Louisiana-Pacific Corp (LPX) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Louisiana-Pacific Corp earnings conference call. My name is Shanel, and I will be your coordinator for today. (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 conference, Mr. Curt Stevens, Executive Vice President of Administration and Chief Financial Officer. Please proceed.

Thank you. Good morning. We appreciate all of you joining us for Louisiana-Pacific's conference call to discuss our financial results for second quarter ended June 30, 2008. With me today are Rick Frost, LP's CEO, and Mike Kinney and Becky Barckley, our regular Investor Relations contacts. As usual, I will start the call with review of the financial results for the second quarter, provide a discussion about our performance of our individual segments, and give you some comments on the balance sheet. I will then turn the call over to Rick who will discuss the current market environment, the challenges and accomplishments during the second quarter of 2008, and a summary of his thoughts and plans for the rest of the year.

As we have done in the past, we have opened up this call to the public and are doing a webcast. They can with accessed through www.lpcorp.com. Additionally, to help with our earnings call, we have provided a presentation with supplemental information. As I go through the discussion today, I will reference these slides. As a caution, this presentation should be reviewed in conjunction with the publicly available earnings release that we sent out this morning. I want to remind all the participants about the forward-looking statement comment that is included in our earnings release and shown on slide two of the presentation. In these uncertain times in the housing market and the turmoil in the credit markets, forward-looking statements are even more difficult in today's environment. Please also be aware the discussion on the use of non-GAAP information that is included on slide three. There is also an appendix to the presentation that contains the necessary reconciliations. I'm not going to reread these statements, but I am incorporating them with this reference.

The first slide I'm going to talk about is the earnings summary, which is slide four of the presentation. We are reporting today a net loss for the second quarter of $81 million or $0.79 per diluted share. Continuing operations, we had a loss of 79 million, or $0.77, and discontinued operations had a loss of about a million. Net sales from continuing operations was 387 million. For the same period last year, we reported a net loss of 23 million, or $0.22 per diluted share. Continuing operations, we had a loss of 16 million, or $0.15 a share, and discontinued operations had a loss of 8 million. Net sales were 461 million. For the first six months of 2008, we're reporting a net loss of 127 million or $1.24 per diluted share on sales from continuing operations of 736 million. This compares to a loss of 61 million or $0.58 per share in the first six months of 2007. Each of these reported periods did have special items that are generally not attributable to ongoing operations.

Look at slide five, there's a summary of those items. During the second quarter 2008 we did record settlement costs associated with the OSB anti-trust action. Total amount recorded was 48 million, which includes settlements for the direct purchaser class, the indirect purchaser class, and an estimate for the opt outs. Although a very difficult decision, the minuscule risk of an adverse jury verdict posed too great a threat and we need to focus on the future. During the quarter, we did experience a fire at our Clarke County OSB facility that shut it down. For Q2 we recorded the estimated cost of repairs a little over $4 million and a million dollars for workers compensation deductible. We do anticipate insurance recoveries for significant portion of these costs will come, but under accounting rules, we do not record gains until amounts are confirmed in writing by the insurance companies. Just for reference, our deductible under the property insurance program, which includes damage as well as business interruption, is $2.5 million.

We continue to feel the turbulence in credit markets through our holdings and auction rate securities. Compared to the end of March of 2008, we recorded an additional other than temporary impairment 1.6 million to the income statement, an increase to temporary impairment recorded on the balance sheet by just short of 13 million. This means of the 151 million face value ARS, only 72 million or less than 50% is currently recorded in long-term investments on the balance sheet. I believe this is very conservative. We continue to pay claims under the 2000 ABT class action settlement. The claim period is 25 years. During the last several quarters we have had an unusual increase in claims activity. Based on this, we did work with our consulting economists and we increased the reserve by about $15 million and we will continue to watch this closely. This is the non-discounted estimate of payments during this 25-year class period.

