Louisiana-Pacific Corp (LPX) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you very much for your patience. Welcome to the third quarter 2007 Louisiana-Pacific Corporation earnings conference call. My name is Bill and I'll be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today's presentation. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today's presentation, Mr. Curt Stevens, Vice President of Administration and Chief Financial Officer. Please proceed, sir.

Thank you very much. Good morning to all of you and thank you for joining us on LP's conference call to discuss our financial results for the third quarter and the nine months ended September 30th, 2007. As Bill indicated, I'm Curt Stevens, Executive Vice President of Administration and CFO. With me today are Rick Frost, our CEO; Mike Kinney and Becky Barckley, our Investor Relations contacts. I will start the call with a review of the financial results for the third quarter and the nine months, provide a discussion about our performance and our individual segments and comment on the balance sheet. I'll then turn it over to Rick who will discuss this wonderful market environment that we're in, our accomplishments and other actions in the third quarter and our summary of our thoughts and plans for the rest of the year, and we'll look into 2008. As we have done in the past we've opened up the call on our webcast. This can be accessed through www.LPCorp.com.

Additionally, to help with the call, we have once again put together a presentation that includes some supplemental information. I will be referencing these slides during the discussion. As a caution, this presentation should be viewed in conjunction with our publicly available Earnings Release. 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. There is also a discussion of the use of non-GAAP financial information included in slide 3 of the presentation and the appendix of the presentation does contain the necessary reconciliation. I'm not going to reread the statements, but I am going to incorporate them with this reference.

Refer to slide 4 of the presentation is a summary of the Q3 2007 results. We're reporting today a net loss for the third quarter of $68 million or $0.65 per diluted share on net sales from continuing operations of about $475 million. For the same period last year, we reported net income of $10 million or $0.09 per share on net sales from continuing operations of $525 million. For Q3, loss from continuing operations was $55 million or $0.52 per diluted share compared to income of $12 million or $0.12 a share in Q3 of last year. For the first nine months of 2007, LP reported a net loss of $128 million or $1.23 per diluted share on sales from continuing operations of $1.3 billion. This compares to income of $148 million or $1.40 per diluted share on sales from continuing operations of $1.8 billion during the same period in 2006. Continuing operations for the first nine months, we had $106 million loss, $1.02 per share compared to income from continuing operations of $153 million or $1.45 per diluted share in the first nine months of last year.

Slide 5 of the presentation refers to some of the special items that are generally not attributable to ongoing operations. In the third quarter of 2007, we had two impairments at facilities that have now been permanently closed: the St. Michel OSB mill and the Hines, Oregon LVL mill. Related to St. Michel, this is a mill that's been on indefinite curtailment since August of 2006. However, several events happened in Q3 that strongly indicated the likelihood of impairment that needed to be considered as we did our quarterly closing procedures. We had several internal meetings to put together actions to reduce the holding costs on this mill, the most significant of which is related to managing the forest license. Leasing this license would reduce those costs but also remove the ability to source the necessary wood to run the mill. The subprime debt crisis came to a head in August and further reduced confidence in the short term turnaround in new housing construction. Most economists, based on that, have pushed out their estimates for recovery for 12 to 18 months. Canadian dollar rose significantly against the U.S. dollar in the quarter, further harming the competitiveness of this mill. Taking all these factors into consideration, we recorded an impairment of $47 million on this mill as we wrote off the wood license, the related roads associated with the timber for this facility and the property plan and equipment was written down to fair market value. Subsequent to quarter end, we did make a public announcement and file an 8-K of the permanent closure of this operation. In Hines, we recorded a $1.5 million impairment to write the remaining assets down to their estimated fair market value. In summary, for the third quarter, these items were reduced results by $48 million, or $30 million after tax. For the first nine months, these and other items described in footnote 4 of the earnings release affected or reported results by $34 million or $21 million after tax.

Now let me go to the individual segments. For OSB, if you refer to slide 6, we had a loss of $32 million in the quarter from OSB. OSB price compared to the same quarter last year was down 4% but it was up 12% sequentially. The decline in pricing from Q3 of 2006 accounted for around $10 million in lower sales and operating profits. In the same comparison period, volumes were lower by 9% and 11% lower sequentially. From a cost perspective, our unit cost was higher due to the negative impact of the strengthening Canadian dollar in both the third quarter and the year-to-date. For the first nine months of this year, OSB lost $141 million, compared to income of $164 million during the same period last year. The change in the sales price accounted for $270 million of this decline, almost 95%.

