Louisiana-Pacific Corp (LPX) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Louisiana-Pacific Corp earnings conference call. My name is Chauntillay, and I will be your facilitator for today's call.

(Operator Instructions).

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

Thank you very much. And thank all of you for joining us on this conference call this afternoon. I know it's a little odd for us to have a Friday afternoon conference call. But we appreciate your indulgence. As the operator said, I'm Curt Stevens, CFO. And with me today is Rick Frost, our CEO, as well as Mike Kinney and Becky Barckley, who are primary Investor Relations contacts. As I usually do, I will begin the discussion with a review of the financial results for the Q2. I'll follow that with some comments on the performance of our individual segments, and talk a bit about the balance sheet.

While I would like to spend a lot of time talking about Q2, because it was a good quarter for us, I suspect what many of you are wondering about is where the market will go next. To that end, after I finish my comments, I will turn you over to Rick Frost, who will give you his weather update for Nashville, discuss the general market environment in which we are operating, and his perspective on both the most recent quarter, and his thoughts for the rest of this year. As we've done in the past, we have opened up the call to the public, and are doing a webcast. And it can be accessed at our website at www.lpcorp.com. Additionally, to help with the discussion, we have provided a presentation that has supplemental information that should be reviewed, in conjunction with the earnings release. And I will be referencing that document, as I go through my comments. This morning, we did file an 8-K that had supplemental information and we intend to file our Form 10-Q later this afternoon.

I want to remind all the participants about the forward-looking statements, a comment that is included on slide two of the presentation. Also be aware on slide three, that we will be discussing some non-GAAP financial information. And the necessary appendix for this is in the back of the presentation, as well as in the supplemental material that we filed with the Form 8-K this morning. I'm not going to re-read these statements, but I will incorporate them with this reference. Direct your attention to slide four of the presentation, for our discussion of the overall Q2 results, compared to the same quarter last year, and the prior quarter.

Today we are reporting net income for the second quarter of $22 million, or $0.16 per diluted share. Net sales from continuing operations were $447 million for the quarter. That's an increase of nearly two-thirds compared to the second quarter of 2009. For the same period last year, we reported a net loss of $29 million or $0.28 per diluted share on sales from continuing operations of $267 million. Adjusted EBITDA from continuing operations was a positive $75 million in the quarter, compared to a loss of $11 million in Q2 of 2009. Very small movement in the tax rate between the two quarters, Q2 of 2010 was 35%, and last year the same quarter was 37%.

On the earnings per share calculation, I would have you note that the basic average shares outstanding used in Q2 of 2010, is 25% higher than the same quarter last year. And the diluted average shares outstanding is 36% higher. This reflects the issuance of the shares in September of 2009, when we did the Clawback equity offering, and the warrants that were attached to the 2017 subordinated notes. In addition, as this was a profitable quarter, it takes into consideration the in-the-money vested options in stock settled appreciation rights.

Slide five of the presentation is a discussion of our year-to-date results compared to last year. We are -- for the year we're reporting basically break-even. Net sales from continuing operations were $744 million, 57% higher than the first half of 2009. For the same period last year, we reported a net loss on sales of $473 million. Adjusted EBITDA for the six months was $78 million this year, compared to a loss of $36 million the prior year. The tax rate at continuing operations looks a little funny here. As a Company is close to break-even, the discreet tax items have a much more meaningful impact on the rate. So while it looks odd at 69%, it is based on very low, or very near break-even performance.

Let me now talk about each one of our sights. Slide six is a overview of our OSB segment. OSB had an operating income of $48 million in the quarter, compared to an operating loss of $18 million, in the same quarter last year. For the quarter, sales increased by more than double, on a 24% increase in volume, and an average sales price that was 78% higher than same quarter last year. Obviously, the increase in sales price created most of the improvement in earnings and adjusted EBITDA. We believe the increase in OSB price was due to several factors. We continue to have some raw material shortages, primarily the logs caused by weather in the US south. We had an incremental real demand, due to higher building activity. We saw desire of our customers to restock their severely depleted inventories, in anticipation of a housing recovery.

