Louisiana-Pacific Corp (LPX) 2003 Q3 法說會逐字稿

Ladies and Gentlemen, thank you for standing by, and welcome to the LP Third Quarter Earnings Release Conference Call.

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 this call, please press star, then zero. As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Bill Hebert. Please go ahead.

Good morning. And an early morning it is. We appreciate your efforts in the early start this morning. Thanks for joining us on the Louisiana-Pacific Corporation Conference Call to discuss our financials results for the third quarter and the nine months ended September 30, 2003.

I'm Bill Hebert, Vice President of Business Development, as well as the primary investor relations contact for LP. With me on the call today are Curt Stevens, Chief Financial Officer; and Mark Suwyn, Chairman and CEO. We'll start the call with a review of the financial results for the third quarter and nine months of 2003, a few comments on the balance sheet, an update on the asset sale process.

Mark will then review the outlook for the next several quarters and talk about the results of some of our recent initiatives within our continuing operations. Finally, we will open it up to question.

As we've done in the past, this earnings call has been opened up to the public and we are doing -- also doing a webcast. This can be accessed through www.lpcorp.com. Additionally, to help with our earnings call, we have provided a presentation to provide summary 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 of the participants about our forward-looking statements comment that is included in our earnings release and shown on slide 2 of the presentation and also the discussion of the use of non-GAAP financial information included on slide 3. Rather than re-read these statements, I'm going to incorporate these into the discussion with this reference.

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

Thank, Bill. As Bill mentioned, I will be referencing the PowerPoint presentation that was included with our earnings release.

I'm going to start with slide 4 of the presentation. During the quarter the most significant story, obviously, is the increased price for OSB commodity products. OSB prices hit record levels for several weeks and continue at these levels today. Last Friday's random linked print it (ph) for seven-sixteenths OSB sheathing North Central was over $450 a square foot.

Mark will give us his views on this market a little later in the call. These price increases were slightly offset by higher costs due to weather-related disruptions, increases in raw material costs, primarily wood, energy and resins which I will highlight in a minute and the strengthening Canadian dollar compared to the same period last year.

With that, we are reporting today a net income for the quarter of 124.5 million or $1.17 per diluted share of which our continuing operations showed income of 110 million or $1.03 per share and discontinued operations also had income of around 15 million or 14 cents a share. The net income from discontinued operations is primarily a result of improved lumber pricing in the quarter as well of liquidation of [Inaudible] associated with the sale of certain of our lumber facilities.

Net sales from continuing operations was 675 million for the quarter. For the same period last year we reported net income of 3.3 million or 3 cents a share of which continuing operations showed income of 17.8 million or 17 cents a share and discontinued operations had a net loss of 14.5 million or 14 cents a share. Net sales from continuing operations next quarter were 415 million.

Now, switching to slide 5 which has the year to date results. For the nine month period ended September 30th, we are reporting net income of 108.8 million or $1.04 per share of which continuing operations contributed income of 120.8 million of $1.14 per share and discontinued operations showed a net loss of 12 million. Net sales from continuing operations were 1.6 billion for this period.

For the same nine month period last year, we reported a net loss of 19.4 million or 19 cents a share of which continuing operations showed income of 25.4 million or 24 cents a share and discontinued operations had a loss of 41 million or 40 cents a share. Net sales from continuing operations in that period were 1.2 billion.

We refer to slide 6 now real quickly and we go through some of the special items that occurred in the quarter that are generally not attributable to our ongoing operations. Included in the continuing operations are a gain of 22.5 million on the sale of certain timber and other assets, the details of which are discussed in footnote four of the release.

Offsetting this gain were two items, a loss of $5 million associated with an energy contract on a mark to market and a loss of about $700,000 associated with severance recorded as part of our divestiture plan.

In Q3 of last year there were four offsetting items, an increase in litigation reserves to $2 million, a gain of $57 million on the sale of certain timber and other assets, severance charges associated with our divestiture program of roughly a half million dollars, and an impairment charge of $18.3 million associated with the cancellation of our OSB project in Quebec.

After adjusting for these items on a pre-tax operating basis, we showed income for this quarter of $180.2 million compared to a loss in the same period last year of $9.7 million.

Let me go into each one of our segments. Side seven, our reference, our OSB segment. For the quarter, OSB prices showed significant improvement. We were up over $150 per square foot or 114%. This is a result of a continued, very strong market demand.

The operating profits from this segment are up about $100 million, $190 million from the same quarter last year and could have been higher. A portion of the increase attributable to the price was not realized due to increases in operating costs were approximately $11 per square foot versus Q3 of last year.

Of this increase, wood represented about $4 both in increased costs and outages, resident energy costs were about $2 and currency was about seven.

With the restarting of our Chambord, Quebec mill, which ended a 13-month strike early in Q3 and the start up of the Woodland, Maine OSB plant was acquired in trade with Georgia-Pacific in 2002, we offset some of the cost increase and set an all-time quarterly production record of over 1.4 billion square feet.

On a sequential basis, our operating costs actually declined slightly.

For the nine-month period ended September 30 as compared to the same period in 2002, OSB prices again, showed significant improvement up $70 per square foot or 50%.

From a profit perspective, earnings were up over 4X versus last year with sales prices offsetting increases in operating costs for approximately $20 per square foot versus the same period last year.

If you refer to slide eight, this is the slide we showed last quarter. It fits a little closer to OSB pricing. As you'll note on the chart, OSB pricing looking at just seven-sixteenths North Central basis, increased significantly in the quarter. To understand the impact of pricing on our results it's important to understand how we sell OSB, especially in periods of rapidly rising and falling prices.

