Louisiana-Pacific Corp (LPX) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2016 Louisiana-Pacific Corporation earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, today's conference may be recorded.

I would to introduce your host for today's conference, Miss Sallie Bailey, Executive SVP, and Chief Financial Officer. Ma'am, please go ahead.

Great. Thank you very much, Michele, and good morning.

Thank you for joining our conference call to discuss LP's financial results for the second quarter of 2016. 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 will begin the discussion with a review of the financial results for the second quarter of 2016, and this the first half of 2016. This will be followed by some comments on the performance of the individual segments and selected balance sheet items.

After I finish my comments, Curt will discuss the general market environment in which LP has been operating, provide his perspective on our operating results, our capital projects, and give some thoughts on our outlook. As we've done in the past, we've opened up this call to the public and are doing a webcast. The webcast can be accessed at www.lpcorp.com.

Additionally, to help with this 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've filed an 8-K this morning with some supplemental information, as well as our Form 10-Q.

I do want to remind all participants of 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 read these two statements, I incorporate them with this reference.

Our second-quarter results continued the momentum which started in the first quarter. In addition to the strong results in our OSB segment, reporting the $63 million improvement in adjusted EBITDA and just a $40 million of increase sales, the siding business reported record SmartSide volume and sales, including a 14% increase in volume from the first quarter of 2016, and 22% improved volume from the same quarter last year.

Now with that, let me go into the details.

Moving to slide 4 of the presentation for discussion of the second quarter and the first six months of 2016 consolidated results, we are reporting net sales of $582 million for the second quarter of 2016, an 18% increase from net sales of $493 million reported in the second quarter of 2015.

In the second quarter reported net income of $32 million, or $0.22 per diluted share compared to a net loss of $20 million, or a $0.14 loss per diluted share on the second quarter of 2015. The adjusted income from continuing operations for the quarter was $40 million, or $0.28 per diluted share, based upon a normalized tax rate of 35%, as compared to a loss of $12 million, or a loss of $0.08 per share reported in the second quarter of 2015.

Adjusted EBITDA from continued operations was $99 million in the quarter, compared to $16 million in the second quarter of 2015. In the first six months of 2016, we recorded net income of $42 million, or $0.29 per diluted share, compared to the net loss for the first six months of 2015 of $54 million, for a loss of $0.38 per diluted share.

The adjusted income for the six-month period was $50 million, or $0.34 per diluted share, based upon a normalized tax rate of 35%, compared to a loss of $31 million, or a $0.22 loss per diluted share for the first six months of 2015. Adjusted EBITDA from continuing operations was $151 million for the first six months, compared to $22 million in the first six months of 2015.

Now moving on to slide 5, and a review of our segment results, beginning with OSB, OSB reported net sales for the second quarter of 2016 of $253 million, up 20% from $211 million in the second quarter of 2015. OSB reported operating income of $44 million compared to a loss of $18 million in the second quarter of 2015. Adjusted EBITDA from continuing operations was $59 million, compared to negative adjusted EBITDA of $4 million in second quarter of 2015.

Sales volume in OSB were down 7% from the second quarter of 2015 primarily due to the conversion of the Swan Mill to a siding mill, and as such those financial results are now included as part of the siding segment. Pricing for OSB was higher by 30%, which improved operating results by $59 million.

For the first six months of 2016, OSB reported an operating profit of $59 million on sales of $470 million, compared to a loss of $47 million and $401 million of sales over the first six months of 2015. The first six months of 2016 we reported adjusted EBITDA of $89 million, compared to negative adjusted EBITDA of $17 million in the first six months of 2015.

Sales volumes were lower by 4%, and sales prices were higher by 22%. The impact of the higher sales price on OMB operations was $86 million for the first six months of 2016, compared to the first six months of 2015. For both the quarter and first six months of 2016, reductions in raw material costs, higher utilization rates, as well as the positive impact of the Canadian currency on our Canadian operations, improved OSB segment's financial results, as compared to similar periods in 2015.

Moving on to slide 6 for the results of the siding business, this segment includes our SmartSide and CanExel siding products, as well as OSB produced on one line of our Hayward Wisconsin facility. Siding recorded net sales for the second quarter 2016 of $207 million, up 26% from $164 million in the second quarter of 2015. Siding reported operating income of $42 million, compared to operating income of $29 million in the second quarter of 2015. Adjusted EBITDA in the quarter was $49 million, compared to $35 million for the same period last year.

SmartSide volume was up 22% from the prior year, and 14% sequentially. Sales prices for SmartSide were down 2% due to changes in product mix, with individual prices remaining relatively flat. For CanExel, sales volumes increased 24% due to increased demands, primarily in Europe. Sales prices were lower by 3% due to the impact of the Canadian dollar. Based upon Canadian dollar selling prices, prices for CanExel were 2% higher than the same period in 2015.

