Louisiana-Pacific Corp (LPX) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, welcome to the LP second quarter earnings release conference call. At this time all participants are in a listen-only mode and later we will conduct a question and answer session and instructions will be given at that time. If you should require any assistance during the call, please press star then the zero and an AT&T operator will assist you off line as a reminder this conference is being recorded. I would now like to the conference over to your host Mr. Curt Stevens, Chief Financial Officer. Please go ahead.

Thank you very much and thank all of you for joining us for Louisiana-Pacific's conference call to discuss our financial results for the second quarter. And for the six--month period ended at the end of June. As the moderator said I'm Curt Stevens, the Executive Vice President and Chief Financial Officer and with me today is Rick Frost LP's Executive Vice President of Commodity products and procurement engineering and Mike Kenny and Becky Barkley who are responsible for our Investor Relations activities. We are making this call today from our new corporate headquarters in Nashville, Tennessee. With the stock price performance this morning my friend Rick here told me that we can probably only screw this up so hopefully we will add to your knowledge of our quarter. I will start the call with a review of the financial results and provide some comments on the balance sheet. And then Rick will talk about the accomplishments for the second quarter and also talk about our outlook for the reminder of the year. Then we'll open it up for question. As we have done in the past this earnings call has been opened up to the public and we are also doing a simultaneous webcast. This can be accessed through our Web page at www.LPcorp.com.

Additionally to help with your understanding of our earnings we have provided a presentation that will assist with supplemental information, along with this call. As we go through the call I will be referring to certain pages of this presentation. As a caution this presentation should be reviewed in conjunction with the publicly available earnings release. I want to remind all the participants about the forward-looking statements comment that is included in our earnings release and also shown on slide 2 of the presentation. And also there is a discussion of the use of non-GAAP financial information, which is included on slide 3. Rather than reread these statements I'm going to incorporate into the discussion with this reference. Let me start with slide 4, the financial results for the quarter. Second quarter results were outstanding and followed a very good first quarter. Once again LP's results were clearly dominated by the strength of Oriented Strand board. OSP prices hit record levels once again, although there was a substantial price decline later in the quarter. For the second quarter the price increase accounted for over 270 million in additional pretax profits compared to the same quarter last year and for the respective six--months period pricing provided over $500 million in additional pretax profits. We are reporting today net income for the quarter of $192 million or $1.75 per diluted share of which continuing operations showed income of 189 million or $1.72 per diluted share. Discontinued operations showed net income of $3 million largely coming from our remaining lumber mill. Net sales from continuing operations were 825 million for the quarter.

For the same period last year we reported a net loss of $17 million or 16 cents per share on continuing operations we had income of 9 million or 9 cents a share and a net loss of 26 million on discontinued. Net sales from continuing operations this quarter last year were 473 million. Referring to slide 5. This is the financial results for six-month period we're reporting net net income of 299 million or $2.73 cents a share of which continuing operations provided income of 302 million or $2.76 cents a share and discontinued operations had a net loss of 3 million. Net sales from the continuing operations were 1.5 billion during this period. For the same period last year we reported a net loss of 16 million or 15 cents a share of which continuing operations had income of 11 million or 11 cents a share and discontinued operations had a net loss of 27million. Net sales from continuing operations were 880 million during the same six--month period last year.

In each of these -- each of the reported periods we did have several special items that are generally not attributable to ongoing operations. In this quarter they're relatively limited. We did announce in the first quarter we had successfully completed a tender offer for most of our senior subordinated debt outstanding. During the second quarter the final bonds were subtle resulting in about $1million charge to cover the premium and related expenses. Additionally we reported a loss of 2 million associated with the continued cost of relocating LPs corporate headquarters to Nashville. In the second quarter of last year we had a of gain 29 million on the sale of certain timber assets and offsetting that gain was a loss of $16 million on evaluation allowance associated with certain note receivable and an increase in product and environmental reserves of about $9 million. After taking these items into account, adjusted net income from continuing operations for this quarter was 192 million or $1.74 per diluted share as compared to 7 million per diluted share in the same period last year. For the six--month period adjusted net income from continuing operations was 339 million or $3.10 a share compared to about break even in the same period last year. These items are detailed out in footnote 2 and 3 of our release.

Let me now just move to the performance of each of our segments. Slide 7 refers to our OSB business. For the quarter OSB prices showed significant improvement over the second quarter of 2003. Up almost $200 per thousand square feet or 132%. This was the result of very strong market demand coupled with limited increases in capacity, operating profits from this segment are up about 275 million for the same quarter last year and over 500 million for the six month period. During the quarter we did see an increase in operating cost of about $10 per thousand versus the same quarter 2003. The major elements of this cost increase were higher wood, energy and resin cost. Offsetting this increase was a slight decline in the Canadian dollar exchange rate. Slide 8 looks a little closer at OSB pricing during the quarter, as I mentioned we hit record levels of pricing over $500 per thousand early in the quarter and then we did see a decline later in the quarter. You will note though in the last print of random links last Friday we did see a tick up in that pricing.

Slide 9 is composite wood products and again as a reminder this is our Smart Side siding products, our hard board siding products and our Chilean mill. For the quarter segment sales showed an increase of 18% and profits were higher by nearly 60%. Our Smart Side products continue to do very well in capturing additional market share as demonstrated by the 31% increase in volume quarter to quarter and for the six-month period a 32% volume increase. This significant increase was possible as we committed virtually 100% of the volume from our Silsby,Texas mill to siding and began to ramp up expanded production at area Tomahawk facility. Additionally we did announce last quarter plans to convert our Heyward, Wisconsin OSB plant to Smart Side and those plans are well under way. In Q2 our Hard Board siding business continued to show significant strength as volume grew 20%. Slide 10 is our plastic billing products. As a reminder that is vinyl siding, composite wood decking, and our molding business. Overall in terms of profitability, this segment showed a decline from the prior year due to the increases in raw materials, primarily resin, which is petroleum based. Each product line within this segment was profitable however, not at the levels of the prior year.

