Louisiana-Pacific Corp (LPX) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2012 Louisiana-Pacific Corporation earnings conference call. My name is Patrice and I will be your operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Sallie Bailey, Executive Vice President and Chief Financial Officer. Please proceed.

Great. Thank you very much, Patrice, and good afternoon and thank you for joining our conference call to discuss LP's financial results for the fourth quarter and the full year 2012. I'm Sallie Bailey, LP's Chief Financial Officer. And with me today are Curt Stevens, LP's Chief Executive Officer, as well as Mike Kinney and Becky Barckley, our primary Investor Relations contacts.

I'll begin with a review of the financial results for the fourth quarter and the full year 2012. And this will be followed by some comments on the performance of the individual segments and selected balance sheet items. After I finish my comments, Curt will discuss the general market environment in which LP has been operating, provide his perspective on our operating results for 2012, and give some thoughts on our outlook for 2013.

As we have done in the past we've opened up this call to the public and are doing a Webcast. The Webcast can be accessed at www.LPCorp.com. Additionally, to help with our discussion, we have provided a presentation with supplemental information which should be reviewed in conjunction with the earnings comments. Now, it's my understanding that the presentation was not put on our website earlier today, but you should see it on the website either now or in the next few minutes. Because these are the slides as usual that I'll be referencing during my comments.

We've also filed an 8K this morning and with some supplemental information and we'll file our annual Form 10-K at the end of the month. I want to remind all the participants about the forward-looking statements comments that's on slide 2 of our presentation and please also be aware the discussion of our use of non-GAAP financial information which is provided on slide 3 of the presentation. The appendix attached to the presentation has some of the necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning. Rather than reading these two statements, I incorporate them with this reference.

Now, before I get started on the detailed discussion of LP's financial results for the 2012 fourth quarter and full year, I have some comments and observations about the housing recovery. We started the year of 2012 with average housing starts at 692,000 and North Central 7/16 OSB average selling price of $189. The December 2011 seasonally adjusted annual housing starts rate was 657,000. We ended 2012 with 780,000 actual housing starts. North Central 7/16 OSB average selling price of $331, the December 2012 seasonally adjusted annual starts rate was 954,000. The rate of improvement in the second half of 2012 was significant.

In September, the annualized rate of housing starts increased 15% from the August housing starts to 872,000. At the end of the third quarter the North Central 7/16 OSB average selling price was $303. The housing recovery and consequently our financial results were much stronger at the end of 2012 than we anticipated even three months ago. As the housing market has begun to recover, so have our financial results. 2012 was the first year since 2006 that we recorded positive earnings per share and net cash flow from operations of over $100 million. With that, let me go into the details.

Please refer to slide 4 of the presentation for a discussion of the fourth quarter 2012 results compared to the third quarter of 2012 and the fourth quarter of 2011. This slide also compares the full year 2012 with the 2011 results. In the fourth quarter of 2012, we recorded net income of $76 million(sic - see presentation slides "$46.1 million") or $0.32 per diluted share. Net sales from continuing operations were $459 million for the quarter. The fourth quarter also included income of $20 million associated with the auction rate securities litigation settlement. This income has been excluded from our non-GAAP results.

For the fourth quarter of 2011, we reported a net loss of $57 million or $0.42 per diluted share on sales from continuing operations of $312 million. The adjusted income from continuing operations for the quarter is $26 million or $0.18 per share compared to a loss of $29 million or $0.21 per share in the fourth quarter of 2011. Adjusted EBITDA from continuing operations was $71 million in the quarter compared to negative EBITDA of $12 million in the fourth quarter of 2011. For the full year, we recorded sales of $1.7 billion, a 26% improvement over the $1.4 billion of sales in 2011. Earnings per share improved $1.56 from $1.36 loss per share in 2011 to earnings of $0.20 per share in 2012. On a non-GAAP basis operating income for the year was $49 million or $0.35 per diluted share as compared to 2011 loss of $97 million or $0.73 per diluted share. The Company recorded $203 million of adjusted EBITDA, an improvement of $208 million from 2011.

Turning to slide 5 and a review of our business units, starting with OSB. OSB recorded operating income of $58 million in the quarter compared to a loss of $16 million in the fourth quarter of 2011. For the quarter, volume was 16% higher and average selling price increased 64%. Adjusted EBITDA was higher by $73 million. The improvement in pricing was the most significant contributor to improved OSB performance, approximately $90 million. As we discussed in last quarter's call, our pricing will differ from random link's North Central 7/16th changes due to our different geographical footprint, broader product offerings and value-added products. In fact, on a comparison to the third quarter of 2012, North Central 7/16th was up 7% and LP's OSB average selling price was up 10%.

