Louisiana-Pacific Corp (LPX) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2013 Louisiana-Pacific Corporation earnings conference call. My name is Erica, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference.

(Operator Instructions)

As reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Sallie Bailey, Executive Vice President and Financial Officer. Please proceed.

Great. Thank you, Erica, and good morning. Thank you for joining our conference call to discuss LP's financial results for the first quarter of 2013. I am Sallie Bailey, LP's Chief Financial Officer, and with me today are Curt Stevens, LP's Chief Executive Officer, as well as Mike Kinney and Becky Barckley, our primary Investor Relations contacts.

I will begin the discussion with a review of the financial results for the first quarter of 2013. This will be followed by some comments on the performance of the individual segments and selected balance sheet items. After I finish my comments, Curt will discuss the general market environment in which LP has been operating, provide his perspective on the operating results for the first quarter of 2013, and give some thoughts on the outlook for 2013. As we have done in the past, we have opened up this call to the public and are doing a webcast. The webcast can be accessed at www.LPCorp.com. Additionally, to help with the discussion we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I will be referencing these slides in my comments this morning.

We have also filed an 8-K this morning with some supplemental information, and we have filed our 10-Q. I want to remind all the participants about the forward-looking comment on slide 2 of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information included on slide 3 of the presentation. The appendix attached to the presentation has some of the necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning. Rather than reading these two statements, I incorporate them into this earnings call by reference.

The first quarter of 2013 is LP's best quarter since 2006, and sales of $538 million, we generated net income of $65 million, and a net income margin of 12%. We also had healthy cash flow from operations. We generated $17 million of cash from operations in the first quarter, as compared to a use of $64 million in the first quarter of 2012. The last time we generated cash from operations in the first quarter was 2006. This is our third quarter of positive GAAP earnings per share and reflective of the recovery of the housing market, as well as our focus on maintaining cost discipline.

With that, let me go into the details. Please refer to slide 4 of the presentation for the discussion of the first quarter 2013 results, compared to the fourth quarter of 2012 and the first quarter of 2012. We reported net sales of $538 million for the first quarter of 2013, a 49% increase from the net sales reported for the first quarter of 2012. In the first quarter of 2013, we reported net income of $65 million or $0.45 per diluted share. And the first quarter of 2012, we reported a net loss of $11 million or $0.08 per diluted share on $362 million of net sales. The adjusted income from continuing operations for the quarter was $59 million or $0.41 per share, compared to an adjusted loss of $9 million or $0.06 per share in the first quarter of 2012. Adjusted EBITDA from continuing operations was $121 million in the quarter, compared to $21 million in the first quarter of 2012.

Moving to slide 5, and a review of our business unit results, starting with OSB. OSB reported operating income of $98 million in the quarter, compared to breakeven in the first quarter of 2012. For the quarter, we have reported adjusted EBITDA of $109 million, as compared to $11 million in the first quarter of 2012. For the quarter, we have a 12% increase in volume, and our average sales price was 82% higher. Sales volumes increased due to increased housing starts. We also increased the percentage of value added sales and industrial sales in the quarter. But I do want to note that in our typical seasonality, we sold about 60 million feet less than we produced in the first quarter, and we sold about 50 million feet more than we produced in the fourth quarter of 2012.

The increase in selling price favorably impacted operating results and adjusted EBITDA from continuing operations by approximately $124 million for the quarter, as compared to the corresponding period in 2012. Offsetting this increase was the higher cost associated with our purchases from our Peace Valley Joint Venture. The joint venture sells to us at market price. Adjusting for the Peace Valley purchases, our increase in sales price resulted in $113 million increase in our adjusted EBITDA and operating income. Also offsetting the favorable impact of improved volume and pricing were costs associated with bringing Clarke County back online and our higher raw materials cost.

