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Executives

Curtis Stevens – EVP, Administration and CFO

Richard Frost – CEO

Mike Kinney – Primary Investor Relations Contact

Becky Barkley – Primary Investor Relations Contact

Analysts

Mark Weintraub – Buckingham Research

Chip Dillon – Credit Suisse

Mark Connelly – CLSA

Steve Chercover – D.A. Davidson

Peter Ruschmeier – Barclays Capital

Louisiana-Pacific Corporation (LPX) Q2 2010 Earnings Call July 30, 2010 1:00 PM ET

Operator

Good day Ladies and Gentlemen. And welcome to the Second Quarter 2010 Louisiana-Pacific Corp. Earnings Conference Call. My name is Santali, and I will be your facilitator for today’s call. (Operator Instructions)

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 CFO. Please precede Sir.

Curtis Stevens

Thank you very much. And thank all of you for joining us on this conference call this afternoon. I know it’s a little odd for us to have a Friday afternoon conference call, but we appreciate your indulgence.

As the operator said, I am Curt Stevens, the CFO. And with me today is Rick Frost, our CEO, as well as Mike Kinney and Becky Barkley who are primary investor relations contacts.

As I usually do, I will begin the discussion with a review of the financial results for the second quarter. I’ll follow that with some comments on the performance of our individual segment and talk a bit about the balance sheet.

While I’d like to spend a lot of time talking about Q2 because it was such a good quarter for us, I suspect that what many of you are wondering about is where the market will go next.

To that end, after I finish my comments, I’ll turn you over to Rick Frost who will give you his weather update for Nashville, discuss the general market environment in which we’re operating, and his perspective of both the most recent quarter and his thoughts for the rest of this year.

As we’ve done in the past, we have opened up the call to the public and are doing a webcast. You may access that at our website www.lpcorp.com.

Additionally, to help with the discussion, we have provided a presentation that has supplemental information that should be reviewed in conjunction with the earning’s release. And I will be referencing that document as I go though my comments.

This morning we did file an 8K that had supplemental information. And we intend to file our Form 10Q later this afternoon.

I want to remind all the participants about the forward-looking statements comment that is included on slide two of the presentation.

Also be aware on slide three that we will be discussing some non-GAAP financial information. And the necessary appendix for this is in the back of the presentation, as well as in the supplemental material that we filed with the Form 8K this morning. I’m not going to reread these statements, but I will incorporate them with this reference.

Direct your attention to slide four of the presentation for a discussion of the overall Q2 results compared to the same quarter last year and the prior quarter.

Today we’re reporting net income for the second quarter of $22 million, or $0.16 per diluted share. Net sales from continuing operations were $447 million for the quarter. That’s an increase of nearly 2/3 compared to the second quarter of 2009.

The same period last year, we reported a net loss of $29 million, or $0.28 per diluted share on sales for continuing operations of $267 million.

Adjusted EBITDA in continuing operations was a positive 75 million in the quarter compared to a loss of 11 million in Q2 in 2009.

Very small movement in the tax rate between the two quarters; Q2 of 2010 was 35%. And last year the same quarter was 37%.

On the earnings per share calculation, I would have you note that the basic average shares outstanding used in Q2 of 2010 is 25% higher than the same quarter last year. And the diluted average shares outstanding is 36% higher. This reflects the issuance of the shares in September of 2009 when we did the claw back equity offering, and the warrants that were attached to the 2017 subordinated notes.

In addition, as this was a profitable quarter, it takes into consideration the in-the-money invested options and stock-settled appreciation rights.

Slide five of the presentation is a discussion of our year-to-date results compared to last year. For the year, we’re reporting basically, break-even net sales from continuing operations were 744 million, 57% higher than the first half of 2009. For the same period last year, we reported a next loss on sales of 473 million.

Adjusted EBITDA for the six months of $78 million this year compared to a loss of 36 million the prior year.

The tax rate in continuing operations looks a little funny here; as the company is close to break even, the discreet tax items have a much more meaningful impact on the rate. So while it looks odd at 69%, it is based on very low, or very near break-even performance.

Let me now talk about each one of our segments.

Slide six is an overview of our OSB segment. OSB had operating income of $48 million in the quarter compared to an operating loss of $18 million in the same quarter last year.

For the quarter, sales increased by more than double on a 24% increase in volume, and an average sales price that was 78% higher than the same quarter last year. Obviously the increase in sales price created most of the improvement in earnings and adjusted EBITDA.

We believe the increase in OSB price was due to several factors. We continue to have some raw material shortage, primarily to logs, caused by weather in the U.S. South. We had an incremental real demand due to higher building activity. We saw a desire of our customers to restock their severely depleted inventories in anticipation of a housing recovery.

