Louisiana-Pacific Corporation Q4 2008 Earnings Call Transcript

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Louisiana-Pacific Corporation (NYSE:LPX) Q4 2008 Earnings Call March 2, 2009 10:00 AM ET


Curt Stevens – CFO

Rick Frost – CEO

Mike Kinney – IR

Becky Barckley – IR


Mark Weintraub - Buckingham Research

Gail Glazerman - UBS

Peter Ruschmeier - Barclays Capital

Steve Chercover - D.A. Davidson

Richard Skidmore – Goldman Sachs


Good day ladies and gentlemen and welcome to the Q4 2008, Louisiana-Pacific Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Curt Stevens, Executive Vice President of Administration and Chief Financial Officer. Please proceed.

Curt Stevens

Thank all of you for joining us on this conference call to discuss our financial results for Q4 of 2008 and for the full year of 2008.

As the moderator said, I am Curt Stevens, CFO and with me today I have Rick Frost, LP’s CEO, as well as Mike Kinney and Becky Barckley, our regular Investor Relations contacts.

As I usually do, I will begin the discussion with a review of the overall financial results for both the quarter and the full year, to be followed by some comments on the performance of the individual segments and the balance sheet.

Rick will then take over to discuss his perspective on the operating results and some thoughts on the near-term outlook. As we have done in the past, we have opened this call up to the public, and we are doing a webcast. This could be accessed at www.lpcorp.com.

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

Last Friday after the market closed we did file our annual Form 10-K report with the SEC and that is available either through the SEC website or directly from the LP website.

Before I get started I do want to remind all the participants about the forward-looking statements comment that is included on slide two of the presentation. Also be aware of our use of non-GAAP financial information included in slide three of the presentation and the appendix with the necessary reconciliations is attached to the presentation.

I am not going to reread these statements, but I will incorporate those with these references. Now moving to slide four of the presentation that shows Q4 2008 results, we are reporting today a net loss for the fourth quarter of $339 million, or $3.31 per diluted share. Net sales from continuing operations were $250 million for the quarter.

The net loss per diluted share for the fourth quarter included $2.66 of noncash goodwill impairment charges that I’ll talk about in a moment, a $0.16 valuation reduction on our auction rate security portfolio, an $0.08 increase in certain noncash settlement reserves, and $0.05 in restructuring charges based on the actions that we announced in January.

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

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

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

Based on the analysis that LP performed we did write-off 100% of the goodwill on our books. As a reminder this goodwill was related to two acquisitions in 1999, [Lake Group Forex] and ABT Co. As I’m sure you’ve seen with other companies, this is a common theme for 2008 as market caps have fallen dramatically given the credit crisis.

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

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

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

Adjusting for these items the net loss from continuing operations was $35 million or $0.35 per diluted share compared to a $29 million loss or $0.29 per diluted share in Q4 2007. For the full year we are reporting a net loss of $579 million or $5.62 per diluted share on sales from continuing operations of $1.4 billion.

The net loss per share for 2008 does include nearly $4.00 related to goodwill impairment other then temporary impairment of investments and other operating charges and credits. For the full year of 2007 we reported a net loss of $180 million or $1.73 per share on sales from continuing operations of $1.7 billion.

Similar to the quarter, page seven summarizes the special items for both of the full years. In 2008 we did have a further $14 million impairment on the St. Michele complex that I talked about offset by a gain on an asset that we sold in the fourth quarter. The other operating charges and credits, the big one again is goodwill of $274 million, the litigation reserve for the OSB antitrust settlement of $48 million, increase in various settlement reserves of $32 million, severance related to right sizing of $11 million. We did have an insurance recovery of about $6 million and then we had an explosion in one of our facilities and we accrued $5 million for that.

And then you can see the highlighted there is the $119 million which is the other then temporary impairment of our auction rate securities. In 2007 you can see there the biggest one was the impairment of long lived assets, a noncash impairment, that was mostly St. Michele. The other operating charges and credits, we had insurance recovery, litigation reserve I talked about before, and other items of about $2 million, and $21 million again was the fourth quarter adjustment that began the write-down of the auction rate securities.

