Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Richard W. Frost – CEO

Curtis M. Stevens – EVP, Administration and CFO

Analysts

Mark Connelly – Sterne Agee

Chip Dillon – Credit Suisse

Steve Chercover – D.A. Davidson

Peter Ruschmeier – Barclays Capital

Analyst for Richard Skidmore – Goldman Sachs

Louisiana-Pacific Corporation (LPX) Q4 2009 Earnings Call February 10, 2010 11:00 AM ET

Operator

Welcome to the fourth quarter 2009 Louisiana-Pacific Corp. earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Curt Stevens, Executive Vice President of Administration and Chief Financial Officer. Please proceed, Sir.

Curtis Stevens

Thank you and thank all of you for joining us on this conference call to discuss LP’s financial results for Q4 and full year 2009. Usually I let Rick give the weather report and I will let him do that for Nashville but we appreciate those who are participating even though the East Coast has the snow problems. As the operator said I am Curt Stevens the CFO. With me is Rick Frost, LP’s CEO as well as Mike Kinney and Becky Barckley, who are our primary investor relation contacts.

As we usually do I will begin the discussion with a review of the financial results for both the fourth quarter and the full year. Then I will follow that with comments on the performance of our individual segments and then some selected balance sheet discussion items. Rick will then take over to discuss the general market environment in which we have been operating, give some perspective on our most recent results and some thoughts on the outlook for 2010.

As we have done in the past, this call is open to the public and we are doing a webcast. It can be accessed at www.lpcorp.com. Additionally, to help with the discussion we have provided a presentation of the supplemental information that should be reviewed in conjunction with the earnings release. I will reference these slides in my comments. Additionally, we filed an 8-K this morning with some supplemental information, and as you know our form 10-K will be filed around the first of March.

I want to remind the participants about the forward-looking statement comment that is included on slide 2 of the presentation. As we all know, for the last three years it was very difficult to forecast the housing environment so our comments need to be taken in that context. Also be aware of the discussion of our use of non-GAAP financial information included on Slide 3 of the presentation. The Appendix attached does have some of the necessary reconciliations and as I mentioned we did file a form 8-K this morning that provided more of those reconciliations. I am not going to reread these statements, but I will incorporate it with this reference.

Before I talk about our results for Q4 and the full year I do want to spend a few minutes talking about what LP accomplished in this last year with our single minded focus on cash. We entered the year with $215 million in cash and equivalents, short and long-term investments and restricted cash. $126 million of this $215 million is what we identified as available. What this means is we reduced the total cash by the carrying value of our auction rate securities and by the amount of restricted cash.

Using that same measure we ended 2009 with $440 million in cash, $394 million of which was available under that definition. That is an increase of $268 million in a year where housing was down 39%. Let me talk about some of the things we did to improve that balance sheet item. Clearly there was net cash from financing activities that included the March senior secured note issuance and the September equity offering offset by some of the bond repurchases we did. The net amount here was $116 million.

Operationally, and I will get into the details here, each of our three operating segments improved significantly as measured by their adjusted EBITDA. A 72% increase in OSB, 15% increase in EWP and over a doubling in our siding business. We did collect the $80 million in tax refunds we forecasted at the beginning of the year. We reduced our inventories across the system by over 25% which released $50 million in cash.

Late in the fourth quarter we did sell a portion of our auction rate securities portfolio for $21 million in cash. We also released an additional $58 million in restricted cash that is now available for our use. While not what we expected, we did generate $8 million from asset sales, short of our expectations. We held capital expenditures and investments in our joint ventures to $10 million. Our selling and administrative expenses fell by 20%, a $27 million savings. Our lean six sigma program continued to generate savings and improve our operations.

With this balance sheet improvement and the lessons we learned during this period we remain very well positioned to respond to whatever the market throws at us over the next several years.

