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Louisiana-Pacific Corporation (NYSE:LPX)

Q1 2009 Earnings Call Transcript

May 5, 2009 11:00 am ET

Executives

Curt Stevens – EVP, Administration and CFO

Rick Frost – CEO

Analysts

Gail Glazerman – UBS

Richard Skidmore – Goldman Sachs

Chip Dillon – Credit Suisse

Claudia Hueston – JP Morgan

Peter Ruschmeier – Barclays Capital

Steve Chercover – D.A. Davidson

Operator

Good day, ladies and gentlemen, and welcome to the Louisiana-Pacific Corporation Q1 2009 results conference call. My name is Mary and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call Mr. Curt Stevens, Chief Financial Officer. Please proceed.

Curt Stevens

Thank you very much and thanks to all of you who are joining us on this conference call to discuss LP’s financial results for Q1 of 2009. As the moderator said, I am Curt Stevens, CFO, and with me today are Rick Frost, LP’s Chief Executive Officer as well as Mike Kinney, one of our Investor Relations contacts.

I will begin the discussion with a review of the overall financial results for the quarter followed by comments on the performance of the individual segments and some comments on the balance sheet. Rick will then take over to discuss his perspective on the operating results and thoughts on the near term outlook for housing.

As we’ve done in the past, we’ve opened up this call to the public and are doing a webcast. This can be accessed on our website 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. As I go through my comments, I will reference these slides.

I want to remind the participants as I usually do about the forward-looking statements comment that is included on slide two of the presentation. Please also be aware of our discussion of the use of non-GAAP financial information included in slide three of the presentation. We have moved the reconciliation out of the presentation to a separate posting on a Form 8-K that will be on LP’s website in the not-too-distant future here. And the reason we’ve done that is we have included a reconciliation to EBITDA from continuing operations as we think that’s a relevant discussion to have during these times. I am not going to re-read these statements, but I will incorporate them by this reference.

Before I get into our performance for the quarter, I do want to put this in the context of housing activity during this last quarter. The actual number of housing starts – and this is just single and multifamily in Q1 of 2009 – was 113.3 thousand units. That’s 50% below the same quarter last year. From the peak in the summer of 2005, the annualized housing start rate is off by 80%. Other construction activity, office construction was off 6% Q1 to Q1 and commercial building was off 22% compared to the same quarter last year.

Clearly, as one economist has tagged us we are in the midst of the great recession, not a depression, but certainly much more difficult than past recessions. In Rick’s comments, he will provide some insight on the key variables that will lead to a recovery in housing and his thoughts on some of the timing.

(inaudible) refer to the presentation slide four is the discussion of our Q1 2009 results. We are reporting today a net loss for the first quarter of $30 million or $0.30 per diluted share. Net sales from continuing operations was $205 million for the quarter. For the same period last year, we reported a net loss of $46 million or $0.45 per diluted share on sales from continuing operations of $349 million.

For this quarter, we have opted not to include a slide on the special items given the immateriality of the amounts. However, I will briefly discuss these and they are also summarized on page four of our earnings release.

In this last quarter, Q1 2009, we did record an additional other than temporary investment impairment tied to our AS portfolio of about $900,000 and that compares to an $800,000 impairment in Q1 of 2008. We also this last quarter did have a small gain on the early retirement of the debt as part of our financing and we had a net gain of about $4 million related to an insurance recovery on legal fees. In Q1 of last year, we also had a recovery of legal fees from insurance of about $4 million that had a small gain on sales of long lived assets.

With that let me turn to our segments. In OSB, which is slide five of the presentation, we had an operating loss of $24 million in the quarter. This was a substantial improvement compared to the $62 million operating loss in Q1 of 2008. This improvement is directly attributable to the actions that we have taken and discussed with you over the last several quarters to adjust our operation to focus on cash. These actions included the indefinite closure now of four OSB mills, significant curtailments of the remaining mills to match production and demand, implementation of floor pricing strategies, and reductions of our operating cost.

In the quarter, EBITDA for OSB was a loss of $17 million. On the pricing side, compared to the same quarter last year, pricing was up 14%. On the flip side of that though volumes were down nearly 60% due to the mill curtailments, the other market curtailments that we took during the quarter. And this all combined to reduced sales by over $80 million, a 55% decline.