After adjusting for these items for the full year net loss from continuing operations was $160 million or $1.54 per share in 2008 compared to a net loss of $115 million or $1.11 per share in 2007. I want to make just a few comments and actually to go back and look at slide four, the tax rate, the quarterly tax rate shown here does vary widely. The tax rate in continuing operations in Q4 2008 was 12% compared to 52% in Q4 of 2007.

The biggest impact in the fourth quarter was the non deductibility of the $274 million write-down of goodwill. For Q4 2007 the higher rate was due to a year end catch up and I’ll explain that when I talk about the full year tax rate.

Page six, the full year tax rate for 2008 was at 26%, again largely as the result of the non deductibility of the goodwill impairment charge. The higher benefit rate for 2007 then the statutory rate was due to the losses and the implementation of several strategic tax strategies. We had a reduction in LP Canada’s deferred tax liability due to an enacted decrease in the statutory rate in Canada. We have interest that’s deductible for income tax purposes on intercompany debt that get’s eliminated in consolidation.

We had the impact of the translation of Canadian operations and then in 2007 we also had the settlement of an outstanding state tax dispute in our favor. Now let me discuss the performance of each of the segments. Slide eight is our summary of the OSB segment, for the quarter OSB losses were lower at $31 million compared to $54 million in Q4 2007 and about the same level as last quarter by sales that were 40% lower.

OSB price compared to the same quarter of last year was up about 6%. However during the period volumes were down nearly 50% due to our production curtailments taken during the fourth quarter. On a quarterly comparison, the higher pricing did account for about $6 million of the improvement with the rest coming from the actions taken within the business to reduce our operating costs. For the full year OSB sales were $622 million compared to $824 million in 2007. Losses were lower by almost $40 million versus 2007, $155 million loss compared to $195 million loss in 2007, primarily driven by actions taken to indefinitely curtail certain unprofitable mills, reductions in our costs and the adjustment of our production to identified customer demand.

For the year average sale price was up 5% due to increased percentage of value added products and other actions taken by LP. The siding business is summarized on page nine, this segment as a reminder includes our SmartSide which is the OSB siding products, our fine fiber siding and commodity OSB produced on one line at our Hayward mill.

For the quarter siding lost $11 million compared to a $4 million loss in Q4 2007. This is a direct reflection of the costs associated with taking significantly more downtime across the siding system to adjust our inventories to greatly reduce customer demand. For the quarter sales volumes were down 23% at SmartSide compared to the same quarter last year, 39% below last quarter.

Sale prices were flat compared to the same quarter last year and up about 5% from the prior quarter. For Canexel sales volumes were down 24% for the same quarter last year with pricing 11% lower due to mix. We believe that volumes at both product lines suffered due to the closure of many branch locations of our channel partners and the redistribution of this inventory to those locations that remained open.

For the full year sales in this segment decreased by only 6% from $424 million compared to the same period last year and profits decreased significantly to $3 million compared to $34 million in 2007. To reconcile that lower product volumes accounted for about $10 million of this lower profit, higher pricing added $6 million and higher raw materials and energy costs including the Roaring River conversion changed earnings negatively by nearly $20 million.

Slide 10 is our engineered wood products business, this segment includes laminated veneer lumber, I-Joist operations including our JV with [Abitibi] plus other related products. For Q4 EWP recorded a loss of around $12 million much worse then the $3 million loss in Q4 2007. Sales prices for I-Joist were 8% lower in the quarter compared to the same quarter last year and a combination of our LVL/LSL pricing was lower by 16%, sequentially pricing fell 4% and 7% respectively.

For the quarter LVL/LSL volumes were down 23% and I-Joist volumes were lower by 33% compared to the same quarter last year. This is a direct reflection of the reduced new housing activity, where the vast majority of these products are sold. For the year EWP sales were at $234 million, about 30% lower then the $332 million reported last year. Losses were $40 million compared to profits of $11 million in 2007, again a direct reflection of the much slower building environment that reduced volumes and sales prices.

