Louisiana-Pacific Corp (LPX) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2008 Louisiana-Pacific Corp. earnings conference call. My name is Becky, and 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)

I would now like to turn the presentation over to your host for today's call, Mr. Curt Stevens, Executive Vice President of Administration and Chief Financial Officer. Please proceed.

Thank you, Becky, and thanks to all of you for joining us on this conference call to discuss our financial results for Q4 of 2008 and for the full year of 2008.

As Becky said I am Curt Stevens, the CFO, and with me today are Rick Frost, LP's CEO, as well as Mike Kinney and Becky Barckley, our primary Investor Relations contacts.

As I usually do, I will begin the discussion with a review of the overall financial results for both the quarter and the full year. This will be followed by some comments on the performance of the individual segments and the balance sheets. Rick will then take over and discuss his perspective on the operating results, and some thoughts on the near-term outlook.

As we've done in the past, this call has been open to the public, and we are doing a webcast, which can be accessed at www.LPCorp.com. Additionally, to help with the discussion, we have provided a presentation with supplemental information, and this should be reviewed in conjunction with the earnings release. As I go through my comments, I will be referencing the page numbers of these slides in my comments.

Last Friday, after the market closed we did file our annual Form 10-K report with the SEC, and that is available either through the SEC website or directly from the LP website.

Before I get started, I do want to remind all the participants about the forward-looking statements comment that is included on slide two of the presentation. Also be aware of our use non-GAAP financial information, included in slide three of the presentation, and the appendix with the necessary reconciliations is attached to the presentation. I am not going to reread these statements, but I will incorporate those with these references.

Now, moving to slide four, the presentation that shows Q4 2008 results. We are reporting today a net loss for the fourth quarter of $339 million or $3.31 per diluted share. Net sales from continuing operations were $250 million for the quarter. The net loss per diluted share for the fourth quarter included $2.66 of noncash goodwill impairment charges that I will talk about in a moment, a $0.16 valuation reduction on our auction rate security portfolio, an $0.08 increase in certain noncash settlement reserves, and $0.05 in restructuring charges based on the actions that we announced in January. For the same period last year, we reported a net loss of $52 million or $0.50 as share on sales and continuing operations of $337 million. Last quarter, just for reference, we had a loss of $111 million or $1.08 per diluted share, on sales of $390 million.

On slide five, unfortunately, there were a lot of special items during the quarter, and I do want to talk about those. In Q4 2008, we did record a gain on the sale or impairment of long-lived assets. We actually sold an asset and had a $5 million gain, and we took an additional $4 million impairment on the St. Michel complex that we have under a letter of intent. That was driven entirely by the change in the Canadian exchange rate, as the purchase price is in Canadian dollars, and we needed to adjust that to the US dollar equivalent.

In the other operating charges and credits, there were $296 million. The vast majority, $274 million, of that $296 million was related to goodwill impairment. The big four accounting firms reached the conclusion that a reconciliation of intangible assets to market capitalization could lead to an indication of impairment. Fundamentally what this means is that if tangible net assets are less than your market capitalization, plus the amount of debt outstanding, plus a reasonable control premium, that companies must carefully review the write off of their goodwill. Based on the analysis that LP performed, we did write off 100% of the goodwill on our books. As a reminder, this goodwill was related to two acquisitions in 1999, Le Groupe Forex and ABT Co. As I am sure you have seen with other companies, this is a common theme for 2008 as market caps have fallen dramatically given the credit crisis. The other thing I would note is goodwill impairment falls directly to the net income line, as there is no tax benefit associated with these write offs.

In addition to that, we had the $9 million of severance pretax, due to the right-sizing and we increased a settlement reserve by about $14 million, and we did bring back a small amount from litigation reserve. On the other than temporary investments, we did take a further $27 million impairment on our $151 million auction rate portfolio that is now valued on the books at $12 million. During 2008, all of these securities did pay interest. As of January, there was one small ARS of about 3.5 million that stopped paying interest in January.