Siding -- on slide 7, this segment includes our SmartSide, which our OSB [big planning] product, hardboard siding and commodity OSB produced at one line in our Hayward Mill. In the third quarter, these operations generated a profit of $11 million, about 40% below the same quarter last year, and about a third lower than last quarter's earnings. The bulk of the change was due to the decline in production of both SmartSide and OSB produced at our Hayward facility. For the quarter, sales volumes were down 17% on SmartSide, compared to the same quarter last year, and lower by 6% from last quarter. Sales prices were up 4% compared to the same quarter last year and flat sequentially due to a sales price increase last summer. Hardboard sales volumes were up slightly from the same quarter last year and 10% lower sequentially. Average sales prices were slightly better than the same quarter last year and up 6% sequentially, primarily due to mix. For the first nine months of the year, siding had operating income of $38 million, compared to $61 million in the same period last year.

Slide 8 is our Engineered Wood Products summary. This statement includes laminated veneer lumber, I-joist operations including our JV with Abitibi and other related products. Profits in this segment for the quarter were $3 million compared with $8 million reported in Q3 of 2006 and down very slightly sequentially. LVL and I-joist volumes were up 7% and 2% respectively compared to the same quarter last year. Given the dramatic fall in housing starts, we are encouraged and believe that we've gained market share. However, pricing was lower by about 10% for both product lines. Sequentially, pricing for both products in LVL volumes were flat while I-joist volumes were higher by 5%. For the first nine months of 2007, EWP made $14 million compared to $29 million during the same period in 2006. It was a direct reflection that the expected decline in housing activity has had on our demand and our pricing. Other building products -- this category consists of our interior molding business, Chilean operations, our cellulose insulation joint venture, U.S. GreenFiber, resource and other non operating facilities. For the third quarter, these operations lost $4 million combined, while molding and Chile were profitable. The losses were a result of poor performance in our insulation joint venture due to higher paper cost at lower demand and also some increased residual cost associated with several non operating facilities. For the first nine months of 2007, these operations lost $4 million, compared to income of $9 million in 2006.

Our discontinued operations consists primarily of our decking business. For the quarter we are reporting a $13 million loss net of tax from these discontinued operations and $22 million loss net of tax for the first nine months of 2007. Today, we expect to complete the sale of the Meridian decking facility and the WeatherBest assets including some of the inventory. However, as a result of the negotiations and the unanticipated increase in the expected cost of some raw materials, we're required to record an additional impairment on these assets of $7.5 million. Additionally, in this discontinued operations, we recorded a $3.5 million loss contingency associated with an executed minimum volume contract associated with the business. Selling and general administrative costs were $37 million for the quarter, down slightly from the prior year. On the unallocated piece of this, costs were down $2 million in the third quarter, compared to the same quarter last year. For the first nine months, total SG&A was down $3 million, compared to last year's unallocated was down about 14%. In the third quarter, our effective tax rate was 42%, the major reconciling items compared to statutory rate relates to the company's foreign debt structure and state income taxes.

While the Balance Sheet -- refer to slide 9 of the presentation. Cash and cash equivalents, investments, and restricted cash were over $900 million. Working capital was just short of $1 billion. Net cash, about $525 million. Capital expenditures in the quarter were nearly $90 million or $225 million for the year-to-date. This also includes investments in our joint ventures. As we have said in the past, we expect our capital expenditures for 2007 to be around $300 million as we complete the Clarke County OSB mill, the Holton OSL line conversion, the new mills in Chile and a variety of cost reduction projects. Book value at the end of the quarter was $18.22. As we mentioned earlier, slide 11 does have the calculation of these non-GAAP financial measures. With that, let me turn it over to Rick who will discuss accomplishments and other actions in Q3, his thoughts on the market and comments on the future. Rick?

Good morning, everyone and thank you for your interest in our call this morning. It's a beautiful day here in Nashville and I guess it's good to be a Red Sox fan or a Pats fan if you are one. As is customary, I'm going to contain my comments to three different areas. I'll look back at Q3, the current environment and a sneak peek into the future.

During Q3, we did as Curt said, generate operating profits in siding, Engineered Wood and molding and in Chile/South America. But more than offsetting those profits were the losses sustained by our OSB business, due to our current pricing environment, the effect of the downtime that we took and the continued strengthening of the Canadian Loonie, affecting the Canadian operations' cost structure. Continued weakness in new residential housing did require us to take downtime in most of our product lines in light of the current and expected demand and to adjust our inventories. In OSB we took 189 mill days down out of our system during Q3. Remember that half of that was St. Michel, 90 days, which St. Michel did not run the entire quarter. The rest was related to several buckets. Our decision to indefinitely curtail Silsbee that we executed in August and then we had Hanceville down for a bark burner installation and we had some wood supply and operations disruptions elsewhere. About two weeks ago we did bite the bullet, as Curt said, and we made the decision to make the indefinite shutdown of St. Michel to a permanent closure. These decisions, both on St. Michel, the temporary indefinite shutdown of Silsbee, and the decking decisions, were tough to make, but they will pare considerable losses from our go-forward operations with those decisions as we eliminate the go-forward cost associated with those decisions.

