Louisiana-Pacific Corp (LPX) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2007 Louisiana-Pacific Corporation earnings conference call. My name is Mike, and I'll be your operator today. At this time all participants are in a listen-only mode and we will be facilitating a question-and-answer session at the end of the presentation. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to turn the presentation over to your host for today's call, Curt Stevens, Executive Vice President of Administration and Chief Financial Officer of Louisiana-Pacific Corporation. Sir, please proceed.

Thank you, Mike. And thank all of you for joining us for our conference call this morning to discuss our financial results for the second quarter and the first six months ended June 30, 2007. With me today are Rick Frost, LP's CEO and Mike Kinney and Becky Barckley for our regular investors conference.

I'll start with call with a review of the financial results for the second quarter, provide a discussion about the performance of our segment, and then give you some comments on the balance sheet. I'll then turn it over to Rick, who will talk about the current market environment, the accomplishments and challenges during the second quarter, and a summary of our thoughts and plans for the rest of 2007. As we have done in the past, this call has been opened up to the public and we are doing a Webcast. This can be accessed through www.LPcorp.com. We have provided a presentation that contains supplemental information. I will reference these slides during the discussion. As a caution, this presentation should be reviewed in conjunction with the publicly available earnings release that we put out this morning. I want to remind all the participants about the forward-looking statements comments that is included in our earnings release and also shown on Slide 2, of the presentation.

Also be aware the discussion of the use of non-GAAP financial information included on Slide 3, of the presentation. The appendix of the presentation contains the necessary reconciliation. I'm not going to reread these statements, but I am going to incorporate them into the discussion with this reference. Before beginning the review of the results, let me spend a few minutes discussing our recent decision to exit our composite decking business. As you heard from us over the last several quarters, decking has been an ongoing challenge for LP to be a profitable and growing part of our profit portfolio. On the last call, we said that we would be evaluating our options for this business at least partially based on the market success during the second quarter of the beginning of the building season. For this and a variety of other reasons we have made the decision to exit this business and have moved the reporting of the results to discontinued operations for all the presented periods. Rick will provide more color in his remarks later this morning.

Now let me open it up to Slide 4, of the presentation, which discusses our results for Q2 of 2007. We're reporting today a net loss for the second quarter of $23 million or $0.22 per diluted share. Continuing operations have a loss of $16 million or $0.15 per share and discontinued operations have a loss of $7 million. Net sales from continuing operations were $461 million.

For the same period last year, we reported net income of $55 million or $0.52 per diluted share. Our continuing operations, we had income of $56 million or $0.53 per share and discontinued operations had a loss of $1 million. Net sales from continuing operations were $637 million during this period. For the first six months of 2007, LP reported a net loss of $61 million or $0.58 per diluted share on sales from continuing operations of $856 million. This compares to income of $139 million or $1.31 per diluted share on sales from continuing operations of $1.3 billion during the same period in 2006. For the first six months of 2007, losses from just continuing operations was $52 million or $0.50 a share compared to income from continuing operations of $141 million or $1.33 per diluted share in the first six months of last year.

Slide 5. Each of the reported periods did have several special items that are generally not attributable to ongoing operations. During the second quarter of 2007, we recorded a gain of $17.7 million associated with proceeds received from a favorable verdict in a lawsuit for an insurance recovery related to our hardboard siding class action suit. If you recall, we did discuss this on last quarter's earnings call as we anticipated receiving those funds in the second quarter. Also in the quarter, we recorded a gain of about $1.5 million associated with a settlement with a British Columbia government on the reduction of certain of LP's timber licenses in the Province. These items are also described in more detail in Footnote 3, of the earnings release.

Let me talk about OSB on Slide 6, of the slide. We had a loss of $45 million in the quarter for OSB. OSB price compared to the same quarter last year was down 38%. The decline in pricing from Q2 of '06 accounted for around $120 million and lower sales and operating profits in this segment. In the same comparison period, volumes were lower by 2%, compared to last quarter, volumes were up 15% sequentially. From a cost perspective, cost per unit was about flat as operating efficiencies offset the negative impact of the strengthening Canadian dollar during the quarter. For the first six months of the year, OSB lost $109 million compared to income of $173 million during the same period last year. Again, this is largely a sales price story, where sales price changes accounted for almost $275 million in reduced sales and operating profit in OSB.

