Louisiana-Pacific Corp (LPX) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your second-quarter 2014 Louisiana-Pacific Corporation earnings conference call. My name is Stephanie and I will be your operator for today.

(Operator Instructions)

I would now like to hand the conference over to your host for today, Ms. Sallie Bailey, Executive Vice President and Chief Financial Officer. Please proceed.

Great. Thank you very much, Stephanie, and good morning.

Thank you for joining our conference call to discuss LP's financial results for the second quarter of 2014 and year-to-date results. 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 Relation contacts.

I will begin the discussion with a review of the financial results for the second quarter of 2014 in the first six months 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, and provide his perspective on our operating results for the second quarter of 2014 and give some thoughts on the outlook.

As we have done 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 have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I will be referencing these slides this morning in my comments.

We've also filed an 8-K this morning and some supplemental information, as well as we filed our second quarter 10-Q. I want to remind all of 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. With that, let me go into the details.

Moving to slide 4 of the presentation for a discussion of the second-quarter 2014 and first six months of 2014 consolidated results, we reported net income of $519 million for the second quarter of 2014, a 9% decrease from the net sales reported for the second quarter of 2013. In the second quarter of 2014, we recorded net income of $2 million or $0.01 per share.

In the second quarter of 2013, we reported net income of $94 million, or $0.65 per diluted share, on $567 million of netted sales. The adjusted loss from continuing operations for the quarter is $4 million, or a loss of $0.03 per share, on a normalized tax rate of 35% compared to income of $58 million, or $0.41 per share, in the second quarter of 2013. Adjusted EBITDA from continuing operations was $26 million in the quarter compared to adjusted EBITDA of $122 million in the second quarter of 2013.

On the year-to-date basis, we recorded $963 million in net sales, a $12 million net loss, and a loss per share of $0.09, as compared to net sales of $1.1 billion, net income of $159 million and earnings per share of $1.10 in the first six months of 2013. On a non-GAAP basis, we recorded an adjusted loss from continuing operations of $11 million, a loss per share of $0.08, and adjusted EBITDA of $49 million for the six months of 2014, as compared to first six months of 2013, when we recorded $117 million of adjusted income from continuing operations, earnings per share of $0.81 and adjusted EBITDA of $242 million.

The primary driver of the decline in earnings from the six months of 2013 is the average sales price for OSB. The decrease in the average selling price lowered operating results by approximately $118 million for the 2014 second quarter, as compared to the second quarter of 2013, and by approximately $231 million for the first six months of 2014, as compared to the first six months of 2013.

I will now move to slide 5 and a review of our segment results, beginning with OSB. OSB recorded an operating loss of $6 million on $224 million of sales in the quarter compared to operating profit of $95 million on $306 million of sales for the second quarter of 2013. For the quarter, we are reporting adjusted EBITDA of $8 million, as compared to adjusted EBITDA of $108 million in second quarter of 2013.

Volume increased 11%, but our average sale price was 36% lower as compared to the second quarter of 2013. The decrease in pricing resulted in lower operating results, by approximately $118 million. For the first six months, OSB had an operating loss of $7 million compared to $194 million of operating profit in 2013.

Adjusted EBITDA for the first six months of 2014 was $20 million compared to $216 million in the first six months of 2013. The impact of pricing between the years negatively impact of the results by approximately $231 million, which accounted for more than the change.

Turning to slide 6, which reports the results of our Siding business, this segment includes our SmartSide and CanExel siding products and commodity OSB produced at our Hayward mill. The Siding segment reported sales of $170 million in the second quarter of 2014, an increase of 11% from $153 million reported in the second quarter of 2013.

The Siding segment reported operating income of $26 million compared to $27 million in the second quarter of 2013 and adjusted EBITDA of $30 million as compared to $32 million in the same quarter of 2013. The reduction in OSB price reduced results by $2 million between the quarters.

For the quarter, SmartSide average sales prices was up 9% and volumes increased 15%, a record for any second quarter. Volume increased in our SmartSide siding line due to continued penetration in several key focus markets, including retail, repair and remodel markets, and sheds. CanExel prices were down 6%, but 1% in Canadian dollars. CanExel volumes were down 10% in the quarter due to lower Canadian and international demand.

