Louisiana-Pacific Corp (LPX) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the LP earnings release conference call. At this time, all participants are in 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 the call, please press zero, then star. As a reminder, this conference is being recorded. I will turn it over to your host, Vice President Bill Hebert (ph). Go ahead.

Thanks for joining us on the Louisiana-Pacific conference call to discuss our financial results for the quarter ended December 31, 2002. I'm Bill Hebert (ph) the VP of Business development as well as primary Investor Relations contact for LP.. With me is Curt Stevens (ph), CFO and Mark Suwyn (ph), Chairman and C.E.O. We will start the call this morning with a review for the financial results for the quarter and the full year 2002. A few comments on the balance sheet and update on the asset sales process. Mark will then review the outlook fort next several quarters and talk about the results with some of our recent initiatives within our continuing operations. Finally, we will open the call up to questions. As we have done in the past, this earnings call has been open to the public and we're also doing a webcast. This will be accessed through our website, WWW .LPcorp.com. We have provided a presentation to provide supplemental information along with the call. As we go through the call, we will be referencing certain pages in the presentation. As a caution, this presentation should be reviewed in conjunction with our publicly available earnings release. Before we begin, I want to remind all participants about our forward-looking statements comment that is included in our release and shown on slide two of the presentation. Rather than reread the statement, I will incorporate this by reference. With that, let me turn the call over to Curt Stevens.

Thanks, Bill. I'm referring now to slide three of the presentation for those who have it in front of them. During the quarter, we saw improvements in our core operating earnings excluding other operating charges and credits and gains and losses on sales or impairments of long life assets as compared to the same quarter last year, primarily due to the improvement in USB pricing, monitor of the costs and no curtailments to deal with market situation. We're reporting today a net loss for the quarter of 43 million or 41 cent per share of which continuing operations showed a loss of 46 million or 44 cent per share and discontinued of 3.4 million or three cent a share. The net income on discontinued operation is a result of gains on various asset sales. Net sales were 432 million for the quarter. For the same period last year we reported net loss of 71 million or 68 cent per share of which continuing operation showed a loss of 54 million or 51 cent per share and discontinued operations showed a net loss of 17 million or 17 cent per share. Net sales for the quarter were 400 million in 2001. Included in the fourth quarter 2002 is the year to date tax adjustment on the income tax line and I will talk about that further in a moment. For the full year ended December 31, 2002, a net loss of 62 million or 59 cents per share of which continuing operations accounted for $21.5 million or 21 cent per hair and discontinued operations account for 36 million or 34 cent per share. Net sales were 1.9 billion for the year. For 2001, we reported net loss of 171 million or 1.64 cents per share and discontinued operations accounted for 135 million or $1.30 a share or discontinued for 36.2 million. Net sales for 2001 were 1.8 billion.

To better explain this, referring now to slide four, in all reported periods, we did have a number of items that were generally not attributable to ongoing operations. In 2001, we had an item titled income loss related to assets and liabilities transferred under contractual arrangement. That was related to the transfer of ownership of the SOMOA (ph) California pulp mill. On the income statement you will notice an additional caption this quarter entitled gain or loss on sale of assets including impairments on long life assets. For clarity we have reclassified a portion of our other operating charges and credits net that relates to long life assets. The logic behind this change is to combine all charges with long life assets in one category. This is helpful with the asset sell and debt reduction program. Two significant items in 2004 were close to a wash, non-cash impairment. 22.5 million related to the decorative panels business and an 18 million gain on the sale of certain timber and other assets. All of the details for all of these items are discussed in footnote four of the release. The final category of items is other operating charges and credits net. The most significant of these items was an increase in reserves related to a hard bored siding settlement entered into several years ago. I will be providing additional details in a few minutes. All of these are discussed in details in footnote three of the release E after adjusting for these items on a pre-tax operating basis, we showed a loss of 28.2 million compared to loss same time last year of 51.7 million. For the 12 months on a pre-tax operating basis we showed a loss of 27 million in 2002 compared to a loss of 134 million in 2001. Both of these are very significant improvements. Historic for last quarter and the full year results for the same period in 2001 are, we're continuing to execute our restructuring plan that we announced last May. We're making good progress and transitioning out of other businesses that have incurred losses in the past, plywood, industrial panels and faults and, three, the continuing focus on our core competency (ph) has resulted in significant cost reduction efforts across the company.

The next series of slides provide more detail on the individual business segment. Slide five talks about our OSB business. For the quarter, OSB prices showed some improvement over fourth quarter 2001, up 10%. This is most likely the result of continued market demand, structured panel down time from several market leaders and slightly better weather during the quarter. From a profit perspective we have also shown a significant increase during the prior year. We didn't get all of this increase due to increases in wood, resin and energy which added about $3 and a quarter. Conversion costs another OSB mills decreased 10% over the prior year. Volume was do you know slightly on a comparable basis due to log outages in our Shamborg (ph), Quebec (ph) mill. For the year, the OSB price was flat for 2001. However, operating profits were quite a bit better due to two factors: One the elimination of good will and, two, improved operation. Slide six shows numbers for our composite wood business. As a reminder this includes the smart system OSB products, specialty OSB products, hardwood business and our Chalaen (ph) OSB mill.. Today we show improving operations. For the quarter sales increased 20% of profits up over 50%. The increase in sales was driven by the continued penetration of our smart systems products and hard board siding. The increase in the decorative panel or tile board on the slide was driven by a new program with a major retailer.

