Louisiana-Pacific Corp (LPX) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Louisiana-Pacific Corporation second quarter 2009 earnings conference call. I will be your coordinator today. At this time, all participants are a listen-only mode. We'll be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Curt Stevens, Executive Vice President of Administration and Chief Financial Officer. Please proceed.

Thank you very much. First, I do want to apologize, apparently we had confusion on the dial-in number and we'll make sure that doesn't happen again. Thank you for joining on the call to discuss our financial results for the second quarter. As the moderator said, I'm Curt Stevens, CFO and with me today are Rick Frost, LPs CEO, as well as Mike Kenney and Becky Barckley, who our primary Investor Relations contacts. As I have done in the past, I will begin with a discussion of the overall financial results for both the quarter and the year-to-date. This will be followed by some comments on the performance of our individual segments and the balance sheet. Then I will ask Rick to discuss his perspective on our operating results for the quarter and his thoughts on the near-term outlook.

As we have done in the past we have opened up this call to the public and are doing a webcast. This can be accessed at www.LPcorp.com. Additionally, to help with the discussion we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. As a good through my comments I will reference these slides. And finally we do plan on filing our Form 10-Q tomorrow with the SEC and I will make comments on that in a minutes. On the forward-looking statements I want to remind all the participants that we have a comment included on slide two of the presentation. Please, also be aware of our discussion of our use of non-GAAP financial information, that is included on slide three of the presentation. You can find these reconciliations in our filed documents with the SEC or on our Investor website. I'm I'm not going to reread these statements, but I'm going to incorporate them by these comments.

Before I talk about the performance, let me just talk about the market. Housing activity in the quarter and this is single and multi-family in Q2 of 2009 was 46% below the same quarter last year. Seasonally adjusted housing starts hit a low of about 480,000 in April. There does appear to be a growing consensus that that was the bottom. May and June, housing starts and permits were higher sequentially and new and existing home sales appear to be stabilizing. The inventory of new homes has plummeted of a high of 470,000 in the middle of 2006 to under 250,000 last month. As a result, new home starts are expected to improve albeit slowly in the months ahead.

On the negative side, competition from foreclosure, poor consumer sentiment, continued job losses, conservative appraisal and a very strict lending standards are all constraining factors to a robust recovery. Finally, the unprecedented government intervention is helping. The $8,000 federal tax credit for first time home-buyers is making an impact as well as similar state initiatives. The hope for homeowners, the restructuring of mortgages we're still in the very early stages there and I think you have seen some attempts to get that program back on track.

With that, let me go to your earnings on slide four of the presentation. We are reporting today a net loss for the second quarter of $29 million or $0.28 per diluted share. Net sales from pending operations were $266 million for the quarter. For the same period last year reported net loss of $81 million or $0.79 per dilute share on sales from continuing operations of $387 million.

Let me talk about the segments. On slide five, OSB, we had an operating loss of $19 million in the quarter, which was a 46% improvement compared to the $34 million operating loss in Q2 of 2008. And that is despite 36% lower volumes and an average sales price that was 9% lower. This improvement is directly attributed to the actions we have taken over the last several quarters to adjust our operations to focus on cash. As a reminder these actions included the indefinite closure of four OSB mills, significant curtailment at the remaining mills to match our production to our consumer demand and other strategies to reduce our operating costs. EBITDA from continuing operation for the quarter for OSB was a loss of $10 million, a 55% improvement from the same quarter last year and better by 44% sequentially. The mentioned OSB price compared to the same quarter last year was down 9%, coupled with significantly lower volumes this led to a 43% reduction in sales. However, compared Q1 2009, which was unseasonably low, volumes were higher by 46%, but we didn't catch much wind in pricing where pricing was lower by 6%. For the first six months, OSB had an operating loss of $43 million, compared to a loss of $96 million during the same period last year, despite sales being down almost 50%.

Slide six is our siding business. This segment include ours SmartSide and Canexel siding products and commodity OSB produced in Hayward. For the second quarter, siding had operating income of $7 million, lower than the $9 million report recorded in the the same quarter last year but a sequential improvement of $5 million. EBITDA from continuing operations for the quarter was $11 million. For the quarter sales were down 17% with unit volume reductions 15% in both of the SmartSide and Canexel. Sale prices were slightly higher in SmartSide and down 13% in Canexel primarily to the decline in the Canadian dollar, these sales are primarily made in Canada. For For the first six months, siding had operating income of $9 million, both in 2009 and 2008. Sales in 2008 were about 25% higher than the same period last year.

