Sallie Bailey – EVP & CFO Curt Stevens – CEO.

Mike Roxland – Bank of America Merrill Lynch Gail Glazerman – UBS Mark Connelly – CLSA Mark Wilde – BMO Capital Markets Chip Dillon – Vertical Research Partners Alex Ovshey – Goldman Sachs Mark Weintraub – Buckingham Research Group Steven Chercover – D.A. Davidson & Company Paul Quinn – RBC Capital Markets.

Welcome to your Second Quarter 2014 Louisiana-Pacific Corporation Earnings Conference Call. My name is Stephanie and I will be your operator for today. (Operator Instructions). I would now like to hand the conference over to your host for today Ms. Sallie Bailey, Executive Vice President and Chief Financial Officer. Please proceed..

Great. Thank you very much Stephanie and good morning. Thank you for joining our conference call to discuss LP's financial results for the second quarter of 2014 and year-to-date results.

I am 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 Relations contact. I'll begin the discussion with a review of the financial results for the second quarter of 2014 and the first six months of 2014.

This will be followed by some comments on the performance of individual segments and selected balance sheet items. After I finish my comments, Curt will discuss the general market environment in which LP has been operating, provide his perspective on our operating results for the second quarter of 2014 and give some thoughts on the outlook.

As we have done in the past we have opened up this call to the public and are doing a webcast. That webcast can be accessed at www.lpcorp.com. Additionally, to help with the discussion, we 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 have also filed an 8-K this morning and some supplemental information as well as we have filed our second quarter 10-Q. I want to remind all the participants about the forward-looking statement comment 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 has been supplemented by the Form 8-K filing we made this morning.

Rather than reading these 2 statements, I incorporate them with this reference. With that let me go into the details. Moving to slide 4 of the presentation for discussion of the second quarter 2014 and first six months of 2014 consolidated results.

We reported net income of $519 million for the second quarter of 2014, a 9% decrease from the net sales reported for the second quarter of 2013. In the second quarter of 2014 we recorded net income of $2 million or $0.01 per share.

In the second quarter of 2013 we reported net income of $94 million or $0.65 per diluted share on $567 million of net sales. The adjusted loss from continuing operations for the quarter is $4 million or loss of $0.03 per share on a normalized tax rate of 35% compared to income of $58 million or $0.41 in the second quarter of 2013.

Adjusted EBITDA from continuing operations was $26 million in the quarter compared to adjusted EBITDA of $122 million in the second quarter of 2013.

On the year-to-date basis we reported $963 million of net sales, a $12 million net loss and the loss per share of $0.09 as compared to net sales of $1.1 billion, net income of $159 million and earnings per share of a $1.10 for the first six months of 2013.

On a non-GAAP basis we recorded an adjusted loss from continuing operations of $11 million a loss per share of $0.08 and adjusted EBITDA of $49 million for the first six months of 2014 as compared to the first six months of 2014 when we recorded $117 million of adjusted income from continuing operations, earnings per share of $0.81 and adjusted EBITDA of $242 million.

The primary driver for the declining earnings from the six months of 2013 is average sales price for OSB.

The decrease in average sales in the average selling price lowered operating results by approximately a $180 million for the 2014 second quarter as compared to the second quarter of 2013 by approximately $231 million for the first six months of 2014 as compared to the first six months of 2013.

I will now move to slide 5 and a review of our segment results. Beginning with OSB, OSB recorded an operating loss of $6 million, on $224 million of sales in the quarter compared to operating profit of $95 million on $306 million of sales for the second quarter of 2013.

For the quarter we reported adjusted EBITDA of $8 million as compared to adjusted EBITDA of $108 million in the second quarter of 2013. Volume increased to 11% but our average sales price is 36% lower as compared to the second quarter of 2013. The decrease in pricing results in lower operating results by approximately $118 million.

For the first six months, OSB had an operating loss of $7 million compared to a 194 million of operating profit in 2013. Adjusted EBITDA for the first six months of 2014 was $20 million compared to $260 million in the first six months of 2013.

The impact of pricing between the years negative impacted the results by approximately $231 million which accounted for more than the change. Turning to slide six which reports the results of our siding business. This segment includes our SmartSide and CanExel siding products and commodity OSB producer at Hayward mill.

The siding segment reported sales of a $170 million in the second quarter of 2014 and an increase of 11% from a $153 million reported in the second quarter of 2013.