Moving on to slide 6 which reports the results of our siding business. This segment includes our SmartSide and CanExel siding products and commodity OSB produced in our Hayward mill. The siding segment reported net sales of $134 million in the first quarter of 2013, an increase of 18% from $113 million reported in the first quarter of 2012. The siding segment reported operating income of $21 million, compared to $17 million in the first quarter of 2012 and adjusted EBITDA of $25 million, an increase of $4 million compared to the first quarter of 2012.

For the quarter, SmartSide average sales prices were up 1% and volumes increased 21%. Volumes increased in our SmartSide siding line due to increased housing starts, and continued penetration in several key focus markets including retail, repair and remodel markets and sheds. Additionally, increased volume was driven by customers buying ahead of an announced price increase which went into effect on April 1. CanExel prices showed a decrease of 1% and volume was down 14%. Sales volumes declined in our CanExel siding lines due to the severe winter weather experience in Quebec and Eastern Canada during the quarter.

Please turn to slide 7 in the presentation, which shows the results of our Engineered Wood Products segment. This segment includes I-Joist, Laminated Strand Lumber, Laminated Veneer Lumber and other related products. This segment also includes the sale of I-Joist and LVL products produced by the Abitibi Joint Venture or under a sales arrangement with Murphy Plywood. The Engineered Wood Products segment operating loss increased slightly the first quarter of 2013, from the first quarter of 2012. For the first quarter of 2013, EWP adjusted EBITDA from continuing operations was similar to the first quarter of 2012 at about breakeven.

Volumes of I-Joist were up 35%, while volumes of LVL and LSL were up 13% compared to the same quarter of last year primarily due to increases in domestic demand. I-Joist, LVL and LSL sales are closely correlated with US housing starts. Pricing was up 5% in I-Joist and essentially flat in LVL and LSL, due to changes in mix in both product lines with individual product pricing remaining relatively flat. The 5% price increase for I-Joist was not nearly enough to offset the dramatic increase in raw materials, OSB and lumber.

Moving now on to slide 8 of the presentation. For the quarter, South American operating income increased to $6 million, compared to operating income of $3 million in the first quarter of 2012. For the first quarter, South America's adjusted EBITDA from continuing operations was $9 million, as compared to $6 million reported for the first quarter of 2012. Volumes in Chile and Brazil were essentially flat as compared to the same quarter last year. Pricing was up 7% in Chile, and up 3% in Brazil. In local currency, pricing in Chile increased 3%, and it increased 16% in Brazil. These changes in pricing are related to product mix, as well as price increases in several product lines.

While there is no slide for other building products group's segment, let me make a few comments. These results are from our molding business, US GreenFiber joint venture, and various other nonoperating facilities. Overall, we are showing a loss of $1 million in the first quarter of 2013, which is comparable to the first quarter of 2012. For the quarter, sales were $9 million which is slightly below the first quarter of 2012.

Total selling, general and administrative expenses were $35 million in the first quarter of 2013, as compared to $31 million in the same quarter of 2012. The increase in SG&A expense is primarily due to the expense associated with our systems upgrade project, as well as other -- as well as higher marketing expenses. General corporate and other expenses net were $23 million for the first quarter of 2013, compared to $20 million in the first quarter of 2012. This increase is primarily due to our systems upgrade project. We had a $0.7 million foreign exchange loss in the quarter, compared to $0.1 million loss in the same quarter last year. Net interest expense of $7 million in the quarter, compared to $8 million in the first quarter of 2012, and this reduction is primarily related to the refinancing of our public debt last May.

Moving on to slide 9 of the presentation. At the end of the first quarter of 2013, we had cash, cash equivalents, investments and restricted cash of $574 million, working capital of $889 million, net cash of $175 million. Capital expenditures for the three months were $13 million, and received from our joint ventures were $7 million. As we discussed during last quarter's conference call, we are planning to spend approximately $70 million to $75 million for capital expenditures in 2013. The acquisition of the remaining 50% interest in our Peace Valley Joint Venture will also use approximately $75 million in cash. With that, I would like to turn the call over to Curt for his comments.

