Louisiana-Pacific Corp (LPX) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter two 2005 Louisiana-Pacific Corporation earnings conference call. I will your coordinator for today. We will be facilitating a question-and-answer session towards the end of today's conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Curt Stevens, Chief Financial Officer. Please proceed, sir

Thank you very much. And good morning all of you. We appreciate you joining us for the Louisiana-Pacific Corporation's conference call to discuss our financial results for the second quarter and the year-to-date results for June 30, 2005. As the moderator said, I'm Curt Stevens, Executive Vice President of Administration and Chief Financial Officer. With me today are Rick Frost our CEO and Mike Kinney and Becky Barckley, who are responsible for our investor relations activities. Similar to previous calls, I'll start this with a review of the financial results of second quarter and the six-months, year-to-date period. Provide a few comments to the balance sheet. And then turn over to Rick who will review the accomplishments for the second quarter and will talk about our outlook for the remainder of 2005. Then we will open up the call for questions.

As we have done in the past, this earnings call has been opened up to the public and we're also doing a Webcast. This can accessed through www.lpcorp.com. Additionally, we have provided a presentation that has supplemental information along with this call. As I go through the call, I will be referencing certain pages in that presentation.

Before we begin I do want to remind all the participants about the forward-looking statements comments that are included in both our earnings release and shown on slide two of the presentation. We also have a brief discussion of the use of non-GAAP financial information, which is included on slide three. I'm not going to reread these statements but I am going to incorporate those into this discussion for this purpose.

Start at earnings summary. On page four of our earnings release we reported net income for the quarter of $100 million or $0.90 per diluted share. Of which continuing operations showed income of 104 million or $0.94 per share. And discontinued operations showed a net loss of 4 million. Net sales from continuing operations were $692 million for the quarter. For the same period last year we reported net income of 192 million or $1.75 a share. We had continuing operations net income of 188 million and net of 4 million from discontinued operations. Net sales in continuing operations were 790 million during the same quarter last year.

The second quarter results continued along the same path as our first quarter results. OSB prices remained strong but did moderate by over $100 per thousand square feet compared to the same quarter last year when the industry enjoyed record pricing levels. In prior discussions we've talked about the leverage that OSB prices provided LP earnings. For the second quarter the price decline alone, compared to the same period last year, accounted for $142 million in lower sales and pre-tax profits. For the respective six-month period reduced pricing, lower sales and pre-tax profit, over $190 million. So clearly we had excellent pricing last year, which did moderate this year.

Effective this quarter we have made the decision to our vinyl siding operations into discontinued. Previously this was included as part of our siding segment. Accordingly, we have restated it in the prior period and included in our 8-K filing with the press release is a schedule at that restates all of 2004 and the first part of 2005 to reflect this change. Page five of the presentation as we have done in the past, we show the reconciliation of special items that are not generally attributable to ongoing operations. So the schedule is are enclosed, but there was very few items in the three reporting periods shown here.

Line six is the summary of the year-to-date results for the period ended June 30, 2005. Reported net income of $202 million or $1.82 a share, of which continuing operations had an income of 210 million, $1.89 a share. And discontinued operations had a net loss of $8 million. Net sales from continuing operations were 1.35 billion for this period. For the same period last year we reported net income of 299 million or $2.73 a share, of which continuing operations had an income of 298 million million or $2.72 a share and discontinued operations resulted in a net income of about $1 million. Net sales from continuing operation were 1.46 billion. As mentioned earlier, the decline in sales and earnings is almost wholly attributable to lower OSB prices. Line seven of the presentation of the special items associated with the six-month period. The largest item during the first six months of 2004 was the $44 million loss associated with the early extinguishment of debt. All these items are detailed in footnote two and three of our release.

With that let me shift to a discussion of our future of our segments. Slide eight is OSB. And as we have done in the past, we are showing both the same quarter last and then the sequential quarter and the change associated with that. OSB pricing while still quite good in an average 297, based on random lengths, reported North Central's 716 pricing is lower by 27% compared to the same quarter last year. And again as a reminder, we had all-time record pricing in April and May of last year.

