Louisiana-Pacific Corp (LPX) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third-Quarter 2011 Louisiana-Pacific Corp. Earnings Conference Call. My name is Karissa and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Mr. Curt Stevens, Chief Financial Officer.

Thank you very much, and thank all of you who are joining us on this conference call to discuss our results for Q3. With me today are Rick Frost, LP's CEO, as well as Mike Kinney and Becky Barckley, who are our primary Investor Relations contacts. I'll begin the discussion with a review of the financial results for the third quarter of 2011, followed by some comments on the performance of the individual segments and a few balance sheet items.

Rick will then take over to discuss the general market environment in which we operated in the quarter, his perspective on our most recent results, and some thoughts on the remainder of this year and into next year. Rick will then provide a bit more color about the organizational announcement that LP made this morning. Following this, he'll turn it back over to me to answer your questions.

As we've done in the past, this call is opened up to the public and we are doing a webcast. The webcast can be accessed at www.LPCorp.com. Additionally, to help the discussion, we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I will reference these slide numbers during my comments. We filed an 8-K this morning with some supplemental information and we will file our Form 10-Q, shortly. I want to remind all the participants about the forward-looking statements comment that is included on slide 2 of the presentation.

Please also be aware of our use of non-GAAP financial information that is discussed on slide 3 of the presentation. The appendix attached has some of the necessary reconciliations that have been supplemented by the 8-K filing we made this morning. I'm not going to reread these statements, but I will incorporate them with this reference.

Before I begin my detailed discussion of our results for the quarter, I do want to focus on 3 factors that affected our reported results this quarter and year-to-date -- housing activity, OSB pricing, and a non-cash impairment. For Q3, housing starts, as reported by the US Department of the Census, were 6% higher than the third quarter of 2010, when activity tailed off due to the expiration of the housing tax credit. For the first 9 months of this year, actual housing starts were 2% below the same period in 2010.

For the third quarter and first 9 months of 2011, our OSB prices were 7% and 19% lower than the same periods in 2010. The swing in pricing for Q3 caused a $9 million reduction in earnings compared to the same quarter last year, and had a cumulative negative effect on year-to-date operating results of a little over $95 million between the OSB and siding segments.

In the quarter, accounting rules did require us to take an impairment against the carrying value of our Houlton, Maine, LSL mill. This non-cash pretax impairment was for $62 million. I want to be very clear that this was an accounting decision, not a business decision. We remain committed to this important product line and expect it to be a strong contributor to earnings when the housing market recovers.

Now let me go to the numbers. Refer to slide 4 of the presentation for a discussion of Q3 results compared to the same quarter last year and the prior quarter. We are reporting a net loss for the third quarter of $66 million, or $0.49 per diluted share, on sales from continuing operations of a little over $350 million. For the same period last year, we reported a net loss of $32 million, or $0.24 per diluted share, on sales from continuing operations of $323 million.

Adjusted EBITDA from continuing operations was a loss of $7 million in the quarter, compared to a positive $4 million in Q3 of 2010. Movement in the tax rate and continuing operations between the quarters. In Q3 we had an effective tax rate of 26%, and compared to a 35% in Q3 of 2010. As I've discussed the last several quarters, this difference is primarily related to the requirement to put a valuation allowance against our losses in Canada above a specific threshold, due to these accounting rules. Compounding this is the impact of discontinued operations, which, by accounting regulations, are required to be benefited at the statutory rate of 38.7%.

That results in a lower benefit rate on continuing operations. Slide 5 of the presentation is a discussion of year-to-date results compared to the same period last year. For year-to-date, we are reporting a net loss of $124 million on sales of $1 billion during this period. Same period last year, we reported a net loss of $32 million on sales of $1.1 billion. Adjusted EBITDA from continuing operations was a loss of $4 million, compared to income of $81 million in the first 9 months of 2010. The tax rate on continuing operations from the first 9 months was 24%, compared to 32% in the prior year.

Slide 6 of the presentation is a discussion of special charges. As mentioned earlier, we did take a significant impairment on the carrying value of our Houlton, Maine, LSL mill. In addition to the impairment at Houlton, we also adjusted the values of some of the assets held for sale to reflect the current reality in the market. This was about a $3 million negative adjustment. As we've said over the last few quarters, we are a willing seller, but it's hard to get a willing buyer to the table on some of these asset sales.

In the other operating charges and credits, the bulk of the positive adjustment is related to a take-back of around $10.5 million from claims reserves set up for the ABTCO hardboard class action. This is based on recent activity. The impact of adjusting for these items gives an adjusted loss from continuing operations of $26 million, or $0.19 per share.