Engineered wood, slide seven, include I-joist, laminated strands, lumber produced in Houlton Maine facility, laminated veneer lumber plus related products. It also includes the sale of I-joist LVL produced by (inaudible) JV or under a sales arrangement. For Q2, EWP reported a lose of $9 million as the same Q2 last year and last quarter. EBITDA from continuing operations was a negative $6 million in the quarter, again the same as Q2 of last year and last quarter. This is despite volumes of I-joist and LVL being down significantly compared to same quarter last year, 40% down and 35% respectively. This is a direct reflection of the reduced house activity as engineered wood products are primarily devoted to that segment. For the first six months, EWP had an operating loss of $17 million in both 2008 and 2009 despite sales being lower by 50% in 2009.

On our other building products, there is no slide for this, but let me make a few comments. This includes interior modeling business, our South America operation, US GreenFiber joint venture and some of our non-operating facilities. Overall, we were about breakeven in both second quarter of 2009 and 2008. For the quarter sales were up $30 million, up slightly from $28 million same quarter of last year. And we did incur about $1.3 million in costs associated with our non-operating facilities. That was about the same level as the same quarter last year.

For the first six months other building products had income of $2 million in 2009 compared to a loss of $3 million in 2008 on sales that were about 15% higher. Other financial items we had a $7 million foreign exchange gain in the quarter, compared to a $5 million loss in the same quarter last year, and that was largely related to the change in the Canadian dollar. Investment income in the quarter was $8 million compared to $11 million same quarter last year, this is a result of lower invested cash and lower interest rates. Interest expense was $21 million in the quarter compared to $13 million in Q2 of 2008 and this is primarily due to the refinancing that we completed late in Q1 of this year. On SG&A costs, they were $29 million for the quarter, a 26% decrease from the same quarter last year. For unallocated of corporate costs were down 17% at $18 million compared to $22 million in the same quarter last year. On the year-to-date basis, SG&A is down 29%. Income income taxes, the effective income tax rate in Q2 of 2009 was 37%, and compares to 42% benefit rate in Q2 2008 and 39% last quarter. As I mentioned before the primary differences between the US statutory rate of 35% respectively applicable to our continuing operations relate to our foreign debt structure, state income tax and deductible foreign income taxes.

Slide nine has some numbers from the balance sheet. Key balance sheet statistics, cash, cash equivalents, investments and restricted cash was at nearly $400 million, $396 million. This an increase of nearly $45 million compared to the balance at the end of Q1. Of this increase was reduction in your overall inventory for $34 million in the quarter and net increase in the carrying value of our auction rate security portfolio of about $13 million . Working capital was $467 million. Net cash, cash, investments, restricted cash minus the debt was at $12 million and year-to-date our capital expenditures were about $6 million. For those who follow us you know that lower than we reported in Q1. That was basically due to the repayment of a portion of advances that we made to our joint ventures. Book value per share was $11.23.

Before I turn the call over to Rick, I do want to mention several items that will be of interest to our stakeholders. Mention we are filing our Form 10-Q tomorrow. In this document we will be disclosing that LP has filed suit against the primary issuers and brokers of our auction-rate securities. The filing alleged that the defendants made material misrepresentations in omissions in connection with the issuance of of the actions for the auction-rate securities which constitute a violation of both State and Federal Securities Law as well as common-law fraud. LP seeks recovery of compensatory damages, rescission of the purchase of securities at par value, consequential damages, punitive damages, attorney fees and any other damages that the court deems propriety under the circumstances.

Also, tomorrow as noted in your earnings release, we will be filing a universal shelf registration on Form S3 with the SEC. The purposes of this filing is simply just good corporate governance to put in place the ability to take advantage of favorable conditions in the financial markets to strengthen the balance sheet, improve our financial flexibility or such other transactions that the board may deem appropriate. There have been no decisions made by the board to pursue the issuance of any securities under this shelf registation. We're making the filing and will working with the SEC to have this filing effective as a matter of sound financial policy. As background information, LP is no longer a well-known seasoned issuer under the SEC rules and because of this, the registration statement does not become effective upon filing. Instead, the registration statement may be subject to a 30-day review period by the SEC. Therefore, we believe it's good practice to have the shelf registration in place and effective so as not to bar or bottleneck the Company if a decision is made to access the public financial markets. With that, let me turn it over to

