Louisiana-Pacific Corporation
Q3 2011 Earnings Call Transcript

Published: 7 Nov 2011

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Louisiana-Pacific Corp. Earnings Conference Call. My name is Carissa, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now turn the presentation over to your host for today's conference, Mr. Curt Stevens, Chief Financial Officer. Please proceed.

[Curtis M. Stevens:]

Thank you very much, and thank all of you who are joining us on this conference call to discuss our results for Q3. With me today are Rick Frost, LP's CEO; as well as Mike Kinney and Becky Barckley, who are our primary Investor Relations contacts. I'll begin the discussion with a review of the financial results for the third quarter of 2011, followed by some comments on the performance of the individual segments and a few balance sheet items. Rick will then take over to discuss the general market environment in which we operated in the quarter, his perspective on our most recent results and some thoughts on the remainder of this year and into next year. Rick will then provide a bit more color about the organizational announcement that LP made this morning. Following this, he'll turn it back over to me to answer your questions. As we've done in the past, this call is opened up to the public and we are doing a webcast. The webcast can be accessed at www.lpcorp.com. Additionally, to help the discussion, we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I will reference the slide numbers during my comments. We filed an 8-K this morning with some supplemental information, and we will file our Form 10-Q shortly. I want to remind all the participants about the forward-looking statements comment that's included on Slide 2 of the presentation. Please also be aware of our use of non-GAAP financial information that is discussed on Slide 3 of the presentation, the appendix attached to some of the necessary reconciliations that have been supplemented by the 8-K filing we made this morning. I'm not going to re-read these statements but I will incorporate them with this reference. Before I begin my detailed discussion and results for the quarter, I do want to focus on 3 factors that affected our reported results this quarter and year to date

[Richard W. Frost:]

Well, good morning, everyone, and thanks for listening in. Before I get started, I can't -- resist props go out to my LSU Tigers over the weekend, which offset our Titans loss over the weekend. It is beautiful here, although the results aren't that beautiful. So this morning in my prepared remarks, I'll add some color to LP's performance in Q3 and then follow with a bit of a look into Q4 and how we presently see 2012 evolving. As is customary, I want to begin with safety. Through our Q3, our year-to-date total incident rate was .42, and we are still on a record-breaking pace of improvement in keeping our peoples more safe every year for the last decade. Our Q3 was nothing to brag about us as we did experience a few more nicks and hickies than in Q3 of last year. But year-to-date, we are still ahead of last year's performance. From an environmental perspective, we experienced no notices of violation for the quarter and experienced no environmental fines. Our Lean Six Sigma efforts continue to yield good results with our year-to-date returns at 6.7

[Curtis M. Stevens:]

Thanks, Rick. With that, Carissa, let's go the take queue.

[Operator:]

[Operator Instructions] And your first question comes from the line of Michael Roxland of Bank of America Merrill Lynch.

[Michael A. Roxland:]

Rick, there was discussion on the last call about increased OSB exports out of North America into South America and the resulted impact on pricing. You just mentioned in your remarks about pricing declines in Chile. What did you actually see with respect to exports out of North America into Chile during the quarter?

[Richard W. Frost:]

Just enough to knock the top off the market down there. I don't have the exact volume in front of me but there is just enough volume to come in there and create a little bit more competition on the pricing end than what we had. So it's not an extraordinary amount. It's just enough to be -- to get our attention.

[Michael A. Roxland:]

If housing remains as weak as it has in terms of any recovery, do you expect the pace of exports out of North America to accelerate?

[Richard W. Frost:]

I think what will happen, at least in South America, that will be determined by the value of the dollar. If the dollar gets weak again then that obviously makes it easier. I remember you got a substantial freight bill to go from here to down there, so the dollar in that freight creates some protection. So it is obviously easier to export out of the United States if the dollar is weaker.

[Michael A. Roxland:]

Just on that freight, what would you peg the freight cost at?

[Richard W. Frost:]

It's about $100 bill.

[Michael A. Roxland:]

Last question, just how does this trend affect your thinking on expanding your footprint in South America, if at all?

[Richard W. Frost:]

Well, we're still extremely happy with what's going on in South America, and the transition that has occurred this year is basically that we have about a 50% conversion in Chile so far in terms of them and their new construction starting to build the way that we build up here. If you can remember, we started out at about 2%, and then we were pretty happy when we got to about 23% or 24%, but the earthquake last year proved that the ability for wood frame housing to sustain seismic activity completed that conversion for us. So we look at the demand to be quite strong down there. Our next challenge will be then to penetrate the building markets in Brazil, and it's not out of the question for us within a couple of years to be thinking that we will want to build another mill in South America, although we haven't identified exactly where yet. So are still pretty bullish on that and it is an advantage being in country.

[Operator:]

Your next question comes from the line of Chip Dillon of Vertical Research Partners.

[Chip A. Dillon:]

First question is, and maybe I missed this but the interest income number that tends to be around $4 million, $5 million was way up at $17 million. And I just didn't know what caused that. Is that a one-time kind of pop? And then I guess a related question, the share count went from, like, 131 to 135 and I've always thought of the diluted amount being somewhere around 142, 143. If that factored into it, because when you get profitable and so just wanted to make sure I have the right share count when you ultimately do turn profitable.

