Louisiana-Pacific Corp (LPX) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Third Quarter Louisiana-Pacific Corporation Earnings Conference Call. My name is Christy and I'll be your call coordinator for today. At this time, all participants are in a listen-only mode. We'll be conducting a question-and-answer session toward the end of today's conference. If at any time during the call, you require audio assistance, please press star followed by zero and a coordinator will be happy to assist you. 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 call, Mr. Curt Stevens, Chief Financial Officer. Sir, please proceed.

Thank you very much. Good morning to all of you and I appreciate you joining us for the Louisiana-Pacific Corporation conference call to discuss our financial results for the third quarter ending September 30th. As the conference coordinator said, I'm Curt Stevens, the Executive Vice President of Administration and Chief Financial Officer. With me today are Rick Frost, LP's CEO and Mike Kenny and Becky Barkley are responsible for our Investor Relations activities.

As I've done in the past, I'll start the call with a review of the financial results for the third quarter and provide a few comments on the balance sheet. I'll turn the call over to Rick who will review the accomplishments of the third quarter and our talk about our outlook for the remainder of 2005 with a brief glimpse into 2006. Then we'll open up the call for questions.

As we've done in the past, this call has been opened up to the public and we're also doing a webcast. This can be accessed through our website, www.LPcorp.com. Additionally, to help with the earnings call, we have provided a presentation that provides supplemental information along with the call. As I go through my comments, I will be referring to pages in the presentation.

Before we begin, I want to remind all of the participants about the forward-looking statements, comments that's included in our earnings release and also shown on the second slide of our presentation. There is also another, on the third slide is a comment on our use of non-GAAP financial measures. Rather than re-reading all of the statements, I'm going to incorporate those into this discussion with this reference.

Let me start on Slide Four which is our financial results for the quarter. We are reporting third quarter net income of $173 million or $1.58 per diluted share of which continuing operations showed income of $176 million or $1.60 per share and discontinued operations at a net loss of $3 million. Net sales from continuing operations were $621 million. The third quarter results continued along the same path as the first two quarters. OSB prices remain strong but have moderated over the past year. In prior discussions, we have talked about the leverage of OSB prices has on LP's earnings. For the third quarter, the price decline accounted for over $70 million and lower pretax profits compared to the same quarter last year. For the respective nine months period, reduced OSB pricing lowered our pretax profits by about $235 million.

In this quarter, we did finalize our plans to repatriate approximately $520 million in earnings and profits from our primary Canadian subsidiary, under the American Jobs Creation Act of 2004. This repatriation resulted in a reduction of our tax provision for the quarter of a little more than $100 million. Excluding this impact and other minor special items, our operating results from continuing operations would have been at $0.68 per share. The same period last year we reported net income of $108 million or $0.98 per share. For continuing operations, we had income of $106 million or $0.95 per diluted share and net income of $2 million for discontinued operations. Net sales from continuing operations last year were $702 million.

Referring to Slide Five of the presentation, this talks about the special items for the current quarter. As I mentioned previously, the most significant impact was the reversal of deferred tax associated with the repatriation under the provisions of the American Jobs Creation Act of 2004. When I get to the slide on taxes, I'll provide a little more detail on that. Comparatively, in Q2 of this year, the impact of special charges was very minimal and in Q3 of 2004, the primary charges shown there were associated with the movement of our headquarters to Nashville and Mark Suwyn's announced retirement in Q3 of last year.

Slide Six looks at the nine-month period ended September 30, 2005 and compares it to last year. Reporting income of $375 million or $3.38 per share of which continuing operations provided income of $385 million or $3.48 a share and discontinued operations had a loss of $10 million. Net sales from continuing operations from just short of $2 billion for this period. For the same period last year, we reported net income of $407 million or $3.72 per share of which continuing operations had income of $403 million or $3.68 a share and discontinued operations result in net income of $4 million. Net sales from continuing operations last year were $2.2 billion.

Slide Seven of the presentation has a similar reconciliation as we did for the quarter of the special items. For the nine-month period ended September 30th, the adjusted net income excluding the special items from continuing operations was $295 million or $2.66 per diluted share. These items are all detailed and footnote two and three are released.

One note I would like to make, if you would look at the reversal of tax liability for the nine month period, it shows a $91 million reversal versus the quarter that had $102 million. This $11 million actually was a provision that we had taken in the first six months of this year. So, that's why it is lower than it would have been in the quarter.

Slide Eight of the presentation provides a tax reconciliation. Make a few comments on this. As I have already mentioned, the biggest one there is the $520 million decision to repatriate earnings from our Canadian subsidiary. We will pay approximately $30 million in cash taxes on this repatriation. The reason for the reversal is we had recorded liabilities for the full taxation upon repatriation and under the Act, there is a lower rate. Therefore, during the quarter, we did reverse the $102 million of recorded tax liabilities.