The improved price of OSB has another impact on our earnings through the accounting for our 50% interest in the Peace Valley OSB mill. As a reminder, we purchase 100% of the production of Peace Valley at a market price less a commission. We sell 100% of the product. Both the sales and the cost of sales are included in our income statement. Our OSB gross margins are negatively impacted when the cost for us to buy the product from Peace Valley is greater than the cost to produce the product.

LP's 50% interest in the earnings from the joint venture is recorded on our income statement in the equity and income or loss of unconsolidated affiliates. This amount is also delineated in our reconciliation of EBITDA from continuing operations filed as part of our 8-K this morning. In the fourth quarter of 2012, Peace Valley contributed $7.1 million to OSB's adjusted EBITDA as compared to decreasing the fourth quarter 2011 OSB adjusted EBITDA by $900,000.

For the year, OSB had operating income of $124 million compared to a loss of $64 million in 2011. Adjusted EBITDA for the comparable period was $166 million in 2012 compared to negative EBITDA of $18 million in 2011. The impact of pricing between the years was $201 million and accounted for the majority of the change. The remaining difference is due to higher raw material costs.

Now, please turn to slide 6, which reports the results of our siding business. This segment includes our SmartSide and CanExel siding products and commodity OSB produced in our Hayward mill. For the fourth quarter Siding reported sales of $117 million with operating income of $11 million, which was $5 million higher than the results for the same quarter last year. The improvement in operating results is due to stronger volumes in SmartSide of 19% and CanExel of 27% OSB pricing contributed $5 million. Offsetting the improvements in volume and pricing were higher raw material costs for resins and overlays and additional sales and marketing expenses. For the year, Siding reported sales of $0.5 billion and had operating income of $67 million compared to sales of $430 million and operating income of $42 million in 2011.

Volume increased in our SmartSide siding line due to continued penetration in several key focus markets, including repair and remodel markets and sheds. Adjusted EBITDA was $83 million in 2012, a $25 million improvement from 2011. The improvement in full year results is related to the success of our segment strategy and increased penetration of our SmartSide strand product. Repair and remodel, as well as shed, continue to be strong growth segments for us on a percentage basis, while single family new construction and retail do it yourself provide solid volume improvements. OSB price contributed $11 million to the improvement in 2012's results.

The Engineered Wood Products business results are on slide 7. This segment includes I-Joists, Laminated Strand Lumber produced at our Houlton, Maine facility, Laminated Veneer Lumber plus other related products. This segment also includes the sale of I-Joists and LBL products produced by the Abitibi joint venture or under a sales arrangement with Murphy Plywood. For the fourth quarter EWP recorded a loss of $4.6 million compared to a loss of $3.6 million in the fourth quarter of 2011.

Adjusted EBITDA from continuing operations was a loss of $1.7 million in the fourth quarter of 2012 compared to a loss of $1 million in the fourth quarter of 2011. Volumes of I-Joists were up 2% related to higher housing starts, while volumes of LVL and LSL were up 14% compared to the same quarter last year, primarily due to increases in LSL sales. Pricing was up 5% in I-Joist and down 1% in LVL and LSL reflecting changes in mix in both product lines. Individual product pricing remained relatively stable. For the year, EWP recorded an operating loss of $14 million compared to a loss of $16 million in 2011. The negative adjusted EBITDA of $2 million was comparable to the 2011 results. For the year, sales are up 5% and adjusted EBITDA is flat. Sales volume in I-Joist is up 11% and volume for LSL and LVL is up 4%.

Slide 8 of the presentation is a summary of South America. This was a record quarter and record year for our South American operations. For the fourth quarter, the South American segment reported operating income of $7 million compared to operating income of $2 million in the fourth quarter of 2011. Adjusted EBITDA from continuing operations was $10 million in the fourth quarter of 2012 compared to $4 million in the fourth quarter of 2011. Volumes in Chile were up 13% over the same quarter last year and up 14% in Brazil, as we continue to penetrate local markets. Sales prices were up 18% in Chile and down 4% in Brazil. But in local currency, both Chile and Brazil record 11% improvements in price.

For the year, South America had operating income of $18 million compared to $12 million in 2011. Adjusted EBITDA was income of $30 million in 2012 compared to $23 million in 2011. Sales volumes in both countries increased significantly, 19% in Chile and 12% in Brazil. Pricing in local currency also improved in both countries. In Chile pricing was 10% better in 2012 versus 2011 and in Brazil pricing improved 9% versus 2011.

