Louisiana-Pacific Corp (LPX) 2011 Q2 法說會逐字稿

Good day, Ladies and gentlemen and welcome to the Second Quarter 2011 Louisiana Pacific Corp. earnings conference call. My name is Derek and I'll be your Operator for today. At this time all participants are on a listen only mode. We will facilitate a question-and-answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Curt Stevens, Executive Vice President of Administration and Chief Financial Officer. Please proceed.

Thank you very much, and thank all of you for joining us on this Friday afternoon to discuss our earnings for the second quarter of 2011. I know it's been a busy day for many of you.

As the moderator said, I'm Curt Stevens, the CFO and with me today is Rick Frost, our CEO, as well as Mike Kenny and Becky Barclay, who are our primary Investor Relations contacts. As I usually do, I'll begin the discussion with a review of the financial results for the quarter, and then I will follow that with some comments on the individual segments and selected balance sheet items, Then I'll turn it over to Rick, who will discuss the general market environment in which we operated last quarter, his perspective on our operating results, and some thoughts on the outlook for the remainder of this year and into 2012. As we have done in the past, we've opened up this call to the public and are doing a Webcast and this can be accessed at our public website www.LPcorp.com.

Additionally, to help with the discussion today is a presentation that we sent out with the release, and I will be referencing those pages as I go through my comments. We've also filed an 8-K with supplemental information that will help with the understanding of this material, and we expect to file our Form 10-Q later this afternoon.

And again, before I start, I want to remind you about the forward-looking statement comments that's included on Slide 2 of the presentation, and also on Slide 3 is a discussion of our use of non-GAAP financial information. I'm not going to read either one of those but I am going to incorporate it by this reference. One final thing before I get to the numbers, I want to put this in context -- I want to put it into context of what housing has done in the second quarter and also on the back drop of OSB pricing.

In the first half of 2010, we believe that the government-provided housing incentives did have a positive impact on both the actual and perceived activity in the quarter. As a result, we did see increased product demand in Q2 of last year and enjoyed favorable OSB pricing, particularly in the second quarter.

The first half of this year started out with some degree of optimism in January and February, but this quickly faded with the adverse weather conditions across the country, lackluster housing demand and numbers, and slowness in the retail sector. This affected the demand for building products in both the first quarter and the second quarter, and had an extremely adverse effect on our pricing for OSB. The bottom line, in Q2 housing starts were down 4% year-over-year, and random links reported that average OSB pricing, based on the benchmark north-central 716, declined by 42% or $123 a $1000. This affected LPs overall sales and operating earnings by $75 million, just due to the change in OSB pricing.

With that as backdrop let me talk about the earnings. If you go to Slide 4 of the presentation, this is our earnings summary. We will be, we are reporting today a net loss for the second quarter of $35 million, or $0.27 per diluted share. Net sales for continuing operations were $363 million for the quarter. For the same quarter last year, we reported income of $22 million, or $0.16 per diluted share, on sales from continuing operations of $448 million. Adjusted EBITDA from continuing operations was a loss of $7 million compared to income of $75 million in Q2 of 2010.

There was movement in the tax rate on continuing operations between the quarters. The effective tax benefit rate on continuing operations in Q2 2001 was 20%, very similar to Q1. As we discussed last quarter, this is primarily related to the requirement to an evaluation allowance against the use of certain of our losses in various jurisdictions above a specific threshold, and this is all due to the accounting rules. Compounding this is in the Discontinued Operations, we were required to use the statutory benefit rate of 38.7%, which results in a slightly lower tax benefit rate on continuing operations. I'll talk about this in a minute, but that affected, if you used a more normalized rate, that would have improved or lowered the loss by about $0.04 to $0.05. In Q2 of last year the tax benefit rate was 35%, which was the statutory rate blended for our various foreign pieces.

Slide 5 of the presentation is a discussion of year-to-date results. For the year, we're reporting a net loss for the first 6 months of $59 million, or $0.45 per share, on net sales from continuing operations of about $700 million. For the same period last year, we reported breakeven results on sales from continuing operations of $745 million.

Adjusted EBITDA for the 6 months was a positive $3 million, compared to a positive $76 million in the first half of last year. And the tax rate, as we've discussed, was a little bit unique.

On Slide 6 of the presentation is a reconciliation of special charges. We did take additional impairments, principally on assets held for sale of about $2.5 million, to adjust those book values to what we expect to receive in these future transactions. In the other operating charges and credits there were 2 items, a positive adjustment to a civil culture reserve and an increase in an environmental reserve that netted to a favorable $600,000. Without these items, earnings per share would have been a loss of $0.24 a share. We also use a more normalized tax benefit rate, our EPS would have been a loss of $0.19 a share, relatively close to the $0.16 loss that is the First Call consensus.

