Louisiana-Pacific Corp (LPX) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2006 Louisiana-Pacific Corp earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Mr. Curt Stevens, Executive Vice President and CFO.

Thank you very much. Good morning. Thank you for joining us. I know it's a busy morning for earnings releases. The purpose of today's call is to discuss our financial results for the second quarter and the first six months ended June 30, 2006. As the moderator stated, I'm Curt Stevens. I'm the Chief Financial Officer. With me today are Rick Frost, our CEO; and Mike Kinney and Becky Barckley who are responsible for our Investor Relations activities. As usual, I'll start this call with a review of the financial results for the second quarter of 2006, provide some detail on our individual segment operations and provide a few comments on the balance sheet.

During my discussion of the results I will also have comments about the results for the first six months of 2006. I will then turn the call over to Rick who will review the accomplishments in the second quarter of 2006 and talk about our outlook for the remainder of the year, then we'll open up to questions. As we've done in the past this earnings call has been opened up to the public. We're also doing a webcast. This can be accessed through our website at www.lpcorp.com. Additionally, to help with the call, we have provided a presentation that has supplemental information that I will be referencing as I go through the presentation this morning. As a caution, this presentation should be reviewed in conjunction with our publicly available earnings release that has all the detailed financial information. Before we begin, I want to remind all the participants about the forward-looking statements comment that is included in our earnings release and shown on slide 2 of the presentation..

We also have a discussion on slide 3 of non-GAAP financial information. And we have the appropriate reconciliation in the back of the presentation. Rather than reread the full statements, I'm incorporating these into the discussion with this reference.

The first line I would refer you to is slide 4. We are reporting today net income for the second quarter of $55 million or $0.52 per diluted share. Net sales from continuing operations were $653 million for the quarter. Through the same period last year we reported net income of 100 million or $0.90 per diluted share. On continuing operations we had income of 104 million, $0.94 per diluted share and discontinued operations had a loss of $4 million. Net sales from continuing operations last year were $692 million.

In past quarters we've often discussed special items that were not generally attributable to ongoing operations. There was nothing of significance to report in either Q2 of this year or Q2 of last year. During Q2 the Canadian dollar did strengthen against the U.S. dollar. Not only did this have a negative effect on the overall operation, but it also required that we record a $10.6 million currency loss primarily related to the remeasurement of our Canadian dollar denominated term loan. This had the effect of reducing reported earnings by about $0.06 per share. When comparing our Q2 results with both the first quarter of 2006 and the second quarter of 2005, you should note that we had a change in the tax rate.

During the second quarter we did recognize the impact of the phased in 2% reduction in the Federal Canadian tax rate. We evaluate our deferred taxes associated with the Canadian operations in light of this change and reduced the related deferred tax provision by approximately 3.6 million. Additionally, during the second quarter, based upon our revised income projections for 2006, we lowered our anticipated tax rate for the remainder of the year to approximately 33%. The combination of these two events resulted in a tax rate of 25% for the second quarter of 2006.

Slide 5 of the presentation talks about our financial results year to date. We're reporting net income of $139 million, or $1.31 per diluted share. On continuing operations, we had income of 140, $1.32 a share, and discontinued operations showed a loss of $1 million. Net sales from continuing operations were 1.33 billion for the quarter. For the same period last year reported net income of 202 million or $1.82 per diluted share. Net sales from continuing operations last year were 1.35 billion.

Let me now discuss the performance of each of our segments. Slide 6 is our OSB segment. OSB pricing was down versus the same quarter last year by 17%. At the same time our volumes were about 7% higher than same quarter last year. About 140 million square feet of this increase came from our Peace Valley joint venture that we sold into our system. We had a reduction of 35 million square feet as a result of the Hayward facility swap that we did in Q1 between our siding segment and the OSB segment, and we had about 50 million additional square feet from our other OSB mills as we began to see the benefit of our capital improvement program.

Looking at the impact of pricing, the 17% reduction in sales price resulted in $65 million in lower profit. From a cost perspective, the biggest challenge we faced compared to Q2 of 2005 was the continued strength of the Canadian dollar. The average exchange rate during Q2 of 2005 was about $0.80, where as in Q2 of this year the average exchange rate was $0.89. It's 11% increase affected about 40% of our OSB cost, those mills located in Canada, and lowered our profits by about $15 million in the quarter. On the raw material side, resins and wax increased a little bit, about $1 a square foot. Utility costs, natural gas and electricity were up about $2. However, offsetting these increases our wood costs did decrease about 3% due to lower pricing and higher yield in our mills. On a year-to-date basis, sales in this segment were down by 70 million and profits were lower by 173 million. A $145 million reduction. Looking at the pricing, pricing accounted for 138 million of this $145 million reduction.