In Engineered Wood, we ran reduced shifts in both LVL and I-joist and in September we did make the decision to permanently shut down our Hines LVL Mill out in Oregon. This mill was seriously disadvantaged by logistical problems of both inbound and outbound freight, and that volume will be replaced in our system by lower cost volume provided by our marketing arrangement with the new West Coast Murphy LVL Mill that will be starting in Q1 of '08. In siding, both in hardboard and SmartSide, we took down time to reduce inventories and adjust to expected sales levels.

On a more positive note, our safety and our Lean Six Sigma efforts continue to please us. Due to additional focus on our summer months, a time which we historically have had our incident rates spike a bit, we were able to improve each month's TRR under any preceding Q3 in our history, and our year-to-date incident rate at LP now stands below 0.9. And several weeks ago we did have the opportunity of picking up an award up in Chicago, one of 10 given out this year by an occupational health and safety magazine for being named one of America's safest companies. A lot of hard work has gone into that. I continue to be pleased with our cost out and process improvement work, which is being accomplished by our Lean Six Sigma teams. Our ratio of returns to our investment continues to exceed our plans for '07 and also the engagement of more people on special projects is good for morale in these difficult market conditions.

Fast on the heels of the close of Q3, we did complete the sale of our Meridian decking facility. In fact, I think that's actually being completed today as the money changes hands. This was done with the company that's already in the decking business, which will allow a continuity of supply to our WeatherBest customers. Because of some raw material issues that cropped up between the letter of intent and the purchase agreement on Meridian, we did sustain a haircut on the purchase price of Meridian, which forced us to recognize an additional impairment of $7.5 million on those assets. And in Q3, we did repurchase 1 million shares of LP stock, under the current authorization that we have.

I now want to briefly discuss the current market environment. Perhaps an understatement -- there hasn't been much good news in the housing front and we're all reading daily the headlines about the markets that we are selling into. Single family permits continued to decline. Unsold inventories of new and existing homes reached record highs in September. And these will take a while to be absorbed. Mortgage rates do appear to have stabilized on long-term money, in the 6 to 6.5% range. I think the Freddie Mac survey last week had 30 year money averaging about 6.33. The Fed has cut once, and most people that I talk to and listen to expect another 25 basis points of reductions, perhaps 50 basis points of reductions over the next six months. Now, that can't help but be favorable in the long-term for new residential construction, although I am not expecting it to be much short-term help. The mortgage issues are leading to increased default rates and aborted closings. That is yet to completely define itself, I think. We're all wondering how that's going to sugar out. It is good to see that some of the financial institutions are considering being more proactive in dealing with potential foreclosures. Actual numbers and future estimates of housing starts have continued to fall. Since I last spoke with you, September's actual new starts was a seasonal rate of 1.19, the last that I read. I personally don't feel a great amount of uplift on that for the rest of this year. 2008 seems to be anybody's guess at this point, but the forecasts that I'm looking at range between 1.35 and 1.1. On the repair and remodeling side, the boxes are reporting mid single digit declines in same store comp sales as people appear to be spending less money on their homes right now. My assumptions behind this are that it is affected by the reduced number of home sales, which is a stimulus on either end for R&R and the reduction in second mortgages and home equity loans and also a reduction in big ticket sales.

I'll conclude my prepared remarks with some comments about Q4. We will take considerable short time across our product lines, with the exception of molding in South America in Q4, to adjust our inventories and match them to expect -- match them to expected take-aways. In OSB, St. Michel, which now has been permanently removed from our productive capacity, and Silsbee will not run during this quarter. Together, these two mills have an annual capacity of about 900 million feet of OSB. In addition to those outages, we also anticipate taking another 150 to 160 mill days of down time, related to capital outages, maintenance, holiday scheduling, and for controlling inventory levels. History does suggest that in a down market such as we're in right now, December activity is very slow. In siding, we are scheduling several weeks of downtime at each facility during this quarter and in Engineered Wood Products, we will run reduced shifting patterns at each mill, both in LVL and I-joist. Q4 will be another aggressive capital investment quarter for us, as we get to substantial completion status on our three major products -- projects, the Clarke County, Alabama OSB mill; the Holton main OSB mill conversion to long strand lumber, which is the name that we have finally picked for the OSL product; and our new OSB mill in Lautaro, Chile. So our engineering resources are going to be fully taxed over the next few months with these completions. As Curt said, we do expect to come in around that $300 million range for capital this year, with capital spending dropping substantially in 2008 to be in the $90 million range. Also this quarter, we are formulating running scenarios for 2008 across our facilities for further conservation of cash and cost reduction. And with that said, I'll turn it back over to Curt for the questions.

