Louisiana-Pacific Corp (LPX) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Q3 2009 Louisiana-Pacific Corporation conference call. My name is Chris, and I'll be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator instructions). As a reminder, this conference is being recorded for replay purposes. Joining us today, is Mr. Rick Frost, Chief Executive Officer, and Mr. Curt Stevens, Executive Vice President of Administration and Chief Financial Officer.

I would now like to turn the call over to Mr. Curt Stevens. Please proceed.

Thank you very much. Sorry for the slight delay here this morning. We had a few technical difficulties. As the moderator did say I'm Curt Stevens, the CFO, and with me is Rick Frost, our CEO. And we also have Mike Kinney and Becky Barckley who are our primary Investor Relations contacts.

As we have done in the past, I will give a review of the overall financial results for the quarter and for year to date, and this will be followed by some comments on the performance of each of the individual segments and on the balance sheet. Then I'll ask Rick to discuss the general market environment in which we operated, his perspective on our most recent results, and some thoughts on the outlook for Q4 and the beginning of 2010.

As we have done in the past, this call is open to the public, and we are doing a webcast, to be accessed at our public website at www.LPCorp.com. Additionally, helpful to the discussion we have provided a presentation that has supplemental information that should be reviewed in conjunction with the actual earnings release, and I will reference these slides in my comments.

Additionally, we filed an 8-K this morning that contains supplemental information, and we will file our Form 10-Q either late today or early tomorrow.

I want to remind all of the participants about the forward-looking statements comment that is included on slide two of the presentation. Also, be aware of our use of non-GAAP financial information included on slide three of the presentation. Mentioned earlier the 8-K that we did file provides the necessary reconciliation. I'm not going to reread these statements, but I'm certainly going to incorporate those with this reference.

Before going into the numbers, I do want to explain another change we have made this quarter, related to the non-GAAP reporting of adjusted EBITDA from continuing operations. In Q1, we did adopt a reporting format that showed EBITDA from continuing operations. This was a -- somewhat prescriptive in that we took income loss from continuing operations and adjusted for income taxes, interest expense net of capitalized interest, and depreciation and amortization. This quarter, we will also adjust that to include net interest. And then further adjustments -- so it may serve as a better proxy for cash flow, we'll make other adjustments to these numbers which include the gain/loss on sale or impairment of long-lived assets, other operating charges and credits net, the gain/ loss on early extinguishment of debt, other than temporary investment impairments, and the non-cash portion of the equity compensation. The 8-K that I mentioned does have the full reconciliation details for all of these items.

Slide four of the presentation is the summary of Q3 results. We are reporting today a net loss for the second quarter of $13 million or $0.12 per diluted share. Net sales from continuing operations were about $310 million for the quarter. For the same period last year, we reported a net loss of $111 million, or $1.08 per diluted share on sales from continuing operations of $390 million. The effective tax rate for Q3 was 45% compared to 38% in Q3 of 2008.

Adjusted EBITDA from continuing operations was a positive $11 million in the quarter, compared to a loss of $28 million in the same quarter of last year.

Year to date, we are reporting a net loss of $73 million or $0.70 per share, compared to a loss of $238 million or $2.32 per share in the same period last year. The effective tax benefit rate for the first nine months of 2009 was 39%, similar to the 40% for the same period in 2008.

Adjusted EBITDA from continuing operations for the first nine months of 2009 was a loss of $25 million, compared to a loss of $118 million in the same period in 2008, an improvement of over $90 million. For this quarter, we have not included in the presentation a slide on special items, however, they will be in our public filings.

Each of the periods did have some special items not generally attributable to ongoing operations. This last quarter, we recorded a $2.5 million gain made up primarily of the following items -- an insurance recovery of $2 million at the Clark County event, a gain of $1 million on the sale of various timber assets, and a loss of $300,000 related to the early extinguishment of debt, and a slight writedown on one of our auction-rate securities. Q3 of last year, we recorded $100 million loss composed mainly of about a $90 million impairment on our ARS portfolio, and an impairment related to the St. Michel complex and other assets of about $10 million.

Let me now go in to our segments, for OSB refer to slide five of the presentation. We had an operating loss of $6 million for the quarter, a 78% improvement compared to the $28 million operating loss in Q3 of 2008, and that's despite 26% lower volumes and an average sales price that was 6% lower. This improvement is directly attributable to the actions we have taken over the last several quarters to adjust our operations and focus on cash.