With that as a preface, let me talk about earnings. On slide four of the presentation this looks at our Q4 2009 results compared to the same quarter last year and the prior quarter. Reporting today a net loss for the fourth quarter of $49 million or $0.40 per diluted share. Net sales from continuing operations of $275 million for the quarter, a 10% increase from the same quarter last year. For the same period last year we reported a net loss of $341 million or $3.31 per diluted share on sales from continuing operations of $250 million.

Adjusted EBITDA from continuing operations was a $19 million loss in the quarter compared to a loss of $38 million in the same quarter last year. Lots of movement in the tax rate on continuing operations between the quarters. The effective tax benefit rate in Q4 of 2009 was 27%. This is lower than what we would expect primarily as the result of a change in estimates due to the need to establish a valuation reserve against deferred state tax assets because of the lack of taxable income in the past three years. The full impact of this valuation reserve was taken in Q4 as we needed to apply the estimated effective annual tax benefit rate to the full year results.

Q4 2008 the tax benefit rate was only 12%. The cause of this low rate was primarily due to the non-deductibility of the $273 million goodwill write off taken last year. Excluding the effect of the goodwill impairment the tax benefit rate in Q4 was 42%.

Slide five is a discussion of special items in the quarter that are generally not attributable to our ongoing operations. In Q4 of 2009 we had a charge of $9 million to increase continual liability reserves which included a charge associated with the sub-leasing of certain office space, environmental reserves on a closed site and an increase in the ABT code class action settlement reserves. We had an investment gain of $19 million on the portfolio from the sale of the auction rate security portfolio I talked about and I will discuss this further in a few minutes.

We did announce we would have a $21 million loss on the early extinguishment of the debt related to the equity [claw back] that we did and completed in October of last year.

In 2008 the items included impairment of $27 million on the auction rate security portfolio, the write off of goodwill that I just mentioned and other operating charges and credits related to severance and right sizing charges and an increase in settlement reserves.

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

Slide seven is a discussion of the special items compared to the two years. For 2009 the items are very similar to what I discussed in Q4. In 2008 we reported $119 million total write down on the ARS portfolio, wrote off the goodwill and then we had other operating charges and credits that included the OSB settlement reserve and the previously discussed reserve increases for severance and right sizing charges.

Let me talk about our segments now. Slide eight is the OSB segment. We had an operating loss of $17 million in the quarter which was a 45% improvement compared with $31 million operating loss in Q4 of last year with a 16% increase in volume and an average sales price of 5% lower. This improvement is directly attributable to the actions we have taken over the last year to adjust our operations and focus on cash.

Adjusted EBITDA from continuing operations in the OSB segment in the quarter was a loss of $8 million compared to a loss of $22 million in Q4 of last year. Compared to Q3, volumes were lower by 4% and price also decreased by 4%. For the full year OSB had an operating loss of $66 million compared to a loss of $155 million during the same period last year despite our sales being down 35%. For the full year, adjusted EBITDA from continuing operations in the OSB segment was a negative 30 compared to a loss of $104 million in 2008, an improvement of over 70%.

Slide nine on the presentation is our siding segment which includes SmartSide, Canexel and the commodity OSB produced paper. For the fourth quarter siding had an operating income of $5 million, significantly better than the $11 million loss in the same quarter last year. Adjusted EBITDA from continuing operations in the siding segment was $9 million compared to a loss of $7 million in Q4 of 2008. For the quarter sales were up 13% with unit volumes better by 19% in SmartSide and down slightly in Canexel compared to the same quarter last year.

In terms of sales price the 25% in Canexel is a combination of changes made since we eliminated our door skin business which had a lower price point in the middle of last year and we also had an increase in the Canadian dollar exchange rate as much of this product is sold in Canada. For the year siding had operating income of $29 million compared to $3 million in 2008, a tenfold improvement in results. Sales in 2009 were 12% lower than the prior year. On the adjusted EBITDA from continuing operations for this segment it doubled to $48 million compared to $24 million in 2008.

