Louisiana-Pacific Corp (LPX) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2006 Louisiana-Pacific Corporation earnings conference call. My name is Chanique and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Mr. Curt Stevens, Executive Vice President of Administration and Chief Financial Officer. Please proceed.

Thank you very much and good morning to all of you. We appreciate you joining us for Louisiana-Pacific Corporation's conference call to discuss our financial results for the third quarter and the first nine months ended September 30, 2006. As Chanique said, I'm Curt Stevens, the CFO, and with me today are Rick Frost, LP's Chief Executive Officer, as well as Mike Kinney and Becky Barckley, who are our regular investor relations contacts.

As I've done in the past, I'll start the call with a review of the financial results for the third quarter and the first nine months of 2006, lead a discussion about the performance of our individual segments during both of these periods. and provide some comments on the balance sheet. I will then ask Rick to discuss the current market environment, our accomplishments during the third quarter and provide his views on the fourth quarter and some preliminary thoughts on 2007.

As we have done in the past, we have opened this call to the public and are doing a webcast. This can be accessed through our website at www.lpcorp.com. Additionally, to help with the earnings call, we have provided a presentation that includes supplemental information. I will reference these slides during my discussion. As a caution, this presentation should be reviewed in conjunction with our publicly available earnings release.

Before we begin, I want to remind all of the participants about the forward-looking statements comment that is included in our earnings release and shown on slide two of the presentation. Please also be aware the discussion of the use of nonGAAP financial information included on slide three of the presentation. I'm not going to reread these statements, but I am going to incorporate them with this reference.

First line I want to talk about is slide four, which is a presentation of our Q3, 2006 results. We are reporting today net income of $9.5 million or $0.09 per diluted share. Net sales from continuing operations were $535 million for the quarter. For the same period last year, we reported net income of $168 million or $1.53 per diluted share on sales and continuing operations of $621 million.

Due to one-time adjustments associated with the true up of our actual tax payments from 2005 compared to our accrual and significantly lower year-to-date income than previously forecasted, we did realize a tax benefit rate of slightly over 125% for the quarter. In the third quarter of 2005, we did include a one-time reversal of deferred tax liabilities of over $100 million -- $102 million or $0.93 per diluted share associated with the planned repatriation of foreign earnings, as provided by the American Job Creation Act of 2004.

Slide five of the presentation shows the results for the first nine months of 2006, reporting today net income for the first nine months of $148 million or $1.41 per diluted share on net sales from continuing operations of $1.87 billion. For the same period in 2005, LP reported net income of $370 million or $3.34 per diluted share on net sales for continuing operations of $1.97 billion.

As in the third quarter of 2005, the first nine months of 2005 included that one-time reversal of the deferred tax liability of $91 million or $0.83 per diluted share. Again, this is associated with the planned repatriation of foreign earnings. Slide six of the presentation presents a reconciliation of the tax provision and the related tax rate for both Q3 of 2005 and '06 and year-to-date numbers.

et me now discuss the performance of our segments. Slide seven of the presentation is a summary of our OSB segment. OSB price compared to the same quarter last year was down almost 30%. During the same period, volumes were up by about 4%. In terms of production, Peace Valley JV accounted for about $125 million of additional volume, but at the same time we had about $50 million of lower output due to the conversion -- or the shift between our Silsbee, Texas, mill and the Hayward, Wisconsin, mill.

Additionally, many of you saw an announcement we made this summer that we curtailed our St-Michel-des-Saints, Quebec, OSB mill and that resulted in a reduced volume of about 50 million square feet. On a quarterly comparison, pricing alone accounted for about $95 million in reduced profitability. On the cost side, the higher Canadian dollar is still our biggest challenge. The average exchange rate in Q3 of 2006 was $0.89 compared to $0.83 in Q3 last year. This 7% increase on about 40% of our OSB costs lower profits by about $6 million in the quarter. On a year-to-date basis, sales in this segment were down by $145 million and profits with are lower by $252 million. Pricing reductions accounted for $216 million of this decline and fx attributed another $121 million to the decline.

Our Siding segment on slide eight, this includes our SmartSide®, or OSB-based siding products, cardboard siding and commodity OSB produced in one line of our Hayward mill, as we continue to convert this operation fully to siding. For the quarter, sales volumes were up 4% at SmartSide® compared to the same quarter last year, and 9% lower than last quarter. Sales prices were up 3% compared to the same quarter last year and 1% sequentially, due to a price increase implemented in August. For Q3, we sold approximately 65 million per square feet of commodity OSB out of this segment compared to 30 million in 2005.

Cardboard sales volumes were down 20% from the same quarter last year and 11% lower than last quarter; however, average sales prices were up 11% compared to the same quarter last year and 5% sequentially, as the increase many price was attributable to a positive change in your product mix. On a year-to-date basis, sales in this segment increased by 16% to $407 million compared to the same period last year, and profits increased by 50% to $61 million.

Slide nine is our Engineered Wood Products segment. This includes our laminated veneer lumber, our I-joist operation, which includes our JV with Abitibi, plus other related products. Profits in this segment were $8 million, flat from Q3 of last year and a slight increase from -- a slight decrease from last quarter. During Q3, demand for EWP products fell off due to lower new housing activity. LVL volumes were down 5% and I-joists were lower by 7% compared to Q3 of 2005.

