Louisiana-Pacific Corp (LPX) 2004 Q1 法說會逐字稿

Welcome to the Louisiana-Pacific quarter one earnings conference call.

At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. If you have a question, depress the 1 on your touchtone telephone. If you should require assistance, please pick up your handset before depressing the numbers. Please press star then 0 on your touchtone telephone for operator assistance.

I would now like to turn the conference over to your host, Mr. Curt Stevens, please go ahead, sir.

Thank you very much. Good morning to all of you. Thank you for joining us on Louisiana-Pacific conference call to discuss our financial results for the first quarter ended March 31, 2004.

As the operator said, I'm Curt Stevens, I'm the Executive Vice President and Chief Financial Officer of Louisiana-Pacific. With me today on the phone from Nashville is Rick Frost, LP's Executive Vice President of Commodity Products, Procurement, and Engineering; and Mike Kinney, who along with Becky Barckley are responsible for our Investor Relations activities. Before I start, I'd just like to remind everyone, Bill Hebert, our long-time Investor Relations contact, is now the President of our joint venture with Canfor that is in the process of designing and constructing our world-class OSB mill in Fort St. John, British Columbia.

I'm please to have Mike involved in Investor Relations with Becky and me. Mike brings almost 20 years of experience with LP and has been involved in many different aspects of our operation. In addition to his Investor Relation responsibilities, Mike oversees all of our budgeting and forecasting, and the financial aspects of our capital planning on his system, and also participates in business development. So over the next several months, I hope each of you get the opportunity to meet Mike at various conferences we'll be attending or on the phone.

I will start this call with a review of the financial results for the first quarter of 2004 and then provide a few comments on the balance sheet. Rick will then review the accomplishments for the first quarter and talk about our outlook for the second quarter and the remainder of 2004. Then I will talk about a question I think is near and dear to many investor's heart, and that is what our plans are for our growing cash position. And finally, Mike will open up the call for questions.

As we have done in the past, this earnings call has been opened up to the public, and we are also doing a webcast. This can be accessed through www.lpcorp.com. Additionally, to help with the earnings call, we've given access to a presentation that provides supplemental information along with this call. As we go through the call, I will be referencing certain pages in that presentation for ease of reference. As a caution, this presentation should be reviewed in conjunction with our publicly available earnings release.

I also want to remind participants about the 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. I'm not going to reread these statements, I'm going to incorporate them, however, by this reference.

For those of you have access to the presentation, refer to slide 4. Our first quarter results continued along the same path as the fourth quarter of last year and was clearly dominated by the strength of oriented strand board. OSB prices hit record levels again as evidenced by last Friday's Random Lengths print for 7/16 OSB Sheathing North Central of about $520 per thousand square feet.

In prior discussions, we've talked about the leverage that OSB prices provides LP's earnings. For the first quarter, the year-over-year price increase accounted for over $220 million in additional pre-tax profits compared to the same quarter last year. The full impact of higher prices was partially offset by higher cost due to increases in raw materials, primarily wood, energy and resins, and the higher Canadian dollar, compared to the same period last year.

We are reporting net income for the quarter of $110 million or $1.01 per share, of which continuing operations showed income of $116 million or $1.06 per share, and discontinued operations showed a net loss of $6 million. Net sales from continuing operations were $695 million for the quarter. For the same period last year, we reported net income of $1 million or a penny a share, of which, continuing operation showed income of $2 million or 2 cents a share, and discontinued operation showed a loss of $1 million or 1 cent a share. Net sales from continuing operations last year were $406 million.

I am now referring to slide 5 of the presentation. Each of these reported periods does have several special items that are generally not attributable to ongoing operations. In the first quarter of 2004, the most significant of these items was a successful tender offer for most of the senior subordinated debt outstanding that resulted in a charge of $40 million to cover the premium and related expenses incurred. I'll talk a little bit more about this shortly.

We also have a loss, a noncash loss on the cancellation of a capital project to build a veneer mill in British Columbia. And then there were some miscellaneous items that it offset. In Q1 of 2003, we had a gain of $12 million in the sale of certain timber and other assets. After adjusting for these items, adjusted net income from continuing operations for the first quarter of 2004 was $148 million or $1.35 per share, as compared to a loss in the same period last year of roughly $6 million or 6 cents a share.

Let me now turn to each one of our segments. On slide 6 of the presentation, the results for OSB. For the quarter, OSB prices showed significant improvement over the first quarter of 2003, up almost $200 per thousand square feet or 115%. This is a result of very strong market demand.

Operating profits from this segment are up about $220 million from the same quarter, and it could have been higher. A portion of the increase of attributable price was not realized due to those increases in operating costs I talked about earlier that accounted for about $12 per thousand square feet. The major elements, again, were higher wood, energy, resin cost, and the strengthening Canadian dollar which accounted for about one-half of that increase.

Slide 7 is a chart we have shown in the past. This is looking a little closer at OSB pricing. It shows that pricing rebounded very quickly at the beginning of the quarter from the end of December and stayed at relatively high levels throughout the quarter. We've also shown this into the second quarter.