On the year-to-date basis, the Siding segment recorded $313 million in sales, $45 million in profit, and $54 million in adjusted EBITDA. For the first six months of 2013, the Siding segment recorded sales of $287 million, profit of $48 million, and adjusted EBITDA of $56 million. Improvement from the first six months of 2013 is driven by the increased volume of 13% in SmartSide and higher sales price. The reduction in OSB prices lowered results by $5 million for the first six months of the year.

Please turn to slide 7 of the presentation, which shows the results from 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 recorded sales of $81 million in the second quarter of 2014, up from $61 million in the second quarter 2013. This segment's operating loss in the second quarter of 2014 was $5 million, the same as the second quarter of 2013. For the second quarter of 2014, adjusted EBITDA from continuing operations increased $1 million as compared to the second quarter of 2013.

Volumes of I-Joist were up 27%, while volumes of LVL and LSL were up 26% compared to the same quarter last year, primarily due to improved market demand. Prices were up 8% in the I-Joist and 4% in LVL and LSL, reflecting price increases in all our product lines.

On a year-to-date basis, Engineered Wood Products reported net sales of $147 million, a loss of $8 million, and adjusted EBITDA of $1 million. In the first six months of 2013, Engineered Wood Products reported net sales of $124 million, a loss of $9 million and negative adjusted EBITDA of $2 million. Sales volume in I-Joist were up 15% and sales volumes for LVL and LSL were up 14%. Pricing was also higher by 6% for LVL and LSL and 9% for I-Joist in the first six months.

Turning to slide 8 of the presentation, for the quarter, our South American segment recorded $42 million of net sales, a slight reduction from $44 million in the second quarter of 2013. Operating profit was $4 million in the second quarter of 2014, compared to $6 million in the second quarter of 2013. South America's adjusted EBITDA from continuing operations was $7 million for the second quarter of 2014, which is $2 million lower than reported adjusted EBITDA in the second quarter of 2013.

Volumes in Chile and Brazil were down 9% compared to the same quarter of last year. The sales volume decrease in Chile was primarily due to issues related to political transition, which has slowed housing demand. The sales volume increase in Brazil is primarily due to increased export shipment, mostly to China.

Pricing was lower by 16% in Chile and 2% in Brazil. In local currency, Chile recorded a 4% decrease and Brazil recorded a 1% improvement in pricing. For the first six months of 2014, South America recorded net sales of $79 million, profit of $8 million, and adjusted EBITDA of $13 million. For the first six months of 2013, South America recorded net sales of $89 million, profit of $13 million, and adjusted EBITDA of $18 million. The lower sales were due to political transition in Chile and the distraction of the World Cup in Brazil.

Total SG&A costs were $36 million in the second quarter of 2014, compared to $35 million in the same quarter of 2013. For the first six months of 2014, SG&A costs were $77 million compared to $70 million for the first six months of 2013. The increase in SG&A cost is primarily due to costs associated with our systems project and legal and transaction costs associated with our now-terminated acquisition of Ainsworth.

We recorded a $3.8 million foreign exchange gain in the second quarter compared to a loss of $3.6 million in the same quarter last year. For the six-month period, we recorded a loss of $500,000 in 2014 compared to a loss of $4.3 million in 2013. Net interest expense was $6 million in the quarter compared to $7 million in the second quarter 2013 and for the first six months of 2014, net interest expense was $12 million as compared to $14 million in the first six months of 2013. The lower interest expense is related to our reduction in debt outstanding in Chile in the third quarter of 2013.

Please refer to slide 9 of the presentation. As of June 30, 2014, we had cash, cash equivalents, investments, and restricted cash of $570 million, working capital of $821 million (sic -- see slide 9 "$823.9"), net cash of $200 million, and capital expenditures for the first six months were $42 million. We generated $15 million of operating cash flow in the quarter and used $58 million of operating cash flow in the first six months of 2014. We are planning on spending approximately $90 million for capital expenditures in 2014.

Before I turn the call over to Curt, I'd like to make a few comments on our capital structure and capital allocation plans. We plan to maintain a debt-to-capital ratio in the range of 25% to 30%. This range is conservative, but also consistent with the debt-to-capital ratios of other mid-and small-cap cyclical companies. Our debt-to-capital ratio, excluding the timber notes was 23% at the end of the second quarter.