Next slide is Slide 7, presentation. This is our siding segment, which includes our OSB-based sliding SmartSide, our hardboard siding, and commodity OSB produced at one line at our Hayward Mill. During the second quarter, profits were at $17 million, about 25% below the same quarter last year, but almost double the last quarter's earnings on a sequential basis. The bulk of the Q2 to Q2 change was related to OSB profits at Hayward as we sold 65 to 70 million square feet of OSB. For the quarter, sales volumes were down 20% in SmartSide compared to the same quarter last year, but were up 23% from last quarter. Sales prices were up 5% compared to the same quarter last year and 2% sequentially. Hardboard sales volumes were up slightly compared to the same quarter last year and 28% higher than last quarter. Average sales price was slightly higher compared to the same quarter last year, but down a bit sequentially.

The sequential decline is the result of a higher mix of door skins, which is a low end product as compared to siding, which brought our overall price average down. If we look at the products in isolation, we are showing an increase in sales price, in both product lines, so it was mix-related. For the first six months of '07, siding and operating income of $27 million compared to $42 million in the same period in 2006. Virtually all of this decline is related to lower profits in OSB from the Hayward Mill.

Slide 8, of the presentation, a summary of our Engineered Wood business. The summary includes our laminated lumber and I joist operations, include our JV with Abitibi. Down sequentially from the $6 million earned in Q1. Most of these products end up in new construction, so the fall and housing start has quite an impact on volumes of both LVL and I-joist, whether we were lower by about 17% compared to the same quarter last year. Sequentially, volumes were higher in both product lines based upon seasonal demand. Additionally, we continue to see weakness in pricing both LVL and I-joist for Q2 over the prior year, we saw a decline in pricing of over 10% for the both products. For the first six months of 2007, Engineered Wood made a little over $10 million compared to $20 million during the same period in 2006, a direct reflection of the decline in housing. The other building product segment, which are those operations that are not significant enough to require segment reporting, which include our interior molding business, our plane operation, our cellulose operation and joint venture in fiber, resource, and other nonoperating facilities had -- we lost a little bit less than $3 million in this segment., which was due to lower sales volumes in our molding operations, lower profits in our insulation joint venture due to higher paper costs, and high increased residual costs associated with this operating facility. For the first six months of '07, these operations were slightly negative compared to operating income of $10 million in 2006.

On selling, general and administrative costs for the quarter, our costs were $38 million, about flat with prior year. On the unallocated SG&A, our costs were down $2 million in the second quarter compared to the same quarter last year, about a 12% reduction. For the first six months, total SG&A was flat compared to last year and unallocated SG&A was down about 16%. On the tax side, for Q2 our effective tax rate was 40%. The major reconciling items compared to statutory rate relate to the Company's foreign debt structure, state income taxes, and the favorable resolution of an outstanding state tax contingency.

Slide 9, has the balance sheet statistics on it. Key balance sheet statistics, cash, cash equivalents, investments, and restricted cash is a little over $1 billion, working capital of about $1.1 billion, net cash about $660 million. This is actually about $15 million higher than the net cash we had at March 31, 2007, our last quarterly reporting as we reduced working capital to offset our capital expenditures, dividends, and the loss that we sustained in operations. Capital expenditures in the quarter were $89 million or $137 million for the total year-to-date. We expect our capital expenditures for 2007 to be around that $280 to $300 million level as we complete our accounting, OSB Mill, the Holton OSL line conversions and our new mill in Chile, as well as a variety of other cost reduction efforts. A little later Rick will give some thoughts on 2008 capital expenditures.

At the end of the quarter, our book value was about $19. As we mentioned earlier, Slide 11, does include the necessary calculations of non-GAAP financial measures, so you'll have to take a look at that. With that let me turn it over to Rick who'll discuss the accomplishments for '02, his analysis of the market, and his comments on the remainder of 2007.

Thanks, Curt. Good morning to all of you and thanks for attending our Q2 '07 earnings call. It's beautiful here in Nashville today, we had a big line of thunderstorms go through last night and everything's freshened up and beautiful. That's the good news. Curt has reviewed the Q2 numbers for you and what I plan to do is add a little color commentary this morning in several areas. First, our decision to exit the decking business, some Q2 activities, a few comments about the markets that we are selling into, make some comments about some future LP action, and then we will address your questions.

Let me begin by making a few comments about our decision to exit our outdoor living business, which we commonly refer to as decking. I have indicated for over a year now that we've been dissatisfied with our progress to be able to grow the decking business to achieve a significant scale that we desired and to significant profitability. On our last call, as Curt said, I did indicate that our next round of decisions around decking would come after viewing the spring sales season. Although I think we've done a pretty good job at developing the weather-based brand, continued efforts on LP's part for the lack of profitable success that we've had make me believe that this product, the brand itself, and the business will be more successful under a different business model. So recently, we made the decision to move on and to sell this business, and as a result, the decking business was placed into our discontinued operations accounting category while we actively pursue the sale. Even more recently, we have signed a letter of intent with a firm named fiber composites to purchase our decking business, the brand, and our Meridian, Idaho, facility. At this time, the completion of the sale is subject to ongoing due diligence and subject to final agreement between the two parties. If things go smoothly, I hope to have this transaction completed within the next couple of months.

