Louisiana-Pacific Corporation (LPX) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Louisiana-Pacific Third Quarter 2013 Earnings Call. My name is Stephanie, and I will be your coordinator today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Ms. Sallie Bailey, Executive Vice President, Administration and Chief Financial Officer. Please go ahead.

Thank you very much, Stephanie, and good morning. Thank you for joining our conference call to discuss LP's financial results for the third quarter of 2013 and year-to-date result. I am Sallie Bailey, LP's Chief Financial Officer, and with me today are Curt Stevens, LP's Chief Executive Officer; as well as Mike Kinney and Becky Barckley, our primary Investor Relations contacts. I'll begin the discussion with a review of the financial results for the third quarter of 2013 and the first 9 months of 2013. 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, comment on the status of the announced Ainsworth transaction and provide his perspective on our operating results for the third quarter of 2013 and give some thoughts on our outlook. 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've also filed an 8-K this morning with some supplemental information and we have filed our 10-Q. I want to remind all 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 that's been supplemented by the Form 8-K filing we made this morning. Rather than reading these 2 statements, I incorporate them with this reference. I'll begin with some comments on the housing market. The third quarter saw housing starts back in the 900,000 range, up from the second quarter level. However, relative to the start of the year, higher interest rates and the uncertainty related to the government shutdown has taken some of the momentum out of the housing market. We continue to see positive funding. The overhang of foreclosures continued to decline, home values are appreciating again and residential construction spending is recovering. Now with that, let me go into detail. Moving to Slide 4 of the presentation for a discussion of the third quarter 2013 and first 9 months consolidated results. We reported sales of $507 million in the third quarter of 2013, a 10% increase from the sales reported for the third quarter of 2012. In the third quarter of 2013, we recorded net income of $38 million or $0.26 per diluted share. These results include income of $17 million related to the reduction of the contingent consideration associated with the acquisition of the remaining 50% of the Peace Valley mill. Under accounting standards, we are required to revalue this liability on a quarterly basis. In the third quarter of 2012, we reported net income of $31 million or $0.22 per diluted share on $462 million of sales. The adjusted income from continuing operations for the quarter is $19 million or $0.13 per share based on a normalized tax rate of 35%, compared to income of $29 million or $0.20 per share in the third quarter of 2012. Adjusted EBITDA from continuing operations was $65 million in the quarter, compared to adjusted EBITDA of $74 million in the third quarter of 2012. On a year-to-date basis, we recorded $1.6 billion in sales, a $198 million in net income and earnings per share of $1.37, as compared to sales of $1.2 billion, a net loss of $17 million and a loss per share of $0.13 in the first 9 months of 2012. On a non-GAAP basis, we recorded adjusted income from continuing operations of $137 million, earnings per share of $0.94 and adjusted EBITDA of $306 million for the first 9 months of 2013, a significant improvement over the first 9 months of 2012 when we recorded $21 million of adjusted income from continuing operation, adjusted earnings per share of $0.15 and adjusted EBITDA of $129 million. I will now move to Slide 5 and a review of our segment results, starting with OSB. OSB recorded operating profit of $30 million on $245 million of sales in the quarter, compared to operating profit of $49 million on $227 million of sales in the third quarter of 2012. For the quarter, we reported adjusted EBITDA of $46 million compared to adjusted EBITDA of $60 million in the third quarter of 2012. Pricing for OSB was down 5% over the third quarter of 2012. This compares favorably, however, to the decline in North Central 7/16 Random Lengths pricing. Random Lengths North