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Executives

Rick Frost – CEO

Curt Stevens – EVP, Administration and CFO

Analysts

Mark Connelly – Sterne Agee

Gail Glazerman – UBS

Chip Dillon – Credit Suisse

Joe Stivaletti – Goldman Sachs

Mark Weintraub – Buckingham Research

Peter Ruschmeier – Barclays Capital

Steve Chercover – D.A. Davidson

Richard Skidmore – Goldman Sachs

Louisiana-Pacific Corporation (LPX) Q2 2009 Earnings Call Transcript August 4, 2009 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Louisiana-Pacific Corporation second quarter 2009 earnings conference call. My name is Mary and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Curt Stevens, Executive Vice President of Administration and Chief Financial Officer. Please proceed.

Curt Stevens

Thank you very much. First, I do want to apologize the panel, we had some confusion on the dial-in number and we’ll make sure that doesn’t happen again. Well, thank you for joining us on the call to discuss our financial results for the second quarter. As the moderator said, I am Curt Stevens, the CFO, and with me today are Rick Frost, LP’s Chief Executive Officer as well as Mike Kinney and Becky Barckley, who are primary Investor Relations contact.

As we’ve done in the past, I will begin with the discussion of the overall financial results for both the quarter and the year-to-date as we follow by some comments on the performance of our individual segments and the balance sheet. Then, I will ask Rick to discuss his perspective on our operating results for the quarter and his thoughts on the near term outlook.

As we’ve done in the past, we’ve opened up this call to the public and are doing a webcast. This 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. As I go through my comments, I will reference these slides.

And then, finally, we do plan on filing our Form 10-Q tomorrow with the SEC and I will make some comments on that in a few minutes. On the forward-looking statements, I want to remind all the participants that we do have a comment that is included on slide two of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information, and that’s included on slide three of the presentation. You can find these reconciliations and our filed documents with the SEC or on our Investor website. I am not going to re-read these statements, but I am going to incorporate them by these comments.

Before I talk about the performance, let me just talk about the market. Housing activity in the quarter, this is single and multifamily in Q2 of 2009, was 46% below the same quarter last year. Seasonally adjusted housing starts had a low of about 480,000 in April. There does appear to be a growing consensus, but that was the bottom.

May and June housing starts and permits were higher sequentially. New and existing home sales appear to be stabilizing. And the inventory of new homes has plummeted from a high of 470,000 in the middle of 2006 to under 250,000 last month. As a result, new home starts are expected to improve, albeit slowly in the months ahead.

On the negative side, competition from foreclosures, poor consumer sentiment, continued job losses, conservative appraisals and a very strict lending standards are all constraining factors to a robust recovery. Finally, the unprecedented government intervention is helping, the $8,000 federal tax credit for first time home buyers is making an impact as well as similar state initiatives. Hope for the homeowners, the restructuring of mortgages were still in the very early stages there and I think you’ve seen some attempts to get that program back on track.

With that, let me go to our earnings on slide four of the presentation. We are reporting today a net loss for the second quarter of $29 million or $0.28 per diluted share. Net sales from continuing operations were $266 million for the quarter. In the same period last year, we reported a net loss of $81 million or $0.79 per diluted share and sales from continuing operations of $387 million.

Let me talk about the segments on slide five and so as to speak, we had an operating loss of $90 million in the quarter which was a 46% improvement compared to the $34 million operating loss in Q2 of 2008, and that’s despite 36% lower volumes and an average sales price that was 9% lower.

This improvement is directly attributable to the actions we have taken over the last several quarters to adjust our operations to focus on cash. As a reminder, these actions included the indefinite closure of four OSB mills, significant curtailment to the remaining mills to match our production to our customer demand, and other strategies to reduce our operating costs.

EBITDA from continuing operations for the quarter for OSB was a loss of $10 million, a 55% improvement from the same quarter last year and better by 44% sequentially. The mentioned OSB price compared to the same quarter last year was down 9% coupled with significantly lower volumes. This led to a 43% reduction in sales.

However, compared to Q1 2009, which was unseasonably low, volumes were higher by 46% while we didn’t catch much win on pricing, where pricing was lower by 6%. For the first six months, OSB had an operating loss of $43 million compared to a loss of $96 million during the same period last year, despite sales being down almost 50%.

Slide six is our Siding business, this segment includes our SmartSide and Canexel Siding products, and commodity OSB produced in Hayward. For the second quarter, Siding had operating income of $7 million, lower than the $9 million recorded in the same last year, but a sequential improvement of $5 million. EBITDA from continuing operations for the quarter was $11 million.

For the quarter, sales were down 17% with the unit volume reductions about 15% in both the SmartSide and Canexel product lines. Sales prices were slightly higher in SmartSide and down 13% in Canexel, primarily to the decline in the value of the Canadian dollar as these sales are primarily made in Canada. For the first six months, Siding had operating income of $9 million both in 2009 and 2008. Sales in 2008 were about 25% higher than the same period last year.