Fiber composites and additional other parties have expressed an interest in our currently idled Selma, Alabama, plant, but this will not be part of the first transaction. It's important to our WeatherBest customers to know that the brand is going into capable hands with fiber composites.

Let me move now to some Q2 observations. As Curt mentioned, our Siding business, Engineered Wood products business, Molding business, and our Chilean/International businesses were profitable. OSB and GreenFiber were not, as well as the previously mentioned decking. Due to weakened demand, we did take some downtime across most of our product lines for various reasons, to avoid inventory build in our non- OSB businesses and to attend to CapEx or maintenance needs in our OSB businesses. Last quarter, OSB had 114 mill down days, over which St. Michelle, which has been idle for over a year now, was 90 of that 114. Log outages, some other small operating disruptions, and maintenance accounted for the residual amount. In Engineered Wood product, we were able to reduced shipping in both of our LVL facilities and our I-joist facilities. And in siding, both hardboard and SmartSide, we did take some downtime to avoid inventory build. Construction continued through the quarter at the three plants that we are building. Clark County OSB, the Holton OSL conversion, and our Lataro, Chile, OSB Mill. Most of the machine centers are currently at place at these facilities now. The buildings, the skin of the buildings is constructed and electrical work has begun. And we have begun some on boarding of new personnel as well. Our ongoing focus on workplace safety has continued to yield us excellent results at keeping our employees from getting hurt, as our TIR for the quarter was about 1.0, which is industry leading and we are very proud of that. Incidentally, we did have two plants that achieved the DPP Star Certification, one at Jasper and one at Roargan River. We made no acquisitions during the quarter and we repurchased no stock. Let me talk a little bit about the market as I see it. Not a lot has changed since our last call. Although we did have a small pump in OSB pricing right at the end of the quarter. Permits for single family new starts continued to decline, which indicates to me that the builders are slowing down new construction. Mortgage rates, at the same time, have crept up a bit to about the 6.5% level for long-term money and as well, the time it takes to gain mortgage approval has lengthened. And I think that's because of more lender conservatism.

The consensus on starts for '07 appears to be about in the 1.45 to 1.50 range. More recently forecasts for '08, have dipped down to the 1.5 level in some publications. It does appear that the subprime foreclosure and default rate issue is the driver behind some of this extended negativity. I'm not ready to make a call on that yet. I think the information is still a bit too sketchy to get a decent read at this point. But I'm not currently anticipating '08 to be significantly better than '07 in new residential starts and I think it's with that view that we will drive our planning process. Looking forward, as we look at the rest of '07, we are anticipating significant downtime across LPs, OSB siding, and Engineered Wood Products facilities. LPs OSB Mills, as it looks now, will take around 170 to 180 mill down days. Of course, 90 of those are St. Michelle, which will remain down the rest of the year, as we previously indicated. The rest of the down days are related to capital tie-ins and maintenance. The Holton, to do the tie-in for the OSL line accounts for 60 of those and we do have a couple of Bark Burner installation tie-ins scheduled for our Southern Mills. As well, we have had some continued log flow problems in the southwest due to the incisive rains that I'm sure you have been reading about or hearing about.

In our siding business, we are looking at several weeks of down time across most of our facilities, specifically to control inventory build. And in Engineered Wood, we will continue to manage inventories with reduced shifting. We look for the new LVL Mill being constructed on the West Coast, not constructed by us, but for which we have a sales and marketing agreement for their output to start producing LVL in late Q4. We are launching a new TechShield product this summer to sell into the retrofit or after market for radiant barrier. We plan to use large installer for this product launch. This product is kind of a neat product. It allows existing homeowners to benefit from a radiant barrier application if they did not have it installed during the initial construction of their home. And the manufacturing of this product is being out sourced. Our OSB siding and hardboard business are consolidating under the SmartSide brand name and we're enhancing the hardboard product to improve its performance as well. I think we'll finish the rest of the year with a high level of construction activity to complete the three mills underway. As Curt said, CapEx for the '07 year should end in the 280 to$300 million range depending upon how many of those builds actually get in by the end of the year. Now our first cut at CapEx for '08, as I indicated earlier in answering questions looks to be significantly less than '07. It will be below our annual DD&A, probably in the range of 115 to $120 million. With those comments made, I'll turn it back over to Curt to handle the Q&A.

Thanks, Rick. Mike, can we go to the queue for questions?

Yes, sir. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Rich Schneider with UBS. Please proceed.

Good morning, Rick.