Vinyl operations were flat for the quarter, average sales prices were up slightly to partially offset increases in raw materials. Our decking business is slowing significant improvements from the prior year. In Q2 we had a volume increase of 23% and a slightly higher sales price in the same period last year. Our expansion at the Meridian, Idaho facility is on track and we shift additional volumes out of these facilities in Q2. Our molding business showed a decline in volume at 7% for the quarter, but due to a very strong first quarter, six-month volumes are actually up 4% and a slight price increase. The next slide, slide 11 is engineered wood this segment includes laminated veneer lumber, and I joists plus other related products which includes a small plywood mill. Growth in the two primary product lines LVL and I-joists was simply extraordinary in the quarter. We were up 37% in LVL and 31% in I-joist as we took new customers and expanded our presence with a large production focus. That's the good news.

The offset is that raw material costs were significantly higher OSB and lumber which affected the profitability. To partially off set these higher costs we did announce price increases several times this year as reflected in the higher price realizations that we show there with LVL 8% and I-joists was up 12%. On selling and general administrative cost they were higher than 2004 by about 2.5 million a 6% increase. As a reminder, these are the expenses that include both the unallocated corporate G&A as well as those directly attributable to business segments. The primary reason for the increase was results driven, was our improved profitability, being above our budget and expectations, we had additional accrued cost associated with the acceleration of several stock-based programs and the accrual of larger management and employee bonuses. Slide 12 is the tax rate, the effective tax rate on continuing operations, is the same as it was in the first quarter about 36%. This is lower than the statutory rate for the primary reason that the level of income that's attributable to our Canadian operations where there is a low overall provincial and federal tax rate.

Due to the various tax buying strategies, utilization net operating loss carry forward we do estimate that our cash is payable or already paid associated with the first six months of earnings will be about 75 to $80 million. On the balance sheet, slide 13 the impact of the strong performance certainly has enhanced the balance sheet and key statistics at June 30, we had over $1.1 billion in cash, cash equivalents, investments both short-term and long-term and restricted cash. As a reminder, the restricted cash represents cash collateralization on our outstanding letters of credit which we routinely issue for workers' compensation, industrial revenue bonds and other items. Working capital about $1.2 billion and if we look at the total cash versus our interest-bearing debt, cash exceeded that debt by over $700 million. Capital expenditures for the six months were at $62 million and we currently project that capital expenditures for the full year will be in the 135 to $150 million range. And then book value, since the end of last year, has increased about $2.60 to 14.90.

Slide 14 is a reminder this is the same slide that we showed last quarter on the use of cash in our financial strategies. We continue to intend to put aside 250 to 300 million to allow us to ride comfortably through the normal business cycle, as well as any extended down turn in the future. We will retire the debt that becomes due or callable in 2005. With the cash we have available, as well as future cash generation we will be returning cash to shareholders via rational dividend and the use of a previously authorized share repurchase program. In terms of capital expansion we'll continue to look for opportunities to grow OSB via acquisition of existing facilities that we can modernize and incorporate into our system. Key issues are the right time and the right price. Within some limits we can grow with (INAUDIBLE) new green field facilities. We broke grown in our joint venture with Camphor in British Columbia in early June and we announced our intention to actively explore a new mill in Alabama.

To help moderate some of the cyclical nature of OSB we are continuing to grow the composite wood and plastic building materials businesses as fast as it's practical. We are pursuing appropriate internal capitalizations plans for these businesses to satisfy our customer's demand. Examples include the planned conversion of the Hayward OSB mill to SmartSide, ongoing expansion of decking production at both Meridian and Selma and planned capacity expansions at our two vinyl siding facilities. Additionally there may be some modest acquisitions available to help us grow these less cyclical businesses faster. For all these reasons we do believe it's appropriate and prudent to build a war chest so we can take advantage of opportunities, should they arise. Let me now turn it the call over to Rick, who will provide his reflections on the second quarter on our accomplishments, how we are managing our business, and the outlook for the next several quarters.

Good morning everyone and it's a spectacular morning here in Nashville and it's great for all the folks that we have moving here this summer to get acclimated to Tennessee. Our second quarter can be described with one word and I think that word is growth. Our Q2 '04 to Q2 '03 growth comparison is reasonably dramatic. We all know that pricing as been quite favorable in the first half of this year, but the growth that I am referring to is volume growth. Beginning with our major product line, in OSB, our volume was up 10%. In Q2 of '03 or Shamboard mill was not running due to a labor stoppage at that time and our Woodland mill that we acquired from Georgia Pacific had not yet been restarted. This year they were both running. But we also took about 48 days of mill downtime, maintenance and capital deployment-related downtime during the quarter. Although June housing starts number were down somewhere between 5 and 8% and I think someone yesterday referred to it as the June pause, July activity is very strong. Our building customers are very busy and making no noise about any slacking of business.

Repair and remodeling reported in to be up 4 to 5% Q2 to Q2 and year-over-year comparisons. And mortgage rates have stabilized and in some places dropped just a bit. And the long-term forecast for the next decade for housing continued to be strong. With projections between 18.5 million new starts and 19.5 million new starts. As Curt mentioned prices printed up last Friday in random links in OSB by $30. Got the price North Central seven-sixteenths up to $305 and I checked the mid week print this morning before I came in here to this call and it's now quoting at 3.25. Channel inventory appears to be lean and our competitors and us have built order files. We are out three weeks in our order file and some of our competitors are out even further. We intend to take about 60 mill days of downtime in Q3 for maintenance and capital deployment work as we continue to reinvest in lowering the cost for our existing OSB mills and getting some additional volume from debottlenecking efforts.

