Louisiana-Pacific Corp (LPX) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Louisiana-Pacific Corporation earnings conference call. My name is Michelle, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Curt Stevens, Executive Vice President of Administration and CFO. Please go ahead, sir.

Thank you, Michelle, and thanks all of you who are joining us on this conference call to discuss our financial results for the last quarter. As Michelle said, I'm Curt Stevens, the CFO, and with me today are Rick Frost, LP's CEO as well as Mike Kinney and Becky Barkley, our primary Investor Relations contacts. As I usually do, I'll begin the discussion with a review of the financial results for quarter. This will be followed by some comments on the performance of the individual business segments and then selected balance sheet items. After I finish my comments, Rick will take over to discuss the general market environment in which we operated, last quarter's perspective on the recent operating results and some thoughts for the outlook for the last quarter of 2010 and looking into 2011.

As we have done in the past, we've opened up this call to the public and we are doing a webcast. The webcast can be accessed at our external website, 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. I will reference these slides as I go through my comments. We also filed an 8-K this morning with supplemental information that will be helpful as we discuss the earnings, and we will file our Form 10-Q later this afternoon.

I want to remind all the participants about the forward-looking statement comment that is included on slide two of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information which is included on slide three. The appendix attached has some of the necessary reconciliations, and that was supplemented by the Form 8-K filing we made earlier this morning. I'm not going to reread these statements, but I am incorporating them for this reference.

Slide four of the presentation is a discussion of Q3 2010 results compared to the same quarter last year and the prior quarter. We are reporting today a net loss for the third quarter of $32 million, or $0.24 per diluted share. Net sales from continuing operations were $323 million for the quarter. For the same period last year, we reported a net loss of $12 million, or $0.12 per diluted share on sales from continuing operations of $311 million. Adjusted EBITDA from continuing operations was a positive $4 million in the quarter compared to $11 million in Q3 of 2009. This is the third quarter in a row of positive adjusted EBITDA despite a housing market that hasn't improved very much.

Slide five of the presentation is a discussion of the special charges in the quarter. The largest is we did record a $17 million other than temporary impairment associated with the anticipated sale of an equity investment and joint venture. What this adjustment did is reduce the carrying value to the estimated sales price. The other charges in the quarter were largely related to the settlement of the final opt outs associated with the OSB antitrust settlement. After we adjust for these, the adjusted loss from operations would be $0.09 per diluted share.

Slide six of the presentation is a discussion of year to date results compared to the same period last year. Year to date, we are reporting a net loss of $32 million on net sales of $1.1 billion. Interestingly, at the end of Q3, we had already surpassed the sales levels for the full year of 2009. For the same period last year, we reported net loss of $72 million on sales of $783 million. Adjusted EBITDA from continuing operations for year to date was a positive $81 million compared to a $25 million loss for the first nine months of last year. The tax rate on continuing operations for first nine months was 32% as compared to 40% in the prior year. For 2010, the difference between the 32% and the statutory rate is primarily due to the impact of foreign source income, FX income on certain intercompany loans and an offset due to the non-deducibility of the other than temporary impairment that we took on our equity investment.

Before discussing the performance of each of our segments, let me just take a few minutes to explain at a high level why earnings are down slightly, though sales are up modestly. On the sales side, OSB pricing accounted for about a $10 million improvement. However, on the cost side, we did have an increase in the per unit cost of raw materials that accounted for a reduction in earnings of about $6 million. The weakening US dollar negatively affected our profits in our Canadian operations by about $3 million. Finally, and probably more significantly, in all of our businesses, we took more production down time in Q3 of 2010 compared to last year as we adjusted to reflect lower customer demand due to the anemic building activity that we had over the summer.

Slide seven of the presentation is a summary of our OSB segment. We had an operating loss of $5 million in the quarter compared to a loss of $6 million in Q3 of 2009. For the quarter, we had about a 4% increase in volumes and an average sales price that was 9% higher. As I mentioned just a minute ago, the increase in sales price resulted in a $10 million improvement in earnings and adjusted EBITDA. Offsetting the increase in price was the strengthening of the Canadian dollar and raw materials cost. Adjusted EBITDA from continuing operations in the OSB segment was flat at a positive $5 million between the years. Compared to Q2 of 2002, volumes were lower by 6% while price decreased 32%. Year to date in our OSB business, we had operating income of $38 million compared to a loss of $48 million in the same period last year. Adjusted EBITDA for the comparable periods was $67 million in 2010 and a loss of $22 million in 2009. Pricing was primarily responsible for improvement, although volumes were higher by 18%.

