Louisiana-Pacific Corp (LPX) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 Louisiana-Pacific Corporation Earnings Conference Call. My name is Joyce, 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 you now like to turn the conference over to your host for today, Sallie Bailey, Executive Vice President and Chief Financial Officer. Ms. Bailey will then turn the call over to Curt Stevens, Chief Executive Officer. Please proceed.

Great. Well, thank you very much, Joyce, and good morning and good afternoon for those of you on the East Coast.

We thank you for joining our conference call today to discuss LP's financial results for the fourth quarter of 2014, and the year ended December 31, 2014. I am Sallie Bailey, LP's Chief Financial Officer. 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 the discussion with a review of the financial results for the fourth quarter of 2014 and the full year. This will be followed by some comments on 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, and provide his perspective on our operating results, and give some thoughts on outlook.

As we have done in the past, we have opened up this call to the public and we are doing a webcast. That webcast 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 will be referencing these slides in my comments this morning. We filed an 8-K this morning with some supplemental information, and expect to file our Form 10-K before the end of the month.

I want to remind all the participants about the forward-looking statements comment on Slide 2 of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information included 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.

2014 was a challenging year for LP. Housing starts grew to just over 1 million starts, or 9% higher than 2013. Single-family housing starts grew 5% year over year. At LP, we remain focused on activities which are in our control, and continue to invest in our future, so we are prepared when US housing starts return to historical levels.

Moving to Slide 4 of the presentation for a discussion of the fourth quarter 2014 and the full-year 2014 results, we reported net sales of $454 million for the fourth quarter of 2014, a 5% decline from the net sales of $480 million reported for the fourth quarter of 2013. In the fourth quarter of 2014, we recorded a net loss of $43 million, or $0.30 per diluted share. In the fourth quarter of 2013 we reported a net loss of $20 million, or $0.15 per diluted share.

The adjusted loss from continuing operations for the quarter is $32 million, or $0.23 per share, based upon a normalized tax rate of 35%. This compares to a loss of $9 million, or $0.06 per share, in the fourth quarter of 2013. Adjusted EBITDA from continuing operations was negative $17 million in the quarter, compared to positive EBITDA of $24 million in the fourth quarter of 2013.

On a year-to-date basis, we recorded $1 billion(sic-see presentation slides �$1.9 billion�) in net sales, a loss of $75 million, and as loss per share of $0.53, as compared to net sales of $2.1 billion, net income of $177 million, and earnings per share of $1.23 for the full year of 2013. On a non-GAAP basis, we recorded an adjusted loss from continuing operations of $60 million, a loss per share of $0.42, and adjusted EBITDA of $44 million for the full year of 2014. In 2013, we recorded $121 million(sic-see presentation slides �$129.3 million�) of adjusted income from continuing operations, earnings per share of $0.90, and adjusted EBITDA of $330 million.

The most significant head wind experienced by LP in 2014 was the 26% decrease in OSB pricing. The lower OSB price impacted operating income and adjusted EBITDA by $298 million, which is more than the year-over-year decrease in adjusted EBITDA.

I will now move to Slide 5 and a review of our segment results, beginning with OSB. LP's OSB segment reported an operating loss of $29 million and $203 million of sales in the quarter, compared to operating profit of $7 million on $230 million of sales in the fourth quarter of 2013.

For the quarter, we are reporting negative adjusted EBITDA of $15 million, compared to positive EBITDA of $27 million(sic-see presentation slides �$22.6 million�) in the fourth quarter of 2013. We had a 1% decrease in volume, and pricing for OSB was down 12% over the fourth quarter of 2013. We took 136 down days during the quarter, which equates to approximately 200 million square feet. Most of the down days were market related. Capacity utilization of our operating mills for the quarter was approximately 77%.

For the full year, OSB had an operating loss of $53 million, compared to income of $230 million in 2013. Adjusted EBITDA in 2014 was $4 million, compared to $285 million in 2013. The impact of lower OSB pricing between the years was $298 million.

Slide 6 reports the results of the siding business. This segment includes our SmartSide and CanExel siding products. The siding segment reported sales of $141 million in the fourth quarter of 2014, an increase of 2% from $138 million reported in the fourth quarter of 2013. The siding segment reported an operating income of $14 million, compared to $16 million in the fourth quarter of 2013, and adjusted EBITDA of $19 million, as compared to $20 million in the same quarter of 2013. During the quarter the siding segment did not produce any OSB, compared to the fourth quarter of 2013 when the siding segment produced 45 million square feet of OSB.

For the quarter, SmartSide average sales price were up 4%, and volumes also increased 4%. Volume increased in our SmartSide siding line due to continued penetration in several key focus markets, including retail, repair and remodel, and sheds. However, the siding segment was negatively impacted by log shortages in the light space. We estimate that the siding business lost 45 days of down time, or 27 million square feet of production in the fourth quarter. We estimate that the gross margin on the lost sales, along with the higher unabsorbed mill costs, decreased adjusted EBITDA by $5 million for the quarter.

