Louisiana-Pacific Corp (LPX) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Louisiana-Pacific Corporation quarter two 2012 earnings conference call. My name is Bree, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. Now, I would like to turn the conference over to your host for today, Ms. Sallie Bailey, Vice President and Chief Financial Officer. Please proceed.

Thank you very much, Bree, and good morning. Thank you for joining our conference call to discuss LP's financial results for the second quarter of 2012. I'm Sallie Bailey, LP's Chief Financial Officer, and with me today are Curt Stevens, LP's Chief Executive Officer, as well as Mike Kinney and Becky Barckley, our primary Investor Relations contacts.

I will begin the discussion with a review of the financial results for the second quarter of 2012 and the first half of 2012. This will be followed by some comments on the performance of individual segments and selected balance sheet items. After I finish my comments, Curt will discuss the general market environment in which LP has been operating, provide his perspective on our operating results for the second quarter of 2012, and give some thoughts on the outlook for the second half of 2012. As we have done in the past, we have opened up this call to the public and are doing a webcast. The webcast can be accessed at www.LPCorp.com. Additionally, to help with the discussion, we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I will be referencing these slides in my comments this morning.

We have also filed and 8-K this morning with some supplemental information, as well as our second-quarter 10-Q. I want to remind all of the participants about the forward-looking statements comment on slide 2 of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information included on slide 3 of the presentation. The appendix attached to the presentation has some of the necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning. Rather than reading these two statements, I incorporate them with this reference.

Before get started on the detailed discussion of LP's financial results for the second quarter, I would like to summarize our successful debt refinancing. We strengthened our balance sheet during the quarter by issuing $350 million in new unsecured bonds, with the 7.5% interest rate, and an eight-year maturity. The majority of the proceeds were used to refinance our 13% bonds, which had a 2017 maturity date. As a reminder, due to the discounted nature of that bond, the effective interest rate was slightly higher than 19%. In addition to replacing the secured debt with unsecured debt, we added approximately $100 million to the balance sheet, while reducing annual cash interest expense by $5.4 million, and annual book interest expense by over $13 million. The offering was well-received in the market, and we are pleased to end the quarter with a stronger balance sheet and lower interest costs. With that, let me go into the details.

Moving to slide 4 of the presentation for a discussion of the second-quarter 2012 and first-half 2012 consolidated results. We reported net income of $428 million for the second quarter of 2012 -- I am sorry, we reported net sales of $428 million for the second quarter of 2012, an increase of 18% from the sales reported for the second quarter 2011. In the second quarter of 2012, we recorded a net loss of $37 million or $0.27 per diluted share. We recorded a $52 million pre-tax charge associated with the early debt extinguishment. This represents the make-whole provision for the debt, which was tendered, plus associated deferred cost. In the second quarter of 2011, we reported a net loss of $33 million or $0.25 per diluted share on $362 million of net sales.

The adjusted income from continuing operations for the quarter is $3 million or $0.02 per share, based upon a normalized tax rate of 35%, compared to a loss of $26 million or $0.19 per share in the second quarter of 2011. Adjusted EBITDA from continuing operations was $37 million in the second quarter, compared to negative EBITDA of $4 million in the second quarter of 2011. Another solid improvement quarter over quarter, with a $65 million increase in net sales and higher adjusted EBITDA of $40 million, compared to the second quarter of 2011. On a year-to-date basis, we recorded $789 million in net sales, a $48 million net loss and a loss per share of $0.35 as compared to net sales of $694 million, a net loss of $56 million, and a loss per share of $0.43 in the first half of 2011. On a non-GAAP basis, we recorded adjusted operating income of $17 million, a loss per share of $0.05, and adjusted EBITDA of $58 million for the first six months of 2012, a significant improvement over the first six months of 2011, when we recorded a loss of $35 million, a loss per share of $0.32, and adjusted EBITDA of $10 million.

I will now move to slide 5 and a review of our segment results starting with OSB. OSB recorded an operating profit of $17 million on $195 million of sales in the quarter, compared to a loss of $23 million on $141 million of sales in the second quarter of 2011. For the quarter, we were reporting adjusted EBITDA of $28 million compared to negative EBITDA of $11 million in the second quarter of 2011. We had a 13% increase in volume, and our average sales price was 22% higher, relative to the second quarter of 2011. The increase in selling price favorably impacted operating results and adjusted EBITDA from continuing operations by approximately $33 million for the quarter, as compared to the corresponding period in 2011. Sales volumes also increased as we continued to sell more products into value-added applications, demand for housing improved, and we increased our exports to our Chilean operations.