Thanks, Rick. Bill, it looks like we have a queue of folks that would like to ask some questions, so if you could start that queue?

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Our first question comes from the line of George Staphos of Banc of America Securities. Please proceed.

Thanks, hi, guys. Good morning.

Good morning.

Quick question on some good news to start. Can you get into what the return to investment target ratios are typically for you in terms of Six Sigma and how much you've been beating those by, generally speaking?

Yes, we started out when we got into this with expectations of a three to one return and we're beating that by about 33% right now.

Okay. Will that naturally fade, Rick, over time? You're doing some easy projects first and as you get more and more into it, the projects get a little bit more -- less obvious, maybe a better way to say it, and therefore returns aren't as high?

The way that seems to be working is -- it started out very strong, but with the run time at some of these plants going down due to the market conditions, we're actually going to -- it's going to be tougher for a while because a lot of the projects that we picked have to do with productive rates at plants and in terms of usage. So if you've got less run time at the plants, then the returns on those will slow down. Now, they'll pick back up, all of those projects will pick back up when the market picks back up.

Okay.

So we're in the process now of challenging the project selection people to work on things that are less volume dependent.

Okay. On the subject of CapEx, I remember, and correct me if I'm wrong, some initial thinking about '08 CapEx being on the last conference call more in the range of $100 million to $120 million. This initial target is obviously lower than that. How much lower could CapEx go if you needed to get to a bare bones level of investment for a period of time, Rick? Could you remind us on that?

This is Curt, George.

Curt, how are you?

The $120 million we used last quarter included an investment -- a potential investment in a joint venture. And so basically it's the same number where we took that potential investment and we'll treat it as a one off if it happens.

I understand.

That's really the difference. We really aren't changing the number.

I like the direction either way.

In that number that Rick gave, there is about $25 million related to a big energy project. If you took that out, you're kind of down to where we think is maintenance.

How long does that project take to complete? Is it a couple quarters? Is it more than that?

It probably won't come online until the middle of '09, so a long lead time.

You've got about a 14 month lead time on the equipment there, so we have to go ahead and get it approved now and start spending on it.

Okay. Last question, I'll turn it over. The decision to buy back some stock now, versus prior quarter or future quarters, what was behind your thinking, away from the obvious?

It was pretty obvious. A pretty good price.

We bought that early on in the quarter, George.

Yes.

And so we did think it was an appropriate level and then obviously we had the deterioration in the housing market and subprime came after that.

Let me turn it over here. I'll be back. Thanks.

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

Yes, good morning. My first question is -- could you just elaborate a little bit more on discontinued operations? Would all of that -- the $13 million loss, would that all pertain to the decking business or were there other assets in that bucket?

There are some other assets, but of the reported this quarter, all but about $1 million was related to decking.

Okay. So you would expect in the fourth quarter, you obviously are going to get about a month of decking in there and then it should drop dramatically to, like you say, something like maybe $1 million a quarter, something like that going forward?

I would think it's going to go lower than that. What we'll have after today, assuming we close on the Meridian assets, we'll still have the Selma facility.

Okay.

So we'll have the ongoing costs associated with maintaining that facility, but --

Okay.

It should fall quite a bit.

All right. And then as you look at the -- I guess the competitive landscape, I know you have -- I guess you're down to, what, about 35% of your OSB capacity now being in Canada? Is that fair?

Well, we've taken St. Michel out permanently. It would be 35 if you conclude all the production capacity out of Peace Valley.

Is that all running or not?

Peace Valley is running, yes.

Okay. Got you. Having the experience up there, do you sense that -- what percentage -- I mean, we know for example in newsprint, 65, 70% of Canada is literally below cash break even. And I know the wood costs bounce around up there based on chip prices, et cetera. But could you make a stab, I mean would you guess that maybe half of Canada is below cash cost at these recent OSB prices?

I would suggest, Chip, that if you look by region, the highest wood cost that we're experiencing right now is in eastern Canada. And that would be with the Canadian dollar, that would be reflective of the most difficult environment from a production standpoint.

Okay. And then you mentioned I think a joint venture project out in the west, Murray, I think was -- Engineered Wood facility. Can you talk about that?

We talked about it -- we announced a marketing relationship with Murphy Plywood I believe about March of -- February, March. Murphy had a plywood mill that burned down in Oregon. It's located right on a rail line and it's located right on the I-5 corridor, so it's a very advantageous location from a logistics standpoint. Plus Murphy does have significant veneer capacity. They decided rather than build a plywood mill, which nobody needs more plywood, that they would build an LVL Mill and they approached us and we agreed to sell the output from that mill. And then we have built into the agreement a mechanism that in the future we may be a participant in that mill.