It should serve as a reminder that in a rising market, we, and most of our competitors, don't capture all the increase due to the way this product is sold. Roughly half of our shipments are priced based on last Friday's print, a week behind, and the other half is based on the length of the order file, two to three weeks in Q1 for LP.

Slide 8 is our Composite Wood segment. The segment includes our Smart Side, which is OSB-based siding products, hardboard siding in our Chilean mill.

For the quarter, sales showed an increase of about 17%, and profits were higher by 56%. Our Smart Side products continue to do very, very well, capturing additional market share as demonstrated by a 32% increase in volume quarter-to-quarter. The significant increase in volume was possible as we committed virtually 100% of the volume from our Silsbee, Texas mill to siding and began to ramp up expanded production at our Tomahawk facility. Going forward, we are finalizing plans to increase the Smart Side production even further.

In Q1, our hardboard siding business showed some signs of strength in terms of both volume and pricing, a welcome reversal of a recent downward trend. And our Chilean operation continues to generate growth and profits. In Q1, shipments were up 16%, largely in the South American market.

Slide 9 is our Plastic Building Products. This segment consists of vinyl siding, composite wood, decking, and our molding business. Vinyl operations continued to show good growth, a 7% increase, and our average sales prices were up 10% for the quarter as we attempted to partially offset the increases in raw materials cost, principally resins.

Our decking business has shown significant improvements from the prior year in Q1. We had a higher -- we had a sales increase of 33%, and we actually also got a higher sales price of 9%, again, to offset some of the raw materials cost. Expansion at the Meridian, Idaho facility is on track, and we expect initial volumes from the expanding capacity to be available later this quarter. We continue to be very excited about this business, as we have seen strong customer acceptance and cost reductions in manufacturing.

Our moldings business had a volume increase of 14% for the quarter, with a slight decline in pricing. Additionally, we did have some increase in raw materials cost for the business. As I've stated before, we continue to explore opportunities in both the existing facility and with our alliance partners to expand our product offerings in this business.

Slide 10 is our Engineered Wood Products. This segment includes laminated veneer lumber and I-joist plus related products. Growth in these two product lines in Q1 was extraordinary. We were up 37% in LVL and 22% in I-joist as we took on new customers and expanded our presence with the large production builders. Unfortunately we weren't able to convert this outstanding growth into higher profits due to the significant cost increase for lumber, veneer, and OSB. On a quarter-over-quarter basis, the Canadian dollar also negatively affected our results.

Our focus continues to be on relentless reductions in cost, better geographic manufacturing and distribution, and maintaining our customer relations. As mentioned earlier, we did make the decision to move our Malakwa cedar mill into discontinued operations this quarter, and for that we did incur a $10 million impairment charge.

On the selling and administrative costs, our costs were higher than the same quarter last year by about $3 million. As a reminder, these are expenses that are directly attributable to business segment, as well as at the corporate level. The primary increase was results driven, with improved profitability above expectations. We had additional accrued costs associated with acceleration of several stock-based programs, including the ramp up of an executive loan program that was put in place back in 1999.

Slide 11 is the tax rate. The effective tax rate on continuing operations is estimated to be about 36.5% for the full year of 2004. The primary difference between the statutory rate of 38% on continuing operations and this calculated rate is primarily related to the level of income that we earned in our Canadian operations where we enjoy a lower overall blended tax rate. Due to various tax planning strategies and the utilization of net operating loss carry forwards, we did make estimated tax payments in the quarter of about $13 million and estimate that our cash taxes associated with the first quarter will be about $45 million.

Slide 12 is the balance sheet. Obviously, the impact from our strong operating performance did enhance our balance sheet. Let me just talk about a few of these statistics.

At March 31, we had slightly less than $900 million in cash and cash equivalents, investments and restricted cash. The restricted cash represents the cash collateralization of our outstanding letters of credit which we routinely issue for worker's comp, certain judgements, and industrial revenue bonds.

Working capital was comparable at about a $1 billion. And at March 31, our total cash exceeded our interest bearing debt by about $450 million as compared to just over $400 million in December. Capital expenditures for the first quarter were slightly below DD&A at $28 million. We currently project that our capital expenditures for the full year will be about $135 million, plus an additional $30 to $40 million as our percentage of our joint venture project with Canfor in British Columbia In the quarter, our book value went up by almost $1.00, the $13.27 from $12.31 at the end of the year.

With that, let me turn it over to Rick who'll provide his thoughts on first quarter accomplishments, how we're managing our business, and the outlook for the next several quarters.

Thanks, Curt, and good morning, everyone. I'm in Nashville in our temporary offices this morning, and the weather here in Music City is fantastic today.

The first quarter demand was very strong. With low volume purchased by most of our customers in the last few weeks of December and inventories in the channels being quite thin as a result, we had strong demand for our products kicking in about the second week of January. And that's when OSB prices started to rebound quickly after the dip that they took in January -- in December, excuse me.

