Louisiana-Pacific Corp (LPX) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2007 Louisiana Pacific Corp. earnings conference call. My name is Toalisha, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate 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 your host for today, Mr. Curt Stevens, Chief Financial Officer. Please proceed, sir.

Thank you very much. Good morning. Appreciate all of you joining us for our conference call this morning to discuss our first quarter results, for the quarter ended March 31, 2007. As you heard, I am Curt Stevens, Executive Vice President and Chief Financial Officer of LP. With me today are Rick Frost, our CEO, and Mike Kinney and Becky Barckley, who are our regular Investor Relations contacts. As I have done in the past, I will start the call with a review of the financial results for the first quarter, provide a discussion about the performance of each of our individual segments, and then comment on the balance sheet. Then I will ask Rick to discuss the current market environment, our accomplishments during the first quarter, and a summary of our thoughts and plans for the rest of 2007.

As we have done in the past, we have opened up this call to the public, and we are doing a simultaneous webcast. This can be accessed through our website at www.Lpcorp.com. Additionally to help with the earnings call, again, we have provided a presentation with supplemental information, and as I go through my comments I will refer to pages in this presentation.

As a caution, the presentation should be reviewed in conjunction with our publicly available earnings release, which has more detailed information in it. Also I want to remind the participants about the forward-looking statements comments included in our earnings release and shown on Slide 2 of the presentation. Please also be aware of the discussion of the use of nonGAAP financial information included on Slide 3 of the presentation, with an Appendix at the end that contains the necessary reconciliation. I am not going to reread these statements, but I am going to incorporate them with this reference.

First slide I am going to talk to you is slide 4, which presents a summary of our first quarter 2007 results. We are reporting today a net loss for the first quarter of $37 million, or $0.36 per diluted share. All of this from continuing operations. Net sales from continuing operations were $406 million for the quarter. For the same period last year, we reported net income of $84 million, or $0.79 per diluted share. Continuing operations we had income of $85 million, or $0.80 per share, and discontinued operations showed a loss of $1 million. Net sales from continuing operations in that quarter were $678 million.

During the quarter, we did record a noncash asset impairment of $5.5 million. The bulk of this charge, $5 million, was related to the decision to write down our St Michel, Quebec sawmill, that had been curtailed since the middle of last year. One other item to note on this slide is the change in the tax rate. Had the effective tax rate of Q4 2006 been applied to this quarter, the sequential performance would have been about the same. The improvement in our nonOSB segments offset the increased loss in OSB.

Before I talk about the individual segment performance, I did want to put the recent decline in new housing start activity in context. Slide 5 of the presentation shows the actual housing starts. These are not seasonally adjusted, it is the actual starts, as reported by the Department of Commerce by quarter since 2000. Year-over-year actual housing starts were in Q1 were down about 25%. For LP, this is significant because a majority of our engineered wood business, as well as OSB products end up in new construction.

Slide 6 is a summary of our OSB business. OSB price compared to the same quarter last year was down 47%. Very significant. In the same comparison period our volumes were lower by 14%, due to three major factors. Our St Michel, Quebec sawmill, or OSB mill is curtailed, and will not likely run for the rest of the year. We have production outages caused by wood shortages and maintenance aberrations, and we had the effect of the Canadian railroad strike in the quarter, which was partially offset by higher production from our Peace Valley joint venture mill. We have often talked about the leverage that OSB prices provide to LP's earnings.

For the first quarter the decline in pricing accounted for over $170 million in lower sales and pre-tax profits compared to the same quarter last year. Slide 7 graphically shows the weekly Random Lengths price for OSB, and it is reported on a weekly basis from May 1999 to the end of March. On this slide the thicker stairstep line on the graph is RISI's estimate of the industry cash costs for the production of OSB.

Since about September of last year, this has been a difficult environment for LP. We believe that the length of this downturn is likely a result of the lower demand due to reduced housing activity, while at the same time we have new capacity beginning to come online. From a cost perspective, we did see an increase in our average cost per unit during the quarter, primarily due to the decline in production volumes.

Slide 8 of the presentation is our Siding segment. This includes our OSB-based product SmartSide and our hardboard siding, and some commodity OSB is produced at one line of our Hayward mill. As we talked about last quarter we were beginning the commissioning of the second line at Hayward to produce SmartSide, and during the quarter we did do that commissioning, our sales force is aggressively seeking new business opportunities.

For the quarter sales volumes were down about 7% in SmartSide compared to the same quarter of last year, but up 33% from last quarter. Sales prices were up slightly at 4%, compared to the same quarter last year, and up 2% sequentially. In Q1, we did sell approximately 43 million sq. ft. of OSB from this segment, compared to 70 million sq. ft. in the first quarter of last year.

The decline in volume and pricing between the two quarters combined to lower earnings in this segment by about $9 million. So after adjusting for the increased loss due to OSB pricing and volumes, SmartSide results are actually comparable to Q1 of 2006. Hardboard sales volumes are down 12% from the same quarter last year, but 18% higher than last quarter. Average sales price was up significantly from the same quarter last year, and sequentially as a conversion of products to higher price and margin siding products continues in our East River plant.

