Louisiana-Pacific Corp. Q4 2007 Earnings Call Transcript

Louisiana-Pacific Corp. (NYSE:LPX)

Q4 2007 Earnings Call

February 5, 2008 11.00 a.m. ET

Executives

Curt Stevens - Executive Vice President, Chief Financial Officer

Rick Frost - Chief Executive Officer

Mike Kinney – Investor Relations

Becky Barckley – Investor Relations

Analysts

Gail Glazerman - UBS

Peter Ruschmeier – Lehman Brothers

Chip Dillon - Citigroup

Christopher Chun - Deutsche Bank

Robert Trout – Goldman Sachs

Operator

Good day ladies and gentlemen, and welcome to the fourth quarter 2007 Louisiana-Pacific Corp. earnings conference call. (Operator Instructions) I would now like to turn the call over to our host for today's call, Mr. Curt Stevens, Executive Vice President and Chief Financial Officer. Please proceed.

Curt Stevens

Thank you, and thank you all for joining us, for LP's earnings call to review our results for the fourth quarter and the full year 2007. With me today are Rick Frost, LP's Chief Executive Officer, Mike Kinney and Becky Barckley, who handle our Investor Relations, along with their other duties.

I will start the call with a review of the financial results for the fourth quarter and the full year of 2007, provide a discussion about performance of each of our individual segments, and comment on the balance sheet. I'll then turn it over to Rick, who will discuss our accomplishments and other actions during 2007, and a summary of our thoughts and plans looking into 2008. As we have done in the past, this call is open to the public. We are doing a webcast. This can be accessed through www.lpcorp.com.

Additionally, to help with the earnings call, we have provided a presentation with supplemental information. I will reference these slides as I go through my discussion. As a caution, this presentation should be reviewed in conjunction with the publicly available earnings release.

Slide two of the presentation, I want to remind participants about the forward-looking statements comment that is included in our earnings release. Please be aware also that during the discussion we may use some non-GAAP financial information which is discussed on slide three of the presentation, and we also have attached an appendix that contains the necessary reconciliation. I'm not going to reread these statements, but I will incorporate with this reference.

Now, looking at slide four, presentation of our Q4 2007 results. We are reporting today a net loss for the fourth quarter of $39 million or $0.37 per diluted share. Net sales from continuing operations were $377 million for the quarter. For the fourth quarter of last year we reported a net loss of $25 million or $0.24 per diluted share on sales from continuing operations of $368 million.

Slide five of the presentation discusses some of the special items that are not generally attributable to our ongoing operations. Let me quickly summarize those. In Q4, we did record another - a further impairment on the St. Michel sawmill of $3.2 million as we continue to market that property. We did have an accrual of $7.8 million based on a tentative settlement of an outstanding environmental lawsuit that we expect to close on in Q1. Not shown on this sheet, but within our discontinued operations we did take a further non-cash impairment on our decking assets of a little over $2 million.

In Q4 of 2006 we recorded about $2 million associated with a change in the method of estimating our workers' compensation liability. We also recorded in discontinued operations another $2 million for this same reason. We recorded a gain of $1.9 million for insurance recoveries in Q4 of 2006 and a net charge of around $4 million associated with product related warranty reserves. All of these items are discussed in note four of the earnings release. If we take these special items into consideration, this gives a relative loss from operations of $30 million in Q4 2007, compared to a loss of $17 million in Q4 of 2006.

Slide six of the presentation is the full year results. We are reporting today a net loss for the full year of 2007 of $167 million or $1.61 per diluted share. Net sales were about $1.7 billion. For the full year of 2006, we reported net income of $124 million or $1.17 per diluted share on net sales from continuing operations of $2.2 billion.

Slide seven is a similar discussion of the special items. In 2007 the biggest amount was $57 million of asset impairments recorded as a result of the facility closures. Principally this was related to the St. Michel OSB and sawmill and the related forestry licenses. We did have an $18 million positive settlement on an insurance recovery and then we had the legal settlement reserve that I mentioned earlier. Again, all these items are discussed in note four of the earnings release. For the year ended December 31, adjusted net loss from continued operations was $115 million compared to income of $136 million for 2006.

Slide eight is a summary of a reconciliation of tax provision and the related tax rates for both Q4 and the full year. For the full year, our tax benefit rate was 47% on continuing operations, compared to 18% in 2006. This higher benefit rate is a result of losses which caused a greater impact of changes in rate in the implementation of several tax strategies. Let me summarize the biggest changes. We did have a reduction in LP's Canadian deferred tax liabilities due to an enacted decrease in the statutory income tax rate in Canada. We had interests that were deductible for income tax purposes on inter-company debt that is eliminated in the consolidation process. We had the impact of the translation of our Canadian operations. Finally, we had a settlement of an outstanding state tax issue in the state of Louisiana that we discussed at the end of Q2.

Let me now turn to the performance of our segments. Slide nine presents a summary of OSB. OSB price compared to the same quarter last year was actually up 2%. During the same period, volumes, however, were down 5% due to curtailments taken during the fourth quarter which included the indefinite closure of our Silsbee, Texas mill.

On a quarterly comparison, pricing accounted for about $3 million in increased sales and profitability compared to the fourth quarter of '06. From a cost perspective, we did see increases in our costs. Those were almost entirely attributable to the mill curtailments taken during the quarter.