For year-to-date, our tax rate in an ongoing basis is approximately 32%. Assuming no major changes in estimates of taxable income had permanent differences, we expect that the same tax rate will apply to our Q4 earnings. For 2006, we expect our normal tax rate to be in the 35% to 37% range. The reason the 32% is lower than statutory rates is primarily due to Canadian income being taxed at a lower blended rate than the U.S. and because interest on certain intercompany borrowings is deductible, largely in both the U.S. and in Canada through the end of 2005. The rate for the Q3 as you can see the benefit at 66% because of the adjustments all hitting the provision during this quarter.

With that, let me talk about our segments.

First slide of Slide Nine of OSB. OSB price as compared to the same quarter the prior year was down 19% on relatively flat volumes. From a cost perspective, we did face several challenges during the quarter. Wood costs remained high in certain regions and in Canada, that was also affected by the increase in the Canadian exchange rate. Petroleum-based products, particularly resins, both [INAUDIBLE ] continue to be significantly higher than previous years. And with fuel at current levels, fuel has also skyrocketed. With the disruptions caused by the hurricanes, we do anticipate these costs to move to even higher levels in the coming months.

As we all know, OSB prices does have a significant leverage on our business. As I talked about early in the discussion, the change in the dollar value of the ASP negatively affected sales and profits by $70 million in the quarter. That put a number to the increase in the raw materials, raw material costs in the quarter compared to the same quarter last year, provided an increase of about $30 million.

Siding is Slide Ten of the presentation, as we talked about last quarter, this now includes our Smart Side OSB base siding and hardboard. The vinyl siding business that we have is for sale and that is included in our discontinued operations.

For the quarter, this segment generated earnings on par with both the same quarter last year and the last quarter. For the quarter, sales were up 14% in our smart side business. As discussed on prior calls, our challenge in this business from a profitability has been our Silsbee, Texas mill. During the quarter we continued to have some operational issues there and we also lost ten days of production due to Hurricane Rita.

As a side note, we have made the decision to accelerate the conversion of our Hayward, Wisconsin, mill to provide more siding products. First line has been converted and we're looking at converting the second line. Concurrently with this, as we did talk about in our release related to the hurricane, we will be shifting Silsbee production to be predominantly OSB to alleviate of some the supply constraints in the south caused by the hurricane and focus our siding production all in the late states.

Hardboard sales volumes are down 13% and flat with the last quarter. However, this is good news because what that means is we have mixed -- we have shifted our mix to a higher margin, higher price, lower volume to maximize earnings of our hardboard business.

Slide Eleven is our engineer wood business. This segment includes laminated veneer lumber, I-joist operations, plus other related products that include a small plywood mill in British Columbia. We also included in this segment the results --

Christy?

Yes, sir.

Can you take care of that?

Yes, sir.

Thank you.

During this quarter, our engineer wood business did take a bit of a breather from the rapid growth we've experienced over the last year. Both LVL and I-joist volumes were down in the quarter and also down compared to Q4 of last year. We believe that the reduction of these volumes in Q3 was primarily related to customers balancing their inventories, moving into the fall months. Subsequent to quarter end, we have seen our sales volumes pick up in both of these product lines.

At the same time, that we did have lower sales volumes, we did have higher prices to offset raw materials costs. As a result, we're showing lower profits from the sequential quarter but doubling of the same quarter last year.

Other building products is Slide Twelve. This category consists of operations that are not individually significant enough to be a segment. The product lines that are included here are composite wood decking or outdoor living, our moulding business, our. Chilean Operation and the insulation joint venture U.S. Green Fiber and other results from nonoperating facilities. Profits from this segment did decline from the third quarter of 2004. Let me talk about the product line.

Compared to both Q3 of 2004 and last quarter, there were decreased volumes in pricing in both our decking and moulding operations. Decking was profitable but was not as robust as it was in Q2. In discussions with our dealers, there was a lot of product in the channel and customer takeaways were less than anticipated. Average pricing was also lower for LP due to the introduction of a midrange product earlier in the year that shifted our mix a bit. For LP, the very good news in the quarter was we did sign a distribution agreement with Blue Links that will give us access to their national dealer network. This should really be a win/win situation for both companies.

In moulding, we believe this was a timing issue, a key customer had ordered lower volumes than anticipated, but this does appear to be changing in the fourth quarter as the order rate has rebounded. In both of these product lines, higher PVC and HDPE raw material costs have hurt margins as the ability to pass through the price increases timely has been constrained.

Our Chilean operations continues to perform very well and had a good quarter even though it is winter in South America. Another product in this category is our cellulose insulation business, a joint venture with Casella Waste Systems. This business performed very well in Q3 and we anticipate that higher energy costs during the winter will accelerate demand for insulation.

