Nov 4, 2008
Executives
Curt Stevens - Chief Financial Officer Rick Frost - CEO Mike Kinney - IR Becky Barckley - IR
Analysts
Mark Connelly - Credit Suisse Gail Glazerman - UBS Peter Ruschmeier - Barclays Capital Chip Dillon - Dillon Investment Research Mark Weintraub - Buckingham Research Steve Chercover - D.A. Davidson George Staphos - Bank of America Securities
Operator
Good day, ladies and gentlemen, and welcome to the Third Quarter 2008, Louisiana-Pacific Corp. Earnings Conference Call.
My name is Lacy, and I will be your coordinator for today. At this time all participants are in a listen-only mode.
We will be facilitating a question-and-answer session towards the end of the conference. [Operator Instructions].
As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr.
Curt Stevens, Chief Financial Officer. Please proceed.
Curt Stevens
Thank you very much, and good morning to all of you, joining us on Election Day. Hope you all had a chance to go out and vote.
I appreciate you joining us for our conference call to discuss our financial ruts for the third quarter ended September 30th, 2008. As the moderator said, I am Curt Stevens, Executive Vice President of Administration and Chief Financial Officer.
With me today I have Rick Frost, Chief Executive Officer; and Mike Kinney and Becky Barckley, our regular Investor Relations contacts. As I usually do, I will start the call with a review of the financial results for the third quarter; provide a discussion about the performance of each of our segments; and some comments on the balance sheet.
I will then turn it over to Rick, who will discuss the current market environment, our accomplishments and challenges during the third quarter of 2008, and a summary of our thoughts and plans for the rest of this year and in to 2009. As we have done in the past, we have opened this call up to the public, and we are doing a webcast.
This could be accessed through www.lpcorp.com. Additionally, as we have done in the past to help the earnings call, we have provided a presentation that has supplemental information that is included in our earnings release.
As I go through my comments, I will reference these slides. As a caution, this presentation should be reviewed in conjunction with the publicly available earnings release.
The second slide of our presentation, I want to remind the participants about the forward-looking statements, comment that is included in our earnings release and also on this page in the presentation. Also be aware that there will be a discussion and use of non-GAAP financial information, and that caution is on page 3 of the presentation, and then we also have an appendix that contains the necessary reconciliation.
I am not going to read all of these, but I am going to incorporate it with this reference. Let me start by referring to Slide 4, this is a presentation that shows the summary of our results for Q3 of 2008.
Reporting today a net loss for the third quarter of $111 million or $1.08 per share. Continuing operations had a loss of $100 million or $0.98 per share, and discontinued operations had a loss of $11 million.
Net sales from continuing operations were $390 million. For the same period last year, we reported a net loss of $68 million or $0.65 per diluted share.
Continuing operations, we had a loss of $55 million or $0.52 per share, and discontinued operations showed a loss of $13 million. Net sales from continuing operations were $473 million.
Each of these reported periods had several special items that are not generally attributable to ongoing operations. I am going to briefly go through those.
Of the most significance in Q3 of this year, we continue to feel the turbulence of credit markets through our auction rate security holdings. Compared to June 30th, 2008, we recorded an additional other than temporary impairment of $89 million through the income statement.
This $89 million has two pieces it to. It includes a $33 million decline in value from June 30th based on the quotations from the issuing banks, and the reclassification of the previous balance of $56 million that was reported as temporarily impaired.
This means of the $151 million face value of the ARS, only $40 million or less than 30% is recorded in long-term investments on the balance sheet. During the third quarter of '08, we also recorded a $1.6 million severance cost associated with our announced indefinite production curtailment of our Athens and Chambord OSB mills.
The balance will be reported in Q4. We did record an impairment of a non-operating facility in Quebec of $10 million, to reduce it is carrying value to the estimated seams price.
Late last week, we signed a variety of agreements to sell this complex this quarter. The estimated sales price was established in Canadian dollars, and therefore with the strengthening in the US dollar in the fourth quarter will likely be required to record an additional impairment in the fourth quarter.
We do expect to receive the proceeds in cash from the sale in Q4, but we have not disclosed the amount. In the third quarter of 2007, couple of big items there, one was the initial impairment associated with the closure of the St.
Michele OSB mill of $47 million. We had an impairment related to the closure of our Hines, Oregon LVL facility of $1.5 million, and then we had a slight gain due to the proceeds received as part of a favorable verdict from a legal suit.
After adjusting from these special items, adjusted loss from operations in Q3 of 2008 would have been $39 million or $0.38 per diluted share, compared to a $25 million loss or $0.24 per diluted share Q3 of 2007. The next slide summarizes the OSB.
Loss in the OSB segment for Q3 was $28 million, better than both the same quarter last year, a $32 million loss and last quarter where we had a $35 million loss. OSB price compared to the same quarter last year was up 5%.
During the same period, however, volumes were down 24% due to market curtailment taken during the quarter, as well as the indefinite shutdown of the OSB mills that I mentioned. The reduction in volume of 24% lowered our sales by about $50 million in the quarter.
On a quarterly comparison, pricing counted for about $8 million in increased sales and profitability. On the cost side, we had a $14 increase in our cost that was about equally split between higher resin and wax cost, and absorption due to the curtailments.
Our Clarke County mill has been repaired, and was ready to run in October. Due to the ongoing poor market conditions, we made a decision to not start up this mill at this time, due to the high startup cost that would be associated to bringing that mill online.
