Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Louisiana-Pacific Corp. (NYSE:LPX)

Q3 2007 Earnings Call

October 29, 200711:00 am ET

Executives

Curt Stevens - EVP of Administration and CFO

Rick Frost - CEO

Analysts

George Staphos - Banc of AmericaSecurities

Chip Dillon - Citi

Gail Glazerman - UBS

Mark Connelly - Credit Suisse

Christopher Chun - Deutsche Bank

John Tumazos - John Tumazos Independent

Peter Ruschmeier - Lehman Brothers

Mark Weintraub - Buckingham Research

Steve Chercover - DA Davidson

Rick Skidmore - Goldman Sachs

Operator

Good day, ladies and gentlemen. Thank you very much for yourpatience, and welcome to the Third Quarter 2007 Louisiana-Pacific Corporation EarningsConference Call. My name is Bill, and I'll be your conference coordinator fortoday. At this time, all participants are in a listen-only mode. We will beconducting a question-and-answer session towards the end of today'spresentation. (Operator Instructions). As a reminder, today's conference isbeing recorded for replay purposes.

I would now like to turn the conference over to your hostfor today's presentation, Mr. Curt Stevens, Vice President of Administrationand Chief Financial Officer. Please proceed, sir.

Curt Stevens

Thank you very much, and good morning to all of you, andthank you for joining us on LP's conference call, to discuss our financialresults for the third quarter and the nine months, ended September 30th, 2007.

As Bill indicated, I'm Curt Stevens, Executive VicePresident of Administration and CFO. And with me today are: Rick Frost, ourCEO; Mike Kinney and Becky Barckley, our Investor Relations contacts.

I will start the call with a review of the financial resultsfor the third quarter and the nine months, provide a discussion about ourperformance and our individual segments, and comment on the balance sheet. I'llthen turn it over to Rick, who will discuss this wonderful market environmentthat we're in, our accomplishments and other actions during the third quarter,and a summary of our thoughts and plans for the rest of this year, and a lookinto 2008. As we've done in the past, we've opened up the call on our webcast.This can be accessed through www.lpcorp.com.

Additionally, to help with the call, we have, once again,put together a presentation that includes some supplemental information. I willbe referencing these slides during the discussion. As a caution, thispresentation should be viewed in conjunction with our publicly available earningsrelease.

I want to remind all the participants about theforward-looking statements comment that is included in our earnings release, andalso shown on slide 2 of the presentation. There is also a discussion of theuse of non-GAAP financial information included in slide 3 of the presentation, andthe appendix of the presentation does contain the necessary reconciliation. I'mnot going to reread the statements, but I am going to incorporate them withthis reference.

Refer to slide 4 of the presentation, which is a summary ofthe Q3 2007 results. We're reporting, today, a net loss for the third quarterof $68 million, or $0.65 per diluted share on net sales from continuingoperations of about $475 million. For the same period last year, we reportednet income of $10 million, or $0.09 per share on net sales from continuingoperations of $525 million.

For Q3, loss from continuing operations was $55 million, or$0.52 per diluted share, compared to income of $12 million, or $0.12 a share inQ3 of last year. For the first nine months of 2007, LP reported a net loss of$128 million, or $1.23 per diluted share on sales from continuing operations of$1.3 billion. This compares to income of $148 million, or $1.40 per dilutedshare on sales from continuing operations of $1.8 billion during the sameperiod in 2006.

Continuing operations for the first nine months, we had $106million loss; $1.02 per share, compared to income from continuing operations of$153 million, or $1.45 per diluted share in the first nine months of last year.

Slide 5 of the presentation refers to some of the specialitems that are generally not attributable to ongoing operations. In the thirdquarter of 2007, we had two impairments at facilities that have now beenpermanently closed: the St. Michel OSB mill, and the Hines, Oregon LVL mill.

Related to St. Michel, this is a mill that's been onindefinite curtailment since August of 2006. However, several events happenedin Q3 that strongly indicated the likelihood of impairment that needed to beconsidered as we did our quarterly closing procedures.

We had several internal meetings to put together actions toreduce the holding costs on this mill, the most significant of which is relatedto managing the forest license. Leasing this license would reduce those costs, butalso remove the ability to source the necessary wood to run the mill.

The subprime debt crisis came to a head in August, andfurther reduced confidence in the short-term turnaround in new housingconstruction. Most economists, based on that, have pushed out their estimatesfor recovery for 12-18 months.

The Canadian dollar rose significantly against the US dollarin the quarter, further harming the competitiveness of this mill. Taking allthese factors into consideration, we recorded an impairment of $47 million onthis mill; as we wrote off the wood license, the related roads associated withthe timber for this facility and the property, plan and equipment, was writtendown to fair market value.

Subsequent to quarter end, we did make a public announcementand file an 8-K of the permanent closure of this operation. In Hines, werecorded $1.5 million impairment, to write the remaining assets down to theirestimated fair market value.

In summary, for the third quarter, these items reducedresults by $48 million, or $30 million after-tax. For the first nine months,these, and other items described in footnote 4 of the earnings release,affected our reported results by $34 million, or $21 million after-tax.

Now, let me go to the individual segments. For OSB, if yourefer to slide 6--we had a loss of $32 million in the quarter from OSB. OSBprice, compared to the same quarter last year, was down 4%, but it was up 12%sequentially. The decline in pricing from Q3 of 2006 accounted for around $10million in lower sales and operating profits. In the same comparison period,volumes were lower by 9% and 11% lower

 sequentially.

From a cost perspective, our unit cost was higher, due tothe negative impact of the strengthening Canadian dollar in both the thirdquarter and the year-to-date. For the first nine months of this year, OSB lost$141 million, compared to income of $164 million during the same period lastyear. The change in the sales price accounted for $270 million of this declinealmost 95%.

