Louisiana-Pacific Corp (LPX) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Louisiana-Pacific Corporation first quarter 2012 earnings conference call. My name is Stephanie and I'll be your coordinator today. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Ms. Sallie Bailey, Executive Vice President and Chief Financial Officer.

Thank you very much, Stephanie and good morning. Thank you for joining our conference call to discuss LP's financial results for the first quarter of 2012. I'm 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 primarily Investor Relations contacts. I will begin the discussion with a review of the financial results for the first quarter of 2012. 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 our operating results for the first quarter of 2012 and give some thoughts on the outlook for 2012.

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, as well as our first quarter 10-Q. I want to remind all of the participants about the Forward-looking statements 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 which 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 first quarter, I want to make some higher level comments and observations. On a March year-to-date basis, single family and multi-family housing starts are up 19% over the same period in 2011. This is also true for new home sales and sales of existing homes. As we stated on our call in February, housing activity is beginning to show some signs of life. Our operating results for the first quarter show improvement. Adjusted EBITDA of $21 million is 58% higher than the first quarter of 2011.

Starting this quarter, we have revised our approach to non-GAAP financial results. Adjusted EBITDA now includes the depreciation from our unconsolidated affiliates, primarily Peace Valley and US GreenFiber. All prior period non-GAAP results have been adjusted as well and the details are in the Form 8-K we filed this morning with our Press Release. We have also calculated the non-GAAP adjusted diluted earnings per share from continuing operations using a normalized tax rate of 35%. This tax rate is calculated using a weighted average rate of the statutory tax rates of the United States, US state and local jurisdictions, Canada, Chile and Brazil, assuming profitability in each of these jurisdictions. The impact of using a normalized tax rate along with the adjustments is also detailed in the reconciliation of non-GAAP information provided this morning. With that, let me go into the details.

Please refer to Slide 4 of the presentation for a discussion of the first quarter 2012 results compared to the fourth quarter of 2011, and the first quarter of 2011. We reported net sales of $362 million for the first quarter of 2012, a 9% increase from the sales reported for the first quarter of 2011. In the first quarter of 2012, we recorded a net loss of $11 million, or $0.08 per diluted share. In the first quarter of 2011, we reported a net loss of $23 million, or $0.18 per diluted share on $332 million of net sales. The adjusted loss from continuing operations for the quarter is $9 million, or $0.06 per share, compared to $16 million, or $0.12 per share in the first quarter of 2011. Adjusted EBITDA from continuing operations was $21 million in the quarter, compared to $13 million in the first quarter of 2011, a solid improvement quarter-over-quarter as well as consecutively. A 9% improvement in net sales and a 58% improvement in adjusted EBITDA compared to the first quarter of 2011, and a $33 million improvement in adjusted EBITDA from the fourth quarter of 2011 on an increase of $50 million in net sales.

Moving to Slide 5 and a review of our business unit results. Starting with OSB. OSB recorded an operating loss of $300,000 in the quarter, compared to a loss of $9 million in the first quarter of 2011. For the quarter, in terms of adjusted EBITDA, we are reporting $11 million of income as compared to $2 million in the first quarter of 2011. For the quarter, we had a 4% increase in volume and our average sales price was 6% higher. The increase in selling price favorably impacted operating results and adjusted EBITDA from continuing operations by approximately $8 million for the quarter, as compared to the corresponding period in 2011. Sales volumes also increased as we continue to sell more products into value-added applications.

Slide 6 reports the results of the 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 $113 million in the first quarter of 2012, an increase of 6% from $106 million reported in the first quarter of 2011. The siding segment reported operating income of $17 million, as compared to $13 million in the first quarter of 2011, and adjusted EBITDA of $21 million, an increase of $4 million compared to the first quarter of 2011. For the quarter, SmartSide average sales price was up 2%, and volumes increased 9%. Volume increased in our SmartSide siding line, due to continued penetration into several key focus markets including retail, repair and remodel, and sheds. CanExel prices showed a decrease of 6% and volume was down 5%. Sales volume declined in our CanExel siding lines due to some weakening in the Canadian housing market and lower shipments to Europe.