Good morning. I was wondering on the Canadian dollar FX hit, you took a big hit from a balance sheet standpoint in the quarter, but you said you were able to offset the Canadian dollar affect on OSB by your good cost performance. Could you give us an idea of what the Canadian dollar impact was on operations and the good cost performance in the quarter, was that due to taking less downtime in the quarter?

Rick, this is Curt. As we've said before, each penny changed in the Canadian dollar is about $4 million annualize on our operations up there. So in the quarter we had about a nickle change, but that would only be from a quarterly results standpoint, so you've got to divide that by four. The good cost performance came from a couple of things. One, we had some of the capital projects that went in place specifically the Bark Burner and Roxboro operation lowered our yield. So our yield was improved and we also did a better job growing the facilities in up time/downtime.

Okay.

So it's just good operations during the quarter.

I would add to that. We're working quite diligently on process and cost improvement. I think I mentioned earlier that we have become a Lean Six Sigma Company and a large portion of our improvement on cost reduction is through the engagement of our employees into project improvement teams and we're very pleased with the start that we have on that.

Great. And on the sale of your decking operations, just wondering, is the buyer already in the decking business? What is he thinking? Just curious, what is he thinking he's able to do that you couldn't to turn that business around?

Fiber Composites currently have one mill. They market their project, which is a similar product, under the name Fiber-On. They are also a producer of the Veranda product, which there's three different contract manufacturers, if you will, for the home depot brand name Veranda. So they have experience in this business. I think they have a smaller scale and different business model. So we anticipate that they will be a good home for our business and they want to preserve and enhance the WeatherBest brand.

Then on the new court ruling that came out on the MACT pollution standard, which has moved the implementation date, I guess, up from October of '08 to October of '07, I know this is very complicated and I'm wondering if you have an initial assessment on what this may do not landscape? Will it cause some older plywood in OSB facilities to shut down? Are people willing to pay what it costs to put in this oxidation equipment and the RTOs I guess? Any comments on that whole area.

There are two court rulings that came out, one was on Boiler MACT and basically what the court said that the EPA's regulations were inappropriate. They sent it back to them and said they have to redo the whole thing. So we're probably looking at one to three years before we'll have any new regulations on Boiler MACT. We have spent some money on compliance with that anticipation of those going into place. Our view is that money's well spent and probably will be in the regulations. They said go back to the drawing board and redo those.. The one you're probably most interested in is the plywood composite wood panel MACT.

Right.

Basically what the court determined is that the EPA did not have the authority to create a low-risk subcategory. We had planned on using that low-risk subcategory for our OSB and our siding mills. Now under this ruling, the way we understand it, our OSB Mills will be required to collect and report emissions data, but we don't believe there'll be additional capital required. On our siding mills that don't have RTOs, there is a possibility that one or two of those mills may be required to put that equipment in place. Then Roargan River is the other mill we have that will be effected by this. We're going to continue with the path that we're on, which is emissions averaging, but we need EPA to culminate new rules so we can figure out how to control those emissions. That's probably two to three years out. Your comment on the plywood mills, I think a lot of the plywood mills were planning on using this low-risk subcategory and that is no longer available to them. So they be required to put that equipment in and burn the natural gas.

I thought also that they had moved up implementation dates from October of '08 to October '07 on just putting in RTOs in general?

They did. What they basically did is they left it up to the state regulators to provide extensions. So I know what we are doing is we're buying those extensions and generally being granted those extensions. When you have a major change like this, it's -- physically, you just couldn't put all that equipment in before the end of the summer. So the states recognize that. It is frustrating for all of us, because we've been working against a set of rules and spending money on that. For the court just to throw them out, it has created a bit of consternation throughout the industry.

Last question. How long are those extensions? I guess they vary, but how long do the states give you on extensions?

In most cases, the states are providing one year extensions, which puts it back on the old schedule, essentially.

Okay. So in essence, that ruling may not have that much of an impact if you're able to get a year extension?

Well, won't have that much of an immediate impact. By throwing the low-risk category out, it's certainly going to have an impact.

Okay, terrific. Thank you.

Okay.

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

Thanks. Hi, guys. Good morning. A question regarding decking. My guess is because you didn't cite a figure, you're not willing to share it at this juncture, but just in case, have you -- what value do you think you might be able to get for decking on this first transaction?

Well, in our reported results, George, we looked at our carrying value of all of our assets and we did take a $9.5 million impairment charge in the second quarter. I think that's all I'll say about that right now.

That's fair, Curt. And what happens to Selma if you can't sell it and what do you think the odds are that, in fact, it will work out that way? Hopefully you're able to sell it either to the buyer or somebody else?