Well good morning everyone. We are having a relatively mild and wet summer here in Nashville, which is quite reminiscent of when we moved our office here five years ago. Today it is a beautiful day. This morning, I'm going to tailor my remarks about Q2 performance and discuss a little bit with you on what Q3 feels like to me and then muse a bit about what next year could hold in store for us. So let me begin with Q2. On the safety front, LP continues to set the bar for the industry in spite of very difficult operating environment of intermittent running, new shifting patterns, layoffs. Our year-to-date incident rate is 0.58, which is industry-leading. Thus far this year we had one plant exceed the 1 million safe work hours without a recordable event and that was our fine fiber Roaring River Mill in North Carolina. We have had only one other mill in our history exceed the 1 million safe work hour mark so that is significant to us.

As Curt said housing starts Q2 '90 compared to Q2 '08 are down 46% in the face of that we have continued to improve our metric of LP volume per housing start in all of our products, except commodity sheathing. We measure this on a four-quarter rolling average. TechShield our product category leading radiant barrier roof sheathing is up 19% in square footage per start. SmartSide is up 34% in square footage per start and LVL and I-joist are up 6% and 5% respectively. TopNotch subflooring is up 2% and our commodity sheathing is down 7% per start. Our sales force racked up 780 wins in Q2. A win, as you remember is defined by us as "a product placement with a new customer or an additional product placement with an existing customer." Our sense of this is when activity eventually does pick up it will bode well for us in both volume and revenue. Quite obviously we are what I call "Top-line revenue challenged," with new starts being down 46% year-over-year. So beside ours efforts on sales wins, our measurable efforts are felt most on the cost-reduction side. Our lean six-sigma efforts continue to pay off for us on and a morale and evolvement standpoint, but also from a financial one. At mid year we're at over a 6 to 1 return from lean six-sigma, well above our internal goal of 3 to 1 and we're on track for $15 to $20 million improvement range. Many of these efforts were focused on the lean aspects of the discipline as our team set about reducing inventories across all aspects of the business, while still meeting our customer needs.

Cost-out projects made up the rest of these efforts, many support LP's power-forward initiative. In power-forward we have set an internal goal for the company to reduce our total energy consumption per unit of volume by the end of 2012 by 10%. We have begun engineering assessments at the mills to identify opportunities for energy-consumption reduction and more reliance on renewable energy sources. We had some help from raw materials in the quarter. Raw materials variances Q2 '09 to Q2 '08, based on '09 volumes were $13 million improvement. Wood was about $2.6 million of that, natural gas was $1.5. Plastics were down about 0.5 million and resin, binders and waxesers were down $8.6 million and electricity went the wrong way by about $300,000. Year-to-date on '09 volumes were are improved about $17 million on raw materials and this is tracking fairly closely with what we presented during our refinancing road show.

As we have repeatedly said, we are managing the company for cash and cash preservation to ensure our ability to make it through this economic recession, and the worst housing market in now what is measured as 61 years. Our cash, cash equivalents, investments and restricted cash, as Curt said were up $45 million from the end of Q1 to the end of Q2 and the lion's share of that improvement came from leaning out inventories. Total Total SG&A costs were down 26% from Q2 of '08 and 29% year-to-date. LP's total personnel count is down over a 1,000 positions or roughly 20% from Q2 '08 to Q2 '09 and this does include the [Messissa] acquisition in the fall of last year. Each one of our functions, businesses and Mills have been hammering away at right-sizing our cost structure and productive capacity to the level of business that we now entertain. It is shown in our cost structures efficiencies and mill gate cost and overhead in spite of the severe impact of overall business level and pricing. We were unsuccessful in making much progress on the sale of non-operating assets in Q2. We did sell the second and last aircraft that we owned. All of the other prospective deals that we have in progress are in what I call "A lingering mode," as perspective purchasers try to line their ducks up in this difficult environment. It was our plan to have raised about $30 million in cash proceeds by this time. Nothing has fallen through, but the time horizons have certainly slipped.

