Louisiana-Pacific Corp (LPX) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Louisiana-Pacific earnings release conference call. At this time all phone participants are in a listen only mode.

Later there will be an opportunity for your questions with instructions given at that time. If you should need assistance during today's call, please press star then zero. As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Bill Hebert, Vice President of Business Development. Please go ahead.

Good morning. Thanks for joining us in the Louisiana-Pacific conference call to discuss our financial results for the fourth quarter and the year ended December 31, 2003.

I am the Vice President of Business Development as well as the primary investor relations contact for LP. With me on the call today are Curt Stevens, Executive Vice President of Administration and Chief Financial Officer and Rick Frost, Executive Vice Product, Commodity Products. Mark Suwyn is going to try to dial in. He is in meetings and will try to get in on the call but he may not be able to make that.

We'll start the call today with a review of the financial results of the 4th quarter and the full year of 2003, a few comments on the balance sheet, and an update on the asset sale process.

Rick will then review the accomplishments for 2003 and talk about the outlook for 2004. Finally we'll open it for up questions. As we've done it in the past this earnings call has been opened up to the public and we'll also be doing a webcast through WWW.LPCorp.com.

Additionally to help with our earnings we have provided a presentation to provide supplementary information along with the call. As we go through the call we'll 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 of the participants about 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 side 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 you very much, Bill. I'm going to start by referring to slide 4 of the presentation. Clearly 2003 with us the year of OSB. As in the third quarter, the most significant story in Q4, was the continuing pricing of OSB commodity products. OSB prices hit record levels for several weeks with a decline toward the end of the quarter and now in January and early February a rebound to close to the record levels today. Last Friday's OSB sheet in north central was over $400 per thousand square feet. Very strong number. We often talk about the leverage of OSB pricing.

For Q4 the increase in price provided $250 million of additional pre-tax profits compared to the same quarter last year. The full impact of the higher prices was partially offset by higher costs related to the strengthening of the Canadian currency, weather-related disruptions, increases in some of our raw material costs, primarily wood, energy and resins that Rick will talk about in his remarks.

We are reporting today a net income for the quarter of $172 million or $1.60 per share. Most of this income, virtually all of it came from continuing operations with this continuing operations showing income of around half a million dollars. Net sales from the continuing operations were $734 million for the quarter. For the same period last year, we reported a net loss of $43 million or 41 cents a share, of which continuing operations had a loss of $28 million or 27 cents a share, and discontinued operations showed a net loss of $14 million or 14 cents a share. Net sales from continuing operations during the same quarter last year were $360 million.

Turning to slide 5, which has the full year results for the year ended December 31st, we are reported net income of $281 million or $2.63 a share on a fully diluted basis, of which continuing operations contributed income of $292 million or $2.74 a share, and we had a loss in our discontinued operations of about $12 million or 11 cents a share. Net sales from continuing operations were $2.3 billion for this period. This compares to net sales last year of $1.6 billion.

For the same period last year, reported net loss of $62 million or 59 cents a share, of which continuing operations showed a loss of $3 million and discontinued operations have a loss of $55 million.

On slide 6 of the presentation we provide a reconciliation of some of the special items during the quarter that are not generally attributable to ongoing operation. In Q4 we had a gain of $54 million from the sale of certain timber and other assets. This was the Texas timberland that we announced in October of last year.

In addition to that we did have a gain of about $29 million related to several insurance recoveries for environmental costs that were incurred in prior years. In Q4 of last year we had a gain of $18 million on certain timber and other assets and we also increased our reserve on hardboard siding in the fourth quarter of last year about $27 million. After adjusting for these items on a pretax operating basis we showed income for this quarter of $262 million compared to a loss in the same period last year of $22 million. The details of all of these items are provided in footnote 3 and 4 of our press release.

With that, let me return to talking about each one of our segments. Slide 7 of the presentation provides a summary of OSB.

For the quarter, OSB prices showed significant improvement over the fourth quarter of last year, up over $200 per thousand square feet or $155%. This is a result of continued very strong market demand. The operating profits, as I said earlier, were up about $250 million from the same quarter last year and could have been higher. A portion of the increase was offset due to higher operating costs.

The major element of these costs, the Canadian dollar, about 40% of our operating assets, are in Canada, and the year-over-year, the Canadian dollar was up 17% to the U.S. dollar. The other major elements were wood, energy and resins.

For the year ended December 31st compared to the same period last year, OSB prices were up $100 or 70%. From a profit perspective earnings were up over 7X versus last year. With sales prices again being partially offset by operating costs that were about $20 higher than the same period last year.

Slide 8 just looked at the OSB pricing during the quarter. Obviously if you look at that 8-week period there where pricing was at 465 -- that was an all-time high. We were able to sustain that through most of the fourth quarter and then did drop off in the latter half of December. I will remind everyone that even with the drop-off at the end of the quarter, these pricing levels for the fourth quarter were the highest of any time in the past five years or more.

Slide 9, which are our composite wood segment: This includes our smart side OSB siding product, hardboard siding, as well as our mill in Chile. This segment also has one mill in (inaudible) Texas that operates as a specialty mill but also produces commodity OSB products.

For the quarter, sales showed an increase of 45% of profits were higher by 151%. Primary reason for the significant increase in profits is related to the commodity OSB produced at [inaudible]. In 2003, [inaudible] produced about 260 million square feet of commodity product. This accounted for about $13 million increase in sales and $10 million increased profitability.