On a year-to-date basis, EWP sales were down 5%, but profits were slightly higher at $29 million. Slide ten is a summary of our other building products. This [inaudible] may consistent of our composite wood decking, our interior molding business, our Chilean operations, our cellulose insulation joint venture, U.S. Green Fiber resources and nonoperating facilities. We had a loss in this segment almost entirely due to poor performance in our composite decking business. This business continues to operate in a highly competitive and fragmented market.

In Q3 the decking business team focused on market research with consumers, dealers and installers to better understand how to effectively serve our decking customers. Additionally, we have an internal project at our manufacturing facility to define our processes and reduce costs and improve efficiency. Findings from this two-pronged approach are being applied to our 2007 sale-to-marketing programs and put in process improvements in place at the plant.

For the quarter, sales were down 55% in our decking business compared to the same quarter last year and also 55% lower than last quarter. Sales prices were up 16% compared to the same quarter last year and down slightly sequentially. For the quarter, sales volumes were up 5% in our molding business compared to the same quarter last year and 5% lower than last quarter. Sales prices were down 4% compared to the same quarter last year and down 6% sequentially.

As discussed last quarter, we have been gradually phasing out of the Home Depot business, which affected our volume. However, we are in the process of doing a major reset at another significant retailer, which will have a short-term cost but longer-term benefits. Our Chilean operations, we continued into make money in Q3, even though it was winter in the southern hemisphere. Quite a impact in Q3 in the dismantling and packing the equipment at our Montrose, Colorado, mill slated for delivery to Chile for our second mill in South America. [inaudible] our accounting rules, these costs cannot be capitalized and must be expensed.

This was about a $2 million cost in the quarter. Our U.S. Green Fiber joint venture was marginally profitable in Q3, as these operations were gearing up for the very important retail season. Year-to-date sales for these other operations were down about 10%, with profits of $3 million, about 20% of the amount reported for the same period in 2005.

On the selling, general administrative costs, total cost were $39.6 million for the quarter, an increase of 8% over the same quarter last year and a reduction from the $41 million reported in Q2. On the unallocated SG&A, costs were up $3 million in the third quarter compared to the same period last year. This increase was primarily driven by higher legal expenses, stock-compensation expenses under the new rules and one-time credits, which reduced our costs in the sec -- in the third quarter of 2005.

Slide 11 has got some summary balance sheet statistics. Cash, cash equivalents,investments in restricted cash was almost $1.3 billion. Working capital about $1.4 billion. Net cash of 950. Year-to-date capital expenditures are $129 million. We do expect the full year to be about $240, as we accelerate the construction of our new Alabama mill. Book value per ending share was $20.27. During the quarter, we did buy back an additional one million shares at an average price of just under $19 per share under our existing authorization. Slide 13 provides the necessary calculations of nonGAAP financial measures that I've discussed.

With that let me turn it over to Rick, who'll discuss our accomplishments in Q3, analysis of the market and comments going forward.

Good morning,, everyone, and thanks for joining us on our Q3 call. It is a beautiful cloudless day in Nashville today. I'm going to switch it up just a little bit this morning and talk about the market first and then get into a brief review of Q3. The current market for our products is definitely off. I think the depth and the speed of this drop-off has obviously caught the builders and the channels off guard, which is causing those of us in manufacturing to scramble to adjust our production schedules to match the slower take away rates. Our OSB and Engineered Wood Products businesses are heavily tied to new residential housing starts, which you know, and these have significantly dropped off and actually regionally have been quite dramatic.

With the reduced demand, we have started to take production curtailments in across most of our product lines to react to either market conditions or to avoid a working capital buildup going into the fourth quarter. Early in Q3 we did make the decision to stop production at our St-Michel, Quebec, OSB mill and the sawmill that's in the same complex. This was our highest-cost complex due to what I'll call the double whammy of Quebec being our most expensive location to manufacturer in with the added impact of foreign exchange.

It's probably obvious to you from all of the recent curtailment announcements in Quebec that that province has some serious business climate problems relating to the forest sector. Late last week, we bit the bullet to balance the rest of our system of outputs and take aways. and we announced additional Q4 downtime in OSB. These curtailments are being taken to adjust our market conditions to do capital and maintenance work, and to also take advantage of the Q4 holidays to soften some of the impact on the affected employees. Together with the continued curtailment of St. Michel, these curtailments are currently planned to cover about 240 to 250 mill down days, or about 0.25 billion feet of OSB production.

When making these decisions, we take into consideration the effect on our customers and our ability to meet firm customer commitments, the relative cost impacts on our system of production and the impact on our employees and the communities where we operate. In Engineered Wood, we are running shortened schedules at our facilities and also at our JV I-joist plants.

Both of our composite decking mills right now are currently running only to balance inventory SKUs and to do design of experiment trials to improve our manufacturing performance. Our SmartSide® and Canexel® siding businesses have remained the strongest, but our Roaring River hardboard mill will take probably 40 to 50 days of market-related downtime in Q4 to adjust our inventories going into the first of the year, but that will depend upon orders. Although unpleasant, particularly for our affected employees, we think that these are prudent moves needed to balance production with orders. We've been through this before so we are trying to go about it in a very orderly way.

