are confidential and while I won't be able to provide you details relative to each sale activity, I think I can give you a flavor of where each of the operations stand.

First of all, we've already taken some actions, just to remind you. We did complete the sale of our Ireland facility, our 65 percent interest to our joint venture partner. That was closed last April. We did complete the sale of our particle board plant in , California, to a regional buyer there just this month. We have given notice to employees at two mills that have had a difficult time competing in this economic environment. The , Texas, plywood plant and the , Texas, particle board plant and then over the last month we've wound down our wholesale lumber trading operation here in this office and are releasing working capital from that operation.

Relative to the lumber business, there's been an excellent level of interest in our lumber operations with over 40 interested parties entering into confidentiality agreements and reviewing our information packets. Last week I was on a trip where we started the mill tour process and I was personally very excited to see the pride our employees are taking in showing their operations to potential buyers and it comes through very strong that they've got a lot of personal pride invested in these facilities. It's my expectation that we should have identified final buyers by the end of this quarter.

I made a fair amount of progress in the necessary legal documentation. If so, we should be in a position to sell this business early in the fourth quarter. If there's any delay at all, it's probably going to come from the fact that we do have a lot of buyers to get through the facilities over the next couple of months. Relative to the distribution centers, we've had a number of interested parties touring through our two distribution centers and getting very close to identifying the final bidders and moving forward with that, expect to close this in the next two to three months.

On our plywood business, as you know, we have four plywood plants, two in Texas, two in Louisiana. We're working with several buyers and regulators in both states on these mills. Also, as we work through with the potential buyers of these mills and with those interested in the timber land, we will be talking to them about a log supply agreement on the timber lands. Related to the timber lands, we have two separate transactions underway in Louisiana, totaling just under 150,000 acres, and one in Idaho for around 35,000 acres.

These should close late in the third quarter or early in the fourth quarter. We've also retained an advisor to work with us on the larger block, you know, about three-quarters of a million acres on how and when to best go to the market with that property. On industrial panels, as you'll recall, we have two particle board plants. I talked about . The other one is in , Montana. One MDF plant in Louisiana, and our decorative panels business.

We have parties interested in all of these facilities. We have offering memorandums out and are asking for preliminary indications of interest in the next few weeks. , Curt talked a little bit about it. We're working -- we have been working with a buyer for the past several months on a transaction that, while it doesn't provide a lot in the way of cash does pretty much eliminate any further exposure to LP related to the site.

And then finally, we have -- we continue to work away on other assets. We've sold all but the two planes that we need to continue to service the business. We also continue to chip away at our surplus property. These are primarily old sites and equipment that every company has. And while they don't generate a tremendous amount of cash, each time we sell something, it eliminates another distraction. So far this year, we've generated several million dollars from this activity.

Bottom line, I really don't see any reason why we should achieve our objective of generating $6--700 million in proceeds from these asset sales over the next 12 to 16 months. With that, let me transfer it over to Mark to talk about the outlook.

OK, thank you. As has been the case for the past couple of years, our industry does not have a demand problem, it has a supply problem. There's simply more production than demand despite a relatively robust housing market. As far as demand going forward, the big builder backlog remains very high, and at least to date, orders continue to be taken at a very high, rapid pace. I think a lot depends on how much the current turmoil in the market -- how long it remains, and how it impacts real estate plans.

Unsold new homes remain at low levels, which is a positive sign. Interest rates remain very low, supporting purchase versus rent decisions. There is no question that the strongest parts of the market today are starter homes and kind of the first step up homes versus the more luxury homes. And that probably is having some little impact on take, because those tend to be somewhat smaller homes in terms of total square footage.

At the retail level, traffic remains very good and off take for Home Depot, Loews, and remains very good. Just recently, in fact continuing on today, several have run specials on OSB panels, where they've taken the price at the store to about $4.99, and we've seen a significant up take in terms of the amount of OSB being sold there. I think this simply is just another indication of, as we get to the low OSB prices, we accelerate the rate at which OSB tends to replace plywood.