Q3 in my opinion has all the indications of being another robust quarter in OSB. Q3 let me remind you is also hurricane season which has a tendency to spike demand in threatened areas. And as Curt mention we did break ground early in the month of June on our JV mill with Camphor and so far on we are on budget and on time in that effort. And the startup plan remains the same which would be Q4 of 2005. In engineered wood products our sales volume Q2 to Q2 were up over 30% in I-joist and over 35% in LVL. As well the plywood volume and price that we make at our integrated facility in Golden, BC was up significantly. Our mills are running extremely well in engineered wood, but we are basically running flat out. Unfortunately we have not been able to entirely offset the raw materials increases for I-joist which is made up of either and LVL or a lumber phalange and OSB web stock, but we have raised prices three times in the last 8 months. The most recent and largest price increase has begun taking effect the 1st of July due to the long order files that we had going into that price increase. We were slightly profitable in Q2 in engineered wood and we expect this to improve significantly in Q3.

When raw material prices do finally subside to a more normal level, I think engineered wood should be in pretty good shape. Our SmartSide product segment was up over 30% in volume Q2 to Q2 our Silsby, Texas mill ran 99% Smartside products compared to over 80% OSB last year at the at the same time. As well our Tomahawk mill upgrades are complete and we are producing more trim and more sidings. On the last earnings call we introduced to you our intention to provide further capacity growth in the SmartSide area by converting our Hayward OSB plant to this business and we will be presenting those capital needs to our Board of Directors this coming weekend. As Curt also reported our decking volume was up significantly, up almost 25%. Our Meridian, Idaho mill is adding technology and capacity improvement to significantly increase the output of that plant and we continue to believe that the future of this product line will be very bright. Now gleaned from recent large home builders releases, year to year backlogs, and the number of homes it's somewhere between 15% on the low side and 30% on the high side. And these are the big builders, Polti, Syntex, Ryland, DR Horton. We think that starch will probably stay within the 1.85 range at least through this next quarter and then adjust seasonally late in the fourth quarter. Wrapping up, current demand across our range of products is very strong and looks to stay that way through Q3. We are sold out across all of our product offerings. And right now our focus is to do what we can to respond to that condition by growing our capacity to produce product. With that I'll turn it back over to Curt.

Thanks, Rick. As we said before our commitment is to grow the Company profitably toward an ever increasing share value while returning cash, via dividend as rational through the business cycle. This quarter was a great quarter. We believe that there are many positive economic and demographic indicators that will allow these good times to continue. We have a motivated management team assembled here in Nashville as well as trained and skilled mill management at each of our facilities. Our investment and marketing plans to grow volumes and reduce cost are well-thought out and being executed as we speak and our financial strength puts us in a position to take advantage of opportunities that may arise in the future. So with that, shelley let me give it to you and open it up for questions.

Thank you, ladies and gentlemen, if you wish to ask a question press star then one on our touch-tone phone, you will hear a tone indicating you have been placed in queue.To remove yourself from the queue, press the pound key. Once again if you do have a question, please press star, one at this time. We have a question from Mark Connelly with CSFB. Please go ahead.

Thank you and congratulations for really outstanding results . A couple of things, first, can you help us with the CapEx progression I'm just trying to get a sense of whether you are going to be on track this year which would be a heavily back-weighted year whether there's any shift from last time we spoke?

Well, ast quarter we talked about was spending about DB&A of $135 million plus our portion of the investment in the Slowcan mill, which was estimated to be 30-35 million. We are a little bit behind that rate you can see where it's 62 million for the first six months of that I think about 10% oft that was going into the slowcan mill. Now some of the downtime that Rick talked about that we are taking this quarter and that we took at the end of last quarter were to get those projects back in place. So I'm now reducing our estimate from that 170 down to between 140 and 150. So I think we'll probably fall short 20 to 25 million from what we talked about..

Does that push into next year?

Probably. Yes.

Okay. And two more questions. We haven't heard much about the Chilean OSB expansion opportunity that was talked about probably over a year ago obviously, you have got other stuff that's on your plate. I'm just curious whether the economics of expanding capacity at the Chilean facility is to produce commodity product is still something that's on the table or are the economics just shifted?

No. Well, there has been a little bit of shift in thinking. We were considering taking down one of our shuttered OSB mills to Chile with the intention of building siding products there and bringing those back in -- not commodity board but the specialty. The decision we made instead was to convert our Hayward, Wisconsin which is a much larger facility due to the demand that we are getting on that product and simply moving that mill down to Chile would have been a short-term stop gap and measure for that business and wouldn't have solved the long-term growth potential. So what we are now considering is the folks in Chile are, our management team down there, is developing a plan for taking that mill down to Chile, but to satisfy demand in South America and selected export markets, none of which are the U.S..

Okay. That's helpful--

Just as an aside, the Chilean mill has been consistently profitable for the last seven quarters so it's been a good operation for us.

Okay. Again, the last question is with respect to engineered wood, you have given how easily prices in lumber and panel have passed through both on the way up and the way down, I'm curious why engineered wood is taking so much longer? So two part question. First, do you think that market is simply oversupplied? And secondly, I understand that you are clearly running that business above cash cost, but I wonder if you might just produce less and just sell the OSB because you make so darn much money on that?

I'll take the first part of your question first, I think up until a year ago if you looked at the prior five years in engineered wood, you would see an overcapacity situation. I think demand capacity for both of those product lines, I-joist and LVL was running down around .7. So you had gradually declining product prices over a five-year period. This last year building got so hot that basically everybody sold out. So the whole dynamics changed and it was the first time when people that were in the business could actually pass on price increases to the customers. And obviously it was something that we needed to do when raw materials went up. I the think the question that we are asking ourself and spending all the time on is will this product line kind of recommoditize if you will as raw material prices go down, or will we be able to hang on to these price increases and basically kind of reset the bar? I don't know the answer to that question. We are going to have to see. If demand falls off significantly, you would go back to the prior situation where your demand capacity went down. But right now there is no indication that there is enough LVL or I-joist in the system to satisfy currents demand. So our guess for the short-term and by short-term I will define as at least the next year, we think prices are going to hold regardless of what happens to raw material costs. Now your second question was?

