Potlatchdeltic Corp (PCH) 2002 Q4 法說會逐字稿

Please stand by for real time text.

Good morning. My name is Valerie and I will be your conference facilitator today. At this time I would like to welcome everyone to the Potlatch Corporation fourth quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, thereby a question and answer session. If you would like to ask a question during this time, simply press star then the nub 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Hosing the call is chief financial officer Gerry Zuehlke and chief executive officer Pen Seigel. Mr. Zuehlke you may begin your conference.

Thank you. Before we begin I remind you this call may contain forward-looking statements within the meaning of the U.S. securities laws. These statements include statements about the company's future business prospects and anticipated performance in upcoming quarters. These statements are not guarantees of future performance and the company undertakes no duty to update them. Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For a discussion of certain factors that may cause actual results to differ from the results anticipated, please refer to Potlatch's recent filings with the SEC. I would like to turn the time over to Pendleton Siegel l who will discuss the fourth quarter results and provide an overview of our markets.:

Thanks, Gerry. I will go through, as is my normal practice, the results, the segments rather than discussing the numbers which you all should have in front of you, we'll discuss anything which is unusual in them, as well as give a market tone on what markets look like today versus fourth quarter. I will start with wood products. We don't normally spend time talking about the resource markets, because they don't tend to change a great deal from one quarter to another. There is seasonality there, however.

In wood products, the one unusual thing that occurred in the fourth quarter was in our particle board plant in Idaho, we took 30 days down time. That was market-related. The markets were weak and we believed it made sense to take that down rather than cut prices further. That was concluded during the fourth quarter, and the plant is again running. In looking at wood products markets, lumber, plywood and particle board, I think, would be categorized as weak during the fourth quarter and remaining about the same, slight movements upward or downward on a weekly basis, which is normal. But there really isn't much change in tone to date in any of those three segments.

The oriented strand-board market which was somewhat better in the fourth quarter this year than last year, although still weak, has improved materially over the last few weeks. As is the case with these commodity markets, sellers will tell you that that's a great sign that markets are headed up and buyers will tell you it's a blip. And the answer is no one really knows exactly what's happening in commodity markets in terms of the ability to forecast price on a weekly basis. But those markets have a substantially better tone in the last three to four weeks than we have seen for a number of months.

Moving to the pulp and paper segment, in that segment there were a couple of unusual events, I think. As we had reported previously, our large facility in Lewiston, Idaho had a labor contract come due in September of 2002. And we entered into negotiations before the contract expired and continued to negotiate throughout the fourth quarter. With the unions covering both our pulp and paper board facility and our tissue facility in Lewiston.

As a result of the negotiations and not knowing exactly how they would end up, we intentionally built inventories in both tissue products and in paper board products. We did so not thinking that there would be a strike but believing that we needed to be able to assure our customers that we could supply them even in the event of a strike, if we were unlucky enough or unfortunate enough to have one. So inventories were built fairly substantially in both products during the fourth quarter. That build skewed pricing somewhat in the average realization of bleached paper board because the area where we had the largest increase in inventories was liquid packaging for export. Just because the lead times there are so much longer because of the distances. And as a result, while we had increase in shipments, we had a substantially larger increase in production than is evident from the numbers.

As we look at those two markets, the tissue market and the paper board market -- excuse me. Let me go back to the labor for just one second. It was I think a very cooperative series of contract talks with the unions in Lewiston. They were not easy from either side's standpoint. We reached an agreement, largely thanks to the help, I believe, of the union leaders in January. And that contract was voted on and ratified by both the paper workers unions and IBW or electrical worker's union that we were negotiating with. As a result the inventories which we have on our balance sheet and which we hold in various places are substantially higher than they would be normally. We will see those inventories come down gradually over the next six months.

