Louisiana-Pacific Corp (LPX) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Louisiana-Pacific Corporation earnings conference call. My name is Amity and I'll be your operator today. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions)

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

Thank you. Thank you for joining us on this conference call to discuss LP's financial results for Q4 and full year 2009. Usually I let Rick give the weather report. I'll let him do that for national, but we appreciate those participating, even though the East Coast has got the snow problems.

As the operator said, I'm Curt Stevens, CFO. With me today are Rick Frost, LP's CEO, as well as Mike Kinney and Becky Barckley, who are our primary Investor Relations contacts. As I usually do, I'll begin a discussion with a review of the financial results for both the fourth quarter and the full year and I will follow that with comments on the performance of our individual segments and then some selected balance sheet discussion items. Rick will then take over to discuss the general market environment in which we have been operating, his perspective on our most recent results, and some thoughts on the outlook for 2010. As we have done in the past, this call is open to the public and we are doing a webcast. This can be accessed at www.LPCorp.com.

Additionally to help with the discussion, we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I'll reference these slide numbers in my comments. Additionally, we did file an 8-K this morning with some supplemental information and as you know, our Form 10-K we filed around the first of March. I want to remind participants about the forward-looking statements comments included on slide two of the presentation. As we all know, the last three years, it's been very difficult to forecast the housing environment, so our comments need to be taken in that context. Also be aware the discussion on our use of non-GAAP financial information, which is on slide three of the presentation, the appendix attached does have some of the necessary reconciliations. As I mentioned, we did file the Form 8-K this morning that provided more of those reconciliations. I'm not going to reread all of these statements, but I will incorporate them with this reference.

Before I talk about our results for Q4 and the full year, I do want to spend a few minutes talking about what LP accomplished in this last year with our single-minded focus on cash. We entered the year with $215 million in cash and equivalents, short and long-term investments and restricted cash. $126 million of this $215 was what we identified as available. What this means is we reduced the total cash by the carrying value of our option rate securities, and by the amount of restricted cash. Using that same measure, we ended 2009 with $440 million in cash, $394 million of which was available under that definition as an increase of $268 million, in a year where housing was down 39%.

We talk about some of the things that we did to improve that balance sheet item. Clearly there was net cash from financing activities included in the March senior secured note issuance and the September equity offering offset by some of the repurchases that we did. That amount here was $116 million. Operationally, and I'll get into the details here, each of our three operating segments, improved significantly, as measured by their adjusted EBITDA. 72% increase in OSB, 15% increase in EWP, and over a doubling in our signing business.

We did collect the $80 million in tax refunds that we forecasted at the beginning of the year. We reduced our inventories across the system by over 25%, which released $50 million in cash. Late in the fourth quarter, we did sell a portion of our option rate securities portfolio for $21 million in cash. We also released an additional $58 million in restricted cash that is now available for our use.

While not what we expected, we did generate $8 million from asset sales, short of our expectations. We held capital expenditures and investments in our joint ventures to $10 million. Our selling and administrative expenses fell by 20%, a $27 million savings and our Lean Six Sigma program continued to generate savings and improve our operations. With this balance sheet improvement and the lessons we learned during this period, we remain very well positioned to respond to whatever the market throws at us over the next several years.

With that as a preface, let me talk about earnings. On slide four of the presentation, this looks at Q4 2009 results compared to the same quarter last year and the prior quarter. We are reporting today a net loss for the fourth quarter of $49 million or $0.40 per diluted share. Net sales from continuing operations were $275 million for the quarter, a 10% increase over the same quarter last year. The same period last year reported a net loss of $341 million, or $3.31 per diluted share on sales of continuing operations of $250 million. Adjusted EBITDA from continuing operations was a $19 million loss in the quarter compared to a loss of $38 million in the same quarter last year.

Movement in the tax rate and continuing operations between the quarters, the effective tax benefit rate in Q4 of 2009 was 27%. This is lower than we would expect, primarily as a result of a change in estimate due to the need to establish a valuation reserve against deferred state tax assets because of the lack of taxable income in the past three years. Full impact of this valuation reserve was taken in Q4, as we needed to apply the effective annual tax benefit rate to the full year results. Q4 2008, the tax benefit rate was only 12%. The cause of this low rate is primarily due to the nondeductibility of the $273 million good will write-off taken last year. Excluding the effect of the good will impairment, the tax benefit rate in Q4 was 42%.