I will take a minute to address the improvements in pricing from the first quarter of 2012. The price increase of 8% is due to the improved average selling price of OSB during the quarter. As we have discussed in the past, changes in north-central 7/16 random length, although widely used as a standard for OSB price changes, do not fully reflect the complexity of the OSB market. We sell products into other regions besides north-central, we sell products other than 7/16, and also we increased our export sales in the quarter, and the export market price didn't change much during the course of the second quarter. On a year-to-date basis, OSB sales of $344 million are 26 % higher than the first half of 2011, while profit of $17 million is $49 million higher than the loss of $32 million in the first half of 2011. Adjusted EBITDA for the first six months of 2012 is $38 million, as compared to negative EBITDA of $9 million for the first six months of 2011. The improvement in OSB's performance for the first of 2012 is driven by higher price, providing a $39 million improvement, and higher volume.

Slide 6 reports the results of the Siding business. This segment includes our SmartSide and CanExel siding products and commodity OSB produced in our Hayward mill. The Siding segment reported sales of $137 million in the second quarter of 2012, an increase of 16% from $119 million reported in the second quarter of 2011. The Siding segment reported operating income of $19 million compared to $11 million in the second quarter of 2011, and adjusted EBITDA of $24 million, an increase of $8 million compared to the second quarter of 2011. For the quarter, SmartSide average sales prices were up 2%, and volumes increased 9%. Volume increase in our Smart Side siding line due to continued penetration in several key focus markets, including retail, repair and remodel markets and sheds. CanExel prices were up 1% and volumes were down 31%. The CanExel sales have been driven by supply chain patterns. Our distributors built inventory through the first half of 2011, and then bled out the inventory over the past four quarters. We anticipate that our 2012 sales volume for the CanExel line will be equal to the 2011 sales.

On a year-to-date basis, the Siding segment recording $250 million in sales. $36 million in profit, and $45 million in adjusted EBITDA. For the first six months of 2011, the Siding segment recorded sales of $225 million, profit of $24 million and adjusted EBITDA of $32 million. The improvement from the first six months of 2011 is driven by increased volume of 16% in SmartSide, and higher sales price, and about $2 million related to improved OSB pricing for product produced in our Hayward mill, most of which was earned in the second quarter.

Please turn to slide 7 of the presentation, which shows the results of our Engineered Wood Products segment. This segment includes I-Joist, Laminated Strand Lumber, Laminated Veneer Lumber, plus other related products. This segment also includes the sale of I-Joist and LVL products produced by the Abitibi joint venture, or under a sales arrangement with Murphy Plywood. The Engineered Wood Products segment sales decreased to $52 million in the second quarter of 2012 from $54 million in the second quarter of 2011. The segment's operating loss in the second quarter of 2012 was approximately the same as the operating loss in the second quarter of 2011.

For the second quarter of 2012, adjusted EBITDA from continuing operations decreased $1 million, as compared to the second quarter of 2011. Volumes of I-Joists were up 17%, while volumes of LVL and LSL were down 9% compared to the same quarter last year, primarily due to lower international sales. Pricing was down 2% in I-Joist, LVL, and LSL due to changes in mix in both product lines with individual product pricing remaining relatively flat. On a year-to-date basis, Engineered Wood Products reported net sales $100 million, a loss of $6 million, and negative EBITDA of $1 million. In the first six months of 2011, Engineered Wood Products reported net sales of $102 million, a loss of $9 million, and the same level of adjusted EBITDA. Volumes and pricing for LVL and LSL were essentially flat relative to the prior year, while I-Joist volumes increased 17% and pricing for I-Joist decreased 2%.

Moving on to slide 8 of the presentation. For the quarter, our South American segment recorded sales of $43 million, compared to sales of $40 million in the second quarter of 2011. Operating income was relatively flat for the second quarter of 2012, compared to the second quarter of 2011. South America's adjusted EBITDA from continuing operations was $6 million for the second quarter of 2012, compared to $7 million reported in the second quarter of 2011. Volumes in Chile were up 30%, while volumes in Brazil were down 27%, compared to the same quarter last year. For Chile, changes in volumes were due to continued strong demand as wood framed housing market penetration increased, due to rebuilding efforts.

The sales volumes increase in Chile was primarily sourced by imports from the US, Canada, and Brazil. The imported sales have minimal margin associated with them, due to the high cost of freight. In Brazil, the loss of volume relates to lower exports to China. Pricing was up 4% in Chile and down 13% in Brazil. These changes in price are primarily related to changes in foreign exchange rates. For the first six months of 2012, South America recorded net sales of $85 million, a profit of $7 million, and adjusted EBITDA of $12 million. For the first six months of 2011, South America recorded net sales of $75 million, a profit of $8 million, and adjusted EBITDA of $14 million. The drivers of the performance for the first six months of 2012, relative to the same period in 2011, are the same as those for the second quarter. In Chile, higher demand for our product, being satisfied by imports with minimal margin, and in Brazil, the loss of volume is due to lower demand from export markets, specifically China.