I want to make just a few observations on each the businesses for emphasis. In OSB, volumes were down 36% and sale prices down 9% from Q2 of '08. Compared to a relatively dead Q1 of this year, volume was up 46%, but price was down 6%. On the cost side, total cost for thousand-square-feet were down 12.5% from Q2 '08 and down 17% from Q1 of this year. The business has done a heck after a job at developing creative running and staffing schedules and our personnel count in OSB is down 500 from a year-ago.

Siding with was the bright spot for us again in Q2, down in net sales on 17% from a year-ago against a backdrop of 46% in starts. Retail has held up better in this category. The first half of '09 and the first half of '08 had about equal operate income on $25 lower sales in '09. Siding products price on value, they are not a commodity. Less than 50% of our volume goes into new residential starts, 50% of our volume is in panel and soffit. Another 20% sales and lap, and 30% and growing in trim, which has a wide variety of uses.

In Engineered Wood Products, this segment, as you know, is the most closely tied to starts and sales were off about 45% in Q2 against Q2 and the operating loss was about the same as last year. I now want to shift my remarks to Q3. We felt a slight seasonal uptick towards the end of June across all product line, coupled with the depleted nature of the inventory levels in the channels of distribution. In OSB, this caused an uptick in random links pricing in late June and July, and actually forced us to work a little bit of overtime at the reduced manning schedules that we currently have to meet deliveries. This uptick seems to have stabilized at the present. We are getting measurable volume from our new product made specifically for furniture stock, which I mentioned on the last call, and have sold about 10 million-square-feet in the last two months. Retail has become more significant for us in OSB with about 30% of our sheathing now selling through that channel.

In strand siding, we made some significant progress on the cost structure at all of our Mills. All of our once OSB-based siding mills are running on a three-shift operating model, improving efficiency, and this should be worth about $1 million in costs out to us on an annualized basis. And fine fiber siding we have also made some significant improvements. We decided to exit the door skin business at our East River Nova Scotia Mill. We reduced one line of production and we eliminated 77 positions. At Roaring River we also pared positions by 27. Together these efficiency moves should yield about $8 million better results on an annualized basis next year at this year's volumes. We are continuing to have good success on our redwood panel in retail that I mentioned on the last call, which is now carried in 800 Home Depot stores. We picked up a lot of the Temple Hard Board business in Texas after their exit and have a modest price increase to implement in mid-august.

In Engineered Wood Products the improvement in Canadian housing activity, '09, is projected about 140,000 I think in 2010 about $164,000, as supported our I-joist sales. As well we have completed the East Coast blitz on introducing LSL to that market and made 400 new contacts and sold over 100 trucks of product in the meantime while we did that. Truck of product holds about a 1,000 cubic feet or about a month's production at our current level of sales. Our Our international efforts of Engineered Wood are focused on the UK, on Japan, and on Australia. Now this isn't doing it much for us right now, but we feel that it has the potential at making the pie larger over the next couple of years, and we expect to be cash-positive on that work in 2010. The main cost in this are in getting certified in these countries. As Curt said South America is holding its own in spite of a sputtering economy in Chile, we're profitable there and more than compensatory for our losses in Brazil. The Brazilian economy, as I read about it, seems to be posed for a sooner rather than later recovery, which will aid our 4A into converting business practices there. We do expect to be cash-positive in Brazil for the year. And the Chilean government has expressed interest in providing additional socialized housing in 2010, up to 25,000 new units, which we hope to capitalize in 2010.

Now looking forward it appears that consensus for new starts right now for 2010 is shaping up to be about 700,000 or better in the US, as this countries continues to work through the foreclosures and unemployment problems. Canada is looking healthier, starts next year projected to be around 165 to 170. There are a lot of mixed signals out there right now for US housing, but it does feel like there is more good news than there is bad. My expectations for Q4 of this year and Q1 of next year are not particularly high, but I do think that they will have better activity than the previous Q4 and Q1. We will also be meeting the off-season with a much-improved cost structure going forward. FX in Canada has not gone our way so far in Q3. Yesterday I read at 0.93. We have had a lot of volatility this year in Canadian FX. It was as low as 0.78 and as high as 0.94, which does increase planning complexity for us. We produced less in Canada now and sell a greater percent of our Canadian produced product in Canada.

We will is also have downtime decisions to make based upon the severity of the seasonal down tick seeing what it will be. As Curt said, our CapEx guidance for the year remains intact. We're just not spending very much and with that I will turn it back over to Curt for questions.

Thank you, Rick. Mary, if we could go to the question queue.

