Louisiana-Pacific Corporation (LPX) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Louisiana-Pacific Corporation First Quarter 2012 Earnings Conference Call. My name is Stephanie, and I'll be your coordinator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Ms. Sallie Bailey, Executive Vice President and Chief Financial Officer. Please proceed.

Thank you very much, Stephanie, and good morning. Thank you for joining our conference call to discuss LP's financial results for the first quarter of 2012. I'm Sallie Bailey, LP's Chief Financial Officer, and with me today are Curt Stevens, LP's Chief Executive Officer; as well as Mike Kinney and Becky Barckley, our primary Investor Relations contacts. I will begin the discussion with a review of the financial results for the first quarter of 2012. This will be followed by some comments on the performance of the 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 first quarter of 2012 and give some thoughts on the outlook for 2012. As we have done in the past, we have opened up this call to the public and are doing a webcast. The webcast can be accessed at www.lpcorp.com. Additionally, to help with the discussion, we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I'll be referencing these slides in my comments this morning. We have also filed an 8-K this morning with some supplemental information, as well as our first quarter 10-Q. I want to remind all of the participants about the forward looking statements 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, which have been supplemented by the Form 8-K filing we made this morning. Rather than reading these 2 statements, I incorporate them with this reference. Before I get started on the detailed discussion of LP's financial results for the first quarter, I want to make some higher-level comments and observations. On a March year-to-date basis, single-family and multifamily housing starts are up 19% over the same period in 2011. This is also true for new home sales and sales of existing homes. As we stated on our call in February, housing activity is beginning to show some signs of life. Our operating results for the first quarter show improvement. Adjusted EBITDA of $21 million is 58% higher than the first quarter of 2011. Starting this quarter, we have revised our approach in non-GAAP financial results. Adjusted EBITDA now includes the depreciation from our unconsolidated affiliates, primarily Peace Valley and U.S. GreenFiber, all prior period non-GAAP results have been adjusted as well and the details are in the Form 8-K we filed this morning with our press release. We have also calculated the non-GAAP adjusted diluted earnings per share from continuing operations using a normalized tax rate of 35%. This tax rate is calculated using the weighted average rate of the statutory tax rate of the United States, U.S. state and local jurisdictions, Canada, Chile and Brazil, assuming profitability in each of these jurisdictions. The impact of using a normalized tax rate along with the adjustments, is also detailed in the reconciliation of non-GAAP information provided this morning. With that, let me go into the details. Please refer to Slide 4 of the presentation for a discussion of the first quarter 2012 results compared to the fourth quarter of 2011 and the first quarter of 2011. We reported net sales of $362 million for the first quarter of 2012, a 9% increase from the sales reported for the first quarter of 2011. In the first quarter of 2012, we recorded a net loss of $11 million, or $0.08 per diluted share. In the first quarter of 2011, we reported -- excuse me, I'm sorry, in the first quarter of 2012, we recorded a net loss of $11 million, or $0.08 per diluted share. In the first quarter of 2011, we reported a net loss of $23 million, or $0.18 per diluted share and $332 million of net sales. The adjusted months from continuing operations for the quarter is $9 million, or $0.06 per share compared to $60 million, or $0.12 per share in the first quarter of 2011. Adjusted EBITDA from continuing operations was $21 million in the quarter compared to $13 million in the first quarter of 2011, a solid improvement quarter-over-quarter, as well as consecutively, a 9% improvement in net sales and a 58% improvement in adjusted EBITDA compared to the first quarter of 2011, and a $33 million improvement in adjusted EBITDA from the fourth quarter of 2011 and an increase of $50 million of net sales. Moving to Slide 5 and a review of our business unit results, starting with OSB. OSB recorded an operating loss of $300,000 in the quarter compared to a loss of $9 million in the first quarter of 2011. For the quarter, in terms of adjusted EBITDA, we are reporting $11 million of income