Engineered Wood at slide seven, this segment includes our I-Joist; Laminated Strand Lumber, producer in Houlton, Maine facility; Laminated Veneer Lumber, plus related products. It also includes the sale of I-Joist and LVL products produced by the Abitibi JV or under a sales agreement.

For Q2, EWP reported a loss of $9 million, about the same as Q2 of last year and last quarter. EBITDA from continuing operations was a negative $6 million in the quarter, again the same as Q2 of last year and last quarter. This is despite volumes of both I-Joist and LVL being down significantly compared to the same quarter last year, 40% down and 35%, respectively. This is a direct reflection of the reduced housing activity as Engineered Wood Products are primarily devoted to that segment.

For the first six months, EWP had an operating loss of $17 million in both 2008 and 2009, despite sales being lower by 50% in 2009. On our other building products, there is no slide for this, but let me make a few comments. This includes our interior molding business, our South America operations, US GreenFiber joint venture, and some of our non-operating facilities.

Overall, we were about breakeven in both the second quarter 2009 and 2008. For the quarter, sales were at $30 million, up slightly from $28 million same quarter of last year. And we did incur about $1.3 million in costs associated with our non-operating facilities, that was about the same level as the same quarter last year. For the first six months, other building products had income of about $2 million in 2009 compared to a loss of $3 million in 2008 and sales were about 15% higher.

Other financial items, we had a $7 million foreign exchange gain in the quarter and that was compared to a $5 million loss in the same quarter last year. And that was largely related to the change in the Canadian dollar. Investment income in the quarter was $8 million compared to $11 million in the same quarter last year, as a result of lower invested cash and lower interest rates.

Interest expense was $21 million in the quarter compared to $13 million in Q2 of 2008. And this is primarily due to the refinancing that we completed late in Q1 of this year. On SG&A costs, they were $29 million for the quarter, a 26% decrease from the same quarter last year. Our unallocated corporate costs, they were down 17% at $18 million compared to $22 million in the same quarter last year. On year-to-date basis, SG&A is down 29%.

Income taxes, the effective income tax rate in Q2 of 2009 was 37%, and that compares to 42% benefit rate in Q2 of 2008 and 39% last quarter. As I mentioned before, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to our continuing operations relate to our foreign debt structures, state income taxes, and deductible foreign income taxes.

Slide nine have some numbers from the balance sheet, key balance sheet statistics. Cash, cash equivalents, and investments in restricted cash was at nearly $400 million, $396 million. This is an increase of nearly $45 million compared to the balance at the end of Q1. Contributing to this [ph] increase was a reduction in our overall inventory to $34 million in the quarter and a net increase in the carrying value of our auction rate security portfolio of about $13 million.

Working capital was $467 million. Net cash, cash and investments, restricted cash minus the debt was at $12 million. And year-to-date, our capital expenditures are about $6 million. For those who follow, you know that’s probably that is lower than we have reported in Q1. That was basically due to the repayment of a portion of advances that we made to our joint ventures. Book value per ending share was at $11.23.

Before I turn the call over to Rick, I do want to mention several items that will be of interest to our stakeholders. I mentioned, we will be filing our Form 10-Q tomorrow. In this document, we will be disclosing that LP is filed suite against the primary issuers and brokers of our auction rate securities. The filing alleges that the defendants made material misrepresentations and omissions in connection with the issuance of auctions for the auction rate securities, which constitute the violation of both state and federal securities laws as well as common law fraud.

LP seeks recovery of compensatory damages, decision on the purchase of the securities at par value, consequential damages, punitive damages, attorney fees and any other damages to court deems appropriate under the circumstances. Also tomorrow, as noted in our earnings release, we will be filing a Universal Shelf Registration on Form S-3 with the SEC.

The purposes of this filing is simply just corporate governance to put in place the ability to take advantage of favorable conditions in the financial markets to strengthen the balance sheet, improve our financial flexibility or such other transactions that the board may deem appropriate. There have been no decisions made by the board to pursue the issuance of any securities under this shelf registration. We are making the filing and we will be working with the SEC to have this filing effective as a matter of sound financial policy.

As background information, LP is no longer a well-known seasoned issuer into the SEC rules. And because of this, the registration statement does not become effective upon filing. In stead, the registration statement may be subject to a 30 day review period by the SEC. Therefore, we believe it is good practice to have the Shelf Registration in place and effective so as not to borrow bottleneck the company if a decision is made access to public financial markets.

With that, let me turn over to Rick.

Rick Frost

Well, good morning everyone. We are having a relatively mild and wet summer here in Nashville which is quite luminous when we moved our office here five years ago. Today, it is a beautiful day.

This morning, I am going to tailor my remarks about Q2 performance, discuss a little bit with you on what Q3 feels like to me, and then muse a bit about what next year could hold and store for us. So let me begin with Q2.

