Louisiana-Pacific Corp (LPX) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2004 LP Corp earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today's presentation, Mr. Curt Stevens, Chief Financial Officer. Please proceed sir.

Good morning to all of you on the call. We appreciate you joining us for this conference call to discuss our financial results for the fourth quarter and for the full year ended December 31. I am Curt Stevens, Executive Vice President of Administration and Chief Financial Officer. With me today on the call are Rick Frost, our Chief Executive Officer, and Mike Kinney, and Becky Barckley, who are responsible for our Investor Relations activities.

I'll start the call to review the financial results for the fourth quarter of 2004 and provide a few comments on the balance sheet. Rick will then review the accomplishments during the year, and we will talk about our outlook for 2005. Then we will open up the call for questions.

As we have done in the past, as Bill indicated, this earnings call has been opened up to the public, and we're also doing a webcast. This can be accessed through www.lpcorp.com. Additionally, to help with our earnings call, we have provided a presentation to provide supplementary information along with the call itself. As we go to the call, I will be referencing certain pages of that presentation. As a caution, this presentation should be reviewed in connection with our publicly available earnings release and other 8-K filings.

Before we begin, I want to remind all the persistence about the forward-looking statements comment that is included in our earnings release and shown on the second page of the presentation, and also the discussion of the use of non-GAAP financial information included on the third page. I won't reread these statements, but I'm going to incorporate into the discussion with this reference.

I ask you to please refer to the financial slide on quarterly results. We're reporting today net income for the quarter of $14 million or 12 cents per share, of which continuing operations showed net income of 16 million or 14 cents a share, and discontinued operations showed a loss of $2 million.

Net sales from continuing operations were 588 million for the quarter. For the same period last year we reported net income of 164 million or $1.52 a share. On continuing operations we had income of 163 million, $1.52 a share, and our discontinued operations broke even. Net sales from continuing operations were 730 million during the same quarter last year.

The next slide to refer to is the one -- is the year-to-date -- the overall year results. For the year ended December 31, we reported net income of 421 million or $3.84 a share, of which continuing operations provided an income of 424 million or $3.87 a share, and discontinued operations had a slight loss of 3 million. Net sales from continuing operations were 2.8 billion for the period. For last year we reported net income of 273 million or $2.56 a share, of which continuing operations had income of 285 million or $2.68 a share, and discontinued operations resulted in a loss of 13 million. Net sales from continuing operations in 2003 were $2.3 billion.

The next slide I want to reference is the reconciliation of special items. Each of the reported periods did have several special items that are generally not attributable to ongoing operations. Let me briefly summarize what was in Q4 of 2004. We recorded a $2.4 million charge associated with the continued cost of relocation of LP's corporate headquarters to Nashville, Tennessee. We have completed most of our phase 1 moves and started a moderate phase 2.

As we mentioned on last quarter's call, in connection with Mark Suwyn's retirement, we were required to record a charge of approximately 2.4 million associated with the Company's nonqualified retirement plan. What this charge we believe that we have no further financial charges associated with Mark's retirement. In the quarter we also recorded impairment charges and losses on the sale of other assets that accounted for about a $6 million charge in continuing operations.

In the same quarter last year we had a gain of 55 million on the sale of our Southern timberlands and other assets, and a gain of 29 million associated to several insurance recoveries for environmental costs incurred in prior years. Offsetting these gains in Q4 of 2003 was a loss of 13 million associated with the increase in certain litigation reserves. After taking these items into account, net income excluding these special items from continuing operations for the quarter was 22 million or 20 cents a share, compared to 120 million or $1.12 per share in the same period last year.

For the year ended December 31, net income, excluding these special items from continuing operations, was 478 million, or $4.36 per diluted share as compared to 223 million or $2.09 per share in the same period last year. These special items are all detailed in the footnotes 2 and 3 of our release.

Before we move into business segments, I want to talk further about the Q4 tax rate and the effect it had on our reported earnings. Please refer to the slide titled, Tax Rate Discussion, in the presentation. The primary reason for the very high tax provision in Q4 is related to a $44 million currency gain on the revaluation of intercompany loans due to a change in the Canadian dollar exchange rate. Financial reporting this gain is eliminated in consolidation. At statutory rates, this gain caused our tax provision to increase by $17 million or 15 cents a share in the fourth quarter. Looking at the tax provision for the full year, we are providing for current deferred taxes of 278 million. Attributable to 2004 we paid 183 million and expect a return of a $29 million over payment. A detailed discussion of the tax provision is included in our press release at footnote 4.

Summing it all up, if we start with a 14 cent per share earnings from continuing operations, adjust for 6 cents of other charges, credits and impairments, and add back the 15 cents per tax adjustment, this will give us an adjusted EPS for the quarter of 35 cents per share, right on top of the consensus estimate. This calculation is summarized on the slide in the presentation.

With those overall results, let me talk about the performance of each our segments. First, let me talk about a revised -- a slide that is entitled, Revised Segments. With Rick taking over as Chief Executive Officer and the internal promotion of Harold Stanton to Executive Vice President in Specialty Marketing and Sales, and Jeff Wagner to VP OSB, we have retooled our business segments to align with this new management structure.