Now I want to spend a few minutes talking as well about Q3. Curt has hit the highlights on most of this, so I'll be relatively brief. LP did have another outstanding quarter of safe operating performance. I continue to mention this to you for two reasons. First because safety is a core value at LP, and second it's a good indicator of the pulse of our manufacturing. We ended the first nine months of this year with a total incident rate of 1.08, which is the best in the industry.

We also had some significant milestones. We have ten of our 30 plants still without a recordable incident in 2006. Last year at this time we had five. Our Chile mill has exceeded over 790,000 hours without a recordable incident and two of our Texas mills, both Carthage and Silsbee, have surpassed over 0.5 million hours. Three other mills in the quarter passed the 0.25 million hour incident free more.

LP's non-OSB business segments contributed $23 million in operating profits in Q3, led by our Siding business and Engineered Wood. And on the CapEx front, as Curt said, we have spent about $130 million so far this year. Construction is underway on the Clark County, Alabama, OSB mill. We're about two to three weeks behind our time line on that project, but we still look for a late '07 to early '08 start-up on that project.

We are just not spending any extra money to expedite anything. The Holton, Maine, oriented strand lumber conversion construction is also underway. We got our air permits about a month ago, and we would like to get that building closed in before winter's onset. And the Montrose, Colorado, OSB mill and some of the equipment from the shutdown Woodland OSB mill are on the boat right now to Chile and should reach the port of Santiago within a week. As Curt mentioned, we did repurchase one million shares of LP stock during Q3.

And late in the quarter, I'm pleased to comment that we did recruit a new executive vice president of sales, marketing and specialty products to replace Harold Stanton who has announced his retirement in February of '07. Rick Olszewski is our new Executive Vice President and he has had senior positions prior with Avery Jennison and Monsanto. Right now we have Rick in a healthy orientation program to LP's business and he and Harold are in transition during this quarter.

I'll conclude my remarks with my own near-term outlook. I think one should not be fooled by the 1.77 housing starts reported in September. Q4 feels lower than that to me, and I expect it to be so. LP will continue to match output with orders. We will be focusing on the cost side of our business, primarily by adding vigor to our Lean Six Sigma efforts. We'll continue on our capital investment plan, having set aside the funds to execute on that plan in the prior years of good sailing.

In OSB, we're going to meet our customers' commitments and focus on going about our curtailments in an orderly and a compassionate way. We'll continue the construction of the new Alabama mill and the Chile mill, and we're also pushing very hard on the growth of our exceptional product -- the radiant barrier product called TechShield® with enhanced efforts. In Engineered Wood Products we will build the oriented strand lumber mill over winter and we're also about at mid-stage in introducing our new software package for our dealers to promote the specing of LP Engineered Wood Products. We're also looking for opportunities to grow in this particular business segment.

In Siding we will complete the conversion of the second line at Hayward towards the end of this quarter. That may stretch into January to SmartSide® production. We are also promoting the rapid growth of our trim products, as well as fascia and a new ventilated soffit product that is getting good reception in the market. In decking, we're using the poor market to reduce variation in our manufacturing processes and to gain some additional marketing insights, and we are also realigning our distribution in the northeastern part of the country.

As well, we are preparing to launch a new high-end railing system that we have designed with the input of consumers and installers and contractors. In the Chilean operation, we are going to open a new sales office in Peru this quarter and we are putting efforts into developing distribution into Korea. As we have done before, we are continuing to promote stick-built house -- stick-built housing building practices in South America. And finally in our JV, U.S. Green Fiber, we have what is becoming a significant business to us. They continue to develop a leading position in the cellulosic insulation market.

So to wrap this up, I'll share with you that it was a lot more fun when housing starts were at two million, but that's not the way it's going for a while. We have protected the balance sheet to be ready for this downturn. We expect to make continued improvements to the long-term value of LP during this downturn, versus just hunkering down and waiting it out. And we are seeing more opportunities to explore on the acquisition front, as well.

With that I'll turn it back over to Curt.

Thanks, Rick. Chanique, why don't we open it up for questions?

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Chip Dillon with Citigroup. Please proceed.

Yes, good morning.

Hi, Chip.

You're right it is more fun when there's two million housing starts, I hear you. The first question has to do on if you could just talk a little more about oriented strand lumber. I know there's the I-joists, which tend to replace the long, you know, if you will, rafters or the joists and then you've also got something called laminated veneer lumber, which is kind of like plywoodish. Could you describe OSL and tell us where it'll fit in the house and about how much capacity it holds and will make on a lumber board-foot equivalent basis?

It's kind of a third leg on the stool when you think of Engineered Wood Products. The LVL is often times a substitute for either steel or for large solid-sawn lumber that's nailed together to transverse large distances. Of course, you know what the I-joist is for. Oriented strand lumber is a lumber institute that's made from the OSB process and, therefore, its advantage is in the cost of raw material. You are taking pulp wood and turning it into something that was originally made from logs. It's going to fit in beams and headers. It's going to fit in stair steps.

