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Louisiana-Pacific Corporation (NYSE:LPX)

Q3 2009 Earnings Call

November 3, 2009 11:00 A.M. ET

Executives

Richard W. Frost – CEO

Curtis M. Stevens – EVP, Administration and CFO

Analysts

Gail Glazerman – UBS

Jason Markson (ph) – Sterne Agee

Chip Dillon – Credit Suisse

Peter Ruschmeier – Barclays Capital

Mark Weintraub – Buckingham Research

Steve Chercover – D.A. Davidson

Richard Skidmore – Goldman Sachs

Presentation

Operator

Good day ladies and gentlemen and welcome to the Q3 2009 Louisiana-Pacific Corp. earnings conference call. My name is Chris and I’ll be your operator for today. At this time all participants are in a listen only mode. We’ll conduct a question and answer session towards the end of this conference. (Operator’s instructions) As a reminder, this conference is being recorded for replay purposes. Joining us today is Mr. Rick Frost, Chief Executive Officer and Mr. Curt Stevens, Executive Vice President of Administration and Chief Financial Officer. I would now like to turn the call over to Mr. Curt Stevens. Please proceed.

Curtis M. Stevens

Thank you very much. Sorry for the slight delay here this morning. We had a few technical difficulties. As the moderator did say, I’m Curt Stevens the CFO; with me is Rick Frost, our CEO. We also have Mike Kinney and Becky Barckley, who are our primary investor relation contacts.

As we have done in the past, I will give a review of the overall financial results for the quarter and for year-to-date. And this will be followed by some comments on the performance of each of the individual segments and on the balance sheet. I’ll ask Rick to discuss the general market environment in which we operated his perspective on our most recent results and some thoughts on the outlook for Q4 and the beginning of 2010.

As we have done in the past, this call is open to the public and we are doing a web-cast. It can be accessed at our public website of www.lpcorp.com. Additionally, to help with the decision we have provided a presentation that has supplemental information that should be reviewed in conjunction with the actual earnings release. And I will reference these slides in my comments.

Additionally, we filed an A-K this morning that contained supplemental information, and we will file our Form 10-Q late today or early tomorrow.

I want to remind all the participants about the forward-looking statement comment. It is included on Slide 2 of the presentation. Also be aware of our use of non-GAAP financial information included on Slide 3 of the presentation. Mentioned earlier the A-K that we did file provides the necessary reconsolidations.

I’m not going to reread these statements, but I’m certainly going to incorporate those for this reference. Before going into the numbers I do want to explain another change that we have made this quarter related to the non-GAAP reporting of adjusted EBITDA from continuing operations. In Q1 we did adopt a reporting format that showed EBITDA from continuing operations. This was a somewhat prescriptive in that we took income loss from continuing operations and adjusted for income taxes, interest expense, net of capitalized interest and depreciation amortization.

This quarter we will adjust that to include net interest, and then further adjustments. So it serves as a better proxy for cash flow, we will make other adjustments to these numbers. Theses will include the gain loss on sale or impairment of long lined assets, other operating charges and credits net, the gain loss on early extinguishment of deed, other than temporary investment impairments, and the non-cash portion of the equity compensation.

The A-K that I mentioned does have the full reconciliation details for all these items.

Slide 4 of the presentation is the summary of Q3 reports. We are reporting a net loss for the second quarter of $13 million or $0.12 per diluted share. Net sales from continuing operations were about $310 million for the quarter. For the same period last year we reported a net loss of $111 million or $1.08 per diluted share; on sales from continuing operations at $390 million.

Effective tax rate for Q2 was 45% in compared to 38% in Q3 of 2008. Adjusted EBITDA from continuing operations was a positive $11 million in the quarter compared to a loss of $28 million in the same quarter of last year.

Year-to-date we’re reporting a net loss of $73 million or $0.73 per share compared to a loss at $238 million or $2.32 per share at the same period last year.

An effective tax benefit rate for the first nine months of 2009 was 39% similar to the 40% for the same period in 2008. Adjusted EBITDA for continuing operations for the first nine months of 2009 was a loss of $25 million compared to a loss of $118 million in the same period in 2008, an improvement of over $90 million.

For this quarter we have not included in the presentation a slide on special items. However we will in our public filing. Each of the periods did have some special items not generally attributable to ongoing operations. This last quarter we recorded a $2.5 million gain in primarily the following items, an insurance recovery of $2 billion at the Clark County event, a gain of $1 million in the sale of various timber assets, and a loss of $300,000 related to the early extinguishment of debt and a slight right down on one of our auction rate securities.

Q3 of last year we recorded $100 million loss composed mainly of about $90 million impairment on our ARS portfolio and impairment related to the Sam Michel Complex and other assets of about $10 million.