Central 7/16 pricing was down 19% over the third quarter of 2012. The decrease in the pricing resulted in lowering operating results by about $13 million. Offsetting the decrease in price was our volume, which was 15% higher than a year ago and overall, our sales increased 8% over the third quarter of 2012. We recorded higher cost in the third quarter of 2013 relative to the third quarter of 2012. The positive impact of fully consolidating Peace Valley was more than offset by higher costs associated with the start-up of the Clarke County facility, higher raw material costs, increased manufacturing, downtime and higher maintenance spending. For the first 9 months, OSB had an operating income of $224 million compared to $66 million in 2012. Adjusted EBITDA for the comparable period was $262 million compared to $98 million in the first 9 months of 2012. The impact of pricing between the years was $222 million and accounted for the majority of the change. The remaining difference is due to higher raw material costs and costs associated with starting up our Clarke County and Dawson Creek mills. 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 sales of $149 million in the third quarter of 2013, an increase of 11% from $134 million reported in the third quarter of 2012. The Siding segment reported operating income of $23 million compared to $20 million in the third quarter of 2012 and adjusted EBITDA of $27 million as compared to $24 million in the same quarter of 2012. Lower OSB prices during the second quarter reduced results by $2 million as compared to the third quarter of 2012. For the quarter, SmartSide average sales price were up 3% and volumes increased 14%. Volume increased in our SmartSide siding line due to continued penetration in several key focus markets including retail, repair and remodel markets and sheds. CanExel prices were flat. Volumes were down 13% in the quarter due to lower Canadian and international demand. On a year-to-date basis, the Siding segment recorded $436 million in sales, $70 million in profit and $83 million in adjusted EBITDA. For the first 9 months of 2012, the Siding segment recorded sales of $384 million, profit of $56 million and adjusted EBITDA of $69 million. The improvement from the first 9 months of 2012 is driven by increased volume of 14% in SmartSide and slightly higher sales price. Approximately $10 million of the year-over-year improvement in the Siding segment related to higher OSB pricing. 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. The segment also includes the sale of I-Joist and LVL products produced by the Abitibi joint venture or under our sales arrangement with Murphy Plywood. The Engineered Wood product segment recorded sales of $72 million in the third quarter of 2013, up from $62 million in the third quarter of 2012. The segment's operating loss in the third quarter of 2013 was $2 million, as compared to a loss of $3 million in the third quarter of 2012. For the third quarter of 2013, adjusted EBITDA from continuing operations increased $1 million, as compared to the third quarter of 2012. Volumes of I-Joist were up 5%, while volumes of LVL and LSL were up 17% compared to the same quarter of last year, primarily due to increased LSL sales. Pricing was up 11% in I-Joist and 3% in LVL and LSL, reflecting price increases in all product lines which are introduced to offset rising raw material costs. On a year-to-date basis, Engineered Wood Products reported sales of $196 million, a loss of $11 million and negative adjusted EBITDA of $1 million. In the first 9 months of 2012, Engineered Wood Products recorded sales of $162 million, a loss of $9 million and essentially breakeven adjusted EBITDA. Sales volumes in I-Joist were up 12% and volumes for LSL and LVL were up 15%. Year-to-date pricing was up 9% in I-Joist and 3% in LSL and LVL. Moving on to Slide 8 of the presentation. For the quarter, our South American segment recorded sales of $42 million, approximately the same level of sales as in the third quarter of 2012. Operating income in the third quarter of 2013 compared to last year was up slightly. South America's adjusted EBITDA from continuing operations was $8 million for the third quarter of 2013, which was also up slightly as compared to adjusted EBITDA in the third quarter of 2012. Pricing was up 