For the full year, OSB earnings were down by slightly over $300 million compared to 2006. This was primarily driven by a 30% reduction in sales price which accounted for over $300 million in lower sales and earnings. The weakening US dollar versus the Canadian dollar, which we estimate impacted our costs of sales by about $15 million, and then these negative factors were offset by productivity improvements at our mills.

Slide ten is our Siding segment. Just a reminder, this includes our Smart Side, OSB siding products, hardboard siding and commodity OSB produced in our Hayward mill. For the quarter, sales volumes were up 17% in Smart Side, compared to the same quarter last year, and 24% lower than last quarter. Sales prices were up 2% compared to the same quarter last year, and down about 2% from the prior quarter. This is almost entirely due to product mix.

Compared with the prior quarter, we do believe that the lower volume levels were attributable to reduced building activity, both new home construction and repair and remodel. Compared to the prior year, while we see an increase, we believe this is a reflection of customers bringing down their inventories in Q4 2006 in anticipation of a further housing decline.

Hardboard sales volumes were flat on the same quarter last year, and 27% lower than last quarter. Average sales price was down 2% and down 6% sequentially. Again, we believe that most of this is related to changes in product mix.

For the full year, sales in this segment decreased by 9% to $449 million compared to the same period last year and profits decreased by 50% to $34 million. Primary causes of this reduction were lower OSB pricing and higher costs incurred as a result of significant downtime at our mills to match demand.

Slide 11 is a summary of our Engineered Wood Products segment. This is our Laminated Veneer Lumber, our I-Joist,s operations which includes our JV with Abitibi, plus other related products. For Q4 we reported a $3 million loss in this segment, down from a profit of $5 million in Q4 of '06 and $3 million last quarter. For the quarter, LVL lines were up slightly, while I-Joists lines were up by 13% compared to the same quarter last year.

For the year, EWP sales were $330 million, about 16% lower than last year. Profits were $11 million in 2007 compared to $33 million in 2006, a direct reflection of a much slower building environment that reduced our volumes and our sales prices.

While there's no slide for other segments let me talk about the performance there. This consists of our Interior Moulding business, our Chilean operations, the cellulose insulation joint venture with US GreenFiber, and our non-operating facilities. We had a loss in this segment of $1.6 million in the fourth quarter compared to about $0.5 million loss in the same quarter of 2006.

For the quarter, sales volumes were flat in our Moulding business compared to the same quarter last year and 12% lower than last quarter. Sales prices are up 20% compared to the same quarter last year and up slightly sequentially. We did have an increase in the sales price but this was due to the cost of the resets that we incurred in 2006 that did not repeat in 2007.

Plant operations lost a little money in the quarter, but for the year were profitable. US GreenFiber joint venture was nearly breakeven in Q4 as strengths in the retail sales offset the weakness in contractor business that is tied to new home construction. High paper costs continue to pull down our earnings in this business.

For the year, although sales for these operations were up 17%, we incurred a loss of $5 million compared to an income of $8 million in 2006. This swing is attributable to the costs associated with our non-operating facilities. We incurred about $12.5 million in costs which included litigation, caring costs, the largest being the St. Michel sawmill and non-allocated expenses associated with exiting our decking business.

Investment income for the quarter was about $10 million. We did capitalize $6 million of interest expense in Q4. For the full year, investment income was about $45 million. That benefited from the capitalization of $19 million of interest expense during the year. Just as a reminder, 2008 as a (capital program) will be significantly reduced. We will not have this offset to interest expense.

On the SG&A side, total SG&A was about $36 million, a decrease of 14% over the same quarter of last year. For the full year, SG&A costs were about $150 million, a decrease of 5%. On our unallocated, on the quarterly comparison it was about the same but for the year at $84 million it was a 15% decrease from the prior year.

Slide 12 provides balance sheet comments. Cash, cash equivalents, investments in the restricted stock, was about $800 million. Working capital was about $590 million, net cash about $390 million. Capital expenditures for the year were $341 million and our book value per ending share was $17.95.

To make a couple more comments, on the capital, I think in Q3 we did provide some guidance that we expected the full year capital to be about $300 million. We also gave guidance that capital for 2008 would be $85 million - $90 million. If you look at those two years together we did pull forward some expenses related to our new mill construction and so our forecast for 2008 is about $20 million left in there, and $65 million - $70 million without acquisitions, and that got pulled in to 2007 which increased our spending by about that amount.

And also when Rick talked about that he was not including the capitalized interests of $19. So the reconciliation there is pulling forward from 2008 about $20 million of anticipated carry-over expenses on the new mills and the capitalization of interest of $19 million.

Another comment on the balance sheet is you'll notice that our accounts receivable is up. Included in our accounts receivable is $157 million income tax refund receivable. Last year that amount was $71 million, so about $85 million increase attributable to a higher income tax receivable.

Because of sensitivities in the market, I also want to spend a few minutes to discuss the auction rate securities, or the ARS, that are part of our investment portfolio. We have approximately $150 million in ARS obligations that are rated Triple-A and in one case Double-A. Most of our holdings were issued in 2004 and 2005, so they are better seasoned than some of the newer issues, and don't include as much of the variable debt. Despite the quality of these issues, the auctions have failed, but they do continue to be reset at the maximum stipulated amounts.

