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Executives

Curtis Stevens – EVP, Administration and CFO

Rick Frost – CEO

Analysts

Steven Chercover – D. A. Davidson

Mark Wilde – Deutsche Bank

Peter Ruschmeier – Barclays Capital

Joseph Stivaletti – Goldman Sachs

Chip Dillon – Credit Suisse

Paul Quinn – RBC Capital Markets

Louisiana-Pacific Corporation (LPX) Q4 2010 Earnings Call Transcript February 10, 2011 11:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2010 Louisiana-Pacific Corporation earnings conference call. My name is Mary [ph] 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 CFO. Please proceed.

Curtis Stevens

Thank you, and thank all of you who are joining us on this conference call to discuss the results for the fourth quarter and the full year of 2010. With me today are Rick Frost, LP’s CEO, as well as Mike Kinney our primary Investor Relations contact.

I will begin the discussion with a review of the financial results for the fourth quarter and the full year of 2010. I’ll follow this with some comments on the performance of each of our individual segments and then talk a bit about some selected balance sheet items. After I finish my comments, Rick will take over to discuss the general market environment in which LP has been operating, his perspective on our operating results for 201 and some thoughts on the outlook of 2011 and then as the moderator did say, we will then open it up for Q&A session.

As we have done in the past, we are doing a webcast of this call today. This could be accessed at www.lpcorp.com. Additionally, to help with the discussion, we have provided a presentation with supplemental information that will be reviewed in conjunction with this. And I will be referencing those slides in my comments. Additionally, we did filed an 8-K this morning that had supplemental information in that including our press release and a reconciliation of adjusted EBITDA. For your information, we will be filing our annual Form 10-K early in March.

Before I get started with the comments I do want to remind the participants about the forward-looking statements, comments that is included on slide two of the presentation and also the non-GAAP financial information language included on slide three of the presentation.

As I said, we have provided a reconciliation in the presentation and in the 8-K filings that we made this morning. I am not going to read these statements but I will incorporate them with this reference.

Move to slide four of the presentation. This is a discussion of Q4 2010 results compared to the same quarter last year as well as Q3 of 2010. We are reporting today a net loss for the fourth quarter of $7 million or $0.05 per diluted share. Net sales from continuing operations were $316 million in the quarter. For the same period last year, we reported a net loss of almost $50 million or $0.37 per diluted share on sales from continuing operations of $277 million.

Adjusted EBITDA from continuing operations was positive, albeit it was a very low number but it was positive in the quarter that compared to a loss of $20 million in Q4 of 2009. As a side note, this is the first positive EBITDA quarter that we have enjoyed since 2005, fourth quarter since 2005. We did have a loss of $6.8 million in discontinued operations that was almost entirely related to increases in warranty reserves for two former product lines, vinyl siding and decking.

You also note in this slide that there is quite a bit of movement in the tax rate between the quarters, the effective tax benefit rate in Q4 was 80% on net income, where the effective tax benefit rate in Q4 of ’09 was 27%. This is primarily the result of the true-up that occurs every Q4, both in 2010 and 2009, caused a by applying the estimated effective annual tax benefit rate to full year results. You look – and I will get to it in a minute, but looking at the full year, the tax benefit rate was 41% in 2010, and 35% in 2009.

On slide five of the presentation is a brief reconciliation of special charges. I think the good news this quarter is that special items were all positive. We did recognized a gain on the sale of a portion of our option rate security portfolio, a $19 million gain, and I will note and I will talk about it later that we did – although we sold these securities we did retain all of our legal rights to pursue the issuers of these instruments with a goal of full recovery of the investment and appropriate damages.

Other items included a slight loss and impairment of long-lived assets and a reduction in the warranty and settlement reserves of $2.5 million. The impact of looking at our results without these items shows an adjusted loss from operations of $0.12 a share.

Slide six of the presentation is a discussion of the full year results. For 2010, we are reporting a net loss of $39 million on net sales of $1.4 billion. For the same period last year we reported a net loss of $121 million on sales of $1.1 billion. Of note here is our sales increased by 30%, while the base housing market increased by about 7%. So clearly good performance based on housing.

Adjusted EBITDA from continuing operations were positive $82 million, compared to a loss of $44 million in 2009. For the year the loss from discontinued operations was $10.4 million, almost all of that related to the warranty reserves mentioned above. And as I said earlier the tax rate was 41% for 2010 versus 35% in the prior year.

Slide seven of the presentation is a reconciliation of special items for the full year, other than the items that I talked about for the fourth quarter, the other big one was the write-down of our U.S. GreenFiber and investments that we took in Q3. And just as a reminder that investment write-down was not deductible, so the related tax provision does look a little bit unusual.