We’ve talked about it before with the LSL start up mill in Houlton, Maine, accounted for about half of these losses or a total of about $21 million. Lower volumes accounted for reduced earnings of $9 million and lowered earnings by another $9 million from a price perspective. I don’t have a slide on our other building products, the segment consists of interior molding, South America now including both Chili and Brazil, our cellulose insulation joint venture, resource and non operating facilities.

In Q4 we had a combined $1 million loss from these operations and a loss in this segment of about $2 million in same quarter last year. For the year sales of both operations were flat at about $100 million, both years we incurred a loss of around $6 million.

The fourth quarter interest expense net of investment income was $6 million compared to interest income of $10 million last year. This is a reflect of higher cash balances in 2007 and then in 2007 due to the construction activity we did have capitalized interest that offset the interest expense. We had a foreign currency gain of $13 million in Q4 this year, compared to a $1 million gain in the same quarter last year. Almost all of this was attributable to the strengthening US dollar against the Canadian currency.

For the full year interest expense net of interest income was $11 million for 2008 compared to a $46 million net investment income in 2007. Foreign currency gain in 2008 was $20 million compared to a $30 million loss in 2007, again largely a result of the Canadian currency. Total sales, general and administrative costs were $26 million for the quarter, a decrease of almost 30% over the same quarter last year.

For the year total SG&A expenses were $142 million, a decrease of 7%. Slide 11 of the presentation shows some key balance sheet and cash flow statistics. Cash, cash equivalents, investments and restricted cash at the end of the year were $215 million, working capital was at $337 million, and net debt was $35 million. As a reminder in Q4 we did retire about $125 million worth of debt.

For 2008 capital expenditures and investments were $161 million and we ended the year with a book value per ending share of $11.45. Also in the presentation as I mentioned in the appendix is the reconciliation of the calculations necessary for the non-GAAP financial measures that I discussed.

Before I turn the call over to Rick, I do want to make a few comments on liquidity as this is perhaps the most frequent question that we all get from analysts and investors. As we have discussed in the prerelease in January, and on various forums, LP is focused intensely on reducing our rate of cash usage.

The actions we have taken and the expected reduction in the use of cash in 2009 versus 2008 will be discussed by Rick in a few minutes. As we have reported the last several quarters we are actively considering other possible measures to enhance our overall liquidity. These could include the possible financing or refinancing on transactions, could include the issuance of secured or unsecured debt, equity or hybrid securities, and/or the entry into one or more credit facilities.

Rick and I fully understand the importance of cash in this turbulent economic environment and I’m sure you can all appreciate this is all that we can say about this topic and we will not be providing any more information at this time. I would ask that none of your questions are about liquidity. We have said what we can say. With that let me turn the call over to Rick.

Rick Frost

Thanks Curt and good morning everyone, I do thank you particularly this morning where I guess the east coast and the northeast are getting hammered by a blizzard that you’re able to get on the call. As you can see we did change our format this quarter for our earnings release to try to provide you more initial detail and initial color and we hope that that is helpful to you in understanding the quarter and we would expect to continue to use this format going forward.

As Curt pointed out the largest impact on our Q4 results was taking the noncash goodwill impairment charge of about $273 million or $2.66 per share. Like many companies we now have goodwill off of our balance sheet going forward. As well as tough year, I think I’ll start out with some of the bright spots for 2008.

I usually mention safety and compliance on these calls because they are part of our core values and in safety we achieved another company best this year and an industry best with a total incident rate of 0.78. In our environmental compliance effort we had our first year ever with zero notices of violation from our operating facilities.

I think both of these milestones are significant particularly in light of the fact that they were accomplished under the most chaotic of operating condition for our people in our facilities. While we always do our best to operate safely and within the law because they are part of our core values, these are significant as well because these results provide significant savings in the immediate and the long-term of our company. Worth mentioning as well was the continued contribution of our lean six sigma teams which achieved for the year over five to one returns against a goal of three to one returns. In our efforts to broaden LP’s market penetration in 2008 we accumulated over 1500 wins.

Now we define a win as a new product placement with an existing customer or a product placement with a new customer and while these wins could not offset the overall decline in the market demand, they did help but more significantly they will turn into new volume and new customers for us when the markets begin to rebound.