We produced approximately 53 million square feel of OSB in the segment during the second quarter of 2016 as compared to no OSB production in the second quarter of 2015. The siding segment recorded sales of $389 million for the first six months of 2016, an increase of 15% from $337 million recorded in the first six months of 2015. The siding segment recorded operating income of $69 million for the first six months, as compared to $62 million in the first six months of 2015. And adjusted EBITDA of $84 million, as compared to $73 million of adjusted EBITDA in the same period 2015. SmartSide sales volumes were up 11%, and sales prices were down 2% for the first six months of 2016, compared to the same period in 2015.

Please turn to slide 7 of the presentation, which shows the results for our engineered wood product segment. This segment includes eye joints, laminated strand lumber, laminated veneer lumber, OSB produced at our Houlton, Maine facility plus other related products. This segment also includes the sale of I-Joist and LVL products produced by the EBITDA joint venture, or under sales arrangement with Murphy Plywood.

The engineered wood products segment recorded sales of $78 million in the second quarter of 2016, up $6 million from the second quarter of 2015. The EWP segment earned operating income of $0.5 million in the second quarter of 2016, compared to a loss of $2 million in the second quarter of 2015.

For the second quarter 2016, adjusted EBITDA from continuing operations improved to $4 million, as compared to $1 million in the second quarter of 2015. Volumes of I-Joist were up 13%, while volumes of LVL and LSL were up 3% compared to the same quarter last year. Pricing was up 6% in LVL and LSL, and up 5% in I-Joist.

For the first six months, sales were $150 million, up from $137 million in the first six months of 2015. This segment's operating loss in the first half of 2016 was $2 million, as compared to a loss of $6 million for the first half of 2015. And adjusted EBITDA improved to $5 million from breakeven for the first six months of 2015.

Moving on to slide 8 of the presentation, for the quarter our South American segment recorded sales of $41 million as compared to $39 million in the second quarter of 2015. Operating income was $7 million, as compared to $2 million in the second quarter of 2015, and adjusted EBITDA improved by $5 million from the second quarter of 2015, to $9 million in the second quarter of 2016.

Volumes in Chile were up 14%, and flat in Brazil compared to the same quarter last year. On the US dollar basis, pricing was flat in Chile, and up 4% in Brazil. In local currency, Chile's pricing was up 10%, with the same quarter in 2015, and Brazil's pricing increased 20%.

For the first six months, our South American segment reported sales of $72 million, as compared to $75 million in the first six months 2015. Operating income was $12 million compared to $4 million in the first six months of 2015, and adjusted EBITDA increased to $16 million from $9 million in the same period of 2015.

Total selling, general, and administrative expenses were $47 million in the second quarter of 2016, compared to $38 million in the same quarter of 2015. For the six-month period, our selling, general, and administrative expenses were $89 million for 2016 compared to $77 million for the first six months of 2015. For both the quarter, as well as the six-month period, the increase in selling, general, and administrative expenses was primarily due to increases in certain management incentive accruals, and higher sales and marketing related expenses.

Please refer to slide 9 of the presentation. As of June 30, 2016, we had cash, cash equivalents, investments, and restricted cash of $495 million. Working capital was $700 million, net cash of $135 million, and in addition to the $495 million of cash on our balance sheet, we had $200 million of availability on our credit facility.

Capital expenditures for the first six months of 2016 were $51 million. We generated operating cash flow of $104 million for the first six months of 2016, and generated net cash flow of $40 million for the first six months of 2016. We are continuing to project capital expenditures for 2016 of $120 million to $130 million, which approximately $60 million is for growth projects, and the other $60 million to $70 million is associated with maintenance projects.

Now I will turn the call over to Curt for his account.

Thank you, Sallie. Good morning, and thanks for joining us on today's call.

As usual I will start with our safety performance. Through the first half of year, our total incident rate, or TIR was 0.31, and the rolling 12 month TIR was at 0.36. I continue to be extremely proud of all of our employees who recognize the value of being safe, have committed to it, and act accordingly.

Today I'll be providing comments on our results and accomplishments during last quarter and first half of the year, discuss key demand drivers, provide an update on our capital planning, including a potential siding expansion, and give you my views on the outlook for the rest of this year and into next year.

Sales in Q2, as Sallie just reviewed, were 18% better than Q2 of last year and produced net income of $32 million and an EPS of $0.22. This was significantly better than Q2 of last year, due to greater demand, leading to higher OSB prices, better siding volumes, and lower manufacturing costs, across all of our businesses. For the third consecutive quarter, all business segments recorded positive adjusted EBITDA, that totaled nearly $100 million for the Company in Q2. EBITDA improved by $83 million over Q2 of 2015, and by $52 million compared to last quarter.