During the second quarter of 2007 we did record a gain of 17.8 million -- 17.7 million, excuse me. Associated proceeds received on a favorable verdict from a legal suit associated on the hard board siding and an additional $1 million gain in the settlement with the Canadian government. Adjusting for these unusual items, adjustable loss from operations in Q2 2008 would have been 35 million or $0.34 per diluted share compared to $28 million loss or $0.26 per diluted share in Q2 of 2007.

Slide six, we updated this slide for the quarter. This is actual housing starts in the US for single and multifamily. This graphical representation certainly shows the depth of the downturn. While Q2 of 2008 was higher than the immediately prior quarter, we believe this was attributable to seasonality rather than an increase in underlying demand. Compared to Q2 of '07, actual starts were 30% lower than the same quarter last year.

Slide seven is a summary of our OSB performance. Loss in the OSB segment for Q2 was $35 million which was lower than both last quarter when we had a $45 million loss and lower -- sorry, lower than the same quarter last year, $45 million loss and last quarter with a $62 million loss. OSB pricing compared to same quarter last year was up 6% while at the same time volumes were down 30% due to market curtailments taken during the quarter as well as the indefinite curtailment at [Silsby]. This reduced volume, reduced sales by about $60 million. Compared to Q1 of last year, or Q1 of this year, pricing was up 17% while volumes were lower by 7%. On a quarterly comparison, pricing accounted for about $8 million increased sales and profitability. We did have cost increase in the quarter, about $3 per thousand attributable to raw materials with resin and wax primarily, about $10 due to the 30% lower production volumes, and about $5 related to the change in the Canadian dollar as it strengthened about 9% from Q2 of '07.

Siding is slide eight of the presentation. This includes our SmartSide of OSB and hard board products, our Canexel siding and commodity OSB produced at one line at our Hayward mill. For the quarter, sales volumes were down by 6% on SmartSide compared to the same quarter last year and 35% higher than last quarter, although this would be related to seasonality. Sales prices were basically flat compared to both the same quarter last year and sequentially. While housing starts are down 30%, we are up 6%. This is another solid quarter retail for these products. Canexel volumes, they were lower by 18% in the same quarter last year and lower sequentially by 32%. The sequential change of 32% is a little misleading. In the first quarter 2008, we did lift volume restrictions on our winter buy program as we changed our primary distribution for this product that we had in place for previous years. The result was we had a significant increase in volume in Q1 which reduced the volume in Q2. 4% increase in pricing compared to the same quarter last year is attributable to the stronger Canadian dollar as most of these sales are made in Canada.

Slide nine is our engineered wood products summary. Segment expanded this quarter to add laminated strand lumber produced at our Holton, Maine, facility. That adds to our LVL and I-Joist. The segment also includes the sale of I-Joist and LVL products produced by Abitibi or under an exclusive sales arrangement with an LVL producer. For Q2, we recorded a loss in EWP of 9 million down from a profit of 4 million and a loss of 8 million in the prior quarter. Volumes in both I-joist and LVL were down significantly as this is a direct reflection of the reduced housing activity. Pricing drifted down a little bit compared to the same quarter last year and last quarter. Also in the quarter this segment, as mentioned, we added the Holton, Maine, LSL mill. During the quarter we incurred all the the expenses associated with the start up while we produced minimal salable product. We did ship about $1 million of LSL to two customers in the quarter.

While there's no slide on our other building products, let me make a few comments. Overall, we had a break even quarter compared to a loss of 3 million in the same quarter 2007. Sales were 36 million, a 50% increase from same quarter last year. About half this increase is related to our operations in Chile and half in export sales. Our molding results were basically flat with the previous year which is very good in this market. As a reminder, that's exclusively a repair remodel product. In our Chilean operations, we broke even compared to a small profit the prior year. The offset there was due to higher administrative costs associated with the new mill startup, and we did see some price pressure on OSB from imported product coming in from the US.

