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Louisiana-Pacific Corp. (NYSE:LPX)

Q1 2008 Earnings Call

May 6, 2008 11:00 am ET

Executives

Curtis M. Stevens - Executive Vice President, Chief Financial Officer

Rick Frost - Chief Executive Officer

Mike Kinney – Investor Relations

Becky Barckley – Investor Relations

Jeffrey D. Poloway - Chief Accounting Officer and Controller

Analysts

Gail Glazerman - UBS

Peter Ruschmeier – Lehman Brothers

Mark Weintraub - Buckingham Research Group

Richard Skidmore - Goldman Sachs

Christopher Chun - Deutsche Bank Securities

George Staphos - Bank of America Securities

Operator

Good day ladies and gentlemen, and welcome to the first quarter 2008 Louisiana-Pacific Corporation earnings conference call. (Operator Instructions). I would now like to turn the call over to our host for today's call, Mr. Curt Stevens, Executive Vice President of Administration and CFO. Please proceed sir.

Curtis Stevens

Thank you very much, and thank all of you for joining us, on LP's earnings call to review our results for the first quarter 2008. As the moderator said I am Curt Stevens the CFO. With me today our Rick Frost, LP's Chief Executive Officer, Mike Kinney and Becky Barckley, who handle our Investor Relations, along with their other duties and Jeff Poloway our Controller.

I will start the call with the review of the financial results for the first quarter to discuss the performance of each of our individual segments and comment on the balance sheet. I’ll then I will turn over to Rick who will discuss our accomplishment and other actions during the quarter and his thoughts as we execute our plans for the rest of 2008. As we have done in the past, this call has been opened up to the public, and we are doing a webcast which can be accessed through www.lpcorp.com

Additionally, to help with the earnings call, we have provided a presentation that has supplemental information. I will reference these slides as I go through the discussion. As a caution, to pass this presentation should be reviewed in conjunction with the publicly available earnings release. I want to remind the participants about the forward-looking statements comment that is included in our earnings release and shown on slide through the presentation.

Also be aware of the discussion on we use non-GAAP financial information included on slide three of the presentation. We do have an appendix attached that contains the necessary reconciliation. I'm not going to read all these statements, but I will incorporate with this reference. First slide, I am going to address is slide four, which has a discussion in Q1, 2008 results, compared to the same quarter last year and last quarter. We are reporting the net loss for the first quarter of $46 million or $0.45 per diluted share.

Net sales from continuing operations were about $350 million for the quarter. For the same period last year we reported a net loss of $37 million or $0.36 per diluted share on sales from continuing operations of just under $400 million. Sequentially, our net loss is a bit lower due to foreign exchange gains, special items and an improvement in our discontinued operations

Slide five of the presentation provides an overview of the special items that are not generally attributable to our ongoing operations and in Q1 of 2008, we recorded a $4 million gain associated with our hardboard products related warranty reserves and related insurance settlements. We also reported a $1 million – about a $1 million other than temporary write-down of our auction rate security portfolio that I will comment on in a few minutes.

In the first quarter of last year, we reported a $5 million impairment to reduce the carrying value of the St. Michel sawmill to our estimated sales prices. Briefly, for last quarter we recorded another $3 million impairment on that same sawmill as our expectations for the sales price came down. We also had a $7 million reserve for an agreed upon litigation settlement or an environmental matter and we recorded a $21 million other than temporary impairment on the auction rate security portfolio.

Slide six of the presentation is the new slide and we haven’t shown before, well this shows is actual housing starts, over the last five quarters, that will help put our resulting context. These are the actual numbers of start as reported by the Census Department. This includes single-family and multi-family. For Q1 of 2008 compared to Q1 of 2007, actual stats declined 30%. Now let me discuss each of our segments.

Slide seven is our OSB segment. OSB price, compared to the same quarter last year was down 4%. During the same period, our volumes were down 15%, due to production curtailments taking at our mills during the quarter. On a quarterly comparison, pricing accounted for about $5 million in decrease sales and profitability. On the cost side, the $9 increase was largely attributable to an increase in the Canadian exchange rate that was offset by a reduction in wood costs associated with lower log cost in some areas and improve wood yields.

During Q1, we did start up the Clarke County OSB mill as we have talked about in the last call. At the beginning of April we received our initial APA certification and we are promptly shipping A grade product from this mill to customers. Siding – as our slide eight of the presentation. This segment includes our SmartSide and CanExel Siding products and commodity OSB produced in our Hayward mill. Beginning this quarter, we are changing the discussion of our Siding business based on a consolidation of our product lines and the launching of an improved fine fiber siding product family.

SmartSide now includes our OSB-based siding products and a treated Hardboard line of products from the Roaring River facility. CanExel refers to our Pre-finished Hardboard product line produced in our East River, Nova Scotia facility. Most of this product is sold in Canada and export markets. For the quarter sales volumes were down 9% in SmartSide side compared to the same quarter of last year. While were 3% higher than the fourth quarter of last year. Sales prices were basically flat compared to both the same quarter of last year and sequentially.

