Louisiana-Pacific Corporation (LPX) Q4 2014 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Q4 2014 Louisiana-Pacific Corporation Earnings Conference Call. My name is Joyce and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your host for today Sallie Bailey, Executive Vice President and Chief Financial Officer, Ms. Bailey would then turn the call over to Curt Stevens, Chief Executive Officer, please proceed.

Great. Well, thank you very much, Joyce and good morning and good afternoon for those of you on the East Coast. Thank you for joining our conference call today to discuss LP's financial results for the fourth quarter of 2014 and the year ended December 31, 2014. I am Sallie Bailey, LP's Chief Financial Officer, and with me today are Curt Stevens, LP's Chief Executive Officer; as well as Mike Kinney and Becky Barckley, our primary Investor Relations contact. I'll begin the discussion with a review of the financial results for the fourth quarter of 2014 and the full year. This will be followed by some comments on the performance of the individual segments and selected balance sheet items. And after I finish my comments, Curt will discuss the general market environment in which LP has been operating and provide his perspective on our operating results and give some thoughts on the outlook. As we have done in the past we have opened up this call to the public and we are doing a webcast. That webcast can be accessed at www.lpcorp.com. Additionally, to help with the discussion, we’ve provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I will be referencing these slides in my comments this morning. We filed an 8-K this morning with some supplemental information and expect to file our Form 10-K before the end of the month. I want to remind all the participants about the forward-looking statements comment on Slide 2 of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information included on Slide 3 of the presentation. The appendix attached to the presentation has some of the necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning. Rather than reading these two statements, I incorporate them with this reference. 2014 was a challenging year for LP. Housing starts grew to just over 1 million starts or 9% higher than 2013. Single family housing starts grew 5% year-over-year. At LP we remained focused on activities which are in our control and continue to invest in our future, so we’re prepared when U.S. housing starts return to its historical level. Moving to Slide 4 of the presentation for discussion of the fourth quarter 2014 and the full year 2014 results. We reported net sales of $454 million for the fourth quarter of 2014, a 5% decline from the net sales of $480 million reported for the fourth quarter of 2013. In the fourth quarter of 2014, we reported net loss of $43 million or $0.30 per diluted share. In the fourth quarter of 2013, we reported net loss of $20 million or $0.15 per diluted share. The adjusted loss from continued operations for the quarter is $32 million or $0.23 per share based upon a normalized tax rate of 35% and this compares to a loss of $9 million or $0.06 per share in the fourth quarter of 2013. Adjusted EBITDA from continuing operations was negative $17 million in the quarter compared to positive EBITDA of $24 million in the fourth quarter of 2013. On a year-to-date basis, we reported $1 billion of net sales, a loss of $75 million and a loss per share of $0.53 as compared to net sales of $2.1 billion, net income of $177 million and earnings per share of $1.23 for the full year of 2013. On a non-GAAP basis, we reported an adjusted loss from continued operations of $60 million, a loss per share of $0.42 and adjusted EBITDA of $44 million for the full year of 2014. 2013, we reported a $121 million of adjusted income from continued operations, earnings per share of $0.90 and adjusted EBITDA of $330 million. The most significant headwind experienced by LP in 2014 was a 26% decrease in OSB pricing. The lower OSB price impacted operating income and adjusted EBITDA by $298 million which is more than the year-over-year decrease in adjusted EBITDA. I’ll now move to Slide 5 and review our segment results beginning with OSB. LP’s OSB segment reported an operating loss of $29 million and $203 million of sales in the quarter compared to operating profit of $7 million and $230 million of sales in the fourth quarter of 2013. For the quarter we’re reporting negative adjusted EBITDA of $15 million compared to positive EBITDA of $27 million in the fourth quarter of 2013. We had a 1% decrease in volume and pricing for OSB was at 12% over the fourth quarter of 2013. We took 136 down days during the quarter which equates to approximately 200 million square feet, most of the down days are market related. The utilization of our operating mills in the quarter was approximately 77%. For the full year OSB had an operating loss of $53 million compared to income of $230 million in 2013. Adjusted EBITDA in 2014 was $4 million compared to $285 million in 2013. The impact of lower OSB pricing between the years was $298 million. Slide 6 reports the results of Siding business. This segment includes our Smart Side and CanExel siding product. The siding segment reported sales of $141 million in the fourth quarter of 2014, an increase of 2% from the $138 million reported in the fourth quarter of 2013. The siding segment reported operating income of $14 million compared to $16 million in the fourth quarter of 2013, and adjusted EBITDA of $19 million as compared to $20 million in the same quarter of 2013. During the quarter the siding segment did not produce any OSB compared to the fourth quarter of 2013 when the siding segment produced 45 million square feet of OSB. For the quarter