Louisiana-Pacific Corp, Q4 2008 Earnings Call Transcript

 |  About: Louisiana-Pacific Corporation (LPX)
by: SA Transcripts


Good day ladies and gentlemen, and welcome to the Q4 2008 Louisiana-Pacific Corp. Earnings Conference Call. My name is Becky, and I will be your coordinator for today.

At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

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

Curt Stevens

Thank you, Becky. And thank all of you for joining us on this conference call to discuss our financial results for Q4 of 2008 and for the full-year of 2008. Becky said I am Curt Stevens, the CFO and with me today are Rick Frost, LP's CEO as well as Mike Kinney and Becky Barckley, our primary Investor Relations contacts.

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

As we have done in the past, this call has been opened up for the public, and we are doing a webcast. This can be accessed at www.lpcorp.com.

Additionally, to help with the discussion, we have provided a presentation with supplemental information and this should be reviewed in conjunction with the earnings release. As I go through my comments, I will be referencing the page numbers of these slides in my comments.

And last Friday after the market closed we did filed our annual Form 10-K report to the SEC. And that is available either to the SEC website or directly from the LP website.

Before I get started I do want to remind all the participants about the forward-looking statements comments that is included on slide 2 of the presentation.

Also be aware of our use of non-GAAP financial information, concluded in slide 3 of the presentation and the appendix with the necessary reconciliations is attached to the presentation. I am not going to read these statements but I will incorporate those with these references.

Now moving to slide 4 of the presentation that shows Q4 of 2008 results. We are reporting today a net loss for the fourth quarter of $339 million, or $3.31 per diluted share. Net sales from continuing operations were $250 million for the quarter. The net loss per diluted share for the fourth quarter included $2.66 of non-cash goodwill impairment charges that I will talk about in a moment. The $0.16 valuation reduction on our auction security portfolio, an $0.08 increase in certain non-cash settlement reserves and $0.05 in restructuring charges based on the actions that we announced in January.

In the same period last year, we reported a net loss of $52 million or $0.50 a share until the continuing operations of $377 million. Last quarter just for reference we had a loss of $111 million or $1.08 per diluted share on sales of $390 million.

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

And the other operating charges and credits there was $296 million. The vast majority $274 million of $296 million was related to goodwill impairment. Big four accounting firms reached a conclusion, that a reconciliation of intangible assets to market capitalization could lead to an indication of impairment. Fundamentally what this means is intangible net assets are less than your market capitalization plus the amount of debt outstanding plus a reasonable control premium that company must carefully review write after goodwill.

Based on the analysis that LP performed we did write-off a 100% of the goodwill on our books. As a reminder this goodwill was related to two acquisitions in 1999 like Le Groupe Forex and ABTco. As I am sure you have seen with the other companies this is a common theme for 2008 as market caps upon dramatically given the credit crisis.

The other thing I would note is, goodwill impairment falls directly to the net income line as there is no tax benefit associated with these write-offs. In addition, to that we had $9 million of severance pre-tax due to the right sizing, we increased a settlement reserve by about $14 million and we did bring back a small amount from litigation reserve.

On the other than temporary investments, we did take a further $27 million impairment on our $151 million auction rate portfolio that is now valued on the books at $12 million. During 2008 all of the securities did pay interest as of January that was once small ARS about $3.5 million that stopped paying interest in January.

As a reminder, Q4 the special items there were the further impairment St. Michel sawmill of $3 million. We had the accrual on tentative settlement on the environmental law suit of $7.75 million that was paid in 2008 and we had the first temporary impairment of ARS investment of $21 million.

Adjusting for these items a net loss from continuing operations was $35 million or $0.35 per diluted share compared to a $29 million loss or $0.29 per diluted share in Q4 2007.

For the full-year, we were reporting a net loss of $579 million or $5.62 per diluted share on sales from continuing operations of $1.4 billion, the net loss per share for 2008 does include nearly $4 related to goodwill impairment other than temporary impairment of investments and other operating charges in credit.

For the full-year of 2007, we reported a net loss of $180 million or $1.73 per share, net sales continuing operations of $1.7 billion.

Similar to the quarter page 7, summarizes the special items for both of the full-years, and 2008, we did have a further $14 million impairment on St. Michel complex, I talked about offset by a gain on an asset that we sold in the fourth quarter. The other operating charges and credit to big one again is goodwill of 274 million, a litigation reserve for the OSB anti-trust settlement of $48 million, increase in various settlement reserves at $32 million, severance related to right sizing of $11 million, we did have an insurance recovery about $6 million and then we had an explosion one of our facilities and we accrued $5 million for that. And then you can see the highlighted there is the $119 million which is the other than temporary impairment of our auction rate securities.