That means for the rest of the business in this segment provided good results. Our smart side products continued to do very well, capturing additional market share as demonstrated by 24% increase in volume quarter to quarter. We continue to use our Chilean mill for trim products as well, increasing our market share in South America. Offsetting the gains in the OSB based products were slight volume declines in hardboard, about a 3% decline in hardboard.

For the year sales are up 12% and profits are up 36% respectively, almost entirely due to the increases in commodity OSB prices and the 13% volume improvement in the smart siding products.

Slide 10 is a plastic building products. Again, as a reminder, this consists of our vinyl siding, our composite wood decking and our molding business.

Vinyl operations continued to show very good growth with a 28% increase quarter to quarter, and gained market share in a product category that has declined slightly during the past several years. Average sales prices were up 7% for the quarter and 6% for the year and this was to partially offset a much larger increase in raw material costs related to resin. We did also announce price increases in early 2004 to continue to offset some of these rising costs.

Our decking business has shown significant improvements from the prior year. Our strategy, implemented in 2002, of a good, better, best product focus is beginning to pay off. In both Q4 and the full year we had higher sales prices than the same period last year, and for the full year we had a volume increase of 58%.

We continue to be very excited about this business since we have seen strong customer acceptance and cost reductions in manufacturing. We did announce earlier this year at the international builders show in Las Vegas that we are committing an additional $15 million in capitol to extend our production capacity.

Our moldings business had a volume increase of 3% for the quarter and 2% for the year. Prices were down slightly and, additionally, we did see increases in raw materials cost for this business. We are continuing to explore opportunities in our existing facility to fill out capacity and with our alliance partners to expand this business.

Slide 11 is our engineered wood segment. This includes laminated lumber and I-Joists other related products. We continue to grow our engineered wood products for both the quarter and year-to- date. We saw significant growth in both LBL, up 35% quarter-to-quarter and 31% for the year, and I-joists, up 49% for the quarter and 13% for the year. And with this is a result of taking on new customers and expanding our presence with a large production builders.

Our focus in this business continues to be on reducing our costs, better geographic manufacturing and distribution, and maintaining customer relationships. While we are seeing good results in terms of sales, and our sales prices appear to be leveling off, following several quarters of decline, we have been negatively impacted in this business by the increased raw materials cost, primarily veneer and OSB. The good news is OSB goes up and the bad news is the engineered wood business suffers a little bit.

Additionally currency fluctuations negatively impacted this business by about $4 million for the quarter and $9 million for the full year.

Included in this business we do have a small plywood mill which like OSB is seeing significant increases in pricing, and we've got about an additional $1.5 in profits from plywood compared to the same period last year.

I don't have a slide for it, but let me just comment on our SG&A costs for 2003. They were higher, about a 25% increase over 2002. As a reminder the way we account for these, there are two levels of expense. One gets directly attributable to a business segment, which includes primarily the sales and marketing part of that, and the second part goes to the corporate level, which is more the administration.

There are three primary reasons for this increase. Let me just highlight those. For the year of 2003 versus 2002, we had a $16 million of the increase was for increased marketing and sales expenses related to expanding our composite wood siding business, which as I mentioned, was up 13% year over year and 24% quarter-to- quarter. Increasing volumes in the plastic segment where volume increased and vinyl by 6% and decking volumes were up 58%, and accelerating the profitable growth of our tech shield radiant barrier product, which also increased in volume.

About $9 to $10 million of the increase was results driven. With the improved profitability above expectations, we did give a special one-time bonus of a $1000 to all of our nonunion employees. We paid out healthy performance-based management bonuses and accrued costs associated with the acceleration of several stock-based programs. The remainder of the increase was spread among a variety of items including higher cost for compliant and protection insurance and audit fees, increases in corporate contributions after several lean years, costs associated with the legal settlement that I mentioned, and minor costs associated with the corporate headquarters consolidation that we announced in September of this year.

Slide 12 is the tax rate reconciliation. The effective tax rate of continuing operations for the year was approximately 45%. That was the same rate that we used at the end of Q3. As we mentioned at the end of Q3, the primary difference between the statutory rate on continuing operations and the calculated rate relates to the permanent difference associated with certain inter-company debt, which is denominated in Canadian dollars and therefore generates gains and losses upon remeasurement into U.S. dollars that are not taxable. These gains and losses are eliminated within the consolidated report.

We've also added a note here that due to various tax planning strategies and the utilization of our net operating loss carry forwards, we estimate that our cash taxes that will either have been paid through estimated tax and will be paid in the year future will be approximately $50 to $55 million.

On the balance sheet and some other statistics on slide 13, obviously the impact of our strong operating performance and excellent execution of our asset sale program has resulted in very dramatic positive changes to our balance sheet. Key balance sheet statistics at December 31, 2003 compared to last year-- we had over a $1 billion in cash and cash equivalence , this included $926 million in unrestricted cash and $111 million in restricted cash.

This restrictive cash represents cash collateralization on letters of credit which we routinely issue for workers' compensation, certain judgments, industrial revenue bonds and other items. Working capital was slightly over $1 billion at the end of the year compared to 225 at the end of last year. Obviously this increase was due to increases in cash and receivables and reduction in the current force of our long-term debt. At year end our net debt was a net cash position of over $400 million versus net debt at the end of last year of $530 million, again due to the asset sale proceeds and operating cash flows.