We are seeing significant good traffic, and most of our products are up more than even the year over year same store sales in the Lowe's, Menard's and Home Depot's. So what does this mean for our products? In OSB we're clearly walking a fine balance between just enough and too much wood on the market. And the buyer's are taking maximum advantage by keeping their inventories very lean, and buying only when they have orders to fill themselves. This is keeping the market on edge.

We took our whole system down for one week in July, and we have our Chambord mill down with a labor dispute. A few other mills have taken some maintenance downtime, but most are still running full. That balance is going to be tightened either through the steady continued replacement of plywood, which is ongoing, or somewhat faster by additional downtime in the industry. It's impossible to predict which of those will occur first.

Today prices are about as low as they tend to go, historically, in this kind of an environment. And as indicated we start to see a significant increase in plywood substitution. In addition, some other overlaying factors that we have seen some wood coming in from Europe, with the weakening of the dollar we expect that that will certainly not accelerate, and perhaps will dry up as the dollar weakens.

Once again, the key issue is going to be that balance of downtime, et cetera. The overall shipment and volume of OSB by the industry is actually quite strong. What we've seen most of this, early part of this year is the ramping up of OSB mills that were built last year, and had some difficulties ramping up, and so that's added a little more OSB to. There aren't, there's no significant new capacity coming on-stream in the next quarter or two, and so we think that this will start to balance out.

In our composite wood and plastic building segments, good housing starts and robust retail sales translate directly into increased sales for our products. We have a good family of products that are generally gaining share of market. They do tend to be somewhat seasonal, with some fall off in the fourth quarter for decking and siding products, particularly when weather turns cold early.

Looking at sales of some of those products in the boxes, our smart system siding products are up 20 percent, and up 30 to 50 percent at some of the big box operations. Our molding is up about 20 percent, and tech shield continues to grow at a 30 to 40 percent per year annualized rate. And so those are seeing very robust sales increases, much more in line with the strength of the housing market.

Overall at this point, we see the third quarter being fairly similar to the second quarter. OSB prices may bump up a little, particularly as we enter the hurricane season, but we're not projecting a major swing at this point. Our composite wood and plastic building products should be seasonally strong, about like the second quarter. Engineering wood products demand is fairly good, but prices are fairly competitive. I think the key is though, if you've seen in all of our commodity products in particular, that we continue to relentlessly drive down costs. And that's allowing us to improve operations despite very competitive pricing.

Near term priorities are that we will continue to focus our efforts on driving costs down even further in our continuing operations. We've been quite successful to date and we're beginning a few modest capital projects to drive them even lower. We have no shortage of high return projects. We'll start them deliberately to ensure that we stay within our targeted capital budget, which we kept a pretty tight rein on during the first half of the year.

We'll continue the assets sales process, which are going well as Bill outlined, with the goal of completing all of them in the original 12 to 18 month time frame. The people running these businesses are doing a fantastic job of both improving operations while at the same time hosting the many interested parties who are touring the facilities. Any facility we cannot sell we'll either close down or squeeze out cash until such time as prudent economic course is to shut down. As the funds come in we'll reduce our debt levels further.

The reporting of disclosure issues at the Congress, the SEC and New York Stock Exchange and many organizations are working on I assume will play out over this next quarter or two and we'll react to them as necessary. As already indicated, we have very good systems, good checks and balances and have been fully disclosing issues in a timely manner. We really don't anticipate these deliberations will require a lot of change on our part.

With that let me turn it over to Curt who will open up for discussions of questions.

All right. Thanks, Mark. Why don't we poll for questions.

Ladies and gentlemen, if you wish to ask a question please press the one on your touch-tone phone. You will hear a tone indicating your line has been placed in queue and you may remove yourself from queue at any time by pressing the pound key.

Once again, if you do wish to ask a question please press one on your touch-tone phone at this time. And our first question comes from the line of from Goldman Sachs. Please go ahead.

Hi, good morning. I was just wondering -- I had two questions. One is I was wondering if you could maybe walk us through the major changes, the major factors that allowed you to reduce your net debt by such a significant amount in the second quarter. I know your cash flow statement -- you provided a six month statement I just wondered if you could just outline the major -- obviously that was very significant even in light of your very, you know, your strong EBITDA for the quarter.

