Louisiana-Pacific Corp (LPX) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2007 Louisiana-Pacific Corporation earnings conference call. I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating 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 like to turn the call over to our host for today's call, Mr. Curt Stevens, Executive Vice President and Chief Financial Officer please proceed.

Thank you and thank you all for joining us for LP's earnings call to review our results for the fourth quarter and the full-year 2007. With me today is Rick Frost, LP's Chief Executive Officer; Mike Kinney and Becky Barckley who handle our Investor Relations along with their other duties. I will start the call with a review of the financial results for the fourth quarter and the full-year 2007. Provide a discussion about the performance of each of our individual segments, and comment on the balance sheet. I will then turn it over to Rick who will discuss our accomplishments and other actions during 2007 and a summary of our thoughts and plans looking into 2008.

As we have done in the past, this call is open to the public, and we are doing a webcast. This can be accessed through www.lpcorp.com. Additionally to help with the earnings call, we have provided a presentation with supplemental information. I will reference these slides as I go through my discussion. As a caution, this presentation should be reviewed in conjunction with the publicly available earnings release.

Slide two of the presentation, I want to remind participants about the forward-looking statements, comments that is included in our earnings release. Please be aware also that during the discussion, we may use some non-GAAP financial information, which is discussed on slide three of the presentation and we have also attached an appendix that contains the necessary reconciliation. I am not going to reread these statements, but I will incorporate with this reference.

Now looking at slide four, a presentation of our Q4 2007 results. We are reporting today a net loss for the fourth quarter of $39 million or $0.37 per diluted share. Net sales from continuing operations were $377 million for the quarter. For the fourth quarter of last year we reported a net loss of $25 million or $0.24 per diluted sale on sales from continuing operation of $368 million.

Slide five of the presentation discusses some of the special items that are not generally attributable to our ongoing operations. Let me quickly summarize those. In Q4, we did record another -- a further impairment on the St. Michel saw mill of $3.2 million as we continue to market that property. We did have an accrual of $7.8 million based on a tentative settlement of an environmental lawsuit that we expect to close on in Q1. Not showing on this sheet but in our discontinued operations we took a further noncash impairment on our decking assets of a little over $2 million. In Q4 2006, we recorded about $2 million associated with the change in the method of estimating our workers compensation liability. We also recorded in discontinued operations another $2 million for this same reason.

We recorded a gain of $1.9 million for insurance recoveries in Q4 of 2006 and a net charge of around $4 million associated with product-related warranty reserves. All of these items are discussed in note 4 of the earnings release. We take these special items into consideration. This gives a relative loss from operations of $30 million in Q4 2007 compared to a loss of $17 million in Q4 of 2006.

Slide six of the presentation is the full-year results. We are reporting today a net loss for the full year of 2000 of $167 million of our $1.61 per diluted share. Net sales were about $1.7 billion. For the full-year 2006, we reported net income of $124 million or $1.17 per diluted share on net sales from continuing operations of $2.2 billion.

Slide seven is a similar discussion of the special items. 2007, the biggest amount was $57 million of asset impairments recorded as a result of the facility closures. Principally, this is related to the St. Michel OSB and saw mill and the related forestry licenses. We did have an $18 million positive settlement on insurance recovery and then we had the legal summit reserve that I mentioned earlier. Again all these items are discussed in Note 4 of the earnings release. For the years ended December 31, adjusted net loss from continuing operation was $115 million, compared to income of $136 million for 2006.

Slide 8 is a summary of our reconciliation of the tax provision and the related tax rate for both Q4 and the full year. For the full year, our tax benefit rate was 47% by continuing operations compared to 18% in 2006. This higher benefit rate is the result of losses which caused a greater impact of changes in rates in the implementation of several tax strategies. Let me summarize the biggest changes. We did have a reduction in LP's Canadian deferred tax liabilities due to an enacted decrease in the statutory income tax rate in Canada. We had interest deductible for income tax purposes on inner Company debt that is eliminated in the consolidation process. We had the impact of the translation of our Canadian operations. Finally, we had a settlement of an outstanding state tax issue in the State of Louisiana that we discussed at the end of Q2.

Let me now turn to the performance of our segments. Slide 9 presents a summary of OSB. OSB price compared to same quarter last quarter was actually up 2%. During the same period, volumes, however, were down 5% due to curtailments taken during the fourth quarter, which included the indefinite closure of our Silsbee Texas mill. On a quarterly comparison, pricing accounted for about $3 million in increased sales and profitability compared to the fourth quarter of '07. From a cost perspective, we did see increases in our costs. Those were almost entirely attributable to the mill curtailments taken during the quarter. For the full-year, OSB earnings were down by slightly over $300 million compared to 2006. This was primarily driven by a 30% reduction in sales price, which accounted for over $300 million in lower sales and earnings. The weakening U.S. dollar versus the Canadian dollar which we estimate impacted our cost of sales by about $15 million. And then these negative factors were offset by productivity improvements at our mills.