Random Lengths was printing at $240 during the first week of this quarter on a 7/16 basis north central, and in the last week of this quarter, random printed at $470 per thousand. Our organization responded quite well. We operated our mills extremely efficiently, and that allowed us in this last quarter to meet most of the needs of our customers while taking advantage of the strong pricing.

Looking forward, I do expect OSB prices to remain fairly high, probably until mid November, as housing starts and repair and remodeling activity look like they will remain quite strong through the rest of this building season. This strength is coming to us from the currently low interest rates and also from the expanded construction work force, which is allowing builders to better respond to the high demand for new homes.

We have felt that for several years there's been a shortage of labor. And that shortage of labor has acted as a bit of a governor to new housing starts. Many of those shortages are now being filled due to weaknesses in other job markets, and this is enable the housing starts at the levels that we're seeing today, 1.9 to 2.0 million. This, of course, in new construction particularly, drives more panel demand.

I was reading an article recently, new housing prices have risen approximately 30% over the last four years. If you take the average size house, which is approximately 2500 square feet per home, that uses approximately 10,000 square feet of structural panels, which means that the average price of a new home due to this large panel pricing increase from $200 to $500, the average price of a new house has gone up about $3,000 due to panels. And housing prices have gone up much more than that.

At this point, we don't see any meaningful new OSB capacity impacting the market until late in the year. And if demand remains at current levels, we feel that the market should digest that new capacity fairly quickly. High prices are nice, but our focus is on improving our cost position, because we know that these prices will subside.

In OSB, we have numerous investment projects under way aimed at lowering our costs and adding a billion feet of production on an annual basis by the end of 2008. We have projects under way at nearly every one of our OSB commodity mills that have good returns and will position us for when the market softens. We expect to invest over $80 million this year into our existing OSB mills, in addition to the capital for the JV that Curt mentioned for British Columbia.

An example of the impact of one of these projects in investments and technology might be at our Swan Valley mill in Canada, in Manitoba. That mill is undergoing about $20 million worth of reinvestment. And what we expect to get out of that is about an 8% reduction in our cost when the upgrades are complete and the plant is up and running at full speed later this year.

In Engineered Wood Products, our sales volumes far exceeded what we expected and had significant growth from year-over-year. Our mills are running well, and they improved significantly their productivity. Unfortunately, as Curt said, we have not been able to offset the rapidly escalating prices of OSB web stock, market veneer, and lumber, which are used as raw materials for the I-joist and LVL products that we sell. In addition, we have not been able to buy all of the veneer that we wanted off the open market so that we could run our LVL facilities flat out.

We have raised prices twice since last fall, and last week we announced another significant price increase across all product lines. I think we're still going to be a little bit short of covering our raw material cost on I-joists, so, therefore, while operations are improving steadily, we will continue to lose a modest sum in Engineered Wood Products until OSB web stock, veneer, and lumber prices trend downward, or until we are able to pass on the rest of the raw materials increases into the marketplace.

Our expansion plans are pretty well under way. We announced the launching of our JV OSB mill in British Columbia earlier this year. Proud to report that most of the key equipment has been ordered. Engineering continues, and we do expect to break ground on that project next month with the startup slated for late 2005.

Our improved siding line in Tomahawk, producing Smart Side lap siding and trim, is up and running and relieving somewhat the shortages that we had last year as the growth of this product line has outstripped our ability to produce. Our Silsbee, Texas mill, as Curt mentioned, has been running 85% to 90% OSB sheathing and is now running 100% siding products today and is scheduled to continue in that direction. We have additional Smart Side expansion plans under study currently with an expectation that we will initiate some additional capacity next year.

Our decking operations are in the throes of a major expansion at our Meridian mill utilizing technology improvements and blending and extruding to continue cost reduction efforts and increase production to support the rapid growth of this product line and to improve margin. As I look to the next couple of quarters in this business, and I consider our go-forward businesses, which are OSB, Composite Wood, Plastics, and Engineered Wood, I'll offer a few additional comments.

On OSB, I think the headlines will continue to be what's happening to pricing. But the bylines will be the cost reduction capital work that we're doing, any introduction of economic substitutes induced by what's happening in this high pricing environment, any additional imports, which may be induced by this high pricing environment, any new capacity increase announcements, which might be induced by the same, what's going to happen to mortgage rates, and subsequent housing demand. As well, we intend to restart our Woodland OSB mill which we shut down in December for lack of wood. We'll start that mill up in late June as our wood decks are filling now.

In our Composite Wood sector, our Smart Side, the story will be to produce all we can to support the tremendous customer demand for these products and to figure out our next installment of volume expansion at a cost advantage to what we do now.

In our Plastic Building Materials, or Decking, we will bring on new capacity at Meridian in July, and we will be focusing on cost reduction to improve the margins in a product line that we have high expectations for.

And finally, in Engineered Wood, the focus is going to be to continue to try to meet customer demand for LVL, which is an extremely hot product now in short supply, while trying to catch up with the rapid rise in raw materials costs through a very aggressive pricing posture.