Please turn to Slide 7 of the presentation which shows the results from our engineered wood products segment. This segment includes I-Joists, laminated strand lumber, laminated veneer lumber, plus other related products. This segment also includes the sale of I-Joists and LVL products produced by the Abitibi joint venture, or under a sales arrangement with Murphy Plywood. The engineered wood products segment's operating loss decreased to $3 million in the first quarter of 2012 from $6 million in the first quarter of 2011. For the first quarter of 2012, EWP realized an increase in adjusted EBITDA from continuing operations of $1 million, as compared to the first quarter of 2011. Volumes of I-Joists were up 2% while volumes of LVL and LSL were up 14% compared to the same quarter last year, primarily due to increases in domestic demand. Pricing was up 3% in I-Joists and down 1% in LVL and LSL due to changes in mix in both product lines, with individual product pricing remaining relatively flat.

Moving on to Slide 8 of the presentation. For the quarter, South American operating income decreased by $500,000 for the first quarter of 2012, compared to the first quarter of 2011. For the first quarter, South America's adjusted EBITDA from continuing operations was $6 million, as compared to $6.5 million reported in the first quarter of 2011. Volumes in Chile were up 14%, while volumes in Brazil were up 2%, compared to the same quarter last year. Changes in volume were primarily due to increases related to continued rebuilding associated with the Chilean earthquake in 2010. The sales volume increase in Chile was primarily sourced by imports. Pricing was up 10% in Chile and down 6% in Brazil. These changes in price were primarily related to the change in foreign exchange rates.

While there is no slide other building products, let me make a few comments. These results are from our molding business, US GreenFiber joint venture, and various other non-operating facilities. Overall, we are showing a loss of $1 million in the first quarter of 2012, which is comparable to the first quarter of 2011. For the quarter, sales were $10 million, which is slightly below the first quarter of 2011. Total SG&A costs were $31 million in the first quarter of 2012, as compared to $29 million in the same quarter in 2011. The increase in SG&A is primarily due to the accrual of 2012 management bonuses. We did not record any bonus accruals in 2011.

We had $100,000 foreign exchange loss in the quarter, compared to a $1.8 million gain in the same quarter last year. Interest expense was $12.6 million in the quarter, compared to $14 million in the first quarter of 2011. This reduction was primarily related to the change on one of our uncertain tax positions which caused us to reverse accrued interest associated with this position. This amount was excluded from our non-GAAP results calculation.

Please refer to Slide 9 of the presentation. At the end of the first quarter of 2012, we had cash, cash equivalents, investments and restricted cash of $294 million. Working capital of $517 million, net cash of $48 million. In addition to the $281 million of cash on our balance sheet, we had $85 million of availability on our asset-based loan facility. And we generated cash through the first four weeks of the second quarter. Capital expenditures for the three months were $3 million, and we contributed $3 million to our joint venture. As we discussed in our fourth quarter conference call, we are planning to spend approximately $25 million for capital expenditures in 2012.

Now I'd like to turn the call over to Curt for his comments.

Thank you, Sallie. Very good review. Today is my first full day as CEO of LP. As we have reported, last Friday I was elected to the Board of Directors of LP and officially became only the fourth Chief Executive Officer in LP's history. After nearly 15 years of participating on the quarterly calls as CFO, this will be my first time talking to you as LP's CEO. I thought it would be useful for me to share with you today what the change in leadership means to LP and where I will be focusing my time and attention. I will also provide some comments on the market.

First and foremost, there will be no change to our vision, values and customer principle within LP. The LP values will remain consistent and continue to drive our actions and how we work together. Safety, as Rick has said and I will continue to say, there is nothing more important than safety at LP. No one should have to get hurt while working at LP are words that we live by and drive a culture focused on zero incidents. For the first quarter, we ended with a total incident rate of 0.48 across the entire Company. In OSB, our largest business, we didn't have a single recordable injury in Q1.

Protection of the environment. This is a legal requirement and necessary to be good members of our communities. Compliance with all laws and ethically with high integrity in all we do. Simply put means doing the right thing. Providing quality products and services to our customers. This is a must have to achieve our objective of being supplier of choice. We respect people within our organization and we have a commitment to teamwork. We have a commitment to continuous improvement with Lean Six Sigma firmly embedded in LP, we've seen the tangible benefits of the many process improvement projects that have been completed using these tools.