(Operator Instructions). Our first question comes from the line of Mark Connelley from Stearn Agee.

You have clearly done a lot of work to get costs out. What I'm wondering is how is the cost of your downtime and the changes you have made in mill scheduling going to affect things as you start to come back out? In other words, if you are getting back at taking downtime, is there a swing back the other way as demand does come back? And related to that, is there an increasing risk of difficulty getting some of these machine back running the longer they are out?

I think in the short-term, based upon -- let me give you a quick example. Jeff in the OSB business now is able to start an OSB mill up and get on production in about six hours. Where before, that might have taken us 24 hours. So that is the kind of improvement that we have made under this kind of duress. What we have seen right now is that if you to get an additional uptick in volume, we have the ability to cover that at current manning and cost schedules. So So in the short-term, any increases in volume will just giver us more leverage over the fixed cost. So I think that is the short-term answer is that we really feel little additional volume based upon the way we're running. Longer-term, I don't think that it's going to be an issue until we get to about that 19 billion-square-foot mark, where it's my assessment as I look at the industry, there is a about 19 billion feet of capacity running inefficiently. So the ability to either add shifts or add overtime gets to that point and beyond that point then you start to get into potentially taking mills that are indefinitely closed and trying to start them back up. And And then as we talked about for years on that that requires working capital investment, rehiring people, retraining people, et cetera. I don't know if that answers your question, Mark, or not.

That is helpful. Thank you. One more question, could you talk a little bit more about what your seeing in repair and remodel. You mentioned it in terms of siding is that having impact on sheathing plywood market, but just curious if you are seeing something there.

If you go back a couple of years we used to sell 20% of our sheathing through retail and now we're up to about 30%. So I think what we're feeling is that there is a replacement going on between OSB and plywood right now. And retail is actually the strength in the game right now compared to new starts.

Is that a function, do you think, of small builders getting back in the game, or is it a shift in the kind of projects that are being down?

I think it's a shift in the kind of projects that are being done. I don't sense there has been any change in the direction of small builders. They are getting harmed in this environment and there are fewer of them everyday.

Thank you, Rick.

Mark, the only thing I would add to that is with the consolidation in the dealer channel, that the stocks and the 84 lumbers where they have closed locations, my guess is that business gravitated towards the home centers.

Very helpful, thank you.

Your next question comes from line of Gail Glazerman, UBS.

This might carry on that discussion a little bit, but is there any more color you can give about the sequential volume trends? I appreciate that the first quarter was weak, but it didn't feel we had that much of a building in the spring and you posted big improvements.

I'm not sure I understand.

The volume increase from Q1 to Q2.

It just seemed lot stronger than I guess I would is expected given building activity.

You have to look at Q1. Q1 was just a corpse quarter. Q3 is stronger Q2 in volume. But Q1 was just horrible.

Okay. So you feel you grew with activity or was there customer inventory restocking?

We felt that. I mean, the channel is just as lean, I think I say that every time and it gets leaner, but it's just about as lean as we have ever seen. So we did field towards the end of Q2 that the channels had run out and had to restock. You saw the evidence of that. But But they are lean again. It's just a poker game out there right now.

Okay. Can you give a little bit more color on cost trends, both in terms of internal cost-cutting initiatives as well as input cost, moving into the second quarter? Are there incremental savings yet to come or have you is seen pretty much what you are going to get?

Based upon what we have seen so far, we're about there. We'll get a little bit more, I think, in Q3 from efficiencies. We pick up a little bit more in wood, a little bit more in resins, but not as significant as from Q1 to Q2. But But I think we'll get a little bit more in efficiencies as well.

Okay. And then the inventory improvement that you had in the quarter, is that something that you feel is sustainable? I mean, is it about as good as that gets or do you think you can take more out?

We're pressing on it really hard, but we have kind of got into a situation where we at the take away that we're experiencing right now, it's going to be hard to go significantly farther.

Okay. And Curt, I apologize if I missed this, but any update on tax refunds? What you received and anything that you might expect to receive?

We did receive about a $6 million from Canada in Q2 and we have about, actually, we made a Canadian payment this month. So net from Q3 is about a break-even and then will 3.5 to 4 million for in Q4. So that will be the total that we talked about at the beginning of the year of $80 million net.

Okay. Thank you.

Your next question comes from the line of Chip Dillon of Credit Suisse.

