Louisiana-Pacific Corp (LPX) 2003 Q2 法說會逐字稿

Welcome to the Louisiana Pacific Q2 earnings release conference call. At this time all lines are in a listen-only mode. Later, there will be an opportunity for questions. Instructions will be given at that time. If you should require assistance during the call, please press star, then 0, and as a reminder, this conference is being recorded. I would now like to turn the conference over to our first speaker, VP of Business Development, Bill Hebert. Please go ahead, sir.

Good morning. Thanks for joining us on the Louisiana Pacific conference call to discuss our financial results for the second quarter and six months ended June 30, 2003. I'm Bill Hebert, VP of Business Development as well as Primary Investor Relations contact for LP.

With me today on the call are Curtis Stevens, CFO, and Mark Suwyn, Chairman and CEO. We'll start the call with the review of the financial results of the second quarter and first six months of 2003. A few comments on the balance sheet and an update on the asset sales process. Mark will then review the outlook for the next several quarters and talk about the results of some of our recent initiatives and continuing operations. Finally, we'll open it up to questions.

As we have done in the past, this earnings call has been opened up to the public, and we're also doing a Web cast. This can be accessed through www.lpcorp..com. Additionally, to help with the earnings conference call, we have provided a presentation to provide supplementary information along with the call. As we go through the call, we will be referring to certain pages in the presentation.

As a caution, this presentation should be viewed in conjunction with our publicly available earnings release. Before we begin, I want to remind all participants about forward looking statements, comments that are included in our earnings release and shown on slide two at the presentation. Rather than reread the statement I'm going to incorporate it into the discussion with this reference. With that, let me turn the call over to Curt Stevens.

Thanks, very much, Bill. During the quarter, we saw improving pricing in the OSB operations, particularly towards the latter part of June, when short supplies and strong demand propelled prices significantly higher. A little later in the call, Mark will give you his views on these markets. Due to weather related disruptions, increases in cost primarily energy, resin costs and the strength in the Canadian dollar, caused our results to be a little short of what we expected.

The impact of resins was in the $4 million to $6 million range versus the second quarter of last year and the strengthening Canadian dollar affected us by about $5 million to $7 million.

I will make specific comments for each business regarding these additional costs. Before I get into detailed numbers, I do want to mention that we announced as part of our earnings release, our intent to divest or discontinue operating our lumber and interior hard board operations.

In accordance with that decision we have moved the remaining lumber as well as the interior hard board operations into discontinued operations, and therefore the operating results for all periods presented reflect these moves. In order to help you understand the restated historical numbers we did file an 8K this morning that includes the press release and detailed information for the last three years by quarter, which includes an income statement, segment results, DDNA and production information. Again, as a reminder, that means that we do not report sales for these operations on our sales line.

You refer to slide three in the presentation, we are reporting today a net loss for the quarter of $17.2 million or $16 cents per share. Of which continuing operations showed income of $8.9 million or 9 cents per share and discontinued operations showed a net loss of $26.1 million or 25 cents per share.

A net loss from discontinued operations is primarily a result of impairment charges of $24 million before tax, $15 million after tax, associated with the lumber mills and decorative panel facilities held for sale and other operating charges of $19 million, $11.5 million after tax or 11 cents per share, primarily related to future release costs on the Bonner Perry saw mill which has been permanently closed this quarter. Net sales from continuing operations were $479 million (ph).

For the same period last year, we reported a net loss of $13.2 million or 13 cents per share of which continuing operations showed income of $7.5 million or 7 cents per share, a discontinued operations had a net loss of 20.7 or 20 cents per share. Net sales for continued operations were $432 million during the same quarter last year.

We refer to slide four, this shows the year to date financial result for the six months ended June 30, reporting a net loss of 15.7 or 15 cents per share of which continuing operations showed income of 10.9 or 10 cents per share and discontinued operations had a net loss of $26.5 million or 25 cents per share. Net sales from continuing operations for the six month period were $892 million.

For the same period last year, we're showing net loss of $22.7 million or $22 cents per share. Of which continuing operations showed income of $7.6 million or 7 cents per share. And discontinued operations showed a net loss of $26.5 million or 26 cents per share. Net sales for this period were $822 million.

Slide five shows a reconciliation of several items that are generally not attributable to the ongoing operations. Let me briefly discuss what is in each one of these categories. The significant items in Q2 of this year were a gain of $29 million on the sale of timber and other assets.

All of the details are discussed in footnote four of the release. Offsetting this gain were three items, a valuation allowance of $16 million associated with notes receivable from Samoa Pacific. As a reminder, these were notes associated with the sale of our small California pulp house several years ago.

An increase in the product contingency reserves associated with the near incompletion of the national class action of the inter seal siding of $6.5 million. We're very confident that this should be the last charge that we'll have against this action. The third item is an increase in our environmental reserves that our closed pulp operation of roughly $2.5 million.

In Q2 of last year, there were three offsetting items, gains of $7.1 million on various asset sales, small impairment charge of $1.3 million on assets held for sale and severance charges associated with the divestiture program of $1.5 million.

After adjusting for the items on a pretax operating basis, we showed income for the quarter of $15.5 million compared to income in the same period last year of $6.8 million. Of with that, let me just talk about each of the segments. Slide six is a slide that talks about OSB.

For the quarter, OSB prices showed improvement over the same quarter last year, up $29 per square foot or 23%. This is a result of continued market demand, slightly better weather, although we did experience weather related disruptions during the quarter that affected both our volumes and our costs. From a profit perspective, we're showing increase in the prior year, not to the extent of the increase in the sales prices. This is due to increase in operating costs approximately $20 per square foot.

Of the increase, wood represented $5, both an increase in cost and log outages. Resin and energy costs are $6. Currency was another $6, and labor down time and other issues caused the remainder of the increase.

Volume was down slightly on a comparable basis, due to an extended strike at the sham bored, Quebec mill, which we settled in July and the mill is running. We had startup costs associated with the ramping up of the woodland Maine facility.

For the six months ended June 30 compared to the same period of 2002, OSB prices again showed improvement, up $20, or 15%. From a profit perspective, earnings were up versus last year, even after an increase in operating costs were approximately $14 per square foot versus the same period last year.