As a reminder, in Q4 the special items there were the further impairment of the St. Michel saw mill of $3 million. We had the accrual on a tentative settlement on the environmental lawsuit of $7.75 million that was paid in 2008, and we had the first temporary impairment of the ARS investment of $21 million. Adjusting for these items, the net loss from continuing operations was $35 million or $0.35 per diluted share, compared to a $29 million loss or $0.29 per diluted share in Q4 of 2007. For the full year, we are reporting a net loss of $579 million or $5.62 per diluted share on sales from continuing operations of $1.4 billion. The net loss per share for 2008 does include nearly $4 related to goodwill impairment other than temporary impairment of investments, and other operating charges and credits. For the full year of 2007, we reported a net loss of $180 million or $1.73 per share on sales from continuing operations of $1.7 billion.

Similar to the quarter, page seven summarizes the special items for both of the full years. In 2008, we did have a further $14 million impairment on the St. Michel complex that I talked about, offset by a gain on an asset that we sold in the fourth quarter. The other operating charges and credits, the big one again is goodwill of $274 million; the litigation reserve for the OSB anti-trust settlement of $48 million; an increase in various settlement reserves of $32 million; severance related to right-sizing of $11 million; we did have an insurance recovery of about $6 million; and then we had an explosion at one of our facilities, and we accrued $5 million for that. Then, you can see the -- highlighted there is the $119 million, which is the other than temporary impairment of our auction rate securities.

In 2007, you can see there the biggest one was the impairment of long-lived assets, a noncash impairment, and that was mostly St. Michel. The other operating charges and credits, we had an insurance recovery litigation reserve I we talked about before, and other items of about $2 million. $21 million again was the fourth quarter adjustment that began the write down of the auction rate securities. After adjusting for these items for the full year, net loss from continuing operations was $160 million or $1.54 per share in 2008, compared to a net loss of $115 million or $1.11 per share in 2007.

I want to make just a few comments, and actually to go back and look at slide four and the tax rate. The quarterly tax rate shown here does vary widely. The tax rate on continuing operations in Q4 of 2008 was 12%, compared to 52% in Q4 of '07. Biggest impact in the fourth quarter was the non-deductibility of the $274 million write down of goodwill. For Q4 of 2007, the higher rate was due to a year-end catch up, and I will explain that when I talk about the full year tax rate.

Page six, the full year tax rate for 2008 was at 26%, again largely as a result of the nondeductibility of the goodwill impairment charge. The higher benefit rate for 2007 than the statutory rate was due to the losses and the implementation of several strategic tax strategies. We had a reduction in LP Canada's deferred tax liability due to an enacted decrease in the statutory rate in Canada. We have interest that is deductible for income tax purposes on intercompany debt, and that gets eliminated in consolidation. We had the impact of the translation of Canadian operations, and then in 2007 we also had the settlement of an outstanding state tax dispute in our favor.

Now, let me discuss the performance of each of the segments. Slide eight is our summary of the OSB segment. For the quarter OSB losses were lower, at $31 million compared to $54 million in Q4 of 2007, and about the same level as last quarter, despite sales that were 40% lower. OSB price compared to the same quarter last year was up about 6%. However, during the period volumes were down nearly 50% due to our production curtailments taken during the fourth quarter. On a quarterly comparison, pricing -- the higher pricing did account for about $6 million of the improvement, with the rest coming from the actions taken within the business to reduce our operating costs.

For the full year, OSB sales were $622 million compared to $824 million in 2007. Boxes were lower by almost $40 million versus 2007, a $155 million loss, compared to a $195 million loss in 2007, primarily driven by actions taken to curtail certain unprofitable mills, reductions in our costs, and the adjustment of our production to identified customer demand. For the year, the average sale price was up 5% due to an increased percentage of value-added products and other actions taken by LP.