CanExel wires were significantly higher up 28% than the same quarter of last year due to strong Canadian and export sales. Sequentially volumes were exceeds almost 70% higher as we did get a seasonal list during our historic winter booking program for the Canadian markets. A 17% increase in pricing compared to the same quarter last year is almost entirely attributable to the stronger Canadian dollar as most of the sales are made in Canada.

Engineered Woods slide nine summarizes the operations of this group. Segment has been expanded this quarter to add our Laminated Strand Lumber or LSL products produced at our Houlton Maine facility along with the laminated veneer lumber and I-joists operations. This segment also includes the sale of I-joists and LVL products produced by the Abitibi JV are under an exclusive sales arrangement with Murphy Plywood. For Q1 our EWP business recorded a loss of about $8 million that from a profit in Q1 of last year’s 6 million and a loss of 3 million in last quarter. Volumes of both I-joists and LVL were down significantly compared to the same quarter last year, 32% and 26% respectively.

This is a direct reflection as a 30% reduction in new housing activity in the quarter. Pricing did continue to drip down compared to both same quarter of last year and last quarter. Also as I mentioned this quarter, we did include the start up losses attributable to the Houlton main LSL mill. During the quarter, we incurred all the expenses associated with the start up but didn't have any saleable product. Currently we are very close or have received the APA certification and we will soon be shipping products to customers.

Other billing products, well there is no slide for this -- this segment or this category, let me make a few comments, overall we had a loss of $2.5 million in the quarter compared to income of $2.4 million in the same quarter of last year. For this quarter, sales were up about 20%, mostly from increase in Chile and our export sales. Our molding operation continued to make money and was slightly better in the same quarter last year, and our Chilean operations, we did have a loss of just over $1 million, this was due to two factors, one was the higher administrative costs associated with the new mills start up down there and the second factor were lowest sales price due to some competition from imported OSB. On the new Lautaro mill we did start up operations in Q1 and we are currently shipping first quality product to our customers.

Our U.S. GreenFiber Joint Venture lost a little bit less than a $1 million in Q1, compared to the slight profit in the same quarter last year. Strength in retail sales here partially offset the weakness in contractor business that is tied directly in the new home construction. Also in this segment we have reported our non-operating facilities and here is where we incurred about a $2.5 million loss to largest that being related to severance costs -- severance and other costs at our St. Michel mills.

We also had a $9.4 million foreign exchange gain in the quarter compared to the $2.8 million loss in the same quarter of last year, about two third of this was related to changes in the Canadian exchange rate, for the reminder related to a change in the Chile and Brazil. Net investment income in the quarter was $2 million compared to $10 million in the same quarter of last year, this is result of both lower earnings on investments, higher interest payments due to borrowings in Canada and a lower amount of capitalized interest associated with -- for investments.

In the quarter as I mentioned earlier, we did recognizing some additional other than temporary loss on the auction rate securities of about a $1 million. On the SG&A costs we were slightly below the same quarter of last year, but on the unallocated side we were up about 6%. Close’s increase was in marketing sale due to higher headcount, but it was offset - we were able to offset the inflationary costs and other expenses with functional efficiencies.

Slide 10 of the presentation is balancing cash flow. On the cash -- cash flow once investments restricted cash at the end of the quarter was $611 million, working capital about $540 million. Net cash and investments $165 million. For the quarter we spent about $42 million in capital and investments in our joint ventures and book value per ending share was $17.03. I know of high interest to – certainly to us, and our investors is to understand, what is happening with – our $150 million auction rate securities portfolio. Let me summarized where we are in this – in these securities. These obligations continue to fail with auction, however they continue to be reset at the maximum stipulated amounts in our performing and current and all interest payments.

There have been no down rates for the credit rating on the ARS that we hold. All indications are they performing that as expected and there have been no negative changes in the underlying collateral. As of March 31st, 2008 we sort out valuations on the securities from the issuing banks, consistent with the approach that we used as of December 31st, of ’07. Based on these values we did make further adjustments, we recorded an additional $12.5 million temporary decline in value and other comprehensive income $7.7 million after-tax and then the $1 million other-than-temporary pre-tax impairment that, I mentioned earlier.

With these adjustments between Q1 and -- between Q4 of last year and Q1 the cumulative impairment was $67 or 44% of the par value. I will note that in April we are using this same approach we did see a $4.6 million increase in the value of the portfolio using these quotations. Other activities that we are pursuing with respect to this portfolio, is we are monitoring the various legal actions that are underway, we are talking to the issuing banks about liquidity alternatives, we are expect - exploring liquidity options with other financial institutions and we are doing work to make sue that we fully understand the collateral.