Let me now go into our segments for OSB, refer to Slide 5 of the presentation. We had an operating loss at $6 million for the quarter, a 78% improvement compared to the $28 million operating loss in Q3 of 2008. And that’s despite 26% lower volumes and an average sales price that was 6% lower.

This improvement is directly attributable to the actions we have taken over the last several quarters to adjust our operations and focus on cash. Adjusted EBITDA from continuing operations for the quarter was a positive $4 million compared to a loss of $14 in Q3 of last year. Compared to the sequential quarter Q2, volumes were higher by 12%, as was sales price also up 12%.

For the first nine months, OSB has an operation loss of $49 million compared to a loss of $124 million during the same period last year, despite sales being down 43%. Change in the Canadian exchange rate did account for about $15 million of the improvement with lower raw materials and more cost effective operations accounting for the rest.

Year-to-date adjusted EBITDA from continuing operations for OSB was a negative $22 million compared to a loss of $83 million in the same quarter last year.

Slide 6 is our siding segment, which is our smart siding Canexel Siding products as well as some OSB produced at our (inaudible).

For the third quarter, siding had operating income of $16 million, over three times higher than the $5 million recorded in the same period last year. Adjusted EBITDA from continuing siding operations was $21 million compared to $10 million in Q3 of 2008.

For the quarter, sales were down 5% with unit volumes about the same as smart side. But down 24% in Canexel compared to the same quarter last year. The volume decline in Canexel is directly related to the decision we made in Q2 to operate only one press line and excess the dorskin (ph) business. Sales prices were slightly higher in Smart Side, and up 5% in Canexel.

For the first nine months of this year siding had operating income of $25 million compared to $14 million in the same period of 2008, despite sales being 17% lower than that same period last year.

Adjusted EBITDA from continuing siding operations for the first nine months of 2009 was $39 million compared to $31 million during the same period last year.

Next slide is our engineered wood business which includes I-Joists, Laminated Strand Lumber produced in Holton, Laminated Veneer Lumber plus other related products. This segment also includes the sale of I-Joist and LVL products produced by the (inaudible) or under a sales agreement.

For Q3 EDP recorded a loss of $6 million compared to a loss of $11 million during the same quarter last year. Adjusted EBITDA from continuing operations was a negative $3 million in the quarter compared to a loss of $7 million in Q3 of 2008. Volumes of both I-Joist and LVL/LSL were down significantly compared to the same quarter last year, 19% and 13% respectively. This is a direct reflection of the reducing housing activity. However, sequentially we did see a 30% increase in I-Joist volumes and almost a 20% increase in the shipment of LVL/LSL.

Pricing was down about 5% for both product lines compared to Q3, but up about 3% compared to last quarter.

For the first nine months, EDP had an operating loss of $24 million, an improvement from $28 million loss recorded in the same period last year. Sales were lower by almost 40%.

Adjusted EBITDA from continuing operations for the first nine months was a loss of $15 million compared to a loss of $16 million, the same period last year.

In our other billing product segment, we were about break even in Q3 of 2009 compared to $2.6 million loss in Q3 of 2008. For the quarter, sales were $27 million, up slightly from $26 million during the same quarter last year.

For the first nine months, other building products had operating income of over a little over $2 million, compared to a loss of $5.4 million in 2008, with sales being up by 12%.

Some other items we did have included a $1 million foreign exchange gain in the quarter, same quarter last year is about $2.2 million gain. Investment income in the quarter was $7.4 compared to $8.1 in the same quarter last year. Interest expense was $20 million in the quarter compared to $12.4 in Q3 of 2008. This was primarily or exclusively due to the higher cost refinancing that we completed in Q1.

Total SG&A costs were $26 million for the quarter, a 29% decrease from the $37 million in the same quarter last year. If you look at the unallocated piece, costs were down 22% at $17.7, compared to $22.7 in the same quarter last year.

Year-to-date total SG&A is down 29% in the unallocated piece is down 20%.

As I mentioned earlier, the effective income tax rate for Q3 was 45% compared to 38% in Q3 of 2008. This is primarily the result of a true-up in Q3 2009 caused by applying the estimated annual tax benefit rate to year-to-date results. Change in the estimate was based on the implementation of a tax strategy and our Canadian entities.

Year-to-date the effective income tax benefit rate was about the same at 39% and 40%. As we’ve said before, the primary difference is between the US statutory rate of 35%. And these effective rates are related to our foreign debt structure, our state income taxes and the effect of foreign income tax rates.

Next slide is just some statistics on the balance sheet. Cash and cash equivalents, investments, and restricted cash stood at $528 million at the end of the quarter. This is an increase of $130 million compared to the balance at the end of Q2.