Well, the Selma facility is in an industrial park off of an old airstrip. It's surrounded by a lot of second and third tier auto suppliers for the industry down there. So it's an attractive site. We don't have any particular certain that we're not going to be able to sell the site. The equipment in it, the extruder are damn near new, so we would expect to be able to recover on those extruder. So when we came up with the impairment value we did in the quarter, we took all that into consideration.

Okay. And the extruder, can the extruder be used for any other process?

Yes, they can.

All right. As far as -- you did a good job on bell tightening, the cash balance was a little bit better than we had expected sequentially. Rick, is there much more that you can do, or Curt, on working capital from here on out and anything else on overhead costs, etc., as you manage through this downturn?

On the inventory, we have several product lines that have higher inventory levels than we'd like they will to have. That's why Rick talked about the downtime we'd be taking in some of these businesses. So we can bring down that inventory. We've been running pretty darn lean in logs, particularly in the south, and we did have to take some curtailment as a result of that. As Rick mentioned, we've had terrible rainy weather in Texas, so we lost about eight days earlier this month in Carthage being out of logs. So we have pulled the logs down where we can now as we talked about in the first quarter and the first quarter of every year, we do have to have an increase in our log inventory to run our northern mills. If you don't put that in place, you can't run during the spring. There's still more work to be done in inventory, and we're looking at that. Receivables, we run about a 20-day DSO. I would argue that that's probably the best in the industry. There's not a lot we're going to be able to do there. Unlike some of our customers, moving their accounts payable to India, places like that slow their turns, we haven't chosen to do that. We think our vendors are important partners to us. We haven't done anything on that side. As far as the rest of the organization, I think what Rick talked about is what we're trying to do is get efficiencies and cost savings through an aggressive implementation of our Lean Six Sigma. And we are doing that.

Okay. With all these initiative, you're not willing to put any dollars right now in terms of targets, and that's fair if that's the case. Just checking.

I think it would not be appropriate to give you a target.

Okay. Two last ones and I'll turn it over. On CapEx, what are the odds that the CapEx initial budget for next year is higher? What are the odds that it's lower? What do you need to spend on envisaged in that $115 million plus CapEx budget? Overall, realizing that if you make any changes to your mill system, the first folks you'll talk to are either your employees or your customers and not us, but Rick could you tell us along with the downtime that you're taking how you're thinking about the network right now, how you're thinking about St. Michelle? Thanks, guys.

That was pretty good three or four questions right there at the end. Let me take the capital one first. What I gave you there was our most recent and first cut at looking at next year I, at this point in time, won't give you any odds on that because I'm, unless provided with different information than I have right now, I'm assuming that that's where I'm going to ask our people to perform. So unless I get different information, that looks to me like it's where it's going to be next year. We have no new information on St. Michelle for you. It is as we told you, down indefinitely and we have said that it will be down through this entire year and that's all we've talked about so far. Hopefully those answer your question.

Well, kind of, but good luck in the quarter.

Thanks. We'll take all the luck we can get.

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

Yes. Good morning. Could you talk a little bit about why we haven't really seen more substitution this cycle of plywood -- OSB for plywood. In fact, we've seen plywood profitability actually remain profitable from what we can tell in some cases. Do you think that there's just a lag here. That the home builders are now going to focus more on profitability and maybe switch more toward OSB and away from plywood?

Chip, this is Rick. I haven't given up on the fact that there will be continued substitution, but in the latest stratification that we've done where these products really sell, the lack of -- or the reduced demand in plywood hasn't been as great as OSB, because in the markets that plywood has had, the historical edge, those markets have held up better than new residential housing, if you look at OSB, it's penetrated new Res upwards, I think on average, in the 80% area. If you look at where OSB isn't as strong and plywood has been strong, which is the light commercial, industrial, and light industrial, plywood -- those markets have remained relatively strong, and that's where plywood has its biggest position. I think the other thing that is worth mentioning, I think I mentioned this the last time, is if you look at the market or the amount of plywood that's actually being sold in this country, today it's down significantly by the reduction of imports that were coming in over the last couple of years entice in here by the very high pricing. So I think if you look at your import information, there's a significant amount of plywood that isn't being sold in this country. In essence, your foreign producers have taken a majority of the reduction in demand. So that's -- but I think as this spread continues and it's obviously less today than it was 30 days ago, there will be continued substitution. The RISI projections continue to move -- if you look at '06 numbers, OSB was 60% of the structural panel by their reports and their projections are it will be 65% of the structural panel market by the end of next year. I see no reason why there will not be continued substitution.

And then as you think about your wood procurement in the future, we've heard about three wood pellet plants, I think, being built in parts of the U.S. and even a cellulosic ethanol plant. I know a lot of their focus at this point is on wood waste, but there are summer the timber owners seeing that as actually a competing source of -- for people like you, for selling -- a competing customer, if you will, to sell your wood too. Is that something you're concerned about yet? And in any of your specific wood baskets, are we going to see any of these plants?