Slide 7 is our siding segment. This includes our SmartSide, which is OSB-based siding products, hardboard siding, and some commodity OSB that's produced on one of our lines at the Hayward mill as we continue to convert this fully into a siding operation. For the quarter, sales volumes were up 12% in our SmartSide business from the prior year, and actually 41% from the prior quarter, while sales prices showed an increase of 5% from the prior year and a slight reduction of 2% from the prior quarter. You may recall that as of January 1, we did switch the Silsbee Texas mill to commodity OSB and the Hayward mill to siding. For the quarter approximately 6 million of the increased earnings came from this transition.

For Q2 we did sell approximately 65 million square feet of commodity OSB out of this segment compared to 14 million in the prior year, and down slightly from last quarter where we produced 69 million square feet. Hardboard sales, volumes were down 7% from the same quarter of last year and higher by 11% over the prior quarter. Price is up from the prior year and prior quarter as we continued to convert our production to higher margin, higher price, lower volume product mix, which helps to maximize earnings from hardboard. On a year to date basis sales in this segment increased by 22% to $270 million compared to the same period last year and profits increased by 75% to 42 million.

Slide 8 is our engineered wood products segment. This includes laminated veneer lumber and our I-Joist operations, plus other related products. Profits in this segment were $9 million, a slight reduction from both Q2 of last year and Q1. During Q2, LVL volumes were down about 6%, and I-Joist volumes were lower about 10%. Compared to last quarter we did see an increase in I-Joist sales while LVL volumes were down by 4. In the latter part of Q2 we were starting to see sporadic price pressure, particularly on our I-Joist. Year-to-date, engineered wood product sales were down slightly to 222 million, but profits were 15% higher at $20 million.

Slide 9 of the presentation is our other building product. This segment consists of composite wood decking, our molding business, Chilean operation, our insulation joint venture U.S. Green Fibre, resource, and some non-operating facilities. The segment was profitable in the quarter, but showed a slight decline from both second quarter of last year and the first quarter of 2006. Our decking business was problematic in the quarter as we saw significant declines in volume shipments of 15% for the same period last year and 32% sequentially. Pricing was higher both compared to the same quarter last year and sequentially, but not even close to offsetting the lower volume. I'd love to play the weather card, because we did have significant rain in California and flooding in New England, but we're not sure that this is the whole story for the reduced volume. We have lots of theories but no firm convictions. It's frustrating, as we've increased our production, improved the quality, and signed up significantly more dealers. Stay tuned.

At our molding business we continue to see declines in sales volumes based upon a previous discussion of a loss of a key customer. This customer did not fully convert, however, so our results were better than expected. We have replaced some of this volume with a new customer, but not at the same level as we lost. Pricing remains relatively flat. Our Chilean operation has continued to do well. In addition, we began dismantling the Montrose, Colorado mill for eventual shipment to a new site in Chile for planned capacity expansion to that region. Finally our cellulose insulation JV grew by acquisition and benefited from a combination of higher energy pricing and a shortage of fiberglass insulation to turn in a very good quarter. On a year to date comparative basis this segment earned $8 million during the first six months of 2006 versus about $11 million in the first six months of last year.

Our total SG&A costs, which includes both unallocated plus our segment business team costs were $41 million for the quarter, an increase of 13% over the same quarter last year. This is about the same percentage increase on a year-to-date basis. The primary contributors to the increase is the unallocated SG&A which I'll discuss in a minute, and increased marketing costs in value-added OSB and siding. In unallocated SG&A, our costs are up about $3 million second quarter compared to the same quarter last year. This is primarily driven by higher legal expenses related to the successful jury defense in a product liability action. Stock option compensation expenses under the new rules, and we also had several offsetting credits during the second quarter of 2005 that lowered our reported expenses by about $1 million. And those were related to a March settlement and the collection of a written off debt. On an ongoing basis, I do expect that unallocated SG&A will track somewhat below the $25 million per quarter.

Slide 10 of the presentation is the balance sheet. The impact of our good operating performance continued to enhance the balance sheet and provide us with some flexibility. To that end, in June we did repay $110 million Canadian from cash flows generated in our north of the border operation against the term loan we put in place at the end of last year and executed tax payment strategy. Also in the quarter we repurchased 1 million shares of stock at a cost of just over $22 million.