5% in Chile and down 3% in Brazil. In local currency, Chile recorded 10% increase and Brazil recorded an 8% improvement in pricing. For the first 9 months of 2013, South America recorded sales of $131 million, operating income of $18 million and adjusted EBITDA of $26 million. For the first 9 months of 2012, South America recorded net sales of $127 million, profit of $11 million and adjusted EBITDA of $20 million. During the quarter, we sold our Molding operations and recognized a gain on the sale of approximately $2 million. As a result of this sale, we have reclassified our operating results to move this operation to discontinued operations for all periods presented. Left in our other building products segment is our U.S. GreenFiber cellulose insulation joint venture, LP's trucking operations and various others non-operating facilities. Overall, we are showing a loss of $2 million in the third quarter of 2013, which is comparable to the third quarter of 2012. Operating results for the first 9 months of 2013 are improved at a loss of $6.1 million, compared to a loss of $7.8 million in the same period of 2012. Total selling, general and administrative costs for the quarter were $34 million, as compared to $31 million in the same quarter of 2012. For the first 9 months of 2013, SG&A costs were $104 million compared to $92 million for the first 9 months of 2012. This increase in SG&A costs is primarily due to costs associated with our systems upgrade project and legal and transaction costs associated with the announced acquisition of Ainsworth. We recorded a $1 million of foreign exchange gain in the quarter, compared to a $400,000 gain in the same quarter last year. For the 9 months period, we recorded a $3.3 million loss in 2013, compared to a $2.3 million loss in 2012. Net interest expense was $6 million in the quarter, compared to $7 million in the third quarter of 2012. For the first 9 months of 2013, net interest expense was $20 million, as compared to $26 million in the first 9 months of 2012. This reduction in interest is related to the refinancing we completed in May of 2012 and the resulting reduction and amortization of deferred debt costs. We did record a small loss and early debt extinguishment in the quarter of about $1 million. This was related to a $19 million prepayment we made in the third quarter on debt outstanding in Chile. Please refer to ninth slide of the presentation. As of September 30, 2013, we had cash, cash equivalents, investments and restricted cash of $685 million; working capital of $881 million; net cash of $310 million. And in addition to the $685 million of cash on our balance sheet, we had $100 million of availability on our asset-based loan facility. We have entered into a commitment for up to $200 million of senior secured revolving financing with the Consortium of Farm Credit System bank. Once the definitive loan documents are in place in early December, this financing will replace our current ABL facility and will provide financing for the announced Ainsworth acquisition. We have terminated the commitment agreement with Goldman Sachs and Bank of Montréal for up to $430 million of financing. That financing was put in place at the announcement of the proposed Ainsworth acquisition and is no longer necessary given the successful consent solicitation on the Ainsworth senior secured notes and our new commitment from the Farm Credit System bank. Capital expenditures for the 9 months were $45 million. This does not include the $67 million net of cash acquired spent on acquiring the other 50% of the Peace Valley facility, which was completed in May. We generated $59 million in operating cash flow in the quarter and $223 million of operating cash flow in the first 9 months of 2013. And as we discussed in our last quarter conference call, we are planning to spend approximately $80 million for capital expenditures in 2013. Based on our initial look at the capital budget for 2014, the range of spending is expected to be $90 million to $95 million, approximately $50 million for capital maintenance and the remainder is targeted for projects, such as capacity expansion in our Siding business, a press rebuild for one of our OSB mills and an additional capital for our third Chilean mill. And with that, I'll turn the call over to Curt for his comments.