Not shown in this slide is a charge we took in our discontinued operations to increase the reserves for the decking class action. Again, this was based on our continuous analysis and review of the data. The increase was about $8 million.

Let me discuss the performance of each segment. On slide 7 is our OSB segment. We had an operating loss of $16 million in the quarter compared to a loss of $5 million in Q3 of 2009.(Sic-see press release) For the quarter, we had an increase of 5% in volume and an average sales price that was 7% lower. The decrease in the sales price accounts for most of this change, a $9 million reduction in earnings and adjusted EBITDA.

This may seem a little bit odd as the oft-quoted Random Lengths 7/16 North Central price index was actually slightly higher than Q3 of last year. But as LP has a national footprint, our prices are influenced by the other regions; particularly the West Coast, where pricing was down 17% quarter-over-quarter. Additionally, higher raw materials costs, principally resins and energy, and the higher Canadian dollar increased our costs. We were able to offset these increases with the results of our Lean Six Sigma efforts and improved operations.

Adjusted EBITDA from continuing operations in the OSB segment for the quarter was a loss of $7 million, compared to a gain in third quarter 2010. Compared to Q2 of 2011, volumes were slightly higher, up 2%, while prices were flat. Year-to-date, OSB had an operating loss of $48 million, compared to a profit of $38 million in the same period last year. Adjusted EBITDA for the comparable periods was a loss of $20 million in 2011 and income of $67 million in 2010. Pricing accounted for more than 100% of this decline, or $91 million.

Refer to slide 8 of the presentation for siding. This includes our SmartSide and CanExel product lines and a small amount of commodity OSB produced in our Hayward mill. For the third quarter, siding had operating income of $12 million, which was higher than the $9 million recorded in the same quarter last year. Adjusted EBITDA from continuing operations in siding was $16 million compared to $13 million in Q3 of 2010. For the quarter, sales were up 7%, with unit volumes higher by 10% in SmartSide and lower in CanExel by 29%, compared to the same quarter last year.

For the quarter, SmartSide average sales prices were up 5% due to a general price increase implemented in the first part of the year to cover increased production costs. CanExel prices also showed an increase of 5%, but this is largely due to CanExel being sold in Canada in Canadian dollars and as the Canadian dollar strengthened against the US equivalent.

Year-to-date, siding had operating income of $36 million, compared to income of $40 million in the same period last year. Adjusted EBITDA for the comparable periods was $49 million this year versus $54 million in 2010. The OSB pricing on the Hayward volume lowered earnings by about $5 million and accounted for most of the shift.

Slide 9 of the presentation is the Engineered Wood segment. This includes I-joist Laminated Strand Lumber, Laminated Veneer, plus other related products. For Q3, reported a loss of $3 million compared to a loss of $5 million in Q3 of last year. Adjusted EBITDA from continuing operations in the EWP segment was just slightly negative in the third quarter compared to a loss of almost $3 million in the second quarter of 2010.

Volumes of I-joists were up 26%, while volumes of our LVL and LSL were up 71% compared to the same quarter last year. This looks like a big number. Let me just remind you that in the third quarter of 2010, we saw significant reductions in inventory in the channel. Therefore, the increases shown this quarter are a bit of an anomaly, with the exception that we did see an increases in our exports for these product lines.

Pricing was down 3% in I-joists, 4% in LVL and LSL, primarily due to changes in product mix. Year-to-date, EWP had an operating loss of $12 million, compared to a loss of $16 million in the same period last year. Adjusted EBITDA for the comparable periods was a loss of about $1 million this year compared to a $6 million loss in 2010.

While there's no slide for our other building products, let me make a few comments. Overall, we're showing a loss of $1 million in the third quarter of 2011 compared to income of $1 million in the third quarter of 2010. For the quarter, sales were at $46 million, up 11% from the $41 million recorded in Q3 of last year, primarily driven by our South America operations. Year-to-date, other building products had operating income of $4 million compared to income of $5 million same period last year.

Adjusted EBITDA for the comparable periods was $14 million in 2011 and $13 million in 2010. We did have a $4 million foreign exchange loss in the quarter compared to a very slight loss the same quarter last year. This loss was driven by the significant temporary increase in the US dollar at the end of September. In early October, the US dollar again dropped in relation to Canadian dollar, Brazilian real, and Chilean peso, so most of this gain we have recovered.

Slide 10 is a summary of the balance sheet. Cash, cash equivalents, investments and restricted cash were $375 million. This is an increase of around $7 million from last June 30. Working capital at $216 million; net cash of $137 million; and we spent about $13 million in capital expenditures.