Our USB and fiber joint venture did better this quarter than the same period last year. Good strength in retail sales but that was offset by continued weakness in the contractor business tied to new home construction. Higher paper costs, primarily raw material, continued to hurt the results. On the selling, general, administrative costs, both unallocated and overall, we had a slight increase from the prior year. The increase was driven primarily by higher sales and marketing costs to drive our [war] for share programs. Additionally, in the second quarter of 2007 we did reverse accruals associated with LP's 2007 management bonus program. 2008 we continue to accrue.

Looking at the actual numbers, total SG&A was about 39 million in the quarter compared to about to 38-1/2 prior quarter, so relatively flat. In other earnings releases, there has been much discussion on the effect of increases in costs of raw materials and energy that have had on global manufacturing in all industries. Our cost to sales was similarly affected. To give you some numbers, we used Q2 of 2008 volumes across our product lines. Raw materials costs and energy were higher by $11 million compared to Q2 of 2007 and $6 million higher than they would have been using Q1of 2008 pricing. Year-to-date, this increase was $23 million with little ability to pass it through to customers in this weakened housing environment. We had a $5 million foreign exchange loss in the quarter compared to about a $13 million last year and that's related to our operations in Canada, Chile, and recently Brazil.

For Q2, our effective income tax rate was 42%. The major reconciling items compared to the statutory rate are related to our foreign debt structure and state income taxes. As we continue a loss position, the impact of the foreign debt structure will continue to drive our benefit rate above the statutory rate. As of today, we anticipate a significant portion of the tax benefit we accrued to date in 2008 will be refunded in 2009 based on our ability to carry back the losses. That investment expense in the quarter was $2 million compared to income of 13 million in the same quarter last year. This was the result of lower earnings on investments, lower cash and investment balances, and higher interest payments due to borrowings in Canada. We also significantly reduced capitalized interest now that a majority of the projects have been completed.

Slide 10 of the presentation talks about the balance sheet, key balance sheet statistics, cash, cash equivalence, investments, and restricted cash were at 511 million at the end of the quarter. We did receive 53 million of the anticipated $150 million tax refund in Q2, we expect the balance of that in Q3. Mentioned earlier we did have a further impairment of $14 million on the auction rate securities which reduced that cash balance. Working capital was over $400 million. Net cash and investments at about $110 million. Year-to-date capital expenditures stood at 125 million. About 45 million of this was the carry over from the 2007 projects accrued at the end of the year, 45 million for the initial closing of the Brazilian acquisition, and about a $4 million investment in our joint ventures. Book value per earnings share was just short of $16.

Over the past few months, there have been several questions from analysts and investors about liquidity and our financing options. We continue to review multiple financing options that are available to us to manage our upcoming debt maturities and our operating needs. We have had discussions with our lead banks regarding possible [expansion] of our credit facilities, but we also continue to review over financing options as well. Our current liquidity position with over 500 million of cash and investments provides us with significant flexibility in addressing these upcoming debt maturities. I know that many of you would like us to be more specific. The turmoil in the bank and financing markets coupled with SEC regulations makes this difficult. Rest assured that we are looking at a variety of alternatives and will communicate our plans at the appropriate time.

Slide 12, the last slide in the presentation, provides the necessary calculations of non-GAAP financial measures discussed in this review. With that, let me turn it over the Rick who will discuss the challenges, accomplishments, and actions during Q2 and his thoughts about the market and comments on the remainder of 2008.

Thanks, Curt, and good morning, everyone. And I also thank you for being interested in the LP building products Q2 earnings call. It's a beautiful day here in Nashville. It's going to be about 95 degrees today. I was out part of the month of June getting a total knee replacement and I'll tell you that that's just about as bad as the housing environment right now. But I'm on the mend and I wish the market would be the same. I would like to be sharing better economic news with you than I did last quarter on the call there, but there hasn't been much improvement. We are still in a tough housing environment and concerns with the mortgage debt and the other financial markets continue to plague the housing industry, as you well know. One small bright spot, it does look like the president may sign the housing bill which I don't think is going to be the solution, but may provide some stability in this market.

