Good day, ladies and gentlemen, and welcome to the Q2 2018 Louisiana-Pacific Corporation Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded for replay purposes. It is now my pleasure to turn the conference over to Mike Kinney, Interim Chief Financial Officer. Please go ahead.

Thank you, Hailey, and good morning everybody. Thank you for joining our conference call today to discuss LP's financial results for the second quarter of 2018. I'm Mike Kinney, LP's Interim Chief Financial Officer and I am joined today by Brad Southern, LP's Chief Executive Officer. As we've done in the past, we've 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 will be referencing these slides in my comments this morning. Also, we have filed our 10-Q and 8-K this morning with some supplemental information. I do want to remind all participants on the call about the forward-looking statements comment on Slide 2 of the presentation. Please also be aware 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 have been supplemented by the Form 8-K filing we made this morning. Rather than reading these two statements, I incorporate them within this reference. Now let me turn the call over to Brad.

Thanks Mike, and thank you all for joining us this morning. I will begin today's call with an overview of our results for the quarter followed by highlights from each segments, a review of the current market environment, the outlook for the second half of the year and our capital allocation priorities. Mike will then take you through our financial results in more detail followed by the question-and-answer session. Before I dive into this quarter's results, I would like to take a moment to thank all of you who joined us at our May Investor Day at the New York Stock Exchange. We hope it was informative. Many of the things we discussed at the meeting regarding our transformation and the progress we're making continue to play out in our strong results for the quarter. Turning to our results, we are very pleased with our performance this quarter. In fact, this was the best second quarter for LP since 2004, driven by steady execution from our team across the business, as well as continued positive macro and industry drivers; Siding, OSB, Engineered Wood in South America all delivered growth both sequentially and year-over-year. Starting with Siding; we're pleased to report that as anticipated our Siding segment is back on track after some volume headwinds that we discussed last quarter. This was a record quarter for Siding with increases in net sales, EBITDA, strand volume and strand order intake. Pricing remains strong across all Siding product families. It may remain solid across all market segments and we continue to be on track to deliver on our anticipated 12% to 14% full year revenue growth target for Smart Side Strand. Inventories for the Smart Side products are at normal levels. As we expected the impact of the residual transportation challenges in Canada…

Thanks Brad. I will begin my discussion with a review of the financial results for the second quarter of 2018. This will be followed by some comment on the performance of the individual segment and selected balance sheet items. Moving to Slide 4 of the presentation for discussion of the second quarter 2018 consolidated results; we reported net sales of $811 million for the second quarter of 2018, a 17% increase from the second quarter of 2017. Net income was $163 million, or $1.11 per diluted share compared to net income of $95 million, or $0.65 per diluted share in the second quarter of 2017. Adjusted income from continuing operations for the quarter was a $157 million, or $1.08 per diluted share based upon a normalized tax rate of 25%. This compares to $84 million, or $0.58 per diluted share based on a normalized tax rate of 35% reported in the second quarter of 2017. Adjusted EBITDA from continued operations was $242 million in the quarter compared to a $167 million in the second quarter of 2017. Turning to our results for the first six months of 2018, net sales were up $1.5 billion, a 15% increase year-over-year. Net income was $254 million or a $1.73 per diluted share up from a $150 million, or a $1.02 per diluted share in the first six month of 2017. Adjusted income from continuing operations was $250 million or $1.71 per diluted share based upon a normalized tax rate of 25%. Adjusted EBITDA was $401 million compared to $281 million in the same period 2017. Moving on to Slide 5 and a review of our segment results. Starting with Siding, this segment includes our Smart Side and CanExel Siding products, as well as OSB produced on one line of our Hayward Wisconsin operation…

[Operator Instructions] And our first question comes from Mark Connelly with Stephens. Your line is open.

Thank you. Brad, I wonder if you could talk a little bit about market penetration in Siding, I mean, you have-- you've done really well. Housing has been really good, but even as housing flows it-- it seems to me that that product still has a lot of room to grow, I was wondering if you could give us a sense of some of the markets that might be less penetrated and how those markets might differ from where you are getting your growth right now?