One final comment before I turn it to Rick. In October we did modify and extend our asset-based loan agreement with our banking group to increase the availability, lower our costs, and reduce the administrative burden. We did file an 8-K on this extension in a timely manner. Key items, including extending the maturity from September 10, 2012 to October 14, 2016, decreased the interest rate payable for certain types of loans. It permits LP to include in its borrowing base certain vendor-managed inventory and it increased our flexibility to incur and prepay certain types of debt. With that, let me turn it over to Rick.

Good morning, everyone, and thanks for listening in. Before I get started, I can't resist -- props go out to my LSU Tigers over the weekend which offset our Titans loss over the weekend. It is beautiful here, although the results aren't that beautiful. So this morning in my prepared remarks, I'll add some color to LP's performance in Q3 and then follow with a bit of a look into Q4 and how we presently see 2012 evolving.

As is customary, I want to begin with safety. Through our Q3, our year-to-date total incident rate was 0.42 and we are still on a record-breaking pace of improvement in keeping our people more safe every year for the last decade. Our Q3 was nothing to brag about us as we did experience a few more [nicks and hickeys] than in Q3 of last year, but year-to-date we are still ahead of last year's performance.

From an environmental perspective, we experienced no notices of violation for the quarter and experienced no environmental fines. Our Lean Six Sigma efforts continue to yield good results with our year-to-date returns at 6.7 to 1 and about 20% of our workforce are participating on improvement teams.

Capital spending in Q3 was a little under $5 million; around $13 million year-to-date. I still expect us to come in around that $20 million number that I have previously offered for guidance for 2011, exclusive of the capital that we spent to complete the purchase of the Brazil mill this year. Cash and investments are $375 million and we are net cash $144 million. Early guidance on capital for 2012, I'm going to put out there around $25 million. I'll update you in February, after I've had a chance to fully review those plans in more detail.

Raw material costs are performing about as we suggested to you back in January, that we thought they would. We expect our raw material price variation to end up a negative of about $25 million at the end of 2011 compared to the end of 2010. The lion's share of that is in resins, binders and wax, at a little bit over $15 million in negative variation, and the other $6.5 million is in the zinc borate and the paper overlay, which we alerted you to in our siding business early in the year.

Now let me make a few comments on each one of our major businesses and our other reporting segment that includes South America. I'll begin with OSB. This business was most of the negative result. Although sales and production volumes were slightly up Q3-to-Q3, our sales price was down against Q3 of last year. We were particularly disadvantaged with very low West Coast pricing where we have a significant presence because of our Peace Valley and Dawson Creek OSB mills. About 27% of our volume was sold into the Western markets in Q3.

Manufacturing costs for OSB were pretty much in line with Q3 of 2010, except resin binder and wax costs, which were up 18%. Or value-added component was up about 12% in volume over our Q3 2010 and made up about 35% of our total mix on a volume basis in the quarter. OSB ran at an effective operating rate of about 70% for the quarter and at about 55% of its total capacity counting the currently indefinitely shut mills of Chambord, Clark County, and now Dawson Creek.

During the quarter, we did make the decision to indefinitely shut down the pressing operation at Dawson Creek and to move that volume to Peace Valley. Dawson has a rated production capacity of about 390 million feet per year. This mill will stay open to process TechShield blanks, but will not press board until there is a future need for its production sometime in the future. During Q3, LP OSB sold about 6 million feet to Asia and exported about 2% of its total sales volume.

Our siding business makes a better story Q3-to-Q3. Net sales were up 7% and EBIT was improved 27% Q3-to-Q3. SmartSide volume was up 10% and our CanExel volume was off 29%, and as we came off allocation as the Canadian housing market slowed down in the quarter. With product mix included, Q3-to-Q3 pricing for SmartSide was up 5% and for CanExel it was also up 5%. One caution there is a reminder that Q3 of last year for siding was a very low quarter as we came out of the bump that we had in the second quarter, as people were taking advantage of that Home Buyer Tax Credit.

Moving on to Engineered Wood. EWP improved in a Q3-to-Q3 comparison by about 35% on an EBIT basis, but this also needs to be tempered with the realization that Q3 2010 was a horrible quarter in Engineered Wood Products in the marketplace. Sales volumes of I-joists, LVL and LSL were all significantly better than Q3 of 2010. The pricing was 3% and 4% worse, respectively, on I-joists and then the LVL/LSL combination. Year-to-date, EBITDA for EWP, although still negative, has improved 79%, largely due to growing international sales, primarily LSL to Australia, and the LSL/LVL volume combination year-to-date is up 14%.

