Louisiana-Pacific Corp (LPX) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Louisiana-Pacific third quarter 2013 earnings call. My name is Stephanie and I'll be your coordinator today. At this time all participants are in a listen-only mode. Following the prepared remarks there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Ms. Sallie Bailey, Executive Vice President Administration and Chief Financial Officer. Please go ahead.

Thank you very much, Stephanie. And good morning. Thank you for joining our conference call to discuss LP's financial results for the third quarter of 2013 and year-to-date results. I am Sallie Bailey. LP's Chief Financial Officer. With me 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 third quarter of 2013 and the first 9 months of 2013. This will be followed by some comments on the performances of individual segments and selected balance sheet items. After I finish my remarks, Curt will discuss the general market environment in which LP has been operating, comment on the status of the announced Ainsworth transaction, and provide his perspective on our operating results for the third quarter of 2013, and give some thoughts on our outlook. 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'll be referencing these slides in my comments this morning. We have also filed an 8-K this morning with some supplemental information and we have filed our 10-Q.

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 has been supplemented by the form 8-K filing we made this morning. Rather than reading these two statements, I incorporate them with this reference.

I'll begin with some comments on the housing market. The third quarter saw housing start back in the 900,000 range up from the second quarter levels. However, relative to the start of the year, higher interest rates and the uncertainty related to the government shut-down has taken some of the momentum out of the housing market. We continue to see positive signing's, the overhang of foreclosures has continued to decline. Home values are appreciating again and residential construction spending is recovering. Now, with that, let me go into the details.

Moving to slide 4 of the presentation for a discussion of the third quarter 2013, the first 9 months consolidated results. The reported sales of $507 million in the third quarter of 2013, the 10% increase from the sales reported for the third quarter of 2012. In the third quarter of 2013, recorded net income of $38 million or $0.26 per diluted share. These results include income of $17 million related to the reduction of the contention considering associated with the acquisition of the remaining 50% of Peace Valley mill under accounting standards we are required to revalue this liability on a quarterly basis. In the third quarter of 2012, we reported net income of $31 million or $0.22 per diluted share on $462 million of sales.

The adjusted income from continuing operations for the quarter is $19 million or $0.13 per share based upon a normalized tax rate of 35% compared to income of $29 million or $0.20 per share in the third quarter of 2012. Adjusted EBITDA from continuing operations was $65 million in the quarter compared to adjusted EBITDA of $74 million in the third quarter of 2012. On the year-to-date basis, we recorded $1.6 billion in sales. $198 million in net income, and earnings per share of $1.37 as compared to sales of $1.2 billion a net loss of $17 million, and the loss per share of $0.13 in the first 9 months of 2012. On a non-GAAP we recorded adjusted income from continuing operations of $137 million. Earnings per share of $0.94 and an adjusted EBITDA of $306 million for the first 9 months of 2013, a significant improvement over the first 9 months of 2012 when we recorded $21 million of adjusted income from continuing operation, adjusted earnings per share of $0.15, and adjusted EBITDA of $129 million.

I will now move to slide 5 and a review of our segment results starting with OSB. OSB recorded operating profit of $30 million on $245 million of sales in the quarter compared to operating profit of $49 million on $227 million with sales in the third imparter of 2012. For the quarter we reported adjusted EBITDA of $46 million compared to adjusted EBITDA of $60 million in the third quarter of 2012. Pricing for OSB was down 5% over the third quarter of 2012. This compares favorably, however, to the decline in North Central 716 Random Lengths pricing. Random Lengths North Central 716 pricing was down 19% over the third quarter of 2012. The decreasing of pricing resulted in lowering operating results by about $13 million.

Offsetting the decrease in price was our volume which was 15% higher than a year ago and over all our sales increased 8% over the third quarter of 2012. We recorded higher costs in the third quarter of 2013 relative to the third quarter of 2012. The positive impact of fully consolidating Peace Valley was more than offset by higher cost associated with the start-up of the Clark County facility, higher raw material cost, increased manufacturing, down time, and higher maintenance. For the first 9 months, OSB had an operating income of $224 million compared to $66 million in 2012. Adjusted EBITDA for the comparable period was $262 million compared to $98 million in the first 9 months of 2012. The impact of pricing between the years was $222 million and accounted for the majority of the change. The remaining difference is due to higher raw material costs and cost associated with starting up our Clark County and Dawson Creek mills.