Slide 10 is our engineered wood business. As a reminder this includes I Joist, Laminated Strand Lumber and Laminated Veneer Lumber plus other related products. This segment does include the sale of I joists and LVL products produced by the Abitibi JV or sales earnings with Murphy Plywood. For Q4 EWP recorded a loss of $9 million compared to a loss of $12 million in Q4 of last year. Adjusted EBITDA from continuing operations was a loss of $6 million in the quarter compared to a loss of $8 million in the same quarter last year.

Volumes of I joist were up slightly while volumes of LVL and LSL were up quite a bit compared to the same quarter last year. This increase was only slightly related to housing. In the quarter we did sell a significant volume of non-structural LSL started board which skewed these numbers from a volume percentage. Pricing was up 2% in I joists and down a bit in LSL with a decline in the LVL/LSL pricing was due to the non-structural starter board I just discussed.

For the year EWP had an operating loss of $32 million, an improvement from the $40 million loss in 2008. Sales, however, were lower by 1/3 in 2009 proportional to the decline in housing starts. Adjusted EBITDA from continuing EWP operations for the year was $21 million compared to a loss of $24 million last year.

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

Some of the other items, we did have a $3 million foreign exchange gain in the quarter compared to a $13 million gain in the same quarter last year. As a reminder, in 2008 we had $125 million Canadian loan that was repaid late in the fourth quarter and it was denominated in Canadian dollars and the Canadian rate dropped. This was the reason for the realized gain.

Investment income excluding the gain of the sale of ARS in the quarter was about $6 million compared to $7 million in the quarter last year. Interest expense was about $6 million higher in the fourth quarter of 2009 versus 2008 primarily due to the high cost of refinancing completed in Q1.

Selling and administrative costs for the quarter were $32 million compared to $26 million in the same quarter of last year. There were several factors that contributed to this increase but the most significant is related to management incentive pay. In 2008 we reversed the year-to-date accrual as it became evident that for the second year in a row LP would not be making these payments. In Q4 of 2009 incentive pay was earned based on substantially exceeding the cash target that was the focal point of the incentive plan and the year-end true up was included in the other expenses.

Other year-end accruals included higher than anticipated health and welfare costs and slightly higher pension expense. For the full year, as I mentioned, selling and administrative costs were lower by 20%, a savings of $27 million compared to last year.

Slide 11 on the presentation is balance sheet. The key balance sheet statistics, as I mentioned, cash and cash equivalents and investments restricted cash of $440 million, more than double the $215 million we had at the end of last year. Working capital was about $535 million. For this year this does include assets held for sale as the current asset on the theory these assets will be converted to cash in the next 12 months.

We had net cash of over $160 million compared to a net debt position of $35 million at the end of 2008. Capital expenditures for the year were $10 million and book value per ending share $9.92. This does reflect the impact of the additional shares issued in our equity offering in late September.

Before I turn it to Rich let me make a few other comments. On our ABL subsequent to year-end we did modify our ABL agreement so that we no longer have to [inaudible] the $60 million bond payment that is due in August of 2010. We did file an 8-K on that last week.

As we have discussed in the last call, Congress did implement the ability to carry back five years and we will be doing that with our carry back losses for 2009 to earlier years. For LP we intend to receive a federal refund of about $45 million in the first half of this year.

The last item I want to touch on and we will have more disclosure in our form 10-K is qualified special purpose entities. Based on new accounting pronouncements related to joint ventures in these special purpose enteritis they become effective in Q1 of this year. We are anticipating we will bring back this off balance sheet arrangement onto the books of LP. This arrangement has been fully disclosed in LP’s notes of the financial statements since this was put in place in 2003.

Essentially what this means is we will record $410 million notes receivable and $366 million of notes payable. The difference is already reported on LP’s books as an investment and/or advancement to an affiliate. This will be eliminated due to the [growth]. Fundamentally this will not result in any change to our net equity position.

With that let me turn it over to Rick.

Richard Frost

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

Let me start by giving you my cut on 2009. I would be less than honest with you if I didn’t admit up front that I am very happy to put 2009 in the books end behind us. It was the most chaotic year I have experienced in my 33 years in the industry and it was a very, very difficult year in which nothing came easy.