In South America, while we do not yet report this part of the business separately, both LP Chile and LP Brazil are having their best years so far. Both are EBIT positive and contributing cash to LP. In Chile, both mills continue to run at near capacity and domestic demand remains strong. We are under some pricing pressure in Chile from imports.

In Brazil, we are operating our Ponta Grossa mill at about 0.5 of its capacity and the decision to start up the second thermal oil line there will probably be put off until Q2 of next year. I just don't know yet, and that will be based upon the business level at that time. About 20% to 25% of the Brazil volume is going to China for interior use.

In terms of looking at the markets, for the rest of this fourth quarter we expect to see the seasonal fall-off in domestic markets across all product lines. My sense right now is that Q1 of 2012 will be relatively slow. The median housing start forecast for next year is currently a little bit over 650,000 new starts with the growth from this year being primarily in multi-family. Current thinking for multi-family is for it to be up 40,000 to 50,000 units from 2011 into 2012.

In general, I think the housing market remains weak about any way you slice it. We are still facing high unemployment, slow household formation, declines in home prices and continued foreclosures. But we have seen a few positive indicators of late. Existing home sales have been improving, home inventories for sale are going down in total and there is a slowdown in the number of foreclosures. Then there was a nice bump in the September housing start numbers that were recently released.

As I finish my prepared remarks, I want to comment on the other announcement that we put out this morning and that is the organizational changes that we're making. Obviously, we are beginning a transition for me to eventually retire from LP. I've recently completed 7 years of service as CEO with this Company.

Bringing on a very competent Chief Financial Officer was a step in that planning process, and then turning over the direct leadership for operations of the Company to Curt as the new Chief Operating Officer is a logical step as well. We plan to allow Sallie Bailey, our new CFO, time to get fully up to speed on LP and for Curt to have a time to put his operating hat back on, before I firm up my departure with our Board of Directors. When we think that we are ready, we will firm that up and we will announce it and that's about all I can give you on that right now.

As I close, I do want to acknowledge that this is the last time that I will be working this call with Curt in Curt's current role as CFO. Sallie will become LP's new CFO in December and as Curt will be moving to Chief Operating Officer. That is a position that's been created temporarily for succession purposes and around my eventual retirement.

Curt and I have been doing these calls and all of our trips to New York now for 7 years together and then Curt worked them with my predecessor for the 7 years before that. Going forward, Curt will be on these calls, but will be adding more of the color commentary as the Chief Operating Officer. With that, I'll turn it back to Curt to handle questions.

Thanks, Rick. With that, Karissa, let's go to the queue.

(Operator Instructions) Michael Roxland, Bank of America Merrill Lynch.

First, congrats, Rick, on the retirement and Curt, on your new role. Rick, there was discussion on the last call about increased OSB exports out of North America into South America and the resulting impact on pricing. You just mentioned in your remarks about pricing declines in Chile. What did you actually see with respect to exports out of North America into Chile during the quarter?

Just enough to knock the top off the market down there. I don't have the exact volume in front of me, but there is just enough volume to come in there and create a little bit more competition on the pricing end than what we had had. So, it's not an extraordinary amount. It's just enough to get our attention.

If housing remains as weak as it has in terms of a recovery, do you expect the pace of exports out of North America to accelerate?

I think what'll happen, at least in South America, that'll be determined by the value of the dollar. If the dollar gets weak again, then that obviously makes it easier. Remember, you've got a substantial freight bill to go from here to down there, so the dollar and that freight creates some protection. It is obviously easier to export out of the United States if the dollar is weaker.

Just on that freight, what would you peg the freight cost at?

It's about $100.

Okay. Got you. Last question, just how does this trend affect your thinking on expanding your footprint in South America, if at all?

We're still extremely happy with what's going on in South America. The transition that has occurred this year is basically that we have about a 50% conversion in Chile so far in terms of them and their new construction starting to build the way that we build up here. If you can remember, we started out at about 2% and then we were pretty happy when we got to about 23% or 24%. But the earthquake last year proved that the ability for wood frame housing to sustain seismic activity completed that conversion for us. We look at the demand to be quite strong down there.

Our next challenge will be then to penetrate the building markets in Brazil. It's not out of the question for us, within a couple of years, to be thinking that we will want to build another mill in South America, although we haven't identified exactly where yet. We're still pretty bullish on that and it is an advantage being in-country.

Got you. Good luck in the quarter.

Chip Dillon, Vertical Research Partners.

The interest income number that tends to be around $4 million, $5 million was way up at $17 million. I just didn't know what caused that. Is that a one-time pop? And then a related question, the share count went from like 131 million to 135 million, and I've always thought of the diluted amount being somewhere around 142 million, 143 million, if that factored into it, because when you get profitable. Just wanted to make sure I have the right share count when you ultimately do turn profitable.