Slide seven looks can closer at the OSB price or the industry OSB pricing. As you note on the chart, OSB pricing, this is a 7/16 basis, increased significantly in the latter part of the quarter. It is important to understand how we sell OSB, especially in periods of rapidly rising or falling pricing. This chart gives you a visual look at the market price as published by random links for the quarter.

We sell approximately 50% of the wood on the open market with typically a two to three week order file and 50% on contract. The open market wood is generally priced at the time of order. So, we'll have a lag time of whatever our order file is, two to three weeks, in general.

The contract wood is generally priced at the time of shipment, based on the random lengths published price from the prior week. In both cases, there are also discounts in other pluses and minus to the price. Given the sales process, the contract terms and order file, there's always somewhere between a two to three week lag actual realizations compared to published prices.

In addition, while the 7/16 north central price is used in a benchmark, LP sells into all regions in North America and we also sell a variety of products from sheathing to flooring to our laminated radiant barrier problems.

These prices generally move in the same direction, the magnitude can differ significantly. Obviously if the order files are lengthened in an attempt to stabilize pricing, the lag time is increased. Slide eight, another major component of the cost differential. This looks at the overall utility costs. We have grouped here natural gas electricity and our utilities.

For the quarter, compared to the same quarter last year, we have a 19% increase over the prior year, about $3.2 million on continuing operations with the bulk of that being in OSB. For the six month period it's a 22% increase with the bulk of that being in OSB. I comment that I would make here is you can see the magnitude that the utilities has on our business. In roughly an $890 million revenue quarter, magnitude on utilities costs is about $20 million.

In composite wood, which is slide 9 in our presentation, let me just remind you what's in here. What's in this product category are the segment is smart side OSB siding products, the specialty OSB products, hardboard siding and the Chilean mill. For the quarter, sales showed a decline of 1% and profits were down about 40%. For the six month period, sales increased 1% and profits down 29%. OSB products, smart siding and other OSB products performed well in the quarter and the six month period showing good increases in volume on comparable sale prices.

Operating costs, while impacted by the same factors, affecting the OSB business, did not see as much weather related disruptions. Offsetting the gains in the fee based products were significant volume declines in hard board siding. Hart board siding has been seeing continued weakness in a key market, Denver and slacking demand elsewhere.

Also, we have seen slowness in the other investor markets for hard board like door skin. However, we did see a firming up of the markets in the latter portion of the quarter. Of slide ten is the plastic building products. This segment consists of vinyl siding, composite wood decking and the moulding business. Vinyl operations continued to show good growth, 13% increase and main market share in the product category that declined slightly during the past two years.

Our cost position of these operations continues to improve in the area of manufacturing, which is necessary to offset the impact of increased resin costs, about $3 million for the quarter and $6 million for the six months. Average sales prices were up 7%, as we recovered some of this cost increase in the quarter and for the six months period up about 8%.

Our decking business has shown significant improvements from the prior year. The strategy implemented last year of a good better, best product focus has paid off. We are showing significant increases in both sales prices and volume over the prior year. We have continued to work to improve the efficiency and output of our existing capacity to generate additional needed demand and drive our costs lower.

The mouldings business has showed a decline in sales volume in the quarter and the six month period due to slower retail activity during the first half of the year. Prices were off slightly. We continued to explore opportunities in the existing facility and with the alliance partners to expand this profitable business.

Next slide, slide 11, is engineered wood products. This segment includes the LVL, the laminated very near lumber and I joist products. Plus other related products. The other products in the Canadian EWP operations we have a curtailed cedar mill and a plywood operation both of which were significant drain to the earnings in the quarter. As a remainder in the quarter and all past periods in the 8K, the remaining lumber operations have been reclassified in the discontinued.

We continue to grow our engineered wood products both for the quarter and year 20 date. We saw significant growth in LVL up 36%, quarter over quarter and I-joist up 3% quarter over quarter as we took on new customers and expanded the presence with large production builders. Competition and capacity continue to impact I-gist products that resulted in the reduced sales price of 5%. We expect this to continue, the focus is to be relentless on reducing our costs, better geographic manufacturing and distribution and maintaining key relationship with our customers.

In addition to focusing on maximizing the potential of the existing facility, we continue to look at other alliance opportunities. Along those lines, I think we talked about several quarters, the last two quarters the joint venture with a plant in Quebec and that plant is now up and running. However, we did experience some minor startup costs this past quarter that did hurt our results.

The next slide looks at our effective annual tax benefit rate. Our tax benefit rate on continuing operations. We estimate that to be 50% for the full year, of 2003, as of the end of June. The primary difference between the statutory rate of 38% and continuing operations and the calculated rate relates to the same item we discussed last quarter, and that is the permanent difference associated with search inter-company debt which is denominated in Canadian dollars and therefore generates gains and losses upon re-measurement into U.S. dollars that are not taxable.

The gains and losses are eliminated within the consolidated reporting. As you are aware, the Canadian dollar has strengthened significantly to the U.S. dollar during the first half of this year. Based upon the magnitude of our inter-company debt, we estimate that for each penny change in the exchange rate, this will create a permanent tax difference of roughly $4 million or effective tax provision by $1.6 million.

Going forward, the impact to the dollars on the rate will depend on the exchange rate as well as our level of income. Slide 13 talks briefly about the balance sheet statistics compared to 12/31 of last year. Working capital sits at about $280 million at the end of June compared to 225m at the end of last year.

The increase is primarily due to increases in cash and receivables and the current portion of the contingency reserves, which we adjusted for the claim and offer program and reductions in the current portion of long term debt.

Net debt was at $386 million versus $517 million at the end of last year due to good operating cash flow and the application of asset sale proceeds. Slide 16, later in the presentation, does provide a detailed reconciliation of this amount. Available liquidity stood at $425 million at June 30, versus 330 at the year end, and increase is due to the increase in cash, both at the restricted and unrestricted balances, and from a combination of better operations and the asset sale proceeds.

Slide 17 provides a detailed reconciliation of this amount. Based on all of our calculations we have met all of the covenants included in the finances. We are in the process of reviewing those with the banking group. Capital expenditures for the quarter were $15 million and for the year $26 million. We currently project capital expenditures for the full year of 2003 to be about $85 million versus the $44 million that we spent last year. Value share was at $9.40 versus $9.62 at year-end.