Capital expenditures for 2003 were at $87 million. That compares to a DDA of about $135 million. As we look into 2004 for capital expenditures, we do expect to spend about DDA on our continuing operations, plus we will have an investment in our recently announced JV project in (inaudible) will be in the $30 to $40 million dollar range. Book value at the end of the year was at 1222 versus 962 at the end of last year.

On the next slide on slide 14, talks about our financial and cash strategies. As I did just mention that we had a positive $405 million from a net debt perspective, so the question we are getting more and more frequently from investors is what will we do with the cash.

In our announcement of the asset sale program 18 months ago, we did talk about this. We stated that we would reduce our leverage, debt reduction, increase our financial flexibility, invest in our remaining businesses and optimize shareholder value. We've done that. Based upon current operations, we believe that operating cash balance should be maintained at the $250 to $350 million level, with an additional cash set-aside of $400 million to retire the debt due in 2005 and the notes that are callable toward the end of 2005.

Through the divestiture program, we have also used proceeds to reduce our revolving credit facilities, [inaudible] notes, and other miscellaneous debts to zero. The public notes are left. During the fourth quarter we announced a tender offer for the $200 million of the 2008 notes at what we and our advisors felt was more than a fair premium. Unfortunately the note holders did not agree and the tender was not successful. We will continue to explore and execute overmarket repurchases and other strategies to repurchase this debt at price levels that are in the best interests of all of our shareholders.

Going forward, other discretionary use of cash include the possible acceleration of capital investments in current businesses, all of which have the potential for profitable growth. We fully expect the funds for this expansion will come from our operating cash flow.

We continue to look at other shareholder initiatives like dividends and share repurchases. As you all know, we currently have restrictions concerning our subordinated debt agreement. These restrictions limit our ability to pay dividends to $25 million per year and place significant restrictions on our ability to buy our own stock. Last November our board did reinstitute a share purchase reauthorization up to 20 million shares and at the board meeting last weekend our board did reinstate a 5 cent per quarter dividend.

We look forward to having discussions with the rating agencies and hope that they will fully recognize the remarkable progress that we have made and our significantly-improved financial position and gain us investment grade ratings. Should the note be rated investment grade these restrictions would be removed.

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

Thanks Kurt, let me give you a quick update on where we stand on asset sales and how we will move forward to completion. The good news is it is a very short report.

During the fourth quarter of 2003, we did close on the big block sale of Timberland totaling 465,000 acres and realized $290 million in value cash and installment notes. The value broke down between the $290 of $264 million of cash and $26 million of notes which are included in other assets on the balance sheet.

This brings our total cash received so far to $500 million and $600 million since we began the 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 have generated more than $750 million in total program to date.

So what is left to be done? Not much, we have three saw mills and a decorative panels business, and we have buyers on the hook. We are working through the negotiating process on those and hope to have those closed either in the first or second quarter of 2004.

With that, let me turn it over to Rick Frost who will provide his reflections on 2003 accomplishments, how we are managing our business, and the outlook for the next several quarters. Rick.

Thank you, Bill and Kurt and good morning, everybody.

I want to begin with a few reflections on 2003. Last year at LP we had three major activities under way concurrently. First as we committed back in May of 2002 in the restructuring announcement, we would complete our divestiture program with the goal of selling the remaining identified facilities and Timberlands.

Second we would focus our attention on retained business and develop strategies to make them stronger through both cost reductions and increased efficiencies, and third with that focus we would grow the businesses. And during last year, we made significant progress on all of these fronts.

First, regarding the divestiture. As Kurt and Bill have already discussed, we substantially completed our divestiture plan and captured over $750 million of value in the process. This was in excess of our original estimate of 600 to 700 million established at the time we announced it. In terms of focusing primarily on our core businesses, I would like to point out that our core businesses have several common characteristics. They have significant competitive position in the categories in which we compete. Second, they have strong growth potential into the future, and, third, they will be internationally competitive as well as competitive in North America.

This last year, we focused our attention on developing and implementing strategies inherent to each of these businesses. In terms of growth we increased our OSB production volume by 7% over the prior year.

This was positively influenced by taking less market-related downtime due to a strong demand, by the start-up of a newly acquired facility, the woodland mill that we got from GP and the plywood trade and increase productivity of our existing plants.

Of course, we had robust pricing, which increased our revenue segment by over 80%. Coupled with growth in the structural panels market and OSB penetration growth into that market, we plan to grow our total LP volume by another 30% over the next four years. As Kurt mentioned, we have begun a $250 million reinvestment plan in our OSB business and through that plan we intend to gain an additional 900 million square feet of capacity by the end of the program and to reduce costs as well.

Additionally as we announced last week we plan to start the construction, along with Slocan forest products on the previously announced OSB mill in British Columbia, which by the way Bill Hebert will be the president of this joint venture. LP will market the output of this new mill which should exceed 750 million square feet when the mill is through start-up and we currently expect this mill to start up in the fourth quarter of 2005.

Our smart side products made up of siding, fascia, and trim increased in volume by 13% for the year and we found our self capacity restrained. We have additional capacity starting up this month in some of these key products to relieve the product shortages that we did experience last year and to satisfy going forward an anticipated 10 to 15% growth per year in these product categories.

Our smart side products are very hot item in the market today. In addition to the extra capacity starting up this month, we are also studying the addition of a new facility to further expand production capacity ahead of expected demand.

Our plastics business, including vinyl composite decking and molding continued to grow. Our vinyl business grew at 13% in production for 2003, and in a category that has been generally flat for us over the last two years.

