Louisiana-Pacific Corp (LPX) 2003 Q1 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the first quarter 2003 earnings conference call for Louisiana Pacific. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If you should require assistance during the call, please depress "0" followed by . As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Bill Hebert, Vice President Business Development for Louisiana Pacific. Please go ahead, sir.

Thank you. Good morning. Thanks for joining us on the Louisiana Pacific conference call, to discuss our financial results for the first quarter ended March 31, 2003. As Pat said, I'm Bill Hebert, Vice President Business Development, as well as the Investor Relations contact for LP.

With me today on the call are Curt Stevens, CFO and Mark Suwyn, Chairman and CEO. We'll start the call with a review of financial results for the first quarter 2003, a few comments on the balance sheet. We'll give you an update on our [Inner Seal] Siding settlement, and update you on the asset sales process. Mark will then review the outlook for the next several quarters and talk about the results of some of our recent initiatives within the continuing operations. Finally, we'll open the call up to questions.

As we have done in the past, this earnings call has been opened up to the public, and we'll be doing a webcast. That can be accessed at our website, LPCorp.com. Additionally, to help with our earnings call, we have provided a presentation to provide supplementary 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 viewed in conjunction with our publicly-available earnings release.

Before we begin, I want to remind all participants about the forward-looking statements comment that's included in the earnings release and shown on slide two of the presentation. Rather than reread this statement, we're going to incorporate it into the discussion with this reference.

With that, let me turn the call over to Curt Stevens.

Thanks, Bill. As Bill said, I'll be referring to some of the pages in the presentation as we go through them. The first page I'm going to start with is number three, which is a summary of the financial results. The very good news is that this quarter, LP is reporting a profit for the quarter. Albeit, that is bolstered by asset sales gains, as Bill will talk about.

During the quarter, we saw improving prices on our core OSB operations. However, due to weather-related impact and increases in costs-primarily related to energy and petroleum-based raw materials-we were not able to reach the full benefit of these higher prices. We did file an EK earlier in the quarter, telling investors that these additional costs would negatively impact our results by between $10-12 million in the quarter. It looks like the actual impact was closer to $15 million versus the first quarter of 2002, in the neighborhood of $9-10 million versus the fourth quarter of 2002.

As we go through each of the businesses, we'll make specific comments on these costs. We are reporting today, net income for the quarter of $1.5 million, or $0.01 per share, of which continuing operations showed a slight loss of $500,000. Discontinued operations showed net income of $1.9 million, or [$.02] per share.

The net income from discontinued operations as a result of gains on various asset sales. Net sales for the quarter were nearly $500 million. For the same period last year, we reported a net loss of $9.5 million or $0.09 per share, of which continuing operations showed a loss of $1.6 million, or $0.02 a share. Discontinued operations had a net loss of $4.1 million, or $0.03 per share. Net sales last year were $475 million during this quarter.

During the first quarter of 2003, like most public companies, we adopted the statement of financial accounting standards, number 143, accounting for asset retirement obligations. As part of this implementation, we recognized a very small pre-tax gain of about $200,000. During the first quarter of 2002, we implemented a statement of financial accounting standards number 142-goodwill and other intangible assets. As part of this implementation, we recognized an impairment charge that had a carrying value of goodwill associated with the engineered wood business, of a little over $6 million, or just short of $4 million after tax. Most of these adjustments were recorded in the line item cumulative affect of changes in accounting principles, as of January 1, 2003 and 2002, respectively.

The next series of slides in the webcast presentation has been added to give you an update on each of these businesses. I'm going to limit my comments to the comparison between the first quarter of this year and the first quarter of last year. However, we have added the sequential quarter being Q4 of 2002 as another reference point.

Page four of the presentation looks at our OSB business. For the quarter, OSB prices showed good improvement over the first quarter of last year-up 9%. This is a result of continued market demand for these products. Downtime was taken by several market leaders during both the fourth quarter and the first quarter of this year, and slightly better weather conditions in certain parts of the country.

As I'll discuss in just a minute, the weather report for Q1 was very regional, and we did experience weather-related disruptions. During the quarter, they impacted both our operations and costs. From a profit perspective, we showed a decline of 40% from the prior year. This decline was due to increases in operating costs of approximately $17 per thousand versus the first quarter of last year.

Of this increase, wood costs, primarily weather related, were about $5 per thousand. Extra resins and energy costs accounted for about $6 per thousand. Currency-primarily the strengthening of the Canadian Dollar, impacted about $2 per thousand. Labor, downtime and other issues resulted in the remainder of the increases. Volume was down slightly on a comparable basis, due to an extended strike at our [Chamboire], Quebec mill, and certain log outages at other operations. Looking forward into Q2, there'll be an ongoing increase in costs due to energy and resins, as there hasn't been much easing in these costs.