Slide five is a discussion of special items in the quarter that are generally not attributable to our ongoing operations. In Q4 of 2009, we had a charge of $9 million to increase contingent liability reserves, which included a charge associated to the subleasing of certain office space, environmental reserves on a closed site, and an increase in the ABT class action settlement reserves. We had investment gain of $19 million on the portfolio, on the sale of the option rate security portfolio that I talked about. I'll discuss this further in a few minutes. We did announce that we would have a $21 million loss on the early extinguishment of the debt related to the equity clawback that we completed in October of last year. In 2008, the items include impairment of $27 million on the option rate securities portfolio, write-off of the good will that I just mentioned, and other operating charges and credits related to severance and right sizing charges and an increase in settlement reserves.

Slide six shows our annual results for 2009, reporting a net loss of $121 million, $1.12 per share compared to a loss of $579 million, or $5.62 per share in 2008. Effective tax benefit rate for 2009 was 35%, 26% for 2008. The primary difference between the years is again related to the nondeductibility of good will in 2008. Adjusted EBITDA from continuing operations for the full year 2009 was a loss of 44 compared to a loss of 155 in 2008, over a 70% improvement by housing starts being lower by nearly 40%.

Slide seven is a discussion of the special item compared in the two years. For 2009, the items are very similar to what I discussed in 2004. 2008, we reported $119 million total writedown of the ARS portfolio, wrote off the good will, and then we had other operating charges and credits that included the OSB settlement reserve and the previously discussed reserve increases in severance right sizing charges.

Let me talk about our segments now. Slide eight is the OSB segment. We had an operating loss of 17 million in the quarter, which is a 45% improvement compared to a 31 million operating loss in Q4 of last year, with a 16% increase in volumes, and an average sales price of 5% lower. This improvement is directly attributable to the actions that we have taken over the last year to adjust our operations and the focus on the cash. Adjusted EBITDA from continuing operations in the OSB segment for the quarter was a loss of 8 million compared to a loss of 22 million in Q4 of last year. Compared to Q3, volumes were lower by 4% and price also decreased by 4%. For the full year, OSB had an operating loss of $66 million compared to a loss of $155 million during the same period last year, despite our sales being down 35%. For the full year, adjusted EBITDA from continuing operations in the OSB segment was a negative 30 compared to a loss of $104 million during 2008, an improvement of over 70%.

Slide nine in the presentation is our siding segment which includes SmartSide and Canexel, and the commodity OSB producer Hayward. For the fourth quarter, siding had operating income of $5 million, significantly better than the $11 million loss in the same quarter last year. Adjusted EBITDA from continuing operations in the siding segment was $9 million compared to a loss of $7 million in Q4 2008. For the quarter, sales were up 13%, with unit volumes better by 19%, and SmartSide down slightly and Canexel compared to the same quarter last year. In terms of sales price, the 25% increase in Canexel is a combination of change in mix. We eliminated our Doorskin business which had a lower price point in the middle of last year. And we also had an increase in the Canadian dollar exchange rate, as much of this product is sold in Canada. For the year, siding had operating income of $29 million compared to $3 million in 2008, a ten-fold improvement in results. Sales in 2008 are 12% lower than prior year. On the adjusted EBITDA from continuing operations for the segment, it doubled to $48 million compared to $24 million in 2008.

Slide ten is our engineered wood business. It's a reminder, this includes I-Joists, laminated strand lumber and laminated veneer lumber plus other other related products. This segment does include the sale of I-Joists and LBL products by the Abbott Tibby JV, are under a sales arrangement with Murphy Plywood. For Q4, EWP reported a loss of $9 million compared to a loss of $12 million in Q4 of last year. Adjusted EBITDA for continuing operations was a loss of $6 million in the quarter compared to a loss of $8 million in the same quarter last year. Volumes of I-Joists were up slightly, while volumes of LBL LSL were up quite a bit compared to the same quarter last year.

This increase was only slightly related to housing. In the quarter, we did sell a significant volume of nonstructural LSL starter board that skewed these numbers from a volume percentage. Pricing was up 2% in I-Joists and down a bit in LSL, but the decline in the LBL LSL pricing was due to the non-structural stater board that I just discussed. For the year, EWP had an operating loss of $33 million, an improvement from the $40 million loss in 2008. Sales, however, were lower by a third in 2009, proportional to the decline of housing start-ups. Adjusted EBITDA from continuing EWP operations for the year was $21 million compared to a loss of $24 million last year.

Our other building products, there's no slide in this presentation, but let me make a few comments. Overall, we lost about $1 million in both Q4 of 2009 and 2008. For the quarter, sales were up, were at 31 million, up 50% from the 20 million reported in Q4 of last year. For 2000 and for the full year, we had operating income in the segment of about $1 million compared to a loss of 7 million in 2008. The sales increasing by 21%.