While there is no slide for Other Building Product segment, the results are shown in the selected segment information filed as part of our 8K. And I will make a few comments. These results primarily reflect our molding business, the US GreenFiber cellulose insulation business and closed facilities. Overall, we are showing a loss of $1 million in the fourth quarter of 2012 as compared to a loss of $7 million in the fourth quarter of 2011. The loss in the fourth quarter of 2011 included a $5.7 million loss due to a goodwill impairment charge at GreenFiber. For the year, other building products recorded an operating loss of $5.7 million compared to a loss of $12.5 million in the same period of 2011. The improvement is primarily due to the fourth quarter 2011 impairment charge, as well as reduced operating expenses at our nonoperating sites.

Unallocated corporate expenses were $22 million for the fourth quarter of 2012 compared to $17 million in the comparable quarter of 2011. This increase is due to higher incentive compensation accruals and higher legal expenses associated with auction rate security litigation, which ended in settlement. For the full year, unallocated corporate expenses were higher at $79 million as compared to $66 million in 2011. The majority of the increase is due to the management incentive accruals and the higher legal expenses.

Key balance sheet statistics shown on slide 9 show the continued strength of our balance sheet. Cash, cash equivalents, investments and restricted cash of $575 million. Working capital of $756 million. Net cash of $175 million. In addition to the $560 million of cash on our balance sheet, we have approximately $100 million of liquidity on our asset based loan facility. Capital expenditures for the 12 months were $31 million as compared to $21 million in 2011. We generated $63 million of operating cash flow in the quarter and $112 million of operating cash flow for the full year. This is the first year since 2006 we've generated net cash from operations in excess of $100 million and in 2006 we produced six billion square feet of OSB and housing starts were 1.9 million.

Now, a couple of comments about 2013 before I turn the call over to Curt. Beginning with raw materials. We are forecasting a negative price variance on raw materials for the first quarter of 2013 of $6 million. About one-third of that relates to higher fiber costs primarily in the US. The remaining two-thirds is due primarily to higher resin and wax costs related to higher market pricing for benzene, which is the primary raw material utilized in the production of MDI and the primary feed stock for phenol. Benzene is currently selling at record high prices.

Reflecting the improved state of our balance sheet and increased optimism regarding the housing recovery, we are continuing our investment in growth and our investment in our current operations. Curt will address the acquisition of the remaining 50% interest in our Peace Valley joint venture in his comments.

We're also increasing our investment in our mills. Our mills need between $1 million and $2 million of capital annually for maintenance. In the past few years we've been spending on the low end of that range. In 2013 we intend -- we anticipate spending at the higher end of the range or about $50 million in capital expenditures for our mills. We're also planning to increase capacity at our Two Harbor siding mill and in Chile and there will be some capital costs associated with the startup of our Clark County OSB mill. These actions may increase our capital expenditures by another $10 million in 2013.

And we are also beginning a much needed upgrade of our information technology systems. We haven't invested much in our systems in the last 12 years and we need to upgrade the data technology. We estimate that the total cash costs of the systems upgrade will be about $30 million. Approximately half of that spending is considered capital and the remainder is characterized as expense. In 2012 we reported $1 million of expense and $5 million of capital associated with our systems upgrade. We anticipate spending $20 million in 2013, split evenly between capital and expense, and the remainder will be spent in 2014 and we anticipate that the 2014 costs will all be characterized as expense. Now I'll turn the call over to Curt for his comments.

Thank you for the review, Sallie. I would like to make a few comments on our performance in 2012, talk about the encouraging news that we are seeing related to the housing market and give you some of my thoughts on 2013. First the 2012 performance.

Our safety performance in 2012 was very good. For the year we ended at a total incident rate of 0.46, which was our second best incident rate ever. Our OSB business continued the remarkable performance I talked about last quarter and ended the year with a single reportable injury, will put them at a total incident rate of 0.08. Incredible performance. I also want to mention our environmental performance in 2012, where LP did not have a single notice of violation for any type of environmental excursion. This is particularly impressive as the degree of oversight from governmental agencies has increased dramatically and there is a lower bar for reported violations. Credit for this all goes to our mill management teams, as they focus on environmental stewardship in the communities where we do our business.

In addition to the safety and environmental performance, as Sallie just reviewed, we had a pretty good year, as housing starts improved by a little more than 25% compared to last year. As a reminder, even with this improvement, housing starts in 2012 were about one-half the level of the actual average seen over the last 53 years. In this improved but depressed market, LP did set sales volume records in a number of product lines. This includes our top notch flooring product, our TechShield radiant barrier panels used for roof decking, our SmartSide strand based siding, Laminated Strand Lumber, and our fire retardant OSB product, FlameBlock.