On the other side, as quickly as the plot price ran up at the end of the first quarter and into the middle of the second, it has dropped back down. And North Central 7/16ths is currently below $200 per $1,000.

Offsetting the positive impact of price in volume is we did have a strength in the Canadian dollar, which increased our cost in Canada.

Adjusted EBITDA from continuing operations in the segment was 58 million compared to a loss of 9 million in Q2 of last year.

If we just look back to Q1, volumes were higher by 1/3, and prices increased by about that same amount, 36%.

Year-to-date, OSB had an operating income of 43 million compared to an operating loss of 43 million the same period last year. And adjusted EBITDA for the comparable periods was 62 million this year compared to a loss of 26 million. Pricing accounted for most of that improvement, although we did have higher volumes as well.

Slide seven is our siding segment. Just to remind you, this includes SmartSide, our Canexel siding product in Canada, and commodity OSB produced in our Hayward mill.

For the second quarter, siding had operating income of $22 million, significantly better than the 7 million recorded in the same quarter last year.

A piece of this improvement was related to the OSB sold in the segment, about 50 million square feet in both Q2 of 2010 – 2009, which contributed $4 million worth of earnings this quarter, and the same quarter last year, about a 2 million loss. So 6 million of that swing is attributable to the improvement in OSB.

Adjusted EBITDA from continuing operation’s siding segment was 27 million compared to 11 million in Q2 of ’09.

For the quarter, sales were up 25% with the unit volumes being better by 19% on SmartSide and down slightly in Canexel. The reduction in our Canexel product line was caused by our decision to halt production on our 16-foot line as well as the discontinuance of our door skin business.

For the quarter, SmartSide averaged sales prices were up 2%. This is largely due to mix. And Canexel prices showed a pretty significant increase, but that is related principally to the Canadian dollar and the strength of the Canadian dollar as well as the exit of our lower-priced product line being door skin.

On a year-to-date basis, siding and operating income of 30 million compared to 9 million same period last year, with adjusted EBITDA being 41 million this year and 18 million in 2009.

As I mentioned in my earlier discussion, most of this improvement is from siding volume and the earnings turnaround in OSB, and it’s in accounted for in this sector.

Engineered wood is slide eight of the presentation. This includes our I-joists, our laminated strand lumber produced in our home main facility, laminated veneer lumber, plus related products.

It also includes the sale of I-joists produced by our Abitibi JV and LVL products that are produced under our arrangement with Murphy plywood.

For Q2, EWP reported a loss of less than half of what they did last year, 4 million versus 9. Adjusted EBITDA of continuing operations was a loss of just under 1 million in the quarter compared to a loss of 6 million in Q2 of last year.

Volumes were up significantly. I-joists up 29%, and LVL/LSL shipments up 46% compared to the same quarter.

Pricing was up 7% in both I-joists and LVL. That was due to a price increase that we put in several months ago to partially offset the higher raw material cost that we saw in OSB, veneer, and lumber.

On a year-to-date basis, the operating loss for EWP was 11 million compared to a loss of 18 million the same period, while EBITDA for comparable periods was 4 million in 2010 versus a loss of 12 million in 2009.

Our other building products, there’s no slide for this, but let me make a few comments. Overall, we’re showing income of about $4 million in the second quarter of 2010, compared to an income of about $1 million in the second quarter of 2009. Most of that improvement is related to our South American operations.

For the quarter, sales were up 59% at $48 million compared to $30 million in Q2 of last year. On a year-to-date basis, about $4 million of income compared to $2.2 in the same period last year with an increase in sales of 50%, getting us to $89 million for the first six months of this year.

Adjusted EBITDA for the comparable periods was 9.2 million in 2010 and 7 million in 2009.

Some other things; we had a very small foreign exchange loss in the quarter compared to about a $7 million gain in the same quarter last year. The primary reason for this is at the end of 2009, we did refinance our Chilean term loan that was in U.S. dollars. And the replacement load is denominated in Chilean pesos. So we shouldn’t have a wide swing in our accounting results related for foreign currency gains and losses attributable to that loan.

The investment income in the quarter was lower than 2-2 of 2009. Returns are down significantly with the low interest rate environment that we’re in.

Interest expense was about 18 million compared to 22 million in Q2 of 2009. This is primarily due to the claw back that we did on the subordinated notes last October.

On the selling general administrative costs, they were flat between years to 29 million. And for the unallocated, or the corporate piece of that, that was also flat at about 18 million in the quarter.

Slide eight are some presentation of some key balance sheet statistics. Our cash, cash equivalents, investments, and restricted cash was at 487 million at the end of June. Working capital nearly $600 million. Net cash of 210 million over the debt. And there is an appendix in the presentation that provides that calculation.