Some of the other items, we did have a $3 million foreign exchange gain in the quarter compared to a $13 million gain in the same quarter of last year. As a reminder, 2008, we had $125 million Canadian loan that was repaid late in the fourth quarter, that was denominated in Canadian dollars, and Canadian rate dropped and this was the reason for the realized gain. Investment income excluding the gain on sale for ARS for the quarter was about $6 million compared to $7 million in the quarter last year. Interest expense was about $6 million higher in the fourth quarter of of 2009 versus 2008, primarily due to the high cost refinancing included in Q1.

Selling and administrative costs for the quarter were $32 million compared to $26 million in the same quarter last year. There were several factors that contributed to this increase, but the most significant is related to management incentive pay. In 2008, we reversed the year-to-date accrual as it became evident that for the second year in a row, LP would not be making these payments. In Q4 2009, incentive pay was earned based on substantially exceeding the cash target that was a focal point of the incentive plan and the year end true-up was included in other expenses. Other year end accruals included higher than anticipated health and welfare costs and slightly higher pension expense. For the full year, as I mentioned, selling and administrative costs were lower by 20%, a savings of $27 million compared to last year.

Slide 11 on the presentation is balance sheet. Key balance sheet statistics, as I mentioned, cash, cash equivalents, investments, restricted cash of $440 million, more than double the $215 million that we had at the end of last year. Working capital is about $535 million. For this year, this does include assets held for sale as a current asset on the theory that these assets will be converted to cash in the next 12 months. Net cash of over $160 million compared to a net debt position of $35 million at the end of 2008. Capital expenditures for the year of $10 million and book value per ending share was $9.92. This does reflect the impact of the additional shares issued in our equity offering in late September.

Before I turn it to Rick, let me make a few other comments on our ABL. Subsequent to year end, we did modify our ABL agreement so that we no longer have to defeat the $60 million bond payment that is due in August of 2010. We did file an 8-K on that last week. As we have discussed in the last call, Congress did implement the ability to carry back five years. And we will be doing that with our carry-back losses from 2009 to earlier years. For LP, we intend to receive a federal refund of about $45 million in the first half of this year. The last item I just want to touch on, and we will have more disclosure on our Form 10-K, is qualified special purpose entities. Based on new accounting pronouncements related to joint ventures of these special groups entities that become effective in Q1 of this year, we are anticipating that we will bring back this off balance sheet arrangement onto the books of LP.

This arrangement has been fully disclosed in LP's notes to the financial statements since this was put in place in 2003. Essentially what this means is we will record $410 million of notes receivable and $366 million of notes payable. The difference is already recorded on LP's books as an investment in or advances to an affiliate. This will be eliminated due to the gross-up. Fundamentally, this will not result in any change to our net equity position. With that, let me turn it over to Rick.

Well, good morning, everyone.

It is cold and cloudy. We had flurries early this morning, but nothing like what's happening on the East Coast. I want to welcome all of you to our end of the year earnings call. My prepared remarks this morning, I'm going to spend some time wrapping up and reflecting on 2009, make a few comments relative to Q4 2009 to Q4 2008, and then share with you some observations and perspectives of how I think 2010 will unfold.

Let me start by giving you my cut on 2009. I would be less than honest with you if I didn't admit up front that I am very happy to put 2009 in the books and behind us. It was the most chaotic year that I have experienced in my 33 years in the industry, and it was a very, very difficult year, in which nothing came easy. Going into 2009, we knew that we had a couple of very important things to accomplish, in addition to the normal pleasing of customers and the manufacturing and selling of building products. We knew that we had to shore up the balance sheet and preserve, conserve, and generate cash.

As Curt said, we began 2009 with about $215 million in total cash, of which about $126 million was available cash. That situation, coupled with the unprecedented low level of business and building products, the predicted losses that we were anticipating, and the debt maturity that was coming at us in August of 2010, I think influenced our stock price all the way down to a low last year of about $1.03 early in the year, as the S&P had bottomed. We focused our management incentives in the organization on cash preservation and generation, exclusive of the refinancing activities, and more or less managed our entire set of businesses for cash in 2009.

In early spring, we were able to complete, as you know, a public debt offering that allowed us to push out the majority of our debt obligations until 2017, because of the financial crisis hitting Wall Street, our debt deal did become quite difficult. It was also quite expensive. It was necessary, and we did get it done. Fortunately, we did have the foresight to put an equity clawback provision into that deal, and in the fall, after more stability returned to the financial markets and our stock had rebounded, as a result of LP showing improved results and more staying power, we did a follow-on equity offering that priced at $6.75 and we were able to retire a third of that expensive debt at a discount, and we relieved ourselves of about $17 million of interest charges going forward.