On a quarterly comparison, pricing accounted for about $8 million in improved sales and decreased loss. From a cost perspective, resin and wax per unit were lower by 16% from the fourth quarter of 2008.

Slide six of the presentation is our Siding segment. As you will recall, this includes SmartSide and Canexel and a small amount of OSB produced at our Hayward mill. For the quarter, Siding had an operating income of $2 million, an improvement to the slight profit recorded in Q1 of 2008. EBITDA from continuing operations in this segment was $7 million. For the quarter, sales were down 31% with unit volumes down about the same in both SmartSide and Canexel. Sales prices were slightly higher in SmartSide, 2% and down 18% in Canexel, primarily due to the decline in the value of the Canadian dollar as most of our Canexel sales are priced in Canadian dollars.

Slide seven of the presentation is our Engineered Wood. This segment includes our I-Joist, our laminated veneer lumber and our laminated strand lumber. This segment also includes I-Joist and LVL products produced by the Abitibi JV or under a sales agreement with Murphy Plywood. For Q1, ESP recorded a loss of $9 million, slightly less than the loss of $8 million in the same quarter last year. EBITDA was a negative $6 million for the quarter.

Volumes of both I-Joist and LVL / LSL were down significantly compared to the same quarter last year, 50% and 30%, respectively. This is a direct reflection of the reduced housing activity. Pricing continued to decline due to reduced activity and imbalance of supply and demand. And LVL / LSL is lower by 14% and I-Joist pricing was lower by 5%.

On our other building products, while there is no slide, let me make a few comments. Overall, we had a profit of $1.6 million in the quarter compared to a loss of $2.3 million in the same of quarter of 2008. EBITDA was at nearly $5 million for the quarter. For the quarter, sales were at $29 million, a 25% increase from the same quarter last year. That was largely due to the inclusion of the Brazilian OSB mill in our South American operations.

In the quarter, our molding business, US GreenFiber joint venture, and our South American operations all had positive operating income. This is also the area where we report non-operating facilities and we did have about $1 million of cost associated with the maintenance of these properties.

A few other things in the quarter, we had a $2.6 million foreign exchange gain in the quarter compared to a $9.4 million gain in the same quarter last year. investment income for the quarter was about $5.2 million compared to $12.8 million in the same quarter last year, a direct result of both the lower average invested cash and lower interest rates in Q1 of 2009.

Interest expense was $11.8 million compared to $11.2 million in Q1 of 2008. This is due to a number of factors. We had no capitalized interest in Q1 of 2009 while we did have $2.6 million in Q1 of 2008. This was offset by the pay down of the Canadian debt in Q4 and the reduction of about $2 million in previously accrued interest based upon the closure of several tax years.

As a note, we did complete the refinancing on March 10th and so only had 20 days of interest on the revised amounts. Going forward, this comparison will not be nearly as positive.

On the selling, general, and administrative side, our total SG&A costs were at $27.3 million, a 32% decrease from the $40 million in the same quarter last year. On the unallocated side costs were down over 20% to $19.1 million compared to $24.2 million.

On income taxes, the effective income tax rate for Q1 was 39% compared to 44% in Q1 of 2008. The primary differences between the U.S. statutory rate of 35% and the effective rate applicable to our continuing operations relate to our foreign debt structures, state income taxes, and deductible foreign taxes. The difference between Q1 of this year and Q1 of last year is primarily due to the lowering of the statutory rates in Canada.

LP has utilized all of our available net operating loss carry backs under current law in both the U.S. and Canada. Therefore, the 2009 tax allowances will be utilized as deductible net operating loss carryovers in future tax periods.

Slide eight of the presentation is some balance sheet and cash flow information. Cash, cash equivalents, and investments in restricted cash was about $350 million. This is reflective of the focusing activities completed in early March and discussed in our SEC filing and on our conference call. Working capital was about $465 million, net debt of $42 million.

Q1 capital expenditures and investments in JVs was about $8 million. The investment in JVs was about half of that and that was largely for working capital purposes. And book value per ending share was at $11.27.

With that, let me turn it over to Rick for his comments.

Rick Frost

Well, good morning, everyone, and thanks for joining us on our call today to discuss Q1. In keeping with tradition of my weather report, in Nashville it’s uranium [ph] week here this week.