OSB and EWP remain separate segments with minor revisions. Rather than having the 2 segments based on -- the remaining 2 segments based on manufacturing technology, composite wood and plastic, we have reclassified our operations into a siding segment and all others. This allows us to discuss siding as a business with all 3 product lines included under a single operating manager. The other category now includes our outdoor living, or composite decking products, moldings, our Chilean operation, our US Green Fiber joint venture, and other nonoperating facilities. Included in this morning's 8-K filings is an exhibit that shows the realignment of our historic numbers to correspond to these new segments.

Let me start with OSB, and you look at the OSB slide in the presentation. For the first time in several quarters OSB prices compared to the same quarter in the prior year is down. We are reporting a decrease of about 30 percent in price and 4 percent in volume. Remember in the third quarter of 2003 is when OSB prices started their rapid rise. This continued into Q4 with the random length print for OSB at $465 for 7 consecutive weeks during that quarter. At the same time, we are not going to sit here and complain about a $260 random lengths average sales price in the fourth quarter of 2004.

In the fourth quarter, we fortunately were not able to take full advantage of the pricing environment due to both planned and unplanned down time. We did take planned maintenance and capital project related down time in the fourth quarter. On our last call Rick announced that we were planning on 80 mill days of down time. We actually took 88. We also took a bit longer bringing some of our mills back up, as the commissioning time took longer than we would have liked. Along with that, we did experience another 9 days of lost mill days due to log outages in the Lake States. The outcome of these factors caused us to produce about 70 million square feet less than planned. However, we were able to make up about 40 million square feet in sales through inventory reductions. Additionally, the Canadian dollar ended the quarter at 83.3 cents to the U.S. dollar. All these factors raised our U.S. dollar cost both year-over-year and sequentially.

For the full year sales are up over 400 million on a 27 percent increase in sales price and 3 percent more volume. This provided nearly 830 million of profits as defined from OSB operations. For the year, operating costs also increased approximately $10 per thousand square feet caused by higher fiber, resin and energy costs, and the effect of the strengthening Canadian dollar.

The next slide to refer to is on siding. As mentioned earlier, this segment includes our SmartSide, which is an OSB-based citing, hardboard siding and vinyl. For the quarter sales were basically flat with a decline in profits of about $6 million. For the year, sales were up 6 percent, with a slight decline in profits. Let me remind you that in past years we have sold quite a bit of commodity OSB from our siding mills. For 2004 we sold approximately 200 million square feet less than in 2003.

Within the product lines our Smart Buy product continued to do very well capturing additional market share, as demonstrated by a 21 percent increase in volume year-over-year. Additionally, hardboard product line enjoyed a 7 percent annual volume increase. Because of higher raw material costs we instigated price increases in all of our siding product lines to partially offset these costs.

Year-over-year SmartSide side was up 6 percent, vinyl was up 4 percent, and hardboard was actually higher by 8 percent. While this is good and necessary, it was not enough to compensate for the significant increase, particularly in our vinyl business.

Refer to the EWP slide, Engineered Wood product line, this segment includes our laminated veneer lumber and I-Joist operations, plus other related products that include a small plywood mill. We also include the results of our I-Joist joint venture with Abitibi in this segment. These product lines continued to experience very good volume growth, up 14 percent in LVL and 3 percent in I goods for the quarter, and 27 and 15 percent respectively for the full year. Equally important, we were able to instigate several price increases during the year that totaled 12 percent for LVL and 13 percent for I-Joist to offset dramatically higher raw material cost, principally OSB, lumber and veneer.

For the price increases, higher volume and better operations, EWP had profits of $7 million for the year, 4 of which came in the fourth quarter as the full effect of price increases was reflected in our results.

As mentioned, this business also includes a plywood mill, which primarily produces plywood as a by-product from the LVL production process. Given the significant price increase in plywood, which typically follows OSB, we operated this facility at higher levels during this quarter and for 2004. As pricing returns to more normalized levels, we would anticipate that this facility would also return to more normalized production levels in plywood.

The final part of our business segments is the other building products. This consists of composite wood decking, or Outdoor Living, our molding business, Chilean operations, our installation joint venture with US Green Fiber, our resource group and other nonoperating facilities. Overall in terms of profitability this segment showed a substantial improvement from the prior year with a doubling of profit. The highest gross rate in this segment was for our decking products where volume increased by nearly 60 percent, and we were also able to raise prices by 6 percent.

In moldings, volumes were up 4 percent year to year, and we increased prices by 6 percent. The price increase in both these product lines was important as we needed to offset petroleum-based resin price increases. Our Chilean operations had a very good year with profits of nearly $6 million in 2004.

Selling, general and administrative costs for the quarter were down 14 percent, but I would hasten to add this is probably more due to timing differences. For the year SG&A costs were slightly lower than 2003. Overall, if we look at SG&A both unallocated and assigned to the segments, this was less than 6 percent of 2004 revenues, which is very competitive in our industry.

The next slide to refer to is the balance sheet and others statistics slide in the presentation. The impact of our strong operating performance continues to do good things to our balance sheet. Let me just highlight a few statistics. On December 31st, we had 1.25 billion in cash and cash equivalents, investments and restricted stock -- or restricted cash, excuse me. The restricted cash represents the cash collateralization of our outstanding letters of credit. Working capital is at more than 1.1 billion. At December 31st, our net debt was to the good by 845 million, as compared to just over 400 million to the good at the end of 2003.