It will fit in a lot of the tall wall studs that are being made now, distances of over 12 feet. So when you go into these houses and you look at tall walls, it's very hard to dry a piece of lumber perfectly that's longer than, like, 12 feet. This stuff can be engineered and it's basically a perfectly -- a perfect board for tall wall studs. So it will be the third offering. Chip, it's very similar to the trend product that Weyerhaeuser makes. It's of higher strength -- lesser strength of LVL but higher strength than the substitutes. So we feel it's going to go into the current LP house in the form of beam and headers, stair stringers and tall wall studs.

When you say stair stringers this would be the side of the stairs as you look at it?

Yes.

Okay. What would be a header?

A header would be anything over a window or a door or a small one-opening garage door.

Where there's not a lot of load bearing?

That's correct.

Got it.

So this strength value LVL is -- most of it is up in the -- this probably doesn't mean anything to you -- but a strength value of about 1.9 up to 2.1. This'll be in the strength range of between 1.5 and 1.9.

Okay. I know, Curt, you mentioned that CapEx next year -- this year, I'm sorry, would end up about 240. And, you know, taking, Rick, what you said about the timing of Clark County probably's not going to change the number much, but where do you see CapEx coming in this juncture chore for '07?

Well, we're still putting together our capital plans, but the two big projects will be the completion of Clark County and the completion of the oriented strand lumber mill in Holton. We would expect it to be in --

In Chile.

-- in Chile. We would expect capital next year to be at or slightly above this level.

Okay. Then when you look at the environment out there -- oh, have I this question, this one. When we look at pricing data, for example, when we see either what you report as revenues for the OSL segment or -- and this may be different -- when we see the published pricing say in Random Links, my understanding is that that does not include freight in either case. Is that true or not true?

In our reported numbers, you do see freight included.

Okay.

In Random Links numbers you do not, although there are some delivered markets in Random Links, so you need to be careful of that.

Right. But like if you look at their composite or say the North Central 7/16th it does not?

Does not.

Okay. And then when you look at -- when you do look at freight -- and I know it's a hodgepodge -- but what would be a reasonable range of where most -- of what most of the -- where most of the wood is moving of what the freight would be on a thousand basis?

Probably $15 to $17 a thousand.

Got you. Okay, thanks.

Our next question comes from the line of Mark Connelly with Credit Suisse. Please proceed.

Thank you. Just a couple of things. Rick, we're hearing from others that acquisition prospects across this space might be improving a little bit in terms of availability of assets and maybe even reasonableness of prices. Are you seeing a trend that is consistent with that, or is more stuff coming out there that you should be taking a look at?

Yes, Curt and Mike are pretty busy right now processing opportunities.

Okay. And maybe a related question, I'm not sure and maybe I'm too sensitive. But when you look at what's happened in your decking business relative to where you expected, you talk about fragmentation. Is that a market that, in your assessment, is in need of consolidation or is the fragmentation just part of the problem?

It's a tough market. There's a lot of players, and it's going to be ugly for a while in terms of who's going to shake out behind Trex as a clear winner that market.

I think, Mark, the way I'd look at that is it's probably not a consolidation. It's probably going there's going to be some that are going to fall off.

More of a shake out?

It's going to be more of a shakeout than a consolidation, because you end up with different products and technologies and that.

It's very hard to roll up, because everybody's using a slightly different technology. And if you are more than a one-horse mill, then you have problems in matching up your colors and all that kind of stuff. It's a tough one to roll up. We've looked at the opportunity to rolling it up and it's just -- it's very difficult to do.

Understood. Okay, and just one last --

So it makes a tough game because you just got to beat everyone else rather than buy them.

Right, and slog through it. Okay. Very last question. In the OSB market, we've talked about terms and potentially changing terms with customers. Are customers any more interested in changing the terms in which they are buying from you now than they were before, other than wanting cheaper prices?

I'm assuming that you're talking about is how they buy?

Yes, exactly. Whether they have a contracted price? Exactly, and when they want things priced, et cetera, et cetera.

With pricing at this level, they like the pricing where it is.

I suspect.

And we don't. [LAUGHTER] So I think it's -- they're more interested in the creative approaches to pricing less high than when it's low.

Okay, okay. Very good. Thank you.

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

Morning.

Good morning, Rich.

How are you? The downtime that you're taking in the fourth quarter, did you say, Rick, that it was a 0.25 billion square feet of OSB?

Yes. It looks like that's about somewhere between 240 and 250 days. and I think that'll equate to about 250 million feet.

Okay. Now, when you look at it, is there much of a financial penalty of taking down mills when, you know, you lost -- on an EBIT line you lost money in OSB in the last quarter and these of are your higher cost mills. How does -- how should I look at it from a financial standpoint?

I think it costs you, particularly if they're short curtailments, because you really don't have a lot of opportunity to get much cost out. A longer term -- you know, the old rule of thumb is if you're not recovering variable costs, you need to go down. In the first week or two that you take that, that's not a terribly good instrument because it costs you more.

What you do is you have a trade off between your operating costs and the costs that you take out by going down. So what we're seeing is that we're getting a little bit of relief in things like energy and things like wood right now, but when you go ahead and take a mill down, then you lose your efficiencies, so they're kind of offsetting each other. So it's not a huge penalty, but it is a penalty.

Okay. How are you looking at, for example, a facility like St. Michel, which as you said, it has a lot of the problem issues that it's operating in Quebec, and it's been down for several months now. How are you approaching that situation? Do you just wait until the market comes back but, you know?