CanExel prices were down slightly in US dollars, or up 6% in Canadian dollars. Canada is CanExel's primary market. Volumes were up 11% in the quarter due to higher Canadian and international demand. On a year-to-date basis, the siding segment recorded $617 million in sales, $80 million in profit, and $98 million in adjusted EBITDA.

For 2013, the siding segment recorded sales of $574 million, profit of $86 million, and adjusted EBITDA of $103 million. In 2014, volumes of SmartSide increased 13% and prices increased 3%(sic-see presentation slides �4%�). The siding segment produced 45 million square feet of OSB in 2014, as compared to 168 million square feet of OSB in 2013.

For the full year, the siding segment was negatively impacted by log shortages. We estimate that the business lost 88 days, or 53.8 million square feet, of production due to the log shortage. We estimate the impact of these log shortages on operating income and adjusted EBITDA was just over $10 million for the year.

Please turn to Slide 3 of the presentation, which shows the results for our Engineered Wood Products segment. This segment includes I-Joist, Laminated Strand Lumber, Laminated Veneer Lumber, plus other related products. This segment also includes the sale of I-Joist and LVL products produced by the Abitibi joint venture, or under a sales arrangement with Murphy Plywood.

In past quarters we've included log sales from our Malakwa forest licenses in this segment. But beginning this quarter and going forward, these sales and the associated operating income and adjusted EBITDA are being recorded as part of the Other Building Products category. The other building products category includes log sales from other non-operating mills. All prior periods have been adjusted. The impact on EWP's results on an annual basis has been between $1 million and $1.5 million of adjusted EBITDA in each of the last three years.

The Engineered Wood Products segment reported sales of $66 million in the fourth quarter of 2014, down slightly from the fourth quarter of 2013. The segment's operating loss in the fourth quarter of 2014 was $6 million, as compared to a loss of $4 million in the fourth quarter of 2013. For the fourth quarter of 2014, adjusted EBITDA from continuing operations declined to a negative $4 million, as compared to break-even in the fourth quarter of 2013.

Volumes at I-Joists were down 9%, while volumes of LVL and LSL were down 3% compared to the same quarter last year. Pricing was up 3% in I-Joists and 5% in LVL and LSL, reflecting price increases in all products.

For 2014, Engineered Wood Products reported net sales of $281 million, as compared to $250 million in 2013, a 12% increase. Sales volumes were up 6% in I-Joists and 9% in LVL and LSL. The 2014 Engineered Wood Products -- in 2014, Engineered Wood Products recorded an operating loss of $14 million, and reported break-even adjusted EBITDA, as compared to a loss of $15 million and negative EBITDA of $2 million for 2013.

Moving to Slide 8 of the presentation. For the quarter, our South American segment recorded sales of $36 million, as compared to $41 million in the fourth quarter of 2013. Operating income of $3 million in the fourth quarter of 2014 compared to $2 million in the fourth quarter of 2013. South America's adjusted EBITDA from continuing operations was $5 million for the fourth quarter of 2013, which is comparable to the fourth quarter of 2013.

Volumes in Chile were up 16%, and lower by 27% in Brazil compared to the same quarter last year. The sales volume increase in Chile was primarily increased demand offset by lower exports. In Brazil, the lower volume was primarily due to reduced exports to the far east market. Pricing was down 16% in Chile and down 6% in Brazil. In local currency, Chile's pricing is 5% lower compared to the same quarter in 2013, due to the continued pricing pressure from North American imports. Brazil recorded a 1% improvement in pricing in local currency.

For the full year of 2014, South America recorded net sales of $150 million, profit of $11 million, and adjusted EBITDA of $20 million. For 2013, South America recorded net sales of $172 million, profit of $20 million, and adjusted EBITDA of $31 million. Total selling, general, and administrative costs were $41 million in the fourth quarter of 2014, compared to $47 million in the same quarter in 2013. For the full year of 2014, selling, general, and administrative costs were about flat between the periods, at $150 million. For the quarter, the reduction in SG&A costs was primarily related to lower incentive compensation.

Please turn to Slide 9 of the presentation, where we note that as of December 31, 2014, we had cash, cash equivalents, investments, and restrictive cash of $548 million, working capital of $778 million, net cash of $177 million. In addition to the cash on our balance sheet, we had $200 million of availability on our credit facility. Capital expenditures for the year were $80 million.

Capital expenditures for 2015 are expected to be approximately $130 million, of which around $80 million relates to our growth projects such as the Swan siding mill conversion, and the third Chilean mill. We did not repurchase any shares of LP stock during this quarter.

Now I'll turn the call over to Curt for his comments.

Thank you, Sallie, for that review of the fourth quarter and the full year.

My comments today will focus on our accomplishments and challenges during the last year, talk about the current state of the housing market, and provide you with my views on what is ahead for us in 2015. I will conclude by discussing the executive leadership changes that we announced this morning.