From a cost perspective, the challenges we had in the last quarter continued. Wood costs remained higher in certain regions and petroleum-based products, particularly resins and wax, continued to move higher than in the prior year. To quantify this, the increase was about 12 million for petroleum-based, about 8 million in wood and about 6 million associated with changes in Canadian currency. Volume at OSB increased 3% over the same quarter last year and was up 9% compared to last quarter.

Siding on slide nine. This segment, as I mentioned, includes - - does not include vinyl siding anymore. It just our includes our SmartSide, OSB and our hard board siding. As you may recall, Q1 was a challenge for this business. For this quarter we do appear to have sales and profits back in line with overall results comparable to the same quarter last year. Sequentially, volumes for SmartSide were up 43% for Q1 and up 6% from last year. Hard board volumes are up from the first quarter but are behind the prior year as we continue to convert to a higher margin, higher priced product maximizing our hard board strategy. And you can see that in the pricing. While volumes were down 22%, pricing was up 24%. As in OSB, we did continue to see increases in similar raw materials.

Engineered wood, in slide ten of the presentation. This segment includes laminated veneer lumber and our I-joists operations plus related products that include a small plywood mill in British Columbia. These products continue to grow in volume and demand higher pricing in the market. Compared to the same quarter last year, volumes grew 4% in LPL and 3% in I-joist. And then compared to last quarter they're up 5% and 15% respectively. More importantly pricing is up on a year-over-year basis, 25% for LPL and 15% for I-joists, compared to the same quarter last year. This allowed us to offset the higher raw materials costs. Compared to last quarter we had a 7% increase in price in both of these product lines. With these price increases, higher volume, and better operations, engineered woods had profits of $12 million in the quarter, compared to only a slight profit in 2004, a significant improvement.

Other building products on slide 11. This segment consists of composite wood decking, mouldings, Chilean operations and a joint venture that we have in cellulose insulation. Overall, in terms of profitability this segment did show improvement for the second quarter of 2004. From a volume perspective, we saw increased volumes in both decking and moulding compared with the same quarter last year. Sequentially from Q1, decking shipments were up 8%, but we did have a slight decline in our moulding shipments. To offset increases in the resins associated with these products, we put in place price increases in January. Therefor we are showing price increases in both decking of 6% and moulding compared to last year.

Our Chilean operations remain profitable in the quarter despite South America entering the winter season. For the quarter, SG&A costs were down quite a bit, over 20% compared to the same quarter in the prior year. This decline in the second quarter of 2005 was related to several one-time benefits. And these include we did have - - we did participate in the Attorney General of New York's settlement with Marsh. And we also settled on previously written-off receivables during the quarter. We expect, though, if you look forward, that our unallocated quarterly SG&A will be in the $23 to $25 million per quarter range.

On the tax rate, the effective tax rate on continuing operations is estimated to be a little over 35% for the full year as of June 30, 2005. The primary differences between the tax rate was about 39% for the combined Federal and State. On continuing operations in the calculated rate relates to several factors. Profits on our Canadian operations carry a lower overall tax rate. We are anticipating a benefit based on the manufacturing tax deduction that became effective at the first of the year. Our current estimate of this is that it could reduce the overall rate by about 0.5%. During the quarter the Canadian dollar did weaken creating an overall tax benefit of about a 0.5% of losses associated with inter-Company loans. I will caution everyone to remember that the rate goes the other way and it does reverse. This rate is slightly lower than our estimate in the first quarter of 2005, 36%, and comparable to the second quarter of last year.

Line 12 Are some balance sheet statistics. We continue to enhance the balance sheet, key statistics comparing the balance sheet of June 30 to the end of last year. At June 30 totaling up cash, investments, short term and long term at almost 1.4 billion. The restricted cash does represent the cash collateralization of our outstanding letters of credit, which we routinely issue for workers' comp, industrial revenue bounds and some other items. Working capital is about 1.3 billion. And as of the end of June, our cash exceeded our interest bearing debt by almost $1 billion. Capital expenditures for the first six months of 2005 were at 120 million. And this does also include our contributions to our two joint venture projects and Rick will talk about those in a little bit. As we've said in the past, we do project capital expenditures for the full year to be about 240 million. And then book value for this year did increase to $17.65.