Just ask you to imagine where we'll be selling when the housing market returns to more normal levels. As Sallie just reviewed, overall sales increased by 26%. We earned $0.20 per diluted share and that's even after offsetting $53 million of early debt extinguishment cost. And we had over $200 million in adjusted EBITDA. OSB prices rebounded nicely due to increased demand. We had solid growth in our Siding business. We had our best year ever in South America.

Closer to home, this did allow LP to pay management incentive bonuses in 2012, while we paid nothing for 2011 performance. We ended the year very well positioned to take advantage of further improvements in the housing market. Strong balance sheet that includes $575 million of cash and investments, clear plans and projects placed to address potential supply chain issues, including bringing online idled capacity. We ended the year with appropriate finished goods and raw materials inventories to accommodate this growth. In the fourth quarter we did agree to acquire the 50% interest in Peace Valley, currently owned by Canfor. We believe this will be completed in the second quarter, as we work through various regulatory processes.

On the housing market, there is lots of continuing good news being reported throughout the housing market. The December annual housing start rate was at 954,000, 37% higher than December of last year. Single family starts at 616,000 and multifamily at 338,000. The December annual rate for permits kept pace, with over 900,000. One of the statistics we look at is the three month rolling average for single family permits and that has been at an upward trend since April of 2011. The current consensus for housing forecast stands at about 990,000 for 2013 and right at 1.2 million for 2014. New home inventory remains very, very low at about 125,000 and that includes both homes -- completed homes for sale and homes under construction.

And then existing home inventory is down 23% compared to the same time last year. And home prices are on the rise and mortgage rates are low. So, I'm confident that the momentum that we've seen recently in housing starts will continue as pent-up demand is very large and parents do want to see their adult children moving out of the basement. So, our outlook for 2013 is for higher housing starts, given that the consensus forecast is at almost 1 million. While I firmly believe there will be demand at this higher level, we will take a more conservative tack as we plan our business operations.

There are several factors that could slow the positive momentum that include the turmoil in Washington, DC related to the fiscal cliff, the debt ceiling, the sequestration, spending authorization to keep the government working and budgets. All this had a negative impact on job growth and GDP with Q4 coming in slightly negative and consumer confidence. The general availability of credit throughout the channel remains of some concern and that's everything from land acquisition to land development to mortgage availability for purchasers.

Builders have been raising the issue of lots of shortages and the high cost of the land and are also raising concerns about the lengths of time to gain approval for new development that has been stretched due to the reduction in municipal funding for infrastructure. Builders and suppliers are complaining about the shortage of labor, both skilled and unskilled. And then builders, because of this, are rightfully concerned about there being an adequate supply of building materials to support this higher housing forecast. As individuals, members of trade associations and businesses, we need to encourage our governmental representatives to take the appropriate actions on the deficit, spending levels and tax policy, which I believe will raise consumer confidence and create job growth.

Sallie and I had the opportunity recently to attend the International Builders show in Las Vegas. Attendance was 35% to 40% higher than it was last year. And importantly, most of the attendees were smiling, as they do believe the recovery is getting stronger. In the customer and builder meetings I attended at the show, the topics I just mentioned were universal. Market dynamics are very good, but there could be some bumps along the road.

My conclusion is that 1 million housing starts in 2013 is certainly possible. There will be substantial improvement. But again, the prudent course of action is to be ready for a slightly lower number and have plans in place to be prepared to take advantage of a better environment. I do believe that 2013 should be a very good year for LP and the building industry. With that, let me turn it back to Sallie for questions and answers.

Great, thank you, Curt. Patrice, if we could, we'd like to open this up for questions and go to the queue.

(Operator Instructions).

Mark Connelly with CLSA.

Just two questions. First, do you see a scenario in 2013 where Engineered Wood Products turns an operating profit? Second question, you talked about investing in growth and you've laid that out for us. Are acquisitions starting to be on your mind to start to reshape the portfolio?

Well, let me take the Engineered Wood question first. I certainly would like to see Engineered Wood return to growth. What we experienced in the second half of the year were increased pricing in raw materials, principally OSB and lumber, and we just haven't been able to pass on those increases to the customers, given the excess supply.

We remain committed to raising our pricing to get an adequate return on that, but again, in the competitive environment that we're in, that has proven to be a little bit difficult. We are going to continue those efforts to raise pricing in the coming months. That's the direction we're going there. Your second question was?

Acquisitions.