The sliding segment reported operating income of $26 million compared to $27 million in the second quarter of 2013 and adjusted EBITDA of $30 million as compared to $32 million in the same quarter of 2013. The reduction OSB price reduced results by $2 million between the quarters.

For the quarter SmartSide average sales price was up 9% and volumes increased 15%, a record for any second quarter. Volume increased in our SmartSide siding line due to continued penetration in several key focus markets including retail, repair and remodel markets and sheds. CanExel prices were down 6% for the 1% in Canadian dollars.

CanExel sales volumes were down 10% in the quarter due to lower Canadian and international demand. On a year-to-date basis the siding segment recorded $330 million in sales, $45 million in profit and $54 million in adjusted EBITDA.

For the first six months of 2013 the siding segment reported sales of $287 million profit of $48 million and adjusted EBITDA $56 million. Improvement from the first six months of 2013 is driven by the increased volume of 13% in SmartSide and higher sales price.

The reduction in OSB prices lowered results by $5 million for the first six months of the year. 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.

This segment also includes the sale of I-Joist and LVL products produced by the Abitibi joint venture are under our sales arrangement with Murphy Plywood. The Engineered Wood Product segment reported sales of $81 million in the second quarter of 2014, up from $61 million in the second quarter of 2013.

The segment's operating loss in the second quarter of 2014 was $5 million the same as the second quarter of 2013. The second quarter of 2014, adjusted EBITDA from continuing operations increased $1 million as compared to the second quarter of 2013.

Volumes in I-Joist were up 27% while volumes at LVL and LSL were up 26% compared to the same quarter last year primarily due to improved market demand. Prices were up 8% in I-Joist and 4% in LVL and LSL reflecting price increase in all our product lines.

On a year-to-date basis, Engineered Wood Products reported net sales of a $147 million a loss of $8 million and adjusted EBITDA of $1 million. In the first six months of 2013 Engineered Wood Products reported net sales of a $124 million, a loss of $9 million and negative adjusted EBITDA of $2 million.

Sales volumes in I-Joist were up 15% and sales volumes for LVL and LSL were up 14%. Pricing was also higher by 6% for LVL and LSL and 9% for I-Joist in the first six months.

Turning to slide 8 of the presentation, for the quarter our South American segment recorded $42 million of net sales, a slight reduction from 44 million in the second quarter of 2013. Operating profit was 4 million in the second quarter of 2014 compared to $6 million in the second quarter of 2013.

South America’s adjusted EBITDA from continuing operations was $7 million for the second quarter of 2014 which is $2 million lower than reported adjusted EBITDA in the second quarter of 2013. Volumes in Chile and Brazil were down 9% compared to the same quarter last year.

The sales volume decrease in Chile was primarily due to issues related to the political trends position which has slowed housing demand. The sales volume increased in Brazil was primarily due to increased export shipments mostly to China. Pricing was lower by 16% in Chile and 2% in Brazil.

In local currency Chile reported 4% decrease and Brazil recorded a 1% improvement in pricing. For the first six months of 2014 South America recorded net sales of $79 million, profit of $8 million and adjusted EBITDA of $13 million.

For the first six months of 2013 South America recorded net sales of $89 million, a profit of $13 million and adjusted EBITDA of $18 million. The lower sales were due to political transition in Chile and the distraction of the World Cup in Brazil.

Total SG&A costs were $36 million in the second quarter of 2014 compared to $35 million in the same quarter of 2013. For the first six months of 2014 SG&A costs were $77 million compared to $17 million for the first six months of 2013.

The increase in SG&A cost is primarily due to cost associated with our systems project and legal and transaction cost associated with our now-terminated acquisition of Ainsworth. We recorded a $3.8 million foreign exchange gain in the second quarter compared to a loss of $3.6 million in the same quarter of last year.

For the six months period we recorded a loss of $500,000 in 2014 compared to a loss of $4.3 million in 2013. Net interest expense was $6 million in the quarter compared to $7 million in the second quarter of 2013 and for the first six months of 2014 net interest expense was $12 million as compared to $14 million in the first six months of 2013.

The lower interest expenses related to our reduction in debt outstanding in Chile in the third quarter of 2013. Please refer to slide nine of the presentation, as of June 30, 2014 we have cash and cash equivalents, investments and restricted cash of $570 million.