I’m convinced that our sales force is going a heck of a job as these battles are being fought every day in the trenches. Now I want to make a few looking backward comments on each of our businesses and then turn my thoughts towards 2009.

In 2008 across the world nearly all the businesses became paralyzed in Q4 of 2008. Building products for new home construction and repair and remodel were not exempted from the carnage. Actually activity really almost stopped and our customers spent the last two months of the year redistributing their inventories. The new home starts number for December was indicative of this. I think that everyone that had not yet done so, turned their attentions inwardly into what they needed to do on the cost and the working capital side to minimize exposure, and cash drain based upon an anticipation of a very slow Q1 2009.

In OSB our Q4 sales volumes were off from Q4 2007 by 48% but our segment operating results improved over Q4 2007 by 42%. That’s evidence of a couple of things, first the way LP operated differently in 2008 and price was actually up 5% Q4 over Q4. We took almost 600 mill operating days down in Q4 and that was including 91 days for Clark County.

A quick glance at 2007 prices versus 2008 prices show an $11.00 improvement in ASP on a 7/16ths inch basis as reported by random links recently. In siding and engineered wood the Q4 story was simply a reduction in volume and the expense of intermittent running. Additionally if you look at those businesses for the year beyond volume in both cases and pricing in engineered wood products, two factors cost us a lot in 2008 that we will not encounter in 2009.

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

Now I’m going to turn my remarks towards the changes in cash burned between 2008 and what we anticipate in 2009. We discussed some of these in the 8-K that we issued in January. We plan for our cash burn to be dramatically less in 2009. In 2008 we paid out about $31 million in dividends that we will not replicate in 2009. Capital will drop from about $160 million to between $15 and $20 million in 2009.

The closures of our Chambord, Clark County and Athens OSB mills will reduce net cash consumed by $30 million. Our right sizing efforts and other cost reduction efforts will reduce the burn rate by about $40 to $45 million. And unpleasant to remember but part of the mix for 2008 was the $48 million payment in the OSB antitrust lawsuit and the write-down of the ARS’s from $151 million to $12 million.

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

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

So to sum all this up I believe that we can exit 2009 with an available cash balance equal to or exceeding the closing amount that we had in 2008 and this excludes any refinancing that we may choose to complete.

So I’ll conclude my prepared remarks with a brief look forward, I think that 2009 can best be looked at as an endurance contest. Those that last will prosper as the economy rebounds. My expectations for total starts this year is now adjusted down to 600,000. That’s approximately one-third of the underlying demand.

Now unless you are older then I am, which probably many of you aren’t, it will be the lowest demand that you have ever seen. Business will adapt or it will fail. Louisiana-Pacific I anticipate will take over 700 mill days of down time in OSB including the indefinite status of [Sills B] Athens, Clark County and Chambord, this quarter.

We will do that to adapt to the reduced demand. In engineered wood products you may have recently seen that we announced the indefinite suspension of our operations at our Wilmington, North Carolina LVL plant. Looking out a little farther, at this point in time for planning purposes, I am assuming 900,000 starts for 2010, that’s all in, that’s new starts, multifamily, and manufactured housing.

We have seen a forecast or two recently that is a bit more optimistic then that but we haven’t changed our planning yet. Our challenge will be to figure out how to be profitable at that level so that a return to 1.1 or 1.2 million starts in 2011 feels to us like the good old days at a much lower level of activity.

And just for reemphasis as Curt said we are managing the business primarily for cash in 2009. Now I’ll turn it back over to Curt.

Curt Stevens

Thanks Rick, we are ready to open it up for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Mark Weintraub - Buckingham Research

Mark Weintraub - Buckingham Research

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

Curt Stevens

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

Mark Weintraub - Buckingham Research

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

Curt Stevens

Yes, the difference is that we file in various foreign jurisdictions largely in Canada, but also in Chili and Brazil, but Canada is where we were expecting the tax refunds that we didn’t get. There is no statutory time limit in either the provinces or the federal government in Canada to pay the tax refund. In the US there’s a 45 day statutory period, that the IRS has to refund the money. So that’s the wild card and the other wild card of course is any refunds coming from the states. The states are under their own rules.

