Louisiana-Pacific Corp (LPX) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Louisiana Pacific Q3 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, instructions will be given at that time. If you should require assistance during the call, please press star and then 0. As a reminder, today's call is being recorded. I would now like to turn the conference over to Mr. Curt Stevens, Chief Financial Officer. Please go ahead.

Thank you very much and good morning to all of you. I appreciate you joining us for Louisiana Pacific's conference call to discuss our financial results for the third quarter and the 9 months ended September 30, 2004. As the moderator said, I am Curt Stevens, Executive Vice President of Administration and Chief Financial Officer. With me today are Rick Frost, who will become LP's CEO next week upon Mark Suwyn's retirement. Mike Kinney and Becky Barckley from our Investor Relations group. I will start this call with a review of the financial results for the first quarter and first 9 months of 2004, provide some comments on the balance sheet, and then turn the call over to Rick who will review the accomplishments for the third quarter of 2004 and talk about our outlook for the remainder of the year. Then we'll open up the call to questions.

As we've done in the past, this call has been opened up to the public and we are also doing a webcast. This can be accessed throughout website at www.lpcorp.com. Additionally, to help with the earnings call we have provided a presentation to provide supplementary information along with the discussion we'll have today. As we go through the call, I will be referencing certain pages in the presentation. As a caution, this presentation should be reviewed in conjunction with our publically available earnings release.

Before I begin, I do want to remind all participants about the forward-looking statement language that is on slide 2 of our presentation and also in the earnings release, and the discussion of the use of non-GAAP financial information that's included on slide 3. I am not going to read these statements, but I am going to incorporate them with this reference.

I'd refer you to slide 4 of the presentation. We are reporting today net income for the quarter of 108 million or 98 cents per diluted share. Of which continuing operations contributed 106 million or 96 cents per share, and discontinued operations had net income of 2 million. Net sales from continuing operations are around 740 million for the quarter. For the same period last year, we reported net income of 125 million, or $1.17 per share. For continuing operation and income of 110 or $1.04 per share and net loss of 14 million on discontinued operations. Net sales from continuing operations were 671 million during the same quarter last year.

Slide 5 of the presentation summarizes our results for the 9-month period ended September 30th, where we are reporting net income of 407 million or $3.72 a share of which continuing operations provided income of 408 or $3.72 a share and discontinued operations had a slight loss of $1 million. Net sales from continuing operations were 2.3 billion for the period. For the same period last year we reported net income of 109 million or $1.03 per share, of which continuing operations had income of 122 million or $1.15 a share and discontinued operations resulted in a net loss of 13 million. Net sales from continuing operations were 1.6 billion during the 9-month period last year.

Slide 6, talks about some of the special items that are not generally attributable to ongoing operations. Included in continuing operations in Q3 of this year were the following. We did record charges of about $5 million associated with the continued cost of the relocation of LP's corporate headquarters to Nashville, Tennessee as we have completed most of our phase 1 move. This charge also includes the losses on subleases of our previous administrative offices in Portland, Oregon and Charlotte, North Carolina.

Additionally, in connection with certain compensation arrangements associated with Mark Suwyn's retirement, where we were required to record a charge of approximately $11 million in the quarter. Additionally, as Mark retires this quarter, we will have a charge of approximately 1 to 1.5 million in Q4 associated with Mark's participation in the Company's nonqualified retirement plan. We also recorded an impairment of about 3 million associated with the write down of a nonoperating facility to net realizable value. And then offsetting this we recorded a small gain due to the reduction of required environmental reserves associated with signing a definitive agreement with the U.S. Government to close out most of our operations in Alaska.

In the same quarter last year we did have a significant gain of $22 million on the sale of certain timber and other assets in Q3 of '03. And offsetting this gain was a loss associated with an energy contract, and also a loss of about 700,000 associated with severance recorded as part of the divestiture plan. After taking these items in account, adjusted net income from continuing operations for this quarter was 118 million or $1.06 per share, as compared the 101 million or 95 cents per share in the same period last year. For the 9-month period ended September 30th, adjusted net income from continuing operations for this year was 457 million or $4.17 a share, compared to 102 or 97 cents per share in the same period last year. These items are all detailed in footnotes 2 and 3 of our press release.

Let me now move to the business segments. Slide 7 is OSB. OSB profits for the quarter were relatively flat compared to the same quarter and the prior year. We did have an increase in pricing of about 4% and 3% higher volume. Unfortunately, our costs were up about $15 per 1,000, it is primarily made up of higher fiber, resins and energy expenditures. Additionally, the Canadian dollar ended the quarter at about 79 cents, negatively effecting our results by several million dollars or about $3 per 1,000.

Looking at the first 9 months of the year as compared to the same period 2003, sales were up almost 600 million and operating profits are up over 500 million. Driven by strong demand, sales prices increased 61% while volume was 6% higher. For the same period, operating costs increased approximately $10 per 1,000 as a result, again, of higher fiber and resin expenditures.

Slide 8 is our Composite Wood segment. Just as a reminder, this includes our SmartSide which is the OSB siding products, hard board siding and our Chilean mill. For the quarter sales were relatively flat and profits were down slightly. The profit decline was almost entirely due to the conversion from commodity OSB in our Silsbee, Texas facility to SmartSide. This is good news because over a cycle, SmartSide products have a much more stable margin, but obviously in times of robust OSB pricing there is a negative impact from this conversion.