Slide 9 is our Engineered Wood segment. This segment includes our laminated veneer lumber, and our I-joist operations, which also includes our joint venture with Abitibi, plus related products. Profits in this segment were about $6 million, about half of what we reported in Q1 of 2006, but up slightly from the prior quarter.

As mentioned earlier, over 90% of these products do end up in new construction, so the fall in the housing starts have had quite an impact on the volume of both LVL and I-joists, where volumes are down about 25%, very similar to the decline in housing starts. Sequentially we did have volumes slightly higher in both product lines. Additionally we continue to see weakness in pricing in both of these products for Q1 over the prior year, we saw a decline in pricing of almost 10% for both products, and we will continue to see pricing pressure going into this quarter.

Slide 10 is our Other building products. This segment continues assists of our composite wood decking, outdoor living, interior molding business, our Chilean operations, a joint venture in sales and installation, and nonoperating facilities. We broke even in this segment, as continued poor performance in our composite decking business, offset a strong quarter in Chile, profitable molding operations and a contribution from our U.S. GreenFiber joint venture.

Total selling general administrative expenses for the quarter were $41 million, which is down slightly from the amount that we spent in Q1 of 2006. For our unallocated SG&A costs, we are down $6 million in the first quarter of 2007 compared to the same quarter last year. This decrease was primarily due to lower legal costs. We had our successful defense of the Nature Guard litigation in Q1 of 2006. And lower accruals for management incentives, based on weakened market conditions.

On the tax side, as most of you know, corporations in the U.S. were required to adopt FIN 48 this quarter that had year end of 12/31. We have completed the necessary analysis and reflected the results in the financial statements included in our earnings release. We are pleased to report that this was not material for LP.

We will be including the required disclosure in our Form 10-Q, that will be filed early next month. The adjustment for this is accomplished as prescribed by the Standard as an adjustment to the beginning balance of retained earnings. For Q1 our effective tax rate was 46%. The major reconciling item, compared to the statutory rate, related to the Company's foreign debt structure and state income tax.

We had another new accounting standard that we adopted this quarter, it was related to plans for preventative maintenance. Basically under this rule you can no longer accrue for future periodic maintenance costs. For LP we had a regular practice of accruing for the media replacement in our RTOs and environmental equipment used in our OSB operation.

To comply, we needed to capitalize the prior purchase of this media, as well as reverse the current balance of the liability, which was accrued for future replacement. This adjustment needed to be made against the opening balance of retained earnings. The impact to LP was about $3.3 million. No P & L impact, but it did increase retained earnings as prescribed by the standard.

Slide 11 is the balance sheet. A couple of things on the balance sheet. Cash and cash equivalents remain at over $1 billion. Working capital about $1.1 billion, Net cash was about $650,000, and in the first quarter we did spend $54 million. $54 million including the investments in our joint ventures.

As we said before, we expect our capital expenditures for the full year to be around 260 to $280 million. Book value per ending share was $19.35. As I mentioned earlier, Slide 13 shows the calculations of the nonGAAP financial measures discussed in this review.

Before I hand it over to Rick, I do want to mention a gain that we will be recording in the second quarter. We have been informed that the insurance company that was involved in a coverage lawsuit related to our hardboard siding has decided not to appeal to the U.S. Supreme Court, the Fourth Circuit Court of Appeals's decision affirming an earlier judgment from the trial court. This judgment has been disclosed in our public filings for the last several quarters. We anticipate that we will be receiving payment this week of approximately $19 million for this judgment, fees, and interest. Additionally, the insurance company will be participating in future payments under the hardboard settlements for specific vintage products.

With that, let me turn it over to Rick, who will talk about what happened in Q1, his analysis of the market, and the outlook for '07.

Good morning, everyone. And thank you for attending our earnings call for Q1 '07. It is a beautiful spring morning in Nashville. Curt has gone over most of the numbers, so I am going to direct my comments in three areas. I will talk about the market environment as I see it right now. I will give you some additional Q1 information on our activities, and talk a little bit about what is in store for the rest of 07.

First, today's market. Unfortunately, 2007 is turning out to be what I predicted in our last call, which is a very challenging market, due to the fall in new residential construction activity. I think the addition to that recently was back in February, we were yet to be concerned about the effects of the problems that are occurring in the sub-prime lending industry, which I think is certainly a threat to prolong the downturn in housing.

Based upon the numbers that I have reviewed recently, new housing starts in Q1 of this year were down somewhere between 25 and 30%, compared to the first quarter of last year. From my way of thinking, the significant effect of this decline is basically related to the unsold inventory of homes, both new homes and existing homes. New, single family homes for sale stood at around, a little bit of over 450,000 units at the end of the quarter, which is about an 8-month supply.

This is about double the inventory that we had during the robust period between 2000 and 2005. The inventory of existing homes for sale is also well above the normal level. I think I read recently it is about 3.7 million homes, which is about a 7.3-month supply. And we would like that number down between 5 and 6. Until this inventory is absorbed to a more normal level, I think that we are unlikely to see a significant uptick in new starts. If we need any other evidence that there is a slow down in the new construction, one has only to review what the builders have been reporting lately.