Distributing the increase for the net proceeds of $132 million from the recently completed equity offering offset by a $13.5 million debt repurchase. And then we also had a net increase of about $17 million in the carrying value of our action rates security portfolio.

Working capital was about $435, net cash for the operation at $155 and year-to-date our capital expenditures made very low at $5 million. For guidance we believe that the end of the year will be at about $15 million. And then book value per share was at $10.40.

As part of the announcement around our equity offering that we did complete in Q3 we made it very clear that we would largely be using the net proceeds to exercise the equity fall back that was imbedded in our 2017 notes offering. In that offering we had the right to retire up to 35% of the principle balance of those notes using the equity proceeds at a formulaic price determined by a premium for the accredited value of the notes.

Immediately upon closing the equity transaction on September 29, we instructed the trustee for the 27 notes to give the (inaudible) notice to note holders of our intention to (inaudible) to 35%. We completed the clause back last Friday. So we retired $131.25 million, face value the 2017 notes, paid the note holders $112.5 million for the clause pack plus accrued interest of around $2 million. We will record a non-cash early extinguishment of debt charge in Q4 of around $21 million. As we stated before, this will reduce our annual interest payments by $17 million.

We’ve provided some pro forma information on Slide 9 of the presentation. Let me just talk about that quickly. So total cash in investments went down $112 million. That was the payment for the notes. The 13% senior secured notes went down by $95 million, which was the book value of those notes. Again, $131.25 million face amount. And then we reduced retained earnings by $21 million to reflect the non-cash early extinguishment debt charge related to the claw back.

In addition to the claw back in October we’ll also be disclosing one other non material subsequent event in our Form 10-K late today or tomorrow. We did (inaudible) into a sublease for one floor in our corporate headquarters in Nashville that will require us to book about $750,000 loss.

The last item I want to briefly discuss is that we did have a $20 million launch of our limited recourse notes payable with the offsetting notes receivable did become due yesterday and was paid. And so as a result the recourse portion of the notes payable as well as the related receivable went down by roughly that amount at the beginning of this month.

With that let me turn it over to Rick.

Richard W. Frost

Well thanks, Curt, and good morning everyone. We do continue to appreciate your interest in our earnings calls. This morning I’m going to categorize my prepared remarks into three buckets. The first is a little bit of color observations on Q3. Second is general housing market conditions. And third I’ll finish up with how we are currently looking at the next few quarters from the macro level.

Beginning first withQ3 observations. The safety of our employees in the communities in which we operate is one of our core values, I’ll begin there. LP had another very good operating quarter, experiencing a recordable incident rate of 0.66. And at 12 months we’re only average of 0.54. During the third quarter we had three significant safety milestones in our corporation. Our Pangy Puwey (ph) Chile Mill reached for the second time one million recordable free hours. Roxboro OSB mill reached two years recordable free. And our Maniwaki OSB mill reaches one year recordable free.

As of this time 43% of our facilities remain incident free through this year. Also during the quarter we were the 2009 National Safety Council Occupational Excellence Achievement Award winner.

Our leading six sigma efforts continued to provide us cost and process improvements. So far this year we are at somewhat of an astounding rate of 7.6 to 1 in terms of returns over the cost of implementing that program.

The big financial news for LP this quarter was of course being adjusted EBITDA positive for the first time in quite awhile. Even under such disadvantage housing and building levels. Curt has discussed the numbers with you so I’m not going to replow that ground. But while I will add a little bit of color by business and also to the sales and market environment.

In OSB I think we had three significant stories in Q3. The first and second stories are that our production costs were quite good. They were added by a tail wind from raw materials and from currency exchange. And also with the improved running configurations of our OSB mills over Q3 of ’08.

We also had continued success in our value added products growth in OSB. On the cost front about 2/3 of our improvement in costs from Q3 ’08 were in raw materials and the rest occurred from operating improvements and in FX.

Now in our value added OSB, our industry leading rating in barrier product Tec shield actually had its fifth largest volume quarter ever with selling over 100 million feet into this severely restricted market. This was accomplished in what I’ll call a “do more with less” environment as our OSB marketing spend is currently 65% below what we spent in 2008.

Turning to our siding segment. It was again an obviously a bright spot for us in Q3 with sales only off 5% from Q2 of ’08 and profits being up over 100%.

Siding was advantaged by a strong Canadian export and retail support from basically our fine fiber product. Our sales were up in Q3 to Q3 in both Lowes and Home Depot in siding. Our cost in siding was improved similarly to the improvements that we saw in OSB from raw materials and efficiency improvements.

In engineered wood products this segment continues to struggle because it is the most highly correlated to new construction. Both volumes and pricing were down in a Q3 to Q3 comparison. But as Curt said volume was up sequentially from Q2.