Looking at the markets for those products, the consumer market was competitive. The tissue market was competitive during the fourth quarter, with more capacity and I think more promotional activity broadly throughout the segment, led by the brands and we mirrored our activities in part on the brands. So when there's more promotional activities there it also affects the private label business, since we're selling to the same people ultimately. The bleached paperboard business I think I would say was stable. We, in Lewiston, had substantial improvements in both product quality and productivity. Late in the fourth quarter, which is continuing into the first quarter. And I would attribute that to a lot of effort by a lot of people for quite a long period of time. In helping to get our act together and in producing things on spec and keeping machine up time running and quality -- and when quality improves, productivity improves also. The two really go hand in hand.

That is not particularly reflected in the fourth quarter numbers, since that is something that really occurred during the month of December and is continuing to date. Those markets, I would say in the paperboard side, are stable. Our Arkansas mill ran very well. The Idaho mill was running very well, as the quarter ended. And in both cases product quality and productivity are, I believe, extremely good. Tissue ran well also during that period. And the pulp market is something of an anomaly for us. We're really in the paperboard and tissue business. To the extent that we have excess pulp we drive and sell it but it's not something that drives our business. The pulp mill in Lewiston, which is the only place we sell pulp from, ran extremely well during the fourth quarter. Jerry, I'll turn it back over to you for some numerical comments.

First I'll give you just a few statistics, financially. Interest expense in the fourth quarter was $11.6m versus $14m roughly in the third quarter. So an improvement there due to lower debt levels. CAPEX during the fourth quarter was $14.4m and year-to-date totaled $51.5m. The third quarter number was $23.7m. Depreciation depletion and amortization totaled $28.7m in the fourth quarter versus $29m in the third quarter. So roughly flat. I would also like to give you some shipment and realization statistics. What I will do is give you changes. Fourth quarter versus third quarter for both shipments and realizations and when I get to realizations I'll also give you December numbers versus the fourth quarter average to indicate trend.

Firstly, shipments, starting with oriented strand-board down 3.6 percent. Lumber down 1.2 percent. Plywood, down 4.1 percent. Particle board, down 42.5 percent, keeping in mind that we were down for one month during the quarter. Paperboard up 3.7 percent. Tissue up 5.3 percent. And pulp out of Lewiston, up 20.1 percent.

Realizations -- Oriented strand board, fourth quarter versus third quarter, up 1.6 percent. Lumber down 11.2 percent. Plywood, down 4 percent. Particle board down 5.2 percent. Paperboard down 3.1 percent. Tissue down 0.5 percent. And pulp down 9 percent.

When you look at December versus the fourth quarter averages, we have OSB down 4.7 percent. Lumber down 1.5 percent. Plywood down 2.3 percent. Particle board down 1.6 percent. Paperboard down 3.8 percent. I would elaborate a little bit on Pen's comments about the markets in paperboard. This down 3.8 percent is a little bit of a mixed question more than it is an ongoing demand in paperboard. During the holidays you normally have a little bit of a slow down and we ended up doing some lesser-priced product and that reflected in the mix. Tissue down 0.6 percent, December versus the fourth quarter. And pulp up 21.5 percent in December versus the fourth quarter.

Those are the statistics. I think we would now -- let me just, one other comment, we did you'll see in the financials, we did close out all the significant accounting accruals and accounts for both the fine paper business that was sold earlier in the year and the Bradley hardwood mill that was sold earlier in the year. So those are all finished and done as of the end of the year. With that, we would like to open it up for questions, Valerie.

If you would like to ask a question at this time, press star then the number 1 on your telephone keypad. We'll pause just a moment to compile the Q&A roster. Your first question comes from Joe Stiveletti from Goldman Sachs.

Hi, good morning. I was just wondering if you could maybe -- when we look at operating income, it went from a negative 5.6 in the fourth quarter last year to a negative 3.7, and yet your EBITDA went down by closer about $9m, looks like. Could you sort of reconcile that, what's being included in the segment operating income?

Joe, could you repeat that you were fading in and out on our end.

