Louisiana-Pacific Corp (LPX) 2013 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q2 2013 Louisiana-Pacific Corporation earnings conference call. My name is Allison and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions )

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

Thank you very much, Allison, and good morning. Thank you for joining our conference call to discuss LP's financial results for the second quarter of 2013 and year-to-date results. 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 second quarter of 2013 and the first six months 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 remarks, Curt will discuss the general market environment in which LP has been operating, provide his perspective on our operating results for the second quarter of 2013 and give some thoughts on the outlook for the second half of 2013.

As we have done in the past, we've opened up this call to the public and are doing a webcast. The webcast can be accessed at www.LPCorp.com. Additionally, to help with the discussion we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I will be referencing these slides in my comments this morning. We have also filed an 8-K this morning with some supplemental information as well as our form 10-Q. I want to remind all the participants about the forward-looking statements comments on slide two 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 with this reference.

Before I get started on the detailed discussion of LP's financial results for the second quarter, I'd like to give you some color on our end market. The second quarter began with seasonally adjusted housing starts through March at just above 1 million and north-central seven-sixteenths OSB average selling price at $420. Second quarter ended with seasonally adjusted housing starts at 836,000 and north-central seventh-sixteenths OSB average selling price at $265. While we are adding shifts and capacities at start of the quarter to meet customers' demand for our product, we ended the quarter by taking out shifts also to meet customer demand consistent with our comments about remaining agile in meeting our customer needs. We believe that our customers built inventory in the first quarter and the initial weeks of the second quarter to meet forecasted demand.

In the second half of the second quarter these same customers were working to take down their inventory levels. Other factors impacting demand for our product were weather-related as well as supply chain issues such as labor shortages, [blotch] shortages, lower levels of government services for inspections and available financing. With that, let me go into the detail. Moving to slide 4, the presentation for discussion of the second quarter 2013 and first-half consolidated results. We recorded net sales of $573 million for the second quarter of 2013, a 34% increase from the net sales reported for the second quarter of 2012. In the second quarter of 2013 we recorded net income of $94 million, or $0.65 per diluted share. These results included a gain of $36 million on the acquisition of the remaining 50% ownership of the Peace Valley mill.

In the second quarter of 2012 we reported a net loss of $37 million, or $0.27 per diluted share, and $428 million of net sales. We recorded a $52 million pre-tax charge associated with the early that debt extinguishment. This represents the May cull provision for the debt which was tendered, plus associated deferred costs. The adjusted income from continuing operations for the quarter was $59 million, or $0.41 per share, based on normalized tax rate of 35%, compared to income of $3 million, or $0.02 per share, in the second quarter of 2013.(sic-see presentation slides "2012") Adjusted EBITDA from continuing operations was $122 million in the quarter compared to EBITDA of $37 million in the second quarter of 2012. On a year-to-date basis, we recorded $1.1 million(sic-see press release "$1.1 billion") of net sales, $159 million of net income and earnings per share of $1.10 as compared to net sales of $789 million, a net loss of $49 million and a loss per share of $0.35 in the first half of 2012.

On a non-GAAP basis we recorded adjusted income from continuing operations of $118 million, earnings per share of $0.82 and adjusted EBITDA of $243 million for the first six months of 2013, a significant improvement over the first six months of 2012 when we recorded $6 million of adjusted long-term continuing operations and a loss per share of $0.04 and adjusted EBITDA of $58 million.

I will now move to slide 5 and a review of our segment results beginning with OSB. OSB recorded operating profit of $95 million on $306 million of sales in the quarter, compared to operating profit of $17 million on $195 million of sales in the second quarter 2012. For the quarter we are reporting adjusted EBITDA of $108 million compared to adjusted EBITDA of $28 million in the second quarter 2012. We had a 2% increase in volume and our average sales price was 59% higher relative to the second quarter of 2012. The improvement in pricing was the most significant contributor to the improved OSB performance, almost $110 million. Our pricing rate of improvement will differ from random length north-central seven-sixteenths changes due to our geographic -- different geographical footprint, broader product offerings and value-added products.

Random lengths north central seven-sixteenths pricing was up 48% over the second quarter of 2012. As we have indicated in the past, our pricing will say above random length in a market with falling prices and our pricing tends to lag in markets with improving prices. Offsetting the impact of higher pricing, is the increase in raw materials as well as start up costs on both Clarke County and Dawson Creek. Curt will update you on those operations during his comments. We closed the Peace Valley transaction on May 31 and the joint venture accounting, 100% of the sales of Peace Valley product have been included in LP sales and the cost of sales have been recorded at market rather than at the cost of production. Now that we own 100% of the mill, all the sales will continue to be included in our reported results. But the cost of sales will reflect the cost of production for the mill. This will give you greater visibility on the margins in our OSB business.