Slide eight of the presentation is a summary of our siding business. This includes our SmartSide and CanExel siding products and commodity OSB produced in our Hayward realm. For the third quarter, siding had operating income of $9 million, which was lower than the $16 million recorded in the same quarter last year. Adjusted EBITDA from continuing operations in the siding segment was $13 million compared to $21 million in Q3 of the last year.

For the quarter, sales were down 8% with the unit volumes lower by 11% in SmartSide and up slightly in CanExel. During the quarter, SmartSide average sales prices were up 1%, primarily due to product mix with the individual product pricings pretty flat. CanExel prices showed an increase of 10%, but this is largely due to the strengthening of the Canadian dollar as we sell most of that product denominated in the Canadian dollar. On a year to date basis, siding had operating income of $40 million compared to income of $25 million same period last year. Adjusted EBITDA for the comparable periods was $54 million in 2010 and $39 million in 2009. Volume and higher pricing of OSB in Q2 accounted for most of this improvement.

Slide nine of the presentation is a summary of our engineer wood business. This includes our I-Joist laminated strand lumber produced at Houlton, Maine, and laminated veneer lumber, plus some related products. This also includes the sale of I-Joist and LVL produced by the Abitibi JV who are under a sales arrangement with Murphy Plywood. For Q3, EWP recorded a loss of $5 million compared to a loss of $6 million in Q3 of last year. Adjusted EBITDA from continuing operations in the EWP segment was a negative $3 million in both quarters. Volumes of I-Joists were down significantly, 42%, and LVL/LFL were down 28% compared to the same quarter last year. These declines were all tied to the slowing new housing activity that led to significant reductions of inventory in the channel after inventory increases in the second quarter of 2010.

Pricing was up 15% in I-Joist, 11% LVL/LFL due to the price increases that we implemented across EWP to offset the significantly higher raw materials cost, principally OSB, veneer and lumber. Year to date, we had an operating loss of $16 million compared to a loss of $24 million in the same period last year. So, even in a horrible pricing market, we have made quite a bit of improvement in EWP. Adjusted EBITDA for the comparable periods was a loss of $6 million versus $15 million in 2009.

On our other building products, there's no slide for this, but let me make a few comments. Included in this area are South American operations, our molding business, the equity investment in US green fiber and some non-operating facilities. For the quarter, sales were up 52% at $41 million from $27 million recorded last year, primarily driven by our South American operations. Income and Q3 for both years was about $1 million, while adjusted EBITDA was about $3 million. Improvement in South America was offset by lower molding earnings due to weakness in the retail channel and additional costs associated with non-operating facilities.

On a year to date basis, we had operating income of $4.5 million compared to income of $2.3 million in the same period last year. Adjusted EBITDA increased to $13 million from $10 million in 2009. A few other items, we did have a small foreign exchange loss in the quarter compared to about $1 million gain in the same quarter last year. Investment income in the quarter was lower than Q3 of 2009, primarily due to the receipt of the $113 million unlimited recourse notes that was paid in the second quarter. Therefore, about $3 million of interest income and conversely, interest expense was not earned or accrued in 2010.

Total SG&A costs were down slightly in the third quarter of 2010 compared to the same period last year. The reduction was primarily due to cost containment. For general corporate, they were about comparable between the two years. Slide 10 of the presentation is a summary of the balance sheet, cash, cash equivalents, investments and restricted cash of $434 million at the end of the quarter, working capital of about $572 million. We are in a net cash position at the end of the quarter of $211 million.

Capital expenditures for the first nine months were $12 million, offsetting that is we did have refunds from our joint ventures of about $6 million. The ending book value per share was $9.40. A couple of things I want to make a comment on the balance sheet. In mid-August, we did pay off the $61 million remaining on the 2010 notes. That matured, so that was paid. And then just in the last few days, we did modify our asset based loan agreement with our banking group to increase the availability, lower our costs and reduce the administrative burden. We will be issuing an 8-K tomorrow that will give you more detail on that. With that, let me turn it over to Rick.