None of the ARS held by us have been downgraded. They continue to pay interest and the rates reset every 28, 35 or 90 days depending on the issue. The custodians, as the agent of records and pricing these obligations are par. They have attempted to get prices from outside sources with limited and dubious success.

Within LP we did develop a methodology to estimate the ARS value using comparable bonds and published indices. The methodology has been reviewed with our external auditors and they are comfortable with our approach and our conclusions. Based on this approach, we did recognize a valuation allowance based upon a temporary reduced value in Q4 of approximately $2 million. This allowance went directly to the balance sheet in our other comprehensive income.

Also in Q4, we did change the classification of these securities to long-term, based on recent guidance from the SEC. We were hopeful this situation will right itself within 12 months, but under this accounting guidance we must classify as long-term because we cannot affirmatively state that this market will be fully liquid within the next 12 months.

Slide 14 is just the summary of our non-gap financial measures in the reconciliation. With that, that concludes my remarks and I’ll turn it over to Rick, LP's Chief Executive Officer.

Rick Frost

Well good morning everyone and thank you for your interest in our call, it is kind of a foggy, hazy morning here in Nashville, but remarkably its over 70 degrees outside, which is odd for the first of February.

I’m going to take a quick look backwards at some of the positive things that happened in ’07 in an otherwise dismal financial year. I’ll start with safety. I’m proud to share with you that LP had its safest year ever in its history of operation, with a total incident rate of 0.87. During the year we were recognized as one of America's safest companies. We currently stand at number one in our industry and are keeping our people safe, and also proud to announce that our OSB business led all of our other businesses with a total incident rate of 0.83. I think what’s remarkable here is this was accomplished in spite of the very poor construction market and the resulting intermittent running of our plants, particularly in the second half of the year.

2007 was our first full year of company implementation of our Lean Six Sigma technology and application. Our Lean Six Sigma program last year engaged about 800 people in improvement projects during the course of the year with results that did exceed our expectations. We removed about 50 overhead positions through attrition last year and through redeployment and reorganization to continue to work on our competitiveness, and adjust to the market.

Our sales force successfully introduced our products to approximately 400 new customers, either builders or people on the channel with a replacement of our products for competitors' products and the additional placing of additional products with current customers and that is in our effort to create a preference for LP products and doing business with LP.

As Curt said we did exit an unprofitable decking business in ’07, perhaps a year too late, which is my fault. We have sold our Meridian site intact to Fiber Composites and we are negotiating an agreement on our Selma site, and we are in at least preliminary discussions on our railing product line.

Because of the poor new housing market, we did permanently shut down an OSB mill in Quebec last year and an LVL mill in Oregon. We also indefinitely curtailed a second OSB mill located in Silsbee, Texas.

We have completed the lion's share of our Brownville plant and the construction of our new mills, Houlton, Maine, LSL - that’s coming along very well and the OSB mill in Lautaro, Chile that’s coming along well. And we were substantially complete with our construction on Clark County, Alabama by the end of the year. And at the end of the year we also announced, I think it was on December 20th, an agreement in principle to acquire a controlling interest in an OSB mill in Brazil that will increase our ability to grow our building products business in South America and other parts of the world.

During the fourth quarter we did repurchase about 400,000 shares of LP stock, but needless to say ’07 was a very tough year financially. Canadian foreign exchange impacted us, reduced demand, and falling sales prices in nearly all of our product lines impacted us, and operating downtime was also severe. All of these also adversely affected both our cost structure and our top line revenues.

In Q4 we took about 410 mill days of downtime in OSB. Remember that St. Michel in Quebec and Silsbee did not run during that quarter and that accounted for 180 of those 410 days. The other down time was taken due to some maintenance and some capital efforts, but mostly to adjust our inventories to targeted levels due to poor market takeaways because the demand was soft, particularly in the month of December.

In siding, both Hardboard and Smart Side and in Engineered Wood Products we did take significant down time in Q4 to lower our inventories based upon our expectations for a slow December and a slow Q1 of ’08.

Now, I want to turn my focus to 2008. Consensus from the forecasters is that new residential starts will be less than ’07 and perhaps worse than the second half of ’07. It will be a very tough year for anyone in the building products business and the new residential construction business.

LP has three new mills production to begin selling. Clark County OSB, which should begin making board in early March, Houlton LSL, which should be making LSL for sale in Q2, probably in April, and our Lautaro, Chile OSB mill is making starter board this week as we speak. As well the Murphy LVL mill, for which we have the marketing and sales rights, has started making product and we have shipped our first sales from that location. We also hope to close on the Brazil OSB deal in April and take control in May.

Regarding the timing of US mill start-ups I will admit that it’s poor, but it is what it is and we’re going to make the best of it. With the completion of the lion's share of our capital reinvestment program done, we will pull our capital spending down considerably in ’08 to about $100 million. Now that $100 million does include the potential of investing in a JV, but it does not include the Brazil deal.

Additionally we intend to stay on the attack in ’08 in sales and marketing at creating a preference for LP products and for doing business with LP. We are out to convert more builders to using LP products and get existing users to embrace a wider number of products.

We will continue to align ourselves with partners in distribution that share our desire to grow and this is going to take shape in several ways. In OSB, we are re-branding our foreign line, capitalizing on enhanced value propositions and warranties. We will also be teaming these products up with our Engineered Wood Product business to promote flooring systems. We are the largest producer of OSB sub-flooring and we’re going to add gas to this effort this year.