In the second quarter LP's 50% interest in the earnings from the joint venture is recorded on our income statement in equity and income or loss of unconsolidated affiliates for the month of April and May. This amount is also delineated in our reconciliation of EBITDA from continuing operations filed as part of our 8-K this morning. For the second quarter of 2013, Peace Valley contributed $7.8 million to OSB's adjusted EBITDA as compared to $3 million in the second quarter of 2012. For the month of June, the Peace Valley results are consolidated. However, given the impact of purchase accounting on a transaction, LP will not recognize the benefit of a lower cost production until the third quarter. You will also note some changes on our balance sheet as a result of the acquisition of the remaining 50% interest in the Peace Valley mill.

Plant property and equipment increased $146 million, timber licenses increased by $34 million we had a $10 million of goodwill. The investment in and affiliates to -- and the advances to affiliates balance decreased by $74 million due to the acquisition. For the first six months, OSB had an operating income of $194 million compared to $17 million in 2012. Adjusted EBITDA for the comparable period was $216 million compared to $38 million in the comparable period of 2012. The impact of pricing between the years was $233 million and accounted for the majority of the change. The remaining difference is due to higher raw material costs and the costs associated with starting up our Clarke County and Dawson mills.

Slide 6 reports the results of the signing business. This segment includes our SmartSide and CanExel siding product and commodity OSB produced in our Hayward mill. The siding segment reported sales of $153 million in the second quarter of 2013, an increase of 11% from $137 million reported in the second quarter of 2012. The siding segment reported operating income of $27 million, compared to $19 million in the second quarter of 2012 and adjusted EBITDA of $32 million, an increase of $8 million compared to the second quarter of 2012. OSB contributed $5 million to the results. For the quarter, SmartSide average sales prices were up 2% and volumes increased 8%. Volume increased in our SmartSide siding line due to continued penetration in several key focus markets including retail, repair and remodel markets and sheds.

Improvements due to higher volumes and prices were offset by higher raw material costs, resins and overlays as well as additional sales and marketing expenses. CanExel prices were down 2% in US dollars, but up 2% in Canadian dollars mostly related to mix and volumes were up 4% in the quarter. On a year-to-date basis, the siding segment reported $287 million in sales, $48 million in profit, and $56 million in adjusted EBITDA. For the first six months of 2012, the siding segment recorded sales of $250 million, profit of $36 million, and adjusted EBITDA of $45 million. The improvement from the first six months of 2012 is driven by increased volume of 13% in SmartSide and higher sales price, and about $11 million related to improved OSB pricing offset by higher raw material costs, especially resins and overlays.

Please turn to slide 7 of the presentation which shows the results from our engineered wood products segment. This segment includes I-Joist, Laminated Strand Lumber, Laminated Veneer Lumber plus 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 recorded sales of $61 million in the second quarter of 2013, up from $52 million in the second quarter 2012. The segment's operating loss in the second quarter of 2013 was $5 million as compared to a loss of $3 million in the second quarter 2012. For the second quarter 2013 adjusted EBITDA from continuing operations decreased $1 million as compared to the second quarter of 2012.

Volumes of I-Joist were up 2% while volumes of LVL and LSL were up 15% compared to the same quarter last year, primarily due to higher LSL sales. Pricing was up 13% in I-Joist and 5% in LVL and LSL reflecting price increases in all product lines and introduce to offset rising raw material costs. Higher cost for lumber, OSB and veneer negatively impacted the results of the EWP business in the second quarter of 2013 and the first six months of 2013 when compared to the same period in 2012. On a year-to-date basis, Engineered Wood Products reported net sales of $124 million, a loss of $9 million and negative EBITDA of $2 million. In the first six months of 2012 Engineered Wood Products reported net sales of $100 million, a loss of $6 million and negative EBITDA of $1 million. Sales volumes in I-Joist were up 16% and volumes for LSL and LVL were up 14%.