DD&A for the OSB segment in Q3 was $13 million. The next slide our Siding segment.
This includes our SmartSide, which is both OSB siding and our fine fiber; Canexel siding and commodity OSB produced that one line in our Hayward mill. For the quarter, sales volumes were flat in SmartSide compared to the same quarter last year, and just slightly lower than last quarter.
Sales prices were basically flat to both the same quarter last year, and sequentially. The change in sales price is largely attributable to product mix.
This segment had $5 million in earnings, compared to $11 million in the same quarter last year, and $9 million sequentially. The variance in earnings was primarily attributable to higher manufacturing costs at our Roaring River plant as our fine fiber products now include zinc borate, and the cost of implementation of this process has been greater than we expected.
We typically limit this discussion on the earnings call to just quarterly performance, but for this product line, it is important to note that year-to-date, we are only down 5%, while housing starts are down more than 30%, which indicates that we are both growing market share and new housing construction, and increasing penetration in the retail markets. Canexel volumes were 20% lower than the same quarter last year and slightly lower sequentially.
As a reminder, these products are primarily sold in Eastern Canada and exported to Europe. Demand in both regions slowed in the quarter.
For the quarter, estimated housing starts in Canada were down 11% from the same quarter the prior year. The 6% decline in pricing compared to the same quarter last year is primarily driven by the strengthening in the US dollar in the third quarter, as these sales are primarily denominated in Canadian dollars.
DD&A for the siding segment was $5 million in Q3. Engineered wood is our next segment.
This segment includes our laminated strand lumber, produced in our Houlton, Maine facility, our laminated veneer lumber and I-joist operations plus related products. This also includes the sales of I-joist and LVL products, produced by the Abitibi JV or under an exclusive sales arrangement with an LVL producer.
For Q3, EWP recorded a loss of about $11 million, down from a profit in Q3 of last year of $3 million, and a loss of $9 million in the prior quarter. Volumes for I-joist and LVL were down significantly, compared to the same quarter last year; 30% and 22% respectively.
This is a direct reflection of reduced housing activity. Pricing is lower by 2% in I-joist and 9% LVL from the prior year.
Sequentially, it appears that pricing may be flatting out, with I-joist showing a slight decrease and LVL a slight decrease. As I mentioned, this segment does include the startup losses attributable to the Houlton, Maine LSL mill.
During the quarter, about half of the losses in this segment were attributable to this operation. There is a clear mandate with the EWP team to reduce these losses.
DD&A for this segment was $4 million. While I do not have a slide on our other building products, I do want to make some comments.
Overall we showed a loss of 2.7 for the quarter, compared to a loss of $3.5 million for the same quarter of 2007. Sales were up $34 million from the same quarter last year, and molding results, were down from the previous year, primarily due to higher resin costs and lower shipments to our retail customers.
With a falloff in oil pricing, we see some relief from those resin prices in the future. In our Chilean operations, we lost about $0.5 million, compared to a profit of $0.5 in the prior year.
The change was due to lower sales prices and higher costs for the new mill starting up in Lautaro. Our US green fiber joint venture results are comparable to the prior year, similar story to the prior year, strength in retail sales partially offset by weakness in contractor business that is tied to new home construction.
We also had much higher paper cost in Q3 of this year. Looking forward, there is some good news.
Paper costs have come down quite precipitously in the last several months as demand in China has dried up. This is also where we report non-operating facilities.
During the quarter we incurred about a $1 million in cost associated with these closed mills. The complex in Quebec is a big piece of these charges, and once that is sold, these charges should go down.
We had foreign exchange gain in the quarter of $2.3 million, compared to a $15 million loss in the same quarter last year. This is primarily attributable to the change in the Canadian dollar.
Looking forward in to the fourth quarter, the significant strength in the US dollar against other currencies in which we do business, the Canadian dollar, the Chilean peso, and most recently the Brazilian real, will have an affect on the reported earnings. If we just look at the Canadian exchange rate, depending on our schedule, our schedule in Canada, each penny in exchange is about $2.5 million positive at the operating line on an annual basis.
Net investment expense was about $4 million compared to income of $30 million in the same quarter last year, the result of both lower earnings on investments and higher interest payments due to borrowings in Canada, and significantly reduced capitalized interest that offsets the expense now that the construction at Clarke Houlton, and Lautaro are completed. In Q3 of 2007, the capitalized interest was almost $6 million.
For Q3 our effective tax benefit rated did decline to 38%. The decrease as compared to the prior quarter is almost entirely due to the significant adjustment on our auction rate securities, which is not currently tax deductible, and therefore, not provided for at statutory rates.
We are anticipating that we will receive the $20 million to $25 million in tax refunds from the Canadian provinces and states later this quarter. As of today, we do anticipate a significant portion of the tax benefit that we have accrued to date in 2008 will be refunded in 2009, based upon our ability to carry back our losses to prior year.
Currently, we estimate that this will be around $80 million. Under current law, assuming no changes, this will exhaust any NOL carry-backs going forward.
Because of some of any confusion we have had in the past on the size of the income tax receivable, we have broken out that amount separately on the balance sheet. So the balance that is shown there is both the expected recovery of the tax benefit in 2009 of $80 million, and the balance that we expect to collect here in the fourth quarter.