Capital expenditures for 2004 were at 173 million. And if we add in capitalized interest and roads (ph) that brings that to about 180 million. This includes our contributions to the Camfor LP JV and British Colombia and the Abitibi TB I-Joist JV in Québec.

Book value for ending share increased to $16.05, an increase of roughly 3.75 from the end of last year.

Let me now turn the call over to Rick, who will provide his reflections on the 2004 accomplishments, the transition to Chief Executive Officer, power managing our business, and the outlook for 2005.

Good morning everyone. A belated happy New Year to all of you. Rather than focus just exclusively on Q4, many of my comments will be aimed on the full year, as well as how we see 2005 shaping up right now. 2004 was a remarkable year for LP building products. '04 has been the best earnings since I have been with LP, and I came on board in 1996. Our stock price increased from around $17 a share at the beginning of '04 to about $26 a share, leading up to LP accepting the award from PaperLoop last year for the best investment return in our industry.

A strong building environment of over 2 million housing starts in '04 led volume growth in most all of our product lines. OSB was up 3 to 4 percent in spite of the production miss that Kurt mentioned in Q4. 4 of our 13 mills set production records in a year where we took every 230 million production days down to do maintenance and to do CapEx. Our smart siding -- our SmartSide siding was up 21 percent. We measure that in square feet. Our hardboard siding was up 7 percent, also measured in square feet. LVL was up 27 percent, and LVL is measured in cubic feet. I-Joist was up 15 percent measured in linear feet. Molding was up 4 percent in linear feet, and decking was up a whopping 58 percent in linear feet.

I'm very proud to share with you that LP had its safest ever, continuing to best our prior year's performance in terms of driving down our OSHA incident rate. We did the same thing in environmental performance. Our entire OSB business went a full year without a notice of violation, and that is no small task.

We retired over $228 million in debt. At the same time we grew our cash by 200 million. We regained our investment-grade status from both rating agencies, Standard & Poor's and Moody's. And we reinstated our dividend last year, and we raised it twice to the current annual rate of 40 cents per share.

Our improved financial profile also allowed Curt's folks to put in place longer-term, unsecured with lines of credit with our banks on more favorable terms and conditions. But it is the same old story, if you don't need your bankers, he is right there for you.

We invested 180 million in capital to improve current operations, add capacity, and fund our portion of the Camfor LP joint venture, and this is more than double what we spent 2003. We consolidated our management and support staffs into our new facilities here at Nashville. And so far we have lost very few key personnel. And actually have used this as an opportunity to upgrade in some areas.

We also said goodbye to Mark Suwyn as he retired after nearly 9 years at the helm of LP. And I think Mark's legacy will live on. He has certainly helped us focus on safety, clean up our quality issues, improve on compliance, and basically got LP doing the right thing. I think my highest compliment to Mark is that he left LP much better than he found it.

In my new role as the Chief Executive Officer I have been able to promote several seasoned managers into new positions. Harold Stanton, who to run our OSB business, has assumed responsibility for all of our non-OSB businesses, plus our sales and marketing organization. Harold brings a crisp focus to these efforts. And Jeff Wagner, after spending the last several years developing a corporatewide procurement organization, is the new Vice President of OSB. And Jeff will be focusing on cost and capacity. And my good friend, Mr. Stevens, Executive Vice President of Administration and our CFO, has added to his plate responsibilities for all of our purchasing and logistics activities.

Beyond this executive team that I just mentioned, we do have an extremely strong cadre of senior managers throughout the Company that are stepping up to the challenges we have ahead of us on a daily basis. And to lead the about 6,400 very qualified employees that we have across North America and also down in Chile.

As many good things happened to us in '04, there are some things there were disappointments. I think the significant dealt with the large increase in costs that we experienced in '04. Wood is in tight supply in the Lake States and has gone up significantly. And the effect of foreign exchange in Canada on wood costs has made Canadian pulpwood much less competitive as well.

You all know the story around energy. Oil-based resins affected most of our production lines significantly, and this is yet to show signs of abating. Energy in terms of natural gas and propane is a well-known story. Also the diesel and gasoline cost effect on transportation and logging has been significant. And exacerbating all of this is the stronger Canadian dollar. We are a Company that has about 35 to 40 percent of our costs of sales in Canada, so it is a significant thing.

Much of our cost increases are beyond one company's direct control. That is if you are trying to affect the purchase price of a gallon of diesel, or 1,000 cubic feet of natural gas, or a pound of resins, or a cord of wood. But what we can attack is consumption, or usage, the more efficient use of energy to better yields to our raw materials and improved logistics and freight. We can attack product pricing, which we have, SKU reduction and complexity elimination, and the efficient deployment of capital to improve our operations, along with cost reduction and margin improvement efforts that are going on in our organization in terms of our lean Six Sigma teams, and our quality scale to sale cost reduction programs.

The other area that is getting increased management attention and focus is the implementation of our capital program. For the most part what we did last year I'm quite pleased, but we can always get better. In the fourth quarter we ended up quite a bit more down time than was desirable. And this was the result of more adverse weather conditions than anticipated at some of our locations that we had large projects going on at. We had difficulties with a few contractors. And then we ended up with a slower ramp up, or what we call the commissioning of the capital after the improvements were put in. We do still have 1 mill limping a bit from a green in job, which is not yet complete. That mill is in Québec.