Well, good morning. You were talking about the inventories coming down, and certainly you did a very good job on the working capital. Do you think there is more that can be done, either on receivables side? It looks like you let the payables suspend by $30 million. Are those stretched about, as much as you can do or not?

Well, object working capital, let me just talk about that. In the inventory about $20 million of the $34 million reduction was logs and that is typical for our industry, because we don't log in the northern part of North America during Q2. So that would be a normal reduction. I I think that what we are trying to figure out is what kind of logging plan we put in place over the winter. So that is an important consideration. On the finished goods, as Rick said, we brought our finished goods down by $11 million and we think we're about at the level that we can get to in finished goods. I'm not sure finished goods can go much lower. On the receivables side we're at 20 days DSO and so as you can probably well imagine our customers with pushing us daily on our increasing our teams and we're pushing back daily on increasing our terms so with that we don't do that. I'm not sure there is a lot to be gained in receivables. That will be based on business activity. In our business, our receivables for trade are the lowest that they will be at the end of the year, because we don't sell any product the last weeks of December. If you are 20 DSO and you don't sell any product for 14 days that means you only have six days of sale sitting in your receivables. On the payable side that just the increase in business activity that we have seen. So we haven't changed. We have extended terms from a few vendors, but we haven't changed dramatically in our terms to vendors.

Okay. And then it was mentioned that there was $30 million in asset sales and some of those were aircraft. What with some of the others you were proceeding with?

The two biggest ones we have been talking about for way too long and haven't closed on are the St. Michelle OSB and sawmill site and the Selma decking facility that we have been work on diligently and that is that amount, basically.

Okay. And Curt, last question, obviously the shelf or the universal shelf, it makes total sense you would do that, just to get yourself established and get effective, I guess, is the right term. As you think later in the year, are you sort of leaving all options open or should we expect it to be more geared towards debt or could there be more equity like we saw in March?

You have to look at corporate governance and we had a shelf in place for a long time. You could file and become effective immediately and we're not in that position was of our market cap. So this is just getting us to be in the position to take advantage of a market opportunity, should the board choose to pursue that. As As I said, the board hasn't made any decisions on this at this point.

Got it. Thank you very much.

Your next question comes from the line of Joe Stivaletti, Goldman Sachs.

I was just wanting to see if you had any particular update on your plans on remaining 8 and 7/8.

We'll certainly pay them when they become due, Joe. I have no plans to call those early.

Okay. But you have to do something before their maturity, right?

We just have to either -- some method of defusing them in forget to keep the ABL in place. So the tie-in is if the ABL stays in place, then we have to put the cash aside.

So this shelf registration isn't particularly targeted at that particular launch?

It is not. It's probably one of the things that the board will look at, but no decisions.

The other question, I just wondered if you thought of it or if you -- I don't know if you can answer the question the way I'm going to phrase it. But I'm trying to understand at what point you think the OSB business gets into positive EBITDA territory? I assume that we're not expecting to see a lot more capacity closing that is currently up and running. So I was wondering if you had a tie to what housing start level you thought would allow sort of pricing power to swing back to the producers, given the current level of production? Given the current level of capacity that is up and running.

I am going give you no answer with a little bit of musing. It just depends upon supply and demand, Joe. If you think about this year somewhere around 13 billion feet of OSB is going to get sold in North America. Current projections are somewhere around between 16 and 17 billion feet next year. If you think about what is available to run, as we guess it anyway in the industry, 19 to 20 billion feet, you start to climb up the demand-capacity ratio thing and when you start to get above 83, 85, you start to get a little bit of pricing power. So your guess is as good as mine exactly how that is going to unfold right now.

I think a rule of thumb that we have given out is that each 100,000 housing starts is about a billion-square-feet. So if you are going to go from this year's level, whatever consensus is 5.50 to 5.70 next year means you can add a couple of billion-square-feet of demand for home building.

Is it given that you are halfway - well, not halfway, but a third of the way through third quarter, seasonal and better pricing that you will be in EBITDA-positive territory in that business in the third quarter?

I think increased pricing is a good thing for EBITDA performance in the OSB business. So having to price up is certainly helpful and Rick talked about some of the things that we did in Q2 that will carry into Q3 on the cost side.

Okay. Thanks.

Your next question comes from the line of Mark Weintraub, Buckingham Research.