Adjusted EBITDA from continuing operations for the quarter was a positive $4 million, compared to a loss of $14 million in Q3 of last year. Compared to the sequential quarter of Q2, volumes were higher by 12%, as was sales price was also up 12%.

For the first nine months OSB had an operating loss of $49 million, compared to a loss of $124 million during the same period last year, despite sales being down 43%. Change in the Canadian exchange rate did account for about $15 million of the improvement with lower raw materials and more cost-effective operations accounting for the rest. Year to date adjusted EBITDA from continuing operations for OSB was a negative $22 million, compared to a loss of $83 million in the same quarter last year.

Slide six is our siding segment, which is our SmartSide and Canexel products as well as some OSB produced at our Hayward Mill. For the third quarter, siding had operating income of $16 million, over three times higher than the $5 million recorded in the same period last year. Adjusted EBITDA from continuing siding operations was $21 million, compared to $10 million in Q3 of 2008.

For the quarter, sales were down 5%, with unit volumes about the same in SmartSide, but down 24% in Canexel, compared to the same quarter last year. The volume decline in Canexel is directly made to the decision we made in Q2 to operate only one press line and exit the doorskin business. Sales prices were slightly higher in SmartSide and up 5% in Canexel.

For the first nine months of this year, siding had operating income of $25 million, compared to $14 million in the same period of 2008, despite sales being 17% lower than that same period last year. Adjusted EBITDA from continuing siding operations for the first nine months of 2009 was $39 million compared to $31 million during the same period last year.

The next slide is our Engineered Wood business, which includes I-Joists, laminated strand lumber produced in Houlton, laminated veneer lumber, plus other related products. This segment also includes the sale of I-Joist and LVL products produced by the Abitibi JV or under a sales agreement. For Q3, EWP recorded a loss of $6 million compared to a loss of $11 million during the same quarter last year.

Adjusted EBITDA from continuing operations was a negative $3 million in the quarter, compared to a loss of $7 million in Q3 of 2008. Volumes of both I-Joists and LVL LSL were down significantly compared to same quarter last year, 19%, and 13% respectively. This is a direct reflection of the reduced housing activity. However, sequentially we did see a 30% increase in I-Joist volumes and almost a 20% increase in the shipment of LVL LSL. Pricing was down about 5% for both product lines compared to Q3, but up about 3% compared to last quarter.

For the first nine months, EWP had an operating loss of $24 million, an improvement from the $28 million loss recorded in the same period last year, however, sales were lower by almost 40%. Adjusted EBITDA from continuing operations for the first nine months was a loss of $15 million, compared to a loss of $16 million, same period last year.

At our other building products segment, we were about break-even in Q3 of 2009, compared to a $2.6 million loss in Q3 of 2008. For the quarter, sales were $27 million, up slightly from $26 million during the same quarter last year. For the first nine months, other building products had operating income of a little over $2 million, compared to a loss of $5.4 million in 2008, with sales being up by 12%.

Some other items, we did have a $1 million foreign exchange gain in the quarter, same quarter last year, about a $2.2 million gain. Investment income in the quarter was $7.4 million compared to $8.1 million in the same quarter last year. Interest expense was $20 million in the quarter, compared to $12.4 million in Q3 of 2008. This was primarily -- or exclusively due to the higher cost refinancing that we completed in Q1.

Total SG&A costs were $26 million for the quarter, a 29% decrease from the $37 million in the same quarter last year. Just look at the unallocated piece, costs were down 22%, at $17.7 million, compared to $22.7 million in the same quarter last year.

Year to date, total SG&A is down 29%, and the unallocated piece is down 20%. As mentioned earlier, the effective income tax rate for Q3 was 45%, compared to 38% in Q3 of 2008. This is primarily the result of a true-up in Q3 2009 caused by applying the estimated effective annual tax benefit rate to year-to-date results. Change in estimate was based on the implementation of a tax strategy at our Canadian entities. Year to date, the effective income tax benefit rate was about the same at 39% and 40%. As we said before, the primary differences between the US statutory rate of 35%, and these effective rates are -- relate to our foreign debt structure, our state income taxes, and the effect of foreign income tax rates.

