Sallie B. Bailey - Louisiana-Pacific Corp. Curtis M. Stevens - Louisiana-Pacific Corp..

Mark William Wilde - BMO Capital Markets (United States) Gail S. Glazerman - Roe Equity Research LLC George Leon Staphos - Bank of America Merrill Lynch Chip Dillon - Vertical Research Partners Scott Liebman - CLSA Americas LLC Bill Hoffmann - RBC Capital Markets LLC Steven Pierre Chercover - D.A. Davidson & Co.

Mark Weintraub - The Buckingham Research Group, Inc. Paul Quinn - RBC Capital Markets.

Good morning, ladies and gentlemen, and welcome to the Louisiana-Pacific Third Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host for today's conference, Ms. Sallie Bailey, Executive Vice President and Chief Financial Officer. Ma'am, you may begin..

Thank you very much, Bridgette, and good morning. Thank you for joining our conference call today to discuss LP's financial results for the third quarter of 2016.

I am Sallie Bailey, LP's Chief Financial Officer, and with me today are Curt Stevens, LP's Chief Executive Officer; Brad Southern, LP's new Chief Operating Officer; as well as Mike Kinney and Becky Barckley, our primary Investor Relations contact. I'll begin the discussion with the review of the financial results for the third quarter of 2016.

This will be followed by some comments on the performance of the individual segments and selected balance sheet items.

After I finish my remarks, Curt will discuss the general market environment in which LP has been operating; update you on his current thoughts on siding expansion plans and the recently announced organizational change as well as to give some thoughts on the outlook. As we've done in the past, we've opened up this call to the public.

And we are doing a webcast. That webcast can be accessed at www.lpcorp.com. Additionally, to help with the discussion, we've provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I will be referencing these slides in my comments this morning.

We filed an 8-K this morning with some supplemental information, as well as our Form 10-Q. I want to remind all the participants about the forward-looking statements comment on slide two of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information included on slide three of the presentation.

The appendix attached to the presentation has some of the necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning. Rather than reading these two statements, I incorporate them with this reference. We are reporting $111 million of adjusted EBITDA on just under $600 million of sale for the third quarter of 2016.

The last time that LP reported adjusted EBITDA of over $100 million was the second quarter of 2013. Now, in the last 12 quarters, LP's earnings profile has changed, as we've grown our Siding segment. For the third quarter of 2016, Siding's percent of sales increased to 33%; the percent of adjusted EBITDA increased to over 30%.

We do expect the percentage of sales and earnings from the Siding segment to continue to increase as a percent of total as the Siding segment continues to grow. Now with that, let me go into the details. Moving to slide four of the presentation for discussion of third quarter and first nine months of 2016 consolidated financial results.

We are reporting net sales of $596 million for the third quarter of 2016, a 28% increase from the net sales of $465 million reported in the third quarter of 2015. In the third quarter, we recorded net income of $66 million or $0.45 per diluted share, compared to a net loss of $27 million or $0.19 per diluted share in the third quarter of 2015.

In the third quarter, we reported an income tax benefit of $7.5 million. This benefit is primarily due to the recognition of research tax credit for the years 2003 to 2015, and the reversal of certain state and local tax valuation allowances.

Excluding the impact of the research tax credit and the reversal of the state and local tax valuation allowances established in the second quarter, the company's annual GAAP tax rate for the third quarter would have been approximately 20%.

The adjusted income from continuing operations for the quarter was $47 million or $0.32 per diluted share, based upon a normalized tax rate of 35%, as compared to a loss of $16 million or a loss of $0.12 per share reported in the third quarter of 2015.

Adjusted EBITDA from continuing operations was $111 million in the quarter, compared to $11 million in the third quarter of 2015.

In the first nine months of 2016, we recorded net income of $108 million or $0.74 per diluted share on $1.7 billion in sales, compared to a net loss for the first nine months of 2015 of $81 million or a loss per diluted share of $0.57 on $1.4 billion in sales.

The adjusted income from the nine-month period was $97 million or $0.67 per diluted share, based upon the normalized tax rate of 35%, compared to a loss of $47 million or a loss of $0.33 per diluted share for the first nine months of 2015.

Adjusted EBITDA from continuing operations was $262 million for the nine-month period in 2016, as compared to $33 million in the first nine months of 2015. Moving on to slide five and a review of our segment results, beginning with OSB.

OSB reported net sales for the third quarter of 2016 of $282 million, up 41% from $200 million reported in the third quarter of 2015. Adjusted EBITDA from continuing operations was $83 million compared to $4 million reported in the third quarter of 2015.

Sales volumes were up 5%, and sales pricing was higher by 36%, which improved operating results by $75 million. Reduction in raw material costs and higher utilization rates also improved the third-quarter 2016 results as compared to the third quarter of 2015.

For the first nine months of 2016, OSB reported sales of $752 million compared to $601 million of sales in the first nine months of 2015. For the first nine months, OSB reported adjusted EBITDA of $172 million, as compared to negative adjusted EBITDA of $13 million in the first nine months of 2015.

Sales volumes were lower by 1%, and sales prices were higher by 27%. The impact of a higher sales price on OSB operations was $161 million in the first nine months of 2016, compared to the same period in the prior – last year.

