Louisiana-Pacific Corp (LPX) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-one 2014 Louisiana-Pacific Corporation earnings conference call.

(Operator Instructions)

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

Thank you very much, Patrick, and good morning. Thank you for joining our conference call to discuss LP's financial results for the first quarter of 2014.

I am 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'll begin the discussion with a review of the financial results for the first quarter of 2014. 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 first quarter of 2014, give some thoughts on the outlook for the remainder of 2014, and provide an update on the status of the planned Ainsworth acquisition.

As we have discussed in the past, we have opened up this call to the public and are doing a webcast. That webcast can be accessed at www.LPCorp.com. Additionally, to help with the discussion, we've 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 an 8-K this morning with some supplemental information, and will file our 10-Q later this morning. I want to remind all the participants about the forward-looking statements comments 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.

Market conditions were difficult in the first quarter. Seasonally adjusted housing starts in March of 2014 were 9% below the seasonally-adjusted housing starts for March of 2013. Weather certainly appears to have been a contributor in the lower demand. That said, we are pleased to see that random lines [trued up] by double digits in all but one region last Friday, and the midweek print was also up in all but one region.

Now please turn to slide 4 of the presentation for a review of the first quarter of 2014. We reported net sales of $445 million for the first quarter of 2014, a 16% decrease from the net sales reported for the first quarter of 2013, primarily driven by the lower OSB prices.

In the first quarter of 2014, we recorded a net loss from continuing operations of $14 million, or $0.10 per diluted share, compared to income of $65 million, or $0.45 per diluted share, for the first quarter of 2013. The adjusted loss from continuing operations for the quarter was $7 million, or a $0.05 per share loss, based upon a normalized tax rate of 35%, compared to income of $58 million, or earnings per share of $0.40 in the first quarter of 2013 using the normalized 35% tax rate. Adjusted EBITDA from continuing operations was $23 million in the quarter, compared to adjusted EBITDA of $120 million in the first quarter of 2013.

Please turn to slide 5 and we'll begin the review of our segment results, beginning with OSB. OSB reported an operating loss of $2 million on $195 million of sales in the quarter, compared to operating profits of $98 million on $287 million of sales in the first quarter of 2013

For the quarter, we reported adjusted EBITDA of $12 million, compared to adjusted EBITDA of $109 million in the first quarter of 2013. Our volumes were higher by 6%, as we started up our Dawson Creek, British Columbia and Clarke County, Alabama mills' unlimited production late in the second quarter of 2013.

Pricing in our OSB segment was down 37% compared to the first quarter of 2013. Random Length's North Central 7/16 pricing was down 47%, compared to the first quarter of 2013.

This decline in pricing was the most significant contributor to the lower OSB performance, almost $115 million. As we've indicated in the past, our pricing percent changes tend to stay above random length in the market with falling prices, and that pricing percent changes tend to lag in markets with improving prices.

Moving on to slide 6, which 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 $144 million in the first quarter of 2014, an increase of 7% from $134 million reported in the first quarter of 2013. The Siding segment reported operating income of $19 million, compared to $21 million in the first quarter of 2013, and recorded adjusted EBITDA of $24 million, a decrease of $1 million compared to the first quarter 2013. Reduction in OSB pricing lowered our Siding business segment results at $3 million.

For the comparable quarter, SmartSide average sales prices were up 6% and volumes increased 12%. Volume increased in our SmartSide siding line due to continued penetration in several key focus markets, including retail, repair and remodel markets, and sheds. Improvements due to higher volumes and prices were somewhat offset by the additional sales and marketing spend.

CanExel prices were down 8%, due to the strengthening of the US dollar, as the majority of these sales are denominated in Canadian dollars. In terms of Canadian dollars, CanExel prices were down 1%, mostly related to mix. CanExel's sales volumes were up 13%, due to increased sales through our promotional winter buy program.

Please turn to slide 7 of the presentation, which shows the results from our Engineered Wood Products segment. This segment includes I-joists, laminated strand lumber, laminated veneer lumber from OSB and other related products. This segment also includes the sales of I-joists and LVL products produced by the Abitibi joint venture, or under a sales arrangement with Murphy's Plywood.

The Engineered Wood Products segment reported sales of $66 million in the first quarter of 2014, up from $63 million in the first quarter of 2013. The segment's operating loss in the first quarter of 2014 was $3 million, as compared to a loss of $4 million in the first quarter of 2013.