As I look forward to 2005, let me talk about a few of the key initiatives that we have at LP. First, our branding effort. At the International Builders Show this year we went public with our new logo and product labeling as part of an overall effort to leverage the LP brand. We also added building products to our LP logo to make it extremely clear what we are focused on, and to once and finally answer the question, we're not a railroad.

For product branding we will tie the LP logo into all of our well-respected brands and put the LP name on products like WeatherBest, SmartSide, Top Notch and TechShield.

This year is starting very well. The general business environments looks good. Forecasts for housing starts have been increasing. And most forecasters, even Reesy now, are at or above the 1.85 million range for this year. That is very significant. Despite yet another 25 basis point in the discount rate, mortgage rates continue to be very attractive. Scanning the paper yesterday morning 15 year money is available at about 5 percent, and 30 year money is available below 6 percent.

Homebuilders for the most part are reporting increasing backlogs, and most markets are still supporting continued price increases. I had the opportunity to spend a couple of days at the International Builders Show last month, and I sure didn't hear any of the bigger builders talking about doing less work in 2005. One article that I read while I was at the show estimated that the top 9 builders had 57 percent of their estimated revenues for 2005 already presold. And as most of you know, OSB pricing started out very strong this year, and has generally stayed above the $300 level. And of course Friday there were a big bump, as I am sure you have observed.

In terms of cost focus we must and we will continue to focus on our costs. And we won't lose sight of the constant need for cost reductions, even in this robust pricing environment. The LP folks understand that for most raw materials that are commodity based, our ability to affect these costs in the short-term is on the consumption or the usage side. Hence our capital is aimed at that, as well as our improvement efforts. I was pleased to see that our SG&A costs did not increase from '03 to '04, despite the significant resources spend on Sarbanes-Oxley compliance this year, and disruption caused by our corporate move.

In terms of capital deployment, capital deployment at both existing and new facilities will continue with the dual goal of reducing costs and increasing capacity to satisfy the needs of our customers. One of our top priorities is to bring the Camfor LP joint venture OSB mill that is being constructed in Fort St. John, British Columbia on line, on time and on budget. Our plan is to bring production at this facility into the marketplace in the fourth quarter of this year.

We announced an expansion of our Engineered Wood Products relationship with Abitibi Consolidated in December, when we began the construction of a second I-Joist line in St. Prim, Québec. And last week our Board approved the doubling of the capacity at our Selma, Alabama composite decking facility that will mirror the success that we had in a similar project in our Meridian, Idaho mill last summer. We will do separate -- we will do site preparation and other planning work on the new mill that we announced in Clark County, Alabama last quarter. This will be a 700 million square foot mill, and is planned to be in production towards the end of 2007.

We have also begun the project to convert the first line at our Haywood OSB plant to manufacture more SmartSide. And production of SmartSide out of the Hayward mill is planned for this summer. And we'll continue to implement portions of the OSB brown field plan that has the dual purpose of reducing costs and increasing capacity.

In terms of cash management, we are looking for opportunities to prudently invest the cash. As Curt said, we have about 1.25 billion. Earmarked are 250 to 300 million for our rainy day fund, or our reserve. We have 200 million to spend this year to retire the notes. And that leaves us with a war chest of about 750 million. So far we have done lots of looking, but no buying. What we have said in the past is we're looking for the right product at the right time and the right price.

'05 looks very exciting for us. It is a full plate, but we've got the people in place I think to do this job to run the race, and to be extremely successful. And with that, Curt, I will turn it back over to you.

Our commitment is to grow the Company profitably toward an ever-increasing share value, while returning cash to our shareholders through an appropriate dividend that is rational through the business cycle.

In summary, 2004 very strong results. Our investments and marketing plans to grow volumes and reduce costs are well thought out and being executed. And our financial strength, as Rick mentioned, puts us in a position to take advantage of opportunities that may arise in the future.

With that, let me open up the call to questions.

(OPERATOR INSTRUCTIONS). Rich Schneider of UBS.

I was wondering if you can indicate whether any of these -- it is hard to tell -- special items impacted the segment numbers, or they were all in the corporate expense area?

Most of those would have been reflected in the segment numbers.

I can get it off-line, but do you have that breakdown handy?

I misspoke. Net of those in the segment numbers, those would be in the impairment line and the other charges line.

Okay. If you look at the siding profits, what were they in the third quarter on this restated basis?

Hang on. We will find that. It is in that 8-K, the last chart in there would have been -- drapes (ph) would have been 26.1 million (multiple speakers) Q2 '03.

So 26.1 in the third quarter of --?

'04 was 18.3.

My question is the drop off from 18.3 to 4.8 in the fourth quarter, could you go through some of the things that impacted you?

As I mentioned it when I talked about siding, we produced about 245 million square feet of OSB in our siding mills in 2003, and we produced about 45 million in 2004. So that 200 million shift went into SmartSide. And if you recall the fourth quarter of last year we had very, very high OSB pricing.

I guess I was looking at sequentially third to fourth.