Slide 5 looks at our composite wood business. As a reminder, this segment includes our [SmartSide] OSB siding product. Special OSB products, hardboard siding, decorative interior hardboard business, and our [Chilaim] at [inaudible] mill.

For the quarter, sales showed an increase of about 3%, while profits were down about $1 million. OSB products, SmartSide and other OSB products performed very well in the quarter, showing good increases in both volume and sales prices. Operating costs, while somewhat impacted by the same factors affecting the OSB business, did not see the same weather-related disruptions.

Offsetting the gains in OSB products were significant volume declines in our decorative interior tile board business. Hardboard siding has seen a continuation of weakness in one of our key markets, and that's Denver. Also, we've seen slowness in some of our industrial markets for hardboard [in Northscam] and retail activity was slower in Q1. That negatively affected our tile board business.

Slide 6 is the plastic building products. This segment consists of vinyl siding, composite wood decking and our molding business. Vinyl operations continue to show growth; at a 4% increase Q-over-Q, and gain market share while the overall categories declined slightly in the past couple of years.

Our costs of [inaudible] operations continue to improve in the area of manufacturing. This was necessary to offset the impact of increased resin costs. There was about a $2.5 million increase for the quarter over the same quarter last year. Average sales prices for our vinyl products did increase 8% during the quarter.

Our composite decking business has shown significant improvement in the prior year-a turnaround of over $3 million. Our strategy implemented in 2002 of a good-better-best product positioning has significantly paid off. We are showing increases in both sales prices and volume for the prior year. We continue to work to improve the efficiency and output of our existing capacity to generate additional needed volumes for our customers. After posting quarterly losses in each of the past two years, I'm happy to report that we did report an operating profit in this segment.

Our molding business has shown a slight decline in sales volume in the quarter, primarily due to the slowdown in retail activity that we talked about earlier. Prices were essentially flat. We continue to explore opportunities in our existing facility, and with alliance partners, to expand this profitable business.

Slide 7 is our structural framing segment. This segment did not perform very well in Q1. This includes our remaining lumber operations, as well as engineered wood-LBL and I-joints. For lumber during the quarter, our operations costs remained relatively flat with the same quarter of the prior year. Unfortunately, sales prices declined another 5% for the same period of the prior year. This decline of about $270 million [inaudible] resulted in a decline of profitability of $4 million. We were also negatively impacted this quarter by a five-week production outage at our very efficient Flint, Michigan mill, due to log shortages, caused by weather.

So far this quarter, we continue to see lumber prices lag, and current averages are off about 10% from Q2 of last year. We're very concerned that until a long-term solution is in place with the Canadian duty situation, we will not see a long-term recovery in lumber prices.

We continue to grow our engineered wood products in the quarter. Compared to last year, LBL volume was up 9%, and I-joint volumes increased by 5%, as we continued to take new customers and expand our presence with large production builders. Unfortunately, competition and capacity continue to impact sales prices of the products, as we realized a decline of 2% in each of these product categories.

While we expect it to continue, our focus is on the relentless reductions in costs, better geographic manufacturing distribution, and maintaining our customer relationships. In addition to focusing on maximizing the potential of our existing facilities, we continue to look for other alliance opportunities. Along these lines, I'm pleased to say that our joint venture with [ABTIBI] on an I-joint plan in Quebec is up and running, on-budget, and ahead of schedule.

Slide A is the tax rate. The effective annual tax rate of continuing operations is estimated to be 45% for the full year. This is based on first quarter results and our current forecast for the full year. The primary difference between the statutory rate of 38% on continuing operations and the calculated rate related to permanent differences associated with certain inter-company debt, denominated in Canadian Dollars, that generate gains and losses upon remeasurement in the US Dollar that are not taxable. Gains and losses are eliminated within the consolidated reporting.

As you are aware, the Canadian Dollar strengthened about 6% against the US Dollar over the last several months. Based upon the amount of our inter-company debt, we estimate that for each penny change in the exchange rate, this will create a permanent tax difference of around $4 million, or affect a tax provision by $1.6 million. Going forward, the impact of these dollars on our rate will depend on the level of income.

During the quarter, we announced the sale of several additional tracts for our timberland, for approximately $19 million. That resulted in a $12.5 million gain. Bill will give you an update on the status of the remaining timberland, shortly.

Slide 9 of the presentation has the balance sheet statistics on it. We, like many other companies, are still struggling with this newly-issued regulation G related to non-GAP disclosures. What we've done here is given you some numbers with a parenthetic reference to detailed calculations that will reconcile this back to our GAP statement. That's on working capital and debt and liquidity.