Going into 2009 we knew that we had a couple of very important things to accomplish in addition to the normal pleasing of customers and the manufacturing and selling of building products. We knew we had to shore up the balance sheet and preserve, conserve and generate cash. As Curt said we began 2009 with about $215 million in total cash of which about $126 million was available cash.

That situation coupled with the unprecedented low level of business in building products, the predicted losses we were anticipating and the debt maturity that was coming at us in August of 2010 I think influenced our stock price all the way down to a low last year of about $1.03 early in the year as the S&P had bottomed.

We focused our management incentives in the organization on cash preservation and generation exclusive of the refinancing activities and more or less managed our entire set of businesses for cash in 2009. In early spring we were able to complete, as you know, a public debt offering that allowed us to push out the majority of our debt obligations until 2017. Because of the financial crisis hitting Wall Street our debt deal did become quite difficult. It was also quite expensive. It was necessary and we did get it done.

Fortunately we did have the foresight to put an equity qualify provision into that deal and in the fall after more stability returned to the financial markets and our stock had rebounded as result of LP showing improved results and more staying power we did a follow-on equity offering priced at $6.75 and we were able to retire 1/3 of that expensive debt at a discount and we relieved ourselves of about $17 million of interest charges going forward.

Towards the end of the year we were also able to free up some restricted cash from our Chilean operation and tendered some of our auction rate securities to our issuers to free up more cash and our operations as Curt said again generated another $50 million in inventory reductions through their efforts.

So at the end of 2009 we had $440 million in cash and a little over $390 million in available cash that has made our entire balance sheet much stronger than it was a year ago. Needless to say, it was not a year that any of us would care to repeat. I think housing starts all in sugared out last year at about 550,000. That is down around 39% from 2008. LP’s net sales were down a little over 23%. The entire year was characterized by managing our capacity to our customer’s immediate needs and our employee’s focused discipline on spending and inventory reduction.

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

In environmental compliance we experienced only two notices of violation for the year which is one of our best performances. Our lean six sigma efforts continued to pay off for us with a 7.5 to 1.0 return in 2009 and in CapEx we had little activity as forecasted and ended up the year with a spend of $10 million.

Our sales and marketing group ended up the year with about 1,800 new wins. A win is defined as a new product placement with an existing customer or adding a new customer with a product placement. In our calculation of a four quarter rolling year-over-year change of LP product volumes divided by the housing start number, all of our product categories were up except OSB sheeting. Some were up significantly. Thick shield was up 24% and SmartSide was up 42%. Sheeting being modestly down did not surprise us as we turned away some sales volume this last year because it was simply not good business for us.

In big box retail sales dollars with Home Depot and Lowes our specialty products for siding and molding were up in 2009 against 2008. LP ended the year with 3,956 employees, down another 713 from the year 2008. As a result, I think of very depressed housing market, seasonality set in early in Q4 and heavily affected our Q4 quarter in siding. Our reporting segments did all perform better in Q4 than in Q4 of 2008 but it was still a relatively weak quarter when coupled with the adjustments and the end of the year noise that Curt has already mentioned.

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

Left indefinitely shut in our stable is our Chambord, Quebec mill and our new mill in Clark County in Alabama. Between Christmas and New Year’s we started our second mill in Chile back up, the Lautaro mill. That mill was constructed in 2008. The Chilean economy is picking back up and they have elected their first pro-business president. We plan to run Lautaro at least four months this year and obviously hope that the demand for the product is such we can run it longer. Panguipuilli, our first mill constructed in Chile about 10 years ago is running full.

I will finish my comments with some thoughts on 2010. We have made our plans for 2010 based upon an assumption of 700,000 new residential starts all in. That is single family, multi family and manufactured housing and about 160,000 new residential starts in Canada. It is our opinion the housing market will ebb and flow over the next several quarters as it slowly improves. Any recovery in new residential starts will be constrained by lingering foreclosures, slow home price appreciation, continued high unemployment and credit that is just hard to get.