As we have discussed in the past, we plan to retain $250 million to $300 million of minimum cash balances. This amount is sufficient to cover our fixed cash costs for two to three years. We recently amended our credit agreement to decrease our minimum required cash balance to $200 million. The reason for the amendment was to clarify the minimum cash balance following the termination of the Ainsworth acquisition and to equate the minimum cash requirement in the agreement to the size of the credit facility.

For cash in excess of $250 million to $300 million, we will continue to evaluate opportunities for acquisitions, for investments in our current businesses, such as the third Chilean mill and further Siding expansions, as well as return of capital to shareholders. In the past, LP has returned capital to shareholders through share repurchases and dividends.

With that, let me turn the call over to Curt for his comments.

Thanks for that review of the second quarter, Sallie.

My comments today will focus on our accomplishments and challenges in the last quarter, talk about the current state of the housing market, and provide you with my views on what lies ahead or us for the rest of 2014 and into 2015.

In the second quarter, LP had a safety total incident rate of 0.41 for the second quarter. In the quarter, a number of our facilities were recognized by the APA for their safety record in 2013. In June, I was able to attend a celebration at our Wilmington LVL mill to recognize the achievement of seven years without a recordable injury.

The good news is that the weather began to improve in late April from a terribly cold Q1; however, this was not without challenges due to heavy rains in many parts of the country. In North America, we did see volume increases in virtually all product lines due to improved billing activity and other demand. We sold record volumes of Laminated Strand Lumber in Q2 and followed a record Q1 of SmartSide siding with another record in Q2.

We did post positive adjusted EBITDA in all of our segments, except EWP, which was about breakeven. OSB prices that were over 35% both Q2 of 2013 and the first half of 2013, accounted for more than 100% of the change in our earnings compared to last year, masking improvement in our overall business operations.

There is little doubt that the housing market is improving, but the June housing numbers and the revisions to April and May, make it very difficult to determine the pace of the recovery. US housing starts in June were at an adjusted annual rate of 893,000, 9% below May, but 7.5% above last June. Permits were 963,000 in June.

The Case-Shiller Index of home prices was up 10.8% in April compared to one year ago. The NAHB Market Index was positive in June and took a big jump in July, as builder optimism about sales in the next six months increased by 10%. While builder optimism looks to be increasing, there is a concern that demand for new homes is softening, as evidenced by new home sales being lower by 5% in the first half of this year compared to last year, due primarily to price increases over last year, higher mortgage rates, and more competition from existing homes on the market.

In the recent releases by homebuilders, there's been a lot of talk about increasing the pace of new home closures by focusing on bringing the first-time home buyer into the market. Several homebuilders are reducing the amenities in their new homes, thereby allowing for lower price points. The homebuilders are more vocal on mortgage access for first-time home buyer through government programs, FHA, veterans and the future of Fannie and Freddie Mae (sic -- see respective websites, "Fannie Mae" and "Freddie Mac").

In other markets, retail sales of building materials were up about 3.5% compared to last year, indicating that consumers are spending more on repair and remodeling activities. There has also been an uptick in nonresidential construction activities.

For the rest of 2014, my optimism has faded, as the housing forecasts have declined every month since the first of the year, which has kept the demand for OSB and EWP products below what we'd expected. The consensus forecast for the year now stands at 1.044 million starts, a 13% increase from last year. For 2015, the consensus, which is a moving target, is about 1.29 million, which would be a 23% increase over this year's revised forecast. Both of these forecasts are lower than they were on our last call.

The 30-year fixed-rate mortgages were at 4.15% in mid-July, still at attractive rate. The key is to have more potential home buyers qualified for these mortgages. The recent growth in the overall economy and the revisions to prior quarters are a strong indication there is more business activity in the US and the jobs reports the last several months have been more positive.

This leads me to believe that we will break 1 million housing starts in 2014, but not by much. For 2015, as I mentioned, the consensus is just shy of 1.3 million, but I don't believe it would be prudent for us to plan our operations around this magnitude of increase. Our Management team is focused on a forecast of next year of around 1.1 million, with the downside scenario being flat for this year.

The demographics and pent-up demand for housing would argue for higher numbers, but I personally think that the political and regulatory uncertainty over the next few years will make home buyers more cautious. As always, we will continue to respond to the slow recovery by adjusting our OSB production, largely in Canada, exploring opportunistic export sales, and driving growth in our Siding business. As an indication of that, in the second quarter, we removed about 125 million square feet of production through our curtailments.

