Louisiana-Pacific Corp (LPX) 2005 Q4 法說會逐字稿

Good day and welcome to the fourth quarter 2005 Louisiana-Pacific Corporation earnings conference call. My name is Bill and I will be your conference coordinator for today. At this time all participants are in a listen-only mode. However, we will be facilitating a question-and-answer session towards the end of today's conference. [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.

Thank you for that, Bill. And good morning to all of you on the call. We appreciate you joining us for Louisiana-Pacific Corporation's conference call to discuss our financial results for the fourth quarter and the full-year ended December 31, 2005. As the moderator said I'm Curt Stevens, Executive Vice President of Administration and the Chief Financial Officer. With me today are Rick Frost, LP's Chief Executive Officer; and Mike Kinney and Becky Barckley are responsible for Investor Relations activities. I will start the call with a review of the financial results for the fourth quarter and the year of 2005 and provide some comments on the balance sheet. And then as we've done in the past, Rick will review our accomplishments during 2005 and will talk a little bit about our outlook for 2006, then we will open up the call for your questions. As we have done in the past this call has been opened up to the public as we are doing a simultaneous Webcast. This can be accessed through www.lpcorp.com. Additionally, to help with the call we have provided a presentation that provides supplemental information. As we go through the discussion I will be referencing certain pages in that presentation. As a caution I would ask you to use this presentation and review it in conjunction with the publicly available earnings release.

Before I begin with the meat of the call I do want to cover the legal aspects. We have provided a forward-looking statement, comment and included in the earnings release it's also shown on Slide 2 of the presentation. There was also a discussion on the use of non-GAAP financial information included on Slide 3, and the necessary reconciliations are included as the last page of the presentation. I'm not going to reread these statements, but I am going to incorporate them into the discussion with this reference. The first line I'm going to talk about is Slide 4, which is our financial results for the quarter. We were reporting fourth quarter net income of $85 million or $0.80 per diluted share of which continuing operations showed income of 91 million or $0.86 per share, and discontinuing operation showed a net loss of $5 million. Net sales from continuing operations were 624 million for the quarter. For the same period last year we reported net income of 14 million or $0.12 a share on continued -- and then for continuing operations we had an income of 17 million or $0.15 per diluted share, and a net loss of 3 million on discontinued. Sales from continuing operations last year during this quarter were $564 million.

Slide 5 does a quick reconciliation of some of the special items of which there weren't a lot in the quarter. These are generally not attributable to our ongoing operations. Let me just talk about it quickly. We did have a loss of about 400,000 attributed to the last stage of our LP Corporate Headquarter move to Tennessee. We had a $1.2 million increase in environmental reserve associated with the facility that was previously held for sale, and then we also had a net charge of about 4 million associated with a product warranty reserve for products that we no longer manufacture. There's about a $2 million impairment charge on idled assets at our Silsbee, Texas siding mill and we converted that back to OSB to write these assets off. The $3 million that shows up as a reversal of tax liabilities due to repatriation is the true-up associated with the final amounts that we repatriated through the Homeland Investment Act. As a reminder, the 102 million shown in last quarter, Q3 of 2005, was our initial estimate. For the year the total amount of the reversal associated with the Homeland Investment Act was $94 million. In Q4 the primarily charges were associated with a Nashville relocation, Mark Suwyn announced retirement and the write-off of capitalized interest associated with facilities that were closed in prior years.

Slide 6 is our financial results for the year. For the year ended December 31, 2005, reporting net income of 456 million or $4.15 per diluted share of which continuing operations provided income of 476 million or $4.34 per diluted share, and discontinuing operations had a $19 million loss. Net sales from continuing operations were 2.6 billion for the year. Last year we reported a net income of 421 million or $3.84 per diluted share of which continuing operations had an income of 420 million or $3.84 per diluted share, and discontinued operations had a slight income of $1 million. Net sales last year were $2.7 billion. Slide 7 is the reconciliation or reconciliation of special items that I'm going to discuss for the quarter. Here, if we look at the adjusted net income of continuing operations for this year for 388 million or $3.54 per share as compared to 476 million or $4.35 per share. All the items related here are detailed in Footnote II and III of our release.

Slide 8, I'm sure the tax rate has been a little bit confusing this quarter but let me talk about that tax rate. As we discussed last quarter we did finalize the plans to repatriate approximately 520 million under the provisions of the Homeland Investment Act. All that repatriation came from our Canadian subsidiaries. Due to the repatriation for the year, we recorded a $94 million reversal in deferred tax, which had been recorded in prior years. But an important point here is, this is not just a book entry, this is really savings. LP expects to pay $94 million less tax in the future than we would have had we not taken advantage of the changes in the law by taking these actions. For the year our tax rate was approximately 29% of continuing operations. This is below the statutory rate for a couple of reasons. One, as a result of the repatriation we no longer have to provide U.S. deferred taxes that previously have offset the Canadian tax benefits associated with our intercompany debt structure. Number two, we implemented the manufacturing production -- deduction included in the American Jobs Creation Act of 2004. And number three, we had a positive impact due to the change in the Canadian exchange rate on our tax. These rate reductions coupled with the, about 18.7% reduction due to the repatriation resulted in an overall tax provision of 10% for both the quarter and for the year. Going forward, we expect our 2006 rate to return to the more normalized rate of 35 to 36%.