The Siding business is summarized on page nine. This segment, as a reminder, includes our SmartSide, which is the OSB siding products, our Fine Fiber siding, and commodity OSB produced on one line at our Hayward mill. For the quarter Siding lost $11 million, compared to a $4 million loss in Q4 of 2007. This is a direct reflection of the costs associated with taking significantly more downtime across the Siding system to adjust our inventories to the greatly reduced customer demand. For the quarter, sales volumes were down 23% in SmartSide compared to the same quarter last year, 39% below last quarter. Sales prices were flat compared to the same quarter last year, and up about 5% from the prior quarter.

Our Canexel sales volumes were down 24% form the same quarter of last year, with pricing 11% lower due to mix. We believe that volumes of both product lines suffered due to the closure of many branch locations of our channel partners, and the redistribution of this inventory to those locations that remained open. For the full year, sales in this segment decreased by only 6% to $424 million compared to the same period last year, and profits decreased significantly to $3 million compared to $34 million in 2007. Reconciled to that, lower product volumes accounted for about $10 million of this lower profit. Higher pricing added $6 million, and then higher raw materials and energy costs, including the Roaring River conversion, changed earnings negatively by nearly $20 million.

Slide 10 is our Engineered Wood Products business. This segment includes laminated veneer lumber, I-joist operations including our JV with Abitibi, plus other related products. For Q4, EWP recorded a loss of around $12 million, much worse than the $3 million loss in Q4 of 2007. Sale prices for I-joists were 8% lower in the quarter compared to the same quarter of last year, and a combination of our LVL/LSL pricing was lower by 16%. Sequentially, pricing fell 4% and 7% respectively. For the quarter LVL/LSL volumes were down 23%, and I-joist volumes were lower by 33% compared to the same quarter of last year. This is a direct reflection of the reduced new housing activity, where the vast majority of these products are sold.

For the year, EWP sales were at $234 million, about 30% lower than the $332 million recorded last year. Losses were $40 million, compared to profits of $11 million in 2007; again a direct reflection of the much lower building environment that reduced volumes and sale prices. We've talked about it before, but the LSL start-up mill in Houlton, Maine accounted for about half of these losses, and totaled $21 million. Lower volumes accounted for reduced earnings of $9 million, and lowered earnings by another $9 million from a price perspective.

I don't have a slide on our other building products. The segment consists of interior moulding in South America, now including both Chile and Brazil, our cellulose insulation joint venture resource, and and nonoperating facilities. In Q4 we had a combined $1 million loss from these operations, and a loss in this segment of about $2 million in the same quarter of last year. For the year, sales of both operations were flat at about $100 million. For both years we incurred a loss of around $6 million.

For the fourth quarter, interest expense net of investment expense was $6 million compared to interest income of $10 million last year, a reflection of higher cash balances in 2007. And then in 2007, due to the construction activity, we did have capitalized interest that offset the interest expense. We had a foreign currency gain of $13 million in Q4 this year, compared to a $1 million gain in the same quarter last year. Almost all of this was attributable to the strength of the U.S. dollar against the Canadian currency. For the full year, interest expense net of interest income was $11 million for 2008, compared to a $46 million net investment income in 2007. The foreign currency gain in 2008 was $20 million, compared to a $30 million loss in 2007; again, largely a result of the Canadian currency. Total sales, general and administrative costs were $26 million for the quarter, a decrease of almost 30% over the same quarter last year. For the year, total SG&A expenses were $142 million, a decrease of 7%.

Slide 11 of the presentation shows some key balance sheet and cash flow statistics. Cash, cash equivalents, investments and restricted cash at the end of the year were $215 million. Working capital was at $337 million, and net debt was $35 million. As a reminder, in Q4 we did retire about $125 million worth of debt. 2008 capital expenditures and investments were $161 million, and we ended the year with a book value per [ending] share of $11.45. Also in the presentation, as I mentioned, in the appendix is the reconciliation of the calculations necessary for the non-GAAP financial measures that I discussed.