Working capital of $821 million, net cash of $200 million and capital expenditures for the first six months were $42 million. We generated $15 million of operating cash flow in the quarter and used $58 million of operating cash flow in the first six months of 2014. We are planning on spending approximately $90 million for capital expenditures in 2014.

Now before I turn the call over to Curt, I would like to make a few comments on our capital structure and capital allocation plans. We plan to maintain a debt to capital ratio in the range of 25% to 30%. This range is conservative but also consistent with the debt to capital ratios of other mid and small cap cyclical companies.

Our debt to capital ratio including the timber nodes was 23% at the end of the second quarter. Now as we have discussed in the past we plan to retain $250 million to $300 million of minimum cash balances. This amount is sufficient to cover our fixed cash cost for 2 to 3 years.

We recently amended our credit agreement to decrease our minimum -- required cash balance to $200 million. The reason for the amended was to clarify the minimum cash balance following the termination of Ainsworth acquisition and to equate the minimum cash requirement in the agreement to the size of the credit facility.

For cash in excess of $250 million to $300 million we will continue to evaluate opportunities for acquisitions for investments in our current businesses such as third Chilean mill and for the siding expansions as well as return on capital to shareholders. In the past LP has returned capital to shareholders through share repurchases and dividends.

With that, let me turn the call over to Curt for his comments..

Thanks for that review of the second quarter Sallie. My comment today will focus on our accomplishments and challenges in the last quarter. Talk about the current state of the housing market and provide you with my views on what lies ahead for us for the rest of 2014 and into 2015.

The second quarter LP and the safety total incident rate of 0.41 for the second quarter. In the quarter a number of our facilities were recognized by the APA for their safety record in 2013. And in June I was able to attend a celebration at our Wilmington LVL mill to recognize the achievement of seven years without a recordable injury.

The good news is that the weather began to improve in late April from a terribly cold Q1, however this was not without challenges due to heavy rains in many parts of the country. In North America we did see volume increase in virtually all product lines due to improved billing activity and other demand.

We sold record volumes of Laminated Strand Lumber in Q2 following a record Q1, the SmartSide siding with another record in Q2. We did post positive adjusted EBITDA in all of our segments except EWP, which was about breakeven.

OSB prices that were over 35% both for Q2 of 2013 and the first half of 2013 accounted for more than a 100% of the change in our earnings compared to last year masking improvement in our overall business operations.

There is little doubt that the housing market is improving but the June housing numbers and the revisions to April and May make it very difficult to determine the pace of the recovery. U.S. housing starts in June with an adjusted annual rate of 893,000, 9% below May but 7.5% above last year. Permits were at 963,000 in June.

The Case-Shiller Index to home prices was up 10.8% in April compared to one year ago. The NAHB Market Index was positive in June and took a big jump in July as builder optimism about sales in the next six months increased by 10%.

While builder optimism looks to be increasing there is a concern in demand for new homes is softening as evidenced by new home sales be lower by 5% in the first half of this year compared to last year due primarily the price increases on last year, higher mortgage rates and more competition from existing homes on the market.

In the recent releases by home builders there has been a lot of talk about increasing the pace of new home closures by focusing on bringing the first time home buyer back into the market. Several home builders are reducing the amenities in their new homes there by allowing for lower price points.

The home builders are more vocal on mortgage assess for first time home buyer through government programs, FHA, veterans and the future of Fannie and Freddie Mae. In other markets retail sales of building materials were up about 3.5% compared to last year indicating that consumers are spending more on repair and remodeling activities.

There has also been an uptick in non-residential construction activities. For the rest of 2014 my optimism is faded as the housing forecast have declined every month since the first of the year which has kept the demand for OSB and EWP products below what we had expected.

The consensus forecast for the year now stands at a 1.44 million starts, a 13% increase from last year. For 2015, the consensus which is a moving target is about 1.29 million which would be a 23% increase over this year’s revised forecast. Whilst these forecasts are lower than they were on our last call.

The 30 year fixed rate mortgages were at 4.15% in mid-July still an attractive rate. The key is that more potential home buyers qualified for these mortgages. The recent growth from the overall economy and the revisions to prior quarters are a strong indication there is more business activity in the U.S.

and the jobs reports last several months have been more positive. This leads me to believe that we will break 1 million housing starts in 2014 but not by much. For 2015 as I mentioned the consensus is just shy of 1.3 million but I don’t believe would be prudent for us to plan our operations around this magnitude of increase.