On the other side, as quickly as price ran up at the end of the first -- into the middle of the second, it has dropped back down, and North Central 7/16 is currently below $200 per thousand. Offsetting the positive impact of price and volume is, we did have a strengthening in the Canadian dollar, which increased our cost in Canada. Adjusted EBITDA from continuing operations in the segment was $58 million, compared to a loss of $9 million in Q2 of last year. If we just look back to Q1, volumes were higher by a third, and prices increased by about that same amount, 36%. Year-to-date, OSB had an operating income of $43 million, compared to an operating loss of $43 million in the same period last year. And adjusted EBITDA for the comparable periods was $62 million this year, compared to a loss of $26 million. Pricing accounted for most of that improvement, although we did have higher volumes as well.

Slide seven is our siding segment. Just to remind you, this includes SmartSide, our Canexel siding product in Canada, and commodity OSB produced in our Hayward mill. For the second quarter, siding had an operating income of $22 million, significantly better than the $7 million recorded in the same quarter last year. A piece of this improvement is related to the OSB sold in the segment, about 50 million square feet, in both Q2 of 2010, 2009, which contributed $2 million -- or $4 million worth of earnings this quarter, and same quarter last year, about a $2 million loss. So $6 million of that swing is attributable to the improvement in OSB. Adjusted EBITDA from continuing operations siding segment was $27 million, compared to $11 million in Q2 of 2009.

For the quarter, sales were up 25%, with unit volumes being better by 19% in SmartSide, and down slightly in Canexel. The reduction in our Canexel product line was caused by our decision to halt production on our 16-foot line, as well as the discontinuance of our door skin business. For the quarter, SmartSide average sales prices were up 2%, this is largely due to mix. And Canexel prices showed a pretty significant increase, but that is related principally to the Canadian dollar, and the improve -- or the strength of the Canadian dollar, as well as the exit of a lower priced product line, being door skin. On a year-to-date basis, siding had an operating income of $30 million, compared to $9 million, same period last year with adjusted EBITDA being $41 million the this year, and $18 million in 2009.

As I mentioned in my earlier discussion, most of this improvement is from siding volume and the earnings turn-around in OSB, that is in -- not important as the sector. Engineered wood slide 8, of the presentation. This includes our

I-Joist, our laminated strand lumber produced in our Houlton, Maine facility, laminated veneer lumber, plus related products. It also includes the sale of I-Joist produced by our Abitibi JV, and LVL products that produced under our arrangement with Murphy Plywood.

For Q2, EWP recorded a loss of less than half of what they did last year, $4 million versus $9 million. Adjusted EBITDA from continuing operations was a loss of just under $1 million in the quarter, compared to a loss of $6 million in Q2 of last year. Volumes were up significantly, I-Joist up 29%, and LVL, LSL shipments up 46%, compared to the same quarter. Pricing was up 7%, in both I-Joist and LVL,that was due to a price increase that we put in several months ago, that partially offset the higher raw material cost that we saw in OSB, veneer and lumber. On the year-to-date basis, the operating loss for EWP was $11 million, compared to a loss of $18 million in the same period. While EBITDA was for comparable periods was $4 million 2010, versus a loss of $12 million in 2009.

Our other building products, there is no slide for this, but let me make a few comments. Overall, we're showing income of about $4 million in the second quarter of 2010, compared to an income of about a $1 million dollars in the second quarter of 2009. Most of that improvement is related to our South American operations. For the quarter, sales were up -- sales were up 59%, at $48 million compared to $30 million in Q2 of last year. On a year-to-date basis, about $4 million in income, compared to $2.2 million in the same period last year, with an increase in sales of 50%, getting us to $89 million for the first six months of this year. Adjusted EBITDA for the comparable periods was $9.2 million in 2010, and $7 million in 2009.

Some other things, we had a very small foreign exchange loss in the quarter compared to about a $7 million gain in the same quarter last year. Primary reason for this, is at the end of the 2009, we did refinance Our Chilean term loan, that was in US dollars, and the replacement loan is denominated in Chilean pesos. So we shouldn't have wide swings in our accounting results related to foreign currencies gains and losses attributable to that loan. Investment income in the quarter was lower than Q2 of 2009. Returns are down significantly, with the low interest rate environment that we are in. Interest expense was about $18 million, compared to $22 million in Q2 of 2009. This was primarily due to the Clawback that we did on the subordinated notes last October. On the selling, general administrative costs, they were flat between years, $29 million. And for the unallocated, the corporate piece of that, that was also flat, at about $18 million in the quarter.