Slide 9 of the presentation is the balance sheet. Cash, cash equivalents, investments and restricted cash was $441 million at the end of September.
We did receive the $75 million federal tax refund in Q3, and that is included in that balance. On the other side, we had accrued in Q2, the OSB anti-trust settlement of $48 million, and all the but a small portion of this was paid in Q3.
Working capital $385 million, so net cash and investment is $51 million. Year-to-date our capital expenditures are $136 million, $45 million of that is related to the Brazilian acquisition and an initial $3 million was for investments in joint ventures.
Book value for ending share was $15.16 at the end of September. I do want to make a comment on our note receivable and note payable from asset sales, and I am making this comment because of a release that OfficeMax issued due to the Lehman bankruptcy.
Based on that, an event of default did take place on a piece of their installment note related to the tale of timberlands. While I am not fully familiar with the OfficeMax structure, LP does have three similar structures.
Two are on balance sheets and one is accounted for, it is an off balance sheet arrangement. These arrangements are all described in LP's Form 10-K.
We regularly monitor the status of all parties involved in these transactions. In fact a $20 million payment was made last Friday, under one of these arrangements, lowering the value of both the notes receivable, the notes payable, plus reducing the recourse amount to LP by that same $20 million.
I wanted to make sure that investors were confident that these arrangements remain in place and are operating as expected. On our last earnings call, we did talk about our plans to refinance a $125 million Canadian term loan, and to address the 2010 note maturity.
We have been working diligently on several fronts to accomplish this refinancing. This includes working with our current banking group on alternatives to the Canadian term loan in December.
However, with the worldwide credit and liquidity crisis, this has made this process a very much more difficult. Let me try to frame the cash situation.
As mentioned previously at the end of September, we had $441 million of cash and cash equivalents, investments, both short-term and long term, and restricted cash. Of this amount, about $110 million is either restricted or not readily accessible due to lack of marketability, and in that category I put the $39 million remaining value of the auction-rate securities.
Short-term debt maturities before the end of the year at September 30th, included $27 million outstanding on our Canadian facility, and $125 million Canadian term loan, a little over $100 million US in today's exchange rate. We have undertaken a number of initiatives to reduce our use of liquidity, including the suspension of our dividends on common stock, the curtailment of operations at our OSB mills in Chambord, Quebec; Athens, Georgia; Silsbee, Texas, and most recently Clarke County, Alabama.
The taking of downtime and many of our other facilities in order to manage inventories of finished goods and the continued pursuit of efficiency gains in cost reductions through our lean Six Sigma programs throughout the organization. Rick will be providing more detail in his remarks about an accelerated right-sizing initiative currently underway at LP.
My expectation is that this will require a fourth quarter restructuring charge of $10 million to $15 million for severance and related expenses that will be paid over the next year. I had hoped to be in a position to have announced our plans by this time, but due to this crisis, this has not happened.
I know that most of you would like much more detail on the actions we are taking, but we are constrained by legal restrictions, related to the various transactions that we have under consideration. Rick and I clearly understand the importance of dealing proactively with the situation in the credit markets, and are going so with all haste.
Slide 11 of the presentation does provide the calculations of non-GAAP financial measures for your interest. With that, let me turn it over to Rick, who will discuss the challenges, accomplishments, actions during Q3, his thoughts about the markets, and what we are going to do to deal with the current situation.
Rick Frost
Well good morning, everyone, and I too thank you for being interested in our call. As is customary, the weather here in Nashville, absolutely stellar, it is about 60 degrees without a cloud in the sky.
This is a big election day in the history of our country, and last but not least the titans are 8-0 in the NFL. That said, things have obviously not improved in the business since our last call.
Housing news is still dismal, and since the middle of September, the banking system and the credit markets have virtually shut down as you know. Today's business conditions are without precedence in my 31 years in this industry.
Sales of building products are at a very slow pace since September. The fed, the treasury, the Congress, and the FDIC have been working overtime to concoct and administer a potion to limit from the housing and mortgage collapse, and the turmoil in the financial services area.
I hope with this increased liquidity, the banks actually start lending to each other and to businesses again. For housing, I am cautiously optimistic that the actions being proposed by Congress and the FDIC around some type of mortgage relief and the direct actions taken by some institutions to renegotiate mortgage terms will reduce the amount of future and anticipated foreclosures.
So with that as an economic backdrop, let me make a comment on Q3 here at LP. I want to begin on the bright side.
LP is having another good safety year. I mentioned that, because it is a core value with us.
We actually have a chance to have our best year ever. In June, we began our 100 days of summer safety focus, and I am pleased to report a TIR for the year stands at 0.91, and we have an excellent change to exceed our internal goal of 0.83.
We had 16 facilities go through the summer months, which are our highest frequency months incident free. As well and Curt mentioned this our lean Six Sigma program continues to exceed our internal goal having returns in a ratio exceeding 3 to 1, even in an environment where the internal running of our plants is intermittent.
Actually year-to-date we have exceeding a 5 to 1 ratio in returns to expenditures. Because of the continued decline in demand for our products from the housing sector, we did announce the indefinite closure of two more OSB mills, the Chambord, Quebec mill, which has a rated capacity of 440 million square feet; and the Athens, Georgia mill, which has a rated capacity of 375 million square feet.