Our moulding business, US GreenFiber joint venture, and various other non-operating facilities are shown in the Other Building Products segment. Overall, we are showing a loss of $2 million in the second quarter of 2012, which is comparable to the first quarter of 2011. For the quarter, sales were slightly above the second quarter of 2011. Operating results for the first six months of 2012 were flat with the 2011 results for the same period.

Total SG&A costs were $31 million in the second quarter of 2012, compared to $28 million in the same quarter of 2011. For the first six months of 2012, SG&A costs were $62 million compared to $56 million for the first six months of 2011. The increase in SG&A cost is primarily due to the accrual of 2012 management bonuses. We do not record any bonus accruals in 2011. We had a $2.6 million foreign-exchange loss in the quarter, compared to a $600,000 gain in the same quarter last year. For the six-month period, we recorded a $2.7 million loss in 2012, compared to a $2.4 million gain in 2011. Interest expense was $13.1 million in the quarter compared to $14.4 million in the second quarter of 2011. This reduction primarily related to lower interest expense we recorded due to the refinancing, as well as lower amortization related to our deferred debt expense.

Please turn to slide 9 of the presentation. As of June 30, 2012, we had cash, cash equivalents, and investment and restricted cash of $440 million. Working capital of $645 million, net cash of $40 million. In addition to the $427 million of cash on our balance sheet, we had $85 million of availability on our asset-based loan facility. Capital expenditures for the six months were $7 million, and we contributed $2 million to our joint ventures. As we discussed in our last quarter conference call, we are planning to spend approximately $25 million for capital expenditures in 2012. Now, I will turn the call over to Curt for his comments.

Thank you Sallie, for that review. In my remarks in early May, I did mention that April was off to a good start, and that I was cautiously optimistic that this would continue for the remainder of the second quarter, rather than the [head fake] that we saw last between Q1 and Q2. The results that Sallie just reported justified that cautious optimism, as they were significantly better than last year, and clearly above our expectations, primarily due to the increased housing activity, up 22% quarter-to-quarter and 27% six months to six months. This led to improved OSB pricing, 22% above last year, and volumes that were 13% better. We also had a much better quarter in siding, where sales were up 16% and segment earnings higher by over 70% compared to Q2 of last year. In fact, after adjusting for the costs associated with our successful debt refinancing, LP made money.

This quarter, we find ourselves once again leaning towards cautious optimism. On the plus side, single-family housing permits ended June at an annual rate of 540,000, a 22% improvement over last year, and multifamily permits, June's number was 262,000, 52% higher than last year. Inventory of new homes for sale continue to decline, now standing at about 115,000. In addition, there are comments about the shortage of existing homes for sale, now stands at about 2.5 million. Vacancy rates, both for apartments and vacant homes for sale continue to decline. With that, the current consensus for 2012 stands at about 750,000 single and multi-family housing starts. This is a forecasted increase of slightly over 25% compared to last year. For 2013, the consensus is now just above 900,000, a 21% increase over the forecast for 2012. Confidence in the housing market is continuing to grow, as homebuilders are accessing debt equity markets, acquiring land positions at an accelerated pace, and beginning construction in new communities.

On the negative side, the on-again off-again financial crisis in Europe is certainly affecting consumer confidence and banking in general. While there is job growth, it is at relatively low levels that is affecting the rate of household formations. Recent comments by the Federal Reserve and the lackluster economic data do indicate a slowing of the overall economy. Mortgage rates, while very low and quite attractive, do require high credit scores and down payments by the banks, which have limited access. And the political situation this election year has everyone worried about the paralyzed government, and the looming financial cliff at the end of the year. My conclusion is that I'm cautiously optimistic going into the second half of the year, but I'm also maintaining an agile stance here at LP.

Part of the discussion on the last call was around this question was if housing is rebounding, what is LP doing to be prepared for the upturn? This has become a very common question from customers, investors, and other stakeholders. Let me answer this question because this clearly has been on my agenda for a while. We did launch an effort to evaluate the areas of risk in the full supply chain from the tree to the delivery of the finished product to the building site. From this effort, we have chartered several projects to address the expected logging and transportation shortages, deferred capital expenditures, critical human capital needs and increased integration with our supply chain partners.

In Siding, we are staffing up to run 24/7 at all of our strand-based SmartSide mills and have cut back on the quantity of OSB manufactured at Hayward so we can use that capacity to produce more siding. In addition, our Board of Directors just last week approved a project to rebuild a press at one of our smaller SmartSide mills that will give us both improved capabilities and slightly expanded capacity. In Chile, we did announce that we were beginning the site selection and environmental permitting process for a third mill to meet the increased demand that is now being satisfied by imports from our Brazilian and North American OSB operations. This will allow us to put the associated freight costs onto our bottom line, rather than give that to the shippers. In OSB, we have significant unused capacity, both in the under-utilization of running mills and indefinitely curtailed mills. We do have detailed lives in place for adding shifts at each of our operating mills, and we will have similar start-up plans in place for idle capacity when it is needed, based on housing starts. We want to manage this increased activity is smoothly as possible, to increase our market share, as the recovery picks up steam. With that, let me hand it back to Sallie to lead the Q&A session.