Our management team is focused on the forecast of next year of around 1.1 million with the downside scenario being flat for this year. The demographics of pent demand for housing would argue for higher numbers but I personally think that the political and regulatory uncertainty over the next few years will make home buyers more cautious.

As always we will continue to respond to the slow recovery by adjusting our OSB production largely in Canada, exploring opportunistic export sales and driving growth in our siding business. As an indication of that the second quarter we removed about a 125 million square feet of production through our curtailments.

For this quarter there are several things that have already happened or will be accomplished. In July we did sell one of our permanently curtailed OSB mills in Athens, Georgia, to a group who is pursuing pellet manufacturing for about $11 million. As an aside, we did retain ownership of the forming line in the press.

Also in July we modified our credit agreement as Sallie discussed. On the down side in late June we did have a catastrophic failure of a flaker in one of our Chilean mills that stopped production. Through the coordinated effort with our folks in Chile, our vendor and U.S. engineering support. I’m pleased to report that that is now back online.

Fortunately this is the winner in South America, we were able to satisfy our customers demand from our production in Brazil. For the rest of the quarter and couple of other things we would like to achieve.

We want to continue to drive the growth initiatives in our siding business and determine the next steps to ensure that we have adequate capacity that satisfies this growing demand.

Well our basics are in place there is still work to be done to address some known shortcomings in our recently implemented ERP system largely to improve the communication between our customers and vendors. As always LP is ready to serve a growing housing market when it happens and we’re looking forward to the increased activity.

With that let me turn it back over to Sallie for questions..

Great. Thank you very much Curt. Stephanie we would like to take questions now if we can go to the queue.

(Operator Instructions) Your first question comes from the line of Mike Roxland with Bank of America Merrill Lynch. Please proceed..

Just quick, first, wanted to start on the EWP business. Obviously, you posted much better pricing in 2Q versus 1Q and also versus prior year's 2Q, yet your profitability worsened, sequentially was flat year-over-year.

And also your EWP performance appears to be worse than some of your peers who have already reported so can you just provide some color on what happened during the quarter that negatively affected your profitability?.

We had several one off events, we had a contract negotiation in our Canadian mill that we actually had a retro adjustment to pay and we also had two termination cost there. But if you took those out we would have been positive EBITDA in that business..

How much did that accounted for, just roughly, a couple million dollars? Is that --?.

Roughly it's about a couple of million bucks..

So Mike to build on Curt’s point we really -- as we were reviewing the business we were really looking more to the year-to-date the first six months to see what the performance of the business is and there you can see particularly on the adjusted EBITDA line almost a $3 million improvement year-over-year..

Got you.

Which would have been more if you didn't have these termination costs and the retro adjustment--?.

That’s exactly correct. Right..

Then, in OSB also, cost and cost premise have increased significantly in 2Q.

So I'm just wondering what happened in the quarter, as well, and whether the cost increase is related to downtime or did you actually see an increase in material cost during the quarter?.

So we actually saw on a cost -- I guess I’m not sure Mike, when I look at the cost of sales I see that they are pretty much the same maybe a little bit lower than they were in the first quarter and certainly lower than they were in the second quarter of 2013 based on our production.

But I mean I think we can say -- maybe you can get with Mike and walkthrough that but we did see some increases in our fiber cost from Q2. ’13 to Q2, ’14 in OSB..

Got you. So that now would be the biggest impact from--.

But not significant, right, not significant. So maybe it's a difference between production versus sales but in general when we look at it we actually saw a decreases in the cost of sales off of the first quarter of ’14 and below the second quarter of ’13..

I will follow-up with Mike offline on that no problem. And just the last question and I will turn it over. As the industry leader in OSB, is there anything else you can do to improve industry fundamentals, especially given your 2015 housing forecast for 1.1 million starts. Most of your peers seem to be running flat out.

You guys seem to be taking some downtime.

As the industry leader with 23%, 24% market share, why not just indefinitely idle one of your higher cost mills until demand improves? Why not just do what needs to be done to get pricing into -- to help move pricing up rather than trending along the bottom here?.