Then let me shift to the segments. On slide eight is our OSB segment, we had an operating loss of $13 million in the quarter compared to a loss of $17 million in Q4 of last year. In the quarter we did have a 6% increase in volume at an average sales price of about $4 million higher. The increase in the sales price accounted for $4 million improvement in earnings and in adjusted EBITDA.

Offsetting the increase in pricing was the strengthening of the Canadian dollar, which increased our cost more than revenue due to sales in the U.S. We also absorbed increases of raw material costs primarily electricity and resins.

Adjusted EBITDA from continuing operations in the OSB segment was $5 million better than the same quarter last year and $8 million lower than Q3, both price and volume were down. For the full year, OSB had operating income of $26 million, compared to a loss of $65 million in the same period last year.

Adjusted EBITDA for the comparable periods was $64 million in 2010 and a loss of $29 million in 2009. Pricing accounted for a $102 million on LP produced products and another $11 million on product produced through our joint venture. One note I will make, on the purchases we make from our joint venture, we recorded 100% of the sales, but we only received 50% of the profits on those sales.

Slide nine of the presentation is our Siding business. This segment includes our SmartSide and Canaxel siding products plus commodity OSB producer or Hayward Mill. For the fourth quarter, Siding had operating income of $12 million, which was an increase over the $5 million recorded in the same quarter last year.

Adjusted EBITDA from continuing operations in the Siding segment was $16 million compared to $9 million in Q4 of 2009. For the quarter, sales were up 18%, with unit volumes higher by 16% in SmartSide and 6% in Canaxel. For the quarter, SmartSide average sales prices were flat between periods, while the Canaxel price showed an increase of 14%. This was largely due to Canaxel primarily being sold in Canada and with the strengthening Canadian dollar that increased the U.S. equivalent sales price.

For the full year, Siding had operating income of $51 million compared to $29 million in the same period last year. Adjusted EBITDA for the comparable periods was $70 million versus $48 million. Higher OSB prices accounted for $9 million of the change and volume was responsible for the rest of the improvement.

Slide ten is our Engineered Wood business. This includes our I-Joist, Laminated strand lumber and our laminated veneer lumber and it also includes the sale of LVL products produced by our joint venture with Abitibi are under a sales agreement with Murphy Plywood.

For Q4, EWP report a loss of $6 million compared to a loss of $9 million in the same quarter last year. Adjusted EBITDA in EWP segment was a negative $2 million in the fourth quarter versus a loss of $6 million, in the same quarter last year. Volumes of I-Joist were down 18% while volumes of LVL/LSL were down 2% compared to 2009 same quarter.

Pricing was up 8% in I-Joist to 17%, and the combination of LVL and LSL due to price increases we implemented in EWP to partially offset higher raw materials cost principally in OSB in the year and lumber. For the year, EWP had an operating loss of $21 million compared to a loss of $33 million same period last year, still a 30% improvement.

Adjusted EBITDA for the comparable periods was a loss of $8 million compared to a loss of $20 million, but better than a 50% improvement. While there is no slide for other building products, let me just make a few comments, we showed income of $1.5 million in the fourth quarter of 2010 compared to a loss of about the same amount in 2009.

For the quarter sales were at $38 million, up 21% from the $31 million recorded in Q4 of last year, primarily driven by our South American operations. For the full year, other building products had operating income of $6.1 million compared to income of about $1 million in the same period last year. Adjusted EBITDA for the comparable periods was $17.2 million in 2010, versus $11.5 in 2009.

Couple other things, we did have a foreign exchange gain in the quarter, compared to a foreign exchange gain of about $1.2 million compared to $3.1 million in the same quarter last year. For the full year, foreign exchange was a $2.2 million gain, compared to $13.4 million in 2009, that largely comes from the cash that we have in our Canadian operations held in Canadian dollars and the conversion of that and then in 2009, we did have a U.S. denominated loan in our Chilean operation that created part of that gain as the Chilean currency strengthened against the U.S. dollar.

Selling general and administrative cost, they were at $31.7 million in the fourth quarter, compared to $32.4 million, so slightly down compared to the same period in 2009. For the full year, it was slightly higher to $119 million, of a portion it represents general corporate SG&A was lower by about $3 million.

Turn to slide 11 of the presentation on the balance sheet, key balance sheet statistics, cash, cash equivalents, investments from restricted cash, $236 million at the end of the year, just slightly down from where we began the year and this was after paying off $60 million in debt. Working capital was about $580 million, a net cash position of over $210 million. We did keep our capital expenditures to the level that Rick had been talking about at $15 million and our book value per ending share was $9.23.

Before I turn the call over to Rick, let me just summarize our year-over-year results at a very high level. We had an operating improvement of $125 million between the years. Higher sales prices accounted for about $130 million of that improvement with OSB being the bulk of it. Our LSL operational improvement, our Houlton Mill added $5 million additional volume contributed about $22 million, but offsetting that is we did had higher raw materials cost of about $25 million that reduced our results and then we had – the Canadian currency went against just for about $15 million.