Well, as I mentioned, there were two, I guess one operational and one kind of seasonal. We did receive our tax refund in the second quarter. It was a little over $40 million and we used that to reduce debt immediately. And the other is we did in the second -- in the first quarter we have a seasonally high period for log inventory in our mills and we did bring our logs down by 50 million so we released cash from that.

So with that 90 million then, plus the operating results that you mentioned, . So those are the two kind of other items.

Plus we kept capital ...

And capital spending was below $10 million. That's correct.

Right, OK. And the other thing is I was wondering if you might be able to tell us a little bit more about the cost cutting -- what you've accomplished in the business. Obviously it's having a very positive impact if it's offsetting the deterioration we've seen in pricing. Maybe you could just tell us a little bit more about that and also how much more of that you think there is to do and how much of that can be achieved without significant cap ex versus what you think you can eventually do if you start to spend more heavily on your existing facilities?

Well there -- there are a couple things . One, when you look at Q -- our 2001 verus 2002, there's about $3 of that cost that's related to good will, amortization, that we did not take in 2002. So there's a piece of it that is just coming from the change in the -- in the accounting rules.

I think in terms of the cost reductions. We've been focusing and getting tremendous results from the efforts that , who runs that business, has initiated over the last year and a half and that has been to really put in some significant discipline processes that allow us to understand exactly what's happening in all parts of that mill, every moment and then organize people to go after little things that can reduce cost and that gets everything from better screening, better operations in terms of making the flakes, just a whole host of things to make sure that that mill is running just as smooth as it possibly can and then that result is just a host of little things that are happening at each mill that then continue to give you higher and higher yields, higher productivity, allow you to do more with the -- with the fewer people and those will continue on. They're no where near the end of that -- running that out.

Now what we are beginning to do is, we have also identified a whole host of significant capital investments that we can make. A lot of them relatively modest but mill by mill by mill that we'll do over the next several years to further reduce those costs than from where we were before and those all end up in better utilization of the wood, a higher quality product, and just a tremendous host of little things that move things forward. We will that capital out as we go through and keep our debt going down and see how the businesses operate but we do have a tremendous amount of projects that -- waiting to invest in those existing operations.

So we're on a very strong path right now, somewhat similar in our engineered wood where a lot of effort has been over the last several years to continue to drive those costs down and a lot of it is coming through the same implementation of discipline processes. A lot of them not unlike what some people work on in their type of operations. It's not really what -- the approach we're using but the net results are very similar to those kinds of activities.

Great. Thanks a lot.

Our next question comes from the line of with UBS Warburg. Please go ahead.

Yeah, just a follow-up to Joe's question on the OSB side. Have you ever quantified the unit cost you've been able to take out of the system at this point? You know on a per thousand board ?

Well I . . .

Compared to what I guess is the . . .

Compared to the same quarter last year?

Yes.

The same quarter last year, we took about $6 out and about half of that, as I said, was the amortization.

OK. Second thing is, just on sort of a broader scale here, wonder if you can give us a bit of color or guidance on the discontinued operations. What, maybe, revenue were in those businesses in the second quarter.

The loss, if you take out the other operating charges and credits that were related to the asset write down.

Right.

We lost about 4.8 million in that -- in the quarter. From a sales standpoint, sales for discontinued operations in Q2 of this year were about 195 million and they were about 180 million in Q2 of last year. And we will be detailing that in this -- in the 8-K that we do file.

Right, no, that helps. The next thing was the -- the whole composite wood slash building products business segment obviously showed pretty meaningful improvement in the quarter. And you did mention that there is some seasonalities to it in the fourth quarter. But what kind of visibility do you have on this business.

I mean, does it feel like it's locked into a higher market share component that's sustainable and/or with obviously potential additional growth?

Well it's -- let me just give a quick run down. In the -- in our smart systems siding, which is also siding, trim, , , et cetera. All of the kinds of products you need to kind of put on the -- beautify the outside of the house, that product is growing very well. It's a very attractive product, it's easy to install, which is important, and it has great curb appeal.