In Siding, we will be launching our Smart Side brand with four major product lines and approximately 80 additional skews to provide products for each set of needs in the market place. We will have an architectural line, which includes our shake shingles, ventilated socket and stucco board. We’ll have a precisions line, which is the old Smart Side line of panel and lap. We will have a foundations line which includes our hardboard product with the addition of zinc boride in that product, and then we will have a full trim line that fit most home owners’ needs. The advantage here is that this trim can be used with LP products and our competitor’s products. These will have enhanced warranties for a greater value proposition for the builder.

In Engineered Wood we are going to be promoting the addition of Laminated Strand Lumber to our product offering to complement LVL and LP I-Joists and our new solutions software. All of these will be introduced at the International Builders Show, which occurs in a couple of weeks in Orlando under the marketing concept of roofs, walls and floors, which is the way the builders think.

In conclusion, as I said in the earnings release that was put out this morning, we will manage our mill takeaways - our mill outputs to the takeaways that we expect, being mindful of not tying up any more cash and inventories than we need to. We will also aggressively continue to market and sell our products with the purpose of creating a preference for LP products, and we will rely heavily on our Lean Six Sigma efforts for the largest part of our cost and process improvement work that is imperative to success this year.

With that said I’ll turn it back over to Curt.

Curt Stevens

Thank you Rick, ladies and gentlemen we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from the line of George Staphos with Banc of America Securities please proceed.

Unidentified Analyst - Banc of America Securities

Hi, everyone, this is Mike (Roxland) in for George since he’s traveling. Q4 was generally a period of de-stocking in the economy. Are there any indications that customers were increasingly willing to hold inventory of OSB and other LP products relative to let’s say 4Q in 2007 overall?

Curt Stevens

You were breaking up a little bit Mike I think your question was, were customers more willing to hold inventory in Q4 of ’07 than Q4 of ’06?

Unidentified Analyst - Banc of America Securities

Yeah, any indications that customers were increasingly willing to hold inventory of OSB and other LP products relative to Q4? Exactly.

Curt Stevens

No, I don’t believe so. I think that what we saw in our Siding business in Q4 of 2006, customers did aggressively reduce their inventories so the takeaways were very low in Q4 of ’06. But until the market hits bottom and the builders see that there’s going to be an increase, we use the term, it’s not just in time inventory anymore, it’s almost late. And because of the demand capacity relationship in all of our product lines, they really don’t have much of an issue getting products.

So, I would answer that, no I don’t believe they’re taking anymore inventory. I think the - as you’ll see the results come out from some of our distribution partners, you’ll note that they’re being hurt in this market environment as well.

Unidentified Analyst - Banc of America Securities

With respect to corporate expense, corporate expense was around $19 million in 4Q. Is there any chance that that $19 million can trend lower in 2008 in light of continued difficult market conditions?

Curt Stevens

Well, as I said in my remarks we brought corporate – the unallocated corporate expenses down by 15% and for the overall SG&A was down 5%. Now, it's a mix because as Rick said we are investing in our sales and marketing efforts, but we’re reducing our head counts and our staff as much as we can in the non-marketing and sales related areas.

Unidentified Analyst - Banc of America Securities

Okay, is there any – is the expectation, that corporate expense will trend lower, I guess is the head count reduction going to more than offset the increase in spending in sales and marketing efforts?

Curt Stevens

Well - Again what we don’t do, is we don’t provide forward-looking comments on our results but if you do look back again we’re 5% down on overall SG&A, we’re down 15% in the unallocated.

Unidentified Analyst - Banc of America Securities

Got you. Just to reiterate with respect to the Action Rate Securities, you mentioned you had to reclassify based on a new SEC ruling?

Curt Stevens

It’s not a new ruling, it was an interpretation in guidance, so, yes, we responded to that by reclassifying those as long-term.

Unidentified Analyst - Banc of America Securities

You’ve reclassified about 150 million from short-term to long-term that’s really why you had an increase in long-term investments?

Curt Stevens

That’s Correct. That was the reclassification.

Unidentified Analyst - Banc of America Securities

Last question. Brazil, can you explain your reasons for the investment? Is there one takeaway that you feel comfortable with that, despite continued issues in North America OSB markets you won’t need the cash being deployed in Brazil in later periods? Is that one of your reasons for making the investment in Brazil?

Rick Frost

That is correct. It makes a lot of sense to us and while we’re up here trading body blows in North America there is a large number of people in South America that have needs for housing. That was a reason for our initial venture down in Chile, which was a great pilot program for us. When we went to Chile, about 2% of the homes built in Chile were built the way that we build up here. Today that number is approaching 30% due to our efforts at training people down there to build the way we do up here which happens to be safer, of higher quality, it's faster and less expensive, and so we looked at Brazil, which is a country that has approximately 240 million people, a government that is reaching some sense of maturity and stability, and what you see there is when that happens in a country, one of the first social needs that would have to be addressed by a government are subsidized housing. So we are hopeful that we can go to Brazil, which is ten times larger than Chile in terms of potential opportunity, and have the same type of success. So, it made sense to us, when we came upon this opportunity, to invest in Brazil and try to be successful in the building products business in a market that is just emerging.