As I mentioned earlier, our net debt at the end of quarter was $386 million and liquidity was 425m. We are making progress on the plans both from an asset sales standpoint plus improved operations. On the asset sales side, I'm going to turn it over to Bill in a minute so he can give you an update there. The question we're getting more and more from investors is what will we do with all of the cash? In our announcement of the asset sale program a year ago, we talked about the use of proceeds.

We stated we would reduce our leverage, debt reduction, and improve our financial flexibility, more cash, and invest in our remaining businesses. This is still the plan. As you know, we currently have a credit agreement with our bank group that is restrictive and relatively expensive.

Currently, we have no borrowings outstanding under either of the two major U.S. facilities, but we use the capacity to support necessary letters of credit. The agreement in place prohibits our ability to pay dividends or buy our own stock. We have begun discussions with our bankers aimed at eliminating many of the restrictions, immediately reducing the cost of the facility and developing a long-term scenario.

They are very supportive, but at the same time would also like to see continued progress on the asset sales, and improved earnings from operations. And in the past several quarter, LP has reduced or paid off most of the non-public debt that would be accretive to our results. To do any further reduction, we are really talking about the public debt at this point in time. Just to refresh everyone's memory of three trenches of public debt. $190 million of 8.5 senior notes due in 2005. $200 million of 8.875 senior notes due in 2010. And $200 million of 10.875 senior subordinated notes due in 2008, but callable in 2005.

We have been and continue to explore a number of strategies regarding this. The most viable options appear to be looking at a limited open market purchase program, a potential tender offer or simply waiting until 2005 to pay off the 8.5 bonds and make an early call on the on subordinated notes. With the success of the asset sales and improving operating results, this is clearly one of the primary focus over the next several months.

With that, let me turn it over to Bill who will give an update on the asset sale.

Thanks, Curtis. Refer to slide 14 and let me give you a quick update where we stand on asset sales and how we move forward to completion. During the second quarter we closed on several blocks of timberland totaling 165,000 acres and realized $113 million in proceeds of which $60 million was in cash and the remaining in notes.

Those notes are include in the other asset category in the balance sheet at June 30, and I'll talk about later were monitized shortly after the end of the quarter. I'll explain the difference between the monitization amount and the note amount here in a minute when I talk about installment sales. This brings the total cash or soon to be cash received so far year to date to $175 million, and $330 million since we began the restructuring program in May of 2002. If you look at it in terms of total value created, cash proceeds, working capital, liquidation, and liability transfer, we have generated $375 million in total value program to date.

So, what's left to be done? Earlier this month, we announced a signing of the purchase and sale agreement and what we now affectionately call son of big block, $465,000 acres in Texas, the unadjusted price is $285 million. This combined with several earlier announced deals means that we have all our remaining $570,000 acres of timber land under contract and expect to generate $350 million in cash.

As we have discussed earlier, we will be using the tax deferred structure with all of the remaining timberland sales. The Bill Hebert vastly over simplified explanation of what this means, is we will get 90% of the proceeds in cash and take notes for the rest that will be doing far in the future when the taxes are ultimately due. These notes will be classified on the balance sheet as a long term investment.

We expect all of the remaining sales to close in the third quarter and first quarter, based on these deals closing, we will have exceeded the previously provided guidance of $600 million to $700 million in value to the shareholders. We also announced this morning the decision to again put the remaining lumber operations and investor hard board business on the market.

In the past quarter, as lumber markets have improved, we have been getting inquiries into the status of our mills. What we and many in the industry learned when we tried to sell these last year. We have good facilities. It was the simply the wrong time to sell.

Some we did sell and others we closed since then. Today I'm pleased to tell you that we have our -- letters of intent on the industrial hard board business and all but two of the sawmills. And discussions are ongoing with those two. We anticipate generating an additional $80 to $90 million in total value, that's cash and working capital through the sales.

With that, let me turn it over to Mark Suwyn who will discuss second quarter accomplishments and how we manage our business in the next several quarters.

Thanks, Bill. I'll touch on several subjects to put our direction and expectations into context. First of all, I'll comment on the second quarter and next our outlook for the next couple of quarters and finally the actions that we're anticipating in the next year. I need to start with the recognition of the whole LP organization, which is having an absolute superb year in safety.

To date, we're at total incident rate of 2.35 versus our goal of 2.99 and well below last year's 3.3. Those of you who have had the opportunity to manage safety and operations, recognize that's a massive change. The whole organization is not only demonstrating a commitment to safety, but importantly the competence to be able to manage it well. Second quarter was a funny quarter. This has hesitated significantly in late March and April and early may, as a result of concern about the war, the economy, where are things going and things just kind of died.

In June, July, and August, we have all been playing catch-up, so the demands have been very high. Most of our product lines, and we have been scrambling to meet the demand. In the first quarter and second quarter, we were hit with several cost increases, many of which we believe are temporary and will be worked down in the next several quarters. The shortage of wood caused by the weather has been worse in the southeast and the upper Midwest.

In these areas, we're basically competing with pulp mills. And when the woods are wet, you cannot get in there to harvest, and that causes shortage. However, history suggests that this will gradually resolve itself, unless the weather stays very, very unusually wet. It can take up to year to get the wood costs back to normal levels when the dislocation occurred there are as big as we had this year. One can generally work them back to the trend line levels and we expect to be able to do so.

Canadian dollar has risen sharply and we have a lot of the OSB facilities in Canada. But the forecast we follow see it trailing down to the 70 to 71 cent level by the end of the year, with some possible further erosion the following year. We're working to moderate the volatility of natural gas costs and the impact on us by longer term contractual commitments to prevent major run-ups next year if shortages drives the prices up. We have taken steps to cover over half our needs.

Resin costs will be driven by petroleum costs but we're one of the largest purchasers of most of the resin based products and have contracts that will give us relief as fast or earlier than the competition.

Finally, our long term investments in the OSB facilities that are underway will tend to reduce the amount of natural gas we use and reduce the wood that we need to use to make OSB and hence reduce the sensitivity to these dislocations.