Oh, okay. And then one quick question on Chile. Is that a second line you're bringing on up in Chile? I know Bill before he left the company was working on something down there. Is this the same plant?

We moved our Montrose, Colorado facility that was shut down for a number of years and reconstructed it, refurbished it and reconstructed it to a location about 80 miles north of our current mill. So it will all be additional capacity to be sold into South America.

And this will be also accounted for in that other segment?

Yes.

Okay. Got you.

And it's -- the purpose of that is to support our continued growth in developing home building markets. It's supportive of our South American strategy.

Got you. Okay. Thanks very much.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Gail Glazerman of UBS. Please proceed.

Good morning. I was wondering if -- you've obviously talked about it, but if you could give a sense of how much over capacity you think there is in the OSB market today in light of I guess the reduced revised outlook for housing and also the response we've seen from the industry in the last few weeks?

I think your best source for those answers are to read either RECI or APA, American Panel Association.

Okay. I mean, in terms of getting the markets back in balance, do you think that still would require an improvement in housing, so we're looking at pushing that out another year or year and-a-half or do you think it's something the industry could do on its own?

Obviously, demand has got to come back. Demand, if you just look at where we were January of 2006, you were at $2.1 million starts and September you were at $1.1 million. So across the country on the average, you're down over 40%. So demand is a piece of it. And then in structural panel, the capacity rationalization has to occur as well to make room for the new mills that are -- have been built or are being built.

Okay. And there's been some news from a competitor in the last week or so on the class action suit in OSB. Was wondering if you could offer any sort of update?

Could you repeat that? You broke up.

There's been some news from a competitor recently on the class action in OSB and I was wondering if you could offer any update?

I think the only update that we could offer is we are proceeding to defend our self rigorously. We think the suit is entirely without merit. As to the rationale for some of our competitors making other decisions, I think you have to ask them.

Okay. And I guess just one final question. You talked a little bit about the panel. Is there any update on I guess the penetration rate? Have you changed your view in terms of OSB being able to take some share from plywood?

Well, I think that this is the time for that to happen. It's very difficult to measure that with the reduced demand. I think the RECI expectations are that by 2010, OSB penetration is going to be up between 68 and 72% of the total structural panel market. I haven't seen anything that would change that. I think the obfuscation that is occurring right now is that the markets for plywood, which they own the largest shares of the light commercial and light industrial markets have been quite strong this year. They're actually up over prior years. And those are the markets where they have sold into. So the continued penetration I think is masked until housing returns. And now this spread is occurring between OSB and plywood makes it pretty obvious to a home builder that there's an opportunity for them, if they haven't switched, to go ahead and switch.

Okay. Thank you.

Thank you very much. Ladies and gentlemen, your next question comes from the line of Mark Connelly of Credit Suisse. Please proceed.

Two things. I wonder if you could give us an update on the new TechShield related products in terms of both cost and timing and roll-out. And second, maybe drawing on that previous question, can you -- you say you think you gained some share in the engineered wood market. Do you think that a housing downturn is going to be a time when we see increased penetration of that product into the market as well?

Let me take your first one first and then I'll try to remember the second one. In terms of TechShield panel, we have -- it's been one of our big successes this year and have actually experienced very good growth year-over-year in TechShield panel. I think on my last call, I made reference to a barrier product, a foil barrier product that we are trying to introduce. Our plan A on the introduction of that did not work and we are going back to plan B now in how to introduce that product to the market. We had planned on going through a very large installer in plan A to introduce the product and now we're dropping back. And with that not working, with that particular individual reducing their operations substantially because of the environment that we're in, we're looking at maybe going through big retail instead. And so we're in the process of putting that plan together right now. Your second question was?

EWP share of the housing.

I don't see how the reduction in the number of homes being built right now can be any type of an incentive to expedite penetration. I think that that penetration is occurring. It makes some sense. But I think that's going to -- that's a stretch to say it would speed up the penetration.

Okay. Fair enough. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Christopher Chun of Deutsche Bank. Please proceed. Mr. Chun, please check your mute feature on your phone.

Sorry about that. Thanks. Good morning, guys.

Good morning.

Curt, could you give us a quick rundown of the change, the quarter-over-quarter change in net cash and what the key moving parts were?

On the net cash?

Right.

I can. Hang on one second and I will give you that.

Sure. And in the meantime, I do also have a question, going back to the cost structure between Canada and the U.S. With the Canadian dollar up at $1.04, so I'm wondering -- I know it depends a lot on specific geographies, but if you could give us sort of some comment about what the cost structure is in Canada on average, versus what it is in the U.S.?

You broke up a little bit, so you're asking what the difference between the cost structure in Canada is and the U.S.?

Right, right.