Smart Side average sales price were 4% and volumes also increased to 4%. Volume increase in our Smart Side siding line due to continued penetration in several key focus markets including retail, repair remodel and sheds. However, the siding segment was negatively impacted by large shortages in the lake states. We estimate that the siding business lost 45 days of down days with 27 million square feet of production in the fourth quarter and we estimate the gross margin on the loss sales along with the higher unemployed mill costs decreased adjusted EBITDA by $5 million for the quarter. CanExel prices were down slightly in U.S. dollars or up 6% in Canadian dollars. Canada is CanExel’s primary market. Volumes were up 11% in the quarter due to higher Canadian and international demand. And on a year-to-date basis the siding segment recorded $617 million in sale, $80 million in profit and $98 million in adjusted EBITDA. For 2013, the siding segment recorded sales of $174 million, profit of $86 million and adjusted EBITDA of $103 million. In 2014, the volumes of Smart Side increased 13% and prices increased 3%. The siding segment produced 45 million square feet of OSB in 2014 as compared to 168 million square feet of OSB in 2013. For the full year the siding segment was negatively impacted by log shortages. We estimate that the business lost 88 days or 53.8 million square feet of production due to the log shortage. And we estimate the impact of these log shortages and operating income and adjusted EBITDA was just over $10 million for the year. Please turn to Slide 7 of the presentation which shows the results for our Engineered Wood Products segment. The segment includes I-Joist, Laminated Strand Lumber, Laminated Veneer Lumber, plus other related products. This segment also includes the sale of I-Joist and LVL products produced by the Abitibi joint venture are under our sales arrangement with Murphy Plywood. In past quarters we’ve included log sales from our [indiscernible] licenses in this segment. But beginning this quarter and going forward these sales and the associated operating income and adjusted EBITDA are being recorded as part of the other building products category. The other building products category includes log sales from other non-operating mills. All prior periods have been adjusted. The impact on EWPs results on an annual basis has been between $1 million and $1.5 million of adjusted EBITDA in each of the last three years. The Engineered Wood Products segment reported sales of $66 million in the fourth quarter of 2014 down slightly from the fourth quarter of 2013. The segment’s operating loss in the fourth quarter of 2014 was $6 million as compared to a loss of $4 million in the fourth quarter of 2013. For the fourth quarter of 2014, adjusted EBITDA from continuing operations declined to a negative $4 million as compared to breakeven in the fourth quarter of 2013. Volumes of I-Joist were down 9%, volumes of LVL and LSL were down 3% compared to the same quarter last year. Pricing was up 3% in I-Joist and 5% in LVL and LSL reflecting price increases in our product. For 2014, Engineered Wood Products reported net sales of $281 million compared to $250 million in 2013, 12% increase. Sales volumes were up 6% in I-Joist and 9% in LVL and LSL. In 2014, Engineered Wood Products reported an operating loss of $14 million and reported breakeven adjusted EBITDA as compared to a loss of $15 million and negative EBITDA of $2 million for 2013. Moving to Slide 8 of the presentation. For the quarter our South American segment recorded sales of $36 million as compared to $41 million in the fourth quarter of 2013. Operating income was $3 million in the fourth quarter of 2014 compared to $2 million in the fourth quarter of 2013. South America’s adjusted EBITDA from continuing operations was $5 million for the fourth quarter of 2014 which is comparable to the fourth quarter of 2013. Volumes in Chile were at 16% and lower by 27% in Brazil compared to the same quarter last year. The sales volumes increase in Chile was primarily the increased demand offset by lower exports. In Brazil the lower volume was primarily due to reduced exports to the Fareast markets. Pricing was down 16% in Chile and down 6% in Brazil. In local currency Chile pricing is 5% lower compared to the same quarter in 2013 due to the continued pricing pressure from North American imports and Brazil recorded 1% improvement in pricing in local currency. For the full year of 2014, South America recorded net sales of $150 million and adjusted EBITDA of $20 million. For 2013 South America recorded net sales of $172 million profit of $20 million and adjusted EBITDA of $31 million. Total selling, general and administrative costs were $41 million in the fourth quarter of 2014 compared to $47 million in the same quarter in 2013. For the full year of 2014, selling, general and administrative were about flat between the periods at a $150 million. For the quarter the reduction in SG&A cost was primarily related to lower incentive compensation. Now please turn to Slide 9 of the presentation, where we note that as of December 31, 2014, we had cash, cash equivalents, investments and restricted cash of $548 million. Working capital was $778 million, net cash of $177 million and in addition to the cash on our balance sheet we had $200 million of availability on our credit facility. Capital expenditures for the year were $80 million. Capital expenditures for 2015 are expected to be approximately $130 million of which around $80 million relates to our growth project such as the Swan siding mill conversion and the third Chile mill and we did not repurchase any shares of LP stock during this quarter. Now I will turn the call over to Curt for his comment.