Slide 10 is our siding segment. Just a reminder this includes our SmartSide OSB siding products, hardboard siding, commodity OSB produced at our Hayward mill. For the quarter sales volumes were up 17% in SmartSide compared to same quarter last year and 24% lower than last quarter. Sales prices were up 2% compared to the same quarter last year and down 2% from the prior quarter. This is almost entirely due to product mix. Compared to the prior quarter, we do believe that the lower volume levels were attributable to the reduced building activity, both new home construction and repair/remodel. Compared to the prior year, while we see an increase, we believe this is the reflection of customers bringing down their inventories in Q4 2006 in anticipation of a further housing decline.

Hardboard sales volumes were flat from the same quarter last year and 27% lower than last quarter. Average sales price was down 2% and down 6% sequentially. Again, we believe that most of this is related to changes in product mix. For the full year, sales in this segment decreased by 9% to $449 million compared to same period last year and profits decreased by 50% to $34 million. Primary cause of this reduction were lower OSB pricing and higher costs incurred as a result of significant downtime at our mills to match demand.

Slide 11 is a summary of our Engineered Wood Products segment. This is our land made and veneer lumber, our I-joist operations which includes our JV with Abitibi plus other related products. For Q4, we recorded a $3 million loss in this segment, down from a profit of $5 million in Q4 of '06 and $3 million last quarter. For the quarter, LVL volumes were up slightly while I-joist volumes were off by 13% compared to the same quarter last year. For the year EWP sales were $330 million, about 16% lower than last year. Profits were $11 million in 2007 compared to $33 million in 2006, a direct reflection of a much slower building environment that reduced our volumes and our sales prices.

While there is no slide for "other" segment, let me talk about the performance there. This consists of our interior molding business, our Chilean operations, the Cellulose insulation joint venture U.S. GreenFiber and our nonoperating facilities. We had a loss in this segment of $1.6 million in the fourth quarter compared to about $0.5 million loss of the same quarter 2006. For the quarter, sales volumes were flat in our molding business compared to the same quarter last year and 12% lower than last quarter. Sales prices were up 20% compared to the same quarter last year and up slightly sequentially. We did have an increase in the sales price but this was due to the cost of the reset that we incurred in 2006 that did not repeat in 2007. Chilean operations lost a little money in the quarter, but for the year were profitable.

U.S. GreenFiber joint venture was nearly break even in Q4 as strength in the retail sales offset the weakness in contractor business that is tied to new home construction. High paper costs continue to pull down our earnings in this business. For the year, although sales for these operations were up 17% we incurred a loss of $6 million compared to income of $8 million in 2006. This swing is attributable to the costs associated with our nonoperating facilities. We incurred about $12.5 million in cost which included litigation, carrying costs, the largest being the St. Michel saw mill and nonallocated expenses associated with exiting our decking business. Investment income for the quarter was about $10 million. We did capitalize $6 million of interest expense in Q4. For the full year, investment income was about $45 million, but that benefited from the capitalization of $19 million of interest expense during the year. Just as a reminder, 2008 as our capital program will be significantly reduced, we will not have this offset to interest expense.

On the SG&A side, total SG&A was about $36 million, a decrease of 14% over the same quarter last year. For the full year, SG&A costs were about $150 million, a decrease of 5%. On unallocated, the quarterly comparison that was about the same but for the year at 84 million it was a 15% decrease from the prior year.

Slide 12 provides some balance sheet comments. Cash, cash equivalents, investments in restricted stocks was about $800 million. Working capital about 590. Net cash about 390. Capital expenditures for the year are 341 and our book value per ending share was 17.95.

Make a couple more comments. On the capital, I think in Q3, we did provide some guidance that we expected the full-year capital to be about $300 million. We also gave guidance that capital for 2008 would be $85 million to $90 million. We look at those two years together, we did pull forward some expenses related to our new mill construction. So our forecast for 2008 is about $20 million less than that and $65 million to $70 million without acquisitions and that got pulled into -- into 2007 which increased our spending by about that amount. And also when Rick talked about that, he was not including the capitalized interest of $19 million. The reconciliation there is pulling forward from 2008 about $20 million of anticipated carry-over expenses on the new mills and the capitalization of interest of $19 million. Another comment on the balance sheet is you will notice that our accounts receivable is up. Included in our accounts receivable is $157 million income tax refund receivable. Last year, that amount was $71 million. About an $85 million increase attributable to a higher income tax receivable.