Working capital is about $240 million at the end of March, compared to $215 million at the end of the year. The increase is primarily due to increases in inventory and accounts receivable that are seasonal in nature. Net debt stood at $525 million. Again, the reconciliation is on page sixteen of this presentation. We did pay off most of the $32 million remaining under the [4X] note in the quarter. Available liquidity stood at about $290 million, versus $330 at the end of the year. The decline, again, was due to the cash that we used for payment of the [4X] note.

In late February, we announced an amendment to our secured revolving credit facility, as it extended the expiration date by six months, to July of 2004, and amended the covenant-required minimum levels of earnings before interest, taxes, depreciation, depletion and amortization, as it applied. Based on our calculations, we have met all the covenants included in our various financing . We are currently in review of these calculations with our banking group.

Capital expenditures for Q1 were $11 million. We currently project capital expenditures for the full year of 2003, depending on market conditions, to be about $80 million, versus the $44 million that we spent in 2002. Book value per [ending] share was $9.65, versus $9.62 at year-end.

Slide 10 provides an update on pensions, pension-funding and expense. That certainly has received a lot of attention, recently, as companies review their assumptions, their actual earnings experiences and valuations. At the Q4 earnings presentation, we discussed our projected funding levels for 2003. Due to better-than-expected pension asset performance in Q4, we now expect our cash funding for 2003 to be about $30 million, as compared to the previously-announced $36 million, and compared to $27 million that we contributed in 2002. On the expense side, we continue to estimate our expense to be about $15 million, which is comparable to 2002 for continuing operations.

The next slide, slide 11, gives you an update on national siding class action. The seven-year period to file for settlement expired on December 31, 2002. So going forward, a homeowner's recourse is in our warranty program. Last year, in 2002, we did establish a printed payment program that's worked very well. It's allowed us to eliminate over $90 million of [base] value claims-about 1/3 of that-or $32 million.

In early April, we did begin implementation of a new program called the Claimant Offer Program, which allowed claimants basically to make us an offer. LP will guarantee payment at the same level the alternative payment program-roughly 36% of face value. However, with this program we will also consider offers greater than this amount as given to us by the claimants, themselves.

We will be reviewing this program, weexpect the returns from this program to be in at the end of April or early May. By mid-May, we'll be reviewing them. Then at the end of June, under this program, we'll be able to send them a check for the accepted amount, or a rejection letter to the claimant if it had an amount greater than what we were willing to pay. So, based on these options, we're reasonably confident that we'll be able to liquidate the remaining claims within our previously-announced reserves.

With that, let me turn it over to Bill to give you an update on the asset sales process.

Thanks, Curt. Refer to Slide 12 of the presentation. I'll give you a quick update on where we stand on the asset sales and how we'll look forward to completion. During the first quarter of 2003, we completed the Missoula particle board mill sale as well as two remaining saw mills-[Marianne and Wesley]-generating cash proceeds of about $30 million plus working capital. Liquidations or payments were about $10 million.

This completes the facility sales portion of our announced divestiture plan. Additionally, we closed several [blocks] of timberland and realized an additional $25 million of proceeds. Since we began the asset sale program last spring, we've generated $210 million in proceeds, and another $55 million in additional value through working capital reductions, by abilities related to the [business]. The remaining assets to be divested are the remaining timberland.

Now let me walk you through where we are in each of those blocks of timberland. As we discussed last quarter, we have several blocks that are currently under contract. Right now we expect our Idaho land to close in Q2, which would generate nearly $20 million in proceeds. Additional, we had previously announced letters of intent which cover approximately 187,000 acres of Southern Texas land, that would generate nearly $130 million in proceeds. Several of these will close in Q2 of 2003, with the remainder in Q3 2003. We are very confident that we'll have the remaining 500,000 acres either sold or under contract by the end of 2003.

It is also our intent that we will pursue the installment-sale treatment on most of the remaining southern timberland tracts, which will have the impact of deferring the payment of income taxes for a period of 10-15 years. We still believe the ultimate value of the timberland that we committed to deliver generally within the value and time frame. Bottom line, we will complete the asset sale program and generate $600-700 million in total value.

With that, let me turn it over to Mark, who will address first quarter accomplishments, and how we're managing our businesses through these uncertain times. Mark?

Thanks, Bill. Curt's going to clear the job of giving you the post-mortem on the quarter. There are a few areas I kind of wanted to comment or elaborate on. There are a number of bright spots in the quarter that confirm that we're headed in the right direction. The OSB, composite wood and plastic building segments were all profitable. We continued to make excellent progress in a lot of operational areas, including safety and environmental compliance. We made some important new product introductions and line extensions, and turned our composite decking product around to profitability.

However, as indicated, increased energy-related costs compounded by poor weather in some parts of the country impacted all of our businesses in one form or another, and seriously cut into earnings.