Before I turn the call over to Rick, I do want to make a few comments on liquidity, as this is perhaps the most frequent question that we all get from analysts and investors. As we have discussed in pre-release in January and on various forums, LP is focused intensely on reducing our rate of cash usage. The actions we have taken, and the expected reduction in the use of cash in 2009 versus 2008 will be discussed by Rick in a few minutes. As we have reported the last several quarters, we are actively considering other possible measures to enhance our overall liquidity [position]. The could include the possible financing or refinancing on transactions; it could include the issuance of secured or unsecured debt, equity or hybrid securities; and/or the entry in one or more credit facilities. Rick and I fully understand the importance of cash in this turbulent economic environment. As I am sure you can all appreciate, this is all that we can say about this topic, and we will not be providing any more information at this time. I would ask that none of your questions are about liquidity. We have said what we can say.

With that, let me turn the call over to Rick.

Thanks, Curt, and good morning, everyone. I do thank you, particularly this morning, where I guess the East Coast and the Northeast are getting hammered by a blizzard, that you are able to get on the call.

As you can see, we did change our format this year -- or this quarter for our earnings release, to try to provide you more initial detail and initial color, and we hope hat that is helpful to you in understanding the quarter, and we would expect to continue to use this format going forward. As Curt pointed out, the largest impact on our Q4 results was taking the noncash goodwill impairment charge of about $273 million or $2.66 per share. Like many companies, we now have goodwill off of our balance sheet going forward.

As well as a tough year, I think I will start out with some of the bright spots for 2008. I usually mention safety and compliance on these calls, because they are part of our core values. And in safety, we achieved another Company best this year, and an industry best, with a total incident rate of 0.78. In our environmental compliance effort, we had our first year ever with zero notices of violation from our operating facilities. I think both of these milestones are significant, particularly in light of the fact that they were accomplished under the most chaotic of operating conditions for our people and our facilities. While we always do our best to operate safely and within the law, because they are part of our core values, these are significant as well because these results provide significant savings in the immediate and the long term of our Company. Worth mentioning as well was the continued contribution of our Lean Six Sigma teams, which achieved for the year over 5 to 1 returns against a goal of 3 to 1 returns.

In our efforts to broaden LP's market penetration in 2008, we accumulated over 1,500 wins. We define a win as a new product placement with an existing customer, or a product placement with a new customer. While these wins could not offset the overall decline in the market demand, they did help; but more significantly, they will turn into new volume and new customers for us when the markets begin to rebound. I am convinced that our sales force is doing a heck of a job, as these battles are being fought every day in trenches.

Now I want to make a few looking-backward comments on each of our businesses, and then turn my thoughts towards 2009. In '08 across the world, nearly all of the businesses became paralyzed in Q4 of '08. Building products for new home construction, and repair and remodel were not exempted from the carnage. Actually, activity really almost stopped, and our customers spent the last two months of the year redistributing their inventories. The new home starts number was indicative of this. I think everyone that had not yet done so turned their attentions inwardly into what they needed to do on the cost and the working capital side, to minimize exposure and cash drain based upon an anticipation of a very slow Q1 '09.

In OSB our Q4 sales volumes were off from Q4 '07 by 48%, but our segment operating results improved over Q4 '07 by 42%. That's evidence of a couple of things. First, the way LP operated differently in '08, and price was actually up 5% in Q4 over Q4. We took almost 600 million -- or excuse me, 600 mill operating days down in Q4. That was including 91 days for Clarke County.

A quick glance at '07 prices versus '08 prices show an $11 improvement in ASP on a [7/16 inch] basis, as reported by [Random Links] recently. In Siding and Engineered Wood, the Q4 story was simply a reduction in volume, and the expense of intermittent running. Additionally, if you look at those businesses for the year, beyond volume in both cases and pricing in Engineered Wood Products, two factors cost us a lot in '08 that we will not encounter in 2009; that being the conversion to the zinc borate process at our Roaring River mill, which cost us about $10 million in the first half of last year in [up-sets], and the start up loss with LSL at Houlton in this dreadful market, which cost us about $21 million.