In OSB, random lengths reported North Central 716's Q2 pricing was 17% higher than the first quarter, and LP averaged a 10% increase due to regional differences, and lower premiums on flooring. However, when coupled with lower cost, our EBIT margin improved to 13.8% last quarter, to 17.4% this quarter.

In siding, our SmartSide revenues grew 26% versus the same quarter last year, and adjusted EBITDA was just short of $50 million, a 42% improvement. In EWP we were EBIT positive for the quarter, and EBITDA was almost $4 million compared to $600,000 in Q2 of last year. South America overall sales were a bit higher, but EBITDA more than doubled. On a year-to-date results, our sales are up 13%, net income was $42 million compared to a loss of $54 million last year, and adjusted EBITDA was $151 million, an improvement of $129 million.

In Sallie's review, she did discuss the expected capital expenditures for 2016. I want to give you a little bit more color on this. One of the projects currently underway will be to more than double the production capacity of fire retardant OSB product, FlameBlock.

Today, we have used a contract manufacturer for the coating. We have licensed this technology from this very important vendor, and are nearing the completion of a $15 million post processing facility located on our Clarke County, Alabama site. The should be operational new the end of this quarter, and will provide us with lower cost production, improve logistics and greater geographical diversity for this important growth product.

At our Board meeting last week we did present three capital projects to our board, which were approved. The first was a maintenance project to rebuild the press at our Jasper Texas mill. This $15 million to $17 million project will take place in the first half of next year. We have done similar projects at Roxborough, Hanceville, and Segola, and we currently have a similar project at one of our lines in Hayward that will begin later this quarter.

You've heard me talk about a third mill in Chile for several years. After an arduous and lengthy environmental permitting process, followed by detailed engineering, our Board did agree to go ahead with the $60 million to $65 million project, which should come online late next year or early 2018. Like our two prior mills in Chile we will be repurposing owned equipment from a few of our shuttered OSB Mills. This expansion will take place on our existing Panguipulli mill site in southern Chile.

The third capital discussion was more of a work in progress as we continue to plan for the next increment of siding capacity. Based on our current projections, we will need additional capacity around the end of 2018. If we are converting an exiting mill, we will need about nine to 12 months for the conversion. If we are building and new mill, this timeframe extends to more than two years.

There are a lot of factors that need to be considered before making this decision: expected growth rates and product mix of our siding business, availability, cost and species of the wood, competitive logistics, a trained and available workforce, available incentives, the overall business climate, and forecasted currency rates. When considering existing mills, the options with the LP are limited due to our existing products and customers that we need to satisfy, the location of those mills, the wood supply to that mill, and the actual mill configuration.

Logically we're also considering OSB mills owned by others, and this exploration is ongoing. For the new mill options we have done quite a bit of work on the potential siding, and have preliminarily concluded that the Iron Range in northern Minnesota makes the most sense. We have been working with the state of Minnesota, an economic development group for that region, the Iron Range Resources and Rehabilitation Board, or IRRRB, on possible site selection and incentives. They have been great partners to us in this effort.

To date the legislature and the IRRRB have combined to offer significant incentives that are greatly appreciated and help to make this alternative much more competitive. At our Board meeting we discussed the status, and requested funds for long lead time items and continuing engineering, while we complete the evaluation of all of our known alternatives. We do not currently have a estimated capital cost, as this will be dependent on a number of factors that have not yet been decided. However, it is most likely that little will be spent in 2016, with spending beginning next year and accelerating as we go into 2018.

With the improvement of our earnings and a continued positive outlook for housing, we're increasingly getting questions on the balance sheet, liquidity, and our plans for the cash. I wanted to provide you with my thoughts. As Sallie mentioned in her review of Q2 results we ended the second quarter with $495 million in cash, cash equivalents, investments, and restricted cash. In South America, we did use some of our cash within Chile to prepay about $7 million on existing debt. Tied in with the third mill in Chile, we have been working with our local banks to put in place financing within Chile to fund the construction. You will probably see this early next year.

So what are we going to do with the cash? Our first priority is to invest in our current facilities to lower costs, allow for the manufacture of value-added products, and increase our flexibility to shift the product mix to what is being requested by our customers. The examples include the FlameBlock line under construction in Alabama that I just mentioned. We are installing a small I-Joist line in Chile to give us additional flexibility within South America, and we continue to make investments in our siding mills to increase our flexibility.

The next priority is to invest in new facilities to meet anticipated demands. Earlier I discussed the addition of a third mill in Chile, and the exploration of where new siding capacity will be installed. These projects all have returns in excess of our 16% ERL rate. We do continue to explore acquisitions that will add to, or complement, our existing businesses.

Finally, our Board continues to discuss returning cash to shareholders, via dividend, or share repurchase. As we continue our string of profitable quarters, adding a dividend will certainly be considered. We do have a current share repurchase authorization in place, but we have not yet purchased any shares under this authority.

