Louisiana-Pacific Corp (LPX) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 1 2005 Louisiana-Pacific Corporation Earnings conference call. My name is Mike and I will be your coordinator for today. At this time, all participants are in a listen-only mode. And we will be facilitating a question and answer session at the end of this conference.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation to your host for today’s call, Mr. Curt Stevens, Chief Financial Officer. Please proceed, sir.

Thank you, Mike. Good morning. I appreciate all of you joining us for Louisiana-Pacific’s conference call to discuss our financial results for the first quarter ended March 31, 2005. As Mike said, I’m Curt Stevens, Executive Vice President of Administration and Chief Financial Officer. With me today are Rick Frost, LP’s Chief Executive Officer, and Mike Kinney and Becky Barckley, responsible for our Investor Relations activities.

As I’ve done in the past, I’ll start the call to review the financial results for the first quarter, provide some comments on the balance sheet. Then I’ll turn over to Rick to review the accomplishments for the first quarter of 2005 and talk about our outlook for the remainder of the year. Then we will open up the call for questions.

As we’ve done in the past, 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 the earnings call, we have provided a presentation to provide supplementary information along with the call. As I go through the call, I will be referencing certain pages in this presentation. As you will note through the presentation, we have included sequential information, which is new for this purpose. However, when I give my comments, I will limit most of those to the quarter-over-quarter versus the sequential comparison.

As a caution, this presentation should be viewed in conjunction with our publicly-available earnings release. I also want to remind all the participants about the forward-looking statements comment that is included in our earnings release and shown on the second slide of the presentation. And also the discussion of the use of non-GAAP financial information that is also included in the presentation. At the end of the presentation, we do have a reconciliation of non-GAAP terms to GAAP. Rather than reread these full statements, I’m going to incorporate them with this discussion.

Let me refer you to the slide entitled Financial Results Quarterly in the presentation. LP had a very good quarter. We reported today net income for the quarter of 102 million, or $0.91 per share, of which continuing operations had income of 104 million, or $0.93 per share, and discontinued operations showed a net loss of 2 million. Net sales from continuing operations were $680 million for the quarter. For the same quarter of last year, we reported net income of 107 million, or $0.98 per share, on continuing operations an income of 112 million, or $1.03 per share. Net sales last year were 695 million in the same quarter.

Next slide I’m going to refer to is the Reconciliation of Special Items. In Q1 of this year, there were very few that are generally not attributable to ongoing operations and the net was about 0. However, in Q1 of last year, there were several significant items that I might just summarize. The most significant non-operating during the quarter last year with the successful tender offer for most of our senior subordinated debt outstanding that resulted in a charge of about 40 million to cover the premium and related expenses. We also had a loss of about 9 million on the cancellation of a capital project in British Colombia, a gain on the reductions from environmental reserves, and then we also had a charge of about 1.7 million associated with the relocation costs to the national headquarters.

After taking all these items into account, income excluding these special items for the first quarter 2004 was 146 million, or $1.34 diluted share, compared to the 103 or $0.93 reported this year. These items are detailed in footnote 2 and 3 of our release.

With that, let me go to each of our segments. If you would first refer to the OSB slide in the presentation. OSB pricing, while continuing to be strong was down 11%, compared to the same quarter last year. Volume was up slightly. On a sequential basis, OSB pricing did rebound from Q4 with an increase of 36%. Production volumes were higher than last quarter but shipments were slightly lower due to two factors. The first factor was difficulty with the transportation infrastructure in North America, both rail and truck. And the second factor was we did have very wet weather in the Southwest during the first quarter which reduced demand.

During the quarter, we did take planned maintenance and capital-related downtime at about the level we announced last earnings call, about 29 days. A highlight was the timely execution of our project to improve the green-in(ph) at our Roxboro, North Carolina mill.

From an earnings perspective, the decline in OSB pricing from the first quarter of 2004 to this year has negatively affected both sales and profits by 50 million and was due to the pricing. Additionally, we had an increase in petroleum-based raw materials, wood, and the impact of the Canadian dollar which increased our production costs by about $20 million. I hasten to add that these factors affected all OSB producers in a similar fashion.

Next slide I refer to is on Siding. This segment includes our SmartSide-- which is an OSB-based siding product -- hardboard siding, and vinyl siding. For the quarter, sales were down from both the prior quarter in the same-- last year, as well as sequentially. Let me discuss this in the context of each of the three product lines within this segment. In SmartSide, we had a decline in volume due to three contributing factors. There was some preseason buying that took place in Q4 which limited the demand in Q1. We had weather-related issues as I mentioned in ROC(ph), primarily in the Southwest affected this product line. But the primary reason for the decline was poor operating performance at one of our siding mills in Silsbee, Texas. This facility ran 100% on SmartSide during the first quarter and we did experience some manufacturing problems that created significant off grade material. The impact of this is it increased costs, lowered the volumes available for sale, and negatively affected the average sales price. Siding business team has a full court press to implement a get well plan but these problems will probably not be fully remediated until Q3.

The decline in volume within our hardboard business was planned. This was a planned change from-- to a richer product mix. In vinyl siding products, we had a decline in volume compared to the same quarter last year and sequentially. As much as this product happens to be installed in the Northeast, again, poor weather conditions in the Northeast hampered sales for the whole vinyl industry. In fact, the Trade Association recently reported that overall vinyl shipments were down 10% in this quarter, compared to the same quarter last year.