As noted in the path, several -- our average sales price for these products do not fluctuate much from a year to year basis. For the full year, it is basically the same story. We continue to be very pleased with the market reception of our siding products, smart system up 17% and hard board up 6% and continued drive to -- the products which is demonstrated by our increased profitability. Slide seven are the numbers related to our plastics business this segment consists of vinyl siding, composite wood decking and our molding business. The molding business continues to do very well on stable pricing. In a somewhat static market we were able to grow volume by 7% through marketing efforts and utilization of our middle berry facility. Final operations continue to show growth, 5% increase in gained market share in this category. Our cost position for these operations continues to improve in the area of manufacturing which is necessary to offset the impact of increased revenue costs. Which partially offset (inaudible) in operating costs and other raw material improvements. Average sales prices were up slightly for both the quarter and year over year as we enhanced our product mix. Our decking business, while operating better is still a drag on earnings in this segment. During the quarter we implemented a price increase consistent with our good, better, best product strategy. In addition, we added third party products to our offering. To date both of these items have helped our operations continue to focus on reducing our cost position. We are encouraged by the early booking levels and the stickiness of the sales price increases. The next slide is our structural framing business, slide eight. This segment includes the remaining lumber Mills as well as laminated veneer and I-joints in the wood business. The lumber operations continue to drive down costs, and we believe we now have some of the top Courtaulds (ph) mills in the U.S. We were able to reduce costs in each mill by $13 per thousand board feet or 4%.

As part of this, log costs have declined and we are hoping they will continue to decline consistent with lumber pricing. We are seeing some pick up in pricing over the last few weeks and we're hopeful that we're coming out of the trough and are headed up to a more normal pricing environment. However, we are concerned until a long-term solution is in place, we will not see long-term recovery in lumber prices. Based on recent activities it looks like there's some hope that the two sides are closer to a longer term agreement. We continued to grow our engineered wood products for the quarter and year to date. We saw significant growth in LBL, up 12% year to year and Ijoist (ph) up 22% as we took new customers, expanded our production and improved our delivery -- on the downside, competition and capacity continues to increase in these products and that reduced in -- resulted in reduced sales prices. We continue and our focus will be on the relentless production and costs, manufacturing and distribution and maintaining customer relations. For both of quarter and the year, we saw almost a 10% in LDL The pulp during the quarter, we have our last mill in chat mill. I'm happy to say that other than our remaining financial interests in -- Pacific, we're out of the pulp business. On the selling administrative side for the quarter, our costs remain relatively constant compared to last year. For the year, costs declined about 9%. During 2002, we focused on the -- and anticipating in 2003 we will continue to right size these costs.

Slide nine of the presentation is a reconciliation of the tax rate. The effect active tax benefit rate used for the full year of 2002 was 26%. The reduction of this rate from the combined federal and state was 39%, and the reduction is a reflection of permanent differences related to foreign exchange gains and losses, revision estimates made in prior years, and the inability to use all of the benefits of net operating loss carrier forwards for state income tax purposes. Using this tax rate, the tax -- the total tax benefit for the year is 21.5 million. On slide 10, in accordance with the accounting rules we are required to calculate the tax provisions on discontinued operations and the cumulative effect of accounting change at the combined federal and state rate of 39%. When this is done, the plug, being the difference between the tax cut and our effective overall tax rate and the allocation to income loss other than continuing operations is allocated to continuing operations. As can be seen by this chart, here, continuing operations had a tax expense of 4.3 million, despite a pre-tax loss. Additionally, as a reminder, accounting rules require that the tax rate that is applied to quarterly earnings or losses is based upon the forecasted results and applicable tax rate for full year operations. Any catch up, benefit or expense must be applied to the current quarter. Prior to Q4, have been recording a tax benefit rate of about 33%. Based upon the final year-end results our tax revision was calculated to the rate. This change resulted in a reduction of our overall tax benefit, about 2 million for the quarter. On slides 11 and 12, we will provide a little more detail on the most significant of our other operating charges and credits in the quarter, which was the addition to our hard board siding (inaudible).

As you know from our public disclosures, we are a party to a class action suit related to the ABT hardwood siding that we acquired in 1999. This goes back to hardwood siding installed from 1995 to early 2000. LP moved into the hard board siding business as part of that acquisition. When we acquired ABTCO we estimated the future liability of the suit based upon the information available at that time and in consultation with council and various economists. Recently, we engaged in independent economist to evaluate the claims data from the first two years of the settlement and provide us with the revised estimate. Based on this review, it appears that we will not see the decline of the rate of new claims as originally estimated due to a number of factors, including the increased visibility from other hard board siding settlements and the cottage industry that has arisen to assist homeowners for a fee and pursuing manufacturers. We have determined the prudent conservative professor is to record an additional reserve, cover both the estimated future claim statements and the related benefits cost. In total this additional reserve is 27 million. 17 million related to claims and 10 million for administrative costs. There are three important observations. Despite this increase, each claim represents less than one half of 1 percent of the hard board siding sold by -- during the 25-year period. This estimate is an undiscounted amount of payments that will stretch over the 25-year period, and, three, the actual claims experience to date is very good, much lower per claim payment and fewer claims.

Another item in the -- other operating charges and credits, as I mentioned during the quarter we completed the sale of the pulp mill which was accounted for as a wholly owned subsidiary. With the sale of this operation, we liquidated the separate corporation accordingly under GAAP, we are required to bring back the income any cumulative translation adjustment is included on the balance sheet. These resulted in the recording of approximately $3 million in income in cash related to the liquidation (inaudible). A follow on question in many of your minds probably relates to the current status of the national class action on inner steel siding. On slide 13 we have a brief summary we are on this. The seven-year period to file claims under the settlement expired on December 31, 2002. Going forward, (inaudible) only recourse now and are in house administered warranty program. In the early part of 2002, we did establish an alternative payment program which has worked very well and allowed us to eliminate over 85 million in claims, $31 million. What is left in the settlement, about 12,000 claims are outstanding with an alternative payment offer with a faith value of about $48 million. We have 4,000 claims under assessment that we're filed in the late -- late in the fourth quarter of last year, and based on an average payout in the past we estimate that to be about 12 million a month at face value. The remaining reserves are approximately 40 million and we're in the process of reviewing our alternative and must make a decision by August 2003. Based on our experience to date and the options payable, we're reasonably confident that we can liquidated the remaining claims in our established reserves. The gain-loss on long life assets, again the details are all in footnote four. On a regular basis, we use a preparing value of all of assets on the books that they meet the fair value test. In the fourth quarter we took a 22.5 million charge related to the write down of our decorative panel system. We were able to increase volumes year over year based on an important contract. Over the last six months we have continued to see the business prices erode, since increased competition (ph) from offshore as well as substantive products. No other charges were taken (inaudible). As mentioned before during of the quarter we announced the sale of another track of our timber lands for approximately 30 million, resulting in a 16 million gain and we had other miscellaneous sales.