Just want to spend a minute on Selling General Administrative costs. We look at SG&A two different ways. The first is overall SG&A that would include both costs associated directly with our product lines that show up in the segments. And the nonallocated SG&A that we carry at the corporate level. Because of timing issues associated with some of the expense categories, I find it most useful to look at the expenses on a year-to-date basis. For overall SG&A, we're tacking at about $10 million lower than the first nine months of this year. So, good cost control there. The non-allocated SG&A, which is -- does not go to the product lines were down about $13 million. What this means that our product line expenses were up a little bit but we've been able to offset that with lower cost at the SG&A level, at the corporate level. On an ongoing basis, we do expect the non-allocated SG&A will track at that $23 to $25 million per quarter.

Next comments I want to make are on the balance sheet which is Slide Thirteen. Obviously a strong earnings performance continues to enhance the balance sheet. The key statistics here, September 30th, we had over $1.1 billion in cash, cash equivalents and invested stock. As we talked about before, the restricted stock represents cash collateralization of our outstanding letters of credit. Working with capital is at $1.2 billion and our cash exceeded our interest bearing debt by $900 million at the end of the quarter.

As a reminder, we did repay $170 million in debt and execute $150 million accelerated share repurchase. Both of these actions reduced cash in the quarter. Capital expenditures for the first nine months of 2005 were at $175 million approximately. And this also includes the contributions to our two joint venture projects. One in British Columbia and the joint venture with Abitibi in Quebec. As we said before, we still project our capital expenditures for the full year to be in the $235 to $240 million range. Book value increased in the quarter compared to year end to 1865.

With that, let me turn it over to Rick to provide his thoughts on the third quarter and how we're managing the business and the outlook. Rick?

Thanks, Curt. It is absolutely beautiful day in Nashville, everybody. It is about 60 degrees. Not a cloud in the sky. Good morning to all of you.

All in all, in my opinion, LP had a pretty solid Q3 operationally. With the help of the change in the tax laws, we were able to augment the $0.68 per share earnings from operations to a takeback of another $100 million. And that's good news, I think for the Company. It should be good news for the shareholder as this will be less tax dollars going out the door in the future than we previously expected. And that's cash not spent which, to me, is strength.

I'll now take a few minutes and update you on some of the key initiatives that we have underway at LP.

I want to talk first about safety. You may inquire why is the CEO talking about safety? Well, we talk about safety every day at LP. First of all, no one should have to get hurt while working for this Company. But as importantly, the efforts that go in to running a safe operation, the attention to detail, and consistent processes are the same things that it takes to run a profitable operation. We are now at a total incident rate of 1.50 which is a 34% improvement over the best year we've ever had as a company and safety, which was last year and all of our people are to be commended for that.

Speaking of quality, in Q3, we realigned our reporting structure of our quality organization so that our quality managers now report directly to our business general managers and this will help ensure that the best interests of our customers come first, in operation decisions around quality.

Curt talked a little bit about capital deployment, year-to-date, we have spent about $174 million in our joint ventures and deployed to our mills and maybe a quick update is in order on some of these projects. During Q3, we did finish our St. [Pram] I-joist mill. That mill came on-line. That's in our engineered wood products business and it is our joint venture with Abitibi Consolidated. That's the second mill that we've built with Abitibi. They've proved to be good partners.

We're on track for the start-up of what will arguably be the world's largest OSB mill in November. The Peace Valley OSB mill which is the JV we have with [INAUDIBLE] will ultimately produce 800 million square feet after ramp up and first board is expected out of that mill within just a couple of weeks. Site preparation work is underway in Alabama, down in Clark County and 50% of the long lead time equipment has been ordered and the project team is in place.

The conversion of the Hayward Line One to produce the Smart Side product line is complete. The Selma Composite decking expansion we've talked to you about is slightly behind schedule but should be in place within the next couple of weeks. And as part of our OSB brownfield plan, the most significant start-up was at our Rockville, North Carolina plant where we put in a new bark burner and early results show this is exceeding our original expectations.

We talk about focusing on cost and I have got to tell you this has been an ongoing challenge. Oil and derivatives of oil are seriously reducing the profitability of this industry, I'm sure you're hearing that from all people. And basically, the worldwide economy. Wood actually did come down slightly in Q3 but diesel fuel increases offset gains that we saw at the stump. Resins and binders are at a very, very high level and plastics have become even more expensive. And now the supply chains for plastics are being impacted by the storms.

Our OSB business was down 26 mill days in Q3. 10 of those were related to the storm and the rest to maintenance and capital upgrades.

Through our capital plan, we've had modest effect on the consumption of raw materials but these costs increases continue to be very significant. Given that, we've focused on usage of raw materials, the control of SG&A, and we're working on the productivity in our plants.

Speaking of financial flexibility, we do have about $1.1 billion in the bank. That is after we had quite a few cash disbursements last quarter. $170 million in debt reduction and another $150 million in the accelerated share buyback.