In all three businesses, we have instigated price increases to help mitigate the increases in raw materials. While this is good and necessary, it was not enough to compensate for the significant increase in cost, particularly in the vinyl business.

Next slide I reference is the Engineered Wood Products segment. This segment includes our laminated veneer lumber and I-Joist operations plus other related products that include a small plywood mill. These products continue to have very, very good volume growth. We were up 17% in LVL and 23% in I-Joist for the quarter, compared to the same quarter last year.

Equally important, we were able to put in place several price increases during the last several quarters to offset high raw materials costs, primarily lumber, OSB, and veneer. These cumulative price increases totaled 22% for LVL and 16% for I-Joist on a year-over-year basis. For the price increases, higher volume and better operations, our Engineered Wood group had profits of $6 million in the quarter.

Next slide is the other building products. This segment consists of our composite wood decking, our moulding business, our Chilean operations, our installation joint venture called U.S. Green Fiber, and other non-operating facilities. Overall, in terms of profitability, this segment showed improvement from the first quarter of 2004.

On a volume basis, we slightly reduced shipments in both our decking and moulding operations, compared to the same quarter last year. Similar to the siding products, we did instigate price increases in January 2005 and several customers purchased products ahead of these increases. In terms of price, we did realize price increases of almost 10% in both of these businesses. Price increases, again, are important because we needed to offset petroleum-based resin cost increases. Our Chilean operations had another very good quarter as we continued to expand our presence in South America.

For the quarter in sales, general administrative cost, we were down 10%, compared to the same quarter last year. This decline was primarily related to several one-time charges recorded in the first quarter of 2004 related to stock compensation accruals that were not required in the first quarter of this year.

Brief talk about the tax rate for the quarter. For 2005, we are projecting an effective tax rate slightly above 36%. This rate is comparable to our projected tax rate at this time last year but is lower than the effective tax rate we had in the fourth quarter of 2004. You may remember that our fourth quarter tax rate was significantly higher due the impact of a strengthening Canadian dollar and certain inter-company loans. The currency gain in those loans is taxable in one jurisdiction but the corresponding loss is not deductible in the other.

During the first quarter of this year, the Canadian dollar weakened slightly against U.S. dollar and the resulting foreign exchange loss is deductible in one jurisdiction while the corresponding gain is not taxable. Therefore, the impact of this exchange rate change, so far this year, is below our projected effective tax rate by a little less than 1%. When calculating our tax rate, we use the actual year-to-date foreign exchange gain or loss at that point in time as we’re unable to project the movement in the exchange rate for the year. Our tax rate also was benefited from an estimate of the U.S. domestic production activities deduction established by the Jobs Creation Act of 2004, which went into effect on January 1st. In addition, the percentage of our earnings in our Canadian and Chilean operations is taxed at lower rates than those in the U.S.

Next slide I refer to is on the balance sheet and other statistics. The impact with strong operating performance continues to enhance our balance sheet. Let me give you some key statistics at March 31st compared to the end of the year. March 31st we had 1.26 billion in cash, cash equivalent, investments, and restrictive cash. As we mentioned before, the restrictive cash represents the cash collateralization of our outstanding letters to credit, which we routinely issue for worker’s compensation, industrial revenue bonds, and other items. Working capital is at more than 1.2 billion. On March 31st, our net debt was a positive 865 million.

Want to make a brief comment on the increase in inventories as we did experience an increase from December 31st. Log inventories are up about 25 million. This increase is on purpose to provide for the winter break up in the northern regions. Finished good, primarily in OSB and siding, were up almost 35 million. Some of this increase is due to disruption in logistics and some of this is the build up in anticipation of the building season.

Capital expenditures for the first quarter were at 44 million. That includes our contribution for the Canfor LP JV in British Columbia. We still anticipate that our capital for 2005 will be in that 235 to $240 million range. Book value per earnings share increased to $16.83 for the quarter.

With that, let me turn the call over to Rick to provide his thoughts on Q1 and also the outlook for the remainder of the year.

Good morning, everyone. Thanks, Curt, and it’s good to talk with you again. The first quarter was a good one for LP. We made over $100 million of net income. While not quite the extraordinary earnings that we had in Q1 of 2004, no OSB producer is likely to complain too much about current pricing and business in general at these levels.

Our most concerning issue has been the raw materials increases over the last year. We all know the story on oil-based materials and none of us counted on 50 plus dollar a barrel oil. In our case, this affects our resin costs and straight in energy costs, as well as affecting wood based upon the cost to produce it. As well, the wood basket in the Lake States is severely stressed and we do have a few mills there.

The other factor is the continued strength of the Canadian dollar, which we’ve talked about, I think, the last three calls. To put this raw material cost increase into context for our company, I asked our supply management folks to do a variation analysis for us. I asked them to use Q1 2005 consumption on wood energy and resins but to apply raw materials cost for Q1 2004. The net effect was $45 million across our businesses. And this would have been higher had we not been employing capital aimed at reducing energy and raw material consumption.

We did, with the exception of our Silsbee siding plant, run better in Q1 than we did in Q4. But we did not get the 3 to 4% reduction in cost that I had anticipated at the turn of the year because of escalating raw material pricing.