Let me turn to the segments on Slide 7 of the presentation is OSB. We did have an operating loss of $23 million in the quarter compared to $48 million of income in Q2 of 2010. For the quarter, we had a 4% increase in volume with a lower average sales price of 36%. The decline in the sales price accounted for virtually all of that change in EBITDA of $71 million. Adjusted EBITDA from continuing operations of the OSB segment was a loss of $13 million compared to a positive $58 million. Again, that same $71 million that we talked about attributable to pricing.

Year-to-date, OSB had a loss of $32 million compared to income of $43 million in the same period last year. Adjusted EBITDA was a negative $13 million in 2011 compared to a positive $62 million in 2010. Pricing was down 25% between the 2 years, and accounted for almost all of this difference.

Slide 8 of the presentation, our siding segment, this includes our SmartSide and CanExcel siding products, and also includes commodity OSB produced in our Hayward siding mill. Net operating income in this segment $11.3 million, and it was worse than the $22 million recorded in the same quarter last year. Adjusted EBITDA for continuing operations in this segment was $15.3 million compared to $27.4 million.

For the quarter, sales were down 9%, with the unit volumes down 8% in SmartSide and down 6% in CanExcel compared to the same quarter last year. The change in OSB pricing in this segment affected both sales and earnings by about $4.5 million. For the quarter, our SmartSide average sales price was up 2%, and that was due to a price increase that we put in on April 1st. This was put in place to offset rising zinc borate and paper overlay costs.

Our CanExcel prices show an increase of 22%, but this is largely due to CanExcel primarily being sold in Canada and the strengthen Canadian Dollar increased the US equivalent sales price. Year-to-date, siding had operating income of $24 million through the first 2 quarters compared to $30 million the same period last year. Adjusted EBITDA was $32 million in 2011 and $41 million during the same period last year, with most of that change being the OSB pricing.

Engineered wood is Slide 9 of the presentation. This is a reminder this includes our I-joists, laminated strand lumber and our LVL products. It also includes sales from 2 of our joint venture mills with Abitibe and a sales arrangement with Murray Plywood. For Q2, EWP recorded a loss of a little over $3 million compared to a loss of about $4.5 million in Q2 of last year. Adjusted EBITDA from continuing operations was breakeven in the quarter, compared to a loss of $600,000 in Q2 2010.

Volumes for I-joists were down significantly, 29%, while the combination of LVL and LSL were down slightly compared to the same quarter last year. We attribute this decline to lower housing starts, as well as an increase in the multi-family versus single family, for which EWP uses more product. Pricing was up 3% and 2% respectively. These increases were a result of the price adjustments that we made last year to offset higher raw material costs. Year-to-date, the operating loss in the EWP improved to a $9 million loss compared to an $11 million loss, and adjusted EBITDA was just over $1 million compared to a loss of $4 million in the same period last year.

While there is no slide for other building products, let me make a few comments. Overall, it was $2.2 million positive in the second quarter compared to about $3.5 million in the second quarter 2010. Adjusted EBITDA was$ 5.5 million versus $6.5 million in 2010. Sales were up 5% to $50 million in the quarter. And then year-to-date our other building products had operating income of a little over $5 million compared to just short of $4 million last year.

On total sales, general administrative costs, were $28 million for the quarter, down about $1 million from the same quarter last year. And the general corporate piece of that costs were $2 million lower than last year. On a year-to-date basis, we're down about $3 million in total SG&A from the same period last year.

Slide 10 of the presentation is Balance Sheet. Some key balance sheet statistics there, we did have cash and investments of $368 million at the end of June. That was an increase of about $6 million from the end of March. Working capital of about $550 million and net cash position of $140 million. This is down from the end of the year of by $70 million, $55 million of which is an increase in working capital for inventory and receivables that is based on seasonal activity. Capital expenditures for the quarter were at $8 million, and book value per earnings share was $8.88.

A few other comments before I turn it to Rick. In the quarter, we did purchase the remaining 25% interest in our LP Brazil mill. That was a price of about $24 million. The accounting for this minority interest is a bit complex, but basically, the difference between the purchase price we paid and the non-controlling interest that we had on our balance sheet already, went through other comprehensive income. Well this showed up as additional equity for LP Corp as an investing, versus a financing, activity on the cash flow statement. So other than the cash flow that went out, there was no impact on LP's financial statements in terms of this working capital.