Yes, that's right. We're going to -- we were just up there -- our executive vice president of OSB was up there last week talking to all of the employees and the unions. And basically, until the market comes back, I think that puppy's going to be down.

Workers are on a long-term hiatus from their jobs?

Well, they're certainly without employment until we can start the mill back up. I mean, that is a bit problematic if you anticipate starting the mill back up because you can lose a very high-quality of work force, so it's a very difficult issue. Now they do have some support up there.

They do go on unemployment, et cetera, but it's tough if you've got a mill down for six months and, you know, I don't know where this pricing's going to go, but, you know, we've got -- it's a tough one up there. I don't know when we'll start that mill back up.

Rich, some of the other things that you can do that we are doing is some of your highly talented people that specific skills, we are redeploying them to some of our other facilities.

Okay. The announcements -- and you're not the only one that's made announcements on taking downtime and maybe they haven't fully kicked in yet -- but have you seen any change in the market as a result, other than maybe forming a bottom?

I think you just got to watch Random. How $andom prints would be the best way to answer that.

Okay. And are you surprised that we haven't seen more permanent shutdowns? I mean, I haven't seen anybody really shutting down things permanently in OSB. Maybe there's one or two plywood facilities.

I'm not surprised at all, Rich. If you remember the answer that I gave back at your conference, you know the people in this game aren't going to give up easy. Everybody's going to do everything they can, number one, to put off taking downtime and then, number two, to make it as temporary as possible. And it's going to have to be an extended period of excruciating pain for people to give up and shutter the door.

And that probably would also apply to the plywood area?

Yes. I mean, you've got to look. I mean, the last three years a lot of people got healthy, and so everybody's going into this thing reasonably flush. So it's going to take a little while for folks to sit down and say, okay, I give up. It hasn't surprised me at all to see no permanent -- or to see very few permanent announcements. I think everybody's going to be playing this a week at a time.

You've got to go through this hope period, you know, where I hope it gets better next week or I hope it gets better next month. People have to become convinced that this reduction in demand from housing starts is going to last a while.

Rich, I think the other thing though in plywood that we've mentioned before, and it's worth mentioning again, is the top three producers of plywood don't have trees any more, and so the ability to convert your trees to cash has gone away. So that's Boise, Georgia Pacific and LP now.

Okay. Could you -- just two other things. I'm reflecting on what you were saying, Curt. Could you talk about what you are seeing with, you know, fiber costs right now? And I know it varies by region, but some areas we've got tighter supply and other areas we've got an overabundance of supply. It really depends upon where you are at right now.

Well, I think it is very regional. If we look at our overall fiber costs, we were up slightly from Q3 of last year and down slightly from Q2 of this year.

Okay did you see --

But a very -- but not huge changes.

Okay.

See, the counter cyclical thing that's going on here in wood procurement, Rich,is that pulp's doing very well, and so the pulp boys are out there buying up every stick of pulp wood that they can. And so you've got a lot of pressure on the market.

And is it more noticeable in the south than in, you know, let's say the west?

It's regional. You know, each wood basket's regional. It depends on -- if you are an OSB guy, it depends whether you've a pulp mill in your backyard or not.

Okay. And just one last question. On SmartSiding®, considering everything that's been hitting the markets, it had a pretty good quarter. And you did get pricing, as you mentioned, in the quarter from the August pricing increase. Could you talk about how you see SmartSiding® holding up during these difficult period?

Well, SmartSiding's® different than OSB and EWP. It does have a repairer model component to that, and so I think it's going to hold up better. Now there is a big piece of it that also goes to new home construction, so we'll be potentially impacted on that. But as you said, in Q3 we did not see a fall off and I think part of that is to a change in strategy we made about nine months ago, where we're selling our trim, our fascia, and our soffit products with all different sidings.

So we'll sell it with fiber cement, we'll sell it with plywood, we'll sell it with vinyl, whatever. And as a result, we've increased the demand for those products, kind of irrespective of what the technology -- the builder chooses to use. We're actually pretty pleased with that business and we expect it to hold up.

Thanks a lot.

Okay.

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

Thanks. Good morning, everyone.

Hey, George.

Hey, Rick, as you look at the downturn now in housing and kind of your view for where we're going ahead, what do you think the risks are that you may see a mix shift across your products, maybe builders start using less engineered wood or less valuable products, as they try to get through this process? Or is it kind of like once they've seen TV ,you can't get them back to the farm; they're never going to go back to the older products.

If you just take them one at a time, OSB's an economic substitute for plywood. So this actually -- if you look back in history, your greatest rates of penetration into the structural panel market are in the downturn. If you look at Engineered Wood Products, usually once a builder converts, they convert their whole building system.

They like the quality of the product that they're turning out, and one of the things, I think, that you don't want to do is a builder in a downturn where it's very competitive is to reduce the quality of your home. So once you kind of hook people into using Engineered Wood, they like it and they don't go back. So I think that probably the downturn promotes substitution into our product lines rather than reduces it.

Got you. As you look at the value you think you can create through the downturn, how do you manage that against, you know, other suggestions you get from time to time for using your capital? Does it affect at all your view on the timing or the return required from some of the investments that you might make?