Our SmartSide product continued to do very well capturing additional market share, as demonstrated by the 12% increase in volume quarter-to-quarter. In Q3 our hard board siding business also continued strong growth, as we had volumes increase by 8%. In the latter portion of Q2, we did instigate price increases in both hard board and SmartSide businesses to help offset the increasing raw materials cost. For the quarter we did recognize an increase of 11% on our SmartSide products and 10% on our hard board.

Slide 9 is our Plastic Building Products segment, this includes vinyl siding, deposit wood decking and our molding business. Overall in terms of profitability, this segment showed a decline from the prior year due to the increase in raw materials, primarily oil-based resins, which the sales increases that we were able to get did not offset. Vinyl operations showed a slight increase in volume of about 4%. And our decking business did show significant increase in the quarter with volume up 73% and in slightly higher sales price in the same period last year. Our moldings business showed an increase in volume of 8% for the quarter on a slight increase in pricing. In all these businesses we have been able to put in modest price increases, however they have not been sufficient to offset the increased price of resin.

Slide 10 is our Engineered Wood Products business. This consists of our laminated veneer lumber and I-joists plus other related products that include a small plywood mill. These businesses continue to show excellent growth, up 24% in LVL and 8% in I-joist. Additionally, due to continued supply constraints, we have been able to instigate several significant price increases totaling 16% for LVL and 18% for I-joist on a quarter-to-quarter basis. That's the good news. The offset is the raw materials cost were significantly higher, principally oriented strand board and lumber, which did effect the profitability. The net showed an increase in profitability, however not to the full extent of the price increases.

We believe that due to ongoing supply constraints, and with raw materials costs now coming down to more normalized levels, we well be able to maintain these price revels. As mentioned, this business also includes plywood mill which primarily produces plywood as a by-product from our LVL production process. Given the significant price increase in plywood, which typically follows OSB pricing, we operated it to facilitate higher levels during the quarter.

On selling and general administrative costs for the quarter, SG&A was flat with the same quarter last year, for the 9-month period, we are showing about a 6% increase -- or $6 million increase. As a reminder, these expenses include those directly attributable to both our business segments, as well as at the corporate level. The primary increase was results driven, with improved profitability, we had additional accrued costs associated with the acceleration of several stock-based programs and the accrual of larger management bonus. Also in the quarter, we did pay a special bonus to eligible employees that totalled about $5.5 million that was spread throughout SG&A and the operation.

Slide 11 is the tax rate. The effective tax rate on continuing operations is estimated to be about 37.5% for the full year of 2004 as of the end of this quarter. The primary difference between the statutory rate on continuing operations and the calculated rate is based on the level of income attributable to our Canadian operations where we have a lower overall provincial and Federal rate. This rate is higher than what we used in prior quarters. We used 36% the first 6 months. Due to a timing difference associated with certain inner-company debt that is denominated in Canadian dollars and therefore generates gains and losses upon remeasurement into U.S. dollars that are not taxable in one of the jurisdictions. These gains and losses are eliminated in our consolidated reporting.

As you probably know, the accounting rules require that companies must effectively adjust taxes on a year-to-date basis using the expected annual tax rate. As a result, our Q3 tax rate ended up at 41% to adjust our annual provision to 37.5. This resulted in additional taxes of about $8 million, or 7 cents a share. So this coupled with the adjusted earnings per share of $1.06 plus the 7 puts us right at about $1.12 to $1.13 on an adjusted basis. Due to various tax planning strategies and utilization of net operating loss carry- forwards, we do estimate that our cash taxes that are payable or will be paid for the first 9 months will be about 158 million.

Slide 12 is the balance sheet. The impact of our strong operating performance continues to enhance the balance sheet. Let me talk about some of the key statistics at the end of September compared to the end of December. We had over 1.2 billion in cash and cash equivalents, investments and restricted stock. This restricted working capital was about 1.1 billion, during the quarter we did have one of our tranches of senior notes became current , about 170 million. Our cash and cash investments exceeded our interest-bearing debt by about 840 million as compared to just over 400 million at the end of December. Capital expenditures, and this includes contributions to our joint venture with Canfor for the first 9 months we're about 104 million compared to DD&A of about 105. Book value per share increased to 15.86 from 12.31 at the end of last year. During the quarter we did put in place a new unsecured $150 million revolving line of credit, which can been increased to 250 if conditions warrant. And we are currently in the final stages of finalizing a renewal of $100 million AR securitization.

Slide 13 is a slide you've seen before. Really hasn't changed from the end of last quarter. We intend to put 250 to 300 million aside to allow us to ride through a normal business cycle and continue our capital investments. We will retire the public debt that becomes due or is callable in 2005 for about 215 million. And then with the cash we have available, as well as forecast future cash generation, we will be returning cash to shareholders via rational dividend and the use of a previously authorized share repurchase program. The remaining cash is available for growth, an area that Rick is going to discuss in a few minutes.

With that, let me turn the call over to Rick, who will provide his thoughts on third quarter, how we are managing our business and the outlook for the next several quarters.

Good morning, everyone. It is nice to be with you again. I want to talk this morning about growth, about the focus on cost, the outlook for our businesses over the next couple quarters and on the leadership transition that's occurring.