Let me just now turn to each of our segments. Slide 9 is Oriented Strand Board. OSB pricing as compared to the same quarter in the prior year was up about 25% on relatively flat volumes and up 15% from last quarter. As we've discussed many times there is significant leverage in LP's earnings from OSB pricing. For the fourth quarter the price increase accounted for over $75 million in higher sales and pre-tax profits, compared to the same quarter last year. From a cost perspective we, and others in the industry did face several challenges in the quarter and for the full year. Wood costs were higher in certain regions due primarily to transportation costs and petroleum-based products, particularly resins, continued to be significantly higher than the prior year. With the hurricanes there was some disruption to the transportation system, coupled with higher fuel prices this caused our freight cost to increase significantly. Along with a change in the Canadian currency the fourth quarter impact of these higher costs was about $18 million. If you look at the split of that, about a third of it was in petroleum-based raw materials, resins, about 3 million was in wood, the Canadian currency accounted for another 4 million, and freight added 2 million. We are anticipating that some of these costs may pull back in the coming months. For the full year, OSB pricing alone accounted for a lower pre-tax profits of over 225 million. In addition, we had higher costs year-over-year of about 10% or a little over $80 million. Somewhere to the fourth quarter a third of this increase was due to changes in the Canadian exchange rate, another third was caused by increases in resins and utilities, and the balance was spread among capital-related and hurricane downtime and higher labor.

Slide 10 is Siding. This segment now includes our SmartSide, OSB siding, and Hardboard siding. In the fourth quarter we did sell our Vinyl siding operations. For the quarter this segment showed lower earnings in the previous quarter and the same quarter the prior year. For the quarter sales were down 10% on our SmartSide business from the prior year and 27% from the prior quarter where sales price showed an increase of 4% and a slight reduction from the prior quarter in 3%. We believe that the decline in year-over-year volumes is primarily related to significant prebuying, which occurred in the fourth quarter of 2004. In the fourth quarter of 2004 we did preannounce a price increase that went effect in the first quarter of 2005. As a result our customers loaded up on their inventory. This caused our fourth quarter of 2004 to be artificially stronger, which in hindsight we probably should have recognized at the time. We look at the sequential reduction in the fourth quarter compared to Q3, it's primarily due to the normal seasonality issues which did not have the influence of an announced pricing increase this year, and customers were watching their inventory very closely. Looking into 2006, we are seeing a very strong first quarter with our order files healthy and our Hayward conversion to SmartSide is on track.

Hardboard sales volumes are down 6% from the prior year and 13% to the prior quarter. However, price is up significantly from the prior year and slightly from the prior quarter as we continued to convert our production to higher margin, higher price, albeit lower volume product mix which helps us to maximize earnings from hardboard. For the year SmartSide volumes are about flat compared to 2004 with pricing about 4% higher. The prebuying in Q4 2004 clearly affected the year-over-year volume performance. From an earnings perspective, the overall Siding segment, SmartSide and Hardboard together is down 13% from 2004 with virtually all of this shortfall due to persistent production and cost problems at our Silsbee, Texas mill that resulted in more operating material and unscheduled downtime. As we did discuss on our last call, we are implementing the decision we made to move siding production from Silsbee to Hayward, Wisconsin. As of January 1st, Silsbee began concentrating exclusively on the production of commodity and specialty OP.

Slide 11 is Engineered Wood. This segment includes our Laminated Veneer Lumber, our I-Joists operation, which includes a 50 -- includes the 50% of our JV in Quebec, plus other related products that include a small plywood mill in British Columbia. During Q4, LVL volumes were down about 13% and I-Joist volumes were flat for the quarter, compared to both the same quarter last year and sequentially. The shortfall in LVL was due to a market miss call on our part. We saw a little bit of weakness for about a six-week period during the summer and we did remove the second shift at our Hines, Oregon LVL Mill. When order files came back in the fourth quarter we simply did not have enough search capacity to catch up. Pricing in EWP continued to be very strong with both LVL and I-Joist up about 10% from the same quarter last year. While some of this increase was necessary to offset raw material costs, EWP continues to have strong demand which is driving higher pricing. As a result we are showing slightly higher profits from the sequential quarter and more than double the profits compared to the same quarter last year. For the year this business performed very well due primarily to this higher pricing; 17% in LVL and 12% in I-Joists. Along with more efficient operations and the latest JV I-Joist Mill in Quebec we grew profits from 7 million in 2004 to 34 million in 2005.