[Curtis M. Stevens:]

Two answers to your question. In the interest income, we did sell a piece of our auction rate security portfolio. We have taken the writedown and the writeup through other comprehensive income, so you reversed and flowed through the income about $15 million. So that was the sale of those ARS [auction rate security]. So what we have left on the books is about $0.5 million for about a $24 million face value. And what we did when we sold those, and we did not compromise our position in the lawsuits that we have outstanding currently, but we expect to recover. On the share count, the increase in the share count was due to the warrant exercises associated with the 2017 notes. And they're still about 4.5 -- about 3.5 million shares are yet to be exercised on those warrants. But if you add that to the 139 shares, you're about right at the 143 share count, ultimately.

[Chip A. Dillon:]

And when you look at the interest income as we go forward, because I know there's also some of the timber notes in there as well. Should that revert back to around the $4 million per quarter level?

[Curtis M. Stevens:]

Yes.

[Operator:]

Your next question comes from the line of Mark Connelly of CLFA.

[Unknown Analyst -:]

This is Tom Natt [ph] on for Mark. First question was, can you provide us with an update on the progress you're making on the building code changes in Brazil? I think the last update you gave was that you're hoping to have, make some progress on spruce and walls [ph] by the middle of next year. Is the timeline still the same? And what are the biggest remaining hurdles for those changes to be instituted?

[Richard W. Frost:]

Well, we've got one, Tom, pretty recently, I think within the last 6 weeks, which is an approval to put panels with wood framing. The approval that we had right before that was an approval to put panels with steel framing. What we have learned through this whole process is they don't approve an entire building system. They improve -- they approve component uses. So we've had to regroup over the last year and go at this in a slightly different way. So we're currently working now on getting approval to construct SIPs, which is a structurally insulated panel, which is like the Styrofoam or the foam in the middle and you put a piece of OSB on either side of it, you make a sandwich, and that is being heavily used in the Chilean market right now for construction. And then the other approval that we're working on is for a use for stucco walls to use the OSB as the panel behind the stucco application. So we have 2 now. To repeat, we have the approval for putting panels with steel framing, we have the approval for putting panels with wood framing and now we're working on SIP approval and stucco approval. You may not have been on the call before but I explained in an earlier call that we've had to adapt our strategy to the bureaucracy of Brazil, and instead of going in like we did in Chile and just converting the way that they build, we're having -- we have an adaptation strategy now which is how do we put our products into the way that they build and create a critical mass which then hopefully will allow us to go to a conversion strategy.

[Unknown Analyst -:]

In kind of in that same vein with the approvals that you've gotten, can you talk a little bit about the export business from Brazil? I think last quarter you mentioned the goal of getting 50 million board feet to China by the fourth quarter. Is that still reasonable or does that move up or down?

[Richard W. Frost:]

I think it's reasonable and I think we'll probably -- I'm talking cubic meters now. And to convert to million feet, you need to multiply the cubic meters by about 1.12. I think we'll probably do 15,000 cubic meters in Q4 to China.

[Operator:]

Your next question comes the line of Mark Weintraub of Buckingham Research.

[Mark A. Weintraub:]

Any particular reasons why OSB in the West was as weak as it was?

[Curtis M. Stevens:]

You know, that's one of the key strategies for the OSB team is to figure that out. It's interesting if you look at it, the Western Canadian price has typically in the last 1.5 year been lower than the others. Although when there is a disruption, it reacts very quickly in the positive direction. But we can't point to anything in particular that drove that lower price in the third quarter. Now in reaction to that, you heard Rick say that we did make the decision to indefinitely curtail the Dawson Creek facility for our production of OSB. We reacted to it from the supply side because we don't understand the demand side.

[Mark A. Weintraub:]

And on the Dawson Creek, I think you also mentioned that you had essentially directed that volume to Peace Valley, which you don't fully own. How do you think about when you're closing a facility which is wholly owned and essentially putting the business into something that is not wholly owned? Do you get some beneficial offset for that decision?

[Curtis M. Stevens:]

Well, no. We actually look at it on a delivered cost basis, how can we get the products to our customers on the lowest delivery cost. And then we obviously work in consultation with our partner, Canfor, which we have a very good relationship with, and we do not attempt to maximize our profitability based on ownership.

[Mark A. Weintraub:]

And then lastly, I believe Georgia-Pacific had previously indicated they were going to bring up a facility in Florida in December. Do you happen to know the status of that? Is that being delayed? Or are there any other offsets that you're hearing about?

[Curtis M. Stevens:]

Well, the 2 public announcements that we heard was they would start up their South Carolina mill by the end of the year, then there was an announcement recently that they have delayed that. That's all I've seen publicly.

[Operator:]

And there are no further questions at this time. I'd like to turn the call back over to Curt Stevens for closing remarks.

[Curtis M. Stevens:]

Thank you very much. And again, thank you for attending the call. As always, Mike and Becky will be available for follow up. And with that, maybe you should give out the replay information, Carissa, and we're done. Thank you.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.