Slide 8 of the presentation, are some key balance sheet statistics. Our cash, cash equivalents, investments and restricted cash was at $487 million at the end of the June. Working capital, nearly $600 million. Net cash at $210 million, over the debt, and there is an appendix in the presentation that provides that calculation. Capital expenditures were very low in the quarter at $5 million. We are on target to be less than $25 million, which is the guidance that we have been providing. Book value per ending share was $9.55. One last thing I want to note, before I turn it over to Rick, is that we did receive the $115 million payment on the timber notes. And we turned around, and repaid $113 million of limited recourse debt at the end of the quarter. So with that, let me turn it over to

Well, good afternoon, everyone, and thank you for your interest in our LP building products second quarter call. True to form, we are having quite a warm and muggy summer in Nashville this year. It's about 95 out there today. At the, I guess, in the name of full disclosure, at the end of business today, I'm headed for the coast of Maine for some vacation and to catch up with my wife. And so really the call is today rather than next Tuesday, so that I can have the weekend to do that. So thank you for checking in on a Friday afternoon. I will follow convention in my prepared remarks this afternoon to discuss Q2 results. I want to make some observations about the quarter, and then give you a sense of how Q3 feels to us right now.

I will begin with our core value of workplace safety, we had another excellent quarter, operating safely. All of our businesses year-to-date are operating with a TIR of less than one, and as a corporation, we are 0.44 at this time through June. Two-thirds of our plants remain injury-free through the first half of this year, compared to about of half of the plants at this time last year. And we did hit a number of significant milestones during the quarter at various plants. To name two, our Panguipuilli mill in Chile set a new Company best at over 1.25 million recordable free work hours. And our Wilmington LVL plant reached three years without a recordable incident. The regulatory environment proposes us uncertainty, as we are waiting for the EPA to write it's Boiler MACT targets, which we expect will be done in the first quarter of 2011.

And we are still wondering about what new CO2 regulations might surface. I'm only mentioning that, because we do not have a clear impact, a view of these impacts at this time, but it is on the radar screen. And our Lean Six Sigma program, and it's, and I guess, it's third full-year of implementation continues to deliver us -- for us about 5.7 to 1 as a return rate this year-to-date. As Curt mentioned, our financial performance in Q2 was a great breath of fresh air for us. Business activity was quite brisk during the first two months of these second quarter, followed then by what I would characterize as a relatively dead June. As Curt explained, the Q2 2010 to Q2 2009 comparisons are good. They are good stories, they show the financial leverage, in my opinion, that we have with just a little bit of additional demand.

OSB was the big story, with first five weeks of the quarter experiencing rapidly rising prices, as demand spiked unexpectedly on a thin channel inventory. That was followed by the next five weeks of rapidly falling prices. And the month of June was relatively flat. Our sales volume was up about 24%, Q2 to Q2. And the pricing story was significant. Our effective production capacity ratio, which I have defined as, what we produced divided by the mills that we currently have running, was 86% for the quarter. If we include our indefinitely shuttered mills capacity in that denominator, that dropped to 66%. In Q1 of 2010, those numbers were 68%, and 52% respectively.

I had the opportunity in the last couple of months to speak to several analysts conferences during -- at which time I was asked a question around the high volatility around OSB pricing. We entered the quarter at North Central 7/16 print of about $220.That ascended to a high, I think, of about $395. And then we actually ended the quarter down at $200 per Msf. Now the analogy that might help in understanding this volatility, is for me to imagine a truck with the suspension and shocks removed. And that was the supply chain, as we went in to the beginning of the quarter. There were just no buffers to absorb any bumps. And so, when the bumps occurred they were metal-on-metal, so to speak. We had a demand increase. We think that was associated with the efforts to come in under the tax credit deadline.