We sell approximately 50% of our wood on the open market with typically a two to three-week order file. In this particular quarter we actually extended that to five weeks at times and 50% on contract. The open market wood is generally priced at time of order and the contract wood is generally priced at the time of shipment based on the random links published price of the prior week.

In both cases there are also discounts and other pluses and minuses.

Given our sales process, contract terms, and length of our order files for Q3, there is somewhere between a five to seven week lag and actual realizations compared to published prices. In addition, while the seven-sixteenths North Central price is generally used as a benchmark, LP with our 15 mills sells into all regions in North America. And we also sell a variety of products, not just simply sheathing.

While these prices generally move in the same direction, the magnitude can differ significantly.

Slide nine attempts to quantify a major component of our cost differential, which was utilities. This chart groups natural gas, electricity, and other utilities. For the quarter we're showing about an 11% increase over the prior year, just around $2 million, on continuing operations, and a 17% increase over the nine-month period, about $9 million. As you'll note from this chart, this increase throughout the organization [Inaudible] increases in the OSB business.

Slide 10 is our composite woods segment. Let me remind you that this segment includes our SmartSide OSB Siding, Hardboard Siding, as well as our Chilean OSB Mill. This segment also has one mill in Silsby (ph) , Texas that operates as a specialty mill but also produces commodity OSB products.

For the quarter, sales showed an increase of about 35%, and profits were higher by over 140%. The primary reason for this significant increase in profits is related to the commodity OSB produced at Silsby (ph) which I highlighted a few minutes ago, saw significant increases in profitability due to higher OSB prices. This mill accounted for approximately a $16 million increase in sales and about $10 million of the increased profitability.

With that being said, the rest of the business in the segment provided good results as well. Our SmartSide products continued to do well, capturing additional market share as demonstrated by a 12% increase in volume quarter to quarter. We continued to utilize our Chilean [Inaudible] for trim products for North America, as well as increasing our market share in South America.

In terms of costs, operating costs increased somewhat as this segment is impacted by the same factors affecting the OSB business. Offsetting the gains in OSB products were slight volume declines and continued price pressure in hardboard siding. Hardboard siding has been continued - has seen continuing weakness due to consolidation of key competitors and some slackening in demand. For nine months, sales and profits were up 12% and 14% respectively, almost entirely due to increased commodity OSB prices and the 18% improvement in the sale of SmartSide siding products.

The final [Inaudible] is our plastic building products. This segment includes our vinyl siding, composite wood decking and our plastic moulding business. Vinyl operations continued to show good volume growth, a 9% increase, and gain market share in a product category that's been a little stagnant the last two years. Average sales prices were up 5% for the quarter and in the nine month period 6%, and that's only partially offset increases in raw materials costs, primarily [Inaudible] .

Our decking (ph) business is showing significant improvements from the prior year. Our strategy implemented in 2002 of a good, better, best product focus has paid off. We're showing increases in both sales prices and volumes over the prior year and also for year to date. We continue to work to improve the efficiency in [Inaudible] of our existing capacity to generate additional needed volume to serve our customers.

Our mouldings business had a volume increase of 9% for the quarter, but is trailing for the full nine-month period due to slower retail activity in the first part of the year. Prices were down slightly to the [Inaudible] ; however, flat in the quarter. Additionally, we also so increases in raw materials in this business. We continue to explore opportunities in our existing facility and with our alliance partners to expand the business.

Slide 12 references our engineered wood products business. This includes laminated veneer lumber and i-joists, plus related products. We continue to grow our engineered wood products both for the quarter and year to date. We saw significant growth in both LBL (ph) up 17% quarter to quarter, and i-joists up 10% quarter over quarter, as we [Inaudible] new customers and expanded our presence with the large production builders.

Our focus continues to be on the relentless reduction in costs, better geographic manufacturing distribution, and maintaining customer relationships. In addition, the focus [Inaudible] on maximized potential of our existing facilities, we continue to look for other alliance opportunities.

While we're seeing very good results in terms of sales and our sales prices appear to be levelling off following several quarters of decline, we've been negatively impacted in this business by the increase in raw materials cost, primarily veneer, OSB and lumber. Additionally, the currency fluctuations against the Canadian currency negatively impacted this business by about $3 million for the quarter and 6 million year to date.

Slide 13 looks at the tax rate, the estimated effective tax rate on continuing operations which is estimated to be 45 percent for the full year of 2003 as of the end of September. If you remember last quarter, the effective tax rate was 52 percent so this has gone down due to the profitability of ongoing operations. The primary difference between the statutory rate of 38% on continuing operations and the calculated rate relates to a permanent difference associated with certain inter-company debt which is denominated in Canadian dollars and therefore generates gains and losses upon re-measurement into U.S. dollars that are not taxable. These gains and losses are eliminated within the consolidated reporting.

Based upon our inter-company debt, we estimate that for each one cent change in the exchange rate this will create a permanent tax difference of 4.2 million or affect the tax provisions by about 1.6 million. Going forward, the impact of these dollars on our rate will continue to depend on our level of income.

Slide 14 of the presentation looks at the balance sheet. Obviously the impact of our very strong operating performance and continued execution of our asset sale programs has resulted in a dramatic positive change to our balance sheet. Let me just highlight a few of those. The key balance sheet statistics at September 30 and December 31st of last year include, September 30th, we had 490 million in cash on the balance sheet. 382 million in cash and cash equivalents and 108 in our restricted cash account.