Slide 12, of the presentation, I wasn’t going to go over but this does provide the calculations of non-GAAP financial measures discussed during my comments. That concludes my initial remarks and with that I will turn it over to Rick Frost, LP's Chief Executive Officer.

Richard Frost

Well, good morning everyone. I usually start with a weather report, it’s a beautiful day here in Nashville, without a cloud in the sky and it's about 70 degrees and that’s the good news. I do thank you all for your interest in LP building products and your interest in our call this morning.

We have released, and Curt has reviewed with you our financial results. This is currently a decimal housing environment and that is coupled with no evident, end of concerns with mortgage debt and other debt related markets, but through this quarter I think we have stayed on mission and had some decent accomplishments that will contribute to LP’s longer-term future.

In 2007 as I announced that the last call, we did have our safest year ever at LP with a TIR of 0.87 this earned us the number one position for the second year a roll of AF&PA’s drilling Products companies. I am pleased to announce that in Q1 we did even better we had an incident rate of 0.62. Now, this was accomplished in spite of the adversity in the market and resulting intermittent running of our mills, which presents all of our people more hazards operating environment due to distractions and the starting and stopping of operations.

We did re-brand dozens of products at the International Builders’ Show this year in February, and we also introduced a handful of new products. We have relaunched a broader and technically improved SmartSide external siding product line that included both and softwoods and variable[Inaudible] and we added zinc borate, which is included now in the recipe of our fine fiber base siding previously, known as hardboard. We also launched a re-branded family of high-performance OSB flooring products at the show, and that is going well. We also introduced LP SolidStart Laminated Strand Lumber to the industry.

On our new mills, and I’ll be the first to admitted the timing of the start-ups in relations to the economy has turned out rather poor, but our execution on the start-up of these mills has been reasonably good. Lautaro Chile OSB mill began operations and producing board in Q1 and we have received our APA certification on the product and Lautaro has been shipping two customers now for over about six weeks. The Chile and building market has remained strong and we expected that continue to remain strong. Clark County OSB that’s this mill began and running in early April and that has recently received APA certification, which has allowed shipment to begin. It really as a magnificent facility like Peace Valley and at some point we’re going to be very glad that we build it.

Houlton Maine laminated strand lumber mill is running product now and is expected to receive soon. I was expecting that on Friday and I haven’t heard the certifications for the first products being shift to our customers and our enthusiasm for this product line in the marketplace remains very high, and the Murphy LVL mill in Oregon, which has been producing unlimited volumes since the first of the year is up to two full shifts currently.

As you may recall we have marketing and sales rights to this product and we are responsible for selling them to our customers. This is a lower cost facilities and the Hines LVL mill, which we closed in 2007. As discussed on the last call we’re close to completing the first phase of acquiring a controlling interest which is 75% and the only other OSB mill in South America. This is mill in Ponta Grossa, Brazil and has an engineered capacity of over 300 million square feet although the most it has produced so far was about 240 million.

Our partner in this Brazilian operation is a publicly traded Chilean company called Masisa. As Curt reviewed, our financial results in Q1 were poor, in the quarter we took about 160 mill days of downtime in OSB. Now this does not, let me remind you and include St. Michel or Silsbee that did not run it all during the quarter. Nor or either anticipated to run in 2008 or 2009. If you remember St. Michel is permanently closed and Silsbee is currently being used as a reload facility.

In Siding both Hardboard and SmartSide and in Engineered Wood we took significant downtime due to lower demand and the need to keep our inventories in check. So, how does the rest of ‘08 shape up for building products not so, good I fear, demand will probably stay at this low rate. Consensus from the most recent set of forecast is that – new residential starts will be at or under the 1 million mark in ’08 with only a forecast that is slight up tick in’09.

Published results for storks and permits in the first three months of this year were certainly give creditability to this lowered ’08 forecast. 2008 is going to be a tough year for anyone in building products and the new residential construction business. So, what would LP continue to do manage through this downturn, as my friend on my left continually tells the organization cash is king, we do still have a strong balance sheet and we are very mindful of managing our resources quite prudently.

During the last six quarters of the current fall in housing, our Board of Directors left the dividend at $0.15 per quarter because of our cash balances and the expectations that the markets would rebound sooner than now anticipated. We did approve the dividend at $0.15 last Friday. Inline of recent questions by investors on the dividend I would like to provide a little bit more color. As many of you know I have been a proponent of the dividends since we reinstated it a few years ago. I’ve shared that when queried and I have this position based upon our cash reserves.

Going forward although supporting the dividend is still my personal preference, there are factors mounting up that are gaining heavier consideration. These are the debt in duration of this downturn, which has not yet been defined. The strength of our balance sheet must be protected in a prolonged down cycle and we are becoming increasingly conservative in our expenditures, both operating and CapEx and we have had the $150 million of liquid securities become illiquid in the short-term because of the auction rate security market situation and as well access to bank and public debt is more expensive and difficult to obtain today.