Good morning, everyone. As Curt said, we do appreciate you listening in on our Q3 call. It is a cloudless day in Nashville today. I'm happy to report that the Titans are off to a 5 and 3 start which makes us happy. And on a personal note, my alma mater LSU beat Alabama over the weekend, and I wish that business was going just as well. In my remarks this morning, I want to give you some observations on Q3 2010 by business, discuss some accomplishments with you for the quarter that are not in the release and then finish up with a few forward-looking thoughts.

In our internal recap of Q3, the term we used to describe the overall business activity was lackluster. Market activity across the building products sector fell in the US considerably from Q2, as you know. Most people drawing a direct correlation with the expiration of the home buying credits at the end of April. It seems clear now that business was actually being pulled forward in response to that reasonably arbitrary stimulus.

In our last call at the end of July, we discussed the fact that sales activity dramatically slowed in June and July. August and most of September were also relatively anemic as our customers adjusted inventories downward. Retail was quite slow, and we did take a lot of manufacturing down time to stay aligned with our customers' take aways and to bring our inventories down in response to that. We did reduce our inventories from the end of Q2 to the end of Q3 by about $17 million, and to do that in a falling sales environment required idling a lot of our North American manufacturing.

We are proud to report that LP continues to perform against its industry leading safety record. We had an excellent 100 days of summer safety initiative this year and ended up Q3 with our lowest total incident rate ever of 0.49. Both our OSB business and our engineered wood products business went the entire 100 days injury free. And during the quarter, we were honored by the National Safety Council to get an industry leader award recognizing the top 5% of its member companies.

As well, our Lean Six Sigma teams continued to drive overall cost containment and improvement at a 6 to 1 return over the cost to support that program. And in this environment of reduced manufacturing activity, I think that's a pretty good pace. This is our third full year as an LSS Company, and we remain pleased with that technology as our continuous improvement vehicle. In spite of severe market headwinds in Q3, we accomplished over 550 sales wins in the quarter. Remember, I have previously defined a win as a product placement with a new customer, or an additional product placement with an existing customer, and our siding products continued to lead this metric. But to put Q3 into its proper perspective all of our North American production volumes were lower in Q3 2010 compared to Q3 2009.

To make a few comments now about each of our businesses, beginning with OSB. Our OSB business, including our Peace Valley mill, operated at 66% of what our current effective capacity is. That excludes Chambord and Clark County, but includes Peace Valley. I did make a mistake with you on the Q2 call as I gave you an incorrect number saying that our effective -- we ran at an effective capacity of 86%. We actually ran Q2 at 73% and then at 66% in Q3. Including Chambord and Clark County, our Q3 percent utilization of OSB capacity was about 53%. While not actually occuring in Q3, the other OSB item of note was our announcement in October to move our OSB trading desk to Nashville over the next few months. As a result, we will permanently close our long standing administrative office in Conroe, Texas by the end of Q1 2011.

Moving on to siding, siding volumes did slide significantly in Q3 in our SmartSide line. Sales were off 8% Q3 to Q3, and volume was off 11%. We now relate this to what appears to have been a Q2 2010 pull forward and subsequent inventory adjustment by our customers. However, we see or sense nothing affecting our optimism on continued siding growth trends. Engineered wood products certainly felt the falloff in housing activity in Q3. Although we were able to hang on to most of our price increases that we got in the first half of the year, LSL and LVL volume was down 28% in Q3 from Q3 last year, and I-Joist volume was down 42%.

Q3 to Q3 financials were about the same, and I give our engineered wood products folks a lot of credit in their year to date 2010 versus year to date 2009 operating loss improvement. But the fact is, this business segment needs new residential construction starts to get profitable. South America included in our other reporting segment continues to grow for us. Both Chile and Brazil were profitable in Q3. Both mills in Chile ran full shifting in Q3. Most of the surge in Chilean OSB demand to date has not actually been for reconstruction from the earthquake, but for immediate repair and shelter needs from that February earthquake. The new Chilean administration has slowed the reconstruction effort for a while to review how construction contracts are being awarded. We anticipate that both Lautaro and Panguipulli will continue to run full. Our Brazil mill in Ponta Grossa is running at about half of its capacity now and is improving monthly as our Brazilian sales team finds more ways to penetrate local and export markets with OSB.

During the quarter, as Curt said, we did retire about $61 million of debt, and we have also improved our net cash position from the beginning of the year from $163 million to $212 million. We spent about $3.5 million of capital during Q3. We are at about $12 million year to date, and I expect to come in for the year at less than $20 million. Looking forward at Q4 and early into next year, I would describe it as not a pretty picture. Forecast consensus is currently that starts for 2010 are going to sugar out about 600,000 to 610,000 all in. And that includes a further slowing in November. I would think a very anemic December as we slip into our normal seasonal slowing.