Moving to slide 8 of the presentation. For the quarter our South American segment recorded sales of $44 million, approximately the same level of sales as the second quarter of 2012. Operating income increased 50% from $4 million in the second quarter of 2012 to $6 million in the second quarter of 2013. South America's adjusted EBITDA from continuing operations was $9 million for the second quarter of 2013 compared to $6 million recorded in the second quarter of 2012. Volumes in Chile were down 5%, while volumes in Brazil were down 10% compared to the same quarter of last year. The sales volume decrease in Chile was primarily due to selling less imported products. In Brazil the lower volume was due to lower export sales as compared to the second quarter of 2012 and taking some downtime in Brazil for maintenance. Pricing was up 6% in Chile and up 9% in Brazil. In local currency Chile recorded a 5% increase and Brazil recorded a 10% improvement in pricing. For the first six months of 2013, South America recorded net sales of $89 million, a profit of $13 million and adjusted EBITDA of $18 million. For the first six months of 2012 South America recorded net sales of $85 million, profit of $7 million and adjusted EBITDA of $12 million.

Our molding business, US GreenFiber joint venture and various other non-operating facilities are shown in the other building products segment. Overall we are showing a loss of $2 million in the second quarter of 2013 which is comparable to the second quarter of 2012. Operating results for the first six months of 2013 were flat with the 2012 results for the same period. Total SG&A costs were $36 million in the second quarter of 2013 compared to $31 million in the same quarter in 2012. For the first six months of 2013, SG&A costs were $71 million compared to $62 million for the first six months of 2012. The increase in SG&A cost is primarily due to costs associated with our systems upgrade project, higher sales and marketing expenses in our siding business and higher incentive compensation accruals.

We recorded a $3.6 million foreign exchange loss in the quarter compared to a $2.6 million loss in the same quarter last year. For the six-month period we recorded a $4.3 million loss in 2013 compared to a $2.7 million loss in 2012. Interest expense was $10 million in the quarter, compared to $13 million in the second quarter of 2012. This reduction was primarily related to the lower interest expense we recorded due to the refinancing as well as lower amortization referred to our lower deferred debt expense. For the first six months of 2013, interest expense was $20 million as compared to $26 million in the first six months of 2012.

Moving to slide 9 of the presentation. As of June 30, 2013, we had cash, cash equivalents investments and restricted cash of $645 million, working capital of $873 million, net cash of $251 million and in addition to the $631 million of cash on our balance sheet, we had $100 million of availability on our asset base loan facility. Capital expenditures for the six months were $26 million. This does not include the $67 million net of cash acquired we spent on the Peace Valley acquisition. We generated $147 million of operating cash in the quarter and $164 million of operating cash flow in the first six months of 2013. And as we discussed on our last conference call, we are planning to spend approximately $85 million for capital expenditures in 2013. Now I will turn the call over to Curt for his comments.

Thank you, Sallie. That was a very detailed review. Lots of numbers there. I will make a few comments today on our performance for the last quarter, also talk about some of the other accomplishments that we had last quarter including the startup of the two mills that Sallie mentioned, give you my views on the housing market and provide some comments on what I see for the second half of this year. For the second quarter in a row, our safety performance was very good with a year-to-date total incident rate of 0.48 and a rolling 12-month total incident rate of 0.37. Again safety remains the number one objective at LP.

As Sallie just reviewed, overall sales increased by about 35%. We earned $0.67 per diluted share, 41% on an adjusted basis. And for the second quarter in a row we had over $120 million in adjusted EBITDA. OSB prices moderated in the quarter from Q1, but we're still up substantially from last year. As in the first quarter, higher shipments of our SmartSide strand products and another strong quarter in South America contributed to our improved performance. While Q2 was a very good quarter, it was also a bit confusing as we saw weakening demand in pricing in OSB, a reported decline in housing starts in June and turmoil in the mortgage markets as rates spiked following comments by the federal reserve. This at the same time that the homebuilders are universally telling the story of improved housing demand, more pricing power and concerns about material shortages.

So here I'm going to share some of my theories. Weather played a big part in lower housing starts. We had very cold weather in April in the northern tier of the US and unusually wet weather in Texas and the Carolinas in June. Builders were delayed by labor shortages, both skilled and unskilled. We also heard about delays in inspections and other local government-supplied support services. We believe that these issues have combined to lengthen the build cycle by 30 to 45 days. The channel did add inventory in Q1 and the first part of Q2, but they did not see the pull through at the builder level due to what I just discussed.

We now believe that the channel has moved through this and are buying to replenish their inventories. Credit remains very tight, particularly for the small and medium builders. Chairman Bernanke's comment on ending bond buying at the US sent mortgage markets into a tailspin. The US experienced the largest month-over-month increase in mortgage rates in 26 years between May and June. However, I am confident these issues will be addressed in the coming months and that builders will be able to satisfy the pent up demand for housing. LP responded to this reduced demand for OSB by taking some downtime in several of our facilities. We increased our expert sales and we slowed the planned start-up volumes at Clarke County and Dawson Creek. I am hopeful that the demand for our products will increase and we can continue to reverse some of these actions.