We will give you update on the timber land held for sale (inaudible). Slide 14 is a summary of the balance sheet for December 31, 2002. Key statistics include capital at about $218 million, net debt, which excludes notes payable, casual, restricted and unrestricted was $523 million, available liquidity, including both unrestricted and restricted cash stood at $328 million. Capital spent tours for the quarter were approximately 15 million and $44 million for the year. For comparative purposes we spent about $69 million for 2001. Book value for ending share was $9.62. Slide 15, and this is really because this is pension funding and the related expenses have received a lot of attention as companies review their assumptions, the actual experience and retention in the pension plan assets. In Q4 we took a $15 million tax direct charge to shareholders' equity to reflect an increase in our additional minimum pension liability. This change as a result of the difference in the market value and the (inaudible) plan the included benefit obligation in the recorded pension liability. For LP, we anticipate that our cash funding requirements for 2003 will increase from 27 million, experienced in 2002 to about $36 million. On the expense side, we are estimating our expense to be about 15 million, which is comparable to 2002. We have also showed that we did reduce our expected long-term rate of return on pension plan assets for 2002 calculation, from 8.75 to 8.5%. With that let me turn it over to Bill who will discuss the asset sale process.

Thanks, Curt. Let me give you a quick update on the asset sales and how we will move forward to completion. As the press release says, we generated over 150 million in cash from (inaudible) in 2002. There are a couple of comments I want to make that -- this does not reflect the -- first it does not include released working capital and the fact that several transactions were structured in a way to allow LP to transfer certain future costs. If we consider these factors, the number grows to northeasterly 200 million for the year. Second, several of the transactions not generating cash proceedings addressed problem businesses dragging the earnings down in recent years in pulp and the -- we feel good about our progress in a difficult environment in 2002. In terms of the remaining assets to be sold, I will review each of these individually. The MEZULA particle board mill is scheduled to close in late February. Two of the remaining sawmills, Marianna and Wesbase (ph) will follow the same time frame. The combined proceeds should be in the 35 to $40 million range. In terms of timber lands, we have completed our evaluation of selling a portion of our Texas and Louisiana timber lands in a single 705,000 acre big block. The market tells us we can definitely sell the big block but discount to do so was not in the best interest of our shareholders, however I want to be quick to point out, it was believed the value of the timber lands that we committed will be delivered and sent away in the time frame that we automobile (inaudible). We have begun the break up of the (inaudible) of our lands and parcels. This week we signed two letters of intent, one for 55,000 acres, with a price of the $39 million. The second for (inaudible) a price of $35 million. These should close in the first half of 2003. We're also moving forward on the previously announced sales of tracks in Texas, Louisiana, and Idaho. Which should close late first quarter, early second quarter and generate about 40 million in proceeds. Regarding the remaining lands, we're actively talking to buyers and we're confident we will have transactions closed or under contract in our remaining lands by the end of 2003. One key learning from the sale profits is that we know who the buyers are and what the respective appetites are. Bottom line, we complete the asset sale program and generate 600-700 million. With that, let me turn the call over to Mark, who will discuss the 2002 accomplishments, how we're managing our business in these uncertain times and the outlook for the next several quarters. Mark?

Thanks a lot, Bill. Let me kind of summarize -- start by summarizing the key events in 2002 as we look at it. Last year, as you know, we made some pivotal decisions on the future of the company. We decided to sell those assets which we did not believe could complete -- compete globally and reduce our debt to have the financial flexibility to grow those businesses we do believe can compete globally. These decisions result in our announced (inaudible) plan to sell our ply plywood industrial panels and distribution -- as well as our timber lands. Our organization has responded very, very well. To date, I am very happy with the progress and feel very confident that we will be able to complete this process in the original timetable that we laid out. I want to spend just a minute summarizing what happened to our operations in 2002. We made good progress across the board while dealing with significant distractions in a very poor market. We finished the year with the best safety record in the history of LP, over our record-setting 2001, and rite up with the best in the industry. This has been a goal that we have had for several years and we're making great progress. Our environmental record continues to improve rapidly. We are now one of the best companies from an environmental compliance standpoint in the whole industry. On the operations front, we took our average OSB cost excluding the good will elimination down 5 dollars per thousand square feet on a 3/8 inch basis. Our average lumber costs were down $13 per thousand board feet. Our engineered wood group grew their volume 15 to 25% last year, taking considerable market share through aggressive service and we expect they will be able to continue to build on that performance this year.

Our siding business, particularly our smart system, showed increased market penetration, driving sales up almost 15% and we expect that growth pattern to continue into 2003. Products' performance, the look on the house and its easy of insulation is really driving this growth rate. We have reduced SG&A costs on a continuing operations basis by 13 million or 9% year over year. We reduced cash expenditures to manage cash flow in a down year, which we have done in previous years as well. And we did complete our exit of pulp. And there's more to come. Each one of our operations have some very specific product quality and cost reduction programs in place. And are driving to achieve those results. In all markets, our view is that the low-cost provider will win. We plan on being that person. But the real question on our mind, and probably in yours as well is, when is OSB and lumber pricing going turn? And (inaudible) with that, can the housing market continue with its strength? As you know, we spend a lot of time with our customers, our big builders in the industrial operations. We read, monitor, and evaluate economic reports and building activity and customer and competitor financial results and even demographic trends. We even studiously asset weather forecasts across North America as it impacts the demand as well as the supply of logs in terms of the ability to get into the forest. We have talked to bankers and advisers and others in the industry. A few weeks ago, we kind of integrated that together. We're talking to a whole host of builders and suppliers at the international builders show in Vegas. The comments we're getting is that order backlogs remain very strong. If not at record levels for several of the builders. Mortgage rates remain attractive and are encouraging homeownership.