Ramping up those investments in cost reduction technology for OSB will increase the total expenditures from $44 to 85m this year with the bulk going into the OSB facilities. Just this past week, we approved two more significant projects for St. Michelle, Quebec and Alabama that will start construction in the next several months. We need these online such that in two to three years if prices moderate, we'll have a lower cost position in the operations.

We have also been making substantial marketing investments in our smart side trim and siding products. Our tech shield radiant barrier products as well as our decking products. To insure that we continue to grow profitably while we grow and cost reduce the OSB segment.

As an indication of the quality and recognition of the product development efforts have been garnering, our Norman Rockwell, non-fade vinyl specialty siding product was picked by consumer reports as the best quality vinyl siding product in the country.

The third quarter should be an outstanding one as July is already complete. We have order files that are about four weeks out, for many of the products, and wood is still in somewhat short supply. We could possibly see a mild sag in pricing during the latter part of August or early part of September, but historically, September and October tend to be strong months as extra houses in the north and east are framed in the northeast are framed to get ready for winter.

With wood supplies for plywood and OSB mills tight, sporadic down time for wood shortages could keep panel supplies tight through the time period.

We always see a slowdown in the first quarter when building slows down up north, and absolute pricing will depend how the supplying industry manages maintenance and market downtime versus demand. Our personal outlook for 2004 is that we will still be in pretty good balance in the overall structural panel market if housing starts stay anywhere near the current levels.

OSB shared the total panel market continues to move upward, and thereby absorbing the small amount of new capacities slated to come on stream next year. For LP, growth of OSB as well as the other specialty product also frame the next couple of years from a sales growth standpoint with the completion of the asset sales, including the lumber facilities Bill outlined for you, as well as the generation of significant free cash flow with OSB pricing where it is, and we'll soon have the cash to take on all of our debt, and the key will be how and when.

As Curtis indicated, we have already started the negotiations with the banks to eliminate the covenants have our hands tied with respect to dividend and share repurchase activities. Our focus is very much on shareholder value (inaudible) I say more emphasis on near term performance than strategic long term opportunities. That will guide those deliberations as we move forward.

With that, let me turn the call back to Curtis, to open up for questions.

Thank you, Mark. Kathy, if could you poll for questions I think we're ready.

Certainly. Ladies and gentlemen, if you would like to ask a question, please press star and then one on your touch-tone phone. You'll hear a tone indicating that you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up your handset before dialing. Our first question comes from Joe Stepaletti with Goldman Sachs. Please go ahead.

Hi Good Morning I was just wondering if we could just to clarify the transaction in terms of selling the remaining timber land, you're talking about an installment sale treatment. I'm just trying to sort of think about how much cash you're going to have when this is all said and done. It looks like if you look at your cash on the books now, the restricted and unrestricted and add in the $53 million of notes that you liquidated in July, you're at about $304 million. I wondered if you could sort of take it to the next step and say where we will be once you close this additional -- these additional sales that you have lined up?

Really, all of the remaining sales are going to be done under the installment method. So, it's ballpark around 90% of the remaining $350 million in proceeds will show up at cash and the residual with show up on the balance sheet as a note or investment.

Joe, that's also true for the 53. You guys take 90% of that, also we got about $45 million came in cash and the rest were in notes.

So, 90% of the $350 million under this installment sale program, you'll get in cash.

That's correct.

And that doesn't include the $80 to $90 million that you are talking about in terms of selling these other assets that you have just announced that you're planning to divest?

That's also correct, yes.

OK.

Unfortunately, the 80 to 90 so we're clear is the working capital liquidation. The working capital would go down the logs and related consumable--.

-- the discontinued off line.

Right.

OK. All right. Now, that's helpful. So, the -- and you expect this $350 -- you're expecting this to all happen in the second half of the year, right?

We are.

Yes.

OK. All right. That's -- I guess the only other question was you're talking about in terms of loosening up your bank agreement, the ability to pay dividends and to repurchase stock, I guess is there anything you can say to us in terms of your priorities in using all of this cash that you have -- I mean, you have done a great job you have built up or finishing building up a huge amount of cash here, the balance between, you know, shareholder -- share repurchases and dividends versus dealing with these public bonds?

Well, I think the key there is going to be obviously we have to make some economic decisions. The real issue is do we wait until 2005 where we have the ability to deal with some of it under the current agreements.

And basically, sit on the cash during that time period, and then well, obviously we'll make that kind of decision and look at what capitalization we're going to have and then we'll make a separate decision based on operating cash flow that we expect over the next several years as to whether we restore a dividend and if so at what level and then the remaining extra cash that we have should we be bringing shares back in? So, those are the tradeoffs that we'll be making.

Like I say, first thing we're trying to do is get this thing done so we get the banks to --so we can have the complete freedom to do any one of those things this that will be the first step. We're -- as I indicated, we're going to be looking at this in terms of primarily what do we do to enhance the value of the stock here in the next couple of years.

So it's fair to say that it sounds like the debt reduction is still your number one priority with this cash flow?

It is. It is our number one priority and we have been very consistent about that.

OK. Thanks a lot.

Thank you. We now have a question from Chip Dillon with Smith Barney. Go ahead, please.

Yes, thank you. Just a couple of questions. First one to follow up on the balance sheet. If we take 90% of the note in July and 90% of the 350m, which is 360, that would leave you, I believe with $26 million in net debt. Is it then fair to say that your estimate of the -- I guess the actual cash or I mean, you have on your balance sheet right now about $69 million from these discontinued operations, 54.8m, plus on the long term, plus the 14.5 short term. Will that - those $69 million of --whether that show up as cash at some point?

Yes and that's related to the lumber and the industrial panels. The interior.

Right. So if we take the 26m and add that back in and that gives you a net cash position of $43 million, then I guess if you are really see the world, the glass half empty then you should subtract the 125m and long and short term contingency reserves and then you have 82m in net debt or 78 cents per share. Did I miss anything there?

Wow.

I guess beyond that, you have to assume the money center banks that have the long term notes receivable go under-is that -- I want to make sure I'm not missing anything here?

The only thing on the contingency reserves is once we get through the last part of the OSB settlement, a lot of those are relatively long tail -- environmental stuff. We talked earlier about the hard board settlement. That's a 25-year deal so.