Great, thank you, Curt. We are ready for questions.

(Operator Instructions)

Mark Connelly from CLSA.

Good morning, this is Kurt Schoen filling in for Mark. In SmartSide, where's all the growth coming from? Is a more a market share story? Is it more of a general demand growth story and what markets are you seeing growth in?

We talked about in the past with siding, siding was about a 65% to 70% new home construction, we entered into the downturn, with housing falling off as dramatically as it has, we have refocused our efforts into a couple different segments. One, retail is very important to us, so if you go into a Menard's or a Lowes or Home Depot, you will see our siding products in all of those stores. And we have expanded the number of SKUs. We are seeing growth in retail. The other area we have seen quite a bit of growth is in the non-residential construction area. This would be sheds and barns and those kinds of structures. We have done very well in penetrating that with a variety products, both really the entire shell of those sheds.

And then in the repair and remodels sector, we began about a year ago penetrating that. This would be the one step distributors that go directly to the installers. You seeing growth in those segments, and then from a product standpoint, we have seen a wide acceptance of our trim products. And this would be soffit, trim, and facia. We are seeing growth there.

Are there any specific areas of the country that you are seeing more growth than others?

Siding as a cladding for a house is very regional. Where siding is very strong, it is strong in the middle of the country, Kansas City, St. Louis, those markets, it's strong in the Denver market, wood-based siding is strong in the Pacific Northwest, and we are seeing a lot of growth in our panel products in the Southeast and Southwest.

Okay. And then secondly, it looks like OSB prices are basically back to 2006 levels despite the spike in 2010. When do you expect idle capacity to come back online? What is your inflection point in terms of housing starts and pricing?

If you look at what capacity is currently running, we can add about 3 billion square feet of capacity to what is running today. So our numbers in the 850,000 to 900,000 housing start level, that's what we need to consider some of the capacity coming back online.

Very helpful, thank you.

Your next question comes from the line of Gail Glazerman with UBS. Please proceed.

Speaking on OSB pricing a little bit, can you touch on what you think has driven some of the regional variation that has developed over the last couple of quarters and if there is any signs of those gaps narrowing?

You are exactly right. The pricing from a regional standpoint, and it's not just regional, as Sallie mentioned, it's also by product type. So if you look at the random lengths, track like 90 products, there's been quite a divergence in the last two quarters. Probably the most significant is Western Canada. If we look back to the middle of last year, Western Canada was selling at a significant discount to the rest of the regions, and now it is the highest. So you are seeing pricing from the Southeast, go for approximately $208 per thousand to Western Canada, $267. You are seeing a wide variation. There is a natural arbitration that takes place there. When you have this big of a disparity, manufacturers in the Southeast will selling to those other regions, and take the freight differential off of that. And that will have a tendency to drive the prices closer together. So we do see that pricing will come closer together as the year progresses.

Okay. And when you look at ramping up your capacity and adding shifts, one, can you outline what your current operating rate is, both effective and actual and have you had any issues adding shifts as you have wanted? Have there been any road blocks and stumbling blocks there?

The operating rates for what is running, we ran in the low 80%s for the second quarter. If you take the 1.6 billion square feet that is not running, that would put us into the 65% range. As far as adding shifts, we have not had any significant issues in the US. We are having some issues in Canada, and that is largely related to skilled trades. One of the projects that I mentioned, as we ramp up, is to make sure that we have adequate human capital needs to staff these mills. And so we are focused on that aspect of it.

Okay, and just going back to the potential expansion in Chile, can you give a sense of time frame and cost and also how does that impact your thought process on ramping up and expanding production in Brazil?

The problem both from North America and from Brazil is it's very expensive from a freight standpoint to satisfy the demand in Chile. That's why we're looking at local capacity. We expect the site selection environmental permitting process to take at least a year. And then as we are going through that process, we will also be putting together the project plan to determine how much the plant will cost. It is our intention to do what we did for the first two mills there and use used equipment from North America to satisfy the primary machinery and equipment. So we think we can do this on a very low cost basis, as we do have permanently curtailed facilities with assets that we can redeploy. So the growth, back to your question on Brazil, the growth and capacity in Brazil will be predicated upon local demand, and then the recovery of the export market that Sallie talked about that fell off the first half of the year.

Thank you very much.

Your next question comes from Mike Roxland with Bank of America Merrill Lynch. Please proceed.

Sticking in line with the last couple of questions here, given improved OSB demand and pricing, have you heard any mills that have been shut or idle might restart? In your own internal budgeting, are you accounting for any potential mill restarts?