Next slide is just some statistics on the balance sheet. Cash and cash equivalents, investments, and restricted cash stood at $528 million at the end of the quarter. This is an increase of $130 million compared to the balance at the end of Q2. Contributing to the increase was the net proceeds of $132 million from the recently completed equity offering, offset by a $13.5 million debt repurchase. We also had a net increase of about $17 million in the carrying value of our auction rate security portfolio.

Working capital, about $435 million, net cash for the operation at $155 million, and year to date, our capital expenditures remained very low at $5 million. For guidance, we believe at the end of the year it will be at about $15 million. And then book value per new share was at $10.40.

As part of the announcement around our equity offering that we did complete in Q3, we made it very clear that we would largely be using the net proceeds to exercise the equity clawback that was embedded in our 2017 notes offering. In that offering we had the right to retire up to 35% of the principal balance of those notes, using the equity proceeds, at a formulaic price determined by a premium to the accretive value of the notes.

Immediately upon closing the equity transaction on September 29, we instructed the trustee for the 2017 notes to give the irrevocable notice to note holders of our intention to claw back to 35%. We completed the clawback last Friday, so we retired $131.25 million base value of the 2017 notes, paid the note holders $112.5 million for the clawback, plus accrued interest of around $2 million. We will record a non-cash early extinguishment of debt charge in Q4 of around $21 million. As we stated before, this will reduce our annual interest payments by $17 million.

We have provided some pro forma information on slide nine of the presentation. Let me just talk about that quickly. So total cash and investments went down by $112 million. That was the payment for the notes. The 13% senior secured notes went down by $95 million, which was the book value of those notes, again, $131.25 million face amount. And we reduced retained earnings by $21 million, to reflect the non-cash early extinguishment debt charge related to the clawback.

In addition to the clawback in October, we will also be disclosing one other non-material subsequent event in our Form 10-K late today or tomorrow. We did enter in to a sublease for one floor in our corporate headquarters in Nashville that will require us to book about a $750,000 loss.

The last item I wanted to briefly discuss is that we did have a $20 million tranche of our limited recourse notes payable with the offsetting notes receivable did become due yesterday and was paid, and so as a result, the recourse portion of the notes payable as well as the related receivable went down by roughly that amount at the beginning of this month.

With that, let me turn it over to Rick.

Thanks, Curt, and good morning, everyone, we do continue to appreciate your interest in our earnings calls. This morning, I'm going to categorize my prepared remarks into three buckets. The first is a little bit of color observations on Q3, second is the general housing market conditions, and third, I'll finish up with how we're currently looking at the next few quarters from the macro level.

Beginning first with Q3 observations, with safety of our employees and the communities in which we operate as of one of our core values, I'll begin there. LP had another very good operating quarter, experiencing a recordable incident rate of 0.66, and a 12-month rolling average of 0.54.

During the third quarter we had three significant safety milestones in our corporation, our Panguipulli, Chile mill reached for the second time, 1 million recordable free hours. Our Roxboro OSB Mill reached two years recordable free, and our Maniwaki OSB Mill reached one year recordable free. As of this time, 43% of our facilities remain incident free through this year. Also, during the quarter, we were the 2009 National Safety Council Occupational Excellence Achievement Award winner.

Our lean Six Sigma efforts continue to provide us cost and process improvements. So far this year, we are at somewhat of an astounding rate of 7.6 to 1 in terms of returns over the costs of implementing that program.

The big financial news for LP this quarter was, of course, being adjusted EBITDA positive for the first time in quite a while, even under such disadvantaged housing and building levels. Curt has discussed the numbers with you, so I'm not going to replow that ground, but I will add a little bit of color by business and also to the sales and market environment.

In OSB, I think we had three significant stories in Q3. The first and second stories are that our production costs were quite good. They were aided by a tail wind from raw materials, and from currency exchange, and also with the improved running configurations of our OSB mills over Q3 of 2008. We also had continued success in our value-added products growth in OSB.

On the cost front, about two-thirds of our improvement in costs from Q3 2008 were in raw materials, and the rest occurred from operating improvements and in FX. Now in our value-added OSB, our industry-leading radiant barrier product, TechShield, actually had its fifth largest volume quarter ever with selling over 100 million feet in to this severely restricted market. This was accomplished in what I'll call a do more with less environment as our OSB marketing spend is currently 65% below what we spent in 2008.