And then on a separate point, I noticed the plastic building products segment, which I believe is the Vinyl siding, and other products, made $6 million in the quarter which was a lot more than I had assumed. Is that sustainable or at least maybe certainly seasonal, but could that business be making, you know, $15, $20 million a year or is that optimistic?

It should, chip (inaudible). The prior turnaround in Q 2 of this year versus Q 2 of last year is the decking operation. They lost a quite a bit of money last year on the market startup and they were about break even this quarter. That was the primary turnaround; you can see vinyl had an increase in volume and increase in price. So, we think that over the long term, that -- as Mark mentioned, the vinyl continues to garner awards.

We're taking market share in the facilities that we have capacity that we can sell there. So, I think vinyl is going to be strong. Moulding has been relatively flat. It's been a good performer. We haven't seen big increases in the sales, but there's a couple of programs we're working on where -- with alliance partners that may kick that up a little bit. Then we have high hopes for the composite decking. You know, we're now in home depot and I think we have 450 dealers nationwide and the product's moving.

Then, last question is on the cost side, you noticed -- you noted how the costs had really shot up on $20 per thousand in OSB. Is there any offset or I'm sorry any moderation in any of those costs that you see in the third quarter, be it they wood, resin and certainly currency has already started a little bit?

Currency has already started. We have seen we're now looking at probably a $2 million to $3 million sequential reduction on resin costs based on petroleum prices. We think the resin costs will be $2 to $3 million lower in the third quarter than the second quarter. Wood -

Starting to flow.

Starting to flow. I'm not -- I'm not to the point where I'm going to predict that it's going to be significantly different than it was in the second quarter. As Mark said, it takes a year to get back in balance. Then natural gas side, again as Mark said, we have entered into long term contract --contractual commitments, long term being in the next 12 months where we have locked in 50% to 60% of the demand there. Those are prices that are slightly lower than Q 2, but give us a little additional insurance for spikes that may come in the winter months when gas demand goes up.

Last point over the last of the last question, so I make sure my math is right when you look at random links and the OSB price, it's already averaging in July well, well above $100 or more where it averaged in the second quarter. I know we have to translate down some for the fact that you have various different markets and also you sell on a 3/8th inch basis. But if prices were up $100 and you're selling a billion-and-a-half feet, including the specialty, that would suggest that you could be making, you know, $150 million more just in that one product in the 3Q, versus the 2Q and after taxes, that would be -- you would be talking close to $1 a share.

No one of course has the courage to put that in their estimates, including me. But is there something that we should also be doing to moderate our view in addition to what Mark said about possible pricing moderation?

I think there's a couple of things that you ought to think about. One, on the specialty side, that product is priced every six months. So, it does not go up and down with the OSB pricing. That's one of the strategic thrusts that we have got is grow our specialty business so we get a more stable earnings space. You have to take that capacity that's going on the specialty side and not look at any price increasing there at all. Because it just doesn't.

That's roughly $215m per quarter, right?

Yeah.

That's about right. $215 a quarter.

That pricing is very stable. It doesn't move hardly at all. On the OSB side, clearly, if we could maintain July price, you would be in that range. But as Mark said, we may see some sail off and late August or early September.

The July pricing were sustained, you would probably not far off.

I think the key here is to recognize that in July, we mainly got late June prices. Because the way you get prices up in the commodity business like this, you have to extend your order files. So, what we sell and -- what gets quoted this week is something that we have sold to deliver four weeks from now.

Yes.

So, when you are on rising market, most of what our pricing and actual pricing in July ends up being mostly what's representative of the pricing that occurred in June.

At least half of it.

August, on half of it. On August, we're going to reflect those prices that occurred in July, as we -- on the half of the wood that we have as prompt wood that we're shipping and bidding every day. So, that's why you have -- that's how you have to look at it. The bad news is as you go into this kind of a rise, you tend to lag. The good news is that if you keep yourself up four or five weeks, you tend to benefit on the other side if it does start to sag, so, that's why we don't make earnings forecasts, because it's a complicated, and as you can see, a volatile and dynamic environment at this moment.

The way to think about it is what you are shipping out this week to home depot and Lowe's will have a higher price than when you are shipping to the open market customers, because you would have sold the open market square footage several weeks ago.

In the rising market, that's true.

In the rising market. Thank you very much.

Thank you. We'll move on to Rich Schneider with UBS. Please go ahead.

Sort of following up on that, if you look at your chart on page seven, in -- I know this is on a 7/16th inch base, if you look at where you would have probably started your pricing for the third quarter, would have been roughly at around $225 on the 7/16th basis, is that the way to look at it?

You're right. And we're walking about four weeks or so out every week.

OK. In terms of your volume, your volume in OSB was only up 11 million square feet from the first quarter levels. Yet, you know, seasonally, second quarter is better, and I know that there was weather related issues, but, you know, first quarter was not particularly good either. Is that -- could you go through what may have occurred there? Was that a wood related issue beyond just, you know, the cost that we -- that you had discussed?

It was actually the first quarter in the winter, you can't get any of the woods and you can get woods. We didn't have any outages from wood shortages. We did in the second quarter, particularly in the southeast, Roxboro (ph), Handsville (ph) and Karthage (ph) had difficulty. I don't know if you saw this, GP announced they're taking the five plywood mills out, because they can't get logs. They're taking the plywood mills out in Texas this year. There's a shortage of logs.

In addition, we didn't have -- when you compare, we didn't have sham bored running and we just started woodland up at the very, very end. So, it was really running all of our mills flat out that could get wood, but we did take quite few days of down time for some mills because we had to stop the -- to build the wood basket back up.

So, as you look at, you know, the latter moving parts between the startups and, you know, I'm not sure maybe you could discuss where you are now in Roxboro but could you give us an idea as to how volume may look in the third quarter as you see right now?

Volume should be up in the third quarter. We started the woodland Maine, mill, in the middle towards the end of June. That mill is up. That has a production capacity of 220 per year. You're going to have volume coming out of that. Sham bored (ph) started up the third week of July. So, sham bored is back up and running. Now, you know, you are not going to get full capacity out of that in the quarter as you will have some ramp-up issues there as you bring in the wood and the rest of it, but we should be up --our volume should be higher. In the third quarter.