Obviously neither of those plants this year was running at those rates. In addition, we also recently made the decision to not restart the Clarke County, Alabama OSB, which is our most newly constructed mill, after we fixed it up from the explosion that we had in June.
Our Houlton, Maine laminated strand lumber mill is shipping to customers, and has been certified for both 1.35E and 1.55E products, and this is good news for us. We are currently working on the 1.75 certification.
However, demand is very slow as customers are reluctant to put inventory on the ground for a new product, with the level of housing starts being so uncertain. What we need here at Houlton are more takeaways.
The LVL mill in Oregon, where we have an exclusive sales arrangement has been producing since the first of the year, with a good ramp up in Q2 and Q3, and a broader portfolio of certified products. The volumes have come up well, but it had somewhat of a predatory effect on our Golden LVL mill up in BC.
Last quarter, I discussed our intention to invest about $35 million in this mill for a JV ownership interest. Given current market conditions, we are working with our expected partner to put off the timing of this investment.
It will not happen in Q4. In South America, the new Lautaro, Chile mill continues to increase product, and it is product is primarily supporting our growth in Chile.
That mill is currently running at about 70% right now. We did have the second closing on our purchase of a 75% interest in an OSB mill in Brazil in early October, and this week we just took over operating control.
I will be visiting both our Chilean operations and our Brazilian operations next week and look forward to getting an update from our operation teams in person while I am there. Capital expenditures year-to-date, including investments in JVs are at $136 million, and for the rest of this year, I would expect remaining investments to be about $25 million, with 20 of that to complete the purchase of the Brazilian operation, and the related working capital investment required.
As stated on the last call, I still do expect about $25 million in CapEx for 2009, exclusive of what we decide to do on the LVL mill on the West Coast. As Curt reviewed earlier, our financial results were indeed poor.
There were several large special items, with the largest being the other than temporary impairment of the reported value decline in our auction rate securities portfolio. In the quarter, we took about 300 mill days of down time in OSB.
This does not include the St. Michel mill which has been permanently closed, and hopefully will be sold in the short period of time, and the indefinite closure of Silsbee.
Silsbee did not run at all during the third quarter, nor do we anticipate it to run anytime soon. We did not actually run Clarke County, our newly constructed OSB mill at all in Q3, and we decided not to restart it for the near term.
As mentioned earlier, we made the decision to indefinitely curtail two other OSB mills that will go down this quarter, Athens and Chambord, and they will be down as we deplete the inventory in the log yards. In Siding and Engineered Wood, we also took significant downtime.
We reduced our shifting patterns, and we took other actions to keep our inventories at levels to just satisfy our customer's needs. Last quarter on the call, I talked about the deterioration problems that our claims people had been seeing on decking products in the composite decking business that we were in several years ago and sold.
While we are no longer in this business, we do have a warranty responsibility for the products that we made and sold, and we did issue a product recall on specific products. Based on the initial responses, we increased this reserve by $15.2 million in Q3, and we will continue to monitor and evaluate this situation statistically, and adjust if trends suggest the need.
The rest of 2008 will shape up for the housing industry as a very anti-climatic ending to an already poor year. Current consensus from forecasters is that new residential starts will be around the $900,000 mark for 2008, with most likely a slight decline under that rate for 2009.
Let me talk a little bit more about what we will do to manage through the rest of this downturn. Obviously, cash preservation and reducing cash burn are top of mind and top of effort.
We are managing all of our resources very carefully. As well Curt mentioned the discussions that we are having around financing options to make our balance sheet stronger.
We will continue to manage our mill outputs to meet customer needs, being mindful of not tying up any more cash in inventory than we absolutely have to. We are anticipating that most of our mills will be down more than they will run in Q4.
Now, new since I spoke with you last, I am in the process of leading an extensive rightsizing anyone initiative to latch LP's company structure, it is size, it is activities and it is initiatives and it is staffing model to our current level of business. When completed, this plan will significantly improve our cost structure and our cash burn rate going forward until housing rebounds.
I am using four criteria to guide our actions in this effort. First, is to keep our people safe; second, is to stay ethical and compliant to all regulations and expectations of a public company; the third is, we will do what it takes to make a quality product; and fourth is, we will do what it takes to sell those products.
Now, basically, I would describe the shift that we are making from being in a strong conservation and cost reduction mode, to adapting to what I will call a bottom-up mode, doing just what is necessary to reach the rebound when that rebound occurs. We intend to maintain a viable manufacturing operation, and a viable sales force.
Our reductions in activity level and staffing will be deep enough for us to capitalize on the concept going forward of variabalizing many of our fixed costs. This is a broad-based reduction effort focusing on significantly reducing our run rate.
To date, I have eliminated four officer-level positions, I have reduced our research, development, and engineering capability, I have shut down and put up for sale, LP's flight department, and I have reprioritized our marketing and sales efforts, and I am now going through a very difficult process of thinning our salaried employee ranks significantly. Since we are in the middle of this, internally right now as we speak, that is about all the detail that I am willing to provide on this issue.
This will have a measurable impact on our cash burn rate after severance obligations have been met. It is very hard work, but under these conditions, this is the right next thing to do.
Now to complete my remarks on a positive note, there are a few things that are starting to go our way. The fall of the value of our Canadian currency makes our operations north of the border more cost effective in US dollars, and we are currently reviewing our operating decisions in light of this quite dramatic change in exchange rates that is occurred just over the last six weeks.