And with those comments made, I'd like to turn it back to Curt to address the question which I'm sure all of you have on your minds concerning how will we utilize the cash that is being generated in this unusually strong OSB market. Curt.

Thanks, Rick. Well, our actions obviously start with the recognition that we are in a very cyclical business, OSB, and as such, strategies to enhance shareholder value over the long-term must take that into consideration. Our commitment is to grow the company profitably to warrant an ever-increasing share value, while returning cash via a dividend that is rational through a business cycle. We have a number of decisions that we have made and options we are pursuing to grow shareholder value.

As I have stated in the past, without our timberlands we intend to put aside $250 to $300 million in cash to allow us to ride comfortably through any extended downturn in the future. Being in a cyclical business, the question is when that will occur not whether it will occur.

We've also earmarked about $215 million to retire the public debt that becomes due or is callable in 2005. On the last call, that number was over $400 million, and with a successful tender offer, we've now reduced that.

In terms of capital expansion, we can grow OSB via acquisition of existing facilities that we can then modernize and incorporate into our system. To do so, however, we will likely have to wait until we are near or approaching the bottom of the cycle for realistic sustainable values to be acceptable to potential sellers. Within some limits we can grow OSB via Greenfield facilities, and we have the Canfor joint venture under way now.

In other businesses, to help moderate the cyclical nature of OSB, we are continuing to grow the Composite Wood and Plastics Building Materials businesses as fast as is practical. They are less volatile, yet attractively profitable over a business cycle. Some of our capital will go towards that goal. Additionally, there may be some modest acquisitions available to help us grow these less cyclical businesses at a faster rate. For all these reasons, we do believe that it is prudent for LP to build a war chest, so that we can take advantage of these opportunities when there is a down cycle.

Additional options to increase shareholder value that will be discussed with our Board include raising the dividend level. We believe that a prudent dividend policy is to move towards paying out 30% to 40% of our normalized mid cycle EPS on an annual basis. As I mentioned, we will be discussing this with our Board over the next several quarters.

Several investors and analysts have raised the question of why not declare a special dividend to reflect the extraordinary cash generation. Along with our advisers, we have reviewed this, included that the impact of special dividends is simply to drop the share price by an amount equal to the special dividends.

We have not found any compelling logic to date where the declaration of such a special dividend provides a long-term advantage to shareholders. In light of the other options we have available to grow shareholder value, a special dividend, therefore, is a lower priority, unless we find ourselves with cash far in excess of that which we need for our normal cyclicality, debt redemption, and war chest purposes.

Finally, we can buy back stock opportunistically. If the share price moves down, when OSB prices normalize, then our stock will likely be a good investment and our Board has approved a 20 million share authorization.

In summary, l would tell you that our focus is very clear, and our energies are quite high, bolstered by strong markets for all of our products. We have a seasoned group of managers, most of which have agreed it move to Nashville. We have well trained and skilled mill managers that are running our operation smoothly and very cost effectively. We have well thought out investment and marketing plans to grow volumes and reduce cost, and OSB prices are greater than $500 a thousand. Net net, we think the future looks very exciting for LP.

With that, let me ask Michelle to open that for questions, and Mike, if you'll moderate.

Thanks, Michelle.

[OPERATOR INSTRUCTIONS]

We have a question from Chip Dillon. Please go ahead.

Yes. Good morning. And my question is this, if you look at where you start the second quarter with prices up about, you know, $50, $60 from the first quarter average, and then the normal lag you get when prices are moving up, plus the Woodland facility that might help you a little bit, it seems to me the consensus of $1.06 might be about half of where things would be if prices held where they were. Is there anything missing in my math there?

Chip, this is Curt. If pricing remains at that level, your math is pretty good.

Okay. And then the same question is, it's interesting how you point out that maybe down the road we'll see a little bit of a -- or some increase in the dividend, obviously not to a point where your uncomfortable, because I'm sure you don't want to cut it again. And then you're left with an opportunistic buyback.

Is there any concern that with a tremendous amount of net cash, with the war chest included, might make you vulnerable in -- while -- to a takeover? And again, that may benefit shareholders, but, again, it might not as much if your stock happens to drop before a bid came in.

Well, I think that's always a possibility. We, as a company, certainly have not been reluctant to explore options to put companies together that are in the best interest of all shareholders, and we would continue to look at that in light of maximizing shareholder value.

At this point, the likely candidates are pretty well consumed with other kinds of activities, whether that be debt reduction or splitting off their businesses. But who knows, could happen.

And then the last question is, you were talking earlier about -- or it was discussed about adding some siding capacity. Would that come from converting existing sheathing or, you know, commodity OSB or would that be potentially a new facility? I've heard, I guess, in the trade press that you all are looking somewhere in the southwest that maybe that might be your next location at some point down the road.

Chip, we're looking at conversion. That seems to make the most sense.

Okay.

But coupled with that, Chip, is if we take OSB production capacity out of the system, we'll be looking at replacing that.