Thank you, Sallie for the review of the fourth quarter and the full year. My comments today will focus on our accomplishments and challenges during the last year. We will talk about the current state of the housing market and provide you with my views on what is ahead for us in 2015. I will conclude by discussing the executive leadership changes that we announced this morning. From a safety perspective LP had a total incident rate of 0.35 for 2014, the lowest level in LP's history. This is a ninth year in a row that our total incident rate has been below 1.0. In addition, we completed all of our capital work in 2014 without a single recordable injury to any of the many, many contractors that were used on site, truly remarkable performance. For the year housing starts were at just over a million led by a strong fourth quarter performance. However, this is only about a 9% increase compared to the beginning of the year forecast of a 20% plus increase. This shortfall put pressure on OSB pricing all year and resulted in North Central 7/16’s pricing being $71 or thousand square feet lower than 2013, quite a disappointment for us. In our siding business we had record shipments of Smart Side for the third year in a row. This success led us to convert all production at Hayward to siding and to make the decision to accelerate the conversion of our Swan Valley Manitoba OSB mill to siding production. We expect this to be operational early in the fourth quarter of this year. In Engineered Wood, we again had record shipments of Laminated Strand Lumber products and higher volumes of both I-Joist and LVL than in 2013. South America, weaker economies in both Chile and Brazil plus the stronger U.S. dollar reduced results, but we were still profitable in both of these operations. That leaves me to a few comments on the housing market. U.S. housing starts in December we’re at 1.089 million units with single family starts at their highest level in 6.5 years. In addition, housing starts for both October and November were revised upward. Housing permits were slightly below starts in December at 1.028 million. The average 30-year mortgage rate for the week ending January 23 was at 3.66, the lowest levels since the spike in rates in May of 2013. Last month I attended the International Builders Show in Las Vegas. Attendance was very strong with an estimate of 125,000 attendees. From the supplier perspective I would say there was a universal caution as we were all cut off guard by the slow pace of the housing recovery in 2014. Most are using around 1.1 million housing starts as a base assumption. Among the builders, I would say there was more optimism around housing activity, but they expressed concerns in a number of areas, costs and availability of prime lots, availability of construction labor and upward pressure on labor costs, the cost of building products and margin pressure as the ability to raise prices aggressively has dissipated. Just last night I returned from the policy advisory board meeting at the Harvard Joint Center for Housing Studies that was held in Washington DC over the past two days. This is a group from all facets of the housing industry, builders, developers, producers, distributors, realtors, government agencies who support housing, banks and other financial institutions. I am pleased to say that the general tenure of the meeting was the most positive in five years. The optimism was broad based, but the most discussed item was expected return to the first time homebuyer due to a variety of factors. Sallie mentioned household formations have been an extremely low level for much of the great recession. These numbers shot up in the fourth quarter to 3x of what they have been averaging over the last three years. Job growth and wage increases from the improving economy gave much of the credit for this. On the financing side, the lowering of premiums on mortgage insurance, the re-emergence of the 3% down payment loans and more favorable credit standards are making financing more available for the first time homebuyer. At the meeting there was also a discussion to try to assess the impact of falling oil prices on housing and it appears to be a mixed bag. In the oil producing areas it doesn't appear that housing activity has slowed, but there is certainly a lot of talk about the timing of beginning new housing projects. Lower fuel prices are adding to consumer confidence which should accelerate household formation, a precursor to the first time home sell or apartment. As an aside we do expect to have lower raw materials costs at our operations due to lower oil pricing primarily resins and energy. Last December when we put our 2015 budget together, we estimated that the savings due to lower oil price was in the range of $25 million to $30 million. Today with the oil prices hovering just north of $50 a barrel, our estimated savings are in the $40 million to $50 million range. In other markets, the National Association of Home Builders Remodeling Index had a record level in the fourth quarter of 2014. The Harvard Joint Center for Housing Studies just released emerging trends in the remodeling market where they concluded that this market will continue to strengthen. With the strong U.S. dollar, we don't see exports returning any time soon to North America. For 2015 and 2016 we agree with the forecasters that housing is going to continue to get better. The consensus forecast for housing starts in 2015 now stands at 1.19 million and 1.426 million in 2016, a 10% increase this year followed by a 20% increase next year. I will take that. As I mentioned in our last call, we’re using 1.1 million as our 2015 base forecast. OSB pricing is critically important to us and our financial performance has demonstrated last year. Clearly, pricing was short of expectations in 2014 as new production came online in anticipation of higher housing activity led to an imbalance between supply and demand. But, we don't provide guidance on earnings or OSB prices, we do use Force economic advisers as a primary forecasting source. For 2015, they see an increase of about 8% in OSB prices and further 14% increase in 2016. We do see the Canadian dollar below the $0.90 level for 2015. To put this in perspective the change in exchange rate in 2014 compared to 2013 improved our results by about $14 million. In the near term we have several important projects on our growth agenda. We have been on allocation our siding business for several months due to long shortages of the lake states and cost production shortfalls. We have been working diligently to put logs into these mills so we can operate without interruption. If nature cooperates a bit I think this will happen. In addition we kicked off an accelerated project to convert our Swan Valley Manitoba OSB mill to siding production early in the fourth quarter. We have further capital projects under development to add capacity or capabilities at our other siding mills to meet customer demand. Having available siding capacity ahead of demand it's a very high priority. South America, we have submitted our environmental permits and have initial comments back for our third mill in Chile and we have started the detailed engineering to be ready to begin construction when the permits are approved. We believe, this will be sometime around the end of the summer. We would always like housing to cover more quickly, we are pleased with our positioning in the market and we stand ready to serve the increased housing market activity. Before I turn over to Sallie for questions and answer, I do want to take a few minutes to discuss the management changes that we announced this morning. The good news is, these announcements that we have a broad deep bench within LP to assume important roles. The bad news is that we will be losing two very talented executives and good friends through retirement. Here is the summary of the changes. Rick Olszewski, our EVP of Sales and Marketing in South America will be retiring at the end of March of this year. As Rick’s title demonstrates, Rick is both the Senior Sales and Marketing Executive for LP and the Executive In-charge of our South American operations. For the first responsibility, Rick will be replaced by Mike Sims our current VP of OSB Sales with a new title of Senior VP, Sales and Marketing. Mike has over 30 years of experience in the selling and marketing of building products and has held a senior role with LP since we acquired ABTco in 1999. Because of the increased role of South American LP's growth plans, I will be taking over Rick's role in South America and Frederick Price, President of LP South America will be reporting directly to me. Jason Ringblom who has held a variety of sales roles with increasing responsibility over the years will take Mike Sims spot as VP of OSB sales. Jeff Wagner, a longtime EVP and GM of OSB and I’ve have been trying about his retirement plans for some time and decided that Jeff will leave his full time employment with LP around the middle of this year. In the meantime Jeff will report to me and assume responsibility for an important internal LP project to get better growth and innovation, as we know we can't rely solely on the housing recovery. Brad Southern, a longtime LP officer and currently the Senior Vice President and General Manager of siding business will assume Jeff's responsibility as EVP and General Manager of OSB. [Indiscernible] creates more cascading. Brian Luoma, another longtime LP employee and currently Senior Vice President and GM of Engineered Wood business will replace Brad and become EVP and GM of siding. Neil Sherman currently our VP of Procurement Logistics will take Brian's position and become Senior Vice President and GM of EWP. Finally, Mike Blosser, LP’s VP of EHS will once again add Neil’s prior responsibilities to his portfolio. Well, it seems like a lot of change and once we are able to make all these moves internally as a result of the talent pool within LP in our robust succession planning process. I am fully confident that each of these changes will bring a new perspective to the position and we will allow our executive management to acquire new skills that will allow for increased responsibility in the future. I want to publicly thank Jeff for the many contributions he made to LP over 35 years plus career with our company and Rick for bringing sales and marketing to the forefront of historically a manufacturing company in his 8.5 years with LP. Now I will turn it back over to Sallie for questions.