The Top 16 public builders, if you look at year-to-year comparisons in Q2 of '06 comparing to Q2 of '05, we are down 31%. In Q3 they were down 40%. Last quarter they were down 35%. And I only have numbers on the five that have reported so far. But that average is down about 28% for Q1 '07 to Q1 '06.

During the quarter, repair and remodeling activity was fairly solid, although we noticed that the major retailers did show lower same store sales. I suspect that much of that is due to the lower commodity prices of building materials, as well as that part of their business that goes into new residential housing. The brighter spots in the market continue to be multi-family, light commercial, and light industrial. While we do have some business in these sectors, it is currently not a large part of our sales.

So we are putting some resources on multi-family, and we are studying how and if to try to attack light commercial with our product offerings. My assessment of the distribution channels is that they continue to be very lean, and they basically see no reason to increase their product positions at this time, as most building materials are in an oversupplied situation, and prompt deliveries are available.

A little more detail around Q1 activities. Last quarter we took production curtailments in most of our product lines to manage inventories with demand. In OSB we took a combined 161 mill days down, to limit our inventory build to execute planned capital and maintenance work. And in some cases, to avoid paying higher prices for pulp wood. Of course part of that 161 days, 90 days of it was our St. Michel OSB mill in Quebec, which was down all quarter. That was 90 days, and we have made the decision that that mill will remain down for the remainder of this year.

Additionally, we did experience disruptions caused by the CN railroad strike, which occurred early in Q1, and we had some other operational problems which have been remedied hence. As a side note, I don't know if you followed it or not. But the CN had another new strike about two weeks ago, which lasted about a week. And having had the experience of going through that in Q1, we did shut one of our mills down for a week. And it did affect the product flow in several other mills in Canada. The CN is back to work now, but currently we have noticed that the CP is having negotiation breakdowns with their maintenance unions. So we will be monitoring that side of the country closely.

In Engineered Wood, we reduced shifts at all of our plants, I-joists and LVL including our JV mills, to adjust to the reduced demand. And in our composite wood decking business, we have begun to implement what we call a one plant scenario. Where we recently stopped production and shut down our Selma, Alabama mill, and we will produce only from our Meridian, Idaho facility. When demand picks back up, we will have the option to restart that Selma mill, if needed.

In Hardboard we took our Roaring River plant down for several weeks, due to weakened demand early in the quarter. Recently with a competitor abandoning that product segment, demand has picked back up for that mill, and we are back in full operation. We are planning on running most of our mills, with the exception of St. Michel and Selma in Q2. But as we say, we do review this on a regular basis.

We have only 8 CapEx of maintenance down days planned for Q2, but we are braced for as many as 18 more market-related days, due to either the market or to anticipated railroad disruptions. Our Q2 unit costs should be positively affected by having fewer down days. We have had our Swan Valley OSB mill down for one week, in anticipation of the latest railroad strike. That mill started back up yesterday.

On a bright note, as we tell you every quarter, we did end up with '06 with our best safety performance ever in the history of LP. We followed this in Q1 with another excellent performance with a TIR of 0.81. And we just learned from the American Panel Association, that six of our LP plants will be recognized as Industry Award Winners for our safety performance. In addition to that our Chilean operation accomplished 1 million incident-free hours in Q1, which is an extremely significant accomplishment, only done by one other mill in the LP circuit in the history of LP.

As Curt reported, we did lose money in OSB, and we lost money in decking. We made money in Engineered Wood products, and we made money in Siding. More than last quarter, but not as much as in the first quarter of last year, obviously. Our capital spending continues to be focused on the completion of our three new mills that we have under construction. Clark County is underway, and we will be planning to start that mill up about the end of the year.

Our conversion of our Holton OSB mill to OSL is underway, and we plan for that start up at the end of the year as well. And our new OSB mill down in Lautaro, Chile is under construction with start up at the end of the year, or in early 2008. Now as I look forward to the rest of the year, not much positive has occurred lately in the marketplace since our last conference call. Housing starts are down. Not much of the unsold housing inventory has been absorbed yet, and then we have this new phenomenon of the sub-prime mortgage market, which I think is likely to have some effect on the number of qualified home buyers until that problem works its way out.

It is going to be a tough year for earnings at LP. But we are continuing to stay our course and implementing our publicly-outlined strategies. I think we said last time that we view '07 as a set-up year for us. It is a year where we are putting capacity in front of all of our businesses in preparation for the next rebound.

We are becoming a more market- and customer-centric organization, and that is helping us gain market share with our best customers in this down market, and our value-added OSB and our SmartSide product segments have held up relatively well against the downturn, which is encouraging for us. We are also continuing to use our Lean Six Sigma technology and tools, to concentrate our efforts on cost reduction and process improvements across the organization, and we are pleased with the progress through our first year. And we are also doing some considerable belt tightening on discretionary spending.

We think that this will set us up for hitting the recovery in full stride. So the challenges are high. But so is our focus and our morale. I think that people are working on that which they can affect, and we are having some positive gains in new business. But on a falling tide, these are hard to see in the roll-up of the numbers right now.