We saw orders in our siding business pick back up in October. OSB pricing got a little bump early in October but appears to be sliding slowly now as we slip in under the influence of seasonal effects, and I expect December to be quite slow for housing. I also expect that our customers will be doing all that they can to be very lean of inventory by the end of the year. So, at this time, I expect January and February to also be slow. It's hard to make a bet whether our customers will take any kind of a pre-spring inventory position in March. We are putting in a few more logs into our wood yards to hedge against this possibility. On CapEx, the pre-guidance that I will give you to our CapEx for 2011 is about $35 million on our facilities and then another $20 million or so to complete the Ponta Grossa mill purchase in Brazil. And I will firm that up with you on the next call.

Finally, we are in the process of developing our operating plans for 2011. Our underlying assumption is for 700,000 new starts all in for next year. That's not a big improvement, but at least it's some. Consensus for 2012 is currently around 1 million starts, which we would certainly welcome, but are not betting on at this point in time. Our year to date 2010 versus 2009 comparisons reflect quite favorably and reinforce the fact that our operating folks are being very thrifty with a buck and that our sales and marketing folks are getting what they can out of this market. That said, I'll turn it back over to Curt for questions.

Thanks, Rick. Michelle, if you could go through the queue for us.

(Operator Instructions) Your first question comes from the line of Gail Glazerman of UBS. Please go ahead.

Hi, good morning.

Good morning.

Just on the OSB pricing quickly, your performance was a little bit better than the industry north central. Was that just a regional mix issue, or is there some catch up in the fourth quarter?

There is a regional component to that, Gail, but as we talked about in July, some of our valued added products, we have pricing that is monthly pricing. And so we didn't capture as much of the uptick in Q2 as we would have in Q3 as pricing fell off. We actually captured a little bit more of that on the valued added products. So, that was the principle area.

Okay, and engineered wood, do you -- even with the correction in OSB pricing, do you continue to think you can hold on to prices there? Or is there growing pressure?

From our perspective, pricing is more important than volume. So, we are certainly focused on business that at least keeps the losses at a low level.

Okay.

We're doing everything we can to hang onto pricing.

Okay, and Curt, can you give us a little bit more detail on what that impairment JV involved, and is there an asset sale down that road -- or some time near-term that we should be looking for (inaudible)?

There's discussions going on with a buyer of our green fiber investment. And from a timing perspective, I would say it's in the next two quarters if it goes forward. But as we've learned in our other asset sales, it's very difficult to actually get a check. We're being cautious of that. But we have gone far enough in the discussions that we felt it was necessary to reduce the investment value. Essentially, this is equivalent to goodwill associated with when we acquired this business in the late '90s.

Okay. And just final question on input costs, I guess they were up a bit in the third quarter. Is that trend continuing? Or have those started to stabilize?

For the year, input costs were about $21 million higher. If we take the volumes we had in 2010 and apply price -- look at the pricing between the two years, we're anticipating as we look from Q3 to Q4, probably a slight increase, but not significant. And then as we look into next year -- let me just go back. The elements of the pricing increase were largely in resins, having to do with the price of oil. So our PF and our MBI resins were about two thirds of that. It really is contingent on what those input costs are for the next year.

Okay. Thank you.

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

Yes, hi. Good morning. I noticed it looks like your net debt didn't really change much from the second quarter even though it looks like your working capital came down. Was there anything else going on unusual with the cash? It looks like your working capital on our measures went down like $35 million. And was there anything that would have offset that?

From a net debt perspective?

Yes. Or net cash.

Well, we did pay off the notes in August. So, that came down -- so debt came down by $61 million.

And cash went down about the same amount too?

Right. That's about right. Because EBITDA for the quarter was a positive $4 million.

Okay and seasonally, would you expect to see the working capital move down again? Or, I guess it's an offset between -- I guess the receivables are down. But at some point your start to build a little bit of inventory as you get into the -- you start thinking about the next building season, or what should we expect from that in the fourth quarter?