Now I am going to turn my remarks towards the changes in cash burn between '08 and what we anticipate in '09. We discussed some of these in the 8-K that we issued in January. We plan for our cash burn to be dramatically less in '09. In '08, we paid out about $31 million in dividends that we will not replicate in '09. Capital will drop from about $160 million to between $15 million and $20 million in '09. The closures of our Chambord, Clarke County and Athens OSB mills will reduce net cash consumed by $30 million. Our right-sizing efforts and other cost reduction efforts will reduce the burn rate by about $40 million to $45 million. And unpleasant to remember, but part of the mix for '08 was the $48 million payment in the OSB anti-trust lawsuit, and the write down of the ARSs from $151 million to $12 million.

Now a couple of other things are going our way as well. The Canadian foreign exchange averaged 0.96 for 2008; today, it is at around 0.80. Our current exposure is about $2 million per $0.01. As well, raw materials related to energy have or are declining in costs, and we estimate that the $47 million increase in raw materials we experienced in 2008 could decrease by $35 million to $40 million in 2009, depending upon the volume that we run this year. Right now, we are working on $30 million to $35 million in non-operating asset sales, which will be turned into cash when we complete them. Obviously, in this credit environment this is slow going. Finally, we do expect a $60 million-plus tax return within the next couple of weeks. So to sum all this up, I believe that we can exit 2009 with an available cash balance equal to or exceeding the closing amount that we had in 2008, and this excludes any refinancing that we may choose to complete.

So I will conclude my prepared remarks with a brief look forward. I think that '09 can best be looked at as an endurance contest. Those that last will prosper as the economy rebounds. My expectations for total starts this year is now adjusted down to 600,000. That is approximately 1/3 of the underlying demand. Now, unless you are older than I am, which probably many of you aren't, it will be the lowest demand that you have ever seen. Business will adapt or it will fail.

Louisiana-Pacific, I anticipate, will take over 700 mill days of down time in OSB, including the indefinite status of Silsbee, Athens, Clarke County and Chambord this quarter. We will do that to adapt to the reduced demand. In Engineered Wood Products, you may have recently seen that we announced the indefinite suspension of our operations at our extension of the operations at our Wilmington, North Carolina LDL plant.

Looking out a little farther, at this point in time for planning purposes I am assuming 900,000 starts for 2010. That's all-in, that's new starts, multi-family and manufactured housing. We have seen a forecast or two recently that is a bit more optimistic than that, but we haven't changed our planning yet. Our challenge will be to figure out how to be profitable at that level, so that a return to 1.1 million or 1.2 million starts in 2011 feels to us like the good old days at a much lower level of activity.

And just for reemphasis, as Curt said we are managing the business primarily for cash in 2009.

Now, I will turn it back over to Curt.

Thanks, Rick.

Becky, I think we are ready to open up for questions.

(Operator Instructions)

Your first question comes from the line of Mark Weintraub of Buckingham Research. Please proceed.

Thank you. Just wanted to follow up on the tax refund. What is the level of confidence on getting that $60 million in -- in the next, I think you said -- did you say weeks? Did I hear that right?

Our level of confidence is pretty high. We have filed the return, and we are just waiting for the refund to come in. Mark, just so you know, what we've talked about in the release in January is that we were expecting about $90 million in total tax refunds, which would include both 2007 and 2008. The 2007, we hadn't yet received at the end of the year, plus 2008, and that is offset by about $10 million in payment. So the net that we expect for the full year is $80 million. What we have filed so far is just the Federal piece of that.

Okay, and I guess the context of the question, and I don't want to get into the weeds, but is though -- you had put out a number for the fourth quarter in terms of the tax refund you expected that didn't play through, and are we in a different situation now where your level of confidence is much higher on this one than it would have been for the numbers in the fourth quarter?