Turning to our siding segment, it was, again, obviously a bright spot for us in Q3 with sales only off 5% from Q3 of 2008, and profits being up over 100%. Siding was advantaged by strong Canadian export, and retail support from basically our fine fiber product. Our sales were up in Q3 to Q3 in both Lowe's and Home Depot in siding. Our costs in siding were improved similarly to the improvements that we saw in OSB from raw materials and efficiency improvements.

In Engineered Wood Products, this segment continues to struggle because it is the most highly correlated to new construction. Both volumes and pricing were down in the Q3 to Q3 comparison, but as Curt said, volume was up sequentially from Q2. I think Engineered Wood will continue to be a tough business until new construction rebounds. In the meantime, we will manage out all of the costs that we can, and continue to push the export market development that we started this last year. We continue to believe that having the 1.75 E-strength LSL product from our Houlton mill will be a differentiator for our Engineered Wood Products business in the future. Under current load demand, controlling our losses out of Houlton LSL is critical to us.

Before I move on, I would like to make a couple of comments on our moulding business and on South America. Both of these are reported in our "Other reporting" segment. In terms of moulding, our interior moulding business as we told you in the past, is a one-mill profitable product segment, sold primarily through big retail. We have had significant underutilized manufacturing capacity in this business. And in Q3 of this year, we were able to come to agreement with Home Depot to stock this product in over 600 of their stores for 2010, which will be good incremental business for us. We will be implementing the replacement of a competitor's product with ours in Q4, which means that we have an inventory buy back of a competitor's product and the stocking of our own, and we expect the impact of this to be favorable on our business in 2010 and beyond.

In South America, Chile was EBIT positive in Q3, and Brazil was EBITDA neutral in Q3. We do see both of these economies starting to improve at this time. Consequently, we are contemplating the restart of our Latora Mill in Chile, at least for the summer, and putting additional vigor into our building practices conversion efforts in Brazil.

Now I want to shift gears to talk about the general market, and some observations there. Total starts have been stuck at the 580 to 590 range for the past four months, that's all in, that's including new res, multi-family and manufactured housing. Multifamily continues to be the most erratic, due to the credit markets. Single family starts are at about 500,000. September permits were at an annual rate of about 450,000, and we are watching this closely to try to get some indication and clues on how that will affect the first half of 2010. The month supply of both new and existing homes continues to drop, now at 7.3 months and 8.5 months respectively. The rate of sales appears to have bottomed out, and is ascending modestly.

The rate of existing home sales is up seven months in a row. The Case-Shiller Index appears to be stabilizing, and two components of overall affordability are positive, that being home prices and mortgage rates. Repair and remodeling appears as well to be bottoming out and turning, and there have been a number of positive articles written on repair and remodeling recently.

I think the wild cards affecting the satisfaction of the underlying demand for housing are the home buyer tax credits, qualification for credit in general, unemployment, mortgage delinquency rates, and consumer and consumption trends. These are unfolding, but in my mind, the unemployment seems to be the 800-pound gorilla in the room.

Looking forward to the rest of this year, and in to the first half of next year, I am expecting a slowing compared to the third quarter, but not the nuclear winner that we had last year, if for no other reason as the country will not be paralyzed by the financial crisis of a year ago.

Now we have begun to feel the seasonal downturn already, and we do expect our customers' behavior to be consistent with last year in depleting their inventory levels to a minimum by year end. So currently, I expect a slow Q1 in 2010, but not as bad as this year. We're currently trying to formulate a hypothesis around the potential positive impacts of what an extension of the home buyer tax credits might mean to both Q1 and Q2 of 2010, and how that might affect our own planning on our inventory levels for the rest of this year.

As it stands now, and as we have communicated in our recent equity offering presentation, we are basing our plan for 2010 on 700,000 starts. That's all in, single family, multi-and manufactured, and we will quickly adjust our activities as we see things changing.

In concluding my prepared remarks, I will repeat that it was nice to have a positive Q3 adjusted EBITDA with such historically depressed product volumes. I think a lot of credit this quarter goes to our employees for making the tough cost out and cost improvement decisions, as well as the lower raw material pricing.

We are genuinely excited about the penetration that we are achieving in our siding products, and our value-added OSB, which bodes well for us when the market becomes in a more robust take-away situation. And we are also encouraged that the economies of Chile and Brazil seem to be improving. And with that said, I'll turn it back over to Curt for the question segment of this call.