Probably $1 billion 3. We're running everything that we can.

So, maybe -- you did $1.3 billion in the second quarter, so it could be up to 1.4 in the third?

It could be up $100 million.

That could be close to 1.4.

Where is things right now with Roxboro?

They're starting to get an increase in the booed last week, but it's still a little --little bit hand to mouth.

The key is if we don't get hurricanes where you just dump a massive amount. It's hot enough if you get four days in between storm, you can get in the woods. I think we're going to get by OK, unless a hurricane comes in and dumps 13, or 20 inches of rain, that will be a significant blow and slow things down. Right now, we're gaining on it a little bit.

So, in essence, the wood issue is manifesting itself in a couple of areas. It's raising costs and also impacted your volume in the second quarter.

Exactly. Yes. This is also true for the rest of the industry. We aren't the only ones that had curtailments because of wood.

And what you mentioned interest were startup costs on the woodland. How much -- startup costs on the woodland. How much is it significant or not?

For the quarter, that was million dollar-and-a-half additional costs that we hired and trained people. Added the training. And we started that really from a cold start. We had a mill manage they're we moved from one of the other facilities, but really, we had to hire all of the time and indoctrinate them, if you will, into the LP system.

Are there any costs associated with the start of sham bored.

Same things. You have to bring the people back on. You have training and you have to get your log flow coming into the mill. So, that is probably another million. I would guess this quarter is probably another million-and-a-half dollar costs, plus you don't get the capacity out of it in July.

OK. And just in terms of, you know, this rapid rise in OSB prices, are you at all surprised that we haven't seen any announcements of new capacity coming on in the -- you know, in the next couple of years as a result of this?

Well, I think -- I -- you know, we can't predict who knows what's going to happen, but I think that as we have discussed in various phone calls in the past, you know, it's been a couple of months. It's not been a couple of years, number one. Number two, the people who might be expected to jump in and do that are recently tied up in other things, such as debt repayment, or supporting other things. There are a couple of mills that are on the -- on the watch list that people think are going to be built.

One is ours, with our slow can joint venture in the British Columbia. And we haven't made that decision yet and we wouldn't make that decision quite frankly based on today's pricing. We follow how's the substitution for plywood going that will trigger when we decide to do that. There is also a couple of New York projects that have been rumored and talked about, and at some point in time, somebody will probably get a bank or two to put up money for one of those, but pretty high cost mill, so it will be a tough one to compete for the long term, but whether those occur or not, that -- you know, at some point in time, this will probably trigger somebody, but so far, no one.

I didn't mean that the prices were up over the last couple of years. I meant when the mill would start up would be a couple of years.

Yeah.

Just last question, you said that you had yet another six-and-a-half million dollars to your OSB reserve.

Yeah.

I -- I thought you were pretty much reserved and there was a potential that it could be reversed with this new fund.

When we talked about at the end of both the year and the end of the first quarter is that we put out another program called a claimant offer program to the remaining claimants. They're about 14,000 claimants, roughly and we basically said that we'll pay you the same 35.87 if you check this box. If you don't like that number, make us an offer. Unfortunately -- well, fortunately, we can get about half of them back. Unfortunately, we didn't get half of them back.

So, our -- the expected participation in that program was slightly lower than we thought. But we have made some decisions internally and we have had implement of those decisions with the remaining payments. We are now beginning to accumulate the results of that. Based on those decisions that we made, and the expected returns, we added that additional reserve. That's really was a result of not getting as robust of a response as we thought on the last program.

Thanks.

Recognize that we're -- our intention here is to close this whole thing out and get it done and we think this is -- the best estimate is what it's going to take to do it.

Thanks a lot.

We have a question from Steve Chercover with D. A. Davidson. Please go ahead.

Good morning, guys. My question was also on the resolution of the OSB siding litigation. You have $7,000 left --

no, no, no. What I said, Steve, is we have 7 half of the 14 responded to us with an offer.

Oh, with an offer.

So, what that does, what that gave us was a database on which to make decisions on what level of offer we would accept and how we would go about liquidating remaining claims

I guess I was assuming they ticked the box and said we'll take -

Where are the other half of them? Did they disappear? Didn't they get letter or what? We have some detective work, modest amount of detective work just to make sure how much of that is simply people that are have -- have gone off the face of the earth and we just don't know it at this point.

my understanding that they could basically -- if they chose not to accept, the offer had a time expiring, and they could get -- choose to take you to court if you wished, but --

No, no, no, no, no, no. If they choose not to accept our offer, then we have the decision to make sometime toward the end of the summer or October, depending on when we get the final data from the administrator, what we wish to do. If we say we're done, we're not going to pay another dime, then you're right, the remaining claimants they are unsatisfied that could come after us. However we say, we're going to pay you next year, one year from now then we have no further rights under that settlement.

Pay in full or pay at some -

You pay at one year from the date. If we make that decision, then the September/October, we pay in full one year later.

Moving on, first of all, your SG & A seemed high. Are there expenses from the asset sales that somehow are coming in there. Should we see those SG & A?

G & A related to the businesses gets charged to those segments. If you look at the overall SG & A, and I don't have the numbers in front of me, but one up $3 million. That was almost entirely three programs that Mark talked about it. The acceleration of the smart side lap siding program with radio, TV and other advertising. It's the acceleration of the tech shield advertising on the radiant barrier products and it's the result of increased expenditures in our decking product to generate the demand there. So, it's really shifted from a G & A to an S. It's basically selling expenses related with the specialty products.

As the company slims down following the sale of the lumber business and the hard board, should we expect to see that trend down as well?

Well, again, most of the direct expenses related to those businesses are charged to those businesses.

OK.

So, the overall SG & A will come down. The unallocated will remain about the same.

OK. Finally, just you gave us some impacts for resins in the Canadian dollar. Were they quarterly or annual amounts?

That was a quarterly amount.

OK.

Thank you.

We have a question from Mark Wild (ph) from Deutsche Bank. Please go ahead.