Thanks for that review, Sallie. I would like to make a few comments on our performance this last quarter, give you an update on the actions that we are taking to respond to the improved housing market, and provide some comments on what I see for the rest of the year.

Before I do that, let me just talk about our safety performance in the first quarter. We had very good performance with a rolling total incident rate of 0.45. The APA recently reported their safety awards for 2012, and LP had a virtual sweep including the safest Company in our industry. However on a sadder note, we were tragically reminded late last month that we can never let up on our safety focus. In our Ponta Grossa, Brazil mill we were at nearly 1 million safe hours, almost four years, when one of our employees was fatally injured when he failed to lock out the machine he was working on. A very sad occurrence for all of us at LP and a reminder, that when it comes to safety, we must remain vigilant.

As Sallie reflected in her comments we had a very good first quarter, as housing starts continue to improve leading to higher demand for all of our products which translated into solid financial results. The current estimates for housing starts for 2013 are 1 million. In fact, we achieved this rate in March of this year. And then for next year at 1.3 million. This is still quite a bit short of the 50 year average of 1.5 million starts, but certainly an improvement over the last six years. As Sallie just reviewed overall sales increased by almost 50%. We earned $0.45 per diluted share and had over $120 million in adjusted EBITDA. Higher OSB prices, record shipments of our SmartSide strand products, and another strong quarter in South America contributed to this improved performance.

Let me update you on the status of our efforts to support this improving housing market with additional volumes. In OSB as we mentioned on our last call, we should complete the purchase of Canfor's 50% interest in Peace Valley this quarter, as we continue to work through the regulatory process to split the timber licenses. We are looking forward to finalizing this transfer for lots of reasons. It is a great operation. We will increase our return on 50% of the sales from a 4% margin to market margins. And finally, it sure will make talking about OSB cost of sales a lot easier for Sallie.

We did move to a 24/7 shifting patterns at Peace Valley in Q1. We recently added a fourth shift in our Maniwaki, Quebec mill. And in the next few months, we will be executing on a capital project that will allow our Swan Valley, Manitoba mill to operate at full production. As planned, we did begin operating the Clarke County mill last month. And as that, as expected, most of the current effort is targeted at addressing the many, many issues that arise when a mill that hasn't run for five years is put back online. We will be in a position assuming demand continues to increase to start up our Dawson Creek, British Columbia mill with limited production of radiant barrier and flooring for the West Coast market this summer.

In siding, the project to rebuild the press at Two Harbors, while at the same time increasing capacity was completed in Q1 on time and on budget. This did take the mill off-line for about 30 days during the quarter. The good news is that we are already seeing the benefits from better tolerance control and higher volumes. In Hayward, we continue to fill up the production on the second line with siding products, as demand increases and we subsequently reduce our OSB shipments. In South America, efforts continue in our search for a site to accommodate a third mill in Chile. In parallel, we are also looking at options to incrementally add capacity at our existing mills to satisfy market demand.

In Engineered Wood, we have increased production in all of our plants, and are evaluating when to bring additional equipment and/or shifts back online. Other actions that we are taking to address potential bottlenecks with higher activity include, we have increased the number of owner-operated trucks that we manage through our new Waverly Transportation division by about 20%. We continue to work with the Canadian rail companies to increase the amount of equipment and service to satisfy higher demand.

In Q1, we struggled getting our products to market due to the inability of the Canadian railroads to meet their commitments. This will be an ongoing issue for our industry and for other rail shippers. In a cooperative effort with our sales force, customers and our credit department, we are working to make sure that our channel partners have the ability to increase their inventory level to support enhanced building activities.

Our outlook -- my outlook for the remainder of 2013 is for steady growth in single-family housing starts, and somewhat erratic growth in the multi-family segment. With March total starts of annualized rate of 1 million, we are increasingly confident that building activity will be strong through the rest of this year and into next year, as household formations increase. To meet this demand, the industry needs to make progress on credit availability, development of building lots and address the shortage of skilled and unskilled labor.