At our most recent Board of Directors meeting, we did have a lively debate about the dividend in light of the market conditions, managing liquidity, refinancing debt and wisdom of continuing of deplete the cash reserves based upon the uncertainty of earning the dividend from operations in this weak market.

As we have told you we discussed the dividend at each board meeting. I don’t think it's out of the question that the dividend could possibly be reduced or suspended until we regain profitability. At this point we’ll have to wait and see and address this uncertainty quarter-by-quarter. In operations, we will manage our mill outputs to takeaways, being mindful of not tying up any more cash and inventory that we need to and this means that there will be more downturn across our system throughout North America in the cross all of the LP’s businesses. At -- excuse me, at this point, I would anticipate, probably 200 down days of OSB mill time perhaps 90-days or greater in the engineered wood, and our siding business impacted by about a 100 mill down days.

Having completed several very large capital projects in the first quarter, we have dialed back capital expenditures to maintenance levels. The expectations to this, we’ll -- excuse me, the exceptions for this will be our investment in Brazil, and a probable purchase of an additional JV interest sometime this summer. We will aggressively continue to market and sell our products with the purpose of creating a preference for LP products, and doing business with LP.

We will also rely again very heavily on our Lean Six Sigma efforts for the largest part of our cost and process improvement work we have and we will continue to shave discretionary spending capitalizing on any attrition opportunity where we think the risk is acceptable and we will put some activities and programs around brand building and marketing into hibernation until better times with that said I will turn it back over to Curt.

Curt Stevens

Thank you Rick. Dan if we go to the Q-and-A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Gail Glazerman from UBS, please proceed.

Gail Glazerman - UBS

I was wondering if you can talk just a little bit more about the current OSB market. What you think has driven the recent improvements and given your outlook for higher mill down days is that just that you expect more output from Clark County or is there something in the market that you are seeing.

Curtis Stevens

I think probably active supply and demand are getting closer together and so that is tightening up the amount of available open market. I don’t think that you seen a shift in demand. I think that the two are just closer together.

Gail Glazerman - UBS

Okay and I mean when you talked about CapEx being dialed back to maintenance levels is there any change from your prior guidance or can you just reiterate what that guidance is for the year.

Curtis Stevens

Well for the year there is a couple of things in the cash flow; one is, we had two very large mills under construction at the end of last year that we finished up in Q1. So we had accrued at the end of Q4 a little over $40 million in payables related to those mills that we will pay -- that we paid in the first quarters and the second quarter and then in addition to that, we do have the two acquisition opportunities that Rick talked about, that Brazilian acquisition and that potential JV, sometime this summer and combined those would be about $100 million and then in addition to that there’s about 60 million that would be core maintenance and finishing up the projects. So, we add all that together, we get about 200 with a 100 of that being acquisitions and 100 of it being the completion of the major projects and maintenance CapEx.

Gail Glazerman - UBS

Okay and changing gears, can you give a little bit of an update on the OSB anti trusts situation that looks like a couple of more competitor have settled?

Curtis Stevens

I can't give an update on that. I think as you said we did have one of the competitors announced yesterday so at this point, all of the defendants in the case except us have settled. As you’ve seen in their public releases, all of the dependants have denied any liability or any wrong doing and we are certainly not going speculate on why they agreed to settle. As far as us, we are preparing for trial which starts in early June, but beyond that it's probably not prudent for us to talk about the specifics of the pending litigation.

Operator

Your next question comes from the line of Peter Ruschmeier from Lehman Brothers. Please proceed.

Peter Ruschmeier – Lehman Brothers

Thanks, good morning. I was curious about -- slide 10 shows $541 million of working capital at the end of the quarter. I was curious Curt on how much of an much opportunity you may have as you look at it with the next several quarters of monetizing some of that working capital?

Curtis Stevens

Actually it’s was good opportunity. Included in the receivable number is a big tax receivable. We have about a $150 million that we are anticipating coming in the third quarter about half in Canada and half in the U.S. So, that’s a piece of it that we would expect to realize, the other piece of that is we do build our log inventory in the northern mills in the first quarter and we basically don’t do much logging in the second quarter in those northern mills so we’ll bringing down that log inventory and that happens every year. So, those are probably too biggest changes to monetize some of that.

Peter Ruschmeier – Lehman Brothers

Any more color you can offer on the tax receivable what that's related to?

Curtis Stevens

Its related to not making money last year.

Peter Ruschmeier – Lehman Brothers

Right, okay. Maybe a question for Rick, if I could; I was just curious in this difficult environment how you think about assessing downtime in your system, you obviously got some lower cost facilities and others, in perfect world, you might run that the real low-cost facilities flat out and take the others down, but that’s perhaps not feasible, can you just share with us how you schedule and plan in this environment?