Mark Weintraub - Buckingham Research

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

Rick Frost

Yes, that’s not going to happen. We’ve looked at this market and we’ve come to an agreement with the people that we were talking to and we are not going to do that.

Mark Weintraub - Buckingham Research

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

Rick Frost

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


Your next question comes from the line of Gail Glazerman - UBS

Gail Glazerman - UBS

I’m just wondering if you could walk us through your assessment of OSB industry supply demand, there’s been so much movement on the supply front recently.

Rick Frost

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

So the industry capacity that’s available to run right now appears to be somewhere between [18 and 20 billion feet] and then at the rate that the industry is operating at now, the delta is being dealt with by intermittent [inaudible].

Curt Stevens

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

Gail Glazerman - UBS

In terms of the start up costs at Houlton, are those narrowing at all, the $21 million for the full year, were they significantly lower in the fourth quarter versus earlier in the year.

Curt Stevens

They are lowering, the way that worked is we brought that mill up in the first half of last year and we’ve really had no saleable product coming out of that mill at all. So all the product that we’re using for the qualification was not saleable. We did begin selling that product in the third and fourth quarter but as Rick said, introducing a new product into a declining market is always a challenge. So that mill is running very sporadically at the current time but the run rate is significantly lower then it was in 2008.

Rick Frost

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

Gail Glazerman - UBS

In terms of FX you gave an updated exposure for the Canadian dollar, is there any sort of guidance you can give on your exposure to the Latin American currencies.

Curt Stevens

There really isn’t a lot of net exposure because we sell those largely in local currency and our expenses are in local currency. So these’s some. The only, there will be some revaluation of the debt. We do have $39 million worth of debt in the Chilean facility or the Chilean operations so there will be some revaluation there but that will be largely noncash.

Gail Glazerman - UBS

Did you make any comments about your agreement about the government subsidies for the Clark County mill and where that stands.

Curt Stevens

There was an article in the local press, I don’t think we published anything on that but its not material, its less then $0.50 million a year.


Your next question comes from the line of Peter Ruschmeier - Barclays Capital

Peter Ruschmeier - Barclays Capital

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

Rick Frost

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

Peter Ruschmeier - Barclays Capital

Any comment if Brazil is cash positive or negative.

Rick Frost

Our goal there is going to be probably be neutral. Our goal was higher earlier but they pretty well caught the cold with this world credit crisis.

Peter Ruschmeier - Barclays Capital

Going back to the US, and just big picture looking at costs, if your OSB volumes are down 50% year on year, I think your headcounts, I think the salaried headcount is down 12% from when you started, how do you think about right sizing the labor force, your forecast for housing starts does not suggest a very significant uptick any time soon, so how do you balance that challenging question of what’s the right size of the footprint.

Rick Frost

Well we took our first stab at that last quarter and I think where I’m at right now is to put it very bluntly the question you’ve got to ask yourself is do we have a better chance with the staffing that we have right now to make our plan or do we have a better chance to make our plan without the staffing. And at this point in time I like the way that we’re staffed based upon what we have on our plate to accomplish and so, but that’s a constant question that we ask ourselves as we’re adapting to the market.

But we accomplished the lion’s share of what we identified that was we felt cost positive to us in the fourth quarter of last year.

Peter Ruschmeier - Barclays Capital

Operationally, I’m curious down in Clark County, how much cash do you need to start Clark County, I would think that the cost structure would be sufficiently positive enough to provide a pretty quick payoff but how do you think about the pros and cons of whether that should be restarted at the, instead of some higher cost assets that you may have.

Rick Frost

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


Your next question comes from the line of Steve Chercover - D.A. Davidson

Steve Chercover - D.A. Davidson

With respect to Houlton LSL, are the start up costs behind you, do you think that it might not be cash flow positive but is there going to be another $20 million loss or anything of that magnitude.

Rick Frost

Start up costs are behind us, the problems we’ve got there now is we just don’t have enough volume so we got real inefficiencies in running but that now with the 1.75 e completed which was a milestone for us the trick is going to be try to, you’ve just got the inefficiencies in running the mill on such a short time basis but in terms of developing the products, making sure you got product for sale as you come up, remember this is a brand new process and brand new product, those are behind us.