The second question was are you making enough money in that business to justify it relative to just taking that raw material and selling the OSB?

Yes. Because OSB and I-joist is say about half of your cost

Right

And then you've got lumber and LVL on the phalange and then the most profitable piece of anybody's engineered wood business right now, is LVL which is laminated veneer lumber and that basically is -- is what's dragging along the I-joist. So I think the answer to your question is is it profitable enough to stay in? Yes, it will be. We're going to -- as I made comments I think we're going to be pretty happy with ourself next quarter without raw material price going down and then once they go down it should be a pretty good little cash business for us. What we're trying to do is figure out how to grow it.

Okay. That is very helpful Thank you.

We have a question from the line of Chip Dillon with Smith Barney. Please go ahead.

Yes. Good morning. Could you update us on what you're thinking your capital spending will likely be in 2005 as you look at the budgeting for next year? And also if you could just update us on where you see the tax rate sort of stay at the, you know, 36% level as far as you can see going through the rest of the year and into next year?

On the capital spending for next year as we talked about in the earlier comment, we are delaying some capital spend from this year, and depending on what the level of engineering support that we have internally to effectively implement that capital we may pick that up or it may just stretch out further. Next year we have got the second half of the construction of the JV mill that we will be meeting our obligations on and then we are looking at somewhere in the 135 again back to DB&A levels as part of the OSB Brownfield plan that we've talked about, as well as the expansion and conversion of the Hayward facility so I think it's going to be about the same DB&A level next year, chip.

Okay. But then the contribution is on top of that though?

Yes. Some of the JV will be on top. Actually shows up as an investment in JV it doesn't show up as capital on our cash flow.

Gotcha. And then the tax rate?

The tax rate as long as the balance of income between Canada and the U.S. stays about where it is now, I think the tax rate is going to be lower than the statutory U.S. rate.

Okay. And are you helped, as that shifts more to Canada or ar you hurt as the income shifts more to Canada?

The combined Canadian rate on average between the provincial and Ottawa is lower than the U.S. about 3 points. One other comment the other thing that we had in our tax rate in prior years was the change in the Canadian exchange rat. So this assumes the Canadian exchange rate stays about where it is. Because if it goes up or down we will also have a change in the rate.

And does it help you -- how is that sensitive -- if the Canadian dollar keeps strength or if it strengthens does that hurt you and if it weakens it helps you?

Yes. And that is the intercompany loan that we don't get to take off of your U.S. taxes

Got you. Okay. And then last question is the net cash number you put up exceeds the amount you plan to keep longer term as sort of a reserve given, which is understandable, given the volatility of the business, but its exceeding by almost a half billion dollars even when you net out what you need for the volume redemption next year. And it seems like that you, you know, that even though group 4X I would argue has got a good return when you compound it you certainly live through times you don't want to experience again, probably given the down cycle and so I hear you are going to be more disciplined in terms of acquisitions. And so that's coming through loud and clear I just was wondering if you have given some thought in light of some of the things we've seen whether it's, you know, the Microsoft announcement or even in this industry where you have Abotiby spinning off pulp trust, you've got the two timber REITs, you've got packaging corp, companies that pretty much give us some greater definition in terms of how they view their excess cash. It would seem to me that you could -- and some of your shareholders have mentioned this to me that you could, you know, maybe put in perimeters and say look everything above X amount we'll pay out unless we see an acquisition and that way I think people could maybe make a better guess as to what you will be paying out.. Understanding of course that you can change your mind if there is a better alternative down the road, have you thought about maybe giving us a bit more definition than you have so far?

We, obviously these are discussions our board has on a regular basis. I think the -- what we try to define is the minimum cash we would like to keep and we understand that there's options and that the street -- we are being asked this question on a regular basis. Let me just say that there are acquisition opportunities that do make some sense, and I don't think you have to be a genius to figure them out. We've talked about where we want to invest, it's in the businesses we are in now, expanding in OSB, there have been some recent actions within the industry to make assets more attractive as a potential acquisition. But as I said the issue is the right time at the right price so patience on these I think is the watch word of management. On the dividend side we've been pretty clear on the dividend that we'd like to get to that to 30 to 40% of normalized earnings. That is where we'd like to get to. As far as the share prepurchase we did not do any share repurchases this last quarter, but that is certainly an ongoing discussion item as we're generating cash. And that probably is the more appropriate way to return cash to shareholders than it would be a special dividend sort of what Microsoft did.

And as you look at getting the 35 to 40% of normalized earnings and I have been watching OSB for many years and I can't figure out what normalized is. And I would gather that the tendency could be that you could keep increasing the payout until you actually get above that level and you get caught in the position you were in in '01, '02 could you give some ideas to what you see normalized earnings so we can maybe make a guess as to where the dividend eventually gets to?

Well, you hit the key point is what do you think normalized OSB pricing is like and if you look back at any of the past five-year periods you got OSB pricing in the 190 to 195 and at seven-sixteenths. The entire industry has seen an increase in the cost levels, part of that is coming from the Canadian currency for those producers that are in Canada where we saw 16% increase in our cost from 2002 to 2003 and then a big part of that is coming from the energy-related resin, natural gas, and then we have also seen particularly in the northern part not so much in the south, but we have seen wood costs go up a bit. So with that being said, we think the new basis is probably in that 200 to 205 so we think it's gone up probably by 10 to $15 so if you look at a normalized price at that level and you run it through some of your models you're going to end up with $1.75 to $2.00 as kind of a normalized earnings.