Looks like in your press release you're showing your segment operating income was negative 5.6 a year ago, went to 3.7 negative this quarter, which was a modest change. Where on an EBITDA basis looks like you were down from around 21.7 down to about 12.5. I guess I was just trying to understand what was included in that, in the operating income by segment that is making that such a differential..

I'll have to research that, Joe. That's not something I can do off the top of my head. Let us research that and we'll give you a call back.

That's fine. I didn't know if there was something obvious.

No, I have to think about it.

I was wondering if maybe you could -- a lot of people have been asking about the weakness in the consumer tissue business and the promotional activities. And I was wondering if you had any, what your perspective was looking ahead in that business, do you expect to continue to see pressure or are you seeing any changes there? I know this was talked a lot about during the Georgia Pacific deal recently, the kind of pressure that's out there. What are your thoughts on that?.

Joe, I'll anticipate that this year's market we'll see more promotional activity than last year's. In addition, when it comes to Potlatch, we probably will face a slight negative in relation to others. And that slight negative would be --we have a paper machine starting up around the end of this year. We will build some volume with new accounts and some with old accounts, but primarily through picking up new accounts in anticipation of that machine. And that volume, since we can't produce it, will be acquired through purchased paper. So we will buy parent rolls of tissue. And we did a fair amount of that during 2002, also, in anticipation of this machine.

We will increase that volume in 2003, convert it into the appropriate products. Generally with what we do is buy parent rolls of the lower grades since we find, the premium grades generally are not available. But we will ship more of our production to premium grades by parent rolls of the lower grades, convert it into the product for customers. And in general you might call that profitless prosperity. You don't make much money buying parent rolls of tissue and converting it and selling it. So the market generally I think will remain competitive this year. It remains, frankly, a very good market. Even under its current competitive status. But we'll be building some volume this year with purchased parent rolls from others.

The only other thing I had was if you could update us on where your liquidity is with your revolver and any major sort of payments that you have coming up.

Sure, Joe. We had $40m borrowed on the revolver at the end of the year. Most of that, if not all of that, is really due to the inventory build that we had, working capital items, especially inventory. And during the fourth quarter we also took all of our floating rate municipal debt and either reissued it at fixed rate or paid it off. We paid off a $17.75m. So we had a reduction in long-term debt of that and added $40m of revolver, again basically to cover inventories. At the same time, we entered into a number of amendments to our bank agreement that were all affected with December 31 to reduce commitments under the revolver from 200 to 150. And reduce underlying levels for LCs from 110 down to 70. And also change the numbers of the financial covenants to more accurately reflect our improved credit stance. So all in all, many improvements to our relationships with the bank group and some reductions in commitments which will improve the cost of that debt over time.

I might add, Joe, if you look at our balance sheet and take a look at inventories at the end of June and then take a look at the end of December, which you can do since you have those balance sheets, is a build-up of some$50m. Probably roughly 40 percent of that is inventory build in an unusual fashion, because of the labor contract and what we were doing to protect customers. The rest of that is a normal seasonal build of inventory which we have every year, primarily in logs and it relates to the fact that in each of Arkansas, Idaho and Minnesota, there are different weather conditions which occur sometime in the first five months of the year which prevents you from moving wood or getting to it in order to move it to mill. So we always build our inventories of logs going into the, going through the fourth quarter. And then that inventory bleeds off as we start by the end of January through the first of May to the end of May, depending on what kind of season we have.

Great. Thanks helpful. Also, Gerry if your revolver is at 150 now and you drew it 40 at the end of the year, what was your availability? I don't know what kind of letters of credit you still have.

We currently have about 38 million of LCs now which will, for the most part will wind away during the year. A good portion of that has to do with back stop and commitments under our tissue machine that's going in Las Vegas. So as that one is built out, the LC goes away, and by the end of the year that ought to be done in the teens, as far as usage goes for LCs.

Great. Thanks a lot.

Your next question comes from Bill Hoffman of UBS Warburg.