Q4 is a tough one to call. I look forward -- it is pretty hard to predict where Q4 is going to go. I think the September housing start numbers that we all saw last week showed an annual rate in September of 2.1 million starts, which is a very hot market. Our larger builder customers say that they are sold out into third quarter of next year. But on the other hand, all of us will be dealing with the upsets caused by the storms and the increased pressure that's being put on the Federal deficit.

As I said last quarter, I still feel the same way. It feels like it is slowing a bit but it is hard to put your finger on exactly where and how.

So, what are my specific worries? I think I could put that into two words. Significant inflation.

I think we're in an inflationary time and that's yet to be fully described by the pundants and by our government.

Raw material costs are, of course, of great concern. Natural gas, resins, fuel, as well as the continuing high Canadian dollar and the exchange rate which impacts our business with about 40% of our cost to sales in Canada. Transportation disruptions, now that the storms are over, there is a great drain on transportation needs to go into the affected areas and the costs are skyrocketing in transportation, both from pressure being put on the need for the available trucking but also from the huge increase in diesel rates.

Rising interest rates. The way I like to think about interest rates is they don't really affect the demand for housing but they do affect the satisfaction or the timing of the satisfaction of that demand. And also, it affects home purchases and refinancing. As most of you probably know, about 80% of the repair and remodeling that's spent on a home is done within two years of it changing hands.

Another thing that we're looking at and experiencing at the moment is raw material disruptions. Primarily, in plastics. Plastics for vinyl, for mouldings and for our composite wood decking business and all of the people that are buying the stuff right now are not only paying hugely higher prices for the raw material but the supply is in question at the moment.

And finally, costs for home heating, transportation, and medical benefits are putting pressure on the end consumer. They're also putting pressure on our employees.

Make a few comments on our product lines. I'll talk about first about OSB. Pricing, while off of the high September levels is still quite good, if you check random this morning, it printed midweek at 375 and 7/16, about $20 down. But supply and demand seem to be in relative balance on OSB right now. Seasonably, we're going into a time where we expect lower pricing. For LP, we're forecasting for Q4 between 50 and 60 mill days, being down, related to what has already occurred from the storms, and then also from scheduled capital outages and holiday maintenance scheduling.

Siding seems to be on -- back on track for reasonable growth. When Silsbee is producing OSB which it is right now and Hayward switches over to siding, we should see an improvement in the cost position of both plants. And hardboard continues to perform very well as Curt said.

In engineered wood, we went from being on allocation for a little bit over a year, year and a half, to a period of about four to six weeks where there were absolutely no orders. And then orders rebounded back and we now have an extended order file again. So, it was quite an interesting third quarter for engineered wood. Our volumes have picked back up. And we're looking to have a pretty good quarter in Q4 in engineered wood. And as I said, we did start up our I-joist plant, with the in St. Pram.

Decking was a tough Q3. Slow quarter. I tend to think that we just got outsold in Q3 and we've put quite a bit of attention to that with the Blue Links deal. Which is -- we are now the sole provider of composite decking to Blue Links. I think that that is going to be very instrumental in getting us back to sustained growth in decking. And there is still a lot of optimism about this product category.

And finally, on the last call, in response to one of the questions that we got, I promised that I would give you an indication of our increased OSB production capability that we have achieved as ancillary benefit of our brownfield reinvestment plan. At that time, I gave you a guess or an estimate which ended up being pretty close. I said it was about -- we were operating at about 230 million feet additional capacity on an annualized basis from the reinvestment so far. We have spent about $100 million on the brownfield work so far. And our OSB team worked it up and they're giving themselves credit for about 240 to 245 million additional square feet of capacity on an annualized basis from these brownfield projects.

Remember however, that the primary benefits that we're trying to capture from the brownfield are aimed at cost reduction by improving wood yield and reducing our reliance upon energy. Our OSB team does expect that the total increased capacity, when the current brownfield plan is complete, will be well over a half a billion feet. As well, I think a new piece of information there is that in our strategic work, our OSB team has stretched the timing out for the brownfield plan by about another 24 months so we intend to complete the plan as it exists today and by 2010 which gives us a little bit more time.

One would ask why -- I think it is prudent to see the results in one mill before we replicate that activity in another mill and that's something that we want to do. We don't want to overextend our engineering folks. And I don't want to add overhead and then also we would like to get a better fix on the Amount of the additional capacity that's actually going to be built as opposed to announced as we spend this money.

So, with that, I'll turn it back over to Curt.

Thanks, Rick.

As Rick said, we're in very tumultuous times. Trying to forecast the future, looking at oil prices, the impact of the derivative products like resins and diesel fuel, energy costs, it is a constant challenge for all of us. For the need to aid the citizens in the affected areas from the hurricanes and other Federal commitments, we'll continue to see pressure on inflation rates and interest rates.