On our auction rate securities, we did have a slight increase in the value of the auction rate security that we report at the end of Q2. We do continue to pursue the litigation filed against the principal issuers of these instruments. Subsequent to the end of the quarter, we did sell all but the collateralized debt obligation portion of our portfolio, and we got net proceeds of that of about $19 million. So in Q3, we will recognize a gain of about $14 million associated with these ARS sales.

With that, let me turn it over to Rick.

Good afternoon, everybody, and we do appreciate your interest in our call. I realize that there are a lot of competing news releases today, plus a lot of national suspense. On top of that, we just completed our Board of Directors meeting here at noon. So Curt was kind enough to get us -- Curt and his people were kind enough to get us ready for this call for this afternoon for a bit of personal indulgence to me. I plan to escape to Maine this evening to spend some vacation time with my family, and so I'm looking forward to that. And instead of waiting until next week, I get away this evening.

I'm going to begin my prepared remarks with an overview of some thoughts on Q2 in the market. I think that it's no secret, its been well publicized that Spring did come late across the US and Canada, and because of that, what building activity that did take place in Q2 started late. I think if I couple this with the sense that we and our customers began the year with a little bit more optimism and a little bit more wood, Q2 was not only slow in activity but we found our customers soon trying to conserve their cash and bleed down what inventories they had on hand during Q2.

That was not a combination that was terribly conducive to robust sales from our manufacturing facilities. I think we suffered all quarter from this combination across all 3 businesses. And then judging from the performance of random link print of OSB prices, there appeared to be more wood on the market than there was demand for it.

Along with US starts being down 4% Q2 to Q2, the Canadian starts were also slowed by the late onset of Spring. And also forecast for Canada are projecting that Canada will be off 5% to 10% from last year in starts.

I'll now direct a few comments towards what we did in the businesses. I usually begin with safety, I'll start there. We had an extraordinary quarter operating safely at LP, and year-to-date our OSHA TIR was down to 0.2 at the end of the second quarter. That is our best performance in LP's 38-year history. And of special note as of today, our OSB business, the entire combination of all of the mills has a string of 310 consecutive days without a recordable accident. Our continuous improvement engine of lean Six Sigma continues to help us improve operations, and partially offset raw material increases with the year-to-date return of over 6 to 1. So even in these market conditions, our folks continue to find significant improvement projects to work on.

I usually talk to you about wins. Win, if you remember, is defined as a product placement with a new customer or an additional product placement with an existing customer. We did quite well in Q2. Our sales force succeeded 538 new wins during Q2, which is almost 10% more than Q2 of 2010. Almost 20% of these wins were in our LSL product line. But I will admit that these wins are tougher to get, and the wins are smaller, as we stay on the bottom of this housing cycle.

In our OSB segment, it was a tough Q2 as we watched, I think, any enthusiasm that we had for a Spring bounce in building activity fade away, and we experienced random prints steadily declining. LPs effective operating rate for Q2 was at 70%,which was only 3% higher than in Q1. And as Curt related, poor pricing and poor demand were pretty much the story there.

Siding, if you remember, Q2 of last year was our best second quarter during what I'll call the down years. And when we compare Q2 of this year to Q2 of 2010, we see about $10 million less in EBIT. I think the difference can be explained most simply by saying it was in 3 major areas. About $4.5 million of that was in the price and volume of the OSB that is sold out of our Hayward siding mill, about $4 million increase in raw materials, and we had warned you of that earlier in the year around zinc borate and our overlay paper, and then the other $2 million was related to the decrease in siding volume quarter-to-quarter.

Unit volume sales and SmartSide were off from Q2 of last year about 8%, but all in all still not a bad quarter for siding. Engineered wood products pretty much tread water financially in Q2 with overall sales being down a couple of million from last year. But that was offset by some operating improvements to yield an overall breakeven in adjusted EBITDA. Year-to-date, we are ahead on LSL sales volumes by about 100,000 cubic meters.

A few comments about South America. Chile continues to be a bright spot for us, as both mills are operating at full capacity. About 87% of the product that we make in Chile is now being consumed in Chile, and we are growing exports also to Argentina and Columbia. Chile is EBIT positive and a cash generator.

Brazil's big news, as Curt mentioned, is that we now own 100% of the Ponta Grossa mill. It's now EBIT positive and cash positive. We're producing at about 16,000 cubic meters per month on 1 thermal oil line at that facility, and we expect that sometime during the second half of this year, we will have to face the decision of starting up the 2nd thermal oil line. Which may be of interest to you, we are exporting about 35% of the OSB volume made in Brazil, and the lion's share of that is going to China for non-structural uses. We are finding it a slow process to gain code approval to break into Brazilian housing, and we're working right now on wall and roof approval. In the meantime, we will be looking to see if there are additional countries that have attractive export situations.