Slide 6 reports the as a 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 $149 million in the third quarter of 2013, an increase of 11% from $134 million reported in the third quarter of 2012. The siding segment reported operating income of $23 million compared to $20 million in the third quarter of 2012 and adjusted EBITDA of $27 million as compared to $24 million in the same quarter of 2012. Lower OSB prices during the second quarter reduced results by $2 million as compared to the third quarter of 2012.

For the quarter, SmartSide average sales price were up 3% and volumes increased 14%. 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 flat; volumes were down 13% in the quarter due to lower Canadian and international demand. On a year-to-date basis the siding segment recorded $436 million in sales, $70 million in profit and $83 million in adjusted EBITDA. For the first 9 months of 2012, the siding segment reported sales of $384 million, profit of $56 million, and adjusted EBITDA of $69 million. The improvement from the first 9 months of 2012 is driven by increased volume of 14% in SmartSide and slightly higher sales price. Approximately $10 million of the year-over-year improvement in the siding segment related to higher OSB pricing.

Please turn to slide 7 of the presentation which shows the results from our engineered wood products segment. This segment includes eye joints, laminated strand lumber, laminated veneer lumber, plus other related products. The 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 $72 million in the third quarter of 2013 up from $62 million in the third quarter of 2012. The segment's operating loss in the third quarter of 2013 was $2 million as compared to a loss of $3 million in the third quarter of 2012. For the third quarter of 2013, adjusted EBITDA from continuing operations increased $1 million as compared to the third quarter of 2012.

Volumes of eye joints were up 5% while volumes of LVL and LSL were up 17% compared to the same quarter last year primarily due to increased LSL sales. Pricing was up 11% in the I-Joists and 3% in LVL and LSL reflecting price increases in all product lines which are introduced offset rising raw material costs. On a year-to-date basis, engineered wood products reported sales of $196 million, a loss of $11 million and negative adjusted EBITDA of $1 million. In the first nine months of 2012, engineered wood products reported sales of $162 million, a loss of $9 million and essentially break even adjusted EBITDA. Sales volumes in I-Joists were up 12% and volumes for LSL and LVL were up 15%. Year-to-date pricing was up 9% in I-Joist and 3% in LSL and LVL.

Moving on to slide 8 of the presentation. For the quarter, our South American segment recorded sales of $42 million, approximately the same level of sales as in the third quarter of 2012. Operating income in the third quarter of 2013 compared to last year was up slightly. South America's adjusted EBITDA from continuing operations was $8 million for the third quarter of 2013 which was also up slightly as compared to adjusted EBITDA in the third quarter of 2012. Pricing was up 5% in Chile and down 3% in Brazil. In local currency Chile recorded a 10% increase and Brazil recorded 8% improvement in pricing. For the first 9 months of 2013, South America recorded sales of $131 million, operating income of $18 million, and adjusted EBITDA of $26 million. For the first 9 months of 2012, South America recorded net sales of $127 million profit of $11 million and adjusted EBITDA of $20 million.

During the quarter, we filled our molding operations and recognized a gain on the sale of approximately $2 million. As a result of this sale, we have reclassified our operating results to move this operation to discontinued operations for all periods presented. Left in our other building product segment is our US GreenFiber Cellulose Insulation joint venture, LP's trucking operation, and various other nonoperating facilities. Overall we are showing a loss of $2 million in the third quarter of 2013 which is comparable to the third quarter of 2012. Operating results for the first 9 months of 2013 are improved at a loss of $6.1 million compared to a loss of $7.8 million in the same period of 2012.

Total selling general and administrative costs for the quarter were $34 million as compared to $31 million in the same quarter of 2012. For the first 9 months of 2013, SG&A costs were $104 million compared to $92 million for the first 9 months of 2012. This increase in SG&A cost is primarily due to cost associated with our system's upgrade project and legal and transaction costs associated with the announced acquisition of Ainsworth. We recorded a $1 million foreign exchange gain in the quarter compared to $400,000 gain in the same quarter last year. For the 9-month period we recorded a $3.3 million loss in 2013 compared to $2.3 million loss in 2012.