Finally, our first installment on the timber notes were paid, 69 million, and the related receivable of 70 million was received. This also will require that we make estimated payments on the related deferred tax liability. As a reminder, the next tranche of these notes are not due until 2008. Key balance sheet statistics at the end of June compared to the end of the year we had nearly 1.3 billion in cash, cash equivalents, investments, and restricted stock, working capital was at more than 1.4 billion. This is a decrease from Q1 as we typically reduce our log inventory in the summer months and AR is lower due to lower OSB pricing. At June 30, our net cash was just short of 1 billion.

Year to date capital expenditures through the end of June were at 74 million, and that also includes our contributions to the Camphor LP JV at British Columbia, initial costs at the mill under construction in Alabama and improvements in our hardware facilities to expand our presence in these higher margin products. We currently anticipate that our capital spending for the full year will be about $260 million. Put value for ending share increased to $20.29 at June 30, 2006. I'll now turn the call over to Rick who will provide his thoughts on Q2 and the remainder of the year.

Thanks, Curt, and good morning to all of you. It is a beautiful day in Nashville, although rather warm. We do appreciate your interest in our call. First, I want to start with my view of Q2 accomplishments. As customary at LP, I'm going to start with safety. Our year to date total incident rate is at 1.01, which is almost a 22% improvement over our best ever performance that we had in 2005 of 1.29. I think that this places us firmly in the number one position in our industry in terms of safety performance.

During the quarter we had four mills that celebrated 250,000-hour incident-free performances. We had one mill that celebrated a 500,000-hour incident-free performance. And most spectacularly, we had one mill that celebrated 1 million incident-free hours. The 1 million is simply incredible, and I think it's definitely the first for LP, and we think perhaps the first in the panel industry.

LP's non-OSB segments had their second successive good quarter in operating profits, which were led by our siding business and engineered wood. We did spend about $26 million in capital in Q2, making progress on several of the projects that we talked about with you in the past. First, the necessary construction permits for our Clarke County, Alabama, OSB mill were obtained, and we began pouring concrete last month. And, yes, in anticipation of what might be one of your questions, we do plan to complete that project next fall. We submitted permit applications for the OSL conversion of our Houlton. Maine OSB plant. We are scheduled tightly on that project to start construction this fall before the ground freezes. If that timing slips due to permitting, we will reschedule the commencement of construction for next spring. We are currently in the process of dismantling our Montrose, Colorado, OSB mill which has been shut for several years for packaging and shipment to Chile this fall with the expectation that we will be up and running with that mill down in Chile in Q1 of 2008. That product, let me remind you, will be aimed at South America and other international destinations not for the U.S.

We are were down 22 mill days in OSB last quarter due to capital outages, and capital related our production Q2 to Q2 in OSB was up about 50 million feet. We launched our company-wide Lean Six Sigma effort in Q2. We have a new crop of Lean Six Sigma black belts which have completed their third week of training and are in the initial round of improvement projects across the Company and I believe that this approach will make us stronger in both process improvement and our cost out work.

Relating to the balance sheet, as Curt did mention we accomplished a couple of things in Q2. We paid down 110 million Canadian on the three-year $235 million loan that we took out at the end of last year to take full advantage of the tax provisions included in the Homeland Investment Act, and this was paid from cash generated by our Canadian operations in the first half of '06. We also repurchased 1 million shares of common stock last quarter at an average price of $22.25.

Looking forward, I'd like to make a few comments on what I see for the second half of the year. I've got to admit, we were surprised by the precipitous fall in OSB pricing levels in the latter part of Q2 and what has continued in July. I personally expected more strength through Q2 and into the summer. We are currently analyzing economic down time as well as we have 38 days of capital -- 38 mill days of capital outage scheduled for Q3.

So what's going on out there? Well, the big builders have been offering warnings about slower traffic, lower price increases, higher unsold inventories with homes, and are now using sales incentives to move homes. Housing starts are down. The reports are bouncing around from month to month, but to me it feels like about 10 to 15%. The channels as well feel lean. It reminds me back of 2002 and 2003 when we started describing inventory management strategies moving from just in time to almost late. It feels like we're back in that almost late scenario.