The restricted cash represents the cash collateralization of our outstanding letters of credit which we routinely issue for workers' compensation, certain judgments and industrial revenue bonds and other items. This cash collateralization is directly related to our recently amended bank credit agreement which removes most restrictive covenants.

Working capital was over 500 million compared to 225 million at 12/31/02. The increase is primarily due to increases in cash and receivables and reductions on the current portion of long-term debt. Net debt, non-GAAP term as defined in our presentation, was about 130 million versus 517 million due to good operating cash flows and additional cash from asset sales.

Capital expenditures for Q3 were 22 million and for the year were just under 50 million. We currently project capital expenditures for the full year of 2003 to be about 85 million versus 44 million we spent in 2002.

Additionally, DD&A for the first nine months was around 100 million in continuing operations and we expect it to be about 125 million for the full year. During this period, our book value per ending share was $10.61 versus $9.62 at the end of the year.

As I mentioned earlier, our net debt at the end of the quarter was 130 million. We announced last Monday the closing of the final large timber sale which will generate an additional 257 million in cash. Due to continued strong OSB pricing, operating cash flows should be relatively robust in Q4. Combined, this should put LP in a net positive cash position at the end of the year.

So the question that Bill and Mark and I are addressing daily is, what are you going to do with all that cash?

Slide 15 talks about that a little bit.

In our announcement of the asset sale program about 15 months ago in May of 2002, we talked about the use of proceeds. We stated that the asset sale proceeds would be used to reduce our leverage, reduce our debt, increase our financial flexibility, vest our remaining businesses, and optimize shareholder value.

This is still the plan. For the divestiture program, our goal was to build appropriate cash reserves and once done review the cost benefit of retiring the various tranches of long-term debt. All debt that can be easily paid down, revolving credit facilities, the 4X notes, miscellaneous items, have already been liquidated. That leaves the public notes.

We have been and continue to explore a number of different strategies regarding these bonds. During the third quarter we did repurchase about $16 million of a public bond at premium prices but they were accretive to our earnings.

As the remainder of the notes there are several viable alternatives. First we can continue to explore and execute open market repurchases at appropriate price levels. We are looking at potential tender offers for some, all, or a combination of the notes. Or we simply can wait until 2005 to pay off the 8.5% bonds and make it an early call on the subordinated notes.

Obviously with the current and expected cash flows, this is clearly one of the primaries of focus for the management team over the next several months.

We continue to make investments in our current business. We've talked about our plans for the cost reduction in OSB operations to take a further 10% out of our operating costs. We expect this will cost about $250 million over the next three to five years, a portion of which, about $50 million, we will complete in 2003.

We continue to look at our other business to make capital investment, which will improve our competitive and cost positions. The funds for these efforts should come from operating cash flows.

As the shareholder initiatives, you may know we currently have certain restrictions contained in our subordinated debt indenture. With the amendment of the bank credit agreements we no longer have any restrictions there, so this falls back to the sub-debt indenture.

The restrictions limit our ability to pay dividends to 25 million per year and place significant restrictions on our ability to buy our own stock. As part of any note repurchase, we continue to look at opportunities to remove these restrictions.

One last item I want to cover before I turn things over to Bill is the recent announcement by Standard & Poor's last Monday when they upgraded our credit ratings by one notch overall. Our corporate credit rating and the rating in our tranches senior notes are now double B+ and our subordinated notes are double B-. We are pleased by this action by S&P but will continue to work with them and Moody's towards our goal of returning to solid investment grade ratings.

With that, let me turn it over to Bill who will give an update on our asset sale process.

Thanks, Curt. I'm looking at slide 16. Let me give you a quick update on where we stand on asset sales and how we'll move forward to completion.

During the third quarter 2003 we closed on several blocks of timberland totaling 105 thousand acres and several sawmills and realized $102.3 million in total value.

The way that total value breaks down is $89 million in cash or soon to be cash of which $25 million is included in other assets representing one timber sale that hadn't yet been monetized at 9/30. And $11 million is included in receivables at 9/30 represented a portion of the purchase price on the sawmills.

All of these announced have now been converted to cash. There was $6.6 million in timber and saw notes, which are included in other assets. And then there was $6.7 million in other consideration, liquidation of working capital and a small piece of contingent consideration.

This brings our total cash or soon to be cash received so far this year to $270 million and $430 million since we began a restructuring program in May of 2002. If you look at it in terms of total value created, cash proceeds, working capital, liquidation and liability transfer, we've generated $400 million in total value program to date.

This past Monday, we announced the closure of Big Block II (ph) , 463,000 acres in Texas. The gross purchase price was $290 million. As we discussed earlier, we did use a tax-deferred structure in this particular timber sale. My oversimplified explanation of what this means, as you get about 90% of the proceeds in cash and take notes for the remainder.

So of the $290 million in gross proceeds, we will realize $257 million in cash and $28 million in notes. These notes will be classified on our balance sheet in "other assets."

So what's left to be done? Not much. We've got four sawmills and our decorative panels business. Two of the lumber mills and the decorative panels business are under letters of credit, with sales expected to occur either in the fourth quarter or the first quarter of 2004.

One other sawmill, we are in Phase II of a very limited auction process and have several very good buyers that we're talking to. And the last sawmill, we're heavily in discussions as we speak. Currently, you know obviously we believe we will exceed the high end of our previously provided guidance of $600 to $700 million by over $50 million in value to our shareholders.