On acquisitions. It's always been a part of our strategy to review acquisitions. That will continue to be part of the strategy. With the recovery that we've seen in those companies that are in businesses that we participate in, they have risen at about the same level we have. So, unless you could do some kind of combination on a trade basis, I'm not sure that that's going to be something that's going to be high on our priority list for the next year.

Okay. Very helpful, Curt. Thank you.

Mike Roxland with Bank of America-Merrill Lynch.

Just two quick questions. In OSB, seems like your costs have increased. Is that more reflective of rising input costs, as you mentioned, Sallie, in terms of your outlook or is that more related to what was -- or the Peace Valley JV.

The answer to that, Mike, is yes. So it's related to -- if we look third quarter to fourth quarter, it is clearly related to the increased costs coming out of Peace Valley. But even if we take Peace Valley out, we did see our costs per unit in OSB go up and that's because some of our raw material costs have gone up, but also because we took some, as we typically do, we took downtime in the fourth quarter. So, we had to cover the overhead.

How much did your cost go up if you look at law costs or resin costs in 4Q?

In the fourth quarter, Mike, you want a Q3 to Q4?

If you have both, Q3 to Q4 and also year on year.

Okay. So, year on year, they're up probably about $6 million and most of that would be wood, and of course much of that would be in our OSB business. And then Q3 to Q4 it's up only about $2 million, but again, most of that would be in the OSB business.

Last question, can you talk about the progress you're making in restarting Clark County? You mentioned, Curt, in your comments as well that labor availability could cause a constraint, particularly from the -- a concern from the builders. What have you seen thus far as you try to ramp Clark County? And also the additional line, I think you mentioned in Peace Valley?

I was down in Clark County last week to participate in their readiness review. I'd say we're on track for Q2's start-up, as we've discussed. From a labor standpoint, we actually were a little bit positively surprised, for the people that we've hired since we made that decision, about 30% of them worked at the Clark County mill in the past and actually 70% of the people that we hired worked for LP somewhere in the past. So, it's encouraging that we were able to bring back some employees that worked for LP, understand our culture and have at least a passing knowledge of wood products and OSB.

In Peace Valley, the hiring we're doing there is for the fourth shift. We've been successful in making those hires. We constantly get pinged by the oil sands people for our technical people, but that's something we've been dealing with the last four or five years.

Lastly, aside from labor, have there been any unexpected surprises with respect to getting those mills up and running?

No, I don't think so. I think it's pretty much on track. I think that probably the one that we're keeping our eye on the closest, we haven't run that mill for four years and so any software updates need to be -- make sure that we've got that fully vetted before we get it started up. Other than that, I don't think there's any issues.

Got you. Good luck in the quarter.

Thank you.

Gail Glazerman with UBS.

Can you talk a little bit about the Siding business. Sallie, if I heard you right, you said the OSB price was about $5 million, so essentially all of the year on year recovery in the segment. Is that correct?

Yes, that is correct.

If memory serves, last year you had a pretty tough quarter because of customer inventory destocking in the core siding business. Can you talk a little bit about what happened this year.

Sure. What you're referring to, Gail, is in our CanExel business, was where the inventory destocking occurred. And as you'll know, over each quarter we talked about CanExel and we indicated that we thought the volumes by the end of the year would be pretty much the same year-over-year, and in fact they are. The volumes for CanExel are just 2% below -- in 2012 below where they were relative to last year. But the pricing in that business quarter-over-quarter is 12% higher and 1% higher for the whole of the year.

Was there a problem in the underlying siding business if you were still kind of reporting -- was it just cost, if you were still reporting flat underlying operations year on year.

I think there are a couple things. The first is that in this quarter we did see some raw material cost increases. We also are continuing to invest in that business in terms of sales and marketing and we're investing in that business ahead of when we're getting the sales.

So, I don't -- I'm not -- to answer your question slightly differently, I am not concerned about where this business is going in, in '13 and the way I thought about it is, I actually looked at the full year numbers and on a full year basis we saw a $14 million improvement in the EBITDA that's solely related to siding, excluding the $11 million for OSB.

And Curt, you mentioned kind of being cautious, but planning to take advantage if the environment's better than what you're planning. Can you give us a little sense of what you might be able to flex if we do see that million start level.

If we get to a million starts, there hasn't been enough announced capacity increases in OSB to meet that. And so, if we do see approaching 1 million starts, I think as I said last time, that we would consider bringing on our Dawson Creek facility for the West Coast. That would be the flex.

So, what we are trying -- we're planning on is between 850,000 and 900,000. We're short of where the market is. That's what we're gearing the operations to. And if you look at what's been announced, that's about what the industry could support. So, if it's greater than that, we need to make some flexing on the upside.