Kurt talked about the volume growth in our products compared to the same period last year. For the first 9 months of this year, OSB was up 6%, SmartSide was up 25%, hard board was up 11, vinyl up 3, decking up 43% and then engineered wood was very strong with LVL up 31% in volume and I-joist up 19. These are healthy growth numbers and each product line is selling more volume to try to continue to satisfy our customers and this housing boom. We're making decisions to allow this growth to continue. The OSB reinvestment program, which I've talked about before,and I'll say a little bit more later on, is in progress and has been going on for about a year-and-a-half now.

The JV OSB mill in British Columbia, in which we broke ground in June is under construction and it's on schedule. That mill is scheduled to produce 800 million more square feet of OSB starting up late next year. We're moving ahead on the conversion of our Hayward, Wisconsin OSB plant to become a SmartSide mill and by next summer we should have the first line converted. Site selection for a proposed new 700 million square foot OSB mill in Alabama is about done, and if you'll remember that mill is to be brought on, at least at this point in time, in very late 2007. There are several additional opportunities that will be discussed with our Board next week to increase our I-joist capacity and engineered wood, and to potentially expand our decking capacity in the Southeastern United States.

On the acquisition front, we have been expending our energies in OSB and engineered wood. We continued to look for opportunities in OSB via acquisition of competitors facilities, thus being able to grow without actually adding capacity into the industry, but it is the same story. It needs to be the right price at the right time. And right now the price of consolidation in OSB is extremely high. And in engineered wood, recent changes in ownership of various industry assets might create us an opportunity to allow us to expand in that area as well.

So we're doing some tire kicking and a lot of analysis, but the key tenants of right time right price still apply and we will continue to look for fair price in a deal and one that is immediately accretive to our earnings. For these reasons we believe that it is prudent for us to sustain our war chest and to be patient so that we have the opportunity to take advantage of good opportunities when we find them.

Offsetting the strong pricing in Q3, were increased cost. Oil at over $50 a barrel and a close to 80-cent Canadian dollar has an impact on our entire industry and certainly impacted us. Overall, LP businesses experienced raw material cost increases in fiber of $10 million and in resins of $9 million Q3 last year to Q3 this year. We also had additional increases in energy-related costs, things that you might not think about like the cost of in-bound and out-bound freight and utilities. Our OSB modernization program is gaining momentum quarterly, with the dual goals of first, reducing cost through improving wood yield, reducing resin use, and limiting energy consumption. And secondly, improving throughput to gain an additional 800 and 900 million feet of capacity through our current facilities.

I mentioned last time I would start giving you a few examples of what this reinvestment is yielding us. So let me start with one for this call. Several weeks ago I had the opportunity to review the results following the completion of a $19 million capital project in one of our mills in Canada. Returns on that capital are projected to be at cycle average pricing, about 30%, right now, of course, they're much higher than that because the price of OSB is much higher. The mill's operating annual rate increased by about 40 million feet per year. Natural gas consumption is down by 15% and we think that that will expand to 25% when we get the circulation system tuned up. And wood yield improved from .71 cords per 1,000 square feet of OSB, to .65 cords of wood per 1,000 square foot of OSB. System-wide in OSB, our monthly production rate is up over 20 million feet per month. Headcount at our mills is down about 3.3% compared to last year. And with the increases in wood cost, resins and energy, it's a good thing that our capital projects have been aimed at these particular cost streams.

Our Engineered Wood Products business has been running its plants full out all quarter. Conversion costs are at a 5-year low for us. But as Curt mentioned, the raw material costs are quite high. OSB is selling, or was selling in the third quarter about 80% higher than OSB was selling in the third quarter of last year. So for I-joist, you have to use OSB and you have to use lumber or LVL, for that construction, those costs are up and therefore very difficult to recover all of them. Now we have been successful in pushing significant price increases in in Engineered Wood, and we have brought our I-joist business to about neutral or slightly positive, and our LVL business is getting more and more positive. With costs anticipated to come down, this will be a bright spot for us in the future.

Our Composite Decking business, we recently completed a capacity increase at our Meridian, Idaho facility. And we are tuning net capacity is inching up this quarter. We plan on going to our Board in a few weeks to discuss the replication of this expansion at our Selma, Alabama plant to help us meet increased demand for these products in the eastern and southern United States. Phase 1 of our Nashville move is complete, and we are finding ways to consolidate positions, share resources and reduce our travel costs. I think we're also experiencing a higher degree of teamwork and timely decision making by having the key decision makers and leaders in the company in a single location.

As I look forward at Q1 and Q4, we historically experienced a seasonal slowing of new home construction because of the weather. But the major homebuilders who have reported results for the recent quarter are giving indications that their future businesses will be quite strong. Our other customers are indicating their belief in the same thing. We did have a very significant hurricane season that slowed new home construction in Florida and other affected areas in the south. And that activity will be pushed to future quarters, which is good news. Repair and remodeling are continuing to be strong, and of course, the hurricane impacts will only make that stronger.

Interest rates remain low, I looked them up yesterday, 5.6 this month for a 30-year mortgage. Almost 5.0 for a 15 fixed. There has been some job expansion in the economy and more is expected. I guess that depends to which political party you talk to. But the wildcard remains to be energy. Although Greenspan has said it's not a big deal, we're all dealing with higher costs in energy-related areas. We've all watched OSB pricing drift down over the last several weeks. [inaudible] this morning printed 7/16 north central $218. Q3 average was $353. We are taking advantage of this lull in the pricing by taking about 80 mill days down for capital installation and maintenance.