Well, Rick talked about is that we will be putting in a few more logs at we exit this year than we did last year. So, that will increase the inventory a bit. On the receivables side, we're running right now about 20 days sales outstanding in our receivables. And so if you look at the end of the year, that's the absolute lowest it's going to be because we don't ship anything the last two weeks of the month. So, fundamentally, you only have a week of shipments in your receivables at the end of the month -- or the end of December. And then traditionally, we build that accounts receivable up in Q1, and we also have the inventory build in Q1. So, we should see receivables come down, inventories come down a little bit, but not much. So, the reduction in Q4 will largely be receivables.

And it sounds to me -- are you doing anything differently this year? Last -- this -- or this fall? When you go back to last fall, no one saw quite how crazy things would get, brief as it was in say March and April. But we did sort of have this -- seemed like the market was sort of fighting to stay caught up as you got into even January and certainly, February, March, April before it jumped ahead of itself and demand has collapsed. But are you doing anything this year that might be more anticipatory on the demand side, or are you just going to literally wait to see if it happens or not?

The only thing that we're doing is we're putting in a few more logs, Chip. And we have basically the flexibility with our mills to expand if we start to see something coming, but we're not planning on it. Remember last year, we had, what I'll call kind of this arbitrary influence, of the tax credit. Obviously, we don't think that's going to happen. And we're just not getting any word right now from our customers on whether they're going to take a pre-spring position in inventory. We have no sense of that at this point. So bottom line, the only thing we're doing differently is putting a few more logs on a couple of mills in case we need them. And then with the long-term weather forecast being La Nina, we don't expect in the spring the wet weather that we had this year.

Okay, and then last thing, and I know maybe you might want to save some of this for the filing, but it seems to me, Curt, the last financing you had that I think was set up about 18, 20 months ago made it very hard, if I remember, to even get the first $50 million, let alone the second $50 million. If I remember, it was like $100 million revolver type thing. How will -- can your give us any color as to -- first of all, is that impression correct? And secondly, it seems like it might be a little bit easier to be able to draw money as you look at this new arrangement. Can you tell us anything about that?

As I said, we will have the details in the filing tomorrow. But basically, when we entered in to that ABL was at the-- I think was in March of 2009, which was probably the bottom of the entire cycle. So, we're not in a very good position to negotiate with our banks. What we have done is we have shown them that we can become EBITDA positive. As I said, the last three quarters we've done that. We've shown that we've improved our net cash position. As a result of that, we've been able to negotiate easier access to the funding, as you suggested. In addition, and probably more important from my perspective is we've lowered the fees quite a bit. And we've also removed some of the administrative burden, and we've also relaxed some of the buckets on the covenant side.

Got you. Okay, we'll look forward to seeing that. Thank you.

Your next question comes from the line of Mark Connelly of CLSA. Please go ahead.

Hi, good morning. This is Aashish standing in for Mark. Just had a -- was wondering, if we remain in a low demand environment as you guys expect but we experience rising input costs, say over the next six to 12 months, are there any further productivity increases you guys can implement to offset some of that impact, or are there other things you can do with your facility rationalization? Thanks a lot.

Aashish, we're about where we think we need to be on facility rationalization. Obviously, if it got worse from where we are today, we have plans on how we would handle that. We're making, I think monthly productivity gains across all of our facilities through our Lean Six Sigma program. But there aren't any big silver bullets out there to offset this stuff in terms of something we'd put an announcement out on in terms of shutting this down or shutting that down. So, I don't know if that answers your question or not.

Yes. No, that's kind -- is there also -- do you think there'd be any ability to pass on some pricing? Or would it be mostly just trying to get it on the productivity side?

Obviously, with OSB trading as a commodity, costs and pricing are not terribly related. So probably not.

Got it. Thanks very much.

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

Thank you, and good morning. And Rick, congratulations on LSU and the Titans.

Alright.

I was hoping you could remind us in your siding business, how much of the end market demand you're seeing is new housing, which obviously is depressed, versus repair and remodel. And what's your outlook for repair and remodel going forward into 2011?

We're putting about 60% of our siding business into some form of repair and remodel. And all of the forecasts and everything that you read has repair and remodeling retail all coming back next year faster than rest of the industry.

Okay. And Rick, I'd be curious on how you assess inventories in the channel, whether they be producers, wholesalers, distributors, builders -- if the channel wanted to build working capital, do they have the liquidity needed to invest in working capital, or are we looking at a pretty lean channel?