With that, let me turn the call over to Mark Suwyn, who will provide his reflections on third quarter accomplishments and how we're managing our business and outlook for the next several quarters.

Thanks, Bill.

There are some areas I'd like to comment on. And let me start with our people.

The organization is absolutely hitting on all cylinders right now. Yes, we have many other things to accomplish, and some ground to gain in some of our businesses, but those things are very well defined, understood and under way.

Our operations are performing extremely well. Our production quality, safety, regulatory compliance, et cetera have never been better. We continue to set production records in many of our products. For example, our OSB production was 1.45 billion square feet this quarter; an all-time record.

In engineered wood, our operations are operating at or near full capacity. And our JV (ph) with [Inaudible] is also doing very well, following the startup earlier this year. In our specialty businesses, we're also running extremely well, as our products continue to gain share in all markets that we're participating.

We're beginning to execute our capital plan, which will only make things better in terms of both cost and productivity on an ongoing basis. These are well-defined projects in terms of scope and expect a return, and we're monitoring very closely to ensure that we have the resources to get those returns as we put these in place.

Our market share is gaining every day, as our customers grow and appreciate the value that LP is bringing to the relationship in terms of the breadth of products and services, and simple things, such as on-time shipments, the ability to deliver what we say we will, which is critical. All of our product lines are either expanding relationships with the existing customers or gaining new customers and markets.

Our asset sale and debt reduction plan has gone extremely well. As Bill outlined, we're on track to deliver more than we promised in May 2002 and this is a result of many people focused on a very defined goal and accomplishing. By the way, this is the only area where I accept being over budget and in several cases, they have done.

I do need to point out that almost all of this has been done and managed by our people without the help, or I might add, the cost, of a significant number of investment bankers and advisers. All of these things are due to our people, they're well-trained, they know what they need to do and they are executing very well.

Now, let me reflect a little bit on OSB pricing and cost. To understand where we are today, you need to have a little perspective. In 2001 and 2002, we had an over-supply situation and that leads to very low pricing. However, when we have such low pricing OSB penetration into plywood's share increases thereby setting the stage for a resolution of that over supply situation unless vast new amounts of capacity come on stream.

Well, no such new capacity has started up in the last year or so and so the predictable happened. OSB supply and demand came into balance. What we experienced earlier this year was somewhat of a perfect storm for OSB pricing. As you'll recall, we, and others, took normal maintenance downtime late last year to prepare our mills for what we believed would be a reasonably healthy year in 2003. Now, several things happened in the early part of the year that changed all that.

Wet weather, particularly across the south and in the upper Midwest prevented us from getting adequate log inventories in front of some of our mills. That same wet weather delayed the building season particularly in the upper Midwest and the Northeast. Meanwhile, the threat of war and the concern over the direction of the economy kept most of the dealers and distributors in a very wary mood and they didn't put nearly as much inventory in their yards in preparation for the start of the building season in the upper North and upper Midwest.

Then, in late May and early June, when the weather did straighten out, everybody ordered and the industry production simply couldn't keep up with demand. Since this is a product that's sold in a constant daily auction, the product goes to the highest bidder and prices shot up. This tight supply situation has continued well into the fourth quarter.

The interesting dynamic to watch over the next several months is whether the rain will slow so the industry can rebuild adequate log inventories for the Winter and whether we can get in our needed maintenance downtime to get ready for a fairly robust 2004.

Now, regarding costs, we saw a slight decline in our OSB operating costs during the quarter after seeing a sharp run up in the first quarter. This is primarily due to better operations at our mills. We'll see significant reductions in our costs, particularly wood and resin next year assuming that conditions around timber harvesting return to normal.

Now, how long this tightness prevails is really dependent on housing starts and capacity additions. We track very closely the new projects that are either coming on stream or scheduled to come on stream and there is one new plant on stream in this fourth quarter and one scheduled for mid to late 2004 and that's it.

Based on what we know and looking at substitution rates, et cetera, we're fairly confident that things will remain in balance for the next few years, absent a crash in housing which we don't anticipate. We're also recognized in a market segment, structural panels, which is about 42, 42 billion square feet, which by most forecasts will continue to grow at 2% to 3% annually, fueled by strong housing and a continued growth in repair and remodeling.

Based on history, OSB will get all that growth. Plus any other business that we can take from plywood or other products we can make other markets.

The next area I'd like to address is the question that Curt posed earlier. So what are you going to do with all that cash?

First of all let me make it clear that we don't get nervous with significant cash in the bank. It does not burn a hole in our pocket causing us to do dumb things in order to use it. That said we've been very clear from the start of our asset sales that the proceeds will be used to reduce debt.

Herb (ph) discussed several strategies that we're exploring in this regard. And while it's a high-class problem to have, we are spending a lot of time thinking about and working on the various strategies. And you'll be hearing more about this in the coming months.

We've talked about our internal capital-spending plan for the existing businesses. This is simply a case of continuing to execute well, bringing the projects in on time, and at or below budget in generating the expected returns.

What we're not likely to do is go out and dramatically increase that budget and get beyond our capability of managing those projects. So therefore, I don't see us likely to exceed our DD&A in any given year.

In terms of Greenfield projects, we track OSB penetration rates in the various structural panel markets to judge when we're going to need such additional new capacity beyond what we're going to get from our modernization.

We're working with our JV partner, Slocan (ph) , with the hopes of moving forward in the foreseeable future on the OSB plant in northern British Columbia. If we were able to get things moving late this year or early next year, our expectation is that we might start up in the second half of '05. No final decision has yet been made.