Good question, Mark. As you know, we have as a company been really focused on single-family new construction across all our products including Siding over the past decade or so. The initiatives that we have in place that we are working on now really focus on diversifying that penetration with our primary focus being further penetration at the Repair and Remodel segment. We have a really good position in repair and remodel in the central part of the country now; kind of around our mill footprint, and we have a we have a full scale strategy in place to broaden that penetration to all the other zones in North America. Multifamily, we also were under penetrated there as well. This year we opened up a multifamily pricing desk for those are typically that segment requires a very competitive pricing, and so, we are learning how to a price and garner some of that business. We don't want all of it because of the impact it could have on margin, but there are times when that does fit our project profile for the business. And then finally I'll talk a little bit about why commercial-- and what we call special-- specified markets, and this is more of the commercial building, restaurant type environment where we are extremely under penetrated primarily because architects usually specify deciding to be used pretty early in the design process, and we have more or less been invisible on that channel. We really introduced to having to be successful in that channel when we introduced our FlameBlock product line which obviously requires specification at the architect and engineering level. So we are being-- have been able to piggyback learning opportunities about our Siding offering along the complements what we have been doing with FlameBlock's specification and we are starting to see some traction there. So those are the three areas we are under penetrated in, and I would say the biggest volume opportunity obviously is the repair and remodel. We are really, really focused on that as a business and then we are learning how to be successful at the multifamily and on the specified market or commercial side of the market as well.

That's really helpful and just one more with respect to your new sales offices in Peru and Argentina, do you have targets for those yet or do you have a general sense of how much opportunity there is there?

We have sales target in both of those sales offices now, and while they're not huge targets given how new we are in both-- both locations we've exceeded those so far this year.

Thank you. Our next question comes from Gail Glazerman of Roe Equity Research. Your line is open.

Hi. Good morning. Just in terms of volatility in OSB pricing, I realized visibility might be pretty low, but can you give us your best guess on what drove it up during 2Q and what is part of the magnitude of the correction that we have seen, and are you seeing any light at the end of the tunnel?

Okay, Gail. So you called it the best guess, and so that's - I'll give you. I think a couple of things, well, what drove it up was demand but also the logistics issues that the industry faced out of Canada, particularly Western Canada, restrictive plots, I mean-- I don't know, I am just speaking from-- for our business, restricted product flow out of our western regional mills into the markets. So definitely the logistics issue that the industry and we face I believe constrained the ability to get manufacturing capacity into the marketplace. And that had a favorable impact on pricing. And in fact, you know as we mentioned in the first quarter, we actually had to take some downtime because we've filled up our warehouses at our Western Mills and weren't able to get enough railcars to ship that out. So we were taking downtime in the face of increasing demand. I can't speak for the other OSB manufacturers, but I assume at least some of that happened at their locations as well. So we had a rising demand as housing started to take off early in the spring and we were still restricted in our ability to move products around due to the logistics issues. But I think that was probably the single biggest-- what I call unexpected-- a restriction on capacity that drove pricing up. Okay, so then we-- then the second part of your question is what-- made it go down, I think one thing the logistics issues got settled because as we got into the second quarter and that pent up inventory that was at our plants or in reloads that were up-- and we were not able to get into the market in Q1, moved into the market in Q2. Secondly, we had the five OSB mills that are starting up in various stages of introducing volume into the market, a couple of them are from my understanding are running pretty well. So we did have to absorb some new capacity coming on early in Q2. And then, I think when we got to July we did just-- set the softening in demand as we moved into the fourth of July holiday week, which is normal for us, but it seemed to be maybe a little bit more extended than we had anticipated-- it was more extended than we had anticipated. And so there was a kind of a pullback from our demand pulls early in July that I think obviously moved prices down as well. And so, that's how I would call it-- I mean others that are in the market may see it a little bit differently, but s how I view the drivers, as well as the spike up and the fall down.

Okay. That's helpful. Can you--

The only thing I would add Gail is that, I think that as we have thought the-- for the longer term, over the next 12 to 18 months, we still think the overall supply and demand is in balance-- it's just that-- it's going to be choppy as we go forward as the demand sways in the individual month, and then when we look at-- how the capacity comes on in the individual mills.

Okay. And, also if you can offer any perspective on where your current pricing is versus the 2Q average?

Well what I mean-- I think it's-- I don't know the comparison where the Q2 average was, but if you look at the where it's printing today, that's what the pricing is, so--

Okay. And just a reminder, should we be thinking about any kind of financial impacts from the Dawson project, as we look into modeling for the second half?

So, Gail, we have been talking about that-- is that if you look at when we converted Swan, it had about $10 million impact in the Q3 and Q4, and so I think that number plus or minus, between Q4, Q1 is would be reasonable to have from an expectation standpoint.