A couple other items of note on the balance sheet. As part of the reclassification of vinyl as discontinued operations, we also moved a related industrial revenue bond to current liabilities, which increased our short-term debt by approximately 16 million. Additionally, the first tranch of the notes receivable, notes payable on the asset sale related to a 1997 timber sale are due in June of 2006. And therefore have been reclassified as current. The offset in current assets/current liabilities was about 70 million. Plus we also reclassified the approximately 25 million in related deferred tax moved current. With that, let me turn it over to Rick Frost, who will provide his thoughts on Q2 and how we manage the business as we look forward. Rick.

Thanks, Curtis. Good morning, ladies and gentlemen. LP had a sound quarter in Q2. It's the second one in a row where we have net income of greater than $100 million. Curt discussed the numbers, but what I would like to do is take a future minutes and update you on some of the important initiatives that are going on at LP. One things we haven't talked about for about a year is the fact that the safety of our employees is one of our most important objectives. When Mark Suwyn got here in 1996, LP had an incident where on an average about 10 employees out of 100 were getting hurt in the course of a year. Every year since 1996 we have improved on that.

Last year we ended up with an incident rate of 2.2, which means about 2 people out of 100 get hurt. For the first half of this year we're down below 2. And we had our best June ever with an incident rate with less than one. And I want to commend all of our employees for the effort that they're putting in in this area.

Second, only to safety is the attention we're putting into the quality of our LP products and service. During this last quarter we had several special events to support this commitment to quality. First, we dedicated our leadership meeting for the first half of the year, and the leadership meeting is composed of the top 50 managers within LP, entirely to the area of quality. And second we had our annual quality summit this last quarter, which was attended by all of senior management, all of our plant managers and all of our technical and quality people. We are making good progress at reducing product variation and improving our quality processes.

And what this means is, the result is reducing product claims and our product claims are going down. As Curt said, we did deploy $120 million of capital during the first half of this year. Over half of that was deployed against capacity expansion. The joint venture OSB mill up in Canfor - - with Canfor in British Columbia, which will from here-on be referred to as the Peace Valley Mill. That's Peace Valley because the mill exists in the Peace River Valley up there. It is still slated to come online in the fourth quarter of this year. The employees have been selected. They're being hired and they're being oriented and trained as we speak this morning. We're really pleased with the level of experience and the commitment that we see in this work force. And Curt and I had a chance to go up there in early June and inspect the construction. And this is quite a big operation.

Our second joint venture I-joist plant with Abitibi-Consolidated is set to come online within the next month. Curt and I had the opportunity to visit that plant last month. And we were very pleased to see the professionalism of the management team up there. And the work being done to install state-of-the-art technology into that I-joist plant. The work is almost done now to convert the first line at our Hayward, Wisconsin OSB mill to SmartSide. And the doubling of capacity at our Selma, Alabama composite decking plant is underway as we speak. And it's on time and on budget. With regards to costs; we and the rest of the industry have seen our costs increase in the recent quarters due to Canadian exchange, wood, oil-based resins and basically anything related to energy. Unit costs were slightly down at our mills from Q1. And it does look like we're going to get a little bit of relief in Q3 mainly in pulp wood costs. But I caution you not to go too far with that, because that could be offset by any energy related freezes.

I'm sure you're interested in what we call our financial flexibility. During the quarter, we increased our cash by about $150 million. Our top priority is still to use these funds to grow the Company and to provide more products for our customers. Because all of our customers are getting bigger. As one analyst described it, we call this moving the ball forward. We continue to evaluate acquisition opportunities, but we haven't yet found one that meets our dual criteria of fitting into our strategic plan and being priced right. We have done in-depth analysis of several businesses that we would like to make part of the LP family. But so far we have found them too highly priced.

We will be spending $175 million next month retiring debt. And as to returning cash to our shareholders, as we have said, we regularly have this discussion both with our financial advisors and with our Board of Directors. Our next Board meeting is in - - is two weekends from now. And this will continue to be a topic. But probably with a little greater or higher sense of urgency given the continued increase in our cash balance and the lack of immediately available alternatives. Operationally, I'd like to make a couple comments as well. In Q1 Curt and I discussed with you the shortfall that we had in our siding business. At that time we told you that focus work would be done at our siding facilities.

I'm pleased to report that we were able to get much better results in Q2, particularly out of our Silsbee mill, which we spent some time talking about three months ago. Now, this was accomplished by the business team reassigning some resources, putting in place a targeted improvement plan and then executing on those objectives. I think it was a good response by this group.