On the safety front, LP continues to set the bar for the industry in spite of very difficult operating environment of interment running, new shifting patterns, layoffs, our year-to-date incident rate is 0.58, which is industry leading. Thus far this year, we have had one plant exceed the 1 million safe work hour mark without a recordable event, and that was our fine fiber Roaring River mill in North Carolina.

We’ve only had two other mills in our history exceed the 1 million safe work hour mark and so that’s significant to us. As Curt said, housing starts, Q2 ’09 compared to Q2 ’08 are down 46%. In the face of that, we have continued to improve our metric of LP volume per housing start in all of our products, except commodity sheathing. We measure this on a four quarter rolling average.

TechShield, our product category leading radiant barrier roof sheathing, is up 19% in square footage per start. SmartSide is up 34% in square footage per start, and LVL and I-Joist are up 6% and 5% respectively. Topnotch subflooring [ph] is up 2% and our commodity sheathing is down 7% per start.

Our sales force racked up 780 wins in Q2, a win as you remember, is defined by us a product placement with a new customer or an additional product placement with an existing customer. And our sense of this, when activity eventually does pick up, it will board well for us in both volume and revenue.

Quite obviously, we are, what I would call, top line revenue challenged with new starts being down 46% year-over-year. So besides our efforts on sales wins, our measurable efforts are felt most on the cost reduction side. Our lean six sigma efforts continue to payoff for us on a morale and involvement standpoint, but also from a financial one.

At mid-year, we are at over 6:1 return level from lean six sigma, well above our internal goal of 3:1, and we are on track for our $15 million to $20 million improvement range. Many of these efforts were focused on the lean aspects of the discipline as our team set about reducing inventories across all aspects of the business, while still meeting our customer needs. Cost-out products made up the rest of these efforts many supporting LP’s Power Forward initiative.

In Power Forward, we have set an internal goal for the company to reduce our total energy consumption per unit of volume by the end of 2012 by 10%. We have begun engineering assessments at the mills to identify opportunities for energy consumption reduction and more reliance on renewable energy sources.

We had some help from raw materials in this quarter. Raw materials variances Q2 ’09 to Q2 ’08 based upon ’09 volumes were $13 million improvement, wood was about $2.6 million of that, natural gas was $1.5 million, plastics were down about $0.5 million, resin, binders and waxes were down $8.6 million, and electricity went the wrong way by about $300,000.

Year-to-date on ’09 volumes, we are improved about $17 million on raw materials and this is tracking fairly closely with what we presented during our refinancing road show. As we have repeatedly said, we are managing the company for cash and cash preservation to ensure our ability to make it through this economic recession and the worst housing market in now what has measured as 61 years.

Our cash, cash equivalents, investments in restricted cash, as Curt said, were up almost $45 million from the end of Q1 to the end of Q2, and the lien share of that improvement came from leaving out inventories. Total SG&A cost were down 26% from Q2 of ’08 and 29% year-to-date. LP’s total personal count is down over 1,000 positions or roughly 20% from Q2 ’08 to Q2 ‘09 and this does include the Messissa [ph] acquisition in the fall of last year.

Each one of our functions, businesses and mills have been hammering away at right sizing our cost structure and productive capacity to the level of business that we now entertain. It’s showing in our cost structures and efficiencies in mill gain costs and overhead, in spite of the severe impact of overall business level and pricing. We were unsuccessful in making much progress on the sale of non-operating assets in Q2. We did sell the second and last aircraft that we owned.

All of the other perspective deals that we haven’t progress and or I would call as a lingerie mode, as our perspective purchasers try to align their decks up in this difficult environment, it was our plan to have raised about $30 million in cash proceeds by this time, nothing has fallen through, but the time horizons have certainly slipped.

I want to make just a few observations on each of the businesses for emphasis. In OSB, volumes were down 36% and sales price down 9% from Q2 of ’08. Compared to a relatively dead Q1 of this year, volume was up 46%, but price was down 6%. On the cost side, total cost per thousand square feet were down 12.5% from Q2 ’08 and down 17% from Q1 of this year. The business has done a hack of a job at developing creative running and staffing schedules, and our personal account in OSB is down 500 from a year ago.

Siding was a bright spot for us again in Q2, down to net sales only 17% from a year ago against a backdrop of 46% in starts. Retail has held up better in this category. First half of ’09 and the first half of ’08 had about equal operating income on 25% lower sales in ’09. Siding products price on value, they are not a commodity. Less than 50% of our volume goes into new residential starts, 50% of our volume is in panel and soffit, another 20% sales and lab, and 30% in growing interim which has a wide variety of uses.

In Engineered Wood Products, this segment as you know has mostly tied to start and sales were off about 45% in Q2 against Q2, and the operating loss was about the same as last year. And now, I want to shift my remarks to Q3.

We felt the slight seasonal up tick towards the end of June across all product lines coupled with the depleted nature of the inventory levels in the channels of distribution. In OSB, this caused an up tick in random links pricing in late June and July, and actually forced us to work a little bit of over time at the reduced manning schedules that we currently have to meet deliveries.