For this quarter, there are several things that have already happened or will be accomplished. In July, we did sell one of our permanently curtailed OSB mills in Athens, Georgia, to a group who is pursuing pellet manufacturing for about $11 million. As an aside, we did retain ownership of the forming line and the press. Also in July, we modified our credit agreement, as Sallie discussed.

On the downside, in late June, we did have a catastrophic failure of a flaker in one of our Chilean mills that stopped production. Through the coordinated effort with our folks in Chile, our vendor, and US engineering support, I am pleased to report that that is now back online. Fortunately, this is the winter in South America, and we were able to satisfy our customers' demands from our production in Brazil.

For the rest of the quarter, there are couple of other things we'd like to achieve. We want to continue to drive the growth initiatives in our Siding business and determine the next steps to ensure that we have adequate capacity to satisfy this growing demand.

While the basics are in place, there is still work to be done to address some known shortcomings in our recently implemented ERP system, largely to improve the communication between our customers and vendors. As always, LP is ready to serve a growing housing market whenever it happens and we are looking forward to the increased activity.

With that, let me turn it back over to Sallie for questions.

Thank you very much, Curt. Stephanie, we would like to take questions now, if we can go to the queue.

(Operator Instructions)

Mike Roxland, Bank of America Merrill Lynch.

Just quick, first, wanted to start on the EWP business. Obviously, you posted much better pricing in 2Q versus 1Q and also versus prior year's Q2, yet your profitability worsened, sequentially was flat year-over-year. Obviously -- and also, your EWP performance appears to be worse than some of your peers who have already reported so can you just provide some color on what happened during the quarter that negatively affected your profitability?

We had several one-off events. We had a contract negotiation in our Canadian mills that we actually had a retro adjustment to pay. We also had two termination costs there. If you took those out, we would have been positive in EBITDA in that business.

How much did that accounted for, just roughly, a couple million dollars? Is that--?

Roughly, it was a bout a couple million bucks.

Mike, to build on Curt's point, we really -- as we were reviewing the business, we were really looking more to the year-to-date, the first six months, to see what the performance of the business is. There, you can see, particularly on the adjusted EBITDA line, almost a $3 million improvement year-over-year.

Got you. Which would have been more if you didn't have these termination costs and the retro adjustment--?

That's exactly correct. Right.

Okay. Got it. Then, in OSB also, cost and cost [premise] have increased significantly in 2Q. I'm just wondering what happened in the quarter, as well, and whether the cost increase is related to downtime, or did you actually see an increase in material cost during the quarter?

We actually saw on a cost -- I'm not sure, Mike, when I look at the cost of sales, I see that they are pretty much the same, maybe a little bit lower than they were in the first quarter, and certainly lower than they were in the second quarter of 2013.

What I would look--

Based on our production.

Okay.

But we can say -- maybe you can get with Mike and walk through that, but we did see some increases in our fiber costs from Q2 2013 to Q2 2014 in OSB.

Got you. So that now would be the biggest impact from--

But not significant, right, not significant. So maybe it's the difference between production versus sales, but, in general, when we look at it, we actually saw decreases in the cost of sales off of the first quarter of 2014 and below the second quarter of 2013.

Got you. I will follow-up with Mike off-line on that. No problem.

Okay.

Just the last question and I will turn it over. As the industry leader in OSB, is there anything else you can do to improve industry fundamentals, especially given your 2015 housing forecast for 1.1 million starts. Most of your peers seem to be running flat out. You guys seem to be taking some downtime.

As the industry leader, with 23%, 24% market share, why not just indefinitely idle one of your higher cost mills until demand improves? Why not just do what needs to be done to get pricing into -- to help move pricing up rather than trending along the bottom here?

Mike, what we do is we run this as a system, as you know. We did start up two mills last year. One was in our Dawson Creek and that was to satisfy two specific value-added products, our flooring and our TechShield in the western part of the US. We have adjusted our production there, as we've talked about to meet what we see as demand there. That's not actually going into a commodity, it's going into the value-added piece.

The other mill that we started up was in was in Clarke County and that -- had I known we were going to be less than 1 million housing starts, we probably wouldn't have done that, but now that we have that mill up and running, what it gives us, is it gives us long-length capability in the eastern part of the US. It's the only mill that we have in the east that can do the 9 and 10 foot.

So we are beginning to do some product introductions on those products. But our plan B always was to take production capacity out of our Canadian mills, as demand failed to meet our expectations, and that's what we have done.