Alright, thank you very much, Curt. Joyce we would like to go in the queue for questions please.

[Operator Instructions] The first question comes from the line of Mark Connelly with CLSA. Please proceed.

Thank you, two things. Your comment about Jeff in particular peaks my interest, we have talked over the years or recently we talk about CanExel and siding, but in the past we talked about Radiant Barriers and other value add, is this new initiative on your part or is there just more coming through the pipes that needs to be managed?

It actually is a new initiative, as you know we try to grow through acquisition last year and it became clear that wasn’t going to come to the forefront. We did engage an outside group to help us with our growth and innovation capabilities. We have done a lot of it over the years, but this just gives us a much more disciplined approach. And so, what we have done is Rick Olszewski and Neil Sherman actually headed up their project for about the end of the last summer until today and Jeff will be taking over that responsibility probably until the middle of the year. And what it does do for us Mark is that it just gives us much more information on the market sizing, where the geographic opportunities might be. So, it should accelerate the growth of some new products plus increase our penetration and geographies where we should be more successful than we have been.

Right that sounds outstanding. Just one more question. Given the time you have spent with builders and other folks lately I am just curious if you see anything that suggest that we are going to see a shift in the rate of adoption or the rate of penetration of engineered wood products over this housing recovery? We have seen shifts in size, we have seen the shift to multifamily, I am just wondering if you are seeing anything that makes you think we are going to see some acceleration?

I think it's going to fall on housing growth. I don't think that we are going to see increased penetration. A number of things have happened there, I think in the past we’ve talked about the lumber going from British Columbia into China that's slowing a little bit, which means there is going to be more lumber come out of British Columbia into the U.S. to help support this market. So, we think that the market shares really haven’t changed all that much even during the recession between engineered wood and solid wood. It's going to be about the same.