Net interest expense was $6 million in the quarter compared to $7 million in the third quarter of 2012. For the first 9 months of 2013, net interest expense was $20 million as compared to $26 million in the first 9 months of 2012. This reduction in interest is related to the refinancing we completed in May of 2012 and the resulting reduction amortization of the deferred debt cost. We did record a small loss on early debt extinguishment in the quarter of about $1 million. This was related to a $19 million prepayment we made in the third quarter on debt outstanding Chile.

Please refer to 9 slide of the presentation. As of September 30th, 2013 you, we had cash, cash equivalents investments, and restricted cash of $685 million. Working capital of $881 million, net cash of $310 million, and in addition to the $685 million of cash on our balance sheet we had $100 million of availability on our asset based loan facility. We have entered into a commitment for up to $200 million of senior secured revolving financing with the consortium with Farm Credit System Bank. Once the definitive loan documents are in place in early December, this financing will replace our current ABL facility and will provide financing for the announced Ainsworth acquisition. We have terminated the commitment agreement with Goldman Sachs and Bank of Montreal for up to $430 million of financing. That financing was put in place of the announcement of the proposed Ainsworth acquisition and is no longer necessary given the successful consensual solicitation on the Ainsworth senior secured note and our new commitment from the Farm Credit System Bank.

Capital expenditures for the 9 months were $45 million. This does not include the $67 million net of cash acquired spent on acquiring the other 50% of the Peace Valley facility which was completed in May. We generated $59 million in operating cash flow in the quarter and $223 million of our remaining cash flow in the first 9 months of 2013. And as we discussed in our last quarter conference call, we are planning to spend approximately $80 million for capital expenditures in 2013. Based on our initial look at the capital budget for 2014, the range of spending is expected to be $90 million to $95 million. Approximately $50 million for capital maintenance and the remainder is targeted for projects such as; capacity expansion in our siding business, a press rebuild for one of our old steam mills, and additional capital for a third Chilean mill.

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

Thank you for that review, Sallie. Today I will make some comments on our performance for last quarter, talk about the current state of the housing market, give you an update on the Ainsworth acquisition, talk about some other accomplishments we had in the quarter, and finally provide comments on what I see for the rest of this year and into 2014.

For the third quarter, our safety performance was very good. For our year-to-date, TIR, total incident rate of 0.52 in rolling TIR of 0.45. In October, I am pleased to say that LP was named one of America's safest companies by EH&S Magazine. This was an honor that we received for the second time.

Sallie just reviewed overall sales increased about 10%. We earned 26%, or -- $0.26 per diluted share, $0.13 per share on adjusted basis and adjusted EBITDA of $64 million in the quarter. Every one of our segments was adjusted EBITDA positive in the quarter in all, except OSB had better results in the same quarter last year. Siding in South America continued to do very well.

As we, think about the housing market, the question I get is so what happens in Q3? My summary is that the housing market is improving across the US, but at a much slower pace than we anticipated earlier this year. In our discussions with builders and our channel partners, they support this view that housing is recovering, although they do have some headwinds. They continue to be concerned about labor shortages, both skilled and unskilled, costs and availability of high quality lots, and the lack of a supportive local infrastructure, and these are planners, inspectors, roads, and utilities. The other thing that has become very obvious to us; is the first time home buyers not yet participating in this housing recovery. This is due to tin crease in mortgage rates, tighter credit standards from banks, and lackluster job growth.

On the other hand as been recently noted in a couple publications, investors are buying new homes for rentals. This is up to 5% to 6% of the total new home sales from historic level of 2%. And clearly in Q-3 the recent silliness in Washington put a serious dent in consumer confidence in jobs while the 17 day government shut-down delayed mortgages and closings. I'm glad that the shut-down and the debt ceiling issues were resolved at the 11th hour, but I remained concern that this will happen all over again in January. The big news in LP in the third quarter was the announcement early September that we will require Ainsworth Lumber Company.