Repair and remodeling has been strong, but for the first time, we are starting to see a few pundits and economist projections that the slope of the repair and remodeling growth is becoming less aggressive. So we're analyzing the effects on our product lines, OSB and engineered wood are quite dependent upon home construction, as you know. We have seen the dramatic effect on OSB pricing, but the take-aways in terms of volume have held up. But the urgency to purchase in the marketplace and to take purchasing positions is definitely less now than it was a quarter ago.

In engineered wood we have seen volumes decline, but experienced price pressure only in certain areas so far. This is a watch closely for us for the rest of the year this area. We have and are taking some production reductions in I-Joists. Our siding business supports both new residential and repair and remodeling, and the SmartSide demand is still very good, and we have actually implemented a price increase effective next month. Our hardboard business is off, particularly in our Denver market, and volumes are also down a little bit due to a prior purposeful decision not to sell hardboard trim in coastal areas.

Curt mentioned molding, which is an R&R product will be down going forward, until we can figure out how to replace the lost Home Depot business as they made a decision last year to go with a competitor. Decking continues to be a trial and a tribulation for us. We did add over 650 new dealers, and a number of new installers to our distribution network to sell out our added capacity at the Selma mill, yet demand fell off for us in Q2. We have several efforts underway from a marketing perspective around determining what is the right product at the right price point, and what kind of marketing support that we need to make sure that we have behind that.

If there's a silver lining in this downturn, it is that it's here versus continually dealing with the psychology that it's imminent. So now the questions are how long is it going to last, and how deep is it going to go. I think to me it feels like it's going to be a slog through the mud for the rest of the year, and into '07. But, at LP, I think we're ready for it, for a couple of reasons. First, we have an experienced management team that has been through this before together. We do have a strong balance sheet and strengthened operations from the capital reinvestment that we've done over the last couple of years. So we will stay the course in our strategic direction and look for the opportunities that will undoubtedly arise in times like these. And with that said is I'll turn it back over to Curt for questions.

Thanks very much, Rick. If you could open it up for questions that would be great.

[OPERATOR INSTRUCTIONS] Your first question will come from the line of Rich Schneider of UBS.

I was wondering if you could talk a little bit about the siding area you had pricing down a bit in the quarter from the first quarter level, but you also said that, I think you mentioned, Rick, that the -- you have a price increase initiative out there. Could you talk through that and how that plays off what's going on in OSB, or can you basically look at these markets very separately at this point?

Well, in terms of the -- we have announced a price increase to our current customers in the SmartSide area. It appears that that's going to stick at this point in time. Siding -- the SmartSide part of our siding business is holding up very well. We have had a little bit of softening on the hardboard side, and so we are currently looking at that and seeing what levers we can pull there. Rich, I don't know if I caught your whole question.

I think part of his question was why was pricing down sequentially. I think it was down sequentially, just based on product mix.

What type of -- could you give us an idea of the pricing that you've announced?

I think the price -- I don't know what the price increase was.

It's about 4% across the board.

Okay. And how do you look at in that terms of the trends that are out there? Why is that business holding up pretty well? You look at that more as an R&R market?

Well, I think that's part of it. You're asking a gut feel question here, because we have to get the marketing data to support it, but my gut feel on our SmartSide product line is it's approaching getting over the hump in terms of market recognition. We've added some significant new distribution capability, in that product line with a couple of very large players that are starting to see the value of that product and the value equation that it offers the customer. So I would relate it to, we're kind of at a point where market acceptance is improving, and it's very exciting for us.

Just on commodity OSB, with current pricing around $145 on a 3/8ths-inch base, how do you see that in terms of cost of production? Would you say Canadian OSB facilities are now down to cash costs?

Well, I can't speak for other people. I can tell you that we are looking very closely at some of our operations north of the board because, as you know, the impact mainly that the change in FX has had over the last couple of years.

Okay. And you mentioned in the quarter that your pricing was down about 10% versus the first quarter level. Random length's pricing was down about 16%. Is that -- did we see a bit of the kind of lag that you sometimes experience as pricing goes down?

Yes, I think the lag is part of it, plus we are, as you know, growing the value add part of that business, and we've continued to grow the value add, which means that you're selling your substrate at the cost of whatever the market is plus with the value added that you put into it you're getting a cost added on top of that. So it's a mix of the two.

Okay. And then just last question, on the share buyback, you started last quarter with 14 million shares less under authorization. I guess you're down to 13. Did you have to go back to the Board to reauthorize this or how are you looking at the remaining 13 million left under it since it was a long time period between purchases?