On a brighter note, I am proud to report that LP had its safest quarter since we-- since I have been with the company, which is over 9 years. We had an OSHA incident rate of 1.4 for the company, which is great progress towards our goal of being an industry leader in safety performance.

As well on the environmental front, LP did not experience a notice of violation in the entire first quarter across all of its plants. And that’s a personal best as well.

We’re nearing the full completion of our 2002 asset sale and debt reduction plan. The agreement to sell our Gwinn lumber mill has been announced and we expect to close that transaction next week and receive funds. We announced the permanent closure of our Malakwa cedar mill. That’s up in British Columbia. With the ongoing lumber dispute, it was not possible for us to get a party interested to buy that. That mill has been closed for almost a year. And with the severance-- although the severance charge will be in Q2, we did announce a couple of weeks ago the permanent closure of our Woodland OSB plant. That plant had been down since last October. The reason for that was principally due to our unwillingness to invest unnecessary capital to meet the MAC environmental requirements.

I’m pleased to report that Curt’s financial people got us through the Sarbanes-Oxley compliance effort for 2004 successfully. We completed the effort with LP receiving unqualified opinions on all aspects of those audits. As you have undoubtedly heard from other companies, while this work had some merit, the level of effort and the cost in its execution was extraordinary. Hopefully as we go forward, this work will become more cost-effective. Perhaps a little more function added to the farm and a little bit more reason added to the rhyme.

As I look forward for the remainder of 2005, from a customer viewpoint, new home construction continues at a very robust pace. While March starts were reported to be off a little, January and February were at near record levels. And yesterday, I’m sure that you read the reports that new home sales did reach a record level for last month. All at a time when there are reports of dropping consumer confidence so there’s contradictory and confusing public information today that we’re trying to forecast on.

I’ve personally been watching the earnings announcements from the home builders. Almost without exception, they have reported excellent earnings, increasing their housing prices, and growing larger backlogs for homes. Plus 30-year fixed mortgage money has been hanging in there really well below 6% and I think this bodes well for building products. In the repair and remodeling sector, the big box retailers have had good but not particularly outstanding quarterly performance.

Operationally for LP we have some very clear objectives for the rest of the year. We will continue to focus on our manufacturing costs. While it’s difficult to affect oil-based material pricing too much, we are working on reducing where we can the actual consumption of those materials. Wood inventories across the South are in much better shape right now than they were three months ago. And pulp wood should begin to recede in costs in late Q2 and Q3. We will continue our capital deployment effectively. The Saint-Prime I-Joist plant which is an LP Abitibi JV is under construction as we speak with startup scheduled for later this summer. The Canfor LP OSB joint venture is slated for startup in Q4. The doubling of our capacity at our Selma, Alabama composite decking plant is underway and should be providing product to the market late this summer. Our Brownfield capital improvements are going on at existing plants and in Q2 we plan to be down about 25 mill days of outage in relation to these capital investments in OSB.

We’ve previously talked about a planned new OSB mill in L.A. That’s lower Alabama, of course. That project is still a go in our minds and the timing still looks like late 2007. We’re commencing site prep work on that facility. We have a project team in Silsbee now because the difficulties in operations there cost us about $5 million in the first quarter in lost production and lower sales utilization.

And finally, I’m sure you have questions on what we are going to do with the cash on our balance sheet. Not much has changed since our last discussion early February except the number has become slightly bigger. We will prudently invest and take care of that 1.25 billion in cash. As we have said, we have earmarked 250 to 300 million for a rainy day fund or for a reserve in case we go into some kind of a longer downturn. We have 200 million earmarked this year to reduce debt. And that leaves about 750 million for a war chest. So far, we have done lots of looking and we’ve done no buying as you’ve observed but I have to reiterate what we’ve said in the past. We’re looking for the right product at the right price. And we do continue to discuss the disposition of this cash with our board of directors on a regular basis.

So in conclusion, I think the next quarters, couple quarters look very good to us across all of our product lines. OSB take always appear to be strong. As you can see, Engineered Wood Products is quite robust. And shipments of our siding and decking products have picked up significantly in April and our orders are up significantly for May.

And with that said, I’ll turn it back over to Curt.

Thanks, Rick. I certainly echo Rick’s concluding comments. A very strong Q1, good fundamentals in place to drive our business for the next several quarters, investment or marketing plans in place to grow our volumes and reduce our costs, and our financial strength does put us in a position to take advantage of opportunity that may arise in the future.

With that, Mike, let me turn it back over to you and open up for questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from Rich Schneider with UBS. Please go ahead, Rich.

Rick, you had said your raw material costs were up about 45 million year-over-year and I think Curt you said in OSB you were up about 20 million year-over-year. I’m trying to reconcile the two. I know you have other operations. And then could you help me with those two numbers?

Yes, Rich, the OSB is just a commodity but in our SmartSide, the four mills that we have there have kind of the same dynamic from a wood and a resin standpoint. And in fact, Rick talked about the high cost of wood in the Lake States. We actually have three of our OSB siding mills are in the Lake States. So if you look at the percentage, about half of it was in OSB as we talked about, probably another 30% was in the SmartSide, and then 20% related to the vinyl-- well, greatly related to resins going into our plastics.

Okay. And--

Rich, if you look at those products, the siding takes more MDI, which has had a more significant increase. And then the plastics business, if you look at the increase and what’s going on there, those are very significantly different percentage increases.