Unidentified Analyst - Banc of America Securities

Thank you very much.

Operator

And our next question will come from the line of Gail Glazerman with UBS, please proceed.

Gail Glazerman - UBS

Hi thank you. I appreciate the comment on the market outlook in 2008. I was wondering if you might give some color to your views beyond that, in terms of what would drive a recovery in OSB and if that’s something you can see happening in 2009. If there’s any sort of number that you keep in your mind. If there is any color that you can give?

Rick Frost

Yeah, you broke up a little bit, but I think I heard what you said. Most of the pundits right now are saying that ‘10 is going to be a good year and so everybody is trying to figure out when, meaning sometime in ‘09, this thing should turn. RISI right now is the most optimistic of the forecasters and they actually have a substantial improvement scheduled for ‘09 and I think their forecast is up in the 1.6 level. I'm not quite that optimistic. I think that ‘08, I have some people that are currently in a meeting in Washington, DC right now and they're saying that the consensus of that group, if there is such a thing, is somewhere between 0.9 and 1.1 for 2008. We had originally put our plan together for a little bit over 1-1. I think the confusing factor right now and the major concern is whether indeed we go into recession, whether we are in recession already and don’t know it and what's the depth of that. So that’s the thing that makes you not too sure what 2008 is going to bring. But if I had to guess I think we’re probably at that one all level this year.

Gail Glazerman - UBS

Let me think of something more current, are you surprised by how weak pricing has been at the start of the year relative to average costs in the industry?

Rick Frost

I guess at this point it's hard to be surprised.

Gail Glazerman - UBS

Ok, switching gears a little bit, can you talk a little bit more of the mix shift that you saw in siding, is that something you can expect to continue moving forward?

Curt Stevens

I’m not sure I understand the question, the shift in siding?

Gail Glazerman - UBS

The mix, I think you were referencing a mix shift which impacted the price levels in siding?

Curt Stevens

Well, you have to put that in context. If we sell more trim for instance we get a higher sales price on trim than we do on our panel siding. It is really is a mix between new construction and what’s going into the home centers. You’ll see that 2-4% kind of change in sale price depending on who’s purchasing the product during the quarter. I don’t see that as - in siding we set our price and we go to the market with it and it doesn’t change very often. The last price increase we had was in August, we are with this new loss of the siding line that Rick talked about. We are repositioning some of those products in the market as we speak so we’ll see a little bit of movement in the various sales prices through that repositioning, but it shouldn’t be significant overall.

Gail Glazerman - UBS

Ok, and finally just a last question. Are there any developments in the antitrust litigation or any kind of milestones that we should be looking out for?

Curt Stevens

In the….

Gail Glazerman - UBS

The antitrust, the OSB antitrust.

Curt Stevens

The OSB antitrust?

Gail Glazerman - UBS

I think someone was referencing some sort of trial coming up, I don’t know if that affects you.

Curt Stevens

Well, where we are involved in the litigation, we have submitted our motion for summary judgment and the other side has the chance to respond to that and we have a chance to respond to them. And then hopefully the judge will rule and make a decision. He has pushed back the trial to the end of the second quarter. That was originally scheduled for March or April. They have pushed that back which leads us to believe he will take a complete look at the submissions from the various parties and make his decision.

Gail Glazerman - UBS

Ok thank you.

Operator

And our next question will come from the line of Mark Connelly with Credit Suisse. Please proceed.

Unidentified Analyst – Credit Suisse

Good morning this is actually (Hamsada Amizari). Just a couple of questions. I'm curious to see what percentage of industry capacity do you think that needs to come off line today that needs to get the market back into balance and secondly, how important do you think diversification is in your OSB product mix in weathering this downturn. Do you think LP needs to shift the mix further away from commodity panel in the long-run or short-run?

Curt Stevens

Well let me take the second one. We think diversification of our OSB product line is very important and if you look at what we have done, we have converted four mills to our siding products, we have taken two North American mills and moved them to Chile and we have announced that we have another mill that has been curtailed and that we will be moving to South America as well to diversify at least from a regional perspective.

In our OSB business, we are trying to get our mix up to a pretty significant part of the mix LP value added product, whether it's our Radiant Barrier TechShield product, its our value added flooring products, we’re making (Air Stop) we’re making rim boards that goes into OSB. We’re also working on some new products that will have application in the industrial markets.

As far your first question on what's it going to take from an industry prospective? I think what we do is we manage our mills based on what demands we have from our customers. To get any broader prospective on that, you really need to talk to others in the industry or to your brother in the financial analyst community.

Unidentified Analyst – Credit Suisse

Right, but just order of magnitude, in your opinion, do you think its 10%, 20%, 17%. Or are you not willing to make a comment on that?

Curt Stevens

I think that would be in our best interest not to comment on that.

Unidentified Analyst – Credit Suisse

Ok, last question. Is there an opportunity to grow share in this downturn in Engineered Wood, relative to ordinary lumber, or do you think it gets tougher as markets get softer?

Rick Frost

We have a strong effort to try to grow share across all of our value at it products ones. We started that effort in the December ’06 and we think we have grown share across each one of our product lines. We are keeping track of that in the ways that we can. Number one, by convergence of new customers to our product and the further penetration with existing customers. So we can keep track of that in terms of either new business or potential new business when the market comes back.

