Louisiana-Pacific Corp (LPX) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Louisiana-Pacific Corporation's earnings conference call. My name is Carol and I will be your coordinator for today. At this time all participants are in a listen-only mode, we will conduct a question and answer session towards the end of this conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Curt Stevens, Chief Financial Officer. Please proceed, sir.

Thank you very much and good morning to all of you. We appreciate you joining us on our conference call to discuss our financial results for the fourth quarter and the full year-ended December 31st, 2006. As Carol mentioned, I am Curt Stevens, Executive Vice President Administration, Chief Financial Officer. With me today are Rick Frost, LP's CEO; Mike Kinney and Becky Barckley our Investor Relations contact. We also have today with us Jeff Holloway who won't be participating in the call as he has only been on the job for about a week but he is our new Corporate Controller.

I will start the call with a review of our financial results for the fourth quarter and the full year 2006, do the discussion about the performance for individual segments during both of these periods and provide some comments on the balance sheet. As I have done in the past I'll then turn over to Rick to discuss current market conditions, our accomplishments during last year and provide some thoughts on 2007.

As we've done in the past we have opened up this call to the public and are doing a Webcast. This can be accessed through our website at www.LPCorp.com. Additionally, as has been our practice to help with the earnings call, we provided a presentation that has supplemental information. I will reference these slides during the discussion. As a caution, this presentation should be reviewed in conjunction with our publicly available earnings release.

Before we begin, I want to remind all participants about the forward-looking statements comment that is included in our earnings release and also shown on slide 2 of the presentation. We also will be using some non-GAAP financial information, and we have provided language to that effect on slide 3 of the presentation and in the appendix have provided the detail. I'm not going to reread all these statements but I am going to incorporate them with this reference. I'm going to start my discussion on slide 4, that shows Q4 2006 results.

For the quarter, we are reporting a net loss of $25 million or $0.24 per diluted share. Net sales from continuing operations were 370 million for the quarter. For the same period last year reported net income of $85 million or $0.80 per diluted share on sales from continuing operations of $624 million. In prior discussions, we've talked about the leverage that OSB prices provide to help these earnings. For the fourth quarter the price decreases accounted for over $160 million in lower sales and pretax profits compared to the same quarter last year.

Slide 5. Each of these reported periods do have several minor special items that are generally not attributable to our ongoing operations. Let me just briefly summarize. We did record a loss of 2.1 million associated with a change in the method of estimating our corporate compensation liabilities. Recorded an additional gain of 1.9 million in insurance recoveries associated with damage and business interruption from hurricane Rita that happened in 2005. As a reminder, we recorded the first portion of this recovery last quarter which gave us a total settlement of about 4.7 million. We also reported in the quarter a charge of 4 million associated with product related warranty reserves, primarily by expected increases in administrative and other costs associated with these future claims. All these items are detailed in footnotes 2 and 3 of our earnings release.

Slide 6 presents our results for the full year. For the full year, reporting income of 124 million or $1.17 per diluted share. Net sales from continuing operations were $2.2 billion. For 2005 we reported net income of 456 million or $4.15 per diluted share on net sales from continuing operations of 2.6 billion. As a reminder, results for 2005 did include a one-time reversal on deferred tax liabilities of $94 million or $0.86 per diluted share, associated with a planned repatriation and completed repatriation of foreign earnings as provided by the American Job Creation Act of 2004. For the year, lower pricing for OSB compared to 2005 reduced both our sales and our pretax profits by $390 million. The remaining decline was related to lower sales volumes in both product lines with the exception of OSB which had higher volumes due to the impact of our Peace Valley joint venture mill.

Slide 7 presents a reconciliation of special items for the full year. We compare the full year-ended December 31st, adjusted net income excluding these items from continuing operations was 128 million in 2006 or $1.21 per share, compared to 388 million or $3.54 per share in the same period last year. I mentioned earlier, we have detailed these in our footnotes 2 and 3 included in the release.

Slide 8 reprised the reconciliation of the tax provision and the related tax rate for Q4 of 2004 -- or 2005 and 6 and the annual comparative numbers. For the year our tax rate was approximately 16% in continuing operations. The 16% rate for 2006 relates to the recognition of the U.S. manufacturing deduction that enacted in 2004, interest deductible for income tax purposes that eliminated the consolidation process, corrections of prior year estimates due to the completion of IRS examinations, impact of the translation of Canadian operations and a reduction of LP's Canadian deferred tax liabilities due to an active decrease in the statutory income tax rate in Canada. All these items have had a much more significant influence on our tax as our income level is lower. Going forward, the same will be true. At lower income levels the rate can vary significantly. Let me now discuss performance of each of our segments.