Rick Frost

Well, I think the first promise is that we have to look at it regionally in terms of the markets that we are selling into, so we take our customer demand and then we apply that back to regional production, so that’s how we have been doing it with the exception of the two mills that we shut down last year. I think problematic for us going forward and probably where you are going is as we do ramp up Clark County, we’ll have a world class facility there and in this market there will necessarily be room for all the additional wood and so, we will be force here in the -- probably over the next three months to look very hard at making room for the Clarke County wood and we may have to do that that at the expense of other facilities in terms of making some tougher decisions that we made so far.

Peter Ruschmeier – Lehman Brothers

Okay. That’s helpful. Last question, if I could. Rick I was curious if you could elaborate on your international strategy. Obviously, you have made some moves in Brazil, you continue to look at work in Chile, if we think about your equity exposure to your OSB, how much ends up offshore today either directly through these interest or indirectly through exports and should we expect that number to rise much over the next few year?

Rick Frost

I think, we’ve got about 8% of our active production right now being exported that’s out of North America. We probably have about 15% of our Chile -- in production going to countries other Chile. One of the purposes of building Lautaro, was to continue to feed the Chilean growth in terms of the fact that more and more stick free bill housing is occurring down there and we basically got sold out, so we were having to limit the amount of exports from Chile and to other continents. So now with Lautaro starting up and we should I think by next month be up to about 6,000 cubic meters and then continuing to ramp that up throughout the year. We can start pushing harder again on exports from Chile so we think that with the addition of the season mill, hopefully being able to replicate on a much broader scale or larger scale of success we’ve had in Chile in terms of selling into local markets and changing our home construction norms that there will also be an opportunity to export some volume out of Brazil, but our main goal down there is to teach them, how to build the way that we build our peer and have the predominance of that product consumed in South America.

Peter Ruschmeier – Lehman Brothers

And not to cut this too finely, but would it be an unrealistic goal to double or triple those export numbers over a three to five year period or any high-level expectation that you have as to what kind of international opportunity you’re really looking at?

Rick Frost

I think that’s very realistic. I think the other thing that you probably have to keep in your head is that right now in this North American market, as I’ve said before, most people come to the same conclusions, so my guess would be that anybody that’s got OSB right now, is trying to push it offshore.

Peter Ruschmeier – Lehman Brothers

Yeah.

Rick Frost

I did say, I think maybe it was a year conference -- a year to year and a half ago, and it’s looking like it may actually come true; I offered the long term observation that North America may actually end up being an exporter, a long-term of wood products simply because of tree availability in some of the other continents and I am starting to see that get some lags particularly with the Russian decree of putting the very high export tax on any of their trees; that’s going to dry up tree supply for countries and I think they are going to look to Canada and the U.S. and to places like South America which we are hoping to gain more of the structural panel.

Operator

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

Mark Weintraub - Buckingham Research Group

Thank you. First Curt I just wanted to follow-up on the account receivables. So was that $65 million or $68 million increase in the account receivables; was that related to the income tax receivables. I thought the income tax receivable already was about $155 million at the end of last year.

Curtis Stevens

Well, there is an additional cooling in Q1 that went into the receivable for the current period.

Mark Weintraub - Buckingham Research Group

Okay. So it was -- so, what was behind -- so is that what was largely behind the credit built?

Curtis Stevens

The increase in the income tax deals is about $35 million and then the other increase in trade receivables if you remember every year December 31 we run a DSO of about 20 days. So -- and the last two weeks in December nobody is building, so our accounts receivable balance is the lowest it ever is at the end of December.

Mark Weintraub - Buckingham Research Group

So, that’s just a normal seasonal increase that’s you saw there?

Curtis Stevens

Seasonal increase in the first quarter.

Mark Weintraub - Buckingham Research Group

On the cap spending and the acquisition where are you in terms of making a decision on Brazil and the JV and do you have the flexibility or are you looking at financing these separate from what ever you might already have in place or have the prices for these acquisitions changed at all given the type of environment that we’re in because obviously folks are looking at what’s happen with the stock and what’s happen with the stock market assessment of values of businesses. I am just trying to find out whether or not you are seeing that in the external world as you are looking at moving forward with your strategy.

Curtis Stevens

Well the South American asset as you know we signed that Memorandum of Understanding at the middle of December with Masisa and that included a due diligence period and some other work between then and now. We are currently in a position were I expect to close the first days of that in the next couple of weeks with that. There have been some modifications to the deal we struck in December, but I wouldn’t consider them to be meaningful. We have explored the possibility of our standalone financing to that facility and it’s still a possibility, probably a possibility further down the roads than right now. So, in answer to your question, we are planning on proceeding the next couple of weeks to the first phase of the Brazilian acquisition and the one that I mentioned for the summer is yet to be determined, but I just want to make sure that you had that in your plan.

Mark Weintraub - Buckingham Research Group

Okay and then, if I understood you correctly, you consider your maintenance spending to be about $60 million a year, additional to the acquisition stuff etc and then there is $40 million, which was related to finalizing some of the expansion projects and so, next year if your maintenance levels is $60 million type of number that one should be penciling in?