Reduction in raw material costs, higher utilization rates as well as the positive impact of the Canadian currencies on expenses incurred by our Canadian operations also improved the nine-month 2016 results as compared to the first nine months of 2015. Slide six reports the results of the Siding business.

This segment includes our SmartSide and CanExel siding products as well as minor amounts of OSB. Siding reported net sales for the third quarter of 2016 of $195 million, up 23% from $158 million in the third quarter of 2015. Adjusted EBITDA from continuing operations was $42 million compared to $22 million in the third quarter of 2015.

SmartSide volume was up 25% from the prior year. Sales prices in SmartSide were up 1%, primarily due to changes in product mix, with individual prices remaining relatively flat. The Siding segment reported sales of $583 million in the first nine months of 2016, an increase of 18% from $495 million reported in the first nine months of 2015.

Siding segment reported adjusted EBITDA of $125 million as compared to $95 million in the same period of 2015. SmartSide sales volumes were up 15% for the first nine months of 2016, compared to the same period in 2015, with sales prices down 1% for SmartSide.

Please turn to slide seven of the presentation, which shows the results of our Engineered Wood Products segment. This segment includes I-joists, laminated strand lumber, laminated veneer lumber, OSB produced at our Houlton, Maine facility, plus other related products.

This segment also includes the sale of I-Joist and LVL products produced by the Abitibi joint venture or under a sales arrangement with Murphy Plywood. The Engineered Wood Products segment recorded sales of $81 million in the third quarter of 2016, up from $74 million in the third quarter of 2015.

For the third quarter of 2016, adjusted EBITDA from continuing operations improved by $1 million as compared to the third quarter of 2015. Volumes of I-joists were up 1%, while volumes of LVL and LSL were up 9% compared to the same quarter last year. Pricing increased 2% in LVL, LSL and I-Joists.

For the first nine months, sales were $231 million, up from $211 million in 2015. Adjusted EBITDA improved to $9 million from $3 million in the first nine months of 2015. Moving on to slide eight of the presentation. For the quarter, our South American segment reported sales of $32 million as compared to $27 million in the third quarter of 2015.

Adjusted EBITDA of $6 million was higher by $2 million as compared to the third quarter of 2015. Volumes in Chile were down 3% and down 9% in Brazil compared to the same quarter last year. On a U.S. dollar basis, pricing was up 13% in Chile and up 10% in Brazil.

In local currency, Chile's pricing was up 10% compared with the same quarter in 2015 and Brazil's pricing was flat. For the first nine months, our South American segment recorded sales of $103 million as compared to $101 million in the first nine months of 2015.

Adjusted EBITDA for the first nine months of 2016 increased to $22 million from $13 million in the same period in 2015. Total selling, general and administrative costs were $47 million in the third quarter of 2016 compared to $38 million in the same quarter of 2015.

For the nine-month period, our selling, general and administrative costs are $136 million for 2016 compared to $115 million for the first nine months of 2015. For both the quarter and nine-month period, the increase in these costs was primarily due to increases in certain management incentive and higher cost associated with sales and marketing.

Turning to the balance sheet, we announced two transactions in the third quarter which impacted our balance sheet. During the quarter, we refinanced our $350 million senior unsecured note with an interest rate of 7.5% due 2020 with new senior unsecured notes, which carry a 4.875% interest rate and will mature in 2024.

This transaction will decrease our annual interest expense by approximately $9 million on an annual basis. We also announced during the quarter that we have entered into agreements to provide for the acceleration of $410 million of notes receivable from asset sales.

At the same time, we gave binding notice to pay off the $369 million of related notes payable. This transaction will be completed tomorrow. As a result of the transaction, LP will accelerate the receipt of $41 million of cash. This will also accelerate the income taxes of $121 million associated with the gain on the sale of timber in 2003.

We anticipate offsetting much of the accelerated income tax with available carryover benefits. Please turn to slide nine of the presentation. As of September 30, 2016, we had cash, cash equivalents, investments and restricted cash of $673 million, including the cash held for bond redemption, or $580 million excluding that cash held for (12:43).

Working capital of $793 million, net cash of $225 million. In addition to the $580 million of cash on our balance sheet, we had $200 million of availability on our credit facility. We are projecting the capital expenditures for 2016 will be in the $115 million to $125 million range.

For 2017, we are planning on spending approximately $140 million of capital. This estimate includes $40 million for our South American operations but does not include any capital to convert or build a new Siding mill. We also anticipate beginning to pay cash taxes in the U.S. in 2017. The U.S.

represents approximately 70% to 75% of our net income – of our income before taxes. We don't anticipate paying cash taxes in Canada due to net operating loss carryovers. The benefit amount of our available Canadian net operating losses was $64 million at the end of 2015. And with that, I'll turn the call over to Curt..

Thank you, Sallie. Good morning and thanks for joining us on today's call. Before I begin my remarks I do want to acknowledge the passing last week of Harry Merlo, LP's first and longest serving Chief Executive Officer.

While Harry was often a controversial leader, there's no doubt that he was instrumental in introducing OSB to the world and promoting the vision of OSB-based siding. I will start with our safety performance. Through the first nine months of this year, our Total Incident Rate or TIR was at 0.39; and this is also the rolling 12-month TIR.