Super. Thanks.

The next question comes from the line of Gail Glazerman with UBS, please proceed.

Hi, good morning. I was wondering if you could give a little bit more color on what went on in engineered wood in the quarter, volumes were pretty weak, I guess, there was some reference of kind of the stocking, how much of that do you think was seasonal versus something else and any signs of that reversing in the first quarter?

Sure Gail. Fundamentally, we do believe that there was a fair amount of destocking that occurred in the fourth quarter and that really highlighted sales in the capacity utilization for that business which was down in the fourth quarter. And we are beginning to see some improvements in the first quarter in orders in EWP and we are having some wins in certain markets in EWP as well.

Okay. And in terms of the inflation comments on oil, I’m just wondering are there any offsets I guess specifically, are you currently seeing any relief from the log cost in the west, any issues with freight and logistics or is that also, is that benefit incorporated in the oil guidance?

Yes. On the transportation side, we actually see this as an opportunity for both railroads and truckers to raise their rates. So, we are actually not seeing much reduction in our freight cost, in fact, we could see a little bit higher pricing particularly coming out of the Canadian railroads because of price increases they put in place plus some of the changes they have made to their AMB routing which has forced us to increase our distribution channel with more reloads and other methods to support our customer. So, we are not seeing on the transportation side. On the log side, we have not seen any relief in the lake states on pricing. We have seen a little bit more availability, but not on the pricing. In the South, we do expect log pricing to come off a little bit, but not significantly.

Okay. And in light of the decline in the Canadian dollar I’m just wondering, are you rethinking or have you made any adjustments to your operating footprint? Maybe increasing production out of the West Coast and flowing down in the U.S., out of Canada and flowing in the U.S.?

We keep looking at them, one of the and I mentioned in my earlier comments that the expert market has dried up. We actually shift a fair amount of work both to the Far East and to Russia out of our Canadian operations and that really has come to a standstill with the strong U.S. dollar plus the havoc that’s going on in Russia. So, we need to replace that volume somewhere else and as a result we have taken some downtime this quarter because of weather and weaker demand. But, we continue to look at the Canadian operations as a good source of parts future. The only asset that we have that is not running is our mill in Quebec, and we do not have any plans this year to start that mill back up.

Okay and with pricing where it is, could you envision seeing any kind of incremental actual mass falls versus just downtime?

Well, I don’t envision that because I do believe that with the market even a 9% increase which is our base forecast versus the 18 and 19 that’s in the forecast would say there is a demand for that word. But, we will do what we have done in the past as we will take market curtailments as we see weaker demand. Sallie mentioned in the fourth quarter we took 136 days of downtime and we are currently taking downtime at our mills right now.

Okay. Thank you.

Your next question comes from the line of Chip Dillon with Vertical Research Partners, please proceed.

Yes, good day to you guys, Curt and Sallie. First question is on your CapEx and I might have missed the number if you gave us a guide but could you remind us what that number looks like for ’15 and just give us some directional nuance for ’16, and I know you mentioned the project in Chile, but are there other definable projects that you are still working - that you would be working on in ’15 and ’16?

Chip, our guidance on CapEx for 2015 is a $130 million, 50 of that represents what we typically talk about in terms of maintenance, the remaining 80 relates to projects like churning our Swan Manitoba OSB mill converting that into a siding mill as well as plans the third Chilean mill. So, the expectation right now is that Swan would be fully converted in 2015, the Chilean mill will look to see what’s going on at economy and think about the timing on that but we expect some expenditure in 2015 and that will move into 2016. And then, we will continue to think about opportunities for growth in our siding businesses if that business continues to grow.

Chip, the only color I would give on that is, as we look into 2015, our 2016 there are a series of additional projects to match the capabilities of our siding mills to the market demand. And so, we will be rolling those out through ’16 but that’s totally based on the demand for the products and those are well thought out and great return projects. The only other one is we have been focused on our FlameBlock product particularly for multi-family and a contractor that we used, we’re currently out of capacity there, so we are determining what we do and that maybe a modest investment that we’ll make internally for both fire-rated in OSB and fire-rated in I-Joist.

Got you. And just to give us a little bit of feel for things, if you kind of go back a few years, I know that we haven’t had very many good years in the last five I would say, but I do recall that for example in 2000, and I think it was 12 or actually - sorry 2013 was a pretty decent year for OSB. And I know that here you made about 86 million in siding and I know you have some OSB inside of that segment. Last year you almost, I mean, you only made $6 million less, you went from 86 to 80 when OSB completely fell down. So, if we kind of stripped out the OSB profits in ’13, I mean, how much, I mean, the peers on the surface to have been quite a big swing upward again in ’14 in siding or at least an up year even though was down for OSB, is that fair?