Will all this affect construction activity? I think the answer is yes but the big but is housing activity continues to be very good. The business in our economy is very good. The need for shelter will continue to grow as a result population demographics and immigration.

What we do know is that LP is committed to serving this market profitably while growing. We're trying to continue to increase the share value and support that with a dividend that's rational to the business cycle.

With that, Christy, let me turn it back to you for the question queue.

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

Hi, guys. It is actually [Arune Dismopfin] in for Cooney. How're you guys doing?

Good

Just a couple of quick questions I guess on the downtime. Just wondering if you can quantify for us, you know, the impact between differences in resin costs, those going up as well as energy kind of split that out for us.

Let me address that on a year-to-date basis. If we look at the first nine months of last year and the first nine months of 2005, the increase in those raw materials costs is roughly $100 million. Now, a piece of that is the Canadian currency. That would affect principally wood costs up in Canada. Of that, wood was about 40% of that, resin was another 40% of that, and then energy, natural gas, electricity, would have been about 20% -- 15% to 20%.

okay, so, of the 100 year on year, year-to-date increase, it is 40, 40, 20, wood, resin and energy.

Approximately, yes.

okay. Great, thanks. And --

Remember that, does include the impact of the Canadian exchange rate.

Oh, okay. Which is you know, 40% of your overall --

yeah, but that's principally on the wood side.

okay, got it. Okay, and then just a little bit more color maybe on the wood situation in the southeast. Are you using salvage logs down there and you know, is the pricing based on those contractive levels or spot markets?

At this point in time, where most of the salvage is taking place is in Mississippi and Louisiana.

Right.

We don't really have any facilities close to there. You could say it is alleviating pressure on our mills that are more northerly. We should see some decline but it is -- as Rick said earlier, it is being offset by fuel.

FEMA is paying $4 a mile to truckers. It is a pain in the [censored] to get trucks. Got it. Okay. And then you know, I guess the other one is a little bit more bigger picture. Can you give us a sense as to your pipeline on potential transactions, you know for the acquisition environment? Are you look at this more relative to maybe half a year ago or just given your cash balance and uses there?

Well, we spend a lot of time looking at acquisitions that may fit into the businesses that we're in or in the ancillary businesses where we've got skills that we can bring to bear there. The difficulty that we've had has been on the affordability side of that. I think as most people on the call will recognize, the financial sponsors do have a lot of money. They have the ability to leverage that pretty significantly. And they're paying multiples of EBITDA that are very hard for us to justify on an ongoing basis. We're doing a lot of looking. We're not doing any buying right now.

You have noticed any changes in those multiple over the last year? We've been hearing that for a little while.

Actually they came down a little bit in the second quarter but then they've come back up in the third quarter.

Okay. Great. Thanks a lot.

Your next question comes from Rich Schneider of Louisiana Pacific.

No, I belong to UBS. [ LAUGHTER ] The situation with your brownfield project, you had indicated you were pushing the time frame out and in terms of the amount of capacity, is it $500 million on top of the $240 that you've already gotten? I think your original number was closer to $900 million.

Yeah, my original number was $800 then it bounced around, Rich. This is Rick.

You're at LP, right?

Yeah. Last time I faced it that's the color of the check.

I just said over a half a billion feet because as the decision of our OSB team right now to push this out two years is a decision we've just made in the last two weeks and so we're -- I've asked them to go back and quantify what the expectation is as compared to the original estimate of 800. There is some moving parts, if you'll remember, that we have to figure out. One is as we move Hayward over to siding, the original plan had some improvements made for Hayward to make OSB.

Okay.

And so now, when we take Hayward out of that brownfield plan and there won't be some money put in there and there won't be some improvements from there.

Another one is an adjustment that we're trying to figure out based upon the reduction in the cut in Quebec. We have three OSB mills in Quebec, as you know, the Quebec government has reduced the soft wood cut by 20% going forward. And I think that that probably affects the hardwood that we use by somewhere in the neighborhood of 5% to 7%. We're having to figure out -- readjust whether we're going to put more money into our Canadian mills because we don't know whether the wood is going to be available or not. Those are probably the two largest impacts. I would think if you still a hang around that 750 to 800 number, we still have that as our goal.

Okay. And as you look out and in, factor this in, I know it is early in the process. What does this do to your cap spending plan over the next couple of years? Maybe you can just sort of give us an idea of what you're looking at in terms of total Cap Ex for next year and maybe potentially the year after.

Well, as we've said earlier, this year, we expect to be in the 235 to 240. Next year, we would expect to invest about DD&A in our ongoing operations then we're starting the construction of the Alabama mill which would be on top of that.

Okay.

I would expect next year to be pretty consistent with this year.

We'll give you a better number next quarter.

Okay.

We're just heading right into our budgets right now.

So, this pushing out of the brownfield is not having much of an impact on the Cap Ex plan. At this point.