2007, you can see there the biggest one was the impairment of long life assets and non-cash impairment that was mostly on St. Michel. The other operating charges and credits we had an insurance recovery litigation reserve, I talked about $4 million and other items of about $2 million, $21 million again was the fourth quarter adjustment that begin the write down of the auction rate securities.

After adjusting for these times for the full-year, a net loss from continuing operations was $160 million or $1.54 per share in 2008 compared to a net loss of $115 or $1.11 per share in 2007.

I am going to make just a few comments and actually to go back and look at slide 4, in the tax rate, the quarterly tax rate as shown here does very widely, the tax rate and continuing operations in Q4 2008 was 12% compared to 52% in Q4 of '07. Biggest impact in the fourth quarter was the non-deductibility of the $274 million write down of goodwill. Our Q4 2007 a higher rate was due to a year-end catch up and I will explain that when I talk about the full-year tax rate.

Page 6, the full-year tax rate for 2008 was in 26% again largely as a result of the non-deductibility of the goodwill impairment charge. The higher benefit rate for 2007 than the statutory rate was due to the losses and the implementation of several tax strategies.

And we had a reduction in LP Canada's deferred tax liability due to an enacted decrease in the statutory rate in Canada, we have interest that’s deductible for income tax purposes on inter-company debt, we get some limited consolidation, we had the impact of translation of Canadian operations, and then in 2007 we also have the settlement of an outstanding state tax dispute in our favor.

Then let me discuss, the performance of each of the segments.

Slide 8 is our summary of the OSB segment. For the quarter, OSB losses were lower at $31 million compared to $54 million in Q4 2007 and about the same level as last quarter. Price sales were 40% lower.

OSB price compared to the same quarter last year was up about 6%. However, during the period, volumes were down nearly 50% due to our production curtailment taken during the fourth quarter.

On a quarterly comparison the higher pricing did account for about $6 million, the improvement but the rest coming from the actions taken within the business reduce our operating costs.

For the full-year, OSB sales were $622 million near to $824 million in 2007. Losses were lower by almost $40 million versus 2007, $155 million loss near to $195 million loss in 2007. Primarily driven by actions taken to a differently curtail certain and profitable mills, deductions in our costs and the adjustments of our production to identify customer demand.

For the year, average sales price was up 5% due to increase percentage of value added products and other actions taken by own fleet.

Buying business summarized on page nine, this segment is a reminder includes our SmartSide which is the OSB siding product. Our fine fiber siding and commodity OSB produced on one line Hayward mill.

For the quarter, siding loss to $11 million compared to $4 million loss in Q4 2007. This is a direct reflection of the cost associated we are taking significantly more down time across the siding system to adjust our inventories to greatly reduce customer demand.

For the quarter, sales volume were 23% in SmartSide compared to same quarter last year 39% below last quarter. Sales prices were flat compared to same quarter last year up about 5% from the prior quarter. For CanExel sales volumes were down 24% for the same quarter last year with pricing 11% lower due to mix.

We believe that volumes of both product lines suffered due to the closure of many branch locations of our channel partners and the redistribution of this inventory to those locations that remained open.

For the full-year, sales in this segment decrease by only 6% to $424 million compared to same period last year. And profits decreased significantly $3 million compared to $34 million in 2007.

To reconcile that lower product volumes accounted for about $10 million of this lower profit higher pricing added to this and higher raw materials and energy costs including the Roaring River conversion changed to earnings negatively by nearly $20 million.

Slide 10, as our Engineered Wood products business, this segment include laminated veneer lumber, I-Joist operations including our JV with Abitibi plus other related products. But Q4, EWP recorded a loss of around $12 million must worst than the $3 million loss in Q4 2007.

Sales prices for I-Joist were 8% lower in the quarter compared to same quarter last year, and a combination of our LVL/LSL pricing was lower by 16%. Sequentially, pricing fell 4% and 7%, respectively.

For the quarter, LVL/LSL volumes were down 23% and I-Joist volumes were lower by 33% compared to the same quarter last year. There is a direct reflection of the reduced new housing activity the vast majority of these products are sold. For the year, EWP sales were at $234 million about 30% lower than the 3.32 recorded last year. Losses were $40 million compared to profits of $11 million in 2007 and a direct reflection of the much slower billing environment that reduced volumes and sales prices.