There is also the rapid fall of oil pricing, which will reduce the cost that we pay for resins, wax, and energy, after the very steep inflation that we have sustained over the last year. The worldwide decline in the demand for pulp, should eventually lower the competition for fiber resources that we use in our mills, and this, along with the decline in fuel costs should work favorably on wood costs over the next year.
To put this in a bit of perspective, year-to-date raw material cost in 2008 are about $40 million higher than year-to-date 2007, based solely on the pricing of these materials. So with the changes that I just mentioned, we should be able to recover much of this in 2009, depending on our production rates next year.
It does appear that the credit markets are stabilizing, and as Curt said, we had hoped to be able to announce the completion of our refinancing efforts on this call, but market conditions since September have not allowed that to happen. Rest assured, as Curt said, that we are exploring a variety of options, and we will let you know the results as soon as we are successful.
With that, I will turn it back over to Curt.
Curt Stevens
Thanks, Rick. Lacy why do not we go to the Q&A queue, if we could.
Operator
(Operator Instructions). And our first question will come from the line of Mark Connelly with Credit Suisse.
Please proceed.
Mark Connelly - Credit Suisse
Thank you. Rick, two related questions.
You know, you mentioned the rise in the US dollar helping your Canadian operations. But can you talk more broadly about what the OSB cost serve looks like now?
And I can't help but wonder if the rise in the US dollar is actually flattening out the overall curve and making things potentially difficult to resolve. My second question is related on the Engineered Wood side.
Could you give us a sense of whether your competitive position there, you think, is better or worse than average right now.
Rick Frost
I'll take the second one, since I remember it better. I think we are about the same position.
We do feel over the last year and a half, we have gained a couple of points of market share in our efforts. Where we're getting killed in EWP right now is bringing on the Houlton mill under such adverse conditions.
And so the majority of our losses in the Engineered Wood Products business have to do with bringing that mill up, and right now, selling it out at about 25%. So that's one of our major issues that we have to think through right now, in terms of what do we do about that?
In terms of the overall cost curve, obviously I think exchange rate this morning was about $0.79, that's making us go back to the drawing board in our scenario planning in terms of based upon what production levels we run in to next year, which mills that we will run. Now we do approach that from a very regional basis, with regional customers, and regional pricing.
So, it does add a dimensions that we are used to deal with back in to the mix in terms of, if conditions actually get worse, and our takeaways go down further, which will be the mills that go down. Under this scenario, it's not quite as obvious as say looking at that eight weeks ago, and we're going through that planning process right now.
I hope that answers your question.
Curt Stevens
Mark, the only thing I would add to that is, that the competition today is very regionally based. So if you think about the change in Canadian currency, for instance, on the West coast, most of the mills that supply the West coast out of Canada will have the same impact of the currency.
Rick Frost
It's obviously very good for us with a mill like Peace Valley or a mill like Swan or Dawson, these things work heavily in our favor there.
Mark Connelly - Credit Suisse
Okay, that helps. Thank you.
Operator And our next question will come from the line of Gail Glazerman with UBS. Please proceed.
Gail Glazerman - UBS
Hi, good morning. Curt, I apologize if I missed the number.
But I think you said you were expecting about $20 million to $25 million tax refunds in the fourth quarter. Did you give a number or did you receive any refunds in the third quarter?
Curt Stevens
Yes, I did. We got $75 million, which was the federal refund in the third quarter.
The tax refund that we are expecting in the fourth quarter is $20 million to $25 million, and that's several Canadian provinces and US states. Most of it is in the Canadian provinces.
Gail Glazerman - UBS
Okay. And again (inaudible) if I missed it, but on the auction-rate securities, in the past you've talked about the fact that they have all been continuing to pay despite the write downs, is that still the case?
Curt Stevens
That is the case. We've spoken to the collateral agent.
We do have two issues of CDOs and there has been some decline in the collateral there, but the bank trust preferred and the credit-linked notes, there has been no reduction in the ratings and they are all performing.
Gail Glazerman - UBS
Okay. And just a final question.
Operationally, as you think of taking the [investment] downtime that you've announced for the fourth quarter. Clearly overall downtime is going to be up, but are there efficiency of the gains in terms of the cost basis that we should be thinking of, I guess, as conditions start to normalize, or not really?
Rick Frost
Yeah, the reason that you go to an indefinite shutdown versus just going up and down is to try to get your fixed costs out. And that's where we went with those two mills, as we are trying to eliminate the fixed cost associated with those two facilities.
So there should be an advantage to that.
Gail Glazerman - UBS
Okay. And is that something that you would expect to see in the fourth quarter, or there is still running down, something we'd see in the first quarter.
Rick Frost
Right now Athens just ran out of wood and I think Chambord has got about 10,000 (inaudible) left. So the impact will be more noticeable in Q1.
Gail Glazerman - UBS
Okay, thank you. Operator And our next question will come from the line of Peter Ruschmeier with Barclays Capital.
Please proceed.
Peter Ruschmeier - Barclays Capital
Thanks. Good morning.
On the question of raw materials, I think you mentioned $40 million higher cost year-over-year. How much of that was fiber?
I presume a lot was energy with the resin, wax and energy you mentioned.
Curt Stevens
Well year-to-date fiber was about one-third of it, and the rest was in energy and resin.