Because of sensitivities in the market, I also want a few minutes to discuss the auction rate securities or the ARS that are part of our investment portfolio. We have approximately $150 million in ARS obligations that are rated AAA and in one case AA. Most of our holdings were issued in 2004 and 2005. So they are better seasoned than some of the newer issues and don't include as much of the variable debt. Despite the quality of these issues, the auctions have failed, but they do continue to be reset at the maximum stipulated amounts. Then the ARS held by us has been downgraded, they continue to pay interest and the rates reset every 28, 35 or 90 days depending on the issue. The custodian, who is the agent of record, has been pricing these obligations at par. They have attempted to get prices from outside sources with limited and dubious success.

Within LP, we did develop a methodology to estimate the ARS value using comparable bonds and published indices. The methodology has been reviewed with our external auditors and they are comfortable with our approach and our conclusions. Based on this approach, we did recognize a valuation allowance based on a temporary reduced value in Q4 of approximately $2 million. This allowance went directly to the balance sheet in our other comprehensive income. Also in Q4, we did change the classification in securities to long-term based on recent guidance from the SEC. We are hopeful this situation will right itself within 12 months, but under this accounting guidance, we must classify as long term because we can not affirmatively state that this market will be fully liquid within the next 12 months.

Slide 14 is just the summary of our non-GAAP financial measures and the reconciliation. With that, that concludes my remarks, and I will turn it over to Rick, LP's Chief Executive Officer.

Well, good morning, everyone, and thank you for your interest in our call. It is kind of a foggy, hazy morning here in Nashville, but remarkably, it is over 70 degrees outside which is odd for the first of February. I am going to take a quick look backwards at some of the positive things that happened in '07 in an otherwise dismal financial year.

I will start with safety. I am proud to share with you that LP had its safest year ever in the history of operation with a total incident rate of 0.87. During the year, we were recognized as one of America's safest companies. We clearly stand at number one in our industry and are keeping our people safe. And, also, proud to announce that our OSB business led all of our other businesses with a total incident rate of 0.83. I think what is remarkable here is this was accomplished in spite of the very poor construction market and the resulting intermittent running of our plants, particularly in the second half of the year.

2007 was our first full year of Company implementation of our Lean Six Sigma technology and application. Our Lean Six Sigma program last year engaged about 800 people in improvement projects during the course of the year with results that did exceed our expectations. We removed about 50 overhead positions through attrition last year and through redeployment and reorganization to continue to work on our competitiveness and adjust to the market. Our salesforce successfully introduced our products to approximately 400 new customers, either builders or people in the channel, with the replacement of our products for a competitors products and additional placing of additional products with current customers. And that is in our effort to create a preference for LP products and doing business with LP.

As Curt said we did exit an unprofitable decking business in '07, perhaps a year or two late which is my fault. We have sold our Meridian site intact to Fiber Composites. And we are negotiating an agreement on our Selma site and we are in at least preliminary discussions on our railing product line. Because of the poor new housing market, we did permanently shut down an OSB mill in Quebec last year and an LVL mill in Oregon. We also indefinitely curtailed a second OSB location -- OSB mill located in Silsbee, Texas. We have completed the lion's share of our Brownfield plan and the construction of our new mills. Fulton, Maine LSL is coming along very well and the OSB mill in Lautaro, Chile is coming along well and we were substantially complete with our construction on Clarke County, Alabama by the end of the year.

At the end of the year, we also announced -- I think it was on December 20, an agreement in principle to acquire a controlling interest in an OSB mill in Brazil. That will increase our ability to grow our building products business in South America and other parts of the world. During the fourth quarter, we did repurchase about 400,000 shares of LP stock. Needless to say '07 was a very tough year financially. Canadian Foreign Exchange impacted us, reduced demand and falling share prices in all of our product lines impacted us and operating downtime was also severe. All of these adversely affected both our cost structure and our top-line revenues.

In Q4, we took about 410 mill days of downtime and OSB. Remember that St. Michel and Quebec and Silsbee did not run during that quarter and that accounted for 180 of those 410 days. The other downtime was taken due to some maintenance and some capital efforts, but mostly to adjust our inventories to targeted levels due to poor market takeaways because the demand was soft, particularly in the month of December. In siding, both hardboard and SmartSide and in Engineered Wood Products, we did take significant downtime in Q4 to lower our inventories based upon our expectations for a slow December and a slow Q1 of '08.

Now I want to turn my focus to 2008. Consensus from the forecasters is that new residential starts will be less than '07 and perhaps worse than the second half of '07. It will be a very tough year for anyone in the building products business and the new residential construction business. LP has three new mills production to begin selling. Clarke County OSB which should begin making board in early March. Holton LSL which should be making LSL for sale in Q2, probably in April. And our Lautaro, Chile OSB mill is making starter board this week as we speak. As well, the Murphy LDL mill for which we have the marketing and sales rights has started making product and we have shipped our first sales from that location. We also hope to close on the Brazil OSB deal in April and take control in May.

