Louisiana-Pacific Corp (LPX) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Louisiana-Pacific Corporation first quarter earnings release conference call. [OPERATOR INSTRUCTIONS]

At this time, I would now like to turn the call over to today's host, Mr.Curt Stevens, Executive Vice President-Administration and CFO. Please proceed, sir.

Thank you very much and good morning to all of you. We appreciate you joining us for the Louisiana-Pacific conference call to discuss our financial results for the first quarter, ended March 31st, 2006. As the moderator indicated, I'm Curt Stevens, the CFO. WIth me today are Rick Frost, our Chief Executive Officer. Mike Kinney and Becky Barckley are responsible for our investor relations activities. I'll start the call today with a review of the financial results for the first quarter, provide some comments on the balance sheet, and then I'll turn it over to Rick, to talk about the first quarter from a more macro perspective and also talk about our outlook for the remainder of 2006. Then we will open up the call for questions.

As we have done in the past, the earnings calling has been opened up to the public, and we are also doing a webcast. This can be accessed through our website at www.lpcorp.com. Additionally, to help with the call, we have provided presentation to provide supplemental information that I will refer to as I go through our discussion today. As a caution, this presentation should be reviewed in conjunction with the publicly available earnings release.

Before I begin the discussion, I want to remind all the participants about the forward-looking statements comment that is included in our earnings release and also shown on slide 2 of the presentation. We also have a cautionary language on the use non-GAAP financial information, which is included on slide 3, and we also provided a reconciliation of the non-GAAP financial information that I'll be referring to. I'm not going to reread these full statements, but I am going to incorporate it into this discussion with this reference. As I go through this, I will indicate the slide that I'm addressing my comments to.

First slide is slide 4, which is the summary of our financial results. Today we are reporting net income for the quarter of $84 million or $0.79 per diluted share, of which continuing operations showed income of $85 million or $0.80 a share and discontinued operations at a slight net loss of $1 million. Net sales from continuing operations were $678 million for the quarter. For the same period last year, we reported net income of $102 million or $0.91 per share on continuing operations with income of 105 or $0.95 a share, and discontinued operations had a loss of $4 million. Net sales from continuing operations in the same quarter last year were $661 million. In past quarters we have often discussed special items that are not generally attributable to our ongoing operations. The impact on Q1 of 2006 and Q1 of 2005 was relatively minimal. However, we have outlined these special items in footnote two of our earnings release.

Also on that slide, I'd like you to look at the difference in the tax rate. The effective tax rate this quarter was 34%. We compare that with a recently completed quarter of December 31, 2005 or the fourth quarter, we had a very low effective tax rate of 10%, due to the full-year true-up of the significant tax advantages that we gained by utilizing the manufacturing tax deduction and the repatriation of foreign earnings, which allowed us to reverse some prior tax accruals. Had the same 34% effective tax rate been applied to the fourth quarter earnings, we would have shown a 25% increase in our operating results for the quarter just completed at March 31st.

With that, let me now turn to each one of the segments. On page 5, there's a summary of our Oriented Strand Board or OSB segment. OSB pricing, as compared to the same quarter last year, is down. It's down about 18%. However, during the same period, our volumes are significantly higher; 14% increase in the volumes. About half of this increase came from the startup volumes produced by our Peace Valley JV mill. The remainder of the increase came from the other mills in the system, where we have definitely seeing the benefits of our reinvestment strategy. From a cost perspective, we continue to face several significant challenges compared to the first quarter of 2005. First, resins and waxes were about $3 higher. Utility costs, natural gas and electricity, was up about $2. Offsetting this, however, is our wood cost did decrease in the quarter compared to the same quarter last year by about 7%, and that was both to slightly lower pricing, but more significantly, to higher yield in our production facilities. Compared to the four quarter of 2005, we are -- the good news is we're down about 6% in our costs. There is some cautionary news and that's that oil at current levels, we do anticipate that this relief from the fourth quarter may be short-term, as resin wax and energy costs will be directly affected and then wood costs may rise due to increased cost of transportation.

Slide 6 is our siding segment. This segment includes our Smart Side, which is an OSB-based siding product, hardwood siding and some commodity OSB produced at one of our lines in the Hayward Mill, as we continue to convert this mill fully to a siding operation. For the quarter, good sales volume increase. We're up 13% in Smart Side business from the prior year and 10% from the prior quarter, while sales price showed an increase of 5% from the prior year, and a slight reduction from the fourth quarter of last year. In the first -- on January 1st, we did switch our Silsbee, Texas, siding mill from siding to commodity OSB and we converted a portion of our Hayward mill to siding. So the Hayward mill is being reflected in the siding segment and the Silsbee mill is back in the OSB segment. We talked several times about the difficulties we had with production at our Silsbee siding mill. I'm happy to report that this shift of Silsbee for Hayward between the two segments has been a win-win situation for both. Silsbee is back to producing commodity OSB, with the additional capability of making a treated OSB product for bug and mold resistance. The Hayward startup of the siding has been right on track, both production and quality.