From a safety perspective, LP had a total incident rate of 0.35 for 2014, the lowest level in LP's history. This is the ninth year in a row that our total incident rate has been below 1.0. In addition, we completed all of our capital work in 2014 without a single recordable injury to any of the many contractors that we used on site, truly a remarkable performance.

For the year, housing starts were at just over 1 million, led by a strong fourth-quarter performance. However, this is only about a 9% increase compared to the beginning of the year forecast of a 20%-plus increase. This shortfall put pressure on OSB pricing all year that resulted in North Central 7/16 pricing being $71 per 1,000 square feet lower than 2013, quite a disappointment for us.

In our siding business, we had record shipments of SmartSide for the third year in a row. This success led us to convert all production at Hayward to siding, and to make the decision to accelerate the conversion of our Swan Valley, Manitoba OSB mill to siding production. We expect this to be operational early in the fourth quarter of this year.

In engineered wood, we again had record shipments of Laminated Strand Lumber products, and higher volumes of both I-Joist and LVL than in 2013. South America, weaker economies in both Chile and Brazil, plus the stronger US dollar reduced results, but we were still profitable in both these operations.

That leads me to a few comments on the housing market. US housing starts in December were at 1.089 million units, with single-family starts at their highest level in 6.5 years. In addition, housing starts for both October and November were revised upward. Housing permits were slightly below starts in December, at 1.028 million. The average 30-year mortgage rate for the week ending January 23 was at 3.66, the lowest level since the spike in rates in May of 2013.

Last month I attended the international builders show in Las Vegas. Attendance was very strong, with an estimate of 125,000 attendees. From the supplier perspective, I'd say there was a universal caution, as we were all caught off guard by the slow pace of the housing recovery in 2014. Most are using around 1.1 million housing starts as a base assumption. Among the builders, I'd say there was more optimism around housing activity, but they expressed concerns in a number of areas: Costs and availability of prime lots, availability of construction labor and upward pressure on labor costs, the cost of building products, and margin pressure as the ability to raise prices aggressively has dissipated.

Just last night I returned from the policy advisory board meeting of the Harvard Joint Center for Housing Studies that was held in Washington, DC, over the past two days. This is a group from all facets of the housing industry -- builders, developers, producers, distributors, realtors, government agencies who support housing, banks, and other financial institutions.

I'm pleased to say that the general tenor of the meeting was the most positive in five years. The optimism was broad-based, but the most discussed item was the expected return of the first-time home buyer due to a variety of factors. Sallie mentioned household formations have been at an extremely low level for much of the Great Recession. These numbers shot up in the fourth quarter to three times what they've been averaging over the last three years. Job growth and wage increases from an improving economy get much of the credit for this. On the financing side, the lowering of premiums on mortgage insurance, the re-emergence of the 3% down-payment loans, and more favorable credit standards are making financing more available to the first-time home buyer.

At the meeting there was also a discussion to try to assess the impact of falling oil prices on housing, and it appears to be a mixed bag. In the oil-producing areas, it doesn't appear that housing activity has slowed, but there's certainly a lot of talk about the timing of beginning new housing projects. Lower fuel prices are adding to consumer confidence, which should accelerate household formation, a precursor to the first-time home sale or apartment rental.

As an aside, we do expect to have lower raw materials costs at our operations due to lower oil pricing, primarily resins and energy. Last December when we put our 2015 budget together, we estimated that the savings due to lower oil prices was in the range of $25 million to $30 million. Today, with oil prices hovering just north of $50 a barrel, our estimated savings are in the $40-million to $50-million range.

In other markets, the National Association of Home Builders Remodeling Index hit a record level in the fourth quarter of 2014. The Harvard Joint Senate for Housing Studies just released their Emerging Trends in the Remodeling Market, where they concluded that this market will continue to strengthen. With a strong US dollar, we don't see exports returning any time soon to North America.

For 2015 and 2016, we agree with the forecasters that housing's going to continue to get better. The consensus forecast for housing starts in 2015 now stands at 1.19 million, and 1.426 million in 2016, a 10% increase this year, followed by a 20% increase next year. I'll take that. As I mentioned on our last call, we're using 1.1 million as our 2015 base forecast.

OSB pricing is critically important to us in our financial performance, as demonstrated last year. Clearly, pricing was short of expectations in 2014, as new production that came on line in anticipation of higher housing activity led to an imbalance between supply and demand. While we don't provide guidance on earnings or OSB prices, we do use forest economic advisors as a primary forecasting source. For 2015, they see an increase of about 8% in OSB prices, and a further 14% increase in 2016. We do see the Canadian dollar below the $0.90 level for 2015. To put this in perspective, the change in the exchange rate in 2014 compared to 2013 improved our results by about $14 million.

For the near term, we have several important projects on our growth agenda. We've been on allocation in our siding business for several months due to log shortages and [leg stays] that caused production shortfalls. We've been working diligently to put logs into these mills so we can operate without interruption. If nature cooperates a bit, I think this will happen.