Slide 12 is our "other" building products. This segment consists of our Composite Wood Decking, our Molding Business, our Chilean operations and 50% of an installation joint venture called "U.S. Green Fiber," and non-operating facilities. Overall in terms of profitability, this segment was marginally profitable as it was last quarter and significantly short of the $5 million that we earned in the fourth quarter of 2004. We saw decrease volumes in pricing in our decking operations, primarily due to a difficult start-up of the recently-completed expansion of our Selma, Alabama plant. Additionally, the industry was thrown somewhat of a curve ball from the International Code Compliance Group that it's setting the initial standards for emerging composite lumber. A new standard took effect in early December, it forced us to hold a portion of our production in inventory as we scrambled to both understand and be in compliance with the new standards. We are making progress and expect to have this resolved in the next few months. Year-over-year we made good progress in putting in place more capacity to be ahead of demand, but we did stumble from a growth perspective as our shipments were about the same in 2005 as 2004, although we did get a slightly higher sales price. On the bright side we do continue to fill the channel with product and coordination with our new distribution partner, Bluelink. We're very excited about the potential level of activity that will result from this relationship.

On the volume side we did see some strength in our molding volumes. Our front net pricing was down 13% however, compared to the same quarter in the prior year and 5% sequentially as we brought on a new program in Q4 to help offset the notification of a loss of a key customer over the summer. Though volume perspective, we did not see the impact of that loss in Q4, but have put plans in place to mitigate it and get additional business in 2006. In both these product lines, higher PVC and HDPE raw material costs hurt margins as the ability to pass through timely price increases has been constrained. Our Chilean operations had a good quarter and a strong 2005. As a result of the success that we've enjoyed in Chile, we did announce last quarter that we are going to expand our operations in South America by renovating and relocating our "mothballed" OSB mill at Montrose, Colorado to a new site in Chile. We're anticipating that this mill will start-up mid to late 2007. The final part of this segment is our Cellulose Insulation joint venture with Casella Waste Systems. This business performed very well in Q4 and throughout 2005. It certainly appears that the higher energy costs experienced during the winter has accelerated the demand for cellulose insulation.

Let me speak a few minutes on Selling, General and Administrative costs. As I've talked about in the past there are two levels of SG&A that we track at LP. The first includes cost directly associated with the management of our mill operations and the business team to support the sales and marketing efforts that get captured in the segment report. The second level is the non-allocated SG&A that we carry at the corporate level. From a combined SG&A perspective we were tracking about 5% below the 2004 level or $8 million lower. For the non-allocated general SG&A which is held at the corporate level, we were down 16 million in the prior year. This is a result of some nonrecurring expenses in 2004 plus the offset in 2005 due to somewhat unusual recoveries. This would include the March settlement, our workers' change -- workers' comp changes, and a collection of written-off obligations. On an ongoing basis I do expect that non-allocated SG&A will track at about 25 million per quarter. A piece of this increase will be due to the expensing of stock equity expenses during -- that began in January.

Slide 13 is the balance sheet. The impact of our strong performance continues to enhance the balance sheet. A couple of key statistics here, this compares December 31, 2005, to December 31, 2004. At the end of this year we did have a 1.4 billion in cash, cash equivalents, and [inaudible] investments in restricted stock. As I mentioned in the past restricted stock represents the cash collateralization of outstanding letters of credit which allow us to buy down the rate. Working capital is just short of 1.5 billion, a $300 million increase. Our total cash exceeded our interest-bearing debt by slightly over 965 million compared to 845 at the end of last year. As a reminder, we did repay 170 million in debt and executed a $150 million accelerated share repurchase program in the third quarter. During the fourth quarter we did borrow C$235 million to take advantage of a tax strategy associated with the repatriation accomplished under the Homeland Investment Act. Essentially two of our Canadian subsidiaries borrowed funds approximately equal to anticipated earnings in Canada for the next three years and did a return of capital transaction with the U.S. parent. This loan has a three-year maturity, but we do anticipate repaying this loan from free cash flows from LP's Canada operations over this period. By employing this strategy we expect to save about $50 million in future taxes. Capital expenditures for 2005 or a 258 million which included the contributions to our two joint venture projects. We're currently anticipating capital expenditures for 2006 to be about 275 million. Book value per share increased by over $3 to $19.31. With that, let me take a break and turn it over to Rick and talk about the accomplishments of 2005 and his outlook for next year.