Signing on slide 7, this segment includes our SmartSide,which are OSB-based signing product, hardboard siding and commodity OSBproduced at one line in our Hayward Mill. In the third quarter, theseoperations generated a profit of $11 million, about 40% below the same quarterlast year, and about a third lower than last quarter's earnings. The bulk ofthe change was due to the decline in production of both SmartSide and OSBproduced at our Hayward facility.

For the quarter, sales volumes were down 17% on SmartSide,compared to the same quarter last year, and lower by 6% from last quarter.Sales prices were up 4%, compared to the same quarter last year, and flatsequentially, due to a sales price increase last summer.

Hardboard sales volumes were up slightly from the samequarter last year, and 10% lower sequentially. Average sales prices wereslightly better than the same quarter last year, and up 6% sequentially,primarily due to mix. For the first nine months of the year, siding hadoperating income of $38 million, compared to $61 million in the same periodlast year.

Slide 8 is our Engineered Wood Products summary. This segmentincludes laminated veneer lumber, I-joists operations--including our JV withAbitibi, and other related products. Profits in this segment for the quarterwere $3 million, compared with $8 million reported in Q3 of 2006, and down veryslightly sequentially.

LVL and I-joist volumes were up 7% and 2%, respectively,compared to the same quarter last year. Given the dramatic fall in housingstarts, we are encouraged, and believe that we've gained market share. However,pricing was lower by about 10% for both product lines. Sequentially, pricingfor both products in LVL volumes were flat, while I-joist volumes were higherby 5%.

For the first nine months of 2007, EWP made $14 million,compared to $29 million during the same period in 2006. It was a directreflection of the effect that the decline in housing activity has had on ourdemand and our pricing.

Other building products. This category consists of ourinterior molding business, Chilean operations, our cellulose insulation jointventure, US GreenFiber, resource and other non-operating facilities. For thethird quarter, these operations lost $4 million combined, while molding and Chilewere profitable.

The losses were a result of poor performance in ourinsulation joint venture, due to higher paper cost at lower demand, and also,some increased residual cost associated with several non-operating facilities. Forthe first nine months of 2007, these operations lost $4 million, compared toincome of $9 million in 2006.

Our discontinued operations consist primarily of our deckingbusiness. For the quarter, we are reporting a $13 million loss net of tax fromthese discontinued operations, and $22 million loss net of tax for the firstnine months of 2007.

Today, we expect to complete the sale of the Meridiandecking facility and the WeatherBest assets, including some of the inventory.However, as a result of the negotiations and the unanticipated increase in theexpected cost of some raw materials, we were required to record an additionalimpairment on these assets, of $7.5 million. Additionally, in this discontinuedoperations, we recorded a $3.5 million loss contingency associated with anexecuted minimum volume contract associated with the business.

Selling and general administrative costs were $37 millionfor the quarter, down slightly from the prior year. On the unallocated piece ofthis, costs were down $2 million in the third quarter, compared to the samequarter last year. For the first nine months, total SG&A was down $3million, compared to last year's unallocated was down about 14%. In the thirdquarter, our effective tax rate was 42%. The major reconciling items comparedto statutory rate relates to the company's foreign debt structure and stateincome taxes.

The balance sheet--refer to slide 9 of the presentation--cashand cash equivalents, investments and restricted cash, were over $900 million.Working capital was just short of $1 billion; net cash about $525 million.Capital expenditures in the quarter were nearly $90 million, or $225 millionfor the year-to-date. This also includes investments in our joint ventures.

As we have said in the past, we expect our capitalexpenditures for 2007 to be around $300 million, as we complete the Clarke County OSBmill, the Holton OSL line conversion, the new mills in Chile,and a variety of cost reduction projects. Book value at the end of the quarterwas $18.22. As we mentioned earlier, slide 11 does have the calculation of thesenon-GAAP financial measures.

With that, let me turn it over to Rick who will discussaccomplishments, and other actions in Q3, his thoughts on the market, andcomments on the future. Rick?

Rick Frost

Good morning, everyone, and thank you for your interest inour call, this morning. It's a beautiful day here in Nashville,and I guess it's good to be a Red Sox fan, or a Pats fan--if you are one. As iscustomary, I'm going to contain my comments to three different areas. I'll lookback at Q3, the current environment, and a sneak peek into the future.

During Q3, we did, as Curt said, generate operating profitsin siding, engineered wood and molding, and in Chile,South America. But, more than offsetting those profits,were the losses sustained by our OSB business, due to our current pricingenvironment, the effect of the downtime that we took, and the continuedstrengthening of the Canadian Loonie, affecting the Canadian operations' coststructure.

Continued weakness in new residential housing did require usto take downtime in most of our product lines, in light of the current andexpected demand, and to adjust our inventories. In OSB, we took 189 mill daysdown out of our system during Q3. Remember, that half of that was St.Michel--90 days which St. Michel did not run the entire quarter.

The rest was related to several buckets. Our decision toindefinitely curtail Silsbee--that we executed in August; and then we hadHanceville down for a bark burner installation; and we had some wood supply andoperations disruptions elsewhere.

About two weeks ago, we did bite the bullet, as Curt said,and we made the decision to make the indefinite shutdown of St. Michel to apermanent closure. These decisions, both on St. Michel, the temporaryindefinite shutdown of Silsbee, and the decking decisions, were tough to make--butthey will pare considerable losses from our go-forward operations with thosedecisions, as we eliminate the go-forward cost associated with those decisions.

In engineered wood, we ran reduced shifts in both LVL andI-joist, and in September, we did make the decision to permanently shut downour Hines LVL Mill out in Oregon.This mill was seriously disadvantaged by logistical problems of both inboundand outbound freight, and that volume will be replaced in our system by lowercost volume provided by our marketing arrangement with the new West CoastMurphy LVL Mill that will be starting in Q1 of '08. In siding, both in hardboardand SmartSide, we took downtime to reduce inventories, and adjust to expectedsales levels.