Let me give you an update of where we stand in this transaction. Ainsworth and LP filed the pre-merger notification report forms with the US government on September 17, 2013 due to the shut-down of the US government in October, the department of justice asked that we withdraw our submission and refile them to give them an additional 30 days to review the transactions. We did withdraw the filing on October 16 and re-filed on October 21. Ainsworth and LP have also made the necessary filings in mid- September with the Canadian government under the Investment Canada Act and the Competition act. We have received a supplemental information request from competition Canada that we will respond to in the next several weeks.

Ainsworth filed their notice of special meeting and management proxy circular on September 24, 2013. They did hold a special share meeting on October 29 and the transaction was almost unanimously approved by shareholders. As Sally mentioned, Ainsworth at LP's requested expense did launch a consent solicitation from the holders of the outstanding 7.5% senior secured notes due 2017 to modify the definition of changing control in the indenture. On October 16, the majority of the bond holders approved this consent, so as Sallie mentioned this will allow us to significantly reduce the amount of contingent debt they will need to have in place in closing. As Sallie also mentioned we are putting in place a new $200 million bank facility that will replace our current ABL and provide additional funding to close the transaction. As a reminder, it's our intention to have cash in the balance sheet of $350 million to $400 million post the transaction.

We have done a fair amount of transition planning and once we receive necessary government approval, we'll be excited to hit the ground running. Based on all this, we continue to believe that we'll complete this transaction around the first part of next year. Other accomplishments in the quarter as Sallie mentioned we did sell our molding business generating [$15] million in cash and $2 million gain. And I am pleased to report that we are on time and on budget with our system upgrade project and looking forward to going live on January 1. For the rest of this year and into 2014, I remain optimistic. The consensus forecast for the full year now stands at about 930,000 which is a 19% increase from last year. For 2014, the consensus about 1.15 million which should be further 23% increase over this year. Both these are lower than the forecast I discussed last quarter, largely a result of the factors I discussed earlier.

The growth next year, the good news for LP is that it is forecast to come more from single family than multifamily and more of our products are used in single family starts. Inventory new homes for sale remains very low at about 140,000 and existing home for sale stand at 2.5 million, about a 5-month supply. This is fostered price increases that average 12.4% year-over-year. Also, important to our business, is residential remodeling activity that jumped at the beginning of this year has stayed at these higher levels. The public big box retailers both raise their forecasts for the full year.

Let's look forward to this quarter. There's some important accomplishments we would like to have in the bag, one, we need to clear the regulatory hurdles for the Ainsworth acquisition; two, be ready to go live on our systems upgrade project on January 1. We need to accelerate the rate of operational improvement at our Clark County and West B mill. And as my friend Rick Crosswood warned me two days is not a trend, but we set several production records this last week, in Clark County, so that is coming along well. And then we will also begin press rebuild products, in our projects, in our TO projects at Tomahawk and Roxboro to be completed early next year.

So in conclusion, the housing recovery is happening, but it's happening much slower than prior cycles do to the factors that we have discussed; limited participation by the first time home buyer, labor shortages that lengthen the building cycle, higher mortgage rates, and tighter qualification standards, weak job growth, and consumer confidence that it's being whip sawed by the political discord in Washington. Well that all that being said, we should have a good year, we'll remain agile and committed to taking the actions necessary to respond to the changes in demand.

With that, let me turn it over to Sallie to manage the Q and A.

Great, thank you very much, Curt. Stephanie, we're ready for questions.

(Operator Instructions)

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

Hi. Good morning.

Hi, Gail.

I guess -- I can't decide where to start. I guess maybe on the regulatory approvals. I'm sorry if I missed the dates and stuff, but with the US and the refiling, when would you expect to hear something at the latest?

Well, the 30-day period expires on November 20. As you know, we can get a second request prior to that.

Okay. And can you give maybe a little bit more color in terms of the Clarke County ramp-up -- what you would estimate any cost might have been during the third quarter? What you might expect in the fourth quarter, and what type of run rate -- I mean, you talked about production records, but only two days. What type of run rate you're at currently?

Well, on the cost side, it costs us -- if you look at the loss at that mill was about $7.5 million in the third quarter, and that is less than it was in second quarter. We made improvement. We're currently running that at about 1.1 million square feet a day.