With that said, wi'll turn it back over to Curt for questions.

Thanks, Rick. Toalisha, if you could go to the queue for questions?

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Mark Connelly with Credit Suisse. Please proceed.

Rick, I have got two questions. The first is with respect to TechShield and new product innovation. Everybody is going green. Every article we talk about is green. TechShield has been a big success there.

Can you give us an update on TechShield. Are you able to even parse it with demand the way it is, to give us a sense of how that is doing, and what else you might have in the pipeline?

Actually, I just saw a review on that yesterday. And if you look at the comparison with what I will call, how much the tide has gone down in the overall market, we are gaining share in TechShield. I think we do own that category right now in terms of brand. And so, I think the future is still wildly favorable ahead of us in that particular market category. And that is our best green story at this particular time.

Do you need to keep investing in that to, to expand it? You talked in previous quarters about maybe expanding regionally? Is there more money you need to put up?

Well the good thing about that and the bad thing about that is, as we fill out the new capacity that we just put in, which is up in Dawson Creek, it is not very hard for us to replicate that. We can put in a fourth and fifth opportunity around the region.

The bad thing about that is, it is not terribly prohibitive for other people to get into. So the real story here is doing the branding work, and trying to own that category. So that you stay ahead by the fact that you were first in, you are the biggest, and you own the brand. But it is very easy to expand, and it doesn't cost much money.

Okay. Just one more question. If we look at decking, you have talked in the past about how difficult that market is. You know is that a business in your mind that is in need of restructuring? You know, is getting out of that business on the table? And in the same vein, maybe not quite so dire, the [Cellulose] Insulation business is that really big enough, has it grown enough to really meet your criteria to be a keeper?

Let me take those one at a time. I will talk about decking first. We are down to one plant for efficiencies purpose right now. What we are focusing on is taking orders, and rolling out our crystal white railing product into the market. If there is to be a pick up in decking activity for us, it is going to show up in May and June. So I am going to be looking real hard at the May and June numbers as a basis for the next round of decisions in decking.

When it comes to GreenFiber, we are very, very pleased with that business. We had a fall-off in the profitability of that business towards the end of last year, due to the very high paper cost. Paper is the primary raw material for that process. Paper costs are coming down. That business is doing well. It is the largest producer of that market, and I think the answer to your question is yes.

It is a profitable business for us, which has a great future to continue to grow. So we don't talk a a lot about it, because we only own 50% of it. A couple of our people sit on that Board. But that is a sweet, little company that is only going to get sweeter.

Outstanding. Thank you, Rick.

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

Hi. Good morning.

Hi, Chip.

Could you just help us a little bit was we look at the other segment going forward? I know you had, I think the fourth quarter where you lost 9 million was an anomaly, if you could just walk us through kind of how you think that will unfold this year, in terms of do you think we'll see that segment go to a significant profit, or to a significant loss in any of the remaining quarters of the year?

Well let's talk about the elements of it. What's in there is our decking business, and our decking business I think as we talked about did not have a good year last year, and we ended up writing down some of those assets, which were noncash but certainly affected the earnings. So the decking business is in there.

The U.S. GreenFiber business, as Rick just talked about is in there, and we would expect that to be profitable for the year. As Rick said with paper costs coming down it will certainly enhance its profitability, we had a tough quarter from all of the paper costs in Q1. Our Chilean operation is in there, and we expect that to continue to be profitable. We were just down there in March, and they are basically sold out. We are providing products from North America down to South America. We actually have product going the other way right now, to allow them to continue to expand, while they are building that second mill. So we expect that to remain profitable.

And then we have got some nonoperating facilities, which we had the carrying costs associated with those. So that is generally not profitable, and then the other piece in there is moulding, and moulding has been consistently profitable. We did have a big cost last quarter, or I guess in the fourth quarter, when we reset all of the load stores, to increase the turnover of those products. So we expect moulding to be profitable. So the only one we would expect to be at a loss in the rest of this year would be in decking.

Got you. And so again, if I still listen to that not knowing the individual components, it sounds to me that you would see that being, you know, in the black in most of the next, at least for the middle two quarters of the year.

I would expect so. You know, Chile is going into the winter. The season for Chile is actually opposite of here. So they will have reduced activity.

Okay. And then switching back to the to the cash flow and balance sheet. Obviously the current marketing conditions are you know, would explain for some of the reduction it looks like a 200 plus million reduction in your net cash balance. But it also seems like the working capital items really shot up. And if you could just talk a little bit about that, it looks more than what you would normally see on a seasonal basis. But you know with receivables up $45 million, and inventory up 35 million, should we expect that to come back down toward the end of the year? And where do you think that net, you know, cash balance will get to as the year unfolds? You know, assuming the market stays rough and given your, you know, 260 or 270 million CapEx plan.

If you look at the elements, you are right, AR is up about, between 40 and 45 million. That is typical because in the fourth quarter of the year you don't ship much product, and our DSO averages 21 days. So we don't ship much product at the end of the year, your accounts receivable balance goes down. So this is probably a more normal level. December 31 is always a low point for AR.