The difficulty is, as I said once before, it’s a bit of a problem working on your boat to make it more buoyant while sitting on a (inaudible) flap. So, we’re having a major, how much our volume in dollars went down, compared to how much the overall market is down. With that as one of our litmus tests we have convinced ourselves that we have made progress in each one of our products lines in the terms of capturing share. As an example, new housing was down for the year somewhere between 20-25% and our Engineered Wood Product line was down 16%.

Unidentified Analyst – Credit Suisse

Ok, thank you very much.

Operator

And our next question will come from the line of Peter Ruschmeier with Lehman Brothers. Please proceed.

Peter Ruschmeier – Lehman Brothers

Thanks and good morning. Maybe a quick question if I could for Curt. I was hoping you could help us to reconcile the - if you look at your cash equivalents and your short investments the delta between 3Q and 4Q is down $257 million and I was trying to reconcile that against your cash burn which you were marginally negative in cash from ops, $115 million in CapEx, a little bit of buy back but I was trying to reconcile that large sequential decline?

Curt Stevens

The biggest piece of that Pete is the 150 that went from short-term to long-term on the ARS that I talked about.

Peter Ruschmeier – Lehman Brothers

Okay.

Curt Stevens

If you look down to long-term investments from the end of last year, we had about $40 million on 12/31/06 and $203 million on 12/31/07.

Peter Ruschmeier – Lehman Brothers

Okay, Alright. Good.

Curt Stevens

That is a switch.

Peter Ruschmeier – Lehman Brothers

Okay. More of a fundamental question on OSB pricing. The price spreads we’re seeing today with plywood being very wide, I’m curious if you’re seeing evidence of share gains in your end markets. I’m not sure how you’d measure that. But if you look at your various end markets with these wider spreads, are you seeing the benefit of gaining share from plywood directly?

Curt Stevens

If you look at, RISI just had their new data that came out in January. And they do show a share gain in new home construction now. They show a share gain, but overall numbers are down.

But if you think about it, new home construction as Rick said was down 28% to30%, somewhere in that range. If you look at the APA numbers, OSB consumption, or production was only down 11% for the year. So that would imply we’re gaining share. Remember the plywood guys benefited greatly by no imports of foreign plywood coming into the country. They had the benefit of essentially, curtailments based on that. There wasn’t as much plywood coming in from offshore.

Peter Ruschmeier – Lehman Brothers

Is it fair that you, you’ve gained a significant share in that builder market and probably the most amount of low hanging fruit, I would think, would be in the do-it-yourself or other consumers who may not be as educated on OSB. I mean, are you attacking that market at all in terms of getting that share gain?

Curt Stevens

We are, and that’s why we started to talk about the new products that we’re trying to develop in that. If you think about plywood, the markets that have been strong have been industrial, light commercial, and that’s where they have a big, big market share. We are beginning to think about products that would fit that. As an example, we have recently developed a flooring product for the RE industry, and that’s directly going after plywood, that’s had that market.

So we’re beginning to do that now. You know what’s happened in the past, these markets are kind of niche markets and they need new products, and a strong housing environment, that’s where the low-hanging fruit is for the OSB. In a weak housing environment you look for other alternatives.

The other one is export. We exported a lot more products in 2007 and we’re hoping to export more in 2008. I would guess that’s the strategy all our competitors have as well.

Peter Ruschmeier – Lehman Brothers

Okay. And where are the biggest export opportunities from your perspective in terms of geography?

Curt Stevens

I think it’s both east and west, although Europe slowed a little bit in Q4 but was strong over the summer. But there’s still demand going east, typically not for construction but for other structural panel uses like packaging and some other alternatives.

Peter Ruschmeier – Lehman Brothers

Okay. Shifting gears if I could to Clarke County. I was curious if you could share your thoughts on the ramp-up. I think originally, it was going to be some time in fourth quarter, then late fourth quarter. Now it looks like March. And I would think that that’s going to be a very low cost facility, and I’m just curious, are there technical issues there, or why wouldn’t you look to ramp that as quickly as possible and potentially take higher cost facilities down?

Curt Stevens

Well, I think what we’ve done is we’ve taken a rational approach. As Rick said, the facility was substantially completed at the end of the year. But bringing on a 700 million square foot mill into a market that doesn’t need the capacity, you have to be pretty careful about that.

What we have done is, as you said, it is a low cost facility once fully operating. The comment that I would leave with you is that a new facility is not a low cost facility in the first year it runs. It’s a higher cost facility, because you have the fixed costs associated with the people and the mill, and you’re not running at your full capacity or at you optimal operating levels.

So we’re trying to take a reasonable approach to that. My guess is in 2007, we’ll run that. What we’ll actually produce in that mill will be less than 50% of its ultimate capacity. So that’s kind of a matching what demand is in the market and also bringing it up without spending a lot of overtime and other costs associated with the start-up.

Peter Ruschmeier – Lehman Brothers

Okay, just lastly and I’ll turn it over. Any comment on your expectation in the OSB business of cost inflation per unit when you net the various cost increases; transportation costs, resins, against what you’re doing on Brownfield, in Clark County, any expectation for what that cost picture looks like?