Last quarter we did make the difficult decision to move our vinyl business into the discontinued operations. Unlike our position in our other businesses, we are a number 7 to number 10 player in vinyl, basically tied for 7, 8, 9, and 10 with less than an ideal cost potion. But more importantly, while we have a strong retail presence in that business, we've not been successful in penetrating the one-step channel, which is an important avenue for these products. So, as a result we can generate cash in this business but we don't see a way to quickly enhance our competitive position and to grow it. We think there are other companies that are in a position to take advantage of this production capability, while selling through their own already established one-step channel access. I'm confident that a new owner would be in a position to be more successful in vinyl. As to how soon that sale may occur, I'm really not in a position to discuss that at this time.

There have been several preannouncements of weaker than expected results in composite decking. But for LP we were profitable in this product line. We showed growth year over year and sequentially from the first quarter, and we had higher prices than last year. I think we, like others, have seen the overall product category grow year over year. But we've also seen new players enter the market and we've seen expanded capacity. So, as a result there appears to be some excess production in the channel that needs to be digested this summer. We think that this is the short term situation.

As mentioned earlier, we are expanding our Selma, Alabama facility to support growing demand and our own growth in this product line. And engineered wood tells a good story. I recall predicting this in the conference call last May, in 2003 - - or excuse me, in 2004. Volumes and pricing were both up year-over-year and sequentially with last quarter. And $12 million in earnings by this business team is certainly an accomplishment.

As I look forward, the second half of the year feels just a little bit slower to me, but not a lot. Most of the big builders appear to be sold out for the rest of the year. U.S. housing starts remain in the predicted range of 1.9 to 2.0 million for the rest of the year. And long-term rates are so low that short-term rates haven't been able to climb very fast.

I do think that there are two things that are different in the markets right now than a year ago. First, last year all of the regional markets were hot. This year my observations are; is we still have hot regions, but not across the board. There's some places that are not as active as last year. Second, production capacity has had a chance to catch up with demand. Most manufacturers geared up what they could, and over time the inventory in the channel has had a chance to build. So, as a result buyers - - and this is the psychology; buyers now have much more confidence that when they place an order for product, they can get it in a timely manner. So this scenario certainly fits, I think, across our product lines OSB, siding, engineered wood and decking.

In OSB the new GP mill in Florida has been absorbed in the market. As we understand it most of the that wood is open market wood or what we call ready wood. The next capacity event in OSB will be the opening of our own Peace Valley mill up in British Columbia in the middle of the fourth quarter. This will come at a time when OSB demand historically falls due to weather changes. We've taken a little down time in both LVL and I-joist production to let the channels empty out a bit. Siding appears to be stable. And the composite decking channels are letting a little inventory out of the system. And we think that the rebuy will pick back up after people have worked off their winter buy material.

At this point we planned any downtime for decking. But we are watching carefully, particularly in light of some of the comment by some of our competitors. Overall, we expect that customers will not need to take large buying positions and the curves to the end of the year will probably be relatively smooth. We are anticipating a break in wood costs for the rest of the year. But it looks like nothing related to energy or oil will retreat anytime soon. We may see some decline in spending but I think that that will come from reduced consumption of those raw materials due to the capital project implementations. And with that outlook, I'll turn it back over to Curt.

Thanks, Rick. Another very small corner of the books with actions in place that we think will continue to create value for our shareholders. As Rick said we do have the good problem with the 1.4 billion in cash and how to deploy that. And we will having that discussion at the upcoming Board meeting. With that let me turn it over to you and queue it up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of [Coony Chen] of Banc of America Securities. Please proceed.

Good morning, everyone. Just had a question. You mentioned that wood costs - - you might catch a little bit of a break there in the second half of the year. Can you give us a run down kind of across all the major regions on where you see the trend in wood costs going, particularly speak to Maine and some of the lake states?

Yes. I think I will. I think that Canada is going to be pretty flat. I think we're going to get probably around - - well it's hard to quantify probably publicly, but we're going to get a break in the lake states. We did had one pulp mill go out of the business. There's rumors that there may be more. A lot of people that adjusted to wood shortage in the lake states in Q1 and Q2 are in balance enough now to where they're cutting off their long-distance wood. So, it's more a logistical reduction in costs than reduction in costs at this points in time. All inventories or most inventories across the south are in much better shape. And I think the South was uncharacteristically high for the last six to nine months. And we see - - I would say from Virginia to Texas you will see those subside a little bit. Does that answer your question?