The other part of that is in inventory. We do build log inventory in the first quarter in the northern part of our operations. Because you have to put sufficient logs in the yard, so that you can run during break up period when you can't get into the wood.

We did see a bit higher finished goods inventory in our SmartSide business during the quarter. And we are working on that right now. The other piece that we don't have a full answer for as we did have a reduction in our AP of almost $30 million. So.

Okay.

So I think that is probably just a timing issue with some of the capital projects that we have. And then the other piece of that was the capital. We spent $54 million on capital and investments in our JVs.

Got you. And then you know, we have talked a lot about the weak demand side of the market. We are also well into the start-up phase of the new plants that we have all known about. And in fact, you could almost argue we are well past the halfway point. Could you just embellish this impression?

It looks like I guess you know that Ainsworth is definitely on hold. Huber is not going forward, and it looks like we only have left to look forward to, is I think just one of the two Grant plants? I think one is running. If you could confirm that. Plus your Clark County plant, and the Tolko Slave Lake plants. In other words, there are three plants still being built right now. Is that your impression, or do you have other intellegence?

We would be happy to comment on what we are doing. That is we are under full construction on Clark County. And somewhere around the end of the year we believe we will turn that thing on. We don't feel comfortable nor do we comment on what the rest of the people are doing. I am sure you understand.

Oh, sure. Okay. And then I guess the last thing is, is there a point at which you would either, I mean, where you would have to make a more permanent decision regarding the one Quebec plant that is down? In other words, is there a risk that you lose a work force? Or I am not sure where St. Michel is. Or do you think this is something that you could in '08 or '09 start back up again?

Yes it is a complicated issue. I will try to give you the highlights of that. It is in a small, little town that has less than 2,000 people. So you know it is one of these one mill towns.

By the fact that as I said, we have sat down and faced the facts that that mill is not going to start back up this year. We haven't come to the conclusion that that mill will never start up. And there are some nuances in terms of the relation of that fiber basket to the fiber basket of our two other mills up there, which we are trying to work out with the Canadian bureaucracy, in terms of understanding how that wood basket may or may not be used.

And I don't think that we will have any clear view of that until probably April of '08. So we are in a temporary status right now. You know the best of all worlds would be that the market would come back, and that the world would need that product. But we feel comfortable that the world won't need that product this year.

And I know lastly that that mill came with group 4 X back in 1999. I seem to recall that is where most of your goodwill came from, 274 million. Can you give us an idea as to what the basis on your books for that mill is right now, and how much of that is goodwill?

You know I couldn't give you that number right now because I don't know what it is. But you were right, there were two pieces of goodwill. There was a piece associated with Group 4 X, and the ABT acquisition, both of which were in 1999. So right now I think about two-thirds of that would be associated with that.

The other comment I would make on St. Michel. St Michel is a good mill. The work force we have there is a very good work force. Their disadvantage is they do not have rail, and the wood cost is the highest in our system. And that is why in these difficult environments, it is a tough mill to run.

Got you. Thank you.

George Staphos with Banc of America Securities.

Thank you. Good morning.

Good morning.

Maybe piggybacking on Chip's questioning there. Rick you enumerated a number of issues that you are facing downright now, understandably, in terms of the market. And you also stated that you are not expecting much improvement, any improvement, for this year.

What other things are you looking to then, you know, what needs to go, perhaps from a market standpoint, even more negatively, to make a determination on where you may begin to idle more capacity? What are the things that you are looking towards? If you could provide any color on that?

Well, I don't think it can get a lot worse. I haven't said that up to now. But if you look at where we are with housing starts at about 1.4, I think this is the low point. And if it doesn't get any worse, I don't anticipate doing that.

Okay. So in other words, given that --

We are going to slug it out.

Okay. Now, in terms of the balance sheet, while you know, you are losing a little bit of cash here these days, you still have a great balance sheet that you built up over the last couple of years. Again you have enumerated in the past how you may use that balance sheet, you know, right now as we sit here April of 2007, what do you think the most important way, or what is the primary purpose of the balance sheet just to get you through this downturn? Or could we see it used other ways?

It is certainly a good time to have it right now. It is allowing us to finish our strategic capital work, which if you didn't have that, if we hadn't planned for this in times past when we have hit these down cycles, we have had to stop that activity, and it is allowing us to complete it in a more orderly fashion. I think as well, it gives us confidence in our staying power, in terms of waiting to see the end of the light at this tunnel, and have that not be a train. And then to date, we have been unsuccessful in employing any of it towards acquisition, but that is not for lack of effort or attention.

We continue to sift through opportunities. I think with the premise that being patient should provide some. I think that more opportunities will come available, as this poor housing market persists. So I don't think we have changed our tune on our intended use for that.

And what it is doing is serving the purposes that we have said all along. It allows us to complete our strategic work. It gives us staying power. I guess someone came up with that comment in one of the analyst's reports, which I thought was appropriate. And with we are sifting through the bushes pretty hard, and searching for you know, what Curt says the right product, at the right price, at the right time.

Rick, though if you think we are hopefully bumping along the bottom here, and it won't get any worse, how does that, how do you reconcile that with hopefully having some better better opportunities to use the cash for investment, to go through the timeframe that you are envisioning?