Yes, the difference is that we file in various foreign jurisdictions, largely in Canada but also in Chile and Brazil, but Canada is where we were expecting the tax refunds that we didn't get. There is no statutory time limit in either the provinces or the Federal government in Canada to pay the tax refunds. In the U.S., there is a 45-day statutory period that they -- the IRS has to refund the money. So that's the wild card, and the other wild card of course is any refunds coming from the states. The states are under their own rules.

Then also there had been a joint venture, or there had been something out in the Pacific Northwest at one point where you had committed to put some money to work. That seemed to have been placed on hold. Can you just update us on the status of that situation?

Yes, that is not going to happen.

Okay.

We have looked at this market, and we have come to an agreement with the people that we were talking to, and we are not going to do that.

Then finally, you mentioned you had a couple of nonoperating divestiture opportunities that you hope to realize in the next near while. Is there much that could be sold beyond those opportunities that you could update us on?

We probably have a list of upsides. Of course, it depends on buyers and people's availability for money, but a list of upsides that are equal to that again.

Okay. Thank you very much.

Your next question comes from the line of Gail Glazerman of UBS. Please proceed.

Hi. I was just wondering if you could walk us through your assessment of OSB industry's supply and demand. There's been so much movement I guess on the supply front recently?

Yes, let me -- I will give you a 30,000-foot view of it, but this is probably the shortest way to explain it. There's about 30 billion feet of capacity out there, near as we can tell, which includes everything that's either completed or to be completed. Of that 30 billion feet, there appears to be about 10 billion to 11 billion that has either been shut down permanently or shut down indefinitely. And so, I think the number of permanent shutdowns is somewhere a little bit below 5 billion, and the amount that has been indefinitely shot down is a little bit above 5 billion. So the industry capacity that is available to run right now appears to be somewhere between 18 billion (audio dropout). And then at the rate that the industry is operating at now, Delta is being dealt with by intermittent (audio dropout). Is that helpful to you?

Yes, it is.

I think the only thing I would add to that, those are annual capacities, and of course you have seasonality in this business in the first -- and the fourth quarter and the first quarter are historically low usage periods.

Understood. And just the start up costs at Houlton, are those narrowing at all? So $21 million for the full year, I mean were they significantly lower in the fourth quarter versus earlier in the year?

They are lowering. The way that worked is we brought that mill up in the first half of last year, and we really had no salable product coming out of that mill at all. So all the product they were using for the qualification was not salable. We did begin selling that product in the third and fourth quarter, but as Rick said introducing a new product into a declining market is always a challenge challenge. So that mill is running very sporadically at the current time, but the run rate is significantly lower than it was in 2008.

I think the bright spot for Houlton and LSL is that we recently did achieve the 1.75 MOE rating that we were after, and we do have -- immediately have orders for that. So that is a significant thing for us which happened right on our timeline for this year, so we are pleased with that. It should help us a little bit.

Okay. And in terms of FX, you gave an updated exposure for the Canadian dollar. Is there any sort of guidance you can give under exposure to the Latin American currencies?

There really isn't a lot of net exposure, because we sell those largely in local currency and our expenses are in local currency. So there is some. The only -- there will be revaluation of the debt, and we have $39 million worth of debt in the Chilean facility -- or the Chilean operation. So there will be some revaluation there, but that will be largely noncash.

Okay. Then just last question, and I apologize if I missed it. Did you make any comments about your agreement about the Government subsidies for the Clarke County mill, and where that stands?

We -- there was an article in the local press, I don't think we published anything on that, but it is not material, it is less than $500,000 a year.

Okay, great. Thank you.

Your next question comes from the line of Peter Ruschmeier of Barclays. Please proceed.

Good morning, Pete.

Rick, I was hoping you could comment on how Brazil may have helped or hurt in the quarter, and your outlook for the Brazilian market?