as compared to $2 million in the first quarter of 2011. For the quarter, we had a 4% increase in volume and our average sales price was 6% higher. The increase in selling price favorably impacted operating results and adjusted EBITDA from continuing operations by approximately $8 million for the quarter as compared to the corresponding period in 2011. Sales volumes also increased as we continue to sell more products into value-added applications. Slide 6 reports the results of the Siding business. This segment includes our SmartSide and CanExel Siding products and commodity OSB produced in our Hayward mill. The Siding segment reported net sales of $113 million in the first quarter of 2012, an increase of 6% from $106 million reported in the first quarter of 2011. The Siding segment reported operating income of $17 million as compared to $13 million in the first quarter of 2011, and adjusted EBITDA of $21 million, an increase of $4 million compared to the first quarter of 2011. For the quarter, SmartSide average sales price was up 2% and volumes increased 9%. Volume increase in our SmartSide siding line to the continued penetration into several key focus markets including retail, repair and remodel and sheds. CanExel prices showed a decrease of 6% and volume was down 5%. Sales volume declined in our CanExel Siding lines due to some weakening in the Canadian housing market and lower shipments to Europe. 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 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's operating loss decreased to $3 million in the first quarter of 2012 from $6 million in the first quarter of 2011. For the first quarter of 2012, EWP realized an increase in adjusted EBITDA from continuing operations of $1 million as compared to the first quarter of 2011. Volumes of I-Joist were up 2%, while volumes of LVL and LSL were up 14% compared to the same quarter last year, primarily due to increases in domestic demand. Pricing was up 3% in I-Joist and down 1% in LVL and LSL due to changes in mix in both product lines with individual product pricing remaining relatively flat. Moving on to Slide 8 of the presentation. For the quarter, South American operating income decreased by $500,000 for the first quarter of 2012 compared to the first quarter of 2011. For the first quarter, South America's adjusted EBITDA from continuing operations was $6 million as compared to $6.5 million reported in the first quarter of 2011. Volumes in Chile were up 14%, while volumes in Brazil were up 2% compared to the same quarter last year. Changes in volume were primarily due to increases related to continued rebuilding associated with the Chilean earthquake in 2010. The sales volume increase in Chile was primarily sourced by import. Pricing was up 10% in Chile and down 6% in Brazil. These changes in price were primarily related to the change in foreign exchange rates. While there is no slide for Other Building products, let me make a few comments. These results are from our Molding business, U.S. GreenFiber Joint Venture and various other nonoperating facilities. Overall, we are showing a loss of $1 million in the first quarter of 2012, which is comparable to the first quarter of 2011. For the quarter, sales were $10 million, which is slightly below the first quarter of 2011. Total SG&A costs were $31 million in the first quarter of 2012 as compared to $29 million in the same quarter in 2011. The increase in SG&A is primarily due to the accrual of 2012 management bonuses. We did not record any bonus accruals in 2011. We had $100,000 foreign exchange loss in the quarter compared to a $1.8 million gain in the same quarter last year. Interest expense was $12.6 million in the quarter compared to $14 million in the first quarter of 2011. This reduction was primarily related to the change on one of our uncertain tax position, which caused us to reverse accrued interest associated with this position. This amount was excluded from our non-GAAP results calculation. Please refer to Slide 9 of the presentation. At the end of the first quarter of 2012, we had cash, cash equivalents, investments and restricted cash of $294 million; working capital of $517 million; net cash of $48 million. In addition to the $281 million of cash on our balance sheet, we had $85 million of availability on our asset-based loan facility, and we generated cash through the first 4 weeks of the second quarter. Capital expenditures for the 3 months were $3 million and we contributed $3 million to our joint venture. And as we discussed in our fourth quarter conference call, we are planning to spend approximately $25 million for capital expenditures in 2012. Now I'd like to turn the call over to Curt for his comments.