I think one of the big things was that we had almost twice the amount of OSB commodity produced in '03 -- Q3 of '04 than then Q4 of this year. And then the pricing was down, what, 31 percent. So that's the biggest difference.

But third quarter you weren't producing commodity OSB in that business, were you -- in that segment?

About, let's see, we did produce some, not a lot. No.

To go from the 18 million to 4.8 million it was related to what? More volume, or what was the sequential decline of 13 million related to?

Remember there are 3 elements of this. There is vinyl in there. And vinyl did not have -- because of the higher resin costs and the inability to pass on pricing, there was a pretty big swing in the vinyl profitability, and then hardboard sales feel off a little bit in the fourth quarter about the same.

Actually I misspoke. I was talking about Q4 of '03. So we actually did produce more OSB actually in Q4 of '04 than Q3 of '04. But the margin is less -- it was less than on the SmartSide.

And what are the prospects that you see going into first quarter for the siding area? Will it start to ramp up? And obviously you're going to be adding new capacity in 2005. Is it pretty constructive there?

At this point we're very glad we made the decision to convert Hayward, because they're going to need that capacity by the summer, based on early sales activity in the quarter.

In fact, we won't see any production from that until Q3, the latter half of the year.

And then on your production outlook on OSB in the first quarter, are you expecting to take much down time? I know you said you have 1 facility that is slow coming up, but are you -- is there any maintenance down time in OSB in the first quarter or other down time scheduled?

This is Rick. We have 29 mill days planned for Q1, which we think that we should hit pretty close to right on the head. As I did say, we do have 1 mill that is limping based upon working on the green end from a project started last quarter. The other exposure that we have is we have a low wood pile at Sogola (ph). And we're kind of taking it off the truck and putting it on the deck right now. And we will have to see where that goes. But that is all we have in terms of scheduled outage for OSB in Q1.

And that compares to 88 days plus the additional 9, or something like 97 in the fourth quarter?

Right. Plus the commissioning time which was significant. The commissioning time meaning the time it took until after we put that equipment in and start the mill back up to get the mills running back to full level. So as I said, we have done a considerable amount of work in the last 6 to 8 weeks in terms of improving our commissioning time. So I think the 29 day number will be a safer bet than the 80 day number was in terms of performance.

Just last 2. Cost increases, what are you looking at potentially going from the fourth to the first quarter? And how are you budgeting costs in '05?

I think we will look -- costs will probably be down from Q4 about 5 percent would be my guess, because Q4 was poor. Wood is going to continue to be up just a little bit. As I said, there is no abating of resin costs at this point in time. But then with the exception of resin, we should see the inflection point in cost in Q2.

And then cap spending for '05, what is your most recent estimate?

I'm sorry, I missed that question?

Cap spending for '05? Comparing it to the 82 you had in '04?

Are you talking about capital? CapEx there is about 60 million, and it still needs to be invested in a JV in Canada. And then the remainder of 2005 we would expect to be at the 170.

So about 230 million, including the JV?

Including the investment in the JV as well as the investment in the Abbot JV.

And a little bit of money down in Clark County, and a little bit of money in the I-Joist plant.

Mark Connelly of CSFB.

Just 2 things. As you look across the OSB market for growth opportunities, you have talked in the past about considerations in Chile, and you have done some stuff in Canada. Is there any place else outside the U.S. that you think over the next couple of years might represent a decent opportunity for OSB?

We're starting to develop a look at foreign markets beginning in South America. And then we currently export small amounts of OSB from Chile to the Far East. And we have charged our Chilean operation with giving us a better look at that mark by the end of this year. They live pretty much in an economy that is based upon import and exports, and are already doing business with a significant number of countries. And so we are starting to see if there is an opportunity for us to go East, as well as continuing to penetrate the South American market. One of the objectives that we have in South America is we not only have to make product down there, but we have to teach them to build houses like we do, so that they use the material. And so it is a slow process.

Yes, that would take a little bit longer. The second question is with respect to working capital, if we look at the working capital situation this year versus last, obviously with the price of OSB that was going to move up anyway, do you have any indication of anything other than the price of inventory that is going to be shifting your working capital in any meaningful way in '05?

Not at this point we don't. If you look at the change in working capital, one of the things that happened in 2004 is the 2005 notes did become current, and they went into current liabilities. So part of the reduction in the working capital occurred when that became current, and those are due in the end of August.

Right. And that is really -- from my look the only big issue that swung around. I am just wondering if there was anything else funny in '05?

No, I don't think so. We actually had a little bit higher log decked in Québec. We took advantage of putting some decks there. We had a little lower log decks in the Lake States, but pretty much on track.

Mark Weintraub of Buckingham Research.

First, I just wanted to come back to the question where you talked about costs being down 5 percent relative to the fourth quarter. Was that cost for per MSF, or what did you exactly mean when you said cost down 5 percent in the fourth quarter?

I was looking at OSB. And based upon the rather poor performance that we had on a cost basis in OSB in Q4, if we factor in the fact that we won't have that poor performance in Q1 it is going to improve.

And so you're basically saying that your average cost total per MSF would be down about 5 percent?

That's my guess at this point based upon better operating performance.

Very good. And in terms of pricing, can you give us a sense of where your average prices in January were relative to the fourth quarter average in OSB?