On a more positive note, our safety and our Lean Six Sigmaefforts continue to please us. Due to additional focus on our summer months, atime which we historically have had our incident rates spike a bit, we wereable to improve each month's TRR under any preceding Q3 in our history, and ouryear-to-date incident rate at LP now stands below 0.9.

And several weeks ago, we did have the opportunity of pickingup an award up in Chicago--one of 10 given out this year by an occupationalhealth and safety magazine--for being named one of America'ssafest companies. A lot of hard work has gone into that.

I continue to be pleased with our cost out and processimprovement work, which is being accomplished by our Lean Six Sigma teams. Ourratio of returns to our investment continues to exceed our plans for '07, andalso, the engagement of more people on special projects is good for morale inthese difficult market conditions.

Fast on the heels of the close of Q3, we did complete thesale of our Meridian decking facility. In fact, I thinkthat's actually being completed today, as the money changes hands. This wasdone with the company that's already in the decking business, which will allowa continuity of supply to our WeatherBest customers.

Because of some raw material issues that cropped up betweenthe letter of intent and the purchase agreement on Meridian,we did sustain a haircut on the purchase price of Meridian,which forced us to recognize an additional impairment of $7.5 million on thoseassets. And in Q3, we did repurchase 1 million shares of LP stock, under thecurrent authorization that we have.

I now want to briefly discuss the current marketenvironment. Perhaps an understatement--there hasn't been much good news in thehousing front--and we're all reading daily the headlines about the markets thatwe are selling into.

Single family permits continued to decline. Unsoldinventories of new and existing homes reached record highs in September--andthese will take a while to be absorbed. Mortgage rates do appear to havestabilized on long-term money in the 6%-6.5% range. I think the Freddie Macsurvey last week had 30-year money averaging about 6.33%.

The Fed has cut once, and most people that I talk to andlisten to, expect another 25 basis points of reductions--perhaps 50 basispoints of reductions, over the next six months. Now, that can't help but befavorable in the long-term for new residential construction, although I am notexpecting it to be much short-term help.

The mortgage issues are leading to increased default ratesand aborted closings. That is yet to completely define itself, I think. We'reall wondering how that's going to sugar out. It is good to see that some of thefinancial institutions are considering being more proactive in dealing withpotential foreclosures.

Actual numbers and future estimates of housing starts havecontinued to fall. Since I last spoke with you, September's actual new startswas a seasonal rate of 1.19, the last that I read. I, personally, don't feel agreat amount of uplift on that for the rest of this year. 2008 seems to beanybody's guess at this point, but the forecasts that I'm looking at rangebetween 1.35 and 1.1.

On the repair and remodeling side, the boxes are reportingmid single digit declines in same-store comp sales, as people appear to bespending less money on their homes right now. My assumptions behind this are,that it is affected by the reduced number of home sales, which is a stimulus oneither end for R&R, and the reduction in second mortgages and home equityloans and, also, a reduction in big ticket sales.

I'll conclude my prepared remarks with some comments aboutQ4. We will take considerable short time across our product lines, with theexception of molding in South America in Q4, to adjustour inventories, and match them to expected takeaways. In OSB, St. Michel--whichnow has been permanently removed from our productive capacity--and Silsbee willnot run during this quarter. Together, these two mills have an annual capacityof about 900 million feet of OSB.

In addition to those outages, we also anticipate takinganother 150-160 mill days of down time, related to capital outages,maintenance, holiday scheduling, and for controlling inventory levels. Historydoes suggest, that in a down market such as we're in right now, Decemberactivity is very slow.

In siding, we are scheduling several weeks of downtime ateach facility during this quarter; and in Engineered Wood Products, we will runreduced shifting patterns at each mill--both in LVL and I-joist.

Q4 will be another aggressive capital investment quarter forus, as we get to substantial completion status on our three major projects: theClarke County, Alabama OSB mill; the Holton main OSB mill conversion to longstrand lumber, which is the name that we have finally picked for the OSLproduct; and our new OSB mill in Lautaro, Chile. So our engineering resourcesare going to be fully taxed over the next few months with these completions.

As Curt said, we do expect to come in around that $300million range for capital this year, with capital spending droppingsubstantially in 2008, to be in the $90 million range. Also, this quarter weare formulating running scenarios for 2008 across our facilities, for furtherconservation of cash and cost reduction.

And with that said, I'll turn it back over to Curt for thequestions.

Curt Stevens

Thanks, Rick. Bill, it looks like we have a queue of folksthat would like to ask some questions, so if you could start that queue?

Question-and-AnswerSession

Operator

Thank you very much, sir. (Operator Instructions)

Our first question comes from the line of George Staphos ofBanc of America Securities. Please proceed.

George Staphos - Bancof America Securities

Thanks, hi, guys. Good morning.

Curt Stevens

Good morning.

George Staphos - Bancof America Securities

Quick question on some good news to start. Can you get intowhat the return to investment target ratios are typically for you, in terms ofSix Sigma, and how much you've been beating those by, generally speaking?

Rick Frost

Yeah. We started out when we got into this with expectationsof a three to one return, and we're beating that by about 33%, right now.

George Staphos - Bancof America Securities

Okay. Will that naturally fade, Rick, overtime; i.e., you'redoing some easy projects first, and as you get more and more into it, the projectsget a little less obvious--maybe a better way to say it--and therefore, returnsaren't as high?

Rick Frost

The way that seems to be working is, it started out verystrong, but with the run time at some of these plants going down, due to themarket conditions, it's going to be tougher for a while, because a lot of theprojects that we picked have to do with productive rates at plants and, interms of usage. So, if you've got less run time at the plants, then the returnson those will slow down. Now, they'll pick back up--all of those projects willpick back up--when the market picks back up.