With that, let me turn it over to Rick.

Rick Frost

Well thanks, Curt and I too appreciate your hour this morning and your interest. Curt explained everything so well. He didn’t leave me much to say, so, I’ll be color commentator today. It is clear and cold here in Nashville and after a significant snow and ice storm that went through here yesterday right at rush hour, the whole town was grid locked last night. And it took me three hours and forty minutes to drive 19 miles. Now that’s nothing compared to what you experience in the Northeast and Midwest, but it’s significant for us.

Along with an economic recession in housing, we also find ourselves in Middle Tennessee and somewhat of a professional football recession that tightens our knot without a starting quarter back and just announced a brand new head coach this year, this week.

So with my prepared remarks this morning, I am going to give you some observations on Q4, a look back at the whole year and then try to provide you with what it feels like entering into 2011. Let’s start with Q4 of ‘010. All of our businesses did perform better than in Q4 of ’09. This includes OSB, Siding, Engineered Wood Molding and Brazil and Chile.

And with this, we were able to eke out an adjusted EBITDA which was positive by a couple $100,000 versus a negative of $20 million in Q4 of 2009. Our loss from operations did drop $18 million from $51 million in the same quarter a year ago. In OSB, we operated a 63% of our currently available capacity and 50% of our total capacity which includes a couple of indefinitely shut mills.

Right now we have three mills that are running full and the rest are on some type of a flex schedule. Volume and price in OSB both declined from Q3, but were better than Q4 of 2009 as shown in our presentation. In our SmartSide siding line, we had our best Q4 ever in the history of that product line in terms of both volume and profit and that does exclude the OSB component which is produced at our Hayward Siding Mill and volume and pricing both contributed in the favorable comparisons.

Engineered Wood continues to struggle, as it is our product line that is most heavily dependent and correlated upon two new residential starts. However we have reduced our losses from Q4 ’09 with some price improvement throughout the year and help from additional international sales volume.

Although we do not report Chile and Brazil separately, we ended the year with both mills in the Chile running full and our Brazil mill running at above 50% and both countries were cash contributors. Overall, for Q4, our sense was that we didn’t leave a lot on the table and we got above all we could under these market conditions.

When I look back at the full year of 2010, I would characterize it about the same, we didn’t leave much on the table for a year when we were anticipating 700,000 starts and we got just a little bit over 600,000 starts, and I don’t think that we misplayed too many cards. 2010 was a year, if you remember where the first half business activity was better than the second and in hindsight now we realize that that was created by the tax incentive for homebuyers that simply pulled demand forward in the year.

As a result, the demand from our customers and the pricing spike which exceeded our expectations in March and April timeframe, which did help us significantly from a cash preservation perspective. In Chile, OSB is growing and acceptance as the new residential construction product, going into the year we had estimated that the conversion to frame stick-built housing has gotten up to the 26% to 28% level. The unfortunate earthquake that took place in Chile last year seems to have accelerated our demand there and it has fed up to full running of our second mill in Chile Lautaro.

The frame-built structure has held up much better during the earthquake than the masonry construction which is the norm and we believe that that will make frame-built construction practices the standard rather than the exception going forward. The Chilean government has stated its plan to subsidize construction of 100,000 homes in 2011.

Our increased international sales in Engineered Wood Products predominantly to Australia did provide additional volume for us to help dilute some fixed cost from that business, but increased new residential construction in the US and higher lumber pricing are still a key to a turn to profitability in Engineered Wood.

The progress in our Siding business continues to create excitement inside and outside the organization and great results as the value proposition for this product line become more obvious to the building and the repair and remodeling community. Net sales overall for LP improved as Curt said year-over-year by 30%, that’s our larger increase than experienced in new residential starts. For LP overall, adjusted EBITDA was improved from a negative $44 million to a positive $82 million and that in a phase of overcoming about $24 million on a year-to-year comparison of 2009 to 2010 increase in raw materials and a $12 million negative currency impact.

Using most of the means that we had available to us last year, we were able to preserve our cash and cash equivalents, beginning the year at $394 million and ending with $389 million, in spite of our inability yet to divest shut assets that we have held for sale. Also in the year we did retire $60 million worth of debt and we added $10 million to our pension fund.

I’d be remised if I didn’t brag on this organization a bit for what they did in safety in 2010. It was the best year in the history of LP and we ended up with a total incident rate of 0.44, which we believe will also be again industry-leading when the numbers for the industry become available. Only 16 people in LP including our international operations had a reportable safety incident in 2010.

We continued to make good use of our lean Six Sigma technology in 2010 with a 6.3 to 1 return level doubling our target of 3.1 over the cost that we put into this program. These improvements permeate now most of the facets of our organization and they do help us offset inflation and raw material increases.