Toward the end of the year, we were also able to free up some restricted cash from our Chilean operation and tender some of our option rate securities to the issuers to free up more cash, and our operations, as Curt said, again, generated another $50 million in inventory reductions through their efforts. So at the end of 2009, we had $440 million in cash and a little over $390 million of available cash, that has made our entire balance sheet much stronger than it was a year ago. Needless to say, it was not a year that any of us would care to repeat.

I think housing starts all in sugared out last year at about 550,000. That's down around 39% from 2008. LP's net sales were down a little over 23%. The entire year was characterized by managing our capacity to our customers' immediate needs and our employees' focused discipline on spending and inventory reduction.

OSB reduced its operating loss 58% on less volume and lower sales in 2009. Siding improved its operating profits over 10X and engineered wood reduced its operating losses by 17% in that environment. South America moved from a loss in 2008 to a profit in 2009. There were some bright spots for us in 2009, in the face of mostly adversity. LP had its best year in safety in its history. We ended up the year with a TIR of 0.67, with all of our businesses under 1.0 for the first time, and that's an accomplishment that all of our employees are proud of, considering the amount of change and up and down in our facilities. 43% of our facilities went incident-free throughout the year.

In environmental compliance, we experienced only two notices of violation for the year, which is one of our best performances. Our lean Six Sigma efforts continued to pay off for us with a 7.5 to 1 return in 2009, and in CapEx, we had little activity, as forecasted, and ended up the year with a spend of $10 million. Our sales and marketing group ended up the year with about 1800 new wins. A win is defined as a product placement, a new product placement with an existing customer, or adding a new customer with the product placement. In our calculation of a four-quarter rolling year-over-year change of LP product volumes divided by the housing start number, all of our product categories were up, except OSB sheathing. Some were up significantly. Tech Shield was up 24% and SmartSide was up 42%. Sheathing being modestly down did not surprise us, as we turned away some sales volume this last year, because it was simply not good business for us.

In big-box retail sales dollars, with Home Depot and Lowe's, our specialty products of siding and molding were up in 2009 against 2008. LP ended the year with 3956 employees, down another 713 from the year 2008. As a result, I think of the very depressed housing market, seasonality set in early in Q4, and heavily affected our Q4 quarter in siding. Our reporting segments did all perform better in Q4 than Q4 of 2008, but it was still a relatively weak quarter when coupled with the adjustments and the end of the year noise that Curt has already mentioned.

Of operating significance in Q4, our Huntsville, Alabama mill lost 31 days of operating time due to log outages caused by the wet weather in the south. We were also close to running out at Roxboro, North Carolina, but did not. We made the decision to go ahead this quarter and put the permanently closed label on two of our OSB mills, which had been in the indefinitely shut category. That's Athens, Georgia and Silsby, Texas. This is about 725 million square feet of rated capacity that moves into the permanently shut graveyard that has been created by this downturn. Left indefinitely shut in our stable is our Chambord Quebec mill, and our new mill in Clarke County, Alabama.

Between Christmas and New Year's, we started our second mill in Chile back up, the Lataro mill. That mill was constructed in 2008. The Chilean economy is picking back up and they have elected their first pro-business president. We plan to run Lataro at least four months this year and obviously hope that the demand for the product is such that we can run it longer. Panguipulli, our first mill constructed in Chile about 10 years ago, is running full.

I'll finish my comments with some thoughts on 2010. We have made our plans for 2010 based upon an assumption of 700,000 new residential starts all in. That's single-family, multifamily, and manufactured housing. And about 160,000 new residential starts in Canada. It's our opinion that the housing market will ebb and flow over the next several quarters as it slowly improves. Any recovery in new residential starts will be constrained by lingering foreclosures, slow home price appreciation, continued high unemployment, and credit that is just hard to get. This makes the short-term outlook difficult to call, given the departure from any historical norms.

2010 does begin with a few favorable influences compared to this time last year. The tax credit is in place this year for home buyers, which was not in place in Q1 of 2009. This may pull forward some buying into the first half of the year. The distribution channels are buying our products. After working through the process of redeploying their inventories from shuttered locations to those that remained open last year. Supply and demand have had another season to become more in sync. And random linked pricing is better than last January and February. Our orders in siding are also stronger than the same time last year.