George Staphos - Bancof America Securities

Okay.

Rick Frost

So, we're in the process now of challenging the projectselection people to work on things that are less volume dependent.

George Staphos - Bancof America Securities

Okay. On the subject of CapEx, I remember, and correct me ifI'm wrong, some initial thinking about '08 CapEx being on the last conferencecall more in the range of $100 million-$120 million. This initial target isobviously lower than that. How much lower could CapEx go if you needed to getto a bare bones level of investment for a period of time, Rick? Could youremind us on that?

Curt Stevens

This is Curt, George.

George Staphos - Bancof America Securities

Curt, how are you?

Curt Stevens

The $120 million we used last quarter included a potentialinvestment in a joint venture.

George Staphos - Bancof America Securities

Okay.

Curt Stevens

And so, basically, it's the same number where we took thatpotential investment, and we'll treat it as a one off--if it happens.

George Staphos - Bancof America Securities

I understand.

Curt Stevens

So, that's really the difference. We really aren't changingthe number.

George Staphos - Bancof America Securities

I like the direction, either way.

Curt Stevens

In that number that Rick gave, there is about $25 millionrelated to a big energy project. If you took that out, you're kind of down towhere we think is maintenance.

George Staphos - Bancof America Securities

How long does that project take to complete? Is it a couplequarters; is it more than that?

Curt Stevens

Actually, it probably won't come online until the middle of'09.

George Staphos - Bancof America Securities

Okay.

Curt Stevens

So…a long lead time.

Rick Frost

You've got about a 14 month lead time on the equipment,there. So we have to go ahead and get it approved now, and start spending onit.

George Staphos - Bancof America Securities

Okay. Last question--I'll turn it over. The decision to buyback some stock now, versus prior quarter or future quarters, what was behindyour thinking, away from the obvious?

Rick Frost

It was pretty obvious; a pretty good price.

Curt Stevens

We bought that early on in the quarter, George.

George Staphos - Bancof America Securities

Yes.

Curt Stevens

And so we did think it was an appropriate level. And then, obviously,we had the deterioration in the housing market, and subprime came after that.

George Staphos - Bancof America Securities

Let me turn it over here. I'll be back. Thanks.

Operator

Thank you very much, sir. Your next question comes from theline of Chip Dillon of Citi. Please proceed.

Chip Dillon - Citi

Yes. Good morning. My first question is, could you justelaborate a little bit more on discontinued operations? Would all of the $13million loss, would that all pertain to the decking business, or were thereother assets in that bucket?

Curt Stevens

There are some other assets, but of the reported thisquarter, all but about $1 million was related to decking.

Chip Dillon - Citi

Okay. So you would expect in the fourth quarter, youobviously are going to get about a month of decking in there, and then itshould drop dramatically to, like you say, something, like, maybe $1 million aquarter--something like that, going forward?

Curt Stevens

I would think it's going to go lower than that. What we'llhave after today, assuming we close on the Meridian assets, we'll still havethe Selma facility.

Chip Dillon - Citi

Okay.

Curt Stevens

Yeah. So, we'll have the ongoing costs associated withmaintaining that facility.

Chip Dillon - Citi

Okay.

Curt Stevens

It should fall quite a bit.

Chip Dillon - Citi

All right. Okay. And then, as you look at the...I guess...thecompetitive landscape--I know you have--I guess you're down to, what, about 35%of your OSB capacity now being in Canada? Is that fair?

Curt Stevens

Well, we've taken St. Michel out, permanently. It would be35%, if you include all the production capacity out of Peace Valley.

Chip Dillon - Citi

Is that all running, or not?

Curt Stevens

Peace Valleyis running, yes.

Chip Dillon - Citi

Okay. Got you. Having the experience up there, do you sensethat -- what percentage -- I mean, we know, like, for example, in newsprint,65-70% of Canada is literally below cash break even. And I know the wood costsbounce around up there, based on, I guess, chip prices, et cetera. But couldyou make a stab, I mean would you guess that maybe half of Canadais below cash cost at these recent OSB prices?

Curt Stevens

I would suggest, Chip, that if you look by region, thehighest wood cost that we're experiencing right now is in Eastern Canada.With the Canadian dollar, that would be reflective of the most difficultenvironment, from a production standpoint.

Chip Dillon - Citi

Okay. And then you mentioned, I think, a joint ventureproject out in the west--Murray, I think--is it an Engineered Wood facility?.Can you talk about that?

Curt Stevens

We announced a marketing relationship with Murphy Plywood, Ibelieve, about February, March. Murphy had a plywood mill that burned down in Oregon.It's located right on a rail line, and it's located right on the I-5 corridor,so it's a very advantageous location, from a logistics standpoint.

Plus, Murphy does have a significant veneer capacity. Sothey decided, rather than build a plywood mill, which nobody needs more plywoodthat they would build an LVL Mill, and they approached us, and we agreed tosell the output from that mill. And then, we have built in the agreement amechanism that, in the future, we may be a participant in that mill.

Chip Dillon - Citi

Okay. And then one quick question on Chile.Is that a second line you're bringing on up in Chile?I know Bill, before he left the company, was working on something down there.Is this the same plant?

Rick Frost

We moved our Montrose, Colorado facility that was shutdownfor a number of years, and reconstructed it, refurbished it and reconstructedit to a location about 80 miles north of our current mill. So it will all beadditional capacity to be sold into South America.

Chip Dillon - Citi

And this will be also accounted for in that other segment?

Rick Frost

Yes.

Chip Dillon - Citi

Okay. Got you.

Rick Frost

And the purpose of that, is to support our continued growthin developing home building markets. It's supportive of our South Americanstrategy.

Chip Dillon - Citi

Got you. Okay. Thanks very much.