Okay. One-- just last one. Just-- you have been talking about inflation, expecting some more inflation in 2018, as you saw in 2017, is that still your view, or is there anything better or worse from that?

Yes, we are actually-- we are right in line, although we said before, I think we were saying that we were kind of line with 2017 increase and our last-- latest forecast for 2018 over 2017 is about the same-- which is in that $25 million range.

Thank you. Our next question comes from George Staphos of Bank of America Merrill Lynch. Your line is open.

Good morning. It's actually John Babcock on the line for George. Just wanted to start out the Siding side of things, I was wondering if you could talk about your expectations for volumes for both Smart Side fiber and also the CanExel products, realizing there was a lot of weakness in the first half.

So we are in the process from within the market of raising prices for fiber which we have done now. We expect to lose some volumes as a result of the magnitude of the price that we have implemented. But I think that's beginning to settle out in the marketplace-- the pricing has been in place for several months, and so I would say-- my expectations is we stabilized around the kind of volumes that we sold in Q2. As far as CanExel, I don't see a lot of opportunity to make the shortfall in the first half, and as Mike mentioned, and this only reminds me about our third of our business for CanExel is in Europe and we are seeing extremely soft markets there for that product. We are doing okay in Canada, but the demand pulls in Europe has been disappointing, and I really don't see that recovering-- enough to offset the shortfalls in Q-- in the first half of the year.

John, the only think that I would add is that, when you look at the volume in that product mix, it's very small volumes. I mean that mill has a-- is running at 50 million feet a year if that so, it's a very small volume on the overall piece. And we were-- if you look year to date, we are down 14% on volume, I think if we go back to full year 2018, we were like plus or minus like 15% up. So, it was up quite a bit, 2017 over 2016, and some of that goes back to that little bit of portfolio we talked about.

And just to keep in mind, - when you look at our sales-- because the product is exported to Europe and primarily to France, the inventory situation over there can really cause big swings in our order files, they build up inventory late last year and they have to work through, and so, there is a little bit of-- more of an inventory challenge in that business we are exporting it.

Okay. That's very helpful. Thank you. And then the second question I have, as you think about your OSB mills, do you see opportunities to perhaps de-bottleneck to improve the overall efficiency and/or output of certain mills?

Absolutely we do. The major initiative in our OSB business is around focus on-- on OEE which is a measurement of basically how well we are operating assets to get production out for their capacity. And as I have mentioned before on these calls, over the past decade as we have appropriately in my view, invested in our Siding business to grow the Siding business and to grow the capability of the Siding business, we had to make decisions around capital investment that we are somewhat biased to the Siding business at the expense of the OSB business as far as the keeping the technology up-to-date. So we had opportunities there. Not only-- not just with capital but also improved operating metrics to really improve our productivity, our cost position in OSB. And as other than growing our value-add part of that business, that is an important initiative we have anywhere in our company, and it is a huge opportunity for us obviously given the capacity we have in OSB.

And are there any specific projects you have in mind for next year or so as you're kind of going through that work?

Well, let me just give you some general ideas about what happens from a machinery standpoint in order to improve OEE. Probably the biggest initiative over the past five or six years, and we have two or three more days to go is press rebuild. We did get behind in our schedule, a press rebuild as we didn't have any capital to spend. And, so, we have been doing about one of those one press rebuild a year in our OSB business and which that increases productivity-- in general increases quality, and ultimately lowers the cost of those mills. We also have plans for dryer improvements in the mills where we have gotten behind on dryer technology, which can improve wood yield. And then, specifically to our operation of Peace Valley which is probably-- well, or not probably, is our poorest-performing mill as far as operational efficiency, we are working there to both upgrade the team and provide the capital as necessary to get that plant up to full operations. So, it's a little bit dependent which mill we are talking about. With that kind-- just to give you an idea of the opportunities that are in front of us to upgrade technology and improve cost position of those mills, and just let me kind of close this answer by saying all of that is put through a lens of return on capital. Fortunately, those projects tend to be fairly high returning projects and so they're pretty easy to justify and approve, but we do want to make sure that we're investing capital wisely in a capital intensive part of our business. But we do see opportunities to improve our cost position through the effective deployment of capital.

Okay, thank you. And then just last question before I turn it over just on the EWP business. I was just wondering if you could talk about the steps you've taken so far and ultimately what you have left to get back to where you wanted to go.