Capital expenditures were very low in the quarter at 5 million. So we are on target to be less than 25 million, which is the guidance that we have been providing. Book value per earning share was at $9.55.

One last thing I want to note before I turn it over to Rick is that we did receive the $115 million payment on the timber notes. And we turned around and repaid 113 million of the limited-recourse debt at the end of the quarter.

With that, let me turn it over to Rick.

Richard Frost

Well, good afternoon, everyone. And thank you for your interest in our LP Building Product Second Quarter Call.

True to form, we are having quite a warm and muggy summer in Nashville this year. It’s about 95 out there today.

I guess in the name of full disclosure, at the end of business today, I’m headed for the coast of Maine for some vacation and to catch up with my wife. And so really the call is today rather than next Tuesday so that I can have the weekend to do that. So thank you for checking in on a Friday afternoon.

I will follow convention in my prepared remarks this afternoon to discuss Q2 results. I want to make some observations about the quarter. And then give you a sense of how Q3 feels to us right now.

I’ll begin with our core value of work place safety. We had another excellent quarter operating safely. All of our businesses year to date are operating with TIR of less than one. And as a corporation, we are 0.44 at this time through June.

Two-thirds of our plants remain injury free through the first half of this year compared to about half of the plants at this time last year. And we did hit a number of significant milestones during the quarter at various plants. To name two; our Panguipulli Mill in Chile set a new company best at over 1 ¼ million recordable free work hours. And our Wilmington LVL plant reached three years without a reportable incident.

The regulatory environment proposes us uncertainty as we are waiting for the EPA to right its Boiler MAC targets, which we expect will be done in the first quarter of 2011. And we are still wondering about what new CO2 regulations might surface.

I’m only mentioning that because we do not have a clear impact, or view of these impacts at this time, but it is on the radar screen.

And our lean Six Sigma program, in its third full year of implementation, continues to deliver for us about 5.7 to 1 as a return rate this year to date.

As Curt mentioned, our financial performance in Q2 was a great breath of fresh air for us. Business activity was quite brisk during the first two months of the second quarter followed then by what I would characterize as a relatively dead June.

As Curt explained, the Q2 ‘10 to Q2 ’09 comparisons are good. They’re good storied. They show the financial leverage, in my opinion, that we have with just a little bit of additional demand.

OSB was the big story with the first five weeks of the quarter experiencing rapidly rising prices as demand spiked unexpectedly on a thin-channel inventory. That was followed by the next five weeks of rapidly falling prices. And the month of June was relatively flat.

Our sales volume was up about 24% Q2 to Q2. And the pricing story was significant.

Our effective production capacity ratio, which I have defined as what we produce divided by the mills that we currently have running, was 86% for the quarter. If we include our indefinitely shuttered mills capacity in that denominator, that dropped to 66%. In Q1 of 2010, those numbers were 68% and 52% respectively.

I had the opportunity in the last couple of months to speak to several analyst conferences, at which time I was asked the question around the highball utility around OSB pricing.

We entered the quarter at a North Central 7/16ths print of about 220. That ascended to a high, I think, of about 395. And then we actually ended the quarter down at $200 per MSF.

And the analogy that might help in understanding this volatility is for me to imagine a truck with the suspension and the shocks removed. And that was the supply chain as we went into the beginning of the quarter. There were just no buffers to absorb any bumps. And so when the bumps occurred, they were metal on metal, so to speak. We had a demand increase. We think that was associated with the efforts to come in under the tax credit deadline.

Pressure mounted for takeaways; the channel had very little inventory. And we had little inventory, and little ability to add production. So there was a hard bounce up. And of course, then we had a hard down reaction towards the end of the quarter.

My people said it this way not too long ago; they said in March and April we could hardly keep up with the consumer and the builder. In May, the builder was finishing up and they quit placing more orders. And in June, the consumer and the builders basically shut down. Our order file then shortened, and then we started to readjust our output to the lower demands.

Our experience was that business did noticeable slow down on Memorial Day Weekend, both from a distribution standpoint and a retail standpoint.

I’ll move now to a short discussion of our siding product segment. Siding did have an excellent quarter. Our profits were up from 6.5 million in Q2 of last year to 21.8 million in Q2 of this year. And as Curt pointed out, 4 million of that was from OSB pricing and the OSB volume that we manufacture at our Hayward plant. The volumes at Hayward Q2 to Q2 were about the same.

Our SmartSide volume was up Q2 to Q2 by 20%. We continue to gain traction in siding in both the retail sector and the distribution sector as the builder’s and homeowner’s delight with this product continues to increase.