I was wondering if you can potentially break down that 45 million between resin and wood and other raw materials.

On the wood side, it’s a little less than half related to wood. And then the resins and the materials going into plastics is about 40%. And the rest would be energy.

Okay. And looking out over to the second quarter, are you still expecting resin costs to accelerate or go up?

Well, there’s a number of things that are going on. It’s not only the cost of the raw materials, which are oil-based. But it’s also, particularly in MDI, is there’s a worldwide shortage of MDI right now. We think that we are as effective in working with the resin producers as anybody but I don’t see any relief in Q2. We do have an index contract for most of these resins that are tied into the base material. For instance, an MDI tied into vendity(ph) and natural gas. And then on PF resonance tied into the cost of phenol. So they are index contracts but we believe that we have as good of contracts as anybody in the industry.

Okay. And could you run through what price initiative you have out in the marketplace and outside of OSB which is really set in the market every day? Like engineered wood, vinyl, decking. Could you give us a summary of those?

In engineered wood, we put in a price increase earlier this month so there’s nothing further going in place there but there should be a little bit of an uptake in Q2.

How much was that?

You know it was regionally based and I don’t have the numbers.

Okay.

But it was basically due to the increase in raw materials cost. We thought OSB was going to come down a little bit and thankfully it didn’t. Though it hurts our engineered wood business, but it’s good for LP. And in SmartSide, we put in the price increase in January so there’s no further increase there. In vinyl, we are trying to put in a price increase. The difficulty is we’re a number seven player there and if the industry leaders don’t lead the charge, that’s tough to implement. Then in OSB, as you said, it trades every day.

Okay. And just the last question on capital spending, you said a 235 to 240 this year. Could you sort of break that out between what is being spent on the OSB facility in B.C. in your share and then give us some general ideas on where the rest of it is going?

Well, new facilities, our half of the JV we’re estimating to be about $60 million this year. The other new facilities, our half of the Abitibi is in the neighborhood of 10 to 12 million. The Selma doubling their capacity’s about 15 million. The OSB reinvestment plan in the existing facilities is somewhere in the 40 to 50 range. What am I missing, Rick?

Alabama.

And then we will have some spending on Alabama. Oh, that’s right. Mike brought up another one. We are doing the Hayward conversion to SmartSide. That’s about a $25 million bill.

And the rest would be maintenance tests?

The rest would be maintenance gap. We are doing some-- we have one facility left that’s got some MAC exposure and that’s Roaring River and we will be doing some work there.

Okay. Thanks.

Mark Wilde, Deutsche Bank

Hi Rick. I wondered if you and Curt could talk a little bit about any efforts to improve the profitability in the engineered wood business. It strikes me it still lags some of your other businesses and we’re in a very good market right now.

Well, we’re in the middle of trying to answer that very same question. We’re-- what we’re doing right now is just running these facilities as hard as we can. And our major effort now is to-- is in twofold-- one, is there an opportunity to pick up a more cost effective facility to add to our stable; and the second one is looking at the type of products that we offer. And without going into too much detail there, we are exploring within our self whether there’s an opportunity to develop some economic substitute product.

We’re pretty well maxed out with what we can do with our current facilities. We do have a dryer-- piece of capital for a new dryer at our Golden facility which will go in probably in Q3, which will reduce some operating cost there but nothing tremendously significant. We have to do something different in that business to significantly make it more profitable. Now, you do realize that as raw materials do move, the price of veneer comes down, the price of lumber is coming down, and if the price of OSB comes down, that business is significantly influenced by core raw materials that have taken a lot of the profitability out of it.

Yes, sure. But I would think net-net, I mean, what you really want is a strong market even if it means higher raw materials cost. And, ultimately, that’s when you should make the most money?

You’re right on.

Okay, can you also just in kind of one other question, can you talk about what you’re seeing in terms of HAL(ph) and other product imports coming in from Latin America right now? I know we had a big dump in plywood imports and I just wondered if you’re seeing any other kind of converted product and how you think about that issue of imports going forward.

Well, I think there’s going to be a continued pressure to bring in South American plywood. There’s a lot of trees planted down there with the intended use of making plywood so local plywood or North American plywood is going to be under siege by what comes in from down there. There is only one OSB mill beyond ours in South America right now. A little bit of that material is coming in in the form of flooring, sub-flooring. They don’t create a screen product so it’s really not a direct competitor to the products made in North America that are made on daylight presses versus a continuous press.

So there’s really not very much OSB that’s going to come in here from South America. We have none planned from our mill in Chile, all of that’s being consumed in South America or exported to Asia. So I think you’ll see continued effort because they don’t have any place else to go with it of southern-- of South American plywood but there’s not a capability of bringing much more OSB in here.

The other thing that we have gleaned from the studies we’ve commissioned is that most of the trees in South America have a name on them right now for pulp. So there’s not a lot of trees left over for OSB.

Okay. Thanks, Rick.

Chip Dillon, Smith Barney

Yes, thank you. I’ve just one clarification or two actually. How much-- I know you said it I just missed it -- how much are you going to spend on the JV this year? And then you mentioned the Haywood conversion. I guess that’s half this year and then the rest is that there’s two lines there? How will that be sequenced in terms of the timing of the switchover of those two lines?