Slide 9 of the presentation shows the summary of our OSB segments. OSB price compared to the same quarter last year was down about 1/2, well, 50%. For the same period, volumes were down by 8% due to the significant curtailment taken in the fourth quarter as a result of poor market conditions, plan maintenance and outages related to planned capital projects. As anticipated, we did take the equivalent of 240 mill days of production out of our system in the fourth quarter. Our mill in St. Michel Quebec was down for the full quarter and is still in a curtailment mode. On a quarterly comparison, pricing accounted for about $160 million in reduced sales and profitability for the segment. From a cost perspective, our mill level costs were at or slightly below the same quarter last year. However, the reported costs are higher due to a direct result of the down time taken during the quarter. For the year, sales in this segment were down by 348 million and profits were lower by 419 million. Pricing reductions accounted for most of this profit decline or $390 million.

Slide 10 is our Siding segment. This includes our Smart Side which is OSB Siding products. Hardboard Siding and commodity OSB still produced on one line at our Hayward mill as we continued to converge its operations, [inaudible]. For the quarter, sales volumes were down 24% in Smart Side compared to the same quarter last year, 46% lower than last quarter. Sales prices were up slightly compared to the same quarter, flat sequentially. In Q4 we did curtail most of the OSB production from our Hayward facility, so at about 26 billion feet short of what we had in the same quarter last year.

Hardboard sales lines were down 21% for the same quarter last year and 24% lower than last quarter. Average sales price was up 8% but down 2% sequentially. Increase in price is primarily attributable to a positive change in our product mix. During the quarter we did undertake a detailed review of necessary warranties for these product lines. Overall for the segment there was a slight take back to income although individual product lines experienced different results.

To avoid confusion in the presentation we have adjusted the sales price comparison to remove this impact. The decline of volume from both of these segments is directly attributable to lower building activity in the fourth quarter, and this was both the new home construction as well as repair and remodel. For the year, sales in this segment had volume growth, increasing by 9% to 493 million, compared to the same period last year and almost 50% higher profit at $67 million. A portion of this increase in volume is related to the conversion of our Hayward, Wisconsin mill to Siding.

Slide 11 of the presentation is a summary for engineered wood products. This includes our laminated veneer lumber and our I-Joist, which include our JV with Abitibi plus other related products. Profits in this segment were 4.6 million, down from 8.5 million reported in both Q4 of last year and from last quarter. During the first part of Q4 demand for EWP products were lower due to the reduced housing activity I spoke of a minute ago. However, we did see increased demand near the end of the quarter, due we suspect as dealers needed to replenish depleted inventory.

For the quarter, LVL lines were down 29%, I-Joist volumes were lower by 26%, compared to Q4 of 2005. For the year, EWP sales were 392 million, about 10% lower than last year, primarily volume driven where we saw 14% lower I-Joist volumes, 9% lower LVL. Profits however for the year were 33.2 million, compared to 34 million last year. Other building products are summarized on slide 10. This consists of our composite wood decking, our interior molding business, our Chilean operations, cellulose insulations, and joint venture U.S. Green Fiber, resource and non operating facilities. We did sustain a loss in this segment due to poor performance in our composite decking business.

In Q4 we did complete the marketing work that we spoke about last quarter, brought the Lean Six Sigma project to a conclusion, identification and key process parameters and the methods to integrate controls into the operations and mostly completed the development of our new railing product. Our sales force is engaged in both our direct customers and the contractors who are so influential in this decision making process. We either retained or replaced key dealers and have the marketing plans in place to support our growth initiatives. During Q4 we also increased our warranty reserves associated with earlier generation products. As I mentioned earlier, we have adjusted the sales price comparisons to remove the impact of this warranty reserve change.

For the quarter, sales volumes were down almost three-quarters in our decking business, compared to the same quarter last year, while sales prices were slightly higher. In 2006 we made the decision to move away from an industry practice of win or buy, a program which allows for higher sales in otherwise slow periods. But has the negative impact of making more difficult to gauge distributor performance and consumer demand. For comparison, this shift in strategy certainly impacted the volumes in Q4, 2006. Going forward, we do think our current approach will help us to better understand our true channel performance.

For the quarter, sales volumes were down 18% in our molding business compared to the same quarter last year, 8% lower than last quarter. Sales prices were down 10% and down 11% sequentially. As we discussed the last several quarters, we've been gradually phasing out of the Home Depot business which affected our volume. We also did complete a major reset at a significant retailer at a fairly high short term cost, about 2 million. We are confident this will provide a long-term benefit.