Let me take them one at a time and kind of give you a view over the dynamics that are underway. The weather played havoc in two areas. First, its impact on wood costs. Wood costs were up for two reasons. First, continued record wet weather across most of the south restricted harvest activity and led to some shutdowns for lack of wood, and higher costs as companies competed for the small amount of wood that was available. Those dynamics will ease as the weather dries up, and more forest becomes accessible, although it doesn't happen overnight.

Compounding those costs were the need to pay fuel surcharges to loggers, as gasoline and diesel fuel prices spiked during the quarter. Those two will ease when fuel prices recede. As Curt indicated, rising oil and gas prices hit us hard in the first quarter. If gas prices ease, we'll see the effect fairly directly, as that's used directly in a lot of our OSB mills for pollution control.

However, on resin and polymer prices, there's at least a quarter lag time. We will not likely see relief until the third quarter, if energy prices and oil prices come down. Meanwhile, we're attempting to get as much of the increases covered by pricing as we can.

The weather also impacted demand as the cold and snowy winter and early spring in the Northeast and the upper Midwestslowed housing starts and some repair and remodeling. We saw the impact in OSB prices that rose smartly from early January through mid-February, and then sagged until about two weeks ago. As things have thawed out, the demand has rebounded and OSB prices have firmed again.

We believe that this reflects the fact that the OSB demand/supply situation is much closer to being in balance than it has been in the past two years. This bodes well as we move into the seasonally strong building period.

We remain very focused on the strategic initiatives we've outlined for our retained businesses. In OSB, we've initiated our investment program to lower the total costs across all of our mills. Our capital budget last year was $44 million. We're raising our target this year to $80 million, if the market stays reasonable.

We have a whole long list of technology and equipment upgrades to put across our system and have been ramping up to do that efficiently. I'll put it into context. While this reflects a significant increase in capital spending, it's still only about 2/3 of our [DDNA], which is about $125 million.

We've seen strong growth in our [SmartSide] family of products; particularly siding and trim. We've penetrated new markets and seen good continued growth in the existing markets. To meet this increased demand, the mills are running very well-up over 11% versus last year. And we've bringing some trim product up from Chile to keep up with the demand.

I won't elaborate on it any more, but as Curt mentioned, we did bring up the I-joint mill in Quebec, on-budget and ahead of schedule. This will increase our cost advantage in I-joint-particularly on the East Coast.

Our composite decking business broke into the black after two years of quarterly losses. As you may recall, we're coming into a rapidly growing market, but one where the incumbent has been well-established for over 10 years. Therefore, it's required us to develop both a better family of products, and also to carry out some very intensive and fairly expensive marketing to break into some of the key distribution chains.

The effort is paying off, as the quality and breadth of our product line is generating strong demand. Meanwhile, our facilities have been ramping up and the costs are coming down. Our key issue this year is to add capacity efficiently to keep up with the demand that we've now created. As Bill mentioned, the restructuring is going well and very much on track. I do expect that we'll finish up all the sales within our original timeline.

These accomplishments I've just mentioned are really all about execution. I'd like to highlight the tremendous accomplishment of the L P team, as they efficiently divest the portions of the businesses that we chose not to keep. At the same time, they're growing our retained business aggressively.

So what comes next? As we sit here today, there's a lot of news and data to try to digest and figure out exactly where wethe industry, and the economy are headed. Housing is still strong. We talk to builders all the time, as many of you do, and you’ve probably seen some of their recent quarterly announcements. They are very busy. The current demographic support that they'll likely stay busy as long as interest rates stay at a reasonable level.

In fact, APA recently released a forecast based on some work by the Joint Center for Housing studies at Harvard University. It stated that demographics would readily support about a 1.77 million housing demand for this decade, on average.

The big boxes-the retail outlets-did have a somewhat slower first quarter. But they attribute this mainly to weather. They point to some big weekends they had when the weather in the East. The war in Iraq generally, as we all hoped it would, with a fairly rapid resolution. We hope that the mopping up and rebuilding will come off as smoothly. Now the tests relative to US economy will be the restoration of consumer confidence, and to kick-start the economy.

We're keeping our eyes on what's going on with the Canadian duty situation in lumber. But to be honest, I really don't have a good clue as to where the final outcome will be. Lumber producers everywhere, including us, are having a very difficult time. Some mills are closing. Some are expanding, hoping to lower their costs and stay alive. At the same time, when they do that, they're creating more capacity which in turn can drive prices lower. It will remain a challenging market, as far as I can see for the foreseeable future.

In summary overall, I'm relatively optimistic about the market and our prospects. We've chosen our battles, and we're executing well. With housing starts at the current levels, we should see good results with continued focus and flawless execution.

With that, let me turn the call back to Curt, and open it up for questions.