The capital from the JV this year is about 60 million, Chip. As far as the Hayward conversion, we would like to sequence it as quickly as possible but that means we’ve got to sell at that capacity. So we’re adding roughly with one half of that, between 200 and 240 million square feet of capacity, which would be a 40% increase over where we are today. So we do have marketing plans in place to sell that capacity but my expectation is we probably will not start the conversion of that second line until the latter half of next year.

Okay. And each half is about 25 million or did you spend some earlier on the first one so it’s a bigger-- ?

-- about 25 million.

Okay, 25?

Yes.

Okay. And then you’re the only guy out there, right, that does this sort of exterior siding product that’s based on OSB? Is that fair?

That’s correct.

So if you look at the industry numbers that-- and obviously the APA estimates their decisions -- but if they-- I haven’t seen, I guess, the latest forecast. Maybe you have but it would seem like they would take this capacity out. And if they decide not to, it-- then we should take it out because obviously this is not competing with plywood and commodity OSB. Is that right?

This capacity should come out of the numbers that we show. We show-- when we look at a net increase, we take the capacity out over time.

Okay.

And the other [inaudible] Chip is, Rick talked about it is we did make the announcement to permanently close Woodland, which is about a 270 million square foot facility.

Right. Now, obviously, everybody but basically Warehouser that’s anybody in OSB has announced something on a capacity front. And, of course, you guys are bringing it on effectively next year through the year ramp up of the joint venture with Canfor. The Alabama site that you’re doing a lot of work on, you know, keeping in mind what we saw back in the late ‘90s when you initially announced what was then a Slocan joint venture that kind of got pushed out for various reasons. When sort of would you be beyond the point of pushing out Alabama if you so chose to do that?

I think we have a window of about a year, Chip. Otherwise it would start costing us money.

Got you. Okay. And then the last question is, you know, you talk about the war chest you have and, of course, with the net cash now up over $800 million, not only does that give you all tremendous flexibility, it could also attract attention from the outside. And noticing that, I believe, in the latest proxy that the board and the management-owned 1% or in that neighborhood or maybe less, what would or could you do if someone made a bid for the company? And in particular, if the number-- of course, hostile is what I’m speaking -- is something that you think is too low. What could you do to or would you do to defend that? And secondly, would there-- would you fight it no matter what the price was?

Well, I think, in answer to your last question, absolutely not. Our job and the board’s job is to maximize shareholder value. So if an offer came in here that the board determined was reasonable, then we’d certainly get on board and make that happen. As to what do we have in place to ensure that our board is fully engaged in any discussion for the potential acquire, we do have a pretty solid defensive profile. We include the class five(ph) board in a pill(ph). And all that, and the data would-- will show that, having those mechanisms in place in almost 100% of the cases ends up in a higher price than companies that don’t have those kind of mechanisms in place.

Got you. Okay, thank you very much.

Mark Weintraub, Buckingham Research

Thank you. Just wanted to follow up, Rick, you had said that orders were up significantly in May. And wanted to get a sense as to how they compare and how demand compares to year ago at this time.

You know I didn’t do that comparison but they’re ahead-- we’re going to make up significant ground on our own internal planning process this quarter.

You’re talking about the--

I’m talking about siding and decking.

Yes.

Okay. And--

-- look backwards at that, Mark, I’m sorry.

Okay. And in terms of OSB, how would you characterize how the order files look there compared to where you normally expect them to be at this point?

I don’t think I normally tell you what our order file is but it’s about normal for this time of year.

And do you have any sense as to where customer inventories are in the key products for you?

Well, it’s all anecdotal. I think that a generally broad statement right now would be that it’s-- the customers have more inventory right now than they did at this time last year. But they aren’t loaded up. The channel isn’t choking.

Okay. And lastly switching gears, on the Hayward conversion, was that going to be-- is that going to be a very similar process to what you have been doing at Silsbee and if so are any of the issues that you’re encountering at Silsbee important to be thinking about as you go through that conversion?

I think it’s quite different, Mark. Number one, those mills are very different mills in terms of the way that they have run and the way that they can run. Number two, it’s a totally different wood species. Silsbee, our challenge has been to try to make the same product out of Southern pine that we’re used to making with aspen. So it requires a different process, it requires a different application of the resins that are in that process.

So we have a huge amount more experience-- actually the siding product was actually invented at Hayward. So they were the ones that invented it and then that technology was then transferred to the mini-mills that currently produce it. So we have great optimism and expect none of the problems at Hayward that we’re currently experiencing with the Southern pine.

And then lastly on the Silsbee, where would you say where you are in the process of correcting those issues? Are-- is it still kind of the discovery process or are you far along and so you can have a pretty good degree of visibility that by third quarter things should be better?

I expect to see a plan on my desk within a very short period of time that puts the metrics and the milestones together and that’s probably within just a couple of days. So we’re right on the front end of that. We are no longer in discovery; we are now into intervention.

Okay. Thank you.

Steven Chercover, D. A. Davidson

Good morning, guys. A couple ones, please. First of all, if I understood correctly, your OSB shipments were lower than your production in the first quarter. So will we see higher volumes in Q2 and will it make the unit cost appear to fall?