And that business is growing and we expect it can continue to grow on an ongoing basis. The hard board siding is pretty much sold out. We have done a little bit of capital expenditures to allow us to make some more, but we're pretty well sold out in that product. As a category, hard board siding is probably flat to down over the next several years, but we are gaining share and maintaining pretty much of a sold out position in the hard board siding with the type of attractive products that we have.

In the plastic building products, we -- we are getting significant growth in our plastic molding area. And a lot of that's coming from some new products that are stimulating additional demand, but also, we're working very closely with the boxes, where this is almost predominately sold to ensure that we've got the right product in the right shelf, it's getting the right exposure. And we are seeing significant pay off for those activities, and that segment is growing -- grew about 20 percent for us so far this year.

The -- vinyl siding is growing well, a lot of it being led by some of our fade-resistant vinyl products that are on the market now, and we expect that that will continue to gain share as well based on some of the products and channels that we're able to get into at this point

And then finally, the decking product. The decking product is still costing us money to expand it. We completely re-did the product line after we had initially introduced it last year, and the revised product line is doing extremely well. Our challenge now has been to grow it and meet the demand that we have out there, and that's costing us some money to scramble to produce more product. And so that product is growing very rapidly, and that's growing, probably, we're growing about as the segment is, because that is taking share from cedar, which is of course extremely high-priced with the tariffs coming out of Canada, and also versus the CAC and the -- what is it -- CQA or whatever the new ...

CCQ.

AQC products -- wood treated products that have a bit of a cloud over them right now, and a lot of people are just opting to go for a maintenance free, worry free deck made out of composite wood. So overall, a pretty robust business that's really hitting its stride this year, and we expect it to continue to grow going forward.

OK, thank you. And then, just the final question. You mentioned earlier, , I guess on the asset sale process that the large tract of timber lands that you're still working on with an adviser -- have you not gone to the market on that and is there a reason you're waiting at this point?

Really we've spent some time kind of looking at the market in terms of, you know, what's already in the market, what's cleared, you know, what's kind of out there. We're pretty confident there's still a lot of money looking for land. So right now we're really just kind of working up the data that we need, you know, to go forward to probably some time late summer, early fall, we'll hit the market with that.

OK. Thanks very much.

Our next question comes from the line of with Salomon Smith Barney. Please go ahead.

Yes, good morning. Question first regarding the asset sale process and classification. I was a little surprised that you, well you mentioned that the timber was not listed as a discontinued operation, and I would think that would be easier to sell. And I guess, if you could clarify, you mentioned you do have two transactions, or I guess three, the two in Louisiana, one in Idaho, that should close soon. Were those operations not classified as discontinued, even though their sales are imminent?

That's true. You've got to look at the whole segment. And, you know, the whole business in timberlands is a, is a business and we've always accounted for it that way, and we've also, you know, our management systems and processes and reports are as that segment. So you basically have to be in a position to dispose of the entire business within 12 months. Sometime in the next two quarters, timberlands is going to end up in discontinued operations, because we will be within that 12 month window.

OK, and then you mentioned that in the discontinued operations that kind of the ongoing component there was a loss of 4.8 million. That was a pre-tax or an after tax number?

That was a pre-tax number.

OK. And ...

Again as I said , you know, lumber was profitable, our distribution wholesale business was profitable, and the biggest problem with that segment was plywood, it was very low commodity price.

OK. And so, and then if you, if you look at the - it says a loss of 4.8 - if you look at the overall number then, a way of looking at it is that you made seven cents from continuing op, from your ongoing businesses, and probably on an after tax basis, if you had not decided to divest everything, you would have still been profitable, because this is about a three cent takeaway I believe?

That's correct. Because the other operating charges and credits related to the asset write-down and the restructuring were about $29 million. Pre-tax.

OK. Now, I noticed that a lot of times when companies classify discontinued operations they make a judgment as to how much debt will be paid down with the proceeds, and they allocate interest to those operations. It appears that you did not do that, is that fair to say? And why didn't you?

We did not allocate any of the liability side.

OK. So in a sense that's gravy, I mean, you know, as a way of looking at it? I mean, in other words, when you sell the assets and get cash and pay down debt, then you will later show, you will have, you effectively will have less interest expense in the future?