Okay. And how about Maine?

Well, Maine pretty flat. I think we'll probably get a little bit of action there but there's really not much different going on in Maine right now. And so I wouldn't anticipate any real movement in Maine probably in the next six months.

Okay. As far as IP's announcements go and they are potential plans to say or spinoff, portions of their wood products business, can you talk about maybe which businesses within that portfolio have the most appeal to you?

I think too early for us to comment on that. That announcement is, what, a week old. And we obviously are going to be looking to pick through those bones like everybody else in this industry is. Bit I'd hate to make a comment this early.

And one last question and then I'll turn it over. Can you remind us again on sort of where you stand with your dividend policy? Is there still a targeted range of mid-cycle earnings or is that pretty much on hold for now to keep your powder dry for potential acquisitions?

This is Curt. There's a couple of things. One, we have said that we would like to be in the 30% to 35% of normalized earnings. We're a little short of that now. And I think - - and this is a discussion obviously that the Board will weigh in on because they have the dividends. My view is that it probably will stay pretty much where it is until we get a look at 2006.

Okay. Thanks.

Your next question comes from the line of Rich Schneider of UBS. Please proceed.

Just following up on that, have you changed any of your views on use of cash considering the level at which it's now built up in? It sounds like - - Rick you sound a little more sense of urgency to do something.

Yes. I think we put the comment in there on purpose.

You know, if the dividend is something that - -

I can't be more explicit than that, because I haven't had my Board meeting.

Okay. All right. If you look at your profits in OSB, they're very strong compared to most people's expectations this quarter. And you show that your price went down for OSB about 11%. And if you look at random links the price drop was more like 17% on a 3/8 inch base. Could you talk about the difference between the your price drop versus the first quarter and the random links drop and are we going to see some of that affect you in the third quarter?

I can talk to that Rich. I think what we've been clear on is in a rising market we don't capture random link because of the way we price. But in a falling market we usually do better. So, Q1 we had a rising market so we didn't do as well versus random. And in Q2 we had a falling market and we did better. And it got exacerbated this quarter because the slope in the two quarters was so much opposite. Again, just to remind you we do is, half of our wood for OSB is on contract, which means it gets priced at last week's random links. So, if random links keeps going up, we will always be trailing by one week on 50% of our shipments. And the rest is open market where it depends on how long you have your order file. But if you have your order file on two to three weeks, then you don't capture all of that price increase because of lengthy order file. On the other hand, when it's going down, you're getting a higher price than you would normally get if you were doing at the price at the time of shipping. So it's simply rising market and falling market

Okay. Looking to the third quarter prices have continued to retrench, but you will lag that theoretically. But on the other hand you also have the issue of, catching up to what the decline was in the second quarter. Do you have sort of a catch-up situation here?

Well again, if it's a falling market and continues to fall, we should do better. We're very reluctant to estimate what OSB pricing is. We're probably always going to be wrong,. But you would expect that it's going to have a bump up at some period of time. So this quarter, you could have falling price for the first half of it and you could have a rising price the second half of it. I don't think there's a formula where you can say it's going to be X% of random lengths.

Your volume also was up nicely from the first quarter levels, in OSB. Could you talk about what happened with downtime in this quarter?

I think at the beginning of the quarter we said we were going to take 25 to 30 days, and I think it was about 20. So, we actually took less downtime than we'd anticipated.

And that was less than the first quarter, right?

That was less than the first the first quarter, that's correct. And we also drew down inventory a bit in the second quarter.

Okay.

So, we're looking - - if you want to know this too. We're looking at 15 to 20 days this quarter going forward downtime - - planned downtime.

And Rick could you just comment on how you see conditions out there in the marketplace? You said there was some hot market regions and then others that aren't as hot. Overall, what's your sense of the market? That it's sort of in balance right now in OSB?