Good morning. Just wondered if you could, Pen, give us a little bit more color on the solid wood markets and what you're seeing. Obviously they continue to be weak here in the first quarter and a lot of it what we expected

You're breaking up, too, could you start a little slower and a little louder.

Is that better?

Yes.

I just wondered, Pen, if you could talk a little bit about the status of the lumber markets and what you're seeing in your regions. Obviously there's ongoing weakness there from a pricing standpoint. But wondering what your expectations are in short-term. And I have some follow-ups.

You're right. There is ongoing weakness. As I think you know, the U.S. Canadian lumber situation remains somewhat unsettled. There are meetings supposedly to begin to take place this week between the Canadian government and the U.S. government to attempt to find a solution to this issue. And so I guess we remain hopeful. Our view as U.S. producers has so far been that the Canadians have had trouble getting agreement from all segments of the Canadian industry as to what position they're willing to take or might be willing to take to enter negotiations. That's been something of a problem with the western Canadians and the eastern Canadians and various segments there having widely differing views on how to solve this issue. With regard to markets, markets remain weak.

We expect our production to increase substantially this year and I could say we’ve identified the enemy as us, but I think if you look at this business, this is a commodity business and the way in which you do well and remain in business is to drive your costs down. And the way in which you drive your costs down is to improve productivity on the capital you have invested. And I'm aware that runs against the tone of markets, but mills tend to run and we are not -- we're not different, as long as you can run and more than cover variable costs, it generally makes sense to do so in a highly fragmented commodity business.

I would expect that to change as we get into the spring building season and to see some improvement in lumber markets, because I don't think there's a great deal of downside at present. Although I issue this, which wasn't in Jerry's disclaimer but I'll issue it anyway, there are no monuments to me or anybody else in forecasting lumber prices short-term. It's a commodity business where prices tend to move fairly frequently in different directions. But we would anticipate that market to be improving as we get into the spring.

You mentioned you expect to see volumes, your own volumes increase quite a bit this year. Could you give us some guidance on what your targets might be?

I'm looking at my partners here at the table to see if we've given anything like that.

We've never given it in hard numbers, no.

Not having given it hard numbers, I think you could probably say we're looking at an increase somewhere in the mid-teens percent output in terms of soft-wood lumber. So I guess we've now given it.

Thank you for that. Just with regards to the capital spending program for this year, obviously you've got the tissue machine coming up. Any other major projects and do you expect the number to be still in that $65m to $70m range?

We don't have any other major projects. The machine itself was announced at $66m level. That together with other normal type items for this year would get us to a budgeted amount approaching $90m for the total. And I would expect that most of that would get spent this year inasmuch as the biggest portion of it is that tissue machine and it's anticipated that it will be for the most part complete this year, if not all spent. And we're looking for a start-up in January of '04. So I would think that most of it will be spent this year.

Some of that $66m was spent in 2002.

That's true.

But $90m would be your target, full year CAPEX.

That's about our budgeted amount.

Okay. Great. Thank you.

Your next question comes from Richard Schneider of UBS Warburg.

Good morning. I just wanted to get some clarification of the 67 cent loss. That does not include the $9m pretax charge to eliminate the 100 salaried employees and it also -- I'm sorry, it does include.

It does include, Rich,. Without that it's about a 47 to 48 cent.

But it also includes a $4.3m gain on the sell of surplus land?

It does.

Okay. And could you go through -- where does that $4.3m show up? Does that show up in the resource segment? It doesn't seem like it. It seems to indicate it's been the other income.

In the segment information, it will be in the segment for resource in the consolidated income statement it's actually in other.

What was the -- why did you need to take this $21m adjustment for disposal costs here in the fourth quarter. Could you discuss that charge?

That, as I mentioned, is the cleanup of all of the various accruals and so on having to do with the sale of our fine paper business and the Bradley saw mill. Obviously most of it has to do with the fine paper business and it has to do, I think, in great part to the final write off of other assets having to do with that business and mainly Branaird, in anticipation of a sell.