Chilean operations continue to make money. There's quite a bit of activity in Q4 in the dismantling, packing the equipment in our shuttered Mancos Colorado mill for delivery for the mill, second mill in Chile. Construction on that mill is under way and we still anticipate a start-up late this year or early 2008. In the meantime, we are seeding foreign markets with production from several of our Canadian mills to create the demand that will eventually be satisfied when this mill is operational. Under accounting rules these costs cannot be capitalized related to the dismantling but must be expensed. This quarter was pretty minimal but for the year was about a $2.2 million spend.

Our U.S. Green Fiber joint venture was profitable in Q4 but fell short of our expectation as the important winter retail season fizzled due in large part to mild temperatures across the U.S. We also believe that the slowing housing market had a negative effect on its demand. For the year, sales for these operations were down about 15%, with a loss of $6 million compared to profits of 13 million in 2005. Most of this reduced performance is attributable to our decking operations.

Looking at selling, general administrative costs, they were 44.4 million for the quarter, an increase of 9% over the same quarter last year, and this was primarily due to legal costs associated with the OSB class action lawsuit. These expenses were included in the results of the OSB segment. For the year, total SG&A expenses were 167 million, an increase of 7% with stock compensation accounting for about 4 million of that increase. For unallocated SG&A, this is the non business level, costs were down about 4 million in the fourth quarter, compared to the same period in 2005. This decrease was driven by lower legal costs as we incurred costs in Q4 of 2005 in our successful defense of the Nature Guard lawsuit. For the year, SG&A costs were about 95 million, an increase of 8%. The increase for the full year is primarily related to legal expenses incurred in Q1 to complete the Nature Guard suit.

Slide 13 of the presentation shows some balance sheet statistics, cash, cash equivalents of 1.15 billion, working capital was about 1.2, net cash of 837 million, and year-to-date we spent about 245 million including investments in our joint venture operation. In 2007, we expect capital to be in the 260 to $280 million level as we complete the projects currently under way. Book value per new share was at 19.84. As I mentioned earlier, the appendix, slide 15 provides the necessary calculations of non-GAAP financial measures.

With that, let me turn it over to Rick Frost who will discuss what happened in Q4, his analysis of the market and some comments on 2007.

Good morning, everyone, and thank you for your interest in attending our Q4 earnings call. It's kind of a gray day in Nashville today, but it's going to get above freezing after having about a week of real winter around here. Curt has gone over most of the numbers, so I'm going to divide my comments into three areas. First, to describe to you the current market as I see it and feel it right now. Second, to rehash a few of the Q4 activities, and third, a general look forward into 2007.

So, the current market first. If you remember on our last call, I think I described the next year as I thought it was going to be a slug through the mud. I think nothing has changed on that, other than the mud might be a little bit deeper. The home building market is still down and we will be operating in a tough environment for a while. Maybe a year or more. I wouldn't be so bold as to try to call the turn or the inflexion point yet. We made our operating plans for this year's business plan, '07, based upon 1.6 million new residential starts for the year and on our marketing people's latest triangulation, they are certainly not over that.

I think some indicators of the market are as follows. There still exists an oversupply of finished but unsold inventory of newly-constructed homes which still needs to be worked off. I think we have somewhere between 7 and 7.5 months of existing homes inventory for sale currently in the country. There has been a decline in production builder new home orders, reports of declines in sales prices of new and existing homes in various regions. There's been an increase in sales incentives that are being offered by the builders to move product and then we've all read about the dropping of options on land contracts by some of the larger production builders.

Sellers of homes right now are in what we refer to as sticky period. What that means is that basically someone that's got their house up for sale wants what their neighbor got for their house a year ago. And that's just not happening. It also puts buyers in a wait and see mode, to see if prices will continue to decline. Also, with existing home sales down, repair and remodeling has slowed a bit as well.

My assessment of the channels right now is that they're very lean and that they're in no hurry to take a position. I think it's reminiscent of the last downturn, the '01, '02 period, in which at LP we coined the phrase inventories have gone from just in time to almost late. We faced tough competition in all of our product lines, as I think none of the competitors out there want to lose share or give up any ground for fear of being replaced or being shut out.

Moving now to a brief discussion of some Q4 activities, as Curt said, LP took production curtailments across most of our product lines. In OSB, we took a combined 241 million -- 241 mill down days due to lack of demand for OSB, as well as planning capital and maintenance outages. Our St. Michel OSB mill up in Quebec was down all quarter, an amount accounted for 90 of those days. We also did curtail the second line at Hayward for more rapid capital deployment to support our conversion of that second line to Smart Side production capability. At Engineered Wood we reduced shifts at all of our I-Joist plants and LVL plant facilities including our JV mills. Both composite wood decking plants ran only to adjust inventory SKUs to demand as that whole category was dramatically off in Q4. And we did take our Roaring River hardboard plant down for about 50 days due to the previously discussed weakened demand in that category.