In addition, we kicked off an accelerated project to convert our Swan Valley, Manitoba, OSB mill to siding production early in the fourth quarter. We have further capital projects under development to add capacity or capabilities at our other siding mills to meet customer demand. Having available siding capacity ahead of demand is a very high priority.

South America, we have submitted our environmental permits, and have initial comments back for a third mill in Chile. We have started the detailed engineering to be ready to begin construction when the permits are approved. We believe this will be sometime around the end of the summer. While we would always like housing to recover more quickly, we are pleased with our positioning in the market, and we stand ready to serve the increased housing market activity.

Before I turn it over to Sallie for questions and answers, I do want to take a few minutes to discuss the Management changes that we announced this morning. The good news is these announcements is that we have a broad and deep bench within LP to assume important roles. The bad news is that we will be losing two very talented executives and good friends through retirement. Here's the summary of the changes.

Rick Olszewski, our EVP of Sales and Marketing in South America, will be retiring at the end of March of this year. As Rick's title demonstrates, Rick is both the senior sales and marketing executive for LP and the executive in charge of our South American operations. For the first responsibility, Rick will be replaced by Mike Sims, our current VP of OSB sales, who has the new title of Senior VP, Sales and Marketing. Mike has over 30 years of experience in the selling and marketing of building products, and has held a senior role with LP since we acquired ABTco in 1999.

Because of the increased role of South America in LP's growth plans, I will be taking over Rick's role in South America, and Frederick Price, President of LP South America, will be reporting directly to me. Jason Ringbloom, who has held a variety of sales roles with increasing responsibility over the years, will take Mike Sims' spot as VP of OSB sales.

Jeff Wagner, our long-time EVP and GM of OSB, and I have been talking about his retirement plans for some time, and decided that Jeff will leave his full-time employment with LP around the middle of this year. In the meantime, Jeff will report to me and assume responsibility for an important internal LP project to get better at growth and innovation. As we know, we can't rely solely on the housing recovery. Brad Southern, a long-time LP officer and currently the Senior Vice President and General Manager of our siding business, will assume Jeff's responsibility as EVP and General Manager of OSB.

As you can tell, this creates more cascading. Brian Luoma, another long-time LP employee and currently Senior Vice President and GM of our engineered wood business, will replace Brad and become EVP and GM of Siding. Neil Sherman, currently our VP of Procurement and Logistics, will take Brian's position and become Senior Vice President and GM of BWP. Finally, Mike Blosser, LP's VP of EHS and Forestry, will once again add Neil's prior responsibilities to his portfolio.

While it seems like a lot of change at once, we were able to make all these moves internally as a result of the talent pool within LP and our robust succession planning process. I'm fully confident that each of these changes will bring a new perspective to the position, and will allow our Executive Management to acquire new skills that will allow for increased responsibility in the future.

I want to publicly thank Jeff for the many contributions he made to LP over his 35-year-plus career with the Company, and Rick for bringing sales and marketing to the forefront of what was historically a manufacturing Company in his eight and a half years with LP.

Now I'll turn it back over to Sallie for questions.

All right. Thank you very much, Curt. Joyce, we'd like to go to the queue for questions, please.

(Operator Instructions)

The first question comes from the line of Mark Connelly with CLSA. Please proceed.

Thank you, two things. Your comment about Jeff in particular piques my interest. We've talked over the years -- well, recently we talk about CanExel and siding, but in the past we've talked about radiant barriers and other value-add. Is this a new initiative on your part, or is there just more coming through the pipes that needs to be managed?

It actually is a new initiative. As you know, we tried to grow through acquisition last year. When it became clear that wasn't going to come to the forefront, we did engage an outside group to help us with our growth and innovation capabilities. We've done a lot of it over the years, but this gives us a much more disciplined approach.

What we've done is Rick Olszewski and Neil Sherman actually headed up that project from about the end of last summer until today. Jeff will be taking over that responsibility probably until the middle of the year.

What it does do for us, Mark, is it just gives us much more information on the market sizing or where the geographic opportunities might be. It should accelerate the growth for some new products, plus increase our penetration in geographies where we should be more successful than we have been.

Right. That sounds outstanding. One more question. Given the time you've spent with builders and other folks lately, I'm just curious if you see anything that suggests that we're going to see a shift in the rate of adoption or the rate of penetration of engineered wood products over this housing recovery?

We've seen shifts in size. We've seen a shift to multi-family. I'm wondering if you're seeing anything that makes you think we're going to see some acceleration?

I think it's going to follow housing growth. I don't think that you're going to see increased penetration. A number of things have happened there.

I think in the past we've talked about the lumber going from British Columbia into China. That's slowing a little bit, which means there's going to be more lumber coming out of British Columbia into the US to help support this market.

We think the market shares really haven't changed all that much, even during the recession, between engineered wood and solid wood. I think it's going to be about the same.

Super, thanks.