Curtis Stevens

I look at it a little bit differently, because when you have -- the $40 million was the carryover that was accrued at the end of the year. We also had additional expenses in Q1 that were not accrued, that were related to the completion of those projects. So, I think you are probably better of looking at maintenance expense which we have talked about before in the $1 million to $1.5 million for facility, which would put that in the $40 million range, $30 million to $40 million.

Mark Weintraub - Buckingham Research Group

Okay right.

Curtis Stevens

I think it was a little high for maintenance.

Mark Weintraub - Buckingham Research Group

Okay.

Rick Frost

And I will add to that; we’re going to connect to (inaudible) so I think that 40 might even be higher for me. We have to work a little more; I have got some of my friends around the table who that directly impacts, but we are having robust discussions about what -- under these conditions about ’09 and ‘10 ought to be.

Mark Weintraub - Buckingham Research Group

Fair enough and lastly, you mentioned several startup losses. I don’t know how much detail you want to give in. Can you give us a ball park for what the total impact on the quarter it was, from Chile and also in Clarke County?

Curtis Stevens

I can give you some rough numbers. In the Engineered Wood about two thirds of that loss related to the whole thing because we didn’t sell any product out of it and had all the expenses of starting that up. So, I give you an order of magnitude on the Engineered Wood. On Clarke County after I -- not going to give you a number on that, but we didn’t sell any product out of that until end of March and early April so, again you have the expenses of having all the folks there, but not any production capacity and then in Chile, they combined with this -- the difference in the sales price and the startup Lataro, was about $2.5 million swing, where they lost about a little over $1 million and they made money last year and that will be attributable to those few factors.

Operator

Your next question comes from the line of Christopher Chun from Deutsche Bank. Please proceed.

Christopher Chun - Deutsche Bank Securities

Your press release provided us production volume, but I was wondering if you could provide sales volumes for the quarter

Curtis Stevens

We have always provided the production volume, that’s what’s in there.

Christopher Chun - Deutsche Bank Securities

Right and can you give us an idea of just on a seasonal basis what your sales volume as like compared to production volumes in 1Q?

Curtis Stevens

Well, from me on a year-to-year basis our inventories don’t really change much and I think as Rick talked about on our inventories just -- Bob where we think is a customer range we take production curtailments. So, finished goods inventory other than maybe a quarterly being higher then we would expect we adjust pretty quickly with our production volumes. We don’t have any space to keep this stuff and on our OSB mills we have got five days of production that we can keep there and then in Engineer Wood there’s about a whole lot more in there; a little more inventory in Engineer Wood, but I wouldn’t say that overtime production volumes and sales volume are going to be very close.

Christopher Chun - Deutsche Bank Securities

Okay, that’s helpful and then going back to the issue of -- is that an earlier call they raised about the different cost structures at your different mills. Can you talk about how flat or steep the cost curve among your different mills might be?

Rick Frost

Its pretty flat. I think that largest influence is the parity of the dollar so that the operations north of the boarder are more expensive than the operations south of the border and that affects decision making right now. All those investments we’re made at a different dollar rate and with the change that’s occurred, their more expensive operations up there, particularly in Eastern Canada.

Curtis Stevens

I think the other piece you have to look at Christopher is that what the customer care is about is the delivered cost, so getting the wood where they need it and that’s an adder to whatever the mill FOB price is and when you take that freight into consideration, that’s why Ricks comment about making regional decision is so important. As you make a decision if the demand in the West Coast is down, that’s going to influence your Western Canadian mills and it probably isn’t going to have any impact at all in your decisions in the lake state. So, you really do need to look at it delivered basis and look at it by region.

Christopher Chun - Deutsche Bank Securities

Yeah that’s an interesting point Curt. Tell us -- on average when your talking about the delivered by the customer, how much of that is freight from the mill?

Curtis Stevens

You know for us its like -- its about -- well its changing with the diesel environment on a regular basis in dislocations and rail, but it is about $20 a 1000 average across our system.

Operator

Your next question comes from the line of Rick Skidmore from Goldman Sachs. Please proceed. Please proceed.

Richard Skidmore - Goldman Sachs

Wanted to come back Curt, if you would just on the cash in 2008, $600 million for acquisitions and CapEx.

Curtis Stevens

Rick I think we lost you.

Richard Skidmore - Goldman Sachs

Can you just go through the puts and takes on the cash flow 2008? Actually, on CapEx?

Curtis Stevens

The question I was responding to was on capital and what I said, is there’s about $100 million that would be for acquisitions for that Brazilian mill and this potential JV interest there was about a $100 million in capital expenditures with 40 of that being a carryover that was accrued at 12/31 of ’07.