Thank you for that review, Sallie. Today I'll make some comments on our performance for the last quarter, talk about the current state of the housing market, give you an update on the Ainsworth acquisition, talk about some other accomplishments we had in the quarter and, finally, provide comments on what I see for the rest of this year and into 2014. For the third quarter, our safety performance was very good. For year-to-date, TIR, total incident rate, of 0.52 and a rolling TIR of 0.45. In October, I'm pleased to say that LP was named one of America's safest company's by EH&S Magazine, this is an honor that we received for the second time. Sallie just reviewed overall sales increase to about 10%. We earned 26% -- or $0.26 per diluted share, $0.13 per share on an adjusted basis and adjusted EBITDA of $64 million in the quarter. Every one of our segments was adjusted EBITDA positive in the quarter and all, except OSB, had better results in the same quarter last year. Siding in South America continued to do very well. As we think about the housing market, the question I get is so what happened in Q3. My summary is that the housing market is improving across the U.S., but at a much slower pace than we anticipated earlier this year. In our discussions with builders and our channel partners, they support this view that housing is recovering although they do have some headwinds. They continue to be concerned about labor shortages, both skilled and unskilled, costs and availability of high-quality lots and the lack of a supportive local infrastructure, and these are planners, inspectors, roads and utilities. The other thing that has become very obvious to us is the first time homebuyer is not yet participating in this housing recovery. This is due to the increase in mortgage rates, tighter credit standards from banks and lackluster job growth. On the other hand, it's been recently noted in a couple of publications, investors are buying new homes for rentals. This is up to 5% to 6% of the total new home sales from a historic level of 2%. And clearly in Q3, the recent silliness in Washington put a serious dent in consumer confidence and jobs while the 17-day government shutdown delayed mortgages and closings. I'm glad that the shutdown of the debt ceiling issues were resolved at the 11th hour, but I remain concerned that this will happen all over again in January. The big news at LP in the third quarter was the announcement in early September that we will acquire Ainsworth Lumber Company. Let me give you an update on where we stand in this transaction. Ainsworth and LP filed the premerger notification report forms for the U.S. government on September 17, 2013. Due to the shutdown of the U.S. Government in October, the Department of Justice asked that we withdraw our submission and refile them to give them an additional 30 days to review the transaction. So we did withdraw the filing on October 16 and refiled on October 21. Ainsworth and LP have also made the necessary filings in mid-September with the Canadian government under the Investment Canada Act and the Competition Act. We have received the supplemental information request from Competition Canada that we'll respond to in the next several weeks. Ainsworth filed their Notice of Special Meeting and Management Proxy Circular on September 24, 2013. They did hold a special meeting with shareholders on October 29, and the transaction was almost unanimously approved by shareholders. As Sallie mentioned, Ainsworth, at LP's request and expense did lodge a consent solicitation from the holders be outstanding 7.5% senior secured notes due 2017 to modify the definition of change in control in the indenture. On October 16, the majority of the bondholders approved this consent. So as Sallie mentioned, this will allow us to significantly reduce the amount of contingent debt they will need to have in place at closing. As Sallie also mentioned, we are putting in place a new $200 million bank facility that will replace our current ABL and provide additional funding to close the transaction. As a reminder, it's our intention to have cash in the balance sheet of $350 million to $400 million post the transaction. We've got a fair amount of transition planning for the integration and once we receive necessary government approval, we'll be excited to hit the ground running. Based on all this, we continue to believe that we'll complete this transaction around the first part of next year. Other accomplishments in the quarter, as Sallie mentioned, we did sell our Molding business, generating about $15 million in cash and a $2 million gain. And I'm pleased to report that we are on time and on budget with our systems upgrade project and looking forward to go in live on January 1. For the rest of this year and into 2014, I remain optimistic. The consensus forecast for the full year now stands at about $930,000, which is a 19% increase from last year. For 2014, the consensus is about $1.15 million, which will be a further 23% increase over this year. Both these are lower than the forecast I discussed last quarter, largely a result of the factors I discussed earlier. On the growth next year, the good news for LP is that it's forecast to come more from single family than multifamily and more of our products are used in single-family starts. Inventory of new homes for sale remains very low, at about 140,000, and existing home for sale stands at 2.5 million, about a 5 month supply. This has fostered price increases that averaged 12.4% year-over-year. Also important to our business is residential remodeling activity that jumped at the beginning of this year has stayed at these higher levels. The public big-box retailers both raised their forecast for the full year. Let's look forward to this quarter. There are some important accomplishments that we'd like to have in the bag. One, we need to clear the regulatory hurdles for the Ainsworth acquisition; 2, be ready to go live on our systems upgrade project on January 1, we need to accelerate the rate of operational improvement in our Clarke County OSB mill. And now as my friend, Rick [indiscernible] would warn me, 2 days is not a trend, but we set several production records this last week in Clarke County, so that is coming along well. And then we will also begin press rebuild products in our projects -- in our geoprojects at Tomahawk and Roxboro to be completed early next year. So in conclusion, the housing recovery is happening, but it's happening much slower than prior cycles due to the factors that we've discussed, limited participation by the first time homebuyer, labor shortages linked in the building cycle, higher mortgage rates and tighter qualification standards, weak job growth and consumer confidence that is being whipsawed by the political discord in Washington. All in all being said, we should have a good year. We will remain agile and committed to taking actions necessary to change -- to respond to the changes in demand. With that, let me turn over to Sallie to manage the Q&A.