In 2009, we instituted a full-court press to engrain improved quality of product and service much the way we have in safety and we have two initiatives underway in this company in 2010, one is called LP by me made here made right, which is internally focused and we have another initiative which is externally focused called LP by me, customer focused and service-driven. We think both of these initiatives will help further differentiate us in the future.

Our product claims, claims on products manufactured in the last 12 to 18 months have dropped significantly as a result of this and we are also developing a measurement system to assess customer satisfaction with our corporation.

For the full year of 2010, our sales and marketing folks ended up with a little over 1900 wins. I have defined a win for you the past as a product placement with a new customer or an additional product placement with an existing customer. LP spent about $14 million in capital in 2010 and we began the year with a little over 4000 employees and we ended up the year with about a 100 less people.

As I look going into 2011, we built our operating plan this year on a foundation of 700,000 new stores. That’s all in, that includes single-family, multi-family, and manufactured housing, and that appears to be pretty much triangulated into the middle of the low estimates of between 6 and 6.50 and high estimates of 750 to 800.

As I noted earlier in 2010, activity bounced in the first half of the year and then fell off in the second. This year, we expect activity to be slower in the first half of the year and somewhat better in the second. What the real fact is, we don’t know and so we are concentrating on being agile and flexible enough to adapt to however the market unfolds this year.

We are not yet getting any indications from our customers that they expect a big spring build or a surge in activity. My assessment of our customers is they are still very lean on products. They are taking a wait and see approach before tying up their cash in inventory. Some of this obviously is weather related as January weather was not conducive across the country for anybody to get too excited about buildings and that was also been demonstrated through these significant OSB pricing drop over the last couple of weeks as reported by Random Lengths.

In Siding, we are starting off the year with quite a healthy order flow and Engineered Wood lags last year by a little bit. At this time, I expect our capital expenditures for 2011 to be about $50 million for our operations, and another $20 million to $22 million to complete the Masisa transaction for 100% ownership of the OSB mill in Brazil.

I will add that if the market does not unfold in an encouraging fashion, we have the ability to moderate our CapEx to our operations. My early concern for this year for 2011 is increasing raw material cost escalation, particularly anything related to energy or energy derivatives. At this point we are expecting our raw material cost to increase about the magnitude that they did last year in 2011 and I think that oil price is the big unknown variable.

Overall, the key issues standing in the way of recovery in housing to a more normal level are pretty much the same. We got to work through the large inventory of homes that are in the foreclosure process or we will enter that process. We have to see home prices start to turn upward and reduce the number of homeowners that are upside down in their mortgages. Unemployment needs to be trending up positive downward direction and at least we have a couple of data points on that lately. And all of this lets boost consumer confidence.

So until then, we are still I think pretty much in an endeavor of preserving cash, while retaining the ability to capitalize on the upswings in the market going forward. With that said, I will turn it back over to Curt for the question-and-answer period.

Curtis Stevens

Thank you Rick. Mary, can we go to the Q&A queue?

Question-and-Answer Session

Operator

(Operator Instructions) your first question comes from the line of Steve Chercover from D. A. Davidson. Your line is open.

Steven Chercover – D. A. Davidson

Good morning and I just thought I would tell Rick that it’s sunny and warm in Portland to commute its really easy. First of all can you just discuss the product acceptance of the Houlton OSL? And I think there is a couple of oriented strand oriented lumber projects in Canada that are based on European technology is that a big threat for you.

Rick Frost

Well let me take those one at a time. We did get significant growth year-over-year ’10 to ’09 but the base obviously was low. We expect to get again more market penetration in 2011 and based to plan on doing that. So we are nowhere near close to filling up that mill. But it’s just really tough in the marketplace to get your customer to design this product into their building plans et cetera in this kind of a market. With lumber pricing having been so low over the last couple of years you know that acts as a bit of a deterrent from the substitution that we are trying to create.

That said we are still confident that this is a very, very good product and in a more robust market people will see the value proposition of that product. In terms of competitors there are two mills that I know of in Canada that claim to have the ability to produce similar technology product neither one of them are doing much with that. One of them I think would yet need quite a bit of capital to complete. So in the short-term we are not feeling pressure on that in the longer term we will just have to see how it plays out. There have only been two people in that product line or two companies in that product line up till now and entry has not been very easy. So I’m it’s hard for me at this point in time to judge that competitive threat it certain if it comes it will come when the market is much more robust.

Steven Chercover – D. A. Davidson

Okay, thanks for that. How about a quick one for Curt and then one more for you. So Curt what’s the face value of those auction rate securities that you sold please.