Yes, Brazil got pneumonia when the rest of the world did in Q2, and so our expectations for Brazil for this year are less than what they were the last time that I talked on this call. Their economy has slowed down, and our sales plan that we had put together as late as November of last year is somewhat reduced, so our expectations for this year based upon what is going on with Brazilian activity down there are less. It won't be tremendously significant. In total, I think South America will perform closely -- pretty close to where we looked at it. Chile has rebounded somewhat, and basically pricing has improved for us in Chile, so we are going to be a little bit better than what we thought in Chile, and probably the same amount worse in Brazil.

Any comment if Brazil is cash positive or negative?

Our goal there is going to be -- probably will be neutral.

Okay. Coming back to the U.S. --

Our goal was higher earlier, but they pretty well caught the cold of this world credit crisis.

Okay. Rick, coming back to the U.S. and just big picture, looking at costs, if your OSB volumes are down 50% year-on-year, I think your head counts -- I think that salaried head count is down 12% from when you started. How do you think about right-sizing the labor force? You know, your forecast for housing starts does not suggest a very significant uptick anytime soon. So how do you balance that challenging question of what is the right size of the footprint?

Well, we took our first stab at that last quarter, and I think that where I am at right now is that -- to put it very bluntly, the question you have to ask yourself is do we have a better chance with the staffing that we have right now to make our plan or do we have a better chance to make our plan without the staffing? And at this point in time, I like the way that we are staffed based upon what we have on our plate to accomplish. And so -- but that's a constant question that we ask ourselves as we are adapting to the market. But we accomplished the lion's share of what we identified that was, we felt, cost positive to us in the fourth quarter of last year.

Okay. One more question, and I will turn it over. Operationally, I am curious down in Clarke County, how much cash do you need to start Clarke County? I think it that the cost structure would be sufficiently positive enough to provide a pretty quick payoff, but how do you think about the pros and cons of whether that should be restarted at the -- you know, instead of some higher cost assets that you may have?

Well, out of the bucket to get that thing up and running, that we probably have to consume $6 million of working capital. So that went into our decision last year as we looked at, do we want to bring Clarke up and take some other mills down, managing on a cash basis it would take awhile to recover that, plus we would then incur severance charges at some other facilities to make room for that wood. So it makes more sense to us on a short-term cash basis to leave Clarke down until the market improves, and our cash situation improves, and then we would rethink that.

Okay. Thanks very much. I will turn it over.

Your next question comes from the line of Steve Chercover of D.A. Davidson. Please proceed.

Good morning.

Good morning.

First question, with respect to Houlton LSL, are the start-up costs behind you? I mean, do you think that -- it might not be cash flow positive, but is there going to be another $20 million loss or anything of that magnitude?

Start up costs are behind us. The problem we have there now is we just don't have enough volume, so we've got real inefficiencies in running. But now with the 175E completed, which was a milestone for us, the trick is going to be to try to -- you've just got the inefficiencies in running the mill on such a short-time basis, but in terms of developing the product, and making sure you have product for sale as you come up, remember this is a brand new process and brand new product, those are behind us.

Are you happy with the quality and market acceptance of the product?

We like the product. Everyone that's looked at it likes the product. The problem is, there's just not many takeaways right now.

Understood. Okay, and then switching gears, it looks like in January the new permits were closer to 500,000 than 600,000, so I don't know if this is the proper word but are you properly capacitized if volume comes in even lower than the 600,000 that you predicted, Rick?

Well, I think we are all looking at what -- a nuclear first quarter. I mean this thing -- the first quarter of this thing is worse than anyone could have guessed. So I think what we are trying to do is we are adapting on a weekly basis based upon our takeaways, and the intense pressure that we have on our operations around managing working capital. So we are just adapting, and evidence of that is the recent announcement we made two weeks ago, where it made less sense to come -- like an engineer would, product, to keep that running. So we just went ahead and took it out, and got more of the fixed cost out of there. But that is a week to week thing.