I think that the way to state that is, as I've told you consistently before, we always have a discussion with our Board around any type of share repurchase. So we will never do one without having a complete agreement and alignment with our Board.

Okay. So right now, you're flexible -- you have the flexibility to go in and repurchase the remaining part of your authorization?

Yes, I think we've got about 13 million left in that authorization.

Okay.

But I think the answer to your question, to be very direct, is that we do that together. Management just doesn't sit out here and make up its own mind on what it's doing. We're lockstep with our Board when we make these decisions.

Terrific. Thanks a lot.

Your next question is from the line of Mark Connelly of Credit Suisse.

Thank you. Just a couple of things. Can you talk about whether there's been any shift in the way buyers want to buy OSB? We used to think in terms of how much was booked at the price at the time of order versus the time of shipment. Are you seeing any meaningful shift in the way people are looking to do that?

Actually, no. It's still a strictly traded commodity product, and then the -- usually what we do is we give buyers the option early in the business year of which way they would like to do business. And that's consistent now as it was a year ago or -- in 2002 and 2003. We have tried to add more options to the potential buyers in terms of exploring. One of the big interest is can you make fixed pricing contracts to take some of the volatility out of this. Obviously fixed pricing contracts don't work in huge amounts of volatility because it quits being a win-win, and somebody gets skinned real bad.

Right. Okay. Just one more question. I mean, clearly there's some unanswered questions on the engineered wood business, but as I look back over the last couple of years, it looks like engineered wood prices seemed to have lagged pretty significantly on the way up, but we didn't get the benefit of that lag on the way down. I'm curious whether you have a sense that there's more going on than just excess capacity. Are you facing new competition? Do you have a sense of market share -- market share shifts or anything like that?

We don't see shifts in market share. Actually, the -- I don't know if you misunderstood what my comments were, but so far engineered wood pricing has held up, more so than the volume. So one has to wonder if -- that's why I said we got it on our watch list. One has to wonder if with the decrease in volume whether prices are going to fall in the future or not. That's a guess at this point in time. But what we have seen, particularly in the West Coast, again, I'll play the weather card there, at least early in the year, we have seen the demand for products such as I-Joists fall off somewhat. But pricing actually held.

Okay. Thank you. Just one last question. With respect to energy efficiency are Radiant Barrier products still selling well? Any difference in TechShield? That kind of stuff?

We're very excited about that product. We're getting close to what I would call having the Kleenex brand in Radiant Barrier, which is our goal. We want people, when they talk about Radiant Barrier, to call it TechShield. Our market acceptance is excellent and growing, and that's why we actually did the conversion, or added another Radiant Barrier line up in Canada to supply the West Coast market. So this thing is tipping over well for us in terms of our ability to grow TechShield.

Rick, I know I've asked you this before but is it growing geographically because of the energy situation?

Well, it's growing in warm climates. I think what the energy situation is doing, is it makes when you go in and make your value proposition for why does it make sense to have it, people are much more sensitized to that value argument. It's something that, as we've talked about, probably for five years, it's one of the pure no-brainers in this business, which we continually are surprised when we run into builders that are reluctant to pay the small value added to put that into the concept of their home. But more and more now with the higher price of energy that's -- and I think that relates to why we are improving our TechShield business every month, is because people are starting to see the value of this.

We're doing studies and have studies now that show that contractors or builders can actually reduce the tonnage of their HVAC requirements by adding this product into the roof of their home. Once you point that out, you raise some eyebrows. And that's what we're seeing in terms of market acceptance. It's still a warm weather product. I think there's actually opportunity for us to market it as a cold weather product, as well, keeping heat in the home, as well as keeping the heat in the home in the wintertime as well as keeping the heat out of the home in the summer.

Very helpful, thank you, Rick.

Your next question is from the line of Steve Chercover of D.A. Davidson.

Three quick questions, please. First of all, back on engineered wood, I kind of thought it would have done better with stable pricing and lower OSB input costs. Can you maybe explain what's going on there?

Well, the biggest impact in Q2 was the reduction in volume. We were down 10% compared to Q2 of last year, and I-Joists and 6% in LVL. That really was the fall off of the second part. Plus on -- as for the input costs, we are on a formula pricing that looks backward. So that input pricing will come down further in Q3, and not so much in Q2. I think it's a six month look-back.

So that relationship still hold true.

Correct.

Then not to read too much into your commentary, Curt, but when you say stay tuned on composite decking, are we to infer that you might even exit that business, or you just got to reassess how you go to market?