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

Thank you. Ladies and gentlemen, if you wish to ask a question, please press the 1 on your touchtone phone. You will hear a tone indicating you've been placed in queue. If you pressed 1 prior to this announcement, we ask that you please do so again at this time. You can remove yourself from queue at any time by pressing the key. If you're using a speakerphone, please pick up the handset before pressing the numbers.

Once again, if you have a question to ask or a comment to make, please press 1 at this time. One moment for your first question.

Your first question is from the line of Joe Stepaletti (ph), of Goldman Sachs. Please go ahead.

Yes, hi. It was very helpful for you to walk through the components of the $17 increase in costs in OSB year-over-year. I was just wondering if you could help us. I know it's early in the quarter, but kind of look at the second quarter. I'm wondering what your expectations are and how quickly those costs, if at all, will come back down. Primarily the wood and the energy/resin. The $5 and $6 components you talked about. What would be reasonable for us to be thinking about there?

Wood costs are very much related to, as indicated, to local weather patterns. In East Texas and on to Alabama and those areas, those are probably 2X normal rainfalls over the last 6-12 months. So that's been that impact.

On the other hand, it is spring, and things tend to dry out a little better. We'll get some relief in the second quarter, but mainly that'll happen in the third quarter as wood decks get built back up and things dry out.

Don't expect much change in any of the resin prices in the third quarter. Those are contractual relationships, and they tend to be quarter-by-quarter. The natural gas question there is really where natural gas prices go. If you track that, you'll see where that impact will be.

[Net net], we expect that overall costs will be relatively flat in the second quarter versus the first quarter. Then we'll begin to see some relief as oil and gas prices begin to wane in the third and fourth quarters.

Joe, just this week-yesterday, actually-we saw natural gas prices spike up about $0.65 to $5.65. We saw crude go up, which is the raw material for the resin. So I agree with Mark's comment that we're probably going to see pretty flat costs for Q2.

Okay. In your structural panels segment, or the other segment-

Structural framing?

I was just wondering what your guidance might be, or your thoughts going forward. Obviously we know lumber prices are continuing to be problematic. I was wondering what kind of thoughts you had there, going forward. I know it was a bit of a tough quarter for that segment.

I'll tell you that basically in lumber, it's going to stay very difficult. We'll continue to look at do we operate or do we take market downtime. Obviously, we're in a bit of a contest with the folks that own the trees, in terms of what they expect out of some of these prices versus what we can get out of lumber. At some point in time, you take some market downtime simply to try to get somewhat lower prices on logs that are coming into your operation.

I don't expect much change in that, second quarter. We'll be looking at that almost on a week-by-week basis, in terms of how much we run and where we run. The engineered wood volume is sound. It will probably improve somewhat in operations during the second quarter. Particularly as we get that joint venture to line up and be contributing in the quarter.

I suspect a little improvement in engineered wood, but overall it will be very problematic and hard to predict, quite frankly.

Okay. Thank you.

Your next question is from the line of Rick Schneider of UBS Warburg. Please go ahead.

I just wanted some clarification on the $15 million number that you cited. Was that all energy? Or was there also the energy secondary effect on resin in that number?

The secondary effects were in that number, as well.

Okay.

And also in there was some increase in the wood costs, as Mark talked about-the fuel surcharges that we pay to bring in the wood.

The $15 compared to the fourth quarter?

No. That was compared to the fourth quarter of last year. The fourth quarter was 9-10

How much of the 9-10, or whichever way you want to look at it, was natural gas without secondary effects?

Probably around $4 per thousand.

Okay.

[inaudible] volume, I don't know. It's $5.5 million or about half of it.

Just wondering on the downtime that you've been taking now for a few quarters. Any change in your expectations on when you'll bring [Woodland] back up? Or look to settle the Quebec situation?

We hope that unless breakup in the upper Midwest catches us, we expect our mills probably shouldn't run out of wood this quarter, unless we have some breakup issues. [Rocksborough] was down for a short time so far, this quarter, because of rain. I think that's straightening itself out.

We would expect to bring [Woodland] up sometime close to the first of July, or somewhere in that ballpark. So it probably won't affect this quarter, but it could affect the available third quarter. The discussions up in [Chambourg] continue. I can't forecast any short-term changes, there.

In the quarter, if you look versus the fourth quarter, what were your OSB prices up, on a dollar basis?

Actually, it's in that presentation. We have the pricing in there on the fourth quarter. If you look on page four, the price is up 10%.

Okay. What exactly was that?

That was probably about $[14].

Looking into the second quarter, where is the pricing in April versus the average of the first quarter]?

What's happened if you look at random lengths, is if you look at the last couple of weeks, OSB prices have jumped quite considerably. I think that simply reflects a pretty good balance between supply and demand. Therefore if that's true, then one would expect that the second quarter would be pretty good pricing. But I don't forecast those. I can only give you random lengths and say it seems to be on a pretty sound upward trend.