That's correct.

That's correct.

OK. Now you mentioned the cap ex was below ten million in the quarter, and I think it's like 15 or 14 for the first half, that's probably unsustainably low. What for the year do you expect to see, and how about next year? And how low, how long can you keep it sort of at those levels?

Well the range we've given out is 40 to 70, and we have been keeping it at the low end of that, just because of market conditions. But that's the range that we've given out for this year. I think from an ongoing standpoint with these, you know, part of the impetus behind the asset sales and divestiture program was simply that we didn't, on a sustainable basis, didn't think we had enough capital to keep all the businesses fully capitalized.

So if you look at the retained businesses, we think we're somewhere in the 40 to 50, from a maintenance standpoint, and growth capital would be on top of that, on an annual basis.

OK, and then looking at the -- speaking of growth -- I guess this year or next year is supposed to be, I guess, the first back-to-back years in history where we don't see any new plants start up.

Correct.

If you could just confirm that. I think the next one's in Canada in '04. And I would imagine, given market conditions and your comments about supply that it's unlikely that you would probably start to build something. I didn't say -- we're not going to hold you to it, but it's unlikely that you would start to build something in the next, I guess, six to 12 months.

I think that's unlikely. You're right. The only mill that we're aware of that's starting any construction is .

Yes.

Which is the one you mentioned. And I think there is a strange set of circumstances there with the natives and the government and all the rest of it that allowed that to go forward.

I think that companies like us are going to very cautious in adding additional capacity until we see what the demand supply situation is.

And when you look at the recent trade association, I guess, tally -- I think it shows about the APA or whatever they call themselves now. But they show a forecast of a mid-90's operating rate in next year. Does that seem reasonable if the economy stays good? Or do you think they're underestimating -- after having overestimated capacity, do you think they've underestimated it?

Well, actually what -- I mean, I saw that report and I also saw the report and their forecast is in the late second quarter, third quarter of next year that the ratio will be over 100 percent. So, it depends on who you read.

From your lips to God's ears.

I'm sure he won't object.

No, but I think the things that's a little hard to predict is when you get to the prices that we've at here the last several months you really do see an acceleration of plywood substitution. And using one set of curves it doesn't turn around again. So, that's really the unknown factor and it doesn't take more than one or two percent substitution and you've consumed all the that's out there.

Yes, OK. OK, thank you.

Our next question comes from the line of with UBS Warburg. Please go ahead.

Just following up on the debt reduction. Do you have a goal this year of reducing debt asset sales? You said you accomplished 150 million in this quarter.

Well, the debt went down like 75, , but we also increased cash balances.

Right.

Then we took contingencies down and that's what the 150 is.

The debt level is going to really depend on how the sales come through and when they come through. And we're going to moderate our capital expenditures based on kind of operations and as we see our ability to spend that and we're going to have to -- we've indicated before -- evaluate how and when we take some of the other debt down as we get more cash to do it at the right time when it's attractive to do so.

What we have out there is at the end of the quarter we've only got 38 million, I think, on the facility none on a bank revolver. You know, we've got the payment coming up. So, in terms of things that are convenient ...

Right, pay the so we can take that out of the 38.

Bill, you had mentioned that the large 750,000 acre track of timberland, you know, that you'd probably have something out late Summer, early Fall. It sounds like, you know, you're making a lot of progress on the other transaction beyond timberland -- everything else that you're trying to sell. Is, you know, if everything seems to be proceeding, you know, at this pace, is the, you know, 16 months out there or 12 to 16 months a fairly conservative estimate?

Yeah, I think it relates probably more to the timberland as to how long of a process we run on that because like we know for a fact that, you know for example, are a tremendous amount of interest in that so it's kind of working through a sale process on that but our goal is still on the operating assets to move fairly quickly on those because, you know, people get focused on such competing rather than running.