Great. Thank you very much, Curt. Stephanie, we're ready for questions.

[Operator Instructions] Your first question comes from the line of Gail Glazerman with UBS.

I guess -- I can't decide where to start -- I guess, maybe on the regulatory approvals, I'm sorry if I kind of missed the dates and stuff, but with the U.S. and the refiling, when would you expect to hear something at the latest?

Well, the 30-day period expires on November 20. As you know, we can get a second request prior to that.

Okay. And can you give me the little bit more color in terms of the Clarke County ramp up, what you'd estimate and the cost might have been during the third quarter, or what you might expect in the fourth quarter? And what type of run rate, I mean, you talked about production records, but only 2 days. Kind of what type of run rate you're at currently?

Well, on the cost side, it cost us, if you look at -- the loss at that mill was about $7.5 million in the third quarter. And that's less than it was in the second quarter. So we made improvement. We're currently running at about 1.1 million square feet a day.

Okay. And can you talk a little bit about what you're seeing in terms of costs, as you move into the fourth quarter and maybe what you might have seen in the third quarter? I missed it if you discussed that.

Sure, Gail. We actually saw, quarter-over-quarter, we saw our costs increase, now this is just the price aspect of it, by about $5 million and probably half of that is fiber related. However, if we look at the third quarter of 2013 relative to the third quarter of 2012, the raw material costs are actually a little bit better.

Okay. And that increase, is that something you'd expect to be sustained or increased sequentially moving into the fourth quarter?

Yes. I think overall, the costs are a little bit but not significantly higher, sequentially.

Okay. And Curt, when you talk about, I guess, the consensus forecast of 1.15 million starts next year, when you talk to your customers, I mean are you reading that level of confidence that we're going to see that big a pick-up given what they have in the backlog? Or do you have any sort of incremental color on that?

Well, I attended the Harvard Joint Center for Housing Studies, I'm on the policy advisory board, so there's a lot of builders and channel partners on that. And we went around the room, and I think that the sentiment was that it's probably going to be between 1.1 million and 1.15 million. And some of the forecasts earlier were up to 1.25 million and they certainly have backed off that. So I think the sentiment around that room is 1.1 million to 1.15 million is a pretty good number.

Okay. And I guess given the comments in terms of the government slowdown, you certainly haven't seen any sort of change in trends or activity in the fourth quarter.

No.

No, not meaningful, no.

I think this is implied in what Curt was saying, Gail. But the fact that we've just kicked the can down to February, I think really as part of that whipsaw of consumer confidence that -- what Curt was talking about.

Your next question comes in the line of Mike Roxland with Bank of America.

Wondering if you can provide just any color around recent pricing trends. It looks like pricing, I think within the last week, was lower. I just want to get a little bit of color on what you're seeing in markets currently.

Well, at this time of year is when building activity does typically slow down. So this is not unusual for us to see a little withdrawal in November and December. I think that overall pricing is going to -- it is what it is, based on the transactions we have every day with our customers.

It's probably fair to say that will muddle along until you have a little bit of improvement in housing.

I think it's a little bit of improvement in housing but it's also weather-related. So if we have an early winter or whatever happens in that regard, as well. So the Random Lengths report last week, they basically said that the retailers and the channel partners are filling to existing orders. They're not taking any inventory. So I think that's the situation we're in. And we do see increased activity, and it will be interesting to see how Q1 comps. Last year, we saw a big upswing in inventory in Q1 and then kind of a deleveraging the inventory in April and May, because we did see slower growth in the second quarter than we had in the first quarter. So if we have a good start to the building season. We could see inventory being added in the first quarter.

Got you. And all year long, we've heard from homebuilders who have had orders come in less than expected as they continue to drive price over pace. And also demand has slowed from higher rates. What's LPX's strategy of orders only continued to rise on a modest pace? And how flexible is your system and how willing are you as the leader in North American OSB to flex that system to maintain pricing?

Well, we manage our system to what we're seeing demand from our customers. So it's all based on customer demand. So we have a weakness in our order files, then we adjust our production schedules accordingly.

Is that something you do in the third quarter? Sallie, I believe you mentioned that took some downtime in 3Q.

Yes, absolutely. We did that in the third quarter and we used that to do some maintenance in our mills, which is, of course, what also caused the increase and some of the costs in our OSB segment.

How much downtime was taken in 3Q? And has that persisted into 4Q?

I don't have the number in front of me. We did take downtime in 2 of our Canadian mills.

It was about 30 to...

$50 million.

30 -- well, I was talking days. Yes, about 30 days.

30 mill down days.

69?

60.

60?