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

Hi, good morning. I was wondering if you could give a little bit more color on what went on in engineered wood in the quarter. Volumes were pretty weak. I guess there was some reference of de-stocking. How much of that do you think was seasonal versus something else? Any signs of that reversing in the first quarter?

Sure, Gail. Fundamentally, we do believe that there was a fair amount of de-stocking that occurred in the fourth quarter, and that really highlighted itself in the capacity utilization for that business, which was down in the fourth quarter. We are beginning to see some improvement in the first quarter in orders in EWP, and we're having some wins in certain markets in EWP, as well.

Okay. In terms of the inflation comments on oil, just wondering, are there any offsets? Specifically, are you currently seeing any relief on the log costs in the west? Any issues with freight and logistics, or is that also -- is that a benefit incorporated in the oil guidance?

On the transportation side, we actually see this as an opportunity for both railroads and truckers to raise their rates. We're actually not seeing much reduction in our freight cost.

In fact, we could see a little bit higher pricing, particularly coming out of the Canadian railroads, because of price increases they put in place, plus some of the changes they've made to their AMB routing, which has forced us to increase our distribution channel with more reloads and other methods to support our customers. We're not seeing it on the transportation side.

On the log side, we have not seen any relief in the lake states on pricing. We've seen a little bit more availability, but not on the pricing. In the south, we do expect log pricing to come off a little bit, but not significantly.

Okay. In light of the decline in the Canadian dollar, I'm just wondering, are you re-thinking or have you made any adjustments to your operating footprint, maybe increasing production out of the west coast and flowing down in the US -- out of Canada and flowing in the US?

We keep looking at that. But one of the -- I mentioned in my earlier comments that the export market is dried up. We actually ship a fair amount of wood both to the far east and to Russia out of our Canadian operations, and that really has come to a standstill with the strong US dollar, plus the havoc that's going on in Russia. We need to replace that volume somewhere else.

As a result, we have taken some down time this quarter, because of weather and weaker demand. But we continue to look at the Canadian operations as a good source of products in the future. The only asset that we have that is not running is our mill in Quebec, and we do not have any plans this year to start that mill back up.

Okay. With pricing where it is, would you -- could you envision seeing any kind of incremental actual mothballs versus just down time?

Well, I don't envision that, because I do believe that with the market even the 9% increase, which is our base forecast versus the 18% or 19% that's in the forecast, would say there is a demand for that wood. But we will do what we have done in the past, is we will take market curtailments as we see weaker demand. Sallie mentioned in the fourth quarter we took 136 days of down time, and we're currently taking down time at our mills right now.

Okay, thank you.

The next question comes from the line of Chip Dillon with Vertical Research Partners. Please proceed.

Yes, hi. Good day to see you guys, Curt and Sallie. First question is on your CapEx. I might have missed the number, if you gave us a guide. But could you remind us what that number looks like for 2015, and give us some directional nuance for 2016? I know you mentioned the project in Chile, but are there other definable projects that you're still working -- that you would be working on in 2015 and 2016?

Sure, Chip. Our guidance on CapEx for 2015 is $130 million. $50 million of that represents what we typically talk about in terms of maintenance. The remaining $80 million relates to projects like turning our Swan, Manitoba, OSB mill, converting that into a siding mill, as well as plans for the third Chilean mill.

If we -- the expectation right now is that Swan would be fully converted in 2015. The Chilean mill, we'll look to see what's going on in that economy, and think about the timing on that. But we expect some expenditures in 2015, and that will move into 2016. We'll continue to think about opportunities for growth in our siding business as that business continues to grow.

Chip, the only color I would give on that is as we look into 2015 or 2016, there are a series of additional projects to match the capabilities of our siding mills to the market demand. We will be rolling those out through 2016, but that's totally based on the demand for the product, and those are well thought out and great return projects.

The only other one is we have been focused on our FlameBlock product, particularly for multi-family. A contractor that we use, we're currently out of capacity there, so we're determining what we do. That may be a modest investment that we will make internally for both fire-retardant OSB and fire-retardant I-Joists.

Got you. Just to give us a little bit of feel for things, if you kind of go back a few years, I know that we haven't had very many good years in the last five, let's say. But I do recall that in -- for example, I think it was 2012 -- or actually, sorry, 2013 was a pretty decent year for OSB. I know that year you made $86 million in siding, and I know you have some OSB inside of that segment.

Last year you almost -- you only made $6 million less. You went from $86 million to $80 million when OSB completely fell down. If we kind of stripped out the OSB profits in 2013, how much -- it appears on the surface to have been quite a big swing upward again in 2014 in siding, or at least an up year, even though it was down for OSB. Is that fair?

That is fair, Chip. In fact, there's probably about a $9-million difference between siding profits in 2013 that were reported in the siding -- OSB profits in the siding segment. It was a $9-million swing. If you took 2013 down, you would see a pretty good growth in the siding business. As I said, we did have record volumes in 2014.