In the long-term demographics related to an aging housing stock remain very strong. On the industry side, we believe that the OSB capacity overhang that we experienced in 2001 and two has been minimized as demand growth has continued. OSB grew about 11 percent last year with minimal increases in capacity. We did announce last October that we've cancelled our plans for the North Shore Quebec (ph) project. Our joint venture with SLOCAN as recently announced the construction on that project will not start for at least another 18 months, which means that wood would not be available for the market until mid 2005, if we continue on that schedule. Additionally, in the lumber side, dialogue has started on the Canadian duty issue, and while no one knows the outcome, the current situation is not palatable for the long-term. Probably some sort of export tax will end up being the solution. There are some wildcards out there. The weakening dollar to the euro. It has been going on. And that's -- that's reducing some of the import of wood into North America and may even help the U.S. and Canada be a little more successful in exporting.

Also, the threat of war. While housing remains at a level, housing could be negatively impacted based on the extent and length of it. As far as how the year has begun, we have seen lumber and OSB prices rise in each of the last three weeks. For OSB as compared to January of 2002, we're up somewhere in the order of 20 to $30 versus last year. Currently, we're selling 7/16's in the 195 to 200-dollar range. Three weeks does not make a quarter but we're pleased to see the level of the take aways and the increased price, which does imply that we are much closer to being in balance as we have anticipated based on our calculations. With the recent price increases can be sustained, then there's no doubt that operating results in Q1 will be better than last quarter. However, we're not counting on it yet. Our short-term priorities for our team are very clear. An unwavering focus on reducing costs, limiting capital spent tours to come (inaudible) and need to operate projects, and a few selected OSB cost reduction projects. Continuing to monitor the demand and pricing situation, and in looking at curtailments, closures et cetera, if necessary, to help the balance of supply and demand. Continuing to gain good market Sharon key products by increasing the effort and contact with our key customers and taking business away because we simply serve that customer better rather than based on pricing. And then completing the remaining pieces of our (inaudible) plan that bill outlined. As we complete our asset sales and debt reduction plan, we're first going to look to reinvest in our businesses to continue to drive down those costs and we have a long list of very high return projects and a whole new technology we're putting across our OSB business that we will put in place as the cash is generated.

Secondly, we will probably look seriously at reinstating the dividend at some reasonable level, and then looking for future growth in internal and external. But that is down the road a ways. First and foremost we will focus on the short-term, completing the divestiture, getting the debt down and continuing to drive costs down in the commodity operations. We have also made a couple of changes here, one here last quarter and then we're announcing today that we have added a couple of directors to our board. Dusty McCoy (ph) joined us in our November board meeting, and he is with the Brunswick Corporation, a strong legal background as well as operations, and we're announcing today that Dan Fryerson (ph), the C.E.O. and Chairman of the Dixie Group (ph) is also joining our board effective in February. We're every adding some directors to the board, because we do have a mandatory 70-year-old retirement age and we have a few directors that are approaching that and we will have a little bit of overlap as they move to retirement. So we're very pleased to have those two gentlemen join our board. We have a very strong board, a very engaged board, and they're going to add considerable strength to it as well. With that, let me turn it back to Curt and let's open it up for questions.

Roseanne, we're ready for questions when you are.

Certainly. Ladies and gentlemen, if you wish to ask a question, please press 1 on your touch-tone phone. If you press 1 prior to this announcement, please do so again at this time. You may move yourself from cue at any time using the pound key. Please pick up your hand set if you're on a speaker phone. The first question comes from the line of Steve Chercover (ph) from DA Davidson (ph). Please go ahead.

A quick question on the OSB facility that you acquired in Maine from the GPS (ph) at Schwabb (ph) what is your time frame for bringing that back online and do you need the additional volume?

Steve, what we have done there, that was a unionized facility, and there was a contract there, and we have successfully negotiated a contract with that union. We are beginning the hiring process for the support people for that mill. And our current anticipation, if pricing continues to hold firm would be to add that mill online in the late June, early July time frame.

Thanks.

Next question comes from the line of Allen Forner (ph) from Penn and Capital Management (ph). Go ahead.

Good morning. I was curious as to a couple of examples of your long list of high-return projects, what kind of projects are you referring to, and what is the magnitude of the return, and how -- let me stop there and let you go ahead.

Let me just take that. We have gone through our whole OSB system. We have over the last three our four or five years developed technology that is aimed at significantly reducing the cost of making OSB, while making a product that performs even better than it has in the past. And that is so that we have a product that can continue to take plywood share, but also one where we're able to take our whole system cost. And we have identified about a $250 million capital project, series of projects over the next four to five years that we have lined up that will take our mill cost down considerably. Now what we're going to do is monitor -- is feed those into the systems as we generate cash. It's pretty much a pay as you go basis. Of the kinds of things that are involved are usually anywhere from, say, four or $500,000 for a project up to, maybe, five or six million dollars, where we might be putting in new low-cost high efficiency dryers (ph) and burners. So there's a -- there are hundreds of projects that all are detailed facility by facility. And we have prioritized those and we will be feeding those into the system as we generate the cash to do so.

What is the order or magnitude of the reduction of mill cost?

It will be on the order of 10%.

And how do you do the math to compare that to other uses of capital?

Well, these projects are in the order of 20, 25% IRR, so they are very good return projects. And obviously each one has it's own return. But when the whole process so done, that's the kind of IRR we would expect out of the capital.

And how do you think about share repurchase as an IRR project versus this kind of a return?

Well, we will be looking at that, along with the restoration of the dividend. We expect over the next several years, the -- if the various pundits views of OSB prices are correct and our specialty and our products continue to grow we should be able to do all of the capital projects and have considerable excess cash flow to give us the ability to look at both the dividend as well as possible share repurchase

But share prepurchase sounds like it's a distant number three?