That's my sense. As I said in my comments there, I think that the customers are building products across the country have more confidence that when they pick up the phone and place an order that the guy on the other end is going to say; yes I can get that to you in a reasonable period of time. So, I think we're relatively in balance across most of these product lines. I don't see anything upsetting that that I can think of for the rest of the year.

Okay and just reflecting on that last year question. We never had a reaction in OSB or plywood to like the hurricanes. What is your read on that? Is it just because there's just enough production out there in the marketplace?

I think it's two things. I think that one, is we had so many last year that folks didn't have to go back to the store. They still had that stuff piled up under their front porch. It's almost that simple. So there wasn't a reaction because that stuff just sit there and rot. It didn't have two years or three years and when people went to pull it out they said oh, God, I have to run town to Home Depot because they just had that stuff just nailed up less than nine months ago. And I think that's the biggest difference.

I think there's one other Rich and that's the fire season going on in Canada. There's quite a few fires across all of the Canadian region. So that could be a disruption in available wood.

Great. Thanks a lot.

And your next question coming from the line of Peter Ruschmeier from Lehman Brothers. Please proceed.

Thanks. Congratulations on the quarter. I wanted to ask a question if I could about the status of the brown field of spending and capacity. I think you previously said that you were about a third of the way through the spend. I'm not sure you gave us an update on whether - - what percentage of the 900 million feet of deep bottlenecking had been achieved.

It's hard to measure right now. What - - we're looking at each mill and trying to get an average run rate from quarter to quarter to quarter. And we're finding that more difficult to measure. If you look at this quarter versus Q1 of - - excuse me. Versus Q2 of last year, that had Woodland in it, so we had to take Woodland out of there that. I think we're at a rate - - this is what I said the last time I answered this question, which was about three months ago, I think that we're probably somewhere in the neighborhood of a run rate that's 150 to 200 million. But the issue becomes - - that's additional capacity. That's the ancillary benefit of that work.

The issue becomes then that you have to run the mills to capitalize on that improvement. And so what we're trying to do now is take a measurable point in time and get the up-front on the mill, which may not be related to the money we're putting in there. So I'll probably have a better feel for that if you ask me that question in three months, because we're sitting down right now trying to get that measurement from year-to-year. But I think you have it assessed right. We're about a third of the way through that spend.

Maybe on a related point, with the market in reasonably good balance and and your own Peace River operation coming up late in the year; can you comment on the degree to which we need to accelerate the brownfield investment and/or the need to which we need bring on - - you had another project in 2007?

Let me take those. They're two really different questions. On the brownfield, we are not accelerating that. What we -- I think we had when we originally put that plan together about two years ago, we had that implementation planned at a quicker rate than what we're currently executing it right now. My plan will be to apply that same throttle to that business next year as well. Because what we're trying to do is make sure that we're getting significant learnings from one facility before we go to the next one. And I think our rollout we thought about, getting on these things bam, bam, bam, bam. And what I'm wanting to do is say if we put a bar corner in Rockburrow(ph) I want to put the bar corner in there. And then I want to measure the results before we go put the bar corner in Hansville(ph) or someplace else. And I think that we had originally planned the implementation to just do one after the other. So I think - - describing the brownfield plan now as an accelerated state does not fit my thinking. I think we're trying to be a little bit more conservative in that deployment for some of the reasons that you suggest.

Now, in terms of Quebec is another example of that. We want to make sure that we have the capability in place in our business team. We have relatively young business teams up there, we've re-engineered them in the last year. And so, we're going a little slower in our Quebec operations for two reasons. One is to make sure we have the capability to deploy. And secondly because Quebec wood costs have just gotten really darn expensive. As I said before a couple years ago people went to Canada to get cheap wood. But nobody is going to Quebec right now to get cheap wood because it's the most expensive wood in North America or close to it.

So, that's a long answer to your Brownfield plan question, was we're going to be a little more conservative in that deployment and take a little bit more time between major jobs to measure to make sure we're getting the return. And that's why I said I think I'll know more about being able to describe the additional capacities that we're getting out of that system because we're kind of taking a breath and measuring on that.

Okay.