And did you expect to get to like I guess what would be the implied dividend rate of, I guess, 70-80 cents something like that pretty quickly? Or is that something you're going to keep gradually ramping up to?

Well, I think what we said last time and my view is still the same is I really want to get a good look into 2005 so we'll go through Q3 probably Q4 and then we'll have a pretty hard decision process in January of next year on raising it again. But that would be our intention.

Okay. And then lastly, when you look at the possibility of share repurchase, do you look at your stock sort of net of the cash. I mean, most companies out there are staggering with debt and you have got a lot of high-yield debt. I've rated companies in the paper industry and yet your net -- your stock price adjusted for the cash is about 15 or only about 9 times normalized earnings and 8 times this past quarter's earnings. Do you look at it that way and does that strike you as an attractive level to buy back your stock?

Well, we certainly do look at it that way and we've been frustrated by the stock price hasn't performed better than it has given what we have been able to accomplish over the last several years both with the best year program, as well as taking advantage of the pricing environment. So we do see that it's relatively attractive levels, and that, again, is a discussion we regularly have with our board. Our board also remembers the 2001-2002 timeframe.

As I do I. Thank you very much.

Okay, Chip.

We have a question from the line of Joel Spigoletti with Goldman Sachs. Please go ahead.

Yeah. Hi. Just on a couple of things in the third quarter, OSB volumes what would be a good number to use in terms of the the lack of production or the production level for the third quarter given your downtime plans?

You know, it's not going to be much different than second quarter.

Okay.

We'll have a little bit more downtime, but we'll have some advantages of these projects we got in place. So I think that's a pretty good proxy.

Okay and you talked about still evaluating the possibility of a facility in Alabama what is your sort of thought-process there in terms of when you might make a decision and move forward or not?

We have a site selection team within the company. We have a resource on the ground. We have looked at, I think, four or five different sites in that area. So we would expect, I would expect to have a recommendation from them on at least procuring a site probably before the end of the year. The timing that we have looked at, Joe, is to have that online Q4 of '07 so it's a ways out there.

And in terms of acquisitions, would you say you would be more likely to focus on OSB or some of these other products?

I think I wouldn't say it's more likely that we focus on one rather than the other. We have been looking at a variety of opportunities in the marketplace. OSB is certainly of high interest to us, but so are specialty businesses. So we continue to look at all of them. The difficulty today is the expectations of value certainly in OSB are much greater than they are in a normalized-price environment. And then some of these specialty businesses seem to be dominated be the financial sponsors who are willing to pay a whole lot more from a multiple standpoint than we could.

Okay And then I guess just finally, I know, I have asked this before, but just sort of maybe any updated thinking on doing anything with the two bond issues you have outstanding given that, you know I know you have been very cautious given the volatility of OSB prices over the years, but now that the cash is just rolling in the way it is, I wondered if you'd, you know, are considering doing anything with those two issues? In terms of either buying bonds in the open market or taking out entire issues? ?

Well, we have bought some bonds in the open market. We didn't buy any in the second quarter but we did the tender plus we bought a few in the first quarter. What we've got is we have a call on the remaining subordinated debt in November of next year and then the '05s are due in August of next year. So if it was accretive to do it, we would do it early. It hasn't been particularly attractive from the premium standpoint. We are looking at potentially doing some swaps on that to go to a floating rate on a portion of those. But again the premium on the tens is pretty prohibitive right now.

Okay. Great. Thank you.

We have a question from the line of Rich Schneider with UBS please, go ahead.

Just to clarify the CapEx situation you will be reporting on your cash flow statement more like 110 to 120 in terms of CapEx that excludes the 30 to 35 million going into the JV is that the way to look at it?

Yeah I think that's the way to look at it. Because what you'll see is the investment it really is capital but it shows up as the investment.

If you look at that price page you gave us on random length pricing and in the notes on the bottom and it says contract wood 450 and open market 453. So that would be the kinds of prices that you got in the quarter?

What this is showing is that one timeframe in there.

Right.

So it's just an -- it's an example of it of you how you would calculate that.

Okay. Would that be sort of representative for LP then?

On what we got for the quarter?

Right.

We were actually random links, if you just average the 13-week period, random links was up 2.1% Q1 to Q2 and our pricing was up about 6%.

Okay.

Q1 to Q2 and again most of that was due to the falling markets and we capture a little more on the falling market.

So that would put you up maybe around 30-$35?

We were up Q1 to Q2 about $23 on a three-eighths basis so, yeah, if you convert that it's probably 30 on a seven-sixteenths.

On Woodland that started up in June right?

Yes.

Did that have much of an impact in the quarter it, you know, obviously it's starting up in June it didn't. So I just answered my question, but will it have more of an impact in next quarter or is that being more offset by the maintenance and the capital downtime that you are taking?

I think the impact in both quarters will be about the same, take away the change in pricing. If the change in pricing in the next quarter or the fourth quarter is different but the impact ought to be about the same.

Okay. And if you look at your downtime that you are taking, how much is it due to maintenance and how much is it due to work on the capital project? Is it half and half?

It's pretty hard to separate, but half and half would be a fair guess. Maybe 40-60 maintenance to capital deployment, redeployment

And looking at your composite wood operation, your siding area there was a nice increase in sales and in profits going from the first to second quarter, yet your production volume actually declined going from the first to the second quarter a little bit. The reconciling that -- does that mean some siding was being sold out of inventory?

Actually, we had a little bit of a production snafu in the first two weeks of April in Silsby, Texas and that's almost 100% of the difference.

Okay.

We ended up changing the paper overlay and it ended up being substandard product and we didn't ship it.

Okay so looking to the third quarter now that we can continue to see some maybe improvement in that, because you won't have the April problems?

Right.

And could you take a little bit about the kind of prices that you have been able to push through on the siding area?