For the quarter, the increased profitability here, about $7 million of the increase is related to the transition of these two facilities. For Q1, we did sell approximately 70 million square feet of commodity OSB out of this commodity, compared to 11 million in the prior year and 25 million in the fourth quarter. Hardboard sales volumes are down 10% from the prior year and flat with the prior quarter. However, as I mentioned in the fourth quarter of last year, price is up significantly, as we convert production to higher margin, higher price, albeit lower volume product mix, which helps us to maximize the earnings potential from our hardboard business.

The next slide is our engineered wood products. This segment includes laminated veneer lumber and I-Joist operations, plus other related products that include a small plywood mill in our Golden operation. Products in this segment almost doubled from the same period last year to $11 million. This is also an increase sequentially, due to higher volumes in LVL. During Q1, LVL volumes were up about 4%. I-Joist volumes are slightly down about 3% for the quarter compared to Q1 of 2005. As compared to Q4, we did see a significant increase of LVL, over 20%, and a more modest 5% increase in our I-Joist volume. In Q1, we were able to hold pricing flat for the last quarter. This price level was quite a bit higher than the first quarter of 2005, as we had a 9% increase in I-Joist and 5% increase in LVL.

Slide 8 is our other building products. This segment consists of composite wood -- composite wood decking, or what we call outdoor living, our interior molding business, our Chilian operations, an insulation joint venture U.S. GreenFiber, and some other nonoperating facilities. Overall, in terms of profitability, this segment showed a slight decline from the first quarter of 2005, but a significant rebound from a poor fourth quarter last year. In terms of volume, we saw increased volumes in decking and molding. At our decking operations, the increase in volume from a shipment standpoint, was 35% compared to the same quarter last year and 89% sequentially. The 89% sequentially has to be taken with a grain of salt. I think what we report -- what we did report last year is that we did have quite a bit of product on hold, pending the resolution of a certification issue, which we did resolve in the first quarter and then shipped that product in the first quarter.

From a pricing perspective, the average decking pricing is 4% higher compared to the same quarter last year, and significantly higher than last quarter. But as you may recall, we did sign a new deal with BlueLink as a major distribution partner, and there was a discount on the initial stocking orders in the fourth quarter. Our Chilean operation's continuing to do well, and they are looking forward to the planned capacity expansion by moving our Montrose mill to chile later this year. Finally, our installation joint venture grew by acquisition and benefited from a combination of higher energy pricing and the shortage of fiberglass insulation to turn in a very good quarter.

On the selling and general administrative cost, total costs, which would include those that are allocated directly to our product lines, were $42 million for the quarter, an increase of 11%. Virtually all of this increase is at the unallocated level, as segment SG&A was flat. On the unallocated SG&A, costs were up about $5 million compared to the same quarter last year. This increase is primarily driven by higher legal expenses related to the cost of trial in the NatureGuard class-action suit, in which we received a favorable jury verdict in the first quarter, stock compensation expenses under the new rules and the timing of audit fees. On an ongoing basis, I still expect the nonallocated SG&A will track somewhat below $25 million per quarter.

Slide 9 of the presentation is the balance sheet. Some selected balance sheet statistics. The impact of our strong operating performance continues to make the balance sheet even better. Let me talk about a few key statistics. March 31st compared to the end of last year, December 31, '05, there's nearly $1.4 billion in cash and cash equivalents investments or restricted stock. Reminder the restricted stock is the cash collateralization of our outstanding letters of credit, which allowed us to reduce the cost of both letters of credit. Working capital was more than $1.5 billion. This is an increase from Q4, as in the first quarter we build log inventory in the winter months in our northern mills, and accounts receivable is generally at its lowest point at the end of the year. But in the first quarter, the balance picks up as activity picks up, as well as extended terms provided under winter buy programming in some of our product lines, notably in the decking and the hardboard siding.

Now, March 31st, net cash, which is cash less debt, was about $966 million. Reconciliations of both of -- all three of these numbers are included in the appendix to the presentation. Capital expenditures for the first quarter were at $42 million, and that does include our contribution to the Camp for JV in British Columbia. The other pieces of this were initial costs associated with our mill in Alabama, improvements in our hardware facilities to expand our presence in higher-margin products. We still anticipate that our capital for the full year will be about $275 million. You can see the increase in book value, about $0.65 a share increase in book value to 1995.