Our decking business, while not completely where we want it from a profitability standpoint, showed significant growth over the past year, shipping over a third more product than we did in 2002. We have further capital expansion under way in composite decking to more than double our capacity.

In terms of financial management with the sale of assets and strong cash position that Kurt and Bill have outlined. LP has substantial cash. Significantly more than offsetting our debt. Our board of directors has restored a dividend, and we have announced capital expansions to the OSB JV as well as growth in siding and composite decking. This year we will continue to deliver on our commitments while retaining a conservative financial posture.

Our near term outlook is quite bullish. Mortgage rates are still in the range of 4 to 6% and our key home building customers expect to build more homes in 2004 than they did in 2003 which was, I might add, a 20-year record pace. Supply and demand as we analyze them remain very much in balance for most of our products.

OSB pricing, as you saw from the chart, remains fairly volatile. Most forecasters have been remaining quite high into the fall and then trailing off late in the year. While we do not publicly predict pricing, that scenario seems to make sense to us. The OSB market needs about a billion square feet of additional capacity per year to meet the projected consumption. We expect two new mills to come on line later this year from competitors to meet some of its capacity and then capacity creep or in growth in existing mills to satisfy the rest of that demand.

Additionally, we will continue our focus on OSB costs to continue to be the low cost leader. We expect also to see continued growth in siding, composite decking and engineered wood. I think it is a than understatement to say overall we're off to a very strong start this year, building on the strong finish of last year.

There is a tremendous amount of excitement at Louisiana-Pacific right now and our employees and our customers are as energized as I have ever seen them over the last eight years. Our organization has the divestment substantially behind us and we are currently assimilating into our new corporate headquarters in Nashville between now and August and our focus is entirely on profitability growth.

With that said, let me turn it back over to Bill.

Thanks we are ready for questions now.

Ladies and gentlemen, if you wish to ask a question, please press star and then one on your phone key pad. You will hear a tone indicating you have been placed in queue. You may remove yourself at any time by using the pound key. If you are using a speaker phone, we ask that you please pick up the hand set before pressing the number. Once again, if you have a question press star and then one at this time.

Our first question comes from Joe Staleti at Goldman Sachs.

Hi, good morning. I just wonder if you could talk about just to clarify on the $250 million spending plan, just I think you talked about 135 million roughly of cap-ex for '04, you said close to DD&A and then 30 to 40 on the new mill. Are those about the right numbers?

Let me just talk about the overall capital plan, Joe, and then I'll talk about the OSB.

Okay.

The overall capital plan for next year as I said is about DD&A, and all of that roughly at over half of that is dedicated to OSB as the next traunch of the multi year $250 million plan, plus our usual maintenance capital and then in addition to that the Slocan contribution for 2004. We anticipate that will be in the roughly 30 to 40 million range.

And the multi year plan let me ask Rick.

The multi year plan is in five phases. Last year our first installment was about 52 million, Joe. This year we have about 66 million dedicated towards that plan plus rule of thumb is about a million dollars a year per plant of maintenance capital. So this year we have out of that 250 we have another 66 dedicated and then next year about the same number, and so we're looking at approaching this on kind of a reasonable basis over five years.

So, for example, the 66 million for 04, that's included in the cap-ex you talked about?

That's correct. That's included in the number that Kurt gave you.

And what's the overall time frame on the Slocan project? You are saying 30 to 40 million this year?

Yes. The rest of it next year and we plan to start that mill up in Q4 of 2005.

Okay. So you didn't really spend anything on that and shell out anything in '03 on that?

Very modest.

Minor amount.

And your total there is going to be --

It is about 150 million U.S.

Okay. All right. Great. Thank you.

We're just half of that, Joe. 50/50 JV.

You are half of the 150?

Right.

All right. Thanks a lot.

And we'll go to the line of Mark Connelly with Credit Suisse First Boston. Please go ahead.

Thank you. You talked about the volatility in pricing. Can you talk a little bit about what you think is happening with inventory strategy? Certainly inventory has had something to do with the volatility. We had a highly unusual period of flat pricing and then this big volatility. When we talk to customers they are starting to indicate that they are making rethinking the way they look at inventory. Is that true for you guys, too?

We just left the builders show about two weeks ago and we did an inventory of all of the customers we could talk to and everybody is thinner right now than they were last year, and so I think a lot of people are trying to rethink their situation so they don't end up in a situation like last year, but with demand pressed up against supply right now. Nobody can actually do anything about it.

So I think until there is some type of an additional capacity which will come on later in the year at the earliest or until there is some type of a weather-related reduction in demand right now, it is really hard for anybody to change their inventory strategy. They just can't do it, because we're supply and demand are bumped up against each other.

For LP, is there any desire to change LP's own inventory strategy?

We as an OSB producer, we don't think that is a prudent thing to do. First of all, we can't keep more than about four days of production in our mills. We just physically don't have the space, and for us to inventory product it begins to smell like the pulp and paper industry to us.

Okay. So your plan is to not think about changing inventory at all and let the volatility fall out where it is?

We'd like to make it and then sell it and if it is not selling then reduce what we make.

Okay. Fair enough. Just one more question. You talked about the impact on your engineered wood business from higher OSB, which certainly makes sense. Does that mean we should expect the profitability of that business to bounce back in the first quarter as engineered wood catches up, or is there some underlying weakness in the supply and demand balance within the engineered wood categories.