Other accomplishments in the second quarter. At the end of May, as Sallie mentioned, we did complete the acquisition of Canfor's 50% interests in our Peace Valley joint venture. We will now be able to enjoy the full profits of this operation less Canfor's earn-out. It will simplify our accounting so it will be more easily understood by our investors and we will be able to integrate this more completely into our broader OSB operations. As Sallie explained, there was some rather complicated accounting for this stepped acquisition which resulted in about a $36 million reported gain. Our siding business continues to grow with the highest quarterly SmartSide strand volumes in our history in the quarter. We also had our best quarter ever in South America with nearly $9 million in adjusted EBITDA, despite a strengthening US dollar. As we've mentioned before, we continue to review options to add capacity in Chile to satisfy domestic and neighboring country demand.

In the quarter our Clarke County and Dawson Creek mills both began limited production. Dawson was constrained by the actions I just mentioned of holding back on production capacity to meet demand. Clarke County was a tough start up. When a mill has been down for five years and before that it would only run for four months, we did have some unanticipated difficulties with maintenance and with our software. We had planned to lose money in the second quarter of Clarke County, about $3 million, and in fact that contributed about an $8 million loss in the quarter. I'm confident that our A-grade production is coming back up and we will solve these problems, but it did negatively impact our second-quarter results.

For the second half of the year and into next, I remain very optimistic. The consensus US housing start numbers for 2013 is about 980,000 and 1.25 million for next year. The rolling three-month average for single-family housing permits has risen every month since April of 2011, which is a good trend. The inventory of new homes for sale remains very low at about 125,000 and existing homes for sale stand at 2.2 million, about a 4.5 month supply. This has fostered price increases that average over 12% year over year. Household formations are starting to rebound which creates demand for housing. In 2012, there was a 980,000 increase in households compared to 634,000 the year before. In summary, I still believe there is demand for 1 million housing starts in 2013 and up to 1.25 million next year. We have taken the actions necessary to support this level of activity, but at the same time we are aware of the potential headwinds related to mortgage rates, labor availability for builders, the ongoing political chaos in Washington, and slower job growth than anticipated. So as we demonstrated last quarter, we remain -- we will remain agile and committed to taking the actions necessary to respond to changes in demand. With that, let me turn it back to Sallie for the question-and-answer session.

Great, thank you, Curt. Allison, if we could we'd like to go to the queue for questions.

Thank you.

(Operator Instructions )

Please stand by for your first question. Gail Glazerman, UBS.

Good morning. I guess starting with OSB pricing, would it be possible to give a sense of maybe where you ended the quarter relative to what your quarter average was? Or just any vague sense of how much a lag there might have been in terms of realizing the market supply?

Well, Gail, if you look at random lengths, random lengths started to go down at the end of -- or about the middle of April and proceeded down really every week through the end of the quarter and did not really turn around until after the fourth of July holiday. So, the random lengths price for the quarter was the lowest at the end of it and again didn't recover until the second or third week of July. And we have seen an uptick in pricing since then, although I think last Friday's was relatively flat.

Okay. But I'm trying to understand your realization versus your average in the second quarter then just how much catch up there may be relative to what happened in the broader market and how much might have been mix and other than?

To be honest with you, I don't have those numbers in front of me. We look at it at a quarterly basis.

Yes, I guess the only thing that we can add, Gail, is that we tend to have, depending on it, a one to two week lag. So that's why we do worse in rising markets and do better in falling markets.

If it's only one to two weeks, though, that would imply that your price performance in the quarter was really driven more by mix than anything else?

I think that is likely very true. I mean we did very -- our value-added product was better in the second quarter of 2013, was a greater percentage than it was in the second quarter of 2012.

Okay.

Gail, the other thing that happened is we did see a tightening of the flooring product between commodity and flooring where in the first quarter flooring was actually selling for a lower price than the commodity and that reversed itself. And we sell -- we have the number one brand in flooring and top-notch so that helped us.

Okay. And I mean, I guess just Curt going on to your broader comments. As you look and we're into August are you starting to see a catch up from the spring? Is there any sort of acceleration or is it more a steady state?

Well right now in OSB we are seeing more of a steady state.

Okay. And can you talk a little bit about your export trends? I mean I presume that's reflected in the Chilean volume being down but if you could just give a sense of the changes that you did have in export?