Siding has really been relatively flat year to year we haven't had much of a change. And that's one of the beauties about this product line is pricing doesn't change much and the volume because it's going into both new home construction and repair-remodel is relatively stable and increasing. We did get very good penetration in the home centers, particularly Home Depot this last six--month period. It's been very strong in the panel products. So our pricing standpoint didn't really change much?

Great. Thank you.

We have a question from Mark Wilde with Deutsche Bank please, go ahead.

Hi I would like to come back to supply on the OSB side again can you just talk a little bit about what you're seeing and what you think we might see if prices remain up here in terms of imports?

You know, imports, I looked at that a little bit the APA just came out with a report there was a fair amount of plywood increase from Brazil that came in in the first six months, and I want to say it was like 300 million feet increase in plywood. And OSB was about 100,000 square feet -- 100 million square feet of increase over the same period last year. So I think you remember Mark, we control a fair amount of that because it's coming from the Irish plant that we used to have an ownership position in. But we haven't seen a lot more than that. In Europe right now the demand is very high for those facilities over there so most of the product is staying there. And then we aren't bringing anything up from Chile. Necisa is bringing in a little bit from the mill in Brazil, but that is a continuous press so it doesn't have a screen back so it's really limited to sheathing and is not being used in the roof or the flooring.

How much an issue is just these guy who want to bring stuff into the country and getting it certified?

Well, the APA will not certify a non-North American company any longer so they are coming in with Tico at least is Necisa is. I'm assume that's what's going on in Ireland but I'm not sure.

What -- Tico is?

Tico is just another certification agency.

Okay. Why won't the APA certify a non North American product?

Because it's the American Panel Association.

Got it. All right. One other question on supply is there any reason, you think that we haven't seen more projects announced, given you know the amazing 12 months we have come through here?

I think there is a couple of things. One, as Chip said earlier people remember 2001-2002, particularly the bankers and so I think financing if you remember there's those two projects in New York have been on the board since 2000 and neither one of those have got financing. I think that there is the environmental permitting piece is a little bit of a hurdle you have to get through and then, you know, frankly when we announced Alabama, we put a stake in a pretty big available wood basket and there aren't a lot of them available in North America and a lot of the wood is spoken for.

Okay. Last question, can you talk a little bit about sort of where wood fiber costs are, kind of across North America for you and where you think the risks may be over the next 12-18 months. I mean, I would think if the paper business continues to pick up, that that should put some pressure on hope wood prices.

You are exactly right. OSB mills and pulp mills are arch enemies they compete for the same food source. So if you see an increase in the pulp business, which you have to -- don't think about paper, think about pulp. Then it does put pressure on the wood basket. Right now what's going on in North America is as follows. The south is declining wood costs seasonally, which is in the summer. There is more availability, so at this point in time, most of your procurement people try to reduce their costs. Availability is good in the south. The problem area for OSB in the United States is in the lake states and there is prices there are going the other way. They are going up and if the pulp business stays strong, I think we'll continue to see higher costs in that area than what we have here in the past This has kind of flip flopped if you go back five or six years, prices were escalating in the south and very stable in the lake states and that's changed prices are becoming more stable in the south and people are fighting for stumpage in the lake states. In Canada I think you will see a general overall slow increase. Inflation seems to be more of an accepted thing in Canada. The other piece of pressure is that the stumpage is in most places in Canada is very cheap and you know that is what this whole lumber dispute is about right now is that government is subsidizing stumpage across the border. So I think their inclination is going to be to raise prices on their stumpage over time to make it more competitive with what's on this side of the border. So net net we're looking at five across next quarter as about flat with this quarter. But generally the south will go down, and the north, the pressure on the north will be to go up.

Okay and there is nothing, Rick, in the way that fiber is priced to you up in Canada that escalates the price based on your end selling price the way there is with say the pulp mills up there?

It depends where you do business. I think there is more of a discussion going on, obviously in certain provinces in Canada now there is an indexing of the stumpage to the finish product pricing. We are not encountering that problem yet in OSB but I think that obviously with this last run up in OSB prices I know the providence of British Columbia looked at it and said darn we missed a real opportunity here to raise our stumpage prices. So I think that you'll see -- one of the ways to skin this cat, rather than an arbitrary increase in stumpage is to index it, because that is more palatable to sell to the consumer. So I think they'll probably if I had to guess a trend in the future, I think that the Canadian provinces will look at more indexing and moving that into other product segments

All right. Very good. Thanks Rick.

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

Hey. Good morning guys. Three questions, please. First of all when should we start to see the impact of the spending that you are undertaking to reduce costs?

Actually we are seeing some of that now, but you have to remember that we basically just got into this program last year, and then this year we have only spent right about $20 million so far this year. So I am starting to see some impact on wood yield and some decreases in the consumption of natural gas already at these jobs that we're completing. I think we'll be able to start measuring it next year and to make it more systemic rather than anecdotal, right now we look at a particular plant and say what's our natural gas consumption after the capital work versus before but we are just starting to be able do that?

So you will start to report on that and give us kind of updates on how it's coming along?

Yeah. I think we will to the degree that we don't compromise ourselves with our competitors. I mean, we're not -- we'll talk generally about how we are doing.

Okay, great. Switching gears a bit you guys normally maintain a two-week order file and if I heard correctly you are currently at three weeks?

Right.

Does that is a anything as to your confidence to continued rally, are you trying to lock in these 3.25 prices or why the change?

Well, it's a little bit different than that. As prices started to slide at at the end of the last quarter, if you want to stop them, what you have to do is build an order file throughout the industry. So you have to sell enough product to get an order file that's probably two weeks or longer in the industry. We've tried to get out three weeks, because we think that gives us the best ability to keep the prices where we want them. So it's not a matter of betting forward and hedging. It's a matter of when you have an order file 2-3 weeks out, it gives you better, it puts you more in the driver's seat of the equation with your customer

I think that's a good answer.