Housing is probably the bright spot in the economy, as the GDP forecast stands at less than 2% for 2013. Reasons for slower economic growth remain the same, and include the turmoil in Washington, DC around the budget, the deficit and tax policy, concern tied to cost and implementation issues of the Affordable Health Care Act, political tensions around the world -- North Korea, Syria, Iran and Afghanistan and more. Lower job growth and consumer confidence on a roller coaster. In summary, I now believe that 1 million housing starts in 2013 is possible, and LP is ready to support this level of activity. But because of the headwinds I just discussed, we do have a plan B that can be immediately implemented if activity slows. As I have often said, LP has to remain agile in a fast-changing world. With that, let me turn it over to Sallie for questions.

Thank you, Curt. Erika, we are ready for questions, if we can go to the queue.

(Operator Instructions)

And our first question comes from the line of Mark Connelly with CLSA. Please proceed.

Thank you, Curt. Two things. Obviously lots of bullishness about housing, but we are also hearing that housing trends are changing. Can you give us a sense of what you are seeing in terms of changes in footprint? And we have also heard lately that there has actually been a small shift away from engineered components. And I am wondering if that is a real shift or just mix? And then one bigger question, strategically you have tried several times over the years to find a complementary business. Siding is getting better, but would it stpill be your preference to find a second big business if you can find one?

Well that is a lot of questions.

Right.

Let me talk about on the housing trends. What we are seeing is, as I mentioned, erratic growth in multifamilys. It goes way up, and it comes way down, it goes way up, and comes way down. Multifamily is important to us, but it not nearly as important as single-family. So there is a lot less of our products in multifamily. On the single-family side, we did see a decline in the square footage from 2010 to 2011. But then that recovered between '11 and '12 back up to where was. So we really haven't seen a smaller footprint. But clearly the mix between single-family and multifamily affects the product.

You asked a question on engineered wood. We are not seeing a decline in the percentage of raised wood floors. Now there are areas of the country, Texas in particular, that does have a significant amount on slab, and there you wouldn't use engineered wood. But on raised -- (Multiple Speakers).

Probably just mix.

I think it's really mix, and where it happens. For the raised wood floors, I think engineered wood is 52% of the market, and it's been about that for the last several years. So there hasn't been a big change there. As far as we would like to diversify into another product as profitable as OSB? We would, but I don't know what it is. (Laughter). The diversification that we have achieved is taking our strand-based technology, and moving it into alternative products like the siding and our laminated strand lumber. And then, diversifying geographically with our investments in South America.

So for now, that will remain the focus, is trying to keep moving with the strands? And then continue to expand geographically, rather than using your balance sheet strength to look for something new?

I think that is the focus right now. We still have a lot of facilities that aren't running near capacity, and we want to take advantage of that as the market comes back.

Sweet. Okay, super, thank you.

Thank you.

And your next question comes from Chip Dillon with Vertical Partners. Please proceed.

Morning. First question is, could you just talk a little bit about your cost experience in the quarter? I know you normally take more downtime in the fourth quarter, which I assume would have a greater cost impact. And yet if I got those numbers right, it looks like your shipments were about 8% less in the first quarter than the fourth, even though you produced more, looking at that swing you gave us. And yet the cash cost of goods sold, look like they were pretty flat from fourth to first. So I was just wondering -- so the unit cost obviously went up. So maybe if you could just help us with that a little bit?