Thank you, Curt. Good morning, ladies and gentlemen, my condolences to those of you that are not Pittsburgh Steeler fans. I am sitting in a room of those this morning and having some fun. In 2005 we made a stronger company out of LP and we put ourselves in a better position to compete in the building products industry. Curt just talked about the improvements to the balance sheet that gave us flexibility to do a number of things; (a), invest in current operations, build new facilities, expand through joint ventures, take advantage of acquisitions that make sense or buyback more LP shares. So I want to reflect a little on 2005 and then make some observations about 2006. I want to start with a few comments on safety. There is nothing more important then the safety of our employees at LP and no one should have to get hurt while working here. I am proud to announce that in 2005 LP had the best safety year ever with the total incident rate of 1.39. And interestingly enough the mills with the best safety records generally were the ones that set production records and yielded the highest profits. The attention to detail required to be safe is the same attention to detail required to make quality products and to run efficient operations. On the quality front we continued to improve our quality management systems across the corporation and reduce the variation of our processes. We have been consistent in telling you that builders and our customers are getting bigger and bigger. To continue to service their growing needs and be sure that we are important to them, we must have capacity in place ahead of their demand. And in 2005 we made steps in that direction with our nearly $260 million of capital investment.

First in OSB, our 800 million sq. ft. Peace Valley JV Mill in British Columbia produced its first board last quarter. And it is currently in a ramp-up curve as the mill irons out the kinks, and this production is targeted towards markets in Western North America. Of particular value in this mill is the ability to produce nine-foot and 10-foot panels that are in an increasing demand due to today's building preferences of higher ceilings. Further, the site work is nearly complete on the new 700 million sq. ft. OSB mill down in Clarke County, Alabama, that is slated for start-up in late 2007. In Siding, Curt mentioned the first line of our Hayward, Wisconsin mill is now operational for a wide variety of SmartSide products. Due to this mill's flexibility and its aspen wood basket, we made the decision to convert Silsbee, Texas, mill back to a commodity and specialty OSB mill. And that timing has ended up being good to take advantage of the reconstruction efforts in the Gulf Coast after the hurricane damage beginning there. In 2006 our plan is to convert the second line at Hayward to SmartSide as well and that will be the equivalent of removing a 550 million sq. ft. mill from service in OSB. In Engineered Wood, the second low-cost I-Joists mill with our partner, Abitibi Consolidated, began production in Q3. These two mills produce a solid-sawn I-Joists that is gaining market share and this new capacity also allowed us to shutdown a higher cost I-Joists plant at our Wilmington, North Carolina facility.

Additionally, we continued to develop efforts to add a strand-based product to our customers and builders that will allow a more complete engineered wood products offering for the home. And I am happy to announce at this time that on our Friday board meeting of last week we received approval from our Board to begin the conversion of an OSB mill for an oriented strand lumber product. If all goes according to plan, this mill will be in operation in late 2007. Building capacity to produce and sell a significant volume of oriented strand lumber for our engineered wood products gives it significant growth capacity and is tantamount to making a significant acquisition of a new product line. Having the cash on balance to -- on the balance sheet to do that is critical. Having oriented strand lumber along with LVL and I-Joists will give us a full product line offering of engineered wood products and help us differentiate against competitors that either don't have that product line or don't have the know how to make it. In decking, following the expansion of our Meridian, Idaho facility in the latter half of 2004 we did a similar project at Selma that Curt mentioned. And while it has been on a slower ramp-up than anticipated we do have capacity in place now to grow market share. We've doubled our capacity at the Selma plant.

As one of our Board members said last year when I came into this job, a good strategy makes easier project decisions. In 2005 we launched a comprehensive effort to review, revitalize and revamp our corporate strategy. This included a thorough review of each of our businesses, positioning of our products, our channels to market, customer trends, and the functional support required here at the corporation to make it happen. Each part of the plan has -- now has clearly defined milestones, objectives and metrics. And additionally, we have monthly working meetings to make sure that this strategy is actionable. Over the coming months Curt and I will be sharing these strategies with investors at various opportunities and conferences and other forums. We are continuing to prospect for acquisitions and we are getting more efficient at it. We did a lot of looking in 2005, but we didn't find anything that met all three of our criteria; right product, right time and right price. In 2005 we increased the dividend to an annual rate of $0.50 a share. This morning I am sure that you noticed we announced that our Board just declared a quarterly dividend of $0.15 per share or a 20% increase. Last summer we also implemented 150 million share accelerated stock buyback -- excuse me, a $150 million accelerated share -- accelerated stock buyback and immediately retired about 5.5 million shares. Based on the callers that we put in place for this transaction it looks like we will be retiring another 200,000 shares later in the week when the repurchase period ends.