Right now, most of our mills are running with the exception of St. Michel OSB. But we do review this regularly with an eye for our customer needs. You may have read about the 20 inches of rain that fell in east Texas over the last month, which also caused some wood outages in our east Texas mills and that amounted for about 13 days so far. And we lost about 10 days earlier in the month at Maniwaki due to an equipment failure. Right now, if we take what we've got and then look through the rest of the quarter, I think we'll probably have about 180 mill days of down time in Q1. Of course, 90 of that is St. Michel, and the remaining 90 days due to either capital and maintenance down time, as well as market-related down time.

On a very bright note, we ended up '06 with our best safety performance ever in the history of LP. And believe that this positions us at the end of '06 as the safest company in our industry. Our TIR was a phenomenal .94 and even more impressively a .43 for Q4. We actually sustained with 5600 people only 4 recordable incidents in October and only 1 in the month of November and 1 in the month of December. That's at over 30 sites. We're very proud. It's been very hard work but it's been very satisfying work to put us in this position.

As Curt reported, we lost money in OSB and decking and we made money in engineered wood and siding, although not as much as we made last quarter. Because of the weakened demand for OSB, our revenue was lower in Q4 and for the year, and on the cost side, 241 days -- mill days down in OSB is a big hit to a system that's built on efficiencies and economies of scale. Down time does have a severe cost implication that goes with it. But our mills cannot inventory more than about a week's worth of production, so we do need to curtail in an environment of slow orders. In decking, there was a very low seasonal take-away in Q4, which resulted in both plants experiencing significant down time.

On the capital front, as Curt said, we spent about $245 million in '06, and we made progress on several major projects and some progress against our Brownfield plant. We did throttle back some of our opportunities for investment and focused our attention more on yield and cost improvements in the mills. Construction on Clark County OSB is under way and we are still planning at this time for a late '07 start-up. Our conversion of the Holton OSB mill to oriented strand lumber is under way and we're planning on a Q4 start up on that as well. And our new OSB mill down in Lautaro, Chile is under construction, and I think we'll probably look at an early '08 start-up, and we have also, at the same time down there, opened up a new sales office in Peru and we are making arrangements in Korea right now. We intend to complete all of these projects as we have planned, and we have set aside the funds ahead of time to complete them because they support strategically where we're going.

I think looking forward at '07 to put it in very plain English, I anticipate a tough year for earnings for LP, based upon the low number of homes expected to be built and the slug of inventory in existing homes which affects the repair and remodel business. I'm going to tell you, that's not to say we're discouraged. We look at our business plan and we view '07 as a set-up year for LP. We're going to put capacity in front of all of our businesses and we are working hard to become a more market and customer centric organization. And our intention is to try to take share, and this sets us up for hitting the recovery when it comes in full stride. Our sales and marketing efforts are aimed at providing more valuable and lasting relationships with the more important of our customers. We're continuing to build our brand and we actually intend on taking share during these difficult market conditions. So it might be worth our time for me to give you a few thoughts by product line.

In OSB, structural panels remains in a highly competitive state because of what I have coined the double whammy. We have reduced demand on one side and new capacity coming in on the other. Even when new housing starts to pick back up, it's my belief that commodity OSB pricing will respond slower than the other products whose demand is correlated directly to new home construction. So LP is positioning itself purposefully with an aggressive approach to growing our specialty OSB products. Such as our TechShield Radiant Barrier product and our top notch high performance and Orange Plus subflooring. As well, the conversion of our Hayward mill to Smart Side production and our Holton mill to OSL will take some of the pressure off of sheeting.

In Engineered Wood, I think that lower raw material costs for both web stock and lumber for flange and veneer for flange will help that product category. We are also developing and rolling out right now a new design in engineer software to increase our value to the existing customers and finding it a good selling tool to attract new customers. We're also looking to capture share by approaching the big builder with more of what we call a one LP approach, bringing our product offerings together to add more value to the end customer. We can offer right now OSB, value added OSB, flooring systems, rim board, LVL and we'll soon be able to add oriented strand lumber products and use the collective ability of that product array to create distinctive value. The completion of our OSL mill in Holton will give us a third product line of Engineered Wood Products which will allow us to also better serve the customer.