To begin my prepared remarks, I want to start with one of our core values, which is safety. I am happy to report that LP had another excellent quarter from a safety perspective. We have a year-to-date TIR of 0.58 and the rolling 12 month average of 0.68. I am particularly pleased with these results given the amount of distractions that we were forced to throw at our folks due to the difficult market conditions with mills running, mills not running, shifting schedules, downsizing crews, and much more. We are continuing to make progress towards our belief that no one should have to get hurt while working at LP.

Shifting now to a business perspective, Q1 was truly what I would call a nuclear winter as reflected in our sales volumes. Curt shared the housing statistics with you as I am sure others have that you’ve listened to, so I won't re-plow that ground. Our operations spent the quarter rebalancing productive capability with the market demand. This included everything from extended outages to indefinite closures to reduced shifts for longer term manning schedules. And these were again another iteration to adjust to a business level below what we expected for the first quarter.

Taking the capacity of what we currently have available to run in OSB, this excludes Clarke County, Chambord, and Athens, which are indefinitely shut, we ran OSB at 36% of available capacity in Q1. Our flake based SmartSide mills have now migrated to an indefinite five-two running schedule across all of those mills and have reduced manning accordingly.

On a brighter note, our Roaring River fine fiber mill has been the winner of the majority of the Temple-Inland business, as they exited hardboard siding in December of last year and the additional volume really helped that mill gain stability during the quarter.

In Engineered Wood Products, Wilmington LVL was indefinitely shut early in the quarter. Our I-Joist plants are running one shift and Golden has been right-sized to market takeaways.

Our LSL mill in Houlton, Maine has only needed to run about one week per quarter under this current demand schedule and was down 72 days during Q1. In our South American operations, our new mill Lautaro is still shut down, but I am glad to report that Panguipulli is back to running completely full. We have had to throttle back our Brazilian mill and right-size our operations there, removing about 38% of the workforce.

Granted, sales activity was very slow in Q1, but our sales force continues to penetrate the market with new wins. As you know, I define a win as gaining a new customer or an additional product placement with an existing customer. In Q1 we had 695 product wins. Interestingly enough, 20% of those were in our SmartSide trim category.

Some sales highlights for us in Q1, we are getting our 12-foot reversible trim into 100 Lowe’s stores. We also secured the placement of a new fine fiber panel called Redwood at 500 Home Depot stores. We landed several new distributors during the quarter and we also completed the introduction of a new OSB product called Superstruc [ph] to several furniture manufacturers. And this has a potential of 20 million to 40 million square feet for us this year.

It’s clear that LP got no help from the market, yet our operating results were quite a bit better than Q1 of ’08, so I would like to give you a bit of a report card on how we did against our priorities and the operating changes that we made that we discussed in our last call.

In terms of the refinancing, and as you know that this is done and is now in place. As I said, it certainly cost us more than we would have liked and it took a lot longer, but I am glad to say that that is now behind us.

In terms of our organizational right-sizing, on the SG&A side we are feeling the positive impacts of this very difficult work. Curt mentioned that our total SG&A was down 32% from the same quarter last year and without the $1 million that we spent on the consent fee as the part of the refinancing, this reduction would have been 34%.

Mill operations, in OSB we have four mills indefinitely curtailed at Chambord, Athens, Silsbee, and Clarke County, and we’ve reduced the production at most of the others. We did get some benefit from higher price in Q1 to Q1 about $8 million, but that was only $8 million based upon the low volume. The change in our operations reduced the losses by about another $30 million.

The raw materials cost, we clearly saw a reduction in oil based resins and other raw materials. Using Q1 2009 volumes raw materials costs were down $4 million compared to Q1 in 2008 and they were down $10 million compared to Q4 of 2008. We do expect additional favorable impact in Q2 as these continue to flush through our system.

Capital expenditures in the quarter, we spent about $4 million in capital on small jobs. These were targeted at safety compliance and need to operate projects and obviously required no capital outages to execute them.

On the tax refund side, we did collect about $70 million in tax refunds, including the federal refund for 2008. And on asset sales, we didn’t come up very strong. We didn’t complete anything of significance in Q1. While we do have buyers identified and committed for various surplus assets, we did not close any transactions. I am cautiously optimistic that some of these will close in Q2.

Now, I would like to spend just a few minutes discussing what I think will it will take for housing to rebound. I focus on five items. First is the reduction in excess inventory of both new and existing homes for sale. Second is looking for an ebb in the mortgage foreclosure rates. Third is looking for a stabilization of home prices. Fourth is a favorable mortgage rate environment and access to credit. And finally, a leveling out of unemployment. And I would like to make just a few comments about each one of those.

