LOUISIANA-PACIFIC CORP (LPX)

RESEARCH PRESENTATIONNovember 7, 2002

Mark A. HughesPortfolio Manager, Sloan IMC Educational Investment Trust

Class of 2003

2

Personal Background

• PM of the Sloan Educational Investment Trust• Prior to Sloan worked at investment bank in Seattle• Summer internship in high yield research at WR Huff

Asset Management• Pursuing CFA

3

Methodology

• SEC filings (10K, 10Q, 8K)• Earnings conference calls• Industry websites• The evil sell-side• Primary research• Financial modeling• Every analyst and buy-side shop has their own

preferences

4

Industry Overview: Building Products

• Innovation in building products???• Plywood vs. OSB• OSB for different uses• Engineered wood products: LVL and I-joists• Wood-related industries are highly correlated

5

S.O.B., it’s OSB!

6

Company Overview

• North America’s largest manufacturer of OSB• Large holdings of timber and sawmills• Engineered wood products, siding• Dumping non-key assets:

– Lumber assets and some mills– Plywood (traded to GP)– Particleboard, MDF– Distribution and trading

7

Competitive Environment

• Three biggest competitors control 57% of the OSB market: LP, Weyerhaeuser, IP

• Overcapacity has crushed OSB prices• Taking down of capacity

8

ST OSB PricesOSB and Plywood Prices - Last 18 Months

$100

$150

$200

$250

$300

$350

Apr-01

May-01

Jun-01

Jul-01 Aug-01

Sep-01

Oct-01

Nov-01

Dec-01

Jan-02

Feb-02

Mar-02

Apr-02

May-02

Jun-02

Jul-02 Aug-02

Sep-02

$ / 1

,000

sq

ft

OSB

Plywood

9

LT OSB PricesOSB Prices - Last 10 Years

$0

$50

$100

$150

$200

$250

$300

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 YTD

$ / 1

,000

sq

ft

10

Customer Base

• Two channels: new home builders and repair /

renovate retailers

• New housing starts strong: 1,843,000, 13% bigger

than August and 16% greater than Sept 2001

• Home Depot, Lowe’s, and Menards are holding up

and report strong sales of LPX products

• Weather can also be a factor (seasonality)

11

CompsName Louisiana-Pacific Corp. Georgia-Pacific Corp. Weyerhaeuser Co. International Paper Co.

Industry Lumber, Wood Production Lumber, Wood Production Lumber, Wood Production Paper Products

Current Share Price $7.65 $15.42 $47.38 $36.69

Shares Outstanding 104,600,000 232,044,000 221,240,000 481,779,000

Market Value $800,190,000 $3,578,118,000 $10,482,351,000 $17,676,472,000

Revenues $2,197 mil $23,960 mil $16,107 mil $24,997 mil

Net Earnings $-89 mil $-146 mil $201 mil $-147 mil

'02 EPS (0.15) 1.49 1.03 1.10

'03 EPS 0.44 2.27 2.84 1.98

'02 Forward P/E -51.0 10.3 46.0 33.4

'03 Forward P/E 17.4 6.8 16.7 18.5

Price/Sales 0.3 0.1 0.7 0.7

Price/Cash Flow 11.8 NA 11.5 NA

Price/Book 0.6 0.7 1.5 1.6

ROE NA NA 3.00% NA

ROA -3.10% -0.60% 0.70% -0.40%

Debt / Total Capital 51.40% 70.78% 70.00% 54.78%

Beta 1.3 1.5 1.1 0.9

12

Capital Structure

in USD

Cash 100,200,000

Restricted Cash 47,800,000

ST & LT Debt 1,104,400,000

Less: Notes Receivable 403,800,000

Net Debt 552,600,000

Common Stock (104,600,000 Shares @ $7.65) 800,190,000

Enterprise Value 1,352,790,000

LTM EBITDA 151,852,000

EV/EBITDA 8.91x

2003 EBITDA 238,546,766

EV/EBITDA 5.67x

LPX Capital Structure as of Q3 2002

13

Credit Snapshot

1999 2000 2001 2002E 2003EEBIT 370 30 (232) 86 107 EBITDA 572 265 (37) 221 239 Less Interest Expense (13) (44) (57) (57) (29) Less Cash Taxes (140) 8 112 (10) (27) Less CAPEX (88) (188) (69) (45) (45) Less Increase in WC (9) (150) 118 48 (26) FCFe 323 (109) 67 157 112