I want to begin with a few comments on Q2. I'll speak first on safety. Last quarter was the best quarter that we've had as a company with a safety experience rate of 0.62. In Q2 we had a setback with the Clarke County thermal oil room explosion and fire that Curt mentioned briefly. We had four employees hurt in that incident and thank goodness not more seriously. As a result, at midyear we have a TIR now of 0.99 which is still under 1.0 and something to be proud of. It creates great challenges for our people in staying safe during these times of great distraction by intermittent running, by changing shift schedules, and the financial concerns that people are feeling at home.

Now, in regards to our new mills, I have a couple of perspectives to offer. I think as I've said a couple of times at conferences, the timing of our North American mill startups could certainly have been better, bringing new mills online during the worst housing downturn in the last 20 years has been a chore and it's certainly not one that I would care to repeat. As I mentioned earlier in the safety section, we did have the unfortunate incident at our Clarke County OSB mill in early May which caused damage to the mill and injuries to four employees. Fortunately, those employees have all been released to come back to work. The damage was to the thermal oil system that powered the press and basically what we had to do was rebuild the thermal oil room at the plant. We anticipate that this mill will restart in early October and begin again moving up the startup curve.

The Holton, Maine, mill laminated strand lumber is now shipping to customers and has been certified for both the 1.35 E and the 1.55 E strength products. This is good news and we're shipping. However, the startup has taken longer and it has been more costly than we planned. About half the loss incurred by our engineered wood products business was related to this startup and getting the 1.55 E product available for sale. Our next objective at that plant is to create the 1.75 E product and we hope to do that by the end of the year.

The LVL mill in Oregon, where we have an exclusive sales arrangement, has been producing volume since the first of the year. And in Q2 with the broader portfolio of certified products, the volumes have come up quickly. The downside of that is that it's forcing more down time at our Golden British Columbia facility. Lataro, Chile started up in Q1, as we reported. We did receive APA certification on that product and it has been shipping to customers for several months. Demand in Chile is still very good and our aim is to get this mill up to full production as quickly as possible and to restore pricing in Chile. We did have the initial closing of our purchase of a 75% interest in an OSB mill in Brazil during Q2. We have a detailed transition plan underway. The current plan being for LP to assume operational control of this mill in early September.

On capital, we expect our capital expenditures for 2008 for completing the Holton mill in Clarke County and other various projects in our operations to be about 110 million. As we mentioned, we did additionally spend about 45 million in the quarter on the initial close of the Brazilian mill, and we anticipate contributing another 25 million for remaining equity and working capital contributions. The other piece of our capital spending that we expect in 2008 is to exercise a call option to create a joint venture with the LVL manufacturer of the new mill in Oregon that we have the sales and marketing agreement with. In that, we would obtain a 50% ownership interest and I'd expect that cost to be approximately $35 million and completed either in the third of fourth quarter of this year.

As Curt reviewed, our financial results for Q2 were poor and they were influenced by several factors. In the quarter, we took 238 mill days of down time and OSB and this does not include the St. Michelle mill which has been permanently shut down and the [Silsby] mill that has been indefinitively shut down, neither of which ran during the quarter. As mentioned above, Clarke County was down for most of Q2, I think about 54 days, and we do not anticipate any production out of Clarke County until the next quarter, so in Q3 it won't be up. In siding both in our hard board mills and SmartSide and in engineered wood, we had the challenge to take significant down time and reduce our shifting patterns to keep our inventories at levels just to satisfy our customer needs.

Due to an unusual increase in the ABT class action hard board siding claims, we did increase our reserves significantly and we are investigating the causes of this and monitoring that situation closely. On another product related issue, we have been seeing some deterioration problems on a small percentage of the decking products that we manufactured and sold several years ago. While we're no longer in the decking business, we do have warranty responsibility for the products that we made and sold. So we did increase this reserve by about $2 million and I currently have a team in place out in the field to determine the cause of that deterioration and what appropriate actions that we need to take as we learn more about that.