It is not huge. When you think about shifting 60 or $70 million a year over that period of time, you're only rolling $10 or $20 million.

Okay. In terms of the share buyback program, your shares, you know, that you gave us for the quarter were roughly about $2 million on average, below the second quarter levels. Should we assume like in the fourth quarter with the completion of this that you'll be another $4 million below in the fourth quarter versus the third quarter?

Yeah, we did that share buyback at the end of August, early September. So, you only had the impact for one month in that quarter. So, it would -- it will come down in the fourth quarter. $4 million I think is too aggressive though.

Okay.

It is probably going to average for the year about $109. On a fully diluted basis.

Okay.

Rich, just for the fourth quarter, probably going to be in the 105.5.

Okay. And then had you Jasper and Silsbee down and I know that was part of the -- I think you said 26 days of downtime and then I think it is probably part of the 50 to 60 that you're talking about in the fourth quarter. Could you give us an idea of what maybe the potential financial impact of those being down, were you looking at it sort of like a maintenance down?

Let me just talk about the hurricanes themselves because both hurricanes affected more than just Jasper and Silsbee. We did take another mill in Texas, Carthage, down. Just as precautionary, just for the hurricanes. We lost about three days of production there. We took earlier, we had Wilmington went down for a bit. Selma went down. Holly Springs went down. But we think that the number's somewhere roughly $3 to $4 million impact in Q3 and about the same in Q4.

Okay. And then just lastly, on cost, can you give us an idea going from the third to the fourth quarter, what you're looking at in terms of increases in resin cost, your situation I know is less than others on natural gas and on transportation -- and then finally on transportation. Those three cost factors.

Well, our biggest business is OSB. We anticipate, given the impact of the downtime, as well as the increased costs that, we'll probably have roughly a $15 increase per thousand in our cost. That would take in both the downtime plus the increased.

That's going from third to fourth quarter.

Right. That's going third to fourth quarter. And our other businesses, we're going to see significant increases, we have already seen significant increases in PVC and HDPE. In addition, [INDISCERNIBLE] allocation on some of those products. So we're going to have curtailed production in both decking and in vinyl.

Okay. Thanks.

Your next question comes from Mark Weintraub of Buckingham Research. Please proceed.

Follow up on the $15. Do you know how much of that would be downtime versus inflation?

I'm guessing about 25% of it would be the downtime. And 75% would be increased costs.

Okay. Costs obviously are going up wherever but with the Canadian dollar doing what it's doing, with it often being further to get to market when you're shipping from Canada as well, I'm undoubtedly that the cost inflation is having a much bigger impact on your Canadian facilities and anybody in the industry. Can you give us any sense as to where the high cost producers in Canada and the OSB business might be at in this type of environment on a 7/16 basis for everyone to look at it?

I can't. I know that Reese is I just came out with their comparative study. I haven't gone through that in detail, Mark. That's probably where I would look first, because they collect that data on a no-name basis. We know what our mills are. And you can guess what the others are. But I have not looked that in detail. That just came out last week.

Is the spread between your Canadian mills and your U.S. mills pretty wide now? Or is it still fairly flat cost curve?

Well, in the past, the Canadian mills have been less -- have been better cost position than the U.S. mill. Now, what you're seeing is the inexpensive wood is in the U.S. and the expensive wood is in the Lake States and kind of in the mid is the Canadian wood with Quebec being much higher than Western Canada.

Okay. Probably running into a dead end here. Are we talking it is now $40 or $50 per unit higher in Canada than the U.S. or is it much less than that?

We're just not going to answer that question for you, Mark. Do your research.

Sure. And then just -- second -- do you have a sense on where -- where customer inventories now in the OSB business. You talked about a lot of inventory movement in engineered wood and the other businesses. How about in OSB? Do you have a sense of customer inventories there?

I think that the chain is in pretty good shape right now. The channels -- I don't think they're overflowing with wood but I think they have plenty of wood and I would expect no more panic buying for the rest of the year.

Okay. Thank you.

Your next question comes from Richard Skidmore of Goldman Sachs. Please proceed.

Good morning. Just a follow-up on the repatriation of cash. Does that change your thinking and strategy with regard to the cash balance that you have? It looks like you finished your share repurchase. Is there anything you're thinking about next with the cash balance?

I don't think it changes our thinking. We could access that -- those dollars. At a cost. But I don't think it changes our thinking.

Okay. Then with regards to a share repurchase, you've completed this $150 million. Is there anything left outstanding with regards to further share repurchased or do you have to go back to the board for that?

Well, the board original authorization was 20 million shares. This pulls us down to a little over 14.5 million. This is a regular discussion that our board and management have every quarter. So, yeah, we'll continue to discuss that.

Okay. And then just shifting to the Blue Links agreement. I believe that was with regards to your composite decking.

Right.

What kind of magnitude are we talking about with regards to that agreement?