Commitments to our communities. LP people are leaders in the communities in which we operate. This is a responsibility that we must embrace, being good environmental stewards, providing safe and rewarding jobs and helping make our locations a better place to live. The LP customer principle is that everyone at LP is responsible for providing a consistent quality customer experience. That will not change but will gain traction. The LP organization that I inherit is in very good shape and has shown an amazing ability to be agile, productive, efficient and effective in a very difficult market. There is no need for major restructuring.

However, there are a few changes that are implemented today to recognize the organizational importance of the business teams and continue the progress we've made towards satisfying LP's customer principle. Brad Southern and Brian Luoma have been promoted to Senior Vice President of their respective businesses, siding and engineered wood. This is an important acknowledgement to the GM role critical to the success of LP. Both Brad and Brian have long served LP in a variety of roles and have excelled in every position they've held. In sales and marketing, I am institutionalizing our one LP from the customer and marketing perspective by having Rick Olszewski more directly involved in OSB sales and all the marketing functions within the business. This will make Rick the single point of contact for sales leadership at LP.

From a business strategy perspective, Rick Frost and I have worked together with our management team and Board of Directors for 15 years. During this time, we have brought different skills, view points and opinions to the table, but we've always agreed on the strategic direction of LP. As the housing market recovers, LP is well positioned to take advantage of the increased demand. We have excess capacity available in each one of our businesses. We have improved operational efficiencies through the adoption of Lean Six Sigma, productivity enhancements and our focus on agility. We have solid customer relationships that can benefit from having a supplier with multiple product lines.

The big question is when will the housing market recover? At LP, we continue to be cautiously optimistic that the recovery is actually started. Let me leave you with a few anecdotes. Housing starts are up 19% quarter-to-quarter with permits keeping pace. The inventory of new homes for sale is at the lowest level since statistics began to be captured, at 121,000. Vacancy rates, both for apartments and vacant homes for sale, continue to decline.

The settlement with the five big banks and the various government programs under the mantel of make home affordable seems to be having a positive effect on short sales and the bundling of foreclosures for investment purposes. This is reducing the risk of the foreclosure overhang. Pending homes for sales on are on the rise. There have even been recent articles talking about bidding wars happening again in certain markets between home buyers and sellers. I can personally vouch for this as my daughter, who lives in San Francisco, and son, who lives in Portland, were involved in competitive transactions that ended with selling, buying a house above the asking price.

This earnings season has been positive for the home builders and with reporting of improved financial results and strong backlogs. The current consensus for 2012 stands at 711,000 single and multi-family housing starts, an increase of 17% compared to last year. For 2013, the consensus now stands at 875,000, a 23% increase over 2012. For LP, Sallie just reported our results which were much better than last year and clearly above our internal expectation as we budgeted based on 625,000 housing starts for this year. This increased activity led to improved OSB pricing and stronger siding sales. While we have been concerned that second quarter activity would follow last year's negative trend, I am pleased that our April activity has remained robust and OSB pricing has held.

Where will I be spending my time over the next several quarters? Principally, I'll be focusing my time on the market. While the indications I just reviewed with you would imply that the housing market is improving, we've had head fakes in the past which has led us to be more conservative in our thinking and actions. If the market is getting better, it is important that we are ready for the recovery. In particular, we at LP will be spending a lot of time and effort on the full supply chain.

What are the potential pinch points for raw materials? Is there enough logging capacity? Can the resin suppliers respond to increased demand? The transportation infrastructure has contracted quite a bit during the downturn. Will there be sufficient truck and rail capacity, both incoming and outgoing? What steps should we be taking at LP to increase our access to cost effective transportation services?

At our mills, we have significant unused capacity, both in the under utilization of our running facilities and in indefinitely curtailed mills. Do we have a detailed plan for adding shifts at each of our operating mills? Have we identified the critical talent necessary to shift these operations? Is there incremental capital required? While we have no near term plans to bring up indefinitely curtailed capacity, it is only prudent to have a comprehensive, robust start-up plan for these facilities to respond to future market demand.