This makes the short-term outlook difficult to call given the departure from any historical norms. 2010 does begin with a few favorable influences compared to this time last year. The tax credit is in place this year for home buyers which was not in place in Q1 of 2009. This may pull forward some buying into the first half of the year. The distribution channels are buying our products after working through the process of redeploying their inventories from shuttered locations to those that remained open last year.

Supply and demand have had another season to become more in synch and random link pricing is better than last January and February. Our orders in siding are also stronger than the same time last year. Our management incentives for 2010 are being built around being adjusted EBITDA positive for the year. I think that is an improvement.

The Canadian housing market appears to be more normal this year but FX with the Canadian dollar has begun the year less favorable than it was this time last year. Currently our assumptions around wood costs are that they will net out relatively flat year-over-year after seeing some increases in Q1 in the south due to the wet weather. The exceptionally wet weather in the south has us fighting for log deliveries at both Hanceville and Roxboro. We do expect to give us some of our cost gains that we made in 2009 in resins, waxes, borate, plastic and electricity continues to escalate.

In 2010 we expect CapEx spend to be less than $25 million. We are beginning the quarter with both Dawson Creek, British Columbia OSB mill and the Swan Valley, Manitoba OSB mills down for the months of January and February. We were unable to accomplish what we set out to do in 2009 around asset sales. That was the bad news. The good news is we will continue to pursue completing those efforts in 2010 and have that upside in cash ahead of us should we be more successful this year.

Underway are the marketing of our permanently closed Saint Michel OSB complex, a building that we own in Franklin, Tennessee and our Selma extrusion facility. Now we will add to that list our Athens and Silsbee facilities.

Finally, last week at LP’s board of directors meeting John Weaver was elected as a member of our board. John is the recently retired Executive Chairman of Abitibi-Bowater. John spent his career in the forest industries and worked in Canada for the last 13 years. We are happy to have him aboard to provide his perspective and council.

In general I think we are more optimistic than we were a year ago. It is a measured optimism to be sure but it feels like we have the worst behind us in almost every aspect. The biggest difference Q1 of last year to Q1 of this year is simply that a sale in the marketplace creates an order at the manufacturing level.

With that I will turn it back over to Curt.

Curtis Stevens

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

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Mark Connelly – Sterne Agee.

Mark Connelly – Sterne Agee

I wonder if we can try to find any trends in the housing market in between the carnage here? We hear some homebuilders talking about trying to hit different price points and reconfiguring. Most of them are hesitant to talk about building smaller square footage. As you look at it from your end of things are any of those trends becoming clearer? The second part of the question is are those trends good or bad for your engineered wood business?

Richard Frost

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

Mark Connelly – Sterne Agee

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

Richard Frost

I think it will because the equation is the same. It is just not as much volume going into the house. I think the bigger influence on engineered wood would be trying to understand the number of houses that are going in on slabs versus the ones that have some type of an understructure. That is a larger influence. You would look regionally and predominately in the south where the building is holding up a little bit better right now you have more homes going in on slab.

Mark Connelly – Sterne Agee

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

Richard Frost

I think it is properly positioned. It probably hasn’t become evident through the numbers because of what is going on but we got ourselves into a bit of a pickle in Q4 around Canexel. We sat down and looked at the housing trends in the summer in Canada and we misread them. We did a serious inventory reduction in that business and then housing came right back with a vengeance right after we reduced those inventories and we got caught on allocation. Through the fourth quarter and the first couple of months of this quarter we actually had to reduce the amount of orders we could take to get straightened out so that we could appropriately service our customer. We do expect to get off allocation and get that straightened out by the second quarter.

Curtis Stevens

The only thing I would add to that is Canexel is largely a Canadian and an export product. It isn’t in the U.S. market at all.

Operator

The next question comes from the line of Chip Dillon – Credit Suisse.