For the first quarter of 2014, adjusted EBITDA from continuing operations was $2 million, as compared to break-even in the first quarter of 2013. The improvement in adjusted EBITDA was related to higher pricing, to up increased utilization of our Houlton LSL facility, as we produced limited amounts of OSB. Volumes of I-joists were up 3%, volumes of LVL and LSL were up 2% compared to the same quarter of last year, and pricing was up 11% I-joists and 8% in LVL and LSL, reflecting price increases implemented during 2013.

Moving on to slide 8 of the presentation, for the quarter, our South American segment recorded sales of $37 million, compared to $45 million in the first quarter of 2013. Operating income declined to $4 million in the first quarter of 2014, compared to $6 million in the first quarter of 2013.

South America's adjusted EBITDA from continuing operations was $7 million for the first quarter of 2014, compared to $9 million reported in the first quarter of 2013. Volumes in Chile were down 18%, while volumes in Brazil were up 7%, compared to the same quarter last year. The sales volumes decrease in Chile was primarily due to reduced production due to maintenance work performed during the quarter.

In Brazil, the higher volume was due to increased export sales, as well as continued penetration of local markets, as compared to the first quarter of 2013. In US dollars, pricing was down 13% in Chile and up 5% in Brazil. In local currency, Chile recorded an increase of 2%, and Brazil recorded an 11% improvement in pricing.

Selling, general and administrative costs were $41 million in the first quarter of 2014, compared to $35 million in the same quarter of last year. This increase in cost was primarily due to higher sales and marketing costs associated with our Siding business, increased costs in our information technology area associated with our systems upgrade, and costs associated with the proposed acquisition of Ainsworth.

We recorded a $4.3 million foreign-exchange loss in the quarter, compared to a $700,000 loss in the same quarter last year. Interest expense net was $5 million in the quarter, compared to $7 million in the first quarter of 2013. This reduction was primarily related to the lower interest expense associated with our Chilean debt, as we reduced the outstanding balance during 2013. Additional reductions were due to lower amortization of debt costs due to the refinancing we completed during the fourth quarter of 2013.

Turning to slide 9 of the presentation, as of March 31, 2014, we had cash, cash equivalents, investments, and restricted cash of $567 million; working capital of $843 million; and net cash of $194 million. We used $73 million of operating cash flow in the quarter, an amount similar to the cash used in the first quarters of 2011 and 2012. Historically, we have used cash in the first quarter to fund investments in inventory and receivables. The operating cash flow was lower than the first quarter of 2013, primarily due to the lower operating results caused by lower OSB prices.

We are planning to spend approximately $100 million for capital expenditures in 2014. We used $24 million of cash for capital expenditures in the first quarter. Among the projects which were successfully completed were our Roxboro, North Carolina OSB mill press rebuild; the RTO rebuild at our Carthage, Texas mill; and the Tomahawk siding mill 50% expansion that is currently in the commissioning process

And with that, I'll turn the call over to Curt for his comments.

Thank you Sally, for that review of the quarter.

My comments today, as Sallie mentioned, will focus on accomplishments and challenges in the quarter, talking about the current state of the housing market, give you an update on the Ainsworth acquisition, and provide you with my views on what is ahead for the rest of this year.

The first quarter, we had a safety total incident rate of 0.40 for the first quarter. In the quarter, we were recognized by the AF&PA as the company with the best overall safety record in 2013. And we also celebrated several safety milestones throughout the Company, with the highlight being 2.25 million hours -- safe hours in our Carthage, Texas mill over a seven-year period.

As Sallie talked about, weather was a big story in Q1 throughout North America. This not only affected building activity and demand for products, but also created havoc for the truck and rail transportation systems. As a result, we had higher finished goods inventories than planned, and we had to curtail operations at several of our facilities and were late on shipments to our customers. While getting better, rail service, particularly in Canada, has not yet returned to normal.

Despite the weather, we did post positive adjusted EBITDA in each one of our segments. While significantly lower OSB prices compared to last year hurt our earnings, I was very pleased that our SmartSide siding products continued to show strong growth for this quarter, setting a volume record compared to any other Q1 in the history.

On our last call, I did mention that we went live on January 1 with our new ERP system. The magnitude of changes to our internal operations, accounting and finance, customer and vendor interactions cannot be overstated. We've all heard the horror stories associated with these types of conversions and I now have a better understanding.