Well, we're going to be their sole supplier of composite decking. So, I can't tell you the exact size of that but it is significant volume and potential volume for us as they do their job and we do our job in putting our product into that product category.

So, going forward, with that be 3%, 5% kind of growth? Going forward?

I don't believe I want to answer that question.

Okay. Thank you.

Your next question comes from Christopher Chun of Deutsche Banc. Please proceed.

Hi, guys. Just following up on the Blue Links question. Does that deal change your thinking at all in terms of ever considering going into the distribution business?

Actually, it reinforces that decision, I believe. We're pretty convinced that that's not where we want to be. That's not where we want to play. We keep reconvincing ourselves of that. So, we think that Blue Links will be an outstanding channel partner going forward.

Okay. And then in terms of the Canadian dollar, I believe you mentioned that 40% of your costs are in Canadian dollars. Do you -- are any of your sales in Canadian dollars?

Yes. Actually, there is a split in our -- I don't have it in front of me but in our annual report, we do a geographic split of sales.

Okay. So, the sales in Canada are in Canadian dollars.

Yes.

Okay. Do you have a number handy in terms of say what a penny move in the Canadian dollar -- what kind of earnings impact that would have?

The number we've used in the past is about $4 million for every penny.

Okay, great. Then in terms of your brownfield projects, besides adding capacity, will that change the cost structure in terms of per unit of OSB produced?

Yes, in fact, that's the principal reason for the brownfield was to reduce our cost and what we're looking there is reducing cost of wood by improving yield and then targeting energy. Just is an example, if we looked at the consumption of natural gas, for the first nine months of this year compared to the first nine months of last year, our natural gas consumption is down 12%. Our electricity is down 2.6%. So, we have, in fact as Rick was talking about, can't do a lot about the price but you can affect the consumption so those projects are bearing fruit.

To give you another example of that without too much detail for our competitors, but in this Roxboro project I talked about earlier, we've improved our wood yield by over 15%. That means it takes 15% less wood to make a thousand square feet of board. Which is, if you can't control the cost of the wood, you can control the amount that you consume.

Right.

Does that help you?

It does. Thanks. Just to clarify, on the Canadian dollar issue, the $4 million, is that one cent in terms of Canadian to U.S. or U.S. to Canadian?

It is one cent the U.S. dollar equivalent of the Canadian dollar.

Canadian dollar being 85 cents of U.S.

Yeah, if I go from 85 to 86, it costs $4 million.

Okay, thanks.

Your next question comes from John Tumazos from Prudential. Please proceed.

Could you describe in each of your segments, roughly, I don't expect you to know this off the top of your head exactly, what percent of sales would the three largest customers be. You mentioned, for example, you went four to six weeks in engineered wood without much orders. Sounds like there is a little bit of volatility and I'm just trying to understand what might drive it by segment.

Well, I'll give you some numbers, John but I'm not going to give them to you by segment. If you look at our top ten customers, it is about a third of our business. If you look at the top 50, you're up to 76%. So, it is a relatively unsteady group. That changes by product.

Which products have the most concentrated customers?

Those that would go through the retail channel. So, like our moulding business, which is all retail product, but have more concentration. Engineered wood would have more concentration than some of our commodity products simply because the distribution partners are such an important part of the process.

If I can ask another question. A completely different company I follow, Phelps Dodge is a little bit like LPX in that they're earning a lot of money from one product and they had about six lean years, just like LPX used to have some lean years in the past. And they've -- they were studying acquisitions and last week, they said they were going to distribute $5 extra to shareholders this quarter and $10 a share extra next year, above their $1.50 annual dividend rate. They have the difficult situation that they earn about $5 per share per quarter. Do you think that the acquisition analysis is sort of non-productive given that it is a strong housing market and the time would be just as well spent attacking your costs and if you distributed the money, it might be just as good as holding it?

I think that you're exactly right in terms of us putting our intentions into attacking our costs. And we're trying to do that about every day, John. I don't agree with your second nor do I think it will be forthcoming. We're going to continue to look for business opportunities to go through acquisition assuming it is at the right price. And we're not spending a lot of time looking at dispersing cash through a special dividend.

Thank you.

Your next question comes from Peter Ruschmeier of Lehman Brothers.

Thanks, good morning. Have a couple of questions on the $170 million of debt you retired. Can you remind us the savings on that?

Those were the 8.5% 2005 notes. So, 70 times 8.5% was the coupon rate on that.

Currently receiving about 2% interest income on your cash balances, is that about right?

Actually, Mark it's doing better than that. Close to -- I think last quarter it averaged about 3.2.

3.2%. Okay. As it relates to your start-up in BC, could you give us a sense of what kind of learning curve you expect from the start-up and maybe how you're going to market, whether you're seeding the market at all with purchases elsewhere to feed into the market or you just expect to bring that on and place it into the market?