Our rolling four quarter volume for North American housing start, year-over-year change in siding is up 33%. And this number excludes retail and our shed business.

In engineered wood products, the uptick in volumes in Q2 of this year over last year, along with implementing the general sales price increase, did allow us to pair our losses considerably, about 47% Q2 to Q2.

Our major bleeder in this business remains our LSL product segment, as we only run that mill at about 14% of its capacity in this difficult market.

Engineered wood, as you know, is the most highly-tied segment to new housing starts. But we are making some inroads with our West Coast LDL in Australia, and with our LSL product in Europe.

From a market penetration perspective, we did capture almost 500 market wins in Q2. As you may remember, I define a market win as an additional product placement with an existing customer, or a product placement with a new customer. Over 100 of these were in our SmartSide Trim product line, and 60 were with our LSL product.

TechShield, our radiant-barrier roof sheeting does continue to grow, and is actually up in volume 40% in per-start calculation year over year.

Another slice on all of this that’s important to me is that we had 132 dealer wins in those 500 wins in Q2. And the dealer win is a large part of our current focus. The dealer is critical to connect the supply chain between our efforts to partner with the distributor and do pull through selling to the builder.

I’ll finish my discussion with Q2 with a few comments of South America.

We are off to our best year ever in Chile; our highest volumes and our highest profits. Both Chile and OSB mills are running full out as a result of the February earthquake. We have also spiked some of their short-term needs with volume from Brazil.

Most of the spike in demand in Chile so far has just been related to the short-term temporary needs from the catastrophe and not related yet to the longer term rebuilding efforts that need to occur. And we are heartened to see that the frame-build construction in Chile did fair far better under the earthquake conditions. So we think that will continue to aid our efforts at converting building practices in Chile.

Brazil was also profitable for Q2 with the mill running at about 60% of its rated capacity. Very little of this product is going into housing yet. We are finding alternative uses for that, but we did achieve our APA panel stamp for our Brazilian product.

So I’ll finish my prepared remark with a few comments about the near future. The current demand environment, I would describe as it has gone very quiet. For us, it was an abrupt shift in the first week of June.

In response to this, we will be taking the necessary downtime across all of our product lines to work down our finished-goods inventories to more closely match production with what we are currently experiencing for demand.

Today, Q3 in terms of demand, feels a lot like Q3 of 2009. To us, it feels like demand was pulled forward into Q2 from Q3 and Q4.

So in the short term, the fundamentals that we all talk about that are dampening the demand for new-home construction are still at play. High unemployment; we have 4 1/2 % of the workforce that’s employed has been unemployed for over six months.

Currently, we have low consumer confidence as a continued-foreclosure and overhang issue. And we do have a slowing of household formation under these conditions.

The current lack of housing demand, job growth, and credit availability has created, I would call, a feeling of caution at all levels in our supply chain.

While I think we look at 2010 as overall better than 2009, I do expect the second half of 2010 to be quiet from what we are experiencing right now. Noticeable improvement may be delayed probably until 2011.

Those are my comments. Curt.

Curtis Stevens

Thank you Rick. Santali, can we turn it over to you for Q&A queue please?

Question-and-Answer Session

Operator

Yes, sir. (Operator instructions) And your first question comes from the line of Mark Weintraub of Buckingham Research. Please proceed.

Mark Weintraub – Buckingham Research

Thank you. I’m trying to understand in the OSB segment, I guess I would have anticipated there to be more profit gain from volume efficiencies. And I know that you mentioned the Canadian dollar was a bit of a hit. I know, if you could quantify that for us. And then maybe help us understand why there wouldn’t have been more volume efficiencies.

And the quick math of why I say that is if you look at your price improvement and you look at your volume, that alone would have gotten you about a $50, $55 million improvement relative to the prior quarter. And that’s all we saw. So we didn’t really see the volume efficiency gains that I would have expected.

Curtis Stevens

Yeah, just to remind you, on the Canadian dollar, every penny is about $1.4 million up or down on an annualized basis. And so if you look at where the Canadian dollar was in 2009 Q2 versus 2010, I think it was about $0.03 different. So that would be roughly a million, million two out of that.

Probably the bigger difference, if we look at Q2 ’09 to Q2 ’10 on the raw materials side, we had about, across the corporation, about a $9 million increase in our cost. About $1.5 million of that was the logs, and the rest was in resins and waxes associated with a higher cost of the oil-based raw materials. So fundamentally it’s in those areas, the Canadian dollar and the high raw materials cost.

Mark Weintraub – Buckingham Research

Do you happen to have those also for 1Q to 2Q?

Curtis Stevens

I do. It was about, for Q1 of ’10 to Q2 this year was about, it was only about $1 million. So it’s relatively flat Q1 to Q2.