Well, I think the -- the easiest way to put that in a longer term perspective is I'll make it personal to LP. When we made the investment in 1.5 billion square feet in Le Groupe Forex back in '98, foreign exchange with Canada was at $0.64. Today at $1.04, you have almost a 50% increase in your cost of sales from what was a competitive environment to today. Producers in Canada that export their product into the United States are at a tremendous disadvantage and that's -- that's what you hear a lot of the squawking and squealing about.

Right. But I guess what I'm wondering is was it the case that back then the cost structures were relatively equal, such that today, the Canadians are just vastly disadvantaged or was it more like the Canadians had a huge advantage back then which has eroded?

When you saw a lot of investment being made in Canada, it was based on the cost structure, particularly the cost of wood being seriously advantaged, and it offset the freight disadvantages. Today you have a cost structure where your wood is no longer advantaged and in the case of eastern Canada, severely disadvantaged and you're still paying your freight disadvantage from being farther from market. Couple that with the increases in transportation costs that we're all experiencing, not only from energy but from rail particularly due to the reasonably monopolistic rail transportation that exists in Canada today, and it's been a double or a triple whammy against Canadian producers that export their product into the U.S.

And then my final question has to do with possibility of further consolidation in the business. As we go deeper into the downturn and LPX stock is down further, I'm wondering if you see better opportunities for acquisitions?

I heard a comment a couple of weeks ago which I thought made a lot of sense to me in terms of its overall reflections. I'm not sure exactly how it will manifest itself. But a guy that struck me as being pretty smart said, when the pack goes into the woods it usually comes out of the woods in a different form. And the pack has definitely gone into the woods right now and I don't know exactly how this will all sugar out. I think the things that beg for consolidation are also some of the elements that become a bit of an obstruction to consolidation. In our case with our stock value where it is now, it's not a very good currency. And then with people looking, trying to find a light at the end of the tunnel on when this overhang in housing is going to be absorbed and the market will come back, there's also a tendency to want to hang on to your cash until you can see the end of it. So there are I think elements that beg for that to happen and then there are obstacles to that to happen as well. So your guess is as good as mine as to how this is going to shake out.

Okay. Fair enough. Thanks, guys.

Let me give you the answer to your question on the -- if you look at the changing cash this quarter, it was about $115 million.

Right.

About -- of that, $90 million was PP&E, about $30 million was non cash, working capital, and the biggest chunk of that was in AR, it was the tax receivable. And then between dividend and share purchase, about $35 million.

Okay.

And if you take the net loss, DD&A, the non cash charges to the income statement, which would include the foreign exchange loss, that was a positive $30 million. So we had borrowings of about $12 million and then the other items is the difference.

All right. Okay. Thanks, Curt.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of John Tumazos of John Tumazos Independent. Please proceed.

Good morning. When you plan out for five years from now, are you planning for a housing market of 1.75 million to 2.25 million to 2.5 million and once we get through the valley, what do we expect the other side to look like?

We are a participant in the Harvard Joint Center for Housing Study and also are voracious readers of the Brookings Institute Study and both of those believe that in the next 20 years, we'll need 19 million to 20 million or I'm sorry, 38 million to 40 million houses, an average of 1.9 million to 1.95 million new homes per year. And that takes into consideration all the demographic factors we talked about and also takes into consideration the removals from the housing stock, either through conversions for other uses or natural disasters, so we still -- there is no data to suggest that the long-term demand is not at that 1.9 million to 1.95 million level. The question is how fast do you get back there? Five years from now, I would say we would certainly need to be there or above that, depending on what happens over the next four years.

Do you want to scale yourself so that you run full and somebody else is the swing producer or do you want to have some extra capacity in case the market grows and good surprises occur?

I think after what we're going through right now, I don't have our next OSB mill on the drawing board right now.

Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Peter Ruschmeier of Lehman Brothers. Please proceed.

Thanks and good morning. Wanted to focus in on Clarke County, if we could, if you could help us maybe to understand exactly where are you? I know you're coming to the short strokes on that facility. But help us to understand, if you could, what's left to do there, what kind of learning curve you might be budgeting and how do you kind of phase that in to the kind of market we're facing and if you could talk a little bit about the benefits? I mean, obviously it's presumably fairly low cost. Maybe you can talk about logistical lower transportation cost issues, but just really trying to better understand that facility as we get closer to start-up.

Yes, we should be substantially complete by the end of the year. I think we're looking at having sellable board in January. And then I just recently had a conversation with our head of our OSB business and the ramp-up that we're looking at right now is probably about half capacity for next year. I think we'll probably -- that's about a 700 million square foot mill and this is a early look, since we don't have it running yet, but we'll probably generate about 350 million feet out of that mill next year.

Okay.

Which interestingly, Pete, matches what we're shutting down in Silsbee.