For that let me turn the call over to Rick, who will talk about his view of the first quarter, outlook for Q2 and longer-term for all of 2006.

Good morning, everyone. It's a rainy day in Nashville, but I think the sun has been shining on LP. We had another good quarter. While earnings were lower than the first quarter last year, due to a drop in OSB prices of about 18%, I'm still very pleased with the way that we played the first quarter. We had volume increases in most of our product lines, led by OSB at 14%. We sold 13% more Smart Side and 35% more decking was shipped to customers. Operationally, our OSB mills hit on all cylinders, with higher volume, lower unplanned down time, and improved yields. We took only six days of maintenance outage last quarter. With the exception of Peace Valley, at the current state of the OSB system, I think this is about full throttle for our OSB system. We did experience some relief in raw materials, as Curt mentioned, but we do have the dark cloud of the effects of higher oil prices looming in the future again. I think we again had a very outstanding safety performance. Coming off of our best year ever in 2005, we started the year with this quarter with the total incident rate of 1.16, which is a 16% in improvement over the entire year of 2005.

We also expanded a pilot Lean Six Sigma initiative that we had going into a broader implementation across our entire Company, and we have identified and begun training 20 new black belts in this program. We've decided to become a Lean Six Sigma Company for three primary reasons. First, to realize the saving that come from an effective implementation of Lean Six Sigma. Second, this is a ideal program for LP to use as a foundation for instilling continuous improvement into our culture. And third, it's an excellent way to provide direct, relevant and beneficial training to hundreds of our employees throughout the Company. So what about Q2 and the rest of the year? I think this is a pretty uncertain time and we're all getting a lot of mixed signals, although to me, Q2 still feels pretty solid. I think the level of housing activity in the first quarter surprised a lot of people. While it was a fairly mild winter in the north, the West Coast was persistently hammered with rain for much of February and March, which did negatively affect building and, hence, some of our takeaways. If we look at 2Q, we should see improved weather conditions, which will lead to building activity.

Product inventories in the channel appear to be fairly normal, except for what we think to be a slight inventory buildup in engineered products in the west. On the other hand, there's a cautionary note being expressed by the big builders and the other channel partners as a result of the increase in the unsold housing inventory, some negative response to higher interest rates, and a moderation of the ability for the big builders to raise housing prices. Given all of that, I expect Q2 to be a good quarter, with the wild card for us being what happens to OSB prices. For our other product line, demand seems to be good and price levels are not being unusually challenged. The second half of the year to me is still a little bit blurry, and I'm going to have to leave the forecasting of that to the [pundents] who get paid to do it. There is a high consumer confidence level right now, but there are also uncertainties about the federal reserve moves on interest rates. Additionally, the rapid increase in energy costs that we've seen is cutting into household resources, and this is bound to influence decisions around large purchases, possibly including housing. I read an April 18th "USA Today" article the other day that said that Americans currently are chipping in an additional $500 million a day at the gas pump. That's a pretty sobering number. LP's response to this uncertain environment is pretty simple. We're going to continue to stay focused on our operating efficiencies, continue to work at getting closer with our customers, and continue to work with our suppliers to find ways to continue to mitigate the risks associated with raw materials.

Now, before I turn it back over to Curt, I think it's my turn in the barrel to take on the cash issue, which is always on our minds and those of our investors. During the quarter, the cash balance didn't change much, as the cash flows generated by operations allowed us to increase our seasonal working capital to fund full log inventories through the spring months, and accounts receivable associated with winter buy programs that have extended terms in both decking and siding. Our capital spending in the quarter was a little bit over $40 million, but we still have a plan to spend $275 million for the full year. The big projects include our Alabama OSB mill, the phase II of our Hayward conversion to siding -- that's taking the second line at Hayward and giving it the capability to make Smart Side -- the oriented strand lumber conversion of our Holton, Maine OSB mill, and the dismantling, movement and the reconstruction of the currently-shuttered Montrose, Colorado, OSB mill to a new site that we have purchased in Chile. Plus we are continuing with the OSB reinvestment plan.

As well, I'm sure you remember we did increase the dividend to a run rate of $0.60 a share on an annualized basis. And Curt, and his business development team continued to evaluate acquisition opportunities that will either expand our position within our current product lines or expand us horally -- excuse me, horizontally with new product lines. And I have nothing new or concrete to report to you in this area. Regularly we do discuss with our board the option of further share repurchase within our current authorization of, I think, about 14 million shares left in that authorization.