Okay. Can you talk a little bit about what you're seeing in terms of cost as you move into the fourth quarter, and maybe what you might have seen in the third quarter? I missed it if you discussed that?

Sure, Gail. We actually saw -- quarter over quarter we saw our costs increase -- now, this is just the price aspect of it -- by about $5 million. And probably half of that is fiber related. However, if we look at the third quarter of 2013 relative to the third quarter of 2012, the raw material costs are actually a little bit better.

Okay. And that increase -- is that something you would expect to be sustained or increase sequentially moving into the fourth quarter?

Yes, I think overall, the costs are, you know, a little bit, but not significantly higher, sequentially.

Okay, and Curt, when you talk about the consensus forecast of 1.15 million starts next year -- when you talk to your customers, are you reading that level of confidence that we are going to see that big of pick-up given what they have in their backlog, or do you have any sort of incremental color on that?

I attended the Harvard Joint Center for Housing Study -- I'm on the policy advisory board, so there's a lot of builders and channel partners on that. And we went around the room, and I think that the sentiment was that it's probably going to be between 1.1 and 1.15. Some of the forecasts earlier were up to 1.25 million, and they certainly have backed off that. So, I think the sentiment around that room was 1.1 to 1.15 is a pretty good number.

Okay, and I guess given the comments in terms of the government slowdown, you certainly haven't seen any sort of change in trend or activity in the fourth quarter?

Not meaningful, no.

I think this is implied in what Curt is saying, Gail, but the fact that we just kicked the can down to February, I think really is part of that whipsaw of consumer confidence that Curt was talking about.

Okay. Thank you.

Your next question comes from the line of Mike Roxland with Bank of America. Please proceed.

Hello, Mike.

Hi, good morning. Wondering if you could provide just any color around recent pricing trends. It looks like pricing, I think within the last week, was lower. I just want to get a little bit of color in what you're seeing in markets currently?

You know, this time of year is when building activity does typically slow down, so this is not unusual for us to see a little withdrawal in November and December. And I think that, overall, pricing is going to -- it is what it is -- based on the transactions we have every day with our customers.

It's probably fair to say that would muddle along until you get a little bit of improvement in housing?

I think it's a little bit of improvement in housing, but it's also weather related. So, if we have an early winter or whatever happens in that regard as well. The Random Lengths report last week -- they basically said that the retailers and the channel partners are filling to existing orders. They're not talking any inventory, so I think that is the situation we're in.

If we do see increased activity, it will be interesting to see how Q1 comes out, because last year we saw a big upswing in inventory in Q1, and then kind of a deleveraging of inventory in April and May because we did see slower growth in the second quarter than we had in the first quarter. So, if we have a good start to the building season, we could see inventory being added in the first quarter.

Got you. And, you know, all year long we have heard from homebuilders who have had orders come in less than expected as they continue to drive price over pace, and also demand has slowed from higher rates. What's LPX's strategy if orders only continue to rise at a modest pace, and how flexible is your system? And how willing are you, as the leader in North America in OSB, to flex that system to maintain pricing?

Well, we manage our system to what we are seeing from demand to our customers. So it's all based on customer demand. So if we have weakness in our order files, then we adjust our production schedules accordingly.

Is that something you do in the third quarter? Sallie, I believed you mentioned that you took some downtime in 3Q?

Yes, absolutely. We did that in the third quarter. And we used that to do some maintenance in our mills, which is, of course, what also caused the increase in some of the costs in our OSB segment.

How much downtime was taken in 3Q, and has that persisted into 4Q?

I don't have the number in front of me. We did take downtime in two of our Canadian mills.

It was about 30 to --

50 million?

Well, I was thinking days.

Oh.

Yes, about 30 days.

30 [mill] down days.

Got you -- two last housekeeping -- I'm sorry. (multiple speakers)

No, I was just going to say -- we did take -- I think the real point isn't how much did we take, as much as did we take it? And the answer to your question is yes. So, as we took downtime -- as we saw the demand lessening, we took downtime within each of the facilities -- within some of the facilities.

I got you. Then the last question is -- where was the downtime taken? Was it mostly in your US mills or your Canadian mills?

Mostly the Canadian mills.

Okay, great. Thanks very much. Good luck in the quarter.