Curt Stevens

We sold the face value was $35 million we got cash at 22 and on that 22 we recognized about $19 million gain. What that leaves us with Steve is we are $15.4 million is on the books of a $61.5 million face. So that’s what’s left on the books but as I said we are retaining all of our legal rights and what I’m actually pursuing was (inaudible) is full recovery of our investment.

Steven Chercover – D. A. Davidson

It was reasonable and what are the facilities that are held for sale please.

Curt Stevens

Well there is various facilities St-Michel you know has been for sale for a while. Well we did shutdown our R&D, lab and we shutdown the hanger and then we have the two over three mills have been permanently curtailed (inaudible) and there are some minor other properties but those are the big ones.

Steven Chercover – D. A. Davidson

Great, thank you very much.

Operator

Thank you. Your next question comes from the line of Mark Wilde, Deutsche Bank. Mark your line is open.

Mark Wilde – Deutsche Bank

Good morning.

Curt Stevens

Good morning Mark.

Mark Wilde – Deutsche Bank

I had a few questions. Rick you brought up the input cost which look to me like there is going to be an issue this year as well could you just kind of walk us through you know the particular issues for you I mean I would think it would be kind of freight and resin before everything else. But just walk us through kind of what’s the real pressure points are going to be for you and kind of what your current view is of how much they may move this year.

Rick Frost

Yeah, actually Mark I’m not docking this one but Curt has a handy, dandy chart right in front of him.

Mark Wilde – Deutsche Bank

Okay, alright. I will take it.

Rick Frost

He is ready to bounce.

Curt Stevens

I’m not going to bounce Mark but wood we see pockets of pressure on pricing but not much. So wood is not going to be a big one we are seeing anything is related to wood. So in our plastics we use, in our plastic molding business we use to place diary then MDI and PF we’re expecting some increases there wax is pretty tightly controlled and there is not much, there is not many alternatives to that so when you get a price increase there you really don’t have much of a change. And then there are for 2011 there are two raw materials related to our siding business that we were significantly we feel like we are under market and we did get some market adjustments to those and that was the zinc borate and our paper overlays so we will see some increases there. We don’t see a whole lot in the energy side electricity seems to go up $2.5 to $4 million a year and we will probably see that. Natural gas won’t be, it won’t be a problem. So those are the principle ones that I would say.

Mark Wilde – Deutsche Bank

Well Rick what’s I’m sorry Curt what’s the kind of total petrochemical resin spends as the at last year’s volumes what did you spend is that you know 20 million, 30 million.

Curt Stevens

Probably between PF and it’s probably 125 million.

Mark Wilde – Deutsche Bank

Okay.

Curt Stevens

So as it was PF, NDI and wax.

Mark Wilde – Deutsche Bank

Yeah, okay. Alright.

Curt Stevens

That’s pretty significant.

Mark Wilde – Deutsche Bank

By then the two things you mentioned for siding the paper and the zinc borate how big an spend is that approximately.

Curt Stevens

The paper is about $25 million spend and the zinc borate is about $10 million to $15 million.

Mark Wilde – Deutsche Bank

Okay, that’s all for last year’s is that right.

Curt Stevens

Right.

Mark Wilde – Deutsche Bank

Right, second question down at Brazil you mentioned you were only running at 50% and I would just think with the way Brazil is booming you know if you are going to be running at full bore you should be doing it right now. Can you kind of just walk us through that.

Rick Frost

Yeah we are in the process of trying to break OSB into the home construction business much like we were in Chile 10 years ago.

Mark Wilde – Deutsche Bank

Yeah.

Rick Frost

Currently, most of the OSB that we sell is for not for construction purposes it’s either used as packaging or it’s used as temporary fencing or it’s used for you know any other thing that people can think of other than putting it on the side of a house. Our strategy there has been changed somewhat from the way we thought, which was to be able to simply take our Chilean model of conversion to but we found that extremely difficult because of the bureaucracy that we have to fight our way through. So late last year we changed the name of our strategy from conversion to adaptation and what we are trying to do now is to find places where OSB will fit into their current building practices until the acceptance of that product becomes greater.

We are also attending their home building show here next month we did the same thing last year and we are starting to generate more interest for people that want to build, for inbuilt housing. So it’s but currently if you are looking at what we are selling most of it is not going to almost all of it is not going into construction so that’s a hard thing right now but it’s very exciting to us as we look at the home demand. And you know a country like Brazil where it’s 10 times bigger than Chile we don’t have to hit a home run.

Mark Wilde – Deutsche Bank

Move a lot of volume.

Rick Frost

We just yeah we just got to get a bond [ph] in play.

Mark Wilde – Deutsche Bank

Yeah.