And can you talk a little bit about what exports did, I guess, in the last part of last year and how you see that trending in 2013?

Our exports to the east went down dramatically because they haven't been willing to pay a market price. We have seen some increase in pricing in our exports to Eastern Europe and we did ship a little product in there in October, November, back off in December. So we're using that as flex capacity. That's another thing that we can do is if we see that increased demand in the US, we'll pull back on exports.

And can you give a sense of what percentage of production that was last year?

Probably less than 5%.

About 2%.

Maybe 2% to 3%. So it's not a big number.

Okay. Thank you very much.

Sure.

Thank you.

Chip Dillon with Vertical Research Partners.

First question is on the full year CapEx for '13. I know you went through a number of projects, Sallie. What was the total budget that we should expect?

About $70 million, $75 million.

Which I think is unchanged from the last call.

Chip, just to be clear, that doesn't include the acquisition of the Peace Valley interest.

And then the second question is, Sallie, you mentioned something about the price cost spread in the quarter being negative 6, and, obviously, the resin costs are up a lot. At least as I look at it and I don't know if that was a -- I'm assuming that's a sequential number.

Yes.

Looks like prices are like $60, $70 a ton, depending on region, above the fourth quarter average and certainly I think your total cost of making the stuff is maybe 1.5 times that difference. Maybe you could help us understand what you meant by that.

I think what Sallie meant, I'll just answer for her, what she was talking about was just the cost of raw materials. So, using same volumes in Q4 compared to the same volumes last year, just looking at the price differential. So, cost of raw materials were up $6 million.

And in the first quarter there I think you were saying -- so what we should expect is that on the equal volume basis with the first quarter of '12 or we should see a $6 million change in the first quarter? Is that what you meant to say?

Yes, thank you.

Or what I should have heard.

I don't know either, but I'm glad you asked the question so that we could clarify it. Yes, this is a pure price variance. So, if the volume goes up, the impact, obviously, on the pricing will be higher.

And I think as we do our models, obviously, we need to also build in there somehow over the course of the year an incremental $9 million for the IT expense portion and then you start to see that as a tailwind in 2014 and '15.

Yes. And so it's our intention that the $10 million for the systems upgrade will show up in corporate unallocated. So, you'll have lots of visibility on that. And then, of course, it will also show up in the CapEx numbers.

When you look at the -- certainly versus what we were expecting, the revenue number was fantastic. And yet not all of it, of course, came to the bottom line. I was wondering, we saw this and Curt will remember this back in '03, for example, I don't know if you call them LIFO true-ups or what, but was there any of that that you can talk about. Like for example, when you transfer OSB from OSB to Siding, that might have held back the profit per unit or maybe raised it because you had these inventory adjustments.

The only thing that we had in Q4 is if we have product that's in transit, we don't recognize that as revenue in the quarter. Some of that -- we had more product in transit in Q4 than we had anticipated from our internal planning. We'll pick that up in Q1.

And then just as we think about our models, when you -- I assume you do sell some OSB from OSB to Siding. You might correct that because I know you make some in Siding as well. Would it not be the practice at the end of the quarter to mark the OSB that has been shipped to the Siding at market and therefore since you haven't sold it on the outside that's actually a charge if the price is going up.

Chip, we don't -- the Siding makes all their own OSB that's used in the siding product.

It's really a transit issue. Okay. Thank you very much.

The only thing -- let me just clarify. The only thing that would get re-categorized is the inventory that we would buy from Peace Valley that's sitting in inventory. But that's --.

We didn't have any sort of unusual accounting items like inventory revaluations that impacted the numbers. I think what you're saying is the impact of higher raw material costs and some downtime in our OSB business that caused the result.

And therefore, as we look at the first couple -- at least the first quarter, you're probably not going to be taking as much downtime.

Our third quarter OSB numbers without Peace Valley were, cost per unit were below, were well below the -- 10% below the fourth quarter numbers.

Got you. Okay. Thank you.

(Operator Instructions).

Joe Stivaletti of Goldman Sachs.

I was just wondering on Peace Valley, it sounds like you've had some delay in closing that. I just wondered if you could shed a little light on that?

Yes. From a regulatory standpoint, Competition Canada, we are through that. What we have in Peace Valley is that we share a pulpwood agreement between Canfor and LP. And just to be clean, both of us thought it was a good idea to segregate that, so we have two agreements, one that Canfor manages and one that LP manages. There's a consultation process that's at least 60 days to go through with First Nations and others. That's really the delay. It's nothing more than that.