Let me shift the talk about the housing market. The Q2 news from the housing market was good, but it did reaffirm that we will likely be in the 8% to 10% annual growth rate for starts, over the next few years. While not as strong as has been forecast, this actually bodes well for both homebuilders and suppliers to the building industry.

Housing starts in the first half of this year up, or 7%, compared to the same period last year. However, the good news for LP is that single-family starts actually increased 13% during these same periods. More of our products are consumed in a single-family start than a multi family start, as mentioned last quarter. The consensus for 2016 now stands at 1.206 million, 9% higher than last year, and 1.34 million for 2017, an 11% increase over this year's forecast.

In June I did attend the policy advisory board meeting of the Harvard Joint Center for Housing Studies, where we previewed the recently released State of the Nation's Housing 2016. While this report looks broadly at housing, home ownership rates, financing, affordability, rental markets, and housing challenges, the key underpinning to their forecast is demographics, and household formation.

This group believes that demographics alone will drive the addition of more than 13 million households in the next decade. Their conclusion, I quote, factoring in the need to replace older units, and meet demand for vacation homes and other uses, housing construction should average 1.6 million units a year over the next decade. I like the way they're thinking.

Other positive housing related data, new homes sales rose 3.5% in June, the fastest rate since February of 2008. Sales of existing single-family homes ran at an annual rate of 4.5 million in May, up 4.7 million compared to May of 2015. On the financing side, the average 30-year fixed-rate mortgage was a 3.42% for the weekend in July 15. Retail sales for building materials regarding equipment supply dealers was 7.7% higher in the first half 2016, versus 2015. In Canada, second quarter housing starts were at a seasonally adjusted rate of 198,000, unchanged from the first quarter, but up about 3% from Q2 of last year.

So as I look to the rest of the year and into 2017, to achieve the forecasted 9% growth in housing starts, with the first half being at 7%, we will need to see an acceleration in activity in the second half of the year. Based on our conversations with builders and the demand we are seeing for our products, I am optimistic that this will happen. I believe that the concerns about labor and land availability for both builders, uncertainty relative lending standards for buyers and the impact of the upcoming election on our nation, and more specifically consumer confidence, have been built into this reduced housing forecast. If the news is better on any of these fronts, we could see an upside in activity.

For 2017, I agree that we will see a 10-plus growth in housing starts, driven by increased household formations and some wage growth. Specific to LP, we have seen further increases in OSB pricing, with random lengths reporting current levels at 16% higher than the average 7/16" North Central price in Q2.

At our siding business we're in track to achieve volume growth of 12% to 14% on a year-over-year basis with strong activity in all of our market segments. As I mentioned last quarter, stronger single-family starts is driving demand for EWP. Additionally, the trade actions that could occur in October related to the expired softwood lumber agreement could also be beneficial for EWP later this year and the end of 2017.

South America expects good OSB and siding demand in Chile throughout the year. For Brazil, we will continue to focus on export opportunities, as these are generally priced in US dollars, and we can benefit from the weak Brazilian currency.

With that, let me turn it over to Sallie for question-and-answer.

Great, thanks Curt. Michelle, if you please, we'd like to go to the queue for questions.

Thank you, ladies and gentlemen

(Operator Instructions)

Our first question comes from the line of James Armstrong, with Vertical Research Partners, your line is open. Please go ahead.

Good morning, congratulations on a good quarter.

Great, thank you.

First question is you've made good progress on your cost per square foot since 2004. As housing rebounds to something more normalized, would you expect cost per unit to continue to come down, or do you think that, as we go forward inflation is going to start taking hold and we'll see the cost start to rise again?

James I'll take that, there's two things we've benefited from. Obviously with oil pricing coming down, our raw materials costs have come down particularly in resins and wax. I don't see that going any lower. I think you will see some pressure as oil pricing comes up on that part of our cost curve. On the other manufacturing costs, I do think as we increase our utilization of our facilities, the we will see cost reductions, really, across the board.

In our OSB business, I think we were expected capacity at --

It was 89%.

89%, so we have a little bit more to go in OSB. In siding we're still filling out the demands from the Swan plant, as it's not being fully utilized yet. And then engineered wood, we have been significantly under utilizing our assets there. You will see the manufacturing costs come down, but you might see a slight rise in raw material costs. The other part of our costs is wood, and I don't see any significant pressure on the wood side.

And, James, you have some benefit from the Canadian dollar, as well.

Okay, perfect, that helps. And then switching to OSB, specifically in Canada, in the Quebec area, there's been articles that they have plenty of trees, but no one, they can't harvest the logs because they can't sell the residuals. Are you considering restarting Chambord or, and on that, do you have any other mills where you can still add shifts?