So to wrap up, it's a very consistent story with our past discussions. Our management team and the board are committed to appropriately deploying the existing cash and maintaining our financial flexibility to create long-term value for our shareholders. And with that, let me turn it back over to Curt.

Thanks, Rick. I -- just a few comments. I do want to ask all the investors and analysts to focus on the fact that we are in the back on our growth track, as Rick talked about. Most of our product lines did experience growth, led by OSB with a 14% increase increase. We are seeing the benefits of our reinvestment program in higher volumes and lower conversion costs at our OSB facilities. And we're looking forward to full production coming out of the Peace Valley mill so we can continue to satisfy our customers' needs. With that, let me turn it over to you, Anika, for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Rich Schneider with UBS. Please proceed.

Congratulations, good quarter. I was just wondering, on the numbers that you had given out, Curt, on input costing down about 6%, that was year-over-year, right?

No, the 6% was from the fourth quarter. Actually, what I talked about is we had an increase in resins and wax and an increase in energy from the first quarter of the 2005. But we did offset that by lower log costs -- or lower fiber costs, which was a combination of improved yield at our facilities and a little bit lower per-unit cost on the input.

Okay. And what are you seeing right now in terms of log costs, excluding the benefits you're getting from improved yield?

I think in the south we're still seeing some benefit from the hurricane wood. So log costs in the south have been trending down since the third quarter. In the north, they're trending down a little bit. Last year we had some difficulty filling up all the woodyards in the north, because they had very wet weather and it was difficult to get into the woods. Currently, our northern mills are in a very good wood position, so that allows us a little bit more flexibility in the market. Quebec still is an area where they're transferring more and more costs to the operating companies, so we're seeing an increase in fiber costs in Quebec. And we're still analyzing the impact of the changes in the stumpage rates and the price for beetle kill in British Columbia, but we actually think that will be slightly advantageous to us the way they've come up with their new system.

So it looks like, overall, you're at this point trending down?

I think it's trending down. The summer months, there will be demand on it, but I don't see it's going to be a negative for us.

The caveat to that is what's going to happen with transportation costs is what we've been seeing is when you get some relief on stumpage and then you're having to put it out in the diesel to produce the logs and get them to the mill.

Okay. In terms of your OSB price in the quarter, you were down 5% from the fourth quarter levels. That's more than -- that's half of what happened with the trade publications. Was that largely due to just backlog you had and when things were shipped or was that -- was there anything else going on there like mix or anything like that?

Well, there's a couple things there. One, when we have a declining price we pick up a little bit. When we have a rising price we don't get it all. So there's a piece of that. The other piece of that is we did have -- we enjoyed a very good quarter in our tec -- our value-ordered OSB products, our TechShield, our high-performance flooring and our orange plus flooring products, we did see volume increases there. And we do get a premium to market. And the other piece of that is that we did have -- if you just look at north-central, that's one indication. But we ship a lot out of the southeast region and pricing in the southeast region was better than north-central. So there was a regional impact there, where we ship our products from.

Okay.

One of the stores that we've been talking about for quite a while is this value-added. And our TechShield business is just taken off like a banshee. We're very, very proud of what's going on there.

Your siding operations had a terrific quarter. Your -- and it wasn't a lot due to price. And was the number that you threw out there, the $7 million, was that the improvement from manufacturing as you switched over from Silsbee over to Hayward?

That's correct.

Okay.

So, going from $7 million to $12 million, seven of that was the Hayward-Silsbee switch and the rest was increased volume coming out of the other facilities and -- plus improvements in their production.

What kind of demand patterns are you seeing in siding? Are you able to keep up with it? Or when you do the second line, could you remind me on the timing on that? Do you think that you're going to be able to reasonably fill that up when it comes on?

You know, it's going to be a challenge. One of the things we did is we converted many of our customers from a hardboard trim product to a SmartSide trim product. And we're running hard to keep up with that demand. That conversion is going well. We're actually accelerating the conversion of the second line at Hayward just so we don't get in a position where we're holding our customers up from a volume perspective.

We're going to the board next weekend with this Hayward conversion ahead of when we thought that we actually would. We thought we'd be doing that later on in the year. But we're in a hurry.

So, when would you potentially start that second line up?

It's about a six-month job.

Okay. So it could be like the end of the third quarter, or --

Probably more likely fourth quarter, Rich.

Okay. Okay. Great. Thanks a lot.

Your next question comes from the line of Chip Dillon with Citigroup. Please proceed.

Yes. Just a follow-up on the siding segment which, obviously, is doing quite well. I noticed the price was only down I think 1% sequentially. And was it part of the benefit -- and I don't think you mentioned this. I'm juggling three conference calls now, but wasn't part of the benefit the fact that you were costing the OSB in that segment probably a bit lower level, because your costs in effect come down faster than the price of the siding has gone up. And of course that hurts you in the other direction, but is some of that in there as well?