This up tick seems to have stabilized at the present. We are getting measurable volume from our new product made specifically for furniture stock, which I mentioned on the last call, and have sold about 10 million square feet in the last two months. Retail has become more significant for us in OSB with about 30% of our sheathing now selling through that channel.

In strand siding, we made some significant progress on the cost structure at all of our mills. All of our OSB based Siding mills have reduced the shift and are running on a three shift operating model, improving efficiency, and this should be worth about $1 million in cost to us on an annualized basis. In fine fiber siding, we have also made some significant improvements.

We decided to exit the door skin business at our East River, Nova Scotia mill. We reduced one line of production and we eliminated 77 positions. At Roaring River, we also paired positions by 27. Together, these efficiency move should yield about $8 million better results on an annualized basis next year at this year’s volumes. We are continuing to have good success on our Redwood panel in retail that I mentioned on the last call, which has now carried an 800 Home Depot stores.

We picked up a lot of the Temple hardboard business in Texas after their exit and have a modest price increase to implement in mid-August. In Engineered Wood Products, the improvement in Canadian housing activity, ’09 is projected about 140,000 I think and ’10 about 164,000 has supported our I-Joist sales. As well, we have completed the East Coast blitz on introducing LSL to that market, we made over 400 new contacts and sold over 100 trucks of products in the meantime, or we did that truck of product holds about 1,000 cubic feet or about a month’s production at our current level of sales.

Our international efforts at Engineered Wood are focused on the UK, on Japan, and on Australia. This isn’t doing much for us right now, but we feel that it has the potential at making the pie larger over the next couple of years and we expect to be cash positive on that work in ’10. And the cost, the main cost on this are getting certified in these countries.

As Curt said, South America is holding its own in spite of a sputtering economy in Chile, we are profitable there and more than compensatory for our losses in Brazil. Brazilian economy, as I read about it, seems to be poised for a sooner rather than later recovery, which will aid our foray into converting building practices there. We do expect to be cash positive in Brazil for the year. And the Chilean government has expressed interest in providing additional socialized housing in 2010 up to 25,000 new units, which we hope to capitalize in ’10.

Now looking forward, it appears that consensus for new starts right now for 2010 is shaping up to be about 700,000 or better in the US as this country continues to work through the foreclosures and the unemployment problems. Canada is looking healthier, starts next year projected to be around 165 to 170. There are a lot of mixed signals out there right now for US housing, but it does feel like there is more good news than there is bad.

My expectations for Q4 of this year and Q1 of next year are not particularly high, but I do think that they will have better activity than the previous Q4 and Q1. We will also be meeting the off season with a much improved cost structure going forward. FX in Canada has not going our way so far in Q3. Yesterday, I read it at 0.93. We have had a lot of volatility in this year in Canadian FX. It was as low as 0.78 and as high as 0.94, which does increase planning complexity for us.

Though we produce less in Canada now and we sell a greater percent of our Canadian produced product in Canada, we will also have some downtime decisions to make in Q4 based upon the severity of this seasonal downtick seen what it will be. As Curt said, our CapEx guidance for the year remains intact. We are just not spending very much.

And with that, I will turn it back over to Curt for questions.

Curt Stevens

Thank you, Rick. Mary, if we could go to the question queue.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Mark Connelly from Sterne Agee.

Mark Connelly – Sterne Agee

Thank you. Rick, just a couple of things. You’ve clearly done a lot of work to get costs out, what I am wondering is, how is the cost of your downtime and the changes you have made in mill scheduling going to affect things as you start to come back out. In other words, if you are getting better at taking downtime, is there a swing back the other way as demand does come back? And related to that, is there an increasing risk of difficulty getting some of these machines back running when the longer they are out?

Rick Frost

I think in the short term, based upon what we have been able to -- let me just give you a quick example. Jeff in the OSB business now is able to start an OSB mill up and get on production in about six hours, where before that might have taken us 24 hours. So that’s the kind of improvement that we made under this kind of duress. What we have seen right now is that, if you get an additional up tick in volume, we have the ability to cover that at the current manning and cost schedules.

So in the short-term, any increases in volume will just give us a little bit more leverage over the fixed cost. So I think that’s the short term answer is that we really feel little additional volume based upon the way we are running. Longer time, I don’t think that its going to be an issue until we get to about that 19 billion square foot mark, where its my assessment as I look at the industry, there is about 19 billion feet of capacity running right now inefficiently. So the ability to either add shifts or add over time gets up to that point, and then beyond that point, when you start getting into potentially taking mills that are indefinitely closed and trying to start them back up. And as we have talked about for years on that, that requires working capital investment rehiring people, retraining people etc. So I don’t know if that answers your question completely Mark or not?