Okay. So on about a year ago maybe five quarters ago now. we took a step back from our EWP business; look no one more than us realizes how quarter that's performed over the last decade. And we just wanted to take a fresh look at what's possible there. The first thing we did is we cut 40 something positions out of that --out of the division, not all of those were filled but a lot of them were. And so we did --pretty much did a consolidation around the operations and sales side of that business. And kept a couple of marketing positions that we thought were unique to the business. We did take a hard look at cutting the SG&A and did so. Secondly, we realized that the primary issue for that from the operational side of EWP was asset utilization. So we've been really focused on growing both the LVL and the LSL part of the business which tends to be more capital intensive part of the business. And fortunately we've been able to do that while raising prices. And so by getting better utilization at our LVL plants and our LSL plants, we're lowering cost while we were increase in pricing. And that's been really good for margins. Now look our benchmark for that business it needs to be sustainably earned the cost of capital. We're not quite there yet. We do see a path to that to getting there. It's a topic of continual discussion within our company and I do as much like OSB, I do see opportunity in an our EWP business to wisely invest some capital and very high return projects that could help with our long term margin situation in that business. So I'm optimistic about the progress we've made and can continue to make. I mean it does --that product offering does complement what we do in OSB, in Siding as far as our distribution and dealer strategy, and even onto the builder and contractors. So it's a fits well in our market facing portfolio, and we just need to make sure that we continue to improve the margins and the operating efficiency of that business. So that we get the returns that we're looking for.

Thank you. Our next question comes from Ketan Mamtora of BMO Capital Markets. Your line is open.

First question, can you just remind us on Smart Side, on the pricing side, how much you all have already implemented out of the announced price increases? What I'm really trying to get to is, is there kind of more coming in, in Q3 and Q4?

So, Ketan, what we so far we've pretty much 4% over Q1 and we're at our Q2 is 17%, we are 4% year-to-date. And I think what we said is it was going to be in that 4 to 6 range pretty much anything other than where we are right now is going to be a mix standpoint. We've gotten the price increase we're going to get and it would be mixed from here on out unless we do something differently in the new year.

Understood. That's helpful. And then, Brad, can you just remind us again on kind of updated thoughts around Cook and Val-d'Or? And kind of how much time it could take for you to get ready in those 2 mills? Because I understand, kind of, the positions are a little different.

So two points there just to remind everyone on the decision process that we'll use will be somewhat dependent on mix. As we've said before, Val-d'Or would be a really good mill for our 16 foot products like lap and trim and Cook would be a little more favorable to our eight foot products, our panel products. So we're continuing to monitor growth by product category to understand which of the mills should be the most viable earlier, but that would only be one item of input along with wood cost logistics and the capital required to get whichever decision we make up and running. As we've looked at our growth for this year especially with where we stand six months into the year and we do expect to begin the evaluation seriously, evaluating that next year. I'll just remind you that our engineering group is pretty tied up right now in the Dawson conversion, but as we get through that in Q1 of next year, it will free up some engineering resources that we have that we will put full-time on doing the analysis for the next Siding mill. So I think we'll be in a position late next year too early part of 2020 really talking more specifically about what we're thinking. But both mills remain viable options for future Siding production.

Got it. That's helpful. And just remind us of how much time would it take for Cook to get ready just in terms of getting the mill up? And how much would it be for - time would it be for Val-d'Or to restart once you made the decision?

Yes. I would say for Val-d'Or, we would be talking about a year from the time we got board approval for the capital, since we would have just --there is a physical infrastructure there. It would take quite a bit of work to convert it on the finishing side deciding and then we'd have to basically hire an entire plants worth of people. On the Cook, we would be looking more two years since that's basically a brownfield mill. We have some idle equipment around our system that we would move in to Cook. So it wouldn't be completely a greenfield, but if you're thinking right now a year away for Val-d'Or and two years for Cook from the time we announced that would be about right. That could bias us a little bit the Val-d'Or because of we could be in the market earlier. So we'll just have to see how it plays out over the next 12 months or so.

And Ketan just remember I know we talked about - we would need to be running OSB for a period of time before we actually made Siding. So although we wouldn't start it up for the OSB production it would be for Siding but we may --we would run OSB before we run Siding.

And in rough terms, is kind of 6 months a good kind of ballpark just as a placeholder to think about it?

For running OSB?