Despite these challenges, the dedicated efforts of our employees and integration partner, as well as the understanding support from our customers and vendors, we are making progress every day, and we did, in fact, close the quarter on the new system, quite an accomplishment. All of us are looking forward to taking full advantage of these new capabilities as we get the systems fine-tuned and fully operational.

Sallie did talk a little bit about capital, but since the first of the year, we have completed significant capital projects at four of our mills. These were completed on time, on budget, and with no injuries to either LP employees or the many contractors who are on our sites.

The highlight for me was the completion of the 50% capacity increase at our Tomahawk SmartSide mill that will allow us to continue to meet our customers' demands for these products. For the housing market, there's little doubt it's improving, but the recent news makes it very difficult to determine the pace of the recovery. US housing starts for March were an adjusted annual rate of 946,000, higher than February, but below March of last year. Permits in March were at 990,000.

The Case-Shiller index of home prices was up 13.4% in March, compared to a year ago. According to the National Association of Realtors, contracts to purchase previously-owned US homes declined in March by the most in almost three years. This means that residential real estate started to stabilize entering the spring selling season. The pending home sales index rose 3.4%, the most since May of 2011, and the first gain in nine months.

The inventory of new homes for sale remains very low, at about 150,000. There are only 2 million existing homes for sale, and that is probably overstated, due to the housing obsolescence on many of these properties.

Residential remodeling in February was up almost 10% from a year ago, and builders remain optimistic about 2014, but they do have concerns about four areas: first is the availability of labor, second is the lack of affordable lots, the third is the future of Fannie and Freddie, and the fourth is mortgage access, primarily for the first-time home buyer.

Let me now take a few minutes to talk about Ainsworth and give you an update on where we are. I know that all of you are frustrated that our comments have been somewhat limited, but I'm sure that you understand that when dealing with these regulatory agencies, the outcome is a culmination of a process that has lots of twists and turns. Plus, I can assure you that you're not the only ones that are frustrated by this.

As I stated in the last call, what I'm going to tell you today is really all we can say at this time, and I appreciate you once again restraining yourselves from questioning Mike and Becky with more detail. Since entering the agreement early last September, we've been in regular contact with the Department of Justice Antitrust Division and the Canadian Competition Bureau on antitrust matters.

Together, we have provided a significant amount of information and analysis to these agencies, engaged in a number of face-to-face and telephone discussions, and are currently operating under a time extension in our efforts to convince the agency that the transaction should be permitted to proceed. At this point in time, the regulators have indicated they will not allow the current transaction to proceed. Therefore, to complete the transaction under its current terms, we may have to litigate with the regulators.

LP and Ainsworth continue to explore other options with the regulators that could invest divestitures that go beyond what was contemplated in the arrangement agreement. This, of course, would require changes to the arrangement agreement that would need approval from both boards and the Ainsworth shareholders. There is no assurance that such agreements (inaudible) can be consummated.

While this has been a much, much more difficult, time-consuming, and expensive process than originally contemplated, we trust that you appreciate that we've been working very hard on this, and that our ultimate course of action will be driven by what we believe will be the best interests of our shareholders.

For 2014, I do remain optimistic. The consensus forecast for 2013 now stands at 1.1 million, about a 19% increase over last year. For 2015, the consensus is at 1.37 million, another 25% increase. While I certainly hope the forecasts are accurate, the weather in the first quarter whacked construction activity, which may make it difficult to reach that 1.1 million this year.

Earlier this week, and I think again today, Federal Reserve Chair, Janet Yellen, made the following comment: One cautionary note, though, is that readings on housing activity, a sector that has been recovering since 2011, have remained disappointing so far this year, and will bear watching. I certainly agree with that. We are watching that.

The overall economy is improving, although Q4 was revised downward to a 2.6 % growth. The forecasted real GDP growth for 2014 is at 2.8%. Consumer confidence took an unexpected bounce in early April to 82.6%, attributed to positive feelings about job prospects and better weather.

The 30-year fixed-rate mortgage have bounced around the 4.3% range since the Fed comments last May. Also, it has been reported there is a slight easing of lending standards.

For Q2, there are several things we'd like to accomplish this quarter. First and foremost, we want to make progress with the regulators so we can get the Ainsworth acquisition done, continue to stabilize and improve on our ERP system, and work with our transportation partners to catch up on late shipments and bring our operations back to normal.