There is no reduction in the amount of demand in engineered wood, but up until most recently, it has been very difficult to adjust pricing related to costs. So when costs increased, you just kind of look it in the shorts. Now, we have been able to push one price increase through last fall, and there is a lot of energy this morning in the marketplace for people trying to increase product costs both in LVL and I-joists simply because costs are going up as rapidly as they have in web stock and veneer prices.

Okay, thanks very much.

We'll go to the line of Chip Dillon with Smith Barney. Please go ahead.

Good morning. I don't mean to complain but it looked like your costs went up quite sharply sequentially from the 135 per 3H range to around $160 and plus the 20%. Obviously the Canadian dollar had impacted you there but were there other things going on that might be not recurring in the first quarter or should we expect your costs per unit to maintain the 160 range that we saw in the fourth?

I don't know where you are getting the 160. Our internal numbers are 140 to 145 and part of that was obviously the Canadian currency was an impact on that. Wood costs was an impact on that, particularly in the lake states and up in Maine and we did take one of our mills down. The woodland mill we couldn't get enough wood for that in December, so we did have down time there.

I just looked at the volume and divided that into the revenue and then into the income and then the difference would be the costs, but what you are saying is -- well, let me ask you this the. Is woodland expected to come back up in the first quarter?

We don't know when we are going to bring that up. The issue at woodland is that there is a nonavailability of wood supply for woodland and so we had to choose between Holton and woodland and we chose to run Holton. And so that could not possibly correct itself until this summer.

Let me ask you, Curt, how your meeting with the rating agencies must go, because you are sitting there with net cash and it is almost like you have to tell them do you expect this to throw this off the empire state building, how can we not be investment grade when we have more cash than we have debt?

Tim, I'd would like for you to go with me. I'm going to meet them next week. That is the discussion that my board asked me last weekend. How can you have such a strong balance sheet, have done everything you said you would do, and exceed the statistics of all of your competitors and still not be investment grade?

And it all the more seems to make sense it makes a lot of people that I've spoken to have complained about the tender level on your bonds then if you have net cash and you have the ability to do things flexibly within an investment grade rating it makes sense not to chase the last dollar in the bond market.

Right.

Now, the second question on the cap-ex, you mentioned I want to make sure I am very clear. It looks to me like you are going to have on the investment line and as a joint venture I would imagine the Slocan joint venture will show up as cash going out for investment. Won't much of those be off set by the assets for the remaining asset sale? So that if you sort of look at it this way, your cap-ex will be about 170, that is the 130 that is internal to LPX and then you'll spend about 30 to 40 in Slocan but then you'll get part of that 30 to 40 back in proceeds from the remaining assets sales?

That's correct. And the estimates right now are somewhere probably $30 to $40 million in cash for all of those assets that Bill was talking about.

So in a sense funding Slocan this year we won't really see that?

It will come out of the assets sale proceeds.

And then the remaining cap-ex is around 130 or 140?

That's correct.

Thank you.

We'll go to the line of Rich Schneider with UBS. Please go ahead.

I was wondering if you can talk about the progress you're making on the $250 million program. Are we going to see some incremental capacity coming out of Louisiana-Pacific this year and particularly in light of the fourth quarter where I think your volume of almost 1.5 billion square feet was a record for you?

Yes, our capacity is going to go up year to year, probably about 400 million is what our plan is.

Does that include the restart of woodland in the summer?

No. Woodland is not in there.

So in that number, you have woodland out for the whole year?

We have, yes, we have woodland out because we haven't figured out when we are and if we are going to be able to put wood into that mill. The problem is not that there is not enough stumpage in Maine. The problem is there are not enough producers to produce the stumpage.

And the 400 million square feet is -- that's coming from more than just the 250 million dollar, the initial part of that program?

Right.

Coming from other things?

That's just from increased efficiencies, the year to year what we'll call creep.

And the mills that were affected in 2003. So year over year, right?

Yes, year over year.

Because we had down time for log outages, et cetera.

So this would be if you look at production and you came in at 5.5 billion square feet of--

It is 200 million. I'm sorry. I was working off of a 5.2 number versus a 5.5 number. We're going to do a little over 5.7 this year.

Okay. The question on engineered products, if you look at your fourth quarter, you improved over your third quarter, even though I think you were disappointed with operating profits there. How was that achieved because, you know, most prices went up substantially or they were very high in the fourth quarter.

One of the turnarounds that I mentioned, Rich, was we did have an improvement in our plywood operation. We had about a 1.5 million.

Okay, okay.

And we sold a lot more volume in Q4 than we normally do. The building season stayed strong, and running the plants fuller we had better operating costs.

Okay. And on slide 8 of your presentation where you go through what happened with prices and you have the notes on the time you placed the order, which was 50% and then the time you shipped it, could you work us through that, what that meant in terms of your average realizations going from the third quarter to the fourth quarter? How much was your OSB up in the fourth quarter versus the third?

Well, the last question first. We were up 40, 45 bucks on a 3H basis. This is 7/16ths. It actually tracks relatively closely to the average if you go back because we were for the quarter we were about a little over 98% random for our ASP versus random, so we made up because last year in the third quarter 2Q to 3Q we fell behind because of the steepness of the curve, and we made a fair amount of that up in the fourth quarter because we had a high percentage of random.

And could you give us some idea how first quarter is unfolding? I mean, average pricing, you know, random is down in the first quarter but what is your situation in terms of delayed shipments and other things as you look at it?