Sure, Chip. Let's start with reminding everybody that at LP, we operate on a FOB destination instead of FOB shipping. And so that has a lot to do with the seasonality that we see in our production versus our sales numbers. And if we look just specifically at your question around the cost of production, our cost of production really didn't increase very much from the fourth quarter to the first quarter. It is probably about 5% higher than the first quarter of 2012, and that would have been related to some of the input costs. But on the cost of sales side, what you are really saying there, is the impact of the Peace Valley Joint Venture, and that we only get 50% of the EBITDA right now coming out of that. And that did in fact -- we did see quarter over quarter, gosh, probably almost a 20% increase in our cost of sales. And most of that is attributed to Peace Valley. A bit of that is going to be attributed to the higher -- to the costs associated with starting up Clarke County.

And -- okay, got you. And can you update us on where -- sort of how that cost -- what-- can you give us some more specifics on the cost of starting up Clarke County, and sort of where you today? I know you have told us that it would probably take several quarters to get that up to full speed, but how does it look now that you are in the process? How do you sort of see that ramping up? Do -- will we be at 50%, for example of capacity by summer, or can you give us some specifics there?

Well, what we said when we started -- I know when we are talking about starting that mill up, it would be $8 million to $10 million in capital and personnel costs. And that is still a pretty good estimate. We started ramping that up -- or we started making some hiring decisions in November of last year. So we had virtually full staffing on board at the end of the first quarter. So we had a lot of those expenses in the first quarter, and the numbers are somewhere in the $4 million to $5 million range, some -- about half of that probably happened in the first quarter. As I said in my comments, we did start up with production in April, and right now, we are troubleshooting. We are producing some product. I would expect that we are going to be -- I think the numbers that we have given, is that we expect to be at kind of 50% to 60% of capacity sometimes towards the end of the summer.

Okay. And then the last question is, you mentioned the seasonality between production and sales in the fourth and first quarter. Where do see that in the second quarter? In other words, where do see your sales relative to where production is?

Well, here is what happens. Now let me just be very clear. So the fourth quarter, we take the downtime and the shipments that we make in the fourth quarter generally happen in the first part of December. They reached the customer. And so that is a -- considered a sale. In the first quarter, anything we shipped by rail in the last two weeks of the quarter is still our inventory. Even though it is sold, it hasn't reached the customer yet. So we don't recognize it. But, so what you are really looking at is the difference of in-transit between the end of each quarter. So we would not anticipate much difference in the in-transit between Q2 and Q3 at the end of the month -- or at the end of the quarter.

Right. Or three or four.

Okay. Thank you.

So it is really the change in the in-transit that --

It is part of the book end quarters.

And it was just more extreme than normal? And -- when we look at the fourth and the first?

Well, I really think you do -- you have to consider is, the demand has been ramping up so much. So it is -- so I think you are noticing the swings probably more than you have in the last six years.

Okay. And then lastly -- (Multiple Speakers). No, go ahead.

One last thing is, what exacerbated that, was my comments on the Canadian railroad. We had a lot of material that was sold, that we couldn't get cars to ship it from Canada.

Got you. And then lastly, did you -- and you might have mentioned this, Curt. What is sort of a good guess as to when the Peace Valley deal closes?

We are -- we hope to close it this quarter.

Okay. Got you, good luck on that.

Thank you. Thanks, Chip.

Your next question comes from the line of Gail Glazerman with UBS. Please proceed.

Hi, good morning.

Morning.

Curt, can you give a little more color on some of the capacity moves that you were discussing? The change at Swan Valley, exactly what are you doing and what will that add? And I guess, once you make all those changes, what would be your operating rate -- assuming you are kind of running that? Would you have anything kind of left in your pocket?

Well, what we are doing -- what we did in the first quarter i,s we ran 24/7 on our US operations. In Canada, we are limited in Swan Valley, we have -- probably more detail than you want. But we have got to increase the stack [height], so that we can meet all of the environmental requirements to run that 24/7. So that is what we are doing there, and we have to wait for the weather to accommodate that construction project. So we ran it about -- in Q1, the running mills ran at about 83% of capacity. And then the only one that is not -- that we haven't talked much about is Chambord. And what we did say, on the Chambord, when we get to 1.1 million kind of housing starts, we are going to have to think about that one. So that is the only one that is not currently running, and that is about a 450 million square foot mill.