Well, what's in there is we produced -- and I talked about it, we produced more OSB in this segment with a conversion of Hayward -- the Hayward-Silsbee swap We produced about 40 million feet of OSB more than we had in the first quarter of last year. But again, that was at a lower price. So the price into that volume as well. And I'm not sure that was your question.

But yes. Basically -- well, I guess what I'm saying is that you were able to in effect sell OSB that you've made into siding ata better price relative to the fourth quarter than if you had made this commodity OSB.

No, I don't think that's quite accurate. The 13% increase that we show in SmartSide is truly just SmartSide to SmartSide.

Okay.

There's no impact of the OSB in there.

And are you able to hold prices here in the second quarter, even though we see -- relative to say the fourth quarter, even though we've seen the more standard OSB prices come down from the fourth quarter levels?

They're really divorced. When OSB pricing went way up, we didn't change our siding prices. And when OSB pricing goes down, the siding doesn't come down because it's not linked to that. We don't price this as an adder. We price it against [inaudible] and vinyl and cedar and what the alternative siding products are. So it really is a separate and distinct market that's not linked at all.

Okay. So as we move into, say, the second quarter, you would actually expect that $12 million to improve because it's the normal seasonal building patterns, is that fair?

Which $12 million?

I think the segment earnings, if I got that number right?

$19 million was the segment earnings.

I mean $19 million. You would expect the $19 million to improve?

I think it's -- we don't give forward-looking, but there's nothing in the horizon near term that said siding is going to be any different than it was.

And then, on a second separate issue, you know, a lot of folks I'm sure ask you and are discussing the ramp-up of the OSB capacity we see coming on over the next year and a half. Isn't it fair to say, and I think this probably is behind your thinking in Alabama, that because of the technology changes that you just continue to see the scales go up on these things, that you really have to do a number of these if you're going to maintain your position in the market or else you will be left behind? Is that fair?

Yes, that's right, chip. I think from our position very strategically, you have to do these for two reasons. You have a tremendous effect on your overall system cost when you bring in a new mill in a preferred wood basket with the manufacturing advantages that you get out of a new mill. And so if you think about retaining your position, I think you have of to continually replace the 20, 25-year-old mills with new production. And our strategic advantage is that we can take these mills with higher costs and put them into our SmartSide program, where it works very, very well for us. And other people don't have that same capability because they're not making that product.

And you know what's fascinating is I can remember two CEOs ago meeting with him 15 years ago and how the new mills then were 80 million feet. Now they're 800 million feet. And even in the mid'90s they were more like 350, I believe. As we look ahead, are we going to see, you know, billion foot mills, billion and a half foot mills or is there some scale here, diminishing scale of economies that is will limit these things from getting bigger?

I think you're right. We all have to look at the size of these mills and where the economic turnover point is. Interesting note on that is the first billion square foot mill is probably going to be Norbord's [Cordeal] and its two lines, which is probably, you know, a harbinger of the future, that may be the way it goes. Although I will tell you that Peace Valley is coming up on their curve and we're pleased with that performance. The mill that we'll build in Alabama will be similar in configuration, although slightly smaller than the Peace Valley because you want to mask it with a wood basket. The biggest advantage for these new mills is being in a wood basket that you select that's low cost. And the technology is a secondary benefit to that.

Got you.

Though we do need to match the wood basket with the size of the operation.

Curt and I are challenging our engineering people at the moment as we look out for what do we do next? To give us the option of building perhaps a billion square foot mill but doing it in two lines. That gives you more flexibility. First of all on how you bring it up, and secondly, you know, then you have more flexibility in how you run it.

Why do you think if it makes sense to do it that way --- I know there's a private company from Canada that's building two plants next to -- near each other in South Carolina. And I guess first of all, everything I hear, they're moving forward apace on those and one will start up this year. But why would you think they wouldn't have chosen to do it like you and Norbord has where they might build them closer together? Is it just because they're each one maxes out a local wood basket? Or is there some other reason they wouldn't do it the way you say it will be in the future where you'll have two lanes in the same facility?

First of all, we're not experts at how our competition thinks. But you would have to think that their logic is somewhat like ours was in Alabama. They're looking at exploiting advantageous wood baskets. And I don't know that in the next mill that we dream up on the drawing board beyond Alabama, I'm not saying it's going to be a two-liner. I'm just saying that that's entered our thought processes.

In other words, you have the capability of adding the second line in the future there.