In terms of a reduction in inventory of new and existing homes for sale, in March, new homes for sale fell down to the 311,000 unit level from a peak of 475,000 units in early 2007. This inventory is now less than what we would call historically normal markets. Existing home inventory in March was at 3.7 million units, which is down about 900,000 from its peak, but it’s still quite a bit higher than where it ought to run in a normal environment of about 2.0 million to 2.2 million.

The potential sales rate has been increasing. Pending U.S. home sales rose slightly for the second month in a row and the excess of new homes yet to be occupied has worked its way down considerably. I think my conclusion there is that we are in a pretty good condition now for new homes yet unoccupied, but we have a ways to go in terms of the sale of existing homes.

In terms of an ebb in mortgage foreclosure rates in Q1 2009, foreclosure filings were 24% higher than the same quarter last year. The recession, job losses, and consumer confidence aren’t helping, to state the obvious. The administration has introduced hope for homeowners, which is a foreclosure prevention program. The banks appear to be increasingly more willing to modify mortgages to avoid foreclosures as an economic decision. I think my conclusion here is although some forces are being brought to bear, it’s still too early to measure the progress against foreclosures.

In terms of the stabilization of home prices, the latest data suggest that the majority of the plunge is over. I think that there is a little bit more to go, but the slope is certainly less deep. One thing we do have going for us is favorable mortgage rates. Mortgage rates are at a very attractive level with 30-year fixed mortgages at less than 5% and as a result refinancings are at very high levels. I think the Fed actions that we are observing will likely keep rates low the rest of this year, anyway.

The banks insist that they are open for business however problematic appraisals have become more realistic and they are asking for higher down payments and higher credit scores, which have limited qualification. The Stimulus Bill did provide an $8000 credit for first time homebuyers, which I think will help. My conclusion here is that mortgage rates are very attractive and they should act as a stimulus to demand, slightly offset by access to credit.

Leveling out of unemployment, which perhaps is the most important variable at this time in my opinion, we had 663,000 jobs were lost in March compared to 551,000 in February. And I think we’ve lost about 5.1 million jobs in the last 15 months in this country. Manufacturing and construction occupations accounted for 44% of the lost jobs in Q1.

Unemployment rate increased to about 8.5% in March. I think the forecast call for that to level out in Q4 to Q1 at about 9.2% to 9.5%. And the average work week has reached a new recent low of only 33.2 hours. That’s not my current work week, but it sounds pretty good. And my conclusion there is that I am thinking Q1 of ’10 before we actually unemployment stabilize and begin to change directions.

So, with that as a backdrop, it does beg the question when will it get better. It feels to me like we hit the bottom in February and that’s the consensus of my LP management team as well. Of course, to be somewhat candid, that’s what I said before the banking crisis in September of last year, so we will see how that works out.

I can't say that it was a lot better in March, but it was certainly less worse than February in March. Anecdotally, we did have an internal sales counsel meeting last week and for the first time in a long time all of LP’s channel managers, which look after the big builder, the home centers, the distribution, and the pro dealers, did have a few more positive comments around what was going on. It feels to me like Q2 will only be slightly better than Q1 and I think that most of that will be felt in the month of June, the last month of the quarter. But I do think we will see a modest seasonal lift in Q3.

Our focus for the next quarter will be on those things that we can control and impact with more certainty, obviously, safety, quality of product and service and compliance. We will have to continue to adjust production to demand levels. We will be driving manufacturing and operational cost down further. And we will keep driving for new business and new wins and of course continue to manage LP for cash.

So, in conclusion, my prepared remarks, I will remind you that LP will hold its annual meeting of shareholder on Thursday, May, 7th, here in Nashville. For those of you that are shareholders you are welcome to attend. Also, I would like to remind any shareholders that listen to this call that we have four proposals that will be voted on at that meeting and I would personally like to ask for your support on all four of those. They are important to help me complete the task of shepherding LP through this downturn. So, please vote for on all four of the proposals that are up this year.

With that, let me turn it back to Curt and open up the call for questions.

Curt Stevens

Thanks, Rick. Mary, if you can give instructions and start the questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Gail Glazerman, UBS.

Gail Glazerman – UBS

Hi, good morning.