We have not put our budget together for the 2014, 2015 timeframe yet. If you think about what I said, that we have to consider whether we bring on capacity when we get to 850,000 to 900,000 housing starts, the current consensus is for housing starts to be 900,000 next year. As we think that is reality, we'll have to make some decisions, probably in the middle of the year, on we bring capacity online. Let me be very clear on that, that this is a long-term decision that is based on demand. It isn't a short-term decision based on pricing.

If a facility has been down less than two years, we believe that it will take six to eight months to bring an that operation back online and probably $5 million to $7 million worth of cash. If it's been idled more than two years, that timeframe probably moves out to the 10 to 12 months and the cost goes anywhere between $8 million to $10 million. There are some idle facilities that we count as idle facilities that have never operated. And it's unknown how long it would take to complete those operations to hire the people and put the infrastructure in place. These are not short-term decisions, they are longer-term decisions, but specific to LP, we will probably need to make some decisions, as we see the market moving to 900,000 or more in the middle of next year.

Got you, appreciate that, Curt. Last question on exports. Have there been any noticeable change in exports from North America to Chile? I know you've seen less exports and hence better pricing than in Chile, given what we have seen through the better domestic demand.

I'm not sure there's been less exports to Chile, to answer your question. What we are trying to do there is, we are trying to satisfy a market until we can bring on that local capacity. No, I will tell you that export pricing hasn't moved nearly as much as the domestic pricing, and that is obviously creating a quandary for all manufacturers looking at export volumes.

When you say that export pricing, it's been pretty stable?

It hasn't moved much. If I look at what is been exported to Europe and to Asia. It has been pretty flat, and as a result, certainly we have deemphasized our shipment days in particular.

Got you, thanks very much.

Your next question comes from Chip Dillon from Vertical Research Partners. Please proceed.

Curt, you mentioned that -- by the way thanks for the specifics on the restart process. You mentioned that there were some facilities that had not run before, and obviously you are including Clark County. Is there something else in your system that you were thinking about beyond Clark County, when you said that?

I was actually talking about the industry, Chip. I was talking about the capacity that could come back on for the industry. Our Clark County facility, we actually did run that for two to three months. We have gone through a big piece of debugging, but it obviously will take as a period of time to bring that back on-line. I was referring to some of the facilities that were under construction.

Got you.

Either halted or -- primarily halted.

Got you, like in South Carolina or Alberta, places like that.

Just to be very clear for our system we have $1.6 billion of idle capacity. Half of that is the Clark County facility, that I would put in the category between been shut for more than two years and never run, because we did run it a little bit. That we have one in the category of being shut more than two years, and that is the Chambord facility and the Dawson Creek facility has only been shut downs since last October.

And what are Chambord and Dawson's relative capacities?

Dawson is around 420 million square feet, and Chambord is about the same.

Got you. I guess the trick is, having been around the block a lot in this industry is that, as you get into the middle of next year, obviously Dawson and probably even Chambord would easily make it into that next season, but there is a seasonal element. Are you going to -- not to pin you down, but are you going to need to see several months or quarters of starts at or above this 900,000 level before you pull the trigger?

I think what we will have to look at is the leading indicator that give us a degree of confidence that's going to be north of 900,000. You get to 900,000, the industry running what its running today, even filling it out with shifts can't satisfy the demand.

Got you. And on that point, there are a number of mills out there that are running that had cut back on shifts. Could you just -- I imagine its a big variation, but you're on the front lines. Are there facilities or how does that work when you've had one shift working in a facility that could handle two, but you've only have one shift assay for five years because of the downturn, how quickly can you add that second shift? Does that build into a number of months, or can it be done more quickly than that?

First, what you do, is you use overtime. And so you use the people that you have already got to run on the weekends. You get additional capacity through the overtime, and then as you decide to make that a more permanent addition to the shift, you bring people into replace overtime. You move into it gradually. And so it's probably no more than a month to a month and a half.

After you have exhausted the overtime option?

Right.

And the last question is, the equipment that you're thinking about for Brazil, that would be in some of the -- I know there was a mill in Texas you shut down a few years ago, but that wouldn't be in these three facilities that are considered indefinitely down? These would be in some of the older facilities who you have had down for longer. Is that correct?

That is correct, and there's a couple reasons for that. One, generally the ones we permanently curtailed have production capacities more in line with adding incremental volume in South America. What you wouldn't want to do is to take a 500 million square foot mill and drop it into a market that is 300 million square feet. So mills that we have used would literally shut down seven years ago. We have equipment there. Athens, Sillsby we have talked about. And then Saint-Michel potentially.

Last question, and I will turn over after this. When you look at the LSL plant that was built in the converted operation in Maine, do you see that in the next housing cycle being able to get close to what you thought it could do? At least, is the market likely to be there, or do you think that there has been some changes in the market that might not make that plant as relevant as you thought it might be when you planned it?

I think there are been some changes in the market that are just the opposite. We do think that lumber's going to come under pressure availability. The beetle kill in British Columbia is obviously the first thing that comes to mind, but also the change in the design values for Southern Yellow Pine, will make it a much easier decision for the builder to use Laminated Strand Lumber as a replacement for beams and headers.