On the customer distribution side of the business, we need to have regular and deep discussions with our channel partners on expected demand and their markets. Over the last six years the channel has leaned out their inventories and relied more heavily on the manufacturers to supply incremental demand. In a recovery, the channel needs to provide this buffer. As an example, I was walking through a new house here in Nashville last weekend and the OSB sheathing installed in the wall had been manufactured in our Hanceville, Alabama facility only two weeks ago. Clearly, not a buffer. If we can manage this better than our competition, we should get more than our fair share of the immediate recovery and that is my goal.

With that, let me hand it back to Sallie to lead the question-and-answer session.

Great. Thank you, Curt. Stephanie, we're now ready to go to the queue for questions.

(Operator Instructions). Mike Wilson, Bank of America-Merrill Lynch.

Curt, congrats on the new role. Any reasons surprise you this quarter? Seems like the west has seen some relative pricing strength lately. What's going on in the west versus other regions and what really caught you by surprise during the quarter?

I'm not sure I'd say that anything caught me by surprise other than the housing -- the absolute level of housing starts. Because we, as I said, had budgeted a lower number than that. We were optimistic it was going to be higher, but it actually was better than I thought. As far as OSB pricing in the west, we're not really sure why it went down last year. If you look at the Q1 differential between Western Canadian print and the other prints, it's pretty much back at its historic average. It's been a recovery of what was unexplained in Q2, Q3 and Q4 of last year.

Anything specific to your ops in the quarter? Seems like the overall enterprise ran a lot better this quarter than in prior quarters.

I think that with our -- as I mentioned, our Lean Six Sigma, we continue to be more efficient and effective in how we run those facilities. We did have a little more incremental demand in all the businesses, which allows those mills to run better. Any time we can get closer to a 24/7 operation we're going to have more efficient operations than we are with different shifting patterns.

In terms of level of down time you took, how does that compare 1Q versus 4Q?

I think the number in OSB we ran effective capacity about 76%. I don't know if you heard Mike, but I think we ran 76%, 77% effective capacity in OSB in Q1, was about 68% in Q4. That's of what's running. That doesn't include the $1.6 billion of curtailed capacity.

Gail Glazerman, UBS.

Do you feel that your customer order flows are matching the improvement that you're seeing on housing starts and permits? Or, do you feel that they're still not believing it's true and there could be a pick-up or a rush later in the quarter?

We were concerned about that because last year we had a very good Q1 from an order standpoint, then it fell off in Q2. That's why I gave you a little color on April. Our order files in April were better than we had expected and continue to show some strength. Again, we're cautiously optimistic that Q2's going to be a good quarter.

Did you feel that any of your businesses in particular might have benefited more from the warm weather and pull-forward of projects slated that would have normally happened later in the year or do you feel it's just true ongoing demand?

I wouldn't say any product line benefited more than another. I think there was probably a little bit more repair/remodel, so business that went through the boxes in the Northern part of the US probably did a little bit better than we expected, but overall I wouldn't say there was one that stood out.

The reference about increased imports into Chile, was that from Brazil or from the US or both?

It was actually both. We imported some product from Brazil into Chile, and we also imported some product from our Canadian operations into Chile. We're seeing more demand in Chile than we can satisfy, so opportunistically we're looking at bringing that product in from other of our facilities.

In Brazil, are you still thinking about starting the second line there or at this point would you see just filling the gaps from North America as a better option?

Let me be clear. Starting the second line means we have a thermal oil system that we need to bring up. It is still the same line, but you could run it a little bit faster if you bring up the second thermal oil. We're currently running between 60% and 65% of capacity in Brazil. As it turns out, because of the transportation cost, it isn't a lot cheaper to move product from Brazil to Chile than it is from North America to Chile, as crazy as that sounds.

Chip Dillon, Vertical Research Partners.

Congratulations to both of you. First question is I notice you did make a change in how you're going to report the adjusted EBITDA, to I believe include the two joint ventures involving Peace River and the Abitibi plant. I know those JVs I believe have very little debt, but I was just wondering the thought of why you would include the EBITDA, unless I'm assuming you can't dividend up to the parent.