Rick Frost

Good morning.

Gail Glazerman – UBS

You are obviously doing a great job given the environment there with the operating improvements. I am just wondering, is the first quarter, given the actions you’ve taken about as good as it can get in terms of taking cost out of the system or will there be carryover that we would expect moving into the rest of the year?

Rick Frost

I think we’ve got a little bit more to flush through in Q2 based upon the actions that we’ve taken recently in Q1 in terms of our operating costs. And then I wouldn’t look for tremendously significant differences in SG&A. We continue to look for what we call the one Zs and two Zs, taking advantage of attrition, continued paring of programs or activities that don’t appear to be working. But that would be my analysis of that, Gail.

Gail Glazerman – UBS

Okay. I mean in terms of the future improvement, would that be focused in any particular segment or across the board?

Rick Frost

Well, we are going to see raw materials continue to flush thorough. We got some impact of that in Q1, but obviously with the volumes down so low, when we replenish inventories at these new prices that we add some carryover from last year. That will be the majority of it. And then the changes, recent changes that we’ve made across the businesses in some of our manning schedules I think we’ll see a full quarter’s implementation of that as well.

Gail Glazerman – UBS

Okay. And Rick, I am just curious, have you done any analysis of the risk I guess to how much material will be used in each housing start moving forward? It seems like builders are talking about kind of shrinking to the market environment. Do you think that will be an material impact on OSB consumption per start moving forward?

Rick Frost

Well, I think it will have some effect, which will offset some of the increased usage of some of the products. I think we are having a big debate here on whether this is a short term phenomenon or whether we really see this square footage of housing go down. So, I don’t have any numbers to share with you because we are in the process of debating the different forecasters’ opinions about having coming up with their conclusion. What I will do is jot that down and in a subsequent call try to give you an opinion on that.

Gail Glazerman – UBS

Okay. Thank you very much.

Curt Stevens

Gail, the only thing I would add to that is the (inaudible) forecast is for a very slight decline. So, they don’t have a major decline in their use of building materials.

Gail Glazerman – UBS

Okay. Thank you.

Operator

Your next question comes from the line of Richard Skidmore from Goldman Sachs.

Richard Skidmore – Goldman Sachs

Good morning, Curt and Rick. Just a couple of quick questions for you. The amount of indefinite capacity that’s off at those four facilities and what’s your current capacity in OSB?

Rick Frost

What we’ve got down indefinitely are Athens, Chambord, and Clarke County, and then of course Silsbee was taken down a couple of years ago. Clarke County, we have rated at 750, Chambord we’ve rated at 440, Athens at 375, and I think Silsbee was a 280 mill.

Curt Stevens

Yes.

Rick Frost

So, that would leave us – what I am saying is my – our current capacity that’s available to run is 4.6 billion including Peace Valley.

Richard Skidmore – Goldman Sachs

Okay. And then secondly, Rick, can you just comment on the asset sales? You mentioned that you didn’t do – close anything in the first quarter, but can you maybe just comment on what’s in the asset sales in terms of the assets themselves and did you provide any guidance before on what you thought that that could be in terms of total proceeds?

Rick Frost

I think when we did our bond deal and we talked to everybody kind of came out there, we thought we’d do somewhere over $30 million in asset sales this year and then on the last call I was asked is there anymore and I said there is an opportunity for that again, so that gives you a ballpark number there. We have not talked specifically about which assets they are. They are non-operating assets, things we no longer have a need for. And most of these things kind of get hung up in this banking crisis where people are ready to go and then either they had a backer that slowed down a little bit or some money fell through and so we’ve been nursing some of these things along until people could adjust.

Richard Skidmore – Goldman Sachs

Okay. And then maybe just coming back–

Rick Frost

That gives me the optimism that we may get some (inaudible) in this quarter as we’ve been nursing these a long while. People are starting to adjust to the environment that they are in and I think they are going to come up with the capability of moving ahead.

Richard Skidmore – Goldman Sachs

Okay. And then maybe if I just one rather [ph] question coming back to the OSB capacity, you mentioned the relatively low operating rate in the quarter. Would – does it make sense to do the rolling downtime that you’ve been doing? Does it make more sense to take another facility or two out indefinitely and further consolidate or is the transportation savings or the transportation costs too high to–?