The residual is not an issue for us. How it becomes an issue is these are generally mixed sands. And so, when you're logging, if you have the mixed sand, then you put the log in the right mill. So if nobody is taking the log for lumber, then it makes it more costly to get out the log for OSB. But we don't really have the problem selling residuals.

Yes we are underutilized in Maniwaki. We're running about three and a half shifts there, so we can still add some production capacity there. In Chambord we have no plans to start that mill this year, but we constantly evaluate where we think housing starts are from a demand, and what that would leave for an OSB demand.

How long would it take to restart Chambord if you were to make that decision?

I think it's probably, there are some environmental equipment upgrades we'd need to make. I'm guessing it's a $6 million to $10 million cost and probably a nine-month period to bring that mill up.

Perfect, Thank you very much.

James, the other thing I would say we don't currently have a wood license from the Quebec government. That wood has not been reallocated to anyone else, but we would have to procure the wood. There is enough private wood to run that at about 60%, but to go beyond that we would need to reacquire that wood license.

How long does that process take, can you talk a little bit about the process of getting a wood license?

I'm speaking without full knowledge, I could bring 160 jobs to Quebec. I probably could get the license pretty quickly.

Perfect--

They probably wouldn't extend the nine to 12 month, but, you--

No, it would be within that probably.

Okay, perfect, thank you.

Thank you.

Thank you. And our next question comes from the line of Mark Connelly with CLSA, your line is open, please go ahead.

Thank you. Curt, we're used to seeing OSB price declines flow through faster OSB price hikes. Is that what we are seeing this quarter, should we be expecting more in Q3, the way things have gone? And related to that, for engineered wood, does that mean we should be expecting a fairly significant headwind in engineered wood products in the third quarter?

You're right, we see the decline before we see, more than we see the increase. I think what hurt us more than that timing on the slope of the increase is actually flooring, pricing was very low. And we're the largest producer of commodity flooring. The flooring had more of an impact on the overall pricing, than I think that timing did in Q2. As far as the cost for engineered wood, I know we went out into the marketplace with an increase in our engineered wood pricing due to raw materials, being lumber and OSB.

And are you confident that the balance in that business is stronger than maybe it was a year ago, to try to actually capture some of that?

I think so. As I said in my comments, engineered wood is heavily dependent on single family. There's not a lot in the multi family area. The increase in single-family helps engineered wood, and again, if there's duties put on from the top of the lumber agreement it raises the price of Canadian imports that could have a positive impact on EWB.

Year-over-year Mark, the utilization, increased almost 10 percentage points in our LVL, LSL capacity. It went from, say, around 55% or 54% to close to 63%. But, was causing some of the improvement in the performance.

Got to help somewhere. Thank you.

(laughter) Thanks Mark.

Thank you, and our next question comes from the line of Garik Shmois, with Longbow Research. Your line is open, please go ahead.

Thank you.

My first question is on siding. You did a good job recovering the business this quarter, as you added the Swan Valley back into the system. Just wondering where you are from a capacities utilization standpoint, with the transition, and how much more room do you have to pick up market share, in siding as you look out over the next couple quarters?

Well with the incremental, capital which gives us more flexibility to produce the right products at the right mill, which will -- we're continuing to do. As I said in my comments, we think we have enough capacity within the siding business to last us through the end of 2018, with that 12% to 14% growth rate in volumes. So we are not, as I said fully utilizing Swan at this point. And part of that is that equipment, because the, -- we're Limited to doing panel production in Swan today. And we need to add flexibility to do some other products in that mill, and we have plans to do that.

Okay thanks. Just wanted to check high level. You talked about your expectations on new housing, wonder if you could talk a little bit about what you're seeing both in retail demand there, as well as just, generally, on the remodel side.

On the retail side, the home centers reported increases of 6% to 7% on a same store basis. Our first half retail business was a little bit short of that; it was 4% to 5% on a volume basis. As we look to planning, we're kind of looking at that 4% to 6% growth rate in the retail. We don't believe we're going to see significant expansion beyond that.

Okay, thanks so much.

Thank you, and our next question comes from the line of Gail Glazerman, with Reo Equity Research, your line is open.

Hi, good morning.

Hi Gail.

A couple questions, first on the potential siding expansion. I apologize if you got more explicit, because I missed it. If you think you need this capacity by the end of 2018, and it could take up to 24 months, then should we expect a formal decision on exactly how you're going to proceed by the end of the year?

Probably not by the end of the year, but we, as I said we got approval from our board on long lead time items, which we will be ordering in the next couple months. We also included in that request that we continue to do engineering so that we would have a much better estimate on what that would cost. If it's a new mill, you probably can anticipate, our board meeting is early part of February. You could probably anticipate an announcement after that, if it's a new mill. If it's a conversion of an existing mill, the timeframe is much shorter than that. It's nine months to do the conversion.