In Siding, the conversion of our second line at Hayward will allow us to push harder this segment. Particularly, we expect to grow share in our trim products, software products and fascia products that cannot only be used with our own Siding, but also with Siding technologies offered by other people. Canexel hardboard produced in Canada is moving very well and our expansion of that capacity last year presents us growth opportunities this year and forward. And we will also be implementing some new proprietary technology into our hardboard offerings in the U.S. for broader incorporation into our overall Siding business.

Decking had a tough year last year. I think after blowing it with what we would say was a bad strategy, we're trying a different tact in '07 and we're aligning our sales and marketing efforts to pull product through distribution by targeting the installers this year, where last year our effort was to focus on distribution. Our discovery there is that distribution was relatively passive in that arrangement. We're also launching a new Crystal White Railing at the International Builder's Show, which starts tomorrow, and that is a railing system that will accompany our WeatherBest product offering.

So in conclusion, the reality is that this is a very poor market right now, but we are in a pretty good position to take ground during this battle. As I say around here, our magazines are full of bullets and the barn is full of hay. Purposefully, we have a balance sheet that gives us staying power in these conditions. We do have the financial ability to take share in this market and we have the manufacturing capacity to service that increased share when the building gets -- building market gets hot again.

We are optimistic about what we think we can accomplish during these tough times. We're being prudent on the cost side but we're focusing more on offense than hunkering down on defense. As well, we are excited about the opportunity on the cost and process improvement side that's being discovered by our Lean Six Sigma teams.

And with that, let me turn it back over to Curt.

Thanks, Rick. Carol, I think we're ready for questions, if you would go ahead and queue, please.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of George Staphos with Banc of America Securities. Please proceed.

Thanks, hi, everyone, good morning. Couple of questions to start. Just quickly doing the math, given the days curtailed, construction days, it seems like 8 to 10 of your systems have been down out in the fourth quarter, first quarter, guys. Is that a reasonable estimate?

You know, I haven't run the percentages, George, but that sounds about right.

Okay. Now, realizing that when you do take down time, you tend to have a fairly heavy cost burden up front, does that cost burden alleviate at all, assuming the days down doesn't change here, but does the cost associated with down time lessen over time or is the burden basically the burden until you start the mill back up?

Well, it depends on how you take the down time. If you're taking mills down intermittently then you really don't get rid of the cost burden. You have you to sit down, to alleviate the cost burden you have to make a longer term decision around a facility or a couple of facilities where you can actually then let most of the costs go. So it kind of depends how you do that. Obviously, the cost burden of having St. Michel down for an extended period of time allows you then to deburden some of the costing. But if you're going through and taking one mill down for two weeks or a couple mills down for three weeks or if you encourage -- incur weather outages, it's very hard to take the costs up.

Rick, obviously you have a much tougher job ahead of you than we do trying to evaluate and run our spreadsheets, but given how tough the environment is as you see it right now, what are some of the challenges associated with maybe not taking a longer term view with some of the other mills and taking a St. Michel approach with some of the other ones, what are you worried about?

Well, our first consideration is our customers. I think you -- and also our strategy and our strategy is to create a different place for LP with the larger consumers of our product. And that means meeting their needs. And so there's a great amount of strategic resolve to make sure that we meet the customer's needs ahead of looking at taking a mill down. So what we have to do is we have to start with their need and then we have to back out where can we alleviate the cost situation and where can we take the down time. So, proximity to market, meeting orders, making sure that we run the right plants to produce the value-added products which are still going out the door relatively well, are the challenges that we have in balancing that.

Okay.

I think we're all going to -- the longer this lasts, have to sit down and have to -- the phrase that was used probably five years ago was, 'what's the next mill on the bubble?' And so we have to continually go through that assessment in our own system, because you have to answer that question, is sit down and say do you have another mill that is very heavily cost disadvantaged or disadvantaged perhaps by the market that it sells into, and then say is there a demand for that product or not.

Okay.

And we're going through that on a weekly basis.

Got you. Two last quick ones. One, this quarter I think the realization [inaudible] whatever, 145 bucks, your cost roughly was more like 170. Based on history, obviously not projecting out to the future, but based on historical precedent, how long would you expect that sort of situation to last, and this year do you expect that you'll be cash neutral or do you think that you'll be burning cash? Thanks, guys.