We are on track for our second-best safety year ever. One recent highlight; our Panguipulli mill in Chile, last week, achieved 1.5 million hours without a recordable injury, a remarkable achievement. The safety of our employees is LP's core value, and I continue to be extremely proud of all of our employees who support this view and act accordingly.

Today, I'll be providing comments on our results and accomplishments in the quarter, provide a little more background to the transaction we announced last Friday with Norbord, discuss the promotion of Brad Southern to Chief Operating Officer, and give you my views on the outlook for the rest of this year and into 2017.

I know Sallie just went through our financial results in detail, but I do want to talk about a few items, because it feels so good. Total sales in Q3 were 28% higher than Q3 of last year and produced net income of $66 million or EPS of $0.45.

For the fourth consecutive quarter, all of our business segments recorded positive EBITDA that totaled $111 million for the company in Q3. In Siding, our big growth business, our revenue grew 23% versus the same quarter last year and adjusted EBITDA was at $42 million.

On a year-to-date basis, our sales are up 18%, net income is $108 million and adjusted EBITDA, as Sallie said, was $262 million. Let me discuss the mill swap with Norbord. As I did mention last quarter, we continued to explore options to building a Greenfield mill in Minnesota as the foundation for our next Siding expansion.

Last Friday, both LP and Norbord issued press releases that described a mill swap between our two companies. Let me explain the rationale from LP's perspective and our preliminary plans going forward. LP's Chambord mill has been indefinitely curtailed since 2008, the beginning of the downturn. Norbord's Val-d'Or mill has been curtailed since 2012.

While curtailed, both mills had a skeleton crew who maintained the equipment to shorten the time necessary for a future start-up. When assessing the facilities as potential Siding mills, we had earlier determined that Chambord did not have ready access to the right wood species, aspen, to make a quality Siding product.

However, Val-d'Or is in an area where there is an abundance of aspen. A complicating factor for both companies as we think about restarting these mills is the actions taken by the Québec government in the last few years to terminate the wood licenses for both mill due to a lack of cutting activity.

A first priority for us is to work with the Québec government to obtain an appropriate wood allocation to run the Val-d'Or facility. To that end, I have had initial conversation with the chiefs of staff and both the Premiers and the Forestry Ministers' offices in Québec.

As I said in last call, the timing for additional siding capacities near the end of 2018. For a new mill, the permitting construction and startup period is likely to be 24-month to 30-month. With the existing mill, we believe that conversion can take place in less than half that time.

Upon closing letter this week, we will immediately begin the engineering assessment to determine the cost and timing of such a project. In addition to the swap of Chambord for Val-d'Or, we also acquired a former Ainsworth OSB site located in Cook, Minnesota during the last quarter.

This will allow us again to further expand Siding at the appropriate time.

I'm very pleased with this result and this will also allow us to continue to work with a very supportive Minnesota elected officials in the IRRRB to redirect the incentives to a site that we believe is better suited from a site development infrastructure perspective than the proposed Hoyt Lakes site.

Last Thursday, I did speak to Governor Dayton, Senator Bakk, House Speaker Daudt and U.S. representative Nolan, and they all pledged their support to this on future project. We have not yet finalized the accounting implication of this transaction is we are waiting on third-party appraisals of the assets involved.

However, we do not believe this would be material. More to come, as we make progress with our discussions with the Québec government regarding the wood allocation reengage with Minnesota officials on the incentives and begin the engineering assessment of both Val-d'Or and the Cook Minnesota sites.

Last Friday, our Board of Directors did elect Brad Southern to a newly created position of Chief Operating Officer. Many of you have met Brad, as he has been a regular participant in investor conferences and also was at the analyst day we hosted last year in Two Harbors. Brad joined LP in 1999 as the controller of our specialty business.

Over the next few years, he moved into increasingly complex operating roles. 2004, Brad became the General Manager of the siding business.

In that role, he was the primary architect of the segment strategy that we'd put in place during the housing downturn to focus on repair remodeling non-residential, structures and retail, in addition to new home construction.

In March of 2015, Brad took over the OSB business and has been instrumental in improving our operating performance and logistics. By the way, along the way, Brad was also the executive sponsor of our successful SAP implementation in 2013.

In his new role, Brad will maintain direct responsibility for the OSB business and will have the General Managers of Siding and EWP report to him along with our Senior VP of Sales and Marketing and the VP of Manufacturing Services. Brad will remain the Chairman of the Board of our LP South America operation.

The elevation of Brad to this new role was part of an ongoing succession planning process that our board has had in place for many years. You may recall that I moved from CFO to COO about five years ago. I am not retiring anytime soon. I also will not speculate on when that time might come.

As the LP board has done in the past, we are making sure that we have qualified internal successors to assume leadership in all of our key roles when the time comes. I'm very pleased to have Brad in this position, as his experience will be invaluable as we continue to take advantage of an improving housing market. Let me talk about the housing market.

Our Q3 housing starts were basically flat for both Q2 of this year into Q3 of last year. However, the mix between multifamily and single-family moved in our favor, with single-family growing at 8% while multifamily declined slightly.

Also, as permits are a leading indicator, we were pleased to see an increase of over 6% to 1.23 million in the September results. With one quarter to go, the consensus for 2016 housing starts now stands at 1.174 million, a relatively slight 6% increase from last year.