Operator

Thank you very much, sir. Ladies and gentlemen, your nextquestion comes from the line of Gail Glazerman of UBS. Please proceed.

Gail Glazerman - UBS

Good morning. I was wondering…you've obviously talked littlebit about it, but if you could give a sense of how much over capacity you thinkthere is in the OSB market today, in light of, I guess, the reduced revisedoutlook for housing, and also the response we've seen from the industry in thelast few weeks?

Rick Frost

I think your best source for those answers are to readeither RECI, or APA--American Panel Association.

Gail Glazerman - UBS

Okay. I mean, in terms of getting the markets back inbalance…do you think that still would require an improvement in housing, sowe're looking at pushing that out another year or year-and-a-half; or do youthink it's something the industry could do on its own?

Rick Frost

Obviously, demand has got to come back. Demand, if you justlook at where we were January of 2006, you were at $2.1 million starts, andSeptember you were at $1.1 million. So, across the country on the average,you're down over 40%.

So, demand is a piece of it. And then, in structural panel,the capacity rationalization has to occur as well, to make room for the newmills that have been built, or are being built.

Gail Glazerman - UBS

Okay. And there's been some news from a competitor in thelast week or so on the class action suit in OSB. I was wondering if you couldoffer any sort of update?

Curt Stevens

Could you repeat that? You broke up.

Gail Glazerman - UBS

There's been some news from a competitor, recently, on theclass action in OSB, and I was wondering if you could offer any update?

Curt Stevens

I think the only update that we could offer is we areproceeding to defend ourselves rigorously. We think the suit is entirelywithout merit. As to the rationale for some of our competitors making otherdecisions, I think you have to ask them.

Gail Glazerman - UBS

Okay. And I guess just one final question. You talked alittle bit about the panel. Is there any update on, I guess, the penetrationrate? Have you changed your view in terms of OSB being able to take some sharefrom plywood?

Rick Frost

Well, I think that this is the time for that to happen. It'svery difficult to measure, that, with the reduced demand. I think the RECIexpectations are that by 2010, OSB penetration is going to be up between 68%-72%of the total structural panel market. I haven't seen anything that would changethat.

I think the obfuscation that is occurring right now, is thatthe markets for plywood--which they own the largest shares of the lightcommercial and light industrial markets--have been quite strong this year.They're, actually, up over prior years. And those are the markets where theyhave sold into.

So, the continued penetration, I think, is masked untilhousing returns. And now this spread is occurring between OSB and plywood makesit pretty obvious to a home builder that there's an opportunity for them, ifthey haven't switched, to go ahead and switch.

Gail Glazerman - UBS

Okay. Thank you.

Operator

Thank you very much. And ladies and gentlemen, your nextquestion comes from the line of Mark Connelly of Credit Suisse. Please proceed.

Mark Connelly -Credit Suisse

Thank you. Two things…I wonder if you could give us anupdate on the new TechShield related products, in terms of both cost and timingand roll-out?

And second, maybe drawing on that previous question, you sayyou think you gained some share in the engineered wood market. Do you thinkthat a housing downturn is going to be a time where we see increasedpenetration of that product in the market, as well?

Rick Frost

Let me take your first one, first, and then I'll try toremember the second one. In terms of TechShield panel, it's been one of our bigsuccesses this year, and have actually experienced very good growthyear-over-year in TechShield panel. I think on my last call, I made referenceto a barrier product, a foil barrier product that we are trying to introduce.Our plan A on the introduction of that did not work, and we are going back toplan B, now, in how to introduce that product to the market.

We had planned on going through a very large installer, inplan A, to introduce the product, and now we're dropping back, and with thatnot working, with that particular individual reducing their operationssubstantially, because of the environment that we're in. We're looking at,maybe, going through big retail instead. And so, we're in the process ofputting that plan together right now.

Your second question was EWP share of the housing. I don'tsee how the reduction in the number of homes being built right now can be anytype of an incentive to expedite penetration. I think that that penetration isoccurring. It makes some sense. But I think that's a stretch to say it wouldspeed up the penetration.

Mark Connelly -Credit Suisse

Okay. Fair enough. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your nextquestion comes from the line of Christopher Chun of Deutsche Bank. Pleaseproceed. Mr. Chun, please check your mute feature on your phone.

Christopher Chun -Deutsche Bank

Sorry about that. Thanks. Good morning, guys.

Rick Frost

Good morning.

Christopher Chun -Deutsche Bank

Curt, could you give us a quick rundown of the change, thequarter-over-quarter change, in net cash, and what the key moving parts were?

Curt Stevens

On the net cash?

Christopher Chun -Deutsche Bank

Right.

Curt Stevens

I can. Hang on one second and I will give you that.

Christopher Chun -Deutsche Bank

Sure. And in the meantime, I do also have a question goingback to the cost structure between Canadaand the US,with the Canadian dollar up at $1.04, or so. I'm wondering…I know it depends alot on specific geographies, but if you could give us sort of some commentabout what the cost structure is in Canadaon average, versus what it is in the US?

Curt Stevens

You broke up a little bit. So you're asking what's thedifference between the cost structure in Canadaand US?

Christopher Chun -Deutsche Bank

Right, right.

Rick Frost

Well, I think, the easiest way to put that in a longer termperspective is--I'll make it personal to LP--when we made the investment in 1.5billion square feet in Le Groupe Forex, back in '98, foreign exchange withCanada was at $0.64. Today, at $1.04,

you have almost a 50% increase in your cost of sales, fromwhat was a competitive environment, to today. Producers in Canadathat export their product into the United Statesare at a tremendous disadvantage, and that's what you hear a lot of thesquawking and squealing about.

Christopher Chun -Deutsche Bank

Right. But I guess, what I'm wondering is, was it the casethat, back then, the cost structures were relatively equal--such that today,the Canadians are just vastly disadvantaged, or was it more like the Canadianshad a huge advantage back then which has eroded in?