Rick Frost

And so we did grow that business significantly in volume last year from where it was when we tip over the first 75% of it and we are encouraged that we are going to be able to ratchet that volume up again this year. We’ve been running that mill only on one thermal oil per system and we think that sometime within the next three or four or five months we will be able to start the second line up and then you know that mill has a capability to do about 360 million feet and we will probably sell 190 to 200 down there well if you take the run rate of December that’s what we can do this year before we start off the second line. So it will take us a little while to fill it out but as you’ve recognized I mean they have an underlying need for homes right now similar deposit of about 6 to 7 million and the government has come out and said that they are going to try to provide 4 million homes in the next two years, which we don’t think is possible. But the stars are lining up pretty well for us there it’s just going to take a little bit of time.

Mark Wilde – Deutsche Bank

Well I’d say that Chilean number I remember only being about 15% penetration about four to five years ago see clearly you’ve made headway there.

Rick Frost

Yeah and actually our strategy there has changed as well because we call that a conversion strategy and then with the earthquake it’s our belief now that what we have is a protection strategy we think that the earthquake completed the conversion process for us now and now what we want to do is be able to maintain our position.

Mark Wilde – Deutsche Bank

Okay, last question I had. If you just take a couple of steps back here ratchet you know what’s puzzling to me is why we haven’t seen sort of more consolidation take place in the market given the extent and the duration of this downturn in the housing market if any thoughts there?

Rick Frost

Well, it’s over simplistic and you’ve heard me say it everybody laughs at me when I do but there aren’t any sissies left in this business and nobody wants to own any or give up their shop and let somebody else own them it’s my opinion. I just think that everybody is likes the business for one reason or another and they want to stay in it.

Mark Wilde – Deutsche Bank

So would you anticipate any further changes in the industry structure if we look out over the next 12 months.

Rick Frost

I don’t anticipate them, maybe somebody else would say that differently but I don’t.

Mark Wilde – Deutsche Bank

Okay, it’s alright. That’s helpful. Thanks guys.

Curt Stevens

Hey, Mark. Before you leave that.

Mark Wilde – Deutsche Bank

Yeah.

Curt Stevens

Let me make a comment. I think where you are seeing the consolidation that you will probably continue to see this in the channel. As the channel guys have had difficulty we’ve had 7000 lumber yards closed.

Mark Wilde – Deutsche Bank

Yeah, I know that both was the wholesalers and with the lumber yards there has been a lot of turmoil and a lot of rationalization has taken place and maybe some more ahead.

Curt Stevens

So I think, that’s where you are going to see more than you will see on the producer side.

Mark Wilde – Deutsche Bank

Okay. Alright, fair enough. Good luck guys.

Curt Stevens

Thanks.

Operator

Thank you. Your next question comes from the line of Peter Ruschmeier from Barclays Capital.

Peter Ruschmeier – Barclays Capital

Thank you and good morning.

Rick Frost

Good morning, Pete.

Peter Ruschmeier – Barclays Capital

Yeah, Rick I’m sorry to hear about the Titan’s quarterback but if it makes you feel better you know the Steelers didn’t have a QB either a good time in the Super Bowl so. Hey listen, I wanted to ask a question but Curt you mentioned if I understand the math right yeah I think you’ve got $0.63 on the $1 for the face value of the AR securities.

Curt Stevens

A little north of $0.65 Pete.

Peter Ruschmeier – Barclays Capital

A little north of $0.65.

Curt Stevens

Yeah.

Peter Ruschmeier – Barclays Capital

Now is that a good president do you think or any reasons why you do better or worse on the remaining $61.5 million of the face value.

Curt Stevens

Yeah, I think it’s you know they are all different securities these were the bank federal notes and if you look at what the ratings were on the latest ratings on those notes and you look at the spreads the 65% was what we think the best you could do given where that paper was rated. The remaining ARS that we have are principally bank trust preferred and they have not recovered to the same level that the federal notes have.

Peter Ruschmeier – Barclays Capital

Okay.

Curt Stevens

So they are, the market value have what we record as we recorded that was our best indication of market value and so the 15.4 versus the 61.5 that’s the best information we have today on the value of the securities.

Peter Ruschmeier – Barclays Capital

Understood. Rick, I’m curious I don’t think you are selling much of any OSB today to China. But I’m curious about I guess whether you are not if you are getting inquiries or not and then how do you think about that as a potential opportunity down the road.

Rick Frost

Well here is my current thinking on China whereas we can determine we think about 75 million feet of OSB went to China last year from North America. Of that 5 million of that was ours, our obstacle in doing business over there has been that it’s a non-attractive market for us in terms of pricing. That is not the case though for Brazil. We probably have the opportunity with a specialty OSB product out of Brazil to maybe go to about 40 million feet over there. But that product is not being used for construction purposes. So our obstacle so far and we keep looking at it and I keep pounding Jeff our OSB guy about how come we are not selling more to China but you know we are just not taking bad business and we haven’t found that many opportunities where it actually was additive to our P&L for doing that.