Gotcha. And is that why -- and, sort of, is there a -- I mean, you obviously have to think down the road beyond Canfor. I mean, are you thinking in terms of something for '06 or '07 that would kind of be natural to do?

The natural timing would probably be in the '07 timeframe. The Canfor JV will come on line late '05 with ramp up in production in '06. So the industry will need additional capacity, particularly if we convert one of our larger facilities to Smart Side.

Gotcha.

You know, one of the things Rick talked about is Silsbee, our Silsbee, Texas facility produced about 250 million square feet of commodity product last year. It won't produce any this year at the current rate.

I see. Thank you.

We have a question from Fritz [Von Scarp]. Please go ahead.

Are you there, Fritz? Michelle, maybe we can try another one.

We have a question from Joe [Sivilatti]. Please go ahead.

Michelle, we're not getting anything.

Maybe we have a problem, Michelle.

Okay.

Hello?

Yes.

Can you hear me now?

Yes, we can, Joe.

Yeah, this is Joe. I just wanted to -- just to talk about the addition of the -- you said you're going to, by 2008, grow your capacity by about a billion square feet, I believe primarily through all these high-return projects at your existing facilities. And I just wondered if you could sort of talk a little bit about the timing of that between now and '08, and also the cost of that additional billion square feet?

Yeah, we're going to -- we have a -- what we call a Brownfield plan, which is a reinvestment capability into current facilities. That volume is going to come on rather evenly over the next five years, as is the investment.

So like last year, we spent a little more than $50 million on this effort. This year we have about $65 million dedicated towards improvement projects, and we're running through kind of a normalized spending effort to bring on cost reduction plus increased volume. So it's about $250 million over five years.

Okay. All right. And so where does that put you for your total cap ex for '04 and '05, including the construction of the new mill?

Well, for '04, we have been giving those numbers out, Joe. We have not given an '05 number. But for '04, our DD&A is about $135 million. We expect to spend that as part of the Brownfield plan, plus the reinvestment in other facilities, the Meridian expansion we talked about. And in addition to that, we will be putting in our 50% on a JV, which will be another $35 to $40 million on top of that. So that's kind of the '04 plan.

Okay. The other thing I was just wondering what the possibility might be that you would look to go ahead and take some of the additional bonds out early, given that, you know, just the huge amount of cash you're building, and given that, you know, given that -- the negative carry there.

Well the -- on the '08, what's left, we believe, is sitting in trust funds that they can't get out. For the life of me, I don't know why the $13 million's still there, but it still is outstanding. I doubt if we're going to have much of an impact on that.

On the '05 bonds, really is not accretive to earnings to take those out at today's premiums. And I would say the same thing on the temp.

Okay. And along those lines, too, though, I mean, what are you -- why -- do you have any perspective on why Moody's is not sort of getting you some, you know, the credit for the kind of improvement you've, you know, experienced? Seemed a bit odd for them to just leave the rating sitting there.

Well, my guess is they're listening to this call, and they know my frustration. Enough said. I don't understand it at all, frankly. We have gone through them in a fairly detailed manner about our plans for the future, what our cost reduction strategies are, where we think OSB will trade in the future. And we can't see any reason at all that we're not investment grade.

Okay. Thanks a lot.

We have a question from Peter Ruschmeier, please go ahead.

Thanks, good morning. Couple questions. Just following up on the debottlenecking projects, the 250 million, the billion square feet. Just curious on why you wouldn't look to accelerate that with presumably an expectation that at least on a near-term basis, pricing would be above trend?

Well, we have a pretty well developed plan and we have the capability to execute that plan. What we've found is if we get too much going on at one time, what you're actually doing is you're trying to ride a bicycle and then fix it, rebuild it at the same time.

And at a couple of our plants where we've had too much going on, it's just been too much to ask the people at the facilities to do these in a safe way and a quality way. So the amount that we have kind of metered out in this plan seems to be what we're capable of undertaking. Because if you get too much going on, you have to take too much downtime.

Okay. So in other words, it could very well be a lost revenue opportunity to go ahead and debottleneck at this time?

Well, we have these projects going on, but we have them kind of metered out at a pace that we think we can sustain.

Okay. Just curious, if you can clarify, I didn't catch the first number on the Silsbee, what it's going from, to. I know you're moving to siding. What was the utilization rate on OSB? And can you elaborate on -- I would think that the OSB is far more profitable than the siding, so I'm just curious about that shift.

Well, there's -- on the numbers, we shipped about between 200 and 250 million square feet out, commodity product out of Silsbee last year. In the first quarter we shipped less than 10; it was about 5 million out of there.

And you're right, in today's environment, it would be more profitable to run sheathing. However, what we have done is we've spent an enormous amount of energy building up our product line, reputation in the market, gathering new customers for the Smart Side product. We think that on a sustainable, over a cycle, there are very, very good margins there. Pricing in that product line varies maybe a buck or two per year. So it's relatively steady.

And this is part of our strategy to have the specialty piece of our business generate consistent earnings over a cycle. For us to back out of that and build sheathing in those mills to maximize short-term profits would be to sacrifice the future, because our customers wouldn't stay with us.