Regarding the timing of U.S. mill start-ups, I will admit that it is poor, but it is what it is. And we are going to make the best of it. With the completion of the lion's share of our capital reinvestment program done, we will pull our capital spending down considerably in '08 to about $100 million. Now that $100 million does include the potential of investing in a JV, but it does not include the Brazil deal. Additionally, we intend to stay on the attack in '08 in sales and marketing and creating a preference for LP products and for doing business with LP.

We are out to convert more builders to using LP products and get existing users to embrace a wider number of products. We will continue to align ourselves with partners in distribution that share our desire to grow. And this is going to take shape in several ways. In OSB, we are rebranding our pouring line, capitalizing on enhanced value propositions and warranties. We will also be teaming these products up with our engineered wood product business to promote flooring systems. We are the largest producer of OSB sub flooring. And we are going to add gas to this effort this year.

In siding, we will be launching our SmartSide brand with four major product lines and approximately 80 additional SKUs to provide products for each sets of needs in the marketplace. We will have an architectural line which includes our shakes shingles ventilated soffit and stucco board. We will have a precisions line which is the old SmartSide line of panel and lap. We will have a foundations line which includes our Hardboard product with the addition of zinc boride in the product and then we will have a full trim line that fit most homeowners' needs. The advantage here is that this trim can be used with LP products and our competitors' products. These will have enhanced warranties for a greater value proposition for the builder.

In engineered wood, we are going to be promoting the addition of laminated strain lumber to our product offerings to complement LVL and/LP I-joists and our new solutions software. All of these will be introduced at the International builders show which occurs in a couple of weeks in Orlando. Under the marketing concept of roofs, walls, and floors, which is the way the builders think.

In conclusion, as I said in the earnings release that was put out this morning, we will manage our mill takeaways -- our mill outputs to the takeaways that we expect, being mindful of not tying up any more cash in inventory than we need to. We will also aggressively continue to market and sell our products with the purpose of creating a preference for LP products, and we will rely heavily on our Lean Six Sigma efforts for the largest part of our cost and process improvement work that is imperative to success this year. With that said, I will turn it back over to Curt.

Thank you, Rick. I think we are ready to take questions.

(OPERATOR INSTRUCTIONS) And our first question will come from the line of George Staphos with Banc of America Securities. Please proceed.

Hi, everyone. This is [Mike Roslund] in for George since he is traveling. Quick question. 4Q is generally a period of destocking in the economy. Are there any indications that customers were increasingly willing to hold inventory of OSB and other LP products relative to, say, 4Q and 2007 overall?

You were breaking up a little bit, Mike. I think your question was are customers more willing to hold inventory in Q4 of '07 than Q4 '06?

Yes. Any indication that customers were increasingly willing to hold inventory of OSB and other LP products relative to Q4, exactly.

No, I don't believe so. I think that what we saw in our siding business in Q4 of 2006, customers did aggressively reduce their inventories. So their takeaway were very low in Q4 of '06. Until the market hits bottom and builders see hat there is going to be an increase, we use the term it's not just in time inventory anymore. It is almost late. And because of the demand capacity relationship in all of our product lines, they really don't have much of an issue getting product. So I would answer that that, no, I don't believe they are taking any more inventory. I think the -- as you will see the results come out from some of the distribution -- some of our distribution partners, you will note that they are being -- being hurt in this market environment as well.

Got you. With respect to Corporate expense. Corporate expense was around $19 million in 4Q. Is there any chance that -- that $19 million will trend lower in 2008 in light of continued difficult market conditions?

Well, as I said in my remarks we brought Corporate -- the unallocated Corporate expenses down by 19% -- or by 15%. And for the overall SG&A was down 5%. Now that's -- it is a mix. Because we -- as Rick said, we are investing in our sales and marketing efforts, but we are reducing our headcounts and our staff as much as we can in the -- in the nonmarketing and sales-related areas.

Okay. Is there any -- I mean, is the implication that -- will trend lower. Is the headcount reduction going to more than offset the increase in spending and the sales and marketing effort?

Well, again, what we don't do is we don't provide forward-looking comments on our results. But if you do look back, again, we are 5% down and overall SG&A. We are down 15% in the unallocated.

Got you. Just to reiterate, with respect to the auction rate securities. You mentioned you had to reclassify based on a new SEC ruling?

It is not a new ruling. It was an interpretation in guidance. So, yes, we responded to that by reclassifying those as long term.

You were classified about $150 million from -- from short term to long term and that is really why you had an increase in long-term investments?

That's correct. That was a reclass reclassification.

Got you. Last question, Brazil. Can you explain, I guess, your reasons for the investment. And is there one takeaway that you feel comfortable with, that despite continued issues in North America and OSB markets, you won't need the cash being deployed in Brazil in later periods. Is that one of the -- I guess one of your reasons for making the investments in Brazil?