Let me give you a couple of examples of that. 80 days sounds huge, but basically we're taking our Athens, Georgia mill down for a press rebuild. That rebuild will take 28 days, we're in the middle of that right now. We're putting in some dryers at one of our Canadian mills and that shut down is 13 days. So 2 mills account for 41 days of the 80 days that I'm talking about.

Finally, the transition in corporate leadership from Mark Suwyn to me is going smoothly. Mark officially retires on Sunday, and I officially take the reins of CEO on Monday and become a member of the Board of Directors as well. We have already completed the position back filling that normally occurs in an internal promotion like this, and virtually all of that back filling has been done internally, which I am proud of and I think is a sign of a healthy organization.

Let me give you a quick summary of the changes. Curt Stevens remains the Executive Vice President of Administration and our Chief Financial Officer. Additionally, I gave Curt part of my old job and he has the responsibility for all corporate purchasing now. With the leaving of Joe Kastelic, we moved Harold Stanton, who was our Vice President of OSB, into the position of Executive Vice President of Specialty Sales and Marketing. And Harold now has the responsibility for all non-OSB businesses, and I took the Engineered Wood Products business, which I used to manage and moved that into Harold's camp. Jeff Wagner, who was formerly our Vice President of Procurement has become Vice President of OSB. And taking over for Jeff as Vice President of Procurement is a gentleman named Brian Luoma. I did eliminate my old Executive Vice President position as a cost reduction in the streamlining effort.

Now let me hand it back to Curt for the final part of the presentation.

Thanks, Rick. So in summary, continued strong results from the organization, where the cloud is we are being impacted by rising costs, particularly those that are energy related. Our investment and marketing plans to grow our volumes, to build on what Rick talked about in each of our product lines are well thought out and we're doing the execution as we speak. Our financial strength puts us in a position to take advantage of opportunities that may arise in the future.

With that, let me turn it over to Paul and queue for questions.

(Operator Instructions). Our first question today is from the line of Joe Staletti from Goldman Sachs. Please go ahead.

Hi, good morning. I was just wondering in looking at, you know, page 13 of your presentation, talking about how to apply the cash which I think is obviously a big issue that people want to understand with your company. I'm just trying to sort of understand what -- you say prices right now are very high in terms of acquisitions, but what would you be sort of willing -- when do you envision being more active in the acquisition market? And I guess tied to that, your Moody's rating, I'm trying to understand what your thoughts are there, why -- what you think might be the timing of getting an upgrade to investment grade would certainly seem like something that should happen or should have happened, and, you know, how that sort of ties to these other decisions on how to spend your cash?

Well, let me answer both of those questions. Let me start with the last part first. With Moody's, as you know, Moody's did put us on review for a possible upgrade in September, actually it was mid-August I believe. When we had [inaudible] conversations with them, it was right about the same time we announced the transition from Mark to Rick. Moody's made the internal decision that they wanted to have the opportunity to meet with Rick before they took definitive action. And we did have that meeting last week, Joe. So Mike, Kinney and Rick and I all met with Moody's and we're -- we would anticipate action. It was a productive meeting and I think what they heard is that Rick and I were part of the team that put the current architecture together from a strategy standpoint, and we weren't looking at anything that was significant departure than what we had spoke with them before. So that being said, I'm hoping that we'll see some activity here in the pretty near term.

As far as Rick's comment on the cost of consolidation within OSB. The OSB facilities that have recently traded hands, the Voyager mill, the Boise sold on behalf of them and their partners, and then the recent transaction with Potlatch, we were involved in the Voyager process. We were not involved in the Potlatch process. But as we look at the prices paid for those assets, while not unreasonable from a per 1,000 standpoint, we would have had some concerns about the wood basket and the cost positions on a long-term basis of those assets. So what's the right price? The right price is probably lower than it is now, but we have seen some of these assets, at least in the public market trading down with some of the major shareholders making decisions on liquidating at least a portion of the portfolio. So we are watching that very closely.

So are you committed, though, to, I guess this was probably a discussion you had with Moody's, but are you committed to making acquisitions and also being able to achieve and maintain your status of an investment grade company? Or should there be any concerns that you might want to do a highly leveraged transaction in terms of growing your company?

Our strategy is, we do think that being investment grade provides us with certain advantages of the market, so our intention, whatever we would do, would be to maintain in investment grade. With the significant amount of cash that we have, it does give us the flexibility along with perhaps a small equity offering to do that and maintain the statistics that would keep us in investment grade. Obviously, we'll -- might be a little bit higher than our target of being at 25 to 35% from a leverage standpoint immediately following the transaction, but we would certainly be committed to bring that down very quickly.

Okay. Thank you.

We have a question from the line of Chip Dillon with Smith Barney.

Yes, good morning. My question has to do with the production capacity or outlook for next year for your company on the OSB side, because we have a couple of moving parts. I know you are moving the mill in Wisconsin to SmartSide, and so at some point I guess you are making some OSB on that one line today and will be in the first quarter, and that will eventually, though, come offline. And so if we sort of see you guys making 5.5 billion square feet you tell me the number this year, what do you think next year's production will be based on the commodity side, based on the fact that you are actually removing capacity to SmartSide?

Here is the puts and the takes, Chip, this is Rick. You got our announcement we are shutting down the Woodland mill so on an annual capacity basis, that's about 250 million feet that we are taking out. It is an indefinite, but obviously if we take that mill down now you can't get wood back in there until at least next summer or next fall because you've got a mud season. So we've gone down for an indefinite shut down there. On an annualized basis, and you can divide that by quarter, that's about 250 to 260 million feet take away.