We don't talk about our pricing. But you can pretty much look at random lengths and figure out in a rising market we are a little bit lower. Then random lengths in a falling market, we are a little bit higher. On average we are probably somewhere in the 95 to 96 percent random on a year by year basis.

All right. Would it be fair to say that it is probably a little bit higher than your 4Q average than if I quickly do that math?

It appears that way to us.

Okay.

(indiscernible) I mean Q4 was 260 random lengths. And if you just take the average right now, it is 325. So who knows where it is going to end up?

I was talking average for January as opposed to a point in point in time. But I think it does still come out a little but higher.

Yes, it should.

Yes.

And then on the -- the Camfor JV if you could just update us on the timing, size of facility, and the cost, and are you basically on track on all those criteria?

The JV is on track. It is an 820 million square foot mill. We own 50 percent of that, and our partner Camfor owns 50 percent of that. The construction schedule is pretty much on track. We have had a little bit of difficulty with weather and wind, which has delayed things a week or 10 days that we are expecting to at least mitigate a portion of that. We're still planning on having production in Q4, and see no reason why that won't happen. As far as the cost of the mill, we haven't talked about it publicly, but our partner has, And they have indicated it is 220 to CAN$225 million, and we still expect that to be a pretty good number.

And lastly, Randements (ph) puts out every month something they call the retail market indicators, where they talk about buyers' views on both sales outlook for the next 3 months and also where their inventory levels are. And it shows that they had a pretty upbeat view on expectations for sales. It also showed that there had been some pick up in where their inventory levels were. When you look at the world and you look at your customers, does it coincide with that or do you have a different perspective?

Oh, we look at economic activity. Obviously housing starts -- new housing starts is an important part of what we do, and so we spend a fair amount of time looking at that. And as Rick said, the forecasters have been raising their estimates over the last month or so. We have spent a lot of time talking to the big builders, to get a sense of what their level of activity is. And then as far as the retail side of it, we do look at obviously Home Depot and Lowe's they issue their release -- their store by store sales. And what they are saying is that store to store comparisons have been up 4 to 5 percent. And they expect another 5 percent growth to come from new store openings. So we track that.

In terms of a sense of what customers have done with their inventories?

Inventories are a tough one. It is all pretty much anecdotal salesman by salesman. So we have not found a good source of inventory in the channel other than anecdotal kinds of things.

And one last quick one. On the vinyl siding side, how do you -- are you trying to put through any price increases currently to offset some of that cost pressure squeeze? Or how should we think about first quarter versus fourth quarter?

I think you can think about first quarter is we will certainly attempt to put price increases, but I can't guarantee they are going to stick. If you look at the raw material going in there -- and on PVC, we are expecting PVC to be up 20 percent year-over-year. And that is not only us, is all the vinyl producers. So I would expect that the industry as a whole will be looking at increases to recover those costs.

Don Roberts of CIBC.

Rick, I just want to focus on the decking market for a second. You saw some good capacity expansion on the composite decking. I would like you to just give us a little more color on the dynamics on that market, especially with respect to the treated lumber right now. And how those folks are doing against you?

The overall decking market over the next -- probably the next 10 years is one of the more exciting places that one can look in building products and say there's an opportunity. Estimated today at about a $600 million for composite decking -- a $600 million business. Us, and I think some of our competitors, estimate that has the potential to be a 3 to $4 billion business. And even some people have suggested that the whole outdoor living idea is a $10 billion business a decade from now.

We are currently the third largest producer of composite decking. We have go to market with 3 product offerings, what we call a good, better, best strategy. We are introducing a new midrange product this year, which will hit the shelves I imagine in another 6 to 8 weeks. And we're finally getting the scale in this business where it is not going to be a lot to do about nothing. We're going to make some money in this business this year, which is really nice.

The SG&A is a large number because it takes a lot of boots on the grounds to sell this stuff, so scale is extremely important. And that is why it was extremely important for us to get our Board to approve the doubling of a capacity of our Selma market, which feeds the eastern part of the United States.

Adding to the kind of robust nature of the idea of maintenance outdoor free living, is that the cedar business is declining, and the treated wood business is continually under attack by the environmental community. So it appears to be the place to go. And as I say in a lot of my presentations, the most people want to do on their deck is to go out with a sprayer full of Clorox once a year and spray their deck down, and then wash it off with a hose. They don't like to be sitting out there restaining it every year. I think that is the concept behind this which makes this a huge trend. Trex is still the number one player. And we hope within a very short period of time to be the number 2 player.

And just to clarify both of the market numbers, that 3 to 4 billion is for the composite decking or the total decking?

Composite decking.

Yes.

That is the idea of the wood flour and plastic mixed together to make not only decking but other types of railings, and other uses for outdoor living.

Peter Ruschmeier with Lehman Brothers.

Just a couple of questions. Can you just elaborate on your tax rate guidance, both cash and book tax rate for '05? And whether there's anything unusual in the first quarter that you expect?

Actually the gain -- there was a $44 million gain was related to the revaluation of an intercompany loan. If the Canadian dollar goes the other way, which right now it is a little bit lower than it was in the fourth quarter, it will probably pull down the rate a little bit in Q1.

What should be a normalized base level?