Thank you, Rick. Chris, if we could ask you to go through the question queue?

(Operator instructions). Our first question comes from the line of Gail Glazerman. Please proceed.

Hi, good morning.

Good morning.

Just starting -- your results were a little bit stronger than maybe suggested at the end of September, and I'm wondering if there is any particular factor that contributed to that?

Well, we wanted to make sure that we weren't overestimating our results, so that was part of it. But September did end the quarter pretty strong in all three of our major businesses.

Okay. And looking at OSB pricing, your quarter-on-quarter improvement seems a little bit lower than maybe random links would have suggested. Is there some sort of lag that we would expect to see benefiting early in the fourth quarter or was there just something with mix or some other reason?

There were a couple of things that happened there. One, we did have a higher percentage of value-add products, and some of those products don't fall randomly, so they are kind of a delay. We price it for a month at a time, so there is a bit of a delay on some of the specialty. The other is that we did take some block buys at the end of Q2, that we delivered in Q3 so we didn't get the full uptick on the pricing. So that was a decision that we made late in Q2.

Okay. And just the last couple of questions. Can you give any sort of update on asset sales as well as tax refunds, and what you expect moving in to next year?

Well, the asset sales have been going darn slow, Gail. We did have one asset sale last quarter, we had about a $1 million gain on the sale of miscellaneous timberland, and we'll probably have another asset sale similar to that in the fourth quarter. The big one that we have been struggling with all year is the St. Michel sawmill, OSB Mill. And that still remains on our target to close soon, but until I have the money in the bank, I can't really give you a whole lot better background on that. It's very difficult to sell assets in this environment. The hangup there is related to securing a timber supply to allow them to operate the mill the way they would like it. So that's where we are.

We do have -- we have been making progress on that over the summer, and so hopefully we'll have something here near term. The other assets that we have for sale are -- the big ones are our R&D facility and our hangar, and we wouldn't expect to see any proceeds from that until next year.

Okay. And just quickly on tax refund?

On the tax refund, I think what we said is we would expect $80 million net of any payments we needed to make for the year, and we are very close to that today. We did receive, I think about $7 million or $8 million in the fourth quarter so far, so if -- basically we received the $7 million or $8 million this quarter, and that's about what we expect for the year.

Okay. And next year would you expect any material refunds?

The only refunds that we would have would be if the currently proposed NOL carryback for five years. I think we have given numbers on that before, that if that does go back five years, there is a potential for $60 million to $70 million in tax refunds next year. Absent that, they will be all carried forward. There are no further carrybacks remaining.

Okay. Thank you.

Our next question comes from the line of Mark Connelly.

Hi, it is Jason Marcus in for Mark. New product innovation, including the radiant barrier and siding products, have clearly been successful. Will those product innovations, coupled with the portfolio changes like Canexel, help LP recover faster than the industry?

Well, I think that the new product innovations that are targeted at residential construction will go with the residential market. Where we have seen success is in our home-center volume, and siding has been very successful in the home centers, principally the SmartSide siding line. Canexel goes basically through distribution; there is not a lot of home center there. But SmartSide has done very well in the home centers, and our home center business for OSB has increased. You know, I think that has increased largely because -- you know, at one point I think we had 9,000 lumberyards in the United States, and the estimate is going to be down to 5,000, so there's 4,000 lumberyards that have disappeared. We think the home centers have picked up some of that business.

All right. Thank you.

I don't know if that directly answers your question, but certainly in the home centers, I think the product innovation, and just the design has helped us offset some of the decline in housing.

Thanks.

Our next question comes from Chip Dillon. Please proceed.

Yes, good morning. And I think you indirectly answered this, Curt, but maybe you could just walk through the remainder of these. But you mentioned how you recently closed out some of your timber-related notes payable and receivable. Weren't those technically taxable, and is it kind of a serendipitous result that it settled this year versus 2004, and that's why you are not paying taxes?

Well, certainly there is a portion of those notes that is taxable, and that's in our deferred tax liability, and, of course, we will liquidate those tax liabilities as these notes become paid, so that's an accurate statement. And so that will get folded in to the tax returns that we file, because it will be a gain that we will recognize this year.