And that mill was running basically pretty full for 3 quarters of this year, is that fair?

Actually, no, it started up in June. We had the positive impact of that mill in June and then we -- actually the first week in November -- we'll run the wood yard there.

So if it doesn't run next year that's like a negative 100 million?

That's probably right.

Yeah, that will take you there. And then actually we'll run Hayward in first and most of the second quarter while we're putting the capital in to convert that over to siding. So you won't really see much of a reduction at least through first quarter and the reduction that you see in second quarter will be simply a tie in. I don't think we expect to have that fully converted until late June, early July.

And that conversion, Chip, would be the first line, it is a 2 line. It is about a 500 million square foot mill. So the conversion would be half of that at 250.

It would be 250 by the end of the -- by the time we got that line up and going.

So basically the last half of next year will have maybe 125 million less over that 2-quarter period because of that?

Probably won't be that much, but it would probably be 75 to 100 would be my guess.

And ISN [ph] aside, when we look at the APA numbers that they give for OSB, do they include products like SmartSiding or -- because I gather that's not technically a structural panel per se, that's more of an external panel, correct?

It depends which chart you get. You always have to ask the question whether you have an OSB technology chart or whether you've got OSB sheeting and flooring type chart, because it is different depending on which chart you get. It is always good to ask that question.

But as far as you are concerned the product you are making doesn't compete -- you will be making SmartSide doesn't compete with plywood for sheeting and flooring?

That's correct.

It competes with stucco and brick and everything else you put on the outside of a house, correct?

This is a move to produce lap siding, which is a totally different use than OSB sheeting or plywood sheeting.

And soffit and trim, that business is doing very well. Just to finish up on your comments, though, in the fourth quarter we will have some marginal volume coming out of the joint venture mill in British Columbia, so there will be an add back. The way that is setup --

Next year.

Yeah, next year. The Canfor will be responsible for running that mill and well be responsible for sales into North America.

Given that mill's capacity, that could be, depending on how fast it comes up, it could be 50, 100 million feet?

That's probably right, 50 to 100 would be what I would guess.

Any other moving parts from the other parts of LPX?

I don't think so. Because the Silsbee mill will be virtually fully SmartSide this year, so there won't be any additional conversion there.

Okay. And then what about the CapEx number for 2005, both on -- if you could clarify the amounts you are going to contribute to the JV.

The JV is a 50/50 and our total investment in that from a Canadian dollar basis is half of 220 million Canadian. So choose your exchange rate. We'll probably have another 50 million going into that. 40 to 50 million next year. And then we would expect to spend right around DD&A for the rest of the businesses.

Okay. Which would be, what, 150 I think?

It's about 135 to 140. Probably 140.

Okay. Lastly, it is interesting when you look at the M&A front, have you seen any changes in the marketplace? I mean, when you sort of take a step back, you've had 3 fairly good size producers, certainly big companies leave the business this year, Boise, MeadWestvaco and Potlatch, and has that changed the dynamics of the marketplace any?

I don't think -- well, we haven't seen the full impact of the Ainsworth acquisition of Potlatch. That's a little early to talk about. But I think this consolidation is probably good. I think it is also an indication those companies are getting out at the high end of the market.

Yeah. And I guess the last thing I would mention or ask is, you know, there is concern about your willingness to, I guess, or the risk that you all would overpay, and I guess it is fair to say you all lost many nights of sleep after, you know, the group for X acquisition, not to bring up a bad memory, which probably has turned out to be an okay investment as time goes.

Turned out to be a very good investment.

I'll tell you with 18 months of tailwind like we've had in OSB, that was a sweet investment, but it wasn't in our calculation to begin with.

I guess you were entering the 8th inning down 15 runs and now you feel like you have gotten ahead here, is that fair?

Remember, we had pretty good pricing right after we bought it, and so we paid a fair amount of that premium down in the first 10 months we owned that. If you go back into 1999. We bought that in the middle of '99, so the latter part of '99 first of 2000 was pretty good pricing.

You got to be careful about how much credit that you take, but all the parts are connected and probably some of the good fortune and some of the things that have created the environment of the last 18 months were a result of that. So, you know, it would just be nice to have done the whole thing with great foresight.

Got you. I'll let it go over. Are you getting any pressure from -- I know you have a number of, I think, pretty sizable shareholders looking at spectrum, are you getting any pressure to maybe step up the possibility of returning cash to shareholders on a greater basis than just getting the dividend up to 30 to 40% of mid-cycle?

We have attended several conferences in the recent past and actually we're attending your conference here coming up in early December. And we do have one-on-one meetings and we talk to those investors and I will tell you that there is not a universal mindset. There are a minority that say you have to do the special dividends, and I will say that's -- it is a minority. There is a fair amount that would say you need to step up your share repurchase program, and just in tying with share repurchase, we have publicly stated that we do have the intention to offset the dilution from various stock-based compensation programs that we've had over the last 12 months, and that's about 5 to 6 million shares that we have sold under those programs, and so we would like to offset that dilution. And we also do have the mechanism to do that. We have an authorization from our Board of up to 20 million shares. And in the third quarter we -- I will tell you it is a very modest number, but we did begin executing that plan.

Thank you very much.

Our next question comes from the line of Rich Schneider with UBS.

I was wondering if you could quantify what the downtime will be in the fourth quarter, the 80 days, what is that equivalent to in 1,000 square feet.