Chip Dillon – Credit Suisse

I kind of missed a couple of things. How much of the ARS have you sold already and what was the face amount?

Curtis Stevens

The face amount was $55 million and we tendered those at 21.5. The important thing there is we retained, as you know we filed suit against the issuing banks there and we retained all of our legal rights to pursue full recovery.

Chip Dillon – Credit Suisse

So that means you have about 107 left?

Curtis Stevens

Actually a little bit less than that. Probably right at 96.

Chip Dillon – Credit Suisse

You are currently carrying that at next to nothing on the books, right?

Curtis Stevens

I would have to look but I think it is around 27. 26? That is based on the quotation that we have gotten from the issuing banks backed up by the work that we have done on the valuation side.

Chip Dillon – Credit Suisse

So if we look at the cash that we see ahead, you mentioned there is some $45 million tax refund you are going to get in the first half. Did you say first quarter or first half?

Curtis Stevens

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

Chip Dillon – Credit Suisse

They will use the excuse they are shut down for three days in Washington or more. When you look at the asset sales you have stuck them up into current assets. That obviously means there is an elevated level of confidence. Refresh our memories, are these ARS assets or are these physical mill assets?

Curtis Stevens

They are the physical mills. We moved the Saint Michel to Selma and the [inaudible].

Chip Dillon – Credit Suisse

These will be sold really to people that would do other things than make OSB I would imagine?

Curtis Stevens

That’s correct.

Chip Dillon – Credit Suisse

Did you say the two mills you shut permanently, Athens and Silsbee, had 725 million feet together?

Curtis Stevens

Million feet. Rated capacity.

Chip Dillon – Credit Suisse

725?

Curtis Stevens

Yes.

Chip Dillon – Credit Suisse

What is the capacity of Chambord and Clark County?

Richard Frost

Chambord is about 550 and Clark County is between 700-720.

Chip Dillon – Credit Suisse

So like you said in the K last year. Could you just talk a bit about what you see in 2010 in terms of your CapEx? Let’s just talk about CapEx and the tax rate.

Richard Frost

CapEx the guidance we have given is less than $25 million. I will let Curt talk about the tax rate.

Curtis Stevens

The tax rate going forward we would anticipate would be at the statutory offset by a little bit of tax playing strategy but it is not going to be markedly different.

Chip Dillon – Credit Suisse

When you look at OSB prices today at least if you look at North Central the price is up at 210 on random links. Let’s say it stayed there you would be a little over 200 for the quarter and that is $30 up from the fourth. Is there anything we should think about in your mix that would encourage us to either assume that is a good benchmark to use as we go from fourth to first or should we make other adjustments?

Richard Frost

I am looking at the mid week trends I just pulled off this morning. I convert these back to 3/8. You are looking at the 7/16 number and we convert back to 3/8 because that is what we keep score on in our cost side. North Central this morning printed at 185. Western Canada printed at 191. Eastern Canada 172. Southwest 184, Southeast 174 and so that is the blended average. North Central as we always are trying to explain how our average sales price is calculated you have to take a blend of these regions based on where our production is. I can tell you that in the last two weeks the most significant thing for us is that Western Canada started to move which is good influence on our Peace Valley mill and also when we start back Dawson and Swan that will help us.

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

Chip Dillon – Credit Suisse

It looks like that number you gave us would suggest it went up another $6 from last week.

Richard Frost

Yes.

Operator

The next question comes from the line of Steve Chercover – D.A. Davidson.

Steve Chercover – D.A. Davidson

Did you gain share in 2009? It appears with prices flat your revenues were down less than the housing stat you referred to.

Richard Frost

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

Steve Chercover – D.A. Davidson

Are you currently building log decks at Swan Valley and Dawson Creek?

Richard Frost

We are bringing logs in there as we speak.

Steve Chercover – D.A. Davidson

Obviously with spring break you have to do it now if you intend to run them. Could you elaborate a bit on the off balance sheet joint ventures? I think you said they are going to come back into the mother ship?