Well, that's a good question because, if you look at the chart here we're ending around 230, say, ballpark and we are at 430 today. Mid week was 430. So it is a dangerous task to try to forecast where that's going, but it has bounced back pretty quickly. We've been chasing it up, so we'll be short of print obviously at the end of the month because of the way we will be chasing it up rapidly.

Okay. So you are trailing behind the random pricing because of when the orders --

Yes, you always do that on a steep slope one way or the other.

Okay. And the last question. Curt, what are you expecting for a tax rate in 2004?

Well, it is really contingent upon the Canadian exchange rate. If we think the Canadian exchange rate is going to stay relatively constant we should be right back to that 38, 39%. If the Canadian dollar continues to increase against the U.S. dollar, the rate will go up.

Okay. Thank you.

We'll now go to the line of Steve Chercover with D. A. Davidson. Please go ahead.

Good morning. Two questions, please. First of all, did any of the gains or insurance recovery flow through to any of operating units and impact the results there?

No, it did not. It showed up on the other item. Operating charges and credits. When it does show up, Steve, it does show up as a receivable. So if you look at the increase of the receivables on the balance sheet it is in that number because we didn't get the cash.

Got it, and secondly, you mentioned two mills coming on this year. I'm aware of the Huber mill and then I thought there would be GP and you guys next year. Can you tell me what the other --

We think the Florida mill for GP is going to come up this year. I know they're hedging that but we can't think of a practical reason why that wouldn't come up.

So between Huber, GP and yourself.

Well, we're not coming up this year. Fourth quarter of '05.

Any other mills that you are aware of?

There is nothing else announced. Now, as well influencing this year will be the residual volume of the ramp up curve out of TOKO at high meadow.

I know that one. And do you know if the guys up in upstate New York are still trying to get financing for either of those projects?

Our rumor mill says they are both trying.

They are both trying and not getting much success, we hope?

That we don't know. We don't know about the success part.

Okay, thanks.

Yes.

We go to the line of Peter Ruschmeier with Lehman Brothers. Please go ahead.

Thanks. Good morning. I just had a couple of questions. Curt, did I hear you correctly your cash taxes you expect to be in the range of 50 to 55 million? Was that for 2004?

That was 2003 and we've either paid, I think we paid about 28 million of that and estimated payments and the rest will come when tax is due.

But looking forward we have earned through all of the NOL so next year's cash tax will be pretty much what it is.

Okay. And can you share your pension assumptions for '04 both in terms of, you know, pension expense and cash contribution if you expect any?

Our pension assumption are 80% on the rate of return. The cost for the year next year from a cash standpoint is about 30 million, and I think we used discounted 6%. So they are relatively conservative.

Okay. And that cash payment I believe that was consistent with 2003?

A little bit up but not much. About the same. I will tell you if we don't get the relief going through Congress right now there is probably an additional 10 million impact on us from a cash standpoint.

Okay. Coming back to the volume on the OSB side, I think, you know, your figures were 5.5 billion on a 3/8ths inch basis for a full year and I want to make sure I understand Rick correctly that you expect that to be up 400 million feet?

It is actually going to be about 200 million feet. A good number to be used is about 5.7. 5.73, that's what we have in our plans.

Okay. Back on the OSB business, is it possible to comment on where your own log inventories are at the facilities?

Yeah. We're in better shape than we were this time last year. We're still probably about 30,000 cords across the system less than we would like to be, but the only place we are hampered at the moment is having our woodland mill down and as late as Monday when I was briefed we don't have any other mills right now that look like they are going to run into downtime based on lack of logs.

Now, of course, sustained weather any part of the country might change that but we're in pretty good shape across the South which is very different than where we were last year. We are struggling a little bit in the lakes states but not in jeopardy of running out.

Up in woodland I think you mentioned there is not enough producers to get the stumpage, and I assume that's unique to Maine or are you finding shortages of folks to get into the woods and get the fiber elsewhere?

To that degree it is unique to Maine. I think overall to the industry, it is an issue that we're going to have to deal with across both Canada and the United States, but not to the degree that we have the particular problem in Maine right now.

Okay.

I mean up until now the logging business hasn't been a terribly profitable business and usually that's a family-run business where the sons and the daughters get in the business after the parents retire, and over the last ten years with the profitability of that, not many sons and daughters are wanting to get into that business.

Understood. If I could another question. On resin costs both for vinyl and I guess for OSB, the trend has been up over time. Can you comment, I guess, on your outlook and maybe the nature of some of the contracts and what you might expect resin costs to change?

We're expecting to get a little bit of relief this year on our P up resins, but a lot of that is going to be offset by the increased costs in MDI. So I think we'll probably come down a little bit in total resins and binders, but at this point in time unless, you know, things like Benzene, takes a dip or natural gas takes a significant dip it is only to the tune of a couple of million dollars.

Okay.

For the course of the year in terms of relief.

Okay. One last question, if I could. Is it possible to comment on what you are seeing in terms of transportation costs both in terms of rail and truck? If there is any bottlenecks in the system, if it is operating smoothly, if there are any kinds of cost pressures?.

Surprisingly smoothly for availability, but we will soon be approaching what we call watermelon season which always ties up trucks in the south, but right now there is pretty good availability of transportation. Diesel is up about 10 to 15 cents over where it was this time last year and that's a concern because at these levels your suppliers usually ask you to participate in that. Rail car availability currently is acceptable.

Very good. That's all I have. Thanks very much.

We go to the line of Gerard Muroff with Prudential.