Any more flexibility there, Curt, to take more capacity out?

Well, we are taking out the capacity that we think needs to come out based on the demand side of it. The other thing we're doing, Mike, and we've talked about this, is we did increase our exports in Q2 versus Q1. That takes that product out of the North American market.

Got you. Thanks very much and good luck in the second half.

Gail Glazerman, UBS.

Just sticking on that last comment a little bit, southeast prices remain particularly weak. Is there anything, any adjustment that can be made in there? I assume -- is Clarke County, would still be profitable at a price of [$170] on a cash basis?

Is your question -- is Clarke County profitable--?

Just the relative weakness in the southeast. Can you deliver to other regions to be profitable? It seems like that price, you've got to be pushing cash costs at the industry overall?

That's probably very close to truth, but I'm not sure what the question is.

I'm just wondering, can you move that to other regions and still make a profit at a mill like Clarke County or do think something is going to have to give, specifically in the south?

In general, we look at reasonable pricing and take advantage of that whenever we can. One of the things that's happened for LP, as Siding has continued to grow, we have taken capacity out of the North Central region, so I know our sales people are looking to filling demand that would have come out of our Hayward mill with production from the Southeast or from Canada.

Okay. Just to that point, the reported production volumes of commodity OSB and Siding, obviously, fell very sharply. Is that a new normal or was there something unusual in the second quarter on that?

In the Siding?

The commodity OSB within Siding.

Yes. That's going to continue to do deteriorate -- deteriorate is the wrong word -- it's a good thing. It's going to continue to be converted to Siding. That's my comment earlier. We do have to decide which mill we are going to convert to Siding on how quickly we are going to need to do that. As the commodity OSB goes away and becomes converted into Siding, this is a market where we have to be ahead of our customers with demand. We have already started that discussion.

Gail, we don't -- we produced 16 million square feet in our Siding mills this quarter. Our expectation is that, that number will be close to zero for the second half of the year. The siding demand is very, very strong.

Okay. Just taking a step back strategically, in light of the failure of the Ainsworth acquisition and looking ahead to a more normal housing market, what options do you have, just looking ahead? Can you do -- is M&A completely out of the question moving forward and, organically, looking within OSB, is there anything that you can do within your system?

I don't think M&A is out of the question, but it has certainly put a cloud over it because of the actions of the Department of Justice. We will continue to look at those. I would guess that, in the short term, until a change in administration or a change in view, it's unlikely that a transaction the size of Ainsworth will be something we pursue aggressively.

But there are some fill-in acquisitions in the OSB business. There's some fill-in acquisitions in our Siding business, potentially, and some fill-in, in EWP that we will continue to look at. Also, though, and our first priority is to utilize all the assets that we currently have.

We are running our OSB business, without [shambor], we ran it about 80% in Q2. Engineered Wood, even with the increase in stock in the second quarter, we are still effectively running that at about 60% of capacity. The one that we are running full out is our Siding business and we're looking at adding additional capacity there in the relatively short term.

Then, South America, we did have a little bit of a pause with the activities around the World Cup in Brazil. We didn't see a lot of internal demand in Brazil, but as Sallie mentioned, we did have good export demand, particularly from China. Then we are contemplating and we have started the environmental permitting process for a third mill in Chile, which would utilize idled equipment in North America, as we did with the other two mills there. So we have got some good growth prospects, not only filling out what we've got now, but also redeploying some of the idled equipment that we have around North America.

Okay. Last question. On Engineered Wood volumes, your volumes were very strong, as were the industry's. It seems maybe a little bit stronger than underlying housing activity would suggest. Was there any inventory shifting or anything else going on there or do think that was just driven by true demand?

I think it was driven by demand and I also think we are beginning to see the impact of a housing recovery and a strong Chinese market for British Columbia lumber. So that's creating additional demand for Engineered Wood.

Okay. Thank you.

Mark Connelly with CLSA.

Curt, following on Gail's question, I've asked you this before, but both of your predecessors have looked to diversify Louisiana-Pacific away from OSB when the market was strong. Obviously, we are talking out a couple of years, but how high is it on your priority list to expand dramatically beyond OSB, given the volatility of the market you're in?

As one of the world leaders in OSB, I've got to embrace it. It is over a cycle. It's one of the best building materials, from a margin standpoint, that there is. We do have periods of supply and demand imbalance that do create difficult pricing environments, but OSB is a great business, and as a platform, it helps us enter into these other businesses.