We're a brand new ground here. This is -- actually, I'd be lying if I told you I wasn't surprised at where and how long pricing has gone. I think in all of our prior street presentations, there is an an anticipation by me, any way, that we would bounce off of cash costs. And although we might not stay down there, I didn't think plunging through those for any period of time would actually happen. So this one is going to be pretty hard -- pretty hard to guess. I think there's some factors in play here, everyone's got a hypothesis about it, but I do believe that there appears to be, because of the consolidation that's occurred in the marketplace on the customer end, and in the distribution end, everyone's coveting their customers perhaps, it feels like a lot more than occurred back in '01 and '02, and so there's more strategic resolve to not let somebody get your place in the line. And so I think with the new capacity coming in, this could be an extended period of pain.

Your next question comes from the line of Mark Connelly with Credit Suisse. Please proceed.

Thank you. I wonder if you could just talk a little bit, Rick, about the opportunity you see with the balance sheet and what you've referred to as the war chest? Clearly, assets are getting cheaper but can you talk about your goals in redeploying that money in terms of whether you want to rediverse-- diversify this portfolio? You know you talk about taking share, but, would that also apply as you're looking at acquisitions or do you want to broaden this thing out?

Well, we haven't changed much in our party line around what the use of the cash is for. I think that, obviously, in this kind of a situation where profits are hard to come by and we do have a very aggressive capital program, as Curt said, for '07, our priority will be to complete those strategic Green Field commitments that we have. That will be our top priority. And we are continuing to prospect for opportunities in the marketplace. I think, until we can get a feel for how long the situation can last, I know that my appetite for bigger expenditures is a bit dulled. So I think what it -- I think we still have our head up and we're looking around for opportunities, but I'd like to have some sense in my own mind of what I see 2009 looking like before -- I think it just falls back the size of the opportunity that we might bite off, until we get a better feeling in our own head around what 2009 looks like.

Okay. And if I could just ask you one more question on decking, and then I'm done. You've talked about the shift in strategy, but a couple years ago before you took over, that was viewed as a pretty attractive strategic growth area. Is it fair to say that your enthusiasm for continuing to invest in that business is down too?

Well, as I said on the last -- well, actually I've said for about a year, it's an exciting product category but the question remains is the view worth the climb. It is a highly fragmented market, and as of yet we haven't figured out how to make money at it. We are working very hard to promote what we think is one of the best products on the marketplace, but we need to figure out how to do that in a way that there's a margin at the end of the game. And so I don't know that our zeal for it is less. I can tell you that I think my board wants to see some profits before they put any more money into this business.

That sounds fair. Thanks, Rick.

Your next question comes from the line of Chip Dillon with Citigroup. Please proceed.

Yes, good morning.

Good morning, Chip.

First question is, we know there were about six new OSB plants that were slated to start up and I believe we've had two very clear at least deferrals. I know the Huber one and the Ainsworth one up in Alberta. Are you assuming that the other four plants, which I believe are Martin, yourself, and two from Grant, and I think even a fifth one from Tolko, are they all expected to start up as advertised, do you believe?

I think you got to go with public information on that. I'm hesitant to sit down and walk through the list of what we think will work and what won't. So, I think you can glean the public announcements probably as good as I can.

Okay. And that would, of course, be consistent with your view that this will be another tough year. Let me ask you this, we agreed that the industry clearly generates negative cash right here, are you surprised that you have not yet seen more permanent closures and do you think it's just a matter of time before we do?

Well, I mean, I think the basic premise one has to go on is that people are going to have their own tolerance for blinking, and as I said a minute ago, my surprise is that -- I don't want -- actually, I guess, if you look back and try to analyze what's gone on, most people went into this relatively flush. As I said, there appears to be more strategic resolve which, my hypothesis is, it's because of the consolidation at the end of the chain, and so people are coveting their position with their customers longer and so it -- everybody's got to make up their own mind on their tolerance for pain.

Now, I guess as another way of looking at it is, in the past we've seen mostly plywood, in fact it's about only plywood capacity shut down in previous down turns. And there's still quite a bit out there and would you expect that to also be the case, that there might be -- or do you think there just aren't -- that these mills have certain specialties to them that this time around the shut downs will have to be OSB? I mean in other words, aren't there still a lot of plywood plants that you'd have to say are suspect?

I've got some theories around that, Chip, and we'll probably have to keep working on developing which ones make sense or not. But the things I'm percolating in my head around plywood are as follows. I think one of the reasons why it's been a bit surprising is that plywood is a finite resource now. You don't have a bunch of new capacity announced, so that I think when actual down time is incurred, that it's felt. I think, as I said with the consolidation of the channels and the customers, there's more strategic resolve around hanging onto what you've got.