Well, from a cost standpoint, with production exceeding shipments, we put that in inventory. So at LTM, it’s in inventory. So that’s not going to affect-- shipping that product’s not going to affect the cost because those were costs that were incurred in Q1. As I mentioned in my comments, we did-- we and, I think, all of U.S. industry experienced difficulties with the logistics system. Of particular note were problems that we had with the CN in Canada. British Columbia was just hammered with lack of rail cars and logistical problems. So we actually could of shipped a lot more in Q1 than we did had the logistics system been in place. So we do expect Q2 shipments to be above Q1 shipments.

Okay and--

The rail system in Canada hasn’t been fixed. That thing’s broken and so we’re going to continually fight these rail shipments, near as I can tell.

Is that because CN took over CP rail or BC rail and they just don’t have enough cars? Or what changed there? I thought they were normally better in their on-time deliveries?

They took over BT rail and British Columbia and that has not gone very smoothly.

Understood. And just wanted to get a sense of maybe what the siding business can do even in the second or third quarter if the problems down in Texas are fixed? I mean, can we profit back up in the double digit levels? Is that reasonable?

Yes.

And would that be a current quarter?

As Rick said I’m not sure about the second quarter. Depends on how quickly we can take short-term action at Silsbee but certainly by the third quarter I would expect them to be in double digits.

We’ve got some work to do down there. We have some systems work; we have some capital to put in there to fix some things that are fundamentally wrong to get the level of quality, basically, and amount of A-grade out of that mill. So this thing isn’t going to be turned around in a month. I would assume it would take two quarters but it should start to get better.

Okay. And last question and then I’ll relinquish the line. On the siding, I think you did 554 million in ’04 in sales. Should we expect that to be greater or less than that total this year given the problems?

Well, I would expect it to be greater. That’s certainly the task we have in front of our sales and operations people.

And remember we’re bringing Hayward on.

Understood. Okay, thanks guys.

Peter Ruschmeier, Lehman Brothers

Thanks. Good morning. I wanted to ask a question if I could about if there is such a thing as a flat housing market. Can you give us some expectation as to what you’re capable of doing in OSB in terms of the delta between ’04 and ’05 and then ’06? So factoring in the timing of your projects, Hanbolt(ph) and B.C. and then later on, I guess, in Alabama, and then also the Ground Field(ph) projects. Obviously, a lot of moving parts. Just curious if you could, in a steady state market, give us some volume guidance?

Well, let me try to address that a couple different ways. One, as we talked about, we think that certainly the next two quarters we have pretty good visibility with what the builders are reporting in backlog and what we’re hearing from our other customers. So they think that 2005 is going to be a pretty good year. It’s not going to be the same year as we had in 2004 because pricing just hasn’t been at the same level. Q1 was down 11% and Q2 I would expect it’s going to be down as well.

As far as-- and I think the question you’re really asking is what is the demand capacity going to look like. If Risci’s right and 2006 is a down year then I would suspect that the pricings going to go down. If you look at all the announcements or proposed announcements or fluff announcements that are out there, it looks like there could be a slug of capacity coming on in 2008. If you think about that, however, it kind of fits right in with the likelihood that we’re going to lose a lot of production capacity in plywood due to the MAC regulations. MAC regulations that equipment may have to have a plan next year and has to be in place in the first quarter 2007. I suspect there’s going to be a lot of plywood mills that aren’t going to make that investment because not only is it a zero return investment but it also is an energy consumer because most of that encompasses putting in RTOs which consume a natural gas. And there are some OSB mills that are also faced with those same considerations.

Then, Curt, I guess part of the question is really-- not even so much a supply demand question but one of kind of your own capabilities of learning curve issues. If the market were friendly to you, realistically, what kind of ramp do you think you could see in your commodity OSB business?

Okay. I could answer that, too, or I could at least give you my opinion on that. On the Green Field plan that we’re-- or the Ground Field plan that we put in our current facilities, we have seen the reductions in the energy and reductions in wood usage and some of the de-bottlenecking in the plants that we made those capital improvements. Today, we’re probably less than 30% invested in those so we still have a ways to go. And last year, we delayed a little bit of that and this year-- get more pricing as we’ll probably further delay a little bit of the implementation there. So we are seeing the returns from capacity coming from those facilities.

And that’s about 900 feet total so about a third of that?

Well, a third of the capital’s been in but you don’t get the returns immediately on that.

Okay.

Because what you end up doing is you end up doing in stages. You do a de-bottlenecking and then you do a second de-bottlenecking and you almost have to go through the bulk of the capital expenditure in the mill before you get it. The second piece of the ramp up is the joint venture mill. I sit on that board and we do have a team in place right now. We’re doing the hiring of the operators. And I would expect that that mill will come up pretty well. We’re not planning on a lot of volume in Q4 but in Q-- in 2006, I would expect to have pretty good production coming out of there.

Okay. And then another question, if I could. I mean, clearly, with a relatively small-cap company or mid-cap company with-- sitting on a billion of cash, I just was curious if you could elaborate on kind of your own financial criteria for making investments. You’ve been disciplined, obviously, so far. Do you think that you can make acquisitions at a better value than your own shares? And why not consider a leveraged recap and if we can’t find suitable acquisitions at reasonable prices, why not consider special dividends? I’m sure you’ve considered all this but maybe you could help us to understand your thought process on the financial criteria and kind of what steers you.