When I say the platform, the strand-based technology that we have in our OSB business, we are also using those assets for Siding, we are also using those assets for Laminated Strand Lumber, and we do see that there's some potential further applications that we could apply the strand-based technology. So as a Company, you are going to see us focused on strand, certainly, for the near- to mid-term.

Very helpful.

But, Mark, as we talked about on the past, we are also very focused on investing in our Siding business and our South American business, that have less volatility than the OSB, to help us in markets like the one we are in today.

Thank you very much.

Mark Wilde, BMO Capital Markets.

I'd like to come back to the EWP business, because I was a little surprised quite how weak the quarter was. You didn't seem to have gotten the lift that some of your peers had. You mentioned about $2 million worth of drag from labor and other things, but I wondered if there was anything else that you'd want to call out in that business?

I wondered -- your two big public peers in that business place a lot of emphasis on being integrated into distribution and that, that distribution arm really helps them in selling the product. I'd like to get your thoughts on that?

Well, I've heard them say that, as well, Mark (laughter). I do think that in the quarter, had we not had the labor things that I talked about, it would have been a much better comparable, then, when looking at our peers. I have high expectations that our EWP business is going to return to consistent profitability, as we see housing starts grow beyond where we are today.

The difficulty in that business has been twofold. One, when OSB and lumber prices are high, the raw materials are high and they don't get, necessarily, the lift on sales price to offset that. When OSB prices and lumber prices come back down, then there is an increased level of profitability. That's what we saw in the second quarter.

Okay. Just a question on distribution, Curt.

On distribution? We end up being, probably, the leading supplier to the independent distributors. So we have a series of distributors across North America that we have selected and work with that we think gives us good access to the market.

Okay.

What I don't know, and you can explore that, is what the inter-Company pricing mechanisms are between the production side and the distribution side and where the margins show up. I'm not privy to that information.

That's something we are always trying to figure out. Just one other question on South America, is it possible for you to break out the relative profitability of the Chilean business versus that big mill in Brazil? I saw your volume was up a lot in Brazil, but you mentioned a lot of that is just Chinese exports, which I assume have fairly low margins given the freight you've got to carry?

The Chinese business is actually a pretty good business. It's a decorative panel, it's not used as a business material. The relative profitability, Chile is more profitable than Brazil, but Brazil, for the last couple of years has been profitable every quarter.

And what would the operating rate be at that Brazilian mill?

It's probably running about 70% to 75%, right now.

Okay. All right, that's helpful. I will turn it over.

Thanks.

Chip Dillon, Vertical Research Partners.

I noticed the first -- that it looks like you guys -- your production was up maybe 6.5%, but you said your sales and volumes of OSB were up closer to 11%. Does that mean your inventories have come down and did you make some adjustments to the quarter in light of the weaker housing markets already?

We did have our inventories come down, Chip, but most of that was related to some export sales that were in inventory in the first quarter that weren't in inventory in the second quarter.

Okay. And then just a quick clarification. The flaker issue in Latin America, in Chile, was that in late June or late July?

Late June. The flaker went down June 29 and it took us a month to get the equipment down and rebuild it and it came online a couple of days ago.

Okay. Then, Curt, you mentioned that you guys are running or planning next year for 1 million to 1.1 million starts in terms of how you will be producing, and you said most of the incremental downtime would be in Canada. Does that mean you're taking a shift off of Dawson Creek, even though that's more of a specialty mill, it looks like, or how do you specifically think you'll operate next year and do you think that there will be decremental operating leverage as a result, because you are not really taking down any of your mills?

The way we are running the mills, we think, is the most cost-effective way to do it. To take a mill down permanently or indefinitely, actually cost you a lot of money in severance and employee costs and the rest of that. So the way we are managing it, we are managing it to cost. The way we do take those shifts out, we either don't add shifts, take shifts off, or we take market-related downtime by laying off the hourly work force for several weeks at a time.

The other thing that's going on, as I mentioned, is we are looking at doing another mill conversion to Siding. One of the mills that we are looking at is a Canadian mill. That would tighten up that supply and demand, should we decide to do that.