Richard Skidmore - Goldman Sachs

Okay and then you’ve got the 160 tax refund coming in later in the year and then whatever you’re doing on the dividend fronts. If you take these cash flow items in the year?

Curtis Stevens

Well, other than operations, which we are not going to give you a forecast on that, but I think what Rick said is it’s not a very good environment out there.

Operator

Your next question comes from the line of Mark Wilde from Deutsche Bank. Please proceed.

Mark Wilde - Deutsche Bank Securities

Hi, good morning. Can you talk Curt just about what you are done at what’s your at -- your trade receivables right now that kind of protect yourself on the bad debt side of things?

Curtis Stevens

Well we have -- obviously we have a credit department. I believe we have on of the best credit guys in the industry; a guy named Bruce Iddings. Bruce manages that very directly. He gets financial statements from the private companies, he public financial statements, he visit our customers, he has a rather sophisticated way that he tracks whether they have earned the discount or not and then Q1 I just received his report and we were at 20.1 day DSO. So we were pretty close to exactly where we are at the end of last year or the end of the first quarter and last year. The challenge is that -- as you know some of our customers are feeling the pressure on their financial resources. So, we have engaged our sales force in that, we do have a couple on our watch list, we’ve actually reduced the credit facilities available. So, we’re managing it extremely reversible.

Mark Wilde - Deutsche Bank Securities

Okay. Second question, when I was in Latina America -- couple of months ago, they mention that you were studying, reciting another one of these North American mills, down into Argentina and sounds like that would be probably a minimum of two or three years off it. Can you just kind of update us with that process? And then it looks to me that if you had it back together with Brazil with the Two in Chile that you have a million units of production potentially in South America?

Rick Frost

Yeah, that’s the long-term goal, but what we are doing this year is we’re taking the Woodland press and anything else that has any significant value and we’re restaging that down to Chile and because that’s the place. If you gets used it will get used in South America is our belief. We do not at this point in time have anything on the drawing board in terms of timing. So we’re trying to sell the Woodland facility and so, we need to get what a value is at that site off and I then want to move it twice. So, the idea is we think that there will be continued growth in South America, but at this point, we have done no site location work, no engineering and I would think you would be very safe to assume that you won’t see any activity on that for a couple of years.

Mark Wilde - Deutsche Bank Securities

Okay and it will be Chile, it won’t be in Argentina. Is that right?

Rick Frost

It could possibly be in Argentina, that’s our thought process at this point in time, but I think when we actually start firing up the computers and pulling out the pencils in terms of where the next piece of South American growth is, the landscape will have changed, but Argentina certainly seems to be a potential spot for this. We basically, can service as part of the Argentina market, now I think all of our Mesisa operation for a couple of years. So, we’re merely trying to think a little longer-term, and also accomplish the purpose of being able to sell the Woodland site and put that the equipment at least in the right continent to figure what to do within a couple of years.

Mark Wilde - Deutsche Bank Securities

Okay. And then last question on a little longer-term perspective Rick. The increase in using kind of wood residuals for bio-fuels or maybe bio-refining, how do you think about that potential impacts of that on the OSB business, over the next 10 years here in North America?

Rick Frost

I’ll tell you, I think it’s got everybody’s attention right now, where a year ago we weren’t sure it was going to be too intrusive. You have a couple of power plants start-up around here if your a paper mill, that’s used to getting their biomass relatively free or at least just for freight. Now if we get into a situation where people are starting to that -- there is a couple of different ways, this is going to affect you. One is some intrusion into the lower diameter classes of pulp plant. In other words you -- what they really want is what we call pre-merchantable wood, which is wooded up into that 5 inch -- below 5-inch diameter class and of course when you put harvesting operation on a site like that you tend to creep-up into what would be wood for building products purposes or pulp making purposes. The other longer term potential impact of this is that the land owners and most of the land owning base with the exceptions warehouse has been separated from these large companies that we historically have dealt with. The new land owners could actually changed there timber growing resin to grow fiber and actually pre-merchantable fiber rather then trying to take that into a pulpwood class or into a log class and that to me is the longest most heavy potential re-precaution on this industry. Is if and I haven’t run the economics on it from my forestry days, but if these guys start switching from trying to grow pulp wood and logs as their in product to sitting down and saying “I’m going to grow a 10 to 12 year rotation and try to grow biomass” that could change the long-term supply of timber and obviously that’s a decade out from the time that people start thinking that way, but it’s certainly a potential.

Operator

Yes, your last question comes from the line of George Staphos from Bank of America Securities. Please proceed.

George Staphos - Bank of America Securities

Hi, guys. Good day; a couple of questions here. I guess given the way 2008 is trending right now, how would you coach us to think about the potential in ’09, where there would be another fairly large tax refund or it would be -- would ’08 be one off in that regard?

Curtis Stevens

Right now -- if you look, when we put together the tax benefit rate for the first quarter we have to take into consideration where we expect full year earnings to be and calculate the rate based on that. So, it’s simply the fact that we did put the tax benefit rate that high at 44% and didn’t increase the tax receivable I think you can assume that we expect to use the benefit of any operating losses and receive a refund next year.