Got you, okay, thank you.

Your next question comes from the line of Alex Ovshey from Goldman Sachs. Please proceed.

On the OSB segment, to be clear, some of that volume that booked in that segment, does that export volume to South America?

Yes.

Okay would you be able to quantify the percentage of your volume in the quarter went into the export market?

5% to 10%.

And that volume, you said because of freight, you are not making any margin?

That's correct.

Okay that's helpful, and then on the import cost five can you talk about what the import cost did for you guys do in the quarter and if you have any forward commentary on costs over the next couple of quarters or into the third quarter?

Yes, in terms of input costs for the quarter, all in, we actually had lower costs than we had quarter-over-quarter. We think going forward that in particular our benzene costs may show some increases. And we had hope to see some of the benefit from lower oil pricing but that not -- unfortunately that's really what is occurring. Benzene moved away from oil and we think those prices, we may see some upticks in the third quarter, but all-in Alex, the big product increases for us came in 2011, and we are not -- we're not really anticipating similarly large raw material increases in 2012.

Got it, and just on the operating leverage in the OSB segment, can you just talk about how you see the incremental profitability of an additional 1,000 square feet of OSB sold in that segment? The other way to ask question is what is the mix between fixed and variable costs for your domestic OSB business?

When we look at the OSB results for the second quarter, what we really see is some improvement based on the increased throughput. But the real lever there is the improvement in pricing.

But, going forward, should we think there is going to be an additional benefit from increasing throughput? Why would you not also see the increase in throughput in that business?

We will see some improvement, but historically, it has not really moved the needle nearly as much as the changes in OSB pricing.

Right, that is fair. And then shifting to the Engineered Wood Products business, can you just talk about what level of housing starts do you think that's a business that can turn profitable?

Again, I keep coming back to that 900,000, I think that's when it probably is contributing a little bit, and 1.2 million I think is returning cost of capital.

And lastly for Sallie just a couple of modeling questions. Can you give us an update on what the run rate interest expense is quarterly as opposed to refi, what is delivered share count is and then maintenance CapEx in the business on an annual basis.

The interest expense going forward, I would have to do the math, but it has decreased by the interest, the $13 million.

Okay, per annum.

Right. That's the way to do that off of -- calculate off of the 2011 numbers.

Got it.

What was the second question? Maintenance capital is $1 million to $2 million per plant. Assuming they are running full out. And as I mentioned, it's $25 million of CapEx we are anticipating for the full year of 2012 and what was your middle question?

For your delivered share count and also on the normalized tax rate?

The normalized tax rate again we are recommending that you all use a 35% rate, which is what it would look like if we had normalized earnings and were earning -- we didn't have to take these Canadian valuation allowances. And on the share count, that will change as we become profitable. So it should go up to about $142 million once we become profitable on a full-year basis but until we are profitable on GAAP basis we don't count those additional shares.

Thank you very much.

Our next question comes from the line of Joe Stivaletti with Goldman Sachs.

Yes, just a couple little things to follow-up. You talked a lot about your perspective on potentially adding shares or opening capacity at some point in the future. I wonder though if you could talk more broadly about the market on a supply-side. Are you seeing much happening there? Or are you seeing people being quite disciplined? Have you heard of anything being added in terms of supply recently? Just trying to get color on that, that you might have.

The demand is actually in pretty good balance. If you look at the increase in volume that APA announces about 11% increase in Q2 over Q2. That is pretty consistent if you think about it, housing up 22%, housing is less than half of the demand for OSB so if you do the numbers, 11% sounds about right. From a production to match the increase in the housing demand. I am not aware of any facilities in the process of being started up right now.

Okay, thank you and the other thing is, I was wondering if you could just shed a little bit of light of the fact you indicate your average OSB price year-over-year was up 22%. Which is a fair amount below the three benchmarks you show in the back of your 10-Q on a year-over-year basis. Just wondering if you could expand a little bit on why there is that differential, what are the major reasons why that exist?

Let me start out with a couple things. One is there is a regional difference. We've got just between the Southeast at the end of June, and the Western Canadian, we have an $80 gap there. First thing you have to do is you have to adjust for the regional mix of where you sell your products. The second thing is less than 20% of our projects is actually 7/16. Then have to look at what the other increases or the changes in pricing have been for your flooring products, for your radiant barrier products, for thin OSB, you have to look at the differences there.