I am guessing a little bit, Rich, because I have to go through my mind real quick, and it depends on the size of the mill, but I think it is about 90 to 95 million feet.

Okay. Just in terms of your comment, you said you are getting about 20 million square feet additional now a month of OSB and is that coming -- that's I guess 240 million square feet, is that part of the capital cost reduction program or -- ?

Yeah, that's this, you know, this 800 to 900 million that we've been talking about as an ancillary benefit to improving our wood yield and energy, et cetera. Yeah, that's sitting down and looking right now at what we produced at in September of this year compared to what we produced at in September of last year. As we sit down and say based upon the improvements that we've made our productive capacity is improving. Now, obviously as we move forward into this, they'll be a finer measurement of that. Because I think right now -- what I am looking at is a point-to-point improvement and what I want is a trend. So I'd be careful of running too far with that, but I'm very encouraged that that's probably the first installment on additional throughput from existing facilities based upon our capital investment.

When would you say that sort of began? I know this is all very rough. But when do you think you've ratched it up to 20? Was it here -- ?

Within the last couple months.

Okay.

It is quite a recent data point. The curve is very sharp and we are just starting to complete, as I mentioned, I talked about that one capital job we just started to complete there and that plant within the last couple of weeks is sitting down and starting to knock out new production records. And so it is encouraging that we're seeing the money that we're putting in getting the results or better than the results we were expecting.

So this would be another moving part to add to the mix of what is going on with your capacity?

Exactly. But it is very hard to quantify right now because you have mills going up and going down, so it is not a straight line. I think over the next 12 to 18 months we'll be able to measure that as we keep track of the pieces that come out, as we talked about earlier with Chip.

And I guess I was a little surprised, Curt, to hear you say that you would look at these facilities at price per 1,000 square feet that a couple of these transactions have gone and the drawback was the wood basket and maybe I am overstating this, but those values were like double of replacement cost values for those transactions. I know you got cash immediately, but, you know, I was surprised by that. Am I interpreting that wrong?

What I said was you could make a case for it. I didn't say we would do that.

Okay. So you would still have some issues with the price per 1,000 square feet?

Right.

Okay.

But you could make a case for it, that's all I would say.

When you get in that top, that real top tier, you know, you are betting that existing pricing is going to last long enough for you to buy down the premium on your first 6 months of earnings. And that's -- some people have won that bet and then -- but its a scary bet to take.

And, Curt, you had mentioned there was $5.5 million of incentive payments in the quarter and that was in the corporate and other category.

It showed up throughout the operation. There was some in SG&A, but it also showed up in our cost. What we did is we did a bonus for our non-union, non-bonus employees across the Company, same amount per employee.

Okay. So going forward, should that corporate item still be roughly about 25 million?

I think that's about right.

Okay. Okay. And just just last, you know, I just find it really helpful if it would be possible if you could, you know, look at your analysis sequential. It gets harder to do things year-over-year, you know, changes that we look at are more immediate, so going from the second to third quarter. Just to comment if it is possible in future releases if -- my feeling is it's more valuable going sequential.

Okay. We'll take to heart and maybe what we'll do is add a single slide that looks at each segment sequentially.

That would be terrific. Thank you.

Okay.

We have a question from the line of Mark Weintraub with Buckingham Research.

Yes, just to follow up on that actually. On OSB pricing, could you give us a sense as to what happened sequentially?

For the quarter?

Yeah.

Yeah. In early July, the price was tanking, or late June the price was tanking, and I think the opening -- about the third week of July the price dropped down to about $275. An awful lot of volume sold below 275 to put a bottom on that. And then about the third or the fourth week of July , the price bounced and actually went back up and I think stayed up at about 412 for approximately 3 or 4 weeks through the month of August, and then actually we ended the month at $300 so this thing started out at 300, went down to 275 a whole lot of volume sold at 250, 260 during that period of time, went back up to 412 and then I think the quarter closed at 300, is that the number, Mike?

310 at the end of September.

310 at the end of September. So we had a lot of volatility. We went down considerably and then went up considerably and then went down considerably.

And looking at average prices third quarter versus second quarter, how much were they down by?

On random links, on Q to Q they were down about 19%. Q2 '04 was at 437, Q3 '04 was at 353 if you just look at North Central.

If I remember right, you sell about half your volume time at shipment, half time at order and given the volatility, I imagine your price experience if you look at your average prices might actually have been somewhat different, was that the case?

Yes, our average prices were lower than that for a couple of reasons. One is that you are your standard of comparison is random North Central, which we sell small portion of our volume into random North Central. We sell volume into random Southwest, random Southeast, we sell it into Eastern Canada, Western Canada and Eastern United States, so all of those have different print prices and they are as much as $20 to $30 difference. So it is very difficult to take just take random North Central and put that in your model and say that's what people are selling at. So our average sales price was lower than the random North Central.

I guess I was trying to get at your delta second to third quarter. Were you down more or less than 19% and by how much?

It was about the same as the market.

Okay. So you were actually down about 19%?

Right.

Okay. Just to try and put these pieces together in terms of production capability for next year. At the end of the day, do you think you are going to have the capability to produce more OSB? And if so, roughly how much more in 2005 than 2004?

You know, with the -- depends on if the Woodland mill starts up the second half of next year. Because right now it is going to be down the first half. So if Woodland does not come up in the second half, we will offset that with gains in our mills and additional volume coming out of the joint venture, but my guess we're probably going to be up 150 to 200 million square feet.