That is fair Chip. In fact, there is probably about a $9 million difference between siding profits in 2013 reported in the siding - OSB profits in the siding segment. So there is a $9 million swing. So, we took 2013 down, you would see a pretty good growth in the siding business and as I said we did have record volumes in 2014.

Okay. Got you. Thank you.

The next question comes from the line of Bill Hoffmann with RBC Capital Markets. Please proceed.

Thanks. Curt could you talk a little bit more, sort of how are you planning for, what are the downside, your housing doesn’t improve like you are thinking and talking with some of these positive signs, from an operating standpoint just really, either take out of the system or could better balance the market, so you had somewhat of a better pricing environment?

Well, I think what we’re doing today Bill is, what we did last year, as we saw demand fall, let me just backup a minute. So, just to remind everyone when we figure out our OSB business at the beginning of the year, we do contract with our customers for volume that doesn’t affect the pricing in general. But, we contract volumes, so with the home centers we contracted certain amount of volume with some of the big pro-dealers and some of the others. So, our contracted volume last year was around 80% and it’s about the same this year. So, when we take downtime really what we are playing with is that 20% its open market wood as we have commitments for the other 80%. Does that make sense?

Yes.

So, the downtime that we’re taking is if we don't see a demand for the open market wood than we adjust our production schedules to satisfy the demand that we do have from our customers.

Right. I guess, what I am asking is does it make sense to even temporarily - facility for a year to help bring this market back and balance on the 20%?

Well, so far we believe the best from an economic perspective is to run at the way that we are running because when you do take a mill down, I mean, you fire all the people, you get rid of the customers that you had contracted that mill with and then you have the start-up costs that go with that.

Okay. Thanks. And then, just the other question, on the log averages that you have experienced in the fourth quarter, is that situation pretty much rectified itself at this point?

I would say its better but its still touch and go. And this is really in the lake state region where they have had some weather issues, they have had infrastructure issues, there has been competing demand from the mills in that area. So, we are actually bringing wooding from further away or paying more for it.

Right. Okay. Thank you.

The next question comes from the line of Mark Wilde with BMO Capital Markets. Please proceed.

Good morning Curt. Good morning Sallie. What if we can talk first about just OSB and really bridging the difference between the year-over-year decline in EBITDA in that sector, you pointed I think to price being about 27 million of that decline and it was a total of about 38. So, the other 11 Curt, is that downtime or what else might be in that number?

Yes that's downtime. That's the impact of the higher downtime of the total cost.

Okay. And I was just curious, you are actually down year-over-year on volumes in OSB in the fourth quarter, but most of the housing indicators as Curt mentioned were up in the fourth quarter. So, how do we get our heads around that delta?

Well, Mark as you recall, we actually produced more in the third quarter, so we failed to add a inventory.

Okay. Alright that’s fine. And then, just turning to the Latin American business, I was just curious about how you see the impacts of the big decline in both the Chile and Peso in the Brazilian AI playing out over the next year or two in that business?

Well, most of the impact is on our reported results because we translated back into to U.S. dollars. Most of the products in Chile is sold in the Chilean Peso, so our costs and our expenses are in the same. In Brazil we have a little a bit of an export market, a little bit more of an export market and that is typically in U.S. dollar so they should benefit a little bit from that as we go forward.

And it’s possible that going back to Chile, an unintended consequence of the higher U.S. dollar would be few of our competitors exporting down into Chile which would help our Chilean operations from a demand point of view and pricing point of view.

Yes, because I guess when I listened to your comments on the fourth quarter, it seems like things moved in an opposite direction from what I would have expected, you talked about more imports coming into the Chilean market and you talked about less exports out of Brazil. And I would have thought given the weakness in both of those currencies that we would have seen, less imports in the Chile and more exports out of Brazil?

Yes, we are continuing to see exports from the U.S. into the Chilean market even with the U.S. dollar where it is and we are seeing that pricing pressure.

It’s not logical Mark.

Right, I mean, we’re just right.

Almost she used that D word if I didn’t know better. I guess the last question I had Curt was just on the EWP business and I just, I wonder whether your strategy or your market position in EWP is, do for a rethink at all?

Well, as we do with all our businesses we look at our portfolio figure out what makes the more sense, I think some of the Sallie’s comments may not picked up on it, but we did have a pretty significant series of design wins or wins with major customers in the fourth quarter. So, I do see that business picking up and so we are seeing more activity in engineered wood.

And is being in that business is that, is there any connection between that business in the siding business, do you have any of the sales and support people that overlap or is that completely separate?

The sales people were up quite a bit, we do have specialists that’s [indiscernible] as you know you need engineering expertise there. So those are specifically identified with EWP but the general sales force sells are specialty OSB, our siding products and our engineered wood. So, they are calling on the same customers, dealers, builders.