Well, there's no reason why on a go forward basis we shouldn't be near statutory rates. What is throwing it around is that intercompany loan. As we have said, that all gets eliminated at consolidation, because it is intercompany, but you do have to provide the deferred tax piece of that.

Okay.

So that will continue to be modified. But to your point, it is not really cash tax unless you decide that you want to settle. it. If you settle it, then it will be a cash tax.

And interest income, I am just curious if you can give us a sense as to what you're currently earning on your cash balances? And whether you expect, aside from market movements, what do you expect -- any change in the way you manage that money?

Well, the way we are managing that is we have 4 professional cash managers, 2 in Canada and 2 in the U.,S., and then we manage the short-term ourselves. The Board of Directors has adopted a very conservative investment policy. What we are concerned about there is not necessarily maximizing returns, but being safe. But we're currently earning about 2 to 2.5 percent on that money.

And then shifting gears if I could, the balance sheet obviously, or cash balance I should say, is obviously a significant (indiscernible) appears you dividend yield, while you have increased the dividend, your dividend yield is below the peer average. Just curious on whether you could share your thought process on what the appropriate level is there, and why not at least be equal to the peer average?

What we would like to do is probably be somewhere in that 30 to 35 percent of normalized earnings. We did discuss it at the last Board meeting about raising it. And what the Board wanted to do was to take a look into this year a little bit further. My expectation is that we will be making a recommendation to increase that at the main meeting. But of course, the Board has the final decision on that.

Great.

This is OSB went up 55 bucks.

Okay. And I am curious maybe, Rick, you could comment, as you think about the distribution capabilities of the Company, as you continue to grow the size of your OSB base in particular, do you think that that is something that is right sized? Is that something that you are looking at?

We had this discussion just Friday. It is a very interesting topic, because if you try to project yourself out 10 years, all of your customers are getting bigger. The boxes are getting bigger. The builders are getting bigger. Everybody that you're going to sell these products are getting bigger. And so it does lend itself to the question, how do you get your product to your customer? Right now we're not in distribution. We use a bunch of the channels of distribution. In fact, we use about all of them. We sell direct to only a very few people.

All I can tell you at this point, around distribution and LP is that we are spending quite a bit of time noodling the strategic ramifications of the way the world is going to look in 10 years to see if the way that we go to market now satisfies our purposes, or if we need to look at the world differently to be prepared for that. And obviously, we haven't answered that question yet.

Fair enough. Am I fair to assume that woodland is still down, and what is the outlook there longer term?

Woodland is still down, and we have to make a decision on that in-house here pretty soon in terms of whether we're going to start it back up or make a decision, a permanent decision on that. I think we have challenged ourselves to do that probably within the next 4 weeks.

Okay.

A key one of the issues is that that facility under the MAT (ph) requirements may not meet the current requirements. So it would entail making a capital investment with a zero return.

Understood. Okay. And then just lastly, is it possible to update us on where you think your run rate capacity is today? Obviously we can monitor the green field stuff, but you obviously had brown field as well. And if you were to run flat out today, what is that number versus what your capabilities where in '03 and '04?

I think we're probably today at a run rate of around -- barring outages, etc. -- we're been at a run rate of about 5 8.

Okay.

And the puts and takes to that is that woodland is not included in that number. So woodland we're sort of -- you would have another 250 to 280 there. But right now, as Rick said, it is down. And then the fourth quarter we do have sales responsibility in North America for the JV. And so that mill will start to come on in the fourth quarter. And then how rapidly Hayward get converted to SmartSide will take a little bit out. And the Hayward we would expect to make up by the improvement that we're making in our existing mills.

Frank Dunau of Adage Capital.

I have got a question. Just on the tax thing, I just want to make sure I understand this. You confuse me every quarter with it. And I try to model it, and I don't know why. But the gain that created the taxable 15 cents a share, is there an offsetting -- and corporatewide I assume then there is an offsetting loss of 42 million that offsets the gain, or how does that flow through? The only thing that is really flowing through income statement is the tax effect, is that correct?

You have got it right. The loss gets offset because we're on both sides of that transaction. But because we pay taxes in 2 different jurisdictions, we have to provide the deferred tax on the gain.

Does all that washing -- does that effect the segment operating results at all? Or is that justn all at corporate level?

All at the corporate level.

Steve Chercover of D.A. Davidson.

I had a quick question regarding resins. Obviously they have been a source of creeping expense. And I understand that the industry is running on allocation for MDI. So where is the new resin going to come from for the 2.5 mills that are being built over the course of next year?

That's a good question. The primary suppliers there are building -- let me just talk about it more generally. What is happening is that China is draining MDI capabilities out of North America. And those are largely going into the production of appliances that is used for insulation. There is a joint venture project in China that is planning -- the capacity is planning on coming online in the first quarter of 2006. This is a very large facility. It is a joint venture between Huntsman and I think BASF. So there's not any capacity relief I don't believe coming from that venture until then. There are other suppliers in the market. And we have seen a little bit of loosening here recently on the capacity side. We think we are in reasonably good shape with the suppliers.

Will you have to switch to formaldehyde or other agents if there is not enough? And does that impact the quality of your board or the --?

Actually it is a lot more complex than that, because you could also change wood species and change your consumption. So you can do PF for a portion of that. And we're looking at all those, and there are just cost trade-offs as well as availability.