It depends a little obviously on what the Congress does with the dividend taxation. Obviously that becomes somewhat more attractive for a lot of our investors, restoring a dividend if in fact there's no tax on it.

I don't mean to beat a dead horse but let me just see if I understand this. These projects are, quote, unquote, pay as you go, yet the company, once the asset assess are complete, would be virtually debt free.

That's correct.

So why not, given that you're trading below book value and two times what you consider normal EBITDA, why wouldn't you initiate a considerable share repurchase as well?

That is something that we will be wrestling with and looking at. It's an alternative we will be discussing. What we have tried to do true this process so not let the cart get before the horse. That is, let's get the asset sales done and get the remaining return -- this is what we've retained here, up and running extraordinarily well before we make any major decisions in that line. That's why I don't anticipate we Mr. Look seriously at that until sometime towards the second half of the year.

But it is on the table?

Mark Suwyn Absolutely.

Thank you very much. You guys are doing a great job.

Mark, if I could make an additional clarification. Under our current credit agreements we are precluded from doing any share repurchase so clearly we're in the process of working with our banks and renegotiating those agreements. But that is --.

That's right ...

On both the dividend and the share repurchase until we get that financial house straightened up.

Thank you.

Next question comes from the line of Joe Sillaletti (ph) from Goldman Sachs. Please go ahead.

Hi, I was wondering, could you -- what is your CapEx budget then for this year?

We're looking at increasing that to about $70 million, Joe, but as Mark said, we will start off pretty slow in the first couple of quarters to make sure that we have some sustained momentum and commodity pricing.

And what was your -- the availability on your bank facility at the end of the year?.

On the revolver, we didn't have any borrowing and we had, like, 50 some million.

We had no borrowings outstanding on that and had about $80 million of LC commitment against it so that would be 110m on the revolving credit agreement and on the AR facility, there was roughly, because receivables were down at the end of the year it was roughly 60 million available on that and we have 30m outstanding.

Total liquidity is 300 million or 328.

And I was just wondering if you could talk about -- I mean, what is your take on why the OSB prices have been so strong here in January? I mean, do you -- do I think it's has a lot to do with the down time that some of the companies have taken in the panel business recently or are you -- I just wanted to get your impression there and trying to look at, you know, what we can think about looking ahead?

Well, there's several things. First of all, as has been the case the last several years, there's no inventory in this system. We have none, and our distributors and our customers have none. And so what has surprised us a little bit is that the demand here in the first few weeks here, the first month, has been quite strong, despite the fact that there's been -- it's been cold and snowy in the most part in the upper midwest and on into the northeast. And so I think that -- tends for this rally to sustain itself very fair -- fairly well. But the instantaneous need for wood, at the end of the year when everybody empties their inventories, ex-seeds the supply. We still have our Shamborg mill down. When we took over the Woodland mill from GP, we shut it down so it's not running. We shut down the Montrose, Colorado mill and haven't started it back up and probably won't. So on an instantaneous basis, there's a fair amount of capacity that is not available. And you add that to a -- to a continued, strong housing build, you saw the numbers in the fourth quarter, and that -- that is what leads to the over demand at this point. The key issue is going to be how does this settle out in the April, May time period. If you do the math and look at the capacity that has incremental capacity that has eased up, it would suggest that we're going to be in much better, closer supply balance, in the April, May, June time period when things tend to even out and some of the inventories have been restored. And if that's the case, then we should be able to sustain this for a much better period of time than we were able to last year.

Joe, just a couple before about what mark is saying. I talked to our guy that runs our OSB sales this morning. He looks at who is buying. It turns out a lot of the demand is coming from the buying group. So these are the folks that supply the true value hardware store, the mom and pop, which just supports -- there's no inventory at all in the system for these guys. The other thing that he said is a lot of our competitors are sold out for the month of February. They have no wood available for this month, which, again, is a sign that they're replenishing inventory and getting it out in the field.

How far out are you roughly?

We're probably out two and a half weeks.

Okay. Thanks a lot.

Next question comes from the line of Rich Schneider (ph) from UBS Warburg. Please go ahead.

Yeah, I was wondering, after you -- Bill, after you have gotten through the first half sales of timber land, what is the amount of timber land in terms of acres that is -- that you're anticipating, you know, in the second half to be sold?

What we know about today is we have, of the 705, the big block, we have a little over a hundred thousand acres under contract. We will probably get a similar amount here in the next several months. So we will -- we will probably look at a half million acres in the second half.

Okay. And that is primarily Texas acres?

Yes. East Texas, right.

Okay.

And just a clarification, you know, there's been jockeying back and forth with, you know, originally trying to sell the stud mills and then your deciding not to because of, you know, the value not being pay corded in the marketplace. Could you give us an idea now of what your lumber capacity is, assuming that you -- the sawmill sales? Where are we going to be left with lumber capacity after all of this?

About 1.1 billion board feet, which will be made up of the 8 remaining Mills. And we've done a very good job of ex-computing our cost strategy there on an operating-cost basis. We're down $13 a thousand year over year. We're also seeing the ability to push log costs down in a significant way. Those have to kind of roll through our average pricing model, but we will see the benefit of log prices in 2003.

And did those look like they will be keepers now?

Each of those mills are running at high levels in terms of their metrics and through puts so our plan right now is those will be keepers.

Let me just add a little color to that. In the discontinued operations we have the Marianna and west pace mill that we heap to close this quarter and the Saratoga process mill that we're in the process of taking down on a permanent basis. The remaining Mills, we showed on the sides, those are up in volume 25% over 2001. So if you just look at the improved productivity coming out of the Mills, we think -- we think we are certainly keepers.

Just another question: Where do you stand now with the Shamborg mill? What is the status of it?

The Shamborg mill is still on strike. There's a disagreement on what kind of pension plan should be put in place. It's not the dollars associated with it, but just the tenor of it.