Chip, simply to be consistent with what we've done in the past. We've always include the EBIT. We always included the EBIT. It just seemed that we should include the DA as well.

I guess you've included all the EBIT, right and then you take off 0.5 in corporate or did you include the 0.5?

We just include the portion that comes to us. Similarly with the depreciation.

The second thing is looks like -- and I know it can vary quite a bit from year to year, but looks like the working capital, I know it always goes up in the first quarter because of seasonality. It seemed to be a bigger cash drain than it often can be. Your net cash position is about $0.50, $0.60 a share less than what it was a year ago, so I was just thinking are you concerned about that? I know your gross cash is still pretty high. Are you going to look at perhaps husbanding more cash later in the year than maybe you had planned?

Let me start with -- cash has been and will remain king at LP. That hasn't changed with the change of the person sitting in the CFO's chair. As we look at inventories, we actually used slightly less cash for inventories in the first quarter of 2012 than we did in the first quarter of 2011. The real difference is coming in the accounts receivable area and that's because our winter buy program actually extended into April this year, whereas in prior years much more of it would have been concluded in the March time frame in terms of the cash receipts.

Would you expect that working capital -- it can sometimes be the second or the first. Because of what you just said, I guess we should expect working capital to perhaps peak in the first quarter and be certainly lower in the second half.

Certainly as you know it all depends on what happens with demand, but we would certainly anticipate, assuming the demand stays at the levels where it is today, that working capital would come down and generate cash over the course of the year, similar to the patterns we've had in prior years. I think if demand increases in the fourth quarter and we're certainly, as you all know, a long ways away from the fourth quarter, we might see some build in logs in particular in the fourth quarter.

The last question is the siding business I think probably beat what most of us were looking for. Some years we'll see seasonal sequential improvement going into the second quarter and some years it may not, you might not because the first was so good. I'm guessing that this year is going to be tougher to see it go up again in the second from the first just because of the warm weather. Would you agree with that or are we being conservative?

I think there's a couple things. One, because we did have the winter buy program this year, we did not have it last year and this is principally for our Canadian manufactured product. We expected a little bit of a drop off in sales there and we have not seen that. That's good news from our perspective. The other good news from our perspective is we did make a decision last week on one of our smaller mills to add a fourth shift. They have not been running 24/7 for the last three years. We only did that because the siding business believes there's a true increase in demand. That's a good thing for our employees in two harbors.

Mark Weintraub, Buckingham Research.

The last couple years obviously have been very tough conditions and you've been spending capital appropriately. Now hopefully we're at the stage where things are going to start looking a little bit better. What type of capital do you think on a go forward basis, assuming that we are starting to enter improved housing conditions, realistically you need to spend maintenance type levels and then are there lots of opportunities for high return types of projects on the cost side that maybe have accumulated during this down time, during this difficult period?

I think the way I would answer that is typically if we are running our operations 24/7, we ought to be putting $1.5 million to $2 million a year into each one of those facilities. We have 26 operating facilities. That would say you're somewhere in the 40 to 50, if you're running 24/7 which we have not been. That's why we've been able to prudently reduce that. There are return projects identified by our businesses that we have held off on. If we do see increased demand, there's probably another $5 million to $10 million of spend that we could add to that in relatively high return, short payback. I think we talked about last year, 2010 -- or 2011, rather, we planned on a $50 million capital budget and when the market did not come back, we knocked that back down to 25. I would anticipate that if we do have strong markets that we could be in that 40 to 50 range, but that's not immediate. As Sallie said, we're holding to the $25 million number for this year.

Can you remind us when you get back into the money making mode, in terms of cash taxes, what you have in place that will reduce the cash tax outlays?

That's about -- I don't think it's in the Q. It's $160 million, it's around $170 million. Mark, we can get you that detail. I just don't remember it off the top of my head. It depends on -- there's some in the US and there's some in Canada, and I think it's split almost evenly between the two of them, but we'll get you to details.

Presumably though, you have a year or two where you would have fairly nominal cash taxes?