Our management incentives for 2010 are being built around being adjusted EBITDA positive for the year. I think that's an improvement. The Canadian housing market appears to be more normal this year, but FX with the Canadian dollar has begun the year less favorable than it was this time last year. Currently our assumptions around wood costs are that they will net out relatively flat year to year, after seeing some increases in Q1 in the south due to the wet weather. The exceptionally wet weather in the south has us fighting for log deliveries at both Huntsville and Roxboro. We do expect to give up some of our cost gains that we made in 2009 in resins, waxes, borate, plastic and electricity continues to escalate. In 2010, we expect CapEx spend to be less than $25 million.

We are beginning the quarter with both Dawson Creek, British Columbia OSB mill and the Swan Valley, Manitoba OSB mills down for the months of January and February. We were unable to accomplish what we set out to do in 2009 around asset sales. That was the bad news. The good news is we will continue to pursue completing those efforts in 2010, and have that upside in cash ahead of us, should we be more successful this year. Under way are the marketing of our permanently closed St. Michelle OSB complex, a building that we own in Franklin, Tennessee, and our Selma extrusion facility. And now we will add to that list our Athens and Silsby facilities.

Finally, last week at LP's Board of Directors meeting, John Weaver was elected as a member of our board. John is the recently retired Executive Chairman of Abitibi Bowater. John spent his career in the Forest industries and worked in Canada for the last 13 years. We are happy to have him aboard to provide his perspective and counsel. So in general, I think that we're more optimistic than we were a year ago. It is a measured optimism to be sure, but it feels like we have the worst behind us in almost every aspect. The biggest difference Q1 of last year to Q1 of this year is simply that a sale in the marketplace creates an order at the manufacturing level.

And with that, I'll turn it back over to Curt.

Thank you, Rick. Why don't we go to the Q&A.

(Operator Instructions) Your first question comes from the line of Mark Connelly with Sterne Agee, please proceed.

Thank you. Rick, I wonder if we could try to find any trends in the housing market in between the carnage here. We hear buildings trying to hit smaller price points and reconfiguring. Most of them are hesitant to talk about building smaller square footage. But as you look at it from your end of things, are any of those trends becoming clearer? And the second part of the question is, are those trends good or bad for your engineered wood business?

My opinion on your first question is that I think the homes that are going to be built this year are going to be smaller. We heard a lot at the International Builders Show about the builders that were building were searching for price points that would be competitive with foreclosures. And so I think that indicates to me that at least in this year's vintage and then even in the Journal this morning you saw, you know, the four-letter word spec that nobody likes to use. There is some brave building going on right now, and I would bet, and it's my belief that if you were able to statistically sample the size of those houses, they would be lower square footage. Lower square footage will affect all the businesses obviously. Not just engineered wood, but because it just uses less volume.

When you think about the construction, I mean one of the arguments in favor of engineered wood was that it allowed for more reliability, et cetera, et cetera. Is that, is that extra benefit going to be paid for in a smaller footprint?

I think it will, because the, you know, the equation is the same. It's just not as much volume going into the house. I think the bigger influence on engineered wood would be trying to understand the number of houses that are going in on slabs versus the ones that have some type of an understructure. That's I think a larger influence.

Okay, okay.

So you would look regionally and predominantly in the south you've got where the building's holding up a little bit better right now, you've got more homes going in on slab.

And just one more question, on Canexel over the last year or so, that product looks like it's done pretty well, all things considered. Do you see that product properly positioned for this sort of slower, less expensive housing market, or are we going to see brand extension there?

No, I think it's properly positioned. It probably hasn't become evident through the numbers, because of what's going on, but we got ourselves into a bit of a pickle in Q4 around Canexel. We sat down and looked at the housing trends in the summer in Canada and we misread them. And we did a serious inventory reduction in that business and then the housing came back with a vengeance right after we reduced those inventories and we got caught on allocation. So through the fourth quarter and the first couple of months of this quarter, we actually had to reduce the amount of orders that we would take to get straightened out so that we can appropriately service our customer. We do expect to get off allocation and get that straightened up by the second quarter.

Okay. Thank you.

Mark, the only thing I would add to that that can XL was largely -- really isn't in the US market at all.

Sure, sure. Thank you.

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

Yes, good morning. I kind of missed a couple of things. Curt, if I could just ask you, how much of the ARSes did you sell -- have you told already and what was the face amount?

The face amount was $55 million and we tendered those at $21.5 million.

Okay.

Now, the important thing there is we retained all of -- as you know, we filed suit against the issuing bank there and we retained all of our legal rights to pursue full recovery.

So that means you have about 100, guessing 107 left?

It's actually a little bit less than that. It's probably right at 96.

Okay. You currently carry that at next to nothing on the books?

I would have to look. I think it's around 27, 26.

Million.

And that is based on the quotations that we've gotten from the issuing banks backed up by the work that we've done on the valuation side.