Got you. That actually opens up a couple of other questions. It looks like your CapEx this year has come down about $10 million, if I'm not splitting hairs, I thought it was around $100 million. But as we look at next year, in light of the weaker CapEx -- I'm sorry, the softer outlook --you might even be more cautious next year, but, then again, you might pursue a Siding conversion.

So I'm asking two things. How much would a Siding conversion cost? And if you did not do it next year, what you think your CapEx would go roughly to?

Chip, you're right, we did take our planned expenditures down from $100 million to $90 million. But more importantly, when we think about next year, and looking where we are, the focus we'll have is on spending for a Siding conversion, which can be about $50 million to $70 million, the third Chilean mill. So consistent with the strategy that we have of trying to lift our earnings when the OSB markets are more volatile.

Then the remaining portion of it, given where we are, we are looking at capital closer to that -- around that $2 million of capital expenditures per mill, which is in that $25 million to $50 million range. So, we will look at the base level and then we'll protect the investments in the growing businesses.

I see. So, if you did pursue a Siding conversion, that's an incremental $50 million to $70 million by itself, right?

Yes.

Okay and then the--

The reason for the range is--

Pardon?

It depends on which mill it is.

I'm sorry, Chip.

Okay, I got you. On the Chilean, if you did the third mill down there, what would that cost be, roughly?

In the past -- it would be pretty similar to what the cost of the Siding mill is. We spent, for the two that are down there, we spent about $50 million together, and the third mill would be about that same, $60 million. But remember, Chip, that's not all in the next 12 months; that's over a period of time.

I see. And just the last question. At this point, from the way it looks, would it look like you would likely try to do those together or one at a time? If one at a time, which one looks to be the better opportunity, at this point?

Well, there's a couple of things that play into that. One, we have made our filing for the environmental permitting in Chile. There has been a change in the regime down there so it could take us longer to get that approval than we anticipated. I'm guessing that the Siding would proceed ahead of the Chilean one, primarily because we cannot be out of Siding capacity and allow a competitor to take that business.

I see. Thank you. Very helpful.

Alex Ovshey, Goldman Sachs.

A couple of questions for you. First, with plywood prices being so strong this year and that spread between plywood and OSB almost on a record level, is there an opportunity to more aggressively take market share from plywood in the back half of this year?

I would certainly think so. I don't know why you would buy plywood with that spread as large as it is. It's a little bit of an enigma to me to understand why plywood pricing is so strong.

Yes. It doesn't seem like there are any concrete examples, though, of people switching. Is that fair? It doesn't seem like there's an answer to why that's not happening, from your perspective, Curt. Is that fair?

That's fair. The APA would say most of the plywood is not going into construction, it's going into some other applications.

Okay. Next question.

I wish I had a better answer for you, but I don't.

It's an interesting question. I haven't really been able to get a good answer to it. Next thing is there is a lot of discussion about the MLP tax structure for paper and forest products -- [names] are more focused on these container board names, but intuitively, if they were to go down that path and get a favorable ruling, there's no reason that -- [where] products companies couldn't necessarily go down that path. So, any thoughts around an MLP tax structure for an OSB mill and have you spent any time thinking about that at all?

Actually, I'm actually in Portland to take this call and I have my tax director with me and he has done some initial review of that and we will continue to monitor it. But we are not aggressively pursuing anything at this time.

Okay.

Alex, we are don't really think it makes sense from what we can see, for our model, which is not to say we won't continue to look at it, but--

Can you elaborate a little bit more on that, Sallie, in terms of what, specifically, you feel--?

Sure, because just what we are talking about today, the volatility of the cash flows coming out of the OSB business makes that not a particularly attractive -- it makes it a great looking structure in time periods when those mills are generating a lot of cash and very unattractive at times when they're not.

Okay. So it's volatility that is a challenge. Got it. Maybe just last one. Can you help us think through what the cost of downtime would be in an OSB mill system? If you are planning to take X amount of million square feet off-line, in terms of lack of order downtime, how should we think about what that would cost to the bottom line of the Company?

Well, what you are going to have is reduced efficiency at the mill. It's largely going to be related to your salary and overhead structure. As you saw in Q2, we did take 125 million square feet out of the system.

That's about 30%. So if you think about it, a way to think about it, Alex, is it's our variable costs are 65% to 70%, so we're the burden 30%ish for those mills.

Okay. That's a helpful split. Okay. Great. Thanks very much.

Mark Weintraub, Buckingham Research.

Following up on the Siding options you are looking at, are those mills that are currently running, that you are contemplating for conversion?