Well, this is Rick. There’s a couple of things that we hinge the future on. One is is that growing profitably is important and scale is important. So if you look at what we’ve done with the company the last couple of years, we’ve said that we’d like to be like number one or number two or striving to be number two in each of the product segments that we choose to do business with.

So probably the first conclusion you can draw from that is if we make an acquisition, it will probably be in a product line that we are already in or one that’s very closely related. We expect to have competencies in what we buy. We expect to have some synergies in what we buy. And, hopefully, it will give us the scale that we need to grow with our customers. Look at this building market, the retail players are getting huge and the big builders are getting huge and suppliers need to be able to grow with these people number one, to meet their demand. But you also have to have their respect or you can get slapped around pretty good. So you need to have some scale.

So we look at the need to do that as opposed to a repurchase and particularly as opposed to a special dividend. We do have this discussion with our board on a regular basis. It is not something that we take lightly in terms of many of the shareholders have expressed some interest that they view the risk of a share buy back to be less than the risk of us making a large acquisition. And we understand that; we’ve heard what they’ve said. But a share buy back doesn’t fundamentally allow us long-term to change the position of the company in terms of profitable growth. And I don’t view-- at least we have spent very little time at this point talking about a special dividend.

And do you anticipate that the various potential targets will in fact meet the financial criteria that’s competitive with buying your own shares? Or is it simply a different analysis?

Well, I think the answer to that is both. It’s a different analysis but certainly it needs to be competitive at buying your own shares back. I mean, that’s one of the things that you have to look at. But one’s kind of a, I think, a shorter-term analysis than the other.

Thanks very much.

I can tell you like that answer, Pete.

Andrew Sussler, Golden Tree Asset Management

Good morning. So just following up with Peter’s question, your stock’s trading at about two times EBITDA on an enterprise-value basis. When you’re looking at the potential products at the right price, would you be looking for something that would be in that two times enterprise-value range?

Well, obviously, there are going to be a lot of profitable businesses that we’re going to want to get into that are going to be selling for two times enterprise value. I think Rick’s comment is that what we need to do is we need to take this company into a position where we can have scale in the products we want to remain in and make sure that we do that growth profitably. I don’t think that we are priced at two times EBITDA on a long-term basis.

Right. Well, that, I mean, that’s the point that, I guess, when I look at this as a shareholder, I look at. At things like your stock is an extraordinary value at two times. And it may be trading at a higher multiple if the cash weren’t there sort of creating this uncertainty as people are wondering where’s it going to go. And people know that it’s probably going to go for an acquisition that’s going to be diluted to that two times enterprise value. So just as a shareholder it’s just concerning to have the potential of a diluted transaction when your stock is such a wonderful value right now but--

You know I think that point of view is being very adequately parlayed to us in almost every meeting that we have with investors. We get the point. There is a perceived risk differential between us making an acquisition and, at least to the investor, us buying stock back. But one accomplishes a longer term different purpose than the other one.

Okay. I just had two other questions. One, with OSB doing pretty well this year and the siding business having some problems and presumably you’ve got your best siding people down to fix them, have you considered or is the board considering a delay in transferring over the Hayward facility given that you’ve got the EBITDA margins are five times in OSB right now.

We’re not considering that for the reason of past experience. And the reason of past experience is if you can’t get the productive capability ahead of the sales, you can’t make the sales. You can’t go out and promote a product and try to grow it and then add the capacity. You have to have the capacity capability in ahead of sales. So we would still be able to make OSB on that line of Hayward that we convert but we have to do the conversion to have the capability to grow the product.

And then how long are you down when you do the conversion?

Well, the tie in will be relatively short.

Okay.

If your question is can we convert-- when we convert to OSB from siding, that conversion can take place in a matter of hours.

Okay. Actually, the question was just how long will it take to convert the plant and spend the $25 million. And presumably down-- your plant that’s having trouble you could convert that to OSB as well.

The Silsbee plant could be converted back to an OSB plant. That’s what it was before we went the other direction.

Okay. So maybe you’ll have a better wood source at Hayward and then you can use Silsbee as more of your marginal production.

The Hayward production or the Hayward capital conversion should be complete by late summer.

Okay. And then this is the last question. You closed the Woodland, Maine mill and you mentioned that some OSB mills are not compliant with MAC. Just, in your judgment in the industry, are there are a lot, are there just a few or are there-- how many plants are there like Woodland, Maine that just have high cost, have really a trouble getting the proper wood fiber, and could in a downturn in prices be closed?

Well, I think that the hit’s going to take place in plywood. I don’t know if-- you’re going to have to go pretty deep before you start shutting OSB plants down because OSB is an economic substitute for plywood. So the first place I would look to do that analysis is what’s the shape of the majority of plywood in all(ph)?

Okay. So it mainly comes out of plywood. And then the last question of--

All the substitution charts. Risci publishes some; we put them in our analyst presentation. There is the basic structural panel growth that goes on and then there’s the growth of OSB that comes out of the hide of plywood because it’s an economic substitute.

How much-- well, this is the last question -- how much of a substitute is it? Is it a perfect substitute or is there always going to be a certain amount of plywood that you need?

Well, in-- there’s always going to be a certain amount of plywood that you need for specialized use. Not many people are making cabinetry out of OSB-- although I think it looks pretty cool. So there’s not going to be marine OSB. So there’s going to be, I would imagine, at least if you look at the long-term graphs, the plywood’s going to hang in there long-term at about 25% of the structural panel market. But if you look at Risci’s curves, they have OSB continuing to penetrate as far as you can see out up to about that 72 to 75% level.