Okay, got you. Thank you.

The next question comes from the line of Bill Hoffmann with RBC Capital Markets. Please proceed.

Yes, thanks. Curt, could you talk a little bit more how you're planning for -- what if there's a down-side case here where housing doesn't improve like you're thinking and talking, even with some of these positive signs. From an operating standpoint, just really either take costs out of the system or to better balance the market so you get somewhat of a better pricing environment?

Well, I think what we're doing today, Bill, is what we did last year. As we saw demand fall -- let me just back up a minute. Just to remind everyone, when we figure out our OSB business at the beginning of the year, we do contract with our customers for volume. It doesn't affect the pricing in general, but we contract volume.

With the home centers, we contract a certain amount of volume with some of the big pro dealers and some of the others. Our contracted volume last year was around 80%, and it's about the same this year. When we take down time, really what we're playing with is that 20% that's open-market wood, because have commitments for the other 80%. Does that make sense?

Yes.

The down time that we're taking is if we don't see a demand for the open market wood, then we adjust our production schedules to satisfy the demand that we do have from our customers.

Right. What I'm asking is does it make sense to temporarily idle a facility for a year to help bring this market back into balance on that 20%?

Well, so far we believe the best from an economic perspective is to run it the way that we're running it. When you do take a mill down, that means you fire all the people, you get rid of the customers that you had contracted that mill with, and then you have the start-up costs that go with that.

Okay, thanks. The other question on the log outages that you experienced in the fourth quarter. Has that situation pretty much rectified itself at this point?

I would say it's better, but it's still touch and go. This is really in the lake states region where they've had some weather issues. They've had infrastructure issues. There's been competing demand from the pulp mills in that area. We're actually bringing wood in from further away, and we're paying more for it.

Right. Okay, thank you.

The next question comes from the line of Mark Wilde with BMO Capital Markets. Please proceed.

I wonder if we could talk first about OSB and really bridging the difference between the year-over-year decline in EBITDA in that sector. You've pointed I think to price being about $27 million of that decline. It was a total of about $38 million. The other $11 million, Curt, is that down time, or what else might be in that number?

That's down time. That's the impact of the higher down time, so the un-absorbed cost.

The un-absorbed cost. Yes, okay. All right. I was curious, you were actually down year over year in volumes in OSB in the fourth quarter, but most of the housing indicators as Curt mentioned were up in the fourth quarter. How do we get our heads around that delta?

Well, Mark, as you'll recall, we actually produce more in the third quarter, so we sold out of inventory.

Okay. All right, that's fine. Turning to the Latin American business, I was just curious about you how you see the impacts of the big decline in both the Chilean peso and the Brazilian reais playing out over the next year or two in that business.

Most of the impact is on our reported results, because we translate it back into US dollars. We sell -- most of the product in Chile is sold in the Chilean peso, so our costs and our expenses are in the same. In Brazil we have a little bit of an export market, a little bit more of an export market, and that is typically in US dollars, so they should benefit a little bit from that as we go forward.

It's possible, going back to Chile, that an unintended consequence of the higher US dollar could be fewer of our competitors exporting down into Chile, which would help our Chilean operations from a demand point of view and pricing point of view.

Yes. When I listened to your comments on the fourth quarter, it seemed like things moved in an opposite direction from what I would have expected. You talked about more imports coming into the Chilean market and you talked about less exports out of Brazil. I would have thought, given the weakness in both of those currencies, that we would have seen less imports into Chile and more exports out of Brazil?

We're continuing to see exports from the US into the Chilean market even with the US dollar where it is, and we're seeing that pricing pressure. Then --

it's not logical, Mark.

Right.

I'd almost use that D word if I didn't know better. I guess the last question I had, Curt, was just on the EWP business. I wonder whether your strategy or your market position in EWP is due for a re-think at all?

Well, as we do with all of our businesses, we look at our portfolio and figure out what makes the most sense. I think some of Sallie's comments -- maybe not have picked up on it -- but we did have a pretty significant series of design wins, or wins with major customers in the fourth quarter. I do see that business picking up. We are seeing more activity in engineered wood.

Is being in that business, is that -- is there any connection between that business and the siding business? Do you have any of the sales and support people that overlap, or is that completely separate?

The sales people overlap quite a bit. We do have specialists that support EWP. As you know, you need engineering expertise there. Those are specifically identified with EWP. But the general sales force sells our specialty OSB, our siding products, and our engineered wood. They are calling on the same customers, dealers, builders.

Okay. Last thing I was going to ask, Kurt, we had some news about another OSB mill in east Texas. It's amazing to me, given the difficulties that the market has gone through over the last seven or eight years, including this last year, that people are talking about building more capacity. Any thoughts?

Well, first, this is a privately held enterprise that has made the announcement. It's also, if you think about it, with today's capacity even bringing back the two or three mills that are curtailed, we can support about 1.4 million to 1.5 million housing starts. If you get north of that, there needs to be a solution for additional capacity -- not that I'm thinking about it. But I'm just telling you what his thinking might be.