We treat export, other than Chile which obviously is very strategic to us to satisfy the demand in Chile, the other export volume we use as kind of a relief valve when we see a disconnect between demand and supply in the US. And so we will take some offshore business both to Eastern Europe and also into Asia.

Okay. And was that down year-on-year or quarter-on-quarter or was it up?

It was up sequentially from Q1. It was probably a little bit down from Q2 of last year.

Okay. And just one last question. Sallie, in recent quarters you've given us kind of an inventory change number. Would it be possible to share that?

Sure. The inventory -- let me, I've just got to get the number. Inventory for the quarter provided $20.5 million. And then year-to-date we have used $28 million.

Okay, and you don't have that on a volume change basis?

Gail, we will have to get back to you on that.

Okay. Thank you.

Mark Connelly, CLSA.

Thank you, Curt, Sallie. Just two things. SmartSide looks like it's just continuing to do well as it has been and obviously not as heavy to the new home build market, so pretty attractive. Is there a way for you to expand that geographically beyond where you are operating now? Or are there plans to try to do that? And the second question is input costs. Can you tell us what you think you're going to see in the second half of the year?

First to your question on siding, we do actually produce a siding product in South America now in our Chilean facility. We have been supplying that to the Chilean market and the Brazilian market out of South America. In North America, we have a product called CanExel which we sell predominantly in Canada but we do a little bit of export of CanExel into Europe. And then our SmartSide, which is really what is driving all the growth, we do sell a -- both a prefinished in Canada out of our East River facility and we also provide some product into Canada. Beyond that, we've got a little bit of business with Lowes in Australia, they asked us to follow them with our siding line down there, so we do some business there. We've looked at the opportunity in China but we think that's a little too early for us at this point.

Curt, thank you for that. I meant to expand it more deeply across North America because it still feels like a relatively regional product. Just wondering if with your success with that product whether there's a way to just grow the -- increase the growth rate faster?

That's what we're trying to do. We are actually in all different regions. We have a dual distribution strategy that we have largely implemented, we haven't completely implemented that yet. But we just change -- we just added a major distributor in Texas which we think will accelerate our growth down there. So we do have a dual distribution strategy throughout the state of Texas.

We are running significant marketing campaigns in the Northwest to turn the tide from some of our earlier issues there and that's been successful. And then the strength of this product has always been kind of in the mid -- middle part of the country and we continue to grow that. So we are going on all cylinders. I think we've added, we've agreed to add four people into the siding sales group in the second half of the year which for us, we only have 100 salesmen, that's a pretty big increase.

Right. Okay. Thank you. And on the input costs for the second half?

The input costs, we think we are going to be relatively flat. It will be up a little bit but not a lot.

Perfect. Thank you.

Mark Wilde, Deutsche Bank.

Good morning Curt, good morning Sally. Curt, you gave us some color on the different restarts, I wondered if you could just give us a bit more detail? How are you running up at Dawson Creek right now? I think the initial plan there was to run one shift. Are you running one shift fully right now?

We are. That's largely focused at our flooring product for the west coast and TechShield. So we're trying to do the specialty products for the west coast where we see that demand. So we will probably keep that at one shift until we do see the demand come up.

Okay. And then down at Clarke County, what kind of rate is that running at right now?

Really crummy. (laughter ) We are running that four shifts 24/7, but as I said we are having a lot of preventative maintenance work going on and debugging of -- one of the big problems we found is that the software got updated on some of our equipment but not all of our equipment. So we're spending a lot of resources just on the software controls down there. We are not seeing any mechanical failures, it's more related to the software.

Okay. You had mentioned that you had an $8 million loss in the second quarter. Do you have any sense of what we might expect out of there if current prices just remain flat in the third quarter?

I would think we'd cut that by at least half.

Okay. All right. And then just moving down to the Latin American business, you said you are still studying the third mill down in Chile. Can you give us some sense of what the timing might be on a decision there?

We actually had a review at our board meeting last Friday, Frederick and his team came up. What they would like to do, of course, is get started immediately. I think more practically our board will review that in either the February or the May meeting and if we can get started on that we would have limited production at the end of 2015.

Okay. And what would that production -- how big a facility are you talking about? I assume this is another relocation of an idled US capacity down in Chile.

It is. I think our current thinking is we do have assets under the same size as we have there now. We also have bigger assets. I think the current plan would be to take one of the bigger assets down there and then idle, put it on the same side as the current mill, then idle the current mill, ramp up the new one, and then probably use that for siding only at some point in the future.