Pressure mounted for takeaways. The channel had very little inventory. And we had little inventory, and little ability to add production, so there was a hard bounce up. Of course, then we had a hard down reaction towards the end of the quarter. As one of my people said it this way not too long ago. They said in March and April we could hardly keep up with the consumer and the builder. In May, the builder was finishing up, and they quit placing more orders. And in June, the consumer and the builders basically shut down. Order -- our order file then shortened, and we started to readjust our output to the lower demands. Our experience was that business did noticeably slow down on Memorial Day weekend, both from a distribution standpoint, and a retail standpoint.

I will move now to a short discussion of our siding product segment. Siding did have an excellent quarter, our profits were up from $6.5 million in Q2 of last year, to $21.8 million in Q2 of this year. And as Curt pointed out, $4 million of that was from OSB pricing, and the OSB volume that we manufactured at our Hayward plant. The volumes at Hayward, Q2 to Q2, were about the same. Our SmartSide volume was up Q2 to Q2, by 20%. We continue to gain traction in siding, in both the retail sector and the distribution sector, as the builder and homeowner delight with this product continues to increase. Our rolling fourth quarter volume for North American housing start, year-over-year change in siding is up 33%. And this number excludes retail and our shed business.

In engineered wood products, the uptick in volumes in Q2 of this year over last year, along with implementing the general sales price increase, did allow us to pare our losses considerably, about 47% Q2 to Q2. Our major bleeder in this business remains our LSL product segment, as we only run that mill at about 14% of it's capacity in this difficult market. Engineered wood as you know is the most highly-tied segment to new housing starts. We are making some inroads with our west coast LDL in Australia, and with our LSL product in Europe. From a market penetration perspective, we did capture almost 500 market wins in Q2. As you may remember, I define a market win as an additional product placement with an existing customer, or a product placement with a new customer. Over a 100 of these were in our SmartSide trim product line, and 60 with our LSL product.

TechShield, our radiant barrier roof sheeting does continue to grow, and is actually up in volume 40%, in a per start calculation year-over-year. Another slice on all of this that is important to me, is that we had 132 dealer wins in those 500 wins in Q2, and a dealer win is a large part of our current focus. A dealer is critical to connect supply chain, between our efforts to partner with the distributer, and do pull-through selling to the builder.

I will finish my discussion with Q2 with a few comments on South America. We are off to our best year ever in Chile, our highest volumes and our highest profits. Both Chilean OSB mills are running full out, as a result of the February earthquake. We have also spiked some of their short-term needs with volume from Brazil. And most of the spike in demand in Chile so far, has just been related to the short-term temporary needs from the catastrophe, and not related yet to the longer term rebuilding efforts that need to occur. And we are heartened to see that the frame-built construction in Chile did fair far better under the earthquake conditions. So we think that will continue to aide our efforts at converting building practices in Chile. Brazil was also profitable for Q2, with the mill running at about 60% of it's rated capacity. Very little of this product is going into housing yet. We are finding alternative uses for that, but we did achieve our APA panel stamp for our Brazilian product.

So I will finish my prepared remarks with a few comments about the near future. The current demand environment, I would describe as -- it has gone very quiet. For us, it was an abrupt shift in the first week in June. In response to this, we will be taking the necessary down time across all of our product lines to work down our finished good inventories, to more closely match production, with what we are currently experiencing for demand. Today, Q3 in terms of demand, feels as lot like Q3 of 2009. To us, it feels like demand was pulled forward into Q2, from Q3 and Q4.

So in the short-term, the fundamentals that we all talk about, that are dampening demand for new home construction are still at play. High unemployment, we have 4.5% of the work force that's unemployed, has been unemployed for over six months. Currently we have low consumer confidence, and a continued foreclosure and overhang issue, and we have a slowing of household formation under these conditions. The current lack of housing demand, job growth, and credit availability has created, I would call a, feeling of caution, at all levels in our supply chain. While I think we look at 2010 as overall better than 2009, I do expect the second half of 2010 to be quiet, from what we are experiencing right now. Noticeable improvement maybe delayed probably until 2011. So those are my comments. Curt?

Thank you, Rick. Chauntillay, can we turn it over to you, for the Q&A queue?

(Operator Instructions).

Your first question comes from the line of Mark Weintraub of Buckingham Research. Please proceed.