Mark Connelly – Sterne Agee

Yes, that’s helpful. Thank you. And just one more question. Can you talk a little bit more about what you are seeing in repair and remodel? You mentioned in terms of Siding, is that having any impact on sheathing traditionally at the plywood market, but just curious if you are seeing something there?

Rick Frost

Yes, if you go back a couple of years as you know, we use to sell about 20% of our sheathing through retail and now we are up to about 30%. So I think what we are feeling is that, there is replacement going on between OSB and plywood right now. And retail is actually the strength in the game right now compared to new starts.

Mark Connelly – Sterne Agee

Is that a function do you think of small builders getting back in the game or is it a shift in the kinds of projects that are being done?

Rick Frost

I think it’s a shift in the kind of projects that are being done. I don’t sense that there has been any change in the direction of smaller builders, they are getting hammered in this environment and there is fewer of them every day.

Mark Connelly – Sterne Agee

Okay, perfect. Thank you, Rick.

Curt Stevens

Mark, the only thing I would add to that is that, with the consolidation in the dealer channel, that the stocks and the 84 lumbers where they have closed location, my guess is that business gravitated towards the home centers.

Mark Connelly – Sterne Agee

Very helpful. Thank you.

Operator

The next question comes from the line of Gail Glazerman, UBS.

Gail Glazerman – UBS

Hi, this might carry on that discussion a little bit that is there any more color you can give about the sequential volume trends? I appreciate that the first quarter was very weak, but it didn’t deal that we had that much of a building season in the spring and you have posted some pretty big improvement.

Rick Frost

I am not sure I understand.

Curt Stevens

The volume increase from Q1 to Q2?

Gail Glazerman – UBS

Yes, it seemed a lot stronger than I guess I would have expected given building activities.

Rick Frost

I think you got to look at Q1. Q1 was a corpse just quarter. So I think you will see a little bit more in Q3. Q3 is stronger than Q2 in volume, but Q1 was just horrible.

Gail Glazerman – UBS

Okay. So you feel that you grew with activity or was there customer inventory restocking or?

Rick Frost

We felt that. I mean the channel is just about as lean, I think I say that every time and it gets leaner, but it's just about as lean we’ve ever seen and so we did feel towards the end of Q2 that the channels had run out and they had to restock, and you saw the evidence of that, but they are lean again. I mean its just a poker game out there right now.

Gail Glazerman – UBS

Okay. And can you say a little bit more color on cost trends both in terms of your internal cost cutting initiatives as well as input costs I guess moving from the second quarter into the third quarter? Are there incremental savings yet to come or have you seen pretty much what you are going to get?

Rick Frost

Based upon what we have seen so far, we are about there. We will get a little bit more I think in Q3 from efficiencies. We pick up a little bit more in wood, little bit more in resins, but not as significant as from Q1 to Q2. But I think we are going to get a little bit more in efficiencies as well.

Gail Glazerman – UBS

Okay. And then the inventory improvement that you had in the quarter, is that something that you feel is sustainable and then is there more is it about as good as that gets or do you think you can take more out?

Rick Frost

Well, we are pressing on it really hard, but we’ve kind of get into a situation where we had -- the takeaways that we are experiencing right now, its going to be hard to go significantly farther.

Gail Glazerman – UBS

Okay. And Curt, I apologize if I missed this, but any update on tax refunds that you have received? Anything that you might expect to receive?

Curt Stevens

We did receive about a $6 million from Canada in Q2 and we have about -- actually we made a Canadian payment this month. So net for Q3 is about breakeven and then there will be about $3.5 million to $4 million more in Q4. So that will be about the total that we talked about at the beginning of the year of $80 million net.

Gail Glazerman – UBS

Okay. Thank you.

Operator

Your next question comes from the line of Chip Dillon of Credit Suisse.

Chip Dillon – Credit Suisse

Good morning. You were talking about the inventories coming down and certainly you did a very good job on the working capital, do you think there is more that can be done either on the receivable side and it looks like you -- the pay [ph] up was expanded by $30 million. Are there stress about as much as you can do at this point or were not?

Curt Stevens

Well, on the working capital, let me just talk about that. In the inventory about $20 million of the $34 million reduction was logs and that is typical for our industry because we don’t log in the northern part of the North America during Q2. So that would be a normal reduction. I think what we are trying to figure out is what kind of a logging plan we put in place over the winter. So that’s an important consideration.

On the finished goods, as Rick said, we did bring our finished goods down by $11 million and we think we are about the level that we can get to in finished goods. I am not sure finished goods can go much lower. On the receivable side, we are at 20 days DSO. So and as you probably well imagine, our customers are pushing it daily on increasing our terms and we are pushing back daily on increasing our terms so with that we don’t do that.

I am not sure there is lot to be gained in receivables that will be based on business activity. In our business, our receivables for trade are the lowest that they will be at the end of the year because we don’t sell any product at the last two weeks of December. If you have 20 days DSO and you don’t sell product for 14 days, that means you only have six days of sales sitting in your receivables.