Obviously what I just talked about doesn’t use all our cash. We've talked before about dividends and share repurchase. We were able to amend our banking agreements that remove one layer of restriction, but we have other restrictions primarily contained in our subordinate bond indenture.

Those restrictions allow us to pay up to $25 million annually in dividends. And we'll be working with our Board over the next couple of meetings to consider that step.

Regarding share repurchases, we are limited to buying shares basically equal to the net proceeds we receive from the exercise of employee stock options. So we can't consider a major share repurchase announcement until these covenants are addressed.

Finally, we're working with our various financial stakeholders, our banks, the rating agencies, et cetera, to define the appropriate financial profile for the future. We will keep a very conservative balance sheet. This will involve keeping some cash on the balance sheet through the cycle. What we're still working through is just how much we will need to keep for our company and cyclical business and also recognizing we no longer have the timberlands as a security blanket.

So what else is there, acquisitions? In our continuing businesses, we are interested in growing each of these businesses and finding the right acquisition at the right price is a very prudent way to grow in our existing areas.

However, we want to - what we want to do is position ourselves so we can grow and acquire through the cycle. I kind of doubt in today's environment we can come to an agreement between our view of long-term value and today's actual market values, particularly in OSB.

Our view of long-term OSB pricing fundamentally hasn't changed; the dynamics haven't changed. We're just in an unusual period.

The last topic I'd like to discuss before we open it up for questions is our recent announcement regarding the move of our corporate office from Portland to Nashville, Tennessee. If you look at how the company has evolved the last six or seven years, there's no question that our center of gravity has moved East. We also need to consolidate and streamline our management and decision-making process to ensure that we make good decisions and implement our growth strategies as well as we have executed our divestment strategies.

With the move, we will consolidate all of our key decision makers in one location, as we ponder where we will take the company in the future. Most of these moves will be taking place over the next three to 12, 18 months. I can tell you that my wife Pat and I have found a home in Nashville and we're anxious to get on with the move.

With that, let me turn it back to Bill, who will open the call up to questions.

OK. Robert, we're ready for questions.

Thank you.

Ladies and Gentlemen, if you wish to ask a question, please press star, then one, on your touch-tone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star, then one, at this time.

And our first question comes from the line of Joe Steppaletti from Goldman Sachs.

Yes, hi - good morning. I was just wondering, on the project in northern B.C., if you could give us a little refresher on the size of the project and the total cost that's expected there and what your share would be. I assume it's 50%.

Joe, this is Curt. That project is a 50-50 joint venture with [Inaudible] , our partner. If you'll recall, what happened there is the British Columbia government gave out more wood allocations that could support facilities. And so the two companies took their wood allocations, put them in a joint venture, and we intend to build a 700 to about 750 million square foot mill.

And that's in Port St. John, which is about 40 miles north of Dawson Creek, which is Outpost One on the Alaskan highway. As a side note, Dawson Creek is one of our lowest-cost mills in the system. So this is an area that we're familiar in operating within. So that's the intent on project costs.

It's going to be somewhere in U.S. dollars, about $130 million for the mill. And our 50% would be $65.

Oh, OK. And the - I guess the other thing, do you have a cap ex budget for 2004 that you could share with us that, you know, excluding the [Inaudible] project or the possible project?

We're in the process of doing our budgets. But, as Mark said, our DD&A (ph) is about $125 million. So we'll be below that. My guess is we'll probably be close to the $100 to $105 million range, with the vast majority going into two different areas.

One, I talked about the potential expansion of our decking business. You know we do see that with CCA (ph) being banned by the end of the year, that there's going to be an increased demand for that product line. And the other would be in the OSB re-capitalization plan in our existing facilities.

OK, great. And just one last thing. Which bonds did you repurchase?

The '05s.

OK, thank you.

Thank you.

Our next question comes from the line of David Martin from Deutsche Bank. Please go ahead.

Thanks, and good morning. Just a few items.

First of all, Curt, I believe early on in your comments you mentioned price changes quarter to quarter. And I just want to confirm that you said $150.

In the increase in the...

Commodity OSB, yes.

Yes.

$150? And then also on the same front, what are current pricing levels versus the average in the third quarter.

If you look at that chart that we had in the presentation, we have not seen any decline from the end of the quarter. Seven-sixteenths is still being quoted right around that 460 level. So we have not seen any decline since the end of the third quarter.

And what would the average have been for the third quarter?

Well, North Central would be up about $80 versus third quarter average.

OK. And then, secondly, moving on to your operations, if you, kind of, look at your production levels in the third quarter you effectively, kind of, ran at full capacity and as Mark mentioned last year, in the fourth quarter you took a lot of maintenance downtime.

Right.

What are you plans looking forward into the fourth quarter and what impact will that have on your production volumes.

Well, when you run an OSB and you run it 24/7 you do need to take maintenance downtime and I think all of our competitors have also mentioned this in their comments. So we do have some planned maintenance downtime at our facilities. In addition to that, to do these capital projects were - I think as our OSB manager has said, if we're, kind of, changing the oil while we're running on the Indy 500 at the same time.

So we will need to take some downtime to implement those capital projects. But those - that downtime will be very carefully planned to minimize the outages that we might have. So I would - and I don't have a number for you. I think we - last year we took two weeks across the mill system out, on average. It won't be that much this year.

I think you might almost have, kind of, an offset because we had forced downtime because of log shortages at several mills in the third quarter and if it doesn't keep raining, we might be able to keep all of our mills running from that standpoint but we'll take some maintenance and capital downtime.