Thank you. I'm trying to understand in the OSB segment -- I guess I would have anticipated there to be more profit gain from volume efficiencies. And I know that you mentioned the Canadian dollar was a bit of a hit. I don't know if you could quantify that for us, and then maybe help us understand why there would have been more volume efficiencies. And the quick math on why I say that, is if you look at your price improvement, and look at your volume, that alone would have gotten you about a $50 million, $55 million improvement relative to the prior quarter. And that's all we saw. So we didn't really see the volume efficiency gains that I would of expected.

Yes, just to remind you , on the Canadian dollar, every $0.01 is about $1.4 million up or down, on an annualized basis. So if you look at where the Canadian dollar was in 2009, Q2 versus 2010, it was, I think, it was about $0.03 different. So that would be roughly $1 million, a $1.2 million out of that. Probably the bigger difference, if we look at Q2 2009 to Q2 2010 on the raw materials side, we had about -- across the corporation --about $9 million increase in our cost. About a $1.5 million of that was in the logs. And the rest was in resins and waxes associated with the higher cost of the oil based raw materials. So fundamentally, it's in those areas -- the Canadian dollar and raw material

Do you happen to have those also for 1Q to 2Q?

I do. It was about, for Q1 of 2010 to Q2 this year, was about only about a $1 million. So it was relatively flat, Q1 to Q2.

Well, then perhaps asking a follow on or slightly different question, Rick you mentioned that 3Q feel as lot like last year's 3Q. And if we were to assume that prices were going to be similar, which of course, they may or may not be, to last year's would you expect performance in the OSB segment to be pretty similar to what it was last year? Or are there some other moving parts?

No, I think the factors will have to take in to consideration now, is that based upon the takeaways that we are feeling across all product segments, we are probably going to be taking more down time in this quarter, to get our working capital back to where we want it to be.

And that was relative to last year's third quarter or relative to the second quarter, that comment?

That's relative to where we are right now. We are in a position, where based upon the orders that we are getting right now, I want to bring working capital down a little bit, and get it more in line what we are feeling. So we will -- I didn't look at what the down time numbers were in Q3 of last year. So I can't make that down time analysis for you.

Okay, and then just lastly, where would you say channel inventories today are, for your key products?

We don't feel that they are fat. But what I think what is significant right now, is that there is a lot of ready wood right now. So there is very little pressure on price right now, because if you want OSB right now you can get it.

Thank you.

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

Yes. Thank you, good afternoon. Just to make sure, we have this right. Should I assume that $700 million in long-term debt, that 400 -- is it $489 million, of the -- I'm sorry -- of the $706, the 489, is that the timber notes part of that?

It is.

Okay, so we'll just take that out. That's how we get to net cash.

There is that analysis in the appendix, it shows the 489. We, actually, on the receivable side, it's 544. So there is actually more money in the receivable side, than there is on the payable side. And that's our investment. We also -- and when we file the Q today. We've extended that debt footnote, to make it very clear what portion is recourse and nonrecourse.

Okay, because I've talked to a lot of people, who didn't get that. But what is interesting, you say the receivable is 544, because on slide 11, it is sort of implied, that it's only 489, I think.

What we did there chip is only wanted we wanted to offset the nonrecourse portion of the debt. And it's awkward wording. We worked on it a lot. If you look at the little asterisk, all we took credit for was the debt portion.

Okay.

Does that make sense?

So what would be the difference between the 489 and the --.

It's about 42 -- it's about $42 million on the receivable side.

Okay, and maybe a reason you might want to take -- be conservative, is that whenever these things unwind, there maybe a tax bill due at that time?

Well, there is. It's accounted for on deferred taxes.

Okay, okay, got you. And then, I guess getting back to the first, second quarter progression, I know you said earlier that the -- there was very little net cost change going from first to second. And I would imagine you ran, again, better volumes in the second quarter, unless we are just mistaken, because you took a lot of down time in., say, June. Excuse me, but is there anything else you can point us to, as to why we might not have seen better cost improvement. And, by the way, I also notice when I look at random links, that price averaged up, well say, let's say, a year-over-year, $128 on a 3/8 basis, not 7/16. And your pricing was at 108. So maybe you can help us understand why your pricing -- and I know that you don't track exactly North Central random links. But is there anything you can do to help us understand what might have happened there?