To me it is a pretty simple concept. I think it depends upon how long individual entities either have a stomach for this, or can stand the pain. So although I don't think I don't think it is going to get a lot worse than it is now, there are varying degrees of staying power which will be affected by this duration.

Got it.

So that is where I think patience is required.

I understand. I guess maybe the last question and I will turn it over, you know, whether using the cash for investment, or for other uses, my guess would be it would require some view on your part, from what you are hearing from the market in terms of when, we finally see an uptick in demand.

Yes.

Five years versus one year, you do different things with the cash flow. What do you think, at this juncture?

I can't make the call on the turn yet. I think we are looking at this. And I just don't know. I haven't seen anybody make the call on the turn yet. So I don't, I would love to be able to tell you on such and such a date this thing is going to tick up.

But what I am watching very closely, as I said in my more formal comments, is we have to look at the absorption of this unsold inventory. And that is going to be the key number. When we start to see that blip do more than blip, which means consistently move in a reducing direction, then I think that is the time to call the turn.

Mark Weintraub with Buckingham Research. Please proceed.

Thank you. First, Rick, can you share with us roughly what maintenance cap spending is in your view?

I think, Mark, what we have said is about a million dollars a facility. A year.

Is it fair to assume that if there is no change in market conditions, that is the type of numbers we should be anticipating in the '08 budget? Or are there other projects that you would potentially go forward with, even in continued difficult markets?

I don't think that that is a fair assumption. But in regards to capital, although we haven't disclosed our CapEx intentions for '08, I can tell you that our CapEx for '08 will be considerably lower than our experience this year. And we are in the middle of that planning process right now, as part of the continued belt tightening that we are doing.

And on a separate vein, I guess, I struggle to which is the greater wonder. How bad OSB pricing has been, or how relatively strong plywood pricing has been. And yet we haven't seen, at least to my knowledge, a major improvement in market share for OSB in the last couple months, despite this ever-widening gap between the two products.

Well, I think there is a couple of points. I tried to make these last time. I don't think I have changed my mind on it. I think plywood has obviously been restructured in terms of market share. And the other notion here is that the markets that have been more resilient, are the markets that plywood has a stronger foothold in.

That is the light industrial, industrial, and light commercial. And those are obviously holding up better than new res. So I think the forecasters are continuing to predict that there will be continued penetration of OSB in to plywood in new res. And then what the OSB guys have got to do if if they want a piece of those more resilient markets, is figure out how to put the product in there.

But to me you have a different structure in the plywood market, there is not new capacity coming on. And the markets that they are strongest in have held up the best. But again, if you believe the forecasters, I just read the most recent RISI report, they do believe that with this price differential, it will become harder and harder for builders, which are basically paying the price differential that they are paying for to remain with plywood to not succumb to the temptations to protect their margins. At least right now there is a forecast of continued, or another round of greater penetration in 2008, based upon the price differential. So that is my read on it.

Okay. I guess in listening to what you are saying, on the fact that the plywood markets have been more resilient, you say how you can go about trying to pursue those markets a little bit more aggressively for OSB. How about though, on the first point, the fact that the plywood industry, the fact that it's significantly restructured seems to have been playing to its favor? Do you take away the same conclusion there, that perhaps it's something that perhaps the OSB business would benefit with?

I will have to leave that one to you.

Thank you.

Thank you.

Steve Chercover with Davidson. Please proceed.

Thanks. Good morning. First of all, can you quantify, Curt or Rick, the cost of the disruptions between maintenance and the CN strike, that would have hit the OSB in the quarter.

You are fading a little bit. I think what you said Steve, is if we could we quantify what the various effects were on the OSB volume?

Precisely. Either in aggregate, or on perhaps a cost/1000 basis.

Well I think they cost us about 20 days of downtime, if I remember. I don't have that slide right in front of me. We reviewed that last week. But in terms of shutdowns that we had to take mill days.

For the strike.

Okay and switching gears a little bit. I guess I am getting back towards what Chip and George were talking about. Obviously, you are not in business to lose money. When you look at the way the cash balances come down by a couple hundred million in the last year, is that kind of consistent with what you expected? You know the operations plus your capital outlays, that you would see that cash balance come down by a couple bucks a share?

Our capital outlays are very consistent. None of us, at least I have said this. None of the people inside these walls anticipated that OSB pricing would be where it is, for as long as it has. I would have, if you would have asked me a year ago or two years ago, would we stay below what is reported to be industry cash cost for as long as we have, I wouldn't have agreed that that would happen.

I think if you go look at the chart, that is why we put the chart in there on page 7. You know, you look back in early 2001 and the end of, and early 2002, where the line came down right on cash costs. Bumped along at cash cost for maybe three weeks and then headed back up. You look at the chart now, since about August, it went down, bumped up a little bit. But then since September it has been below that line.

That is the longest sustained period of being below that line that we have ever seen. We are in uncharted territory here. We did not predict that.

It is extraordinary. I guess that is the function of the new capacity coming on-stream right now.

I think it is a combination of the precipitous demand from housing, as well as new capacity.