Well, we're producing sheathing right now. So there isn't seeding that's required. We have a plan to bring that to specific customers. We know where as that board comes off that line, where it is going to be shipped to. People have orders already in place for that. So, we know where that product is going. I would expect next year that that mill will probably make somewhere around 600 million square feet and then when it gets ramped up, it will probably move on up to the 800 number as the capacity we've laid on that.

Okay. But with the mid quarter start-up in 4Q, is it fair to assume not a very large contribution in volume in the fourth quarter?

Well, the fourth quarter will be the commissioning and starter board so you won't have the same sales price. I think that's very fair. There won't be much board coming -- much profitability from that operation.

We will be reporting that production volume in our numbers. We will be recording the earnings from that in our numbers.

Okay. Switching gears, back to the buyback that you did, just to clarify, I think it was Rick's question. Do you need approval to act on the remaining 14 million share buyback or since you've already approved the 20 million share buyback, are you authorized if you choose to go in the market?

I think it is a good one for me to answer because we have that discussion all the time. We have approval from our board. What you need to understand is I'm on the board and that I will work in concert with my board. My board is only a phone call away. So, we would deal with anything that we do of magnitude with consensus on our board between management and the board. So, it is -- I don't know exactly what question you're asking but any time that we act, it will be with approval and agreement of our board, whether that's tomorrow or whether that's three weeks from now or whether that's immediately after a board meeting or whether it is two months after a board meeting.

Okay.

Making the distinction that we either have approval or don't have approval, is irrelevant because what we will be doing is acting in concert with our board whenever we act on significant financial expenditures.

Okay. Fair enough. And you know, I think you've been pretty clear in terms of your capital structure as it stands now that you really haven't yet seen the opportunities. I guess the question gets to, you know, we've had a lot of time go by with not seeing the opportunities in the cash positions you're building and do you think it is prudent that you know, you could see a period of 12, 24 months from now where you continue to sit with this kind of capital structure or is it more a decision tree you come to at some point that you either buy into current valuations of acquisition costs or take alternative steps and it sounds like you've ruled out the step of the special dividend.

I think we have, at least at this point in time, unless our board were to urge us to do something differently. We have ruled out the idea of a special dividend. I think that as we discuss with them and ourselves on a very frequent basis, what is the best path to go forward, we have a general consensus that having a strong balance sheet in the face of volatility is the absolute best place that you can be. I can find no one that can convince me otherwise. I would be interested in hearing that argument that professing to want a less than strong balance sheet in the face of volatility would be a good idea. So, I think that we're going to continue to look for the opportunities to use our cash as we have said and then we will probably continue to have opportunities to act as we did last quarter. If you put in perspective what we did in Q3, we spent over $300 million of that cash to the advantage of the shareholder in the Company by retiring debt and by buying stock back. $300 million on a $1.4 billion is -- we did something with 25% of the cash.

Mm-hmm.

I think that's reasonably responsible. As we continue to build a cash balance and if we have not found a good acquisition, then I would assume that we would act prudently again. I think that probably one should look at what we did last quarter and say you know, those guys aren't unreasonable. They're careful, but they're not unreasonable in terms of what they're doing with their cash. And that would be the way that I would expect us to act going forward.

Okay. Just lastly, if I could, Rick, it is really a question along the same lines. And you know, this is maybe a tough one to answer but as you think about acquisition opportunities, is it fair to compare and contrast an acquisition opportunity to the acquisition opportunity of your own share price as an opportunity -- an acquisition being equal to or greater than the kind of accretion from your own stock. Or in the name of strategic moves, is it, you know, reasonable that the right scenario would be worth going after even if it did not have the same kind of near-term financial return as buying your shares.

Well, obviously that's a really tricky question. I'm sure it is not intended to be. I do think that why we have been reasonably stalwart in saying we would like to spend some of this money on acquisitions is that our customers are growing. And that we need product growth. We need to provide more product to the people that are asking it for us or they're going to have to go to someone else. So, part of the notion of acquiring is to satisfy the customers. And so you're going to do what you need to do and if you can't do that with an organic plan, then you need to spike that with the opportunity for acquisition. I think if we branch out into building materials product lines that we aren't currently in, I think that we need to see a great amount of synergy with our distribution channel or with the products that we currently make or that the returns have to be stellar. So, but I think you would probably -- if you sat down and you made the decision between your own stock and an acquisition that allowed you to better satisfy your customers, you might take a little bit of a discount to better satisfy your customers because that's a longer term notion of success.

Okay. Fair enough. Thanks very much.

Christy, we got time for one more question.

Yes, sir. Your last question comes from Cooney Chen of Banc of America Securities. Please proceed.

All of my questions have been answered. Thanks again.

Thank you.

Okay, Christy, if you could give the replay information and thank you for joining us on the call as usual, Mike and Becky will be available if you have more detailed questions. Thank you.