Got you, but then again because of the loss situation and the downcycle you don't actually have to -- you probably won't ever have to pay -- effectively pay taxes on the land you sold at a gain 10 years ago?

Yes, it's a timing issue, but you are essentially right, you won't pay it when you recognize it. The other piece to that is we do have -- there's another piece that's current -- about $90 million is due on the Simpson payment -- $113 million -- excuse me -- is due on the Simpson payment at the end of June of next year, so that is also current on the balance sheet.

Got you. I know it is early days here, but, you know, could you give us a view of how you think about capital spending next year? I would of course expect you to have quite a wide accordion depending on -- and I would expect you to answer it assuming things don't get better, but if next year hypothetically turned out to be 2003 and we -- after Memorial Day when we are off to the races, what could it be, and kind of what kind of things would you like to do that you just don't feel you can do in this environment?

Chip, I think we're pretty well balanced in our look at next year. Our guidance that we have given, I think, in our various presentations this year was less than $25 million this year, and no more than $25 million next year, and I don't really see that changing regardless of whether the business picks up fast or not. We don't have a great, huge, pent-up demand for capital right now with the caveat that if we had a press failure that we aren't expecting, those things can cost you $10 million or $12 million to rebuild.

And then the last question is, you know, without be terribly specific obviously, but we have seen on our count, 25% or so of the plywood and OSB capacity announced as indefinitely or permanently closed in North America since 2006, late 2006 for that matter. And I would imagine as the remaining plants -- if some of them are older and inefficient need --- like, for example, you mentioned a case of a press failure or some other big capital need, you would think there could be more that would be shut down. Are you hearing, or do you think that there will be more in the industry that may come out, or do you think we have pretty much seen it for this cycle?

I don't really know, and obviously I'm not hearing. I do believe that the longer an asset is left in that indefinitely curtailed category, the greater chance for it to never come back. I think I'll leave the answer there.

Okay. And then lastly, what do you have left that's running in Canada at this point in OSB?

We have Peace Valley, which is our large and newest joint venture. We have Maniwaki; we have Dawson and we have Swan.

Got you. So then what would be down --

Chambord is in the indefinitely curtailed category, and St. Michel is permanently shut.

Got you. Thank you.

Our next question comes from the line of Peter Ruschmeier, please proceed.

Thanks. Good morning. Curt have you shared with us a range of what you are expecting for St. Michel?

What we said is 25 to 30 for asset sales is what we said last -- well, in the first quarter when we did the bond deal.

Okay. That's helpful, and you mentioned --

The reason for the range, it's payable in Canadian dollars, so when the exchange rate changes, it moves around.

Understood. You mentioned the $17 million favorable adjustment for the AR facility, can you remind us where -- what level that brings you to, and where that mark stands relative to the original face value, and what is your outlook for that?

Yes, the face value is $151.8 million, and it's now in the books for around $42 million. The low point is it did get to $11.4 million. So we wrote -- when the accounting standards changed in April, we were -- we wrote up about $14 million in Q2, and then another $17 million this quarter. So that's where it currently stands.

I think as you know, we did talk about it on the call that we did file lawsuits against the primary issuing banks and the broker, and right now there's just really -- my General Counsel doesn't necessarily like me to talk about it, but we're kind of in procedural purgatory is the way I define it. We are trying to figure out what venue we are going to try those in. So that's where that stands.

We have seen transactions take place as part of the public/private investment partnership. And we have also seen some level of liquidity in similar securities to what we hold, but certainly not near par.

Okay. Okay. That's helpful. I wanted to ask, if I could, about your volume outlook, you mentioned you are already beginning to see some of the seasonal weakness. You have got a pretty easy comp year-over-year in OSB. It is possible, do you think that you may see a positive comp in fourth quarter?

It depends on the level of inventory destocking that goes on. Most of the channel did not add a lot of stock in Q3 where last year, one of the reasons the volume was so significantly low is the channel just liquidated all of the inventory that they could. I do believe, though, in Q4, that the channel is going to buy inventory when they have got a customer. They are not going to stock it in anticipation of a further increase.

Now one of the things Rick talked about is if the home-buyer credit does get extended and it gets extended as they are currently contemplating and only through April, it would mean in parts of the country we will have more winter building than we would without that. So I think there's that piece of it.