For next year, the current consensus is $1.272 million, an 8% increase over this year's forecast. There have been some other positive housing-related data released recently. New home sales, August is the last reported period, were up 20.5% compared to August of 2015.

Existing inventory of single-family homes fell to 2.04 million, 10% below August of last year. On the financing side, the average 30-year fixed mortgage rates were largely unchanged compared to last quarter at 3.47% for the week ended October 14. Retail sales for building materials, garden equipment and supply dealers were about 1.5% higher than Q2.

In Canada, third quarter starts were at a seasonally adjusted annual rate of a little over $200,000, about a 1% increase from the second quarter and down about 5.5% from Q3 of last year. As I mentioned, the current forecast for 2016 shows 6% growth in housing starts, almost all this from single-family.

For 2017, we should see demand for housing continue to increase, driven primarily by increased household formations and wage growth. However, because of numerous constraints, labor, adequate lots, regulatory cost and timing, I think that the growth rate in housing will once again be between 5% and 10%.

We will likely see a trend towards starter homes as the first-time homebuyer appears to be coming back. I recently attended the Policy Advisory Board meeting of the Harvard Joint Center for Housing Studies.

Among other presentations at the meeting, they did provide their forecast for household formations for the next 20 years based on demographics and immigration and their forecast of future homeownership rates.

For household formation, this group is forecasting 13.6 million net new households in the period 2015 through 2025, and 12.4 million net new households in the next 10-year period. Coupled with household removals due to demolition, catastrophe, or conversion plus second homes, this is good news for the housing industry.

On homeownership, they concluded that it could go up or down from the current 62%. The low end of the range was 61% and their high end was 64.5%. Also, at the meeting, the Harvard group reaffirmed their forecast that growth and repair remodeling expenditures should continue at about 4% for the next several years.

With that, I'll turn it over to Sallie for questions..

Great. Thank you, Curt. Bridgette, if we can, we'd like to go to the queue for questions please..

Our first question is from Mark Wilde with BMO. Your line is open..

Good morning, Curt. Good morning, Sallie..

Good morning, Mark..

Thanks for noting Harry's passing; he really was a very large figure not only for LP but for the industry..

That is very true..

I'm just curious.

In your comments about Cook and Val-d'Or, and that sort of 24-month to 36-month timeframe to kind of start up a new mill, should we assume that you're going to move first on Val-d'Or? Is that really what you're saying?.

Well, that would be my preference. As I mentioned, the difficulty there is we don't have an adequate wood supply. So we have to be cognizant of working with the Québec government and how long that might take, and look at our options. So that's why we're doing the assessments at both facilities.

But obviously, converting an existing facility is cheaper and faster..

Okay.

And can you just help us from a – kind of a cost standpoint how the two projects would compare?.

Well, in the Val-d'Or case, the conversion cost would be somewhere between what we spent in Hayward, which is about $60 million, and what we spent at Swan Valley, which is about $85 million. So it's somewhere in that $60 million to $85 million range would be my guess.

On a new plant, again, having an existing site that has the infrastructure will reduce that cost. There is some equipment there, although a lot of the equipment has been sold; and we would think about repurposing equipment that we own elsewhere in North America. But the number's probably going to be somewhere 275 to 300 for base OSB.

Then you're going to have the same conversion cost to turn it into Siding..

So that's – I'm sorry, that's per 1,000 Curt?.

Per 1,000 of capacity, correct..

Yeah, okay. All right.

And can you give us a sense of kind of what capacity would be at either of those two – at each of those two sites?.

The Val-d'Or mill has got, I think, a rated capacity for OSB about 320, 330. You have to discount that for Siding, so it's probably going to be in the 250 to 260 range, roughly. And if we were to do something at the Cook site, my guess is that would be a 400 million capacity mill given the equipment that we have already existing in North America..

Okay, all right.

Just switching gears a little bit, can you also give us an update on kind of where you're at down with the third mill down in Chile?.

I can. We have approved the project. We approved that at the July meeting. We have acquired about $15 million worth of the equipment. Most of that is either on site or on its way down. And we have started the site preparation, so that's where we are on that..

Okay. If we think, Curt, about CapEx for 2017, I know you put out that $140 million number, but you said that doesn't include anything on Siding.

So should we – could we assume that if you move ahead with Val-d'Or that that number is $30 million to $40 million higher?.

I don't think you can assume that yet. Because if we do Val-d'Or, we don't need the capacity till the fourth quarter of 2018. Most of that work would actually be spent – or the money would be spent towards the end of 2017 into 2018. And I don't have a good handle on that yet.

We've been in the mill a very short amount of time, so we still have a pretty significant engineering evaluation to complete..

Okay. All right. And finally, just with this clarity on Siding, which I think is great, can you just update us on your Engineered Wood business and how you're thinking about that? Your margins are still running pretty low in that business.

And I guess I'm also just curious, with sort of clearer runway now in Siding, whether that changes your view of the Engineered Wood business?.

Well, I'd say a couple things. One, I'd just to remind you on the margins because we looked at the competitive margins between us and Boise and Weyerhaeuser, who just reported, and our margins for our manufactured products are pretty much right on top of theirs.

The difficulty you get is Weyerhaeuser looks like they're reporting it coming out of distribution, not as a pure manufacturing play. But the reminder is the JV – we sell 100% of the product, but we only get half of the margin out of that.