Rick Frost

We are arguing about that every week and we are – I am anticipating more volume of OSB being sold in Q2 and Q3 than what we ran in Q1. So, regionally, with the manning schedules that we’ve got put together right now, we are relatively balanced. And if we take something out of a particular region right now, it doesn’t appear to save us a lot of money when you throw the severance cost in there.

Richard Skidmore – Goldman Sachs

Okay.

Rick Frost

So, what we’ve got to do is – and of course we also have some mills with full food piles. So, if you think about the notion of managing for cash, when you’ve already got your wood inventory bought, that is a factor that plays into managing for cash as well. So, I think probably over the next four or five months, we will be looking and trying to come up with a conclusion of what’s actually needed next year in terms of in North America for OSB consumption and probably that stayed like it is today, we would have to do some additional work.

Richard Skidmore – Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Chip Dillon of Credit Suisse.

Chip Dillon – Credit Suisse

Yes, good morning.

Rick Frost

Good morning, Chip.

Chip Dillon – Credit Suisse

If you could first of all review with us I think that the two big projects of the last cycle were Houlton and Clarke County and I believe the costs were – just so I have this right – about 160 for Houlton and about 200-220 for Clarke County, is that right?

Curt Stevens

Yes, well, you are close. It was about 240 for Clarke County and about 140 for the improvements at Houlton.

Chip Dillon – Credit Suisse

Okay. And in terms of the Clarke County mill that’s not running, I am just curious, obviously, it’s the newest equipment. Why would you not run that since it’s new and instead run – and instead take downtime somewhere else? Is there – are there other factors like the wood cost there or the experience of the work force?

Rick Frost

The decision we made there is we did start that mill up last year in the April-May timeframe and then we had the fire there and had to make improvements to or had to repair that. The decision we made when that repairs were done because we were ready to start that up is we look at the cash that would be required to start that mill up because when you do start a new mill it does have a learning curve to that mill where you’ve got less than the appropriate level of A grade products, so you have downgrade product you have to sell for a lower price. You have a learning curve with the work force. And then you have the modifications that you need to make to the equipment as you get the running experience. So the decision we made as we look at the amount of cash that it would in this – this is just cash, we looked at the cash that it would take to get through 2009, so starting it up in September of 2008, getting through 2009, and compare that to the cash that would be created by shifting that production to our existing mills, we made a determination that weren’t going to bring that mill up.

Chip Dillon – Credit Suisse

Okay. And when you look at the Houlton facility now, you mentioned – are you – is the same sort of principle there, is that why you are running that just one week a quarter?

Rick Frost

Well, the principle is we retooled Houlton and made the improvements to run laminated strand lumber. What we have certainly discovered is introducing a new product into a declining market is a tough thing to do. So, we sold very little volume out of that mill last year. We had to seem to pick up in Q1. In fact, part of the reason why our average sales price and the combination of LVL and LSL is down is because we sold the lower price LSL, which was the expectation all the way. So, we are getting some acceptance in the market, but we found that to be very difficult to get our dealer network to put new inventory on the ground of a new product.

Chip Dillon – Credit Suisse

Okay. And one quick follow-up on Clarke County. Are you under any obligation to either start that up by a certain date or pay back some incentive money to Alabama or the county?

Curt Stevens

We actually disclosed that last call. We have worked with the county and the state and we have an agreement with them where we are providing a small amount of cash compensation to extend the employment requirement that we had in that agreement.

Chip Dillon – Credit Suisse

And how long was that extended by?

Curt Stevens

We extended it for up to eight quarters.

Chip Dillon – Credit Suisse

Okay. And then last question, Curt, you mentioned at the beginning that something wouldn’t as favorable going forward, was that the capitalized interest going down, is that what you were referring to or some other financial item–?

Curt Stevens

No, I was referring to the expensive debt that we put in place.

Chip Dillon – Credit Suisse

Oh the interest expense – got you. And can you give us sort of a rough estimate because I think that that was issued I think right as the quarter was ending, if I am not mistaking.

Rick Frost

It was March 10th, we had 20 days that accrued interest.

Chip Dillon – Credit Suisse

Okay. So, what will be sort of a good guess as to what interest expense might be in the subsequent quarters?

Curt Stevens

Well, I think what you look at is about 45 million to 46 million per year.

Chip Dillon – Credit Suisse

Okay. All-in and that includes the – that’s just on the expense side?

Curt Stevens

Right. It’s on the expense side.