I think engineered wood would continue to be a tough business until new construction rebounds. In the meantime, we will manage out all the costs that we can and continue to push the export market development that we started this last year.

We continue to believe that having the 1.75 E Strength LSL products from our Holton mill will be a differentiator for engineered wood product business in the future. Under current low demand, controlling our losses out of Holton LSL is critical to us.

Now before I move on, I would like to make a couple of comments on our molding business and on South America. Both of these are reported in our other reporting segment. In terms of molding, our interior molding business as we have told you in the past are a one mill profitable product segment sold primarily through big retail.

We have had significant underutilized manufacturing capacity in this business. And in Q3 of this year we were able to come to an agreement with Home Depot to stock this product in over 600 of their stores for 2010. Which will be good incremental business for us? We will be implementing the replacement of a competitor’s product with ours in Q4. This means that we have an inventory buy-back of a competitor’s product and the stocking of our own. And we expect the impact of this to be favorable on our business in 2010 and beyond.

In South America, Chile was EBITDA positive in Q3 and Brazil was EBITDA neutral in Q3. We do see both of these economies starting to improve at this time. Consequently we are contemplating the restart of our Letrero Mill in Chile at least for the summer. And putting additional vigor into our building practices conversion efforts in Brazil.

Now I want to shift gears to talk about the general market and some observations there. Total starts have been stuck at the 580 to 590 range for the past four months. That’s all in, that’s including new res multifamily and manufactured housing. Multi-family continues to be the most erratic due to the credit markets. Single family starts are about 500,000. September permits were at an annual rate of about 450,000 and we are watching this closely to try to get some indication and clues on how that will effect the first half of 2010.

The month supply of both new and existing homes continues to drop. Now at 7.3 months and 8.5 months, respectively. The rate of sales appears to have bottomed out and is ascending modestly. The rate of existing home sales is up seven months in a row. The Case Shiller index appears to be stabilizing and two components of overall affordability are positive. That being home prices and mortgage rates.

Repair and remodeling appears as well to be bottoming out and turning. And there have been a number of positive articles written on repair and remodeling recently.

I think the wild cards affecting the satisfaction of the underlying demand for housing are the home buyer tax credits, qualification for credit in general, unemployment, mortgage delinquency rates and consumer and consumption trends. These are unfolding, but in my mind the unemployment seems to be the 800 pound gorilla in the room.

Looking forward to the rest of this year and into the first half of next year, I am expecting a slowing compared to the third quarter. But not the nuclear winter that we had last year. If for no other reason as the country will not be paralyzed by the financial crisis of a year ago.

Now we have begun to feel the seasonal downturn all ready. And we do expect our customers’ behavior to be consistent with last year in depleting their inventory levels to a minimum by year end.

So currently I expect a slow Q1 in 2010, but not as bad as this year.

We are currently trying to formulate a hypothesis around the potential positive impacts of what an extension of the Home Buyer Tax Credit might mean to both Q1 and Q2 of 2010, and how that might effect our own planning on our inventory levels for the rest of this year.

As it stands now, and as we have communicated in our recent equity offering presentation, we are basing our plan for 2010 on 700,000 starts. That’s all in single family multi and manufactured. And we will quickly adjust our activities as we see things changing.

In concluding my prepared remarks I will repeat that it was nice to have a positive Q3 adjusted EBITDA with such historically depressed product volumes. I think a lot of credit this quarter goes to our employees for making the tough cost out and cost improvement decisions as well as the lower raw material pricing.

We are genuinely excited about the penetration that we are achieving in our siding products and our value added OSB, which bodes well for us when the market becomes at a more robust take away situation. And we are also encouraged that the economies of Chile and Brazil seem to be improving.

And with that said I’ll turn it back over to Curt for the question segment of this call.

Curtis M. Stevens

Thank you, Rick. Chris, if we could ask you to go through the question queue.

Question-and-Answer Session

Operator

(Operator’s instruction) Our first question comes from the line of Gail Glazerman, please proceed.

Gail Glazerman – UBS

Just starting, your results were a little bit stronger than maybe suggested at the end of September. And I’m wondering if there is any particular (inaudible) that contributed to that?

Curtis M. Stevens

Well, we wanted to make sure that we weren’t over estimating our results. So that was part of it. But September did end the quarter pretty strong in all three of our major businesses.

Gail Glazerman – UBS

Okay. And looking at OSB pricing. Your quarter and quarter improvement seems a little bit lower than maybe random links would have suggested. Is there some sort of lag that we’d expect to see benefiting early in the fourth quarter or was there just something with Nicks or some other reason?