I'm sorry, Silsbee is the offset is what you're saying?

It matches that production we just took out. So in other words --

Clarke County was certainly a variable in our decision-making process around what we did with Silsbee in terms of making room for that wood.

Okay. And the rest of the infrastructure presumably you feel good about in terms of ability to freight to market, raw material cost into the facility, presumably that's been squared away already?

That looks pretty good right now, although we haven't started taking wood in there yet. We will sometime soon. But that shouldn't be a problem at that rate. It's in a good wood basket. The people are being hired and trained right now and it's just a matter of completing this thing in the next couple months.

Okay. And then shifting gears, I guess you mentioned the Silsbee, how should we think about Silsbee in terms of the options? I mean, it's down indefinitely, conceivably could be down permanently. What other options might exist for the facility? Anything you can do to help us out on that front?

Silsbee right now is indefinitely curtailed. So we have taken the steps to reduce the carrying cost of that facility, certainly in the immediate future. It is in a reasonable wood basket where the growth to grain is positive. We also have made some investments in some of our Specialty Products down there. So I think the best we can tell you is it is indefinitely curtailed, given these market conditions, but we are going to keep it in a position where it could start.

Okay. Just lastly, if I could, obviously we've been seeing a very weak U.S. dollar, stronger building markets overseas than certainly we have here. Are there opportunities you foresee for more of an export emphasis going forward?

Well, I'll speak for us, but I would imagine -- having no great claim on all the wisdom in the industry -- everybody's shoving as much volume at Europe right now as they possibly can as a place to put it. There is a limit as to how much can be exported over there. I think when the volume coming from the U.S. -- it's my belief, anyway, when it becomes onerous, then they'll figure out a way to stop it, either through specifications or some other way and so I think about all the volume that can go over there is going over there right now.

And Asia?

Asia is a big question mark for us. I think that over the long-term, and people have looked at me reasonably crazy for saying this, I think over the long-term North America will be an exporter of panel products to Asia because there's not enough unclaimed trees over there to satisfy that market. In the short term, we are exporting to that part of the world through our Chilean operations and that's where some of our volume will go, to support our international growth. The markets need to be developed for structural panel products over there because obviously as you know, they don't build the same way that we do. So it's a longer term -- unless you want to put your product into packaging, it's a longer term strategy to sit down and like we did in South America, or are doing, teaching people how to use the product for building purposes, rather than packaging purposes.

Very good. Very helpful. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Mark Weintraub of Buckingham Research. Please proceed.

Thanks. You mentioned conservation of cash a couple of times, understandably. How do you think about the dividend during these times and what circumstances might make you think about any potential changes to the dividend?

I think the dividend's pretty important. I have look memory of the last time we stopped paying the dividend and that didn't go over extremely well, so the dividend is certainly within all of our planning around our cash. So we think the dividend is important to our shareholders and we have that in all of our planning on how we make it through this period of time and continue to desire to support that dividend.

So would it be fair to say that you would certainly sooner pull your cap spending to maintenance and keep it there than do anything to touch the dividend?

That would be my personal opinion and obviously I'm only one of the voters on that, with our Board of Directors. But I think I'm speaking well for our board in that regard.

Great. And then what are you able to do right now to get comfortable regarding the health of some of your customers and managing account receivable programs, et cetera, given that there could be some shake-out in the home building space?

Well, we have a very active credit group that has an excellent experience throughout the cycle. Our credit group does visit with our customers. As you know, we have some very large customers now that are private. But we do demand from them financial assurances that are commensurate with the risk. It's obvious in this period you do have to have more diligence related to that. But our DSOs are averaging under 20 days and have been for the last couple quarters and our write-offs are very low. So we think we have a pretty good handle on that.

Then lastly, there have been a number of questions regarding the differences in the cost position in Canada versus the U.S. Now, there also have been some shifts in pricing regionally and was hoping you might address what those impacts have been on the relative profit margins, obviously maybe that's been something of an offset. And have the regional spreads gotten as wide as they possibly could get where you start seeing potentially board from one part of the country being shipped further north because of the higher pricing?

Well, when we talk about Canada, we ought to be clear. The Canadian dollar hurts us all across Canada but the biggest problem is eastern Canada, because not only do you have a high Canadian dollar but you also have that increased cost associated with the wood resource there. Western Canada still is one of the lowest regions for wood cost, even with the Canadian dollar where it is. So you got to keep that into mind. If you're talking about the difference in pricing, what has hurt is the Southeast pricing, because that's where all the new capacity is coming online. And so to keep it close to market, they accept a lower price to offset the freight. One of the advantages that LP has is that because of our physical footprint, we can deliver cost effectively to most regions. So while the Southeast pricing has not been a positive to us, we can also supply those other regions without shipping out of the Southeast. So we believe that we are advantaged with our footprint, given what the pricing -- now, the pricing changes every week, so we're talking about what happened in the third quarter. In the third quarter, the Southeast pricing was low.