Rich, when we sold the business to Sappi (ph) and made the decision to exit the Branaird plant and to close it, we were working and did subsequently work with a major international consulting firm that thought we had a reasonable chance of selling that plant for specialty papers to one of the larger worldwide paper manufacturers. We wrote the plant down at that time as a result to what we thought the sell price might be. And then negotiated and were unable to complete that sale. We subsequently agreed to sell it, but at a much lower price, to a smaller company, which really is coming into being solely to run and operate the Branaird plant producing uncoated papers. So the remaining write off really relates to the difference between what we were able to sell it for and the amount we had reserved thinking that we might be able to sell it for back in May. Clearly there are a bunch of other items in cleanup but that's really the major item.

Just staying on the financial stuff. When can we get maybe some of the new segment on -- are you going to provide us before the first quarter with some historical new segment data?

No, we plan to put those out as comparative numbers at each quarter throughout the year.

Okay. Because it really helps if we just, from a modeling standpoint, if we can get some historical data before we have to just look at it on a comparison basis.

We understand that, Rich. We have clearly accounted for things internally on a plant by plant, on various different bases, but we haven't accounted for them under all the SEC rules. And so we have a relatively thin accounting staff in terms of the numbers of people. And they've all been focused on things as you would guess at year-end related to closing and being sure that our numbers which we're releasing were accurate. As we go forward, they will then go back and be sure that we have numbers. And we'll consider if we have, when we have all the numbers which meet all the SEC guidelines for breaking those segments down, issuing them. But we haven't reached that decision.

Okay.

I would just say, though, that for the first quarter it's going to be at least that long before we're comfortable with how we've broken things out.

Okay. Just on this resource segment. It was indicated that you had a lower percentage of logs coming from Potlatch sea land to satisfy your needs in the quarter. Could you discuss what went on there and also your attitude to continue to maybe do these one off sales?

The one off sales, if you're referring to the --

The hybrid.

The whole $3m, that was a number of years ago, I believe 1993, Rich, we acquired two large adjacent farms in the Columbia River basin to grow hybrid poplar trees to grow pulp chips. We converted them gradually, you couldn't do it at once it was 20 some thousand acres.

A couple of years ago, we changed the focus to produce hardwood saw logs but we also looked at the value of the land which had increased fairly substantially and on an opportunity cost basis, rather than converting the last 3,000, 3,500 odd acres, we were better off selling that land. So that was not aimed at generating income, per se, it was an investment decision which did generate income. It wasn't done as a way to try to add income to the resource group. With regard to the resource group earnings, part of their earnings each year are finding higher and better use lands and selling them to others and then generally reinvesting the proceeds in other timberlands. That's not been a major factor in our income over the years. And if it becomes one, we'll let you know, but I doubt it.

We do have one thing which we have announced which we're negotiating in Idaho, which is a long-term conservation easement, we're negotiating with a trust for public lands, which would have substantial income impact, assuming the results of those negotiations. But to date that is not -- it would not affect our log flow long-term at all from company lands. It would be the sale of development rights, in essence. And if and when those transactions occur, we will highlight them in quarterly and annual results. But they have not yet occurred.

Okay. And percentage of logs coming from your own lands in the quarter, is that just a one quarter situation or do you see that percentage going back up in the first half of the year?

The answer there would be it depends a little bit on weather and what we're harvesting. But our harvests from Idaho tend to be as well as other regions, we tend to harvest what we are comfortable saying is long-term growth. So the harvest will not really change materially. So, yes, that percentage will be higher.

Okay. You mentioned being able to add a Lewiston, improve productivity and you saw some of that occurring late in the quarter. How do you balance that with the need to reduce inventories over the next six months?

Productivity comes first. We believe we can do both.

So you'll be producing more and at the same time trying to push down inventories, which means that I guess you're looking for other avenues to sell your product into.