Curtis M. Stevens

Well, there are a couple of things that happened there. One, we did have a higher percentage of value added products. And some of those products don’t follow random links. There is kind of a delay where we price it for a month at a time. And so there is a bit of a delay on some of the specialty.

The other is that we did take some block buys at the end of Q2 that we delivered in Q3. And so we didn’t get the full up tick on the pricing. So that was a decision that we made late in Q2.

Gail Glazerman – UBS

Okay. And just last couple questions. Can you give any sort of update on asset sales as well as tax refunds and what you expect moving into next year?

Curtis M. Stevens

Well the asset sales have been going darn slow, Gail. We did have one asset sale last quarter that we had about a million dollar gain on the sale of miscellaneous timber land. We’ll probably have another asset sale similar to that in the fourth quarter. The big one that we have been struggling with all year is the St. Michel Saw Mill. OSB Mill and that still remains on our target to close soon. But until I have the money in the bank I can’t really give you a whole lot better background on that. It’s very difficult to sell assets in this environment.

The hang-up there is related to securing a timber supply to allow them to operate the mill the way they would like to. So that’s where we are. We have been making progress on that over the summer. And so hopefully we’ll have something here near term.

The other assets that we have for sale are the big ones, our R&D facility and our hanger. And we wouldn’t expect to see any proceeds from that until next year.

Gail Glazerman – UBS

Okay. And just quickly on tax refunds?

Curtis M. Stevens

On the tax refund I think what we said is that we would expect $80 million net. Any payments that we needed to make for the year. And we’re very close to that today. And we did receive, I think about $7 or $8 million in the fourth quarter so far. So basically we receive the 7 or 8 this quarter and that’s about what we expect for the year.

Gail Glazerman – UBS

Okay. And next year would you expect any material refunds?

Curtis M. Stevens

Well, the only refunds that we would have would be if the currently proposed NOL carry back for five years. I think we’ve given numbers on that before. If that does go back five years there’s a potential for $60-$70 million in tax refunds next year. Absent that, they will all be carrying forward. There are no further carry backs remaining.

Gail Glazerman – UBS

Okay. Perfect. Thank you.

Operator

Our next question comes from the line of Mark Connelly, please proceed.

Jason Markson – Sterne Agee

Hi. It’s Jason Markson for Mark. New product innovation, including the radiant barrier and siding products have clearly been successful. Will those product innovations coupled with the portfolio changes, like, Canexel help you recover faster than the industry?

Curtis M. Stevens

Well, I think that the new product innovations that are targeted at residential construction will go with the residential market. Where we have seen success is in our home center volume. And siding has been very successful in the home centers. Principally the Smart Side siding line Canexel goes basically through distribution. There’s not a lot of home center but Smart Side has done very well in the home centers. And our home center business for OSB has increased. And I think that’s increased largely because – at one point I think we had 9,000 lumber yards in the United States and the estimate going to be down to 5,000. So there’s 4,000 lumber yards that have disappeared. We think the home centers have picked up some of that business.

Jason Markson – Sterne Agee

All right. Thank you.

Curtis M. Stevens

I don’t know if that directly answers your question. But certainly in the home centers I think the product innovation in just the design has done helped up offset some of the decline in housing.

Jason Markson – Sterne Agee

Thanks.

Operator

Our next question comes from Chip Dillon, please proceed.

Chip Dillon – Credit Suisse

And I think you indirectly answered this, Curt. But maybe you could just walk through the remainder of these. But you mentioned how you just recently closed our some of your timber related notes payable and receivable. Weren’t those technically taxable and is it kind of sort of a serendipitous result that they settled this year say versus 2004 and that’s why you’re not paying taxes?

Curtis M. Stevens

Well, certainly there is a portion of those notes that is taxable. And that’s in our deferred tax liability. And of course we will liquidate those tax liabilities as these notes become paid. So that’s an accurate statement. So that’ll get folded into the tax returns that we filed. So it’ll be a gain that we’ll recognize this year.

Chip Dillon – Credit Suisse

Gotcha. But then again because of the loss situation in the down cycle you don’t actually have to – and probably won’t ever have to effectively pay taxes on the land you sold at a gain ten years –

Curtis M. Stevens

Yeah. It’s a timing issue. But you’re essentially right. You won’t pay it when you recognize it. The other piece of that is we do have – there’s another piece that’s current, about $90 million is due on the Simpson pay - $113 million, excuse me, is due on the Simpson payment at the end of June of next year. So that’s also current on the balance sheet.

Chip Dillon – Credit Suisse

Gotcha. And I know it’s early days here but could you give us a view of how you think about capital spending next year? I would of course expect you to have quite a wide accordingly depending on – and I would expect you to answer it assuming things don’t get better, but if next year, hypothetically, turned out to be 2003 and we – after Memorial Day we’re off to the races. What could it be and kind of what things would you like to do that you just don’t feel you can do in this environment?