George Staphos - Bank of America Securities

Okay, fair enough and…

Rick Frost

And I said Georgia at the annual meeting on the Thursday of last week, our expectation for ’09 is to only be marginally better than ’08 in terms of overall starts in demand.

George Staphos - Bank of America Securities

Okay. So, I guess trying to summarize without 10 pin pointing the forecast there should be some benefits again next year that we could directionally anyway think about it in our models, that would be correct?

Curtis Stevens

That would be correct

George Staphos - Bank of America Securities

Okay. Now as far as you know safety and branding you talked about your initiatives this year but ultimately it’s in a very difficult market. How would you guide investors to gauge your performance this year since we done have quite the visibility into how you are performing other than the financials that you report. Are you gaining share? Should we expect further reductions in manufacturing cost? I mean help us try to quantify that a little bit guys that would be helpful do you have that?

Rick Frost

While we already has two specific about share, but I also made the comment at our annual meeting that internal metrics that were keeping do indicate the efforts we have been putting in on being proactive in the marketplace are convincing us that we are gaining share in each one of our product lines. I will be -- and I think there is the Cavia to that is as one of our managers in his report to the Board said, gaining share is hard. When you can pick up a point of share you have really accomplished something, but our internal metrics suggest that there are more LP products in the homes on a volume basis per start, which is -- puts the relatively and depending -- that’s the thing that allows you to compare period-to-period of robust market versus down market. We have more LP volume per start in homes today than we did two years ago, so that’s encouraging us. On the other side of that coin, some bad news for us or news that we didn’t like is that a considerable amount of our branding work in this down market has not been very effective in terms of increasing awareness. So, what we are doing as we’re looking at our sales and marketing work and trying to measure where we’re getting a bank for our buck and we are going the stuff into hibernation where if the potential return on that is too far out, we can’t be spending money right now to help ourselves in brand awareness three years from now. So we are looking at some of those activities for hibernation.

George Staphos - Bank of America Securities

Would that even include the giving out of the naming rights on the stadium, and -- not that material but…

Rick Frost

That’s a done deal.

George Staphos - Bank of America Securities

Okay.

Rick Frost

You should think of that as a long-term centerpiece for our own LP effort. We are very happy with what we have done so far there in terms of that providing us the customer relationship that’s very special opportunity for people that we bring into that and plus we signed the contract on that, so as we told you when we did that I think we have taken money out of other areas. So, that’s not a complete addition cost, we used funds from other things that we were doing to create more of a focused approach there.

George Staphos - Bank of America Securities

Okay. One last question, appreciating all the color and commentary on the dividend and things that’s you looking at right now and the likelihood that you will be dialing back the CapEx in a fairly significantly next year, could you review again for us Rick and Curt, the though process we have investing some amount of money in Brazil right now giving the environment; why it’s a good time to be doing that here and what kind of returns you expect and how easily will you be able take the cash that you do generate in South America over the next several years and bring it back to the States if you need that. Thanks guys.

Curtis Stevens

Well, let me just try about this. The Brazilian decision really is a decision to expand our presence internationally. We have had a very good experience in Chile. Brazil got 220 million, 230 million people underserved for housing needs right now. We think we can take the experience in Chile and move that into Brazil successfully. From a timing perspective when these mills become available, you want to strike while you can. We have been in discussions with Masisa for several years and we do believe that that this is the right time given the strategic direction they are going and how we would want to expand it’s presence. We have looked at and one of the reasons that’s we are willing to going to Brazil is that Brazil from an economic standpoint has gotten much better than historic. I think you just saw that as into S&P or Moody's or one of them just raised there, their sovereign debt rates up to investment rate which is a very good sign. The way we are structuring the transaction we should have no problem brining back our investment in the facility or our earnings in the future very taxable.

Rick Frost

I think the way to think about South America is making the pie bigger. The long-term forecast for US 1.8, 1.85 starts is -- that’s about what its going to be and at through the last boom, I think we ended up with an industry that was sized to be able service two million starts or more. So if you have a limited market here but yet the product and the building techniques are favorable in emerging countries and it was either Mark or Rich mentioned earlier. We can potentially have a billion feet of production in South America which if you put that compared to what we produce up here in North America that will be a substantial part of our company going forward. So we look at it as a way to continue to grow this company understanding that in this country, demand overtime is about 1.8 to 1.85.

George Staphos - Bank of America Securities

Understand. Realize the long term growth opportunities, but also obviously got some challenges here domestically so that's why I raised it. Thanks guys. See you tomorrow

Curtis Stevens

Alright. Thank you Dan for moderating discussion and thank all you for participating. As always Mike and Becky are available to the follow up on questions that didn't get answered during this discussion. Thanks again.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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