LP stands ready to serve a growing housing market, and we're looking forward to the increased activity. With that, we turn it back over to Sallie for questions and answers

Great. Thank you, Curt. Patrick, we'd like to go to the queue for questions now.

(Operator Instructions)

Michael Roxland, BofA Merrill Lynch.

Hi guys. It is actually John Babcock sitting in for Michael Roxland. Just have a couple questions for you. I'll obviously refrain from say anything about -- or rather, asking about anything regarding Ainsworth.

But first of all, with 2014 housing forecasts coming in, given the weather, lower affordability, and other factors, how are you guys thinking about OSB capacity and utilization? And on top of that, also, has LPX adjusted its production schedule with housing not materializing as expected?

Well, let me answer the second one. As I said, we did have quite a bit of disruption, particularly in Canada, during the first quarter due to the rail problem. We did take quite a significant amount of downtime in our Canadian mills.

And we also had, believe it or not, we had rail problems in the South due to the snow and ice that we had down there. So, we took additional downtime at our Clarke County mill.

So, yes, we did take a fair amount of downtime in the first quarter. In fact, our volumes were lower than we were the fourth quarter of last year.

As we look forward, I've talked about this in the past, we used to do budgeting, and then we did forecasting, and now we do now-casting. So, we are adjusting our production schedules based on demand on a regular basis, and we'll continue to do so.

Okay. Can you give us a sense of how much downtime you guys took during the quarter?

It's about 40 days.

About 40 mill days of downtime in the first quarter.

Okay. And then, what was the operating rate for that?

If you don't include the Chambord mill, which is still shut down, we operated at about 81%.

Okay. And now what are -- do you mind providing what you guys anticipate having for downtime in the second quarter?

Well, the only downside that we might talk about is, we do have about five days related to capital projects. But other than that, we're not providing more information.

Okay, sounds good. And then also, have you, with some of the recent plywood curtailment announcements, including Boise's Medford, Oregon mill, the Freres mill in Mill City, Oregon, and also the recent explosion I told you at Pacifics mill, have you guys experienced better OSB demand from that?

Those aren't OSB mills.

Oh, sorry, plywood. (laughter)

It wouldn't be significant, so I can't tell you that we've seen anything as a result of those accidents.

Okay sounds good. And then, anyway, I'll get back in the queue. Thanks.

Chip Dillon, Vertical Research Partners.

Yes, thank you, and good morning. Could you give us a little more detail on the $7 million -- and I guess there's a higher pretax gap between what you -- or distance between what you consider the non -- I'm sorry, the non-GAAP adjusted loss of $0.05 a share and the $0.10? I know you mentioned there's some Ainsworth expense, but do you have the [preat] of the elements of that difference?

Yes, sure. I can tell you what they are at a high level, and then you can follow up, Chip, with Becky.

But Ainsworth would be a big piece of that, and then there's a foreign exchange loss associated with some Canadian dollars that we bought in anticipation of the Ainsworth transaction being completed last year. And with the decrease in the Ainsworth -- I'm sorry, with the decrease in the value of the US -- the Canadian dollar relative to the US dollar, we took a hit on that this quarter.

Got you. And I will at least ask this, I don't know if you'll answer it. But do you think we'll know which way you guys will move on this by the time of the next quarterly call, in terms of how you would proceed regarding Ainsworth?

Well let me just give you -- there is some timing in the agreement that we have. We did an extension of the arrangement agreement that takes us through June 4. We have the ability to unilaterally extend that for another 45 days, which takes us to the middle of July. Absent that, we would have to have an agreement with Ainsworth to extend beyond the middle of July.

I see. That's helpful. And the last thing is, just in terms of your -- I know in mid-April, you all had some -- you talked a little bit about your plants of adding shifts or maybe what you could do.

Given the slow start to the year with the winter weather and everything, are you proceeding as you had thought you would back in December, January? Or have you slowed back, in terms of some of the shifts you might add or the -- let's say how fast Clarke County comes up?

We started making that adjustment over the last summer, and we're continuing to look it better, on a weekly basis.

Okay. I see. Thank you.

Mark Connelly, CLSA.

Thank you, two questions. As you think about all of these restarts, and then we think back over the years, we've spent a lot of time in the last 10 years adding capacity to the market.