We have a couple of things that are going to influence that. One is a decision, do we it at 750,000 as a block or in pieces. If it's a block, then we're probably pretty conservative in terms of the time it's going to take. If we end up selling it in pieces because we can extract a lot higher value out of it, then that's when you start stretching out a little bit because you're doing multiple deals on that property and the other thing that we're deep into now that will influence the timing is, with all that land, you've got to make sure you've got all the titles ready, clean, clear, et cetera, and that's just a lot of property and it's, unfortunately, not one great big title, it's a bunch of smaller pieces. So those are the things that stretch you out a little bit and, you know, we're probably being conservative. On the other hand, we'd like to over deliver.

And it's also, I will remind you, it's title searches in Texas and Louisiana.

Alright. Could you update us on what's going on with Quebec strike. Are you operating at all up there?

Well the one mill is on strike, that's Chambord and the labor dispute is around their desire to have a defined benefit pension plan and our commitment not to have anything other than a defined contribution and we believe that's an important issue to have a dispute about. The mill is not running. We are shipping product out of there that had been produced before but it's not running and have no prediction as to when that will get resolved. Right now I probably don't need that capacity anyway. So we're simply talking to each other once in a while.

, this same union is involved at and they have chosen not to join with their fellow workers. That mill is running.

And could you give us an -- could you give us what happened with OSB prices in the second quarter, like the variance from the first quarter level?

And the -- as the market pricing of OSB year over year was down 16.8 percent and on the quarter it was down about 4 percent. So Q1 to Q2. Our realization was better than that. We were down about 9 percent year to year and better quarter to quarter by about 5 percent.

OK. So, in other words, you were up maybe about $6 or $7 in the quarter sequentially?

Sequentially that's correct, $6.

OK. Great. Thanks a lot.

Our next question come from the line of Matt Berler with Morgan Stanley. Please go ahead.

Thank you. Could you give us an estimate of how much production you might have lost in the downtime that you took earlier this month and what the possible hit will be to the P&L from that downtime.

We figure that a week of down time costs us about $5 million, by not running. And the amount of down -- the amount of production, take $5.6 billion and divide it by 52. Sort of -- about -- what is that, $10 million a week?

Yes, something like that.

So it's about $10 million, .

And do you figure your entire system was down for about a week, is that roughly right?

We had the entire system down the July 4 week, which is actually a pretty good week to go down because people are taking -- you know, the 4th of July vacations, demand isn't very strong. In addition, we also don't running at all, so it isn't running this month at all, we're not anticipating it running until some time in September.

OK, and then coming back to the pricing question that was just asked. Your average price, 2Q over 1Q for OSB was up $6.00 a thousand, did I hear you right? But I think random links was down on a 7/16 basis by $7.00.

About six bucks, yes.

About six bucks. So, does that mean that your pricing just is lagging Random Links.

It did in the first quarter, and then we recovered that in the second quarter.

And a mix.

And then the mix. As I mentioned, you know, a higher percentage of tech shield and high performance flooring raised our price.

So, are there implications here for the third quarter in terms of pricing. In other words, are your prices down -- going to continue Random Links. If we get a little bit of a rally here in the next month or so, will your prices stay lower and lag?

Generally, that's a fair statement, that if prices rally, we lag it. When prices go down, we don't go down as fast. So I think that's generally true. So if we do get a strong rally. It depends on how far out the, you know, the order files, and that's a judgment call that our sales guys make every single day.

I guess we're hearing that prices have firmed just a little bit in the last week or so.

Well, it's gone up 2 bucks since last Friday, so, you know, last Friday's print was 141, it was 143 last night, so ...

Not throwing a party yet.

So, yes, not time to break out the champagne, but ...

Are you surprised that your down time didn't result in a firmer market?

We're surprised that the pricing isn't stronger than it is.

Right.

I think that's a fair statement.

And do you think this is just a reflection of the fact that the industry ...

I think everybody's sitting on their hands ...

... market right now. People just aren't buying.

Traveled last week with some lumber folks, and their sales guy was with us and he was just bemoaning the fact that on the lumber side, there's nothing moving.

People buy a truck at a time instead of rail cars. They're just waiting to see.

Did you think our calculations, when I say our, I mean collectively, everybody's calculations about where cash break even is and where mills will shut need to be updated for the drop in cost that I think most mills have seen in the last 12 months on the fiber side and chemical side. Do you think that's part of the issue?