I think that the whole structural panels market went into this downturn more flush than they did before. There has been an obvious consolidation on the plywood side of the structural panels business. And also the greatest reduction in demand and there's more to this that we're just trying to figure out, but the greatest reduction in demand has been where OSB has been the most highly penetrated. We think, anyway, that about -- OSB holds about 80% penetration into the new res market, and about, I would think, somewhere between 55 and 60% penetration in R&R. Where plywood -- and that's where your reduction in demand is taking place. Less reduction in demand in the non-residential and some of those other categories that have held up better, which are plywood strongholds.

Got you. That's helpful to know. And I guess just the last question, Rick, as you continue along with the Houlton Maine project, if you could just refresh my memory. I believe the dollars involved there are about 100 million. And what is the -- I guess the capacity in board feet and what kind of premium, kind of in rough terms would you expect that the types of products you make there would trade to say the random links deposit?

Our capacity is going to be somewhere between 7 and 8 million cubic feet. That's the way you measure that stuff. And I won't answer your premium question, if that's all right with you.

But it will be a premium product.

Yes, it will. Actually, you know what that's going to do, is that's going to predate a little bit of LVL and it's going to continue to accelerate substitution for solid saw and lumber.

And is the way to convert cubic feet to square feet, just multiply by 12 is that roughly the same thing?

I think what you ought to do is become conversant in cubic feet rather than try to use those conversions.

Why wouldn't you measure it in square feet like -- I mean board feet like you do lumber.

It's the same measurement as LVL, Chip.

It's the same -- it's the same purpose. Same purpose as LVL. So you want to keep it in that respect.

I'll change my language. Thanks very much.

Your next question comes from the line of Rich Schneider with UBS. Please proceed.

Good morning.

Good morning, Rich.

How are you? Tough market. Wondered if you could talk about CapEx going into 2008. You talked about being 200, and I think, 60 to 280 for '07. Is that going to be sort of a near term peak or do you think that will start winding down in 2008?

We haven't given any guidance for '08 but the bulk of that investment is going into the three mills that are under construction. That's completing a full year of construction on Alabama, a full year of construction on Houlton, Maine and a full year construction on the new mill in Chile. In addition that has a conversion of that second line in Hayward. So those are the big expenditures and we don't expect in 2008 -- well, we couldn't. We've already had the permit to mill to have the same level of construction activity in '08 and we don't have any permits in process.

Without giving you numbers, we're going to back off quite a bit in '08.

Okay. If you look at some of the price data you gave us on the SmartSiding area and engineered wood, pricing really didn't come down much in the quarter, yet volume took big hits. Is there a delay on the impact on pricing that we'll start to see in the beginning of 2007 or why is it that when you're taking such volume hits, pricing hasn't really reacted that much?

Well, there has been a delay, obviously. I think one would have to draw their hypothesis from guesstimating what the demand's going to be. Obviously, I think a system that has oversupply is subject to price degradation. So, what I will tell you is that we were -- have been pleasantly surprised so far this year with the activity in both siding and engineered wood. Now, the question that we have around that is this simply because inventories were brought down very substantially at the end of the year, like everybody does, and this is simply a reorder point, or are these particular product categories actually going to outperform, and we don't know the answer to that yet, but we're pretty happy in both those product lines with what we've seen in January.

Rich, I would just add, that is a price product, not a traded product, as is engineered wood. Engineered wood is probably going to have a little more price pressure. But siding is a value proposition against the alternatives. I wouldn't expect any significant degradation there.

I was wondering, you mentioned the warranty reserves and was that -- I was a little confused. Was that through various segments in the fourth quarter?

Yes, the one I talked about that was in the other was related to the class action.

Okay.

And basically, what happened there is the inspection costs for each one of those claims went up pretty significantly from the last time we ran that. And remember that's a 25 year warranty replacement program. So, this is looking at a long-term [tail] liability and adjusting accordingly. The other warranty reserves I talked about are in the product categories, and they are included in those numbers.

Could you give us the size of that again?

Siding we took a slight take-back to income as depending on the product line. But, within the siding segment there -- it wasn't much. It was a little bit in the siding segment. And then in decking we took $1.5 million additional reserve.

Okay.

Your next question comes from the line of Richard Skidmore with Goldman Sachs. Please proceed.

Good morning. Just a question, Rick. Can you just clarify on the market share that you were talking about in terms of you were gaining market share and how do you do that in such a difficult price environment in OSB?

Well, without spreading our approach throughout the whole industry in a public environment, I'll speak to it at a high level. We're being very successful creating multi-disciplined builder teams to go at the production builder with the full array of LP products, and creating a preference for those products, which then pulls that product through distribution. And we're having some success with that, and we're going at that full speed.

So it's less than just -- it's more than just competing on the commodity product on price?