How are these rate restarts entering the market relative to history? Are you seeing bigger swings than usual in inventory? Are you seeing more deals getting cut?

From the restart, the disruption that we saw in the first quarter, frankly, was all transportation-related. I wouldn't say it was an impact on the restarts.

For us, what we have said is Dawson Creek we brought up on a limited ship basis to support our tech shield and our foreign products, principally. And then Clarke County, we've been on a steady ramp since the summer, and we're continuing that ramp-up. Most of the downtime that we've taken is in Canada.

Okay. That's helpful. Just one minor question, you had talked a while back about shipments to Asia and targeting a couple million a month. Can you tell us whether that's still your target, or is there anything bigger we can look forward to?

We look at that opportunistically. I would say that the shipments out of North America are principally going to Eastern Europe and Russia, not to Asia, from our Company.

Some of the others that you've heard do ship more to Asia than we do. But our focus has been on the Eastern Europe and Russia.

And we do do some shipments out of Brazil into Asia.

Right.

And is that number moving in any particular direction?

It improved.

It improved in the fourth quarter and first quarter.

Okay, thank you.

Alex Ovshey, Goldman Sachs.

Thank you. Good morning, everyone. First question, would you be able to quantify what the impact of weather was on the quarter? And as things are normalizing weather-wise, are you going to see some of that costs reverse as we move through the year?

It's hard to quantify. We've had late shipments to customers, and often that has a pricing impact. Probably one number we could quantify is, we spent about $2.7 million converting to truck. And we did have extra logistics costs that we couldn't pass on to our customers.

Got it. Okay, that's helpful. Then on the EWP side, one of the key players is bringing on new capacity -- or I shouldn't say new, but restarting capacity. Do you have any thoughts on how that may impact supply and demand as we move through 2014 in EWP?

You'd have to ask them why they restarted it, but we're expecting to have an increase in housing starts. Our volume actually was better in Q1 of this year than it was Q1 of last year, even though housing starts are down.

Got it. And then more of a medium- to longer-term question, if we look at all the new OSB capacity that's been announced for restart, and assuming that it comes online, what do you think the housing start level needs to be in order to be able to absorb that capacity?

And then maybe looking at it a little bit longer than that, assuming that all the idle capacity in OSB gets restarted, what housing start level do you think we need to be at in order for that to be absorbed? Do you have any thoughts on those questions?

Well, the rule of thumb for just housing is 1.1 billion square feet of OSB per 100,000 housing starts. So if you think that over -- I think the idled capacity today that has not been restarted is probably somewhere in the 1.5 billion range, and what's started, but isn't fully running, is probably another 2 billion. I would say you'd need roughly 300,000 more housing starts to absorb that.

Got it.

That gets you to the 1,300,000, and we're supposed to be at 1,370,000 next year. So starting at the end of next year or early in 2016, coming up to some limitations, which would require restarting of the other mills that are out there.

Got you, Curt. Thanks very much.

Mark Weintraub, Buckingham Research Group.

Thank you. I realize, Curt, you can't say anything in additional to what you've already said on the Ainsworth situation, but just wanted to clarify and make sure I understood it correctly.

So basically, are there three alternatives now? Is one, you either litigate; two, you walk away; or three, you continue to work with the regulators, but that would also require a change in the initially contemplated transaction? Is that a fair summary, or are there other options, too?

The fourth is they could give up.

The regulators.

Well, presumably they would do that after you started the litigation process, though.

Yes, I think those are the three options.

Okay. Fair enough. And I'll throw one other. The new ERP system, can you quantify potential upside from getting that system in place?

We think that we will get -- and these are very high-level numbers -- but we ought to get $1 in sales price by having better analytics tools, and we ought to get $1 in cost. That's the way we would quantify it.

Okay, great. So, basically $10 million to $15 million of cost of system?

More than that. I'm talking about on all of our volume.

Everything. Yes, makes sense. Okay. Thank you.

Joe Stivaletti, Goldman Sachs.

Yes. I just wanted to come at this question a little bit differently.

And the issue is, basically, if you look at Reis' forecast, they're still using the last structural panel commentary of 1.2 for housing starts. And if we're now talking about 1.1 or even less, on the overlay that, you're obviously for this year coming up with some pretty low operating rates.