Well, you got a new number.

All right. Yeah.

Got you. This is really 2...

I was just going to say, we did take -- I think the real point is on how much should we take, as much as did we take it, and the answer to your question is, yes. So as we took downtime, as we saw the demand lessening, we took downtime within each of the facilities, within some of the facilities.

I got you. And then last question, where was the downtime taken? Was it mostly in your U.S. mills or your Canadian mills?

Mostly the Canadian mills.

The next question comes in the line of Mark Connelly with CLSA.

This is Garrett Hines [ph] for Mark Connelly. How comfortable are you with the way OSB restart capacity has entered the market? And as you think about the last couple of years, do you think OSB producers have been more sensitive to the risk of flooding the market?

Well, I can just tell you what we have done. We've said when we saw housing starts get to over 1 million to 1.1 million that we'd consider a restart and then the forecast, as we entered into 2013 was for 1.050 million kind of numbers. So when asked the restart of Clarke County and you brought that on late in Q2 of this year and that's ramping up now. And then also in Q2, we started up on limited production in our Dawson Creek mill to satisfy specialty OSB demand on the West Coast.

That's helpful. And what is your operating rate in OSB right now in the U.S.?

It is -- for our facility it's probably not even for the operating facility for the quarter probably just around 75%.

Great. And what do you think would be a normalized rate of EBITDA in Engineered Wood?

Well, when we've talked about Engineered Wood is that we need to get to north of 1 million starts before it's going to a positive contributor. If we go back to 2005, 2006, it was in the $45 million to $55 million range.

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

You answered all the questions.

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

On capital allocation, can you just remind us what you view as the appropriate leverage ratio in the business, I guess, pro forma assuming that the Ainsworth deal closes. And just remind us on how you're thinking about potential returning cash to shareholders via share buybacks?

Well, I don't really think, Alex, our thinking on that with acquisition of Ainsworth has changed very much. So as Curt mentioned, we intend to keep $350 million to $400 million on the balance sheet and as of right now, we'll use a fair amount of our cash to fund that, as well as then fund Ainsworth acquisition and in fact, we suspect we'll have to borrow a little bit from our Farm Credit Systems revolver to help finance that activity. From a debt-to-cap ratio, that number hasn't changed and we've historically talked about a 30%, 35% number and that number hasn't changed.

Got you, that's helpful. And then on the Siding business, we've seen very nice improvement in the profitability there, even though starts are well below normal. I'm curious if you can sort of talk about the earnings runway in that Siding business as your housing starts get back to that 1.5 million level.

Well, you have to think about the Siding business in kind of the segment strategy, because we sell into new home construction, probably about 40% of that. And then into the retail channel, probably another 25% to 30%. And the remainder goes into our repair and remodel and nonresidential structures. So as housing recovers, so if we -- say we have a 20% increase in housing, from a Siding perspective, that means it we'll pick up about 8% growth, with the 20%. So you don't -- your Siding doesn't respond according -- because retail does go up at that same rate, retail is up 3% to 5% kind of growth rate. And then we're seeing about a 5% growth rate in the other markets beyond retail and new home construction. But we think it continues to have a good growth rates, we've been averaging in the 8% to 10% even through the downturn. The little markets have improved. And I think this year, we'll probably be 12% growth year-over-year.

Got it and thanks for that color. Curt, just last question for me, as you think about budgeting for '14 and getting your facilities ready for '14, what's the base case outlook for housing starts? I know you talked about the consensus numbers being 1.1 million to kind of 1.150 million. I mean, is that what you guys are you using? Or are you using something less more conservative than that number?

We're using 1.1 million for our base case.

Your next question comes from the line of Joe Stivaletti with Goldman Sachs.

I just had a couple of follow-ups. One, given the current outlook for housing and whatnot in the current market conditions, are you rethinking any of your capacity decisions? Are you changing any of that or ramping things up at a different pace or less fully ramping them up? And have you also -- have you seen much in the industry going on that -- in terms of that type of adjustment given the slower third quarter relative to the first half?