So there's been no change?

There's been no change.

No change. And as we have indicated before, right now, we're you know, which is probably one of the reasons OSB prices are up as much as they are so it's not all bad.

Just a couple of things, on the siding on the issues, as you mentioned, there were 4,000 claims filed in fourth quarter --.

What happens to these siding claims, you to determine if it's our product. So you have correspondence going back and forth on that. Then secondly you have to decide -- you have to clean up some problems with the claim itself. So some of those could be earlier filings than that. But basically the latter half of last year.

Okay. So the deadline was the end of this year for claims on the class action settlement; is that correct?

That's correct. That would be post -- by December 31.

Now the decision will be around August, if you pay off the remaining claims under the formula that is established, which could contribute another $50 million or so to the claim plan, is that sort of the progress here?

No, if you looked at it, we're estimating that 4,000 claims could turn into 12 million claims. So that is a total of 60. That is the universe.

Okay.

And we have 40 million in reserves. So if you had to pay a hundred % of it, it would be a 20 million additional charge -- he do nothing that is probable. I gave you statistics from and it was kind of interesting, we had liquidated almost 20,000 claims for the alternate payment program. 62% of the people accepted 36 cent on the dollar. And the other thing that was -- is, of those who rejected 36 cent on the dollar in 2000, 50% of it took it this last time. So we are looking at strategies to clearly continue the alternate payment program to continue to the extent we can and then perhaps some additional strategies would help us liquidate it at much less than the face value.

So in other words we're pretty close to the end of the class action settlement and then anybody else that is following -- that is filing would come under the warranty situation.

That's correct.

That's correct.

The other thing, Rick, is remember, if we decided in August to pay -- let's say don't do anything between now and August and we pay the 60 million, the way the settlement works is we pay the greater of one half or$50m one year from then association that would be the summer of 2004, and then the remainder in the summer of 2005.

Okay.

So the cash -- if we stayed with settlement, wouldn't go out until, you know, a year and a half from now.

But you're looking a at alternatives to that?

We're leaking at alternatives to -- much less than we could earn on the cash.

Okay, thanks a lot.

Next question comes from the line of Peter Ruschmeier (ph) from Lehman Brothers. Go ahead.

Thanks, and good morning. Hi a couple of questions of clarification just to start. I want to make sure that if I looked at your -- excluding all gains and charges on a pre-tax basis, you mentioned there's the 28.2 million negative numb were for the quarter, on an after-tax basis I believe it's 26.6, which would be a 25 cent loss. But thin there's about a nine cent unusual tax situation so that would get you closer to a 16 cent number. Is that accurate?

That's the way we look at it, yes.

And, also Bill, you mentioned this I believe but you were breaking up a little bit, on the six to 700 million in proceeds from asset sales how much of that is counting what you have already done versus what you have left to do?

Well, we did 200 in 2002. If you Look at the first quarter on the operating side, we will have, you know, ability 40 million from the two operating businesses. We will probably have --.

Is that after tax?

No. Those are pre-tax. And then on the two timber transactions that we know we're going to have under contracts, those are a -- over, say, 75. Then on the flee other tracks, let's see, that would be the Texas and Idaho figure, 40 millionish. So those are all first draft transactions.

Okay. Any rough guidance on what the after tax proceeds might look like.

Well there is a couple of things here. One, we are planning on using a deferral tragedy on the timber land sales, which is where the bulk of the gain is. From a cash standpoint, that will be pretty close to the cash numbers. We have built in to the Texas Timler land somewhere in the 175 to 200 million gain.

Okay.

So you would defer the tax on that.

Okay. That's helpful. I guess -- let me see, just moving down the list. On OSB production, I believe that over the last two years, your production has been reasonably flat. The industry numbers have been up a bit. Could you just elaborate on that? I think perhaps it might have to do with integrating some of the that OSB capacity into the siding bills but why is your production business flattish with the industry up about 10 percent in the last two years?

There's a couple of things. If you look ate, you're exactly right. Between 2001 and 2002, we're down actually a little bit. We're down for a couple of reasons. One, Shamborg has not produced any products say since May of 2002, so with the Shamborg mill being out and we had a work stoppage at our creek mill for about three months earlier this year and that reduced the value. Then when we went in the third and the fourth quarter, we took a week of down time across the system, the Fourth of July, we also took curtailments that averaged about six days per mill in the fourth quarter. So it's spending to the market.

In the close of 2001.

Okay. And just another question on the discounted -- you did not discount the hard board siding liability. I wonder why you didn't do that? That would be a more conservative number.

The reason we didn't do that, under the accounting release, you to have -- they're pretty strict rules on having a prescribed series of payments. And because this is an estimate, and I will be honest with you, it's a wide range estimate because we only have two years of data on which to project a 25 years settlement, we took the middle road of those estimates and then, because of the fact that it is so unsure, you're not allowed to discount that future stream, but you're exactly right. If you look at the settlement or the projections or the estimates right now, the estimated payments for the first 10 years are nearly identical to what was done in 1999. It's really that long tail (ph) of years 11 through 25. One way to think about this is, if the projections are accurate, we would not be making any additional payments on the reserve until 2013.

One last question, if I could. Mark, you mentioned inventories tend to be pretty low through the system and buying is starting to take place. I'm curious, if you could quantify or estimate on the scale of one to 10 where you see inventories through the distribution channels and does it vary much by product or is it pretty consistent among your various products?