As most of you know, we did take the charge for the expected settlements of the OSB antitrust action. As Curt mentioned, this was a very difficult decision. It is absolutely clear to me that no LP employees did anything wrong. But to fight this in court with the remote responsibility that a jury decision could go against the company, that would have the potential of driving us into bankruptcy while we would be pursuing vindication through the appeals process. Simply put, it was a case where the probability was very low but the stakes were very high and it was not a risk that I chose to take.

I'll wrap up my comments with a look forward. I don't see any help from the housing market for the rest of this year. I think that's relatively consistent with what most of the forecasters are saying. Consensus from the forecasters is that new residential starts will be under 1 million for 2008 and with only a slight projected uptick in 2009. The published results that we've seen for starts and permits in the first six months of this year certainly give credibility to that forecast. 2008 is going to be a really tough year for anyone in building products in the new residential construction business. 2009 might be slightly better, but we're not counting on that at this point. I'm hopeful that current interventions by government the housing bill, and support for the mortgage industry will prevent further deterioration, and I am predicting overall improvement in 2010, but I don't have a sense on the slope of that line yet. What are we going to continue to manage through this downturn? As Curt always says, cash is king. We do have a strong balance sheet and we are mindful of managing our resources very carefully. Curt mentioned some of the discussions that we're having around refinancing options.

During the last six quarters of the current fall in housing, our Board has left the dividend at $0.15 per quarter. Because of our cash reserves and the expectation that the markets would rebound sooner than they have, I did discuss this with you on our last call that the Board is seriously considering either cutting or eliminating the dividend. Our board meeting is this weekend and we will make some decision. We will issue is press release next week after that Board meeting to inform the market and investors what decision that we made. We will continue to manage our mill outputs to much the take aways that we have. We have to be mindful of not tying up any more cash in inventory than we need to. Right now I am anticipating that our OSB business will sustain 280 days of mill down time in Q3, 30% of that will be at Clarke County. We have completed several very large capital projects but we've also dialed back our capital expenditures and plans to maintenance levels. Exceptions to this have been our investment in Brazil and the probable purchase of our interest in the JV, LVL mill later this year.

Looking forward along with the market demand. Curt mentioned this as well, I am concerned about inflation in raw material costs. Energy costs are surging into most of the tributaries of the supply chain. Now, our challenge will be to offset these as best we can with operating decisions, but we must also figure out how to pass these costs on which is very difficult in a down market. Our sales and marketing force continues to aggressively sell our products with the purpose of creating a preference for doing business with LP. And our measurement vehicles continue to be very positive in showing us that our LP products consumed per housing start are improving year-over-year. The problem is we need more starts. We also continue to be pleased with our lean six sigma efforts and that is contributing the largest part of our cost and process improvement work and we are exceeding our goal for the year of 3:1 returns, meaning the savings that we get as compared to the amount of money that we spend to achieve those savings.. With that said, I'll turn it back over to Curt.

Thanks, Rick. That wasn't very upbeat. Shanel, why don't we open it up for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of George Staphos Banc of America Securities. Please proceed.

Thanks everyone. Good morning. Rick, maybe first question. I know it's a little early. Hypothetically, do you have further opportunities if you need to to rebalance within the fleet of mills? Do you think you have opportunities on the cost curve by which to improve performance if in fact you chose to take some down time as we look out to 2009?

I think the way I'll try to answer that is when you take temporary down time, it's the most expensive down time you can take because you don't get it fixed cost. We have shut down two mills to get at the fixed cost structure. If we are hopeful at continuing to get at the fixed cost structure, the what we would have to do is to look at some of our temporary decisions and to declare them as more permanent and then actually get the rest of the costs out of the system. I'm not prepared to say anything more about that at this time.

Okay. I understanding. Could you remind us or give us a bit more in the way of detail in terms of what's attractive to you about the joint venture in Oregon and the decision on the timing to invest a bit more now in light of some of the obvious other challenges you've got right now from a cash flow standpoint?