Well Mike what we do is we run this as a system as you know and we did startup two mills last year, one of them was in our Dawson Creek and that was to satisfy two specific value added products, our flooring and our TechShield in the western part of the U.S.

and we have adjusted our production there as we talked about to meet what we feel is demand there. So that’s not actually going into a commodity. It's going into the value added piece.

The other mill that we started up was in in Clarke County and that -- had I known we’re going to be less than a million starts we probably wouldn’t have done that but now that we have that mill up and running what it gives us is it gives us long length of capability in the eastern part of the U.S.

It's the only mill that we have in east that can do the 9 and 10 put and so we are beginning to do some product introductions on those products. But our Plan B always was to take production capacity out of our Canadian mills as demand sales to meet our expectations is that s what we have done..

Any more flexibility there, Curt, to take more capacity out?.

Well we’re taking out the capacity that we think needs to come out based on the demand side. The other thing that we’re doing Mike, and we have talked about this is we did increase our exports in Q2 versus Q1 so that takes that product out of the North America market..

Your next question comes from the line of Gail Glazerman with UBS. Please proceed..

Just sticking on that last comment a little bit, southeast prices remain particularly weak. Is there anything, any adjustment that can be made in there? I assume -- is Clarke County, would still be profitable at a price of $170 on a cash basis? Just the relative weakness in the southeast.

Can you deliver to other regions to be profitable? It seems like that price, you've got to be pushing cash costs at the industry overall?.

That’s probably very close to truth but I’m not sure what the question is..

I'm just wondering, can you move that to other regions and still make a profit at a mill like Clarke County or do think something is going to have to give specifically in the south?.

Well I think that in general we look at reasonable price and take advantage of that when we can.

One of things that has happened for LP is as siding has continued to grow we have taken capacity out of the north central region and I know our sales people are looking to filling demand that would have come out of our Hayward mill with production from the South East or from Canada..

Okay. Just to that point, the reported production volumes of commodity OSB and Siding, obviously, fell very sharply.

Is that a new normal or was there something unusual in the second quarter on that?.

In the siding?.

Yes. The commodity OSB within Siding..

Yes. That’s going to continue to deteriorate, well it's a good thing. It's going continue to be converted siding and that’s my comment earlier.

We do have to decide which mill we’re going to convert to siding and how quickly we’re going to need to do that because as the commodity OSB goes away and becomes converted into siding this is a market where we have to be ahead of our customers with demand. We have already started that discussion..

Gail, we produced 16 million square feet in our siding mills this quarter and our expectation is that that number will be close to zero for the second half of the year. This siding demand is very, very strong..

Okay.

Just taking a step back strategically, in light of the failure of the Ainsworth acquisition and looking ahead to a more normal housing market, what options do you have, just looking ahead? Can you do -- is M&A completely out of the question moving forward and, organically, looking within OSB is there anything that you can do within your system?.

Well I don’t think M&A is out of the question but it certainly put a cloud over it because of the actions of the Department of Justice. We will continue to look at those.

I would guess that in the short term until there is a change in administration or a change in view, it's unlikely that a transaction the size of Ainsworth will be something we pursue aggressively.

But there are some fill in acquisitions in the OSB business, there is some fill in acquisitions in our siding business potentially and some fill in in EWP that we will continue to look at.

We will also although -- and I think our first priority is to utilize all the assets that we currently have, we’re running our OSB business without (indiscernible), we ran it about 80% in Q2. Engineered Wood, even with the increase we saw in the second quarter is still effectively running at about 60% of capacity.

The one that we’re running full out is our siding business and we’re looking at adding additional capacity there in the relatively short term and then South America we did have a little bit of a pause with the activities around the World Cup in Brazil.

We didn’t see a lot of internal demand in Brazil but as Sallie mentioned we did have good export demand particularly from China and then we’re contemplating and we have started the environmental permitting process for our third mill in Chile which would utilize idled equipment in North America as we did with the other two mills there.

So I think we have got some good growth prospects not only just filling out what we have got now but also redeploying some of the idled equipment that we have around North America..

Okay. And just last question on Engineered Wood volumes, your volumes were very strong, as were the industries. It seems maybe a little bit stronger than underlying housing activity would suggest.

Was there any inventory shifting or anything else going on there or do think that was just driven by true demand?.

I think it was driven by demand and I also think we’re beginning to see the impact of housing recovery in a strong Chinese market for British Columbia lumber. So that's creating additional demand for Engineered Wood..