And finally looking back one last time, we at LP are also proud of some pretty decent things we did last year around the hurricanes that wreaked havoc on the Gulf Coast. We donated a $0.5 million in cash to the Red Cross for relief efforts within four days of Katrina and donated over 2 million sq. ft. of siding, both OSB and vinyl, to Rita and Katrina relief. As well our mill employees in the affected areas helped out power companies and their communities in relief efforts by providing generators and hot meals and the like. As I look forward to '06, it is starting out quite well for us. In January we came out of the chute strong right on our plan, OSB prices are holding up; demand for engineered wood and siding products is strong; and the winter buy program for decking looks to be in very good shape. My view of the first half of this year is good. As to the second half, many of the economists are predicting a slowdown in the economy but with a soft landing, but I think that we're just going to have to wait and see. And now the strategic plans are in place for LP and we will execute. The capacity that came with the capital put in place in 2005 needs to be produced and sold profitably. The Peace Valley Mill is ramping up. I-Joists demand appears to be strong and we will capitalize on the decking winter buy momentum -- winter buy momentum which has been greatly bolstered by our new distribution arrangement with Bluelinks. We have a capital budget of 275 million for 2006 this includes the new OSB mill down in Alabama, significant modifications to existing mills, things like the Hayward-line two conversion, the SmartSide, the Holton OSB Mill to OSL, and the relocation renovation of the currently idled Montrose Mill to Chile. And other ongoing investments in existing facilities to take advantage of cost reduction opportunities and new product capabilities.

Building on the success that we have had in the hardboard business in this Company, we will be expanding our lean Six Sigma efforts as the corporate continuous improvement methodology this year. This disciplined approach with dedicated resources has led to solid improvements in our siding business and we expect similar results corporate wide. We're continuing to manage the cash for the long-term benefit of the shareholders. We will keep a prudent balance to allow for consistent investments through the cycle, and on the acquisition front we are looking for the right product at the right time at the right price. Management and Board are both committed to a regular review and analysis of our dividend level and to further share repurchases, and we have demonstrated both of these recently. And finally all of this only happens with the dedicated efforts of a knowledgeable and motivated group of employees, and in 2006 we will be accelerating our efforts to earn a reputation as an employer of choice in this industry. And with that I will turn it back to Curt.

Thanks, Rick. Well, 2005 is in the books. Good operating results. We took full advantage of the tax laws with actions that will save us about $150 million in future taxes, and we made the investments in capacity that will allow us to grow with our customers. 2006 is ahead of us. As Rick just talked about we have the team and the plans in place, now we need to execute and we will do so. With that, Bill, let me turn it over to you for the Q&A.

[OPERATOR INSTRUCTIONS]. And our first question comes from the line of Mark Connelly of Credit Suisse. Please proceed.

Thank you. Just a couple of things. You talked about the composite decking market, can you help us get a sense of what's going on there more broadly? We see a proliferation in new products, lots and lots of players out there. Curious what your view is in terms of the need for investment in new products yourself or whether it is more attractive to try to get those acquisitions in a category like that, what you're thinking about market share as this business really starts to take off?

Yes, Mark, this is Rick. It is a tough one to read. It is a very fragmented business right now. There is a lot of players. I think I counted up about 45. There aren't that many regional players, but it seems like a handful of them go out and a handful of them come in every year. Share is -- appears to be moving around. It used to be a market that was dominated by one or two or three players and the big guys are -- share components are going down and other people are coming in. And it appears to be -- have a lot of regional influence. Everyone that has knowledge of extruding, looks at that business line and says, What a fantastic opportunity. And there is not a huge barrier to getting into the business in terms of extrusion.

So it is -- as we found it so far it is a tough place to make money. We think it is a trend. We think it is an opportunity. And we think that eventually having the capability of putting on a national product offering, the advantage of scale and with the new relationship that we have established with Bluelinks that we will continue to grow share from where we are right now. But it is a tough place to make money.

Are you putting a lot of money into R&D in that business right now?

I don't know what you would call a lot of money. We do have part of our R&D center and our Franklin facility is dedicated to supporting that business.

Okay. And just one more question. Again, big picture, as you look at the OSB market regionally, are you seeing any differences in the way homebuilders are dealing with Louisiana-Pacific in terms of how they're putting orders in or the way they want orders to be filled? And just curious if there is anything changing there, as homebuilders, some of them are getting a little bit bigger and maybe a little more sophisticated?

Well, I think there is a lot of talk about changing some of the relationships with the largest builders, actually in terms of anything happening it hasn't yet. We have actually been what we think is reasonably accretive this year in giving buyers of OSB several different options in terms of how to buy the product rather longer time frames, a more locked in price for a period of time, and the market seems to be appreciative of us offering those options, but they're not taking advantage of it. It is like, Thank you very much for the choice, we think that's nice, but we'll continue to do business the way that we always have.

But I think the bigger builders as you talk to them, particularly if home prices continue or are stopped going up so fast are going to come back and look at their supply chain for larger sources of their margin and then I think they're going to -- at least some of them that have the clout -- will try to redefine some of their relationships that have existed up to now. Now, that won't be the entire marketplace that will just be with the people that are big enough to do it.