Curt Stevens

You look by element. Oil, I’ve seen numbers anywhere from $77 to $105 a barrel. That will certainly affect resin. I did talk to our resin supplier, one of our major resin suppliers. I had dinner with him last night. They’re anticipating pretty flat resin pricing for the year. So I don’t think that’s going to be a huge increase, unless we do get a spike in the derivatives being oil and natural gas. If you look at the wood side, the pulp business is still pretty strong. I’d hoped for it to weaken. We’d have a little bit more ability to get some price relief. But it doesn’t look like that’s going to happen.

On the Canadian currency, we’re budgeting parity. I know that the range is somewhere between $0.96 and a $1.02 depending on who you look at. But we’re going to budget at parity. That does put all Canadian operations at a disadvantage, all of our Canadian operations at a disadvantage. So on average it’ll be a little bit higher than it was in 07 but it’s not going to be significantly different.

On the wage and benefits side, I think the industries are looking at somewhere in the 3% to 4% range for wages, and then health care, somewhere in the 5% to 8%. That goes your major input.

Rick Frost

My add would be that the, as I look at this year, our biggest variable on costing is going to be taking the mills up and down. Based upon the market, how much we’re able to run, that will be our largest impact on costs this year is the inefficiencies created by starting and stopping.

Peter Ruschmeier – Lehman Brothers

Okay. That’s very helpful. Thanks.

Operator

And our next question will come from the line of Chip Dillon with Citi. Please proceed.

Chip Dillon - Citigroup

Yes. Good morning.

Curt Stevens

Good morning Chip.

Chip Dillon - Citigroup

Hi. I’ve noticed there was a slight difference, not to be too picky, between the press release, that said, without unusual items you lost $0.29 and on the slide it says $0.28. Could you tell us what that Penny difference was, or why there is a Penny difference?

Curt Stevens

You know I suggest that you need to call Mike or Becky, because I couldn’t tell you what that it is. It’s probably rounding.

Chip Dillon - Citigroup

Okay. Alright. So I’ll do that. When we look at the, that 150 that you’re reclassifying. I think you’re referred to it, I think as an ARS. Was it ARS as in Sam of ARF, and what does that stand for?

Curt Stevens

It stands for Auction Rate Securities.

Chip Dillon - Citigroup

And who are primarily your - I mean these are obviously investments you’ve bought. Are these obligations of a sieve or obligations of a specific issue? Or could you tell us a little more about that please?

Curt Stevens

You know in the queue we did talk about what’s in there from, kind of, the instrument. Generally what these are is they hold individual securities, and they’re packaged. So the trustee has access to the individual securities that are underneath the package.

Chip Dillon - Citigroup

And you are getting interest paid?

Curt Stevens

We’re getting interest paid on time. None of them have been downgraded. You know S&P just downgraded 56% of their portfolio and none of them were holdings that we had.

Chip Dillon - Citigroup

Gotcha!

Curt Stevens

I think the important point is that a lot of these very exotic instruments that come under a lot of attack were issues in the '06 and '07 time frame. Virtually all of ours are 2004, 2005 that have been rolling.

Chip Dillon - Citigroup

And then when you look at your net interest expense in the – you mentioned you had $6 million capitalized in the fourth quarter. I think you said $19 million in capitalized interest for the year. What would that be in '08? I know it’s going to come way down. Would it be zero or a couple million?

Curt Stevens

I think you can count on a pretty low number. It’s going to be insignificant. Maybe $1 million to $2 million.

Chip Dillon - Citigroup

Okay. And then, and then as you look at your, you consider the illiquidity, I guess or less liquidity with the ARSs and, where cash flow as they are where they are right now, how important is the dividend on a scale of, in the scheme of things, in other words, when would you get kind of queasy about continuing to pay that?

Rick Frost

We just had a board meeting last week and we assume that supporting the dividend is something that we want to do. And so I think until we get pressed to a position where we don’t think we can cover that along with everything else we got going on, I think paying the dividends to our shareholders is a good idea.

Chip Dillon - Citigroup

Okay. Thank you very much.

Operator

And our next question will come from the line of Christopher Chun of Deutsche Bank. Please proceed.

Christopher Chun - Deutsche Bank

Yeah, thanks. Good morning. Just following up on the questions about the Alabama mill. I was just wondering if that mill will in fact cause your capacity to increase by the amount that it will run, or whether you’re planning to take down lower cost, or, higher cost capacity elsewhere.

Rick Frost

Let me restate that perhaps in a shorter version that what Curt had. We’re going to bring that mill up this year and wring it out at about half speed. I anticipate making somewhere around 300 million feet down there. If you will remember we shut the Silsbee mill down last year. In my mind it was to make room for that wood and then I would anticipate, based upon what I understand the world to be right now, which is, we don’t know exactly how this is going to play out.

But I would anticipate running that thing full board next year, because it will be a low cost facility by that time, and if it causes casualties within our own system because the market is not there for takeaways, then it may cause casualties.

Christopher Chun - Deutsche Bank

And can you tell us a little bit about your philosophy in terms of the trade off between taking market downtime and just sort of shutting permanently or at least indefinitely idling specific mills.

Rick Frost

Well we’re running our mills to meet our customer orders, and when we don’t have customer orders that we can see, then we don’t allow or we’re not going to allow our inventories to build. So I think the key to this year, as we’ve said inside our operations, is operational flexibility. It’s a very difficult year shaping up for our mills and their run schedules.