It depends on how good the year is from what I can tell, but it's a pretty significant number, yes.

Mark Wilde, Deutsche Bank.

Curt, you've already addressed adding more shifts at some facilities. Could you walk us through how you would think about actually restarting some of the idled facilities and what the time line from the moment you decide to restart until something could actually start running again, what that would look like?

Yes, I can talk about that. I'll talk about it -- I assume you want to focus on OSB. So I'll focus on that. Right now, today, there is roughly 19.5 billion to 20 billion square feet of capacity that's running in North America. Now, it's not running at that rate but it's running. Today -- I think last year the demand was 15.5 billion to 16 billion square feet. There's another 3 billion that we could add.

Think about housing starts, every 100,000 housing starts is 1 billion square feet. If you increase your housing starts by 300,000 over the 580 we had last year, that says when you get close to 900,000 you're going to be out of OSB capacity. As a producer from our standpoint, we would look at that and see if we see sustainable housing starts at 900,000 or north, we have to think about adding that capacity.

From a timing standpoint, obviously the mills that have been shut down the longest are going to be longest to come back up, but it's probably, from the time you make the decision, it's a 9 to 12 month ramp-up and that includes getting your logs in the deck and hiring your people, training your staff. We have a decided advantage because we have multiple facilities and we can seed those operations with current employees. But you heard me talk about our plans to be prepared for a recovery. We will have detailed plans in place that will make that as short as possible so that we can get the most market intelligence before we make those decisions.

From a cost standpoint, the other comment you had was about cost. Again, depends on how long the mills have, but it's probably a $5 million to $10 million number to bring up one of these big operations and that's things like the forklift that you took out and relocated to another mill. You've got to replace that. The spare parts that you took out of the storeroom, you've got to replace that. Then your working capital with resins and wood. That's the numbers we think about.

As the business appears to be picking up, do you think that this could be the trigger to seeing a little more consolidation in the OSB business? Really aside from GP buying grant, there has not been a whole lot during the downturn.

Well, it's interesting. Didn't happen at the top. Didn't happen on the way down. Didn't happen at the bottom. The only thing left is on the way up. I will use one of the Rickisms. There aren't any sissies left.

I've heard that one. I was just comparing your engineered wood volumes to the numbers that were reported last week by Boise Cascade and also to what Weyerhaeuser reported. You were pretty flat in that business. Both of those other guys, the two main competitors in the business, showed much stronger year-over-year volume gains in those businesses. Any thoughts on why that comp might have appeared as it did?

What we are trying to do with our engineered wood business, Mark, is that business does not have any repair/remodel component to speak of. Little bit of light industrial and commercial, but it's principally new home construction. We're trying to make that cash neutral as best as we can. And market share, when you're under water doesn't help you much. We have actually walked away from some business that just didn't provide -- didn't help us reach that cash breakeven that we're focused on.

Still a business you want to stay in, however? Still a business that you want to stay in over the long term?

There's lots of very, very positive things for engineered wood. If you think about the situation in British Columbia with the beetle kill and now with these explosions, there's probably going to be less capacity coming out of that. Having the China market come back and then the change in the design values for Southern yellow pine lumber are going to make it increasingly beneficial to the builder and architect to use engineered wood.

Gail brought up that issue of imports into Chile. Seems like over the last few years we've seen a lot of other players or some other players shipping OSB down into Latin America, I'll avoid calling it a dumping ground. Are you continuing of to see other players ship into South America on an opportunistic basis.

We can see the import statistics in Chile. We do get those on a quarterly basis and look at it. We have a pretty good feel for what the external volume is. It's still not very significant. It's kind of an annoyance but it's not very significant.

You mentioned supply chain and things. One branch of the supply chain you didn't mention is what's happened to all of these building products distributors, the intermediaries because it seems like, to me, that a lot of these guys are privately held. I don't know how many of them have gone out of business over the last three or four years.