In terms of our Alabama mill, that is on schedule. We have not made any decision to slow that down. It is in progress. We will be going down there sometime in the next couple weeks to - - or next couple months to put a brass shovel in the ground with the Governor and kick this thing off. And then we expect that to come up in the fourth quarter of 2007. It's very important to continue to upgrade part of your system with the newest, lowest-cost production. If you just sit back and don't do that, then the people that do are going to eat your lunch. So, we're trying to do that in as conservative a way as we can. But we are the leaders in this market, and we have to lead. We cannot abdicate all of the new local cost productivity or production to someone else.

Okay. That's very helpful. Just lastly if I could Rick tying that into a longer range CapEx forecasts, can you comment on beyond this year what you think CapEx might look like in '06 and '07 ballpark? And on a related note if you strip out all growth initiatives, what kind of maintenance level of CapEx do you think is reasonable to maintain the assets of the business?

I think I need to have a few more months under my belt to answer that one. We're in the middle of the planning process right now. So, the questions that you're asking me I'm asking the business. We're putting that plan together. I think I'd misspeak right now or speak prematurely before we sit down and plow our way through that in the next couple of months.

Fair enough. Thanks very much and congratulations.

Thank you. And your next question comes from the line of Christopher John from Deutsche Banc. Please proceed.

Thanks. Good morning, guys. Just following up on Peter's question about your longer-term plans. I was just wondering if you guys might comment on sort of your outlook for the median term in OSB? You mentioned that OSB prices have moderated. Although, they still remain at healthy levels. And you think that some of the new capacity that GP has built in Florida is having an impact. And it seems to me that over the next two to 2.5 years there's quite a bit of new OSB capacity scheduled to come online. Then this - - I think ties back to your answer about your plans on Alabama. But can you talk about what your overall outlook is for the market and whether you might be inclined to do shut some of your older capacity as you bring on new projects at the same time?

Yes. Maybe Curt and I will both take a shot at this one in case one of us has something profound to say. Longer term, we're sitting down probably like everybody in this business and you all and trying to put a probability factor on two things. One is, is how much of this announced capacity is really going to get build and when? And then the other question is then at what speed does plywood leave the market? And so what always shows up in nice, smooth curves in forecasts, which is new OSB capacity comes out and comes in and plywood goes out and they balance each other out, what happens in reality is that people don't die easy. And so plywood is going to go forward. And they will lose a lot of money before they shut down.

Our intentions around our older mills will be, number one, we need to build the new mills to say give us the capability of satisfying our customers if the older mills become too unprofitable. But we're still counting on - - and I think it's a unique ability that LP has. We're counting on the continued conversions of these plants into specialty products like we have so far with siding. And I think that gives us - - if you think about the way paper mills work, no paper mill goes right out of business. It goes from being a commodity mill to a specialty bill and then it eventually finds its demise. I think that's one of the things that we've been able to do with this Company with our first generation mills, is to convert them. So, in terms of what it looks like, there's a lot of capacity coming on. There is growth in the market. And there will be the continued expiring of plywood. But how that all balances out I think it's going to be bits and pieces. And there's going to be time when it's going to be tough to make people give up.

I'd just make a couple other comments just to reinforce what Rich said about the conversion of our mills to the more specialty products. The Hayward expansion, I think Rick talked about that in the first line, will be running some siding products this month, so we are starting that. In addition to that, with the new mill coming online in British Columbia, that does give us the opportunity to do more specialty products than in our Dawson Creek facility. One of the things we did realize in Q2 is we had a 28% increase in our tectshield(ph) product in southern California. And as California looks at ways to reduce energy consumption, they are increasingly demanding that product and we will probably have to put capability in the West Coast and British Columbia to satisfy that. So, we are continuing to increase demand for those products, and we will respond by converting some of our other commodity mills.

Okay. Thanks for your help.

And your next question comes from the line of John Tumazos of Prudential. Please proceed.

Your - - some of the other questions dwelling upon - - your OSB earnings performance was particularly good the falling market prices. Were there particular good productivity performances at some of the mills? You talked about safety and quality statics in your introduction. Those usually correlate pretty well to good production runs as well, in addition to your explanation of the time lags and your realizations not following quite as much as random links.

Well, I think that John, that's a pretty shrewd observation. That is my matra as I go around from plant to plant. If you get the safety and the quality right, the rest of the stuff kind of falls in line. It takes the same amount of discipline and attention to detail to get that. I'd like to tell you, though, that there were some extraordinary performances in terms of production, there weren't. Basically the plants pretty well just performed as we expected them to. There weren't any stellar efforts.