No, I'm talking about if we decide to build another mill beyond Alabama. I should say when we decide to build another mill beyond Alabama, that will be an option that we look at.

Okay. Got you. Thank you.

Your next question comes from line of Peter Ruschmeier with Lehman Brothers. Please proceed.

Thanks, good morning and congratulation on the quarter.

Thanks, Peter.

Wanted to ask if I could, Rick, I know you addressed it partially up front, but as it relates to utilizing your cash, I'm curious if you can share with us a time frame for either identifying an acquisition opportunity, which I know you've been -- you constantly evaluate, or reconsidering buybacks or special dividends which, to date, have been off the table. Is it reasonable to think about a time frame? I noticed you saw another record high in new home sales number today, and so just curious on whether your approach is really to wait for a downturn for these opportunities or whether we should be more proactive, I guess?

Well, I think Curt and I have been very up front with our intention was we thought we would, in terms of acquisitions, spend the money most wisely in a downturn. The good news is we haven't had the downturn, which we've prospered greatly from. The bad news is is that our scenario on when we wanted to strike, so to speak, has continued to be prolonged. So, I can remember getting up in front of you guys a year and a half or two years ago saying, with that REITs forecast at that time, the downturn was just a year away and that was our time frame. Here we are 18 months out and we haven't really experienced that yet, so the problem with our valuations in our acquisition work is that it looks like you're going to pay the real top long dollar if you go buy something right now, which is not really what -- how we want to spend the money.

So, I think in the meantime -- so what I'm trying to indicate from there is that we will continue to have patience to try to stretch our dollar out, spending it at a better time. In the meantime, what we don't want to do is turn a blind eye to our shareholder, and that's why we continue to say, and continue to have the discussion with our board of when it makes sense to purchase stock back. And so both of those things are in our strategic thinking and -- or in our plans. I can't really comment on the timing of that though. I think that would be inappropriate. It would be excluding my board from that decision making process, which it can't do. But we have intentions in both of those areas.

Very fair. That's helpful. Another question if I could the Chilean OSB opportunity. It seems like you've had some success in seeding that market for future growth, and for not a lot of capital dollars. I'm curious if you have any other plans or considerations under way to repeat that strategy in other places around the globe? I'm thinking particularly the Asian market. Does it make some sense for modest capital dollars to, you know, to seed other markets or you're sticking put with Chile at the moment?

Well, what we're going to do, Pete, is we are moving the second mill, the Montrose mill as talked about, down to Chile. We are this year going to open up sales offices in Peru and Argentina so we continue our penetration in the South American markets, where we think we have the ability to repeat the conversion to wood frame construction that we've been successful at in Chile. From an Asian perspective, the Chilean mill has been seeding the Korean market for quite some time. They are currently out of capacity, so we are seeding that out of north America today. But our intention is to open up an office in Korea either late this year or early next year to build on the success that we've had. And the reason we're starting in Korea is the U.S. military's been there since the early 1950s and they make homes the same way we do. So the Korean economy is used to wood frame construction. From that base, then, we will look at other Asian markets, but it really is dependent on how quickly we can convert building practices to be similar to what we have in the west.

Okay, great. Last question, I'll turn it over. Working capital is up in your slide $73 million. Curious if there's an expectation by the end of the year as to how much of an opportunity you may or may not have on working capital?

Well, as I said, there's two seasonal reasons why working capital is up at the end of the second quarter. The first is logs. And we'll bring log inventories down pretty significantly over -- between now and the end of the summer. For instance, Peace Valley cut off logging about three weeks ago and they won't start it up until July. So they'll be burning that log inventory off. And the second is the increase in accounts receivable that is associated with the winter buy program and the extended terms. So by the end of June, those extended terms will all have been satisfied so the balances should come back down for those reasons, as well as the logs.

And the difference on the log inventories, and this is something probably helpful for you to think about in the future is, is last year, we had very -- we had a lot of difficulty, the whole industry did, in filling the log piles. Because weather conditions weren't conducive to building inventories to go into the nonlogging season. This year, most -- almost all the way across the country, except for the people that needed ships on the west coast, we were able to build those log inventories. And the reason that you want to do that, number one, is to reduce the risk of running out, but number two then, as you're trying to influence what you pay for logs, it's much easier to do that with a full wood pile than it is with an empty wood pile.

Okay.

The difference between last year and this year is that we weren't able to fill the wood piles and this year, we were.

Okay. That's very helpful. Thanks very much, guys.

Your next question comes from the line of Steve Chercover with D.A. Davidson. Please proceed.

Good morning. First question, [inaudible] of an answer, a couple years ago, resins were getting extremely tight. Has that situation been addressed now?