Well, the timing was pretty well predicated on the deal we made when this mill was built. We have a call option and it makes sense for us to execute that. It's a very low cost source of product. And what we want to do is at this point in time what you have to do is you have to make LVL at the lowest possible cost. That's the only way that you can sell it. So it makes sense for us. It's a good mill. It will reduce our cost structure in that part of the world and we had planned to do it and we have the ability to do it.

Okay. Thanks. I'll turn it over.

And your next question comes from the line of Chip Dillon of Citigroup. Please proceed.

Hi. Good morning. My question first, to make sure I got this right, on the CapEx, did you say, I'm sorry, 110 million for the second half?

I think what Rick's comment was 110 million not including the acquisition.

And that's for the whole year?

That's for the whole year.

Okay. And that includes obviously the remaining spending for Holton and I guess Clarke County is pretty much paid for?

Right. What you have to add to that though is you have to add the the [Matissa] and this proposed LVL.

Matissa I think already has been like about 45 million?

Correct.

So that will be 70 all in. So there's another 25 and 35 for the Oregon JV.?

Correct.

Could you describe the plant in Oregon? Is it similar to Holton?

No, no. This is laminated veneer lumber. It is not LSL. It would be similar to what we produce in our Golden facility and in our Wilmington, North Carolina, plant.

Okay. Would 35 million represent a discount to replacement costs?

That's our estimate at this time. There's quite a mechanism to go through to get to the actual number.

Okay. And, Curt, if you could just review sort of the -- we see you need the CapEx I guess for the second half is going to be 34 million and then you have this 60 million from Matissa in Oregon. And then I think you have a term loan of what, 127 million? When is that due?

Term loan is due at the end of December. It's 125 million Canadian. And that was the remaining balance on the 235 that we put in place as part of our tax strategy, what we could do the repatriation of earnings from Canada.

Got you. And who is the bank there?

It's our standard banking group. It's actually a little bit expanded because they have to have a Canadian presence. There's a probably a predominance of Canadian banks in that facility.

Okay. And then beyond that I think you have what, some maturities next year. Could you just review those?

We have a $200 million senior debt piece that's due in August of 2010. Next year the only thing we've got is a renewal of our revolving credit facility.

And that has nothing outstanding, right?

It has outstanding letters of credit.

Got you, got you.

There is no outstanding balance on that.

As we think about the 511 million of cash and investments, obviously the ARSs are in the 106 but you can pretty much get at the other 400 of that, right?

That's correct.

Okay. And I don't know if Rick or you want to give us your thoughts. If you sort of add up the joint venture in Oregon and Brazilian investment that's over 100 million. I just remember back in early 2000 you all had sort of a plan to keep your net cash between 200 and 300 million and you're still in tough times and you're below that and I'm just kind of wondering why you're doing these other investments when you're below that level and you've got to renew with the banks? If you could just give us your thoughts on that.

Let me make a couple of other comments. One, we are anticipating close to $100 million tax refund this quarter which will offset some of that. I think the comment we said is we wanted to keep 250 to 300 of cash on the balance sheet. I don't think we ever said net cash.

Okay.

That's correct. I always called it my rainy day fund and always between 250 and 300.

If you look at our debt to total cap we are still one of the best ratings in the industry.

After you get this refund, and let's say when you do turn profitable, not predicting what you do in the third quarter and beyond but just up to now, I guess you're carrying back to get this hundred million. Would you then, let's say hypothetically, you started to make money tomorrow, would you be a taxpayer right away or do you have actual carry forwards you can use?

I would have to research that before I gave you an answer on that. I think we would become a tax payer because we can carry back the current year losses.

So if you lose money in the second half, you might have more refunds you can go back and grab? Is that right?

Yes. In fact, today we've got -- as of -- and this will be in the queue so you'll see it there. If you break out receivables, we show an increase in receivables up to 280. If you look at the trade receivables, they are only about 75 of that. There's 170 million income tax receivable in there. The 100 that I talked about getting in Q3 would come out of that. The remaining balance we would expect to be able to carry back from the 2008 filing.