I'm just trying to get your perspective on how you think the industry is behaving, or will behave, given these lower housing starts. Are some of these restarted facilities not fully wrapping up, or have you seen any slowdowns in that activity? Just trying to get some color to see if we can get a higher comfort level that operating rates will be at reasonable levels this year.

Because I certainly understand your looking out over the next couple of years, if we get up to 1,370,000 and whatnot, we'll be in good shape, but it's more looking at 2014 here. Do you have some perspective on that?

Really what I can talk about is what we're doing, and I think I've said that. We were much slower ramp-up than Dawson Creek than we had anticipated.

We're not running full at Maniwaki and Swan. And we're in the ramp-up phase with Clarke County. We really do adjust those schedules based on what we see is demand for products in the marketplace.

I know you're not going to get into talking about a specific competitor or anything, but broadly out there, are you -- do you think other people are being that responsible in terms of taking that -- being conservative and really being -- adjusting their production like that on a real-time basis, or --? I was just curious.

Overall, I think the APA said volumes Q to Q were up 8%. If you look at Q1 of last year to Q1 of last year, they said that that was the production increase. That's probably a pretty good benchmark to look at, is what's being reported to them.

Okay. All right. Thank you.

Steve Chercover, DA Davidson.

Thanks. Good morning, everyone.

Question about engineered wood, the EBITDA was up quite nicely when you consider that the sales were rather flat. Is that due to lower costs, as the OSB that you bring into the segment, the prices are far lower?

Yes, it was principally tied into the sales price increases that we announced in 2013 that reflected this quarter. And then the second, as Sallie mentioned, was better utilization of the whole facility was a bit lower, our overall thoughts.

And I think you have some issues at Houlton, so with seasonality and no polar vortex, we should start to see some torque in that segment, correct?

Well, in addition to that, we actually had a fire in the LSL line in Houlton. We were down the full month of January. We were able to make OSB in that mill, but during that time, but we didn't run any LSL in January. We would expect to see some acceleration there, yes.

Okay. And then on the Ainsworth deal, I don't want to put words in your mouth. But the rationale is unchanged, so I guess the only reason to walk would be if the economics don't work. Is that how you look at it?

Well, as I said in my comments, we are going to do what's best for shareholders. And if the economics do change to the negative, then that would certainly be a consideration we'd have to take into thinking.

All right. Thanks, Curt.

John Tumazos, Very Independent Research.

My question -- and I apologize it's been asked a little bit kind of different ways. But presumably it doesn't require a specific decision by Curt at the top level to reduce schedules or output or whatnot. You just have an order book.

If the order book isn't full, the mills run less shifts. And if there's too many mills open the EBITDA is negative, and you decide to have fewer sites active, et cetera.

So is it reasonable to look at your results and the EBITDA is still positive, so you're not at the point of curtailing capacity yet?

As I said, we are adjusting our production schedules based on demand, so you're exactly right. What our salespeople see is demand from our customers dictates what we do from a production standpoint. Typically, what Jeff does, who runs that business, is he sets inventory targets at his mills, and once you hit those targets, he adjusts his schedules.

Thank you.

Paul Quinn, RBC Capital Markets.

Thanks very much. Just a question on -- we've seen a lift in OSB pricing last couple weeks. Just whether you attribute that to the delay in the US home-building activity as result of weather, or is that --? And if you could give an indication of what you see in field inventories?

Yes, I think it is weather-related. As I mentioned in my comments we did have late shipments. Those are starting to show up, but they're going right out to the field. So our salespeople would say that inventories remain lean, and the building season has begun in earnest, and that's a good thing.

Okay.

So I'm very happy about this.

Yes, I know. Good to see, as well. On operating rates, just trying to understand what you're doing in Clarke County. Sounded like you took downtime in the quarter, but that was more rail.

Maybe you could give an indication of what you expect to produce in that mill, and what you're running Dawson at? Is that running one shift or two?

I think Dawson, it moves between one and two. It's no more than two. And at Clarke County, we expect to produce this year somewhere in the 400 million square-foot range.

Okay. That's helpful. Thanks very much. Best luck. Thank you.

Patrick, I think that's all the time we have for questions, and that's the questions we have. So if you could please provide the replay number, we will move forward. And we'd like to thank everybody for participating in the call.

Mike and Becky, as always, are here to answer any of your follow-up questions. So thank you, and have a good day.

Ladies and gentlemen, to access the replay, please dial 1-866-233-1854, and use replay code 63373789. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.