It's hard to -- hard to do. I guess, and take this as a somewhat educated guess at best. In OSB, by in large, we probably came out of the year, of the end of the year, with most mill systems, if one is minimal and 10 is kind of a maximum, most of the Mills were probably in the two range. Because most of us took a lot of down time in the fourth quarter so we had a little left over but not much. In the case of the distribution system, my sense is that, once again on that same scale, they're probably in the one to three range. They all stripped them down and because they don't know where prices are going, they've all essentially go to no inventory. What has happened is they have been (inaudible), this first month. And so how much of that is going into house and how much is starting to restock a little bit of basis inventory on the ground, it's a little hard to tell. We do know, for example, anecdotes are not, you know, something you project to the whole industry. But we have had interesting anecdotes when you could tell when our board was made. We have seen board on a house five days after we shipped it. So it's a pretty lean inventory through the system. And I think it's -- what has happened over the last several years is that we, along with most of our competitors, have gotten better and better at delivering on time. And as a result, we now ship probably 98 percent of our OSB on time as promised. Well as a result of the " just in case " inventory that people used to keep, it's gone, because they could count on getting it when we said they would get it. All of that has gone to cutting back on the inventories, and I think they're still at fairly low levels.

Thanks very much.

Your next question comes from the line of Jared Muroff (ph)of Prudential Financials.

I understand price came in a bit but I was wondering what was going on behind the scenes and whether or not you should have taken some down time?

That is part of it, we took a fair amount of down time from the lumber operations in the fourth quarter. As I mentioned, log costs are coming down but at the end of the quarter we're chewing up higher cost wood and then pricing was little bit weaker than even fourth quarter last year. To follow up on Pete's comment own the lumber business, of course, we have had an overhang in the market due to the Canadian production situation. What we see in recent weeks is, depot is coming into the market and replacing some European wood that they were bringing into their system with North American wood and we have seen it can stud prices up sharply in the past couple of weeks so we will see how that continues. But it's is really about the down time and then the higher wood cost going through the system.

So even with volumes up 25% versus the fourth quarter last year, there was more down time?

I don't know on the more down time but we take a fair amount of down time.

We took down time in the fourth quarter of the previous year as well.

It just looked like revenues were much stronger that segment of 16% but the operating profit was weaker and so I'm trying to figure out how that would be.

Lousy prices in the lumber business (inaudible) down time.

Like Mark said in this comments that includes engineered wood and engineered wood products are up sharply.

Okay. Thank you.

Your next question comes from the line of Chip Dillon from Salomon Smith Barney. Please go ahead.

Yes, good morning. A question regarding the -- you mentioned, I think, that the OSB prices at this point, I guess, if they held where they were, would be about 20 to $30 above where they were in the 1Q '02?

They're about that level where they were last January.

So is it fair to say if you kind of assume you had that level of increase this year versus last year, that would look like that would add on a billion two plus or give or take some feet from there that, you know, you could be seen, you know, an increase of $30 million from that, and tax affected, that would be about a 20 cent swing and it would seem you could be looking at break even in the first quarter if we see in this rate of increase hold.

From your lips to God's ears.

Chip, I think that is true from the fourth quarter. But if you remember, in Q1 of last year, we did have a significant rally in march.

Okay. Okay.

So if you look at year to year, you know, in Q1 of last year on a 7/16th basis for us, averaged about 165. We're currently, as mark said, we're above that, we're at a 174 but we didn't start that strong in January.

The quarter to date average, were four dollars behind.

But it's certainly true from Q4, we're going to be much -- significantly better.

Got you. Now, when you look at the asset sales, I know the total goal, I believe, is 600-700 million pre tax. 150 was the number, I believe, mentioned in the press release. But Bill mentioned 200. Where does that other 50 come from? Is that in 2001?

The 150 is what comes off the statements inner terms of proceeds. But some of the businesses we closed down. So we're taking credit in terms of the six to seven (ph) hundred (ph) million for not only cash proceedsbut liquidation of working capital from businesses that are either sold or closed. Then to the send that we needed an avoidance of liabilities, for example in requirement, there was forgiveness of loan guarantees and it's obviously taking -- it's all money at the end of the day. So we're taking credit for that as well.

Okay. So if you take the 200 and then 150 that you talked about from the two letters of intent, the mill transactions and then the two -- the three timber land transaction in it first half, that would suggest that you have about 250 to 350 left. And should all of that come from the remaining of -- the remainder of the big block on which you don't have letters of intent?

That's correct.

Yep.

So everything else is sort of plant related has already been done.

Yep.

Or will be done the first half. (inaudible)

One other thing I wanted to make sure I got right. You mentioned the cost production projects, you said, Mark, that the tomorrow of all of these projects is like 40 to 50 million?

No. I think the OSB capital plan that we have laid out for ourselves is about a four or five year plan that will consume about 200 to $250 million over that time period.

There's annual plan then you're in the 50 million range.

So four to five years, we will do it at $250m.

We will do it on a basis where the OSB can get enough -- chance to cooperate. They may get more than that this year because they're generating a loot of cash.

Now, if you look at the $70 million you have planned for this year in CapEx would any of that 70 include this 250?

Sure.

What about what proportion?

Well if you think about our annual cap budget, it's about 40 million. There's 30 million of return projects and virtually all of that would be indicated to the OSB this year.

So if we get, say, into a strong environment I think you said you may accelerate this because it may not be exactly 1/4 or one fifth every year. At what point would you maybe slow down -- not slow down -- but in other words if this is a real good year would you at some point decide maybe we should take some of the cash and instead of putting a hundred on this project, say you had that much, you mite send 80 on it, put 20 toward of dividend or something like that?

We can't spend that much. What I mean by that is that we don't have the engineering capability to say, double or triple, if they had a bang out engineer year. They would get more but not the whole thing because weep don't have the physical capabilities of Manning the projects well. So if they were to occur, then we will -- obviously as curt indicated, we will completely redo our banking relationships, and that will then free us up to look at both dividends and share repurchase.

Okay. And last question, actually two more real quickly, you mentioned your banking relationships, you were very modest in your press release when you talked about reducing your debt by $70 million. The way I'm keeping score is that you -- you actually reduce your net debt by about one 1/4 of your current stock price by about $1.85 a share. And I know asset sales had a lot to do with that. As you debt continues to come down, you know, net debt, which is now, as you mentioned $5.23, are your banks starting to lighten up a little bit? In fact, I would think people would want to lend to you.