Joe, as you know, we only talk about ourselves and I'll continue to talk about ourselves. But we've made the decision to bring Dawson Creek up on a limited basis and we're running on a limited basis. We brought Clarke County up, our contingency was that we saw weakness that we would take -- either take some export business or we would take downtime in our Canadian mills. And that's exactly what we did in the third quarter and we'll continue to look at that, in the fourth quarter and the first quarter.

Okay. And then just one quick capital structure question on the -- assuming everything closes with Ainsworth, are you planning to -- is your current thinking that you'll just leave those Ainsworth bonds in place for now?

Yes.

Okay. And then just finally the CapEx numbers you shared, that is -- that excludes Ainsworth? That's just you in terms of your forecast that you shared earlier in the call.

That is correct.

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

A couple of regulatory process-related questions, if you can help us on them. Can you share -- are the authorities looking at the structural panels market given that plywood and OSB are interchangeable in most applications or are they looking at more on an OSB focus?

I have no idea. It's a structural panel market in North America, and that's the way they should look at it. But their questions are all over the place right now.

Okay. And then did the U.S. folks, and maybe you have no idea on this either, but I assume they are primarily looking at the U.S. business and Canada is looking at the Canadian business, or are they looking at the North American businesses? Is that something you can have any color on?

Again, they've asked questions about both -- well, about all of North America. So the questions have been pretty far ranging. So I honestly can't tell you what they're thinking.

Okay. And then lastly just shifting gears, you mentioned current expert potential, taking bids from the export market. Is that a meaningful potential outlet? Can you maybe quantify that a little bit for us?

Yes. It has ranged from probably 15 million to 40 million square feet a quarter.

And what was it in the just ended quarter, order of magnitude?

It is about 2% of sales on a dollar basis, about $13 million.

So at the low end of the range?

Yes, so it's at the low end of the range. That's correct.

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

Just a couple of questions. One on downtime, you mentioned 30 mill days in Q3. What is Q4 expected to be?

Okay. I think Mike revised that it was 60 mill days of what Mike...

No, 30.

Never mind. You are right, 30.

Okay. So for Q4 it's...

I don't have that right in front of me. I would assume, it's going to be a little bit more because we're starting the Roxboro press rebuild. So Roxboro will go down from up 30 days between December and January.

And then just on the cost increase. And Sallie, you related half of that to fibers. Was that due to wet weather that you experienced in the U.S. sales or is it that more just regional market?

It was really across North America, so nothing specific.

Yes, some in the U.S and some of -- yes.

Okay. So it wasn't one region specific. And then just lastly, on the system's upgrade project, just trying to understand the main benefits of that. And if there's any implications for your flexibility in ramping up or ramping down your production based off markets that you see at the time?

Well, we're not doing anything at the mill level, with the systems. This is really replacing legacy systems that we had that were customer facing and a general system that's kind of end-of-life. So it's really just upgrading older systems.

And really our systems have just gotten to the point where it was either -- we had to do something and so it's really focused on bringing the system to a more modern era, I'd say. Paul, really the way to think about it is if systems tend to have, let's just call a 5- to 7-year life. And when we would've begun to reach that point of time was when the housing would've been reaching the worst of the downturn. And so we've been deferring spending on those systems, and we just concluded this year that -- I mean, we've been doing the studying [indiscernible] but it was now -- it's the time to bring us into the -- to set the systems upgrade project in place. So it's really about improving the systems versus looking at getting a lot of efficiencies.

I think the way to look at it is it's really about the magnitude of a press rebuild. It's time to rebuild, but...

That's a great way to think about it, yes.

The IT press [ph].

Your next question comes from the line of Ketan Mamtora with Deutsche Bank.

Can you talk about any regional differences you are seeing in your OSB price realizations? And if that has changed in the last couple of quarters, I know one of your competitors was talking about weakness in the Southeast prices?

Yes, it's been really an usual quarter because there's been a lot of regional price differentials, there's also been a lot of differentials in some of the value-added products, particularly in flooring. In flooring, we had the highest differential between commodity boarded flooring of any quarter since I've been here, since 1997, very unusual. And I don't think we really have an explanation for that. We've talked our sales guys. We enjoy it, but it's interesting that if you look at North Central, Q3 to Q3, down $61. But our average sale price is only down $15. It really had to do with those regional differences and the premium on flooring. It was very unusual.