Well, it's affected it to this degree so far is we had another OSB mill on the drawing board for right after we finished Clark County and now we're arguing real hard about that. I think maybe we might out to back off of that and slow down just a little bit. So I'm in a debate with our OSB business team manager in terms of the timing on that. But on the rest of it, you know, what we're real concerned about is coming out strong when this thing turns around.

That's our strategy. We put the money in the bank to go ahead and complete the strategic capital that Curt talked about that we were spending. So I think the only thing that -- at least in my mind that I backed off of is I'm not sure the world needs another OSB mill in 2009.

I think the other thing, George -- and this is maybe where you were going with that question -- is on the acquisition front, it's working with the sellers to think about the next 12 months rather than the last 12 months.

Right.

If you base your allegation on the last 12 months, we're not going to be able to close that gap.

Right. I guess also I was thinking about currently enjoy a high-class problem, you know, but as time progresses, you also, again, have competing demands and suggestions for that capital. We're at least happy to hear about your view on capital and capacity and the new mill not being on the drawing board.

I guess the last question I had, given that the builders have been somewhat surprised by the drop-off in starts and I guess by implication LP, as well, is there anything else you could do differently here in going into the downturn in terms of the way you operate the mills? Or is it pretty much standard? You take downtime until proven otherwise.

Well, I mentioned about six months ago or nine months ago that we had decided as a Company to incorporate the Lean Six Sigma approach to improving our processes. And I think what we're doing differently this time, rather than reverting to what I've been through in six economic downturns, which is calling everybody in and asking every eighth person to give up their job, we're putting great vigor into implementing the Lean Six Sigma.

We're actually putting black belts on the payroll, training people in the green belt status. And we are choosing to engage our work force to create the cost improvements that we need. So, it's a very different approach for us rather than what we've been through in the last two downturns that I've been through with LP.

Okay, thanks, guys. Good luck in the quarter.

Thank you.

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

Good morning, guys.

Good morning, Steve.

I wanted to drill into a couple of the issues that have already been touched on. First, with respect to the curtailment in the quarter, obviously the last two years when OSB was in the stratosphere, it didn't take a lot of downtime.

I thought it was a reasonable price, Steve. I didn't think stratosphere.

Okay. [LAUGHTER] Well hopefully that's the new normal but now it's in the depths. It was in the depths before and you also took a lot of downtime over the holidays, so I'm just wondering, is this really much different than it was earlier in the decade in terms of magnitude?

I think if you go back to the 2001, 2002 it's probably not a lot different than that. You know, we do have some contractual commitments during the holidays to take downtime at some of our facilities with our work force, and we do that. And it's also a time of decreased demand. There's not a lot of building activity going on between Christmas and New Year's. So that is not atypical for most manufacturing operations to consider taking downtime during the holidays.

Well, that's how I remembered it, so I thought the announcement made it seem almost, you know --

The downtime that we took with St, Michel being out, that's unusual. And then the downtime that we're taking the rest of this month and into November, I think is -- we wouldn't have done in prior years. But we would have done in '01 and '02.

Exactly. Okay, thanks. And moving on to decking. Was it the decking that you were referring to, Curt, in terms of diminishing your exposure with Home Depot?

No, that was our interior molding product. Basically what's happened is our competitor there has Home Depot and we've got Menards and Lowe's, so it's kind of a -- you know, they don't like to have the same supplier.

Okay. So in terms of the decking then, you still split the Home Depot business with Universal?

That's correct. Well, I don't know who their other suppliers are. I wouldn't talk about that, Steve, but we are supplying them, yes.

That's what I understand. [multiple speakers] Is that going -- it's obviously not going as well as we would have thought.

Actually, the home center business is up. I think a couple of things we're seeing in this down turn is the home centers, I think in structural panels and in decking products, we're taking market share away from the rest of the channels.

Okay. Then one last question if I could and I'll turn it over. You said that -- well, Curt, I'm not sure everyone's busy, but Curt and Mike are especially busy, you know, looking at acquisitions. Do you see anything beyond your current product line that you'd like to get into that just seems to make sense?

I think, you know it's the same comments we've made before and we want to stay in building products. We're not going to go downstream into raw materials supply and buying timberland and we're not going to go upstream into distribution. But if you think about building products, we would continue to look at those, particularly those that have a commonality with our distribution channels.

So even if they were non-wood for instance, you might go that way?

We wouldn't nec -- we would consider those, yes, Steve.

Great.

So our first priority is the businesses we're in. Second priority would be those other building folks.

Understood. Thanks, guys.

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

Great. Thank you. Good morning.

Good morning.

Hey, when you guys announced 4Q downtime last week, you mentioned some of your facilities were cash negative at current OSB prices. I was wondering if you had a feel for what percent of the industry might be cash negative at this point?

I'm not -- the question is what is the industry?

Right.

You know, what I'd asked you to do is look at the RECCI study. They do a competitive benchmarking at the mills. I think if you look at that study you can draw a line and you'll at least get the percentage of the mills.. Maybe not their prime location.

Okay, fair enough. If OSB prices fail to improve from here, can you tell us your thoughts about potentially closing some of the mills and definitely the ones that you're taking downtime in?