I'll answer that one. What we've got now is, we're not making any money in decking, and I haven't lied to you guys about that. What we've got do is figure out how to do that. So with the reduction in volumes -- we went into the year with a very key assumption, which was to sell our productive capacity out what we needed to do was to sign up more dealers, because we had in our own business kind of a rule of thumb which says for every dealer that you sign up, you will sell three truckloads of product. What happened to us in Q2 is after we signed up all those dealers, we sold about a truck and a half load of product. So that raises several questions in the decking area.

Number one is that something happened in the marketplace that makes the differentiation between these products less. And so we have to go do a very disciplined market study around, have consumer preferences changed, number one, our number two, is there less differentiation between the different products that people make. Number two is, we have to stabilize our manufacturing processes. One of the impacts on the industry in decking is that there have been new certification standards placed upon the producers, and what were quite wide specifications have become narrower specifications, and so I think particularly -- I'll say us -- I'm sure other people are dealing with the same issue. Is that requires more of a reduced variation in a predictable process in manufacturing this material, and so we have a two-pronged effort right now. Number one, to determine are we making the product that meets the demands of the market in 2006 going forward versus 2004 when we designed the last version of this product. Number two, what have we got to do in our manufacturing processes to make them more stable.

Got you. Here's my last one. Maybe it's the hardest one. But over the last five years, LP has really reconfigured itself, and one of the objectives is at the next downturn you're going to remain profitable, and I guess July is pretty indicative of trough levels for OSB. If you were to annualize or quarterize your results that you've seen so far, how do you think it would look?

Well, Steve, you're right. It's a difficult question to answer because we don't give forward projections. But I think it's a fair comment, and you're seeing in probably all the wood, solid wood guys that are in the panel, the panel pricing is very low right now, and we don't expect it to stay at that level for very long.

Okay. Thanks, Curt..

Your next question will come from Peter Ruschmeier of Lehman Brothers.

A couple questions. Rick, I was curious if maybe you could comment on the spread we've seen open up on OSB and plywood and the relationship that that has with OSB's share of the panel market. Is that behaving as it has in the past? In other words, are you seeing evidence of OSB accelerating the market share gains from plywood as those spreads widen out?

Well, I think if you go back, we have a chart we keep here that goes back to probably when I was -- when OSB was invented, that shows how those things -- what the spread is. It gets narrower and then it gets bigger, gets narrower and gets bigger. I think the short answer to your question is that in my -- this is my opinion is that it's a little early for you to see what you're looking for. As I've made comments, probably ad nauseum at the analyst presentations, nobody is going to give up easy. People are going to be forced to give up. We haven't seen a huge change in penetration of OSB, but the expectation and our assumption around reading the tea leaves of the future are that we're going to continue to see escalation of OSB penetration in terms of its total share of the market, and that our belief is still the same that that penetration is enhanced in times like these. But I think it's a little early for you to get a measurement on that. A lot of the statistics that we get are annual statistics, and they become more clear to you as you look back on a year, not back on six weeks.

Okay.

Pete, again, it's only logical, they had cash costs sooner so they can't go as low.

Yes. Maybe a related question. If the remaining share to be gained is primarily in the repair and remodel market, not so much the home builders who are already using your product, is there a new emphasis needed on advertising or, kind of a brand awareness, market awareness about your product? Can you talk about those issues? Why are you having the kind of penetration in those end markets that you want?

Maybe a couple questions. I'm not sure that I would agree with your first comment. If we're somewhere around 60 to 61% penetrated, which is the projections for this year, I think that the consistent projections for penetration by the end of the decade is somewhere above 72, 75%. That's just in the current use of panel. So I think that that's -- there's no reason for us to think that that's not going to continue to happen, and, in fact, it's the tough times that stimulate that penetration.

The answer to your second question, perhaps is more generic, but I think that you see it in our actions around what we're trying to do as a company in terms of going to market. One of the terms that we use more and more is 1 LP, which is to build our brand and to connect in the marketplace what LP makes, and that it's a family of products. And so we are -- our intentions are to up our market focus. We have a term here we call customer-centric. I think if we look back on our past, we have been a very manufacturing-centric organization with kind of the idea that if you build it, they will come. We know that that's not going to work for us in the future. Plus, particularly with our emphasis on building non commodity products, we have to have more of a presence in the marketplace. So we have a full court press on building the LP brand.