Sure.

The one thing I would add, Mark, this is Curt, is you do have CANTEX, which just created CANTEX Distribution, so they are now taking product directly into the big neighborhoods that they're producing.

Right. Okay, thank you very much.

Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Rich Schneider of UBS. Please proceed, sir.

Hi, Rick, I was wondering if you could talk a little bit about the start-up at Peace Valley? You mentioned a little bit about it. How's it going? What were the start-up costs in this quarter? And what do you expect will be the output in 2006?

Well, I don't think I will comment on the start-up cost for this quarter. I will comment on how it is going. It is going slower than we had hoped that it would. Not to the point where we think we have any major problems from an engineering standpoint, it is just a reminder that when you try to start up the world's largest OSB mill, it doesn't go as smoothly as you envisioned before you start turning the machine centers on.

We're about probably 50 to 60% of where we wanted to be at this point in time and we are sending some more resources to that mill actually as we speak to put some more capability from some of our other OSB plants. You have to remember that that mill is run by a separate group of people. It is a separate company. But they have been amenable to us trying to provide some additional operating and engineering resources. But we're about 50 to 60% of where we had hoped we would be at this time.

Could you give us a rough idea of what you think our production could come in, in 2006?

Rich, this is Curt. The mill capacity has got a [inaudible] capacity about 820 million feet, and we would expect to do about 70% of that this year.

Okay. And the start-up costs that I was referring to was the cost in the fourth quarter, not the first quarter. Is that -- would you answer that question?

Those costs are included in our OSB segment.

Okay.

Of 50% of those costs our partner takes the other 50%.

Okay. But you haven't disclosed how much they were, right?

No, we have not.

All right.

But they are, Rich, they are a reason why our -- one of the reasons why our OSB costs are up in the fourth quarter.

Okay. Just sticking with that, resin costs -- I know you talked about them year-over-year, but what were they up sequentially going from third to fourth and are they still going up?

The question was what, Rich? I'm sorry.

On resin costs, I know you talked about it year-over-year. But sequentially could you give us an idea how much they may have been up and are they still going up?

In going from Q3 to Q4, resin costs for -- now this would include the PVC and HDPE as well -- were up about $10 million.

Okay. Are they still moving up right now?

If you recall, Rich, what happened is the resin companies called "force majeure" with the hurricane --.

Okay.

-- in the Gulf area, and hit us with higher transportation costs, as well as higher costs for the input material. We had the Formosa plastic plant blew up and created some real issues in the marketplace.

So now that you may be out of the force majeure are costs still going up or are they flattening out?

They're pretty -- actually they went down a little bit in Q1, but then oil jumped up again. So we're working -- let me just maybe -- just back up for a minute and tell you how our major resin suppliers -- we have a base rate and then we index that based on the major input materials. So there is an increase in benzine or plastic or some of the other inputs and we get a bump up the next quarter in that pricing. So at the end of Q4 they were down. So Q1 is going to be okay. Q2 looks like it might be up a little more.

Okay. And just last question, I was wondering if you could talk about the conversion you were mentioning at Holton on -- from OSB to oriented strand lumber, sort of what the timing is on that? And could you talk about that product and how maybe it differs from engineered wood?

Yes, well, it is an engineered wood product, Rich. Timing is we -- we got approval from our Board Friday, we will have a permitting piece of work to do which will probably take us out until August or September with the State of Maine. Assuming that that is successful then we will try to get the buildings put up before the worst of winter sets in so that we will then be able to work into -- work in a warm condition to start implementing the equipment, and we would hope to be making product by the fourth quarter, end of the fourth quarter of next year.

What this product is, is very similar to TJ's TimberStrand. It is made with an oriented strand technology, and what it will do is it will substitute for the lower-valued products that were being satisfied by LVL. Lower-valued meaning lower strength products for beam and header use, also it would be used for long length 2x4s and 2x6s, which are currently being supplied by the lumber market. So it will be a direct substitution for the lower strength LVL and direct substitution for cut lumber.

Okay and --.

And so you will be able to go to the market with a full component of Engineered Wood Products. You will go with the LVL product, you'll go with the I-Joist product, and then you can go in with this engineered strand -- oriented strand lumber.

Great. And the full mill of 280 million sq. ft. is being converted?

Yes. And then the benefit of doing it this way rather than just building a brand new mill is that while we are constructing the facility, Holton will be able to continue making OSB, and then as we go up the ramp-up curve on the production of OSL, if while we're not making OSL, going up the ramp-up curve we can switch over and run the OSB line. At the completion of the project when we have sold the mill out on OSL, then the OSB capacity leaves the marketplace because we don't have a plan to run both lines at the same time.