And on the payable side, that’s just the increase in business activity that we have seen. So that and we haven’t changed, we have got some extended terms from a few vendors, but we haven’t changed dramatically in our terms of vendors.

Chip Dillon – Credit Suisse

Okay. And it was mentioned there was like $30 million in asset sales you’ve talked about, and I think some of those were aircraft, but what were some of the other assets that you are -- you said that you are seeing with?

Curt Stevens

Well, the two biggest ones that we have been talking about for way too long and haven't closed on are the St. Michelle OSB mill and sawmill site and the Selma decking facility that we have been work on diligently. And that is that amount basically.

Chip Dillon – Credit Suisse

Okay. And then Curt last question, on the -- obviously the shelf or the universal shelf, it makes total sense that you would do that just to kind of get yourself established and get effective I guess this is the right term, and but as you think later in the year, are you sort of leaving all options open or should we expect it to be more geared towards debt or could there be more equity like we saw back in March?

Curt Stevens

Well, I think you just have to look at is corporate governance. We had a shelf in place for a long time and as a larger share [ph], you could file and become effective immediately and now we are not in that position because of our market cap. So this is just getting us to be in a position where we could take advantage of the market opportunity, should the board choose to pursue that. As I said the board has not made any decisions on this at this point.

Chip Dillon – Credit Suisse

Gotcha. Thank you very much.

Operator

Your next question comes from the line of Joe Stivaletti, Goldman Sachs.

Joe Stivaletti – Goldman Sachs

I was just wanting to see if you have any particular update on your plans on the remaining 8.875 [ph]?

Curt Stevens

We will certainly pay them when they become due Joe. And I have no plans to call those early.

Joe Stivaletti – Goldman Sachs

Okay. But you have to do something before their maturity right under the--

Curt Stevens

Yes, we just have to either -- some method of defusing them in February to keep the ABL in place. So that’s the tie-in is if the ABL stays in place, then we have to put the cash aside.

Joe Stivaletti – Goldman Sachs

So this shelf registration isn't particularly targeted at that particular launch?

Curt Stevens

It is not. Most probably, one of the things that we and the Board will look at, but it is not targeted at this point. There is no decision.

Joe Stivaletti – Goldman Sachs

Okay. The other question, I mean I just wondered if you sort of it heard if you -- I don’t know if you could answer the question the way I'm going to phrase it. But I am trying to understand at what point you think the OSB business gets into positive EBITDA territory? I assume that we are not going to -- we are not expecting to see a lot more capacity closing that’s currently up and running. So I was wondering if you sort of had a tied to what housing start level you thought would allow sort of pricing power to swing back to the producers given the current level of production, given the current level of capacity that’s up and running.

Curt Stevens

We are going to give you no answer with a little bit amusing. It just depends upon supply and demand, Joe. If you think about this year, somewhere around 13 billion feet of OSB is going to get sold in North America. Current projections are somewhere around between 16 and 17 billion feet next year. If you think about what’s available to run, as we guess at anyway in the industry that 19 to 20 billion feet, you start to climb up the demand capacity ratio thing, and when you start getting above 83, 85, you start to get a little bit of pricing power. So that’s your guess is as good as mine exactly how that’s going to unfold right now.

Rick Frost

I think a rule of thumb we have given out is that each 100,000 housing starts is about 1 billion square feet. So if you are going to go from this year level, whatever consensus is 5.50 to 7.00 next year, I mean you are going to add a couple of billion square feet of demand for home building.

Joe Stivaletti – Goldman Sachs

Given that you are half way -- well, not half way but a third of the way through your third quarter, is there a hope that with the seasonal -- some of the seasonal pick up you are talking about and a little bit better pricing that you will be in EBITDA positive territory in that business in the third quarter?

Curt Stevens

I think increased pricing is a good thing for EBITDA performance in the OSB business. And so having the price up is certainly helpful and Rick talked about some of the things we did in Q2 that will carry into Q3 on the cost side.

Joe Stivaletti – Goldman Sachs

Okay. Thanks.

Curt Stevens

Yes.

Operator

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

Mark Weintraub – Buckingham Research

Thank you. Curt, how do you feel about your balance sheet at this point given what you’ve gone through and what you see ahead? Are you comfortable with where your balance sheet is at this juncture?

Curt Stevens

I think we talked about when we put the financing in place and we thought that putting that financing in place, the way we did even though it was much more expensive than we would have liked allows us to get through the other side. So I think and given what we did in Q2 by improving our cash position and seeing a little bit of positive news in the housing market, I am feeling a little better than I was when we announced the financing.

Rick Frost

I don’t like the interest rate on the debt, but we had to do, we had to do and we did it.

Mark Weintraub – Buckingham Research

Understood. I remember Rick, probably six quarters ago, when things were really just starting to get difficult--

Rick Frost

It was longer than that, pal.