As I understand the announcement is that there were some economic development grants discussed. I don't think they were approved, but they were discussed. I think he's getting ahead of it, because as you think about it, he's got to get the site, which as far as I know he doesn't own a site. He's just got economic development grants.

You've got to buy the site. You've got to get environmental permitting. Then you've got to order the equipment. Then you've got to build it. You're three to four years out. If you think about it in that context, it's not totally wacky. Plus, he is privately held, so he doesn't have to talk to shareholders and analysts.

Presumably, he still likes to get a return on his money. Okay, that's good enough. I'll turn it over. Thanks.

The next question comes from the line of Mark Weintraub with Buckingham Research Group. Please proceed.

Thank you. Curious, you mentioned that you've got about 80% of your OSB volumes contracted last year and this year. Is that relatively standard practice for the larger producers, or are you an outlier in that regard, would you say?

I don't know specifically what they do. If you think about the home center business, we know what percentage we have, and the rest of that home center business is supplied by our competitors. Home Depot and Lowe's don't do anything but contracting. I assume that on the retail side that there's contracts in place. I also assume the same thing on the big dealers. But I can't tell you specifically.

Do you have a very out-sized position in Home Depot and Lowe's, would you say, relative to the competition?

I think our position is probably consistent with our market share.

Okay. Switching to siding for a minute, if you think about the impact of the log shortages, et cetera, do you think that you were -- that the opportunity cost on the market share is something that's lost? Do you think that inventory was pulled out of the channel, somewhere along the channel, to meet where that demand was, so there's capability for you to refill that channel? How should we think about the dynamics of how the log shortages are impacting the siding business?

Well, I think with the allocation that we went on, we maintained our customers, or our customer loyalty. But the shortfall we had in production, we lost that to another technology.

I don't think inventories were adjusted. That's why we have to always be ahead of siding from a capacity standpoint. We feel bad about that, but we're doing everything we can to recapture that volume.

Okay. Lastly, one quick one. Trying to understand a little bit, you talked about the third mill in Chile as being part of the $130 million. It sounded, though, like you were still considering the exact timing of how you want to proceed there. Can you maybe flesh that out a little bit more for us?

We've had a third mill on the drawing board for a while in Chile, and then we had the recession in Brazil. We had the fall in copper pricing. We are being very cognizant of what's going on in those economies. Now, the other piece of this is we are intending to supply other South American countries with this capacity. As you probably know, Colombia's doing very well now. Peru is coming back. Argentina's a mess, but assuming they have a change in government soon, that could come back.

From a timing perspective, it's going to be a year construction period. I think Sallie was the one that was hesitating a little bit. We expect to get the permitting by the end of the summer, but to her thinking, and I would agree with that, is if the Chilean economy remains in the doldrums, we might delay that a little bit.

Presumably if that happens, part of the $130 million gets shifted to a later time period? Is that the right way to --?

That's correct.

Are we probably talking $20 million or $30 million, or what type of order of magnitude?

It's probably in that range. I think the numbers we've given before is we thought this was a $50-million to $60-million project. Again, it's a construction period of a year.

Great. Thanks very much.

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

Good morning. I'm on a cell phone, so I hope you can hear me.

Got you.

Yes, we can hear you.

Great. Many of the questions have already been asked, but with respect to OSB, since it's now $20 per 1,000 square feet below 2014, are we on track possibly for a worse year, or do you think the higher volume and the lower raw materials will offset pricing?

It's an interesting question, because when I was at the builder's show and when I was at the Harvard meeting, I talked to some of our distributors and said what are your inventories like? They all said they're pretty lean, because I can get whatever I want right now at a pretty low price. I said what's going to happen in March and April if this does take off. They all said well, we're a little worried about that.

We did see a little bit of a firming last Friday. I think for us in certain regions it did hit our floor pricing. We don't sell below our floor pricing. Again, it did get a little tick up last week. We'll see.

I guess it's incumbent on all of us to look at the pricing beyond just north central that we're so focused on. Do you believe the industry has in place sufficient capacity to satisfy 1.2 million starts in 2015? It seems like that's part of the problem is we've been excessively optimistic for a couple of years now on OSB demand.

I think with what's running today of a ramp pull-out, you can score 1.2 million. Yes, I do believe that.

That seems like that's part of the problem, right? Clark County's presumably up to full capacity at this stage?

We're meeting customer demand, Steve.

Okay. Switching gears a wee bit. Have you had any early inquiries from customers who are seeking an alternative source of supply now that Ainsworth and Norbord are married?

I can't answer that because I'd have to talk to the traders. They haven't called me. I can tell you that.

Okay. One final one then on log availability. I guess you've gotten a lot of snow in the northeast this year, but it's not a polar vortex, thank goodness. Are you laying in sufficient inventories in lake states that we won't have a repeat of the shortages that you endured last year?