I don't think so, I don't think it's much different. I think we're -- we seem to come down and bounce around the same place at the bottom. I don't think there's a massive change there.

I think what's going on is that we are absorbing the capacity of the mill coming up and the new mill. Because if you look, Canadian production was up pretty significantly and it was really the impact of those two mills.

OK, thanks very much.

our next question comes from the line of with Goldman Sachs. Please go ahead.

Could you give us a sense as to what the EBITDA contribution from the timberlands was during the quarter? Just as we think forward for when those businesses will be sold?

We're scrambling to look for that number . I don't have it right at my fingertips. It's probably, for the quarter it was probably ten to 12 million.

OK. And if you could quickly run through ...

Let me just clarify that. It's ten to 12 million, but as you know, we've been in a regime of improving our timberland through the clear cutting and replanting of plantations down there, so that's a net EBITDA after those expenses. Which we expense and do not capitalize.

Right. OK.

Our next question comes from the line of with Lehman Brothers. Please go ahead.

Thanks. Good morning. Had a couple questions. Was curious if you could just maybe elaborate a little bit more detail, the pricing spread between OSB and plywood has really opened up, and has been wide for a while now. And then also you commented that plywood was, you know, really underwater. Can you, can you just elaborate on that, does that have to do with, you know, pulp wood versus saw log costs? What do you think of the dynamics on that pricing spread being so wide?

Well I think it's simply a matter of cost. And that is that, let me just give you a couple of illustrations. A typical OSB mill today will make between five and 700 million square feet, and it will have 150 employees. A plywood mill would make maybe 200, 250 million square feet, and have 400 employees. The log costs for the plywood mill, they're competing with, on saw logs, and so they're paying a dramatically higher cost than you are, when you have an OSB mill where you're buying pulp wood.

So the combination of significantly higher number of employees, lower throughput, and much higher log costs, you simply have costs that are something roughly 2X what they are in OSB. And therefore OSB obviously can go down to substantially lower prices, today in some cases almost half, and be able to make a product that's the equivalent to the plywood product. And so wherever there is a place where it's already discretionary decision as to use plywood or OSB, at these prices you go to OSB. And usually you're converting people that haven't used it before, and once they use it they find it's fine, so why go back and pay higher prices even in the future if OSB prices rise somewhat.

The second thing that's going on is that in some of the niches where plywood continues to dominate, new OSB products have been manufactured and are now on the market, and are growing quite well, that are taking those plywood markets as well. Probably the biggest one is the sub floor market, which used to be 85, 90 percent plywood. We and other people have developed OSB flooring products that perform as well or better than plywood, and yet they're substantially lower price. And so that whole erosion is accelerating as well. So it's simply a matter of fundamental costs are about half, and therefore with the right properties, it's possible to go in there and be able to replace the plywood.

OK. That's very helpful. And Mark, do you have any updates on your view of when the S curve really starts to flatten out on OSB taking share from plywood? And how far out that is?

Well, our view has been that it would be -- you're going to go up towards about a 75 or 80 percent penetration rate, and we're in the high 50s today, so it says there is still some to be had. Generally speaking, that'll probably be increasingly determined by the adoption of new OSP products as to simply some big construction in new OSP mill.

Because it's becoming important, like in the flooring case, to modify some of the OSP products to be able to go in there.

OK.

Fortunately, fortunately we have been kind of the leader in that development of other products, but we are getting some other people beginning to follow on and create some similar kind of products as well, which will simply accelerate the rate of substitution.

OK, and I apologize if you commented on this, but can you comment on your own level of inventories, and your view of what pipeline inventories are like out there today.

Well, typically at our mills, we have to hold the product for three days in order to let it cool off before we can ship it, and that's the extent of our inventory. Occasionally, it might rise to four or five, but we soon run out of space. We just don't -- we don't have warehouses to store OSB. We believe the inventory through the channel is extremely lower, that the lumber yards and other places are not stashing it up and holding it, because they don't know where prices are going to go, so there's a -- very little in the pipeline.

And the big boxes, like a Loews, Depot, and , they don't have space to store it, and so they're -- they replenish every couple of days. So there are not, as far as we're aware, major stashes of OSB sitting anywhere.