Mark Weintraub – Buckingham Research

Okay, it got really difficult and there is a I was question asking about potential consolidation in the business and your response at that time was that, when the pack goes into the woods it usually comes out with the woods in a different form and you had mentioned the pack had definitely gone into the woods and clearly, those woods got deeper. Now its beginning to sound like for the first time or may be seeing a little bit of light that might suggest that we must be getting out of the woods at some point in the hopefully not too distant future. Do you still have the view that the pack is going to come out in a different form or has that view changed?

Rick Frost

It appears that the pack is still around. They just have taken on new spots. I mean we have had two of the larger producers declare bankruptcy, but they are still around and one of them is for sale right now, we will see where that goes. So I don’t -- I think something that I said recently and I probably said it on one of these calls is that, there is no Sissies left in the wood-products business. Everybody that is in it right now are in it because they want to be and so even though people seem to run out of money, they somehow stay operating. And so I guess the rest of that story, I don’t know if I expect anybody to disappear. I think over time the mills that can’t compete will continue to disappear. But at this point in time, I don’t see a real structural change based upon it what we have looked at so far, which is people go bankrupt, but they don’t disappear.

Mark Weintraub – Buckingham Research

Okay. Thank you.

Operator

Your next question comes from the line of Peter Ruschmeier of Barclays Capital.

Peter Ruschmeier – Barclays Capital

Thanks and good morning.

Curt Stevens

Good morning.

Rick Frost

Good morning.

Peter Ruschmeier – Barclays Capital

Rick, I was hoping you could share with us your thoughts on Clarke County. I would think with the C dollar at $0.93, I would think Clarke County would be much lower cost. I know you have shared in the past maybe some liquidity concerns or investment cause of starting that up, but how do you think about that and is that something that’s on horizon?

Rick Frost

Not on the planning horizon right now. We don’t see the need for that mill probably until 2011, and then as we get closer to that, we will see what happens. The problem with that of course, we’ve discussed the reason that we did not restart it for a cash basis and while we are managing for cash, we are not considering that. But secondly, when you bring on 700 million feet at one time, it’s a real slug. So that’s not in the next year and half, and our planning cycle right now.

Peter Ruschmeier – Barclays Capital

Okay. That’s helpful. And I was hoping you could amplify on your comments about OSB being used for furniture. From a furniture maker, why would I choose OSB over plywood and what geographic opportunities might you see in this application?

Rick Frost

While we have two major customers in furniture right now. Let them remain nameless. What they are doing is a pure cost-substitution. We have designed the products specifically for them and what OSB adds is a uniformity to the furniture manufacturer basically an absence of voids in the middle of the board that plywood doesn’t have. So we’ve got couple of relatively large customers where we’ve designed the product specifically for them and seem to be successful so far selling about 10 million feet of that in the last two months.

Peter Ruschmeier – Barclays Capital

Okay. And down in Brazil, I am curious on whether you can comment -- I mean does OSB have much of a cash cost advantage in Brazil over plywood and are you taking any specific steps, what is your business approach to boosting your share in Brazil?

Rick Frost

There is a slight cash advantage and we have stated and what we hope to do is to replicate what we did in Chile which is to go in and convert building practices from cement and steel to wood products. Right now, most of the OSB’s that’s consumed in Brazil is used for things like creating construction fences, packaging anything that you might use a panel for, but they don’t really build the way we build up here. In Chile, we had great success by going into the government and convincing them that they could build safer, faster and cheaper by building the way we build in the US and Canada. But we think that same opportunity exists because of the huge need for both socialized housing and just housing in general in Brazil over the next ten years.

We had our first large, large homebuilders show in Brazil about three or four months ago, created a lot of interest obviously this economic downturn has not been good for us in terms of getting that started. But we think that our success in Chile was to first start with the government and show them how they could put up very nice homes very quickly. And so that’s our approach in Brazil. We are starting that now. Their economy does need to rebound somewhat for us to make headway there. And then probably have about the same speed of ramp up that we had in Chile because changing the norms and moreeses of a particular building culture take some time.

Peter Ruschmeier – Barclays Capital

And what charity you think you are up to now in Chile and on a related note the 25,000 homes that you mentioned may be built, is that all wooden homes or that’s just total units and you get some share of that?

Rick Frost

That’s total units and we would hope to get some share of that. We think that we are up around 28% or 29% of all new residential starts and Chile now have at least one floor of wood based construction. When we first got there, that was about 3% or 4%. So we have been pretty successful there and we were successful with the government in Chile and how we kicked this whole thing off was a socialized housing down there. So I don't know exactly how much of that will get because they have to actually finalize the program, but it should be helpful to us in both volume and pricing in 2010.

Peter Ruschmeier – Barclays Capital

And just lastly, do you have similar figures for Brazil as to what you think the share -- the wooden housing share is of the market?

Rick Frost

It’s almost nothing, probably less than 1% right now. But the cool thing is, there is ten times the number of people in Brazil that there are in Chile and I think Brazil has a backlog now in new residential needs of somewhere around 1.2 million per year and with a long-term rate of about 1 million a year. So hopefully, we will be able to penetrate that over the next couple of years. That was our goal in going down there and buying that mill.