Richard W. Frost

Chip, I think we’re pretty well balanced in our look at next year. Our guidance that we’ve given, I think, in our various presentations this year was less than 25 this year and no more than 25 next year. And I don’t really see that changing regardless of whether the business picks up faster or not. We don’t have a great huge pent up demand for capital right now with Caviad (ph) that if we had a press failure that we aren’t expecting, those things can cause you $10 or $12 million to rebuild.

Chip Dillon – Credit Suisse

And the last question is, without being heavily specific, obviously, we’ve seen on our count, 25% or so percent of the plywood and OSB capacity announced an indefinitely permanently closed in North America since ’06, late ’06 for that matter. And I would image that as the remaining plants, if some of them are older and efficient need – for example you mentioned a case of a press failure or some other big capital need, you would think that there could be more that would shut down. Are you hearing or do you think that there will be more in the industry that may come our? Do you think we’ve pretty much seen it for this cycle?

Richard W. Frost

I don’t really know. And obviously I’m not hearing. I do believe that the longer an asset is left in that indefinitely curtailed category the greater chance for it to never come back. I think I’ll leave the answer to that there.

Chip Dillon – Credit Suisse

Okay. And then lastly. What do you have left that’s running in Canada at this point in OSB?

Richard W. Frost

We have Peace Valley, which is our large and newest joint venture. We have Maniwaki, we have Dawson and we have Swan.

Chip Dillon – Credit Suisse

Gotcha. And so then what would be down –

Richard W. Frost

Sham board is in the indefinitely curtailed category and St. Michel’s permanently shut.

Chip Dillon – Credit Suisse

Gotcha. Thank you.

Operator

Our next question comes from the line of Peter Ruschmeier, please proceed.

Peter Ruschmeier – Barclays Capital

Thanks, good morning. Curt, have you shared with us a range of what you’re expecting for St. Michel?

Curtis M. Stevens

Yeah. What we said at 25-30 for asset sales is what we said last – well, in the first quarter when we did the Fond deal.

Peter Ruschmeier – Barclays Capital

Okay. That’s helpful. And you mentioned –

Curtis M. Stevens

And the reason for the range its payable in Canadian dollars. And so when the exchange rate changes it moves around.

Peter Ruschmeier – Barclays Capital

Understood. Okay. You mentioned a $17 million favorable adjustment for the AR facility. Can you remind us what level that brings you to and where that marks stands relative to the original face value? And what’s your outlook for that?

Curtis M. Stevens

Yeah. The face value is $151.8 million. It’s now on the books for around $42 million. The low point is it did get to $11.4. So we wrote, when the accounting standards changed in April we wrote up about $14 million in Q2 and then another $17 million this quarter. So that’s where it currently stands. I think as you know we did talk about it on the call that we did file law suits against the primary issuing banks and the broker. And right now there’s really just – our general counsel doesn’t necessarily like me to talk about it. But we’re kind of in procedural purgatory, is the way I define it. Trying to figure out what venue we’re going to try those in. So that’s where that stands. We have seen transactions take place as part of the public-private investment partnership. And we’ve also seen some level liquidity in similar securities to what we hold. But certainly not near par.

Peter Ruschmeier – Barclays Capital

Okay. That’s helpful. I wanted to ask if I could about your volume outlook, you mentioned you’re already beginning to see some seasonal weakness. You’ve got a pretty easy comp year-over-year on OSB. Is it possible, do you think, that you may see a positive comp in fourth quarter?

Curtis M. Stevens

It depends on the level of inventory destocking that goes on. Most of the channel did not add a lot of stock in Q3. Last year one of the reasons the volume was so significantly low is the channel just liquidated the entire inventory that they could. I do believe though on Q4 that the channel is going to buy inventory when they’ve got a customer. They’re not going to stock it in anticipation of a further increase. Now one of the things Rick talked about is if the Home Buyer Credit does get extended and it gets extended as they’re currently contemplating and only through April, it would mean in parts of the country we will have more winter building then we would without that. So I think there’s that piece of it.

The other piece of it is, it is heavily dependent on where price goes. Because as you know we have sacrificed volume for price in OSB. In fact, our commodity, OSB going to the building channels is down year-over-year. And it’s down on purpose. Because there was a pricing that we didn’t want to take. So part of the improvement that we’ve had in our results is not taking volume and pricing that didn’t make sense.

Peter Ruschmeier – Barclays Capital

Okay. That’s great. And maybe just lastly before I turn it over. Any comment you can offer on input costs? I’m thinking specifically pulp wood, things like transportation costs. I think you mentioned costs were an advantage in the third quarter. To what extent are you seeing some of the rain’s impact your pulp wood costs throughout the south? And are transportation costs in the status quo or what observations would you make there?