Okay. Alright. Fair enough.

The parallel to that, Pete, actually there is an important parallel to that, and that's in the plywood. That's why you don't see more plywood coming into sheathing. Plywood's done the same thing, they've generated customers for specialty products. If they abandon them now --

I think there's a third piece of that, which ought to be considered. Most of the time the second lifecycle of a mill is going into specialty products, which extends the period that that mill can operate, and you can get a whole lot more of the value out of the assets. Which also then, in turn, allows us to put in lower cost OSB capacity.

So you get a double whammy out of that. You get good, stable margins out of siding, and then you have room in the industry, then, to add new low cost production.

Okay. All right. Shifting gears if I could to -- Curt, I don't know if you can comment on your tolerance or the threshold of -- debt to cap ceiling, I guess, is what I'm looking for. If you think about strategic opportunities that you might go down a path in the future, you know, what's your tolerance for how high you'd be willing to lever this company?

Well, the numbers that we've been talking about are 25% to 35%. I can't see doing beyond 35% unless it's absolutely compelling and there's a clear path to bringing it back down below that.

Okay. Thanks very much.

We have a question from Andrew [Sieman], please go ahead.

Thanks. Can you go back to slide 6 for a second and repeat what you said about the costs? Because I didn't necessarily -- I'd like to just make sure I got it right about -- you mentioned four things that were Wood, Energy, Canadian dollar. I guess three things. If you can just review that.

Let me take that one, Curt.

Our costs are up about 12 bucks quarter-to-quarter. Half of that is foreign exchange, which is the change in the -- with Canadian dollar. About 40% of the dollars that we spent in our cost of sales in OSB is spent in Canada. So that's a very important number.

The other $6 is increases in wood, increases in resin and wax, a slight increase in maintenance and cost of manufacturing. But predominantly, 6 bucks is foreign exchange, and 3 bucks is wood.

Okay. So the costs right now is running, what, $140, approximately?

Actually we don't disclose that.

Oh.

You can get to it on volumes, but we don't talk about our cost position.

All right. Well, let me ask it another way. You mentioned year-over-year, I think you said it was $12. Was it also sequentially up, you know, for the first quarter versus the fourth quarter?

It was pretty flat.

Okay. So it's about the same as what you experienced in the fourth quarter?

That's correct.

About the same, and then we're anticipating a slight drop in the next quarter.

Okay, thanks. And in the last conference call, one of the analysts asked you if your asset sales that you envision this year would be enough to cover the $35 to $40 million that you're going to put into the Canfor joint venture, and you said yes. Is that still the case?

It's going to be very close to that.

Okay.

These last dogs and cats have taken longer than we anticipated, but they should be going forward in the next quarter.

Beautiful. And then finally, on the use of cash, I appreciate you having that slide and laying out the potential opportunities. Is there something -- at this point, what do you need in order to make a decision as far as -- is it a Board meeting or something? I mean, is there a date where you think you might have some of these things decided?

Because at this point, everything else has happened. You know, you refinance the debt, the prices of their products have held. You know, the uncertainties have pretty much been removed. So, you know, there's nothing left except for you to make the decision.

Well, we have our annual meeting coming up on May 3rd. And just prior to that, on -- next weekend on the 1st and 2nd, we will be having both a strategic discussion with our Board, a very active strategic discussion, as well as a Board meeting that weekend. So that would be the next event, Andy.

Okay. Terrific. I look forward to it. Thank you.

We have a question from Rich Schneider. Please go ahead.

I was wondering if you could give us what happened sequentially going from the fourth to the first? Where was your OSB price in your first quarter versus the average for the fourth quarter?

Curt, I'll take that one. Rich, the -- our OSB price was about, from quarter-to-quarter, about 3%, 4% up. And you know, year-to-year, almost 140%.

Okay. And if you look at your OSB sales in the first quarter versus the fourth, they're down about 6.5%, or about 8%, and yet your profits remain, you know, flat going from fourth quarter to the first quarter.

Could you go through that? I know when you look at the production numbers, the production numbers were down in that, I imagine, in OSB related to the switching to the siding product. Could you go through the dynamics? Because you normally don't see a drop in sales of about 8% and yet profits hold flat.

Well, couple of things there. One, we did have some product that did not ship at the end of the quarter due to the Canadian rail strike that's going on. Us and the rest of the industry did experience some logistics issues there. So if you look at the production volumes, production volumes are actually up, but the shipments are down due to that. So that's probably the biggest reason.

Probably about 27, 30 million feet in Q1 that didn't get shipped.

Okay. But your production from your fourth quarter level was down. It was down about 6.5%, right? You did almost 1.5 billion square feet, and you were below 1.4 in the first quarter.

Well, you remember, we shut our Woodland main mill down in December, towards the end of December, and it has been down through the entire first quarter.

Okay.

That mill makes about 700,000 to 800,000 square feet a day.

That was also Silsbee.