Okay. And is it possible in Latin America to give us some sense of relative profitability between Brazil and Chile? Because it sounds like Brazil's been running at probably -- it's a bigger facility, been running at a lower operating rate. So I assume that, you know, Chile is disproportionately profitable versus Brazil right now?

That's true for two reasons. One, in Chile most of it is going into the home construction. In Brazil we are still going into packaging and furniture and other applications. So we haven't made the full penetration to home construction. So the margins are positive in both places but they're much more profitable in Chile.

Okay. And then finally, can you just talk about what it's going to take to get the engineered wood business to profitability? I know you mentioned costs were up, but in the face of better volumes and better price, it was a little disappointing to see results actually down there.

Yes. It was disappointing to us as well, but if you think about it, and I've seen the releases from our competitors as well, we all saw pricing go up a little bit, like go up 10% which is -- engineered wood is a pretty big increase. But the cost production is up 30% when you got OSB and lumber pricing where it was. You know I think we're going to see improved -- well I know we will see improved results in Q3 because we worked through some of the expensive inventory as pricing has comes down in OSB as well as in lumber. You know, what we've said pretty consistently is that we need 1 million to 1.1 million starts for that to start to show black ink and that's kind of where we are. Now it was a tale of multiple products. We actually made money in our LVL business and we were pretty damn close in our LSL business. Where we lost it all was I-Joist which is very heavy to the raw materials that I just talked about.

Okay, very good. I will turn it over. Thanks.

Chip Dillon, Vertical Research Partners.

Good morning, Curt and Sallie. I wanted to ask you first in terms of understanding kind of how you all look at free cash flow. I know there are a lot of moving parts, but if we look at the net debt change as you all measure it from the first, second quarter, your net -- or net cash, I should say, went up by $77 million and then you spent $67 million on the Peace Valley -- on the other half of the mill. So if I add those together I get $144 million and of course I know working capital, as you mentioned, was a big part of it. But am I missing something in that equation?

Yes, Chip, I think the best thing to do really is to look at the 8-K supplement that we filed or look at the 10-Q and look at the cash flow by the quarter. We generated $147 million of cash in the quarter, we spent $71 million between CapEx and the Peace Valley joint venture. So that gets primarily the improvement that we are talking about.

Okay. All right, I will take another look at that. That helps a lot. And then in terms of the -- you mentioned the Clarke County mill looks like it lost $8 million in this quarter. What was -- could you remind us what it was in the first quarter? And you're sort of saying it might be cut in half, like maybe $3 million or $4 million in the fourth -- sorry in the third. Where do you see that thing hitting profitability again and keeping price constant? Could be a $10 million or $15 million EBIT contributor next year?

Absolutely. Yes. We fully expect that level of profitability next year. You know what we've always said is ramping up these mills after they've been idle for a while does take time. So we are -- we are behind our curve, probably by two months, two to three months, but we expect to be, given that lag, we expect to be where we said we would be next year.

Got you. When you look at CapEx, I know you mentioned it's at $85 million for this year, I know it's early days, but can you give us kind of a range of where we could see it next year? And how much incremental would there be because of Peace Valley?

Well -- we are going through our capital allocation right now so I'm not sure I'm comfortable giving you a number for next year. On Peace Valley we did have some extraordinary maintenance that we had this year that's included in that $25 million of at least our portion including that $25 million number. I don't think Peace Valley's going to be much different than any of our other mills. We don't see any major deferred maintenance that's there. So I think it will just be kind of in that $2 million to $2.5 million per plant number for maintenance capital.

And Chip, to give a little bit more color on the $85 million, $10 million of that relates to our systems upgrade product and then $75 million relates to the base businesses.

Got you. And then as you look at the -- what's interesting about the mills that were built or started, I guess, back in this last cycle, you know you've seen them kind of be last to start up if you will, whether it's the one in South Carolina or yours in Alabama and I guess there's one up in Canada. And do you think there's a lesson here in terms of maybe the scale of new capacity, maybe we've hit a point of diminishing returns and one day we will need more capacity? And you think it will come in smaller chunks or do you think that they will still be of this size?

You know, that's a real good question. We have a mill in Hayward, Wisconsin that's in our siding business that has two lines and I really like that configuration. Because it gives me the flexibility to do siding on one of them and do OSB on the other and then convert back to siding when the demand takes on -- takes off. So I think that's a pretty good configuration. That's exactly what we're talking about in Chile. Mark asked the question earlier about Chile's plan. We will put a second plan on the same site so we can use the same management team, but it will be physically separated rather than being an $800 million gorilla, it will be smaller than that.