Okay, that is helpful. And can you maybe give a little bit more color? I guess you referenced some mix shift in OSB in the quarter. Exactly kind of what that is, and was that a positive or negative impact given how strong commodity prices were in the quarter?

(Multiple Speakers). Well, yes, and we did -- we saw, Gail, we saw more value added in the quarter, because we are continuing to increase our value added. And so on a relative basis, if you just do the percentages, if you look at these percentage change in price, and you compare that to a commodity price, the percentage changes will be less on the value added. So, but the gross margin -- that doesn't mean the gross margin is less. So on a cash basis, it is good for the Company, but on the realizations to a commodity, you are not going to see that same level of price realization.

Okay. And just I guess, just sticking with OSB and pricing, can you give a little bit of perspective on what you think has sparked the recent sell-off, and do think supply has finally caught up with demand? Or would you expect that to kind of bounce back in the near-term?

Well, I think -- and I hate to do this, but I am going to blame it on the weather. We had very severe winter in Canada, and then we had a late winter in the northern tier of the US. In fact last week, we had what, 19 inches of snow in Minnesota. So there was not much building going on in Minnesota. I think part of it was a backup due to those weather considerations. And the other piece of that -- and I mentioned as we are working closer with our customers.

Customers are somewhat constrained, because most of them are working on asset-based lending facilities on how much they can bring in. And so they really need to get the flow-through, because they don't have the ability to carry extra inventory. So I think it was related to that. We did have -- in Q1 we had the highest Q1 OSB prices, at least since I have been in LP for 15 years. So it was a high number. And I think that some of the buyers were looking for an opportunity to pull back on their purchases, so they could affect the price, and that is what we have seen in the last four or five weeks. I would expect that as the weather improves, that all of our discussions with the builders, is there a lot of pent-up demand for that product, and it is going to flow pretty quickly. And then, we are going to be in a position where there is going to be tightness between available supply and demand.

Okay, thank you.

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

Thank you. If I remember rightly, you were also going to add a shift at Peace Valley, did that happen?

It did. I think I said it -- yes.

Okay, great. So when we take into account all the actions that you have taken and everything you are going to take ex the possibility at Chambord, how much production of OSB do you think is - let's say next year, again if we keep Chambord to the side, how much do think you will be able to produce?

Well, I -- next year if we have the ability to run 24/7, we can do about 1.3 billion,1.4 billion per quarter. So that would give you 4.2 billion roughly without Chambord.

I am sorry, so 5.2 billion without Chambord --?

4.2 billion without Chambord. Or I am sorry, I take that back, yes, it would be about 5 billion with Peace Valley. I didn't include Peace Valley. I am sorry.

Okay, great. And just also, you had mentioned that Clarke County -- there had been some costs at Clarke County in the first quarter. Are there going to be similar types of costs in the second quarter related to Clarke County? Or does that start going away, and are there -- what other type of start-up costs as you are ramping up your system might we be seeing in the short-term?

Well, there will be cost associated with -- or, I mean, Clarke County's production costs will be higher in the second quarter than it will be when it is running. So but again, you will absorb some of that $4 million that I talked about in the cost of production.

Okay. And then lastly, just make sure I understand. So had you -- had the OSB product that had gotten into this onto the rails, but hadn't been delivered to the customer. Had the customer actually taken ownership of them prior to the end of the quarter, can we just take the average profitability of the OSB system, which was order of magnitude of $130 per 1,000 board feet, and times that by the $60 million. And that was kind of -- was it accumulated in inventory that is going to show up in the second quarter?

You can do part of that. Now the difficulty that we always have is, when we disadvantage the customer by not delivering, they get the lower of the price of the order, when they actually get it. So in a declining market, we will get a little bit of a hiccup there. So this rail situation has been problematic for us. But the customer in of themselves, do not own inventory until it delivers to their site.