As an example, TNG flooring, actually the price was less than the price of 7/16 in the second quarter which is odd because you're adding value to it, but that way random lengths printed. So you have to look at that. Then the third thing you have to look at is, what is your mix of value added products and how does that play into the overall pricing environment? Remember, from a value-added damn point, what you try to do is try to price that based on competitive substitutions of that product, and you don't always get all the increase in the random lengths, and you certainly don't get the decrease in the random lengths, so you try to maintain a more steady margin there. An example there would be what we are selling into the furniture market. The furniture market, the pricing there certainly goes up with random lengths but it doesn't go up nearly as much. And then the fourth factor you have to look at is how are you selling your product? If you're selling your product on contract, that is priced at the time of shipment, then whatever I ship this week its priced based on last week. If you're pricing it on the time of order, and you are out three weeks in your order file, then you've got a lag in a rising market, but you also have the same lag in a falling market, where you tend to have advantage. Those are the four areas I would look at.

Joe, the export aspect that we mentioned previously.

Okay, that is very helpful. And just one quick follow-up there. Do you -- I don't see in your filings, where you explicitly state what your average realizations for OSB were. Is that a number that you provide? I don't see it anywhere.

It is not.

We don't share that.

Okay, so when you show your sales for the OSB segment, which is $195 million this quarter, does that correspond to when you show your production volume chart? Does that correspond to just the one line, $922 million or is that not really -- does that math not really work, does that include other things?

The production is what we produced, and the sales volume, you can get it from the increase that we got. We give an increased percentage, but we don't specifically state that.

Okay, thank you.

Your next question comes from the line of Mark Weintraub with Buckingham Research Group.

Quick clarification. When you said making a decision in the middle of next year, does that mean that the earliest that realistically you would be restarting a new facility would be for the 2014 building season?

If we make a decision in the middle of next year, that would be the earliest.

Okay, and that is what you had said, that would be the soonest you would make a decision?

Remember what I said is I am basing it on what I expect housing starts to be 850,000 to 900,000, and we have confidence in that. Today, given what the forecasts are, I would say that's a middle of next year. That is my comments.

Okay and then you mentioned that less than 20% of your OSB mix is actually the 7/16 et cetera, and the benchmark that many of us often look at. Can you help us a little bit as to what are some of the other large percentage categories and if now is not the time, that is fine. But that would be really helpful at some point. And if you can do it now great.

What we said is over one-third of our volume was value-added products, so that would include our flooring products which are thicker products, and would include our radiant barrier products, it would include rim board, web stock, and our flame block. The remaining two-thirds is going to be about half of the remaining two-thirds is going to be commodity, 7/16 and 3/8 and the rest is going to be different thicknesses, 9-foot and 10-foot panels. And others.

Mark, point taken. We will try to figure out if there are any other sort of standards that we can provide, but not promising anything, but we will take that into consideration.

Great, I appreciate that. One small little question. I saw the LVL-LSL volume was down year-over-year despite housing being stronger. What is going on in that in the volume basis?

That was principally the export. We exported a fair amount of LVL to Australia last year the first half of this year, we haven't exported as much. They're going through a little bit of a slowdown in the building in Australia, plus there were some inventory issues at several of our big customers. They were up in the US quarter over quarter and down internationally.

Okay. And one last one, if you look at your price in your various OSB categories in July or where it is currently, how does that stack up relative to the Q2 average? Particularly if you look at random length and you look at the mainstay benchmarks it's about $25 per unit higher. How would your actual, given the mix that you have and all of the various points that you been making, how would it compare again either now or with the July average versus Q2?

I don't have an answer to that because I don't have that data in front of me.

Okay.

I would expect our realization to be higher in July that was in June.

Right and then versus Q2 average as well?

Right now, random lengths in July is higher than the Q2 average.

Okay, thank you.

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

I feel like you ought to bring Red Cross back for a little while here, after what he went through the last five or six years. I'm curious if you can talk first of all about any just near-term supply disruptions that are going on in the industry. I think we heard about a mill that didn't have any power up in Saskatchewan or Alberta. Any other things that you think may be affecting the market in the near-term?

It's a couple things. There have been several lightning strikes I think the mill has been affected a couple times with lightning strike. We have had, within LP, we have had some log outages in Canada in our Swan Valley mill and we have had some difficult log situations in some of the other mills in Jasper, Carthage, and Haynesville, where we lost a few days of production there just because of inavailability of logs. And that we did have one equipment failure that we lost a day or two in one of our mills. But that is not atypical. Things you have to deal with. But those are the ones that I have heard about.

Okay. Second question, thoughts on consolidation of the business. Rick used to say he thought pretty much everybody that was in it was in it to stay, but if you look at the structure of the OSB business, it seems like there is a reasonably long tail of second and third tier producers. And I just wonder, with the business picking up, whether you think there's room for some more consolidation in the business.

Yes, I think, as you and I have talked in the past, I think there is room for consolidation, but you have to have a willing buyer and a willing seller to put a value on it that makes sense, and as we have talked about when the market is going down, we didn't see a lot of activity. Whereas at the bottom, we saw little bit of activity, whereas at the bottom, we saw a little bit of activity, because we had some folks go through bankruptcy. So ownership changes there, and now that we are coming out of it, we will see. From a consolidation from my perspective, the easiest one, and I have to have a willing seller, is to consolidate our position in the Peace Valley mill.