Peter Ruschmeier - Barclays Capital
Okay. And any reason with oil where it is today, why we shouldn't see the full reversal of resin, wax and energy?
And can you help us understand contracts that may prevent that from being realized, you know, over the near term, how does the timing work out?
Curt Stevens
Yeah, on the energy we do some forward purchasing of natural gas, so we do a portion of our purchasing going forward, so we should see most of the natural gas decline. On the resins, it's a look back.
So you look at what the CMAI or the other index is of worth, end of a quarter, and that would affect the next quarter's pricing. So there's a little bit of a lag.
So you probably won't see the big reduction in Q4, you should see it in Q1 from a pricing standpoint.
Peter Ruschmeier - Barclays Capital
Okay, that's helpful. Looking at the balance sheet, the current and long-term contingency reserves, I believe, when you add them together, down about $52 million sequentially.
Can you help us understand what that was?
Curt Stevens
Well, the big piece of that was the OSB anti-trust settlement, it was 44 of that.
Peter Ruschmeier - Barclays Capital
Okay. Got it.
All right. And then as we think about, the LVL investment situation, is that contractual?
Are you on the hook for making that investment? Or is that discretionary.
And what kind of timing, and we mentioned that in the fourth quarter, but what's your expectation for if and when you may complete that?
Rick Frost
Well, what I have told our partner or potential partner and there is certainly a partner in the sales piece is that, until we can complete our refinancing activities that we're just not up for it. So that's about as specific as I can get with you.
Peter Ruschmeier - Barclays Capital
Okay. And then just lastly, if I could, Curt, can you help us understand, I think it's $78 million on the sale of investments line in the quarter.
What exactly does that line represent?
Curt Stevens
On the cash flow?
Peter Ruschmeier - Barclays Capital
Correct.
Curt Stevens
You know, the accounting rules require you, when you change investments you got to (inaudible) to the sales on a repurchase. If you go back a couple of years ago, we would have shown $2.8 billion in purchases, and $2.7 billion in sales.
So it's just the in and out of the investment portfolio.
Peter Ruschmeier - Barclays Capital
And what kinds of exposures are we talking about there?
Curt Stevens
Hang on a second. I'm getting a cheat sheet from Becky.
Becky, why don't you answer it.
Becky Barckley
The net difference is partially because what you've done. As you get to a point where your original maturity become less than one year, you are moving that to current.
So that's a piece of what the 78 is. What's left in our basically marketable securities, include primarily short commercial paper, there's some corporate obligations that of some very high quality that we have seen little to no decline at all on value.
Peter Ruschmeier - Barclays Capital
Got it.
Curt Stevens
Yeah. So it's principally just a reclassification between cash and cash equivalents and investments.
Peter Ruschmeier - Barclays Capital
Got it. Super.
Thanks, guys. I'll turn it over.
Operator
And our next question will come from the line of Chip Dillon with [Dillon Investment Research]. Please proceed.
Chip Dillon - Dillon Investment Research
Hey, good morning.
Rick Frost
Good morning, you resurfaced.
Chip Dillon - Dillon Investment Research
Yeah, I didn't stay under water too long, but still fighting to keep my head above. Hey, on the cash flows that we see as we look in at your near-term financial situation.
Just want to confirm that of the 441 of cash, you pretty much have access to about 300 of that right now. Is that fair?
And what you really owe, I want to make sure I understand is about $27 million in Canada -- I'm sorry about $130 million; is that right in US dollars over the next, say, two quarters?
Curt Stevens
Yeah, I would say that at the end of September about 110 of that was not readily accessible either ARS or restricted cash. So I can give you 330.
And you are correct, as of today with the exchange rate at about 130 of the September 30th balances would be due before the end of the year.
Chip Dillon - Dillon Investment Research
Okay. And so you've got about 200 more than that, plus you have the tax refunds coming in from Canada in the fourth quarter?
Curt Stevens
Correct.
Chip Dillon - Dillon Investment Research
Okay. You talk about your refinancing.
The real issue is having, if I'm not mistaken is having access to a revolver that you have nothing, really, outstanding under, but, which, I believe matures sometime in the second half of next year; is that right?
Curt Stevens
The current revolver, we need to cash collateralize the (inaudible) that we have outstanding under that. And we have done that.
You are right, there is not any liquidity under the current structure, and we would look to replace that with some other structure that we would look to replace that with some other kind of a facility that would provide liquidity. I think it's September of '09 is when that expires, Chip.
Chip Dillon - Dillon Investment Research
Okay. And then when you look at the moving parts back in the third quarter, when we look at the change in the net debt of the company, basically it's operations, plus the $75 million in tax refund, minus about $48 million, I think you said for the OSB payment?
Curt Stevens
The OSB payment and then the invest and (inaudible).
Chip Dillon - Dillon Investment Research
That's right. And you actually might have even today a dividend, is that right?
Curt Stevens
No, No. we didn't pay a dividend in the third quarter.
Curt Stevens
We did in the second quarter.
Chip Dillon - Dillon Investment Research
Gotcha. And let me ask you lastly this.
$25 million in CapEx for next year; that is really getting that number down there. How long can you stay at that level?
In other words, if we had a really tough period through say, 2010 or 2011, I would imagine you couldn't keep it quite that low, but could you keep it say, under 50 in 2010, and keep the plants in good shape?
Rick Frost
Chip, in is Rick. Actually I've got my operations for next year at $20 million, and I've got $5 million for something that breaks that we haven't thought of.