And then whatever we sell from Murphy plywood into the West and into export markets, we only get a sales margin on that. So when you look at it, we don't have the asset base, so we haven't spent the capital, but our margins look lower.

The good news in Q3 is that what's been a drag on this business for some period of time is when we converted the Houlton mill into laminated strand lumber, and we had the best volumes in laminated strand lumber in the third quarter that we've ever had.

And actually that mill was EBITDA positive for the first time I think ever since – well, since we've converted it. So we have good momentum on the LSL side that will continue.

And then the second thing I would say is we did have the Forest Economic Advisory guys in here and they continue to say that we're going to see a shortage of LVL as the housing starts get towards 1.4 million, which leads us to believe that that's probably a business that we ought to continue to hold on to, to take advantage of that market when it does come back.

That is a market that is heavily tied to single-family new construction. And as that becomes a greater part of the housing starts are actually happening plus housing starts grow, we think that we'll get that business back into a profitable region that we enjoyed in 2003 and 2004..

Okay. That's really helpful, Curt. I'll turn it over. Thank you..

Our next question is from Gail Glazerman with Roe Equity Research. Your line is open..

Hi, good morning..

Good morning..

Going back to the Siding expansion, would there – assuming you can get the wood license from the government, would there actually be potential at that site for further expansion beyond the existing capacity?.

I think, again, Gail, I think we have to complete the engineering evaluation. We have done that at two of our smaller mills, which this would be bigger than those mills, but less than the Swan. And ways you could expand that is you could add extra platens to the press to get a little more capacity. We did that at Two Harbors, increased capacity by 35%.

And then at Tomahawk we had a plan to increase that capacity by 50%. So that may be an opportunity, but I don't have the engineering expertise to answer that right now..

Okay. And I presume there are no restrictions in terms of the transfer, the swap agreement with Norbord, on how you use that site.

So if you chose not to go ahead with Siding, in theory, it would still be an option for OSB?.

There are no restrictions in it either way..

All right. And just switching gears, can you talk a little bit about what you're seeing in the OSB market? Specifically, maybe some of the price gaps.

Last quarter, you talked about the gap between commodity and flooring; and also just in recent weeks there's been incremental pressure in Western Canada that we're not necessarily seeing in other regions..

In the quarter, it was a little bit from a regional pricing, it was pretty much a mirror of Q2. I don't think we saw any big differences between how the market reacted in Q3 than Q2. What you saw is a little weakness at the beginning of the quarter, then it strengthened.

I think a couple things I would say is that the market was so tight from a demand/capacity that any anomaly that happened in the market would drive pricing up; then it would kind of drift back down; then we'd have another event and it would drive pricing back up. That's kind of what we saw.

I've been actually encouraged that October hasn't come off much. Because historically you would see pricing coming off in the fourth quarter. And I think Random is only down in a single region last week and flat in the other ones, and that's been kind of the case the last couple weeks..

And just wondering, anything specific that you sense driving the weakness in Western Canada of late? And then also just if you could touch on the flooring versus commodity you feel, is that what you were saying mirrors kind of recent trends?.

Well, Western Canada, we did have the capacity come online with the Tolko mill that has been ramping up. So I think that's been a little bit of a drag on the pricing..

Okay.

And were there any impacts either in terms of operations, wood supply, or customer demand from the hurricane?.

No. We probably saw – and I can't even tell you for sure whether we did – we might have seen a little bit of incremental demand from the box stores. But it takes so long for the money to flow through the system for rebuilding; we're still dealing with Sandy. We're probably getting benefits from Sandy now, not from Matthew..

Okay. I was thinking that there might be like building sites that didn't work. And then just one last one, as you look at the softwood lumber agreement and potential for trade action, last quarter you talked about maybe potential demand for Engineered Wood from that.

And also if you could just give any further update and also any risk to wood cost in Canada?.

So, I would respond to that a couple ways. One, I was a little bit surprised by the strength of West Fraser and Canfor's earnings. I think a lot of that is they ship one hell of a lot of lumber in the U.S., and benefited from the low Canadian currency, and shipped that lumber into the U.S.

And if we do have trade duties in the 25% to 30% level will go in place next year that will probably limit the amount that comes from Canada. So I think that was an impact that we saw in Q3 because their earnings were very good.

As far as the impact on Engineered Wood, I still believe that if you had 30% to the cost of Canadian lumber, that we should have some benefit in I-joists and LVL. But we didn't see anything in the third quarter. We're not anticipating those duties actually being collected until probably early the second quarter of next year..

And any risk to your fiber supply up in Canada?.

I don't know. I don't think so, because we buy a different fiber than the lumber guys. We buy primarily hardwood. The only impact we've had in the past is like that with the beetle kill, if you're doing a mixed stand, I think it becomes a little more expensive to log it. But other than that, I think it should be very minimal..

All right. Thank you..

Our next question is from George Staphos with Bank of America. Your line is open..

Thanks. Hi, everyone. Good morning. Thanks for the details. Just a couple quick things.

First of all, back to the ability to hold on to Engineered Wood products as you're looking towards a 1.4 million, 1.5 million start type of environment, do you think you have enough veneer capacity to keep up with that level of demand? I recognize that maybe prices on products would move up.