There is three buckets to it, fundamentally. The first bucket is, that not everything is -- sold in North Central. So if you look at it, you actually will have in any given time -- I think today, you probably have between the mid atlantic and the north central, probably $15 per thousand price differential today. You look during the quarter, we started the quarter with very low pricing on the west. It went up pretty significantly, but then it fell further, so any volume that would of gone into the west. So if you adjust for that, it's probably a third of the difference that you just -- that is related to where -- what regions we saw the product in, and what the random links was in the area.

The other thing -- the second bucket -- is there are functional discounts for big purchasers. So that is a piece it. And as the price goes up from a dollar standpoint, that goes up as the functional discounts are as a percentage. The second or the third bucket for us, is that we do sell our specialty products on a different way, than daily trading. We generally provide a monthly pricing. So for our TechShield product, for our topnotch flooring products, we provide a pricing -- a flat pricing during a particular month and then adjust that. So when you have a rapidly rising market, you don't capture all that. And when you have a falling market, nobody bought anything, you don't get the advantage of it going down. So those will be the three buckets.

Okay. And I guess the last thing is, as we go in to maybe you kind of answered this. But given that you had such --- a really a three month period, I guess or four months where things were really hot. And then it just fell apart, Does that -- how should we think about the third and fourth quarter? In other words, because of what you said about the third bucket, should we maybe not expect the -- should we be careful not to just look at the price change, and assume that is going to be -- you are going to see an income hit that's equal to that?

It's -- it's directionally -- it's going to go the direction. If (inaudible) goes up, we are going to get an advantage -- if it goes downward, we're not -- we're going to get hurt. But I wouldn't expect it to be a whole lot different. I think in an environment where it's gradually changing, we are going to get more of it, than when it rapidly changes one way or the other. When it rapidly goes up, we are going to lag, because of the pricing we have on our specialty products. And in a falling market, there is no demand. And so you don't get it.

Okay. All right. And then when you -- just last question -- is on -- if you could just update us, I know you kept CapEx quite low, what do you -- is there change there? And any help again on the discrete items, when we compute our tax rate for the full-year?

Well, for the full year, if we are near break-even, you are going to have a funny rate, so taxes aren't -- isn't going to be a meaningful part of that. Right? For the capital, the $25 million that we gave you last, late last year, is still the number that we are targeting to be under. Obviously, when the market has taken a turn the other direction recently, there are some projects that will likely delay. That's certainly won't be more than the $25 million.

I got to ask you this. Given the run up we had, I know we didn't last that long were you surprised you didn't see, to my knowledge I don't think you did see -- any -- not only not -- did you not see restarts of all the plants shut down. But I don't recall seeing really many adding shifts even, any comment as to why you don't think we saw that happen?

Well, I will answer that from the perspective of our organization. Through that whole thing, and I think consistent with the communicating we have done, we ended up adding two shifts through that process. We added a shift, a permanent shift on to our Peace Valley mill, which is our joint venture mill. And had that on for about eight weeks. And then we added temporary shift in [Carthage], Texas and had that on for about eight weeks. Both of those shifts, we have now taken off based upon what has happened. That was all that we thought we could get on -- our expectation as we looked at that, was that it wouldn't last very long. I think that was probably everybody's -- your expectation as well -- you even wrote an article that you thought it was more a supply induced thing, than a huge spike in demand. That's the way we are looking at it. We were very slow to put additional productive capacity on, Chip.

What we said consistently is, that for us to put another mill on line, we have to see real sustained long-term demand, that it isn't going to be a pricing decision. It has to be a demand decision. And we just aren't in a position to see that demand right now.

I understand, thank you.

Your next question comes from Mark Connelly of CLSA. Please proceed.

Thanks, just two questions. First, how should we think about wood costs in Q3?. Is the weather affects completely behind you? And second, a bigger question, when we look at engineered wood, what does it take to turn that business profitable? I mean, it certainly had a lot of volatility but seems like OSB drives the bus there, and might be something structurally just wrong with the business. You had a big pick up in volume, you had good prices, still it doesn't make money. And I understand that the OSB prices go up, but should you be be in that business if you are a slave to OSB prices?