Get that obviously first half of '09?

Correct.

And given as much money as you made in the up cycle, if you keep losing, you basically can continue to claw back I would think.

At some point it's going to run out and hopefully the market is going to turn so I don't have to worry about that.

Got you. All right. Thank you.

Yes.

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

Thanks, good morning.

Good morning.

Hey, Curt, I was hoping you could remind us the capitalized interest in '07 and what you think it is for '08 and I guess it really drops off in '09.

It should drop dramatically in '09. I have Becky scurrying to get you that number for '07, Pete. Do you have another question, I'll answer that?

Maybe shifting gears to the LVL and Oregon, can you remind us who the partner is there and the 35 million call option estimate, what does that do for you in terms of your increase in your equity of the LVL capacity. What kind of capacity does that buy you?

The partner would prefer we not disclose them. We will when we do the transaction, but right now it's a little bit sensitive. What that facility currently is about 4-1/2 million cubes and we would have a 50% interest in that. We also believe we have the ability to increase that when the market demand comes up.

Okay. So the 35 million would take you to 50%.

Correct, correct. And the capitalized interest for the second quarter 2007 was $4 million and it was under a million for the second quarter of this year. And for the six months it was 7 versus 3-1/2.

One more comment to refresh your memory on engineered wood products. Last year we shut down our [Hinz], Oregon, mill which has a capacity of about 5 million cubes and we did that with an eye for this volume being available to us at a lower cost structure. And so this is the continuation and the substitution for the shutdown of the Hinz, Oregon, mill.

Okay. That's helpful. Rick, could you maybe comment on what you learned so far about the Brazilian OSB opportunity both in terms of how you see the domestic and export opportunity developing over time?

Yes, actually I'm headed down there in September when we actually take over operational control. The mill's in pretty good shape. We're going to have to put a little bit of money into it. Our primary responsibility down there right now is to improve the quality of that product. That's one of the advantages of them partnering with us. We're having their recipe sent up here to our lab and then hopefully we'll get the product stamped. And currently it's not being used for structural products. The first thing we have to do is improve the quality of that product so we can get a structural product stamp.

What seems to be exciting about Brazil is that as you look at the demographics of Brazil and all the forecasts are on Brazil, Brazilian families will be expanding at an average annual rate of 2% per year. Current unmet housing needs in Brazil are at over 2.1 million, involving new homes and repaired remodel. And Brazil is viewed as a very excellent real estate opportunity around the world. Housing investment is projected to grow from a current state in '07 of about 165 billion Real up to over 400 billion Real in the next 20 plus years. So if you look at the improvement in the financing ability, the financing system of the Brazilian housing market by the elimination or by the deregulation that's occurred there, there's going to be a surge of funds available to meet the housing needs. So we're looking at a number of new families in Brazil will move from today around 60 million to 95 million over the next 25 years. So there's going to be a need for 37 million new homes in Brazil. And I believe that an awful lot of that is going to fit into the way that we develop the market in Chile.

A lot of that will be low income housing where we can go in and give prototypes to the government models, which is the way we got into Chile, to get the new housing construction themes accepted. So if you look today in the population of Brazil, it's about 189 million people. Over the next 20 years it is going to be 230 million people. And homes today in Brazil, there's 56 million and projected to be 93 million in 2030. So we think we're in at the right time in having structural components in Brazil. And it may actually give us an opportunity to export some of our other products down there as well. I really am hopeful that very little of the Brazilian product is exported. I think it can all be consumed within that country.

Okay. That's very helpful. Rick, good luck with the recovery on the knee.

Hey, man, I'm coming along.

Pete, I'm glad you asked that question. He's been prepping for a week on that.

Thanks, guys. Appreciate it.

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

Good morning, guys. Curt, can you talk about what you'd expect inflation to be up in the third quarter given what you've seen thus far in the month of July?

I think your question has to do with raw materials?

Correct.