How do you think, Curt, your margin cost would hold up in that environment? Second question that I had, just in terms of working capital. It looks like you had a relatively good quarter here. Could you remind us what might have been going on in the quarter in terms of working capital for LPX? And I had one quick follow-on..

Okay. Let me address the veneer demand. I'll let Sallie talk about working capital. On the veneer demand, we only create our own veneer in one facility. That's in Golden, BC. And we have forestry licenses there for the next 25 years. So I don't have any concern about veneer demand in British Columbia.

We have a very good wood supply and very good tenures there. In the case of Murphy Plywood, Murphy creates their own veneer, so he's not on the open market. So he has plywood operations, so he provides himself. So as long as we have that manufacturing arrangement, again I don't get too concerned about veneer availability on the West Coast.

The one facility we would have risk from a veneer standpoint is in Wilmington, North Carolina. But we've had long-term supply agreements with a number of plywood producers there. I think that it'd be more of a cost than it will be an availability.

So I think we're probably okay, but that would be the one I would look at as the most at risk because we don't control the veneer..

Right. But you think that you....

I also hasten to add that on the East Coast that's where we have our laminated strand facility, and we do have a good wood supply for that..

Fair enough on that one..

So, I think, George, in terms of working capital, as OSB becomes a bigger piece of our working capital, the days sales outstanding on OSB are shorter than the other two businesses. So that is reflected pretty clearly in the improvements in the cash conversion cycle or the DSO.

And likewise, as we spend more money on capital, we tend to see more money that's in capital in accounts payable. So that's the biggest drivers, along with up to four of our General Managers really continuing to take a focus on inventory and making sure that we have inventory at the right levels, given the demand going on in the market.

So we've seen a slight decrease in inventories in the third quarter..

Okay, thanks for that, Sallie. Most of my other questions were already asked, but one quick thing on EWP again, Curt, if you would. To the extent that we look at your results versus other players – and recognizing their moving parts, and directly comparable results are probably difficult to get at.

How do you think your shares are doing within Engineered Wood relative to your peers? Do you think you're maintaining, growing, losing? And to the extent you can comment why would that be your view? Thank you..

So, our growth rate in volume sales was about the same as the industry's. It wasn't that far off. The big market share gain in the Q3, and actually Q2 as well, was when Boise bought GP's, so you combined the GP market share into the Boise numbers. Although on their call, they talked about that one plus one wasn't two..

Yes..

That they were not able to retain a lot of that business and I think last quarter, I talked about a lot of the churn that was going on with the consolidation we saw in the pro dealers, with some changes we made in Canada to our distribution, and with the acquisition of GP by Boise, a lot of that business is up in the air.

So we won a little – we probably won more than we've lost. But I wouldn't say it's a marked shift between any of the three major players at this point..

Okay..

But one shift I would say is that the smaller Canadian producers are taking more market share in I-joist, and that's certainly true for us. There's a pricing environment up there, and we're just not choosing to play in..

That's very helpful. Thanks, Curt. I'll turn it over..

Our next question is from Chip Dillon with Vertical Research. Your line is open..

Yes, and good morning, Curt and Sallie..

Good morning..

First question, Curt, you mentioned that the base OSB, to put that in at say 400 million square feet would be around, I think you said 275 to 300 a 1,000 at Cook. Now there is existing equipment.

If you didn't have existing equipment, how much would that cost be? In other words, how much do you save by both using their equipment and repurposing some of your own?.

The last few OSB mills that have been built are roughly $325 million per 1,000 square feet, and I haven't heard a number on Martco, but I'm guessing that that number is about the same.

But the two Grant mills in South Carolina, that now GP owns, our mill in Alabama, and the joint venture mill in Peace Valley were all in that $310 million to $325 million kind of range..

And there were a slew of plant shutdown -- in fact, the other Pollux/Ainsworth wins in that same area, and a lot of others that were shut down I guess in 2006 and 2007.

And so what you're suggesting, I guess, is that a lot of these facilities are -- you would have to spend maybe 80% of what you would spend to get them back to running again as much as you would spend on a new mill. In other words, it might not – that's just an argument why it might not be worth even building these things or restarting them.

Because you'd have to go ahead and build a whole new mill and maybe you want to start from scratch anyway.

Does that make sense?.

I think, in a lot of ways it does because you can have the newest technology. But the advantage at Cook for us, it's in the same region where the Hoyt Lakes site was; it's a good aspen wood basket; we have the incentives both from an operating standpoint and to offset some of the construction cost.

And the Cook site has already got rail to it, it's already got a wood yard on it. But we happen to – actually we've been using that wood yard for the last couple years as a satellite yard to our other mills in the area. So it's got good logistics. It's got a good labor force in the area.

So there's some real advantages to using that site rather than just starting with a piece of raw land. I just gave you – I'll give you an example. At the Hoyt Lakes site, we figured it was going to cost us $30 million to bring rail in, and that included building a trestle over the river, dealing with wetlands, putting the track in.

And we won't have to spend that now..

Understood. Now, shifting gears a little bit, Sallie, that was a great rundown about the whole timber unwind. And so it looks like, obviously, you'll make $41 million in cash, but then you're going to give some of that up and maybe all of it in terms of the deferred taxes being paid.