Steve, your customer doesn't want to run out and if he can't get wood for three weeks then they have a tendency to be willing to pay a higher price.

But the order file we have right now is not a hedge. It is something that we wanted to do so that we would kind of get back in the driver's seat.

Understood. Finally the company formerly known as Boise or soon to be known as Office Max has got a little plastic wood composite in Washington and I don't think it's had a very good start up is that anything that would interest you guys on the sheave?

No. You are talking about the old home base -- home plate or whatever it is.

Yeah. And I don't think it's ever worked properly.

Yes. And I think your conclusion is accurate.

So the answer is no thanks.

No thanks

Great, congratulations and good luck.

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

Thanks. Good morning and congratulations on the quarter. Couple of questions just want to make sure that I am using the right operating rate for OSB are we running in the second quarter at about 95-96%?

For the industry?

For your capacity, your utilization rate?

As Rick said, Woodland only ran in June. It didn't run in April-May and then we have what? 48--

48 days of downtime. I didn't do the math. I think you're probably just a tad high.

Tad high, okay. And just to better understand to how this dynamic works. You know the question earlier,I mean the volumes are up 10% year on year, production volumes though are down in OSB about 5% from the second half of last year but I think that's 100% attributable to the shift to the siding business?

I think it's two pieces it's the shift in the siding business and it's also Woodland ran the second half of last year and we took it down in December.

Okay

And brought it back up in June.

And then looking to the third quarter though with a better production on the siding, that should be up and the OSB should be relatively flat, meaning that the ramp of Woodland will be offset with other (INAUDIBLE) related to maintenance and capital projects?

I think that's right.

Right. And Woodland won't really ramp it's operating at the level it's going to operate at right now, so.

Okay. All right but the--

Basically Silsby and Woodland cancel each other out. I would look quarter to quarter OSB production at about flat.

Okay, good. I guess I wanted to follow-up on a comment about sponsors being able to pay more, Curt, for acquisitions.

I'm talking about in the specialty side, Pete, if you look at, you know, like vinyl or roofing or some ply gems went out, ply gem I think sold for 8.5 times EBITDA. And that's, you know, and what's happening, I think is that the financial markets are willing to fund it at the 5.5 to 6 level and then sponsors can put in, 2 to 2.5.

Yep.

That gives you pretty damn big multiple to try to overcome when we're selling at 3.5 times EBITDA.

Okay. I guess coming back to the high class problem you have on what to do with your cash, maybe for starters can you help us to understand your view of cash management. I mean, should we just assume that, you know, we're not going to get a whole lot of interest income? Is there stuff that you might be considering given that this is obviously a pretty good size asset at this point, just your thoughts in general about cash management.

We have a investment policy that's been approved by our Board of Directors and the number one tenet and the number two tenet are preservation and number three is yield. Okay. We have four professional cash managers that we have divided the excess cash among, two in Canada and two in the U.S. And so they are managing that within our guidelines and then we manage the short-term cash. If you look at those and actually our internal cash manager did a little better than the external, but you're right. It's in the 1 to 1.2 kind of range and not a huge yield.

Okay and then coming back to potential acquisitions I mean obviously that's always a possibility and I'm sure that you are well-aware of everything that's out there in the marketplace. Can you help us to better understand how you think about the hurdle rates, especially as it relates to comparing and contrasting acquisitions versus buying your own stock. Is it a fair assumption that if you act on an acquisition that you will deem it to be a better opportunity than buying your own stock, or do strategic considerations overwhelm economic considerations on a near term basis?

Those are the regular discussions that we are having. We have our hurdle, our internal hurdle rates for capital projects inside the company at 16% and when we look at acquisitions and take into account synergies and you also have to take into account risk. For an OSB acquisition the risk is obviously much lower and then we understand these operations, we understand how to integrate them and can do that very quickly. So it's probably fair to say that there is a lower hurdle rate on that. The other businesses that we're in, if they are directly bolt on again we understand how to integrate those and take advantage of the synergies, if it's a little bit of -- it's consistent with the segments we are in, but a little bit of a departure, then we'll put a higher hurdle rate on that.

Okay. But I guess the way I was thinking about it, let's say for argument's sake you know OSB is your core competency and you find opportunity there and presumably is it fair to assume that the price per unit of EBITDA on a normalized basis is going to have to be more attractive than what those dollars could buy of your own enterprise value? Or is that not necessarily the way you think about it?

You know that's -- you have to make a lot of assumptions on a share repurchase on what, you know, how the market reacts to that. And we do make those assumptions and then we do look at it? .

Okay. All right. Fair enough. How about on working capital and I know this is also kind of a tough question, but if you think about first half of the year versus second half of the year any thoughts on your expectation at least for working capital at this point in terms of source or user cash?

Well, if you look at working capital is actually pretty easy within our business. On receivables it follows the trend in sales and sales prices, we are running less than -- right about 20 days on a DSO basis. We do provide extended terms, particularly in our specialty products at the end of the year and into the first quarter and we do carry a little higher receivable balance. At the end of the year it's going to be the slowest period because we don't sell a hell of a lot of material between Christmas and New Years. And so it's always down there I think we were up $30 in receivables between December and March and it's up a little bit to the June quarter based on pricing On the inventory, inventories are highest at the end of the March quarter. Because what you are doing is you're building log decks to get prepared for breakup then they come down over the summer. So that is what happens on the inventory side.

Okay. And inventories of finished product, I presume are quite low?

They are. They are very low and actually you build some inventory particularly in, again some of the specialty products, in vinyl and in decking you build product in the fourth quarter. There's not as high as the demand and then you sell it under these early buy programs in the first half of the year.

Okay. Just quickly coming back to engineered wood products prices you mentioned three price increases in 8 months and you're working on the latest one in July. Could you help us understand where prices are July 1, relative to the second quarter average and then what amounts are the price increases for I-joist, LVL?