, I'm just looking at my numbers for the last four months, and it hasn't varied more than about 2 percent.

OK. Two last questions, if I could. Any ability to quantify the impact of the Canadian dollar over the last five, six, seven years, you know, on your business? Any kind of sensitivity you can offer as to what that's done to your cost structure?

Well, it's -- the Canadian mills are cost competitive, but they are not outrageously cost competitive, and the reason is that while you have a $0.65 dollar, which helps, you do tend to have higher social costs. Generally speaking, you're having to haul your wood a lot longer distance to get it to your mills, so that adds cost because you're harvesting areas where the trees grow very slowly, and therefore you end up having to haul a lot longer distances, generally speaking, in order to get it to your mill.

The -- any competitive cost advantages that we have in Canada, quite frankly, come from the facility and how well it's operated far more than the -- any significant currency differences.

OK, so the ...

, in the last five years, the Canadian dollar hasn't moved all that much, it's been in the, you know, 63 to 69 kind of range.

OK, all right. So you wouldn't see a material impact if the Canadian dollar went back to $0.70.

No, but in fact, you know, one of the things that I did comment on in OSB, if you look between Q2 of this year and Q2 of last year, and on the currency revaluation did account for about a $4 million swing ...

OK.

... in reported profits.

Just lastly, if I could, on working capital, given your new configuration, can you give us some kind of sense as to what kind of opportunity you have to squeeze out working capital going forward or what kind of, you know, are you basically there or do you have additional ability to squeeze out working capital?

There's an additional ability to squeeze it out. Obviously when -- if we sell the lumber and the industrial panels and the plywood businesses there's roughly, just looking real quickly here, there's about 40 million in inventories associated with that.

OK.

They have some logs. So you'd probably pull another 60 there and then you pull out some receivables but most of that product is 10 day terms.

OK.

So you're not going to pull that all, you know, a lot on the receivable side.

Great. Thanks very much.

OK.

Our next question comes from the line of Mark Connelley with Credit Suisse First Boston. Please go ahead.

Hi. It's actually . I just had two quick questions. One, what's your cash cost in OSB and also, which assets does the impairment charge reflect.

The -- let me just handle the second one. The impairment charge was the plywood business and industrial panel. The one that Bill mentioned that would give a , about 2 million of that was related to that mill and there's about 20 million related to plywood.

Great.

Cash costs, we don't share that number. It gives our competitors far more information than they deserve.

OK and that's it.

If there's any addition questions at this time, please press the one on your touch-tone phone and we do have a question from the line of from . Please go ahead.

Hi. I may have missed this question but can you just talk a little bit about the availability on your revolving credit line.

facility we had nothing outstanding at the end of June. That's $190 million line. It is reduced by the amount of outstanding which are roughly 40 to 45 million. So that would have been 150 available on that and on our AR Securitization we had about 38 outstanding. The line itself's 125 but it's based on qualified receivables. So there's probably another 50 or so available on that.

Great. OK. Thank you very much.

Oh, I forgot the Canadian. We also have a Canadian line that was -- there was nothing drawn against that.

And how much is that?

It was 25 million Canadian.

Great. Thank you very much.

We have a question from the line of Steve Chercover from D.A. Davidson. Please go ahead.

Morning. A lot of my questions have been answered but can we assume that you've done a pretty extensive review of your good will and now that you've taken this change, what you have left is pretty stable.

You can assume we did a hell of a lot of work on that goodwill with our outside auditors. Yes, we've gone through that very extensively. We looked at all the businesses we had goodwill related to and the only -- the impairment charge that we did take was related to goodwill in the wood products business and we have taken that. The rest of it, we are in very good shape but as required by the rules, we'll continue to look at that ever quarter.

Great and review with our finance and audit committee.

And there are no additional questions at this time. Please continue.

OK. Thank you very much for participating. As usual, Bill and are available. I would ask you to limit it to clarifications and not new information and we will try to get this 8-K filed as quickly as we can with the historic financial performance as well as the segment information and the reason I can't give you an exact time is we do need to go through that with our external auditors and we are putting that data together.

Thank you very much.