Curtis M. Stevens

Well, if you look at year-to-date for the first nine months, we take the volumes that we purchased this year at last year’s pricing versus this year pricing, fiber was about an $8 million favorable to us across all of our businesses. In the fourth quarter we’re anticipating that’s going to be – compared to the fourth quarter of last year, it’s going to be at $1-$2 million unfavorable. And it’s principally for what you said, it’s the rain in the South. We’ve actually been forced to take more down time in some of our mills in Texas and Alabama because it’s just been raining like crazy. So rather than pay the higher price we’re taking the downtime. I guess that’s the way I would say it.

Peter Ruschmeier – Barclays Capital

Okay. And cost and availability of truck and rail I would think they’re available but any observations on freight cost?

Curtis M. Stevens

With gasoline prices and diesel pricing creeping up it’s going to have some impact. But I don’t think it’s going to be significant in Q4.

Peter Ruschmeier – Barclays Capital

Very good. I’ll turn it over. Thanks.

Operator

Our next question comes from the line of Mark Wientraub, please proceed.

Mark Weintraub – Buckingham Research

Thank you. Just a couple of clarifications. On the $60-$70 million if we go to a five year look back instead of a two year. Was that all related to losses which you will have already incurred by the end of this year or does that also fold into next year?

Curtis M. Stevens

It actually is combination of losses we couldn’t carry back last year plus the losses this year. It doesn’t contemplate any future loss.

Mark Weintraub – Buckingham Research

And would you be eligible potentially for future losses or if you do the five year –

Curtis M. Stevens

I hope not.

Mark Weintraub – Buckingham Research

I understand. But if you were unfortunately to lose money would the look back period give you more fire power, so to speak or not?

Curtis M. Stevens

I don’t think so. I think most of what we would recover we would recover based on the refilling of ’08 and ’09.

Mark Weintraub – Buckingham Research

Okay. And just clarify, under St. Michel, I think you said in the past that that would not be producing a product that would compete with OSB, is that correct?

Curtis M. Stevens

That is correct.

Mark Weintraub – Buckingham Research

Okay. And then lastly, I was just trying to fully understand on the deferred tax liability. Could you just go over that again? I wasn’t fully clear whether or not there would be any cash out of pocket related to those deferred taxes or not? And maybe if I just put the question that way.

Curtis M. Stevens

We do not believe – well, give that certainly the $20 million we that received this year we will not pay cash taxes on the $20 million. That will be offset by the operating results this year. Next year with $113 that comes in its possible depending on operating results next year that a piece of that will be paid in cash. But that will a filing in the first or second quarter of 2011 that would get paid at that time.

Mark Weintraub – Buckingham Research

Okay. And it would be 35% of the $113, is that the way to think of it?

Curtis M. Stevens

No. The $113 is the full amount of the notes and then there’s the taxable piece of that. See, the full proceeds weren’t all taxable income.

Mark Weintraub – Buckingham Research

Okay. And then it’s 35% of the piece of it though, it’s not the full?

Curtis M. Stevens

Piece of the taxable income, that’s correct.

Mark Weintraub – Buckingham Research

Perfect. Okay. And can you tell us roughly what that percentage of the $113 was?

Curtis M. Stevens

If you get to Mike, we talk about it in the past. I don’t have it in front of me.

Mark Weintraub – Buckingham Research

Sounds good. Okay. Thank you.

Operator

Our next question comes from the line of Steve Chercover, please proceed.

Steve Chercover – D.A. Davidson

Just wanted to ask a quick question regarding your relationship with the big builders. If I understood your comments you’ve turned down business from them because the price wasn’t satisfactory. And that makes sense. But does that jeopardize the relationship going forward?

Curtis M. Stevens

Actually, we don’t sell anything to the builders. So this would be a channel partner that is satisfying a builder. So if a pro bill came to us and said, we’re only going to be OSB at a $132, and we say we’re not going to sell it to you for $132, that’s too far below our costs.

Steve Chercover – D.A. Davidson

This makes a lot of sense. But that said –

Curtis M. Stevens

Really, the only business that we are giving up with these big builder programs is commodity. And the fact of the matter is we could get that back tomorrow if we want to meet the price. But we’re spending our efforts with the builders is going after the Tec shield and the flooring products are top notch series of products that have better margins for us. And when you capture that business and building comes back you’ve got name brand recognition and you’ve satisfied a niche that the consumers want.

On the commodities as Rick has said numerous times, definition commodity, you don’t care whose it is. So for regular sheathing we have sacrificed sheathing business but we’ve maintained the value added business.