Thank you. Just a couple of questions. Maybe more housekeeping items to start.

In your cash flow statement there is a return of capital from the unconsolidated sub of about 365 million. It looks like that was maybe 260 million in 2003. I was hoping you could just refresh my memory as to what that was?

That's the investment vehicle we use to defer the tax on the timberlands and the monetization amount, so that's actually cash that came back through that when we monetization those notes relate to the timberland sale we made in 2003.

So that --

For all intents and purposes you can treat that as cash.

Okay. And then on the note receivable, the $404 million note receivable when does that come due? When do you see the cash from that?

If you look at it there is a note payable on the other side of 396, so there is really a net difference of 8 million there so it is a self liquidating note. Again that was related to the timberland transaction that we did in 1998. The importance of that is not really those notes because they are self liquidating. The importance of that is starting in 2006 we will have some deferred tax to pay through 2012 on that deferral and that is in that deferred tax account. I think the number is roughly -- total is about 150. I think it is like 20 million in 2006?

Yes, 25, I think.

But the notes themselves will self liquidate.

Okay. And then just a final question. Just trying to clear something up. It looks like your OSB production volume was up 23% or so in the quarter versus a year ago and yet your OSB volume on the slide you indicated was only up 13%?

One is production and one is sales.

But you indicated you are only keeping four days worth of -- you can't keep much in the way of inventory. It seems like a very large discrepancy between those two numbers that you would be building a huge amount of inventory.

No, I think that's the answer. That's what it is. Change in inventory.

Okay. Thank you.

We'll go to the line of Mark Weintraub with Bunckingham Research.

Curt, just to clarify on that. The fourth quarter, I think the number you provide in the press release is the shipment number and that was the 1485?

In the press release it should be production.

That's production?

Yes. And remember, production also includes the commodity product coming out of Sillsby. When Rick talks about OSB we do not include the Sillsby and the OSB segment. That is included in the composite wood because it is both the smart side product line as well as commodity product.

Okay. So that explains a lot. So the 1485 includes Sillsby. The 57 does not include Sillsby?

Correct.

Okay. And on the capacity expansion, I think, Rick, you mentioned 30%. Does that include 100% of the JV?

Yes, it does.

Okay. And when we model pricing for the first quarter, should we essentially use the paradigm you set out on that slide, 50% placed at the time of order and 50% at the time of shipment? Would that be the best way to go about it?

Yes, that's pretty consistent from year to year.

Like Rick said we're chasing it a little bit now because it has moved up sharply.

The comment I'll make on pricing is we kind of joke about it here, but RITZY is doing their weekly long-term pricing forecast. If you look at RITZY, they came out just last week at I think $350 number for the year on a 7/16ths basis which was up from a $205 number from the prior month, so I'm not sure who is the best at forecasting pricing, but I don't think anybody is too good at it from an OSB standpoint.

And the customers are guessing, obviously. If they are anticipating the price is going down they want to pay at shipment and if they anticipate it is going up they want to pay at time of order.

So just to understand then when you say chasing prices up, that is supplemental to the fact that in January your prices would be lower than in random months because you had a lot of pricing that was set in December; do I understand that correctly? It is supplemental to that?

Yes. It is that effect plus the effect that a lot of our wood is priced based upon randoms which is the week following, the Friday of the close of the week, and so we, on a steep curve we're chasing it up.

In all cases, 50% of the wood we are going to be a week behind. The other 50% is going to be behind based on where your order follows at.

Do you have yet a sense of where the average price in January was relative to the fourth quarter?

Yes, but we're not going to disclose that.

Okay. And then lastly you talk about selective acquisitions and I just wanted to -- should I interpret selective as meaning small or what does the selective part mean?

I think you can look at it a couple of ways. One, certainly there are facilities that we would like to add to the four segments that we've got. For instance the composite decking this may be an opportunity to buy a small facility that fits into that. OSB, you know, periodically an OSB mill comes on the market and we would look at that at reasonable price levels so that's what we mean by selective is they are going to be in core business. We are not planning on going outside of the four segments we have today.

Okay. Thanks very much.

Let's go to the line of Frank Denall with Adage Capital.

I had a couple of questions. You were talking about the acceleration of the performance bonuses or performance options and there have been headlines coming across about exercising and surrendering. Could you explain what's going on there?

We, in our restricted stock grants over the last four years there has been an accelerator based on the performance of the stock and the stock has tripled in the last year and so when you hit those performance accelerators we need to accrue the costs associated with those.

Those shares were granted in the January, early February time frame and the way our plan works is that the individuals received the net shares, so after the tax is gone so what you are seeing in those reports are the exercise or the sale of a sufficient number of shares to cover the tax withholdings.

And so basically these are option grants. Nobody is going in the open market and buying them?

They are restricted shares, not option grants. They are going in the markets, though.

Now I am confused.

Pardon?

So they are going in the open market?

No, no, the net shares aren't. The net shares could go in but the ones that are being used to satisfy the tax liability are not.

So they are being sold in the open market and the other shares. Example, someone got 100 and he sold 25. So net 75? The only open market effect was the 25 sale to satisfy the tax effect?

No, the open market effect will be if he sells the 75.

Okay, all right. And just, you know, you are talking about the 5.7 million I think it was production for this year expected?

For next year, yes.

Next year, okay. Thanks. I thought it was this year. Thank you. That's it.

We go to the line of Paul Choe with Steadfast. Please go ahead.