You did mention that of that $121 million, a bit of it would be offset by carryovers.

And, I know we can kind of make a guess looking at the K from last year; but can you just give us a rough ballpark? I mean, do you think half of that $121 million, or is it two-thirds, or a one-third? What would be kind of ballpark that at?.

It is – and I think we actually put this into the original announcement, it's a little over $70 million deferred tax assets that would be used..

Okay. Okay. So we should basically think that this whole thing is going to cost you $10 million. That you'll use the $70 million, so your cash taxes are $50 million, and then you get $41 million from unwinding the receivable payable. So your net cost is $10 million..

From a cash basis, yes. But then you have to think about what our earnings are in 2016 and that we'll start paying taxes on those because we'll use up our – for the U.S., we'll use up our deferred tax assets and then some..

Yeah, I see, so indirectly there'll be a little more cost to the extent you're profitable in the U.S. this year. I got you. And then the last question is, just to make sure I heard this right.

You said, I think, Curt, in Chile, you'd bought – it was at 1-5 million, $15 million in equipment that you had already bought?.

Yes..

Okay, not $50 million, okay, I see. All right, that is all I need. Thanks very much..

Great..

Thanks, Chip..

Our next question is from Mark Connelly with CLSA. Your line is open..

Hey, guys. It's Scott Liebman in for Mark..

Hi, Scott..

Two quick questions for you.

The first one is, in the third quarter, how much of the rise in OSB prices hit your Engineered Wood business? And is that a fairly normal amount? And what are your thoughts on the fourth quarter, assuming OSB prices hold where they are?.

It was relatively small amount. It's probably between $1 million and $1.5 million. And part of the offset to that is we did sell some OSB out of Houlton; so if you net it, it was probably right around $1 million negative impact..

Okay.

And Houlton is in that segment?.

Correct..

Right..

Got you. Okay.

And then just looking at the idle OSB capacity that's out there in North America right now, how much of that capacity do you think might ultimately restart if housing was a little bit stronger than we're experiencing now?.

Well, I think that as a rule of thumb – I've talked about this before, it's about 1.1 billion square feet of demand for every 100,000 housing starts. So if you think we're going to have 80,000 housing starts, there's going to be demand of roughly 900 million square feet that we're going to need on top of that.

And I haven't seen the industry numbers, but I've seen what Weyerhaeuser ran at, which they said they ran at 102% of capacity in the third quarter. And I think Norbord was in the high 90%s. We were in the low 90%s. And now with this swap, we're going to – if you took Chambord or that number, we'd be even a higher percentage.

So I don't think there's a lot of available capacity to satisfy that increase, 800 million square feet to 900 million square feet of demand next year. So we will need some additional restarts or new mills. And as you know, the Martco mill is slated to start up sometime the second half of next year.

I don't think it will have a big impact on 2017, but it will on 2018. And then, for us, we don't have anything left to start unless we start Val-d'Or up as an OSB mill because Chambord is not in our portfolio any longer.

And then our competitors – I did read the Norbord transcript and I think their first priority is going to be the Huguley mill to satisfy demand in the Southeast, Southwest..

Okay, great. That's very helpful. Thanks, guys..

Thank you..

The next question is from Bill Hoffmann with RBC Capital Markets. Your line is open..

Hi, yeah. Thanks, good morning..

Bill..

Curt, can you talk a little bit about the Cook site? Is there any possibility that you would go put OSB capacity in there as well? And is the fiber basket accessible for that?.

Well, you certainly can use aspen for OSB. So there's no – nothing from a fiber supply that would preclude you from doing that. It's really – the intention is to make that a siding facility. But one of the things you heard me say is I don't mind being early with siding capacity because I can run OSB until the siding fills it out..

Right..

So as an example, when we started up Swan Valley, we're running that as a siding mill, but we converted one of the lines at Hayward back to OSB. And so that's every month there's – we're making less and less OSB as we make more Siding.

And that's exactly what we would probably do at both Val-d'Or during the conversion and at an additional mill in Cook..

And just from a cost standpoint, do you expect that the Cook lathe (49:58) can be as cost competitive as your other sites?.

I think so. One of our best mills in Sagola, Michigan, which is not very far away, so I don't have any reason to believe it won't be competitive..

Okay, thank you. That was it..

Our next question is from Steve Chercover with Davidson. Your line is open..

Thank you. Well done.

So, I guess, beating a dead horse, I just wanted to clarify, the ownership of the Cook OSB mill, it was no longer part of the Norbord/Ainsworth family, right?.

Well, what happened is before Norbord bought Ainsworth, Ainsworth sold that site to a scrap dealer. They were taking equipment out and piecemealing to anybody that wanted to buy the equipment or selling the rest as scrap. We were leasing it from that scrap dealer for the wood yard for the last couple years.

So it has supported our other mills in the region. So no – so we actually purchased the site in September from the scrap dealer..

Got it. I was flying my drone over there and it looks like there's also a biomass facility or something. But – okay.

And one other thing, switching gears, can you discuss the seasonality of Siding? Because, I think, intuitively, I would have thought that, like OSB, peak demand would be in Q3; but that doesn't appear to be the case, at least the last couple years..