Overtime if there is an additional uses for this product or if we can invent more specialty products, which will go over there we are certainly going to chase it when it seems to make sense but that’s my assessment of where we are in China right now.

Peter Ruschmeier – Barclays Capital

Okay, that’s helpful.

Rick Frost

Most of the noise in China appears to be around lumber as I’m sure you are really up on.

Peter Ruschmeier – Barclays Capital

Okay, how do you think about whether you need to grow your footprint in Chile or not and you mentioned you are sold out I think you got visibility of strong demand so is that something that you need to put new capacity on the ground do you serve that market from North America. How do you think about that?

Rick Frost

Well, obviously in the short-term if we get sold out and not wanting to create a void we can service it from up here but we are now wrestling in the next five year time frame let’s say around where our next mill should be down there in terms of Chile and then obviously the one that could potentially surprise us and come at us faster is where would our new mill in Brazil be. Because there is just such a huge if we get wood on the ball in Brazil you know with 360 million feet that’s a little yellow spot in the snow compared to what it could be.

Peter Ruschmeier – Barclays Capital

Okay, that’s helpful. Just lastly I will turn it over here.

Rick Frost

That’s one of the reasons why we are hanging on to some of the older equipments that we have here because you know that’s what we did in Chile so far we took hold shutdown Vintage I OSB mills and took them down there and if you build a smaller mill in an environment like that you can fill it up quicker the economics are better.

Peter Ruschmeier – Barclays Capital

Okay, just lastly could you remind us what it takes to start up some of your definitely old mills some of them are presumably low cost in Clarke County and others that have been shut down for a while you know with the current forecast it doesn’t appear that for housing it doesn’t appear you need to start these up anytime soon but what have to happen once you make that decision and how quickly can you do that how do you think about that.

Rick Frost

Here is our latest thinking I’ll use Clarke County as an example. First of all we are not planning on running that this year because we don’t think there will be a need for it. But I think it will take us 10 months from the time that we make the decision to do it to be making a healthy supply of board. Okay. And then as we’ve said in many of our conferences for last I don’t know the last couple of years then there is a significant cash outlay that’s required there to go ahead and hire the people get them trained up bring your inventories of raw materials up to speed and so we’ve estimated that at somewhere around $7 million cash outlay and about 10 months to do soup to nuts.

Peter Ruschmeier – Barclays Capital

Okay, thanks very much.

Operator

Thank you. Your next question comes from the line of Joe Stivaletti, Goldman Sachs.

Joseph Stivaletti – Goldman Sachs

Good morning. Just two things, one, I was just wondering if maybe you could talk a little bit about your views on LSB pricing against that your 700,000 starts forecast for ’11 and you know maybe talk about some of the recent sort of volatility in pricing. That was my first question.

Rick Frost

I don’t really know how to comment on that. Pricing is driven by how much supply there is and how much domain there is and we can’t tell you two weeks from now what pricing is going to be. You know I’ve been doing this a long time and I still can’t tell you what pricing is going to be two weeks from now.

Curt Stevens

Just as example Joe we had several weeks where pricing has gone down pretty hard and then mid week it was up in two regions this week so.

Rick Frost

You know at this level you’ve got some people running their current capacity appears to be pretty full out I told you what ours was we are running in a small amount so it’s really is very difficult for you to give us, for us to give you any guidance on pricing but simply a relationship of supply and demand at any given time.

Joseph Stivaletti – Goldman Sachs

Okay, the other question I had was just whether you would whether there is any thought on potential opportunities to expand any parts of your business particularly away from the OSB part of your company. I just wondered if that was something that’s even on your radar screen if you look at opportunities in those areas engineering wood or what have you.

Richard W. Frost – CEO

In our foreseeable plan the two areas that we are trying to pour gas on are siding business and our South American business. That’s where we within the context of the markets that we are operating in now and the limited resources that we have that’s the two areas that we are actually calling growth areas for ourselves.

Curt Stevens

Remember Joe we have a lot of capacity in front of every one of our business so priority one is to use the capacity we already put in place as we had an aggressive capital plan as we entered into the downturn and just talk about Clarke County mill that brand new mill should be very low cost we aren’t running at all. We talked about LSL being significantly underutilized and then in siding we are still running 200 million feet a year on Hayward of OSB that we would like to convert to siding.

Joseph Stivaletti – Goldman Sachs

Okay, but not a particularly any high level of interest in maybe going after property that could be available on the engineering wood product side of things.

Curt Stevens

Well, if you did that you will make a decision when we are going to shutdown are you going to shutdown what you just bought or something you already own. Those are tough decisions to make.

Rick Frost

And then in reality even if we were thinking about that we couldn’t tell you.

Joseph Stivaletti – Goldman Sachs

No I was just trying to gauge your level of interest in that part of the specs you know part of the industry. So these growth opportunities are you know your focus on South American siding you would characterize this all basically organic type of growth opportunities.