That's correct. It makes a lot of sense to us and while we are up here trading body blows in North America there is a large number of people in South America that have needs for housing. That was our initial -- was the reason for our initial venture down in Chile which was a great pilot program for us. When we went to Chile, about 2% of the homes built in Chile were built the way we build up here. Today that number is approaching 30%. Due to our efforts at training people down there to build the way we do up here, which happens to be safer, of higher quality. It is faster. And it is less expensive. And so we looked at Brazil, which is a country that has approximately 240 million people, a government that is reaching some sense of maturity and stability, and what you see there is that when that happens in a country, one of the first social needs that have to be addressed by a government are subsidized housing. And so we are hopeful that we can go to Brazil, which is ten times larger than Chile in terms of potential opportunity, and have the same type of success. It made sense to us when we came upon this opportunity to invest in Brazil and try to be successful in the building products business in a market that is just emerging.

Got you. Thank you very much.

Our next question will come from the line of Gail Glazerman with UBS. Please proceed.

Hi, thank you. Appreciate the comments on the end market outlook in 2008. I was wondering if you might give some color to your views beyond that in terms of what would drive a recovery in OSB and if that is something that you can see happening in 2009? And if there is any sort of kind of housing start number that you keep in mind? Any color that you can give.

You broke up a little bit, but I think I heard what you said. Most of the pundits right now are saying that '010 is going to be a good year and so everybody is trying to figure out when, meaning some time in '09 this thing should turn. RISI right now is the most optimistic of the forecasters, and they actually have a substantial improvement scheduled for '09. And I think their forecast is up in the 1.6 level. I am not quite that optimistic. I think that '08, the -- I have some people that are currently in a meeting in Washington D.C. right now, and they are saying that the consensus of that group, if there is such a thing is somewhere between 0.9 and 1.1 for 2008. We had originally put our plan together for a little bit over 1.1. I think the confusing factor right now and the major concern is whether indeed we go into recession, whether we are in recession already and don't know it, and then what's the depth of that. So that's -- that's the thing that makes you not too sure what 2008 is going to bring. But if I had to guess, I think we are probably at that 1.1 level this year.

Okay. And just taking it to something more current. Are you surprised by how weak pricing has been at the start of the year relative to kind of average costs in the industry?

I guess at this point it is hard to be surprised.

Okay. Just switching gears a little bit. Can you talk a little bit more about the mix shift that you saw in siding? Is that something that you would expect to continue moving forward?

I am not sure I understand the question. The shift in siding?

The mix. It seemed like -- I think you are referencing a mix shift which impacted kind of the price levels in siding.

Well, you have to put that in context. If we sell more trim, for instance, we get a higher sales price on trim than we do on our panel siding. So it really is a mix between new construction and what is going into the home centers. You will see that 2 to 4% kind of change in sales price depending on who is purchasing the -- the product during the quarter. I don't see that as -- in siding, we set our price and we go to the market with it, and it doesn't change very often. The last price increase we had was in August. We are with this new launch of the siding line that Rick talked about, we are repositioning some of those products in the market as we speak, so we will see a little bit of movement in the various sales prices due to that repositioning, but it shouldn't be significant overall.

Okay. And finally, just last question. Are there any developments in the antitrust litigation or any kind of milestones that we should be looking out for?

In the?

The antitrust, the OSB antitrust.

The OSB antitrust.

I think someone was referencing some sort of trial coming up or -- I don't know if that affects you.

Well, where we are, we are in -- involved in the litigation. We have -- we have submitted our motion for summary judgment. And the other side has a chance to respond to that and we have a chance to respond to them and then hopefully the judge will rule and make -- make a decision. He has pushed back the trial to the end of the second quarter. That originally was scheduled in March or April. So he has pushed that back which leads us to believe he will take a complete look at the submissions from the various parties and make his decision.

Okay. Thank you.

Our next question will come from the line of Mark Connelly with Credit Suisse. Please proceed.

Good morning, this is [Hamza Mizari]. Just a couple of questions. Curious to see what percentage of industry capacity do you think needs to come offline today in order to get the markets back into balance? And secondly, how important do you think diversification is in your OSB product mix in weathering this downturn. Do you think LP needs to shift the mix further away from commodity panel in the long run or short run?

Well, let me take your second one. We think diversification of our OSB product line is very important. If you look at what we have done, we have converted four mills to our siding products. We have taken two North American mills and moved those to Chile. We have announced that we have another mill that has been curtailed that we'll be moving into South America as well to diversify from a regional perspective. In our OSB business, we are trying to get our mix up to a pretty significant part of the mix that will be value-added product whether it's our radiant barrier TechShield product, it's our value-added flooring products, we are making web stock, we are making rim board that goes into OSB. We are also working on some new products that will have application in the industrial markets. As far as your first question on what is it going to take from an industry perspective. I think what we do is we manage our mills based on what demand we have from our customers. I think to get any broader perspective on that, I think you really need to talk to others in the industry or to your brethren in the financial analyst community.