Rick Frost

Well, I think when you saw a lot of investment being made inCanada, it wasbased upon the cost structure, particularly the cost of wood being seriouslyadvantaged, and it offset the freight disadvantages. Today, you have a coststructure where your wood is no longer advantage, and in the case of Eastern Canada, severely disadvantaged, and you're still paying yourfreight disadvantage from being farther from market.

Couple that with the increases in transportation costs thatwe're all experiencing--not only from energy, but from rail, particularly, dueto the reasonably monopolistic rail transportation that exists in Canadatoday. And it's been a double or a triple whammy against Canadian producersthat export their product into the US.

Christopher Chun -Deutsche Bank

Okay. And then, my final question has to do with possibilityof further consolidation in the business. As we go deeper into the downturn,and LPX stock is down further, I'm wondering if you see better opportunitiesfor acquisitions?

Rick Frost

I heard a comment a couple of weeks ago, which I thoughtmade a lot of sense to me, in terms of its overall reflection. So I'm not sureexactly how it will manifest itself. But a guy that struck me as being prettysmart said, when the pack goes into the woods, it usually comes out of thewoods in a different form. And the pack has definitely gone into the woodsright now, and I don't know exactly how this will all sugar out.

I think the things that beg for consolidation are also someof the elements that become a bit of an obstruction to consolidation. In ourcase ,with our stock value where it is now, it's not a very good currency. Andthen, with people looking, trying to find a light at the end of the tunnel--onwhen this overhang in housing is going to be absorbed, and the market will comeback, there's also a tendency to want to hang on to your cash until you can seethe end of it.

So, there are, I think, elements that beg for that to happen,and then, there are obstacles to that to happen, as well. So, your guess is asgood as mine as to how this is going to shake out.

Christopher Chun -Deutsche Bank

Okay. Fair enough. Thanks, guys.

Curt Stevens

Christopher, let me just give you the answer to yourquestion on that, if you look at the changing cash.

Christopher Chun -Deutsche Bank

Right.

Curt Stevens

This quarter--it was about $115 million.

Christopher Chun -Deutsche Bank

Right.

Curt Stevens

About of that $90 million was PP&E.

Christopher Chun -Deutsche Bank

Right.

Curt Stevens

About $30 million was non cash working capital, and thebiggest chunk of that was in AR, it was the tax receivable.

Christopher Chun -Deutsche Bank

Okay.

Curt Stevens

And then, between dividend and share repurchase, about $35million.

Christopher Chun

Okay.

Curt Stevens

And if you take the net loss, DD&A, the non cash chargesto the income statement, which would include the foreign exchange loss, thatwas a positive $30 million, and we had borrowings of about $12 million, andthen the other items is the difference.

Christopher Chun

All right. Okay. Thanks, Curt.

Curt Stevens

Yeah.

Operator

Thank you very much. So ladies and gentlemen, your nextquestion comes from the line of John Tumazos of John Tumazos Independent.Please proceed.

John Tumazos - JohnTumazos Independent

Good morning. When you plan out for five years from now, areyou planning for a housing market of 1.75 million to 2.25 million to 2.5million? Once we get through the valley, what do you expect the other side tolook like?

Curt Stevens

Well, we are a participant in the Harvard Joint Centerfor Housing study, and also are voracious readers of the Brookings Institutestudy. And both of those believe that in the next 20 years, we'll need 38million-40 million houses, an average of 1.9-1.95 million new homes per year.And that takes into consideration all the demographic factors we talked aboutand also takes into consideration the removals from the housing stock, eitherthrough conversions for other uses or natural disasters.

So we still feel there is no data to suggest that thelong-term demand is not at that 1.9-1.95 million level. But the question is,how fast do you get back there? Five years from now, I would say we wouldcertainly need to be there, or above that, depending on what happens over thenext four years.

John Tumazos - JohnTumazos Independent

Do you want to scale yourself so that you run full, andsomebody else as the swing producer, or do you want to have some extra capacity,in case the market grows and good surprises occur?

Rick Frost

I think after what we're going through right now, I don'thave our next OSB mill on the drawing board, right now.

John Tumazos - JohnTumazos Independent

Thank you.

Operator

Thank you very much. So ladies and gentlemen, your nextquestion comes from the line of Peter Ruschmeier of Lehman Brothers. Pleaseproceed.

Peter Ruschmeier -Lehman Brothers

Thanks, and good morning. I wanted to focus in on Clarke County, if we could, and if youcould help us, maybe, to understand exactly where are you…I know…you're comingto the short strokes on that facility. But help us to understand, if you could,what's left to do there? What kind of learning curve you might be budgeting,and how do you kind of phase that in to the kind of market we're facing, and ifyou could talk a little bit about the benefits?

I mean, obviously, it's presumably fairly low cost, maybeyou can talk about logistical lower transportation cost issues, but just reallytrying to better understand that facility as we get closer to start-up.

Rick Frost

Yes, we should be substantially complete by the end of theyear. I think we're looking at having sellable board in January. And then, Ijust recently had a conversation with the head of our OSB business, and theramp-up that we're looking at, right now, is probably about half capacity fornext year. I think that's about a 700 million square foot mill, and this is an earlylook, since we don't have it running yet. But, we'll probably generate about350 million feet out of that mill next year.

Peter Ruschmeier -Lehman Brothers

Okay.

Rick Frost

And then…

Curt Stevens

What's interesting, Pete, it matches what we're shuttingdown in Silsbee.

Peter Ruschmeier -Lehman Brothers

I'm sorry, Silsbee is the offset, is what you're saying…?

Curt Stevens

Well it matches that production that we just took out.

Peter Ruschmeier -Lehman Brothers

Okay. So, in other words, you wouldn't anticipate…

Curt Stevens

Clarke Countywas certainly a variable in our decision-making process around what we did withSilsbee, in terms of making room for that wood.