We talked about it before with the LSL start up mill in Houlton, Maine accounted for about half of these losses totaled by $21 million. Lower volumes accounted for reduced earnings of $9 million and lowered earnings by another 9 million from price perspective.

I don’t have a slide on our other building products, segment consists of interior moulding, South America now including both Chile and Brazil our cellulose insulation joint venture, resource and non-operating facilities. Q4 we had a combined $1 million loss from these operations and a loss in this segment about $2 million in the same quarter last year.

In the year sales of both operations were flat at about $100 million, both years we incurred a loss of around $6 million,

The fourth quarter, interest expense, net of investment income was $6 million compared to interest income of $10 million last year. A reflection of higher cash balances in 2007 and then in 2007 due to the construction activity we did have capitalized interest that offset the interest expense.

We had foreign currency gain of $30 million in Q4 this year compared to $1 million gain in the same quarter last year. Almost all of this was attributable to strengthened US dollar against the Canadian currency.

For the full-year, interest expense net of interest income was $11 million for 2008 compared to $46 million net investment income in 2007. Foreign currency gain in 2008 was $20 million compared to $30 million loss in 2007. Again largely a result of the Canadian currency.

Total sales, general and administrative costs were $26 million for the quarter, a decrease of almost 30% over the same quarter last year.

For the year, total SG&A expenses were $142 million, a decrease of 7%.

Slide 11 of our presentation shows some key balance sheet and cash flow statistics, cash, cash equivalents, investments and restricted cash at the end of the year were $215 million. Our working capital was at $337 million, and net debt was $35 million.

As a reminder, in Q4 we did retire about a $125 million worth of debt.

2008, our capital expenditures and investments were $161 million. And we ended the year with a book value per earning share of $11.45.

Also in the presentation, as I mentioned, in the appendix, is the reconciliation of the calculations necessary for the non-GAAP financial measures that I discussed.

Before I turn the call over to Rick, I do want to make a few comments on liquidity and this is perhaps the most frequent question that we all get from analysts and investors.

As we have discussed in the pre-release of January and on various forums, LP is focused intensely on reducing our rate of cash usage.

The actions we have taken, the expected reduction, the use of cash in 2009 versus 2008 will be discussed by Rick, in a few minutes.

As we have reported the last several quarters, we are actively considering other possible measures to enhance our overall liquidity. This could include the possible financing or refinancing of transactions. Could include the issuance of secured or unsecured debt, equity or hybrid securities and or the entry in one or more credit facilities.

Rick and I fully understand the importance of cash in this turbulent economic environment. I am sure you can all appreciate this is all that we can say about this topic and we will not be providing anymore information at this time.

I would answer none of your questions about liquidity we have said what we can say. With that let me turn the call over to Rick.

Rick Frost

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

As you can see we did changed our format this year quarter for our earnings release to try to provide you more initial detail and initial color and we hope that is helpful to you in understanding the quarter and we would expect to continue to use this format going forward.

As Curt pointed out the largest impact on our Q4 results was taking the non-cash goodwill impairment charge of about $273 million or $2.66 per share.

Like many companies we now have goodwill off of our balance sheet going forward. As well as a tough year I think I will start off with some of the bright spots for 2008. I usually mentioned safety and compliance on these calls because they are part of our core values and in safety we achieved another company best this year and an industry best with a total incident rate of 0.78.

In our environmental compliance effort we had our first year ever with zero notices of violation from our operating facilities. I think both of these milestones are significant particularly in light of the fact that they were accomplished under the most chaotic operating conditions for our people and our facilities.

But we always do our best to operate safely and within the law, because they are part of our core values these are significant as well because these results provide significant savings in the immediate and the long-term of our company. Worth mentioning is, was the continued contribution of our Lean Six Sigma teams which achieved for the year over five to one returns against a goal of three to one returns.

In our efforts to broaden LP's market penetration in 2008, we accumulated over 1500 wins and we defined a win as a new product placement with an existing customer or a product placement with a new customer.

Now, while these wins could not offset the overall decline in the market demand they did help but more significantly they will turn into new volume and new customers for us when the markets began to rebound. I'm convinced that our sales force is doing a heck of a job as these battles are being fought every day in the trenches.

Now I want to make a few looking backward comments on each of our businesses and then turn my thoughts towards 2009. In '08 across the world nearly all the businesses became paralyzed in Q4 of '08. Building products for new home construction and repair remodel were not exempted from the carnage.