Okay. Last thing I was going to ask Curt, we just, we had some news about another OSB mill in East Texas, it’s amazing to me given the difficulties that the market has gone through over the last several years including this last year that people are talking about building more capacity any thoughts?

Well, first this is a privately held enterprise that has made the announcement. It's also if you think about it, with today's capacity even bringing back two or three mills that are curtailed we can support about a million four to a million five housing starts. So, we get north to that there needs to be a solution for additional capacity not that I am thinking about it, but I am just telling what his thinking might be. And as I understand the announcement is that there were some economic development grants discussed, I don't think they were approved, but they were discussed. So I think he is getting ahead of it because you think about it, he has got to get site which as far as I know he doesn’t own a site, he has just got the economic development grant. You got to buy the site, you got to get the environmental permitting and you got all the equipment, and then you got the builder, so you are three to four years out. So, if you think about in that context it's not totally wacky plus he needs help, so you don't have to talk to shareholders.

Presumably still like to get a return on his money. Okay that's good enough. I will turn it over. Thanks.

The next question comes from the line of Mark Weintraub with The Buckingham Research Group. Please proceed.

Thank you. Curt, you mentioned that you have got about 80% of your OSB volumes contracted last year and this year. Is that relatively standard practice for the larger producers or are you an outlier in that regards what do you say?

I don't know specifically what they do. But, if you think about the home center business we know what percentage we have and the rest that home center business supply by competitors and home depot alone still do anything but contracting so I assume that on the retail side that there is contracts in place and I also assume the same thing on the big dealers, but I can't tell you specifically.

Do you have a very outsized position in home depot and lows would you say relative to the competition?

I think our position is probably consistent with our market share.

Okay. And then, switching to siding for a minute, if you think about the impact of the log shortages etcetera, do you think that you were - that the opportunity cost on the market share is something that’s lost, do you think that inventory was pulled out of the channel to - somewhere along the channel to meet where that demand was and so there is kind of capability for you to refill that channel or how should we think about the dynamics of how the log shortages are impacting the siding business?

Well, I think that the allocation that we went on, we maintained our customers loyalty, but the shortfall we had in production we lost that to another technology and I don’t think inventories were adjusted. So that's why we have to always be ahead of siding from a capacity standpoint. We feel bad about that but we are doing everything we can to recapture that volume.

Okay and then lastly just quick one, just trying to understand a little bit you talked about the third mill in Chile as being part of the 130 million it sounded like you were still considering the exact timing of how you want to proceed there. Can you maybe flush that out a little bit more for us?

We have had a third mill on the drawing board for a while in Chile and then we had the - the recession in Brazil, we have the fall in copper pricing so we are being very cognizant of what’s going on in those economics. Now, the other piece of this is we are intending to supply other South American countries with this capacity and as you probably know Columbia is doing very well now, Peru is coming back, Argentina is a mess but assuming we’ve a change in government soon that could come back. So from timing perspective it's going to be a year construction period and Sallie was the one that was hesitating a little bit. We expect to get the permitting by the end of the summer. But, to her thinking and I would agree with that is if the Chilean economy remains in the doldrums we might delay that a little bit.

And presumably if that happens then part of the 130 million get shifted to a later time period, is that right?

That’s correct. That's correct.

And 20 million or 30 million or what type of order magnitude?

It's probably in that range. I think the numbers we have given before as we thought this was $50 million to $60 million project and again it's a construction period of a year.

Right. Thanks very much.

The next question comes from the line of Steve Chercover with D.A. Davidson. Please proceed.

Good morning. I am on the cell phone so I hope you will hear me.

Got you.

We can hear you.

Great. So many of the questions have already been answered but with respect to OSB since it's now $20 per thousand square feet below 2014, are we on track possibly for a worse year or can you think the higher volume and the lower run through as we offset pricing?

I think answer to your question is when I was at the builder show at the Harvard meeting I talked to some of our distributors and said, what are your inventories like, they all said they are pretty lean because they give whatever I want, right now are pretty well priced. And still what’s going to happen in March and April, this does take off and they also worried about that. So, we didn’t see a little bit of a priming last Friday, I think for us in certain regions that did hit our core pricing. So, core pricing and did get a little tick up last week. So we will see.

Yes, I guess its incumbent on all of us to look at the pricing beyond just North Central were so focused on. But do you believe the industry has in place sufficient capacity to satisfy $1.2 million starts in 2015? And it seems like that’s part of the problem as we’ve been excessively optimistic for couple of years now on OSB demand?

Yes, I think with what’s running today of a ramp, you can score 1.2, yes I do believe that.

The other teams like that’s I guess part of the problem right, I mean, Clark County is presumably up to full capacity at this stage?

We are meeting customer demands Steve.

Okay. And then, switching gears a little bit have you had any early enquiries from customers who are seeking alternative sources of supply now that things are working in our border merry?