Not necessarily other avenues. Some of what we produced was probably produced earlier. But there is -- if you look at the export mill business, that's a business where the consumption occurs pretty heavily or is heavily weighted seasonally to the summer. We always produce in advance starting in the winter, we produce some more. At this time around to be sure we could cover ourselves. But as we look at our order backlogs and mix of customers, we believe we can sell that product. Part of that, I think, Rich, is a function of the, even though it occurs at a different mill, up until a couple of years ago we produced cup stock and folding card and stock at both Lewiston and Arkansas. And we made a shift, a dedicated shift to dedicate Arkansas to folding card. At the same time we made improvements to the equipment down there to allow us to produce a better quality board. And as a result of that shift and the better quality, we have picked up a fair amount of volume that we could not access before just because of consistency and quality constraints out of Arkansas. We moved the cup stock to Lewiston. Lewiston makes an excellent cup stock. And it's doing very well at that. And so it isn't just a nature of what's happening to the market, we've had some fairly substantial improvements in our ability to access certain segments of the market that we could not access before.

All right. Just last two questions. Could you maybe quantify the benefit, 100 salaried positions that you reduced and how do you see that impacting you in 2003. And then could you give us what you were able to accomplish through the labor settlement.

The 100 person reduction in work force will provide benefit in the neighborhood of $7m, probably more so than $7m in the next year. The labor contract would result in about $5m, a little over $5m a year on an annualized basis.

In savings?

Plus some improvements, Rich, in flexibility of running the mill.

Are we going to see both of these start to appear in the first quarter?

Yes.

The labor savings, I think, really takes a little longer to phase in. We'll start to see some of it. We may not see that whole amount phased in from first quarter.

Thanks a lot.

Your next question comes from Andy Fineman of Meridian.

For the full year what was the DD&A. I know you mentioned what it was for the fourth quarter. But I just wanted to write down the full year number. I don't have it.

It was $115,469,000.

I think you said that that will be about the same next year?

Correct.

Do you know, can you tell us what your net debt was, say fourth quarter versus third quarter? When I say net debt, I mean short and long-term minus cash. I don't know whether you look at it that way.

I don't have that written down but Doug is going to quickly add them up for you.

Have you sold the Branaird mill already?

We are in the final, I guess, would be the right term, of negotiations on the contractual sale. We have been dealing with someone for a couple of months now and there's a number of things that have to be done still. But -- still some contingencies that need to be finalized.

But we don't anticipate a problem there. We anticipate closing that during the first quarter.

Can you say what you wrote it down to, the book value?

Is it in there? I'm thinking about that one.

I mean it just, you know, I'll take cash anywhere you can get it, especially now since you're going to --

It's not a significant amount. It's roughly in the $5m range.

Okay. I know that -- where do you make particle board?

Where do we make it?

Which mill?

It's in post falls Idaho.

Seems like that business has gotten a lot more competitive. And I think it was, I don't know, it was not a quality -- it was a GP call, somebody started to talk about the imports from Asia and their management basically said, yeah, forget it. You can't make that stuff here, be profitable anymore. Now, I'm talking about the particle board that you use for furniture backing and things like that. Are we -- is that business getting harder?

Yeah, it is another commodity business. It's a small mill for us. It has capacity of $70m.

It's not meaningful then.

On a three-quarter's basis. It's not a large mill but it's been a very profitable mill for us over time on capital invested because we have none. We have very little capital invested.

Now, I understand that the business is difficult and that you're operating in a difficult environment. And I guess part of the reason that you can own Potlatch stock today is because you're playing the cycle since the cycle is so bad right now. And management is gradually trying to upgrade the business. But I'm looking at the chart and I see that this stock hasn't, it's a $21.37 right now. It hasn't traded at this price since before the, since sometime in the '80s. At least 15 years. It's at least a 15-year low, maybe more. And I mean it seems to me -- I don't know how long you wait when you have businesses, I mean they say that your timber lands alone are worth 40 bucks a share. And individually your businesses with each would be very attractive to your competitors in that particular business. So I mean the family that owns 40 percent of this company. I mean are they getting tired of waiting? Are they -- how long do we have to wait before you just capture the value in this company, it's this public stock market won't do it for you. I'm obviously frustrated. I have a 30 percent loss and so you know where I'm coming from, but so I don't need to be giving you a hard time, I'm just trying to understand -- I think this is a realistic and reasonable question.