Actually activity really almost stopped and our customers spent the last two months of the year redistributing their inventories.

The new home starts number for December was indicative of this. I think that everyone had not yet done so, turned their attentions inwardly into what they needed to do on the cost and the working capital side to minimize exposure and cash drain based up on an anticipation of a very slow Q1, '09.

In OSB, our Q4 sales volumes were up from Q4, '07 by 48%, but our segment operating results improved over Q4, '07 by 42%. That's evidence of a couple of things. First, the way LP operated differently in '08, and price was actually up 5% Q4-over-Q4. We took almost 600 mill operating days down in Q4, and that was including 91 days for Clarke County. A quick glance at '07 prices versus '08 show an $11 improvement in ASP on a 7/16-inch basis, as reported by Random Length recently.

In Siding and Engineered Wood, the Q4 story was simply a reduction in volume and the expense of intermittent running. Additionally, if you look at those businesses for the year beyond volume in both cases and pricing and engineered wood products, two factors cost us a lot in '08 that we will not encounter in 2009.

That being the conversion to the zinc borate process at our Roaring river mill, which cost us about $10 million in the first half of last year and upsets and the startup loss with LSL Houlton, in this dreadful market, which cost us about $21 million.

Now I am going to turn my remarks towards the changes in cash burn between '08, and what we anticipate in '09. We discussed some of these in the 8-K that we issued in January. We plan for our cash burn to be dramatically less in '09.

In '08, we paid out about $31 million of dividends that we will not replicate in '09. Capital will drop from about $160 million to be between $15 million and $20 million in '09. The closures of our Chambord, Clarke County, and Athens OSB mills will reduce net cash consumed by $30 million.

Our right sizing efforts and other cost reduction efforts will reduce the burn rate by about $40 million to $45 million. And unpleasant to remember, but part of the mix for '08 was $48 million payment in the OSB anti-trust lawsuit, and the write-down of the ARS's from $151 million to $12 million.

Now, a couple of other things are going our way as well. The Canadian foreign exchange average 0.96 for 2008, today it's at around 0.80. Our current exposure is about $2 million per penny. As well raw materials related to energy have or are decline in the cost, we estimate that the $47 million increase in raw materials we experienced in 2008 could decrease by $35 million to $40 million in 2009 depending upon the volume that we run this year.

And right now, we are working on $30 million to $35 million in non-operating asset sales, which will be turned into cash when we complete them. Obviously in this credit environment this significant slow going. And finally, we do expect a 60-plus million dollar tax return within the next couple of weeks.

So to sum all this up, I believe that we can exit 2009 with an available cash balance equaled to or exceeding the closing amount we had in 2008. And this excludes any refinancing that we may choose to complete. So I will conclude my prepared remarks with a brief look forward, I think that '09 can best be looked at as an endurance contest. Those that last will prosper as the economy rebounds.

My expectations for total starts this year is now adjusted down to 600,000. That's approximately one-third of the underlying demand. Now unless you are older than I am, which probably many of you aren't it will be the lowest demand that you have ever seen. Business will adopt or it will fail

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

Looking out a little farther at this point in time for planning purposes, I am assuming 900,000 starts for 2008 that's all in that's new starts multifamily and manufactured housing. We have seen a forecast or two recently that is a bit more optimistic than that, but we haven't changed our planning yet.

Our challenge will be the figure out how to be profitable at that level. Though that returned to 1.1 million or 1.2 starts in 2011, feels to us like the good old days at a much lower level of activity, and just for reemphasis as Curt said we are managing the business primarily for cash in 2009.

Now I will turn it back over to Curt.

Curt Stevens

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

Question-and-Answer Session


(Operator Instructions). And your first question comes from the line of Mark Weintraub of Buckingham Research. Please proceed.

Mark Weintraub – Buckingham Research

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

Curt Stevens

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

Mark Weintraub – Buckingham Research

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

Curt Stevens

Yes, the difference is that we filed in various foreign jurisdictions largely in Canada but also in Chile and Brazil, but Canada is where we were expecting the tax refunds that we didn’t get. There is no statutory time limit and the use of the provinces or the federal government in Canada to pay the tax refund. In the US, there is a 45 days statutory period that the IRS has to refund the money. That’s the wild card. And the other wild card, of course, is any refunds coming from the states.

Mark Weintraub – Buckingham Research

Okay. Great.

Curt Stevens

The states are under their own rules.