I'm not going to tell you what the economy is going to do. We have seen natural gas slide back down so we do expect to have some improvement in natural gas pricing in the third quarter. We've seen oil down below $130 a barrel. The derivatives that go in to our [P-up] and our MDI resin haven't come off much, but I don't anticipate a big increase this the third quarter over the second quarter. I'm guessing if I sit here in October for the third quarter call, I probably tell you that raw materials and energy are going to be up slightly from Q2 but not significantly.

Okay. And then just shifting to a balance sheet question, the current portion of contingency reserves, $68 million, is that something that's going to be paid out in 2008 or can you clarify what that is?

48 million is the OSB settlement. And we paid 10 on that already and then we will pay the balance before October 1. The other piece of that is if you recall in the fourth quarter of last year we reserved about $9 million for an environmental settlement in [Lockhart] and we have not paid that yet. We're anticipating that will get finalized in next six months.

The OSB settlement is this year being paid out?

Yes. 10 of it has already been paid and then the additional whatever it is, 34 million would be paid before October 1.

Okay. And then on slide whatever 12 or whatever your net cash position. Is that contingency reserve in that number or not? It doesn't look like it, but I want to make sure.

It would be in the current liabilities in the working capital.

Okay, okay. Thank you.

Yes.

Your next question comes from the line of [Angie Salom] of Deutsche Bank. Angie, your line is now open.

I was wondering if you could tell us what was available under you credit facilities at the quarter end? How much [LSEs] were against it?

Credit facilities right now we have an unsecured line that is callable in Canada that is 100 million and we've got about 35 outstanding on that. So there's about 65 available there. And then in the US we have $150 million credit line. The only thing that's outstanding against that is letters of credit. As we talked about in last quarter's 10-Q, if we were to access that we would need the cash collateral.

Okay. The cash collateralization is still in place?

Correct.

I know it's difficult to discuss any sorts of refinancing, but is there any sort of details you can give us on options you're looking at? Refinancing the credit facilities or the term limits coming up in December?

I think what I said is we're exploring a variety of options and those would be some of the options we're exploring.

Okay. Is there a time frame when you would be able to tell us what the options were?

If you can tell me when the credit markets are going to be open and when the banks are going to be open with our checkbooks, I can probably give you a better time. We will be prepared this quarter to take advantage of windows of opportunity.

Okay. So as far as you being comfortable with the amount of cash that you have currently if, for example, the credit markets did not open by December when the term loan is due, you would just pay it off?

That would be our intention. Yes.

And just on what exactly is under the debt balance currently? Could you break that down for us? If there is something drawn on the credit facility. Looks like the recourse notes were paid down. Is that just an accounting adjustment?

The recourse notes are related to an installment sale that we did on several timber transactions. They are slightly higher receivable than there is payable on that. So the receivable and the payable self-liquid date. So there's no cash consideration for LP other than the small amount we'll get in the receivable above the payable.

Okay. Thank you very much.

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

Thanks. Can your just tell us what CapEx is going to be for '09?

The guidance there, Christopher, is that we try to hold that to 25 million.

Okay.

We don't really have any further commitments or large projects that we anticipate would flow into 2009. So it would be basically at those maintenance levels. The only change in that might be what we find when we go into the Brazilian mill that Rick talked about. It should be a pretty low level.

Right.

I think what I actually said on the last call is that it would be under 50 million and I was arm wrestling the guys that want the money and I'm winning.

Okay. In the OSB business, I saw that you ran at a EBITDA loss again. I was wondering if you might be able to break out for us in terms of the cost structure at the segment level how much of that is fixed and how much is variable?

You're asking about the OSB costs?

Right.

I think the comments I made talked about compared to Q2 of last year. I didn't talk about the increase of raw materials being about $3 a thousand. The effect of the 30% reduced production, which would be fixed costs, were up about $10 a thousand and then there was about $5 in the Canadian currency.

Right. I mean we can extrapolate to some extent based on those comments. I was wondering if you cared to make any --

We don't really publicly comment on our cost breakdown for obvious reasons.

Fair enough. Thanks.

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