I understand where you're coming from, Andy. I think it isn't a family situation. We have a lot of shareholders, some of them are family members. Some are not. All of them I think want the same thing, which is a much better stock price. And it's something we discuss internally. We discuss various option with our board, frequently. And if and when we ever have something to announce, we'll announce it. But other than that there isn't much I can say with regard to your question.

All right. I guess the only other thing I'll say and I'll let you go, you haven't been to New York in at least three years to meet with investors. And it would be great if we could sit down and if you could sit down and talk to the people that are still trying to hang in there despite the fact that it's at a 15-year low.

Well, it's not quite right. We were there in February of 2001 for the splinter group. But we have not -- with everything that was going on with the sell of SAPPI, or sell to of our fine paper division, we were not really in a good position to be in front of the public much during that time frame. So it kind of put us in between a rock and a hard place. You can't be out there talking about the company when there are some things going on so it does make it difficult. And we certainly plan on being there and we're going to be there again in April of this year.

I look forward to that.

Just to clean up the one issue, we had net debt, $651m at the end of the fourth quarter, versus $601m at the end of the third quarter. Again, a good deal, the bulk of that would have been due to the inventory buildup.

Do you see that number rising at all during the current year?

We fully plan on having a reduction of that number by, certainly by the end of the year. You won't see anything very visible in that reduction until we get into the more traditional seasonal business.

Second quarter.

Second quarter, into the summer. It will remain roughly in the same ballpark for the first few months, several months.

So you don't see it going up any way?

We do not.

I thought of something else. The mill you're building in Las Vegas and GP mill is building a two-year dry machine in Washington, I guess, is that -- what are we seeing as far as the competitive situation? You have these two new mills coming up and, yeah, the move kind of -- you're private label and they're kind of budget brand. So new competition I imagine in the same markets.

I think as we understand it, Andy, they're not the same markets. The product, the [inaudible] dried product which was the innovative product was Bounty towel from Proctor & Gamble and is clearly a good product that those of us with conventional manufacturing facilities have been unable to match the combination of strength and absorbency of that towel because of the manufacturing process. We are geared to providing our customers who are really the retail grocery chain, drugstore chain type of players, with products at least equal of the leading brand. The leading brand that was our target for years was a west coast brand, not Bounty because it was primarily in the east. So our volume is aimed at that market segment. You'll have to talk to Georgia Pacific about where their product is aimed. But it would appear that it is not aimed at that segment. That it's aimed at the mass merchant discount store type of market. I think Georgia Pacific's towels, Brawny is the leading brand which came from Fort James, are very large in the U.S. and it will take a lot of machines to replace that volume if they're attempting to upgrade it into premium. But every machine adds capacity, and all machines compete with other machines at the margin in one way or another, because it is one overall market.

Okay. Thanks.

Your next question comes from Steve Chercover of DA Davidson.

Good morning. A lot of my questions have been answered. And I know we're all very aware of what's happened over the last three years. I just wanted to get a sense, call it from 10,000 feet, how you guys feel about the next year or two. If commodity prices were to stay flat, for instance, is there enough that you can do to reduce your costs to achieve break-even levels? I just want to hear how you're feeling over the next year or two.

We believe there's a great deal we can do on the cost side, Steve. So I think the answer to your question would be, yes.

So you can return to profitability simply by the $7m in salaried staff, $5m from the new contract? That would be sufficient to –

And equipment productivity. It's primarily the equipment productivity side that does it. But that takes, as a given, a very big question mark, which is what do realizations do across all product lines. If you assume those realizations are flat, then I believe we can do enough on the cost side to offset losses, more than offset losses. But that's clearly a realizations are variable.