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

Curt, following on Gail's question, I've asked you this before, but both of your predecessors have looked to diversify Louisiana-Pacific away from OSB when the market was strong.

And obviously, we’re talking out a couple of years, but how high is it on your priority list to expand dramatically beyond OSB given the volatility of the market you're in?.

Well as one of the world leaders in OSB I got to embrace it. I think it is over a cycle, I think it's one of the best building materials from a margin standpoint that there is.

Now we do have periods of supply and demand, in-balance that do create difficult pricing environments but I think OSB is a great business and I think it's a platform it helps us enter into these other businesses, or I would say the platform. The strand-based technology that we in our OSB business, we all are using those assets for siding.

We’re also using those assets for Laminated Strand Lumber and we do see that there is some potential further applications that we could apply the strand-based technology. So I think as a company you’re going to see us focused on strand certainly for the near to midterm..

But Mark, we have talked about in the past we are also very focused investing in our siding business and our South American business that has less volatility than the OSB that help us in markets like the one we’re in today..

Your next question comes from the line of Mark Wilde with BMO Capital Markets. Please proceed..

I'd like to come back to the EWP business, because I was a little surprised quite how weak the quarter was. You didn't seem to have gotten the lift that some of your peers had.

You mentioned about $2 million worth of drag from labor and other things, but I wondered if there was anything else that you'd want to call out in that business? I wondered -- your two big public peers in that business place a lot of emphasis on being integrated into distribution and that, that distribution arm really helps them in selling the product.

I would like to get your thoughts on that?.

While I have heard them say that as well Mark. I do think that in the quarter had we not had the labor things that I talked about it would have been a much better comparable than one is looking at our peers.

I have high expectations that our EWP business is going to return to consistent profitability as we see housing starts grow beyond where we’re today. The difficulty in that business has been two pull, one, when OSB, the lumber prices are high the raw materials are high and they don’t get necessarily the lift on sales price offset that.

When OSB prices and lumber price come back down then there is an increased level of profitability and I think that’s what we saw in the second quarter..

Okay and then just a question on distribution, Curt..

On distribution?.

Yes..

We end up being probably the leading supplier to the independent distributors. So we have a series of distributors across North America that we have selected and work with that we think gives us good access to the market.

What I don’t know is -- you can explore that as what the inter-company pricing mechanisms are between the production side and the distribution side and where the margins go up. I don’t -- I am not privy to that information.

That's something we are always trying to figure out.

Just one other question on South America, is it possible for you to break out the relative profitability of the Chilean business versus that big mill in Brazil? I saw your volume was up a lot in Brazil, but you mentioned a lot of that is just Chinese exports, which I assume have fairly low margins given the freight you've got to carry?.

Yes, the Chinese business actually is a pretty good business, it's a decorative panel, it's not used as a business material. The relative profitability, Chile is more profitable than Brazil but Brazil for the last couple of years has been profitable every quarter..

And what would the operating rate be at that Brazilian mill?.

It's probably running about 70% to 75% right now..

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

I noticed the first -- that it looks like you guys -- your production was up maybe 6.5%, but I think you said your sales and volumes of OSB were up closer to 11%.

Does that mean your inventories have come down and did you make some adjustments to the quarter in light of the weaker housing markets already?.

We did have our inventories come down Chip, but most of that was related to some export sales that we’re in inventory in the first quarter that weren't in inventory in the second quarter..

Okay.

And then just a quick clarification, the flaker issue in Latin America, in Chile, was that in late June or late July?.

Late June. I think the flaker went down to 29 of June, it took us a month to get the equipment down and rebuild it and it came online a couple of days ago..

Okay. Then, Curt, you mentioned that you guys are running or planning next year for 1 million to 1.1 million starts in terms of how you will be producing and you said most of the incremental downtime would be in Canada.

Does that mean you're taking a shift off of Dawson Creek, even though that's more of a specialty mill it looks like, or how do you specifically think you'll operate next year and do you think that there will be decremental operating leverage as a result because you are not really taking down any of your mills?.

Well the way we’re running the mills we think it's the most cost effective way to do it. Take the mill down permanently or in definitely actually cost you a lot of money in severance and employee cost and the rest of that. So I think the way we’re managing it we’re managing it two costs.

The way we do take those shifts out, we either don’t add shifts or we take shifts off or we take market related down time by laying off the hourly workforce for several weeks at a time.