Good morning. I wondered if we could just talk a little bit about what's going on with provincial timber allocations up in Canada. It sounds to me like the provinces are starting to trim some allocations. I wonder if that has any affect on any of your operations. And if it also might have some effect on any of your operation construction of any new OSB mills going forward.

What you are dealing with there is primarily a softwood allocation issue where they have gone back and said they're going to -- if you will, reduce the cut, the allowable cut on various contracts by a certain amount and then they're going to compensate you for that and you'll be able to buy that wood in the open market. Part of this is aiming to try to get more of an open market environment that the U.S. keeps insisting they need to have for the softwood lumber.

For OSB business, the OSB businesses, those are not softwood operations. Those are hardwood. And those have not been modified as part of this process. In the softwood, we do have our softwood allotment is in our --what was our Evans operations, the laminated very near lumber has a plywood and cedar operation there. There we will have some impact in terms of the reduction in terms of allowable cut. And then the real uncertainty is going to be so, how you are compensated for that, and how much, you know, does it represent the real value or impact.

In terms of running the operations, probably won't make a whole lot of difference, because the mills that are there are going to be the ones that consume the product anyway. Probably the biggest uncertainty is some of this is going to be given to the bands of natives, residents. So, how that's going to play out whether they'll have the same harvest plan, et cetera, is really an unknown, but that's the only place we're going to have an impact will be in that laminated very near lumber operation that we have. Up in golden.

Mark, I wondered also, though whether up in Canada you're starting to see some more environmental issues around harvesting some of these northern hardwood forests?

There are -- there have been for quite some period of time people who focus on the Borio (ph) forests in Canada and concerns as to whether it's being managed well or not. I would say that the provinces and at the federal level. They're very sensitive to that. I think you're seeing most of the companies, including ourselves, are adopting sustainable forestry initiative or the Canadian standard CSA. And those basically are harvesting and growing and managing techniques that are designed to maintain sustainability over the long term.

And so, I think you're going to see an ongoing evolution there as people take a harder look in terms of how things are being managed. Our own experience is that by and large, they're being managed very well. There's an awful lot of government watching you harvest their trees. It's not as if people are behind a fence someplace doing whatever they want to. I don't personally anticipate a significant impact on the forest products operations in Canada over the next several years.

I guess what I'm also wondering, though, Mark, is whether this would make it maybe a little more difficult to site a lot of new OSB facilities up in Canada going forward?

I think that's already a challenge because the inexpensive wood is already allocated.

OK.

Now when you're going to do a new one, you either have to go way up so far north that you add another $10 or $12 to the shipping costs, or you're harvesting such small trees that you have to harvest three to get the wood of just one a little further south.

Or you're in areas that have pretty difficult access. That raises -- when you are in difficult access, the more mountainous, et cetera, that significantly raises the cost of harvesting. So, the logical places are pretty well taken and -- but I don't think it will be environmental considerations, frankly, that will restrict it. It will be economic considerations that -- OSB you cannot have high cost wood.

Yeah. OK. Thanks, Mark.

We have a question from Peter Ruschmeier at Lehman Brothers. Please go ahead.

Thanks. Good morning. I understand that the priorities for the cash flow that refers to reduced debt. Mark, I just wanted to clarify your concluding comments and opening remarks that I think you said you're more focused on the near term value enhancement which I think you're referring to dividends and buy-backs rather than long term strategic opportunities.

Yeah, basically, I'm saying that right now, if somebody walked in and said we have a great deal for you, some sort of a acquisition that will be negative for three years and pay off big five years from now, that would fall way down the list versus taking more deliberate actions of the type that you have indicated. I think we'll be in that mode for some period of time.

OK. You can also contrast, though, the dividends and buy-backs where they stack up relative to, say, you know, the JV with slow-can and that type of opportunity?

I think that quite frankly, when we look at the next several year, we think that we're going to have sufficient both financial flexibility and cash generation to be able to do both. So, I don't think we're going to have an either-or. It may affect timing. But I don't think we'll have an either or situation.

OK. Moving on to the cash flow statement, I'm not sure I fully understand the installment note situation. You indicate that you sold $110 million of assets in the second quarter. Your cash flow statement shows about $30 million of proceeds from asset sales. Is the difference related to installment note?

Yes.

OK.

We just add -- the timber -- not all of the timber we sold in the second quarter was under the installment note process.

Half and half.

About half and half and one of those we did monetize during the quarter and the other one was towards the end of the month and didn't get monetized until early Q3.

Got it. OK. Coming back to the mechanism in OSB and how the prices work and understand as you know lag as the prices are rising. I just wanted to clarify, if we were to see a sudden drop in OSB prices, do you really expect that you will continue to ship at the -- you know, at the higher price from, two to three weeks prior, or you know, should we assume that, you know, if there's a sudden change in OSB markets that, you know the orders placed in the last couple of week, we would let reactively adjust to the new price.

No, we have never done that, and we don't adjust when it's going up, and therefore we don't adjust when it's going down. So, that for wood that's on order and been committed like that, absolutely no change. We have never made a change of that at all.

OK.

But do recognize that if prices for example, went down $10 this week, the contracted wood, which we ship next week is based on Friday's random lengths number. So, those numbers, half of that, roughly, the contract wood, would reflect whatever that random lengths number is, whereas the thin wood would be whatever they committed to.

OK and just last question, this may be a stale point, but you have indicated in the past that you think that your normalized EBITDA as much as $400 million with trend pricing, and I believe that that was pro forma for asset sales. I'm just curious on whether that's still something that big picture, you think is realistic, and if you just kind of indicate, you know, I mean, where are we -- we arguably weren't that far below normalized levels in the second quarter, but obviously, the EBITDA was.

I would say, yes, that's still our -- with the long term picture on it, what has to happen to be there? A couple of things. First of all, as we have indicated, we're on a investment plan to drive our costs down to OSB. And we have to continue to drive down that. As we do that, we'll move more and more toward that level at normalized OSB pricing.