Great. Thanks a lot.

Yes. It's a pretty neat project.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Mark Weintraub with Buckingham Research. Please proceed.

Thank you. Rick, can you give a sense of how much you think your demand for the OSL product could be two, three years out or whenever it would be really ramping up?

Yes, I think at year four we ought to be selling somewhere in the neighborhood of 7 to 8 million cubes, cubic feet.

And how much --.

And the compatibility of this is is, again, just in the LP homes that we currently supply in I-Joists and LVL this will be a natural extension of the business that we're already doing for over two-thirds of our product.

Okay. Just so I understand, are you going to be using this product in the manufacture of further engineered products or are you going to be largely selling the OSL to third-parties?

Oh, no. This product will be going along with I-Joists and LVL so that we come up with a complete Engineered Wood Product package to our customers. The builder right now that uses Engineered Wood Products inspects LVL and inspects I-Joist, and then for the -- some of the other structural components buys lumber. And in a lot of the applications of lumber this product will be both cheaper and perform better, so there will be a continued substitution for the lumber product with this product.

Do you have a sense as to what percentage of the lumber market overtime could be targeted by this product, as for instance a lot of the plywood market overtime has been targeted by OSB?

Yes, I do. I am not sure I want to put that out at this time. We've -- obviously, that's part of our forecast. There is a huge opportunity for this much greater than what we will put a debt in with the production of our plant.

Okay. Obviously, some we're going to be paying a lot of attention to. But shifting gears right now, on the future tax savings, Curt, you mentioned this 150 million. Is that going to show up in lower cash tax rates any time soon and what should we be thinking of as a cash tax rate for the next year or so?

Well, remember this is all related to bringing in foreign earnings and paying the U.S. tax on that. So the 94 million that we reversed this year we will not pay in the future. So that will affect any cash payments we would have made had we repatriated in a year other than 2005. The 50 million that I mentioned on the loan, that would be the timing of when you pay those cash taxes is when you would have repatriated the funds and we no longer have to do that.

Okay, so it --.

But it all shows up in cash taxes. But it is the timing of when you would have made the repatriation.

Understood but your cash tax rate would have been higher as opposed to lower than book tax rate at those times if you hadn't been doing this; is that --?

That's correct. You would have paid cash taxes on it. That's real cash you would have paid.

Okay. And then lastly, Rick, you also gave some guidance on what OSB unit costs might be in the coming quarter relative to the just ending quarter. Do you want to hazard some guidance there?

I am going to step up about 10,000 feet and maybe make the same comment I made last week at a conference I was at. I think that we probably hit the high watermark, in general, on costs. I don't know how fast they're going to come down, but if you look at it about the only wild card that's left out there is oil. I think we've got a handle on gas. I think we have -- I just think everything has got about as high as it is going to go. And so now it is going to be a -- now, that isn't building products. I mean some of these guys that are dealing with cement costs and dealing with aluminum costs and some of those things I think they may still have a place to go.

The other issue that we don't know about costs is where the Canadian exchange rate is going to go. We have from the major banks in Canada projections from as low as 0.78 to as high as 0.92. So obviously with that affecting 40% of our costs of sales that's the wild card we have in our plan for this year. But I think, in general, if you just add all the costs together that it goes into make -- that go into making OSB or any of our other products I think we have about peaked out.

Okay. And then maybe, hopefully a simpler question on CapEx. For this coming year 275 -- and I am sure that includes a certain amount for the JV investments -- what might that amount be and then do you have any initial read on '07 yet?

The JV investments are pretty much done. We would expect any further investments for the JV to be funded from their profitability. The big projects that Rick mentioned for 2006 are the Alabama OSB Mill, beginning work on this OS mill that he talked about, and then in the renovation and shipment of the Montrose Mill to Chile, are the three big projects. And on '07, we have an idea but we're not ready to share that.

Okay. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Kuni Chen, Bank of America Securities. Please proceed.

Hi, good morning.

Good morning.

Can you just bring us up to date on the Brownfield investments, excluding Peace Valley how much would you say you've added to your capacity in 2005 and how much do you think your capacity, your base capacity will grow in '06?

Yes, that's a good question. I think I answered this the last quarter. The answer is about the same. Since we started this work we're up we think a run rate of about 250 million over where we started.

Okay.

The problem is, is there is so many moving pieces to this, as someone keeps talking about, maybe it is Chip. But, yes, you've got -- you're taking mills in and you're taking mills out. We have or we used to have a mill that we ran in Maine and that was part of the '04 numbers, and now it is out. We're now converting Hayward out of the Brownfield plant and into whatever. But if you just take all that to puts and takes, this is a discussion I have regularly with our Vice President of OSB, we feel we're at a run rate of about 250 million in terms of improved benefit from the Brownfield.