Okay. Just on that topic can you remind us what you see as your competitive advantage and barriers to entries for others to try to get into this given your ability to get double-digit growth?

Being a little bit facetious, we paid $1 billion in claims on siding, in the 90s, which I think has been somewhat of a deterrent to others getting into it. We did reformulate the product, and we do have an exclusive with our supplier of zinc borate. We have an exclusive with our supplier of the paper overlay that we use in the product. We have years of experience in building, or converting OSB mills to siding mills and running those. And then we have a sales force that's been selling this product since 1997.

Okay, and switching gears, the price gap between plywood and OSB, particularly North central has got quite narrow, one of the levels we've seen in at least three years. Then there's some plywood capacity coming on. No one seems to be expecting much relief on the trade front. I'm just wondering, any concerns that might start to impact customer behavior and thought process?

We haven't seen it to date. If plywood is lower priced then OSB, then certainly builders are going to convert back to plywood. But we have not seen any reduction in expected demand for our product due to plywood pricing at this point.

And we didn't see that in 2013. We didn't see much substitution.

And finally, if you look to the Chile project coming up, how much of that demand have you been supplying to date with volumes coming out of North America?

Yes that's a really good question, Gail. Last quarter, we had our highest sales ever in Chile.

So there was roughly 13 thousand to 14 thousand cubic meters of product that was imported. Either by us directly or by some of our competitors into that marketplace. The expansion that we are planning on doing would allow us to cover all of the imports. Now, the imports are coming from Brazil, from our own facility in Brazil, a little bit came from North America.

We also saw imports because of the weak euro, we saw imports coming in from Bulgaria and Romania. By some of the foreign competitors. We believe that when we have that mill there, we will have a significant advantage, because we'll eliminate $100 per thousand of freight.

That's very very helpful. Thanks so much.

Thank you, and our next question comes from the line of Bill Hoffmann with RBC Capital Markets LLC, your line is open. Please go ahead.

Thanks, good morning.

Good morning

Curt, could you talk obviously OSB prices are terrific right now, can you just talk about if there's anything new development wise on the industrial applications, but also from the diversification standpoint?

On the industrial side, we focused on the furniture market about four or five years ago; now our competitors are focused on it. I think that the furniture market is converting away from plywood into OSB. That's been successful, although, we have been able to pull much of an edge there. Because everybody, our competitors are doing the same thing. It does expand the market for OSB, which I think is good.

The Flame Block product we are really targeting at multi family more than we are single family. So that's an enter and a play into the multifamily market.

The other industrial applications that we have been pursuing have to do with container aligning, cargo trailers, interior garage panels, and some of those things, and we are making some progress there. As you know in this industry, builders are slow to adopt new products and new building techniques. We're pursuing that, and we expect to have success in the future, but I wouldn't claim victory yet, except in the furniture panel.

Any guess of what the total percentage is of your OSB sales? Of all that other stuff?

I can't tell you that, but for the, if you look at overall, from the APA, there's about 10 billion to 11 billion square feet of demand that is nonresidential construction-related. So today if we're calling it a 23% of demand, 13% will be residential, and 10% to 11% would be nonresidential. Now that's just an overall percentage.

That's fine. Thanks.

And then second thing from the capital allocation, obviously got a lot of cash. Any thoughts on timing and when you're going to do something or announce something on your capital strategies, and, as a part of that question, how much cash do you want to keep on the balance sheet? We obviously, when we go through down cycles you need a lot, so, I'm curious where--

The number we've used in the past is to $250 million to $300 million in cash that we like to have on the balance sheet, and that basically covers cash needs if we go into a 2009, 2010 downturn. I know you're banker Bill, but the banks aren't there when you need them. You have to have some cash.

So that's the minimum that we've talked about. From a timing standpoint I really do think we need to make this decision, whether we're going to be converting an existing mail, or building a new mill. As I answered Gail's question that's probably end of January early February we will make that preliminary decision. I think that's when I will be asking the board to really look at whether we consider a dividend or become aggressive on chair repurchase.

Thanks Kurt. Good luck.

Thank you.

Thank you.

Thank you, and our next question comes from the line of George Staphos with Bank of America. Your line is open, please go ahead.

Good morning, this is actually John Babcock on the line for George. Just wanted to ask a question on the siding side of things, first of all, I was wondering if you could remind us essentially what you see as the long run potential or margins in the business? And then also based on the alternatives you mentioned earlier, I don't know if you could provide any sort of probability whether you'll lean towards a Greenfield, a conversion of an existing mill, or find one from the outside?

Siding margins, we think that we can be in the low 20s, on a pretty consistent basis. That's where our target is on that. As far as probabilities, it's a tough one. When I talk about being a new mill, it actually will repurpose equipment we already own. So it's kind of a Brownfield, Greenfield, is the way I would think about that.