But right now, we should be up at least on average of something like $15-20 of the average of the first quarter

About 20

Okay. Thanks a lot.

Your next question is from the line of Chip Dillon with Smith Barney. Please go ahead.

Yes. Good morning. I needed just a couple of quick clarifications . I think you mentioned, Curt, that the costs overall on OSB would be-I think you said year-over-year--$17 per thousand?

That's correct.

Again, wood was $5, resin $6, Canadian dollar $2 and natural gas $4. Is that the way to think about it?

Actually, energy, which would include not only natural gas but the resins and the rest of that-would be $6-7.

Sorry. Again, energy was up $4? Is that what you said?

Energy would include both natural gas and the resin increase--$6. So natural gas wouldn't have been a separate number, there. The other increases in costs had to do with labor, some of these outages, and the ongoing [Chambourg] strike that we didn’t have in Q1.

On the same basis, what were the costs then versus the fourth quarter?

They were up probably about $8 from the fourth quarter.

Last year, you still showed a nice, seasonal improvement in revenue overall. Even though we had a very good warm winter. Not good for skiers, but a warm winter last year. This year, we've had anything but that. So would you expect to see at least the same kind of seasonal volume jump that you normally get in this year? Or could it perhaps be more because we haven't had much of a season, yet?

Well, as Mark talked about, actually, the first six weeks of the year were pretty good across the country. Then the East got hammered in the latter part of February and March. That's when we saw the decline. So the first quarter, as you can see from the revenue side, was actually up about $25 million overall from the first quarter of last year. With that being said, retailers we talked to did not have a great first quarter. They were hampered by weather conditions. The builders didn't get as much activity in. So I would expect that we're going to see an increase in the second quarter. That's sure to be the same magnitude as last year. Certainly, the feel in the marketplace right now is that the ice is gone and things are really picking up.

When you look at the OSB pricing situation, I believe last year it was down second quarter versus first. Right now is it safe to say it's up pretty comfortably for the first quarter average? At least for you all?

Correct.

If you could just again walk through how your tax expense is impacted by the Canadian Dollar and your debt up there? I think if I recall, what you're saying is that for every million dollars of the Canadian Dollar's strengthening, it increases your interest expense by $4 million per year? Is that right?

No. What we've got, Chip, is an inter-company loan. Some of our L P Canada companies have borrowed money on an inter-company basis. That all gets eliminated in consolidations. So it doesn't affect the results, either as reported interest expense or anything else. But because gains and losses on that translation are not tax deductible, it does affect the tax rate. So that's what the impact is.

What I said is that if there's a $0.01 change in the exchange rate-if the Canadian Dollar goes from $0.68 to $0.69, that's the $4 million swing in the non-deductibility of that interest in the pre-tax. Then after-tax, it would be about $1.7 million.

But net net at the bottom line hasn't changed?

The bottom line doesn't change other than the tax provision changes.

Gotcha.

When it's turned around, it goes the other way.

Gotcha. The last question. Let's say a week from now you're sitting here and you've done all the timber sales. I believe you have some debt on your balance sheet that's not callable that you might want, I would think, to be called-because what you'd be receiving would be cash that's less than what you're paying out. Is that true? If so, is there anything you can do about that?

Actually it is true. Right now, other than the three trunks of public debt, there's very little debt we need to pay off. We're a little bit outstanding on our AR securitizations, but nothing is outstanding on our revolver. As I mentioned, we took out the last piece of forest at the end of the first quarter. So really, the only debt on the books that we can take down are the three trunks of public debt, and the [on]callable until 2005 on the coordinated debt. Then we have [inaudible]

Of course at that point, there'd be nothing to stop you from either buying back stock or making acquisitions?

Well today, the revolver doesn't allow us to do share repurchase or dividends. So the use of the cash would be looking at retiring a public debt early. We have not implemented the strategy for that You're absolutely right. That's [deficit payback]

Gotcha.

Our focus right now is to get the asset sales done, and then to restructure our banking agreements to give us the flexibility to take all of those-all or some of the above.

In other words, don't try to run with a pass unless you've caught it, first.

Exactly. Right on.

Your next question is from the line of Bruce Klein, CSFB. Please go ahead.

Hi. Most of my questions were asked. The restricted cash-what goes on there? What happened? What's it used for?

The restricted cash account. We need to put the after-tax proceeds for after sales into that restricted cash account. There are limitations on what we can use that for. We need to pay down a certain amount of debt, and then after that we can use it for capital expenditures. Then after another threshold, we can use it for acquisitions. Also, we can pay contingencies, which are another form of liabilities. When you look at the restricted cash balance, actually the [4X] sales we paid out of our regular cash accounts? We got reimbursed out of that restricted cash account early in April. So that $32 million that came out of the cash account came right back in. It went from restricted to the other.