Thanks, Sallie. That was a very good review. Today is my first full day as CEO of LP. As we have reported, last Friday, I was elected to the Board of Directors of LP and officially became only the fourth Chief Executive Officer in LP's history. After nearly 15 years of participating on the quarterly calls as the CFO, this will be my first time talking to you as LP's CEO. I thought it would be useful for me to share with you today what the change in leadership means to LP and where I will be focusing my time and attention. I will also provide some comments on the market. First and foremost, there will be no change to our vision, values and customer principle within LP. The LP values will remain consistent and continue to drive our actions and how we work together. Safety, as Rick has said and I will continue to say, there is nothing more important than safety at LP. "No one should have to get hurt while working at LP" are words that we live by, and drive a culture focused on 0 incidents. For the first quarter we ended with a total incident rate of 0.48 across the entire company. In OSB, our largest business, we didn't have a signal recordable injury in Q1. Protection of the environment. This is a legal requirement and necessary to be good members of our communities. Compliance with all laws and ethically with high integrity in all we do, simply put, it means doing the right thing. Providing quality products and services to our customers. This is a must-have to achieve our objective of being the supplier of choice. We respect people within our organization, and we have a commitment to teamwork. We have a commitment to continuous improvement. With Lean Six Sigma firmly embedded in LP, we've seen the tangible benefits of the many process improvement projects that have been completed using these tools. Commitments to our communities. LP people are leaders in the communities in which we operate. This is a responsibility that we must embrace: being good environmental stewards, providing safe and rewarding jobs, and helping make our locations a better place to live. The LP customer principle is that everyone at LP is responsible for providing a consistent, quality customer experience. That will not change, but will gain traction. The LP organization that I inherit is in very good shape and has shown an amazing ability to be agile, productive, efficient and effective in a very difficult market. There is no need for major restructuring. However, there are a few changes that are implemented today to recognize the organizational importance of the business teams and continue the progress we've made toward satisfying LP's customer principle. Brad Southern and Brian Luoma have been promoted to Senior Vice President of their respective businesses, Siding and Engineered Wood. This is an important acknowledgment to the GM roles critical to the success of LP. Both Brad and Brian have long served LP in a variety of roles and have excelled in every position they've held. In sales and marketing, I'm institutionalizing our "one LP" from the customer and marketing perspective by having Rick Olszewski more directly involved in OSB sales and all the marketing functions within the business. This will make Rick the single point of contact for sales leadership at LP. From a business strategy perspective, Rick Frost and I have worked together with our management team and Board of Directors for 15 years. During this time, we have brought different skills, viewpoints and opinions to the table, but we've always agreed on the strategic direction of LP. As the housing market recovers, LP is well positioned to take advantage of the increased demand. We have excess capacity available in each one of our businesses. We have improved operational efficiencies through the adoption of Lean Six Sigma, productivity enhancements and our focus on agility. We have solid customer relationships that can benefit from having a supplier with multiple product lines. So the big question is when will the housing market recover? At LP, we continue to be cautiously optimistic that the recovery is actually starting. Let me leave you with a few anecdotes. Housing starts were up 19% quarter-to-quarter with permits keeping pace. The inventory of new homes for sale is at the lowest level since statistics began to be captured, it's at 121,000. Vacancy rates, both for apartments and vacant homes for sale, continue to decline. The settlement with the 5 big banks in the various government programs under the mantle of make home affordable, seems to be having a positive effect on short sales and the bundling of foreclosures for investment purposes. This is reducing the risk of the foreclosure overhang. Pending home for sales are on the rise. And there have been recent articles talking about bidding wars happening again in certain markets between home buyers and sellers. I can personally vouch for this as my daughter, who lives in San Francisco, and son, who lives in Portland, were involved in competitive transactions that ended with selling, buying a house above the asking price. This earnings season has been positive for the homebuilders, and with the reporting of improved financial results and strong backlogs. The current consensus for 2012 stands at 711,000 single and multifamily housing starts, an increase of 17% compared to last year. For 2013, the consensus now stands at 875,000, a 23% increase over 2012. For LP, Sallie just reported our results which were much better than last year and clearly above our internal expectation as we budgeted based on 625,000 housing starts for this year. This increased activity led to improved OSB pricing and stronger siding sales. While we have been concerned the second quarter activity would follow last year's negative trend, I am pleased that our April activity has remained robust and OSB pricing has held. So where will I be spending my time over the next several quarters? Principally, I will be focusing my time on the market. While the indications I just reviewed with you would imply that the housing market is improving, that we had faced in the past which has led us to be more conservative in our thinking and actions. But if the market is getting better, it is this important that we are ready for the recovery. In particular, we, at LP, will be spending a lot of time and effort on the full supply chain. What are the potential pinch points for raw materials? Is there enough logging capacity? Can the resin suppliers respond to increased demand? The transportation infrastructure has contracted quite a bit during the downturn. Will there be sufficient truck and rail capacity, both incoming and outgoing? What steps should we be taking at LP to increase our access to cost-effective transportation services? At our mills, we have significant unused capacity, both in the underutilization of our running facility and in indefinitely curtailed mills. Do we have a detailed plan for adding shifts at each of our operating mills? Have we identified the critical talent necessary to ship these operations? Is the incremental capital required? While we have no near-term plans to bring out indefinitely curtailed capacity, it is only prudent to have a comprehensive robust start-up plan for these facilities to respond to the future market demand. On the customer distribution side of the business, we need to have regular and deep discussions with our channel partners' unexpected demands in their markets. Over the last 6 years, the channel has leaned out their inventories and relied more heavily on the manufacturers to supply incremental demand. In the recovery, the channel needs to provide this buffer. As an example, I was walking through a new house here in Nashville last weekend, and the OSB sheathing installed in the wall had been manufactured in our Hanceville, Alabama facility only 2 weeks ago, clearly not a buffer. If we can manage this better than our competition, we should get more than our fair share of the immediate recovery and that is my goal. With that, let me hand it back to Sallie to lead the question-and-answer session.