Yeah, it's a great question, and I actually – I have the answer for that. In 10 years out of the last 11 years, Q2 has been higher volume than Q3. And the reason for that is that we load up the pre-finishers in Q1 and Q2 for the repair, remodel market, and then they sell out of inventory in Q3 and into Q4..

Got it. Okay..

That's really what it is. (52:04).

Yeah, I thought it might be something to do with a pre-buy or something. Okay. That makes sense..

It's actually not a pre-buy; they don't get a discount. But they don't have the capacity to run what they need during the building season, so they have to run the inventory..

Yeah. Intuitively I would have thought people are hustling to, kind of, seal up any structures that they have in Q3 so they can do the interior work when the weather changes. So I thought it might have had something to do with repair and remodel. But that's great. Thanks, Curt..

All right..

Our next question is from Mark Weintraub with Buckingham. Your line is open..

Thank you. So, with the Cook facility, first of all, just kind of doing the math, it seems like you'd be like 150 million to 180 million or 200 million.

Is that order of magnitude right?.

Well, when I complete the engineering, I'll tell you, Mark. That seems to be in line if we do a 400 million square foot facility, that's what you would think..

Okay.

And second, on Val-d'Or, so if it were to be a 250 million square foot facility, 260 million square foot facility, does that – is that about – how do you think about that? Is it two years' worth of growth, two-and-a half years, or how should we think about that?.

We think we should have growth rates in volume 12% to 14% a year. And today we're selling 850 million square feet, is that right? 950 million square feet. So, we're almost at 1 billion square feet right now. So I would say 120 million to 140 million a year. So, yeah, you're somewhere in that ballpark..

Okay, great. And then lastly, you've got a lot of cash now, it seems, more – historically, you've talked about wanting, I believe, about $300 million in cash at the ready..

$250 million to $300 million, yes..

$250 million to $300 million? So maybe kind of update us on the thinking there. And given that you have such a strong cash position, excellent liquidity, and I think you have referenced contemplating at some point the question of returning cash to shareholders, maybe any update on thoughts in that vein..

What I said on the last call is that, we would come in to our board in early February with an update on kind of our capital allocation and how we would look at that, which would include returning cash to shareholders. We would plan on having that discussion with them in the early February.

And then if there were an action on a dividend or a share repurchase, probably it wouldn't happen until the May meeting. We do have $100 million share repurchase; but as I – again, what I said on the last meeting is I don't have unanimous support for that at the board. There's varying views.

The other thing I think is important is that we've got a lot of opportunities for reinvesting our cash in South America, reinvesting our cash in Siding. We've been doing a lot of work over the last several years on growth, innovation, and new products and new markets.

So we've got some pretty exciting things that we're trying to explore internally before we either do share repurchase or dividend..

Okay, great.

Is that $250 million, $300 million number for cash, though, is that still kind of an updated view? Or given the list of...?.

It's the best view I have right now. When Sallie gets the work done in January, she'll give me another update.

Do you have another update, Sallie?.

No, I do not. But I assure you, Curt, you will be the first to know..

Perfect. Thank you, guys..

And our next question come is from Paul Quinn with RBC Capital Market. Your line is open..

Yeah. Thanks very much and good morning..

Good morning..

Good morning..

Hey, just a question on the Siding volume. It looks like the volumes are up 15% year-to-date, and you're sort of referencing 12% to 14% growth in that business.

What is – if you could dive into the details on where you're taking market share in that business? And then, just because of the mill swap with Val-d'Or, Val-d'Or was a mill that Norbord contemplated doing some siding.

So does that preclude Norbord as competing against you in siding?.

I have reviewed their transcript, and I think Peter did say something about not entering the siding market in the near term. But, I mean, I hate to speculate on what they might do. As you know, we have a 20-year history in Siding. We have early warts (56:53) and beatings around siding. We haven't had anything in the near – in the last 15 years.

It's been a great product with a great warranty history. We do have 140 trained salespeople in the field selling that. We've got a marketing team that's probably 15 people or 20 people. It would take a lot for somebody to compete against us at Siding, much more than just being able to manufacture the product.

As far as where we're seeing growth, home centers were relatively flat. With the imports of plywood coming in from Chile and Brazil, we did see some aggressive pricing on T1-11 siding in the boxes, which I think probably hurt our panel siding a little bit. But we've been pretty flat there.

So most of the growth we have seen has been in the repair, remodel side with the pre-finishers, and we've seen a growth rate in single-family new construction. And I guess, our non-residential business, the shed business, has been very good..

Okay. Then just lastly, Curt, you mentioned that you're not retiring any time soon. But one I dive into your press releases, it looks like you got named COO back in November of 2011 and six months later CEO.

Not that I don't have full confidence in Brad, but that is that the timeline that we're looking at for a transition?.

That was the timeline when I was named, you're right..

Okay. Fair enough. Best of luck, guys..

Great. Thanks, Paul..

Thanks, Paul..

Okay, Bridgette, I think that's all the time we have for questions. So, if you could please provide the replay number, and I'd like to thank everyone for participating in our call. And as always, Mike and Becky are here to answer any follow-up questions. Thank you and have a great day..

Ladies and gentlemen, this does conclude the program and you may now disconnect. If you'd like to listen to the replay, you can dial 1855-859-2056 and use the conference ID of 94568919. The replay will be available in about two hours. Everyone have a great day..