As I look forward, I think back over the last few conferences that I've been to, and as many of you have heard me say, we put our operating plan together for 2011 based upon an expectation of 700,000 starts, all in. That was based upon the belief that the first half of this year would be slower than the first half of last year, but that the second half of this year would be stronger than the second half of last year. I guess as I look at that, I'd say we got it half right. The first half of this year was definitely slower than last year, but it doesn't look to me like the second half of this year is going to be much stronger. Right now, I think that we'll be fortunate to end the year at about 625,000 starts all in, in the US.

So that's the guidance that I've recently offered our LP folks in terms of driving how they are going to do their spending, make their inventory decisions and their operating assumptions. As I look forward, most of the forecasted updates that we have related to 2012 are around that 700,000 number.

There has been a little good news lately that the impact from foreclosures may not be quite as bad as the gloom and doom that was being spread there. But I still think it comes back to having more certainty of an economic rebound needed by the general consumer, and then how soon the country can get back to job creation. I feel pretty confident now that our Capital expenditures for 2011 will not exceed the $20 million mark, plus the $24.5 million that Curt mentioned in the completion of the Brazil mill purchase.

And in terms of what's going on right now, OSB pricing, particularly in the West, is quite low. Since we supply most of that volume from Canada, the 1.05, 1.06 Canadian Dollar is quite problematic for us in siding. Canada has slowed a bit, but our US order file has recovered over Q2 levels. And in engineered wood, distribution volume has built up in Australia, which is where we are exporting quite a bit of material, and that's going to put us in a bit of a bind on our West Coast LVL volume. South American activity remains quite strong into the winter, and the North American channel feels very, very lean right now,

So with that I'll turn it back over to Curt to run the Q & A.

Thank you, Rick. Derek, if we could go to the queue?

(Operator Instructions) Our first question is coming from the line of Mike Roxland from Banc of America, Merrill Lynch. Please proceed.

Thanks very much. Curt, in your remarks you mentioned that the decline in the OSB profitability in Q2 was basically driven by OSB pricing. What was the impact, if any, of higher costs such as resin in the quarter?

What we do, Mike, is we look at the raw materials costs across the business. For the quarter, compared to the second quarter of last year, raw materials costs were up about $6 million. About half of that was in resin, about $2 million of that was in the zinc borate and the paper associated with the siding business, and the rest would have been in power and wood. Now, what we were able to do was offset that with some of the continued efficiencies that we've gained through our lean Six Sigma program. So when you think about OSB, we offset the increased raw materials cost with more efficiency in the mill.

Got you, and how have input costs trended with respect to your initial expectations of, I think, total petro-chem spend this year of around $125 million?

The second quarter ended up being about $4 million higher than what we had budgeted, and that was largely because of the spike in benzine and methanol pricing that we had in Q1, because we have a look back adjustment factor in our resin. So our resins were all of that. Wood came about where we expected it to. Natural gasses where we expected. Electricity is where we expected. So it really was in the resin area. That was because methanol and benzine were high.

Got you, and just a last question before turning it over. Just in terms of capital spending, obviously you're trying to keep that as lean as possible. What's your typical level of maintenance capital spending, and how long can you run at those levels without the mills requiring additional spending in the next year or so?

Typically what we look at is about a $1.5 million to $2 million per mill, but we aren't running the mills full-out so we don't have that same level. So typically, what you would see is in the $40 million to $45 million from a maintenance capital, and we aren't going to spend that this year, and we didn't spend it last year. So we are building up some projects there as we look out into the future years but I will emphasize we're not running them 24/7 either. So those costs probably aren't the same as they would be if we're running 24/7.

Got you, thanks very much.

Your next question is coming from the line of Gail Glazerman from UBS. Please proceed.

Hi, good afternoon. Rick, last quarter you talked about some initiatives to increase your exports out of North America. I guess you talked a little bit about maybe some engineered wood going to Australia. Can you maybe give us an update on how that initiative stands?

Yes. I've said a little bit of it but I'll just kind of run through the businesses. We have achieved quite a bit of success coming out of Brazil to China in non-structural OSB, and that's, I think that will be about 400,000 cubic meters, excuse me, 4000 cubic meters. The conversion is hell, 4000 cubic meters a month are coming out of Brazil to China. Last quarter, we moved about 5 million feet out of North America to Asia, admittedly at very lousy pricing. Most of that product did go to Korea. I'm hopeful that we will start being able to put OSB from North America into China, but the game that we have to accomplish there is that we have to try to strategically position that product in China where it's good business, not just a take-or-refuse business, which means we have to try to position it strategically into the housing market. I would guess, if our plans come with what we have on the drawing board right now, I'm hopeful to get up to 15 million board-feet per quarter by the fourth quarter of this year. In terms of our engineered wood products business, we have had considerable success going to Australia. We are also penetrating Europe now with, predominantly, our LSL product, and so that is 1 of the reasons that you see our LSL sales going up. Does that answer your question, Gail?