So that's what I'm looking at next year. And our belief is that that is replicatable in 2010.
Chip Dillon - Dillon Investment Research
Okay.
Curt Stevens
Let me just tell you why, Chip. We have relatively new facilities, we’ve made significant capital investments to upgrade those.
So we have done, you know, these are not mills that are broken or mills in need of repair. The other thing to remember is, we will have a significant amount of these mills curtailed, so they will be just in the maintenance, we won't be doing the introduction of any new products or additional capabilities.
Chip Dillon - Dillon Investment Research
Okay. And then finally on Houlton.
You suggested, I think yes the loss was somewhere around $5 million or so dollars in this last quarter for startup, and, you know, recognizing the next two quarters are the slowest quarters seasonally, do you see that number coming down in those two quarters, or will you really need to get in to an environment where the demand is better?
Rick Frost
I've got to more fully load that plant, Chip, and so I'm trying to explore opportunities to do that. And you know, whether it's contract manufacturing or whatever, we just have to figure out.
Although we're out there burning the bushes pretty hard in terms of coming up with new orders, which we are, we've got to have additional volume through that plant, or it continues to be problematic.
Chip Dillon - Dillon Investment Research
Gotcha. Thank you.
Curt Stevens
The other thing to note on Houlton because it has had a significant new capital investment there. There is a big piece of that in DD&A, but when you think about it from a cash standpoint it's not as bad from a cash standpoint.
I think the other thing I would say as we are modifying operating schedules not only at Holton but at our other mills to take out fixed costs. As Rick said, we're trying to variabalize our cost as much as we can and Holton is one of those mills where we have changed the shifting patterns.
Chip Dillon - Dillon Investment Research
Gotcha. Thank you.
Operator
And our next question will come from the line of Mark Weintraub with Buckingham Research. Please proceed.
Mark Weintraub - Buckingham Research
Thank you. I think you've laid out how you about $311 million of accessible liquidity, and $105 million of tax refunds that that can come to you, but, obviously you got to be potentially paying off that debt, et cetera.
And then the big question I guess is while I understand you are not in a position to share specifics with us, where do you think you can get the cash burn down to in this type of operating environment with the measures that you are contemplating?
Rick Frost
You are just a little bit early in asking me that question to put me in a position where I can give you a real good look at it, and I have to apologize for that, but I try very carefully to keep my internal and external communications the same and I can't get ahead of this. I'm right in the middle of this process right now.
So, please forgive me.
Mark Weintraub - Buckingham Research
Fair enough. But presumably, this is a big program, and there's a lot of leeway in terms of where you can get; I guess, maybe to help me get a better grasp is when you talk about variabalizing many of our fixed costs, I understood the various taking out of fixed cost measures that you talked about.
Is there something beyond that that you are referring to or is it just, you are taking out a lot of fixed costs?
Rick Frost
Well, we are taking them out and when you make a decision to re-enter whatever activity that you abandoned, then you have a much more clear decision in terms of how to go about doing that. If you take an organization, and that's why I'm calling it and describing it and exercising it in this corporation is rightsizing.
The notion of having as many variable costs as possible in a cyclical business makes a lot of sense. But if you basically have a structure that has been put together to support a $2 billion plus corporation, there's only so much cutting you can do before you have to sit down and look at it from a different direction.
So, what we're going through is looking at ourselves as a $1.2 billion to $1.4 billion corporation, which we currently are now and saying what do you have to do if you are a company of that size? So, an example of that is, instead of having your own research and development laboratory, you keep your key capabilities out of that group, but in the future, you would contract more of that work and use other people's facilities then monetize your fixed investment.
So, that would be an example I would give you.
Mark Weintraub - Buckingham Research
Okay.
Rick Frost
Flight would be another one. At a company of our size, we can't afford to have an airplane and a hangar, and it's very difficult to eliminate good people that have performed [available] service for us, they have looked at the world very differently.
Mark Weintraub - Buckingham Research
That really makes lot of sense. Is there much leeway do you think that you have at the mills in creating greater variabalizing, what's often thought of as fixed costs at the big mill level?
Rick Frost
I think we have a couple of levers to pull there. One is continuing to get better on how we schedule both uptime and downtime.
The other one is facing the reality that we may not be able to shelter our employees in the mill environment from loss of wages and salaries to the degree that we have up till now. So, in other words it's another element of treating what you learn in school as [oppose to positively] a variable cost, and often times to protect future capability, we have treated it as a fixed cost, and we have to reassess that.
Mark Weintraub - Buckingham Research
Very helpful. And do you have a sense when you will be in a position to lay this out a little bit more definitively for us?
Rick Frost
Yeah, I would think by the next call, I'll be able to give you a run up of what we've done and what we expect to get out of it. I will just say it will be measurable and if you take what we're doing in terms of rightsizing ourselves along with the things that appear to be going our way in raw materials, it should be significant.
Mark Weintraub - Buckingham Research
Okay. Thank you.
Curt Stevens
Mark, the one last comment I'd make, and I only addressed it circumspectly is we do have selected assets for sale the one that I mentioned we closed last week. So, we will be seeing cash proceeds come in over the next couple of quarters related to some asset sales principally non-operating facilities.
Operator
And our next question will come from the line of Steve Chercover with D.A. Davidson.
Please proceed.