Thank you.

Your next question comes from the line Alan Benson of Deutsche Bank. Please proceed.

Hi, I actually have three questions. The first one is I wonder if you could comment on the current acquisition environment?

Well, from our perspective we are in building products and so that's what we look at. So, we've limited our look to that segment. So, the comments I will give you will be in that segment alone. There's an increased amount of attention from the financial sponsors in building products as you can see by the blue lengths and the transaction in the new Cage, the Boise transaction and a few others. And those have been very profitable transactions for the financial sponsors. What we are seeing is that with low-cost money, that they have a willingness and an ability to leverage up their balance sheet with pretty low-cost debt and pay multiples on EBITDA that strategic acquirers just can't afford to do. So, that's probably the biggest thing going on in the building products. In addition, some of the other targets that we've looked at, we believe the acquisition premium is already built into the top price. And when you're asking beyond at that, it just becomes noneconomic.

Okay.

And I guess the final comment on that is last quarter, our Q1 was a pretty good pricing and there was an expectation of value that was beyond what we believed was sustainable.

Okay. Given that you've talked about acquisitions and talked about dividends, is there anything in terms of, I guess, color on share repurchase or the outstanding debt?

Well, the outstanding debt, 175 million of that will be paid in next month. And then there's a small piece that we have a call on in November, about 6.5 million, and we'll make that call. And the only other debt is about 190 million due in 2010. We plan on leaving that on the balance sheet. So, there's really not a whole lot you can do. If you look after the 2010, it's really not particularly accretive where those bonds are trading.

Okay. And then I guess the final question is have you guys had any conversations with TPG in terms of what they're interested in?

I guess the comment I would give you is that we talk to all of our investors with hopefully available information and they would fit in that category.

Okay. Thank you.

Your next questions comes from the line of Steven Chercover of D. A. Davidson & Co. Please proceed. Sir, your line is open.

Steve, are you there?

Yes, I'm here. Sorry, we've been having troubles. It looks like a chunk of your timber notes have come due. Is there going to be any tax implications as you pay that off?

Yes. And that's what I talked about. We moved - - if you look at the balance sheet, we moved about 26 million of deferred tax to current. And that will be paid next June when those - - the note payable, note receivable liquidate.

Apologies. I said, had some technical difficulties. Secondly, can give us any sense of how much the vinyl business was contributing in terms of sales and operating earnings?

Over all - - and these are rough numbers - - it was about a $100 million business from a sales standpoint, and EBITDA for the last five years was probably averaging in the 10 to 15 range

So once that's gone, you'll have no exposure to vinyl siding or soffits or any of the other ancillary businesses?

Well we do provide soffits in our SmartSiding. So we do have trim, soffits, fascia and we also have a few products in hard board. But principally in our SmartSiding product line. And that can be used with any product. But a lot of customers use a lot of of our trim products because it's lighter and easier to use.

Great. Thanks, Curt.

I think we have time for about one more - - or two more questions.

Your next question will come from the line of Mark Weintraub of Buckingham research. Please proceed.

Thank you. Just trying to piece together various comments that you made, Rick. Am I right to understand that profitable growth is still a primary or a top priority but at the same time, you're trying to assess whether or not you have the capability to both position yourself for significant profitable growth and do other things? Or is it that you're even - -?

Yes, you're right on. In some of our investor discussions, people throw their hands up in the air and say how much cash is enough? You've asked us that. And we added another $150 million to the coffers this last quarter. And so you have to ask yourself if you've been unsuccessful so far with making acquisitions, then we've always said that we're open-minded about this. But yes, the priority is still we would like to grow profitably. But we also have to be considerate of the possibility of returning more cash to shareholders.

Great. Thank you.

Does that answer your question?

It does.

Okay.

Your last question will come from the line of [Eston Westin of Martin Curry]. Please proceed. [OPERATOR INSTRUCTIONS]

Well, the darn good question. I think with that why don't we end the call. And if you could give the replay instructions. As as usual, Becky and Mike are available for follow-up. Thanks very much.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. In order to access the replay for today's call, you may dial 888-286-8010 and you may access the replay code - - I'm sorry. I do not have the replay code with me. I apologize. You may now disconnect. Have a great day.