If it stays -- if the weather stays where it is now, we should be in okay shape. I wouldn't say great shape, but okay shape.

Okay. Thanks, Curt.

Yes.

The next question comes from the line of Paul Quinn with RBC Capital Markets. Please proceeded.

Yes, thanks. Good morning, Curt and Sallie. A couple questions. One, just following up on Steve's question on OSB pricing, I notice that's down year to date. That's sort of against the seasonal trend. Do you expect a pick-up after President's Day? When does that usually track through in terms of an increased order for the home building season for you?

I can't tell you there's a usual year, but typically we see the early March to mid-March is when you see an inflection point. That's when the dealers are putting in the inventory to support the building season.

Okay. Then over on the Canadian dollar sensitivity, I think you mentioned $14 million benefit in 2014 versus 2013. If Canadian dollar stays at where it is right now, just below $0.80, what is the benefit you expect in 2015?

Each penny is about $2 million to us.

Okay. Last question on siding. I haven't seen some updated stats for engineered wood in the siding market and how that's growing in terms of market share. Do you have anything that you can update us with? Are you still taking share from vinyl and fiber cement, and some wood too?

I think that most recent study was a Precipia study. Mike would have more details on it than I do, but we did take market share against other technologies. In fact, if you just took siding business, it looks like we were pretty much on track with Hardy in the second half of the year. If Hardy puts in their backer board for tile -- which really isn't a siding product. But if you took that out, Precipia actually gave us a stronger market share than we had thought. So that's good. It's a good place to be.

Yes. No, it's a great business. Great. I'll follow up with Mike. Thanks.

Thank you.

The next question comes from the line of Alex Ovshey with Goldman Sachs. Please proceed.

Thank you. How are you, Curt and Sallie?

Good.

Good.

Good. First on the OSB side, you talked about the cost of down time in the fourth quarter. Do you by chance have a number for the full year? How do we think about that down-time cost potentially reversing over time, if it does?

No, we don't provide that kind of number. Really, I think Alex, you'd have to sort of work through I think talking to Mike and see where our cost per 1,000 have been in prior periods when we had higher capacity utilization.

Okay, I got that. On the inflation side, what's your normal labor inflation run in the business on an annual basis? At this point in the cycle, are you thinking that you offset that through volume and then price, or are there productivity initiatives in place to be able to just offset the normal labor inflation in the business?

Well, typically we hold to what is the local market determination of where our plants are. That has been running the last couple years at about 3% on the wage side. On the benefit side, we actually had pretty good experience on our health care the last couple years, so we haven't seen as much of an impact on the health care. I think a 3% to 4% number is probably about where it's been.

On the productivity, as you know we're a Lean Six Sigma Company. Last year we got a 5.8 to 1 return on our investment in Lean Six Sigma, so we've really used that as our continuous improvement approach to the mill. Most of that actually of the wage increase gets offset with productivity or the Lean Six Sigma.

Okay. Got it, Curt. On the EWP side, yes, there's two public competitors out there. I'm looking at their numbers. One explicitly reports the numbers. The other, I think you can essentially back into the numbers.

The profitability, both the absolute level and the year-over-year improvement, was just materially ahead of where you guys are showing the numbers. Fundamentally, is there a difference in the businesses?

There is fundamentally a difference.

Can you talk about that?

I can. I talked to it last time. Let me just tell you again what it is. In our business, we have owned facilities and then we have partnership facilities and we have a sales arrangement. For instance, an LVL probably a third of our volume we buy from Murphy Plywood. What we get there is we get a sales margin. We don't get a manufacturing margin. But we also have no investment in the plant and equipment.

In our I-Joist business, probably 70% of our I-Joists come out of the two joint venture mills that we have with Abitibi and Bowater. There we -- again we get the sales margin and we get half of the manufacturing margin, but not all of it. If you look at it on a return on assets, we look really good.

But if you look at it just on a margin, we don't capture the full margin either on those I-Joists or the JV, because we only get half of it. Then in the Murphy we just get a sales margin. There's a difference in the operating models in that we don't own and operate all of our own facilities.

Okay.

When you adjust for that, if you look at the sales pricing between the two other public entities, our sales pricing is right on top of, maybe even a little bit ahead, and our manufacturing costs are right on top of them. But it's the manufacturing margin that we don't enjoy on the Murphy Plywood, and only half of it on the I-Joist.

Okay. One really quick one. On the buy-back, do you have any stated goal in terms of how much buy-back you'd like to do in 2015?

No.

Thank you.

There are no further questions in queue at this time. I would now like to turn the call back over to Ms. Sallie Bailey.

Great. Thank you, Joyce. If you could please provide the replay number, and I'd like to thank everyone for participating on this call. As always, Mike and Becky are here to answer any follow-up questions you may have. Thank you for your participation, and have a good day.

Thank you.

Ladies and gentlemen, as requested, the replay number for this conference is 1-866-233-1854. The replay code is 78917817. This concludes today's conference. Thank you, and have a great day.