Chip Dillon – Credit Suisse

Okay, great, thank you.

Operator

Your next question comes from the line of Claudia Hueston, JP Morgan.

Claudia Hueston – JP Morgan

Hi, thanks very much, good morning.

Rick Frost

Good morning.

Claudia Hueston – JP Morgan

I was hoping you could just provide a little bit more color on the input cost side, what your – are you seeing much relief in wood fiber cost? I don’t think you’ve talked too much about that. So, if you could just put a little bit more color on that, that will be helpful. And then secondly, if you could just maybe comment on how lower costs might play into expectations for working capital for the rest of the year. Thanks.

Curt Stevens

On the wood side, if we compare it to Q1 of 2008, it was slightly positive, about $1 million positive. But if you compare it to Q4, it was actually about $3 million positive on the wood, and then the remainder of that improvement, $3 million improvement from Q1 of ’08 to Q1 ’09 was – on anything that had to deal with oil. So, that was our MDI or PF and our wax, principally. We did see an increase in electricity cost because electricity hasn’t come down in any of the areas we operate, so that was about $1 million increase. From the sequential quarter, looking back to Q4, again $3 million in wood and about $7 million in the resin based materials.

And as Rick said, it would have been more than that in Q1 had we run more volume but what we had is we had the inventory – we had inventory coming into the quarter of resins that was at the higher pricing. So, when we go into Q2, we should see an improvement on that.

We also expect to see an improvement in wood given the decline in the pulp and paper side. And we are seeing that in some of the activities that we are running our forestry group right now.

Operator

Thank you. Our next question comes from the line of Peter Ruschmeier from Barclays Capital.

Peter Ruschmeier – Barclays Capital

Thanks. Good morning.

Rick Frost

Good morning, Pete.

Peter Ruschmeier – Barclays Capital

A couple of questions. You are Siding results in a difficult environment I thought were better than I was expecting. Anything unusual there? I would think that going forward at least seasonally I would think that pricing, volume, cost trends would be at worst flat and might be better, which would imply even better results out of Siding over the near term. Is that reasonable or is there something else going there that helped 1Q?

Rick Frost

Well, the biggest improvement was – as you remember, Temple got out of the business in December and we were able to take significant volume in the Roaring River woods, lost a lot of money in the first half of last year. And that’s our biggest piece. Of course you know that the pricing there is flat to slightly up, so we haven’t taken a hit in pricing there. Volumes are down and we are reasonably optimistic about that right now. We’ve had – after a very, very slow first quarter, a reasonable uptick here in the last month. And so I think you’ve come to the right conclusion there.

Curt Stevens

Well the new panel at Home Depot –

Rick Frost

Yes, and then some of the impact – potential impacts of the new panel. We think we’ve got a winner on this Redwood panel that we are putting into Depot; 500 stores is pretty significant.

Peter Ruschmeier – Barclays Capital

Okay. And any help you can offer on end market breakdown there and I mean I presume it’s mostly residential, but I would think there is some non-res commercial stuff in there as well. Anything you can offer up on that side?

Rick Frost

Not too much commercial. It’s basically res and then you get a lot of that in out buildings like sheds, barns, et cetera.

Peter Ruschmeier – Barclays Capital

Okay, that’s helpful.

Curt Stevens

Multifamily.

Rick Frost

Multifamily as well, I am sorry. Yes, that’s a reasonably good success for us as well. That’s where we are making quite a bit of penetration.

Peter Ruschmeier – Barclays Capital

Okay.

Curt Stevens

And we also have a quite bit of success in manufactured housing although manufactured housing volumes was way down, but the advantage of using the SmartSide panel there is you don’t have to use the substrate behind it. Use them as the panel.

Peter Ruschmeier – Barclays Capital

Okay good. Shifting gears, if I could, to OSB, if we exclude the mills that are down, I am curious if your U.S. and Canadian assets are running at similar operating rates and given the decline in the Canadian dollar is your profitability starting to get back to parity between the U.S. and Canadian mills?

Rick Frost

Yes, it’s pretty evenly split on operating rates between Canada and the U.S. Obviously the dollar going the way that it did helped take one of the disadvantages that we had about having so much production out of there. The problem is, is a lot of that Canadian volume is sold into the most distressed OSB market in terms of pricing, which is the west

Peter Ruschmeier – Barclays Capital

Yes.