Curt's chopping at the bit to talk like a forester now, he runs all the forestry operation but I'll pull rank here and give you my 30-year perspective versus his two-year one.

He's been there longer than that, come on.

But he's only been a Forester for two years.

Okay.

I think the people that are most concerned about this are the pulp and paper industry, which have had a steady diet of biomass coming into their plants at a cost of little more than freight. For both pulp and paper and the panel industry or the panel industry, or oriented strand panel industry, there is a concern that these biomass energy plants will dip into that bottom 1 to 1.5 inch diameter class which is on the minimal range of acceptable quality coming to either make pulp or OSB. So we've got our eye on it. I don't feel as threatened by it as if I were perhaps in the pulp and paper industry, because our minimum spec is about an inch better than what I recall used to be, our minimum diameter spec is about an inch better than what I recall pulp used to be.

The only comment I would make, Chip. Is that we are spending time and energy to make sure that we're not put in a competitive disadvantage to use that fiber. We do not think it's appropriate for those operations to be subsidized in buying fiber that's been a traditional source of fuel for us without a subsidy.

Okay. When you look at the remaining start-ups and you can sort of feel them, I'm sure, as they happen, but it seems to me there's only two or three left. Yours, I think Grant still has one, although they may have thrown the switch and maybe there's another one in Canada? And I'm not counting the company that stopped building theirs, but is that your understanding that there's only two or three including yours left to start up?

Well, can I comment on ours. Ours is going to start up. I think you probably have to talk to those two other parties, because we don't know exactly what their plans are.

And you're still looking at fourth quarter, right?

Yes. Right at the end. We're hoping to get her turned on and look at the product by New Year's eve is what we're looking at now.

Thanks very much.

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

Thank you. Just two questions. I wonder if you can talk about the siding mix situation and whether you think you're seeing something fundamentally different or whether this is a one or two-quarter event? Then the second question is back to my favorite topic, which is TechShield. This after market product, is this still a panel product or is this a film product that's going to be going up against the stuff, the tie-backs of the world?

I'll talk to the second one. I don't quite understand your first question, but let me finish the second one and then have you re ask the first one. What this product is is a -- it's basically a craft paper product, which has foil laminated to it and so the potential is all of the existing homes in the country, this stuff is produced in rolls and can, through an installer or through an over the shoulder trade, people can actually go in and staple this stuff inside of their attic and you get the same affect as if you'd constructed your home with a panel with the foil on it as well. So it has the same characteristics and the same impact, but you just either hire an installer or you go in yourself with a staple gun and put this up inside your rafters and you get the same cooling affect in your attic. Hopefully I've answered that question.

Okay. So this won't have any -- won't have anything to do with your OSB business at all?

This isn't a competing product, this is a very green product which capitalize on the same notion that we've been so successful in developing the TechShield brand on new construction, this just provides us to leverage that technology and the energy efficient movement into an after market and then the co-branding should be very effective for us, raising brand awareness in both products.

That's helpful. My first question --

I think I understand your first question. My comment there was just on hardboard at our [Ace] River Facility. Because up we make our CanExel Siding and we also door skin. In Q2 we had more door skins than we had had in the prior quarter.

Oh, okay. Got it.

It wasn't a significant mix change at all.

Thanks very much.

Yes.

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

Thanks. First question is on decking. I guess I really wanted to know what went wrong. It seemed like there was so much promise there a couple years ago and I recognize you're not the only ones to have difficulties, but was it the input costs or the extruder or just execution?

I think it was a little bit of both. I've got some do over that I'd like to have. Our problem is, you don't get them in today's world. I think we tried to expand too fast. That's a major do over. The real thing that affected us so greatly was the rapid and very dramatic increase in the raw material costs. And then, of course, it's a very fragmented and with a lot of players in that market and basically I think most of the competing products, if you go back to where we had positioned our product initially, which was the very high end niche product, most of the product quality has come up across all of the product offerings so that we felt less ability to differentiate our product. Then as I mentioned, I think probably several quarters ago we had a false start last year in the way that we went about taking the product to market basically following a belief that if we filled the distribution channel that the product would sell,up dating our marketing information, what we realized is that the decision makers is the installer and the contractor and not the person that distributes the product and so that was a false start late in the game and I think the way I've explained it to our people is we just ran out of time and ran out of money for the perspective scale that we thought we had get. I think this is a smaller scale type product. And it wasn't going to fit into where we were going long-term.

Got it. Then just quickly for clarification, the 180 days of downtime in OSB, is that for the third quarter?