Right, but just order of magnitude. In your opinion do you think it is 10%, 20%, 17%? Or do you -- are you not willing to make a comment on that I guess?

Well, I think it would not be in our best interest to comment on that.

Okay, got you. Last question. It is there an opportunity to grow share in this downturn in engineered wood relative to say ordinary lumber or do you think it gets tougher as markets get softer.

We have a strong effort to try to grow share across all of our value-added product lines. We started that effort in December of '06 and we think we have grown share across each one of our product lines. We are keeping track of that in the ways that we can, number one, by conversions of new customers to our product and further penetration with existing customers. So we can keep track of that in terms of either new business or potential new business when the market comes back. The difficulty is as I said once before, it's a bit of a problem of working on your boat to make it more buoyant while it's sitting on a climb flat. So we are having to measure how much our volume dollars went down compared to how much the overall market is down. And with that as one of our litmus tests, we have convinced ourselves that we have made progress in each one of our product lines in terms of capturing the share.

That's very helpful.

As an example, new housing was down for the year somewhere between 28 and 25%. And our engineered wood product line was down 16%.

Okay. Got you. Thank you very much.

Yes, sir.

Our next question will come from the line of Peter Ruschmeier with Lehman Brothers. Please proceed.

Thanks, and good morning.

Good morning, Peter.

Maybe a quick question if I could for Curt. I was hoping you could help us reconcile the -- if you look at your cash and equivalents and your short-term investments, the delta between 3Q and 4Q is down $257 million. And I was trying to reconcile that against your cash burn, which you were marginally negative in cash from ops. $115 million in CapEx. A little bit of buyback but I was trying to reconcile that large sequential decline.

The biggest piece of that is the 150 that went from long-term to short term on the ARS I talked about. If you look down at long-term investments from the end of last year we had about $40 million at 12/31/06. $203 million at 12/31/07. That's a switch.

Okay. More of a fundamental question. On OSB pricing, the price spreads we are seeing today with plywood being very wide. I'm curious if you are seeing any evidence of share gains in your end markets, I'm not sure how you'd measure that but if you look at your various end markets with these wider spreads are you seeing the benefit of gaining share from plywood directly?

If you look at -- RISI just had their new data that came out in January and they do show a share gain in new home construction. They show a share gain, but the overall numbers are down, but if you think about it, new home construction as Rick said was down 28 to 30%, somewhere in that range. If you look at the APA numbers, OSB production was only down 11% for the year. So that would imply we are gaining share.

Okay.

Remember the plywood guys benefited greatly by no imports of foreign plywood coming into the country. So they had the benefit of essentially curtailments based on that, because there wasn't as much supply coming in from offshore?

Is it fair that you -- you've gained significant share in that builder market and probably the most amount of low-hanging fruit I would think would be in the do-it-yourselfer and other consumers who may not be as educated on OSB. Are you attacking that market at all in terms of getting that share gain?

We are. And that's what I am talking about some of the new products that we are trying to develop in that. If you think about Plywood, the markets that have been strong have been industrial, light commercial, and that's where they have a big -- big market share. We are beginning to think about products that would fit that. As an example, we have recently developed a flooring product for the RV industry. And that's directly going after plywood that has had that market. So we are beginning to that now. What has happened in the past these markets are niche markets and they need new products. And the housing environment, that is where the low-hanging fruit is for OSB.

Okay.

The weak housing environment, then you look for other alternatives, the other one is export. We exported a lot more product in 2007, and we are hoping to export more in 2008. I would guess that's a strategy that all of our competitors have as well.

Okay. And what are the biggest export opportunities from your perspective in terms of geography?

I think it's both East and West. Although Europe slowed a little bit in Q4 but was strong over the summer but there's still demand going East, typically not for construction but for other structural panel uses like packaging and some other alternatives.

Okay. Shifting gears, if I could, to Clarke County. I was curious if you could share your thoughts on the ramp-up. I think originally it was going to be some time in fourth quarter, then late fourth quarter and now it looks like March. I would think that that is going to be a very low-cost facility. And I am just curious, were there technical issues there or why wouldn't you look to ramp that as quickly as possible and potentially, take higher cost facilities down?

Well, I think what we have done is we have taken a rational approach as Rick said the facility was substantially complete at the end of the year, but bringing on a 700-square-foot mill in a market that doesn't need the capacity. You have to be pretty careful about that. Now what we have done is -- as you said, it is a low-cost facility once fully operating. The comment that I would leave with you is the new facility is not a low-cost facility in the first year it runs. It's a higher-cost facility because you have the fixed costs associated with it, the people in the mill, and you are not running at your full capacity or at your optimal operating levels. So we are trying to take a reasonable approach to that. My guess is in 2007, we will run that -- we will actually produce -- the mill will be less than 50% of its ultimate capacity. So that's kind of a matching -- what demand is in the market and also bringing it up without spending a lot of overtime and other costs associated with the start-up.