The other piece of it is it is heavily dependent on where price goes, because as you know, we have sacrificed volume for price in OSB. In fact our commodity OSB going to the building channels is down year-over-year, and it's down by -- on purpose. Because it's -- frankly, it was a pricing that we didn't want to take. So part of the improvement that we have had in our results is not taking volume at pricing that didn't make sense.

Okay. That's great. And maybe just lastly, and I'll turn it over, any comment you can offer on input costs? I'm thinking specifically pulp wood, things like transportation costs. I think you mentioned costs were an advantage in the third quarter. To what extent are you seeing some of the rains impact your pulp wood costs throughout the south? And are transportation costs status quo, or what observations would you make there? Thanks.

Well, if you look at year to date for the first nine months, we take the volumes that we purchase this year at last year's pricing versus this year's pricing, fiber was about an $8 million favorable to us across all of our businesses. In the fourth quarter, we're anticipating that's going to be -- compared to the fourth quarter of last year -- it's going to be a $1 million to $2 million unfavorable, and principally for what you said, it is the rain in the south. We have actually been forced to take more downtime at some of our mills in Texas and Alabama because it has just been raining like crazy, so rather than pay the higher price, we're taking the downtime. I guess that's the way I would say it.

And cost and availability of truck and rail? I would think they are available, but any observations on freight costs?

With gasoline prices and diesel pricing creeping up, it's going to have some impact, but I don't think it is going to be significant in Q4.

Very good. I'll turn it over. Thanks.

Thanks.

Our next question comes from the line of Mark Weintraub, please proceed.

Thank you. Just a couple of clarifications. On the $60 million to $70 million, if we go to a 5-year lookback instead of a 2-year, was that all related to losses which you will have already incurred by the end of this year, or does that also fold in to next year?

It actually is a combination of losses we couldn't carry back last year, plus the losses this year. It doesn't contemplate any future losses.

And would you be eligible potentially for future losses, or would the --- if you do the 5-year --?

I hope not.

I understand. But if you were unfortunately to lose money, would the lookback period give you more fire power so to speak or not?

I don't think so.

Okay.

I think most of what we would recover we would recover based on the refiling of 2008 and 2009.

And just [trying] to understand St. Michelle, I think you said in the past that would not be producing a product that would compete with OSB; is that correct?

That is correct.

Okay. And then lastly, I was just trying to fully understand on the deferred tax liability, could you just go over that again? I wasn't fully clear whether or not there would be any cash out of pocket related to those deferred taxes or not. And maybe if I just put the question that way.

We do not believe -- well, given that certainly the $20 million that we received this year, we will not pay cash taxes on the $20 million. That will be offset by the operating results this year. Next year, with $113 million that comes in, it's possible, depending on operating results next year, that a piece of that will be paid in cash, but that would be a filing -- or that would be a filing in the first or second quarter of 2011, that would get paid at that time.

Okay. And it would be 35% of the $113 million? Or is that the way to think of it?

No, the $113 million is the full amount of the notes, and then there's the taxable piece of that. See, the full proceeds weren't all taxable income.

Okay. And then it's 35% of the piece of it, though, it is not the full amount?

The piece of it is the taxable income; that's correct.

Thank you. And can you tell us roughly what that percentage of the $113 million was?

I'll give it to Mike. We have talked about it in the past. I don't have it in front of me.

Okay. Thank you.

Our next question comes from the line of Steve Chercover.

Good morning.

Hey, Steve.

Just wanted to ask a quick question regarding your relationship with the big builders. If I understoodd your comments, you have turned down business from them because the price wasn't satisfactory, and that makes sense, but does that jeopardize the relationship going forward?

Actually we don't sell anything to the builders, so this would be a channel partner that is satisfying a builder. So if ProBuild came to us and said we're only going to buy OSB at $132, and we say we're not going to sell it to you at $132. It's too far below our costs.

Which makes a lot of sense, but that being said --

So really the only big business we're giving up with these big builder programs is commodity. And the fact of the matter is, we could get that back tomorrow if we want to meet the price. Where we're spending our efforts with the builders is going after the TechShields -- and the flooring products are our top notch series of products that have better margins for us. And when you capture that business, and building comes back, you have got name brand recognition, and you have satisfied, you know, a niche that the consumers want.