It actually has. Huntsman increased their capacity in Louisiana and also increased their capacity in Europe so it's taken some of the pressure off. The big sucking sound on MDI resin was going into China and the activity there has slowed a little bit. In addition, there is a new joint venture being constructed in Chile for MDI -- not chile, in China for MDI, that will give us further relief. So on the MDI side, it has eased. The biggest problem we in the industry are facing right now is wax. There's a real shortage of wax. And seems kind of silly, but we're competing with a candle industry here, and it's very much tied to the cost of oil. And so we've seen about a 30% increase in the cost of wax plus a shortage. That's the one that I think is going to whack people a availability perspective.

Is there an alternative sort of wax you can use?

Actually, there are pinnacle things that is we are looking at. But I'm not going to talk about them. [LAUGHTER] But we are looking for an economic substitute for that.

Okay. But the -- at least as far as resins go, they might be costly, but they are available?

I think that's right. And one of the other shortages we talked about last year was shortages on the resins that go into vinyl siding and those haven't eased, but it doesn't affect us anymore because we sold that business.

Okay. Thanks, Curt. And maybe following on the previous question on South America, how long will it take to get the Montrose facility up and running down there, and do you see there being sufficient demand in, you know, the very southern portion of South America or will they be -- will products be moving offshore?

Well, as I said, we're trying to establish two more beachheads in South American countries now where we think the building practices and the industry be conducive to doing a transition, so we're starting that activity today. We are using wood from North America to seed that market, similar to what we did in chile when we started that. We used North American wood to seed it. And then we are seeding the Asian market. So when you think about it from a demand standpoint, we're trying to build the demand with seeding from here. The timing is that we will be dismantling the mill over the next couple of quarters having some of the equipment refurbished by vendors, shipping into South America and having the reconstruction hopefully completed by the fourth quarter next year with a startup in early '08.

Okay. And one last question, if I could. Rick characterized your operating rate as full throttle. And I'm just wondering, have you done any analysis as to whether that's the profit maximizing solution or would we be better to have a little tighter OSB supply and maybe higher prices?

Well, I think what Rick's comment was is that we're seeing the benefits of the reinvestment program and seeing the benefits of our focus on operations with the improved yield, reduced downtime. On an OSB mill, it really makes no sense to run it other than 24/7. I mean, you either take it down for a long period of time or you run it 24/7 and that's what we're doing with our facilities.

Is it your sense that inventories are lean enough? Or are they stacking up anywhere to the best of your knowledge?

I think what we -- our comment was that we think it's fairly normal for this time of year. We don't see --we don't see acute shortages and we don't see areas where there's too much. Pretty much, business as usual.

Great. Well, thank you.

Okay.

Your next question comes from the line of Mark Weintraub with Buckingham. Please proceed.

Hi, thank you. Rick, I remember a year ago or so we were talking about your non-OSB business and whether maybe investors weren't fully appreciating the potential earnings power there in your view, or at least the goal that these could generate $100 million or so even in tougher times on an annualized basis. And I see in the first quarter -- if I'm doing my math right, if I add it together and times it by four, I'm at $140 million. Is that type of earnings power for these businesses, you think, sustainable? Or are they also cyclically quite sensitive? And maybe update us on your thoughts on the non-OSB businesses and what they can do across the cycle type of earnings for LPS?

I'm not going to let you trap me into forward statements, but I think your math is good. That's why I'm pretty excited. I think that all the work that we've been putting in trying to grow these non-OSB businesses is starting to show itself. And I think your math is pretty good.

Well, let me try and dig a little bit more and looking historically and -- particular at the quarter just finished. There was the comment that the shifts between Hayward and Silsbee had added about $7 million or so. Did that include the benefit of more commodity OSB production being included in the siding segment?

Yes, it did.

Yes.

Can you give us a sense of -- is --

Volume --- volume is a --

Can you give us a sense of how much the commodity OSB is generating in the siding business, because I guess that is a more volatile earning stream?

Well, it's really -- we could give you that, but it's not really relevant, because what our intention is to convert that to siding. So as you're looking forward, you're obviously thinking about Hayward as a siding mill.

Fair enough. Let's say we were looking forward and you had converted it, would your expectation be that it would be generating similar levels of profitability as which it was generating as commodity OSB in the recent quarter?

If you look at over a cycle, the margin on siding is almost right on top of the margin on OSB.

Okay. And finally, then I'll give up this line of inquiry, but while appreciating you don't want to give forecasts, et cetera, are there any critical cyclical elements that you think we should be thinking about when reviewing the non-OSB businesses?