I think that would be speculation on our part. I think what you can be pretty much assured of is that we will continue to look at the cash position of our mills and take actions that are appropriate to maximize the value of LP.

Okay. And finally in terms of CapEx, you've given us some guidance on what this year and next will be, but can you talk about how you view the level of -- what the level of maintenance CapEx is?

I think what we've said in the past and I think it's still valid, it's somewhere between $1 and $2 million per facility, and we've roughly got 32 manufacturing facilities. If you go back in '01, I think we were at $42 million in capital in '01, but we didn't have any growth capital on the horizon.

Okay, and then one final question if I might, Curt. Going back to the -- sort of the mill cost position, can you talk a little about how deep the cost curve within OSB? The sort of the -- your most efficient mill's 10%?

Well, I think there's two --

Or 20%?

-- There's two things you have to look at. One, pricing is very regional. If you look at Random Links you have a much lower pricing in eastern Canada and a much lower pricing in western Canada than you do in the southern United States and Southern California. So where you're shipping from and to is important because you got to look at that print. So that affects the margin.

Then you have to look at the cost side. And if you look cost side, and I don't think there's any question that we are pretty consistent with what RECCI says from a region standpoint. Eastern Canada's the most expensive region. The U.S., north central is the second most expensive, western Canada's probably third and the southern United States is the cheapest.

Okay, great. Thanks for your help, Curt.

Our next question comes from the line of Don Roberts with CIBC World Markets. Please proceed.

Thanks so much. Rick, you had mentioned about Quebec having a serious business climate problem. Aside from the wood costs and the Canadian dollar, are there other specific issues there that you've got? And second, if you sort of sit back and you do have other facilities in Quebec, like the Chambord and so forth, is it fair to say that Quebec of the mills that you've still got operating are truly the marginal facilities in the firm?

Well, I wouldn't put them in a marginal category. St. Michel was the most disadvantaged. One of the reasons there is we didn't have rail into that mill. But I think the most problematic piece of what's going on in Quebec is, number one, the wood cost and then kind of the off-loading that the province has done onto businesses of cost that used to be paid for by the province.

So when you couple fx with the off-loading and then extremely high wood costs, it's getting into anybody I think that is doing business there. There's also --and I don't want to make a political statement here, but they're very, very friendly rules to the work force, and so it's difficult to drive change as well in that organized environment.

Given that all of these problems are common all of the Quebec facilities, though, wouldn't that sort of, again, suggest that if there's other -- if the demand does stay down more than we expect that the employees are more likely -- additional shutdowns are more likely to come in those Quebec mill than --

Well, I can only speak for LP, but if you look at our other OSB facilities in Quebec, if you want to compare them to the U.S. south, there's certainly higher costs.

Thank you.

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

Thank you. First, Rick, it's pretty notable that the Engineered Wood business pricing seems to have held up reasonably well, considering the weakness in volume and general market conditions. That still the case and do you think that can be sustained?

No, I think it's coming off. We don't know how much it's going to come off, but it's starting to soften now.

Okay. And, Rick, you talked about the potential of an extended period of excruciating pain. If that is going to be the case or if that were to be the case, would you hunker down our OA cap spend, at least on organically speaking to those maintenance-type levels?

That's not the plan. That's why we saved our money the last two years. The plan here is to execute the strategic capital that we have on the books and come out of this downturn stronger than we were when we went into it, And that's why we've hung on to the money.

Let me just clarify. I was talking obviously '07, that's understood what's going on there.

Right.

And then I was looking at '08 and not talking about acquisitions, but talking about internal growth initiatives.

We haven't given my guidance on '08 yet. I think that about one year out's about as far as we want to get.

Okay. Just conceptually speaking, though, when you first answered the question, I would have come away with a sense that no, there are also internal projects that would you still be considering.

Sure.

Okay.

You bet. That's why we save the money.

Okay.

To be able to support our organic growth, to be able to improve our current facilities and hopefully to have an opportunity to pick somebody off that makes sense for our business.

Mark, I'd also point out, though, that Rick did talk about another OSB mill we had in the planning horizon that we are reassessing. Obviously, the economic conditions will affect projects that have not yet begun and the timing on that.

Okay. And then lastly, on that composite decking, how much of the issues that you're confronting do you think are general industry issues versus Louisiana-Pacific problems at this point?

You know, I'd ask you, again, [inaudible] to the public company, you can listen to their earnings announcement here in a week and a half or so and you can hear directly from them. There's also another company, [Ayerd], that will announce publicly and you can look at their earnings. And then as you know, there's business as part of UFP, which they may discuss, and businesses as part of ELK that they may discuss during the announcements. That's how I'd get at that if I were you, Mark.

Okay. Thank you.

Our next question comes from the line of Peter Ruschmeier of Lehman Brothers. Please proceed.

Thanks and good morning.

Good morning.

I wanted to ask -- I apologize if you mentioned it -- but can you update us on a specific timing of Alabama and maybe how you think about, you know, learning curve?

Well, the mill should get up in late '04.

'07.

Excuse me, '07. That would be good, wouldn't it? [LAUGHTER] I wish it had been up in late '04. Now the mill should get up in late '07 and we should be coming up that learning curve probably for the next nine months after that.