The other thing is that the system is still very much sold out.

Yeah. That's why we're, kind of, minimizing the amount of downtime.

OK. And then lastly on your capital program, you've stated in the past that you've planned through efficiencies and de-bottlenecking to increase your annual capacity by, you know, a billion square feet or in excess of 15% over the next few years, how much of this billion square feet has been realized and how should we think about modeling this additional capacity going forward over the next two to three years?

That's probably going to be back end loaded at the end of the project because what you need to do is implement multiple projects at a facility to get that capacity. So today, you know, it probably has a slight impact in 2003. A little more impact in 2004 but you'll see the bulk of it in 2005 and 2006.

OK. Thank you.

Thank you. Our next question comes from the line of Chip Dillon from Smith Barney. Please go ahead.

Yes, good morning. When you look at the earnings, we're getting, you know, the $1.03 number, I believe, that you're saying from continued operations but just so we're on the same page, I would think there are three, kind of, unusual things in the numbers. The gains that you mentioned that were 13 cents, three cents of charges, I guess, tied to the energy contract and then there's also the early retirement of debt which I don't think you spell out with the tax impact but it looks like that's about a penny, and so if you net all that, it looks like it's about 94 cents; is that the right way to look at it?

No. Actually, if you strip all that out on an after tax basis, you're probably in the $1.05 to $1.06 range.

But that would be including the discontinued operations; right? In other words, if you - that's including the lumber mills that are separately reported.

Because you're saying continuous ...

Yes, I got it. That's right. That does include the discontinued on the lumber. That's correct.

OK. So if we take out then it's the, you know, if the 90, it's the, you add 13. I'm sorry. You take away 13 and you add four and it's nine cents. So it's a dollar; it's 94 cents.

I guess the second question is just looking--Bill mentioned that the average, just as we look at the fourth quarter, the average OSB price he mentioned was about 80, I'm sorry, were about $80 above the random links average. And yet, you know, there is that lag you mentioned. Plus October I would imagine you probably pretty well sold out on the spot basis what probably 'til mid to late November.

It would seem like you probably, I mean, you know, have earned at least, you know, 55, 60 cents just in October alone. Is there anything wrong with my math?

A question for December I think.

Yes. I don't think there's anything wrong with your math. As Bill said, you know, it can come off quickly.

I mean you could lose some of it in December if it's a bad market.

Right. Right. But October will be a very good month.

Yes. Let me ask you this, when you look at the seasonality, you know, we're all sort of sitting here waiting for the market to ease up as it will inevitably do with the weather. How do you think it's going to evolve given that, from what I've heard, you might comment on this, that there've been shortages of panels or at least not the ability for people to all finish their projects, you know, before the winter.

And also given the need to refill the pipeline, do you think that's going to have any impact with how far the price drops, how long it drops, and when it comes back next spring?

I think absolutely it will. The issue is how do you judge how much that is?

The other factor is prices at the levels that they are right now, the other uncertainty is how much inventory build will dealers and distributors do in the first quarter to get ready for next year's building season? And it's a bit of a scary thing to go out and load up wood sitting in your - on your ground in the first quarter if you're paying in the $3-400 and some price range.

So it's going to relatively uncertain period during this time. But if housing stays as robust as it has, it's going to probably be a modest adjustment until we then get back into the spring and it'll probably continue at a fairly good balance.

OK. And then just a technical question on the divestiture program.

I think Bill, you mentioned if I got it right, that just so far this year you've gotten, I think this is through September 30, $270 million in cash-in and then since May of '02, $430 million in cash. And then what was the total consideration?

I think you mentioned $400 million ...

Four-eighty was the total consideration if you take into account, you know, liquidations of working capital and liability transfer, et cetera.

OK.

That's program to date.

Got you. OK. And then what we're going to see is another 290 I think you said, right, from the big block, too?

Our total consideration but it also includes our portion of the notes but 257 cash.

Two-fifty-seven in cash. But the way you're counting it, you would count the total value received at 290, is that fair?

Correct.

Correct.

OK. And then you mentioned, I know that you're probably in negotiations, but could you just again review what comes after this that you haven't announced? Or you might just give us a bundle of sort of some ballpark value, not that it's going to be that much, for the sawmills. And what was the other plant you mentioned that you're also selling still?

It's our decorative panels facility [Inaudible] .

There could be as much as another $50 million in that.

OK. And that wouldn't happen till next year, probably?

Well, we're hoping to get a couple of them done in the fourth quarter.

OK. And the last question is, I know there's a covenant issue with the dividends, and I guess two questions. Is the covenant issue just tied to the dividends and not to buybacks? And secondly, is a middle of the road path to dealing with that, as opposed to just going out and paying up for the bonds, could you pay a little extra interest and get a consent? Is that something that you would think about doing?

Two things. One, your first question, there's a limitation on dividends of $25 million a year. The restrictions on the share repurchase are basically - we use the proceeds from stock option exercises to repurchase share. So it's very limited on the share repurchase.

There is a general $25 million bucket for what they call restricted payments. So you could do some under that. But it's pretty limited under share repurchase. And then as far as have we considered just going out with a consent, we have. And we'll continue to look at that.

Got you. Thank you very much.

Thank you.

Our next question comes from the line of Rich Schneider from UBS. Please go ahead.

As you mentioned, you had a notch upgrade by S&P. If S&P and Moody's over time were to upgrade you both to investment grade rating, how would that impact these covenants on the subordinated note?