Yes.

Ketan, I would say at least, yes, a minimum of six months because we would want to make sure we got the quality systems lined out before we made that conversion over to running Siding.

Thank you. Our next question comes from Chip Dillon of Vertical Research. Your line is open.

Yes, good morning, Brad, Mike. Thanks for taking my questions. First question is just could you remind us quickly when did or does Dawson shift from OSB to Siding and therefore I would assume if it's over there when you do the startup, that's where the startup costs would be incurred in the fourth and first quarter. Has been shifted over?

Yes, yes, I am just going to say Chip, it's been in the Siding segment since 1/1/2018 so and it would continue to be in the Siding segment in Q, obviously in Q4 and Q1 as we incur any startup cost.

Okay, that's helpful.

Chip, I'll just give everyone an update on our current thinking on timing. So we're looking at taking the mill down in November-- sometime in November and so to run OSB through October, take it down sometime in November and to start doing the downtime necessary for the conversion, and then starting up sometime in Q1 on Siding. And I should say early Q1 on Siding.

Okay, that's helpful. I mean it's pretty clear you guys are pretty active in the market yet you're up to a $1 billion in cash and that could certainly build over time. What is your thought about at least the part of that cash that you want to hold for the longer term? What are your thoughts about how to invest it? I know back when you were in big --having big balances back right before the crisis, you bought some securities that didn't work out so great. And I just didn't know what your thoughts are this time? Is it just simply like Treasury bills or would you maybe buy like two years notes? Are you buying commercial paper? How should we think about that?

Yes, Chip, obviously, I've been here and I still have probably some scars from that. And I would say that we are very conservatively invested in very short term securities. I don't see us changing that. And I would say that it's just not --I mean at any time somebody tells you that you can get more return for the same amount of risk or less risk, there could be something there that doesn't make sense, and that's what we found out with the auction rate securities. So we will continue to invest the cash that we want to keep on our balance sheet conservatively.

Chip, we did make a really good investment in Q2 this year. We bought our own shares back.

Yes, well it's interesting when you look at your net --your value it's --we're constantly reminded that your company is worth less than the stock price because of that cash. So we happen to agree and then just on another point. Could you talk a little bit about to the extent you can about where you think we stand in terms of the capacity situation in North America from a standpoint of what you're feeling in your business? There were a lot of restarts. I know there's one new mill down in Texas and it seems to at least to us that we really haven't seen anything really announced in the better part of a year or more so. We're really wondering if most of or a large portion of what we could anticipate is already in the market/

Definitely, Chip, it's in the market. I would say I mean I'm just giving you my feel maybe we've absorbed half of the ultimate capacity of the new capacity that's coming on. We see more product from certain of the new mills than we do others, but it's feeling like maybe if you took the all five of them they're running about half of capacity. So I think there will be more volume entering the market as those mills get lined out over the next four quarters. But I really think it was more to Gail's question. I don't really think that any of those one mills had a huge impact on pricing as much as the de-bottlenecking of the logistics in the first between the Q1 and Q2, and a little softening demand in early July. So and I look --I think it would be choppy quarter-to-quarter as the capacity gets lined out or demand we get demand swings or inventory shifts, but I don't believe if we stay on this course of 1.3 million starts this year and another to 5% to 10% growth in housing starts next year. I believe that those mills capacity will be pretty easily absorbed.

Okay just last question.

Yes, sorry, go ahead. Well, I was just saying with [Multiple Speakers] things across the way but overall I think the industry is in pretty good balance.

And last quick question when you and maybe you just answered it but with the pretty rapid decline in pricing which isn't surprising given the seasonality. Are we getting close to a point where you might rethink how you or you operate for the year? In other words could there maybe be some --in certain markets some downtime if you if we continue to see the price decline.

Yes. I mentioned that in my comments. We are and we will meet the demand requirements for our customers, and that's a huge priority for us and the ultimate priority I would say. But at the end of the day when we are not going to run production if there is not demand in the marketplace. And that means that --if that means adjusting our footprint regionally and in possibility of taken down time, we will do that rather than run product to inventory or run product that's not sold.

Thank you. Our next question comes from Mark Weintraub of Buckingham Research. Your line is open.

Thank you. First just a couple of follow-ups perhaps. You had referenced a little bit weaker demand in early July. Did that subsequently rebound?

Yes. I would say over the last week or so we have seen stronger pulls in our order file.