Okay.

On a net basis.

Helpful. Thank you. And then lastly, now that -- in winter season do your backlogs tend to get shorter? And so in terms of doing this calculation, the pricing in fourth quarter versus third quarter, any guidance on the best approach to use? Should we be using 2 weeks back for the 50% that gets booked at time of order or should we still be sticking to kind of the 4-week back methodology?

I am going to take a shot at answering what I think you asked. I am going to avoid being in the business of predicting where OSB prices are going, because that's a tough game. Our order files are typically shorter in the fourth quarter. Right now there's ready wood, all across the country. Ready wood meaning that if you call up and want it you can get it. And that's why you've seen prices float down from where they were is that order files are short. Short meaning we're probably out a week, where at some times we've talked to you we've been out 3 and some people have been out a lot more. I think the market is searching right now for a bottom. And, you know, we have a Friday print and we have a Wednesday mid-week print, which are about the same, which is the first time in probably about a month that that has happened. So the market seems to be finding somewhat of a bottom and then where exactly it will go from there I don't know. I can tell you all order files are shorter right now, and if I were you I would be looking at the 2-week measurement versus the 4-week measurement.

Okay. Thank you.

Our next question comes from the line of Steve Chercover with D.A. Davidson.

Good morning. Couple quick questions. First of all, you did mention at some stage that using trend prices for OSB, can you give us a sense of what you think trend is now and has there been a step function up?

I answered this question I think at Rich's conference. I don't know how well. But our believe is that average cycle pricing right now on a 7/16 basis is somewhere between $205 and $210. And then nobody sells right at market, so you put some kind of a slight discount factor on that and the reason that that's up from -- if you asked us that question 2 years ago, we'd have been at about, what, 192, and the reason that that's up is because everybody's cost basis has gone up. And so the cash costs are higher, which ought to support a new bottom.

Okay. That's logical. Secondly, do you guys have a philosophical bias of gains to special dividend? And if so could you maybe explain why?

I have a philosophical bias against it, Steve, because I can't see any compelling data anywhere that it created long-term shareholder value. Where special dividends have been put into place in the recent past have largely been where a major shareholder would like a liquidation event. Now I will tell you I haven't look at the Potlatch in detail, I know they made an announcement yesterday, but it is relatively modest, I think it was 75 million they were looking at. And I think from our perspective and from the data that we've seen, it makes much more sense to get our dividends up to a level of -- a percentage of normalized earnings that makes sense and is consistent with the industry.

Okay. Final question, and I am going to be guilty of kind of stringing together 2 comments that were made in different portions of your discussion. At one stage, Curt, I think you said for the right acquisition, and presumably it would be a big one, you could issue equity, and then later in the call you said that you had been repurchasing shares in the third quarter and, you know, one kind of implies shares are fairly or overvalued and the other says they are under value so I thought you might say where --

You are taking those out of context, what I said within I talked about issuing equity would be a part of an acquisition to maintain an investment grade balance sheet.

I did say they were completely different elements of your speech.

Right. We are not currently negotiating any acquisitions so we do need to be responsive to our investor base on returning some cash to them, and there is a fair amount of investors that would like to see us offset the dilution that's been created by these stock-based compensation programs.

So if we were to say that presently you are repurchasing shares and you have $8.50 a share in cash, then presumably your shares you still view to be under valued.

I would say it is more cash per share than that if you actually run the numbers.

Net cash.

You mean net, okay.

Thanks, guys.

All right.

Our next question is from the line of Peter Ruschmeier with Lehman Brothers.

Thanks. Good morning. The question hasn't been asked, so maybe I will try and tackle it. Could you elaborate a little bit on the pay package for Mark, $11 million is that above and beyond any options? That's a cash payment if I understand it correctly, and I just want to better understand the metrics and what that was about.

Let me talk about that. The Board made he the decision to accelerate the vesting date under various stock compensation programs for Mark. When you make that decision what you have to do is that acceleration of the vesting date creates a new measurement date, and that's what resulted in the charge, was the difference between the stock price at the time they mate that acceleration and the stock price that was either the option or on the vesting schedule for restricted shares. I will hasten to add this is a noncash charge, this was not a cash payment to Mark.

Understood.

Acceleration of the vesting dates under these programs.

Got it. Also, can you comment, you mentioned you'll put in a new AR facility just to have the flexibility. Can you comment on the current AR facility if there is anything outstanding and is it on balance sheet or off balance sheet?

It is on balance sheet. There is nothing outstanding on either -- well, on the revolving credit agreement we do have letters of credit commitments under that. But there's nothing outstanding under the AR facility, it is a $100 million facility. Basically we're just renewing it on slightly different terms and conditions.

And just lastly, curious if you could talk about the fiber markets as you see it. You know, some indications in different markets of some escalating costs, you've talked about that a little bit, but can you elaborate and maybe talk about strategies for procurement if you changed at all in terms of how you are thinking about securing wood and how you are trying to lock in pricing to the extent you are?

I'll take that one, Peter. The wood baskets, it is like politics, all wood baskets are local. But I think you can generalize this one into probably 3 areas, which are behaving somewhat differently for different reasons. Take the U.S. South first, which I'll call Virginia to Texas. Basically flat, particularly this time of year, as you move into the winter season, which means rain, which means there's usually not an abundance of wood, people will have got their wood piles where they want them by Thanksgiving, and then probably, unless the weather is extraordinarily wet, wood will be relatively flat until the spring and then my prediction is that wood will go down a few bucks next summer.