Okay. Okay. And with sales down, you know, was it price that really kept the profitability level in the first quarter with the fourth?

Yes.

Okay. Okay. And could you talk a little bit about downtime that you've been taking? You've been taking downtime on sort of this rolling basis. And I guess some of it is due to your capital projects. Could you give us an outlook on what you expect to be doing at least into the second quarter and maybe even beyond?

Yeah, we have -- our Carthage mill is scheduled for two weeks down to put a saw line in this quarter. Then I think our Sagola mill will be down about a week to do some dryer work. So we have three hard weeks of down -- mill weeks down, scheduled for cap ex.

Now, we ought to get a little bit of that back because we lost probably two and a half weeks to very extreme cold. Our Maniwaki mill was down over a week in the first quarter, which obviously won't be the case. And then we had several of our other mills, one in British Columbia, took a three-day outage as I remember, and then we had some weather upsetting a few of the southern mills.

So, that probably shouldn't be the case in Q2. But in terms of formal -- formal downs we've got about three weeks of outage scheduled for capital work.

So is it fair to say second quarter you should be running with less downtime and then, you know, actually by the end of the second quarter substantially less when you bring Woodland on?

Right. We expect to bring Woodland up probably late in June.

Okay. Okay. And the -- just a question on Engineered Wood. How much OSB are you either applying internally, or how much OSB is needed for your Engineered Wood operations?

You know, I don't have that number right offhand. I'd have to call you back on that one.

Well, Rich, you can look at it as kind of an estimate. Each lineal foot of an I-joist is about a square foot of OSB.

Okay. Okay. Great. That's it. Thank you.

We have a question from Paul [Cho]. Please go ahead.

Hi, can you hear me?

Yes.

I have a question -- some questions on the cash flow. You had a significant increase in working capital, noncash working capital on a sequential basis. It looks like it's seasonal. I just wanted to make sure that's true. I'm just sort of curious what's that going to look like going forward.

Most of that is, you're exactly right, it's seasonal. At the end of the year, we run about 21 days sales in receivables. At the end of the year, we don't sell much product in the last two weeks of the year. So our receivables is always going to be at its lowest level at the end of December. So receivables is seasonal increase plus being driven by pricing as well.

And then in the inventory, we did have a rise in inventory of about $45 million. And that was, about half of that is logs, as we get prepared for the winter breakup, we put more lotion in our log decks.

Mm-hmm.

About half of it was there. And about half of that was finished goods. In many of our product lines, the demand comes in the summer, when we're far in excess of what our capacity is. So we do put inventory in place. And that would be in decking and siding. And the other place we had it was in OSB, the shipment that we were unable to make because of the railcar issue.

Right So going forward it should be flat to a source of capital?

Q2 shouldn't be much different. Actually we'll start bringing the log deck down in Q2 and Q3.

And then, where are your order files at the moment for your OSB?

We're out about two weeks. We have a little bit of wood available the week of 5/10.

And then finally -- actually, just going down to -- you said your costs were flat in OSB on a quarter-to-quarter basis. But just following on, I guess, an earlier question, it looks like they roughly must have been down slightly, because your production was down, your net sales were down, but your profit was essentially flat for the quarter. You're saying your costs were actually flat -- ?

They were down slightly, not significantly.

Okay.

Maybe a buck or two.

Okay. That's great. Thanks for your help.

We have a question from Kent Green. Please go ahead.

Yes. Could you please address the lag policy on pricing? Just how severe is it, and do you, you know, have special arrangements with some of the large buyers?

Rick, you want to take that?

Sure. To keep it relatively simple, about half of our wood is contracted, and that means that the price that we -- the price is determined on last Friday's Random Lengths print. And then the other half of the volume is based upon the price at the time of shipment. So if our lead times are out two or three weeks, then you will get the price two or three weeks from now on the volume that you're taking the order for now.

So basically in a rising market we chase it up. And then in a declining market, it should come back to you in terms of the realization of Random Lengths pricing.

Rick, I think you said that backwards. I think --

You lag going up, I assume.

We lag going up --

We lag going up, and then we get it back going down.

Right. I understand.

Correct.

That's what I thought. So if you say that you think pricing in the overall market will remain strong through November, could we reasonably expect that your pricing will remain strong most of the calendar year?

I'm not sure I understand your question.

It can come off very fast. If you look mid December we had pricing fall $100 in one week and $50 the next. So it can come off --

Right. I did see that.

-- very sharp.

How much are you currently influenced by the very large builders that have developed, that are doing 40,000, 50,000 homes a year? At what percentage of your sales goes to those very large builders who can probably with their balance sheets stockpile inventory?

Well first, we don't sell directly to the builders, we don't go to the job site. So we sell through our channel partners. Ultimately, most of the OSB production probably goes to the builders, but not directly.

And they could, but typically this is not a commodity that many people stockpile. If you look at the dealer inventories right now, they're very lean. This is kind of a just in time -- we can keep about four days production in our facilities and it ships into the channel.