If you get the asset sales out and get a new bank agreement payment, is it possible to take out some of the debt before it's callable?

It's possible.

Thanks, guys.

We're being careful of what we signal.

Your next question is from the line of Bill Hoffman of UBS Warburg. Please go ahead.

Good morning. Just a quick question. I don't know if I missed this earlier. Referring to the OSB operations and your volumes for the first quarter, I just want to get a sense of what kind of operating rate you had in your facilities. So we can get a better sense of where those volumes can go in the second and third quarters, as we go forward.

There are two things. We have two mills that weren't operating. [Woodland] and [Chambourg]. [Woodland] we haven't started up, yet. [Chambourg] was out on strike. Then we did have weather-related outages in the quarter. But I think that operating [inaudible]

Yes. 1991. We're off about 80 million feet versus the first quarter of last year. Primarily, it's weather-related, plus a little bit of [Chambourg].

Is that 80 million square feet with [Woodland] and [Chambourg]-do you think you can bring it back up on line? Is it going to be more than that? Do you have the capability to do that?

Yes. Yes. About 500 million square feet.

Between the two, maybe say [200-250] million a quarter

[inaudible]

Your next question is from the line of John Tamazos, Prudential Financial. Please go ahead.

Good morning. Actually, this is Jarred Mirafont for John Tamazos. Most of my questions have been answered. Talking about the restricted cash-where on the balance sheet is that?

It's in a non-current asset. If you look down.

Oh, there it is; okay. One of the other questions I had is, your "other segments." You had an operating profit of almost $4 million. What's in that other segment?

The remaining timberlands are in there. Then there are some miscellaneous operations. But generally, the profitability from the timberland.

That's from sales made inter-company?

No. It's sales of product-trees [inaudible]. Yes.

[inaudible]. It's transfers.

We do transfers. So, yes; some are inter-company, yes.

The discontinued operations, you showed a slight profit. But it would have had it looks like a $7.5 million gain on a sale.

That's correct.

If you total those, they actually lost money on an operating basis, but they are now gone. Right?

Correct.

As an exporter, there will be no discontinued operations?

Well, you've got some tails on Workers Comp, at various facilities that we sold. We still have several lumber mills that are shut down on the [sell] list that haven't sold. So there's ongoing cost, there. We also have one investor panel facility that’s still in there. So there are some ongoing costs.

Okay. Great; thank you.

Your next question is from the line of Peter Ruschmeier of Lehman Brothers. Please go ahead.

Thanks. Good morning. I wanted to ask about the siding business-just what your expectation is with one of your competitors starting up their composite siding. Is it fair to assume that your volumes may come under some pressure? Or do you expect your volumes to hold up in that business in the next couple of quarters?

Are you talking about Boise?

Yes.

That's a very, very different product. We don't anticipate it selling into the kinds of markets that we sell into. We have really three siding products, and they all have different kinds of dynamics going on, right now. Hardboard siding as a category is slowly declining. There are focuses to make sure that we've got the breadth of product line and the costs that allow us to operate as that category shrinks slowly. That's been a very successful strategy. It's been generating a lot of cash.

The issue that's hurt us the last six months or so is Denver as a market has been hit pretty bad. That's quite frankly the hotbed of hardboard. They love hardboard out there. Until that market begins to pick up a little bit more, that's been a challenge.

Our SmartSiding, which is an OSB-based product-we're the only people that make that. That product is growing very strongly. It's not just the siding, it's also the trim and fascia and soffit products we've developed.

We keep introducing new products which will extend the product line. We expect that growth rate, which has been on the order of 8-10% per year to continue on, as we go forward. We have the ability, fortunately, to supply that out of several different operations, with a modest amount of funds. We can make it even more available.

In the case of vinyl, despite the fact that vinyl as a total category has been flat-to-down a little bit in the marketplace, we've been growing ours in the order of 4-5%. We introduced some new products that have gotten us into additional distribution channels that we were not in before.

Overall, the siding business for us is net-net growing, driven by the SmartSide and Vinyl, and we're doing our best to make sure that we continue to sell all of our hardboard siding, going forward.

Okay, great. So it really doesn't have too much of an effect, there. How about on the margins? The resin costs you described, I assume are largely for OSB. Are you getting squeezed at all on the margins for your vinyl siding products, in terms of raw material costs, there?

Yes. Vinyl prices are up. Resin costs are up. As I indicated, we're taking steps to get some of that back in pricing. You can't get it all back. It's a pretty competitive market. But we've got some of that pricing back. It hits us across the board.

Also, the resins are used in the SmartSide product and in the hardboard products. There's resin involved there, as well.

But that's all included in the $6 figure you gave for resin/energy combined?