Our biggest drag in engineered wood right now, Mark, is the fact that we built this LSL mill. And it's running at 40% of its capacity. 14.

14.

Excuse me, 14% of its capacity at this point. So most of our losses are in one place. We know where they are. And the way we have to deal with that, is to continue to make market penetration with that product. And it's a slow go in this demand environment. It's tough to get people to change products right now. In general, the -- our biggest bogie we got to deal with in engineered wood, is not the price of web stock and the I-Joist. Its fact we have to continue to penetrate the LSL product in to the home building sector, find more and more uses for that.

And what is the prospect for that in a slow housing market?

Prospect for that is slow, in a slow housing market. I think right now we are twice what we were last year. And I think that we have to have that kind of continued improvement for the next couple of years. We do think that in an environment where overall in the engineered wood products business, we can get back to 900,000 housing starts, that we have a profitable engineered wood products business.

Okay. That's helpful. And on the wood costs, your overall wood costs?

The wood costs, we are anticipating flat cost in Q3, no change from Q2. From a supply stand point, I think the risk is going to be in Canada due to fires. If they shut down the forest segment. BT has already been shut down once.

So you're -- it's sort of a flat to up outlook.

I think it's going to be flat. The risk is on supply, you may have log shortages.

It's not a cost issue, because those are under our control.

Understood. Appreciate it. Thank you.

Thanks, Mark.

Your next question comes from the line of Steve Chercover of DA Davidson.

Good morning, guys.

Morning, Steve.

My questions are similar to the other ones. But given what looks at an asymmetric exposure to rising prices and falling prices, do you consider going to market differently? Because it seems like you don't get the benefit of the upside, but you get all of the downside.

We had those discussions every single day. You are exactly right. If you think about the specialty products, though, they are going in to building almost immediately. And they are going right directly to the job site what the builder wants is wants certainty on the raw materials, and that's why we price it that way. So we continue to evolve that, and we had various pricing themes over the years. But you are exactly right. It's not the same benefit to us on the downside, because there is no demand on the downside. Prices going down, no ones buying anything. That's why it's going down.

I didn't look at it carefully, but it seems like one of your biggest competitors in OSB, that's Norbord headquartered in Toronto. It looks like they beat expectations. So I was assuming some how they managed to crystallize a longer order file, when prices were going up. And, therefore didn't get that full downside. Do they do something different? Luckier?

I don't know what they do. But I will tell you I look at the release, they provide a fair amount of detail. And Jeff Wagner and I went through that. And if you take the volume that we produced at Hayward, and add it to the volume Jeff produced in his segment, it's almost exact exactly equivalent -- North America to Norbord. And if you take the earnings, they are right on top of each other. Absolutely on top of each other.

I have to dig a little bit better. So the earnings are the same. So the margins are the same.

Exactly.

I guess that stands for reason we thought it was a flat -- anyhow. Well, hope for incremental demand.

That's exactly right.

Thanks, guys. Have a good Holiday, Rick.

Thank you.

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

Thank you, and good afternoon. Curt, I wanted to come back on your point about the rolling 12 month figure for siding. Could you remind us what you were quoting there, it was up 33%?

What I was trying to get at, is if you look at the either EBITDA, or the profit, the operating profit in siding, if you take Q2 of 2009, that's $7 million, included in that was a $2 million loss for OSB. So siding was actually $9 million profit. In Q2 of 2010, there was $4 million of profit on the OSB, it was 18. So we went really from -- we doubled the profit in siding. This looks like we tripled it. Does that make sense, Pete?

Right.

That was my point. That this improvement was partially in OSB, and partially in siding.

Okay. Understood. But the -- how does the strong demand you are seeing in siding, square with the housing market being weak?

The siding for 2009, and I haven't done it for the first six months, but for 2009, over two-thirds of siding went to repair, remodel, and non-new home construction. It's a very, very heavy repair model. We've done very well in the shed market. We done very well in replacement trim and soffit. And we done reasonably well from a penetration standpoint, in new home construction. If you look at a -- we look at we look at siding per start, that is not going to sheds, and not going to retail. And we do that on a 12 month rolling, and we look at the last 12 months, how much siding per start did we sell. And then we look at the prior 12 months, we are up 30%. So we are continuing to make penetration in new housing, plus two-thirds of the sales went to non-new res applications.