Rick Frost

Yes. Yeah, and that’s where any additional resources we have right now that’s where they go. I mean this is not a resource rich environment as you know we are in a cash preservation game.

Joseph Stivaletti – Goldman Sachs

Great, great. Okay, thank you.

Operator

You next question comes from the line of Chip Dillon, Credit Suisse. Chip the line is opened.

Chip Dillon – Credit Suisse

Yes, hi. Good morning.

Rick Frost

Hey Chip, before you get started I want you to go for 38 in a row okay.

Chip Dillon – Credit Suisse

Okay. Well, it’s all in your hands. I think you will get there. Hey listen, on the timber sales that you’ve done in the past and I know that you know you update us every quarter in terms of the corresponding assets and liabilities there. And sort of how do the remainder of those roll off since it’s you know been a number of years you know is this something that will stay constant for a few years and then drop off or will it continue to kind of edge down.

Curt Stevens

You know we do have that information out there Chip and I will do it from memory I think there is about $113 million that’s due in 2013 on the sale in the Northwest. And then we have a bullet payment on the Southern Timberlands in 2018. That’s all one. Then there is a minor amount another $20 million or so in 2012.

Chip Dillon – Credit Suisse

So like the big one is 2018 and I guess the amount of tax that you ultimately pay on that will be a function of say how much money you might be making then plus or minus whatever your NOL situation is.

Curt Stevens

That’s correct. So for instance in 2010 we did receive a $115 million - $120 million payment out of which $4 million was to us and then $116 million paid up the liability side and we think we will defer all that tax from want to consume some operating losses that to offset that tax so there won’t be a tax payment this year.

Chip Dillon – Credit Suisse

Got you. And then I think you had mentioned this before but the two plants that are shutdown I think that’s Chambord and Clark County right?

Curt Stevens

Correct.

Chip Dillon – Credit Suisse

What is and I know you mentioned I think to a prior question about sort of how long it would take to ramp those up and as you think about it I would imagine Chambord could I mean again we are assuming if the market conditions were there could come up faster than the work force is probably you know pretty available whereas how about so could you just tell us what do you think it would be from the day you decided to start that to kind of your, you are getting wood out the door and how about the same for Clarke County which I would imagine since you’ve never really had a work force there it might take longer.

Rick Frost

Clarke we think is about 10 months and I will take 2 months off of that if it was Chambord.

Chip Dillon – Credit Suisse

Got you okay that’s great. Thank you.

Operator

Your next question comes from the line of Paul Quinn, RBC Capital Markets.

Paul Quinn – RBC Capital Markets

Yeah, thanks. Good morning guys. Nice and sunny up here in Vancouver. Just a question on siding, you guys have done a great job on that segment and it seems like a lot of growth. I get 80% operating rate there so I just wanted to question that and then how do you look at the growth of that business and do you look at taking some of the OSB product out of Hayward to further growth that or do you look at converting in another mill.

Rick Frost

Yeah, our largest offer, we have some inefficiency built in right now because we are not operating all the mills fully shifted so. As we get more volume this year we solve that problem simply by running full shifting on the three little mills. And the next chunk of volume is the 200 million feet of capability that we have in Hayward where we would kick OSB out the door and we would have 200 million more feet to grow there and then of course that leads you into supposing that one of our strategic discussions around here is where and when should the next siding mill be. But that you know basically that’s going to depend upon how fast this growth comes at us. So but we’ve got significant volume capability ahead of us from where we are right today before we have to answer that last question.

Curt Stevens

Paul, the only other thing I would add there is we’ve already made the capital investment for that 200 million feet at Hayward so there is not any additional capital it’s already in place.

Paul Quinn – RBC Capital Markets

Okay great that’s helpful. And just on CapEx I heard $50 million I guess you break that down into about 15 on maintenance and the rest on discretionary.

Rick Frost

Well most of it is maintenance or maintenance related there is some of its got a return on it and some of it just stuff that we have to do. So as the 50 is like I said I think if I have to as I continue to look at how the year unfolds I can pull that back or in that sense meter it out at a rate to where if I feel like I want to, don’t want to go that far I will just have to tell some people to make that. And then the other 20 is - 20 to 22 is to complete from the season [ph] deal.

Paul Quinn – RBC Capital Markets

Okay great. Thanks guys. Thanks a lot.

Operator

Thank you. At this time I would like to hand the call to Curt Stevens for closing remarks.

Curt Stevens

Alright, well thank you very much for attending the call and thank you for your thoughtful questions. As always Mike and Becky will be available for calls following that and as I mentioned before we will have our Form 10-K up by no later than the 1st of March it will be available. Thank you very much and Mary if you want to give the replay information that will be great. And talk to you next quarter.

Operator

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect.

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