You know, the economics of these big plants is when they do go down they go down and you lose all of it, where if you have different configurations I think you have more flexibility. As far as how we're going to add capacity, we are going to take a page from the playbook of siding where we've added capacity in existing facilities to the extent we can by adding plans or adding additional peripheral equipment. We did that in Two Harbors, increased their capacity by 25%. Our board just approved a project at Tomahawk to increase their capacity by 40%. And we have something on the drawing boards to increase Hayward by another 40%. So I think that's the way we are going to approach this. Plus we do have -- we control a fair amount of vital equipment that we can redeploy like we have in South America and we will look at that as an alternative.

Got you. Very helpful. And real quickly, how many salespeople did you say you added in the siding business?

Well we're adding four in the second half. We added five the first half. So we've added 9% of our sales force basically between the first half and the second half of the year just in siding.

Got you. Thank you, very helpful.

Mark Weintraub, Buckingham Research Group.

Thank you. First just back on Clarke County for minute. Could you remind us when that started up? The facility?

It started up in late April, early May.

Okay and so I guess so it was hit with a lower price and the product that got sold was hit when the pricing had already rolled off some?

Well, what we sell is, you have to qualify the product and so you're selling less than A-grade products, so you're selling it for dunnage and other -- so you're selling it for lower price because of that.

Okay. And at this point how far along are you in terms of having rectified the issues?

Well you know it's a day-to-day. We are ramping it up every day and we have some really good days and once in a while we have a bad day. It's not unique to any other kind of a complicated start up like this.

Okay.

I will say we warned everybody that these start ups don't happen easily. (laughter)

Sure. And so where is your capacity at this point and your ability -- how much can you produce at this in, say, the second half of the year? Recognizing that you are obviously going to run to demand, but what type of rated capacity do you have at this point?

I think we are right about 1 billion a quarter, maybe a little north.

And now if I -- didn't you produce 1 billion in the second quarter?

Yes, we did.

Okay. And so I just was -- I think you had mentioned that you had taken some downtime. And so I was just trying to understand those two --

What's your question, Mark, I'm sorry.

I'm just -- so --

I think the downtime that we mentioned was the downtime that we took in Brazil.

Okay.

And what Curt's talking about --

We did take some in North America.

I know we did, but I mean, but specific -- in North America we did that by taking shifts out versus --

We took some shifts out in two of our Canadian plants.

Okay. And then lastly, I noticed production was up I think it was about 8%, shipments I think were only up 2%, so superficially it seems like you maybe built some inventory in the quarter, is that accurate? And was that -- and how do you --

That's why we took the downtime, because we saw inventory coming up.

And also Curt talked about how some of our sales were -- we had some export sales this quarter and so we talked about this a lot in one of our earlier calls about the FOB shipping versus destination. And those export sales generally, if they are on the water they sometimes are in our inventory and that was true and so -- or they're at the port waiting to be shipped. And so that shows up in those numbers as well and in some of the different -- I just want to go back to the rated capacity. Our rated capacity is -- I mean of what's running is this 4.2.

Okay. Thanks very much.

Steve Chercover, DA Davidson.

Good morning, Curt, Hi Sallie. I'm also interested in your theoretical capacity. Is all that you've got left to add would be Chambord and then three shifts at Dawson? Is that how we should look at it?

That's right.

So that would be, what, another 400,000 -- 400 million square feet or so combined?

Chambord is about a 500 million square foot mill so probably 500 and then full shifts and Dawson would add another 300.

Got it. And you know you mentioned taking, I guess not a world-class although I think Chip's is onto something that world-class might not be the best thing to have, but I guess what would have been a good scale facility back a generation ago down at Brazil or to Chile. So which one of those idled assets would that be, like Silsbee or St. Michel?

Well it's actually another asset that we bought in the market about 1 year ago.

Can you identify that?

It's the Lemoine mill that [Marco] had.

Okay. That's interesting. And so that would be --

Caught you off guard, didn't I, Steve? (laughter)

Yes. I guess I forgot about that one. So that one would be dedicated to commodity OSB and then ultimately the small unit would be toward SmartSide?

Yes, it's about 140 million square feet that's down there now that we would probably dedicate to SmartSide.

And how's the early market acceptance of SmartSide down in South America?

We don't have enough capacity and in fact we are struggling because Brazil's going to want SmartSide as well and we have not figured out how to do that on a continuous press.

Oh that's the challenge. Okay. Thanks. I appreciate it.

Alex Ovshey, Goldman Sachs.