Okay. Looking at the Q3, I know the crystal ball is a little bit fuzzy, but based on the demand levels you are seeing, what kind of guidance, if any can you offer on your big businesses, whether siding or OSB, on a sequential basis? Any order of magnitude as to what you are expecting, clearly demands come off, any order of magnitude you can help us with?

We hesitate to do that that's why we didn't give you Q2 because we didn't know it was going to happen. And that was a smart thing to do, because it fell off in June. And I just don't know -- it doesn't feel right to me that activity has fallen off as fa r-- a fast as it has. If every day I can pick up a piece of news that looks good for housing. And I can pick up a piece of news that looks bad for housing. Every single day. I just -- I don't really have a good feel where it's going.

Yes.

Like the home center business, they came out of Q1 very strong, very good comps. I suspect they are going to say comps are down for Q2, and then -- but they're optimistic for Q3, and Q4. Yes.

So -- we are definitely at a lull in the action here at the end of July Q3. It's pretty quiet out there right now.

Okay. Understood. How about -- shifting gears to Chile. Can you remind us -- you said you are running flat out there. What kind of production volumes are you running there? And can you help us to understand the profitability. Is it material? And if the demand is as big as you are suggesting in terms of the rebuild that's needed going forward, how do you adjust that do you address that with local capacity, do you address it with volume from North America? Can you elaborate on that?

We think, for capacity down there we got about 250, 260 million square feet between the two small mills. As we look going forward, we think we have the capacity in place down there to meet most of the needs of the rebuild. Because that rebuild will occur over a period of years. So the optimism in that is, that we will be able to run both of our mills full out, or we expect to for a number of years, based upon that additional demand. Now in the short-term obviously there was a spike in demand to react to the short-term catastrophe-related needs. And we were able to bring some volume over from our Brazilian mill.

And from here.

A little bit from up here as well. But we think that we pretty well got it covered, in terms of going demand with those two mills. The bigger question, in terms of longer term future, is as we are able to gain more traction in Brazil. That's a market that's ten times bigger than Chile, if I had to guess, that will be at some point in time and place, we are going to want to expand our productive capacity.

The other thing I would add to that Pete is, by consuming all that product in Chile, we are have removed from the Chilean mills the ability to satisfy the other South American markets that we were shipping to. And we have shifted that production to Brazil. So Argentina, Columbia, Venezuela, that is now coming out of Brazil.

Any update on Brazil in terms of trying to get more adoption of wood product demand? Rick, any comments on that?

Actually you made a interesting word there which is something that we are actually looking at. I think when we originally went to Brazil we had the same model in our head that we would convert building practices. And as we looked at what we can do in Brazil we are trying to adapt our product into building, that's actually going there. Because we are running in to bigger obstacles, around straight conversion of building systems than what we anticipated. So we are seeing traction there. And that will actually be our strategy going forward as we see it now, is instead of trying to convert to a totally different building system, we are going to look for uses of our OSB into existing building systems. And we think that's the path of least resistance in the short-term.

Okay/ It's helpful. Last question, and I'll turn it over. The fiber situation, Peace Valley, as you look out long-term, can you comment on your expectations as related to the pine beetle, salvage harvest, there is plenty of fiber now. Do you have concerns going forward about the fiber availability?

We do not. And where we are located in Port St. John, we are not affected by the beetle kill at all, plus that's not the wood we use. We use Aspen and other -- poplar.

Okay, Very helpful Thanks, guys.

Thank you.

At this time, there are no further questions in the queue, and I would like the turn the call back over for closing.

We appreciate all of you joining us on the call. We did have great quarter. We are hoping that the market is going to pick up here, so we can have a couple of more great quarters. I think the important message I want to leave you with is what Rick talked about, is if we get a little bump in demand, the organization is situated, so we can really take advantage of that, and put good solid numbers on the bottom line. So thanks very much. With that, I will end the call. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day