All right. Another question going back to Chile, I have seen that one of the biggest -- the biggest forest products company down in Chile, Arauco, has made a couple of good-sized acquisitions here in the US most recently, Flakeboard. They don't want to be doing anything in the OSB business down in Chile. Do you have any thoughts on that?

They do want to do something in OSB, they're private labeling from us.

But they haven't done anything in terms of production, and now they have bought about seven or eight wood paneled plants up here in the US to go with what they have down in South America.

We have a wary eye on them. You are right, they are an acquisitive bunch.

All right, good enough. Good luck in the third quarter and through the second half of the year.

Your next question comes from the line of Steve Chercover with D.A. Davidson. Please proceed.

I actually wanted to drill in a little bit on the cost structure because it occurs to me that the cost were up about $20 per thousand and I would have thought they were going to fall. Is there anything else beyond the occasional wood problem, freight, and benzene?

We're not seeing that, how are you doing the calculation?

Maybe we ought to take that off-line and talk to Mike, but our costs were not up in Q2.

I will speak to Mike on that than. And I guess its terrific that you're at the point in Chile that you think you are ready for another facility. I guess it's a little ironic to me that Brazil, which has Olympics pending and I think World Cup soccer is not growing a little faster, are they still resistant to single-family dwellings?

Actually it is a missionary effort there to make it out of wood products. But just a couple anecdotes there, we have more sales -- how do I put this? More houses were sold with wood in Q2 than all of last year. With our system. So we're having very good success in the penetration but it just -- it is slow to get going and when we do get it going, that mill is going to be exactly the right place. There is a little bit of turmoil going on in Brazil, as you know, their growth rate has slowed, the economy is in a difficult spot, and then the real has certainly, as Sallie mentioned, the foreign in exchange loss that we had, the real has weakened considerably against the dollar.

I guess you outlined four potential sets of assets that could go down to South America. Despite the slow absorption in Brazil, you could have another facility in Brazil as well?

I think that it over time that's going to be necessary. If we get just a fraction of the penetration we have had in Chile we will need additional capacity there now.

You might almost be to the tipping point then given your comments on Q2 versus all of last year?

Well, again, we are starting from a very low base. I wouldn't read that into it. But I would suspect that when we get out to 2014, we're going to have to think seriously about relocating some of those assets.

Okay and then all the anecdotal discussions says that field inventories are very tight. Can you confirm that?

From everything I've seen, same thing you can do, drive around looking your lumber yards, and if you see material above the fence line, they probably have adequate stock, if you can't see anything, they probably don't.

Last quick question, you get some good color where Polton becomes profitable and then earns its cost of capital. How would you characterize it's operational elements? Is it running sufficiently for you to say that you did a good job bringing it up? Or does it need any tweaks and all?

The mill is running very well. But it's only running at 20% of capacity. We change shifting patterns there so we are running it as cost-effective as we can. So we're confident that we could run that mill at high yield and high quality levels because we have been doing that even at this reduced capacity. I think the only additional capital that's required would be a little bit on the green end, and but it not significant.

Thank you both, and Mike, get ready for my call.

Your next question comes from the line of Paul Quinn with RBC Capital Markets. Please proceed.

Question on net capacity. Curt, you have done a good job explaining how you think about it, but in terms of your regional order files, is there an area with longer order file that would suggest that would be an area that you would look at adding capacity to? Seems you've got mills located all around North America.

Where we are seeing strength is in the West Coast. Amazingly enough, Phoenix and Las Vegas actually have home starts going in, coastal California communities are pretty strong. And we're seeing pretty good activity in the Pacific Northwest. The West is strong, and then Texas, as you know, is what it is, as well as any region, and they can continue to build in the Texas region. We aren't seeing anything, really, there is nothing going on in the Atlanta area. What's going on in Florida is mainly high-rise stuff, so that is not helping a whole lot. And then there's a lot of building activity going on in North Dakota, but it's starting from a pretty low base.

Just on the siding side, CanExel, you mentioned destocking there. Is that over now going forward?

Yes, we believe so. What we saw, as we were on allocation through August of last year and so what was happening was our distribution partners were taking everything they could get. When we went off allocation, they said we don't have to build up our own inventory, we can rely on them. They brought their inventories down in the second half of last year and into the first half of this year. Now we think they are buying at the replacement level and so we should see -- we suspect that year-over-year you will see a slight increase in CanExel.

Good, that's all I had, thanks guys.

Thank you Paul. Bree, thank you. I think that's all the time we have for questions. So if you could provide the replay number, and I would like to thank everybody for participating in the call and as always, Mike and Becky are available to answer any follow-up questions.

Ladies and gentlemen, the replay number is 1-888-286-8010 and the pass code is 33944069. Once again, the replay telephone number is 1-888-286-8010 and the replay pass code is 33944069. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.