Have we got to the point where it starts making sense for southeastern producer to actually ship outside of the Southeast because of the higher pricing potentially offsetting the freight differentials?

They are attempting to do that. I think that's exactly right and you'll do that until -- I mean, the customers will do that arbitrarily for you if you don't do it.

Okay. Great. Thanks a lot.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Steve Chercover of D.A. Davidson, please proceed.

Good morning. Couple questions. First of all, with respect to St. Michel, you guys have a history of not blowing up mills but occasionally taking them to South America. Is that --

Steve, I'm sorry. What did you say? We have a history of blowing up mills?

No, not blowing them up.

Well, we have. We have done that and we also moved them off-shore.

At least you're not going to sell it to someone else.

We have no history of selling it to someone else.

I guess that's what I was trying to get at. Is there an opportunity to take that one in the long-term down to South America? I know it's quite a bit larger than what you've got thus far. And alternatively, the fiber that you relinquish, if you ever wanted it back, presuming the mill is not imploded, can you get it back at a price?

We don't assume that we're going to want it back and so I think the answer to that is no, we haven't thought about getting it back and obviously, it would be there for someone else that wanted it but it won't be us.

Okay. And switching gears to the repurchase, can you remind us how much is left on your authorization?

There's a little over 11 million shares left.

Do you anticipate maybe being a bit more aggressive. You said that you thought the stock was attractive in the quarter.

I'll give you the same answer I always give you. We review that quarterly with our board.

Thanks, Curt.

We'll continue to do that.

In terms of the future of the St. Michel assets, I didn't talk to that, Steve. Obviously, as we continue to explore our international strategy, one of the things that we're doing is looking for wood baskets. And so like we did with the second mill in Chile, we are continuing to look around the world and say where could those assets be used. But that has to be done in tandem where we also think that we can do the market development work to get people to use the product in home construction.

I think the other thing to recognize is we do have some facilities, Rick and I were just at Dawson Creek's 20th anniversary. So we do have some facilities that may need some major pieces of capital, and obviously a mill like this is a source for that capital, which can reduce future maintenance expenses.

But is there anything -- I mean, could St. Michel be an export mill or just not on a big enough body of water?

The wood basket there is tremendously disadvantaged.

You mean an export mill to move the mill?

No, actually running that for export purposes?

There is no rail there so it makes it really disadvantageous from a logistics standpoint.

And the wood basket is depleted at this stage?

Quebec is the highest [wood] we've got in the system.

Thanks.

Thank you very much, sir. Our last question today, ladies and gentlemen, comes from the line of Rick Skidmore from Goldman Sachs, please proceed.

Good morning, Rick and Curt. Just a follow-up question on the Clarke County mill. You mentioned Silsbee, the new volume coming out from Clarke County matches what you've taken down at Silsbee. Just trying to reconcile Silsbee being down, housing starts likely lower in '08 versus '07, your inventories needing to be adjusted downward -- are you going to take any additional volume out as Clarke County ramps up or should we assume it is ramping up and you might have this capacity issue again?

As I said in my prepared comments, we are using this quarter to look into next year as best we can and decide what we're going to run and how hard we're going to run it and I think that will start with an optimization model between both our OSB business and our siding business to give us more or less what's possible. And then we will work that back into what we think makes the best sense in the short term while preserving the long-term strategies of both those businesses. So as we work our way through how much we plan to run, where, of which products, then that will formulate itself into our operating plan for '08. And if there are any significant short term tactical changes required to get through the short term and they're material, then we'll announce those.

Just one sort of follow-up question, one of your competitors talks about being able to sell all that they produce. Is there -- in the marketplace as you're out selling your product, are you sensing that others are doing something different and just willing to seed losses for market share and LP's operating under a different strategy? Or can you help reconcile what a competitor might be doing versus the way LP is approaching the business?

Well, I think that what we have seen in the last three or four weeks is we've seen a variety of strategies. Some have said they're running full-out, although on reduced shifts. We've seen reduced shifting patterns. We've seen indefinite curtailments. We've seen permanent closures. So I think we're all trying to figure out what makes the most sense for our operations.

Okay. Thank you.

Okay. Well, thank you, all, for joining us on the call and Bill, maybe you can give out the replay information, should somebody have come in late and want to hear the front part of it.

Certainly, sir. If you would like to listen to the replay on your conference call today, please feel free to dial 617-801-6888. The toll free number for that is 888-286-8010. And the access code for the replay today is 50142399. And we thank you very much for your participation in today's conference call. This concludes your presentation for today. You may now disconnect. Have a good day.