Okay. And then can you talk about how your inventories are in the system right now and how they have done in the last couple of quarters?

Okay. The question is what? I'm sorry, on inventories?

Yes. Inventories in your system at the moment and considering that we're heading into a seasonally slow period. How do you think you stand with your inventories?

I think we're about where we need to be. Our Siding business need to be about 58 to 60 days and that's about where they are. Our EWP business is in 30 to 35 days and our OSB business is around 20 days. So I think, we're in pretty good shape.

Got you. And then a couple of quick questions. Are you seeing any uptick in pulpwood cost, not just in a particular region, but any significant change in pulpwood cost? And if you can remind us how your contracts are structured there?

Well, as we look into the next year, we see a slight increase, probably more related to inflation than anything else. There are regions, IP just announced the closure of a huge pulp mill in Alabama. That will have a positive impact on the mill that is closest to that. So we'll see an improvement there. So that's really -- and you're exactly right, that's who we compete with, is the pulp-and-paper guys. And they pull capacity off, it gives us a little bit more leverage with our vendors.

Got you. And a couple of quick questions for Sallie. You mentioned the operating rate in U.S. was 75%?

In OSB.

And this excludes the mill that are shut right now or this is across the system?

Yes, it excludes the Chambord [ph] facility.

And if you -- got you. And then the $200 million Farm credit, can you tell us what the interest rate will be on that at this point?

Well, it's a floating interest rate. I don't remember what that -- what is it? 1.75%? 1.75%.

And the final questions will come from the line of Steve Chercover with D.A. Davidson. Steven Chercover - D.A. Davidson & Co., Research Division: Just 2 quickies. First, I assume that you're probably in discussion with your channel partners in 2014 -- or, sorry, for 2014. Do you have to know how many of channel partners that you currently share with Ainsworth?

Yes. That's the one area of diligence we haven't been -- that we haven't looked at, at all. Steve, is we really have to look at the customers. We know through their public reports who their largest customer is but, as far as those details, we won't be able to see that until the transaction closes. Steven Chercover - D.A. Davidson & Co., Research Division: I mean, would you perceive that as a risk or as an opportunity? I mean, that's presumably where I guess some freight synergies could be obtained. But do you think you might lose anything if folks want to have diversity?

Well, I think that the logistics piece will bring us some advantages. One of the things we've done is we did do a listening tour with our biggest customers and talked about what they like about us and what they like about how Ainsworth conducts business and try to take the best of both. Steven Chercover - D.A. Davidson & Co., Research Division: All right. And my second was I guess a follow on, on Engineered Wood. I mean, it's nice to see it finally EBITDA positive, and I heard you loud and clear that you need 1 million starts for any tension in the market. But you've alluded to kind of $45 million to $50 million of EBITDA in 2005, which is probably the peak. But at that stage, I don't think Houlton was running. So I mean, would some puts and takes shouldn't we be a bit better than $45 million once housing is leased back to normal?

We will be when we get to 1.5 million plus starts, absolutely. There's a shortage of LVL, I think. Steven Chercover - D.A. Davidson & Co., Research Division: What do you spend on the Houlton, $100 million or something?

On the construction? Steven Chercover - D.A. Davidson & Co., Research Division: Yes, the conversion there.

The conversion is about $120 million. Steven Chercover - D.A. Davidson & Co., Research Division: So I mean, that ought to, I guess, if you got a 15% to 20% return, contribute, what, $20 million.

Our pro forma is even better than that.

Right. You're right, Steve. Our expectation would be that if we got there, that we'd see a performance that was better in our EWP business than we've seen in the past, because of the addition of LSL at the Houlton mill. Great, all right. Well thank you very much. Stephanie, I think that's all the time we have for questions. So if you could please read -- provide the replay number. And I would like to thank everyone for participating in our call. Mike and Becky are here to answer up any follow-up questions you may have. And we thank you for your participation. Hope you have a good day.

Thank you, ladies and gentlemen. The replay will be available for 8 days. The replay number is 45001139 and the replay number to dial-in to is 1 (888) 286-8010. And the replay number again is 45001139. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.