I can't answer that I’ll have to talk to the traders.

Okay, and one final one then on log availability, I guess you got lot of snow in the North East this year but it’s not poor vortex banked in this, so are you lying sufficient inventories in lake states that we won't have repeat of the shortages that you needed last year?

The weather stays where it is now, we should be in okay shape, I won't say great shape but okay shape.

Okay. Thanks Curt.

Yes.

Thank you.

Your next question comes from the line of Paul Quinn with RBC Capital Markets. Please proceed.

Yes, thanks. Good morning Curt and Sallie. Just a couple of questions, one just following up on Steve’s question on OSB pricing we notice that’s down year-to-date and that’s sort of against the seasonal trend, do you expect a pick up after President’s Day or when is that usually tractor in terms of an increased order for the home building season for you?

Well I can't tell you there is usual year, but typically we see out in the early March to mid March is when you see an inflexion point. That's when the dealers are putting in the inventories for the building season.

Okay and just around the Canadian dollar sensitivity I think you mentioned $14 million benefit in 2014 versus 2013 can you - if Canadian dollar stays at where it is right now, below 80 what is the benefit you expect in 2015?

Each penny is about $2 million for us.

Okay and then just last question on siding I haven’t seen some updated stats for sort of engineered wood in the siding market and how that’s growing in terms of market share. Do you have anything that you can update us with and are you still taking share from vinyl and fiber I guess and some wood too?

I think the most recent study was a peer study. Mike would have more details on it than I do but we did take market share against other technologies. In fact, if you just took siding business it looks like we’re in half of the year. [Indiscernible] for tile, which really isn’t a siding product but if you took that out precipice actually gave us a stronger market share than we had thought. So it's good place to be.

Yes, it's great business, great, I’ll follow up with Mike thanks.

Thank you.

The next question comes from the line of Alex Ovshey with Goldman Sachs. Please proceed.

Thank you. How are you Curt and Sallie?

Good.

Good.

good. First on the OSB side, you talked about the cost of down time in the fourth quarter do you by chance have a number for the full year and how do we think about that downtime cost of potential reversing overtime if it does?

Yes. We don't provide that kind of number really, I think Alex, you would have to sort of work through I think back in the Mike and see where our costs have been in prior period when we are set to higher capacity utilization.

Okay. I got that. And then, on the inflation side what's your normal labor inflation run in the business on annual basis and at this point cycle are you thinking about you offset that volume and then price order productivity initiatives in place to be able to just offset the normal labor inflation of the business?

Well, typically we hold to what is local market determination of our plants are. That has been running last couple of years at about 3% on the wage side and then on the benefit side, we actually had pretty good experience on our healthcare last couple of years. So we haven’t seen as much of an impact on the healthcare so I think 3% to 4% numbers probably about where it's been. And on the productivity as you know we are Lean Six Sigma Company and last year we got 5.8 to 1 return on our investment in Lean Six Sigma so we really use that as our continuous improvement approach to the mill. So, most of that actually wage increase gets offset with productivity or the Lean Six Sigma.

Okay got it Curt. And then in the EWP side, there is two public competitors out that are out there, I am just looking their numbers one explicitly report the numbers, did the other, I think you can essentially back into the numbers? Just the profitability above the absolute level and the year-over-year improvement that was just materially ahead where you guys are showing the numbers I mean, fundamentally is there a difference in the business?

Yes, I talked to you last time so let me just tell you again what it is, in our business we have owned facilities and then we have partnership facilities and we have sales arrangements. So, for instance, in LVL probably a third of our volume we buy from Murphy Plywood and what we get there is we get a sales margins, we don't get manufacturing margin. But, we also have no investment in the planning equipment. In our I-Joist business probably 70% of our I-Joist has come out of the two joint venture mills that we have with [Bowater], and there we again we get the sales margin and we get half of the manufacturing margin but not all of it. So if you were to look at ROA, return on assets, we look really, really good. But if you look at just on a margin, we don't capture the full margin either on those I-Joist or the JV to only half of it and then on the Murphy we just get the sales margin. So there is difference in the operating model and we don't own and operate all of our own facilities. But, we adjust for that if you look at the sales pricing between the two other public entities our sales pricing is right on top of maybe little bit ahead and our manufacturing cost are right on top of them, but it's the manufacturing margin that we don't enjoy on the Murphy Plywood and only half of it on the I-Joist.

Okay and just one real quick one, on the buyback do you have any stated goal in terms of how much buyback you like to do in 2015?

No.

Thank you.

There are further questions in queue at this time. Now I would like to turn the call back over to Ms. Sallie Bailey.

Great, thank you Joyce. Could you please provide the replay number and I would like to thank everyone for participating in this call. As always, Mike and Becky are here to answer any follow up questions you may have. Thank you for your participation and have a good day.

Thank you.