Great. Thank you, Curt. Stephanie, we're now ready to go to the queue for questions.

[Operator Instructions] Your first question comes from the line of Mike Roxland, Bank of America Merrill Lynch.

Any reason surprise you this quarter, it seems like the West has seen some relative pricing strength later -- lately, excuse me, so what's going on in the West versus other regions? And what really caught you by surprise during the quarter?

I'm not sure I'd say that anything caught me by surprise other than the housing -- the absolute level of housing starts because we, as I've said, have budgeted a lower number than that. We're optimistic it was going to be higher, but it actually was better than I thought. As far as OSB pricing in the West, we're not really sure why it went down last year. If you look at the Q1 differential between Western Canadian print and the other prints, it's pretty much back at its historic average. So it's been a recovery of what's kind of unexplained in Q2, 3 and 4 of last year.

Got you. I mean, anything specific to your ops in the quarter, it seems like the overall enterprise ran a lot better this quarter than in prior quarters?

I think that with our -- as I mentioned, our Lean Six Sigma, we continue to be more efficient and effective in how we're run those facilities. We did have a little more incremental demand in all of the businesses, which allows those mills to run better. Anytime we can get closer to a 24/7 operation, we're going to have more efficient operations than we are with different shifting patterns.

And in terms of the level of down time that you took, how does that compare 1Q versus 4Q?

I think the number in OSB, we ran effective capacity about 76%.

77% in Q1 this year, and Q4 was...

I don't know if you heard, Mike, but I think we ran 76%, 77% effective capacity in OSB in Q1. It was about 68% in Q4. Now that's of what's running, that doesn't include the $1.6 billion of curtailed capacity.

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

Do you feel that your customer order flows are matching the improvements that you're seeing on housing starts and permits? Or do you feel that they're still maybe not believing it's true and there could be a pickup or a rush later in the quarter?

Yes, we were concerned about that because last year we had a very good Q1 from an order standpoint that it fell off in Q2. That's why I gave you a little color on April. Our order files in April were better than we had expected and continue to show some strength, so again, we're cautiously optimistic Q2 is going to be a good quarter.

And did you feel that any of your businesses in particular might have benefited more from the warm weather and pull forward of projects completed that would have normally happened later in the year? Or do you feel a shift to your ongoing demand?

I wouldn't say any product line benefited more than another. I think there was probably a little bit more repair remodels, so business that went through the boxes in the northern part of the U.S. probably did a little bit better than we expected. But overall, I wouldn't say there was one that stood out.

Okay. And just last question the reference about increased imports into Chile, was that from Brazil or from the U.S. or both?

It was actually both. We imported some products from Brazil into Chile, and we also imported some products from our Canadian operations into Chile. We're seeing more demand in Chile than we can satisfy. So opportunistically, we're looking at bringing that product in from other of our facilities.

And I guess just one last quick follow-up on that. In Brazil, are you still thinking about kind of starting the second line there? Or at this point, would you see just filling in the gaps in North America is a better option?

Well, let me be clear. Starting the second line means we have a turmoil system that we need to bring up, it's still the same line. But you could run a little bit faster if you'll bring up a second turmoil. We're currently running between 60% and 65% of capacity in Brazil. As it turns out, because of the transportation costs, it isn't a lot cheaper to move products from Brazil to Chile than it is from North America to Chile, as crazy as that sounds.

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

First question is, I noticed you did make a change in how you're going to report the adjusted EBITDA to I believe include the 2 joint ventures involving, I guess, Peace River and the Abitibi plant. And I know those JVs, I believe, have very little debt. But I was wondering the thought of why you would include the EBITDA? Unless, I'm assuming you can't dividend it up to the parent.

Chip, simply to be consistent with what we've done in the past, we've always included the EBIT. We've always included the EBIT, so it just seems that we should include the DA as well.