Curtis Stevens

We sold Timber land in California in two different transactions where we delayed paying the taxes by having a tax structure with a receivable and a payable that really self-liquidate but allowed us to treat it on an installment tax basis for purposes of filing our returns. Those were on balance sheet because the rules at that time had required us to put them on balance sheet. When we sold the Southern Timberland the rules had changed and we were required to have that as an off balance sheet transaction. So that was the sale of the Louisiana and Texas timber lands where there was a 15-year deferral on the payment of those taxes. The structure we used there again was a notes receivable/notes payable with LP’s investment being about 10% of that. That is the $44 million we have on our balance sheet at this time.

The notes themselves are backstopped with a letter of credit which is backstopped by cash. So there is not any risk associated with it. But it has been fully disclosed in our financial statements the change in the rule we now need to gross the balance sheet back up, put the full amount of the note receivable on the books and the full amount of the note payable.

Steve Chercover – D.A. Davidson

This is the same 123 that we have seen for years that has been widdled down?

Curtis Stevens

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

Steve Chercover – D.A. Davidson

So this would show up similar to that?

Curtis Stevens

It would be very similar to that. It would be basically because I don’t think there is recourse in any of these.

Steve Chercover – D.A. Davidson

But at the end of the day we will basically have an offsetting asset and liability?

Curtis Stevens

You will have an asset $44 million higher than the liability. That is the investment that LP has.

Richard Frost

I want to add a bit more color on the share answer I gave you. I will go back to a comment I made a few quarters ago which is how difficult is it to measure improving the buoyancy of your boat if it is sitting on a clam flat. The way we try to measure share in this environment is that we take a four quarter rolling average of our volume that is going into the marketplace that we sell and then we are dividing that by the housing start number which is about the only way we can figure out whether we are gaining share or not. Does that help you? The housing start number is going down but if we look at our volume and do a consistent division then if that percentage is going up for us then that is helpful. We exclude big box from that.

Operator

The next question comes from the line of Peter Ruschmeier – Barclays Capital.

Peter Ruschmeier – Barclays Capital

You mentioned your employee headcount is now down below 4,000 and I was curious if you could elaborate on what that means for the company in terms of runability? When you bring mills back up does that mean you are going to utilize these employees? Do you have to hire people back? Can you comment on what this means to the organization?

Richard Frost

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

Peter Ruschmeier – Barclays Capital

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

Richard Frost

No, these are actual numbers of people that work. These are not laid off people. We just drifted down another 700 folks last year with the reductions we made at our current capacity. If we add shifts obviously we would bring on wads of people as you add shifts.

Peter Ruschmeier – Barclays Capital

Back on the assets held for sale what is the collective balance of that in terms of all the different sites?

Curtis Stevens

About a $65 million carry value.

Peter Ruschmeier – Barclays Capital

Remind us, have you sold all the planes and hangars?

Curtis Stevens

The planes have been sold but the hangar has not. We are still holding that.

Peter Ruschmeier – Barclays Capital

But that is still held for sale as well?

Curtis Stevens

It is still being actively marketed and we are seeing at least the fractional folks in leasing coming back. I don’t think anybody is buying planes for their corporation but we are seeing that business come back. There is a logical buyer for that when their business reaches a certain level.

Peter Ruschmeier – Barclays Capital

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

Richard Frost

That is our guess right now other than we think they will be accelerated in Q1 which might bleed into Q2 in the south.

Curtis Stevens

That is just wood.

Richard Frost

We are waiting to see what to make of all of this renewable energy, the [BCAP] rules came out, the early rules came out last week. We are waiting to see how that sugars out. There is no money being paid out right now. We are not making any strategic moves or determinations until we actually see how that plays out. There are plusses and minuses I think in general. The government is sticking its nose into subsidizing wood for other purposes is not a good idea. It is very hard to build markets based upon subsidy.