Our sense with our customers is that they're very lean right now. And our belief is that they will -- if they have any fat left at all, they will lean out by the end of the year to get their numbers right. Our demand, as I said in my prepared comments, did pick up a little bit on the repair and remodel side in October. Actually, we liked the month that we had in siding very much. And we're back towards where our plan was, which was a good sign. But I think that you'll -- we don't sense any of our customers taking an early position at this point in time.

Okay. That's helpful. Maybe a last question, if I could, for Curt. The interest expense was a little lower than we thought. If I annualize that number and take it as a percent of long term debt, it's sub 6%. Presumably, you're not getting a whole lot of interest income on your cash balance. Anything else going on on that interest expense number? Is that a good quarterly run rate going forward?

What happens in the interest expense and the interest income is that the accounting literature forces us to report those on separate lines. So, you do have the impact of those timber notes in there. That's what I explained, the reason the interest expense went down is we did pay off -- we did receive $115 million or $116 million on one of the timber notes, and we paid off $113 million. But both the income and expense side went down by about $3 million between Q2 and Q3. You really should look at the long-term debt footnote in the 10-K, and I'll give it to you. But the impact of those timber notes just really throws those around.

Understood.

And it's grossed up, it's on both sides.

Okay. Very good. Thanks, guys.

Thanks, Pete.

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

Good morning, everyone. Start with Curt. Can you discuss the share count? It seems to have moved around. Is that due to some of the debt that you've retired in the quarter? And maybe just tell us what share count we should use?

Well, the share count has moved around because of two things. One, the equity offering that we did last September is a piece of it. The second piece of that is the warrants that are being exercised. It didn't affect this quarter, because we were in a loss position. From a dilution standpoint, some of those were non-dilutive. Or were diluted so they didn't get counted in the share count. What is the share count, Becky, at the end of the quarter? 138.

Okay, so that was a function of the loss?

Yes, it was a function of the loss.

Thanks for that. And perhaps an update on your auction rate securities? Are you still getting paid on those? Can you discuss what's going on in the lawsuit?

The -- we are getting paid on all but the one auction rate that I think they stopped paying about 18 months ago or more. So, the rest of them are all paying on time. The lawsuit, as disclosed in the 10-K, it's really in the same point it was before. We have one lawsuit that's been moved to New York and one that still is in the ninth district. We are pursuing those and hopefully, we'll be successful.

Aren't most of those ARS coming due some time in the near future?

No. They have long tails on them. Some are out to 2020, 2025.

Oh, really? Okay. And then going back to Chip's question, doesn't sound like you're planning to run any more facilities in 2011 than you did in 2010. So, how do you flex it? Are you planning to run only two shifts at certain plants? Or how would you --

We have shipping arrangements that are different by mill and by business. But what we -- basically, the way we set up our OSB business is we have a primary mill and a secondary mill. And so we try to focus more of our down time on our secondary mill in each region than our primary mill. But that's basically on a week by week basis in terms of looking at what our order file and then adjusting our run rate to that in each particular region. So, some mills are running two weeks on, two weeks off. Some mills are running reduced shifting. Some mills are running full while another mill barely runs. So, it's different in each region based upon what we think the takeaway is going to be in that particular area.

So, the only difference this year is your log inventories going into it.

That's the only difference that we have, that we're doing purposefully heading into the spring.

Very good. Thanks very much.

Your next question comes from the line of Mark Weintraub of Buckingham Research. Please go ahead.

Thank you. Trying to understand, if the 700,000 housing start environment plays out and your view and repair remodeling plays out as well, order of magnitude? What would that do to OSB demand, do you think, 2011 versus 2010?

Go ahead.

Well, we use, Mark, as kind of a thumb, look at that as each 100,000 housing start is about 1 billion square feet of capacity on the housing side. And then if we get incremental repair and remodel demand, we would add to that.

Okay. So, a 5% type of -- a little less than 5% perhaps, 5% increase?

Well, we're not doing $20 billion today. I think the number for 2010 is likely to end up between $15 billion and $16 billion for the year, so it would be less than that.

Okay, and I know you've done a lot of work to reduce the fixed cost basis on your system. When we think about the impact that increasing volume can have, how much of additional profitability, beyond what the profit per unit you're showing at current prices, can we think as being levered by that incremental volume?

You'd have to look at that by business. In siding, every unit of siding that we sell from a volume perspective adds to our profitability. For both EWP and OSB in Q2, the additional volume at the pricing that was in the market would not have increased profitability at all.

In Q3?