Okay. Just lastly and then I will turn it over. Any comment on your expectation in the OSB business of cost inflation per unit when you net the various cost increases, transportation costs, resins against what you are doing on Brownfields in Clarke County. Any expectation for what you think that cost picture looks like?

You look by element, oil, I have seen numbers anywhere from $77 to $105 a barrel. That will certainly effect resin. I did talk to our resin supplier -- one of our major resin suppliers. I had dinner with them last night. They anticipate pretty flat resin pricing for the year. I don't think that is going to be a huge increase unless we do get a spike in the derivatives being oil and natural gas. If you look at the wood side, pulp businesses is still pretty strong. If pulp were to weaken, we would have a little bit more ability to, I get some price relief, but doesn't look like that is going to happen.

On the Canadian currency, we are budgeting parity. I know that the range is somewhere between $0.96 and $1.02 depending on who you look at. We are going to budget at parity and it does put all Canadian operations at a disadvantage -- all of our Canadian operations at a disadvantage. So on average, it will be a little bit higher than it was in '07 but it's not going to be significantly different. On the wage and benefits side. I think the industries are looking at somewhere in the 3% to 4% range for wages. And then health care, somewhere in the 5% to 8%. There goes your major input.

My add would be that as I look at this year, our biggest variable on costing is going to be taking the mills up and down. Based upon the market, how much we are able to run, that is -- that will be our largest impact on cost this year is the inefficiencies created by starting and stopping.

Okay. That's very helpful. Thanks.

Our next question will come from the line of Chip Dillon with Citi. Please proceed.

Yes, good morning.

Good morning, Chip.

Hi. I noticed there was a slight difference -- not to be too picky -- between the press release that said the -- without unusual items you lost $0.29 and on the slide it says $0.28. Can you tell us what that $0.01 difference was or why there is a $0.01 difference?

You know I suggest -- you need to call Mike or Becky because I couldn't tell you what that is. It is probably rounding.

Okay. All right. Okay. And then -- all right. When we look at the -- I'll do that. When we look at the -- that 150 that you are reclassifying. I think you referred to it I think as an -- was it ARS as in Sam or ARF? And what does that stand for?

It stands for Auction Rate Securities.

And who are primarily your -- I mean -- these are obviously investments you bought. Are these -- are these obligations of a sieve or obligations of a specific issuer? Could you tell us a little more about that, please?

In the Q, we did talk bout what is in there from the instruments. Generally what these are is they hold individual securities and they are packaged. So the trustee has access to the individual securities that are underneath the package.

And you are getting interest paid?

We are getting interest paid on time. None of them have been downgraded. S&P just downgraded 56% of their portfolio and none of them were holdings that we had.

Got you.

The important point is a lot of these very exotic instruments that -- that come under a lot of attack were issued in the '06 and '07 time frame. Virtually all of ours were 2004 and 2005 that have been rolling.

Okay. Then when you look at your net interest expense in the -- you mentioned you had 6 million capitalized in the fourth quarter, and I think you said 19 in capitalized interest for the year. What would that be in '08, I know it is going to come way down, could it be 0 or a couple million?

I think you can count on a pretty low number. It is going to be insignificant. Maybe 1 to 2 million.

Okay. And then as you look at your -- you consider the -- the illiquidity or less liquidity with the ARSs and whee cash flows look like they are right now. How important is the dividend on the scale of -- scheme of things? In other words, when would you get queasy about continuing to pay that?

Well, we just had a Board meeting last week and we assumed that supporting the dividend is something that we want to do. And so -- I think until we get pressed to a position where we don't think we can cover that along with everything else we have got going on, I think paying a dividend to our shareholders is a good idea.

Okay. Thank you very much.

Our next question will come from the line of Christopher Chun with Deutsche Bank. Please proceed.

Yes, thanks, good morning. Hey, just following up on the questions about the Alabama mill. I was just wondering if that mill will, in fact, cause your capacity to increase by the amount that it will run or whether you are planning to take down lower costs -- or higher cost capacity elsewhere?

Let me restate that perhaps in the shorter version of what Curt had. We are going to bring that mill up this year and ring it out at about half speed. We anticipate making somewhere around 300 million feet down there. If you will remember we shut the Silsbee mill down last year. In my mind it was to make room for that wood. And then I would anticipate based upon what I understand the world to be right now, which is we don't know exactly how this is going to play out. But I would anticipate running that thing full bore next year because it will be a low-cost facility by that time and if it causes casualties within our own system because the market is not there for take-aways then it may cause casualties.

All right. Okay. Then can you talk a little bit about your philosophy in terms of the trade-off between taking market downtime and just sort of shutting permanently or at least indefinitely idling specific mills?