Right. It's -- what we think we have not done as well as we could is we have basically sold LP products as individual products into the marketplace. What we think one of our advantages is, particularly against the competitors with a smaller array of products, is to go in with multiple solutions for people and that's being quite effective.

Just shifting, just as you have been in the industry for a long time going back to '01 and '02 when we were in the last trough of the cycle and prices really did bounce around the bottom for a couple of years, and as we look forward in your commentary on '07 it seems to be that that might be the case for '07. But the OSB market seems to have been built for sort of a 1.8 to 2 million kind of level of housing starts, if not a little bit more than that. How do we get out of the bottom of the cycle sooner than bouncing along like we did the last time for a couple of years?

I don't know. I'm kind of thinking we're going to bounce for a while.

It wouldn't surprise you to see us bounce along similar to like we did in '01 and '02, as you made sort of allusion to looking out to '09 even?

It's very hard for me to have a better crystal ball than anyone else. I think that this is going to be a hard year. As I said, I think at the Citigroup conference when I spoke up there in December, what you really have to look at is the demand coming in and then back into the permanent closures which are required. And that's going to determine this thing over the long-term.

Okay. Great.

I would say a couple other things, though. We had our focus on value added products, our Radiant Barrier products that have been very successful. Flooring products, we're trying to replicate that success. And then we are taking certain facilities out of the system. Conversion of the Hayward line two is going to be in Siding. The Houlton, Maine facility is going to be in OSL. So we are converting to new products to adjust our production.

Thank you.

Carol, we've got time for two more questions but I do want to remind everyone that Becky and Mike are available for follow-up, but we'll do two more.

All right, sir. Your next question comes from the line of Steven Chercover with D.A. Davidson. Please, proceed.

Most of my questions have been answered, actually. But can you describe the new products, once again, and then how quickly you anticipate they'll be accepted into the marketplace?

Well, the newest product we'll have is going in strand lumber, which is a conversion of the old Maine, the last of our engineered wood portfolio. As you know, we do have a competitor in engineered wood that has a similar product. We think that we will be very competitively from a manufacturing cost basis with that product.

And who is going to distribute it for you?

Pardon?

Who will distribute your OSL?

We'll put it into our current channels.

And, what about the railing? Is that going to be part of the system with decking --

It is. And we're actually introducing that tomorrow at the International Builder's Show. This is a replacement for a product that we had in 2004 and 2005. It actually provided a fair amount of marginal profitability. But in 2006 we were not able to offer that product through our contract manufacturer. But we believe that we have designed a system that will be much more user friendly for the installers and very attractive. We designed that with the input from our contractors.

Thank you.

Your final question comes from the line of Christopher Chun with Deutsche Bank. Please proceed.

Thanks. I notice that on a quarter-over-quarter basis your net cash was down about $110 million. Can you tell us how much of that you consider sort of operating cash burn and how much was working capital and other seasonal factors and one-time items and things like that?

Well, in the quarter we spent 108 million in capital.

Okay.

So I mean, you can almost look at that one for one.

Right. But you wouldn't -- you would always need to spend some capital, right?

Right. What we have talked about is our maintenance capital somewhere between 1.5 million to 2 million per facility, which would put that at about 60 million or [50.25].

Right. And then I know you've already touched on this in terms of your strategy of going ahead and trying to take market share in a down environment. But can you explain a little bit about, hypothetically, if you took the opposite strategy of trying to minimize operating losses, what disadvantage you would face when the market improves compared to the strategy that you're taking now?

I think that our focus on the customer is for a very important reason. In this kind of market environment, if you stumble, if you stumble on product quality, you stumble on delivery, you stumble on your ability to keep their shelves full, you won't get those customers back. And I think that's what Rick was talking about is, we're trying to stick with the customers that we can grow with and satisfy their needs and if you do give that up, it's going to be very difficult to gather it back. And very expensive.

Okay. Thanks for your help.

All right. Thanks everyone for your attention. A couple things I'd remind you of, Rick and Mike will be in New York on February 22 presenting at the Credit Suisse conference, and they will also be available for one-on-one meetings if you schedule through the Credit Suisse folks. I will actually be in British Columbia on the same -- at the same time, the 21st and 22nd at the CIBC conference and I'm going to have Jeff Wagner with me. I figure there will be a few questions on OSB so I might as well bring the EVP for OSB with me.

And Curt gets to go skiing and I get to go to New York.

And then the final comment is you will probably notice we did declare our quarterly dividend yesterday. With that, Carol, you can give the redial information, and as I said, Mike and Becky will be available. Thank you very much.

Thank you.

Thank you for joining today's conference. You may now disconnect. Thank you.