Yes, but we are also looking at idle facilities, but principally be running mills.

Okay. Would you anticipate, certainly by the end of this year, to have made a decision on that?

We will have made an internal decision. Right now, we are focused on going to our Board in January with a request to start that project.

Mark, it's to our advantage to convert an OSB mill that's currently running, because we already know we have a certain level of quality in that mill.

Yes. Okay, great. And then curious, in that process itself, would the mill go down for a while or is it that it runs OSB until you convert to Siding?

We try to limit the downtime as much as we can, but I'm guessing it would probably be 30 days to 45 days down, but, basically, what you're doing when you convert this mill, is you have to put the finishing line in.

Right. Then presumably, you have swing capability for a while, too. You can produce OSB if you choose to and you can produce Siding if you choose to. Is that fair?

That's correct.

Okay. Second, Sallie, you were laying out the various options, acquisitions, investments, and you've certainly given us a few investments on your plate, and then also return of capital. Do have a share repurchase authorization in place, at this point?

No. Go ahead, sorry.

If not, given that, that was one of the options you suggested could be in there, why not?

We do not have a share authorization in place and we're continuing to talk with our Board about the return of capital to shareholder opportunities.

Okay. Great. That's it. Thanks.

Steve Chercover, D.A. Davidson.

Mine are more follow-ons. First of all, with respect to Engineered Wood, I just wanted to know, do you have a price like that's pending for the third quarter or that was perhaps implemented June 1 that should benefit Q3?

There were price hikes in the second quarter that will have more impact in Q3 than Q2.

Got it. That was in the mid-single-digits?

That's right. It depends on the product line and the region, but, yes.

Okay. Then, this is maybe as much of a comment as a question, but I'm glad to hear that your 2015 outlook is a little more restrained than the new consensus, which calls for still another 20% uptick. But given that Clarke County is ramping up, if it's only 1.1 million, you'll still need to take probably some downtime or a facility out of the system. Is that correct?

What we're doing is adjusting the production, again, principally in Canada, or looking for export, Steve. So if we don't have the export opportunities, then it would be downtime, probably mainly in Canada.

And, the conversion to Siding? How much does that chew up of your capacity?

Well, as we just talked about, what you'll do is we will make the conversion, and as demand rises, we will do more and more Siding and less and less OSB. So, it will be running virtually full with one product or the other. The mills we are looking at would be somewhere between 380 million and 500 million square feet of overall capacity.

Great. Okay, thanks, Curt.

Stephanie, we have time for one more question.

Paul Quinn, RBC Capital Markets.

If I could sneak in two easy questions. One is relative levels of OSB North American exports. Then second, what are you seeing on the Siding side? Where is that demand coming from? Is that coming from the [US south], just pointing out that you don't have any Siding mills down there?

Let me just take the second question. The demand for Siding is coming from the retail business, so we have at least four SKUs in every [Leonard's], Home Depot and Lowe's in North America. So we are seeing a pick-up in that demand. We are seeing it from nonresidential structures, so the shed and outbuilding business, and then, we are seeing it from new home constructions.

I mentioned some of these builders are doing these really lower-amenity structures. One of these is D.R. Horton has got their Express Homes. Their Express Homes all have LP SmartSide on them. The reason they can do that is they don't have to use OSB as the backer behind it because they can use it as the structural component. So we are seeing a lot of demand from new home construction, as well. So it's pretty broad-based. Second question, Paul, was--?

Relative levels of exports?

The export. In Q1, we did $24 million and we did $32 million in Q2.

And just on the demand for Siding, you described that as retail, but is there a geographic mix to that, as well?

No. It's pretty broad.

Does it make more sense to convert a mill down in two US south to Siding, as opposed to one up in Canada?

We did that many years ago. What we found is we couldn't maintain the same quality levels with the southern yellow pine, so we focus on aspen markets for where we produce.

Great. That's very helpful. Thanks very much.

Thank you, Paul. Thank you, Stephanie. If you could please provide the replay number. We would like to thank everybody for participating in the call. Mike and Becky, as always, are available to answer any follow-up questions you all may have. Thank you very much and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day. The replay is available for eight days by calling 1-888-286-8010. Again, the number is 1-888-286-8010 and the access code is 85634474. Again, the access code is 85634474. Thank you for your participation. You may now disconnect and have a great day.