And then one other question. You keep talking about all of these other product lines that have great sales gains and great outlooks in the future, but they just barely break even or make money. Are you really lacking critical mass? And how do you get to critical mass in Engineering Wood and some of these other ones? Are they as fragmented an industry, and will you do that by acquisition or just gaining market share?

Rick, you want to take that one?

You have to take them one at a time. In Engineered Wood, we're a number three player behind T.J. and Boise. I think that we have mass there, but you have to recognize that the market leader has over 50%. So in that particular case, I think growing the way that we're going, growing incrementally is our path forward until we see an opportunity to do something differently.

In Siding, I think we're going to try to make a breakout. And that is what we talked about earlier in the call in terms of rapidly increasing our position in siding to becoming a number two player overall. And we'll do that through -- mainly through in-house conversion.

On our Plastics platform, which is basically outdoor living, which is decking, we've started the first installment of increasing capacity. And now what we have to do is figure out how to get a margin to go along with that additional capacity and market our way into a much stronger number two position there.

Thank you.

We have a question from Jarod Muroff. please go ahead.

Hi. Good morning. I just wanted to make certain I understood something you had said. You had mentioned that the LVL market you had thought was structurally short, and yet you were unable to recover the raw material cost inflation.

First, I'm wondering if I'm getting that right. And if so, it seems odd to me that a market that would be structurally short you would have trouble getting -- gaining the cost inflations.

I painted with a broad brush there. Where we're not recovering raw material costs is in I-joists.

Okay, so in LVL you're doing all right?

In LVL, we're making some money, but not enough to cover the whole line.

And the I-joists in the costs that you're not recovering, that's largely costs that are intracompany, right? It's your OSB that you're selling, so it's the profitability in the OSB, whereas the I-joist --

Well, we produce some of our own web stock for ourself, and we buy quite a bit off the open market, as well. So it's not quite left pocket, right pocket.

And then we buy all of our lumber off the open market for our flange stock. So those -- the increase in price of LVL, which is an internal transfer, hits you. The increase in web stock, which only part of that is an internal transfer, is very real, and the increased price in lumber is very real.

Okay. Thank you.

Michelle, we have time for two more.

Okay. We have a question from Frank [Denow], please go ahead.

Yeah, I'd just like a few clarifications. Somebody talked about two and a half weeks lost in production. I assume that was in a few mills, not the whole system? Or how was that -- what was that referring to?

That's correct. Those were mill days.

Okay. So if you were to try to put it across the system, can you quantify it that way? You know, like take whatever you lost wherever you lost it and, systemwide how much would you have lost?

I didn't sit down and think to quantify it, but if you take two weeks at Dawson, at a million feet a day, that's about 14 million feet.

If you look at two weeks, we have 14 mills when we were not running, so figure it one day across the system.

Okay. In Woodland, I guess in the last conference call you talked about having trouble getting people to go in the woods to get the logs, if I remember correctly?

Yeah, there's a shortage of raw material up there.

And now is that alleviated, or how is it now that you're being able to open it up in June?

Well, what we've been able to do is to bring wood in there at a slower pace, and therefore not have to pay a huge premium for it. And so the log deck over the last -- we've built a log deck over the last three months bringing wood in there at a much slower pace. Now when the weather changes, there'll be more wood available.

Okay. So it's not like you bring it in slower, you operate it, and then you run out of the wood again and you shut it down or -- ?

Well, that's a distinct possibility. That scenario could repeat itself at the end of next year.

Okay. I think that's all. Actually, one other question. Just in terms of potential acquisition, is there any thought to acquiring something that is not something you're directly in now but a related field? You know, to sort of maybe give yourself another leg or anything like that?

Well, as I answered Pete's question or Andy's question, rather, we are having strategic sessions with our Board, and we constantly look at options. At this point, we're pretty much focused and sticking to what we're in now.

Okay. Thanks.

We have a question from Jim [Costell]. Please go ahead.

Yeah, hi. Now that the covenants on the debt are gone, the Board has authorized a 20 million share buyback, and the company currently is not buying any stock in the market. A, are those three points correct?

And the second part to the question, has the company's legal counsel, either internal legal counsel or exterior legal counsel advised management that at this time it would not be appropriate to purchase stock?

Well, at least, let me answer the first question. The Board actually authorized that last November subject to various restrictions. So it was actually the November meeting that the share authorization was put in place. It is true we did not buy any stock in the first quarter.

As far as legal council, we have an insider trading policy that we adhere to for all of our reporting officers and those that have access to what we would consider to be company confidential information, and we regularly employ that. Yes.

No. I meant to the company buying back stock?

No, there is no prohibition.

Thank you.

Thank you very much for joining us. As usual, Becky is available, and now with Bill's departure to the JV, Mike is available. So if you have further questions, please give Mike or Becky a call. Thank you very much. Could you give the replay information, Michelle?

Sure. Ladies and gentlemen, this conference will be available for replay after 3:30 p.m. today through May 5th, 11:59 p.m. You may access the AT-- AT&T I dialing 1-800 320-365-3844. Access code 727324. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.