It did indeed. Curt, can you keep the corporate expense line kind of in general where it was in the second quarter, or would you expect that to move up later in the year?

Right now, the primary reduction is we are falling short of our budget from a bonus standpoint so we reverse management bonuses, and unless we see OSB pricing go up dramatically, I would expect it to stay at those same levels.

Okay, and just one last question on engineered wood products. so you're kind of, I guess, EBITDA breakeven in the quarter. Is there something that you think you can sustain moving forward, or was that kind of just something unique in the quarter and that you'll probably maybe get a little bit negative moving forward?

That's why I put that little ditty in there about Australia distribution backing up. I think that's going to cause us a little bit of problem out of our Golden mill. The other thing is we kind of, in a little bit of a process of switching from watermelons to cantaloupe, they're developing an appetite for a treated product. So, we're changing some volume production from the Western side of the United States to the Eastern side of the United States to be able to handle that. So I would think probably while we're working through both of those issues, 1, their distribution leaning out a little bit,,and secondly, us getting some treated product into that market, will be a little slower on our exports to Australia in the second half.

Okay, and I have just one last quick question. Rick, you mentioned inventory is something built up earlier in the year with expectations. Do you think those have largely been worked out of the system by now?

Yes, It just feels really, really clean out there right now. I mean, it's hand to mouth. At least, that's the way it feels to us and that's what our customers are projecting to us.

Okay, thanks very much, and have a great vacation.

One last thing I'd just like to add. Rick stopped a little short on our export business. In siding and molding, Lowe's is opening up a presence in Australia, and they have selected our siding and molding products to be stocked in their stores. So we are seeing a little bit of activity in siding and molding in Australia as well.

Your next question is coming from the line of Mark Connelly from CLSA. Please proceed.

Thank you. Rick, two questions. Looking a little past the wins that you've got this quarter, are you thinking about shifting around where you're going after business, or have you been shifting around where you're going? I'm increasingly convinced that homebuilding is going to pick up in much different places than it was strong before and I'm just wondering how much you can shift around and react to that. Second question is, as we see home builders simplifying floor plans, trying to hit lower price points, are they doing anything with siding or panel that is going to help you in that process, beyond some of the things you've already talked about with CanExcel?

Let me take your shifting question first, Mark. I'm interpreting that question to mean geographically inside the US, are you talking?

Yes, for the most part, that's right.

I think we're already there, and I would bet that anybody you ask that question is too. We have just really almost started doing microanalysis and we're actually putting sales efforts and marketing efforts based upon individual cities now. You can no longer look at this thing nationally, or even regionally, and so our sales guys are out there trying to find just individual cities where their activity is greater, and that's the way it's going to come back, and that's where we're putting our sales effort together right now.

Are you more nimble in doing that now than you were, say, a year or two ago?

Yes. We've learned a heck of a lot. My executive manager, Executive Vice President of Sales and Marketing is sitting here smiling because he keeps telling me that he's getting a lot better at that. That's basically been his job the last 3 years, and of course, it's also been a necessity. So yes, we're getting much more nimble at that, and also much better at that.

Right. We all hope he's right.

In terms of your second question on siding, I don't see any trends in terms of home builders changing that were particularly benefit from us, but what I do see is that our siding products have a very good growth trend, and I talked about the 20% of our wins last quarter in LSL. Even a larger proportion of those wins are in 1 siding product or another. So we're still very excited about, once we get a builder to use our siding products, they use it again because they like it. They like working with it, and so we have some growth there. We have a couple of new products that we're trying to penetrate in some different markets than what we've been in before as well.

Perfect.

Does that answer your question?

It sure does. I appreciate your help, thank you.

You bet.

Your next question is from the line of Bill Hoffmann from RBC Capital Markets. Please proceed.

Yes, good afternoon. Rick, I just wondered if you guys could put some numbers on some of this export business that you're talking about, where you are today and what you see the potential capability, growth rates from that business are at the moment?

I think I'd rather not. I really don't want to share that with everybody else that might be listening, if you understand.

Okay.

Maybe we can do a little bit more later, but right now there's a whole pack of dogs trying to run anywhere where there's a piece of meat, and we don't want to point out where the meat is.

Got you.