Got you. Got you. And I guess you've included all the EBIT, right? And then you take off 1/2 in corporate or did you just include the 1/2?

We just included the portion that comes to us, similarly with the depreciation.

Okay. And then the second thing is, it looks like, and I know it can vary quite a bit from year-to-year, but it looks like the working capital, I know it always goes up in the first quarter because of seasonality, it seemed to be a bigger cash strain than it often can be and your net cash position is about $0.50, $0.60 a share less than what it was a year ago. And so I was just thinking, are you concerned about that? I know your gross cash is still pretty high, is there -- are you going to look at perhaps husbanding more cash later in the year than maybe you had planned?

Well, let me start with cash is -- have been and will remain king at LP, so that hasn't changed with the change of the person sitting in the CFO's chair. As we look at inventories, we actually used slightly less cash for inventories in the first quarter of 2012 than we did in the first quarter of 2011. So the real difference is coming in the accounts receivable area. And that's because our winter buyer program actually extended into April of this year, where as in prior years, much more of it would have been concluded in the March timeframe in terms of the cash receipts.

Got you. And would you expect that working capital, I mean that can sometimes be the second or the first book because of what you just said, I guess, we should expect working capital to perhaps peak in the first quarter and be certainly lower in the second half.

Yes. Certainly, as you know, it all depends upon what happens with demand, but we would certainly anticipate, assuming demand stays at the levels it is today, that working capital would come down to the season -- would come down and generate cash over the course of the year, similar to the patterns we've had in prior years. I think if demand increases in the fourth quarter and we're certainly as you all know, a long ways away from the fourth quarter, we might see some build and logs in particular in the fourth quarter.

Got you. And the last question is, the Siding business, I think probably beat what most of us were looking for. And some of you will see seasonal sequential improvement going in the second quarter. In some years, it may not -- might not because the first was so good. And I'm guessing that this year is going to be tougher to see it go up again in the second from the first just because of the warm weather. Would you agree with that? Or are we being conservative?

I think there's a couple of things. One, because we did have the per-buy [ph] program this year, we did not have it last year. And this is principally for our Canadian manufactured product. We expected a little bit of a drop off in sales there. We have not seen that. So that's good news from our perspective. The other good news from our perspective is we did make the decision last week on one of our smaller mills to add a 4 shift [ph]. They have not been running 24/7 for the last 3 years. And we the only did that because the Siding business believes that there's a true increase in demand. So that's a good thing for our employees in 2 harbors.

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

The last couple of years, obviously, has been very tough conditions, and you've been spending capital appropriately. Now hopefully, we're at the stage where things are going to start looking a little bit better. What type of capital do you think on a go-forward basis assuming that we are starting to enter improved housing conditions? Realistically, you need to spend kind of maintenance type levels and then are there lots of opportunities for high return types of projects on the cost side that maybe have accumulated during this downtime, during this difficult period?

I think the way I would answer that is typically, if we are running our operations 24/7, we ought to be putting $1.5 million to $2 million a year in each one of those facilities, we have 26 operating facilities. So that would say you're somewhere in the $40 million to $50 million, if you're running 24/7, which we have not been and that's why we've been able to prudently reduce that. There are return projects identified by our businesses that we have held off on. So if we do see increased demand, there's probably another $5 million to $10 million of spend that we could add to that and relatively higher returns short payback. So I think what we talked about last year's, 2010 -- or 2011 rather, we've planned on a $50 million capital budget and when the market did not come back, we knocked that back down to $25 million. I would anticipate that if we do have strong markets, that we could be in a $40 million to $50 million range. But that's not immediate. And as Sallie said, we're holding to the $25 million number for this year.

Okay. And can you remind us when you get back into the moneymaking mode, in terms of cash taxes, what you have in place that will reduce the cash tax outlays?

It's the -- I can get that. That's about -- I don't think it's in the material, I think it's $160 million -- it's around $170 million. Mark, we can get you that detail. I just don't remember it off the top of my head. It depends on -- there are some in the U.S. and there are some in Canada. And I think it's split almost evenly between the 2 of them. But we'll get you the detail.

Okay. Presumably that you have 1 or 2 years, where you would have fairly nominal cash taxes?

Well, I mean, of course it depends on how good the year is from what I can tell. But it's a pretty significant number, yes.

The next question comes from the line of Mark Wilde with Deutsche Bank.