Okay. And so if we look at the cash that we see ahead, you mentioned that there's a $45 million, I believe tax refund that you're going to get in the first half, right? Did you say first quarter or first half?

I said the first half. I would like to get it in the first quarter, but I'm hedging my bets.

Well -- they are shut down for three days in Washington.

That's right.

Or more. But when you look at the asset sales, you know, you've stuck them up into current assets. That obviously means there's an elevated level of confidence. What -- just refresh our memories. Are these ARS assets, or are these physical mill assets?

They are the physical mills. We move the St. Michelle, the Selma, and the Athens facilities up there.

Okay. Okay. And these will be sold really for people that do other things that make OSB I would imagine?

That's correct.

Okay, and then the last question, did you say the two mills that you shut permanently, Athens and Silsby, had 725 million feet together?

Million. Million feet. Right at capacity.

725.

Yes.

Got you. And what is the capacity of Chambord and Clarke County?

Chambord is about 550 and Clarke County's between 7 and 720.

Okay. So like you said in the K last year, all right. And can you just talk a little bit about what you see in 2010 in terms of your CapEx, and, you know, as you look -- well, let's just talk about CapEx and the tax rate.

Well, CapEx, the guidance that we've given is less than $25 million. I'll let Curt talk about the tax rate.

The tax rate going forward, we would anticipate would be as of statutory offset by a little bit of the tax strategy, but it's not going to be markedly different.

Okay, got you. I promise this is my last one. When you look at OSB prices today, at least if you look at north central, you know, the prices up averaging -- well, it's at 210 on random links. So let's say it stayed there. You would be a little over $200 for the quarter. And that's $30 up from the -- for the fourth. Is there anything we should think about in your mix that would encourage us to either assume that is a good benchmark to use as we go from fourth to first, or should we make other adjustments?

I'm looking at midweek trends that I just pulled up this morning, Chip. And I'll convert these back to 3/8, you're looking at 7/16 number, we convert back to 3/8 because that's what we keep score on on our cost side. But north central this morning printed at 185. Western Canada printed at 191. Eastern Canada, 172. Southwest, 184. Southeast, 174. So that's the blended average. North central, as we are always trying to explain how our average sales prices are calculated, you have to take a blend of these regions based upon where our production is. I can tell you that in the last two weeks, the most significant thing for us is the western Canada started to move, which is a good influence on our Peace Valley mill and when we start back with Dawson and Swan, that will help us.

Got you., thank you.

Use about 87%, just as a round number to get you close of that 7/16 number to get you to 3/8.

Yes, looks like the number you gave us, which went up another $6 from last week.

Got you. Thank you.

You're welcome.

Your next question comes from the line of Steve Chercover with DA Davidson. Please proceed.

Thank you, good morning. First of all, did you gain share in 2009? Because it appears that with prices flat, your revenues were down less than the housing stats that you referred to.

I think we gained share in siding, gained a little bit of share in engineered wood. We gained a lot of share in specialty OSB, and we gave up some share in commodity sheathing.

Great. Thanks for that. And are you currently building log decks at Swan Valley and Dawson Creek?

We are bringing logs in there as we speak.

Okay, because obviously with spring break up, you got to do it now if you intend to run them. And then, Curt, could you just elaborate a little bit on the off balance sheet joint ventures? I think you said they are going to come back into the mother ship.

Yes, well, Steve, we sold timberland in California, two different transactions. We delayed paying the taxes by having a tax structure with a receivable and a payable on the really self liquidate, but allow us to treat it on an installment tax basis for purposes of filing a return. Those were on balance sheet because the rules at that time had required us to put them on balance sheet. When we sold the southern timberland, the rules had changed and we were required to have that as an off balance sheet transaction. So that was the sale of the Louisiana and Texas timberlands, where there was a 15-year deferral on the payment of those taxes.

The structure we used there was the notes receivable and notes payable with the 44 million that we have on our balance sheet of this investment. The notes themselves are backs topped with a letter of credit, which is back stopped by cash. So there's not any, any risk associated with this. But -- a change in the rule we now need to gross the balance sheet back up, put the note, full amount of the note receivable on the books and the full amount of the note payable.

Okay. So this is the same like 123 that we've seen for years, that's been whittled down?

Those were the California transactions. Those are the ones that have been on the balance sheet and have been since 1999.

Okay. Will it show up similar to that?

Yes, it will be very similar to that basically, except I don't think there's recourse in any of these.

But at the end of the day, we'll have basically an offsetting asset and liability.

Well, you'll have an asset 44 million higher than the liability. And that's the investment that LP has.