And we’re going to force ourselves to be a flexible as possible and as nimble in going up and down based upon the business that we see coming at us, and our major concern in the up and down schedule is in holding on to the very valuable people that are skilled labor.

Christopher Chun - Deutsche Bank

Right. But on the other hand you mentioned that there are certain cost inefficiencies of starting and stopping mills. So I was just wondering if you …

Rick Frost

We sell our product regionally. So you have to look at your demand by where you’re sourcing your product to. And so it’s not as simple as just saying I’m going to take all my downtime in one place.

Christopher Chun - Deutsche Bank

Okay, and then just a quick clarification question for Curt. Curt I thought you mentioned that the Canadian Dollar impact, was it $15 million?

Curt Stevens

$15 million.

Christopher Chun - Deutsche Bank

Right. Was that just in OSB quarter-to-quarter, or for the whole company?

Curt Stevens

It was OSB. And you know we are targeting to sell more product in Canada. So that was a net on the sales side in Canada. And our other businesses, our siding business sells predominantly in Canada. So it’s not as big an issue for East River Mill, and then we did have an impact in our EWP business.

Christopher Chun - Deutsche Bank

Okay. So that’s for the, so the 15 is just for the OSB or for the whole company?

Curt Stevens

Right.

Christopher Chun - Deutsche Bank

I’m sorry. For the OSB or for the entire company?

Curt Stevens

The 15 is for OSB.

Christopher Chun - Deutsche Bank

Okay. And about, and that’s 4Q '07 relative to 4Q '06?

Curt Stevens

No, that was for the full year, 2006 to 2007.

Christopher Chun - Deutsche Bank

Okay. Can you give us an approximation of what the number would look like if we looked at the entire company?

Curt Stevens

You know it’s probably another million or $2 million in EWP. It’s not all that significant.

Christopher - Chun - Deutsche Bank

Okay. Thanks for your help guys.

Operator

And we have time for one last question and that question will come from the line of Bob Trout with Goldman Sachs. Please proceed.

Robert Trout – Goldman Sachs

Good morning guys. On the operating rates for the quarter, would you be able to give us an approximation of what they were in OSB, fourth quarter?

Curt Stevens

You know what I’d refer you to Bob is RISI comes out with that and so does the APA.

Robert Trout – Goldman Sachs

Okay.

Curt Stevens

I think the APA number was in the mid 70’s.

Robert Trout – Goldman Sachs

Mid 70’s, and you think you pretty closely mirror that? And you think you’re pretty close to that you said?

Curt Stevens

Last quarter, we took, as I think I said was 455 days including the 2 mills that were down for the entire quarter, so that’s mill days down based upon our system.

Robert Trout – Goldman Sachs

Okay, and I know it might be tough to answer, you don’t really give guidance on this but you expect that on average in 2008 operating rates will be kind of similar for the industry?

Rick Frost

Well, that’s hard to guess at this point in time, I think that this quarter is starting off slower than what we experienced last year. We have a tentative plan, and again this is a flexibility issue, to have about 150 mill days down this year exclusive of numbers we’ve included in the past of St. Michel and Silsbee, as I answer questions about that going forward, I will not include Silsbee and St. Michel. So as it looks right now we anticipate probably, based upon the orders that we have about 150 days scheduled, of milled days down scheduled for OSB in Q1.

Robert Trout – Goldman Sachs

Okay, and then just a clarification on the housing question, are you…

Rick Frost

On what question, excuse me?

Robert Trout – Goldman Sachs

On housing, are you still, I think you mentioned that your original plan for 2008 was that you were budgeting for around $1.1 million, is that still the case?

Rick Frost

Well my budget’s done, now I’m reacting to the real world, and we’re not at that rate at this point. December looked like it was about 1.0, everything thrown in. January feels worse; I don’t have any numbers yet for January. I think one of the things that you could look at is permits. Permits continue to decline, which tells us this thing isn’t going to turn any time real soon.

Robert Trout – Goldman Sachs

And then just in terms of what you’re hearing from your customers, I know you said that the RISI forecast, they think 2009 will be a good year at 1.6 million starts or something like that. What, are you hearing anything from your customers that suggests that that’s way too high?

Rick Frost

Well, I don’t know that, RISI is the most optimistic if you put up all six or eight of the forecasts out there on a chart. There’s everything between 1.2 and 1.6 for next year. We do go to the builders show in about two weeks from today, or from tomorrow, is that next week? Next week, and we will have a much better indication of what the composite is from talking to all the people that show up there. I think people are looking about 1.0 right now, and everybody’s waiting to see if we have a recession or are in a recession. That’s the magic question right now.

Robert Trout – Goldman Sachs

Right, last question on that topic. One of your competitors mentioned last week that in order to get back to a normalized price level for OSB, they think that we need to be in about a 1.5 million unit kind of housing start environment, do you agree with that?

Rick Frost

I wouldn’t care to comment on what my competitors say, thank you.

Robert Trout – Goldman Sachs

Okay.

Operator

That concludes our question and answer session. I would now like to turn the call back over to Mr. Curt Stevens for a closing remark.

Curt Stevens

Well thank you all for attending, thank you for your questions, I know that we didn’t satisfy all the questions, and Mike and Becky are available and so they're ready to answer questions and give you a little more color on the results. Again thank you for your participation.

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