I would be reluctant to give you probabilities. We're exploring all of them pretty aggressively now, and as I've said in my comments we really appreciate everything the state of Minnesota has done. They've been very supportive of this, I know they need the jobs in the Iron Range, we have several mills in Wisconsin, and they are some of our most productive, and they have our best workers. It's a good place to be.

Thanks for that. And then, with regards to checking out mills on the outside that you might buy, current OSB mills, is there Are they essentially mills that might not be producing at this point, or are they mills that are actively in the market that you think you have an advantage holding?

The key is kind of where they're located. Because, to do siding we have determined that the highest quality product is using an aspen, a wood source. And so it needs to be in a location that has a good aspen wood basket. So you think about that, that's kind of late state, that's along the border in Canada. A little bit in Quebec. That is where we would be focused.

Okay. And then with regards to EWP, I think you mentioned you put a price increase out there, what regions of the US was that in? I think I heard previously that there was one in the West Coast.

I think ours is mainly in the West.

Okay, got you. Have you heard of anything in the South at this point?

I'm not aware we've done anything in the south.

Okay, and then just lastly, I don't know if you could share any sort of color around what benefits you might be seeing from acquisitions on the EWP side there, and whether you've gotten any potential business from that at all? If market share has more or less been less consistent.

I would describe EWP market as being in turmoil. There's been a lot of change in allegiances with some of these mergers that have happened on the distribution side, Pro Build and PFS came together, they put their EWP wood out for bid, stock, and BMC, put their EWP out for bid. In Canada we've had some change in distribution, lineup, so it really is in quite a bit a turmoil right now. I think we're getting our fair share, in that turmoil, but it's not a steady state, currently.

And was or any benefit in the last quarter from that?

There probably was a little bit of benefit. We picked up some big dealers, and there was some, they had to put their inventory on the ground. I think that probably slowed us a little bit in July, but we're seeing a pickup again.

Alright, thanks, that's all I have for now.

Thank you

Thank you, and our next question comes from the line of Ketan Mamtora with BMO Capital Markets. Your line is open; please go ahead.

Thank you. Congratulations on a very strong second quarter in siding. I want to come back to the siding capacity addition one more time. Can you give us, at this point, just in a ballpark basis, any guideline on what CapEx could look like? If it's a new mill, obviously there's been some numbers that's been out from the trade press. If you can just give us some color on that, and potential capacity, that would be helpful.

The first advice I can give you is on a conversion. As you know, we converted Swan which is about a 480 million square-foot mill. We converted that for $85 million, we're going to get about 350 siding volume out of that. You don't get the same volume in siding as you do in OSB. That's the number for a conversion.

For a new mill, the numbers that are out there are numbers that the IRRRB, which I mentioned earlier, put out. The number they publicly put out there was a $440 million number. That was for a, that was their estimate for a double expansion, so it was putting in an initial line then adding a second line. I haven't, I don't exactly know what their number is.

But for something like that, it ought to be kind of like 800 million square feet. So, that's a big number. As you know our siding business has benefited from conversions of existing mills. So they basically got the OSB mill for nothing, and then added the additional equipment. As I said in my comments, we're becoming pretty short of mills that we can do that in our own stable. That's why we looking at other alternatives.

Okay. And then, just wanted to, following up on that, is adding another line at one of your existing siding mills is an option, or that's not possible because of maybe, fiber availability, or from a market standpoint?

That's a good point. We have looked at that.

Actually the mill that we thought would be best positioned for that, we just don't have the physical size of the site to allow that to happen. We had a lot of property owners around and some other constraints. That continues to be a consideration. As an example, well not just siding, but the third mill in Chile is actually going on in existing site, it will use the same management team to manage both of those lines. And what that will allow us to do, is do specialty products on one line, and do OSB on the other line there.

Will you say at this point, this is probably at the bottom end of the option range in terms of additional siding capacity?

I declined to give percentages a minute ago. I'm going to do it again. (laughs)

Just one last one, is Chambord an option at all, or it's completely ruled out at this point?

You know, Chambord is an option we continue to look at. It doesn't have as good an aspen wood supply. There are alternative species in that mill are 30% to 35%, which is a little high from our perspective, from a quality standard.

Got it. Just on siding EBITDA for the second quarter, how much EBITDA in the siding business was from OSB?

It was pretty minimal. It was about, a little under $1 million.

Got it. Perfect. That's what I had. Good luck in the back half of the year. Thank you.

Great.

Thank you.

Thank you, and our next question comes from the line of Mark Weintraub with Buckingham Research, your line is open, please go ahead.

Thank you. You had mentioned that pricing for flooring was very low in the quarter. Can you give us color around that, and perhaps more importantly, has that changed? Has flooring pricing moved up with the rest of the market?