Well, one of the things about our non-OSB business is -- well, there's a couple pieces of it. If you look at engineered wood, that is very much tied to new construction. So 95% of engineered wood would go to new construction. So that's going to be tied into housing activities. Our siding business, our decking business, our molding business, is more tied to repair remodel. If you go back to the last 15 years, we have not had a quarter where repair remodel expenditures have gone down. So, that portion of the business is much less susceptible to the cyclicality that comes with housing starts.

Okay. Thank you.

Let me make one more comment on this Silsbee to Hayward conversion. I think it's good to try to understand it. We've got a multiple whammy going on when we were able to make that decision and then actually do it well. We produced the siding at a lower cost at Hayward than we made it at Silsbee. We produce more A grade at Hayward than we made at Silsbee. And we then allow Silsbee, which services our OSB business now, to reduce its costs and what it was costing it to make OSB because it's running 24/7 on fewer SKU's with less difficulty. And so the whole thing was like a -- was a triple whammy. When we validate the capital returns off of the first or the second line conversion at Hayward, we're able to do that, not only from growing our Smart Side volume so we're selling more product, but we're also producing that product at a lower cost. And so there's a double justification, if you will, for making that conversion. The ancillary advantage is that Silsbee, because it was a siding mill, has the capability of producing what we call bugboard. It is the insect and moisture-resistant product, which we think will provide us some opportunities in the gulf coast reconstruction. So it was just -- the only thing we're slapping ourself for is we didn't do it quicker.

Your next question comes from the line of Christopher Chun with Deutsche Bank. Please proceed.

Thank you. Good morning, guys. Just following up a little bit on your discussion around Chip Dillon's question about the necessity of these new mills. I was wondering if you could talk a little bit about what the variable cost per unit is at your new Peace Valley mill compared to what your cost is in the rest of your system, and if you have a good feel for it, what's sort of the industrywide standard is?

Well, I think that what I refer you to is the [RECE] and the Beck Group both do studies every other year on the cost differential in these various mill systems. The most recent RECE study actually looked at it regionally. They looked at western Canada, eastern Canada, the lake states and the southeast. And they also looked at it by mill size, where they looked at 350 and below, 350 to 500, and then 500 and above. And if you look at those studies, what it will show you is, from a regional standpoint, the biggest differential was wood cost by a significant, very significant factor. If you looked at it by size, within a particular region, it turned out to be labor and overhead was the cost differential. So I'd refer you to that rather than me trying to give you numbers on Peace Valley.

The biggest impact in all of this stuff is where you put your mill and what kind of a wood basket you're putting in it. All the rest of that stuff is chump change.

Okay. How about in -- just in the first quarter, though? Can you talk about how much of a contribution Peace Valley made?

Well, in the first quarter, Peace Valley produced about 88 million square feet and we sold about 80 of that. So there was about 8 million in inventory. Currently, it is operating at what we expect that will end up at about a 600 million square foot run rate.

Contribution then to the bottom line was actually minimal, it sounds like. In the first quarter?

You know, we don't talk about individual mills, Christopher. Sorry.

Okay. Thanks for your help.

Your next question comes from the line of George Staphos with Banc of America Securities. Please proceed.

Hi, this is [inaudible] for George, actually. Can you just talk a little bit more about the return of cash to shareholders? You talked a little bit about buybacks, what else you're considering. And then just as a final question, are you open to different ownership structures in your current structure?

We're always open to anything that is wildly beneficial to our shareholders. We are not interested in paying a special dividend and I don't know what else I can tell you that I haven't said in terms of when we would like to spend the money around acquisition and the fact that we continually review when the opportunity might be the best to do share buybacks with our board.

And you said earlier that it would be mainly due to -- timing would be around a downturn in the market. Is there anything else that you'd consider if you came across something that's really compelling, even if a higher-priced OSB environment of --

Well, if something's compelling, we're going to consider it at any time. What we have run into historically, and told anyone that's interested, is that the valuations that we've analyzed so far, are too high. And so we're going to wait and see if they get a little better.

Okay, great. Thanks.

Can I just ask for clarification? I didn't understand your change in ownership structure. What are you referring to? I want to make sure I didn't miss it.

Nothing specific. Just, you know, given that you have a lot of cash on your balance sheet, possibility that you'd be open to -- is it best that you're continuing to operate as a public company or private just given the investments that you have as well.

All right, now, I understand. Okay. I think that's all the time that we have for questions. But as always, Mike and Becky are available for follow-up discussions that any of the investors or analysts would like to have. Again, this is available on our website and maybe you could give out the replay information after we sign off here. Thanks again for attending.

Thank you for participating that today's conference. This the concludes the preparation. You may now disconnect. Thank you and have a good day.