Okay. That's helpful. Just a couple of financial questions, if I could. I'm doing my math right on exiting out the special items, the unallocated expense in the quarter was about 34 million, which I think is a little higher than your run rate. Any guidance for that, Curt, going forward?

Unallocated should be running right around 25, a little less than 25. I don't know where you got the -- where did you get the 34? Does that include the currency?

That's--.

There's 10 million in currency.

10 million adjustment, yes. Okay. So net of that, it's still 25 million.

Correct.

Got it. And I think you alluded to this, Curt, but can you walk us through again, -- the current portion of notes receivable from asset sales came off the balance sheet, what that adjustment relates to?

Yes. We put in place a deferred tax structure when we sold our California Timberland, and there were various pieces of that. There were actually two transactions, two major transactions. One was Simpson Timber Company, and one with Sierra Pacific. They had different terms on them. What we did there is we actually had an offsetting notes payable and notes receivable, and they came in different tranches. The tranches just became -- just got paid, Simpson paid us $70 million, and we turned around and repaid $69 million on the notes. So we ended up with a $1 million repayment net. And now that will no longer bear interest, and we'll pay the deferred tax this year that's related to that, which is about $26 million.

Got it. Very good. Thanks very much, guys.

Your next question is from the line of Christopher Chun with Deutsche Bank.

First of all, I just wanted to confirm my understanding of how the Peace Valley mill outset is treated. Is it true that it is included in segment sales but not included in your production--.

Christopher, we can't pick up your question. We don't know what you're saying.

Is that any better?

That's a lot better.

I just wanted to confirm my understanding of how your Peace Valley mill is treated in terms of your OSB segment. Is it true that it is included in the sales but not in production volume?

Actually, we put a footnote in the last page that it is included in the production volume. That our JV production at both the FTB JV that we sell and the Peace Valley.

Okay.

Now, that's new. In the prior quarters, we did not include that. That's what that footnote is.

Very good.

But the 50 million that I mentioned is not Peace Valley volume. That's performance to performance of the mill systems without Peace Valley, the additional 50 million.

Right. Can you tell us how much Peace Valley contributed in this quarter?

Peace Valley had about 140 million square feet.

Okay. And is that -- are you going to be looking for more production from that in coming quarters? Is it still ramping up a little bit?

Yes, we will be looking for more production coming out of that.

Okay.

The mill, what we've stated, is about a little over 800 million is their full capacity, but that, of course, will take time to come up.

Great. Then in terms of your CapEx needs, can you tell what you consider is your sort of maintenance CapEx requirements?

Well, we talked about in the past is about million to $2 million per facility. Per year.

Right. So on a company-wide basis?

On a company-wide basis. So if you look at 33 manufacturing facilities, that puts you somewhere in the 40 to 60 million range. If you go back to 2001, I think we spent 46 million.

Right. Okay. And then in terms of your non-OSB businesses, I'm wondering what your perspective is in terms of how vulnerable they are to a slowdown in new home construction?

Well, I think we talked about that on the call, but with the housing slowdown, and the new housing construction, the two businesses that are most impacted are OSB and engineered wood. The other businesses have a heavy piece of remodel -- repair/remodel activity to it. So if you look at the siding business, it's probably two-thirds repair, and a third new construction. Our molding business is 100% repair/remodel. Decking is probably 80/20 repair/remodel versus new, or more. So on the non OSB businesses other than engineered wood, there's more on repair/remodel.

But I think a tide rising or lowering tide affects everything. So we're not sitting around here thinking that if building goes into a slump for awhile that everything is going to be wonderful, but our challenge to our people is to sell through this downturn.

Okay. That's fair. Thanks for your help.

And your next question is from Mark Weintraub of Buckingham Research.

Thank you. First, just wanted to get a sense from you as to the steepness of the cost curve in OSB in your opinion? I don't know if you think it most appropriate to use the vantage point of your system or the industry overall, but how steep would you say the OSB cost curve is at this point?

Well, I think what I'd refer you to is the most recent industry study, and they looked at by region, and what they determined is that the U.S. south was the lowest cost. That the Canadian west was the second lowest cost, that the upper Midwest, the lake states, was the third, and the highest cost of the system was eastern Canada.

Do you remember, order of magnitude what the spreads, say between the U.S. south and eastern Canada?

I don't remember exactly, but if you think about it, that study was completed probably in the third quarter of last year, based on 2004 numbers. So that would have had the Canadian exchange rate at a much lower, at 8-0, so now we've got 11% increase from that. So probably more exacerbate how non competitive eastern Canada would be, and it may even switch the position between western Canada and Lakes although I don't think so.