Got you. Okay. Thank you.

Steve, add just a little bit more color on the share answer I gave you and I'll go back to a comment I made a few quarters ago, which is how difficult is it to measure improving the buoyancy of your boat when it's sitting on a clam flat. The way we try to measure share in this environment is that we take a four-quarter rolling average of our volume that is going into the marketplace that we sell, and then we're dividing that by the housing start number, which is about the only way we can figure out whether we're gaining share or not. So does that help you?

Yes.

So the housing start number is going down, but if we look at our volume and do a consistent division, if that percentage is going up for us, then that's helpful and we exclude big box from that.

Thank you, Rick.

Yes.

(Operator Instructions) And the next question comes from the line of Peter Ruschmeier with Barclays Capital. Please proceed.

Thank you, and good morning. Rick, you mentioned that your employee head count is now down below 4000, and I was curious if you could elaborate on what that means for the company in terms of runability. When you bring mills back up, does that mean that you're going to utilize these employees? Do you have to hire people back? Can you just comment on what this means to the organization?

Well, the way that we're configured now, we have basically taken shifts out of some of these mills and so once we get to needing to run another shift, then we'll have to bring employees back. So we're operating more efficiently in an inefficient mode, if you will, right now the way we've reconfigured. But there will be a point at which, say right now if you just take Peace Valley up in western Canada, it's running at three shifts. So if we want to get that mill back up to full capacity, we would have to add the fourth shift. So that means bringing people on that are currently not employed. But it would hopefully be the same trained people and that would be a shorter period of time.

Okay. So maybe a different way to think about it is that perhaps your employee base is a little bit more variable than it has been in the past.

Well, no, these are actual numbers of people at work. These aren't laid off people.

Right.

We just drifted down another 700 folks last year, with the, with the reductions that we made at our current, at our current capacity. Yes, we had shifts, obviously, we'll bring on wads of people as you add shifts.

Okay, okay, fair enough. And back on the assets held for sale, what is the collective balance of that, Curt, and in terms of all those different sites?

It's about at $65 million carrying value.

Okay, and remind us, have you completely -- have you sold the, all the planes and the hangars?

The planes have been sold. The hangar has not. We're still holding that.

Okay, but that's still held for sale as well?

It's still being actively marketed. And, you know, we are seeing at least the fractional folks in leasing are coming back. I don't think anybody's buying planes for their corporation, but we are seeing that business come back and there's a logical buyer for that when their business -- reaches a certain level.

Okay. And then maybe lastly, Rick, I was curious if you could maybe share your thoughts on your procurement strategy in the current environment you're in, which is perhaps temporary challenges with the wet weather, but as you look out longer term and we're hearing more about utilities taking more aggressive stance, looking for sources of fiber, can you comment on whether you're looking to more aggressively bid for longer contracts and, I'm surprised to hear you say, I think you said procurement costs for full year 2010 would be relatively flat in 2009?

That's our guess right now, other than we think it's accelerated in Q1, which might lead into Q2 in the south.

Right.

We are waiting to see what to make of all of this renewable energy. The big cap rules came out, or the early rules came out last week. We're waiting to see how that sugars out. There is no money being paid out right now, and so we are not making any strategic moves or determinations until we actually see how that plays out. There are pluses and minuses.

I think in general the government is sticking its nose into subsidizing wood for other purposes is not a good idea. It's very hard to build markets based upon subsidy. But, so we're playing the wood angle at least strategically from two ends. One, if we're preparing for B cap, if it actually becomes a reality and at the same time we're lobbying against, against the government getting in and subsidizing renewable wood energy.

Okay, and I'm sorry, maybe just lastly, so as we think about the variance in our models from 4Q into 1Q, clearly you've got this nice list of pricing mitigated somewhat by the higher fiber costs and I think you mentioned that energy costs are running up, not sure there's anything specifically why there, why electricity is running up. But Curt, can you help us with the other cost items in terms of, you know, wax and resin and some of the other things we should be thinking about that might be a mitigating factor in the run-up in price?

Yes, you look -- if you look at the full year of 2009 versus 2008, and we apply the pricing between those two years to the volumes that we've produced in 2009, there was overall about a $15 million savings over 2008, and of that, the wood was about a third of it. Energy was a piece of that, but the biggest piece was in the resin. As we look into 2010, as Rick said, we expect wood to be relatively flat. I think there's probably a little bit of, a little bit more on the higher cost side than lower, but relatively flat. We expect resins to be up, principally because of oil is up and very volatile. And it's not just oil. It's the derivatives, phenol and benzene, primarily for resins. And then energy the increase is almost all electricity and in these local jurisdictions are using energy, basing electricity rates on a regular basis. So I would guess that we're going to get back about 25 to 30% of what we have for savings last year.