Steve Chercover – D.A. Davidson

So your value added product, will that too go through a third party as opposed to directly to the builder?

Curtis M. Stevens

Right. They still go through a third party but there’s a big pull through from the builder. So (inaudible) for instance goes standard on Tec shields in Texas. Then they go to the channel to add this deal with LP. And the way we do that is we don’t want to effect pricing to the channel. But we do builder advantage rebates that would go directly back to the builder. That’s the way you adjust the pricing rather than having channel partners with multiple prices.

Steve Chercover – D.A. Davidson

And the 700,000 starts that you’ve used in your materials, is that predicated on receipt or Harvard or census data or –

Richard W. Frost

Yeah. I’ll take that one because it’s quite interesting. Here is the most recent forecast that I currently have before me. Rece (ph) says 980 – this is just single and multi. This is without say another 50-60,000 in manufactured. Rece says 980, FEA says – which is Forest something or other, says 960. You through those two out, National Association of Realtors says 804, Freddy Mack says 800, NAHB says 716, APA says – that’s American Panel Association says 665, Wells Fargo says 660 and RBC says 651. The numerical average of all that is 780 for just single and multi. We all know that these things are all over the board. And they have bookends on them and so we’ve just chosen 700 by running this through our modeling. And said 700 seems to be doable. As one economist said recently we have to remember that housing has rebounded to an astoundingly low level.

The other thing that’s affecting somewhat of our optimize for the future is that Canada is basically come back to normal. Canada is at over 170,000 starts right now because they didn’t have the credit problems that we experienced in this country. So it’s a bit of an anomaly. But certainly we sell quite a few of our products into the Canadian market.

So we all chase these things down. And I’m sure we’re going to chase them up. But we’re making our plan on the 700 and we’ll adjust accordingly.

Steve Chercover – D.A. Davidson

Great. And final question, back on the auction rate securities. I thought they were kind of short term by definition. So how many of them are maturing now? Is that why the values are going back up to $42 million or are we just going to start to see you getting the principle back and see gains?

Curtis M. Stevens

Well, they were short term because there was an auction every 28 days. That essentially provided liquidity. But they are not short term security. So some of these are 2015 to 2020 kind of maturities.

Steve Chercover – D.A. Davidson

Okay. So it was really just the coupon that reset every 28 days?

Curtis M. Stevens

That’s correct. Well, the coupon plus the liquidity that you could get out of these until really (inaudible) in the middle of 2008.

Steve Chercover – D.A. Davidson

Okay. Well best of luck. Thank you.

Curtis M. Stevens

All right. See you next week, Steve.

Steve Chercover – D.A. Davidson

Yup. See you then.

Operator

Our final question comes from the line of Mr. Skidmore, please proceed. One moment, let me find Mr. Skidmore. Mr. Skidmore, can you please press star 1, one more time. You may proceed, Mr. Skidmore.

Richard Skidmore – Goldman Sachs

Thanks. Curt and Rick, thank you. Rick, can you just elaborate a little bit on if your view of the long term trend in housing has changed at all?

Richard W. Frost

Yeah. I can elaborate on that probably ad nauseam. But let me get it down to a nutshell. Just got back from the Harvard Joint Center of Housing study’s meeting last week. They still stand behind the underlying demand of household formation. If there is weakness in that 1.8 to 1.9 per year household formation it appears to be in immigration. Obviously unemployment has slowed immigration somewhat. The way that I’m boiling that down is the new normal to me taking into consideration some of that is probably in 1.5 to 1.6 level. And that’s the way we’re looking at it. But they when quizzed mightily by a lot of CEOs they still stand behind that underlying household formation information.

So, what we’re looking at here to use my words, is we’re looking at the factors that effect the satisfaction of that demand, not questioning whether that household formation will actually occur. And so that’s what we’re all doing right now is trying to figure out how these macro and micro economic trends effect in any given time the satisfaction of that demand.

Curtis M. Stevens

The only thing I’d add there, Rick, is we did have Rece in here and they basically mirrored what Rick just talked about at Harvard.

Richard W. Frost

So I believe there’s no question that it’s going to come back. We’re all just – all of us in this industry are trying to figure out when and how fast. And one thing we can bet on is it will not be orderly. Is that it?

Curtis M. Stevens

I think that’s it. Thank you for participating. And as always, Becky and Mike are available to provide clarification if there are further questions. Thank you very much. And if you’ll give the replay information out, Chris, I’d appreciate it.

Operator

Yes. If you would like to dial in to the replay you may dial in on the toll number which is 617-801-6888 or the toll free number at 888-286-8010. Your access code will be 44559549. Thank you for calling in today’s presentation. This concludes the presentation. You may now disconnect. Have a good day.

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