With the Peace Valley acquisition now closed, can you talk about how we should think about that from a modeling point of view? Are you expecting the inventory write-up to also impact part of the third quarter? And then can you give us any color on how we should be thinking about the payout for that acquisition? To Canfor?

Sure. Alex, we should be through most of the write-up due to the acquisition in the second quarter. There will be some minimal impact in the third quarter. So I think you should view that -- I think you should view that mill similar with how you would do the modeling for the other mills that we have. Other than it's the largest mill now in our family of mills I don't see that as being any different from the other information we've provided. Do you want to address that?

On the earn out you all will be happy and so will I if I pay the earn out out. Basically what we've done is we've set a base level of EBITDA and we share a portion of that for the next three years. That's the way that works. But I'm not prepared to give you the number.

Okay, Curt. And just one follow-up on that side, can you guys talk to what the impact was in the second quarter from the inventory write-up?

Fundamentally it would have been if we had owned them, as if they'd been a joint venture the entire time. So what really happened is some of that write-up of the inventory showed up in the gain on the sale that we recorded.

Okay, got it.

But we --

Sorry, go ahead.

No, that's all right, go ahead.

Okay. And as you're restarting all the idled mills that have been out for the last couple of years, can you just talk about where you see LP on the cost curve relative to the competition? And also talk to which mills do you see as the flex mills in the context of choppiness and then demand, which mills would be the ones that potentially would be the ones where there would be downtime taken first?

Well as far as the cost curve, we see the [Reecee] studies and the Beck studies and by region we are pretty close to being on top of each other. The decision I want to take out is generally a freight decision more than it is a cost of production because it's getting into the market. So our Canadian mills have taken a disproportionate amount of the downtime and I would think that would continue because Maniwaki is a long ways away and Dawson Creek's a ways away and Swan Valley. So I would expect that if we flex they're going to be flexing the Canadian mills. Now the currency, US dollar getting stronger helps us a little bit in that decision, but when it was over parity, pretty easy decision on where to take out capacity.

Make sense, Curt. And just last question for me. With the cash flow -- with the cash position building on the balance sheet can you talk about the appetite for a potential special dividend similar to what your neighbor to the north has talked to? Where a variable dividend is paid out reflective of the cash flow generation of the Company during the course of a year?

Yes. Go on.

Historically, our board has not supported a special dividend and they've based that decision on data. But if you look at a special dividend it reduces your stock price by 105%. Doesn't sound like a very good use of money for shareholders. So that's not something we are too excited about. Now we had a regular dividend in the past and we've also done share repurchases in the past, but special dividend would likely be at the bottom of our list.

Got it, Curt. That's helpful. Thank you.

Paul Quinn, RBC Capital Markets.

Good morning Curt and Sally. Just a couple of questions. What's the order file? Could you sort of give us an idea where you are at now versus sort of what you saw in Q2 and Q1?

You know I think that the order file was longest in Q1, shortest in Q2 and we're probably somewhere in between in Q3. (laughter) How's that?

Not as detailed as I expected. (laughter)

I think it's probably exactly as detailed as you expected but maybe not as detailed as you would've liked. (laughter)

That's true as well. Just drilling down into EWP, the higher costs in the quarter from OSB I guess on the I-Joists, how much inventory do you have in that segment? And I mean because obviously what we saw in OSB pricing was down so I'm just trying to reconcile that with the comment on higher cost.

Generally, they would have between in transit because most of the production -- or most of the web stock is coming out of Canada. So you've got three to four weeks in transit and then you're probably sitting on another three to four weeks. So you're probably eight week kind of level where you are committed to pricing.

Okay. That's helpful. And then just lastly, just on qualification for Clarke County. How long does it take once you start up to qualify that board?

Well the board got qualified very quickly. It got qualified within five days, but then you have to make sure that every board that's coming off the line. So there's extra level of quality scrutiny on that and if there's any question about it being A-grade or not, we downgrade it because we don't want to take any reputational risk.

Okay. So for example in June, can you give us a rough idea as to what would be qualified board and what would be selling for less than A quality?

Probably in the 25% to 30% was downgraded in June.

Okay.

I don't have that right front of me, but that's kind of what I would've expected and now I think you're probably in the less than 15% kind of number.

Great. That's great. Thanks very much. Best of luck.

Thank you everyone. Allison, I think that's all the time we have for questions. So if you could please provide the replay number. I would like to thank everybody for participating in our call and Mike and Becky are available as always to answer any follow-up questions you may have. Thank you and we hope that all of you have a good day.

Thank you. Ladies and gentlemen, that concludes your conference call for today's call. You may now disconnect. Thank you very much and good day.