And based on what you know about your own systems, does the study make sense to you?

It does. In Quebec, as you probably remember, they did cut back on the wood allocation, and they've been pushing more and more costs onto the companies that are managing those timberlands, so in Quebec, it's probably the highest priced wood we have in our system.

I know it's tough, because you don't have a huge presence in eastern Canada, but do you know why we haven't seen more down time announcements in eastern Canada yet?

Well, we do have a huge presence in eastern Canada. We have 1.6 billion square feet of capacity there.

Well, the question still stands, I guess. Maybe even more so.

I can only refer you to Rick's comments that we are looking at our system, and which we have done for the last 20 years, on what our operations are generating cash or not generating cash, making appropriate decisions. And actually I think you did hear one announcement. Kruger announcement.

Right. On the engineered wood, do you have a sense as to how much of that demand weakness may have been reducing inventory in the chain versus just end consumption slower?

Well, as Rick said, on the West Coast we did have torrential rains in California. So we know that affected the timing of some of the demand. I think what I'd probably ask you to do is wait until next quarter and see what the third quarter does, and that will give us a good indication of how much was weather related and how much is slowing in those regions.

I think at my last call, or at our last call, I think I did make the comment that we were sensing that there was some inventory build in the channel at that time in OS, so it's probably a combination of both. I think we'd like to know the answer to that question as much as you do. Maybe more. Probably more.

Maybe to finish off, then, you've been in the market buying your stock from time to time, can you share with us again the philosophy as to what dictates when you -- both the timing and the scale of your repurchase activity?

That's pretty hard to share with you. That is a discussion that we have on a regular basis with our Board based upon sitting down and looking at the value of the stock, looking at alternative needs or uses for the money, then coming to a determination of whether we ought to move or not. So that's about as explicit as I can be or care to be.

Fair enough. Thanks, Rick.

And your next question is from Chip Dillon of Citigroup.

Hi. Good morning. I apologize if this has been asked. We're doing musical chairs with conference calls, but the tax rate was quite low in the quarter, and I was just wondering if you -- was that due to the international mix of your earnings?

Secondly, what would be a good guess for your tax rate in the third and fourth quarter?

I think when we said earlier, Chip, is the biggest change there is in the Canadian Parliament changed the federal tax rate, and a phased approach. But it's going to come down 2 points, so a 2% lower Canadian tax rate, so what we needed to do was look at our deferred tax related to our Canadian income, and we had to make a one-time adjustment to that deferred tax rate. That was about a $3.6 million reduction, and so that affected the rate reported in the quarter. The second piece of that is we look at our earnings projection for the year, because you've got to bring it forward to what you expect your year end tax rate to be, and we estimated that we would be running at about a 33% tax rate for the year.

For the year as a whole.

Right. And so we made that come forward adjustment in June, in the June quarter.

Okay.

That's what we're estimating our year-end rate will be, is about 33%.

I know you kind of addressed this, but it's interesting, when you go back, and we go back I think several years on a quarterly basis, or actually until 1999, and it's amazing, up to this year, your average OSB realization has been 100% of the north central, but it's bounced all over the place. I've never seen two quarters where it's been 115% and 113% when you convert to the 3/8ths. Do you think some of that is going to be kept in the future, or do you think it's just purely lag?

Well, let me -- you have to look at where our regional production is, because if you just look at north central it works as a benchmark, you're right, if you look back, but our production is in all these different regions, and we actually saw a very wide disparity of pricing, particularly in eastern Canada versus north central, and even the southwest. We adjusted, and I wouldn't say we were 13% above. We were above random links on a weighted average basis across our system, but it wouldn't be that high.

I think the way for you to look at that is, what we think we'll consistently be able to do as we grow these value-added OSB products is that should give us an advantage over whatever list of print, or whatever is. I think anybody's smoking dope that sits here and says that they're a lot smarter than everybody else, and that they just buy or sell better than everybody else. It's a commodity, and where we're going to distinguish ourself going forward is if we're as successful as we think we're going to be in these value-added OSB products. Where they haven't added on them.

Got you. Thank you.

We have time for one more question.

Gentlemen, you have no further questions at this time.

Perfect timing. Thank you for joining us. I know it was a busy day. We appreciate you listening in. As usual, Becky and Mike are available for follow-up. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Everyone have a wonderful day.