Yes.

Okay.

And 90 of that is St. Michelle, which has been down for over a year.

Understood. Finally, I think from your comments, Rick, I kind of gleaned that you don't expect the rally in OSB prices to be sustainable. Do you think we're going back towards cash costs or are we going to vary below cash costs? And maybe give us some color, as well, on the LVL and other engineered products?

Well, I don't know where OSB prices are going. I think everybody's got to make up their own mind on that based upon the macroeconomics view of supply and demand and everybody takes a cut at that. Yours, I'm sure will help you answer that question. I really can't give you any forward-looking statements at what I think pricing's going to do. If I move over into the Engineered Wood, which you had asked about, I think what you have coming into play there based upon what we've seen -- I think about Engineered Wood as kind of a hybrid product. It's partially a commodity and it's partially not. By that I mean the definition of a commodity to me is that your customer doesn't care who they get it from. Well, it's not a commodity in that respect because it's technical enough that your customer cares who they get that product from and it's supported by architectural technology and a lot of engineering. But when demand drops off as considerable as the new residential housing marketing has, it does not only take away your volume sales, but at some point in time, and if you go back six years, you can see this, when the DC ratio gets to a certain point, then it does start to affect pricing more towards a commodity-type product. I think that's the way I'd look at it. I think what's happened in Engineered Wood right now is that being tied probably to the degree of 90% to new residential construction, you've seen a product category that's declined almost 30% in a year in terms of the take way. And Engineered Wood and volume is going to come back when new Res comes back. At some point in time, the macro economic affects of the relationship of supply and demand are going to start affecting price. And we seen that last quarter. Siding has been different case. There's nothing commodity about siding. So we've actually seen our prices go up and siding is holding up extremely well, as you can tell from the numbers for us.

Sure. Last question, I promise. To take the bait on OSB, to what do you attributable the uptick in the month of June? Was it less irrational behavior or better demand?

What we've found from our customer is that they needed board. Their inventories got too thin so they said, we want some more board. And when we said, if you want more board than you've been taking, we'd like to charge you a little bit more for it.

Great. Best of luck in the quarter.

Thank you.

And the next question comes from the line of Rick Skidmore with Goldman Sachs. Please proceed.

Good morning, Rick. Just two questions, really. First in the OSB business, are there any particular mills within the LP system that are contributing any out-sized losses relative to the others, or is it relatively an average across the whole system?

Well, the one, obviously, that was the biggest outlier has been down for over a year now. So we're not sitting on our haunches. I think we continue to look at that in terms of does it make sense to make additional moves. We have not made any at this point in time.

And the second question, really, is on that last comment. If the view is that housing continues to be down in the second half of this year and possibly into early '08 and you've got the new mills that are ramping up, what is it that will trigger taking more down time or would you expect to see more volume come out, at least temporarily, in the OSB business?

Well, I think that you've named all the things that you have to put in the pot and continually revisit to sit on and say is there a particular facility that based upon the conditions as you see them now as lost at least its short-term technical right to run. Those are discussions that we have on a regular basis. Again, I'm cautious here about making any forward statements, simply because we haven't made those decisions. But all of the things that you mentioned are obviously part of the mix when we have that debate on a regular basis. And as you would suspect, you would be looking at the mills that have your greatest negative margin contribution to be discussed more often than the ones that are doing better.

Okay. One last question. How many mill days do you have in a year or in a quarter?

Well, if you got --

14 times 90. 14 mills time 90.

Got it. Thank you.

Mike, we've got time for two more questions.

Okay. The next question comes from the line of Peter Ruschmeier with Lehman Brothers.

Thanks and good morning Rick and Curt.

Good morning. Thanks for saying good morning to Curt. He feels neglected when y'all don't say hello to him.

I know he took it hard on the comment about the two-year foresty guide. I had a question about BC, the BC strike and whether that's going to provide any complications for Peace Value or whether you think you've got smooth sailing through that strike situation this summer?

We don't anticipate any impact on our operations.

Okay. Another question on transportation. I'm curious if you can remind us of -- well, I guess, transportation costs trends would be one question. Any cost pressures that you're seeing. And can you remind us your mix of truck and rail and whether that's changed much?

On transportation, we are seeing fuel surcharge that we get on the foresty side as well as on the outbound and inbound transportation. Those will come down little bit. My guess is they'll probably go back up this summer. I don't think we're at any competitive disadvantage there. I think we're being hit with the same surcharge of all of our competitors. We did have a slight disruption in Q2 and a much bigger one in Q1 from the CN rail strikes, but in Q2 it didn't affect us all that much. As far as the shift from truck to rail, I'll give you what I recall. We did have a rail line in the upper Midwest where I think CN bought it and basically tripled rates, and so we shipped it from rail to truck at those locations. But in general, I think it's about the same. Mainly truck in the south and mainly rail in the north.