Okay. Last question and then I will turn it over. You did mention that you have been examining acquisition opportunities for years. And you have been cautious, and that is appropriate. Would your top priority still be to grow, you know, OSB? Is there any other peripheral product line that makes a lot of sense right now?

Well, I think what we have been very clear about, is we like to grow in the businesses that we are in. But we are also see ourselves as supplying products to the exterior of the house. So I think that is kind of the framework you want to think about us in.

Maybe one more, if I could? It is just amazing just how bad decking has got in the last few years. It seems seemed like such a promising category. Is everything suffering the same? I know Trex is down big-time in the last year or so, although I don't follow their fortunes precisely. Has that category just lost its luster?

There is a couple of comments that we would make about that. It seems like for every entry that is unsuccessful, then someone else has an idea that they can be successful. Anybody that believes they can extrude anything, believes that there is an opportunity in here, because just intrinsically this category makes so much sense. We don't, we know that there are what, 35 or 40 entries into this particular market. And more keep showing up every day.

And I think the other problem with this particular category is it has overpromised its ability to perform, in terms of its ability to be bulletproof. There are, people's expectations, because of the way that it is been marketed, are that you just put it down, and you never have to do anything with it. And I think the pullback across the entire decking segment volume, has to do with the fact that people are saying well, gee, this product isn't quite bulletproof.

Plus if you look on the other side, particularly treated lumber is about at an all-time low, so when people are looking at what they have got to pay for a product that isn't quite as bulletproof as they thought it was going to be, versus southern yellow pine treated, I think the volumes are off across the decking business significantly. And for our case, we have a very, very good product, which costs a whole lot of money to make. And it just costs us more to make it and sell it, than we get for it. And that is kind of a problem.

Yes it is. Okay. Thanks, guys.

We have time for two more questions.

Thank you. Our next question comes from the line of Rich Schneider with UBS. Please proceed.

Hi. I was wondering if you could discuss, you know the drop in OSB price that you experienced in the quarter versus the fourth quarter. It shows on your charts you were down about 7%. The industry Random Lengths was down about 13%. Is the difference from some of your value-added products? Or were you also seeing any of the timing issues that we have discussed before?

I think there is a couple of impacts. It could be the value-added products. The other we have said in a falling market we usually do better than the average. In a rising market we usually do worse. And we are certainly we were in a falling market in the fourth quarter.

Okay. So then there could be a little bit of the reverse in next quarter with the prices up a little bit?

Right.

Okay.

Right.

Are you forecasting that?

Well, well it looks like it has picked up slightly here.

Can I write that down?

Yes. (laughter) Right. That is about as good as the prediction of the exact date when OSB turns. Just looking at you know, Smart Siding, obviously that is holding up. And you have got a little bit of price here. Could you talk about, you know, what you are seeing in that market? Why that seems to be holding up? And obviously it reaffirms your value-added strategy here.

I think a couple of things there. One, as the builders are entering this new regime of much more pricing pressure, they are looking at ways to reduce their costs. And our SmartSide is actually a very cost effective method of siding a house. And so we are getting more opportunities to pursue big builders with the SmartSide.

The other important thing going on with SmartSide is a heavy piece of that is trim. And this trim product you can use on any substrate in the house. You can use it with SmartSide, you can use it with hardboard, you can use it with fiber cement, you can use it with cedar, for that matter. So our trim volumes have gone up very well. So, I think it is a combination of us getting our value proposition in front of the builder, and on an installed basis this is very cost effective, and then pushing the trim and the soffits, and the other products, to work with any choice of substrate.

Okay. And then just looking at the wood issue that you mentioned. How has that impacted you in the quarter? The availability of pulp wood? Has it been mostly the issue of price, and what you have to pay? Or have you seen some areas where it has actually caused you to take downtime?

The decision when we ran out of logs principally in the south and a little bit in Maine, it was principally an issue of price. We simply couldn't pay that price and increase our losses. We chose the downtime rather than paying a high price for the pulp wood.

Okay. And are you still seeing a similar situation here in the same quarter?

It is actually coming down. If I look at Q1 of '07 to Q1 of '06 on the same volumes, across North America our wood cost is down a million dollars. So we are actually a little bit lower overall on the volume, I just looked at the price differential. If I look at it from Q4, it was basically flat from Q4. If I look forward in the south, we should be entering a less expensive logging season, but we won't be harvesting anything in the north. Because we are in break up. So you won't start any harvesting up there until the summer.

Okay.

But as an old wood buyer, Rich, sometimes you have got to live with the decisions that you make. And actually, the wood outages that we sustained, you know the phenomenon that caused them was the wet weather.

But it was actually decisions that we made back last fall in the inventory levels that we were willing to sustain. And by making choices almost nine months ago, around whether we were going to pay the dollar that we had to pay to buy the wood, then you have a weather phenomenon six months later, and that is what really causes you to run out.

Okay. Just last question. In your response, Curt, to the question about acquisitions, and you said, you know, you like the exterior of the house. Why? Why is that area more attractive to you versus other areas?