Curt, you've already addressed adding just more shifts at some facilities. Could you just walk us through how you would think about actually restarting some of the idle facilities? And sort of what the timeline from the moment you decide to restart until something could actually start running again, what that would look like?

Yes, I could talk about that. And I'll talk about it, I assume you want to focus on OSB, so I'll focus on that. Right now, today, there's roughly 19.5 billion to 20 billion square feet of capacity that's running in North America. It's not running at that rate, but it's running. So today, I think last year, the demand was 15.5 billion to 16 billion square feet. So there's another 3 billion that we could add. And think about housing starts, every 100,000 housing starts is 1 billion square feet. So if you increase your housing starts with 300,000 over the 580,000 that we had last year, that says when you get close to 900,000 you're going to be out of OSB capacity. So as a producer from our standpoint, we would look at that and see if see sustainable housing starts at 900,000 or north. We have to think about adding that capacity. From a timing standpoint, obviously, the mills that have been shut down the longest, it's going to be the longest to come back up. But it's probably, from the time you make the decision, it's a 9 to 12 months ramp-up and that includes getting your logs in the deck and hiring your people, training your staff. Now we have a decided advantage because we have multiple facilities and we see those operations with current employees. But you heard me talking about our plan to be prepared for recovery. We will have detailed plans in place that will make that as short as possible, so that we can get the most market intelligence before we make those decisions. From a cost standpoint, it's about cost, and again, it depends on how long the mills are down-- but it's probably a $5 million to $10 million number if you bring up one of these big operations. And that's things like the forklift that you took out and relocated to another mill, you got to replace that. Those spare parts that you took out of the storeroom, you've got to replace that, then you're working capital with resins and wood. Well, that's the numbers we think about.

Okay. And I just -- I'm curious, as the business appears to be picking up, do you think that this could be the trigger to seeing a little more consolidation in the OSB business? I mean, really, aside from GP buying Grant, there has not been a whole lot during the downturn.

Well, it's interesting. it didn't happen at the top. It didn't happen on the way down, it didn't happen at the bottom. So the only thing left is on the way up. I will use one of the Rick-isms, there aren't any sissies left.

Yes, I've heard that one. Okay, a couple of other questions. I was just comparing your Engineered Wood volumes to the numbers that were reported last week by Boise Cascade and also to what Weyerhaeuser reported. And you guys were really pretty flat in that business and both of those other guys, the 2 main competitors in the business, showed much stronger year-over-year volume gains in those businesses. Any thoughts on why that comp might have appeared as it did?

What we are trying to do with our Engineered Wood business, Mark, is that business that does not have any repair or remodel components to speak of, a little bit of light, industrial and commercial because principally new home construction. We're trying to make that cash neutral as best as we can. And market share, when you're under water, it doesn't help you much. So we have actually walked away from some business that just didn't provide -- didn't help us reset our cash breakeven that we're focused on.

Okay. Is it still a business that you want to stay in, however?

Pardon?

Still a business that you want to stay in over the long term?

Oh, there's lots of very, very positive things for Engineered Wood. If you think about the situation in British Columbia with the beetle kill, and now with these explosions, there's probably going to be less capacity coming out of that. Having the China market come back and then the change in the design values for Southern Yellow pine lumber are going to make it increasingly beneficial to the builder and architect to use Engineered Wood.

Okay. Just 2 other ones. Gail brought up that issue of the imports into Chile. It seems like over the last few years, we've seen a lot of other players or some other players shipping OSB down into Latin America, I will avoid calling it a dumping ground, but are you continuing to see other players kind of ship into South America on an opportunistic basis?

Well, we can see the imports statistics in Chile. So we do get those on a quarterly basis if you look at it. So we have a pretty feel for what the external volume is. It's still not very significant. It's kind of an annoyance, but it's not very significant.

Okay. And the last question I have. You've mentioned sort of supply chain and things. One branch of the supply chain, you didn't mention, is just sort of what's happened to all of these building products distributors, the intermediaries? Because it seems like to me that a lot of those guys are privately held, and I don't know how many of them have gone out of business over the last 3 or 4 years.

Well, I think at that level, there's about 5,400 that no longer exist. So a lot of those have gone out. And I mentioned, compasset[ph] if I didn't, we are concerned about getting it to the job site. Who we dealed generally with is the 2 stepper that gets it to those guys that then get it to the job site. And that's important from 2 perspectives. One, it's important from just the logistics and moving the material there. But the other important role that they play is they finance the builder. And with the banks being reluctant to finance builders, the channel has to assume that role. So we are concerned about that.