No, OSB. That was OSB. [The others are smaller]. Just to give you a number, again, you can look at page 6. We did get an 8% increase in our vinyl siding product in the quarter. I think I did mention that we had about a $2.6 million increase quarter-to-quarter in the resin used in vinyl. So the 8% increase wouldn't have offset that.

On the other hand, when you do get these price increases, the way the market responds is by coming off slower. So you do pick up a little bit of that in the backend when resin prices do come back down.

Then just to clarify the way the resin contracts work and OSB. I think they're fairly lumpy. Can you give us an indication as to whether the current contract outstanding is kind of indicative of where market prices are? Or should we expect, based on the timing of the next contract that it's going to gap up?

I'm not as familiar with the direct negotiation of that Pete. I think that's either a quarterly or semiannual adjustment. So in Q1, we would've been basing that on the indexes as of the end of the year.. We're going to have some increase here in the second quarter. But obviously, our job is to keep going back and threatening begging, controlling, whatever to get as much relief as we can. We do do that. We're a big consumer of these products. So our suppliers work with us, on the other hand. They're facing the cost on the other end. So it's a relatively dynamic situation. We're not locked in for long, long terms.

I wanted to ask about the Canadian Dollar. You indicated it had some impact there. I'm curious though, operationally, if there's much of an impact. You're positioned on both sides of the Canadian border. Do you see the economics causing you to shift some of your production? Shifting the emphasis to the US? Or are the moves we've seen in the Canadian Dollar not material enough to really change the cost curve enough between Canada and the US?

First of all, we generally go with time with it. We run those 24/7. They've got a lot of ability to move that production. And from an economic standpoint, about 23% of the Canadian mill sales are in Canada, with about 75% coming down to the US. The functional currency for Canadian operations is the US Dollar. That's where you've seen the increase in costs is at those mills, because they're paying Canadian Dollars and it's reported in the books as US Dollars.

At this point, it doesn't make any sense to move the production. First of all, we can’t, second of all, not that it would hurt, but it's not that big of a magnitude.

One of the few things, though, that's going [inaudible] lumber. We read a lot of Canadian releases that are coming out this week and last week and they all complain about the Canadian dollarmoving up [inaudible].

Just a last question. You mentioned that your cash payout you expect to be down from $36 million to $30 million. I just wanted to see if you could clarify a little bit. That's basically better performance in the fourth quarter?

Yes.

Okay.

It was better performance in the fourth quarter and we got the new actuarial assumptions from our actuary.

All right. That's all I had. Thanks, guys.

Your next question is from the line of Steve Chercover; D A Davidson. Please go ahead.

Good morning, guys. Could you give us a sense of what you think inventories in the field are, now. How far do your order books] for OSB extend?

The inventories remain extremely thin. The whole industry, quite frankly, has gotten hooked on just-in-time type of operations. We don't keep any significant inventory at all. We have to keep it in our mills for three days, to let it cool off and then ship it. We don't keep any significant inventory. The inventories for the system appear to be fairly lean, and continue to be so.

Our order files. I think most of the industry is quoted in random lengths, on the order of two-plus weeks out. Our mills vary a little bit, depending on where we choose to take them. Right now, things are moving well, and in pretty good shape from that standpoint.

Increased production costs notwithstanding-as I understand it, you'd be happy to sell at the current 199 level from here to eternity.

I'd say that's right. But 205 would be even nicer.

At what point do you think that economic rents generated by high OSB prices prompt people to start dusting off their blueprints? With respect to that, what’s your status of your joint venture with [Slowcan]?

I can't other predict peoples' behavior. I can only monitor ours. That is, and I think we've indicated clearly, our number one priority from an investment standpoint is putting in this technology and modernization across our existing mill system. That's underway.

We do have, with [Slowcan] a joint venture that intends to fill the bill interior [BC] at some point in time. As we look at that project, it's still a very good project. So it will likely be done at some point in time.

But we work on a routine basis with them. At some point in time, we'll decide if the market is right and the timing is appropriate to do so. But we've not decided that at this point.

Do you have a site?

We have a site and we have a permit. We can go when the time is right. But we have not decided that the time is right, yet.

Okay. Thank you.

Maybe one more question, and then I'll be available later for a follow-up.

Actually, that was your last question, sir.

Okay. Good timing.

Thank you all for joining us. As Bill said, he will be available. We appreciate your support. Pat's going to give the replay [inaudible].

Thank you. Ladies and gentlemen, this conference will be available from 11.30 Eastern Time this afternoon until midnight on April 30th. You may access this call by dialing 1.800.475.6701, using the access code of 680892. That number again is 1.800.475.6701, with the access code of 680892. If you're dialing internationally, the number will be 1 for country code, 320.365.3844, with the same access code of 680892.

That does conclude your conference for this morning. Thank you for participating in Louisiana Pacific's Earnings Call.