And so on the topic of sort of restarting capacity, it sounds like your view is that the industry is currently set up to deal with 850,000 to 900,000 starts this year, based on what everybody's announced that they're reopening. And that that obviously could end up being a little bit below or is a little bit below where some of the forecasts are? Is that what I heard you saying?

That's what I said. With what's been announced today and with the timing of when that capacity comes on and how it ramps up, but it's the 850,000 to 900,000 that can be supported. That's not to say something further won't happen. And you heard me say that if we're close to 1 million that we might think about bringing Dawson on for the West Coast.

So, Clark is going to come on in the second quarter, I think you said. When would you -- what are your -- what's your decision process like on Dawson Creek? I mean, what do you need to see to get comfortable with bringing that online and how long would that take?

Well, what we need to see is we need to see that the forecasts are right, that we are actually seeing housing starts at the level, the 950,000 to 1 million. To bring it on, it would be relatively fast for us to bring it on, on a single shift basis, because we already have employees there who are actually manufacturing TechShield there.

So, we take the blanks from Peace Valley, ship it to Dawson Creek and we add the TechShield foil to it. We have a crew there. We have a plant manager. We've got environmental manager. So, we got the base level there. So, to start a one shift operation I don't think it would take us more than about two months from the time we make a decision. Again, that's a one shift operation. So, that's not running full-out.

And your other facilities that you're -- the other OSB mills that you're operating away from Peace Valley, are they all operating full-out or is there any ability to add more shifts or --?

The only ability we have to add capacity is in Canada and there we do have a freight penalty that we're dealing with. But again, if demand is strong, pricing is reasonable, then we can bring more wood out of Maniwaki. And as I said, Maniwaki has been kind of our export mill and we'd cut back on the export and provide that wood domestically. And then Swan Valley's got a little bit left for capacity, too, in Manitoba.

So, all the US mills are operating full-out?

They are.

Okay. All right, thank you.

Mark Wilde with Deutsche Bank.

Just, Curt, first I just want to kind of check the numbers here. I think in the past you've said that 100,000 starts is equivalent to roughly 1 billion square feet of OSB demand. Is that right?

Yes. I think that what FDA would say it's about 1.1 roughly.

And then just kind of checking what I think I know about restarts at this point, you guys have announced Clark County, you've got an extra line up in BC, but I think an Atlanta based producer is starting up a new mill. I think there's a mill that's being restarted in Texas. There's a mill that's been restarted up in New Brunswick, a small mill, and then I think Ainsworth has announced that they're moving ahead up in Alberta. Is that consistent with what your knowledge of what's going on on the supply side?

I haven't seen an announcement from Ainsworth, but the others I have seen announcements on, yes.

I think it's on their presentations right now. So, I think that's about 860,000 square feet or thereabouts. A couple of other just questions on capacity. There was a lot of plywood that came out in 2010, 2011. Have you guys seen anything that would suggest any of that plywood capacity would be coming back into the market?

I haven't seen any of it.

And then the last question I had, Curt, just Latin America, because you really -- you put up nice margins down there, particularly in the fourth quarter. I'm just wondering whether you're getting some benefit down there right now from the sort of ripples of the market getting better up here?

Because my sense was that when the market was weak here, you might have had some people pushing product into the Latin American market and that might have depressed the market in South America and so that maybe some of the benefit right now is just sort of a second derivative off of the US pick-up?

I think that's right. There's less imports coming into South America than there were before.

Excellent. Those are my questions. Good luck in the first quarter and through the year.

All right, thanks, Mark.

Paul Quinn with RBC Capital Markets.

Questions on just inventory levels in the OSB side in the channels, what are you seeing out there right now.

What we're seeing is that there's very little inventory and that's for a couple reasons. One, as I talked about credit being throughout the -- for land acquisition all the way to the mortgage. The dealer and the distributor network is just really strained on their ability to borrow money to put inventory on the ground, and so they have lean inventories. I just give you an example. We saw OSB price come off a couple weeks ago when we had bad weather.

The reason we saw that is because it's going straight through to the building sites, because there's not much inventory there. When we talked to the distribution channel at IBS, that was a major question is they want us to be their bank. We don't want to be their bank. They are going to have to figure out how to get more financing. I don't think there's very much in the channel.

Then in terms of just capital allocation with cash and cash like at $575 million, historically you've had a dividend in place. Is that a topic that the Board's bringing up more, or how are you looking at returning cash to shareholders going forward?