Mark Weintraub – Buckingham Research

Then perhaps asking a followup on a slightly different question. Rick, you mentioned that 3Q feels a lot like last year’s 3Q. And if we were to assume that prices were going to be similar, which of course they may or may not be to last year’s, would you expect performance in the OSB segments to be pretty similar to what it was last year? Or are there some other moving parts?

Richard Frost

Well, I think the factors we’ll have to take into consideration now is that based upon the takeaways that we’re feeling across all of our product segments, we’re probably going to be taking more downtime in this quarter to get our working capital back to where we want it to be.

Mark Weintraub – Buckingham Research

And that was relative to last year’s third quarter, or is that relative to the second quarter that’s upcoming?

Richard Frost

That’s relative to where we are right now. We are in a position where based upon the orders that we’re getting right now, I want to bring my working capital down a little bit and get it more in line with what we’re feeling. I didn’t look at what the downtime numbers were in Q3 of last year, so I can’t make that downtime analysis for you.

Mark Weintraub – Buckingham Research

Okay. And then lastly, where would you say channel inventories today are for your key products?

Richard Frost

Well, we don’t feel that they’re fat. But what I think what is significant right now is that there’s a lot of ready wood right now, so there’s very little pressure on price now because if you want OSB right now, you can get it.

Mark Weintraub – Buckingham Research

Thank you.

Operator

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

Chip Dillon – Credit Suisse

Yes, thank you. Good afternoon. Just to make sure we had this right, should I assume that of the $700 million in long-term debt that $400, is it $489 million of the – I’m sorry, of the 706, 489, is that the timber notes part of that?

Curtis Stevens

It is.

Chip Dillon – Credit Suisse

Okay, so we’ll just take that out is how we get to our net cash.

Curtis Stevens

There’s that analysis in the appendix. And what it shows is the 489, we actually on the receivables side, it’s 544, so there’s actually more money in the receivables side than there is on the payable side. And that’s our investment.

We also, and when we filed the Q today, we’ve extended that debt footnote to make it very clear what portion is recourse and non-recourse.

Chip Dillon – Credit Suisse

Okay, because I’ve talked to a lot of people who didn’t get that. And what’s interesting, you say the receivable is 544 because on Slide 11, it sort of implied that it’s only 489 I think.

Curtis Stevens

Yeah. What we did there, Chip, is we only wanted to offset the non-recourse portion of the debt. It’s awkward wording. We worked on it a lot. And if you look at the little asterisk, all we took credit for was the debt portion.

Chip Dillon – Credit Suisse

Okay.

Curtis Stevens

Does that make sense?

Chip Dillon – Credit Suisse

Well, what would be the difference between the 489 and the 544?

Curtis Stevens

It’s about 42 million, it’s about $42 million dollars on the receivable side.

Chip Dillon – Credit Suisse

Okay. And maybe a reason you might want to be conservative, is that whenever these things unwind, there may be a tax bill due at that time?

Curtis Stevens

Well, there is, and it’s accounted for under deferred taxes.

Chip Dillon – Credit Suisse

Okay, got you. And then, I guess getting back to the first-second quarter progression, I know you said earlier that there was very little net cost change going from first to second. And I would imagine you ran again better volumes in the second quarter, unless we’re just mistaken because you took a lot of downtime in say June. But is there anything else you can point us to as to why we might not have seen better cost improvement.

And by the way, I also notice when I look at random links, that price averaged up, well, let’s say a year-over-year $128 on a 3/8ths basis, not 7/16ths. And your pricing was at $108, so maybe you could help us understand why your pricing – and I know that you don’t track exactly North Central random links, but is there anything you can do to help us understand what might have happened there?

Curtis Stevens

Well, there’s three buckets to it, fundamentally. The first bucket is that not everything is sold in North Central. So if you look at it, you actually will have at any given time – I think today you probably have between the Mid-Atlantic and the North Central, there’s probably a $15 per 1,000 price differential today.

If you look during the quarter, we started the quarter with very low pricing on the West. It went up pretty significantly, but then it fell further. So any volume that would have gone into the West. So the adjust for that is probably about 1/3 of the difference that you just said is related to what regions we sell our product in and what the random links was in that area.

The other thing, the second bucket is there are functional discounts for big purchasers. So that is a piece of it. As the price goes up from a dollar standpoint, that goes up as the functional discounts are a percentage.

The third bucket for us is that we do sell our specialty products on a different way than daily trading. We generally provide a monthly pricing. So for textural products, for our top-notch flooring products, we provide a pricing, a flat pricing during a particular month, and then adjust that.

