Louisiana-Pacific Corporation
Q3 2007 Earnings Call Transcript

Published: 29 Oct 2007

[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:]

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

[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?

[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:]

Thanks, hi, guys. Good morning.

[Curt Stevens:]

Good morning.

[George Staphos:]

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:]

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:]

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:]

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:]

Curt, how are you?

[Curt Stevens:]

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

[George Staphos:]

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:]

I understand.

[Curt Stevens:]

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

[George Staphos:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

Okay.

[Curt Stevens:]

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

[Chip Dillon:]

Okay.

[Curt Stevens:]

It should fall quite a bit.

[Chip Dillon:]

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:]

Is that all running, or not?

[Curt Stevens:]

Peace Valleyis running, yes.

[Chip Dillon:]

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:]

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:]

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:]

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

[Rick Frost:]

Yes.

[Chip Dillon:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

No, not blowing them up, but...

[Curt Stevens:]

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

[Steve Chercover:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

And the wood basket is depleted at this stage?

[Curt Stevens:]

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

[Steve Chercover:]

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.