In the interest income, we did sell a piece of our auction rate security portfolio. We had taken the write-down and the write-up through other comprehensive income. So you reverse and flow through the income of about $15 million. That was the sale of those ARS. What we have left on the books is about a $0.5 million dollars for about a $24 million face value. What we did when we sold those, we did not compromise our position on any of the lawsuits that we have outstanding currently that we expect to recover.

On the share count, the increase in the share count was due to the warrant exercises associated with the 2017 notes. There's still about 3.5 million shares that are yet to be exercised on those warrants. So if you add that to the 139 million, you're about right at the 143 million, the share count, ultimately.

Got you. Okay. That's very helpful. When you look at the interest income line as we go forward, because I know there's also some of the timber notes in there as well, should that revert back to around a $4 million per quarter level?

Yes.

Got you. Okay. That's it. Thanks.

Mark Connelly, CLSA.

This is Tom Knott on for Mark. First question was can you provide us with an update on the progress you're making on the building code changes in Brazil? I think the last update you gave was that you were hoping to make some progress on roofs and walls by the middle of next year. Is the time line still the same and what are the biggest remaining hurdles for those changes to be instituted?

We got one, Tom, pretty recently, I think with within the last 6 weeks, which is an approval to put panels with wood framing. The approval that we had right before that was an approval to put panels with steel framing. What we have learned through this whole process is they don't approve an entire building system. They approve component uses. So, we've had to regroup over the last year and go at this in a slightly different way.

Okay.

So we're currently working now on getting approval to construct SIPs, which is a structurally insulated panel, which is like the Styrofoam or the foam in the middle and you put a piece of OSB on either side of it, you make a sandwich and that is being heavily used in the Chilean market for construction. The other approval that we're working on is for a use for stucco walls to use the OSB as the panel behind the stucco application. So, we have 2 now. To repeat, we have the approval for putting panels with steel framing. We have the approval for putting panels with wood framing. Now we're working on SIP approval and stucco approval.

You may not have been on the call before, but I explained in an earlier call that we've had to adapt our strategy to the bureaucracy of Brazil. Instead of going in like we did in Chile and just converting the way that they build, we have an adaptation strategy now, which is how do we put our products into the way that they build and create a critical mass, which then hopefully will allow us to go to a conversion strategy.

Okay. That's very helpful. In that same vein, with the approvals that you've gotten, can you talk a little about the export business from Brazil? I think last quarter you mentioned a goal of getting 15 million board feet to China by the fourth quarter. Is that still reasonable or does that move up or down?

I think it's reasonable and I'm talking cubic meters now, and to convert to 1 million feet you need to multiply the cubic meters by about 1.12. I think we'll probably do 15,000 cubic meters in Q4 to China.

Okay. All right. Thank you so much. That's really helpful.

Mark Weintraub, Buckingham Research.

First, just any particular reasons why OSB in the West was as weak as it was?

That's one of the key strategies for the OSB team is to figure that out. It's interesting -- if you look at it, the Western Canadian price has typically, in the last year-and-a-half, been lower than the others. Although, when there is a disruption, it reacts very quickly in the positive direction. But we can't point to anything in particular that drove that lower price in the third quarter. Now, in reaction to that, you heard Rick say that we did make the decision to indefinitely curtail the Dawson Creek facility for production of OSB. We reacted to it from the supply side because we don't understand the demand side.

On that, the Dawson Creek, I think you also mentioned that you had essentially directed that volume to Peace Valley, which you don't fully own. How do you think about, when you're closing a facility which is wholly-owned and essentially putting the business into something that is not wholly-owned, do you get some beneficial offset for that decision?

No. We actually look at it on a delivered cost basis. How can we get the product to our customers on the lowest delivered cost? Then we obviously work in consultation with our partner, Canfor, which we have a very good relationship with. So we do not attempt to maximize our profitability based on ownership.

Lastly, I believe Georgia Pacific had previously indicated they were going to bring up a facility in Florida in December. Do you happen to know the status of that? Is that being delayed and are there any other offsets that you're hearing about?

The 2 public announcements that we heard was they would start up their South Carolina mill by the end of the year and then there was an announcement recently that they have delayed that. That's all I've seen publicly.

Okay. Okay. Thanks very much.

There are no further questions at this time. I'd like to turn the call back over to Curt Stevens for closing remarks.

Thank you very much and again, thank you for attending the call. As always, Mike and Becky will be available for follow-up. With that, maybe you can give out the replay information, Karissa, and we're done. Thank you.

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