Thank you. I'm curious how you feel about your balance sheet at this point given what you have gone through and what you see ahead? Are you comfortable where your balance sheet is at this juncture?

I think we talked about when we put the financing in place and be thought that putting that financing in place, the way we did, even though it was much more expensive than we would have liked allows us to get through to the other side. So I think given what we did in Q2 by improving our cash position and seeing a little bit of positive news in the housing market, I'm feeling a little better than when we announced the financing.

I don't like the interest rate on the debt, but we had to do what we had to do and we did it.

Understood. I remember, Rick, I think probably six quarters ago, when things were really just starting to get difficult.

It was longer than that, pal.

Okay. It got really difficult. And there was a question asking about potential consolidation in the business, and your response at that time was that when the pack goes into the woods it usually goes out of the woods in a different form, and you mentioned that the pack had definitely gone into the woods back then and clearly, those woods got deeper. Now it's beginning to sound like for the first time that we may be see a little bit of light that might suggest that we might be get out the woods in the hope any not too distant future. Do you still have the view that the pack is going to come out anyway different form or has that view changed?

It appears that the pack is still around. They have just taken on new spots. We had two of the larger producers declare bankruptcy, but they are still around. One One of them is for sale right now and we'll see where that goes. I think something that I said recently and I probably said it on one of these calls is that there is no sissies left in the wood-products business. Everybody that is in it right now is in it because they want to be, so even though people seem to run out of money, they somehow stay operating. So I guess the rest of that story, I don't know if I expect anybody to disappear. I think over time the mills that can't compete will continue to disappear, but at this point in time, I don't see a real structural change based upon what we have looked at so far is that people go bankrupt, but they don't disappear.

Okay. Thank you.

Your next question comes from the line of Peter Ruschmeier of Barclays Capital.

Thanks and good morning.

Good morning, Pete.

Rick, I was hoping you could share with us your thoughts on Clarke County and the CDOT at $0.93 I would think Clarke County would be much . I know you shared in the past, liquidity concerns or investment concerns about starting that up. But how do you think about that and is that something that is on the

Not on the planning horizon right now. We don't see the need for that mill probably until 2011 and as we get closer we'll see what happens. The problem with, that we discussed the reasons we didn't restart it for cash base and while we're managing for cash we're not considering that. Secondly, when you bring on 7 million feet at one time, it's a real slug. So that is not in the next year, year and a half planning cycle right now.

Okay. That is helpful. I was hoping that you could amplify your comments on OSB being used for furniture. Furniture-maker why would I choose OSB over plywood and what geographic opportunities might you see in this application?

We have two major customers in furniture right now. I will let them remain nameless. What they are doing is a pure cost-substitution. We have designed the products specifically for them and what OSB adds is a uniformity to the furniture manufacturer, basically an absence of voids in the middle of the board. That plywood doesn't have so we have a couple of relatively large customers where we have designed a product specifically for them, and seem to be successful so far at selling about 10 million feet of that in the last two months.

Okay. And down in Brazil, I'm curious on does OSB have much of a cost-cash advantage in Brazil over plywood? And are you taking any specific steps or what is your business approach to boosting your share in Brazil?

There is a slight cash advantage and what we have stated and what we hope to do is to replicate what we did in Chile, which is to go in and convert building practices from cement and steel to wood products. Right now most of the OSB that is consumed in Brazil is used for things, like, creating construction fences, packaging, anything that you might use a panel for. But they don't really build the way that we build up here. In Chile, we had great success by going into the government and convincing them that they could build safer, faster and cheaper by building the way we build in the US and Canada. We think that same opportunity exists because of the huge need for both socialized housing and just housing in general in Brazil over the next ten years. We had our first large, large home builders show in Brazil about three or four months ago. It created a lot of interest. Obviously this economic downturn has not been good for us in terms of getting that started, but we think that our success in Chile was to first start with the government and show them how they could put up very nice homes very quickly. So that is our approach in Brazil. We're starting that now. Their economy does need to rebound somewhat for us to make headway there and probably have about the same speed of ramp up that we had in Chile, because changing the norms and more of building customer takes time.

What share do you think you are up to in Chili and on a related note, the 25,000 homes that you mentioned may be built, is that all wooden homes or just total units and you get some share of that?