And so when you have a rapidly rising market, you don’t capture all that. When you have a falling market, nobody is buying anything. And so you don’t get the advantage of it going down. So those would be the three buckets.

Chip Dillon – Credit Suisse

Okay, got you. And I guess the last thing is, as we go into – and maybe you kind of answered this, but given that you had such a, really a three-month period I guess or four months where things really hot and then they just fell apart, how should we think about the third and the fourth quarter. In other words because of what you said about that third bucket, should we maybe not expect – should we be careful not to just look at the price change and assume that is going to be – you’re going to see an income hit that’s equal to that?

Curtis Stevens

Directionally, it’s going to be, it’s going to go the direction. If random goes up, we’re going to get an advantage there. If it goes down, we’re not, we’re going to get hurt. But I wouldn’t expect it to be a whole lot different. I think in an environment where it’s gradually changing, we’re going to get more of it than when it rapidly changes one way or the other. When it rapidly goes up, we’re going to lag because of the pluck pricing we have on our specialty products. In a falling market, there’s no demand and so you don’t get it.

Chip Dillon – Credit Suisse

Yeah, okay, all right. And then when you, just last question is on – if you could just update us. I know you’ve kept CapEx quite low, what do you have? Is there any change there? And then any help, again on those discreet items when we compute our tax rate for the full year?

Curtis Stevens

Well for the full year, if we’re near breakeven you’re going to have a funny rate, so taxes are going to be – it really isn’t going to be a meaningful part of that. Right?

Chip Dillon – Credit Suisse

Uh-huh.

Curtis Stevens

For the capital, the 25 million that we gave you late last year is still the number that we’re targeting to be under. Obviously, when the market has taken a turn the other direction recently, there are some projects that we’ll likely delay. But that certainly won’t be any more than that 25 million.

Chip Dillon – Credit Suisse

I’ve got to ask you this. Given the run up we had, I know it didn’t last that long, were you surprised that you didn’t see, and to my knowledge I don’t think you did see, any – not only did you not see restarts of all the plants shut down, but I don’t recall seeing really many adding shifts even. Any comment as to why you don’t think we saw that happen?

Richard Frost

Well, I’ll answer that from the perspective of our organization. Through that whole thing and I think consistent with consistent with the communicating that we have done, we ended up adding two shifts through that process. We added a shift, a permanent shift onto our Peace Valley Mill, which is our joint-venture mill, and had that on for about eight weeks. And then we added a temporary shift in Carthage, Texas, and had that on for about eight weeks. Both of those shifts we have now taken off based upon what’s happened. That was all that we thought we could get on.

Our expectation, as we looked at that, was that it wouldn’t last very long. I think that was probably everybody’s, and your expectations as well. You even wrote an article that you thought it was more a supply-induced thing than a huge spike in demand.

That’s the way we’re looking at it. So we were very slow to put additional productive capacity on, Chip.

Curtis Stevens

I think what we had said consistently is that for us to put another mill online, we have to see real sustained long-term demand. That is isn’t going to be a pricing decision, it has to be a demand decision. And we just aren’t in a position to see that demand right now.

Chip Dillon – Credit Suisse

I understand. Thank you.

Operator

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

Mark Connelly – CLSA

Thanks. Just two questions. First, how should we think about wood costs in Q3? Is the weather affects completely behind you?

And second, a bigger question. When we look at engineered wood, what does it take to turn that business profitable? It certainly had a lot of volatility, but it almost seems like OSB drives the bus there. And that there might be something just structurally wrong with the business. You had a big pickup in volume. You had good prices. Still, it doesn’t make money. And I understand. I mean, the OSB prices go up, but I mean should be in that business if you’re a slave to OSB prices?

Richard Frost

Our biggest drag in engineered wood right now, Mark, is the fact that we built this LSL mill. And it’s running at 40% of its capacity.

Curtis Stevens

14%.

Richard Frost

Excuse me, 14% of its capacity at this point. So most of our losses are in one place. We know where they are. And the way that we have to deal with that is to continue to make market penetration with that product. And it’s a slow go in this demand environment. It’s tough to get people to change products right now.

So in general, our biggest bogie that we’ve got to deal with in engineered wood is not the price of web stock in the I-joists. It’s the fact that we have to continue to penetrate the LSL product into the homebuilding sector; find more and more uses for that.

Mark Connelly – CLSA

And what is the prospect for that in a slow housing market? I mean –

Richard Frost

The prospect for that is slow in a slow housing market. I think right now we’re twice what we were last year. And I think that we have to have that kind of continued improvement for the next couple of years. We do think that in an environment where overall in the engineered wood products business if we can get back to 900,000 housing starts, that we have a profitable engineered wood products business.