We have strong relationships with our banking institutions but it's been all industrial companies. It's been a difficult relationship with the banks as they have gotten overly conservative. Didn't help that the rating agencies also have gotten conservative. It's easy to go down but very hard to come back up. We have regular conversations with the agencies and apprise them of our plans and our progress and we would expect that to prove. We're kind of in a funny situation right. The agencies say we can't make you an investment safe company and -- and the bank says we can't give you (inaudible) rating until you have a rating.

Having said that we have received high recognition for what we have done today.

Last question, we have seen in the last year or two when the dollar was extremely strong, OSB coming from France and other places that we are not used to, we haven't been used to seeing it. Any sign that some of the non-northern American supplies started to back off?

I don't know quite frankly, I don't know of any anecdotes in OSB but we do have several anecdotes where lumber is beginning to back off. So I expect we're going zero see the same thing in OSB, it simply becomes an economical --.

Let me just talk about that a little bit. Because there's a lot of rhetoric around the OSB coming into the country. We look at the constant statistics and there was about $220 million feet -- 220 million feet brought in last year and a lot of that came in from our former Irish facility and we truly controlled the sale of that. So it's a factor but it is not on a 42 billion square foot mark for structural panels, that's not a big number.

Chip Dillon Okay, thank you.

Next question compress the line of Mike Kristopolis (ph) from Inwood Capital (ph).

Mark I see forward pricing for OSB on Bloomberg, 205 dollars, 3 months out, $215, 6 months out and I'm curious if you're seeing an evolution of a futures market given all of the big home builders have big funded bag logs and they're trying to control their costs? ?

Well there are several attempts at having a -- the last one with a serious effort was Enron. They haven't worked out too well. What in fact does happen, many of the distributors that we sell to, the lumber yards, et cetera, will at times strike some deal with their builders that they're supplying for a couple of months, three months, sometimes they come back to us and we will work out some type of a compromise situation. But by in large, attempts to have a major futures market on OSB have just failed, and I don't see a lot of that happening. We have worked with big builders and done some year programs. But they haven't really grown too much to that extent at all.

What you do see is we do see large consumer lock in volumes, not pricing but they do lock in volumes so we have probably 40 to 45 percent of our OSB capacity is contracted.

From what?

From a value standpoint with a fluctuating price but they do lock in the capacity.

Mark, in your prepared comments at the beginning, I thought you made the comment that you may be prepared to take further down time in OSB, again, as the 25% market share player, are there things that you can do to, you know, effectively be explained and, you know, hold back production now at 190 if you think you can get 215 in a no or two.

I don't want to be overly greedy but Shamborg is down and the new Woodland facility is down. So if we wanted to simply say, run, ton, and gun and flood the market, we could have taken steps to have those running. We think it's more prudent, particularly in the last few years where there's been an -- capacity not to rush oust and put those in the market. As I indicated, we're planning on bringing Woodland up in June, July, unless the market sours significantly, and then we will probably never bring Montrose up but Shamborg will get resolved at some point in time but, area' we're trying to be responsible as being the largest producer, and I think it's -- it stood us well last year and I think it's standing us well today. The downside of withholding when things are starting to go pup rapidly is that they will go too far too fast. The last thing that we need right now is $300 OSB, not that I wouldn't love to have the earns for a couple of months but that simply encourages people to go out and build new capacity.

I applaud your discipline. Thank you.

I think we have time for one more question and we will be available obviously for follow-up questions.

, okay, your last question is from Bill Hoffman (ph) at UBS Warburg. Go ahead.

I realize this is late. Bill can you walk us through from a cash standpoint, generating a lot of cash in the fourth quarter and I want to know if there's -- normalcy is there now, whether you have been able to better have a little management.

You kind of cut out. I think part of it, we had a fair amount of down time in the late December, so our receivables were off a lot. We did have a buildup in log inventories in the lumber business. We had an opportunity to put in some logs at pretty low prices, so we took advantage of that. And that will be liquidated, you know, through the first and early part of the second quarter as we go through the break ))up that's helpful. And then --.

Two major changes.

And then just one other question. With regards to the plastic building products, I just want to get a sense on, you know, whether -- what you saw that further quarter was just seasonality or whether you were seeing increasing costs there which would trim the Marge anyone that business? I know it's a smaller business but I just wanted to get a sense of what was happening and the dynamics?

There's two major pieces to that. One is the vinyl business which as you point out we have seen higher raw material costs there. You know, we're not a price leader per se in that business. Historically, some of the bigger producers have moved prices up as the raw materials have moved up. We haven't see that -- seen that completely yet. On the composite decking business, we're pretty encouraged with both the value and the price very E. increases we have seen in composite decking for orders for 2003 so we're hoping to get a turn around there.

What kind of percent do you think you might be up this year?

I think we're 20% plus year over year pricing.

Well, a couple of things in pricings for 2001, 2002, which is relatively flat, we instituted the price increase of about a 30% increase in the fourth quarter, (inaudible) effect for shipments that began last month. And now it's an average price. What I talked about, I didn't go into detail but we have a good, better, best strategy. And we went into the market trying to establish that those products, and unfortunately we didn't could as good a job as we should have in pricing for the value of the best part of that. Our product mix is more heavily toward the best and so that price increase will show up this year. So the combination of the increase in price, plus we have added some new higher volume extruders that have lowered our manufacturing costs.

And based on, again, January results and the fact that the price increase does appear to stick, we're reasonably confident we're going to be able to turn that business around pretty significantly in 2003.

Great. That's helpful. Thank you.

Roseanne, if you would kind of rap it up and give the replay information that would be great. We will be available for a follow up questions all the rest of the week.

This conference will be available for replay after 11:30:00 a.m. Pacific time through February 12, midnight. You may access the AT&T teleconference replay system at any time by dialing 18004756701 and entering the access code of 670637. International participants dial 320, 365, 3844. Those numbers are 18004756701 and (320)365-3844 with the access code of 670637. That concludes our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.