Thank you.

Your next question comes from the line of Mark Connelly with CLSA. Please proceed.

Hi, this is [Garrett Hinds] for Mark Connelly.

Hi, Garrett.

Hi. How comfortable are you with the way OSB restart capacity has entered the market? And as you think about the last couple of years, do you think OSB producers have been more sensitive to the risk of flooding the market?

Well, I can just tell you what we have done. We said, and when we saw housing starts get to over 1 million to 1.1 million, that we'd consider a restart. And then the forecast as we entered into 2013 was for 1.50 million kind of numbers.

So, we announced the restart of Clarke County, and we brought that on late in Q2 of this year, and that is what we're ramping up now. And then also in Q2 we started up on limited production in our Dawson Creek mill to satisfy specialty OSB demand on the West Coast.

Thank you. That's helpful.

And what is your operating rate in OSB right now in the US?

It is, for our facility, it's probably -- now, these are for the operating facility -- for the quarter is probably just around 70% -- you know, around 75%.

Great, and what do you think would be a normalized rate of EBITDA in engineered wood?

Well, what we've talked about engineered wood is that we need to get north of 1 million starts before it's going to be a positive contributor. We go back to 2005, 2006, it was in the $45 million to $55 million range.

Okay. Great. That's all I have, thank you very much.

Thank you.

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

Hi, Chip.

Your line may be on mute. Check your mute features.

Chip?

We answered all of his questions.

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

Thank you. Good morning, Curt and Sallie.

Hi, Alex.

On capital allocation, can you just remind us, you know, what you view the appropriate leverage ratio in the business side, I guess, pro forma, assuming that the Ainsworth deal closes? And just remind us how you're thinking about potential returning cash to shareholders via share buyback?

Well, I don't really think, Alex, our thinking on that with the acquisition of Ainsworth has changed very much. As Curt mentioned, we intend to keep $350 million to $400 million on the balance sheet. And as of right now, we'll use a fair amount of our cash to fund that, as well as then fund the Ainsworth acquisition. And in fact, we suspect we'll have to borrow a little bit from our Farm Credit Systems revolver to help finance that activity.

Got it, Sallie.

You know, from a debt-to-cap ratio, that number hasn't changed, and we have historically talked about a 30%, 35% number, and that number hasn't changed.

Got you. That's helpful.

And then on the siding business, you know, we have seen really nice improvement in the profitability there, even though starts are well below normal. I'm curious if you can talk about the earnings runway in that siding business as US housing starts get back to that 1.5 million level.

You have to think about the siding business in kind of a segment strategy, because we sell into new home construction probably about 40% of that. And then into the retail channel probably another 25% to 30%. And the remainder goes in to repair, remodel, and non-residential structures.

So, as housing recovers -- if we say we have a 20% increase in housing, from a siding perspective that means that we'll pick up about 8% growth with the 20%. So, your siding doesn't respond according -- because retail doesn't go up at that same rate. Retail is a 3% to 5% kind of growth rate, and then we're seeing about a 5% growth rate in the other markets beyond retail and new home construction.

Got it.

It continues to have good growth rates. We have been averaging in the 8% to 10%, even through the downturn. Those other markets have improved. And I think this year will probably be 12% growth year over year.

Got it, and thanks for that color, Curt. And just last question for me -- as you think about budgeting for 2014, and getting your facilities ready for 2014, what is the base case outlook for housing starts? I know you talked about the consensus numbers being1, 1.2, 1.150 -- is that what you guys are using, or are you using something that is more conservative than that number?

We're using 1.1 for our base case.

Got you, thank you.

Great, thanks, Alex.

Your next question comes from the line of Joseph Velardi with Goldman Sachs. Please proceed.

Good morning, Joe.

Hi. I just had a couple of follow-ups. One, given the current outlook for housing and whatnot, and the current market conditions, are you rethinking any of your capacity decisions? Are you changing any of that, or ramping things up at a different pace or less fully ramping them up? And have you seen much in the industry going on that's -- in terms of that type of adjustment, given the slower third quarter relative to the first half?