We did a 10% across the board back in May. And that is what we are expecting to kick in the major portion of that is yet to kick in, it will kick in this month.

Okay. So the --

Prior increases were 3 and 2%.

Okay so the improvement 2Q to 3Q in price in that business sounds like it could be as good or better than the improvement of 1Q to 2Q just given the timing?

You bet.

Okay. That's all I have, thanks very much guys.

Okay. Shelley got time for one more.

All right. Then the next question -- last question will come from Mark Weintraub with Buckingham research. Please go ahead.

Thank you, Rick, I was hoping you could maybe walk through your thoughts on what happened in the OSB markets during the the second quarter. I guess it was kind of surprising to me at least from the outside that the price came down in what seemed to be pretty good markets overall with inventories pretty lean and it seems to be pretty difficult to predict these markets short-term and they seem to have a tremendous amount of volatility and so I was hoping to get some color from you.

Well, you're exactly right when it's very difficult to predict these things short-term. We didn't predict it going as as high as it went. I think we closed the quarter out -- the first quarter out at 470 at Ranum and we got all the way up to 520, which we didn't anticipate and then we slid basically real fast about from about 514 on and then all of a sudden it's kicked in again. I think what happened, there was some impact on the take aways based based upon weather. So people got off to a good start early in the quarter, weather kicked in in a few areas and slowed the building down. But I also think that some volume had crept into the channel and so people were -- once they get into a position where they think the price might break and believe me if you are a buyer and you're looking at a price of 490, or 450 you are believing that the price is going to break. Once they believe that the price might break then you get into kind of a stare down contest or a liar's poker contest and the buyer's sitting there saying I'm going to put off any major order in hopes that the price will go down. And then you as a manufacturer sitting there saying I'm not going to drop my price until I have to, but once my mills fill up with wood then I have to because I got to make room for the next board coming off the line. And so I think it just softened up enough, there became enough wood in the channel and with this pause that we talked about in late May and early June, people were able to put off their purchases a little bit longer than the manufacturers were able to hold the price.

Now what happened is that in that rapid slide, a bunch of buys were made as people thought that geez, $300 wood or $260 wood doesn't look all that bad I think I'll buy it then the order files got out obviously July is hot in terms of business activity. August is going to be hot, September is going to be hot. And now these guys can't let their customers run out of wood so they are buying again. And that's why we've had a $50 jump in the last four days. Is the woods not there and people are -- when they call up and they say well we'll get you, well we say we'll get you some in three weeks that has a positive impact on pricing. So I think some wood got in the channel because it slowed down and then now the channel is relatively dry. The boxes seem to be having panel wars right now, which is moving quite a bit of product into the do it yourselfers and so with this very strong housing. I mean our belief the July-August-September are going to be a ball of fire and then everybody is sitting there and everybody that's in the building business knows that if you are on the gulf coast or the east coast you got a chance to have a hurricane com in this year and you don't want to get caught short there. So that would be the way I'd describe the current dynamics and right now with everybody filling up their order file, the 2 to 3 weeks or even farther than that, that puts upward pressure on the pricing.

So at the end of the day would you say that the supply/demand is from an underlying basis relatively balanced or are we still in virtual shortage type conditions and then tie that into what might be the implications -- if we are relatively balanced does that mean we likely go through a pretty sharp seasonal drop off in 4Q and then possibly have a big rally again coming into the spring of next year if housing holds?

Well, I think we are in better balance say than we were when you were looking at $500 pricing, but you got to remember a lot of that $500 pricing is psychological. It's market panic on the way up and so if we had to guess right now, the demand-capacity ratios for the next three months are forecasted to be right about 1.02. 1.01so that is pretty close. All right. And then you have to factor in whether anybody is taking downtime or whatever. So probably in relatively good balance and then there is always a seasonal falloff in building as the weather changes. Where that will go to I don't know? But if I had to guess it would probably go more towards cyclical average.

Okay great.

I don't know if I answered your question, but it's really hard to look in that crystal ball and guess. But as I look at all of the anecdotal information that I can get around the next 12 to 18 months, I look at the supply side and I see some volume coming on, that volumes going to come on scattered throughout next year, you've got GPs going to start a mill up next year in first or second quarter, you've got Delang board tie in which is a couple hundred million feet and then we've got a mill that's going to come on at a reduced rate in the fall of next year. But if OSB prices do fall, you continue to get the substitution rate from plywood to OSB and then you also just the general market is growing by 2.5 to 3% a year. Mortgage rates stay where they are, I don't know why housing is going to go in the dumps next year. I mean I think there is still room for that. As we look at the forecast, new household formation is expected to be on a clip of 13.3 million houses over the next decade that's new household formation. Homeownership rate is expected to go from a current high of 68% on up to 70%. That adds an additional 10 million new homeowners by 2013 primarily from immigration. And then on the other side of that coin, which is interesting statistic that we just pulled up not too long ago is that the number of older homes that's being demolished are now at a rate of about 400,000 a year, which is about twice the clip of the last decade. So we're seeing continued strength. I mean, I would certainly don't expect to have pricing where it is right now for the next year and a half, but I don't -- you kind of got to make your own hypothesis if you think housings going to get wrecked in the next 18 months because I haven't been able to put that hypothesis together.

Great. Obviously complicated and I appreciate the color.

All right. Thank you very much for joining us. As usual, Mike and Becky are available and the number -- their numbers are on the release. And Shelly if you would give the replay information I would appreciate it.

Thank you. Today's conference will be made available for replay after 11:30 a.m. today and running through August 6, at midnight. You may access dates into your replay system at any time by dialing 1-800-475-6701 or international participants dial 320-365-3844 and enter the access code 737854. Again those numbers are 1-800-475-6701 or 320-365-3844 and enter the access code 737854 that does conclude your conference for today and thank you for your participation and for using AT&T, you may now disconnect. .