I have a question. I don't know if I missed this earlier. Did you mention where your order files are currently for the OSB?

We haven't mentioned that.

That's fine.

We are about four weeks right now.

About four weeks?

Yes.

Okay. And then also in terms of the expenses you mentioned it was 16 million is increased marketing costs in different, various segments. Is that something that is going to occur going forward? Is that a permanently higher level for the marketing or would you expect that to go down in the future?

Well, I couldn't hear you. It is 16.

16.

What we are doing in our specialty businesses is we are spending a fair amount of marketing expenses establishing brands. Our smart side siding brand has been increased recognition and we will continue to do that.

In 2003 we looked at three particular markets that we wanted to go after siding in a big way and we did. We were successful in those markets and, in fact, we expect to have very good growth coming out of smart siding as a result of those programs. With that successful test marketing and the increased sales we are probably going to continue with marketing at that level.

The other one significant in the plastics area we are establishing our weather best decking product from a brand standpoint and we will have continued expenses in that as well. So as the specialty businesses continue to grow you will see marketing and sales expenses increase. The way you can kind of look at LP is for commodity business, you generally look at total SG&A and somewhere in the 5 to 7% range and if you compare it to a specialty business being an Armstrong or Owens Corning they're probably running in the 17 to 19%. So we're a blend blend of that. Having the specialty business plus the commodity.

That's great. Then finally do you have the ability to actually just deceive the high yield debt or would that actually not remove the covenant?

It doesn't remove the covenant and it is also relatively expensive because you have to put it into treasuries, basically.

Okay. That's great, thanks.

Maybe one or two more questions and then we'll be available for follow-up questions as well.

And we'll go to the line of Andrew Fineman of Meridian Asset Management. Please go ahead.

Thanks. If you gave this, I apologize, but how much will DD&A be this year?

It is going to be in the same 135 to 140 range.

Okay. And the pension contribution that you made, I think you said it might be around 30 for the current year but what was it for 2003?

It was about the same. It was maybe 26 million.

And is that net of what you expensed? In other words, that's over and above the amount that's actually been expensed on the income statement?

No.

How much was the expense then? In other words, I don't want to hit you with 26 million of cash going out if you have a noncash expense item that you've already accounted for that with?

About 16 to 18 was expensed, and so the contributions were about 10 million above that.

Okay. And then for this year?

It is about the same.

Okay. And let's see, I think the only other thing I just wanted to comment that on the bonds and the ratings that I wanted to agree with Chip about the rating, and I think also it is worth noting that on the bonds you try to tender for the yield to call is about 2.5%, so, you know, I think the alternative for the bond holders of waiting for that call is pretty unattractive and in light of the fact that you don't need to get those bonds in because if the rating goes up you can return some of your excess cash to us, the shareholders, then I think your strategy is right on.

Thanks, Andy.

Thanks, we appreciate that.

And we'll now go to the line of Eric Fell with TAZA Capital. Please go ahead.

I was wondering if you could comment on the OSB spot market and then the quick recovery. If inventories of the home builders are as low as you say they are and, you know, their backlogs are higher than they were at this point last year, why would they have allowed the spot price to fall as much as it did? I'm just curious to hear your take on what happened exactly.

Obviously pricing and OSB is very psychological, but towards the end of the year first of all everybody is trying to clean out their inventories for their own books but secondly there is historically a lapse in business at that time of the year based upon weather, and so everyone was basically looking backwards and saying this is the time of year when prices go down, and with going into that time of the year with extremely high prices what happened for a period of about two to three weeks is almost all of the buyers quit buying in anticipation that prices were going to fall and then they would reestablish their position at a lower rate.

That happened for a short period of time, but the demand didn't fall off, and so people had to replenish, again, immediately when they came back to work after the Christmas holidays and that's what caused it to climb back up the ladder rapidly because the basic inventory position hadn't changed. So I think there was a psychology that was trying to force an establishment of new levels of pricing but the basic supply and demand didn't change so the psychology didn't overpower the fundamentals.

Fair enough. And then just following up on a question a couple of questioners ago sort of on the lag. The prices that you guys receive relative to the spot price. I wanted to make sure I understood or I think I understood you correctly. Where there might be a week or two relative lag to a spot what you guys typically realized and that can vary based on whether the customer wants to pay on order or on delivery?

It depends on the length of your order file but with some of your major contracts if I take an order Monday, that order gets priced on the following Friday.

Previous Friday.

Excuse me, the previous Friday. So you have a lag. In I take an order on Thursday the same thing happens. In terms of if you have an order file that's a month out, if you have the deal with that customer to price at time of shipment, then it is going to be priced at that particular time, but the volume you are selling before then is priced at a lower price and that's what I mean by chasing it up. You only really catch it when it levels off.

Right.

The other thing we have is if you are looking just at 7/16ths published price you've got cash and functional discounts that probably knock you anywhere from 2 to 4% off of that number depending on where you are.

Just directionally, in a rising price environment, your price would typically lag spot?

Yes. We are making, you know, selling decisions every day and sometimes we, you know, guess right and sometimes we don't guess right.

Conversely in a falling environment would your selling prices typically be above?

Yes. 99% of random in the fourth quarter and made up part of the -- because we had the same phenomenon going from the second quarter to the third quarter where we were chasing it up.

We have months we are actually 105% of random if it is going the other way.

Fair enough. I just wanted to be clear. All right. Thank you so much.

Okay. Why don't you go ahead and give the replay information and we'll be available for follow-up.

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