Peter Ruschmeier -Lehman Brothers

Okay. And the rest of the infrastructure, presumably, youfeel good about in terms of ability, freight-to-market, raw material cost intothe facility, presumably, that's been squared away already?

Curt Stevens

That looks pretty good right now, although we haven'tstarted taking wood in there yet. We will, sometime soon. But that shouldn't bea problem, at that rate. It's in a good wood basket. The people are being hiredand trained; right now, it's just a matter of completing this thing in the nextcouple months.

Peter Ruschmeier -Lehman Brothers

Okay. And then shifting gears, I guess, you mentioned Silsbee.How should we think about Silsbee? In terms of the options, I mean, it's downindefinitely, conceivably could be down permanently; what other options mightexist for the facility? Anything you can do to help us out on that front?

Curt Stevens

Silsbee, right now, is indefinitely curtailed. So we havetaken the steps to reduce the carrying cost of that facility, certainly in theimmediate future. It is in a reasonable wood basket, where the growth to grainis positive. We also have made some investments in some of our specialtyproducts down there. So, like the best we can tell you is, it is indefinitelycurtailed given these market conditions, but we are going to keep it in aposition where it could start.

Peter Ruschmeier -Lehman Brothers

Okay. Just lastly, if I could, obviously we've been seeing avery weak US dollar, stronger building markets overseas than certainly we havehere. Are there opportunities you foresee for net more of an export emphasisgoing forward?

Rick Frost

Well, I'll speak for us, but I would imagine having no greatclaim on all the wisdom in the industry, everybody's shoving as much volume at Europeright now as they possibly can as a place to put it. There is a limit as to howmuch can be exported over there. I think when the volume coming from the US,it's my belief anyway, when it becomes onerous, then they'll figure out a wayto stop it, either through specifications, or some other way, and so I thinkabout all the volume that can go over there is going over there right now.

Peter Ruschmeier -Lehman Brothers

And Asia?

Rick Frost

Asia is a big question mark for us. Ithink that over the long-term, and people have looked at me reasonably crazyfor saying this..I think over the long-term, North America will be an exporterof panel products to Asia, because there is not enoughunclaimed trees over there to satisfy that market.

In the short term, we are exporting to that part of theworld through our Chilean operations, and that's where some of our volume willgo, to support our international growth.

The markets need to be developed for structural panelproducts over there, because obviously, as you know, they don't build the sameway that we do. So, it's a longer-term--unless you want to put your productinto packaging--it's a longer-term strategy to sit down and, like we did inSouth America, or are doing--teaching people how to use the product forbuilding purposes, rather than packaging purposes.

Peter Ruschmeier -Lehman Brothers

Very good. It's very helpful. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your nextquestion comes from the line of Mark Weintraub of Buckingham Research. Pleaseproceed.

Mark Weintraub -Buckingham Research

Thanks. You mentioned conservation of cash a couple oftimes, understandably. How do you think about the dividend during these times,and what circumstances might make you think about any potential changes to thedividend?

Rick Frost

I think the dividend is pretty important. I have look memoryof the last time we stopped paying the dividend, and that didn't go overextremely well; so the dividend is certainly within all of our planning aroundour cash.

So, we think the dividend is important to our shareholders,and we have that in all of our planning--on how we make it through this periodof time--and continue to desire to support that dividend.

Mark Weintraub -Buckingham Research

So, would it be fair to say that you would certainly soonerpull your cap spending to maintenance and keep it there than do anything totouch the dividend?

Rick Frost

That would be my personal opinion, and obviously, I'm onlyone of the voters on that with our Board of Directors, but I think I'm speakingwell for our Board, in that regard.

Mark Weintraub -Buckingham Research

Great. And then…what are you able to do right now to getcomfortable, regarding the health of some of your customers, and managingaccount receivable programs, et cetera, given that there could be some shakeoutin the home building space?

Curt Stevens

Well, we have a very active credit group that has anexcellent experience throughout the cycle. Our credit group does visit with ourcustomers--as you know, we have some very large customers now that are private,but we do demand from them financial assurances that are commensurate with therisk.

It's obvious in this period you do have to have morediligence related to that, but our DSOs are averaging under 20 days, and havebeen for the last couple quarters, and our write-offs are very low. So, wethink we have a pretty good handle on that.

Mark Weintraub -Buckingham Research

Okay. And then, lastly, there have been a number ofquestions regarding the differences in the cost position in Canadaversus the US.Now, there also have been some shifts in pricing regionally, and was I hopingyou might address what those impacts have been on the relative profit margins;obviously, maybe, that's been something of an offset.

And have the regional spreads gotten as wide as theypossibly could get, where you start seeing, potentially board from one part ofthe country being shipped further north because of the higher pricing?

Curt Stevens

When we talk about Canada,we ought to be clear. The Canadian dollar hurts us all across Canada.But the biggest problem is eastern Canada,because not only do you have a high Canadian dollar, but you also have thatincreased cost associated with the wood resource there.

Western Canada still is one of thelowest regions for wood cost, even with the Canadian dollar where it is, so yougot to keep that into mind. If you're talking about the difference in pricing,what has hurt is the Southeast pricing, because that's where all the newcapacity is coming online.

And so, to keep it close to market, they accept a lowerprice to offset the freight. One of the advantages that LP has is because ofour physical footprint. We can deliver cost-effectively to most regions.

So while the Southeast pricing has not been a positive tous, we can also supply those other regions without shipping out of theSoutheast. So, we believe that we are advantaged with our footprint, given whatthe pricing changes every week. So, we're talking about what happened in thethird quarter; in the third quarter, the Southeast pricing was low.

Mark Weintraub -Buckingham Research

Understood. And have we got to the point where it startsmaking sense for southeastern producers to actually ship outside of theSoutheast because of the higher pricing potentially offsetting the freightdifferentials?