I think, Mark, the only thing I would add I think is the way we're thinking about it is that with the way the holidays fell this year being in the middle of the week that kind of --it is kind of different than it normally is and when it --and it kind of people have a tendency to take a few more days off either on the front end or the back end. So it felt like we saw that.

And I guess one interpretation might have been that might have been sparked a little bit of destocking possibly by customers and then maybe the demand strengthening, maybe that kind of you went through that process and would that be a reasonable -

Mark, I think you're thinking - you are thinking about it reasonably. As prices start falling, the magnitude of the falls that we saw early in January, obviously, a purchaser is going to be hesitant to restock inventories in the face of those kinds of pricing falls. And so the tendency is to wait and from their perspective find a bottom which is understandable. And so at some point though there has to be a restocking but I do think there was some hesitancy in the face of a hot July after the holidays to take a big inventory restocking position given the magnitude of the price falls each week.

And then and really just following up on Gail's question where she --I think she had asked whether or not you felt things had bottomed yet. I didn't know if you explicitly had answered that part of the question or felt you had visibility to answer that.

Okay. I'm not calling the bottom to be clear about that, but we have seen strengthening in our order files beginning late last week. Now how that will run through reported pricing over the next couple weeks? It's hard to guess it for me anyway.

Yes. I think you can guess.

And then shifting gears, lastly, any update on the smooth Smart Side product?

Smooth Smart Side product, hard to say, is in the second phase of product testing. And really looking at weatherability is the key, obviously the key component there along with that statics. And so I'm not ready to call that commercialized yet because we haven't done it, but we are making progress towards successfully having a smooth offering in our strand portfolio.

Any sense on timing of when you might be ready to call it?

I would love to introduce it at the IBS, but we're not ready to call that yet.

Okay and when's the IBS?

In February, next year.

Great, and then lastly are you seeing any impact from the new hardy capacity and I realize it's pretty early for that too, but any anything in your markets related to that you're seeing?

No.

Thank you. Our next question comes from Steven Chercover of D.A. Davidson. Your line is open.

Thanks, good morning, everyone. I also wanted to ask along the lines of the thresholds of one you might take some downtime not so much with respect to customer order files, but what is the threshold? Is it earning the cost of capital or just generating cash?

Well, I mean we're going to run if we can earn the cost of capital, that's for sure but it really is more-- I don't really want to peg it on a pricing parameter because when you have momentum up or down it's kind of hard to call that --it's for me I don't know --I'm not --don't feel comfortable calling that number. It really is our sense of demand capacity balance in the markets that we play in. And when we said-- we have customers that have strong pulls that need to take an inventory position. And what we're going to sell into that. We're not going to leave them hanging. And so I would just want to characterize it as a demand capacity balancing decision rather than one is just only pegged to pricing. And I just historically, Steve, I think the thing that's different about LP is before we were more focused on maintaining a low cost position in all markets, which kind of tended to have us have a philosophy in the word running in either selling and either putting the product in inventory or try to sell it into the wholesale market --office of wholesale market or these third parties. We don't do --that's what we don't want to do anymore. We want to make sure we're selling into a more of a balanced demand situation than creating an imbalance by us continuing to run when the market is soft.

Okay. So it sounds like it's more nuanced and it's really with view to customer service and relationships than just the cost position.

Yes. That's exactly right. We would --we were more interested in keeping that balance, keeping our customer supplied and but what we don't want to do is push volume into the market if there's not demand for.

Okay, thanks. And then switching gears on South America and it's terrific to see the new records being established, but it's still fairly small. I mean my rough math says that the three mills do about the same revenue as one large North American mill. So can you give us a sense of what the operating rates are there? And sort of sound like a finance guy but are you earning your cost to capital in South America?

We are earning our cost of capital in South America. We have struggled in the past to earn the cost of capital in Brazil, but we have been focused on turning that around and obviously the market there in Brazil the last five years have been horrible. But as far as the Chilean assets go, we've consistently earned the cost of capital there, And the way out the way I look at our LP South America operation, it is small today, no question about that. But we look at that continent and currently we're the only OSB manufacturer down there. We also make our Siding product offering down there. And we see a lot of opportunity to grow. We got to do that wisely and obviously the political winds change down there, but we see real opportunity to be a major player in the structural panel market in South America. And as are evidence by our opening offices in Peru and Argentina. And I see real growth opportunity there, and the pricing is somewhat insulated from the North America pricing environment. Now ultimately, the big --the price swings here will play into South America over time as people look for outlets for production ,but quarter-to-quarter and sometimes even year-to-year we can maintain a more stability in pricing down there. And definitely maintain more stability and pricing down there than we see in North America. So I think the investments we make down there relatively safe. And from pricing volatility standpoint, we typically are moving assets out of North America down there. So it's pretty capital efficient to make those investments down there. And as long as we have growth options in front of us for that business. it makes me excited about having in our portfolio.