Now the other thing is going on as I mentioned is we’re looking at doing another mill conversion to siding and one of the mills that we’re looking at is a Canadian mill and that would tighten up that supply demand should we decide to do that..

And that actually opens up a couple of other questions. It looks like your CapEx this year has come down about $10 million, if I'm not splitting hairs. I thought it was around 100 million.

But as we look at next year, in light of the weaker CapEx -- I'm sorry the softer outlook -- you might even be more cautious next year, but then again you might pursue a siding conversion.

So I guess I’m asking two things, how much would a siding conversion cost and if you did not do a next year what you think your CapEx would go roughly?.

Chip you’re right, we did take our planned expenditures down from a 100 million to 90 million but more importantly when I think about next year and looking where we’re the focus we will have is on spending for a siding conversion which can be right about $50 million to $70 million, the third Chilean mill, so consistent with the strategy that we have of trying to lift our earnings when the OSB markets is more volatile and then the remaining portion of it given where we’re, we’re looking at capital closer to that get around that $2 million of capital expenditures per mill which is in that $25 million to $50 million range.

So we will look at the base level and then we will protect the investments in the growing business..

I see.

So, if you did pursue a siding conversion that's an incremental $50 million to $70 million by itself, right?.

Correct..

Okay, I got you.

And then on the Chilean, if you did the third mill down there, what would that cost be, roughly?.

In the past it would be pretty similar to what the cost of siding mill is. We spent for the two that are down there we spent about 50 million together and the third mill would be about that same 60 million. So but remember Chip, that’s not all in the next 12 months so that’s over a period of time..

I see. And just the last question.

At this point, from the way it looks, would it look like you would likely try to do those together or one at a time? If one at a time, which one looks to be the better opportunity, at this point?.

Well there is couple of things that play into that one, we have made our filling for the environmental permitting in Chile. There has been a change in the regime down there so it could take us longer to get that approval than we anticipated.

So I’m guessing that the siding would proceed ahead of the Chilean one and primarily because we cannot be out of siding capacity of 100 to take that business..

Your next question comes from the line of Alex Ovshey with Goldman Sachs. Please proceed..

A couple of questions for you.

First, with plywood prices being so strong this year and that spread between plywood and OSB almost on a record level, is there an opportunity to more aggressively take market share from plywood in the back half of this year?.

I would certainly think so. I don’t know why you would but plywood if the spread is large as it is. It's a little bit of enigma to me to understand why plywood pricing is so strong..

So it doesn't seem like there are any concrete examples, though, of people switching. Is that fair? It doesn't seem like there's an answer to why that's not happening, from your perspective, Curt.

Is that fair?.

I think that’s fair, I think the APA would take most of that plywood is not going into construction, is going into some other applications. I wish I had a better answer for you but I don’t..

Yes. It's an interesting question. I haven't really been able to get a good answer to it.

Next thing is there is a lot of discussion about the MLP tax structure for paper and forest products -- names are more focused on these container board names, but intuitively if they were to go down that path and get a favorable ruling, there's no reason that -- where products companies couldn't necessarily go down that path.

So, any thoughts around an MLP tax structure for an OSB mill and have you spent any time thinking about that at all?.

Well I’m actually in Portland to take this call. I have my tax director with me and he has done some initial view of that and we will continue to monitor but we’re not aggressively pursuing anything at this time..

We’re not really think it made sense from what we can see for our model which is not to say we won't continue to look at it..

Can you elaborate a little bit more on that, Sallie, in terms of what, specifically, you feel--?.

Sure. I mean just what we’re talking about today, the volatility of the cash flow is coming out of the OSB business, makes not a particularly attractive structure, it makes a great looking structure in time periods when those mills are generating a lot of cash and very attractive at times when they are not..

Okay. So it's volatility that is a challenge. Got it. Maybe just last one.

Can you help us think through what the cost of downtime would be in an OSB mill system? If you are planning to take X amount of million square feet off-line, in terms of lack of order downtime, how should we think about what that would cost to the bottom line of the company?.

Well what you’re going to have reduce efficiency of the mill until it's largely going to be related to your salaries and overhead structure and as you saw in Q2 we did take 125 million square feet out of the system..

That’s about 30%. So if you think about it, a way to think about it Alex is, our favorable comps are 65% to 78% so we were in the burden of 30ish percent for those mills..