Okay. And can you help us to understand, Rick, the pros and cons of, postponing. You talk about the depth and speed of the decline and what are the pros and cons of pushing Alabama back, you know, one, two, three quarters, as opposed to staying rigid on a time line? Especially if it's cannibalizing your own, Canadian and other high cost operations?

Well, the most efficient way, once you get started, to complete that mill is to complete it. You have contracts. You have equipment orders. You have people that are supposed to come on site in a timely manner and so, once we get started on something like that, we're going to go ahead and button it up, because that costs the least amount of money.

Okay.

But I think you heard Rick say earlier that he wasn't going to accelerate it.

Right. Right.

It's also a little bit of the chicken and the egg. It will be one of our premiere low-cost facilities, so that's a very important thing to us is to reduce our overall system costs. One of the ways you do that is make improvements in what you've got running, but the biggest impact you can have is bring on a world-class low-cost facility. And you can't wait around to fry to do that.

You have to pretty well blink and go forward, because you can never time it exactly right where you say, well, I'll try to start building this mill so that it comes on in the next upturn. The problem is we don't know exactly when the next upturn is.

There was a couple questions about St. Michel and I'm curious as it related to that how you think about the Canadian dollar? I would think if you think the Canadian dollar is kind of a permanent fixture at these levels, I've got to believe there's some facilities that are not viable long term in Canada. But can you share -- how do you think about the C dollar as a very moving -- a big moving part on the cost curve?

You know when we look at it, you can get a forecast about anywhere you want it. Right now, for our planning purposes, we're expecting it to stay in about the range if is. If you look at what we've done in the past, when the Canadian dollar did start its rise, we had a wood allocation in Quebec and we turned that back to the government. So what you've seen from our actions, other than the joint ventures, we have not made any investments in Canada.

It just makes it more difficult to do that with the Canadian dollar at the current rate. As far as the long-term viability, the mills we have in Quebec, with the exception of St. Michel -- and St. Michel if we could solve some of the wood issue would also be a good facility. But Maniwaki and Chambord are very good operations, and we expect them to make a lot of money for our shareholders in the future?

Okay. On the income statement, unallocated expense is a little lower than I thought, and I'm curious if you can help us go forward with either a forecast or a range of what you expect, either quarterly or annually on the allocated expense line.

What we expect is that to remain right around the $25 million, you know, maybe up or down given timing of particular expenses, but that's kind of the range where it's going to be.

Okay.

That's a little bit higher than the past, largely as a result of the stock-option expensing rules.

Okay. You haven't mentioned resin costs as an input cost or the oil coming down. I'm curious if you can comment on the outlook there, if you get any relief or not?

Yes, we should see relief in the first quarter. Those are generally backward-looking indexes, so for Q4 we're looking at pricing in Q3. So we're probably not going to get any relief in Q4, but we would expect to see that in Q1.

Okay. That's all I had. Thanks, guys.

Alright, thanks. Chanique, we have time for one more question.

Our final question comes from the line of Rick Skidmore with Goldman Sachs. Please proceed.

Good morning. Just a couple of quick ones. Just, Rick, in terms of thinking about organic growth, in terms of size of acquisitions, can you help us understand what you are thinking about there?

Well, I could. I really don't want to comment on that. You know, I walked myself into a box on that one, so I can't win answering that question.

Second question would be have you seen any evidence of acceleration and substitution from plywood to OSB in the early part of this down turn?

Not yet. It's kind of like trying to measure throwing a bucket in a lake right now, because the demand has fallen off so it's hard to measure what's going on within the pieces. I think we'll probably have a better look at that as we roll is up at the end of the year.

Where might you see that penetration come -- or that substitution come from? OSB versus plywood?

Oh boy. Well, yes, you're going to see it probably in subflooring. You know, all of these OSB companies are making a subflooring now. And I think you'll continue to see more penetration in wall sheeting.

And then last question, just going back to St. Michel for a second. Is there any length of time that's important for to us think about with that mill being down? Namely do you start losing cutting rights or do you have to pay your employees severance at some given point in time with the machine idled?

Well, it's a little early to call that one, because we'd like nothing better than for this market to turn around and put all of those good folks back to work. But, you know, if I had to make a guess, I don't know if that thing'll run -- you know, if things stay like they are, I don't know if that thing will run before next summer.

Is there anything in Quebec provencial law that suggests you have to declare them permanently unemployed and pay them severance after a given number of days or can it go on indefinitely?

No, I don't think so. I mean, we have to at some point in time issue a -- once we make the determination that we know that we're not going to start it back up, then we have to declare and then, of course, you go through what you have to do once you declare a facility's not going to run again. But I don't think we're looking at St. Michel as a facility that won't run again.

It's pretty hard to guess. What we're said is we've got to have either some relief on the cost side or we have to have relief on the market side to start the mill back up, because we're just stapling dollar bills to every load.

Okay. Thanks, guys.

Well, thank you very much for your participation. As usual, Becky and Mike will be available for follow-up discussions. Thanks again. Chanique, if you could give the replay instructions, then I think we're done. Thank you.

Okay. To join into the replay, you can call 1-888-286-8010. Again that is 1-888-286-8010, and your access code would be provided by the host. Thank you for your participation in today's conference. This will conclude the conference. You may have a good day.