Paul, when we look at the $560 million of cash we have on the balance sheet, we think about a couple things. We're thinking about our -- the bonds that we refinanced, those have a 2016 call on them, so we'd like to continue to build cash so that we can have options there. That's about $363 million. And then we have our timber notes that are coming due over the course of the next five years and we'll have taxes to pay on those.

And that equates to about $153 million. And of course, we still have to pay for the Peace Valley acquisition. So, at this point, we're really focused on seeing the cash generation towards those ends. But clearly, we'll continue to think about other ways to return capital to shareholders.

Great. That's all I had. Best of luck. Looks like an interesting year.

Thanks, Paul.

Mark Weintraub with Buckingham Research.

First, just on Dawson Creek, how much can it produce on a single shift?

Probably, 80 million feet.

80? So not that much.

About 100 million.

100 million. Okay. And then how long would it potentially take you to start up -- are there two or potentially three shifts there?

Four.

Four. So, what could the potential ramp be if you do see housing playing out favorably?

Probably, four months to on-board, to find the people and on-board them.

And second, on OSB prices, you've talked a lot about mix and also I think sometimes lags can have an impact. I don't know if there was any of that going on. Maybe it actually helped you a little bit in the fourth quarter. If we think about where things are today, can you give us a sense of when you take into account the geographic mix and the lags, where your price realizations today might be relative to where they averaged in the fourth quarter?

I'm reluctant to do that. I certainly will announce those results in April, but --.

That's sort of hard to do looking forward, because we still have two more months to go in the quarter. Who knows what's going to happen to the Random Lengths pricing among the various regions and where our demand is going to be.

I was just trying to see where they were, though, on average today. That's okay. And then finally, Engineered Wood, can you give me a sense perhaps of what are realistic target operating margins over the course of the cycle for that business in your view?

Well, what we have seen historically is that the margins have been in that low teens kind of level. I think that's what you can expect on a go forward basis. Now, we might get a slightly higher margins in our LSL product, as we continue to make penetration there against LVL. From a return on capital employed, because we don't have a lot of value in there, it's pretty high. It's in the mid-20s to high 20s.

Appreciate it.

Steve Chercover with D.A. Davidson.

I, too, wanted to ask questions that Mark and Mark had touched on on Engineered Wood. First of all, a couple of the larger players have explicitly announced price hikes for March 1, so hopefully they're going to go from being a problem to being rational. Are you going to follow suit there?

The last three we've led, Steve.

Is that right? Well, you said they were competitive, so I guess that speaks to their behavior. And when OSB prices come back to earth, you said mid-teens operating margins. So would that generate cost of capital returns for you?

For the Engineered Wood business?

Yes.

About a little bit north of that. And then return on capital it's much higher than that.

And you didn't exactly take the bait on when OSB prices come back to earth, but -- (Laughter). Do you think that there's --?

Here's an interesting perspective. Going to 1 million housing starts from where we were in 2012, first of all, I don't think you can get there because of what's been announced from a capacity standpoint, but as these facilities, new facilities come back online, they don't come back online at 100%. They come up incrementally. And so if we can have incremental growth for the next four years, it's going to match the way capacity comes back online and keep those operating ratios at pretty high levels.

So, you think we're going to have elevated prices, but that's not the same as saying that this is the new normal, $300 plus OSB.

I can't tell you what the new normal is. And we set the price every day, transaction with our customers.

Okay. Well, I think since I'm at the end of the call, most of it's been covered. Thanks, Curt.

Thank you. Patrice, we only have time for one more question.

Alex Ovshey of Goldman Sachs.

So, if you factor in the start-up of the Alabama mill, what do you see as the upward bounds to your production of OSB in 2013?

The upward bound?

Yes.

About 4 -- between 4.4 billion square feet and 4.5 billion square feet.

And on the EWP business, how do you think about the sensitivity of volume in that business relative to new housing starts?

Well, the impact on our OSB business, frankly, is all pricing.

No, no, on the Engineered Wood Products business, how do you think about sensitivity of volumes there relative to housing starts?

I'm not sure what you're saying. How much volume per housing start.

No, no, no, in terms of if housing starts are up 25%, what's the right way to think about what your Engineered Wood Products volume should change behind that scenario.

The difference in Engineered Woods and our other business is [so] heavy raw materials costs. The pricing's really what gives you the leverage, it's not necessarily volume. The manufacturing costs at an I-Joist plant are less than 5% of the overall cost. It's really raw materials.

Okay. Thanks.

Okay, great. Well, thank you all very much. Patrice, that's all the time we have for questions. So, if you could please provide the replay number, that would be great. And I'd like to thank everybody for participating in our call today and as always, Mike and Becky are here to answer any follow-up questions.

Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.