In Q3. But as you go forward, what you can see is the impact of incremental demand in Q2, for example, and what pricing did with the dramatic improvement in the earnings. So really, all three of the businesses in Q2 with not much more demand, but incremental demand.

Okay, and just to clarify. It would be cash positive, even at Q3, but not--but it wouldn't be EBIT positive? Is that right? It's the difference between the depreciation?

Right, it would be cash positive in OSB, it would not have been EWP.

Okay, and the DD&A actually goes up when you're running more because of the way you account for it.

Right, we account for our units of production. Rick made the point, but let me give you some numbers. Our production volumes were so low in Q3 compared to Q3 of last year. Just to give you an idea, OSB was only off 3%, so it wasn't off much. Siding production was down 25% Q3 of '09 to Q3 of 2010. I-Joist was down 43%, and laminated veneer lumber, laminated strand lumber is down 23%. So, to have basically comparable results with that much less production volume shows you what we have done at the facilities with our flexible scheduling and trying to reduce our fixed costs.

And though it -- but what -- how much of it, though, is the flexible scheduling so that when the volume picks up, it doesn't all flow to the bottom line versus how much of it is a reduction of fixed costs so that when volume picks up, it would all flow to the bottom line? That's where I'm trying to get to.

I'm not sure I can give you that answer. From a fixed cost standpoint and also from a veritable cost standpoint, if we have to increase shifts, obviously, you're going to have costs associated with that. On the other fixed costs, they should -- we should gather most of that, but I don't have a percentage for you.

Okay. Thank you.

(Operator Instructions) Your next question comes from the line of Paul Quinn of RBC Capital Markets. Please go ahead.

Yes, thanks, good morning. Just a couple of questions and a comment. On South America, I'm trying to understand the upside. And it sounds like you've described it as most of the USB right now is for immediate repair. If the Chilean government turns around and starts to look at increasing their reconstruction, which we expect going forward, how do you take advantage of that with Chilean mills operating at 100%?

Well, you take advantage of it a couple of ways. We did shift down product out of North America to help them with the short-term blip right after the earthquake. Obviously, with the production schedules that we are running in the US, we have the opportunity to do that. The weak US dollar is kind of an opportunity for that. But primarily the way we're going to do that, as Rick said, we're only running our Brazilian mill at 50%. So, we can easily bring product from Brazil into Chile, and that's probably the first place we would go. And the second place we would go is looking at our OSB operations in the North America to support that surge in demand.

As well, what will happen is that that product that has been used over the last few months, just for these temporary shelters, there'll be less of a demand for that, and that product will go then into satisfying real home construction. We had about 500,000 homes that were affected in Chile, which is somewhere in the neighborhood of two to three years of supply. So, the product that's been going into temporary shelters and packaging and just basic emergency relief will transfer then into actually building structures.

I think the other way that we are looking at that is Chile exported product to other countries in South America as well as into Asia. And we will try to satisfy that demand from the Brazilian mills or the North American mills.

What's the timing on the Chilean government change to move to more reconstruction?

I think just a couple of months. They just came in and looked at -- they wanted to take a look at how they were allocating out this work. I think they may have found some things that they didn't particularly like from the last administration, and they were -- before they went whole hog on that, they wanted to clean up a few of those things. So we didn't really expect that to put things off for more than just a few months.

The miners are safe, they have to turn their attention to something else.

Okay, and just on the siding, can you remind us the split between the SmartSide and CanExel and your expectation for the CanExel product line going forward? It seems like the Canadian housing market is slowing down here.

CanExel is on allocation, so we haven't seen -- I don't anticipate that there's -- there'll be enough of a slowdown in the Canada market to put the CanExel product line in any kind of a shape where we won't sell it out. So, we're not looking there. Where that may affect us more is we do sell a lot of engineered wood products up there. And if housing slows down, then that will affect our takeaways in engineered wood.

And just a split on sales or operating earnings between the two?

We haven't provided that information. It is a single line in East River that runs CanExel, and then we've got five facilities in the US that produce SmartSide.

Okay. Then just maybe a comment. I understand the bias for football analogies describing your operational performance. But looking at the Nashville Predators at 5, 5 and 3, I think they're probably a better comp.

Paul, well said, Paul. But I'm not a hockey fan, so I'm not paying any attention.

Thanks, guys, good luck.

Michelle, I think that's all the time we have. If you could give the replay information, and if for those on the call, Becky and Mike will be available for follow-up. Thanks very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.