Bill, what we will have is in our 10-K. We do put in international sales and we'll break those out by country.

Yes. Just the second question is, with the purchase of the other share down in Brazil, I just wonder if you could talk even a little bit more about, maybe, what future opportunities you see there. And that's obviously solidified that position today but what else you see opportunistically down in the South America markets.

Well, we are making progress in Argentina and also Columbia right now. Those are the two countries as I talked to our South American leader down there, where he's putting his efforts. So you add that to currently doing business in Peru and then Chile. So as Chile fills up and as I said 85% of that production is kept in Chile and used in Chile. Brazil will be the source of that product. So that will help us start to fill up Brazil, and of course, the big win and the ultimate strategic hurdle that we're looking for is that we make this breakthrough and become part of the housing construction system that's got to satisfy this 14 million home need in Brazil over the next 10 years.

Great. Thank you and then just last question is on resins. What do you guys looking at, at this point in time? Any shift in the strategy on resins, especially with some of the rulings of formaldehyde and the like?

The rulings on formaldehyde don't really affect us because that's at the customer level. When you go through the process, the formaldehyde is taken out of it. So we continually look at the trade-off between PF and MDI and optimizing our resin recipes to be as cost-effective as we can, but those are relatively modest modifications. We aren't making anything that's significant. We are looking at alternatives for wax, so we have qualified tallow wax at our mills. Today that's not cost effective, but with the volatility we've seen in wax pricing, we can switch back and forth.

Okay, great. Thank you.

Your next question is from the line of Chip Dillon from Vertical Research Partners. Please proceed.

Yes, good afternoon.

How was the garden vacation?

Well, it wasn't all gardening, that's all I'll tell you, but it was good, thank you. Listen, I remember on the last call, or maybe it was 2 calls ago you guys mentioned that if you made a decision to start up Clark County, it could take as much as, I think, 9 to 12 months to really get the people hired and get everything shaken down, and I guess the first question is, is there any reason why it would take others who have existing plants less time to restart them than that same 9 to 12 month period? It would seem not, given that you have sort of a clean slate there, and that it would therefore take others just as long to really get their plants restarted if they were attempting do that.

You must be getting older. You forgot. I said it would take up to 9 months. I'm kidding you. We still think that it would take somewhere between 8 and 9 months to get Clark County up and going. Clark County is a huge mill. We would have to basically start over with training people and all of that. We think that if we were to say go after and start up [Chambor], it might only take us like 6 months because most of those people still live in that area and it would be a little speedier process, depending upon the time of the year that we made that decision. So I think for us, that's what we think. I don't know how anyone else would have much of a different approach to that. Probably part of that answer is when somebody admits that they started, right, so if somebody wants to look good they will tell you three months into their process of getting started that well, we can do this in 3 months, and that's probably because they got 3 months already done.

Well let's say it does take whatever the number is, 8 to 9 months, or even 6 from the time you decide. If you're down here in the States, aren't there other factors like, for example, the supply chain that's around that mill, whether it's getting wood procured, getting people to bring it to the mill, as well as wholesalers and other relationships to take the product? Is that something that could actually delay a restart, and I'm not talking about just you but anyone?

You bet. I mean just to add on to that, let's say you're in the North, depending on where you were in the logging cycle up there. If you don't get your wood in in the winter there, you can't start logging again until mid-June, early July, so that's a complicating factor. So on your wood supply, you can be affected by a month or 2, and then also the other end of it is what shape will the distribution channel be in when there's a need for these mills to start back up, and I think all of us are wondering that.

Got you. Okay, thank you.

That's why you don't get a real precise answer of, like, it's going to take 97 days and on the 98th day I'll be doing it, because it's different for each location.

Well, there's a brand new pulp mill, I won't say the name, that was announced last year in Brazil and they gave, I think, almost the hour at which they plan to start it up, and I think it's in 2013. So if that happens, I'm going to Vegas. I hear you.

Well, we try to make the distinction between precision and accuracy around here.

Thank you.

Your next question is from the line of Gene Pavlanco from D.A. Davidson. Please proceed.

This is Steve.

Hi, Steve.

Sorry about that. I had to switch phones. 2 quick questions, please. First of all, the wins that Rick was referring to, do they come at someone else's expense, and if so, do you think that this is, perhaps, exacerbating the depressed price levels?

Well, I think they do come at someone else's expense. That's true. Now, whether it's exacerbating anything or not, I'm not sure. I mean, it's a dog, or dog-eat world out there for customers, and so everybody's competing for customers. There's too few customers and there's too much distribution, and so we have to have demand. That's what's going to solve that problem. Our customers have to have more customers.