Curt Stevens

They are attempting to do that. I think that's exactly right,and you'll do that until, I mean, the customers will do that arbitrage for youif you don't do it.

Mark Weintraub -Buckingham Research

Okay, great. Thanks a lot.

Operator

Thank you very much, sir. Ladies and gentlemen, your nextquestion comes from the line of Steve Chercover of DA Davidson. Please proceed.

Steve Chercover - DADavidson

Thanks, good morning. Couple of questions. First of all,with respect to St. Michel, you guys have a, I guess, history of not blowing upmills, but occasionally taking them to South America…

Curt Stevens

Steve, I'm sorry. What did you say? We have a history ofblowing up mills?

Steve Chercover - DA Davidson

No, not blowing them up, but...

Curt Stevens

Well, we have. We have done that, and we also moved themoff-shore.

Steve Chercover - DA Davidson

At least you're not going to sell it to someone else.

Curt Stevens

We have no history of selling it to someone else.

Steve Chercover - DA Davidson

I guess that's what I was trying to get at. Is there anopportunity to take that one, in the long-term, down to South America? I know it's quite a bit larger than what you've got, thusfar.

And, alternatively, the fiber that you relinquish--if youever wanted it back, presuming the mill is not imploded, can you get it back ata price?

Rick Frost

We don't assume that we're going to want it back, and so Ithink the answer to that is, no, we haven't thought about getting it back. Andobviously, it would be there for someone else that wanted it, but it won't beus.

Steve Chercover - DA Davidson

Okay. And switching gears to the repurchase, can you remindus how much is left on your authorization?

Curt Stevens

There's a little over 11 million shares left.

Steve Chercover - DA Davidson

Do you anticipate maybe being a bit more aggressive? Yousaid that you thought the stock was attractive in the quarter.

Curt Stevens

I'll give you the same answer I always give you. We reviewthat quarterly with our Board.

Steve Chercover - DA Davidson

Thanks, Curt.

Curt Stevens

We'll continue to do that.

Rick Frost

In terms of the future of the St. Michel assets, I didn'ttalk to that, Steve. Obviously, as we continue to explore our internationalstrategy, one of the things that we are doing is looking for wood baskets.

And so, like we did with the second mill in Chile,we are continuing to look around the world and say, where could those assets beused? But that has to be done in tandem, where we also think that we can do themarket development work to get people to use the product in home construction.

Curt Stevens

I think the other thing to recognize is, we do have somefacilities. Rick and I were just at Dawson Creek's20th anniversary. So we do have some facilities that may need some major piecesof capital, and, obviously, a mill like this is a source for that capital,which can reduce future maintenance expenses.

Steve Chercover - DA Davidson

But is there anything, I mean, could St. Michel be an exportmill, or just not on a big enough body of water?

Rick Frost

The wood basket there is tremendously disadvantaged.

Curt Stevens

No. You mean an export mill to move the mill?

Steve Chercover - DA Davidson

No. Actually running that for export purposes…

Curt Stevens

There is no rail there, so it makes it reallydisadvantageous, from a logistics standpoint.

Steve Chercover - DA Davidson

And the wood basket is depleted at this stage?

Curt Stevens

Quebec is thehighest wood we've got in the system.

Steve Chercover - DA Davidson

Okay. Thanks.

Operator

Thank you very much, sir. And our last question today,ladies and gentlemen, comes from the line of Rick Skidmore from Goldman Sachs,please proceed.

Rick Skidmore -Goldman Sachs

Good morning, Rick and Curt. Just a follow-up question onthe Clarke Countymill. You mentioned Silsbee is matching that new volume coming out from Clarke County matches what you've takendown at Silsbee.

Just trying to reconcile Silsbee being down. Housing startslikely lower in '08 versus '07; your inventories needing to be adjusteddownward--are you going to take any additional volume out as Clarke County rampsup, or should we assume it's ramping up, and you might have this capacity issueagain?

Rick Frost

As I said in my prepared comments, we are using this quarterto look into next year as best we can, and decide what we're going to run, andhow hard we're going to run it, and I think that will start with anoptimization model between both our OSB business and our siding business togive us more or less what's possible, and then we will work that back into whatwe think makes the best sense in the short-term, while preserving the long-termstrategies of both those businesses.

So, as we work our way through how much we plan to run,where, of which products--then that will formulate itself into our operatingplan for '08. And if there are any significant short-term tactical changesrequired to get through the short-term and their material, then we'll announcethose.

Rick Skidmore -Goldman Sachs

Okay. And just one sort of follow-up question. One of yourcompetitors talks about being able to sell all that they produce. In themarketplace, as you're out selling your product, are you sensing that othersare doing something different and just willing to seed losses for market shareand LP's operating under a different strategy, or can you help reconcile what acompetitor might be doing, versus the way LP is approaching the business?

Curt Stevens

Well, I think that what we have seen in the last three orfour weeks is, we've seen a variety of strategies. Some have said they'rerunning full-out, although on reduced shifts. We've seen reduced shiftingpatterns; we've seen indefinite curtailments, we've seen permanent closures; soI think we're all trying to figure out what makes the most sense for ouroperations.

Rick Skidmore -Goldman Sachs

Okay. Thank you.

Curt Stevens

Okay. Well, thank you all for joining us on the call. And,Bill, maybe you can give out the replay information, should somebody have comein late and want to hear the front part of it.

Operator

Certainly, sir. If you would like to listen to the replay onyour conference call today, please feel free to dial 617-801-6888. The tollfree number for that is 888-286-8010. And the access code for the replay todayis 50142399.

And we thank you very much for your participation in today'sconference call. This concludes your presentation for today. You may nowdisconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Louisiana-Pacific Corp. Q3 2007 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts