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Louisiana-Pacific (NYSE:LPX)

Q3 2012 Earnings Call

November 06, 2012 11:00 am ET

Executives

Sallie B. Bailey - Chief Financial Officer and Executive Vice President

Curtis M. Stevens - Chief Executive Officer, Director and Member of Environmental & Compliance Committee

Analysts

Mark W. Connelly - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Gail S. Glazerman - UBS Investment Bank, Research Division

Michael A. Roxland - BofA Merrill Lynch, Research Division

Joseph Stivaletti - Goldman Sachs Group Inc., Research Division

Chip A. Dillon - Vertical Research Partners, LLC

Mark A. Weintraub - The Buckingham Research Group Incorporated

Mark Wilde - Deutsche Bank AG, Research Division

Steven Chercover - D.A. Davidson & Co., Research Division

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Louisiana-Pacific Corporation Quarter 3 2012 Earnings Conference Call. My name is Catherine, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Sallie Bailey, Executive Vice President and Chief Financial Officer. Please proceed, ma'am.

Sallie B. Bailey

Thank you very much, Catherine, and good morning. Thank you for joining our conference call to discuss LP's financial results for the third quarter of 2012. I'm Sallie Bailey, LP's Chief Financial Officer, and with me today are Curt Stevens, LP's Chief Executive Officer; as well as Mike Kinney and Becky Barckley, our primary Investor Relation contacts.

I'd like to take a moment on behalf of LP to express our sympathy and concern for those who have been touched by the devastation of Hurricane Sandy. Our thoughts are with all of our friends in the Northeast as they begin to recover and rebuild their lives.

I'll begin the discussion today with a review of the financial results for the third quarter of 2012. This will be followed by some of the comments on the performance of individual segments and selected balance sheet items. After I finish my remarks, Curt will discuss the general market environment in which LP has been operating, provide his perspective on our operating results for the third quarter of 2012 and give some thoughts on our outlook. As we have done in the past, we've opened up this call to the public and are doing a webcast. The webcast can be accessed at www.lpcorp.com.

Additionally, to help with the discussion, we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I will be referencing these slides this morning in my comments. We also filed an 8-K this morning with some supplemental information, as well as our 10-Q.

I want to remind all participants about the forward-looking comments on Slide 2 of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information included on Slide 3 of the presentation. The Appendix attached to the presentation has some of the necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning. Rather than reading these 2 statements, I incorporate them the with this reference.

We are reporting stronger results for the third quarter. This is the first quarter in 2 years we are reporting net income on a GAAP basis. The trends in U.S. housing statistics have been favorable over the past 9 months, and the improvement in our end markets and corresponding rebound in OSB demand are reflected in our improved financial performance.

Turning to Slide 4 of the presentation for a discussion of the third quarter of 2012 results compared to the same quarter last year, the second quarter, as well as the year-to-date information. We reported net sales of $468 million for the third quarter of 2012, a 33% increase from the sales reported for the third quarter of 2011. In the third quarter of 2012, we reported net income of $31 million or $0.22 per diluted share. In the third quarter of 2011, we reported a net loss from continuing operations of $59 million or $0.44 loss per diluted share on $351 million of net sales. In the third quarter of 2011, we recorded an impairment on the Houlton, LSL facility for approximately $65 million and the $10 million reversal of a portion of the ABTco siding class-action reserve.

The GAAP tax rate for the quarter is 20% on continuing operation, which reflects our ongoing inability to record a tax benefit on Canadian losses. The adjusted income from continuing operations, which excludes certain items such as impairment, for the quarter is $29 million or $0.20 per share based upon a normalized tax rate of 35%, compared to a loss of $26 million or a $0.19 loss per share in the third quarter of 2011.

Adjusted EBITDA from continuing operations was $75 million in the quarter, compared to negative EBITDA of $3 million in the third quarter of 2011. Another solid improvement in adjusted EBITDA, $78 million higher than the third quarter of 2011 on an increase in net sales of $117 million and with cash flow generation of $63 million in the quarter.

On a year-to-date basis, we recorded $1.3 billion in net sales, $17 million net loss and a loss per share of $0.13, as compared to net sales of $1 billion and net loss from continuing operations of $115 million and a loss from continuing operations of $0.87 per share in the first 9 months of 2011.

On a non-GAAP basis, we recorded adjusted operating income of $66 million, earnings per share of $0.17 and adjusted EBITDA of $133 million for the first 9 months of 2012, significant improvement over the same period in 2011 when we recorded an operating loss of $53 million, a loss per share of $0.51 and adjusted EBITDA $7 million.

I'll now move to Slide 5 and the review of our segment results. Starting with OSB. OSB recorded operating income of $49 million in the quarter, compared to a loss of $16 million in the third quarter of 2011. For the quarter, in terms of adjusted EBITDA, we're reporting $60 million as compared to negative EBITDA of $5 million in the third quarter of 2011. For the quarter, we had an 11% increase in volume. Sales volumes increased primarily due to improved housing starts. Pricing for OSB was up 50% over the third quarter of 2011. The improvement in pricing was the most significant contributor to the improved OSB performance.

As we discussed in last quarter's call, our pricing rate of improvement will differ from Random Lengths North Central 7/16 changes due to our different geographical footprint, broader product offerings and value-added products. In particular, in a quarter with such steep increases in commodity OSB prices, value-added product price increases did change at a much lower rate. The increase in selling price favorably impacted operating results and adjusted EBITDA from continuing operations by approximately $71 million for the quarter, as compared to the same period in 2011.

The improved price of OSB has another impact on our earnings through the accounting for our 50% interest in the Peace Valley OSB mill. As a reminder, we purchased 100% of the production of Peace Valley at a market price less the commission. We sell 100% of the product. Both the sales and the cost of sales are included in our income statement. Our OSB margins are negatively impacted when the cost for us to buy the product from Peace Valley is greater than the cost to produce the product. LP's 50% interest in the earnings from the joint venture's recorded on our income statement in the equity and income or loss of unconsolidated affiliates. This amount is also delineated in our reconciliation of EBITDA from continuing operations filed as part of our 8-K this morning.

In the third quarter of 2012, Peace Valley contributed $5 million to OSB's adjusted EBITDA, as compared to decrease in the third quarter 2011 OSB adjusted EBITDA by $2 million. For the year, sales are up 39% to $571 million, with adjusted EBITDA improving by $111 million to $98 million. Volumes have improved by 10% and pricing is 27% higher.

Slide 6 reports the results of the Siding business. This segment includes our SmartSide and CanExel siding products and commodity OSB produced in our Hayward mill. The Siding segment reported sales of $134 million in the third quarter of 2012, an increase of 20% from $112 million reported in the third quarter of 2011. The Siding segment reported operating income of $20 million, compared to $12 million in the third quarter of 2011 and adjusted EBITDA of $24 million, an increase of $8 million compared to the third quarter of 2011.

For the quarter, SmartSide average sales prices were up 2% and volumes increased 15%. Volume increased in our SmartSide siding line due to continued penetration in several key focused markets, including retail, repair and remodel markets and shots. CanExel prices were up 2% and volumes were up 26%. As we discussed last quarter, quarter-to-quarter changes to CanExel sales are driven primarily by supply chain patterns. Our distributors built inventory through the first half of 2011 and that bled inventory through the second half. Sales in 2012 reflect normal demand levels. We continue to anticipate that we will end 2012 with sales volumes in line with 2011 levels.

On a year-to-date basis, the Siding segment recorded $384 million in sales, $56 million in operating income and $69 million in adjusted EBITDA. For the first 9 months of 2011, the Siding segment recorded sales of $337 million, operating income of $36 million and adjusted EBITDA of $49 million. The improvement from the first 9 months of 2011 is driven by increased volume of 14% in SmartSide and higher sales price of about $6 million related to improved OSB pricing for product produced in our Hayward mill.

Please turn to Slide 7 of the presentation, which shows the results from our Engineered Wood Products segment. This segment includes I-Joist, Laminated Strand Lumber, Laminated Veneer Lumber plus other related products. The segment also includes the sale of I-Joist and LVL products produced by the Abitibi joint venture or under a sales arrangement with Murphy plywood. The Engineered Wood Product segment sales increased $62 million in the third quarter of 2012 from $55 million in the third quarter of 2011. The segment's operating loss and adjusted EBITDA in the third quarter of 2012 is approximately the same as the loss in the same period a year ago. Volumes of I-Joist were up 20% due to increased demand related to housing starts, while volumes of LVL and LSL were flat compared to the same quarter last year. Pricing was even in LVL and LSL and down 1% in I-Joist due to changes in mix in both product lines and with individual product pricing remaining relatively flat.

On a year-to-date basis, Engineered Wood Products reported net sales of $162 million, an operating loss of $9 million and breakeven EBITDA. For the first 9 months of 2011, Engineered Wood Products reported net sales of $157 million, a loss of $12 million and negative adjusted EBITDA of $1 million. Volumes in pricing for LVL and LSL were essentially flat relative to the prior year, while I-Joist volumes increased 14%, and pricing for I-Joist decreased 1%.

Moving on to Slide 8 of the presentation. For the quarter, our South American segment recorded sales of $42 million compared to sales of $36 million in the third quarter of 2011. Operating income of $5 million was twice as high as the operating income reported in the third quarter of 2011. South America's adjusted EBITDA from continuing operations was $8 million for the third quarter 2012, compared to $5 million reported in the third quarter of 2011. Volumes in Chile were up 18%, while volumes in Brazil increased by 15% compared to the same quarter last year. For Chile, changes in volume were due to continued strong demand as wood frame housing market penetration increased due to rebuilding efforts. The sales volumes increase in Chile were primarily sourced by imports from the U.S., Canada and Brazil. The imported sales have minimal margin associated with them due to high cost of freight.

In Brazil, the improved volume came from higher export sales to China and increased penetration in local market. Pricing was up 1% in Chile and down 10% in Brazil. These changes in price are primarily related to changes in foreign exchange rates. And local currency, both Chile and Brazil, reported an improved pricing of approximately 4% in Chile and over 10% in Brazil.

For the first 9 months of 2012, South America recorded net sales of $127 million, operating profit of $11 million and adjusted EBITDA of $20 million. For the first 9 months of 2011, South America recorded net sales of $111 million, profit of $10 million and adjusted EBITDA of $19 million. Volumes in Chile for the year are similar to the increased volume reported in the third quarter. In Brazil, year-to-date volumes are slightly down from a year ago due to lower export sales, especially in the second quarter. In local currency, our Chilean and Brazilian operations recorded improvement year-to-date of approximately 9% for pricing.

Our Molding business, U.S. GreenFiber joint venture and various non-US operating facilities are shown in the other buildings product segment. Overall, we are showing a loss of $2 million in the third quarter of 2012, which is $1 million -- which is a $1 million improvement due to performance of our GreenFiber Joint Venture, compared to the third quarter of 2011. Operating results for the first 9 months of 2012 improved by $1.4 million.

Total selling, general and administrative expenses were $31 million in the third quarter of 2012, compared to $26 million in the same quarter of 2011. For the first 9 months of 2012, selling, general and administrative expenses were $93 million compared to $83 million for the first 9 months of 2011. The increase in SG&A costs is primarily due to the accrual of 2012 management bonuses. We did not record any bonus accruals in 2011. We had a $400,000 foreign exchange gain in the quarter compared to a $4 million loss in the same quarter last year. The swing is primarily related to our Brazilian and Chilean operations.

For the first 9-month period, we recorded a $2.3 million loss in 2012 compared to $1.6 million loss in 2011. Interest expense was $10.7 million in the quarter compared to $14.2 million in the third quarter of 2011. This reduction in interest expense for the quarter and year-to-date was primarily related to the lower interest expense we recorded due to the refinancing, as well as lower amortization related to our deferred debt expense. We recorded $4.1 million in investment income in the third quarter of 2012, as compared to $16.7 million in the third quarter of 2011. The high investment income in 2011 is primarily due to the realization of $15.2 million on the sale of auction rate security.

Turning to Slide 9 of the presentation, as of September 30, 2012, we had cash, cash equivalents, investments and restricted cash of $504 million. We had net working capital of $688 million, net cash of $102 million, and in addition to the $504 million of cash on our balance sheet, we had a $100 million of availability on our asset-based loan facility.

Capital expenditures for the 9 months were $16 million and received $7 million from our joint ventures. Given the improvement in our 2012 results and positive cash flow generation, we are increasing our estimate of capital expenditures for the year from $25 million to approximately $35 million as we begin to pull forward projects from 2013 and investment growth capital projects, such as the expansion of our Two Harbors mill and a third mill in Chile.

Now I'll turn the call over to Curt for his comments.

Curtis M. Stevens

Thank you for that review, Sallie. I could tell you're excited by the results as I am and the outlook looking forward for housing. I want to use my time today to talk about 3 areas: The housing market, discuss with you some of the work we're doing internally to identify the pinch points in our supply chain and share my thoughts on the fourth quarter and next year.

Before I do that, let me give you a few comments on our safety record so far this year. Through 9 months, our Total Incident Rate stands at 0.55. Remarkably, through that same period, our OSB business has had only 1 recordable injury that puts them at a TIR of 0.16. Over the summer, we believe that our Panguipulli OSB mill in Chile became the first structural panel mill in the world to work over 2 million hours without a recordable injury. Again, a focus for LP.

There's a lot of good continuing news in the housing market being reported. The September annual rate of housing starts was at 872,000, 35% greater than the same time last year. Single-family starts were at 603 and multi-family at 269. The September annual rate for the permits was nearly 900,000: 545,000, single-family; 349,000, multi-family. The 3-months rolling average for single-family permits has been on upward trend since April of 2011, a leading indicator that we watch very carefully. The current consensus forecast, as reported by APA for housing starts, stands at 759,000 through this year and 931,000 through 2013. New home inventory remains very, very low at 115,000 and existing home inventory for sale is below 2.5 million. Foreclosures remain at very low levels, 180,000 in September. And home prices are on the rise in most regions.

One of the few negatives is that residential remodeling had a slight rise in the first half of this year and has slid backwards the last several months. While this is good news, particularly after what has happened in the last 6 or 7 years, there are certainly some headwinds. The result of today's election will have a profound effect on the economic health and direction of our country. Europe remains in crisis and China is slowing. What this will mean for the U.S. economic recovery remains to be seen.

The fiscal cliff seems to be the next big economic crisis. We will need to have a more productive political environment to solve this problem in a timely manner. Availability for credit for mortgages, yes, we have low interest rates, but not everyone who wants to buy a house has a credit score north of 780 and have a 20% down payment. Builders have been raising the issue of lot shortages and the high cost of land. The length of time to gain approval for new development has stretched out due to the shrinkage of local governments and their staff. Our own balance, it is our belief that we are in the midst of a sustainable housing recovery, and we are taking steps to be ready to meet higher demand. At the same time, we will remain agile to respond quickly to any short-term disruptions to this recovery.

Turning to the supply chain and our internal review of our supply chain risk. We have identified many potential problem areas that can be grouped into 5 broad categories. First category is fiber. In the U.S., we do not believe there's a shortage of fiber in any of the regions where our facilities are located. The growth versus drain has been very positive due to less fiber demand in the downturn and better forestry practices. Another potential threat to the supply, biomass energy uses, has also dissipated due to the low cost to natural gas.

In Canada, there is no shortage of fiber but access to that fiber is under attack. Specifically, the change in the management of the Québec provincial forest land for manufacturing company's to the government is a bit concerning. Also, the Canadian Boreal Forest Agreement is now 3 years old, and is in a challenging point in time. A more immediate concern is our belief that the logging and transportation infrastructure has been damaged during the downturn. We are spending an increasing amount of time with our core suppliers to rebuild this capability by providing them with committed volumes that will allow them to reinvest in equipment and people to meet our needs.

On the manufacturing side. As you all know, during the downturn, we closed a number of OSB facilities permanently and shuttered several others definitely. As the recovery gains momentum with greater levels of new construction and repair remodeling activity, we will need to reopen capacity to meet our customer needs. For OSB, a general rule of thumb is each 100,000 housing starts equates to about 1.1 billion square feet of OSB demand, plus another 300 million to 400 million square feet related to other uses.

As an example, looking at APA's reported numbers, North American OSB production was about 15.6 billion square feet in 2011, and it is expected to rise to 17.8 billion square feet this year, on an expected housing increase of about 150,000 units. APA reports in 2012, this increase in demand was satisfied by filling out shifts at currently running mills. In fact, in Q3, we ran all of our U.S. mills at full capacity. That means for LP that our only remaining surge capacity is in Canada.

If there are another 150,000 to 175,000 housing starts next year, then we believe there could be demand for another 1.5 billion to 2 billion square feet of OSB. We can add shifts in our Canadian mills and we'll likely do so if there is regional demand next year. In the Southeast, we can only meet increased demand by restarting an idled mill.

LP's idled 1.6 billion square feet of capacity is in 3 mills: Our Clarke County, Thomasville is a new mill that ran for a few months in 2008. This mill is located in one of the highest the regions for OSB, as housing recovers. Our Chambord, Québec mill has been down since 2007, and our Dawson Creek mill has been done for about a year and mostly focusing on value-added OSB products, tax shield, radiant barrier and flooring.

On our last call, I said that we would consider starting one of our curtailed OSB mill if we saw housing starts approach 850,000. Well, it came quicker than we thought with last month's reported annualized housing start rate at 872,000 and permits at nearly 900,000. As a result, we are putting plans in place and beginning to do the work necessary to bring on shifts or restart idled capacity to meet our customers needs regionally. Our current thoughts are that we will add a 4 shift at our Peace Valley mill in British Columbia in Q1, we will restart at Clarke County mill in Q2 and we will consider the restart of Dawson Creek. In the first part of 2014, we see housing starts headed towards 1 million.

In Siding. Our Siding goal is to always have capacity in front of demand in this product line. Over the summer, our board approved a $6 million-plus project or expand our capacity at Two Harbors mill, while increasing the technical capabilities. In Hayward, we have a 2-line mill, where one of the lines has been dedicated to OSB. We have already made the necessary capital investments to very quickly convert this production to Siding. We're fully engaged and looking at ways to increase capacity at the existing Siding mills and have started discussions on the next OSB mill to convert for a new site.

The next area in the supply chain is finished goods distribution. There's a shortage of both truck drivers and equipment, primarily flat bed. The downturn removed much of the available capacity in the new DOT rules that apply to drivers, drastically, cut the supply of these workers. In response, LP has dedicated more resources toward building of our own in-house capability through our New Waverly Transportation company. Here, we manage safety, sales, dispatch and collections for qualified owner-operators. Plus we have to be ever diligent and work in the railroads to add equipment in a timely manner that meet their delivery commitments, particularly in Canada or the CP and CN [ph] run virtual monopolies.

Next here is our channel and customers. We do not take the product the last mile. We don't deliver to the job site. So we need to focus not only on the transportation of our customer, but also have a clear understanding of our customers inventory policies and plans and their downstream transportation capabilities. Our customers share many of the same concerns we do, shortage of transportation equipment and drivers. Then one other concern that we have solved is strengthening of our balance sheet, access to capital debt inventory and expand their business. Underlying all of this is the fifth area, and that's people.

I attended the Harvard Joint Center for Housing Studies Policy and Advisory Board Meeting several weeks ago. One of the questions that was asked as part of the roundtable was around anticipated bottlenecks if there's a strong housing recovery. Universally, a shortage of qualified labor was at the top of the list. I've already talked about loggers. 10 years ago, the average logger is 48, now they're 58. And truck drivers. Anyone with a trade skill electricians, millwrights, process control technicians at the mills and framers, electricians, plumbers, HVAC, bricklayers and more at the job sites. Drug tests are increasingly a problem. Immigration policies and guest workers. So as a general rule, we were on the table, it took 10 interviews to hire for one position.

Looking in to the fourth quarter and 2013. We have been getting slightly different stories on the fourth quarter depending on who we talked to. The builders are very bullish and concerned about an adequate supply in materials and labor. The channel remains skittish and unwilling to commit to inventory for a fear of another false start. The retailers are seeing some pickup in demand, with Home Depot being more aggressive. Sallie mentioned Hurricane Sandy earlier, a tragedy. For building products, there has been some impact. To meet the demands of the initial phases of cleanup and temporary repairs, we are working with our channel partners to provide the products they need. And in some cases, that has meant prioritizing our inventory and increasing production scheduling to the upcoming holiday periods, to make sure we have availability. As rebuilding starts in the Northeast, we will factor this additional demand into our plan to react to continuing signs of an improving demand for our products.

For 2013, we have done all our initial planning on 850,000 housing starts, which now looks to be conservative. But my perspective, I'm probably not going to change this forecast until I have assurance that we won't fall off the fiscal cliff. But as we have done in the last 7 years, a budget is an interesting document, a forecast is for planning, but decisions are made daily based on now casting. Flexibility and agility will continue to be critical skills for our organization.

With that, let me turn it back to Sallie.

Sallie B. Bailey

Thank you, Curt. Catherine, we're now ready for questions if we could go to the queue.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from the line of Mark Connelly from CLSA.

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Curt, do you have a timetable for the Engineered Wood business to become consistently profitable as you think about the rest of this? And is that a core business? And if so, why is it a core business? Second question is with respect to your last comment on distribution. Neither of your 2 predecessors expressed interest in having an in-house distribution business. Could we see that change given the environment you're facing now?

Curtis M. Stevens

Well, let me address the EWP business. As we have talked about for the last several years, it is part of our core strategy, because it helps us frame the full house for our customers. We do believe that there is so much excess supply in EWP that until we see a million housing starts, it won't be consistently profitable, is our best guess. I will say it was positive EBITDA in Q3, which was certainly a positive. So it remains core. We do see that with the shortage of lumber coming out of British Columbia due to the beetle kill and the advent of the Chinese business, plus some of the changes in design values for southern yellow pine that builders won't increasingly turn towards Engineered Woods as a solution. As far as in-house distribution, Mark, I got to tell you, I looked at that so many different times, and it looks to me like negative synergies. So I don't think you'll see a change under me. I can see that there's not much value to us.

Operator

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

Gail S. Glazerman - UBS Investment Bank, Research Division

Curt, I guess just a couple of questions. One, any sense of what you think really drove the pop in OSB pricing because, clearly, it didn't seem like you expected it on the last earnings call? And in terms of your realization, I understand the regional difference is the mix, but was there any carryover where it might have just been a delay and you'll see some pricing slip into the fourth quarter or is it more that you just didn't transact at the peak prices?

Curtis M. Stevens

Well, your first question was on...

Gail S. Glazerman - UBS Investment Bank, Research Division

What you think that drove...

Curtis M. Stevens

Drove the price?

Gail S. Glazerman - UBS Investment Bank, Research Division

Yes, drove the price. It didn't seem like you are anyone expected to kind of on earnings call last quarter and then all of a sudden prices ran?

Curtis M. Stevens

Yes. I think that -- yes, I think that when pricing went up in Q3, I think the buyers put away their PO books. So while we had high prices that were published, there wasn't a lot of business transacted at those prices because they are waiting for pricing to come down. And it did come down, but it didn't come down as far as they thought it would, and then housing starts came out. And I believe that they all got spooked and said, "With housing starts that high, I guess, I got to put some inventory on the ground." And when they started to do that, then pricing headed up. Now what's happened in the fourth quarter so far, and I talked about it briefly, is with Hurricane Sandy, there is going to be some pull for demand from that. And that's likely to whole pricing at today's levels is my expectation. As far as the value-added piece, generally, our value-added products are priced looking backwards over a period of time, so there's a longer index attached to those. So we'll see a little carryover into Q4. But in general, that's what you see in a rapidly rising market.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And then in terms of bringing for Clarke County Brack online, have you started the process already or you kind of already along the process or as you changed your view, fiscal cliff or whatever, that you're not too far along to change that decision?

Curtis M. Stevens

Well, when I took over in May, one of the first things I did is asked Jeff Wagner, who heads up our OSB business to really do this whole supply chain risk analysis for us. And we identified that we needed articulated start-up plans for the 3 facilities that are down and then we needed to have good plans in place to add shifts. So one of the first things we did is commissioned each of the businesses to make sure that we did have those plans in place. So that when we decided to trigger it, then we know what to do. So we actually started the planning effort last May, but it accelerated really in the last month as we saw housing starts coming out of the higher levels and permits at the higher levels. Now what we said before is that it was about a 9-month time frame to bring that up and roughly $10 million between capital and working capital. That's probably a pretty good estimate. So that's why I'm saying Q2 of next year. Now I will -- and again, I will be very clear on this, we are going to remain agile. So we're taking the steps necessary. We're dealing with a long lead time things, but if we do have a pause in the recovery due to the fiscal cliff in the first half of the year, we will make some adjustments.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And then just one last quick question. Within Siding, it looks like OSB production was flat quarter-on-quarter, and I thought you were supposed to be kind of transitioning some of the commodity into higher-value Siding products. Has that been pushed out or is there any change in how to think about that?

Curtis M. Stevens

You're saying OSB and Siding?

Gail S. Glazerman - UBS Investment Bank, Research Division

The commodity in Siding -- the commodity OSB within Siding. It looked like production was kind of flat sequentially and I would have expected it to go down a little bit as you moved up the value chain.

Curtis M. Stevens

Well, what we did in Siding is we added 4 shifts at all 3 of our smaller mills and we ran those 24/7. So we satisfied the increased demand for Siding out of those other 3 mills. My comments on growth going forward, is we do have the ability to shift that production to Siding when demand requires it.

Operator

The next question comes from the line of Mike Roxland from Bank of America Merrill Lynch.

Michael A. Roxland - BofA Merrill Lynch, Research Division

Just a quick question on your OSB costs. It seems as though the cost on per MSF basis moved higher versus 2Q. Is that totally just due to the JV or are you seeing any particular increase in cost whether it be resin or nat gas to maybe impacting your operations in 3Q?

Sallie B. Bailey

Right. Sure. Actually, when we looked at our cost, Q3 to Q2 without the Peace Valley joint venture, they're pretty much the same. They're actually below where they were in the third quarter of 2011. So it's really the impact of the Peace Valley joint venture.

Michael A. Roxland - BofA Merrill Lynch, Research Division

And the other cost, you refer as the other cost really were neutral quarter-over-quarter?

Sallie B. Bailey

Right. And of course, we add more throughput as well. So that's really the biggest change on what you're seeing.

Michael A. Roxland - BofA Merrill Lynch, Research Division

Got you. And just one quick question on what Gail has mentioned, the last question on the capacity. How quickly can you react to the market? So if the fiscal cliff really takes effect in January and you've already started to bring up Clarke County. I mean, how quickly can you react to that? And if it doesn't actually materialize and you do bring up Clarke County, what type of production should we expect see out of it in 2013?

Curtis M. Stevens

Well, the rating capacity of that mill is about 750,000, so you probably see somewhere -- assume it starts in the second quarter, it cuts it in half and it's a start up, so you're probably talking about 250 million to 300 million square feet of it for next year. Now how quickly, what we would do is we just wouldn't -- we'd continue to train the people and recruit the people, but we wouldn't start the capacity -- or wouldn't start the machinery.

Michael A. Roxland - BofA Merrill Lynch, Research Division

Got you. So you have people in place just in case that does turn around, so you'll be able to start the machine pretty quickly?

Curtis M. Stevens

My view is the fiscal cliff is going to be a short-lived crisis because we just can't afford to let that happen to the country. So if Congress can't get together and solve the problem by the end of the year, we could have a dip in Q1. But I'm convinced whoever the new administration is, we'll have a mandate to fix it. So it will probably get fixed in the first quarter then we'll come back out of it. So I see there's more of a 2 to 4 month delay than a fundamental change in demand.

Operator

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

Joseph Stivaletti - Goldman Sachs Group Inc., Research Division

I just had a couple of things. So if I understood right, the 903 million square feet of production in OSB in the third quarter, that was your mills in the U.S. full out and then in Canada, you feel you can move that up a bit in the fourth quarter, so I wondered what that would likely add if you run -- what you will likely produce in the fourth quarter given that plan?

Curtis M. Stevens

Well, it depends on what the demand is, Joe. But in Peace Valley we're only running 5 days a week there and we don't intend to run a full 24/7 until the first quarter of next year. So we don't have any additional capacity coming out of there. Our shifting patterns in Swan and Maniwaki are really focused at their regional demand. Maniwaki, we do -- opportunistically do some export business out of Maniwaki. And so depending on what export pricing is, we could kick that up or down. I don't -- fundamentally, I think you're probably going to be somewhere between Q2 and Q3 pretty flat. Now what we did do and I talked about it on the last quarterly call, on the fourth quarter, we usually take downtime around the holidays, because of Sandy, we are looking at running some of our mills through that, that holiday period just to supply this incremental demand that's required in the Atlantic seaboard.

Joseph Stivaletti - Goldman Sachs Group Inc., Research Division

Okay. That's helpful. And I guess, I had 2 other things. One was, what are your thoughts in general on the announcements you've seen by the industry as a whole looking at 2013? Do you think that -- would you characterize the industry as being rational? Do you feel that people are being possibly too optimistic with some of these reopenings or...

Curtis M. Stevens

Well, I think I would just go back to what I talked about. If you look at incremental demand that would come from 150,000 to 175,000 housing starts, it's somewhere between 1.5 billion or 2 billion square feet of capacity. So we need that incremental capacity to satisfy the demand should it come forward.

Joseph Stivaletti - Goldman Sachs Group Inc., Research Division

Okay. And then given the stronger environment, you talked about increasing your CapEx slightly for 2012. What are your thoughts on CapEx for 2013 and what kinds of projects are you focusing on?

Sallie B. Bailey

Yes. Joe, as we think about 2013, I think we've often talked about the need for just maintenance capital for each of our mills someplace between $1 million to $2 million. And as you know, we've been on the low end of that for quite a few years. So I think you can start with a program that would be close to $2 million for plant that would put us in the $50 million range. And then potential growth projects on top of that, including the Chilean mill, which was a third mill in Chile, which we're looking at. And we'll look at other growth capital opportunities, which would put us someplace, I'd say, from modeling purposes right now that if you look at $60 million, so that would be probably a good starting point.

Joseph Stivaletti - Goldman Sachs Group Inc., Research Division

What's the Chilean -- what's the cost of -- roughly the cost of what you're considering there?

Curtis M. Stevens

Well, what we're considering is relocating an idled facility in North America down there. It'll be a larger capacity in either of the mills that are down there now because, frankly, there is no more smaller mills around. So we are currently thinking -- we did the first one for $25 million, we did the second one for $35 million. I'm thinking this one is probably going to be $50 million over the 3-year period.

Operator

The next question comes from Chip Dillon from Vertical Research.

Chip A. Dillon - Vertical Research Partners, LLC

When you look at your tax situation, I know you had about, I want to say, $170 million, I guess, of carryforwards. And I guess if you look at the federal government it's like 60 and 60, U.S. and Canada roughly at the end of last year. How do you -- let's say you stay profitable, so let's assume that, how should we think about how that gets used up? I mean, I guess there's some minimum cash taxes you have to pay? I mean, does it -- can you use it up to certain tax or down to a certain tax rate? Or how should we think about how that gets used up? And is the reason the number might not be higher is because you had a lot of tax loss carrybacks, I guess, you call them, that you took advantage of earlier?

Sallie B. Bailey

I'll answer those questions in reverse order. Yes, it's because we utilized the cash -- the carryback as much as we can. And going forward, I think you should anticipate that we will utilize the Federal and the Canadian tax net operating loss as much as we can.

Chip A. Dillon - Vertical Research Partners, LLC

Got you. And maybe the way you would encourage us to, I guess, think about modeling the company I don't -- well, first of all, the book tax rate is obviously well below that 35% normal number. When do you think the book tax rate could get to that level? And again, I'll give you my assumption. Let's say that you your pretax income exceeds of, say, $100 million next year.

Sallie B. Bailey

Right. So the book and the cash tax rates are not -- will generally not be the same, as I think you're aware of.

Chip A. Dillon - Vertical Research Partners, LLC

Of course.

Sallie B. Bailey

Right. So as soon as Canada begins to become profitable, those Canadian -- that Canadian income will get taxed at the Canadian tax rate, which has -- I don't have it right at hand. What was it? 26%, that's what I was thinking. It's about 26% or 27%. So for modeling purposes, it depends -- we certainly have net operating losses in both countries that should -- that we'll utilize in 2013.

Chip A. Dillon - Vertical Research Partners, LLC

So maybe just a way to think about. Let's say we get into sort of a profitable steady state in a couple of years. You would have 35% in the U.S. plus a few percent for federal -- I'm sorry, for state. But then the Canadian part would be taxed at lower rate. So the blend, if everything is profitable, probably doesn't get much above 33%, 34%. Is that a fair guess?

Sallie B. Bailey

Of course. That's exactly how we did the 35%. And you have to remember the Chilean rates, the Chile and Brazil as well.

Chip A. Dillon - Vertical Research Partners, LLC

Okay. And they're higher than Canada?

Sallie B. Bailey

No, no, no they're -- let me -- I found my sheet. All right. So Chile is now at 20%, Canada is around -- just under 27%.

Chip A. Dillon - Vertical Research Partners, LLC

Okay. So a lot of companies will show something north of 35% because of state taxes. But because of the -- assuming you make decent profits or proportionately your profitable, these are the regions you should be below, I mean, 35% actually looks conservative.

Sallie B. Bailey

Well, and remember, again, this is going to be -- Chip, that's going to be -- the book, we're still going to have book expense even as we used the NOL with the exception of -- you have to think about how Canada goes back into that, because we haven't been able to take valuation allowances against that.

Chip A. Dillon - Vertical Research Partners, LLC

Okay. And then shifting gears a little bit on the -- you've given us your thoughts about sort of how you might bring up the capacity given the demand changes. And I think you mentioned the first thing would be a shift at Peace Valley and a fourth shift, and I think that capacity is at 820 million square feet, which I don't know if that's based on 4 shifts or how -- I mean, does that mean the increment is like 200 million or how should we think about that one?

Curtis M. Stevens

That's the way you should think about it.

Chip A. Dillon - Vertical Research Partners, LLC

Okay. And then, of course, Clarke County is still 750 million, but if you start that in the second quarter, I mean, there'll be some learning curve there, I guess, of course since it really hasn't opened up before?

Curtis M. Stevens

Right. And that's why I said that next year, we started, middle of second quarter, let's call it, that, that would be between 250 million and 300 million is what you would out of that mill as a quality products.

Operator

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

Mark A. Weintraub - The Buckingham Research Group Incorporated

So Curt, should be thinking about your incremental production capability next year as that 200 million, plus the 250 million to 300 million, so 450 million to 500 million or are there some other variables that could be at play?

Curtis M. Stevens

That's probably reasonable. I think the only variable at play, as I mentioned, Maniwaki we're not running full out and we could look at some export business incrementally there.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Okay. But that's not a big number, presumably?

Curtis M. Stevens

Not a big number. I wouldn't go into unlikely going to this market. Let me just step back a minute. We looked at running Maniwaki and Swan Valley full out to satisfy the demand of the U.S. The problem is the Canadian dollar, the dollar too and the rail freight coming from either Maniwaki or Swan Valley just makes it so compelling to open up Clarke County, that basically, you swap out that volume. So we're not going to run that volume in Canada, instead we're going to run it in Clarke County. It's currency and freight play.

Mark A. Weintraub - The Buckingham Research Group Incorporated

And when we think about the cost of the new incremental capacity at Clarke, I guess, you are -- it's going to be kind of a fully loaded cost, but it's a brand-new mill so maybe a little lower than the average in your system, is that fair? And then Peace Valley, since it's incremental capacity and a mill that's already running, I would imagine that could be a fair bit lower?

Curtis M. Stevens

I think your second comment is true. Your first comment, remember, we're going to be in a start-up mode next year, so anytime you are in start-up mode, your costs are higher.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Okay. And that beyond the $10 million you're just in general?

Curtis M. Stevens

$10 million is just working capital and capital.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Got it. And then as we look to 2014, presumably, much of the balance -- obviously, you're going to be responsive to market conditions, but in terms of potential, you would have much of the balance of Clarke. So it could be as much as 450 million in 2014. And then, I think you had mentioned, and I apologize -- what did you mentioned about in the first quarter of 2014 being under consideration?

Curtis M. Stevens

Well, Dawson Creek is our specialty mill, and so as we see demand for our flooring on our textile radiant barrier products, we would consider bringing that up in the first part of 2014 to satisfy that product need in the West Coast.

Mark A. Weintraub - The Buckingham Research Group Incorporated

And can you remind us what's the capacity at Dawson Creek?

Curtis M. Stevens

I think it's 450 million.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Okay. And then there's a third mill in your system, which basically is not in the plans at this point, is that...

Curtis M. Stevens

It's in Chambord Québec and we believe we can satisfy incremental regional demand for Maniwaki and from Swan without having to bring that up. So we wouldn't think about bringing that mill up until we have Swan and Maniwaki from regional standpoint, filled out.

Operator

The next question comes from Mark Wilde from Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Firstly, I just had a question about Clarke County. Are you going to bring that up, Curt, on 4 shifts or might you do something like we're you run 2 or 3 shifts as it comes back in the market?

Curtis M. Stevens

Mark, I'm going to let Jeff make that decision. That's in his operating plan. I honestly don't know.

Mark Wilde - Deutsche Bank AG, Research Division

Well, it sounds, Curt, like over the last several years you guys have gotten more comfortable at running these mills at something less than 24/7 without really blowing the cost structure up. So I'm just curious as to whether that's something you're thinking about with Clarke County.

Curtis M. Stevens

I'd tell you if I knew. Jeff is running that program Mark.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. All right. That's fine. Second question I have, can you just remind us kind of puts and calls that might in place around that Peace Valley JV?

Curtis M. Stevens

Well, it's a 50-50 JV and there is a modified shotgun with tag-along rights. So I Canfor would like sell their interest -- well, first of all, I'll tell you, I'm not selling my interest, Mark. So LP is not selling. But if Canfor we're looking for an opportunity to get cash. It would have a couple of things. One they can negotiate directly with us, which would probably make the most sense. Second thing, they could market their 50% but we have a right of first refusal on that. And if it's a crazy price, then we have drag-along right, so we could choose to sell our piece to the new buyer as well.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. Then one other question, and I hate to have you make too much of this before you have the money on your pockets, but just uses of cash flow during this upturn. It seems like if you look at the OSB business industry as a whole, where producers have really struggled with how they use cash during the upturn. The last upturn, we had an awful lot of new capacity added and some acquisitions made that didn't work out very well. What are you guys thinking about over the next 2 or 3 years for use of your cash?

Curtis M. Stevens

Well, one of the things you just mentioned that we have some joint ventures that are strategic to our businesses going forward. So to the extent that our joint venture partners would like to exit those, that would be use of cash in there. I'm thinking not only the Canfor joint venture but the Abitibi JV, and then we do have the sales arrangement with Murphy Plywood, which is a very low-cost producer of LVL in the West Coast that we'd also be interested in adding to our portfolio. But that's the piece of it. The Chilean mill, we talked about earlier, we do plan on going forward with that assuming the analysis comes out appropriately, and I think it will. So those are some. And then, as you know, in the past we've had dividends, we've had share repurchase programs and all that's part of our ongoing look at what we would do with excess cash.

Sallie B. Bailey

And of course in 2016, the notes that we issued earlier this year become callable.

Curtis M. Stevens

Correct.

Sallie B. Bailey

The only thing I'd like to add to that, because I remind our team here in Nashville around the country, of this with some frequency that we'd like to see that cash flow generated first. So while we're very thrilled with the $63 million generated [indiscernible]...

Mark Wilde - Deutsche Bank AG, Research Division

Yes. that's why I hated to ask the question, but...

Sallie B. Bailey

And I appreciate the question, Mark, because it gave me an opportunity to -- for us to respond. But we're really pleased with the cash flow generation we have this quarter. I mean, $63 million, but we'd like to see that -- see us generate the cash before we start spending that.

Mark Wilde - Deutsche Bank AG, Research Division

Well, I think we're all on the same camp, Sallie. It's just that, over time, the use of cash has been a real challenge in the business.

Operator

The next question comes from Steve Chercover from D.A. Davidson.

Steven Chercover - D.A. Davidson & Co., Research Division

My questions have been answered, but you have 3 idled mills if I'm not saying mistaken, Saint-Michel, Athens and Silsbee. Are they all candidates to be taken down to Brazil?

Curtis M. Stevens

They are and we also have some other options as well. Remember we have the Woodland mill. And we still have peripheral equipment sitting all over the place. So there's many options, but that's the point, that those mills are bigger than what we had before. So the milling goes down, there's probably going to be 350 million to 400 million square foot mill.

Steven Chercover - D.A. Davidson & Co., Research Division

Okay. And not to jump the gun, but I think the South American strategy has been pretty effective. I mean is there even one OSB mill in Mexico? Would it make sense to try and replicate the strategy, kind of a little closer to home?

Curtis M. Stevens

We need trees and we believe we need a stable political environment and a place where you'd actually want your employees to go.

Steven Chercover - D.A. Davidson & Co., Research Division

You can't use cactuses [ph], I guess?

Curtis M. Stevens

It's just...

Steven Chercover - D.A. Davidson & Co., Research Division

Okay. And then can you just maybe articulate what the challenges of bringing up a mill that hasn't been utilized for 4 or 5 years are? Because you're not the only guys who are planning to bring on mills that have been idled for substantial period.

Curtis M. Stevens

Well, we had a skeleton crew at Clarke County, including a mill manager and a maintenance superintendent. So we think the machine centers are all in pretty good shape. I think the biggest challenge we're going to have is in the hiring process. And that's where we got to get started relatively early, and that's the skilled trades. Bringing in the maintenance people, bringing in the electricians, bringing in the process control people. So that's probably going to be the biggest challenge, I think, for us is bring those people in and getting them trained up to run the mill now. The advantage we have is we have other mills in the area, so we can bring workers from our other mills in on a periodic or a short-term basis. But that's, I think, going to be the biggest challenge.

Steven Chercover - D.A. Davidson & Co., Research Division

And how do the machine centers degrade if you hadn't had on-site maintenance?