Joe, as you know, we only talk about ourselves, and I will continue to talk about ourselves, but we made the decision to bring Dawson Creek up on a limited basis, and we are running at a limited basis. We brought Clarke County up. Our contingency was -- if we saw weakness, that we would take -- either take some export business or we would take downtime in our Canadian mills. And that is exactly what we did in the third quarter, and we'll continue to look at that in the fourth quarter and the first quarter.

Okay. And then just one quick capital structure question on the -- assuming everything closes with Ainsworth, are you planning to -- is your current thinking that you'll just leave those Ainsworth bonds in place for now?

Yes. (multiple speakers)

Okay. And then, finally, the CapEx numbers you shared, that excludes Ainsworth. That's just you, in terms of your forecast that you shared earlier in the call?

That is correct.

Okay, great, thank you.

Thank you.

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

Thank you. A couple of regulatory process-related questions, if you can help us on them? Can you share -- are the authorities looking at the structural panels market, given that plywood and OSB are interchangeable in most applications, or are they looking at more on an OSB focus?

I have no idea. It's a structural panel market in North America, and that is the way they should look at it. But their questions are all over the place right now.

Okay. And then did the US folks, and maybe you have no idea on this either, but I assume they are primarily looking at the US business, and Canada is looking at the Canadian business, or are they looking at the North American businesses? Is that something you can -- have any color on?

Again, they have asked questions about both -- well, about all of North America. So, the questions have been pretty far-ranging. So, I honestly can't tell you what they're thinking.

Okay. And then lastly, just shifting gears, you mentioned current export potential -- taking bids from the export markets. Is that a meaningful potential outlet? Can you maybe quantify that a little bit for us?

You know, it has range from probably 15 to 40 million square feet a quarter.

And what was it in the just-ended quarter, order of magnitude?

It was about 2% of sales on a dollar basis -- about 13 million.

So, at the low end of the range?

Yes, it was at the low end of the range. That's correct.

Okay. Thank you.

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

Yes, thanks very much. Just a couple of questions -- one on downtime. You mentioned 30 mill days in Q3; what is Q4 expected to be?

Actually, I think Mike revised that. It was 60 mill days, was what Mike -- nope, 30, never mind. You're right, it's 30. (laughter) Okay, so for Q4, it's -- ? I don't have that right in front of me. I would assume it's going to be a little bit more because we're starting the Roxboro press rebuild.

Okay.

The Roxboro will go down for about 30 days between December and January.

And then just on the cost increase, and, Sallie, you related half of that to fibers. Was that due to wet weather that you experienced in the US South, or is that more just regional market -- ?

It was really across North America.

Yes, there were some in Canada, and some in -- (multiple speakers)

It was nothing specific.

So, it wasn't one region specific. Then just lastly on the systems upgrade projects, just trying to understand the main benefits of that, and what -- if there is any implications for your flexibility in ramping up or ramping down your production based off market that you see at the time?

Well, we're not doing anything at the mill level with the systems. This is really replacing legacy systems that we have that were customer-facing, and a general system that was kind of end of life. It was really just upgrading older systems.

Really, our systems had just gotten to the point where it was either -- we had to do something. And so it's really focused on bringing the system to a more modern era, I'd say.

Paul, really the way to think about it is -- systems tend to have a, let's just call it, five- to seven-year life, and when we would have begun to reach that point of time was when the housing would have been reaching the worst of the downturn. And so we've been deferring spending on those systems, and we just concluded this year that -- I mean, we have been doing the studying obviously on that, but now was the time to bring us into the -- to put the systems upright project in place. So it's really about improving the systems versus looking at getting a lot of efficiencies.

I think the way to look at it is it's really about the magnitude of a press rebuild. (multiple speakers)

That's a great way to think about it, yes.

The IT press.

Okay, thanks very much.

Your next question comes from the line of [Ketan Montala] with Deutsche Bank. Please proceed.

Thank you. Can you talk about any regional differences you are seeing in your OSB price realizations, and if that has changed in the last couple of quarters? I know one of your competitors was talking about weakness in southeast prices.

Yes, it has been really an unusual quarter because there has been a lot of regional price differentials. There has also been a lot of differentials in some of the value-added products, particularly in flooring. I think flooring we had the highest differential between commodity board and flooring of any quarter since I have been here -- since 1997.