Well, we need the economy to grow a little faster than 1.3% for that.

Yes, sir, I would agree with you.

Second question then, you indicated that 8 of your mills are operating, 2 are on a definite hiatus. Can you tell us what the operating rate was during the quarter and where you think it will be for the next couple quarters?

I can't tell you where it will be but I did say in my opening prepared remarks that we operated in the second quarter at an effective capacity of 70%, Steve, and then it depends on what happens in this market this quarter and where that sugar's out. We're making decisions almost weekly on what we run and what we don't.

Yes. I know I said only two questions. Do any of your mills in the South, are they benefiting from the extraordinary dryness, which has made logging very simple and depressed wood prices?

Well, I think probably the benefit that's not terribly obvious is that we've had a large increase this year in diesel prices, but yet you haven't seen our wood costs go up a whole lot. So the offset in the increase in diesel prices is probably offset by the availability of wood, which allows us to cut on the stumpage side a little bit. So that's the benefit of it., but it's not huge. I think we're up probably favorable to last year by 800,000, 900,000 in the South.

Got it, and the $14 million gain that you're going to get on the asset backed securities in Q3, does that put this whole thing to bed after this, or is there still litigation pending?

There is still litigation pending against both the issuer, the primary issuers of the securities. Part of that litigation is in New York and part of that is in California. We will have, as I mentioned, we did not sell the collateralized debt obligation because basically they're valued at about $0.04 on the $1.00, and all but 1of those is currently paying interest. So it makes more sense to hold those. They're on the books for a little less than $2 million so it's not much value there, but we're going to hold them for the interest. Because getting the $2 million and putting it in money-market funds wouldn't be a very prudent thing to do, and we are getting interest paid on that, but we are aggressively pursuing the litigation because we do believe that we were misled, as the industry was, on these.

So but what's the face value if you're holding them at $2 million?

About $25 million on face value. So we're collecting interest on about $21 million, but we're carrying on the books for $2 million.

And when do they mature?

At various time frame but they're generally like 2018 to 2025. There's only 1 that's not paying interest. The rest are.

Well, hopefully none of us will be doing this by the time those things come due.

Before then, the litigation.

Okay, thank you very much.

Yes.

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

Thanks, good afternoon.

Hi, Pete.

I wanted to come back, if I could, to the wins, Rick, and I don't know if you can maybe give us some more specific examples. In particular, I was curious if you have any good examples of OSB penetrating new markets in plywood that might be different from the kind of markets you've gone after in the past?

Yes, I'm not going to give you the specific, but we just recently had a good win in 1 of our specialty OSB products in the State of Florida, where Florida has not typically been a very good recipient for OSB products. So I'm not going to give you the detail on that, but it would be a builder going standard on our product in a place where they have substantial activity where they had not before given us a standard. Is that a good example?

That's a good example, and I guess I was curious if you have any examples outside of traditional housing end markets.

Well our siding business is continuing. I think I made some comments on the last call around we've gone to a segment strategy in our siding business where we divided up into 5 different segments, and let's just take 1 of those which I'll call the shed segment. I think they've got a fancy name for it now, but where we would go to people that have traditionally constructed sheds for people and we have been able to inject a handful of our siding products into that shed construction. Everything from a siding panel that has the radium barrier on the inside to a flooring product in that shed that actually has a paper overlay on it, and that would be an example of going into a segment and convincing them to move away from plywood and the old conventional plywood paneling or whatever, and switch to SmartSide, and that would be an example of that, and we are quite successful there.

Okay, that's helpful. Then I'm curious, too, if you could take a step back for us and help us to better understand in the siding market, if you can remind us, your share of the overall siding market and how much share you think you're gaining, and what kind of limitations you have, and is it vinyl that you're going after most successfully? Which categories have you been most successfully gaining on?

Well, if you remember back to our investor presentations that we've done over the years, we have a chart in that section where it breaks down. In fact, you've got a copy of this, you know you do. It breaks down the overall siding business, and where we put ourself is we're the only people that make the kind of siding that we make, and that's about 3% of the market. The other thing that we've observed over the last 5 or 6 years is that everybody's taking a bite out of vinyl. So the growth in all of the other kinds of siding, I think, have come at the expense of our vinyl. I think the first time I gave one of those presentations 7 years ago, vinyl had like 43% of the market, and I think they are down to somewhere around 25% of the market. Our products compete very much head-to-head with cementation siding. So that's where the big battle is.

Okay, and how about, do you have any stretch goals or targets in this area? I mean, If you're at 3% of the market, if you were to aspire to have 5% market share, how long does it take you to get there? I mean, do you have kind of line-of-sight to what's achievable?