We were actually selling flooring, the endorsement of the random lenses price for flooring was below commodity. Which essentially means you're not being paid to put a tongue and groove in. So we are shifting our sales focus away from siding, which is difficult because we have customers that like our siding product--

Flooring.

Our flooring products. It's weird, three years ago, flooring was at about a $25 to $35 premium, and this year it's in a negative. But, it's a weird market, I wish I could explain it better than that, Mark.

And so it continues to be, though, at a negative, even now?

Mike, do have the number on flooring?

I don't, no. But I don't think it's changed much.

When you talk to Mike, he'll have the number, because he'll have random in front of him. We don't have it in front of us right now, but I don't think it changed a lot.

Maybe as a follow up, you noted that random [lense] is up 16%, I don't know if that's quarter date or current, versus the second quarter?

It was current versus the average of last quarter.

And is that a number that we should view as reflective of what should likely be happening to your mix of business at this point?

I just, that's just North central, so you'd have to look at the other parameters. And again, it came up from the end of last quarter, so the average up isn't 16%. That was a point in time versus an average for last quarter.

Okay, understood, thank you.

Thank you and our next question comes from the line of Steve Chercover with Davidson. Your line is open, please go ahead.

Good morning everyone.

Good morning.

So it's late in the Q&A. I did have a question about Jasper, and how much lost production does that entail in the first half of 2016, and how much capacity will the new press add?

Jasper is about a 400 million, 420 million mill. These outages usually take 35 to 38 days being out. The advantage of these, press rebuild team comes in a couple areas.

The capacity is pretty incremental. You might get 2% to 3% additional capacity. What you get is, you get a higher A grade because you have much better thickness control, and you also reduce your maintenance costs and your downtime. So that's where you pick it up. You really pick it up on the cost side more than you do the volume side.

Alright, and obviously your hurdle rate is 16%, so that's good.

Well, that's for capital projects, that are for return. We see press rebuild as the necessary maintenance. We don't include those. You're not going to get a 16% return on press rebuild. But if you don't you are going to have a catastrophic loss of equipment.

Got it. More like an oil change then. Got it do it.

Right

Is there any research being done into producing OSB out of mixed species?

Well there was some very, we had a 2.5 year research project in Silsbee Texas, making it out of southern yellow pine. And we didn't like it.

Okay, because I was thinking it in the context of, Chambord, where you said you could almost instantly get enough to do, to run the mill at 60%, but, because of the mix. I'm not even thinking about siding, I was just thinking about quality OSB.

I challenged our guys about that too, so if you 60% of aspen, do siding at 60% of the time and do OSB the other 35%, they didn't like that idea. They thought that operationally would be very complicated. We do use mixed species, but generally it's no more than 20%.

Got it. Okays, thanks very much.

Thank you.

Thank you. And our last question comes from the line of Paul Quinn with RBC Capital Markets, your line is open. Please go ahead.

Thanks very much. Good morning. Just a couple of easy questions. Sallie mention 89% operating rate in OSB, what was the downtime taken in Q2?

Sure, the downtime, Paul, was 27 days; it was about 37 million square feet. I want to reiterate what Curt said; remember, that is off of our rated operating capacity. How we determine the capacity utilization.

You mentioned 30% increase in price year-over-year, which translated into 59 million in EBITDA improvement, so the difference between, on a year over year basis, the remaining $4 million, how do you break that down between, you saw lower cost FX and also volume?

Right. We don't really provide that level of breakdown Paul.

Well volume is actually down a little--

Yes, volume was down--

Because Swan opened--

Volume was down because Swan was, yes, thank you. The Canadian dollar was, I think of the, it varies there, so it was probably the largest impact.

Just switching over to siding there, the capacity added you need by 2018, just so I've got it clear, that's, you need that because you still have latent capacity as Swan? Is that also factoring in a conversion, well not the conversion, but switching over the other line at Hayward to, from OSB to the siding, as well?

Yes it does. Yes, and it includes adding, a lab kit capacity at various mills, and putting the ability to do variable length panels and whole bunch of other things that are in our capital plan the next two years.

Lastly, if you could comment on channel inventories in the OSB side we've seen prices, obviously you've reported and commented they've come up in Q3. But they slow down here, where are channel inventories, and what do you expect for the balance of the quarter?

I think they're pretty lean. I think were going to be in an environment where the market's only going to order what they need. And it's going to pulled through pretty quickly.

Great, that's all I had. Best of luck.

Thanks Paul.

Thanks Paul. Alright, well, thank you Michelle.

I think that's all the time we have of questions. So if you could please provide the replay number, and I'd would like to thank everyone for participating on our call today. As always Mike and Becky are here to answer any follow-up questions you may have, and we hope everybody has a great day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a good day.