Okay, got it. Thanks very much.

Yes.

Your next question comes from the line fo Graham Meagher with TD Securities. Please proceed.

Hi, thanks for taking my questions. I guess, just thinking about the operating costs, if you could provide your -- a little bit of an outlook on fiber and resin, and specifically on labor as you are ramping up production at some of these mills?

Sure. In terms of fiber, we are really seeing -- I would say plus or minus, we are seeing costs that are pretty similar with -- quarter -- with where they were last in the -- towards the end of last year. So we are not seeing huge increases in our wood quarter over quarter. In terms of resins, as which you will recall we talked about higher costs. And in particular, in our siding business we are seeing the impact of higher cost associated with our resins and wax. And quarter over quarter, and while we don't expect that those will continue to increase consecutively, we have seen higher increases when you compare them to the prior year quarter. And labor, we haven't seen huge increases in our labor costs at this point.

Okay, great. That's all I had, thank you.

Your next question comes from the line of Steve Chercover with D.A. D. Please proceed.

Thanks, Good morning, everyone.

Good morning.

First of all, what level of capacity utilization do you need to get engineered wood profitable, and where do think you are now?

Well, it was an interesting quarter for engineered wood, because we did see increased demand with housing coming back. And unfortunately, the cost of sales in I-Joist really overshadowed an improvement in profitability of both LVL and LSL. If you think about an I-Joist, when we had OSB pricing going up by 102%, and lumber going up significantly, we just couldn't catch up with price increases quickly enough to offset the raw materials cost. So other than I-Joist, I actually was pretty pleased with Q1 performance for engineered wood, but it is coming back. I do think -- (Multiple Speakers).

What do you think the ingredients in the LVL sandwich are doing now, and will that help in the second quarter?

Well, I think that there is increasing demand for both LVL and LSL. And as I said in my comments, we are adding production in both of those. Really the struggle for us, has been in the I-Joist.

Yes, sorry, I misspoke, Curt.

Yes.

But yes, but it looks like OSB and lumber prices are coming down so.

And that will benefit EWP, but frankly, it hurts me more in OSB than EWP. (Laughter).

(Multiple Speakers). Yes, I'm sure.

Brian doesn't like that, who runs our EWP business but.

Well, I guess it just depends which pocket is bigger. (Laughter). And then with respect to plan B, you didn't really articulate it, but does that mean you might slow up some of the restarts?

Yes. That -- it is that, plus we also have -- we have developed a cadre of customers that are export, but the export isn't willing to pay a North American price yet. But what it does allow us to do, is move volume off profitably to make the supply/demand balance more favorable.

And final question. Good to see that you continue to ramp up in South America. So the third plant in Chile, what is the timeframe for that -- and if I just remember correctly, is it Saint Michel? would probably be the next machine to go down there?

No, it probably won't be Saint Michel. We actually have equipment available in a variety of configurations. And so I think that is the discussion, that we are having is what size expansion do we do, and at what timeframe do we do that? So I would expect that we will have a recommendation from our South American leadership sometime this summer, which would mean another 18 months to put the equipment in place.

But the two you brought down, one was from Colorado, and the other one was originally from Houlton, Maine was it not?

No, it was from Chilco, Idaho, was the first one. And the second one, you are right, it was from Colorado. But we also have Silsbee, we have Athens that are permanently curtailed and the Saint Michel which you mentioned. Saint Michel mill is about a 460 million square foot mill, which is probably too big of a bite to go down there, and we have some other thoughts on redeploying that. Because we also need more siding capacity, and so we need to think about what equipment we want to use for that.

Okay. Well, just -- if -- Canada seems to be the CanExel market, but do you think that the LP SmartSide siding would be good for the Canadian market? Or you would ship it from Saint Michel?