The challenge in the first and early part of the second quarter is that costs rolled right up with energy. The wood shortages, etc. Much faster than -- as fast as the pricing did, so we didn't get, if you will, the benefit of that. So, as those kinds of costs go back more towards normal and we continue to drive the costs out through our investment program, OSB earnings and EBITDA will continue to widen, and approach the levels that we have indicated. The second part is what Curtis indicated, the investment that we're making in marketing and sales to drive the growth of our profitable specialty products area and that's the other segment that we expect to grow over the next couple of years to be able to add considerable EBITDA to those as well. So, with the caveat that we need to execute and are executing the plans that we have laid out in front of you, that is still --that would still be our projection and number.

OK, just to summarize, you're assumptions would assume lower costs than we have today for the energy and fiber, and would also assume some growth, you know, especially in some of the specialty businesses.

And growth in OSB, because as we modernize these, we get more volume out of it.

OK, thanks very much.

We have a question from John Tumazos Prudential. Please go ahead.

This is I guess has been partly explained. I was going to ask what the --if discounting was on different types of OSB sales. And I understand that half of the wood is sold on contracts to lagging random lengths and half is bid and that the specialties are six month pricing. If you could explain what the customs are for pricing different size customers.

There's no -- we don't do any six month pricing. Our pricing is that we do contracts that they will supply you wood all year, and next week's price will be what this Friday's random lengths is. So, we don't -- we don't tend to go out and do -- long term pricing.

I think what John's referring to is what I might comment as we don't change our siding part.

Oh siding. That's it-- I'm sorry. On the specialty side, that's right. The price is very stable. We don't change it. On the commodity OSB, it is priced every week.

Every day.

Now, there's -- there are very modest, very, very modest functional discounts, pluses and minuses that can go with any given sale, but it's a very minor number.

Thank you.

And we have a question from Jared Muroff, Prudential Financial. Please go ahead.

I have a couple of questions. The first one is it sounds like on your timber sales what you try to do to defer taxes is take this - to accept a note instead of cash. Is that generally why you do that? it sound like that was a tax planning issue?

It is a tax planning issue. This defers the payment of income tax.

By money advertising that note, do you pull forward the tax payment.

we do not.

you do not.

No.

The next question I have is -- has been covered I think in the last two, but I'm still a little confused. In the case, the OSB prices were to fall $75 per thousand square feet on Friday and you have got four weeks of orders, how easy is it for that four weeks of orders to all of a sudden disappear and become two weeks of orders and people to cancel orders and reorder. Can your customers do that or are they not able?

They might try, but they can't. Our history is we have been through this many, many times. We don't do that. We hold them to it, and the reason is that when things are going up, we don't go back to them and say, you know that stuff we sold you for $250 four weeks ago? Prices are now $320, you owe us $320.

I understand.

We don't do it on the way up, they don't do it on the way down.

The final question, I was hoping you could give us a sense of maybe in third quarter and fourth quarter, what the incremental production from both Woodland and -- going to be as they ramped up into the second half of this year.

-- a couple of hundred a quarter.

As I said, Woodland annualized capacity was at 220m and you have got to figure out what the ramp-up is going to be. That's roughly 50m a quarter and the annual production at -- was about 410m. So that would be 100m a quarter as it ramped up.

How long is the ramp-up period for these --.

Was really -- It was a cold start with hiring all new crew. So, that startup period was roughly five weeks, I think five or six weeks before they got to some level of production. For them to get to the full production, I'm guessing that's probably two months.

That's pretty close now.

Then --, that also was a cold startup, but we were able to retain all of our salaried employees, some changes in the hourly workforce, so there were training issues there plus getting the infrastructure in place to support that -- that operation. So, it is probably in the same six to eight weeks before it's at its capacity.

Great. Thank you.

We have a question from Michael Khristadillo (ph), Endwood Capital.

Yes, could you comment -- on the field inventories that you are seeing now, they are both in your yards on rail cars and a lots of secondaries and some of the homebuilders?

Well, we have no inventory. We ship after -- we have to keep it for three days to let it cool off and then we ship. So, we don't have any stashed away. What we understand is that things -- and the behavior of the marketplace would suggest there isn't very much spare wood sitting around, and the reason for that is that you measure that by the number of panic calls you get where somebody needs some wood tomorrow or the reports we get back from the secondaries where they simply don't have any people who need it tomorrow. And so, right now, we would suggest that there's very limited wood throughout the system, and I think that's simply been the case because the consumption rate probably is at or above what the production rate is right now.

Sometime in October, November, that's when all of a sudden somebody will find that they called up and they can get some next week. Then that will start to sag off. But right now, across the country actually, things are still seeming to be very tight. We're not aware of any big stashes of OSB. Particularly, when you get to this high a price, people don't tend to keep any on the ground, because they're concerned they'll get stuck with it after the prices go down. So, I think it's probably moving through about as fast as it can go.

All right. Now, when OSB peaked back in 1999 at $355, apparently it stayed over $300 for about 11 weeks, which seems to be consistent with your thought that maybe, you know, strength through September and October. Is that the right way to read that?

You know, to the extent it's a predictor of the future, I don't know, but I'm just saying that right now, building is strong, retail trade is strong, and there doesn't seem to be a lot of wood sitting anyplace. So, we seem to be in pretty good balance. And, when we're in balance, you get these kinds of prices.

And lastly, what's the earliest date that you think some green-field capacity could start up? Do you think it would be the spring 2005 building cycle?

There's one mill that's going to start up late this year, early next year.

Sometime, next year.

The Toko Mill in Saskatchewan.

OK, and anything after that? The next after that?

That would be.

Huber in Oklahoma and that's probably '05.

Yeah. That's a specialty.

But if you wanted us to -- for exam, we decided that -- today to build our mill with slow can, it would be at least -- and we already have it permitted, so we wouldn't have that lag time, it would probably be two years before we get any significant production out of there.

OK. Lastly, actually, any quantification mark, of the continued substitution effect from plywood to OSB?

It's moving on. In the second quarter, I believe the number was -- the first quarter, the number had moved from 57% to 59%. And if you look at the plywood shutdown, et cetera, I suspect that by the end of the year, we may be between 59% and 60%.

Thank you.

Kathy, maybe a couple of more questions, please.

There are no additional questions at this time.

All right. OK.

Thank you very much for the call. Kathy will give you the updated information on the replay call. This is Bill Hebert, I'll be available as well as Becky Barkley for any follow-up questions after the call. Thank you for attending today.

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