That is total units and we would hope to get some share of that. We think that we're up around 28 or 29% of all new residential starts in Chile now and have at least one floor of wood-based construction. When we first got there, that was about 3 or 4%. So we have been pretty successful there. We were successful with the government of Chile and how we kicked this who'll thing off was socialized housing. I don't know how much we'll get because they have to actually finalize the program, but it should be helpful to us in both volume and pricing in 2010.

And just lastly, do you have similar figures for Brazil as to what you think the wooden-housing share is of the market?

It's almost nothing. Probably less than 1% right now, but the cool thing is that there is ten times the number of people in Brazil that there are in Chile and I think Brazil has a backlog now in new residential needs of somewhere around 1.2 million per year and with a long-term rate of about a million a year. So hopefully we'll be able to penetrate that over the next couple of years. That was our goal in going down there and buying that mill.

Very good. Thank you Rick.

Thank you, your next question comes from line of Steve Chercover, D.A. Davidson.

Thanks and good morning everyone.

Hi Steve.

A couple of question on the auction-rate securities. I think Curt mentioned you got 13 million back. By definition, these were "short-term assets," do you think that we're going to start to see a whole slug of them come back into the money?

Part of what happened we implemented the new fair-value accounting requirements this quarter and so that actually went through other comprehensive income and didn't flow through the income statement at all. It was balance sheet. What we got were pretty unrealistic values from one of the issuers at the end of Q1. We did a fair amount of work internally and in Q2 they significantly increase those values and it's not clear to us exactly why. We have triangulated around those values by looking at various models and we think that the values we have are appropriate. We have not seen much activity on the bank side of providing liquidity for those investments and that is why we took the action as I mentioned earlier.

ARe you you being paid on the majority?

There is only one security that is about $3 million that has been accelerated by the senior tranch.

Well, about $152 million, if I recall.

$151.8. You are exactly right.

You probably don't want to comment on the lawsuit, but is this a class-action?

This is an action that LP is taking.

The really two dealers put you into it and one no longer exists or has been a amalgamated. We are filing this against Merrill Lynch and Deutsche Bank and Money Market One is the broker. So B of A has liability for Merrill now?

I would assume so they kept the corporate structure so we are filing appropriately.

Good luck.

Thank you.

Your next question, final question comes from the line of Rick Skidmore from Goldman Sachs.

Good morning. Just to follow-up on the cost side of things, what are seeing with regard to specifically wood and resin cost as you go into the second half of the year?

On the resin side, those were inputted into phenyl, Benzene and natural gas and so we're actually seeing pretty flat for resins compared to the second quarter. On the wood side we're entering into the logging season and we should have more supply in the market in the third quarter. So as Rick said earlier, we should see a little reduction in wood. So overall as I look at Q2 to Q3, I would expect modest improvement, but not nearly what we saw Q2 of '09 versus Q2 of '08. Probably half of that magnitude.

Okay and just a different question as you look bigger-picture. You talked about needing to have the -- the market having capacity running about 19 billion-square-feet and currently shipping 13 suggests you need 1.1 to 1.2 million housing starts to get though that 19 billion-square-foot level. As the market gets back in terms of housing starts, expanding, how do you foresee bringing capacity back online, Rick? Do you anticipate that you will run up against full capacity, or are you going to need to need to start up other facility before you get to that level just to be able to service the national footprint that you have?

I don't know yet, but as we have spoken before in some of these mills, if you want to make them out of indefinitely curtailed status, you may have lead time of 3 to 6 months so planning horizon is actually pretty long. I think it would be inappropriately for me to comment strategically how we think about that at this point at this point in time.

Thank you.

I do, before we get off this call, I do owe someone from the last call a comment around what is going on with the average size of housing. I promised that I would go dig around on that. It does appear that the average size of new starts has declined between '07 and '08 by about 70-square-feet. If we stayed at the current level, that would equate to somewhere in the neighborhood of about 500 million feet. If you go out about four or five years, probably the house size decline, if it stays where it is, is equivalent of one kind of generation two OSB mill. I just owed somebody that answer.

Thank you for moderating and thank you for attending our call. As always Becky and Mike will be available for follow-up questions, and as I mentioned, we will be follow filing both the S-3 Universal Shelf Registration and Form 10-Q tomorrow. Thank you and Mary, if you could give out the replay information, that would be good.

Thank you. Thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect. For replay you may dial 617-801-6888 or 888-286-8010. The access code would be 16497049. Thank you. Once again, have a great day.