Mark Weintraub – Buckingham Research

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

Rick Frost

Yes, that’s not going to happen.

Mark Weintraub – Buckingham Research


Rick Frost

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

Mark Weintraub – Buckingham Research

And then, finally, you mentioned, you had a couple of non-operating divestiture opportunities that you hoped to realize in next near while. Is there much that could be sold beyond those opportunities that you could update us on?

Rick Frost

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

Mark Weintraub – Buckingham Research

Okay. Thank you very much.


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

Gail Glazerman – UBS

Hi. I was just wondering if you could walk us through your assessments of OSP industry supply demand. There has been so much, I guess, from the supply front recently?

Curt Stevens

Yes. Let me give you a 30,000 foot view of it, but this is probably the shortest way to explain it. There is about 30 billion feet of capacity out there near as we can tell which includes everything that's either completed or to be completed. Of that 30 billion feet there appears to be about 10 billion to 11 billion square feet that's either been shut down permanently or shut down indefinitely. And so, I think the number of permanent shutdowns are somewhere a little bit below 5 billion and the amount that's been indefinitely shutdown is little bit above 5 billion.

So, the industry capacities that's available to run right now appears to be somewhere between 18 and 19. And then at the rate that the industry is operating at now Delta has been dealt with by intermittent. Is that helpful to you?

Gail Glazerman – UBS

Yes, it is.

Rick Frost

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

Gail Glazerman – UBS

I understood. In terms of the start-up cost that worsen, are those narrowing at all is those $21 million for the full-year, I mean were they significantly lower in the fourth quarter versus lower year-on-year?

Curt Stevens

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

Rick Frost

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

Gail Glazerman – UBS

Okay and in terms of the FX you gave an updated exposure of the Canadian dollars is there any sort of guidance that you can give on your exposure to the Latin American currencies?

Curt Stevens

Yeah there really is not a lot of net exposure because we sell both largely in local currency and our expenses there in the local currency and there is some. The only, there will be some revaluation of the debt but we do have $39 million worth of debt in the Chilean facility or the Chilean operations. So there will be some revaluation there but that will be largely non-cash.

Gail Glazerman – UBS

Okay and then just last question and I apologize if I missed it, did you make any comments on your agreement about the government subsidies for the Clarke County mill and where that stands?

Curt Stevens

There was an article in the local press, I do not think we published anything on that but it's not material it's less than $0.5 million a year.

Gail Glazerman – UBS

Okay great thank you.


And your next question comes from the line of Peter Ruschmeier of Barclays Capital. Please proceed.

Peter Ruschmeier – Barclays Capital

Thanks and Good morning

Curt Stevens

Good morning

Peter Ruschmeier – Barclays Capital

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

Rick Frost

Yeah, Brazil got pneumonia when the rest of the world did in Q4 and so our expectations for Brazil for this year are less than what they were the last time that I talked on this call. Their economy has slowed down and our sales plan that we had put together as late as November of last year is some what reduced. So our expectations for this year based upon what's going on with Brazilian activity down there are less. It won't be tremendously significant in total I think South America will perform closely, pretty close to where we looked at it, Chile has rebounded some what basically pricing has improved for us in Chile. So we are going to be little bit better than what we thought in Chile and probably the same amount of orders in Brazil.

Peter Ruschmeier – Barclays Capital

Any comment that Brazil is cash positive or negative?

Rick Frost

Goal is going to be probably being neutral.

Peter Ruschmeier – Barclays Capital

Okay, coming back to the US and into the.

Rick Frost

Our goal was higher earlier but they pretty well caught cold so why we are very, very.

Peter Ruschmeier – Barclays Capital

Okay, Rick coming back to the US and just big picture looking at cost if you always be volumes, down 50% year-on-year. I think your headcount I think the solid headcount is down 12% from when you started. How do you think about right sizing the labor force, your forecast for housing starts does not suggest a very significant up tick anytime soon, so how do you balance the, the challenging question of what's the right size of the footprint?

Rick Frost

No, we put took our first stab in that last quarter and I think that where our math right now and just to put it very blindly, the question you are going ask yourself is do we have a better chance with the staffing that we have right now to make our plan or do we have a better chance to make our plan without the staffing. And at this point in time, I like the way we are staffed based upon what we have on our plate to accomplish and, so that's a constant question that we ask our self as we are adapting to the market but we accomplish the lion share of what we identify that was we felt cost positive to us in the fourth quarter of last year.