I'm personally of the opinion that realizations won't be much better than flat, because I think there's so much slack in the system that we can ratchet up production to satisfy incremental demand. So it really has to be on the cost side. But do you think the conditions are going to get worse or better in your budget. With 15 percent growth in lumber, one had better hope there's incremental demand or else we just add to the problem.

When you look at something like lumber, which is highly fragmented, Steve, clearly what each player does overall affects the market. But our increase in lumber I don't believe is significant, particularly significant in a market-related sense. Other than it drives our costs way down. But again we're not -- and you asked for markets. I expect the economy to improve slowly. But that's not factored into our own internal forecast which we don't discuss.

Okay. Thanks.

As a reminder, I would like to inform everyone that it is five minutes until the scheduled ending of today's call. Your next question is from Byron Heruit of Standard & Poors.

Actually it's Bryon Korutz from the Standard & Poors equity group. You answered my first question regarding the after tax impact of the head count reduction, but I'd like to go back to the wood market outlook. I don't see a dramatic improvement on the supply side. Wonder if you could give me color on what you see the demand side of the equation looking like for 2003, meaning you see the housing starts remaining strong or moderating a bit or up slightly?

Brian we don't employ any economists because we wouldn't do anything different if we did. So we clearly watch those markets. My own view is that housing will remain quite strong, just because the economy is going to not be particularly strong. We expect it to strengthen. We expect as a result interest rates to remain low.

Because the economy improving, inch up a little bit there should be some --although historically high levels, you will see a slight moderation in housing starts which thus would further exacerbate the supply demand equation we're seeing in the wood products.

I don't happen to subscribe to that. I think a fair amount of economic growth to have the Fed willing to push interest rates up. Your guess is clearly as good as mine or anyone else's.

Thank you very much.

Your next question comes from Wayne Hooperman of Cobalt Capital.

Are you contemplating any further asset sales this year and might you look to sell some of your lumber supplies to kind of help improve the balance sheet further?

Wayne, we on a fairly consistent basis look at a variety of strategies. Gerry mentioned, for example, in response to a question earlier, why we hadn't been in New York last year. And it was just we were in active negotiations to sell [inaudible] paper and yet we couldn't tell anybody about it until we had something to announce publicly. That's the nature of public companies. And as a result --

I was asking strategically, without specifically, just trying to understand what the strategy of the company is going from here forward.

Strategically, we've said we have three businesses which we think are core businesses and make real sense for us. We have another one where we believe we have the size to compete and to be a core business, but we didn't have the cost structure. And that was related to the paperboard business where we were working on Lewiston. And we made some major improvements in Lewiston. Beyond that, I think I wouldn't have a comment.

Okay. Thanks.

Your next question comes from Elaine Williams of Louis Morning.

It's actually Elaine Williams of the Lewiston Morning Tribune. This is related to the Lewiston plant. It's my understanding that it used to be that employees there in pulp and paperboard and consumer products with seniority could bump those without it in the event of a sale of either division. I'm wondering if the recent settlement changed that?

Elaine there are a whole series of, as is always true when you negotiate a contract, there are a whole series of changes in contract provisions. We have, as you know, [inaudible] which cover both consumer products and paperboard and we have a variety of rules allowing employees to bid for jobs upon job openings, et cetera. I don't believe we've ever divulged the specific contract terms and I think if I were to do so I would get a bunch of fairly angry calls from a variety of people, including management and union leaders. So it's really a subject I can't comment on any further than we reached an agreement which we believe is good for the company, good for the employees and one we can both live with.

Thank you.

There are no further questions at this time.

All right. On behalf of Pen and myself we'd like to thank you for joining us today and look forward to talking to you next quarter. Thank you.

This concludes today's conference call. You may all now disconnect. Call ended at 12:00 p.m. . --- 0