Of the $50 million.

Yes. Between $25 million and $30 million of the 50.

It's been pretty difficult for us to plan. We obviously finished our plan in December for this year and then when we got the second week of January, oil had gone up to $82. So our procurement people scrambled around and gave us a bunch of new forecasts and oil is back to $73 today. So this is a moving target that we'll be chasing all year long.

Understood. Thanks very much, guys.

Your next question is a follow-up from the line of Chip Dillon with Credit Suisse. Please proceed.

Yes, thank you very much. Just wanted to make sure, when you could you just review for us that the Holton Maine plant, I know there was something saying you weren't running it as much and it might help produce a loss. And sort of what are your plans for that facility, the LSL business as you go out and you look at the next housing cycle?

Yes, as you know, engineered wood is our most closely tied business to new residential starts, and currently in engineered wood in general, all of the levers that we've got in terms of controlling the losses are around controlling the costs at the mills. Holton LSL is the major bleeder until we can get more volume. I think last year we sold about 600,000 cubes of A grade product. That mill has the capacity to produce about 7 million cubes. So we're operating that at a gross inefficiency. As the math that we have done in general in engineered wood, we think that we need about 1 million starts to get profitable in engineered wood and about 1 million starts and continued product penetration in LSL. Does that answer your question?

Yes, that's great. And then I guess the last thing is, when you look at let's say that this is finally the beginning, which I know we would all love to see, and you're making money in the second quarter and I guess there's the math on the tax loss carry-forward that you would take ahead would be obviously influenced by the ability to carry it back and you're getting the $45 million, but sort of how much money cumulatively would you have to make? I know it's hard to put an exact number because of Canada and the US, but I mean could you guys make 4 or 500 million in the US before you would be paying significant cash taxes? How should we think about that in the next cycle?

Well, I don't think it's that much, Chip, because, remember, in the loss in 2008, we had the good will write-off, which is taxable but I think a good, a good proxy for that is to look at the balance sheet and you'll see what we have as deferred tax assets and deferred tax liabilities. From a net standpoint, we believe we have more deferred tax liability than we do deferred tax assets. Which means that we intend to use that. Part of that will be the gain that we'll record on the timber sales, these installment notes that I talked about.

Yes.

There is like $113 million coming due this year. We'll have a gain in it. So part of the loss -- if we have a loss this year, part of that would be offset by that gain.

Got you.

It will be a while before we pay cash taxes, but I don't think it's the magnitude that you have mentioned. It's probably, you know, I would be guessing, my tax guy will be all over me, so I probably shouldn't guess.

He's not listening.

He probably is.

He sure is!

Hey, I'm paid to try. Okay, thanks, guys.

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

Good morning. This is actually Alex Ovshey on behalf of Rick. I would like to get your perspective on the move-up in OSB prices here in the first part of the year, do you see that more as a supply-driven versus demand driven? And just a follow-on to that, can you talk to how you're seeing your demand trend across the key products in the first part of the year relative to the fourth quarter? Thanks.

I was thinking about the answer to your first question. You'll have to repeat the second one. I think that where we are right now is it's a supply-driven issue and what I mentioned in my prepared remarks, which this year the channels of distribution are relatively empty and so an order in the marketplace becomes an order back to manufacturing, if you take our particular example, say, where we purposefully in November made the plan, anticipating a very lean first quarter to take Dawson and Swan down, they are down. And so that's wood that is not in the marketplace that could have been in the marketplace had we not made that. So I think it's more supply-driven than it is demand-driven at this point in time. And then whether we have a spring bump or not, I don't know.

Thanks. And my second question was just on the demand front across your key products and how you've seen that change in the first quarter relative to the fourth quarter. Have you seen anything beyond the normal seasonal change in demand for your key products?

No, we are off to a pretty good start in our orders in siding, particularly. Engineered wood is just a little bit better and then we're basically constrained. I think if we didn't have the log problems in the south, we could probably sell a little bit more wood in OSB, but we don't have the logs.

Great. Thanks, Rick.

This concludes the Q and A session for today's conference. I would now like to turn the call back over to Mr. Curt Stevens for closing remarks.

All right. Thank you very much, and I appreciate all of you joining us on the call today and as always, Becky and Mike are available for follow-up questions. And with that, Amity, maybe you could give the callback number, and thanks for joining us.

Ladies and gentlemen, to access the replay, the toll-free number is 888-286-8010 with an access code of 99312648. Ladies and gentlemen, that also concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.