On the commodities, as Rick has said numerous times, the definition of commodity, you don't care whose it is. So for regular sheathing, we have sacrificed sheathing business, but we have maintained the value-added business.

So your value-added product, will that too go through a third party as opposed to directly to the builder?

They still go through third-party, but there's a big pull through from the builder. So Pulte, for instance, goes standard on TechShield in Texas, then they into to the channel and say I have this deal with LP. And the way we do that is we don't want to affect pricing to the channel, but we do builder-advantage rebates that would go directly back to the builder.

Okay.

That's the way you adjust the pricing rather than having channel partners with multiple prices.

And the 700,000 starts that you've used in your materials, is that predicated on [Reesey] or Haver or census data?

Go ahead Rick.

I'll take that one because it's quite interesting. Here is the most recent forecast that I currently have before me. Reesey says 980 -- this is just single and multi. This is without, say, another 50,000 to 60,000 in manufactured. Reese says 980, FEA says -- which is forest something or another -- says 960. You throw those two out. National Association of Realtors says 804, Freddie Mac says 800, NAHB says 716, APA says -- that's American Panel Association, says 665, Wells Fargo says 660, and RBC says 651.

The numerical average of all of that is 780 for just single and multi. We all know that these things are all over the board, and they have bookends on them, so we have just chosen 700 by running this through our modeling, and said 700 seems to be doable as one economist said recently, we have to remember that housing has rebounded to an astoundingly low level.

The other thing that is affecting somewhat of our optimism for the future is that Canada has basically come back to normal. Canada is at over 170,000 starts right now, because they didn't have the credit problems that we experienced in this country. So it's a bit of an anomaly, but certainly we sell quite a few of our products into the Canadian market.

Sure, and --

So we all chase these things down, and I'm sure we are going to chase them up, but we're making our plan on the 700, and we'll adjust accordingly.

Okay. And final question, back on the Auction rate securities, how many of those -- I thought they were short-term by definition. So how many of them are maturing now? Is that why the values are going back up to $42 million or we just going to start to see you getting the principal back and see gains?

They were short-term because there was an auction every 28 days that ostensibly provided liquidity, but they are not short-term securities. So some of these are 2015 to 2020 kind of maturities.

Okay. So it was really just the coupon that reset every 28 days?

That's correct. Well the coupon plus the liquidity, because you could get out of these until, really, last -- in the middle of 2008.

Okay. Well best of luck. Thank you.

All right. See you next week, Steve.

Yes, see you then.

Our final question is from the line of Mr. Skidmore. Please proceed . One moment. Let me find Mr.

Tell him to call us.

(Operator Instructions). You may proceed, Mr. Skidmore.

Thanks, Curt and Rick, thank you. Rick, can you just elaborate a little bit on, if your view of the long-term trend in housing has changed at all?

Yes, I can elaborate on that probably ad nauseum, but let me get it down to a nutshell. Just got back that from the Harvard Joint Center of Housing Studies Meeting last week. They still stand behind the underlying demand of household formation. If there is weakness that 1.8 to 1.9 per year household formation, it appears to be in immigration. Obviously unemployment has slowed immigration somewhat. The way I'm boiling that down is the new normal to me of taking into consideration some of that is probably in the 1.5 to 1.6 level, and that's the way we're looking at it. But they -- when quizzed mightily by a lot of CEOs, they still stand behind that underlying household formation information.

So -- I mean, what we're looking at here, to use my words is we're looking at the factors that affect the satisfaction of that demand, not questioning whether that household formation will actually occur. And so that's what we're all doing right now is trying to figure out how these macro and microeconomic trends affect at any given time the satisfaction of that demand.

The only other thing I would add there, Rick is we did have Reesey in here, and they basically mirrored what Rick just talked about at Harvard. So I believe there's no question that it is going to come back, we're just all -- all of us in this industry are trying to figure out when and how fast. And one thing we can bet on is it will not be orderly.

Is that it?

I think that's it. Thank you for participating, and as always, Becky and Mike are baseball to provide clarification if there's further questions. Thank you very much, and if you could give the replay information now, Chris, I would appreciate it.

Yes. If you would like to dial in to the replay you may dial in on the toll number which is 617-801-6888, or the toll free number at 888-286-8010. Your access code will be 44559549. Thank you for calling in to today's presentation. This concludes the presentation. You may now disconnect. Have a good day.