Okay. That's helpful. Thanks. And shifting gears to Chile, any update on -- you mentioned you've got some more capital going in down in Chile, but house's the market demand, how's the acceptance of the product, and I guess I would be curious if you think there's any growth opportunities, whether that Chilean strategy is transferable to other parts of the globe. And if so, how soon?

We just had our Chilean guys up here, I guess it was last week and I think one of the numbers that I had thrown out, at least in some of our analyst presentations are continuing to improve. I had made the quote in the past that when we went to Chile, only about 4% of the new residential construction in Chile was in some formal fashion stick built or frame built housing like we do in North America. I had reported about, I think six months ago that that number is up to 19%. The new number shared with us by our Chilean general manager now is that that is up to 23%. So we're continuing to see a evolution into more stick built or frame built housing, even if you don't see it on the first floor, you're starting to see it on the second floor of contraction down there. Obviously, we're building the new mill down there, which is the old Montrose Mill, which has been refurbished and reconstructed because we're out of capacity in Chile. In fact, I think I may have mentioned this at the last analyst conference, we've actually been shipping some board from one of our southern plants to Chile to allow them to continue to grow their market. So our new mill can't start-up fast enough right now for us to continue to grow in Chile and the surrounding countries in South America. We're positive on that and nothing strategically that we would care to reveal from a competitive basis, but do continue to put energy into how to expand the success that we've had there because we think that that model, although requiring some patience, is going to be extremely effective going forward as more and more of these developing nations start to try to be or start to become forced into satisfying their subsidized housing needs.

Rick, can you remind us on the Montrose transfer, is it primarily the press. how much equipment did you transfer from Colorado down to Chile and is that an unusual one off situation, or was there any reason that that model couldn't be repeated at the right time in the future in.

Well, we took most of the Montrose Mill down there. Obviously, not the building and I will tell you we took a little bit less than we did the first time because when we built the first mill, down in [Pangaea] we found we took a bunch of garbage down there that they either had to replace or refurbish.. But the majority, all your business centers -- machine centers, excuse me, went down there and we actually robbed a little bit, couple pieces of equipment from our Woodland Main Mill. So as far as we look ate, this one is going about ten times better than the last one because we're in it the second time, we're using the same general contractor, and we think this model is repeatable for us and we ought to be pretty advantage at it, having done it twice now.

Okay, that's --

There's not much left in Montrose Rose, Colorado, other than a building.

And it's sold, isn't it?

Last question, if I could. Maybe for Curt. Any update on the resin cost impact in the quarter, kind of with a the trend was that you saw and whether you have much visibility for the resin costs over the near-term?

Resin costs for the quarter, the largest increase, if I look at it compared to Q2 of last year, PF resins were about $3.5 billion and MVI was up about $1 million so about a $4.5 million. So that was all input materials to go into that. Because that's an index contract. Looking at Q2, we actually expect Q2 to be flat in MDM and down a little bit in PO. And other increase has been wax. Wax has been an increase.

Okay. Good. Thanks very much, guys.

Okay.

And our final question of the day comes from the line of Christopher Chun with Deutsche Bank. Please proceed.

Yes, thanks. Good mornings guys .

Good morning.

I was just wondering about fiber costs and with a you're seeing there.

I'll let our resident Forester answer that.

I've only been here two years. In Q2 to Q2 when you look at the volume we assumed in Q2 was up about $1 million,across our entire system, so very little change. If we look at it sequentially, it was flat.

Okay. Do you have much visibility on what it's going to be in Q3 and beyond?

We do in our Canadian operations. It's a little bit -- well, it is weather related in the south. We've seen reductions in the late stage, we've seen increases in the south due to the rain. And then in western Canada, it's been pretty flat and then rising costs in Quebec.

And is your Seat Valley Mill in an area where it accepts wood from beetle damaged trees.

We take mainly hardwoods up there. We don't have the beetle woods going into that mill.

Okay. Well, that wraps up my questions. Thanks.

Good. I know we didn't get to all the questions, but Mike and Becky are both here, so any of those that would like to follow-up, please give Mike or Becky a call. We do appreciate you participating on our call this morning and we look forward to better results in Q3. So thanks very much. Mike, if you could give the redials instructions?

Sir, on this call we're showing that the dial-in information is for replay. 1-866-233-1854. Once again, that's 1-866-233-1854 and the code to be used is 69389105. That's 69389105. And you may also use 888-286-8010. Once again, that's 888-286-8010. Once again, ladies and gentlemen, thank you for your participation today. This does conclude the presentation.