Curtis M. Stevens

Well, if you don't bump the motors, you could have a lot of rust. You could have mold, you could have a whole bunch of problems. So if you don't lubricate the conveyors, you got to rebuild a lot of the bearings and those kinds of things.

Operator

The next question comes from the line of Paul Quinn from RBC Capital Markets.

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Just 2 questions. One is just on OSB production volumes were down 2% quarter-over-quarter despite the robust demand. I'm just wondering if you had any operational issues in the quarter why we saw a less production?

Curtis M. Stevens

We did. We actually had log shortages in 2 of our facilities, and then we had a piece of equipment go out, I think, in our Jasper mill and we lost a couple of days of production. So it was with log outages in 2 mills and then we had about 3 days of downtime on a piece of equipment at Jasper.

Sallie B. Bailey

And some weather in Maniwaki.

Curtis M. Stevens

And some weather in Maniwaki.

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Okay. And then it seems like this is the third quarter in a row where the analyst community sort of overestimated what you're going to do in the quarter and we're probably most guilty in this. So I understand the sort of the value-added component to your mix and why that pricing improvement will be slower. But maybe if you could give us some detail around your sales channels and how each of those channels, whether it's to the pro dealers, to industrial customers or to the retail segment differs from the print prices?

Curtis M. Stevens

Well, that's a...

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Easy question, easy, easy.

Curtis M. Stevens

When we look at it, the wood that we have on contract, generally, it's about a 2-week lag. So if you back off, you take the 13-week average during the quarter and you go back to in to the prior quarter and you back the last 2 weeks out of the current quarter, that's going to give you a good indication of what the wood we sell into the home centers going forward, right.

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Okay. And that percentage is approximately?

Curtis M. Stevens

It's about 25%. And then if you look at the open market wood, what you're doing there and I think, again, I think you all may understand this, what we're trying to do it open market wood is we're anticipating what the price is going to be when we deliver to them. And so we're guessing out 2 to 3 weeks what the price is going to be and that's what the buyer contracts with us on. If they think price is going down, then they'll offer a lower price. If they think the price is going up, they'll offer a higher prices. So that could be -- again, depending on which direction it goes, could be coupled positively or negatively. And then we do have a small amount of export. I talked about the export going into in Maniwaki, so that's going to have some impact on the overall because that's going out at a lower price. So adding a contribution margin, but it's not the same prices we're getting in the U.S. And the reason for that is, we couldn't sell that wood in the U.S. without affecting the price negative and that's why it's going offshore. So the single biggest reason is that value-added I talked about. We did about 38% of our product was in value added. And only -- so 2/3 was in commodity and 1/3 was in the value-added piece. And then the other piece is the whole regional pricing as we operate in all different regions. The other thing, Paul, I just want to be clear on this, the people who we sell to in open market have been in this business a long time and they're very sophisticated. They buy less product at the top of the market than they do when the market is coming down. I mean, they're good at it. Remember, the indication of Random Lengths is just what these guys in Eugene thinks at any given point in time. So the count of the market is not a lot of wood transacted, either on the way up or in the way back down.

Operator

The next question comes from the line of Alex Ovshey from Goldman Sachs.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

I'm curious if you have a view at what housing starts level would be industry start to run out of capacity, and if you have an updated view of how much it would cost to actually build the new OSB mill here in North America again?

Curtis M. Stevens

We just had the fourth economic advisory guys in to see as couple of weeks ago in our leadership meeting and they went through their housing scenario and they went through their panel demand. And what they show that what's running -- what could run today that's been not announced is permanently curtailed, about 25 billion square feet and they showed that if we could be out of capacity between 1.4 million, to 1.5 million housing starts. Replacement capacity today, we believe, is somewhere in the $300 per thousand range.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

That's helpful, Curt. And I think you had mentioned in your prepared remarks about potentially upgrading some of the OSB capacity to make Siding product, if I heard that correctly. Can you just talk -- if you did say that, can you talk about what the incremental cost to do that would be and what the target of returns on capital would be there?

Curtis M. Stevens

Well, all of our current strand-based Siding plants are former OSB plants. So the Hayward has got the 2 lines, which is about 500 million square feet of capacity. The others are somewhere in the 125 million range. So what I said is as we look to be approaching the capacity of our current facilities that we're looking 3 different areas. We're looking -- first area that we're looking is there something we can do similar to what we did at Two Harbors with the $6 million project where we're increasing the capabilities of the press, but we're also adding capacity about 25% of capacity for that number. So we're looking at other mills, is there anything we can do similar to that to add capacity in the mills that we currently have. The second thing we're doing if there's discussions between the OSB business and Siding business, is there a mill that could get converted to Siding, it currently is running at an OSB mill. Now remember, the way that would work is it would go into our Siding business, but you wouldn't convert 100% of it. It would still remain capable of running OSB like Hayward does. So if you convert it, let's call it, Swan Valley as an example, which is 450 million square foot mill. If we converted that to Siding mill, it may take 50 million the first year, 100 million the next year, 150 million the next year. So gradually, it will be converted to 100% Siding. The incremental investment, when we did Hayward, was about $35 million to convert that facility to add the Siding capability.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

That's very helpful, Curt. Okay. And just last question, on fiber you had talked about not being concerns that there would be significant inflation there given the supply being good and the biomass demand not necessarily materializing. But maybe just -- on the other hand, to the extent that we have the lumber capacity coming back and more incremental woodchips are out there in the market place. Is there some reasonable probability that you may see a decline in virgin fiber prices because of that?

Curtis M. Stevens

Being lower demand for pulp, you mean?

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Well, just lumber coming back and that driving incremental, just woodchip availability because of that and as well as, the paper grades being in secular decline and supply being pretty decent and biomass not materializing. Is there a probability that you may see a step change lower in virgin fiber prices?

Curtis M. Stevens

I don't think you'll ever see a step change lower, but it could be because I think you're right. We compete directly with the pulp mill, that's who we compete with fiber. And if their demand is lower, it ought to give us an advantage.

Operator

Thank you, ladies and gentlemen. Thank you for joining today's conference call. This concludes the presentation. You may now disconnect and have a very good day.

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