Peter Ruschmeier – Barclays Capital

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

Rick Frost

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

Peter Ruschmeier – Barclays Capital

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


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

Steve Chercover – D.A. Davidson

Thank you, good morning.

Rick Frost

Good morning.

Steve Chercover – D.A. Davidson

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

Rick Frost

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

Steve Chercover – D.A. Davidson

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

Rick Frost

We like the product, everybody that has looked at it, likes product. The problem is there are just not many takeaways right now.

Steve Chercover – D.A. Davidson

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

Rick Frost

Well, I think, we are all looking at nuclear first quarter. I mean, the first quarter of this thing is worse than any one quote of gas. So I think what we are trying to do it do, is we are adapting on a weekly basis based upon our takeaways and the intense pressures that we have on our operations around managing working capital.

So we are just adapting and evidence of that is the recent announcement we made two weeks ago where to me like an engineered wood products to keep that running. So we just went ahead and took it out and got more of the fixed cost out of there, but that's a week-to-week time.

Curt Stevens

Steve, the only thing I would add to that is obviously with the recent actions that government has taken with a various stimulus packages in housing recovery. There is a fair amount of money going in to the system and there are certainly a concentrated efforts to, I think, in much greater recognition that housing is important to the recovery.

That’s why you saw the $275 billion being targeted for housing where you saw the $8,000 tax credit going to new home buyers. And we also saw on the budget that there was an increase in the housing and urban development budget most are foreclosure and to encourage people to stay in their homes.

Rick Frost

It is positive glimpse, and it's pretty hard to define any, but I think January was first month where permits exceeded starts, and that's nice place to be. So we do anticipate some seasonal up tick. I mean it's not going to be the normal seasonal up tick. Certainly, the North fars out there is going to be a seasonal up tick.

Steve Chercover – D.A. Davidson

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

Rick Frost

That's correct.

Steve Chercover – D.A. Davidson

Okay thank you.

Rick Frost

I think we have time for one more question Becky.


All right, your final question comes from the line of Richard Skidmore of Goldman Sachs. Please proceed.

Richard Skidmore – Goldman Sachs

Hey. Good morning, guys. Curt could you just talk about the cost side of things? I think you mentioned $30 million to $40 million of may be cost savings in 2009. I would assume that's obviously cost of good sold, but what are key bucket is it wood fiber, is it resin, is it obviously, probably energy as well. But could you elaborate a little bit?

And then, second point to that would be, is the market sufficiently competitive right now that you would expect to actually give that away in the form of pricing, or do you think the market is taking sufficient downtime and people are seeing the pain enough that prices kind of stabilizing actually, see the benefit of those cost reductions?

Curt Stevens

Well, let me take the cost piece first. I think, fundamentally, what I would expect in 2009 is that we will get back to the level of pricing on the raw materials that we had in 2007. For that perspective for us, if we compare the full year 2008 versus the full year 2007 on comparable volumes, our raw material's cost were up about $48 million.

When that broke out, about a third of it was in wood, about 20% of it was in electricity, natural gas and electricity and then resins and wax made up the rest of that. Though, we would expect that given the fall in oil pricing, that's going to affect the wood cost. And the other effect of the wood cost is that the pulp business is much depressed from where it was last year, and that's the primary competition we had throughout raw material.

We have already seen a significant reduction in [NVI and PF resin] as we went into the first quarter and we see a further reduction in the second quarter. Then, natural gas, you will recall last year, about this time, we were selling to 12 bucks, and I think it's a 12.80 today. We will see those reductions. I would expect to recover most of the increase that we had in 2008, and increase we had in 2008 should get back to 2007 levels.

As far as in a competitive marketplace, we are in a very competitive marketplace and always have been. I am encouraged though when you look at your 11 inch pricing it stayed up. They were pretty flat for really last couple of quarters we got a slight increase in the first part of February that's held. I think last week we had a couple of reasons come up a bit, but it is very regionally based and it also is reflective of the delivery cost to the facilities.

Richard Skidmore – Goldman Sachs

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

Curt Stevens

Well, business how much we are running. Historically, we have used about 100,000 pounds of MDI about 100,000 pound not 70,000 a PF roughly. I am sorry 100 million. So historically, our resins have been about a $200 million spend but was greatly reduced run schedule we got it's going to be less than that.

Our natural gas, our spend has generally been about 35 million to 45 million again it depends on where you are running.

Richard Skidmore – Goldman Sachs

Okay, great. Thank you.

Rick Frost

Thank you, Mark.

Curt Stevens

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


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