So 250 million as of today. And then if we were to look forward a year from now, where would that be, up 400 million, 500 million?

I don't think I am ready to speculate on that. It depends on the timing of these jobs that we put in this year.

Okay. And typical question that you guys always get, obviously with all the cash on the balance sheets, anything new that you guys are looking at in '06, anything changing with you're thinking there or it's kind of more of the same strategy with the cash?

I think it is more of the same. As Rick talked about, we are regularly reviewing the dividends and we're regularly reviewing further share repurchases with our Board and with the management. We continue to be pretty aggressive in looking at acquisition candidates, although we haven't seen any. And we've continued to take advantage of internally generated ideas like this OSL, which is a pretty big investment and a step-up on a new product line, so we're doing all of those with the [caption.]

And I think my sense is, is that as we go into this year I think there is going to be a few more reasonable opportunities that surface. I think some people that are running business products businesses are getting closer to figuring out what they want to do strategically, which may then provide opportunities for people like us that have a war chest that we can put to work.

Okay. And just really quick on the OSB business, any if you were to compare where you are in terms of backlogs versus this time last year, any better or worse or tracking at about the same level?

I think the way you have to look at that is any -- the first quarter activity is almost entirely tied to weather, and we've had a pretty warm winter so far. So we've got a lot of activity going on. Last year in January was also a pretty good January and then it turned wet in February. Now I will give you a heads up that with the warm weather in the late stage there is going to be problems with wood for the industry because you're going to be getting a break of much earlier than what we would anticipate. We haven't had the hard freeze that we've had in the past. So we are a little concerned about that.

Right. So perhaps some increased wood costs earlier on?

It could be wood costs and it could be outages. We are actually in pretty good shape for wood. Our inventories at the end of the year were up about 16 million over last year per logs, but it is something that we're all watching.

Okay. Thanks.

Thank you very much, sir. Ladies and gentlemen, our next question comes from line of Christopher Chun of Deutsche Bank. Please proceed.

Thanks. Good morning, guys. First of all, I wanted to ask about your working cap -- capital situation. It looks like it is up almost $300 million and it looks like a big chunk of that is just growth in cash. But even if you net out the cash it looks like it is up quite a ways. Can you talk a little bit about that and whether there might be opportunities you [inaudible] to cut that down?

You were kind of breaking up there. Can you -- your question was on working capital?

Yes. It seems to be up quite a bit year-over-year and it looks like a big chunk of that is just growth in cash. But even net of the cash it looks like it is up over $100 million, and I am wondering what the reason for that was and whether there is opportunity to reduce that going forward?

Let me just talk about it in kind of the elements. As you said cash in investments are up based on the returns that we had. On the inventory I talked about logs being up about 14 million over the same period last year. Inventories and finished goods are up about $18 million, about half of that in OSB, so there's about 34 million that we would expect to have come down in the first quarter. And then on the receivable side we're actually down there. Nothing really stands out as being a problem. Now, we did have a reduction of the current portion of long-term debt, and so that could be what you're looking at.

Yes. Okay, Curt --.

Because we did bring back -- we did buy the bonds back in the third quarter.

Right.

160 million.

I just have a basic question about your volume comp in OSB year-over-year. It looks to me from the press release --.

[Interruption] No, I'm not done yet.

-- that you were up a bit.

Production volume, yes.

Oh, maybe that's the difference, production volume versus sales volume. And then I am looking at your slide which says that you were down a bit.

Right. It's production volume.

So production was up but sales were down?

Volumes were down, right. And that's why we had higher inventory at the end of the year.

Oh, okay, that explains it. And then on your Chilean expansion.

Yes.

Can you talk about what market that will serve?

Well, today our Chilean operation supports principally Chile and a little bit of export activity into the neighboring countries in South America, as well in the Far East. There is a preferential trade agreement between Chile and Korea. And one of the advantages from a freight standpoint is a lot of Korean goods come into Chile and go back empty and so we get very good rates going into Korea.

The expansion is intended to continue to support the Chilean market where about 18 to 19% of the homes are now built with wood frame construction using our products versus 0 in 1999 when we first went down there. And also, expansion opportunities in Peru and Argentina would be the first two South American countries that we'll be pursuing more aggressively.

Okay. And finally on your share count can you tell us how many shares you had outstanding at the end of the year basic and diluted?

I can tell you in just one second. Outstanding at the end of the year was 105,780.

Was that basic or diluted?

Actual.

Okay. Thanks.

Thank you very much, sir. And, ladies and gentlemen, that will conclude our question-and-answer session for today. We would like to turn the call back over to our speakers for any comments they may have.

Let me make a couple comments. One, I appreciate all the interest and attending on the call. As usual, Mike and Becky are available for follow-up questions and we look forward to a successful 2006. Thanks very much.

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