Well, I am not sure we would start it up at Saint Michel, because we are still working with a buyer on some of the other facilities there. And I think what we would probably do is redeploy that equipment somewhere else into a wood basket that is logistically appropriate. The problem was Saint Michel is there is no rail siding there, and that makes it problematic for shipping.

Well, it sounds like you have got options. Thank you very much.

Lots of options.

Your last question comes from the line of Paul Quinn with RBC Capital Markets. Please proceed.

Yes, thanks very much. Morning, Sally and Curt. Just a question on -- I guess realizations is where we miss. And it sounds like it is really from this effect on FOB destination versus shipping. Any idea of how you could quantify that, and whether that is regular practice with the rest of the industry?

Well first, I don't think the realization is related to that. That is really just the sales volume versus production volumes is more what that is. On the realization side, there is a couple of things to remember. First of all, we sell a whole series of products into all different markets. As Sally talked about, thinking that the first quarter, our value-added products were about 45% of our sales, versus the commodity at 55%. If we just look at a commodity index and our commodity pricing, we are pretty close from a realization, in that 90% to 95% range.

When you get into the value added in a rising market in particular, there is a couple things. One, the value-added pricing doesn't respond as quickly. And the second part of that is, generally you sell this at a level, and then there is an adder to it. But you don't get the market accelerator on the adder. The adder remains the same. So for instance, we sell TechShield at random length plus $50, the plus $50 doesn't change. So you don't get an increase on that.

The other piece of our realization is, I just talked about with Steve on plan B. When we do see a supply/demand imbalance, we do use our export market as a relief valve. And so, when we sell in the export market, it is profitable business, but it is not at the same pricing that we see in the domestic market. But the advantage to us, is by tightening up that supply/demand, it gets reflected in random lengths pricing. And so we are better off from that perspective. So those are kind of the elements of it. So it would be, whatever we get -- the increase we don't get on the adder, the slower response on some of the value-added products.

As an example, 20 -- on our flooring products, the flooring products lagged the commodity index in random lengths pretty significantly in the first quarter. And we are the leading seller of flooring products. So those are kind of the element of it. I can assure you that we spent a lot of time looking at realization. And on the strictly commodity side, we do very well. We are right on top of the index. It is these other moving parts, and what we decide to do from an export standpoint, and how the value-added products respond.

Okay, that is helpful. And just on order files -- maybe you can comment on just your recent activity? It seems like from a number of trade publications, that sales volumes have picked up in the last week or so. What you are seeing there, and what you are seeing on your order files going forward?

Well, what Random Lengths said is, that order files were sporadic, depending on who they talk to. Some people have wood available next week, and some didn't have anything available until the end of June. So it depends on the strategy for the various producers in various regions. I think it is fair to say that most producers extended order files last week, and we would expect to see that happen again. Particularly with weather coming back and there is going to be more flow-through the channel and they will need to replenish. What Random Lengths said is, that there were a lot of buyers out there looking to fill back up their inventories.

Okay. And just lastly, investors seem nervous with the analysis capacity additions coming into the market. Based off your experience with Clarke County start-up, and all the other ones you noticed out there, versus what you expect on consensus starts, and housing activity, and hopefully better weather, is that a concern to you?

It isn't. And I think, Paul, I have seen some of the work you have done. If we think about 1.1 [billion] square feet per 100,000 housing starts. And we are going to go from 0.75 million last year to 1.3 million, that is 6 billion square feet of OSB demand. And what we have announced as start off, is about 1.7 [billion], and that is going to start up over time. So I think we are bringing it back in a very rational way to meet the demand.

Great. Best of luck, thanks.

Okay.

Well, thank you very much. Thanks, everybody. Erika, if you could please provide the replay number, we would like to thank everybody for participating on our call, and Mike and Becky are here to follow-up with any other questions you may have. Thank you all, and have a very good day.

The replay number for this call will be 866-233-1854 or 617-614-4949, with a replay access code of 23503432. Again, 23503432. Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect, and have a great day.