Your next question comes from the line of Mark Weintraub with Buckingham Research Group. Please proceed..

First just following up on the siding options you are looking at, are those mills that are currently running that you are contemplating for conversion?.

Yes but we’re also looking at idled facility but principally the running mills..

Okay. Would you anticipate, certainly by the end of this year, to have made a decision on that? We have made an internal decision. Right now we’re focused on going through our Board in January with a request to start that project..

Mark, to our advantage to convert an OSB mill that’s currently running because we already know we have the certain level of quality in that mill..

And then curious, in that process itself, would the mill go down for a while or is it that it runs OSB until you convert to siding?.

We try to limit the downtime as much as we can but I’m guessing it will probably be 30 to 45 days down but we wouldn’t -- but basically what you’re doing when you convert this mill is you have to put the finishing line in..

Right. Then presumably, you have swing capability for a while, too. You can produce OSB if you choose to and you can produce siding if you choose to.

Is that fair?.

That’s correct..

Okay. Second, Sallie, you were laying out the various options, acquisitions, investments, and you've certainly given us a few investments on your plate and then also return of capital.

Do have a share repurchase authorization in place at this point?.

No please..

And if not, given that, that was one of the options you suggested could be in there, why not?.

We do not have a share authorization at place right now and we’re continuing to talk with our Board about the return of capital to shareholder opportunities..

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

Mine are more follow-ons.

First of all, with respect to Engineered Wood, I just wanted to know, do you have a price hike that's pending for the third quarter or that was perhaps implemented June 1 that should benefit Q3?.

There were price hikes in the second quarter that will have more impact in Q3 than Q2..

And that was in the kind of mid-single digits?.

I think that’s right. It depends on the product line and the region but yes..

Okay. Then, this is maybe as much of a comment as a question, but I'm glad to hear that your 2015 outlook is a little more restrained than I think the new consensus, which calls for still another 20% uptick.

But given that Clarke County is ramping up, if it's only 1.1 million, you'll still need to take probably some downtime or a facility out of the system.

Is that correct?.

Well what we’re doing adjusting production again principally in Canada or looking for export Steve. So we don’t have export opportunities then it would be downtime probably mainly in Canada..

And the conversion to Siding? How much does that chew up of your capacity?.

Well as we just talked about, what we will do is we will make the conversion and as demand rises we will be -- it will be more and more siding and less and less OSB. So it will be running virtually fully with one product or the other. The mills we’re looking at would be somewhere between 380 million and 500 million square feet of overall capacity..

And the final questions will come from the line of Paul Quinn with RBC Capital Markets. Please proceed..

If I could sneak in two easy questions. One is relative levels of OSB North American exports. And then second, what are you seeing on the siding side? Where is that demand coming from? Is that coming from the U.S.

I was just pointing out that you don't have any siding mills down there?.

Well let me just take the second question, the demand for siding is coming from the retail business so we have at least four SKUs in every (indiscernible) Home Depot and Lowe's in North America. So we’re seeing a pickup in that demand.

We’re seeing it from non-residential structures so the shed -- and the out building business and then we’re seeing it from new home constructions, I mentioned like some of these builders are doing these really lower amenity structures. One of these is D.R. Horton has got their Express Homes. Their Express Homes all have LP SmartSide on them.

And the reason they could do that is they don’t have use OSB back or behind it, they can use it as their structural component. So we’re seeing a lot of demand for new home construction as well. So it's pretty broad based.

Second question Paul was?.

Relative levels of exports?.

In Q1 we did 24 million, and we did 32 million in Q2..

And just on the demand for Siding, you described that as retail, but is there a geographic mix to that, as well?.

No. It's pretty broad..

Does it make more sense to convert a mill down in two U.S.

south to Siding, as opposed to one up in Canada?.

Yes we did that many years ago, we found that we couldn’t maintain the same quality levels where the -- selling the old pine [ph]. So we focus on absent markets for where we produce..

Thank you Paul. Well thank you Stephanie. If you could please provide the replay number. We would like to thank everybody for participating in the call. Mike and Becky as always are available to answer any follow-up questions you all may have. Thank you very much and have a great day..

Ladies and gentlemen thank you for participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day. The replay is available for eight days by calling 1888-286-8010. Again the number is 1888-286-8010 and the access code is 85634474, again the access code is 85634474. Thank you for your participation.

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