I'm going to answer your question in a different way. We'll probably sell about 400 million feet of siding this year. Current capacity to make siding in the LP system right now is about 700,000, so my first--.

700 million.

Excuse me, 700 million. So our first goal is to fill up the capacity that we've got, and then where are we going to build our next mill or convert the next OSB mill to this product. I think longer term we are aspirationally believing that siding can be $1 billion revenue business for us. I can't put the timeline on that right now because of the morass that we're in the middle of right now does not allow me to make any kind of a reasonable projection about that.

Understood. Thanks very much.

Your next question is coming from the line of Mark Wilde from Deutsche Bank. Please proceed.

Good afternoon, Rick. Afternoon, Curt.

Hi, Mark.

Just a couple questions down in South America. You mentioned that you're selling most of the Chilean output in Chile, and I know a couple of years ago, seemed like there were some guys from the North American market who had been dumping OSB down in Latin America and really depressing that market. Is that still going on or have you seen some of that tail off?

There are some occasional forays from non-Chilean companies into Chile.

But it sounded like a couple years ago, it was a pretty serious issue, and if you're selling most of your output in Chile now, is that less of an issue?

Well it can be obviously. I mean, what it can be is if you could end up in a situation where you got more wood on the market than the market wants, and that affects pricing. So yes, I mean, you have to keep your eye on that. Nothing you can do about it by the way, but obviously it affects you.

Yes. I just wonder the fact that you could sell so much in Chile was a marker that maybe there was less of that going on. Doesn't sound like it.

Our competitive advantage there is freight and distribution. We're the local producer. We're the Chilean company making it, and we don't have to ship it from a different continent. So that's how you compete with the occasional intrusion.

Doesn't seem like it. Whenever I'm down there, you go about 50, 100 miles on that Pan American highway without seeing an LP billboard. Over in Brazil, could you just talk about the headway you're either making or not making in terms of getting some of these building codes changed? What you think the timeline might look like.

Yes. The last conversation that I had with our South American leader down there, is that we're hoping to have made some progress on roofs and walls by about this time next year.

Okay, how long have you been working on that?

A year, year and a half.

Okay. All right. Do you have any precedent from what you've gone through in any of these other countries?

Well, it's too early for a precedent there because our precedent before was Chile where we had great success in conversion, and what we've learned going into Brazil is the bigger the opportunity in the country is usually the bigger the obstacles in the bureaucracy are. So that's what we're working to overcome.

Yes, okay, and you mentioned you were having luck up in Colombia, which I think is really enjoying some good growth right now. Do you want to talk briefly about that?

Well, just that's been the discovery, if you will, of our Chilean President is that he likes the look and the feel of the Colombian economy and thinks that that may be a good place for us to sell more products. So he never really talked to me in the past before last week about Colombia, and he was pretty complimentary of what he thought the opportunity might be there.

Okay, and then--.

Safety's improved in Columbia.

Yes, I know about that. Are you exporting anything over to Europe right now? I mean, it seems like European prices are a little bit better and the currency, the dollar is weak.

Yes. Actually, that's a little better deal for us than the stuff that's going to Korea. We're putting some product in Europe right now from our Quebec mill, and that's pretty good business. Their ears perk up every time Jeff mentions a UK order or a European order.

Okay, and then the last question I had, you mentioned that the pipeline was, appeared to be pretty empty. I just wonder, we go into August here, and it seems like 1 year out of 4, 1 year out of 5, we get a pretty good hurricane season. Usually you sell a lot of panels during hurricane season. Do you have any thoughts on what this market could do if we saw 1 or 2, and if there's any kind of buffer out there in the market if demand does pick up?

Well, I think the only thing that, I'd just have to go back to my original comments, I think the channel is extremely lean, and so if there's some kind of an upset created by anything that tends to put some franticness in the market which tends to make pricing react favorably in that particular sales area, but I don't know how to handicap that for you.

Okay, good enough.

Supposed to be an active hurricane season.

What we say around here about hurricanes is that we like a lot of them but we want none of them to hit land. We just like the process where everybody gets scared and goes and boards up their property and then nobody gets hurt or loses anything.

Well, listen, you won't get much up in Maine. Enjoy the lobsters, okay?

Thank you, pal.

Derek, I think that's all the time we've got for questions. So if you could give the replay number, and I want to thank all of you for participating, and as always, Mike and Becky are here to answer any follow-up questions. Thank you.

Ladies and gentlemen, that concludes today's conference. If you would like the number for the replay, that will be 888-286-8010 with the access code of 49386948. You may now disconnect and have a great weekend.