Great. Thank you very much.

Eric Gold, Forest Investment Management

Thank you. Good morning. Not to beat a dead horse here but isn’t the best way to do an acquisition to get your stock value up and can use the cash primarily for that purpose so you have a currency value in which to do accrete of acquisitions?

Could you just-- would you repeat the question, Eric?

Sure. Isn’t the best use of your cash, rather than doing acquisitions today, but to either do a stock buy back, increased dividend, something that gets your stock price more fairly and appropriately valued? And then with that higher, more appropriately valued stock price, use that now fairly valued or attractive currency to make your acquisitions rather than take your cash in a company that is preferably underleveraged and undervalued. And almost any acquisition you do is going to be diluted to an EBITDA measure.

Well, that’s certainly one approach.

So why is that not the right approach?

Well, as Rick said we’re having these discussions regularly with our board.

And so that is a fair consideration as what might happen?

It is a consideration.

Why would that not be the right course of action?

I’m not sure I can answer that without you sitting in our strategic sessions.

That works for me. All right. Thank you very much.

Mark Wilde, Deutsche Bank

Yes. Just coming back to kind of supply and demand in the OSB business, I just-- I wondered, Rick, if any of these harvest restrictions that we’re starting to see up in Canada, particularly in Quebec, is this going to have any effect on the supply side do you think over the next three or four years?

Well, the way they hit you is the thing that’s making all the headlines is they’ve cut the softwood back by about 20%. That’s softwood. Now, our mills and the other OSB mills up there are using hardwood. They’re using aspen predominantly and a slug of birch that goes in with that.

Our best guess based upon what we’ve put our forestry guys to is that the impact of the 20% reduction in softwood is going to equate to a somewhere between a 4 and a 7% reduction in the amount of hardwood because a lot of the stands up there are mixed. So if you can’t go in to log the softwood, then it’s less economical to log the hardwood. But at a 4 to 7% rate, we think that the impact on us is going to be minimal.

Okay. Great, thanks.

That answer your question?

Yes, it does.

Every once in a while it helps to be a forester.

Chip Dillon, Smith Barney

Yes. Some of the numbers I’ve seen and I guess they’ve been a little bit massaged because it’s such a moving target with like Woodland going down but it looks like you’ve seen a fifteen-ish percent increase in OSB since 2000 and yet the total structural panels market or capacity in North America seems to be unchanged. And I keep getting all these questions about this OSB market and capacity and could you just clarify for us that it’s-- there’s no such thing as a OSB market. It’s a structural panels market and I would imagine that-- I’ve heard that 80 to 90% of the products are interchangeable as we measure the capacity. And then could you also just give us a view like we’ve seen this dramatic reduction in plywood since 1990. I guess it’s what, 30% or so. How much more do you think will be shut down because of these new regulations because I don’t seem to recall any regulations like this in the past?

Well, I don’t know what’s going to be directly attributable to MAC. You know, in reality lots of times people pick an excuse to blame shutting a plant down on dependent on what axe they’ve got to--but as you’re probably well aware of. But I’ll go back again to the best thing we’ve got which is a Risci forecast. And what Risci says is that you’re going to see a penetration into this structural panel market of up to 72 to 75% in the foreseeable future which is out to about 2010, 2011. It’s hard to guess past that. So that’s the room that you have left to grow so you forecast the growth in structural panels.

And then if you think about construction and how most of this stuff is used. You know, 85% of it’s used in new housing construction. And what’s actually happened and how has OSB eaten plywood. Almost all of the wall sheathing is now OSB and the room that’s left is to continue the penetration into the roof sheeting and the sub-flooring.

And now you see companies like ours and companies like Uver(ph) and companies like Warehouser that are making the sub-flooring products, which are actually superior products at a lower price than plywood for sub-flooring. So it is a direct economic substitute for most uses. As I mentioned earlier on this call, I will doubt if you will see us construct a marine OSB to substitute for a marine plywood. I don’t think too many people are going to develop the skill or the taste to have OSB furniture or cabinets. But the size of the house in continuing to increase so you’re starting to get higher ceilings, you’re starting to get more volume within a house. And that’s another thing that continues to add growth for structural panel but all of that’s going to get taken up with OSB. So did that answer your question?

Yes, thank you.

Frank Dunau, Adage Capital

Yes, I just want to make an observation. You know, I actually don’t think what you’re doing is wrong with the cash. I mean, I’ve always said I want to see one person holding the cash and wait for something to get cheaper and buy it. I’m old enough to remember back in the ‘80s when a lot of people leveraged separate-- special dividends because things will never get worse and that was a bad idea. So if you want to diversify your income stream going forward and away from OSB at a price that’s something greater than two times EBITDA and something less than six or something, seems like a reasonable idea to me. Well, it’s just a comment.

Well, you are a cry in the wilderness.

Sam Martini, Cobalt Capital

Hey guys, I’m sorry. My questions have been answered. Thanks a lot.

Well, thank you all for joining us. I am going to ask Mike to give out the replay instructions after this. And as always, Becky and Mike are available for follow up questions. So thank you very much. Mike, if you could just give the replay instructions?

Thank you, sir.

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