No, I get. I mean it's not if you build they will come but I think it makes sense for the long haul. And then maybe one last one with respect to both your geographic mix and the value add which is less volatile than commodity. Is there any rule of thumb you can give us just on how we should kind of think of your overall mix with respect to the North Central benchmark?

Well, Steve, what I mean I would say it mean based on the geographic mills, in terms of --from a volume standpoint if that's what you're talking about. I mean in reality the north-central region is less than 10% of our volume. That's a small region but when you look at the Southwest, we have two mills southeast. We have two mills mid-Atlantic one, Eastern Canada one, and then in Western Canada we have the big mill being Peace Valley. And then Dawson is still running OSB. So we have two mills there, so geographically from a volume standpoint that's what you're going to get. Now I think the way I would look at the --when you look at the bigger mills. They're going to be more commodity than the smaller mills. So the bigger mills of Peace Valley, Mainwaki, and Clark County are more commodity focus that doesn't mean we are looking --continuing to look at doing more value add on in those mills but with that kind of volume they do have more commodity. Does that - is that what you're asking?

Thank you. Our next question comes from Paul Quinn of RBC Capital Markets. Your line is open.

Hey, thanks for taking my questions. Just a couple of easy ones. One, Brad, I thought you did a good job explaining the price run-up and subsequent weakness. It seems like you put a lot of focus on inventory levels and logistics and the resolution there bringing prices down. Where are your Western Canadian mill inventories in terms of OSB? And is there - should we see further weakness as that volume hits the market? And then do you think your conversion at Dawson Creek and Weyerhaeuser Grayling press rebuild is good enough - it will be enough to take the market?

So the second question I think obviously the downtime in October --sorry in November and December and on into January should tighten the market, but it is in the middle of the winter. So I don't know how much of an impact that will have depending on how we finish the year from a demand standpoint. From an inventory level, I think Mike we're pretty much have back to normal.

Yes.

In our Western Canadian Mills, after the buildup in the first quarter, we worked through the logistics challenges there. So just --we do not have any excess inventory on the ground, abnormally, that we would have in a normal August.

I think, Paul that what happened there when we talk inventories for the most part the mills may have been a little higher, but what happened across the industry is it was a lot either on the rails or in reloads. So the middle I mean --most mills aren't designed to handle more than a few days' worth of inventory. So it gets out of the mill or you got to take downtime.

No. Fair enough. And just on Dawson Creek, you mentioned startup early on Siding in Q1 of 2019. Can you remind me; is that a plan to run that mill only in Siding, like you did for Swan? Or are we going to be toggling back and forth between OSB and Siding?

Okay. So we are going to retain the capability to make OSB at Dawson, but Paul our focus especially early on is we would prefer to run that plant full bore on Siding for as long as we can. Now let me tell you what will play into that, obviously, it's the order file, but something this will be a little bit different than Swan. This-- and I had mentioned this before; this plant will have really good logistics efficiency for our West Coast customers. So we'll be looking at this that sourcing our West Coast customer base at a Dawson. Where in Swan, we were basically railing product past Hayward to get it into the market. So we - so I could see I mean the idea is to run it on Siding, make the reallocation of customer demand so that we're able to run that plant for full bore on Siding for as long as we can. But just remind you, we do want to retain the ability to swing it back to OSB if we need to, but that is not the plan.

Hailey, I think that's all the time we have for questions. So if you could please provide the replay number and thank you everybody for participating in our call. And as always myself and Becky are here to answer any follow-up question. Thank you and have a good day.

Ladies and gentlemen, this conference will be available for replay after 2 P.M. Eastern Standard Time today through August 14th 2 P.M. Eastern Standard Time. You may access the replay system at any time by dialing 855-859-2056 and entering the access code 4199937. Again the phone number is 855-859-2056 and the access code is 4199937. That does conclude our conference for today. Thank you for participating. You may now disconnect.