Peter Ruschmeier – Barclays Capital

Very good. Thanks, Rick.

Operator

Thank you. Your next question comes from the line of Steve Chercover, D.A. Davidson.

Steve Chercover – D.A. Davidson

Thanks. Good morning everyone.

Rick Frost

Hi, Steve.

Steve Chercover – D.A. Davidson

Couple of questions on the auction rate securities. I think Curt mentioned, you got 13 million back. I mean these by definition were short term assets. Do you think that we are going to start to see whole slug of them start to come back into the money.

Curt Stevens

Well, partly what happens Steve is, we implemented a new fair value accounting requirements this quarter, and so that actually went through other comprehensive income. So it didn’t flow through the income statement at all which is the balance sheet item. What we got were pretty unrealistic values from one of the issuers at the end of Q1, we did a fair amount of work internally and chose not to change that valuation. Then to Q2, they significantly increased those values and its not clear to us exactly whey we have triangulated around those values by looking at comparable securities and running various models. So we think the values that we have are appropriate. We have not seen much activity on the bank side of providing liquidity for those investments and that’s why we took the actions that we did take as I mentioned earlier.

Steve Chercover – D.A. Davidson

Are you still being paid on the majority or all of those--?

Curt Stevens

There is only one security that’s about $3 million security that has been accelerated by the senior tranche. The rest are all paying at the stipulated rates.

Steve Chercover – D.A. Davidson

And its about $152 million or something if I recall.

Curt Stevens

$151.8, you are exactly right.

Steve Chercover – D.A. Davidson

Probably don’t want to comment a lot on the lawsuit, is it a class action?

Curt Stevens

This is an action that LP is taking.

Steve Chercover – D.A. Davidson

You are taking. And if I recall, there were really two dealers that really put you into it, and one no longer exists or has been amalgamated.

Curt Stevens

We are filing this against Merrill Lynch, Deutsche Bank, and money market one is the broker. That will be disclosed tomorrow.

Steve Chercover – D.A. Davidson

Okay. So BOA I guess has liability from Merrill now?

Curt Stevens

I would assume so. They have kept the corporate structure, so we are filing appropriately.

Steve Chercover – D.A. Davidson

Great. Good luck.

Curt Stevens

Thanks.

Operator

Thank you. Your next question, final question, comes from the line of Richard Skidmore from Goldman Sachs.

Richard Skidmore – Goldman Sachs

Good morning. Just follow-up on the cost side of things. What are you seeing with regards to specifically wood and resin cost as you go into the second half of the year?

Curt Stevens

On the resin side, those were inputted into phenol, benzene and natural gas and so we're actually seeing pretty flat for resins compared to the second quarter. On the wood side, we are entering into logging season, so we should have more supply in the market in the third quarter. So we should say as Rick said earlier, we should see a little reduction in wood. And so overall, I think Q2 to Q3, I would expect modest improvement, but not nearly what we saw Q2 of ’09 versus Q2 of ’08 probably half of that magnitude.

Richard Skidmore – Goldman Sachs

Okay. And then just a different question as you look at the bigger picture, you talked about needing to have the market having capacity running about 19 billion square feet. Currently shifting about 13 suggests that you need kind of 1.1 million to 1.2 million housing starts to get to that 19 billion square foot level. As the market gets back in terms of housing starts expanding, how do you foresee brining capacity back on line? Rick, do you anticipate that you will run up against full capacity or you going to need to start up other facilities before you get to that level just to be able to serve as the national footprint that you have?

Rick Frost

Well, I don’t know yet but as we have spoken before in some of these mills if you want to take amount of the indefinitely curtailed status, you may have lead times of anywhere between three and six months to do that. So your planning horizon is actually pretty long. I think it would be appropriate for me to comment technically or strategically how we think about at this point in time.

Richard Skidmore – Goldman Sachs

Okay. Thank you.

Rick Frost

I do, before we get off this call, I do owe someone from the last call to comment around what’s going on with the average size of housing? I promised that I would go take around on that. It does appear that the average size of new starts has declined between ’07 and ’08 by about 70 square feet. If we stayed at the current level, that would equate to somewhere in the neighborhood of 500 million feet if you go out about four or five years. So probably the house size decline, if it stays where it is, is equivalent of one kind of generation to OSB mill. And I just owed somebody that answer.

Curt Stevens

Mary, I want to thank you for operating and thank all of you for attending our call. As always, Becky and Mike will be available for follow-up questions. And as I mentioned, we will be filing both the S-3 Universal Shelf Registration and the Form 10-Q tomorrow. And Mary, if you could give out the replay information, that will be good.

Operator

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. For replay, you may dial 617-801-6888 or 888-286-8010. The access code would be 16497049. Thank you once again. Have a great day.

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