Steve, the only thing I would add to that is obviously with the recent actions that the government has taken with the various stimulus packages and housing recovering, there is a fair amount of money going into the system, and there is certainly a concentrated effort to -- I think there is a much greater recognition is important to the recovery. That's why you saw the $275 billion being targeted for housing, that's why you saw the $8,000 tax credit going to new home buyers, and you also saw in the budget that there is increase in the housing and urban development budget to forestall foreclosures and to encourage people to stay in their homes.

Another positive glint, and it's pretty hard to find any, but I think January was the first month where permanents exceeded starts, and that's and that's a nice place to be. So we do anticipate some seasonal uptick. I mean, it is not going to be the normal seasonal uptick. As soon as the North thaws out, there is going to be a seasonal uptick.

And one other question, if I could. I just wanted to make sure I understood what you said. Closures will save you $30 million, and then the right-sizing at corporate and whatnot is another $40 million, is that correct?

That's correct.

Thank you.

I think we have time for one more question, Becky.

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

Good morning, guys. Curt, could you just talk about the cost side of things? I think you mentioned $30 million to $40 million in maybe cost savings in 2009. I would assume that is obviously cost of goods sold, but where -- what are the key buckets? Is it wood fiber, is it resin, is it obviously probably energy as well, but could you elaborate a little bit? And then a second point to that would be is the market sufficiently competitive right now that you would expect to actually give that away in the form of pricing, or do think that the market is taking sufficient down time and people are seeing the pain enough that pricing -- prices kind of stabilize and you actually see the benefit of those cost reductions?

Let me take the cost piece first. I think fundamentally what I would expect in 2009 is that we will get back to the level of pricing on our raw materials that we had in 2007. To put that in perspective for us, if we compare the full year of 2008 versus the full year of 2007 on comparable volumes, our raw materials costs were up about $48 million. The way that broke out, about a third of it was in wood, about 20% of it was in electricity, natural gas and electricity, and then the resins and wax made up the rest of that. So we would expect that given the fall in oil pricing, that is going to affect the wood costs, and the other effect on the wood costs is that the pulp business is much depressed from where it was last year, and that is the primary competition we have for that raw material.

We have already seen a significant reduction in MDI and PF resins as we went into the first quarter, and we will see a further reduction in the second quarter. And natural gas, you will recall last year at about this time it was selling for $12, and I think it is at $4.80 today. We will see those reductions. So I would expect to recover most of the increase that we had in 2008 -- increase we had in 2008 to get back to 2007 levels.

As far as competitive marketplace, we are in a very competitive marketplace and always have been. I am encouraged, though, when you look at [Random Links'] pricing, it stayed up, it stayed pretty flat for really the last couple quarters. We had a slight increase in the first part of February, and that's held. I think last week we had a couple of regions come off a bit, but it is very regionally based, and it also is reflective of the delivery cost to the facilities.

Can I just ask one other follow-up? Can you just provide what your natural gas consumption might be, and maybe an order of magnitude on the resin consumption?

Well, it depends on how much we're running. Historically, we have used about 100,000 pounds of MDI and about 100,000 -- no, no, about 70,000 of PF, roughly. That's not right, 100 million pounds. Got my numbers wrong. So historically, our resins have been about a $200 million spend. But with the greatly reduced run schedules we've got, it's going to be less than that. On natural gas, our spend has generally been about $35 million to $45 million, and again it depends on what you are running.

Okay. Thank you.

Thank you, Mark.

I appreciate all of you joining us on the call. As usual, Becky and Mike will be available. Again, I am pleading with you, don't ask us about liquidity because we can't say anything more. I don't want to shut down your questions, but we are not going to talk about that at this time. Thanks again.

Becky, if you could give out the playback information, I would appreciate it.

Certainly. Ladies and gentlemen, thank you for your participation in today's conference. This conference can be heard again through a replay that can be accessed through the toll free number (888) 286-8010 using access code 18457024. Once again, that is toll free (888) 286-8010 and the access code is 18457024.

Thank you again for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.