Steve Chercover - D.A. Davidson

Are you happy with the quality and market acceptance of the product.

Rick Frost

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

Steve Chercover - D.A. Davidson

Switching gears, it looks like in January the new permits were closer to 500,000 then 600,000 so I don’t know if this is the proper word but are you properly capacitized if volume comes in even lower then the 600,000 that you predicted.

Rick Frost

Well I think we’re all looking at what nuclear first quarter, this thing is, the first quarter of this thing is worse then anyone could have guessed so I think what we’re trying to do is we’re adapting on a weekly basis based upon our takeaways and the intense pressure that we have on our operations around managing working capital. So we’re just adapting and evidence of that is the recent announcement we made two weeks ago where it made less sense to [inaudible] like an engineered wood product you keep that running.

So we just went ahead and took it out and got more of the fixed cost out of there. But that’s a week to week thing.

Curt Stevens

Obviously with the recent actions that the government has taken with the various stimulus packages and housing recovery, there is a fair amount of money going into the system and there’s certainly a concentrated effort, I think there is much greater recognition that housing is important to the recovery and that’s why you saw the $275 billion being targeted for housing, why you saw the $8,000 tax credit going to new home buyers and you also saw in the budget that there’s an increase in the housing and urban development budget to forestall foreclosures and to encourage people to stay in their homes.

Rick Frost

Another positive and its pretty hard to find any but I think January was the first month where permits exceeded new starts and that’s a nice place to be. So do anticipate some seasonal uptick. Its not going to be the normal seasonal uptick. The north thaw is out, there is going to be a seasonal uptick.

Steve Chercover - D.A. Davidson

I just wanted to make sure I understood what you said, closures will save you $30 million and then the right sizing at corporate and whatnot is another $40 million, is that correct.

Curt Stevens

That’s correct.


Your next question comes from the line of Richard Skidmore – Goldman Sachs

Richard Skidmore – Goldman Sachs

Could you just talk about the cost side of things, I think you mentioned $30 to $40 million maybe cost savings in 2009, I would assume that’s obviously cost of goods sold, but what are the key buckets, is it wood fiber, is it resin, is it obviously its probably energy as well, but could you elaborate a little bit and then a second point to that would be is the market sufficiently competitive right now that you’d expect to actually give that away in the form of pricing or do you think that the market’s taking sufficient down time and people are seeing the pain enough that pricing, prices kind of stabilize and you actually see the benefit of those cost reductions.

Curt Stevens

I think fundamentally what I would expect in 2009 is that we will get back to the level of pricing on the raw materials that we had in 2007. Put that in perspective for us, if we compare the full year of 2008 versus the full year of 2007 on comparable volumes our raw materials costs were up about $48 million. The way that broke out, about a third of it was in wood, about 20% of it was in electricity, natural gas, and electricity and then the resins and wax made up the rest of that.

So we would expect that given the fall in oil pricing, that’s going to effect the wood costs and the other effect on the wood costs is that the pulp business is much depressed from where it was last year and that’s the primary competition we have for that raw material. We’ve already seen a significant reduction in [NVI] and PF resins as we went into the first quarter and we’ll see a further reduction in the second quarter.

Then natural gas, if you recall last year about this time it was selling for $12 and I think its at $4.80 today. We will see those reductions. So I would expect to recover most of the increase that we had in 2008 so it can get back to 2007 levels.

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

Richard Skidmore – Goldman Sachs

Can you just provide what your natural gas consumption might be and maybe an order of magnitude on the resin consumption.

Curt Stevens

Well it depends on how much we’re running, historically we’ve used about 100 million pounds of MDI, and about 70,000 of PF roughly. So historically our resins have been about a $200 million spend. But with the greatly reduced run schedules we’ve got its going to be less then that. On natural gas our spend is generally been about $35 to $45 million and again it depends on what you’re running.

I appreciate all of you joining us on the call, as usual Becky and Mike will be available. Again I am pleading with you don’t ask us about liquidity because we can’t say anything more and I don’t want to shut down your questions but we’re not going to talk that at this time.

Thanks again.

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