Mark Connelly – CLSA

Okay, that’s helpful. And on the wood costs, your overall wood costs.

Curtis Stevens

Yeah, the wood costs, we are anticipating flat costs in Q3. No change from Q2. From a supply standpoint, I think the risk is going to be in Canada due to fires, if they shut down the forest. BC has already been shut down once.

Mark Connelly – CLSA

So you’re – it’s sort of a flat-to-up outlook.

Curtis Stevens

Well, I think it’s going to be flat. I think the risk is on supply that you may have log shortages.

Mark Connelly – CLSA

Sure, okay.

Curtis Stevens

Yeah, it’s not a cost issue because those are under our control.

Mark Connelly – CLSA

Sure, understood. Appreciate it. Thank you.

Richard Frost

Good bye Mark.

Operator

Your next question comes from the line of Steve Chercover of D.A. Davidson. Please proceed.

Steve Chercover – D.A. Davidson

Morning guys.

Richard Frost

Hey, Steve.

Steve Chercover – D.A. Davidson

My questions were kind of similar to the other ones. But given what looks like kind of an asymmetric exposure to rising prices and falling prices, do you consider going to market differently? Because it seems like you don’t get the benefit of the upside, but you get all of the downside.

Curtis Stevens

We have those discussions every single day. You’re exactly right. If you think about the specialty products though, they’re going into building almost immediately. And they’re going right directly to the job site. And what the builder wants is he wants certainty on his raw materials. And that’s why we price it that way.

We continue to evolve that. And we’ve had various pricing schemes over the years.

But you’re exactly right. It’s not the same benefit to us on the downside because there’s no demand on the downside. Price is going down. Nobody’s buying anything. That’s why it’s going down.

Steve Chercover – D.A. Davidson

But I didn’t look at it carefully, but it seems like one of your biggest competitors in OSB, the [inaudible] in Toronto.

Curtis Stevens

Does it start with an N?

Steve Chercover – D.A. Davidson

It looks like they beat with, they beat expectations. So I was assuming that somehow they had managed to crystallize a longer order file and prices were going up, and therefore didn’t get that full downside. Do they do something different, or were they lucky?

Curtis Stevens

I don’t know what they do, but I will tell you that I look at the release. And they do provide a fair amount of detail. And Jeff Waggoner and I went through that. And if you take the volume that we produced at Hayward and add it to the volume Jeff produced in his segment, it’s almost exactly equivalent in North America to Norboard. And if you take the earnings, they’re right on top of each other. Absolutely on top of each other.

Steve Chercover – D.A. Davidson

Okay, I’ll have to dig a little bit better. So the earning were the same. The margins are the same?

Curtis Stevens

Exactly.

Steve Chercover – D.A. Davidson

Going into Q2, but okay. I guess that stands to reason. We thought it was a flat cost curve anyhow. All right, well, let’s hope for some incremental demands.

Curtis Stevens

That’s exactly right.

Steve Chercover – D.A. Davidson

Thanks guys. Have a good holiday, Rick.

Richard Frost

Thank you.

Operator

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

Peter Ruschmeier – Barclays Capital

Thank you, and good afternoon. Curt, I wanted to come back to you on your point about the rolling 12-month figure for siding. Could you remind us what you were quoting there? It was up 33%.

Curtis Stevens

What I was trying to get at is if you look at the, either the EBITDA or the profit, the operating profit in siding, if you take Q2 of ’09 at $7 million, included in that was the $2 million loss for OSB. So siding was actually $9 million profit.

In Q2 of ‘10, there was 4 million in profit on that OSB, so it was 18. So we went really from – we doubled the profit in siding. This looks like we tripled it.

Does that make sense, Pete?

Peter Ruschmeier – Barclays Capital

Right.

Curtis Stevens

That was my point is that this improvement was partially in OSB and partially in siding.

Peter Ruschmeier – Barclays Capital

Okay, understood. But how does the strong demand you’re seeing in siding square with the housing market being weak?

Curtis Stevens

The siding for 2009, and I haven’t done it for the first six months, but for 2009 over 2/3 of the siding went to repair model and non new-home construction. It’s a very, very heavy repair model. We’ve done very well in the shed market. We’ve done very well in replacement trim and soffit. And then we’ve done reasonably well from a penetration standpoint in new-home construction.

If you look at a – what we look at is we look at siding per start that’s not going to sheds and not going to retail. And we do that on a 12-month rolling. We look at the last 12 months. How much siding per start did we sell? And then we look at the prior 12 months. We’re up 30%. So we’re continuing to make penetration in new housing, plus 2/3 of the sales went to non new-res applications.