Well, we are running our mills to meet our customers orders. When we don't have customer orders that we can see, then we don't allow -- or are not going to allow our inventories to build. So I think the key to this year as we have said inside our operations is operational flexibility. It is a very difficult year shaping up for our mills and their run schedules. And we are going to try to force -- force ourselves to be as flexible as possible. And as nimble in going up and down based upon the business that we see coming at us. And our major concern in the up-and-down schedule is in holding on to very valuable people in our skilled labor.

Right. But on the other hand you mentioned that there are certain constant inefficiencies of starting and stopping though. I was just wondering if you might--?

Well, we sell our product regionally so you have to look at your demand by where you are sourcing that product to. So it is not as simple as just saying I am going to take all my down time in one place.

Okay. And then just a quick clarification question for Curt. Curt, I thought you mentioned that the Canadian dollar impact was $15 million.

15.

Right. Was that just in OSB quarter to quarter or for the whole Company or?

It was OSB -- we are targeting to sell more product in Canada. So that was a net on the sales side in Canada. And our other businesses, our siding business sells predominantly in Canada so it's not as big an issue for our East River mill and then we did have an impact in our EWP business.

Okay. So that's for the -- 15 is just for the OSB or for the whole Company?

Right.

I am sorry for the OSB for for the entire Company.

The 15 is for OSB?

Okay. And about -- and that's 4Q '07 relative to 4Q '06?

No. That was for the full year, 2006 to 2007.

Okay. Can you give us an approximation of what the number would look like if we looked at the entire Company?

It is probably another 1 million or 2 million in EWP. It is not -- it is not all that significant.

Okay. Thanks for your help, guys.

We have time for one last question. That question will come from the line of [Bob Trout] with Goldman Sachs. Please proceed.

Good morning, guys. On the -- the operating rates for the quarter. Would you be able to give us an approximation of what they were in OSB fourth quarter?

You know what I would refer you to Bob is RISI comes out with that, so does the APA. I think the APA number was in the mid-70s.

Mid-70s and you think you pretty closely mirror that? And you think you are pretty close to that you said?

Well, I think -- last quarter we took as I said, -- I think I said this 455 days including the two mills that were down for the entire quarter.

Okay.

That is mill days down based upon our system.

Okay. And I -- I know that it might be tough to answer and you don't really give guidance on this, but you -- do you expect that -- on average in 2008, operating rates will be kind of similar for the industry?

Well, that's hard to guess at this point in time. I think that this quarter is starting off slower than what we experienced last year. We have a tentative plan, and, again, this is respectability issue to have about 150 mill days down this year exclusive of numbers we have included in the past of St. Michel and Silsbee. As I answer questions about that going forward I will not include Silsbee and St. Michel. As it looks right now we anticipate, probably -- based upon the orders we have of about 150 days scheduled -- of mill days down scheduled for OSB in Q1.

Okay. Okay. And then just a clarification on the housing question. Are you--?

On what question, excuse me?

On housing. Are you still -- I think you mentioned that your original plan -- for 2008 was that you were budgeting for around 1.1 million starts. Is that still the case?

Well, my budget is done. Now I am -- now I am reacting to the real world. And we are not at that rate at this point.

Right.

December looked like it was about 1.0. Everything thrown in. January feels worse. I don't have any numbers yet for January. I think one of the things that you could look at is permits. Permits continue to decline, which tells us this thing isn't going to turn any time real soon.

Yes. And then just from -- in terms of what you are hearing from your customers. I know you said that the RISI forecast, they think 2009 will be a good year at 1.6 million starts or something like that. What -- are you hearing anything from your customers to suggest that that's way too high?

Well, I -- I don't -- I don't know that -- RISI is the most optimistic if you put up all six or the eight of the forecasts out there on a chart. There's everything between 1.2 and 1.6 for next year. We do go to the builders show in about two weeks from today -- or from tomorrow. And I -- is it next week?

Next week.

Next week. And we will have a much better indication of what the composite is I guess from talking to all of the people that show up there. But I think people are looking about 1.0 right now. And everybody is waiting to see whether we have a recession or are in a recession.

Right.

That's -- that is the magic question right now.

Right, right. Last question on that topic. One of your competitors mentioned last week that in order to get back to like a normalized price level for OSB, they think that we need to be in about a 1.5 million unit kind of housing start environment. Do you agree with that?

I wouldn't care to comment on what my competitors think. Thank you.

Okay.

All right.

This concludes our question-and-answer section. I would now like to turn the call back over to Curt Stevens for closing remarks.

Well, thank you all for attending. Thank you for your questions. I know that we didn't satisfy all the questions. And Mike and Becky are available, and so they are ready to answer questions and give you a little more color on the results. Again, thank you for your participation. If you can give the playback information, that would be good.

Thank you for your participation.