I think at that level, there's about 5,400 that no longer exist. A lot of those have gone out. I meant to encompass that. If I didn't, we're certainly interested -- we are concerned about getting it to the job site. Who we deal generally with is the two-stepper that gets it to those guys, that then get it to the job site. That's important from two perspectives. One, it's important from just the logistics and moving the material there. But the other important role that they play is they finance the builder. With the banks being reluctant to finance builders, the channel has to assume that role. We are concerned about that.

Good luck in the second quarter and through the balance of the year.

Paul Quinn, RBC Capital Markets.

Thanks very much and congratulations both of you. Pretty decent Q1 results. Looking at your operating rates, 76%, 77% in the quarter, you've got a little bit of ability to add capacity and previous questions have been asked about how long that's going to take to get back. Do you see a first mover advantage in adding that back earlier than the rest of the industry?

You mean a new mill or indefinitely curtailed mill?

In indefinitely curtailed mill, yes.

Again, I don't -- given what's running today and what that means from a housing standpoint, until you do get towards that 900,000, it doesn't make much sense. We're better off filling out what we've got running and from our perspective, we should be differentially advantaged because we do have the lowest operating rate. We can see what Ainsworth is announcing, as well as Norbord.

I'm trying to put in context of that sort of 9 to 12 months before you bring it up and that current consensus which you've got at 875 for '13.

It's right, it's 835 for '13. In my mind, if that is accurate and we go from there, middle of next we're year going to have to make some decisions.

On Brazil, volume's pretty flat year-over-year. If you could give us some additional color, the growth of the market and how you look at that going forward.

One of the things we've been trying to do, Paul, is we've been trying to go through what is a very bureaucratic process to get our building system approved and we've actually made some great strides there and we do have demonstration projects in Sao Paulo, Rio and in Curitiba where we have had builder partners build 40 to 60 units, both for middle class residential, as well as for government sponsored building. Those are still demonstration projects and we've got some of the certifications, not all of it. I wish Rick O were here today because he could give you more detail on that.

We are making progress in the building system area. Generally what that means is adding our OSB to steel studs and then adding roof decking using asphalt shingles. We are making some progress there. The other area we continue to make progress is in the industrial, but that was relatively flat year-over-year. Any increase we did have was in the, what I would call, the nascent building side of that.

Steve Chercover, D.A. Davidson.

Number of my questions have been asked, but I wanted to ask about the changes to building codes that have allowed the construction of multi-story, I think up to seven story wood frame buildings. Have you actually seen any of these projects using this style of construction?

I was in Vancouver. I did see there's a city hall up there that's using this cross laminated timber, which basically you can do the same thing with our LSL, but then you get into logistics of shipping something that's going to be 8 feet wide by 68 feet long and 4 feet thick. That's a tough piece of wood to come from how Holton, Maine. Practically speaking, here in the US I think the four story and under is probably going to be our sweet spot. We are seeing a fair amount of multi-family using that. I know there's a lot of talk around it to build these bigger buildings. I just don't know how much of the market they're really going to represent going forward.

To a certain extent, this was a bit of an academic exercise to demonstrate --

I think it is. We actually had Peter Greene -- is that his name? He's the big architect -- Michael Greene and Associates up in Vancouver. We had him spend some time with us. Probably the most interesting thing that he brought to my attention that I wasn't aware of is that concrete, from a sustainability standpoint, is terrible. It provides or it creates 8% of the gas in the US, versus transportation which was 2.5%. Concrete as a building material is not very sustainable. The under four story using concrete steel is not the right way to go. Probably more than you want to know.

I don't think concrete grows back. I think part of the objective was to stimulate the Chinese adoption. Anything over there?

I think you're exactly right. What they're trying to do is demonstrate they can build a 15 or 20 story building and have the Chinese say this is perfect for 6 stories then.

It's definitely still academic.

Well, thank you. Stephanie, I think that's all the time we have for questions. If you could please provide the replay number and then I'd like to before you do that, I'd like to thank everyone for participating on our call. Mike and Becky, as always, are here to follow up, to answer any follow-up questions and I thank you and hope everyone has a good day.

Ladies and gentlemen, if you would like to listen to the replay you can dial in the US toll free number at 1-888-286-8010 and the access code is 74994732. The international direct number 1-617-801-6888, and the access code 74994732. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. You have a great day.