Very unusual, and I don't think we really have an explanation for that. We talked to our sales guys. We enjoy it, but it's interesting that if you looked at north central Q3 to Q3, it was down $61, but our average sales price was only down $15. That really had to do with those regional differences and the premium on flooring. It was very unusual.

Okay, and then, can you talk about how your inventories are in the system right now, and how they have gone in the last couple of quarters?

The question is what? I'm sorry, on inventories?

Yes. Inventories in your system at the moment, considering that we are heading into a seasonally slower period. How do you think you stand with your inventories?

You know, I think we're about where we need to be. Our siding business needs to be about 58 to 60 days, and that's about where they are. Our EWP business is in 30 to 35 days, and our OSB business is around 20 days. So I think we're in pretty good shape.

Got you. And then a couple of quick questions. Are you seeing any uptick in [pulp wood] costs, not just in a particular region, but any significant change in pulp wood costs? And if you could remind us how your contracts are structured there?

Well, you know, it's -- as we looked into next year, we see a slight increase, probably more related to inflation than anything else. There are regions -- you know, IP just announced the closure of a huge pulp mill in Alabama. That will have a positive impact on the mills that's closest to that. So we will see an improvement there. That's really -- you're exactly right, that is who we compete with, is the pulp and paper guys. If they pull capacity off, it gives us a little bit more leverage with our vendors.

Got you. And a couple of quick questions for Sallie. You mentioned the operating rate in US was 75%?

In OSB.

And this excludes the mill that are shut right now? This is across the system?

Yes, it excludes the [Shamba] facility.

Got you, okay. And then, the $200 million Farm Credit -- can you tell us what the interest rate will be on that, at this point?

Well, it's a floating interest rate. I don't remember what -- 1.75%.

Got you. Thanks very much.

The final questions will come from the line of Steve Chercover with DA Davidson. Please proceed.

Thanks. Hi, Sally. Hi, Curt.

Good morning.

Just two quickies. First, I assume that you're probably in discussion with your channel partners in 2014 -- or sorry, for 2014. Do you happen to know how many of channel partners that you currently share with Ainsworth?

Yes, that's the one area of diligence we haven't been -- we haven't looked at, at all, Steve, is we really haven't looked at the customers. We know through their public reports who their largest customer is, but as far as those details, we won't be able to see that until the transaction closes.

I mean, would you perceive that as a risk or as an opportunity? That's presumably where some freight synergies could be obtained, but do you think you might lose anything if folks want to have diversity?

Well, I think that the logistics piece will bring us some advantages. One of the things we have done is we did do a listening tour with our biggest customers, and talked about what they like about us and what they like about how Ainsworth conducts business. Trying to take the best of both.

All right. And my second was a follow-on, on engineered wood. It's nice to see it finally EBITDA positive. I heard you loud and clear that you need 1 million starts for any tension in the market. But you've alluded to kind of $45 million to $50 million in EBITDA in 2005, which is probably the peak. But at that stage, I don't think Houlton was running, so with some puts and takes, shouldn't we be a bit better than $45 million once housing is at least back to normal?

We will be when we get to 1.5 million-plus starts. Absolutely. (multiple speakers) There's a real shortage of LVL, I think.

What do you spend on Houlton, $100 million or something?

On the construction?

Yes, the conversion there?

The conversion was about $120 million.

So, that ought to -- I guess if you got a 15% to 20% return, contribute what, $20 million?

Our pro forma was even better than that, but then the housing market collapsed.

You're right, Steve.

All right.

Our expectation would be that if we got there, that we would see performance that was better in our EWP business than we had seen in the past because of the addition of LSL at the Houlton mill.

Well, let's hope it gets here soon. Thanks.

We agree.

Great. All right, well, thank you very much. Stephanie, I think that is all the time that we have for questions, so if you could please provide the replay number? And I would like to thank everyone for participating in our call. Mike and Becky are here to answer up any follow-up questions you may have, and we thank you for your participation. Hope you have a good day.

Thank you, ladies and gentlemen. The replay will be available for eight days. The replay number is 45001139. And the replay number to dial into is 1-888-286-8010. And the replay number again is 45001139.

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