The subordinated note has got two sets of covenants. One which stay with the notes, which is basically a senior note package regardless of the rating. But the notes are rated investment grades. It's not a company rating. The note rating, Rich...

OK.

... then there's a whole set of covenants, including the ones I just talked about that fall away. That's obviously our preferred course.

OK. And when you've had discussions with S&P and I guess Moody's, it seems like, at least with the S&P announcement, they said that the company is earmarking cash for debt repayment. Could you give us an idea of how much cash that earmarking is for debt repayment?

Well, clearly, from our perspective, there's no question with today's position that we would look at obviously paying the 2005s on their maturity date, but that we make the call on [Inaudible] , which would roughly be about 375 (ph) .

OK. So that would be the cash that would be earmarked?

I think that's right. If you look at the 10 (ph) , where they're priced today, it just simply isn’t accretive to repurchase them.

OK.

And having that piece of long-term debt is probably not a bad part of the capital strategy.

And there was a mention of the hardboard siding and the market being very competitive with other sub-straights (ph) , et cetera. What is - and I know it's not a huge part of your business. But is this - you know, since you're cleaning up a lot of things, how are you looking at hardboard siding?

Well, the way we look at hardboard is we call that our last man standing strategy. We have the lowest cost position in the industry in the [Inaudible] product line. So if anybody survives in this business, it's going to be us.

We do believe that competitively somebody is going to exit this business similar to what Masonite did about a year and a half ago. When Masonite exited the business we got about - we captured about 65% of their volume and we intend to do the same thing with another competitor. So the way we look at this is, you know, we'll run it as long as it's generating positive cash flow but it really is not a business that we're going to do significant investments in on a go forward basis.

As they continue to lose share to other competing products [Inaudible] ?

It's going to lose share but as that pie shrinks we intend to ...

Right.

... bigger and bigger piece of that pie to utilize our capacity and we think - we think others will suffer much before we do.

The other thing on hardboard is that the Rocky Mountain states are big hardboard markets, Denver in particular. But Denver is a housing market that's either white hot or it's dead. And it's kind of dead right now. So as that comes back, I think it will be somewhat helpful for hardboard.

Curt, you said, again, and I know it was asked, but you said that your OSB prices were up sequentially $150 in the quarter?

Not sequentially. Q2 of last year - or Q3 of last year.

And sequentially, what was the move?

Sequentially - hang on. Bill's got it. Hang on.

Looks to be about $115.

Sixty-seven percent higher. About 115.

OK. Just doing - just a quick calculation here. So, yeah, OK. So that, you know, basically $160 million move in your profitability going from the second to third quarter was really you got the full effect of the price because costs look like they stayed at least comparable?

Costs are actually down just a little bit.

OK.

But we also had a 20% increase in volume. So ...

Right. Right.

... you had the volume increase plus the price.

OK. OK. Great. Thanks a lot.

Thank you. Our next question comes from the line of Mark Connelly from CSFB.

Just a couple of quick things. First, a little clarification. We talked a lot about OSB prices, can you tell us what's happening with order volumes in October versus what you would normally expect and it's been pretty red hot, but can you give us a sense of what it's done versus September and what would normally happen?

Well, we've been basically sold out since probably April, May and we're still sold out. So we're selling everything we're making and are still in that position today.

And what is normal in October versus September?

Well, October usually is a fairly robust month because a lot of places in the Upper Midwest and the North East, they're trying to close in as many - frame in as many houses as they can so they have something to work on in the Winter inside. And so it usually is a pretty strong month. By this time, going forward, you might expect a little bit of softening which we haven't seen yet. Most of us have pretty significant order files out anywhere from three to six - some - we hear of some people who are out eight to 10 weeks.

And so right now, it would appear as if the demand is still very much right on top of our ability to supply.

OK. And just a hypothetical question. We have a lot of plywood producers who are, sort of, involuntarily down and I know the normal pattern is for OSB to take business away from plywood and keep it but do you have any sense, Mark, of any risk that as plywood comes back, there's actually a shift of share back in the other direction?

Well it's an interesting thing because there were a little bit of time when plywood lagged our pricing and was actually a little bit below. Of course now they've shot by and their prices are right up there above OSB.

So I think that the, since we're not in that business I can speculate, I would guess that the plywood producers are, were making serious judgments as to whether it's better to run what they've got at today's prices or to go out and spend the money to start up older, higher cost mills, cause an over supply, and watch the prices plummet.

And that'd be a tough - I think that would be a tough call for somebody to make.

Let's hope they don't.

People might start back up, but that's a tough thing to do, to go back and restart up a plywood mill.

Right. One last question, your decking expansion plans, can you give us a sense of what that will be for you in terms of, I know you don't give out volumes, but can you give us sort of a percent increase in that and what it's going to cost?

Well we're going to be doing it kind of in step wise fashions and making sure that the demand, et cetera, that we want is in fact, you know, solid and sound so we don't get too far ahead of ourselves.

We've got really four phases. One is a beginning remount of our Meridian facility, which would, if we did both phases, would cost about $15 million plus or minus and would probably take that up, what, 60 ...

Double.

Almost double its capacity.

And then a similar type project, a little less expensive in Selma to follow that could do the same thing. We'll time those to follow the market. We got to get a little bit ahead of it because the demand is such that a challenge would have us to meet the demand.

It's going to be a relatively uncertain year next year because this is going to be the year when CCA treated wood is no longer produced. And how much of that is going to translate into more demand for this kind of a product versus some alternative materials is yet to play out. It's going to be kind of an unknown territory.