Rick Frost

They are kind of offsetting each other.

Peter Ruschmeier – Barclays Capital

Okay. And just lastly, if I could, I am curious if you can share any comments on the local demand trends – I am thinking offshore now – local demand trends, and share trends for your OSB business in both Chile and Brazil?

Rick Frost

In the first quarter we sold about 15% of our OSB production that was made in Chile outside of Chile. The majority of that was to adjacent South American countries. I think in Brazil that number was slightly smaller. In terms of what we are doing down there, we are trying to export in both directions. And then one of the strategic decisions that we’ll have to make here in the next three or four months is to decide whether to restart Lautaro, which has a wood pile full of wood. We got about 30,000 cubic meters of wood down there. Or to actually run a little bit more production in Brazil and bring that over to feed the Chilean market. So, exports obviously have slowed because of the global nature of this recession. But we are getting about 15% of our volumes sold outside of the countries that it’s manufacturing. I think that amounted to about 10,000 cubic meters last quarter.

Peter Ruschmeier – Barclays Capital

Okay. And also, Rick, just in terms of the local market though, is OSB penetrating its share of wood product consumption?

Rick Frost

Tremendous success in Chile and also that economy hasn’t been hit quite as hard as Brazil. So, obviously, we had a big tank in Q4 in Chile and then now as I said, Pangui [ph] is running back full and we are actually needing a little bit more volume. The pricing has come back about 20% for us in Chile as well, which is – makes all the difference. Now, in Brazil, our plan there was to try to replicate what we’ve done in Chile and we are just in the infancy stages of that and it’s very difficult to do that in the economy that they have in Brazil now. We did attend and display at the largest building show in Brazil about six weeks ago now, something called FICON, I don’t know what that stands for. But the idea of the way that build in Chile with our building products, it was the largest attended – a very large builder show. So, we are really excited about the introduction of the idea. The results of housing stimulus program designed or in place in Brazil now, which I think is about $4 billion to try to address some of the socialized housing needs, and we are hoping that we can get some of our designs approved for that. So – but, yes, it’s pretty slow and particularly with the state of the Brazilian economy, it’s been affected worse than Chile.

Peter Ruschmeier – Barclays Capital

Okay, very helpful. Thanks very much, guys.

Operator

Your next question comes from the line of Steve Chercover, D.A. Davidson.

Steve Chercover – D.A. Davidson

Thanks, good morning.

Rick Frost

Hi, Steve.

Steve Chercover – D.A. Davidson

Two Quick questions please, first of all, have you guys been monitoring the log decks at any of the other Northern mills and do you have any sense to some of them just didn’t put in a log deck for the year and therefore there is no way they are going produce this summer?

Curt Stevens

We have been monitoring it and I think the question is that the pricing that we’ve had over the last several months in Western Canada when those decks are gone, what’s going to have to happen to pricing is pricing will have to go up.

Steve Chercover – D.A. Davidson

So, put another way, if it was your mill and prices for the end product don’t move up, you would not be replenishing those decks?

Curt Stevens

That would be a fair conclusion. I think that what Rick said is we are looking at that every single week and where we expect pricing to be compared to what the input costs are.

Steve Chercover – D.A. Davidson

Okay. And I hope this one doesn’t sound silly, but is there any chance you could add a little bit of diesel to your hog fuel and get some credits?

Rick Frost

I’ve been talking to our engineering – our VP Engineering about that for a long – and they are ridiculous.

Steve Chercover – D.A. Davidson

Oh! It’s crazy, but it’s consistent with fiduciary duty to get the money, but–

Rick Frost

I think I will buy some more of that, Steve.

Steve Chercover – D.A. Davidson

Alright, so there is just no chance. Alright thanks.

Rick Frost

They actually call the liquid, so it doesn’t work in the bark runners [ph]. Bark runners produce the energy but we are not getting credit for it because it is defined as a liquid and we don’t do –

Steve Chercover – D.A. Davidson

Maybe you put some coal in there. Alright. Thank you very much.

Rick Frost

You bet.

Curt Stevens

Thank you.

Operator

Thank you. There are no other questions at this time and I would like to hand the call to Curt Stevens for closing remarks.

Curt Stevens

Alright. Well, thank you again and as always Becky and Mike are available for follow-up questions. Appreciate your participation. And, Mary, if I can ask you to give the replay information just so that’s available. And with that, thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day.

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