Steve Chercover - D.A. Davidson
Thanks, good morning.
Rick Frost
Good morning.
Steve Chercover - D.A. Davidson
First question in terms of the operating rate which you said will be below 50% in the fourth quarter, can you give us a sense of what it was in Q3 or even just does that correspond to six or 700 million board feet of production?
Rick Frost
Let me try it this way. I think in Q3, we ran at 77% of our capacity of our rated capacity OSB, if you exclude both Silsbee and Clarke County from that calculation and include Peace Valley.
If you exclude Clarke County from that calculation and exclude Silsbee, which is indefinitely shutdown, we ran at 77% of the capacity last quarter.
Steve Chercover - D.A. Davidson
Okay, thanks. And with respect to the sale of St.
Michel complex, is that going to make OSB for someone else, or is there a prohibition on what products it makes going forward?
Curt Stevens
Steve, that wouldn't be a very smart thing for us to do, but those agreements are confidential at this point.
Steve Chercover - D.A. Davidson
Well, hopefully you are smart because I hope…
Curt Stevens
Thanks. Give me a little credit, Steve, okay?
Steve Chercover - D.A. Davidson
Okay. Thank you.
I'll give you credit, then. Well, that was it because my other questions have been answered.
Curt Stevens
All right. Lacy, we have time for one more question.
Operator
And our final question will come from the line of George Staphos with Bank of America Securities. Please proceed.
George Staphos - Bank of America Securities
Thanks. Hi, everyone.
Good morning.
Rick Frost
Hi, George.
George Staphos - Bank of America Securities
I wanted to come back to Pete's question regarding the joint venture. Realizing that you've told your potential partner that you'd like to pull if off until a refinancing is completed, is there still a time by which you would still need to fund that investment if in fact refinancing did not go with the timing that you would expect?
Rick Frost
I don't think I can provide anymore color on that at this time.
George Staphos - Bank of America Securities
Okay Rick. Second question and I'll try to make them quick, given the time of the call.
The operating posture that you are currently at right now within OSB and if we hold pricing constant at these levels which is obviously a fairly large assumption, do you think that the operations as you are currently running are still going to burn cash in 2009 or do you think you would be in a position where you could keep your operations above water from a cash generation standpoint?
Rick Frost
Yeah, that's dependent on a couple of moving parts. Obviously, the challenge that we're issuing the organization is as it looks at itself at the size we are today, we have to try to figure out how to be cash neutral until things turn around.
There are a couple of moving parts there though, based upon what we run and what we don't, based upon the acceptability of the arrangements with customers in terms of how much they want at what price.
George Staphos - Bank of America Securities
I see.
Rick Frost
So, that's the difficulty that we're having and the challenge that we're taking on here in terms of sitting down and if we look at this for another year, at least in this type of condition, we are probably going to be willing to pass up business that we have taken in the past and as a result take the downtime in our operating system.
George Staphos - Bank of America Securities
Okay.
Rick Frost
I don't know if that's helpful to you or not.
George Staphos - Bank of America Securities
It helps. Two last ones.
I know you can't quantify much on the rightsizing, but could the cash generation be at least as large as restructuring charge and then over the course of 2009, how much cash would you like to have on hand as you run the operations? What would be the minimum that you need?
Thanks, guys. Good luck on the quarter.
Curt Stevens
Well, on the cash burn rate compared to the restructuring charge, we would expect that the benefit would be much greater than the restructuring charge in 2009. Now as you know, when you have severance, what you do is you need to accrue that severance based on the time that you would indicate to the individual that they are not part of the go-forward plan since they are actually terminated.
So, the accrual will likely be over a couple of quarters.
Rick Frost
A pretty good rule of thumb for you on staffing reductions is it's about two to one, your run rate advantage to what your severance cost is. By the time you loaded up with benefits and all of that…
George Staphos - Bank of America Securities
Okay.
Rick Frost
You run that out, it takes you probably about half as long as to start gaining your actual run rate as you have severance out there.
George Staphos - Bank of America Securities
Okay. And the minimum cash?
Curt Stevens
When you think about the cash, we said this on last call and I just said it on this one as well, what I would really like to do is that I'd like to be in a position to address both the 125 roll over and the August 2010 bonds of $200 million. So, I'd like to be in a position where I can add that much cash to the balance sheet so that the ability to pay off the short-term loan and to de-fees, potentially de-fees the 2010 gives us the running room we need to get this economy back on shape.
George Staphos - Bank of America Securities
Thanks, guys.
Curt Stevens
Thank you. Well, I appreciate everybody participating on the call.
As always, Mike and Becky are available for any follow-up questions. I also will tell you that it's painful time in the credit markets and I wish I could give you better news on that, but we're doing everything we can as aggressively as we can to take advantage of a poor situation.
And as Rick said, we are committed to improving the operations going forward with the right sizing the mill downtime that we're taking and the changes in our operating schedules at the mills. We would expect to do significantly better and what we think will be basically a flat market.
With that, thank you very much, and Lacy if you could give the replay information I would appreciate it.
Operator
Thank you. To access the replay for today's call, you may dial 888-286-8010 toll free, or 617-801-6888 internationally with the replay passcode of 80225988.
The replay will be available approximately one to two hours at the end of the conference. Thank you for your participation in today's conference.
This concludes your presentation. You may now disconnect.
Good day everyone.