EBITDA / Interest 45.72x 5.98x (0.64x) 3.85x 8.31xDebt/EBIT 2.87x 41.46x (5.13x) 12.84x 5.61xDebt / EBITDA 1.85x 4.62x (32.59x) 5.00x 2.51xDebt/FCF 3.28x (11.27x) 17.81x 7.05x 5.34xNI + Depr 419 222 24 120 183 NI + Depr - CAPEX 331 34 (46) 75 138 Annualized FCF % Debt 30.44% -8.87% 5.61% 14.19% 18.72%Debt / EBITDA - CAPEX 2.19x 15.82x (11.26x) 6.28x 3.09x

LP Credit Snapshot

14

Stock Performance

15

Current Stock Valuation

• Price = $7.65• 52-week range: $5.35 to $12.55• ’03 EPS = $0.44 / share• ’03 P/E = 17.4, in line with peers IP and WY• 2003 EV/EBITDA = 5.67x

16

Assumptions

• Proforma Assumptions: – OSB Prices increase to $180 / 1,000 sq ft by 2004– Divestiture of $575 million of timber and other assets– Core operations reduced to OSB, EWP, siding

• DCF Assumptions:– 5-year time horizon– 2% terminal value growth rate– Terminal value based on EV/EBITDA multiples

17

Equity Valuation

• Competitors’ 2003 P/E: $ 7.75• Comp. Transaction EV/EBITDA (8x): $18.28• Historical EV/EBITDA (6.5x): $14.82• DCF (13% WACC, 7x EBITDA TV): $13.08

18

DCF Valuation2003 2004 2005 2006 2007 2008 and Onward

FCFe 111,913 154,316 158,269 158,841 159,456 162,646EBITDA 238,547 245,573 246,729 247,973 249,313 254,299

10% 11% 12% 13% 14% 15% 16%PV 2003-2007 555,684 541,057 527,022 513,546 500,601 488,162 476,201

TV EBITDA Mult 10% 11% 12% 13% 14% 15% 16%

4x 1,129,865 1,084,893 1,042,365 1,002,125 964,023 927,924 893,702

5x 1,273,411 1,220,852 1,171,201 1,124,269 1,079,878 1,037,865 998,077

6x 1,416,956 1,356,810 1,300,037 1,246,414 1,195,734 1,147,805 1,102,452

7x 1,560,501 1,492,769 1,428,873 1,368,559 1,311,589 1,257,746 1,206,828

8x 1,704,047 1,628,728 1,557,709 1,490,703 1,427,444 1,367,687 1,311,203

9x 1,847,592 1,764,687 1,686,545 1,612,848 1,543,300 1,477,627 1,415,578

10x 1,991,138 1,900,646 1,815,381 1,734,993 1,659,155 1,587,568 1,519,953

10% 11% 12% 13% 14% 15% 16%4x $10.80 $10.37 $9.97 $9.58 $9.22 $8.87 $8.545x $12.17 $11.67 $11.20 $10.75 $10.32 $9.92 $9.546x $13.55 $12.97 $12.43 $11.92 $11.43 $10.97 $10.547x $14.92 $14.27 $13.66 $13.08 $12.54 $12.02 $11.548x $16.29 $15.57 $14.89 $14.25 $13.65 $13.08 $12.549x $17.66 $16.87 $16.12 $15.42 $14.75 $14.13 $13.53

10x $19.04 $18.17 $17.36 $16.59 $15.86 $15.18 $14.53

LPX Equity DCF Valuation Matrix

WACC

LPX Share Price Valuation Matrix

19

Sell-side sentiment

• Some buy-side firms will totally ignore sell-side• General consensus is that sell-side analysts provide

interesting bits of data, access to covered companies, and the trader’s perspective on the name

• On LPX, sell-side is lukewarm due to bad industry conditions

D.A. Davidson BUY 16.00$ CIBC BUY 10.00$ UBS Warburg BUY 14.00$ Salomon Smith Barney OUTPERFORM 15.00$ Lehman Brothers EQUAL-WEIGHT 11.00$ Morgan Stanley Dean Witter EQUAL-WEIGHT 11.00$

CS First Boston NEUTRAL 12.00$

Prudential HOLD 8.00$

20

Positives & Negatives

+’s

• Low-cost producer of OSB• Focus on key markets• Divesting bad assets• Will be virtually debt-free• Solid FCF generator

-’s

• Pure commodity business• OSB overcapacity• Depressed prices• Siding liability• Labor troubles in Canada

21

Big Issues

1) Completion of asset sales

2) Pricing & excess capacity

3) Continued health of housing sector

22

Final Recommendation

• BUY: TARGET PRICE = $13

• Proposed Trade = 400 shares @ $7.65

• What will make the stock move– Upgrade from the sell-side– Successful asset sales– Debt repayments– Realization of cost reductions (through CAPEX)– Share buyback– Rebound in market will help depressed names