In any event, you guys are well aware of the scarcity and working to mitigate whatever problems across the system?

Yes. And not only scarcity, but the cost. Now what we did see is we did see benzene come down quite a bit. And it hit an average of almost $4.00 a gallon and back down to 2.80 a gallon level, which is the primary input for MDI.

That was my question. Thanks guys.

It is a real deal of resin, probably in terms of the percentage of the amount that it has gone up year-to-year in the board is probably it up over 30, 35 percent. It is a real deal. And as we said, we've got to see something in the first 2 quarters of this year that turns those curves over. And right now the first good sign was that benzene pricing is coming down.

Onosa Persod (ph) of Deutsche Bank.

I just had a question. I was looking at the other major producers in the wood products businesses in 4Q, and they all seem to come in way below expectations. Whereas you guys, if you adjust for that abnormally high tax rate, came in pretty much in line. And I wanted to know if you had any insights into why that was, or what you guys did differently from everyone else? Thanks.

I've read those releases as well and what I've seen as a common theme is energy, resins, wood, and outages related to loss. So I think we're probably pretty similar to the rest of them. With a higher pricing we should have done better than we did. And we had some issues with our down time.

Thank you.

I think maybe another way to look at it is our non OSB businesses are starting to perform significantly. And I think we'll continue to see that. So if you take what I am most unhappy about for the last quarter, which was the commissioning of the mills coming back up from being down, if you took that out, we would have actually done better.

Your last question today comes from the line of Chip Dillon from Smith Barney.

My first question is on the down time. Was it 88 days or 97? You mentioned a 9 days because of logs?

We had 88 actual down days due to either maintenance or capital shuts. Then we added another 9 on top of that for log outages in the Lake States. And then you have got the equivalent of a considerable more amount of time, more mills were running at less than capacity as we were commissioning that equipment.

Got you. Okay. And then on that capital spending, I wasn't totally clear, is it 170 and then the 60 for the joint venture in Canada, or does the 170 include the 60 for the joint venture in Canada?

It does not. You have to add those together. So the 230, as Rick said, is the right number.

So basically your baseline CapEx is going up from like 1 pre-joint venture -- pre-Camfor joint venture from like 130 to 170. And is that about the way to look at it?

I think that is the way you look at it. And of course it will come back down after we don't have these new plants being constructed.

Got you. Because the real spend for Alabama when that -- when you decide, and if you decide to definitely do it on the timetable you have expressed, would be really not until '07. Is that right, or a little bit in '06, but big numbers in '07?

If you're going to come online at the end of '07 then you've got to break ground in the middle of '06?

And I noticed that you had a filing that said -- that there was a change in control agreement that normally gets renewed every 3 years that for some reason the Company decided not to renew on February 1. But can you just talk a little bit about that?

That is pretty simple. In our change of control agreement, we had what they call a double trigger in there, which means that management can decide to leave the Company rather than have someone decide that management leaves the Company in the case of a change in control, and our Board didn't like that. And they are just taking that out of there. And so to do that what they had to do is give us notice that they're going to do that. And that is as simple as that was.

So again, so I understand it, does it mean that someone would have to -- they would have to -- in the old way there wouldn't actually have to be a change in control but now there does?

No, it doesn't -- no, it just is that under the old provision when someone bought you out, there was a window in there were management could choose to leave, even if they weren't diddled with. That is what they call a double trigger.

I see. So in this case, if something does happen and you are offered an equal or better position to stay, then you're not -- you no longer get any kind of severance under this provision?

Just go deselect yourself and walk away with all the money.

Got you. I see. And then lastly on the tax rate, and I missed this part, I'm sorry, I know someone asked this. But what did you say we should sort of use as a guess for, or did you say we can't even do that, because of the uncertainty of this intercompany situation?

It is really dependent on the Canadian exchange rate.

It didn't change what would you use?

If you didn't change, the rate wouldn't change.

It would therefore be 40 percent or --?

Pardon?

What rate would you use assuming it didn't change?

For purposes of -- because we're in Canada and the U.S. -- probably about 38.

Got you. Okay, and then as the Canadian dollar, again, strengthens that raises the tax rate, and as it weakens it lowers it?

Right.

And my last question, and I appreciate your patience. It looks like to me that your production of siding I should say was basically flat in '04 versus '03 at 5.5 plus billion feet. Just when you add the amount of siding you made in '03, I guess in the specialty area. And when you look at '05, when you mentioned that 5.8 billion, is that sort of -- is that a capacity number or is that sort of a production number that we should expect you to make in the siding area?

That is a -- OSB is the number you talking about?

I don't mean main siding, I mean in the structural side?

That was a capacity number. We will -- our plans are to produce just a little bit less than that.

Ladies and gentlemen, that concludes our question and answer period for today. I would like to turn the call back over to the speakers for any closing remarks they may have. Thank you.

Thank you very much for joining us. And as always, Becky and Mike are available for follow-up questions. And I would encourage you that didn't see the presentation to take a look at that, as well as the 8-K filing. It does have the segments going backwards.

And I appreciate your help. And just as further background, we will being participating in a Smith Barney conference next week in Las Vegas. And then we will be participating in CIBC conference in British Colombia also next week. Thank you very much.

Thank you very much, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation, and you may now disconnect. Have a good day.