Well, it is an area where a lot of our products go now. So it's an easy, easy discussion to have with a builder. And it is also an easy discussion to have with the buyers at our customers. That is typically, they focus on particular areas of the house. So it is just more consistent with our channels to market, and consistent with where our products are sold today.

Great. Thanks.

Our final question will come from Peter Ruschmeier with Lehman Brothers. Please proceed.

Thanks and good morning.

Hi, Pete.

Just a couple of questions. I guess as you look at Holton going from OSB to OSL. I was just curious on you know, maybe some learning curve issues, and kind of how you think about this. You know, how much of the success of this project is going to be the engineering feats of what has to happen, and how much is going to be market readiness, if you will, and just curious on how quickly you think you might actually get to earning money at that facility, given the market challenges that we have today.

Well I think our plan is to probably, we are putting the marketing plan together right now. But our intention would be to sell half that mill out, after the plant gets up and gets some of the kinks out. And then, within two years, be up to full capacity. That is our look at it right now. So we do have some engineering challenges there. So it won't be a simple.

This is new technology and hasn't really been built before, except for theoretically in terms of what we are trying to do. So we don't think it's going to be a matter of just turning the switch, and we will be at full capacity. So there is about a two year ramp-up from about 50% to 100% is our anticipation right now.

Okay. Is it fair that it is matching your expectations though, in terms of its ramp, in terms of the building process? The conversion process?

Yes, so far so good. I think what we are going to find out is once we get it all built we are going to have to go back and tweak a few things that we are exploring right now. Hopefully that won't be significant.

The one back-up plan we have, this whole thing stems around fiber utilization, and it's around how many of the, what percentage of the strands you actually make can make it through the process with the integrity that they started out with. And the back-up plan as you work that out, is that you can accumulate that stuff and actually make OSB with that product. If you are having more problems that you want.

Okay.

As we are looking at it technically now, we, and from a market basis, they both sync up, that we expect to sell about half that production the first year, and ramp that up to 100% by the end of the third year.

Okay.

We can run both products there.

Okay.

We can run OSB or OSL. So as the market ramps up, we will make less OSB and more OSL.

It is a side by side line, so actually the new line will be side by side with the OSB line.

Okay. That is helpful. Curt maybe a question for you. Really just a clarification. I am just trying to reconcile the cash flow statement from the change and the net cash balance. If the net cash balance looks like it's down $222 million, if I look at the cash flow, I think cash from ops is negative 104, CapEx 64, Dividends 16, that is 184. I am off 38 million in terms of reconciling with changing and the net cash, versus the change in the cash flow. I am sure I am missing something obvious here.

You know what I might suggest? Maybe you could call Mike or Becky. Instead of trying to find it right now on the call.

No, okay. That's fine.

Mike or Becky would be happy to do that.

Maybe lastly you mentioned you just got back from Chile. I am curious on how you see that market evolving. You know, I don't know if you have any guesstimates as to what kind of, you know, share of the market opportunity that you have today, and how that may change over time. And whether this Chilean market, you they, serves as a precedent for other opportunities in other markets. So I know this has been kind of in the making a long time. But are you getting to the point where you think this could be a much more scalable type of opportunity?

Well, obviously it is scalable by the fact that we are building a bigger mill down there right now, than the one that we did build five or six years ago. Maybe I can talk around that with some interesting facts we have from down there. When we first went down there about 3% of the new housing in Chile was frame built or stick built. Today it is up to about 19%.

We basically are the I think we are the only OSB producer in Chile, and probably sell 99% of the product. So we are building the new mill, because we filled up the old one. As well, we are using that as our principal place of export, to develop other countries under the same model in South America.

And we are also developing a reasonable export market to the Far East. And to the Mid East. So we are having to build this plant right now. It is actually a little bit earlier than we had originally anticipated, because we are out of product, and we are actually having to take product out of Athens, Georgia right now and send it down to Chile, so they can satisfy their needs. We did just this quarter open up a new sales office in Peru, and trying to see if we can replicate the same experience there. I don't know if that answers your question or not.

That is very helpful. Rick, that 3% to 19% what time period was that?

That's over, when we first, that was one of my projects back when, in my old days. And that was about five years ago. Five to six years ago when we first started looking at it, so this thing is exploding. If you go down there, they are starting to, the cottages, the second homes are all, not all but the majority of them are stick built. Now we are starting to penetrate into the multi-family on the second floor. Although they still use masonry and concrete and brick on the first floor, the second floors now are starting to be stick built, and I think it is just a matter of time before they make the whole structure that way, because it is both safer and more cost effective.

Are there two or three other countries that might be natural progressions of this model? Or do you see just continuing to develop Chile and service other, you know, Latin American markets?

Obviously we have declared in Peru.

Yes.

I would really not like to show my position on the chess board on the other countries.

Sure. Okay. Very good. Good luck with the quarter, guys.

We need it.

I would now like to turn the call over to Curt Stevens for any closing remarks.

Thank you all for joining us. As usual, Mike and Becky are available to answer more detailed questions, or walk through the cash flow. Thanks again, and we look forward to talking to you next quarter.

Thank you for your participation in today's conference. This now concludes your presentation. You may now disconnect, and have a wonderful day.