The lake states is a horse of a different color. There is a lot of competition for hardwood, specifically Aspen in the lake states. Huge appreciation in stumpage prices, as long as the pulp market stays strong and the panel market stays strong, I don't expect that to come down. I don't know when it is going to come down. We bought wood 7 or 8 years ago in the lake states for probably $58. People in the lake states now are buying it for $100. That's been the impact of the competition. So something's got to give there. Usually what gives is that the pulp market gets soft and those are the guys that take the biggest chunks out of it.

And then Canada is a lot of the fiber increase in Canada is the foreign exchange, the strength of the U.S. Dollar. A lot of companies made bets to go to Canada to buy cheap fiber, and it looked pretty cheap at 0.62. At 0.8 it doesn't look nearly as cheap. The other thing that's going on in Canada is kind of across their country, there is a general off-loading of forestry expenses that the government used to pay that they are now passing onto their licensed holders. But the biggest impact on wood in Canada, there is certainly enough of it, it is just that the strength of the U.S. dollar has made that wood more expensive.

And just to clarify, related to the wood question, you mentioned you've are taken your yield -- you've improved your yield from 0.71 to 0.65 cords. I assume that that's across your mix and is that a function of some of the newer projects, the de-bottlenecking just being that much lower costs? Can you help us to understand how you bring that down.

Sure. That example that I gave you was at one mill and it was part of a capital project in which we both addressed wood yield and energy cost. But that is our design at all of our mills is to create wins like that and returns from the capital that we invest. So that was a direct result of the 19 million that we put into that plant. And we will be hoping to achieve those kind of results or greater at the other plants where we go in and do similar type projects. Did that answer your question?

Yes, it did. Thanks very much.

Our next question comes were the line of Mark Wilde with Deutsche.

Good morning. Rick, I wondered if that number you throw out earlier for what the average cycle price was, I wondered if you can tie that in not only to what is going on with resin, but how much of an impact there is to the industry's cost curve from the appreciation in the Canadian dollar?

Mark, this is Curt. I think there's the Canadian dollar if you look at the OSB assets probably 30 to 35% of the assets are volume are in Canada. So you can take that increase in the currency rate, times that 35% and that would give you an indication of how the industry cost curve has gone up based on the Canadian dollar. If I run those numbers in my head real quickly it is probably $4 to $5.

Okay.

On the resin side, we are still getting resin increases because they lag a little bit on the oil cost, but our resin costs are probably up $3 a 1,000 from the same period last year. And with the fourth quarter -- that doesn't include the fourth quarter increases that are going in. Now, if we believe that $50 to $60 oil is going to continue then you are not going to see any relief in that. If you think oil is going to go back down in the 25 or 30 that will come back off. That's where it is today. And then on natural gas, that effects primarily the U.S. facilities. There is not a lot of pollution control equipment on the Canadian mills, but our natural gas cost has gone from 3.50 up to about 7 now, based on what I saw yesterday. That probably adds another buck, buck-and-a-half on the U.S. operation.

Okay.

I think the good side of that, if there is one, is that the guts of our rejuvenation of our plants, this [inaudible] plant are aimed at reducing the amount of wood we use, reducing the amount of natural gas that we use and reducing the amount of resins we use. If you think about it and you say in the short-term you can't do much about the per-unit cost, but where you get at your costs is you try to reduce the amount that you put in your board.

I got one other question, that's about LP Chile. I think as we had this big rally in OSB prices you shifted that mill from making downstream value added products to actually shipping just regular 4 x 8 sheets into North America. I wondered with prices now dropping whether you back off from that? And then also any thoughts on timing of expansion down there?

Mark, we didn't bring any board back in the last quarter, I don't think, any 4 x 8 panels.

Okay.

Most of that is being consumed within South America. About 75% of that product is being consumed down there or exported to the Far East.

Okay.

As far as expansion down there. They probably bent your ear when you visited them last. They want to expand immediately. They think there is a real need and growing demand. We are looking at that as part of our strategic review and part of the budget process, but I wouldn't anticipate a decision until middle of next year.

Very good. Thanks, Curt.

We have time for one more question, Paul, sorry.

Go to the line of Frank Dunau with Adage Capital.

I have a question back to the tax rate.

Yes.

If I remember correctly, maybe I am wrong, I thought, if I remember, the second quarter seemed a little low that was, I thought because the Canadian dollar was a little weaker?

No, the second quarter the reason it was low is the percentage of our income in Canada was taxed at a lower rate.

Okay.

Created a lower rate. So we've had -- actually had pretty stable Canadian currency between the quarters and then in the third quarter, we just had an awful September where it ended up at 79.

Right.

And what that meant we had to do is remeasure inner-company loans, and as a result, it's not deductible in both jurisdictions in Canada and the U.S. and that created the additional tax liability.

The Canadian dollar appreciates -- stays where it is now, which is appreciation for, we're in the third quarter, we see a hit on the tax rate again or is that just a -- ?

No, we're assuming that tax rate stays until the end of the year. So if it stays where it is at the end of September, you won't see any change in the rate.

Okay. Thanks.

Okay. Well, I appreciate all of you attending. As usual, Becky and Mike are available for follow-on questions. And with that, Paul, let me turn it back over to you and let you give out the replay information.

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