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

Just looking at your operating rates, 76%, 77% in the quarter, you've got a little bit of ability to add capacity. And I guess previous questions have asked about how long that's going to take to get back, but do you see a first mover advantage in adding that back earlier than the rest of the industry?

You mean a new mill? Or an indefinitely curtailed mill?

An indefinitely curtail mill, yes.

Again, just given what's running today and what that means from a housing standpoint, until you do get towards that 900,000, it doesn't make much sense. We're better off -- we're better off filling out what we got running. And from our perspective, we should be differentially advantaged because we do have the lowest operating rate because we can see what Ainsworth is announcing as well as Norbord.

Okay. I'm just trying to put in the context, so that's sort of 9 to 12 months before you bring it up and that's sort of current consensus, which you've got at 875,000 for '13.

Well, it's right. It's 875,000 for '13. So in my mind, if that is accurate and we grow from there, in the middle of next year, we're going to have to make some decisions.

All right. And just on Brazil, volume is pretty flat year-over-year. Just if you could give us some additional color of the growth of that market, and how you look at that going forward?

Well, one of the things that we've been trying to do, Paul, is we've been trying to go through what is a very bureaucratic process to get our building system approved. And we've actually made some great strides there. And we do have demonstration projects, Sao Paulo, Rio and in Curitiba, where we've had builder partners build 40 to 60 units both for middle-class residential, as well as for government-sponsored building. Now those are still demonstration projects, and we've got some of the certifications, not all of it, wish Rick O were here today because he can give you more detail on that. But we are making progress in the building system. Generally, what that means is adding our OSB to steel studs and then adding roof decking using asphalt shingles. So we are making some progress there. The other area we continue to make progress is the industrial. But that was relatively flat year-over-year. So any increase we did have was in the, I would call, the nascent building side of that.

The final question comes from the line of Steve Chercover with D.A. Davidson. Steven Chercover - D.A. Davidson & Co., Research Division: A number of my questions have been asked, but I wanted to ask about the changes to building codes that have allowed the construction of kind of multi-story, I think up to 7-story wood-framed buildings. Have you actually seen any of these projects using this style of construction?

I was in Vancouver and I did see there's a City Hall up there that's using this Cross-Laminated Timber, which basically, you do the same thing with our LSL. But then you get into logistics of shipping something that's going to be 8 wide by 68 feet long and 4 feet thick. That's a tough piece of wood to come from Houlton, Maine. Frankly speaking, here in the U.S. I think the 4-story and under is probably going to be our sweet spot, and we are seeing a fair amount of multifamily using that. I know there's a lot of talk around it to build these bigger buildings. I just don't know how much of the market they're really going to represent going forward. Steven Chercover - D.A. Davidson & Co., Research Division: So to a certain extent, this was a bit of an academic exercise to demonstrate?

I think it is. We actually had Peter Green. He's the big architect -- Michael Green, an associate up in Vancouver. We had him spend some time with us. Probably, the most interesting thing that he brought to my attention that I wasn't aware of is that concrete, from a sustainability standpoint, is terrible. It provides or it creates 8% of the gas in the U.S. versus fuel or versus transportation which was 2.5%. So concrete, as a building material, is not very sustainable. So the under 4-story using concrete and steel is not the right way to go. Steven Chercover - D.A. Davidson & Co., Research Division: Yes. Because I don't think concrete grows back. But I think part of the objective was to kind of stimulate the Chinese adoption. Anything would be there?

Yes, I think you're exactly right. What they're trying to do is demonstrate they can build a 15- or 20-story building and then have the Chinese say, "Well, this is perfect for 6 storys then."

Great. Well, thank you. Stephanie, I think that's all the time we have for questions. So if you could please provide the replay number. And then I'd like to -- before you do that, I'd like to thank everyone for participating in our call. Mike and Becky, as always, are here to follow-up -- to answer any follow-up questions. And I thank you and hope everyone has a good day.

Thank you.

Ladies and gentlemen, if you would like to listen to the replay, you can dial-in the U.S. telephone number at 1 (888) 286-8010 and the access code is 74994732. The international direct number, 1 (617) 801-6888 and the access code 74994732. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. You have a great day.