OK. You've got some high quality problems. Thank you.

Yes.

Thank you. Our next question comes from the line of Steve Chercover from D.A. Davidson & Company.

Good morning. Several of my questions have been answered.

But first of all, can you give us an idea of what the trends are for resin prices and wood fiber? Are they starting to come down?

On the resin side we did see a slight decrease in Q3 and we expect to see a further decrease in Q4 on that.

On wood prices, not yet. With the wet weather there's still a lot of competition for the wood.

We expect, frankly, for wood to be up probably through the first half of next year and then start to come down in the third quarter.

And you're obviously being disciplined buyers of wood. You're not - you don't want to pay up for inventory?

We are - we are managing it very carefully, Steve.

Recognize that we have - we're in many places competing with pulp mills. And pulp mills have a billion dollars sitting on the ground. If they don't want to stock, you don't really want to get into a fight with them because they have no upper limit.

Generally what we do in those circumstances, Steve, is we go further out. So rather than trying to destroy the local wood market by driving prices up, we'll go into other wood markets and absorb it in the transportation costs.

OK. Have you guys quantified yet the anticipated expense of moving the headquarters?

We've obviously got estimates for, you know, a variety of aspects of that, both the personnel side as well as what it might take from a capital standpoint for the newer facilities. As we talked about, we will be moving our research and development laboratory from here. We are consolidating - we'll be shutting down our Charlotte, North Carolina office entirely. We'll be moving people from the corporate headquarters here in Portland and we're also taking people out of Coneral (ph) and Chambord (ph) .

We will also be taking actions to reduce the amount of space we have in both of those places that will generate savings from lease terminations as well as potentially selling some of those facilities and leasing an appropriate amount of space in the general area for the remaining employees. So, again, we're working on those estimates. We don't have anything at this time to publicly talk about.

OK. And one final question and I'm not sure if you'll know the answer. Do you have a sense that people are double or triple ordering for OSB in order to get as much as they can as soon as possible?

We don't - we don't think so. You know, our sales people are pretty savvy to that. We haven't seen that.

If you look at the various surveys of lumberyards and dealers, et cetera, their inventories are very low. And in addition, they might want to try to do that, but nobody has any wood to sell like that. So, from what we can tell, there's no - nothing sitting out there causing that - waiting to come back and bite us.

So really, it's fair to say that the fourth quarter is almost done.

Well, certainly October and through November. As Bill said, December is really the issue for us.

OK. Great. Well, congratulations. It's nice to have some wind at your back.

It is.

Robert (ph) , I know there's about eight companies reporting today so maybe we'll take another question and then, you know, we can take follow-up calls directly from people.

OK. Thank you. We'll go to the line of Peter Ruschmeier from Lehman Brothers. Please go ahead.

Thanks. Good morning and congratulations in a long series of assets sales that have been successful and the strong results. Curious if you could comment on the date of the next board meeting and if you could elaborate on your expectation for the timing of a decision that’s more definitive related to the B.C. OSB project.

The - our partner, I know, is having a board meeting this month. So they are - they are reviewing it with their board. Our board meeting is on November 1, Pete.

OK.

And we intend to review it with our board at that point in time. The permit that we actually have we extended the wood reservation as well as the permit and under the current obligation of that permit, we need to really put footings in the ground by next summer to keep that in place. So that's why timing is important.

OK. And Curt, a couple cash flow questions for you. Can you comment on your expectation for cash tax rates going forward and also on cash flow? What's your expectation if you have one, near-term, for working capital from here?

I'll take the tax question, Pete. As you know, from the footnotes, we've got a substantial net operating loss and ANT (ph) loss carry forward. We'll probably use most of those this year so our cash taxes for '03 are going to be pretty minimal. After that and once they're gone, we'll probably be paying full, you know, 38-40% tax - cash taxes.

OK.

We'll have some timing differences as we roll out these capital projects in terms of when, you know, depreciation is taken for tax purposes versus [Inaudible] . But that, you know, we will be paying cash taxes. Working capital, you know, we talked about the log supplies. We do need to build up some log suppliers. You know, some of the products like the decking and some of the, you know, specialty products we generally do build some inventories for Summer for second and third quarter shipments but that's not substantial [Inaudible] and I don't think we'll ...

OK.

There was an increase in receivables from the end of December but that was really seasonable. We don't ship much in the last two weeks in December and we didn't last year. And then pricing, I will tell you that I just looked at our receivables report and we're less than 20 days of turnover, so we're doing very, very well there.

OK. Great. And last question, if I could, any noticeable trends in your transportation costs to date? Do you expect any meaningful change in your transportation costs going forward

Well, last - last year when oil prices shot up we did get fuel premiums from our loggers. So those have stayed in place. They should ameliorate a little bit but they're still in place. So there's been an increase but I wouldn't say it's been dramatic this year over last year.

Great. Thanks again and congratulations.

Good.

Thanks.

Robert...?

Yes, sir.

We will be available following the call for any follow up questions, either myself, Bill Hebert or Becky Barclay (ph) and we appreciate everybody participating in the call at this early time this morning. So, thanks for your attendance and Robert will give the replay details.

Ladies and gentlemen, this conference will be available for replay after 9:30 a.m. today, Pacific time and it will be available until October 29th at midnight. You may access the AT&T executive playback service by dialing 1 800 475 6701 and entering the access code 699596. Once again, those numbers are 1 800 476 6701 and entering the access code 699596. That does conclude our conference for today. Thank you for your participation and thank you for using AT&T executive teleconference service. You may now disconnect.