Peter Ruschmeier – Barclays Capital

Okay. Looking at the third quarter, I know the crystal ball is a little bit fuzzy, but based on the demand levels you’re seeing, what kind of guidance, if any, can you offer on your big businesses, whether it’s siding or OSB on a sequential basis? Any order of magnitude as to what you’re expecting? Clearly demand’s come off, but any order of magnitude you can help us with?

Curtis Stevens

You know, we really hesitate to do that. And that’s why we didn’t give you Q2 because we didn’t know what was going to happen. And that was a smart thing to do because it fell off in June. I just don’t know. It doesn’t feel right to me that activity has fallen off as fast as it has. And every day I can pick up a piece of news that looks good for housing. And I can pick up a piece of news that looks bad for housing. Every single day.

Peter Ruschmeier – Barclays Capital

Yeah.

Curtis Stevens

And I just, I don’t really have a good feel on where it’s going. Like the home center business. They came out of Q1 very strong, very good comps. I suspect they’re going to say their comps are down.

Peter Ruschmeier – Barclays Capital

Yeah.

Curtis Stevens

For Q2, and then they’re – but they’re optimistic for Q3 and 4.

Peter Ruschmeier – Barclays Capital

Yeah.

Peter Frost

But we’re definitely at a lull in the action here at the end of July Q3. This is pretty quiet out there right now.

Peter Ruschmeier – Barclays Capital

Okay, understood. How about shifting gears quickly to Chile. Can you remind us, you say you’re running pretty flat out there. What kind of production volumes are you running there? And can you help us understand? The profitability, it is material? And if the demand is as big as you’re suggesting in terms of the rebuild that’s needed going forward, how do you address that? Do you address that with local capacity? Do you address it with the volume from North America? Can you elaborate on that?

Richard Frost

Well, we think we – for capacity down there, we’ve got about round numbers, 250, 260 million square feet between the two small mills.

As we look going forward, we think we have the capacity in place down there to meet most of the needs of the rebuilt because that rebuild will occur over a period of years. So the optimism in that is that we will be able to run both of our mills full out, or we expect to for a number of years based upon that additional demand.

Now in the short term, obviously there was a spike in demand to react to the short-term catastrophe-related needs. And we were able to bring some volume over from our Brazilian mill. So we think that a little bit from up here as well, but we think that we’ve pretty well got it covered in terms of ongoing demand with those two mills.

The bigger question in terms of longer-term future is as we are able to gain more traction in Brazil, that’ s a market that’s ten times bigger than Chile. And if I had to guess, that will be in some point in time a place that we’re going to want to expand our productive capacity.

Curtis Stevens

The only thing I would add to that Pete is by consuming all that product in Chile, we have removed from the Chilean mills the ability to satisfy the other South American markets that we were shipping to. And we shifted that production to Brazil. So Argentina, Columbia, Venezuela, that’s now coming out of Brazil.

Peter Ruschmeier – Barclays Capital

Okay. Any update on Brazil in terms of the signposts of trying to get more adoption of wood product demand. Rick, any comments on that?

Richard Frost

Well, actually you’ve made an interesting word there, which is something that we’re actually looking at. I think when we originally went to Brazil, we had the same model in our head that we would convert building practices there. And as we’ve looked at what we can do in Brazil, we are trying to adapt our product into building what’s actually going there because we’re running into bigger obstacles around straight conversion of building systems than what we had anticipated.

So we are seeing traction there. And that will actually be our strategy going forward as we see it now, is instead of trying to convert to a totally different building system, we are going to look for uses of our OSB into existing building systems. And we think that that’s the best least resistance for us in the short term.

Peter Ruschmeier – Barclays Capital

Okay, that’s helpful. Last question and I’ll turn it over. The fiber situation, Peace Valley, as you look out long term, can you comment on your expectations as related to the pine beetles salvage harvest? There’s plenty of fiber now. Do you have concerns going forward about the fiber availability?

Curtis Stevens

We do not. Where we are located in Port Saint John, we’re not really affected by the beetle kill at all, plus that’s not the wood we use. We use Aspen and Poplar.

Peter Ruschmeier – Barclays Capital

Okay. Very helpful. Thanks guys.

Curtis Stevens

Thank you.

Operator

At this time, there are no further questions in the queue and I would like to turn the call back over for closing.

Curtis Stevens

Well, we appreciate all of you joining us on the call. And we did have a great quarter. We’re hoping that the market’s going to pick up here so we can have a couple more great quarters.

I think the important message I want to leave you with is what Rick talked about, is if we do get a little bump in demand, the organization is situated so that we can really take advantage of that and put good solid numbers on the bottom line.

So thanks very much. With that, I’ll end the call. Thank you.

Operator

Thank you for your participation.

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