So we are playing the wood angle at least strategically from two ends. One, if we are preparing for [BCAP] if it actually becomes a reality and at the same time we are lobbying against the government getting in and subsidizing renewable wood energy.

Peter Ruschmeier – Barclays Capital

So as we think about the variance in our models from 4Q into 1Q clearly you have this nice lift on pricing mitigated somewhat by the higher fiber costs. I think you mentioned the energy costs are running up. I am not sure if there is anything specific as to why electricity is running up but can you help us with the other cost items in terms of wax, resin and some of the other things we should be thinking about that might be a mitigating factor to the run up in price?

Curtis Stevens

If you look at the full year 2009 versus 2008 and we apply the pricing between those two years to the volumes we produced in 2009 it was overall about a $50 million savings over 2008. Of that the wood was about 1/3 of it. Energy was a piece of that but the biggest piece was in the resin. As we look into 2010 as Rick said we expect wood to be relatively flat. I think there is probably a little bit more on the higher cost side than lower. But relatively flat. We expect resins to be up principally because oil is up and very volatile and it is not just oil it is the derivatives being [phenol benzene] primarily for the resins.

Then energy the increase is almost all electricity and that is these local jurisdictions raising electricity rates on a regular basis. So I would guess we are going to give back about 25-30% of what we had for savings last year.

Peter Ruschmeier – Barclays Capital

Of the $50 million.

Curtis Stevens

Yes.

Richard Frost

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

Operator

The next question comes from the line of Chip Dillon – Credit Suisse.

Chip Dillon – Credit Suisse

I just wanted to make sure, could you review for us the Houlton, Maine plant? I noticed there was a line in there saying you weren’t running it I think as much and that might help reduce the loss. What are your plans for that facility, the LSL business as you go out and you look at the next housing cycle?

Richard Frost

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

Chip Dillon – Credit Suisse

Yes. When you look at, let’s say this is finally the beginning which we would all love to see and you are making money in the second quarter and I guess the math on the tax loss carry forward you were taking ahead will be obviously influenced by the ability to carry it back and you are getting the $45 million but how much money cumulatively would you have to make, and I know it is hard to put an exact number on it because of Canada and the U.S., but could you make $400-500 million in the U.S. before you would be paying significant cash taxes? How should we think about that in the next cycle?

Curtis Stevens

I don’t think it is that much because remember in 2008 we had the goodwill write off which not deductible. I think a good proxy for that is to look at the balance sheet and you will see what we have in the deferred tax assets and deferred tax liabilities. From a net standpoint we believe we have more deferred tax liabilities than we do deferred tax assets which means we intend to use that. Part of that will be the gain we will record on the timber sales, the installment notes I talked about, there is I think $113 million coming through this year and we will have a gain in it. If we have a loss this year part of that would be offset by that gain. It will be awhile before we pay cash taxes but I don’t think it is the magnitude that you mentioned. I would be guessing and my tax guys would be all over me so I probably shouldn’t guess.

Chip Dillon – Credit Suisse

He’s not listening.

Curtis Stevens

He probably is.

Operator

The next question comes from the line of Analyst for Richard Skidmore – Goldman Sachs.

Analyst for Richard Skidmore – Goldman Sachs

I would like to get your perspective in the move up in OSB prices here in the first part of the year. Do you see that more supply versus demand driven? A follow-on to that can you talk to how you are seeing your demand trend across the key products in the first part of the year relative to the fourth quarter?

Richard Frost

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

Analyst for Richard Skidmore – Goldman Sachs

My second question was on the demand front across your key products and how you have seen that change in the first quarter relative to the fourth quarter. Have you seen anything beyond the normal seasonal changes?

Richard Frost

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

Operator

This concludes the question and answer session for today’s conference. I would now like to turn the call back over to Mr. Curtis Stevens for closing remarks.

Curtis Stevens

Thank you very much. I appreciate all of you joining us on the call today. As always Becky and Mike are available for follow-up questions. With that, operator if you could give the call back number and thanks for joining us.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Louisiana-Pacific Corporation Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts