Louisiana-Pacific Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 12 speakers on the call.

Operator

And thank you for standing by. Welcome to LP's Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Aaron Hoboll, Vice President of Investor Relations and Business Development.

Operator

You may begin.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the Q2 of 2023 And our outlook for Q3 and the remainder of the year. My name is Aaron Holwald, and I am LP's Vice President of Investor Relations and Business Development. Joining me this morning are Brad Southern, LP's Chief Executive Officer and Alan Haughie, LP's Chief Financial Officer. During this morning's call, we will refer to an accompanying presentation that is available on LP's IR webpage, which is investor.

Speaker 1

Lpcorp.com. Our 8 ks filing is also available there, along with our earnings press release and other materials detailing LP's Strategy and sustainable business model. Today's discussion will contain certain forward looking statements and non GAAP financial metrics As described on Slides 23 of the earnings presentation, I will incorporate those slides by reference rather than reading them. The appendix of the presentation also contains reconciliations that are further supplemented by this morning's 8 ks filing. And with that, I will turn the call over to Brad.

Speaker 2

Thanks, Erin. Good morning and thank you all for joining us. I'll briefly describe LP's results for the quarter before I turn my attention to the future and discuss LP's strategy of growth, innovation and efficiency and how it positions us exceptionally well to benefit not only from the ongoing rebound in new All single family starts are down 21% for the first half of the year compared to 2022. May June saw stronger than expected building activity. As housing starts have rebounded, demand for LPs or unit strand board has followed, Pushing prices meaningfully higher and improving LP's EBITDA and cash flow outlook.

Speaker 2

By contrast, The repair and remodeling market appears to be comparatively weak and softening, likely due at least in part to constrained home inventory and reduced home sales. Existing home sales, which in a typical year outnumber starts by 4% or 5% to 1%, are down 23% for the first half of the year And vacancy rates and active listing count suggest that trend will persist. The shed market where LP has a dominant share of exterior siding panels closely follows existing home sales and has been similarly weaker so far in 2023. Against this backdrop, LP generated $611,000,000 in net sales, dollars 93,000,000 in EBITDA, $88,000,000 in operating cash flow and $0.55 in adjusted diluted earnings per share. While our EBITDA performance exceeded guidance from the prior quarter, Siding revenue was lower than expected with sheds the softest component of the Siding business in the quarter.

Speaker 2

Overall, siding volume dropped 16% versus prior year quarter, roughly equal to the drop in single family starts for the quarter. Partially offsetting this, Siding prices were 6% higher than prior year with the result that net sales were 11% below prior year. On Slide 6, you can see that while single family startups dropped 22% on a trailing 12 month basis, Siding volume was flat and siding prices were up 11%. Comparing the first half of twenty twenty three to the first half of twenty nineteen before the pandemic, Siding revenue has grown at a compound annual rate of 14%. Over the same full year period, single family starts were essentially flat.

Speaker 2

The first half of this year is certainly softer compared to the COVID year since siding was on allocation. The siding growth consistently exceeds that of the underlying market. A bright spot for the quarter was expert finishprefinished siding, which saw flat volume in Q2 compared to prior year Despite the general R and R slowdown, our newest expert finished facility located in Bath, New York will open in Q3, Bringing increased automation and improved efficiency to LP's prefinished siding production. To support ongoing product innovation, In the Q2, LP opened our new innovation center at the Natural Resource Research Institute in collaboration with the University of Minnesota, Duluth. The Innovation Center will accelerate our development of high performance and sustainable building solutions.

Speaker 2

We're also happy to announce the introduction of 2 new additions to the Siding product portfolio. The new products are Brush smooth expert finish lap and pebble stucco panels. These new offerings retain SmartSide's durability, Efficiency of installation and industry leading sustainability will help us gain share in markets that prefer these aesthetic characteristics. For the OSB segment, the ongoing improvement in single family new construction has led to increased demand for OSB, which has in turn led to higher prices. Given the 2 to 3 week OSB order file, the price increases in the last days of Q2 Well, most will be reflected in Q3, but impressive operating efficiency and a sequentially higher structural solutions mix of 54% Help the OSB business contribute $37,000,000 in EBITDA in Q2.

Speaker 2

Both businesses have done an impressive job so far this We are operating efficiently despite lower capacity utilization as we manage our operating footprint with discipline. While the current market environment for repair, remodeling and siding may be softer than anticipated, our commitment to our strategy is unwavering. We will continue to grow through innovation, manage our capacity with discipline and efficiency and preserve the strong balance sheet that lets us invest in our future. Our strategy is working. We will continue to invest in capacity to produce and deliver the best Siding and Structural Solutions products in the industry.

Speaker 2

The acquisition of what will become our next siding mill in Wawa, Ontario is an example of this. We are pleased with harvest local aspen fiber, and we have begun the engineering work necessary to prepare Wawa to become a state of the art siding mill, so that we can meet growing customer demand. Our capital allocation strategy gives us the flexibility to adjust the timing of investments in growth Before I turn the call over to Alan, I want to conclude by spending a moment talking about safety, which is a core value at LP. Our goal is 0 injuries. And while we will never be perfect, we work every day to continuously improve safety at LP.

Speaker 2

We were recently notified that LP won the 2022 Safest Company award from APA to Engineered Wood Association. This is the 11th time in 15 years that LP has earned this award. The safety is not about winning awards. It's about building a culture where we look out for ourselves and each other so we can all go home to our families safely every single day. I'm happy to say that LP's safety performance in Q2 has continued to build on our safety legacy.

Speaker 2

The Q2 of 2023 LP Siding business had a single recordable injury. The rest of our North American employees, including the OSB business And all corporate functions ended the quarter without a single recordable injury. That means LPT members in North America completed almost 2,000,000 work hours With only one recordable entry. One is too many, and we will learn from it and improve. But we are incredibly proud of this result, And I know that every employee shares my commitment to being the safest company in our industry.

Speaker 2

And with that, I will turn the call over Alan for a more detailed review of the financial results before we take your questions.

Speaker 3

Thanks Brad. The waterfall on page 7 of the earnings deck And the revenue guidance miss. This 16% volume decline resulted in $54,000,000 less revenue and $26,000,000 less EBITDA Given Siding's high variable margin, price increases partly offset the volume decline. The combination of list price increases last July this January lifted net prices by about 6%. Outside of volume and price, other factors in the quarter includes continuing mill conversion costs.

Speaker 3

On our Q1 call, we identified $16,000,000 of such costs embedded within EBITDA. As predicted, that cost has fallen to roughly $10,000,000 this quarter as Segola ramps up production. $5,000,000 of this is identified on the waterfall and the further $5,000,000 is a repeat cost from last year, same cost, different mill And so does not pop as a variance, but it's there nonetheless. On the plus side, input prices have stabilized and in some cases already falling. Year over year, freight costs fell by $4,000,000 partially offsetting a $6,000,000 headwind from raw material inflation.

Speaker 3

Thankfully, a much smaller impact than in recent quarters. The resulting EBITDA of $59,000,000 at a margin of 18 would have been 3 points higher, but for the mill conversion and ramp up costs, which I must stress are entirely discretionary and incurred in the interest of long term growth. The OSB waterfall on Page 8 is similar to those of previous quarters and that the price change dwarfs all other factors. And as in recent quarters, I will dispense with price and describe the remarkable performance delivered by the OSB team, Managing the business safely and efficiently in a challenging market environment. Commodity volume was down 12% year over year With market curtailments and the removal of Segola, partially offset by substantial improvements in operating efficiency.

Speaker 3

Structural Solutions mix was up sequentially and year over year accounting for 54% of second quarter volume. As in Siding, raw material inflation plateaued and is receding from any input categories. Perhaps most impressive, The OSB business achieved a 5% reduction in cash cost of production compared to the Q2 of last year despite volumes being nearly 20% lower. The $17,000,000 benefit from lower cost of production combined with $4,000,000 in freight savings and the transfer of Segola overhead to the Siding business Added $32,000,000 of year over year EBITDA benefit in the quarter, more than offsetting all other non price factors. This highlights the considerable value of our strategy of operating OSB efficiently, while maximizing the incremental contribution from the Structural Solutions portfolio.

Speaker 3

Cash flow is shown on slide 9. As expected, it improved sharply in the 2nd quarter with a net outflow of $56,000,000 Compared with a $257,000,000 outflow in the Q1. Clearly then, absent the $80,000,000 payment for the Wawa facility, Cash flow would have been positive in the quarter even with ongoing investments in Segola, Bath and other maintenance and growth capital spending. In addition to spending $74,000,000 on CapEx and acquiring Wawa, LP paid $17,000,000 in dividends and paid $12,000,000 in cash taxes. We ended the quarter with $30,000,000 drawn on our revolver, leaving us with about $600,000,000 of liquidity.

Speaker 3

Cash flow has continued to improve in recent weeks in large part due to increased OSB prices with the result that the revolver has now been fully paid down. LP's capital allocation strategy is unchanged as is our commitment to it. We'll continue to earn cash, invest in growth And return a significant portion of the remainder to investors via dividends and share buybacks in that order. With Segola producing A grade lap siding and Bath starting soon, the bulk of 2023's CapEx is behind us, so the rate of expenditure And as OSB prices and cash flows improve, so too does the probability of share buybacks. Now, It was rather a busy quarter regarding the reconciliations of net income to both EBITDA and adjusted net income.

Speaker 3

So let me spend a moment to describe Three items that appear on Slide 10 of the presentation covering, in this instance, the net income to EBITDA reconciliation. Reading top to bottom on the slide, the first item of note is a $21,000,000 tax provision. We decided to repatriate $45,000,000 of cash from LPSA in the 2nd quarter. This means that we can obviously no longer assert The cash held in South America is permanently invested there, which triggers the obligation to book a tax entry to reflect the potential tax we would pay if and only if We choose to repatriate the remainder of LPSA's cash. That charge was about $22,000,000 $5,000,000 of which relates to the $45,000,000 actually repatriated, leaving $17,000,000 of the $22,000,000 charge as a non cash The next item on the list is a $17,000,000 other operating charge, of which $16,000,000 relates to the resolution and settlement of a patent dispute within the OSB business.

Speaker 3

And finally, you'll note $34,000,000 in business Exit charges in the quarter. This refers to Entekra, the exit of which was referenced on our Q1 earnings call and is mostly non cash, Which brings us to guidance. I've already mentioned the near completion of 2023's major capital projects, so that's why I'll start. Remaining expenditures for the year should bring full year CapEx to about $300,000,000 implying roughly $110,000,000 of spending in the second half of the year With a roughly sixty-forty split between growth and sustaining maintenance. With reference to Siding growth, In previous quarters, the long lead times resulting from our managed order file enabled greater near term visibility and made quarterly revenue guidance both useful The combined effects of moving off a managed order file and our increased focus on 1 step distribution has resulted in a new normal order file of roughly 2 weeks.

Speaker 3

Now while this makes us much more responsive to our customers, it also makes Quarterly revenue is predictable. So we'll take a longer term focus going forward. First, recall that our 3rd and 4th quarters of last year set records And while we expect second half revenue to be roughly 5% higher than first half revenue, This will result in a year over year decline in the second half of 12% to 13%, and therefore a full year siding revenue decline of roughly 10%. With respect to OSB, the rapid increase in OSB prices also complicates our algorithmic approach to revenue guidance In part, because LP's price realization tends to lag price movements in either direction. That being said, If we assume that prices remain flat at last Friday's levels published by Random Lengths and if we adjust for the lag time induced by our order file and other factors, We would expect OSB revenue to be at least 50% higher sequentially compared to the Q2 of this year.

Speaker 3

And it should go without saying, but just for the avoidance of doubt, this is not a price prediction, merely an assumption for modeling purposes. Under these assumptions and including the cost of a Q3 press rebuild in Siding as well as some maintenance in the OSB business deferred from earlier in the year, We would expect total company EBITDA to be between $160,000,000 $180,000,000 in the 3rd quarter. And with that, we'll be happy to take your questions.

Operator

Thank you. Our first question comes from Susan Maklari with Goldman Sachs. Your line is now open.

Speaker 4

Thank you. Good morning, everyone. Thanks for taking the questions. My first question is, can you talk Good morning. Can you talk a bit about the volumes in Siding as we think about the back half?

Speaker 4

Any color perhaps on where the channel inventories are? And then as we think about, you increasingly lapping the pricing that were taken last year and even earlier this year, is it fair to assume that a lot of that decline in the back half comes through volumes?

Speaker 2

So Susan, let me start with inventory questions. So yes, we're still experiencing higher inventories than What would have been normal pre COVID in our opinion, those inventories were down, say, really starting in March Through the Q2, but for certain parts of our distribution channel, they're still elevated higher than we would like So I do think we'll work through all that in Q3. From a pricing standpoint, just to remind everyone, we did do a price increase midyear last year and the beginning of this year. So all that price that will be lapping to your In your terminology that mid year, last year price increase during Q3 and then we'll obviously enjoy the increase that we had this year. So the revenue guidance that we have given does incorporate those 2 price increases, but doesn't anticipate another midyear Price increase.

Speaker 4

Okay. And then perhaps turning to the margin in siding, Can you give any color on how you're thinking about the cost structure in the back half? Any potential relief in terms of raw materials, Transportation that could come through in there. And as you think about that coming through, is it possible that we could see those second half Margins in siding moving closer to perhaps that 20% range even as the volumes continue to be lower?

Speaker 3

Well, that's a tough call. So certainly we are seeing raw material costs some raw material cost relief, which is beginning to Show through. I did mention the existence of a press rebuild in Q3, specifically so that Kind of so that wasn't treated as being sort of incremental because we will have the fall off from Q2 to the second half of some of the ramp up costs To be kind of replaced by the cost of the press rebuild. And then so there's nothing Sort of particularly unusual that we're modeling in the cost base within Siding of the second half of the year.

Speaker 4

Okay.

Speaker 3

There is a little bit of relief on raw materials.

Speaker 4

Yes. Are you seeing that there is some year over year deflation that Yes. Okay. All right. Thank you for the color.

Speaker 4

Good luck with everything.

Speaker 3

Thank you. Thank you. Thank you.

Operator

One moment for our next question. Our next question comes from Michael Rocklin with Chorus Securities. Your line is now open.

Speaker 5

Thank you, Brad, Alan, Aaron for taking my questions. Can you just following up with Siding, can you help us think about Future volume growth in Siding, obviously, shed demand, which I think is about 20% of your mix, was notably weaker this quarter. Demand was also pulled forward during COVID. So, just trying to figure out how you see demand shaping up and I think on a go forward basis and look, what type of growth we should ultimately expect maybe once channel inventory is clear?

Speaker 2

Yes. So We're optimistic about growth going forward in siding. And if you think about all the work and effort and product innovation that has gone into Start with our expert finish, pre finish program, the facility that we're building in Bass, New York To provide East Coast volume in an efficient way, we really feel like we're positioned well and from Starting with a pretty low market share in the repair and remodel area outside of the Midwest to really grow that repair and remodel through our export finished penetration across the country. And then from we launched builder series early last And that's a product that is focused on the large national builders, and who We all know we're taking market share in this current environment, and we feel like that really positions us well to grow With calls within new construction, we are underpenetrated with large national builders. And now that we have this product in place, really encouraged that as Housing continues to improve as the large builders continue to take share.

Speaker 2

We're really in a Fine position from a competitive product standpoint to take advantage of that growth. So we're super optimistic about The portfolio and let me just add one other thing. We are we do have an initiative to place lap and trim Consumer retail, which is another area where we've been very underpenetrated historically. So all that really gives us a lot of confidence to believe that after this year, we're going to be back on that solid growth rate that we've enjoyed over the last decade in Siding. And plus, we've got 200 salespeople whose job it is and whose comp is related to growing siding.

Speaker 2

And so we feel like we've got the right product, we've got a good brand, a really, really good value proposition, and we've got a sales force that is in the process Transitioning from 2 years of operating under a managed order file to actively selling and picking up market share. So super excited about continued growth in Siding over the midterm to long term time horizon.

Speaker 5

Thanks, Brad. Just in terms of your forecast, does your forecast in terms of signing growth still assume that sheds comprise 20% of the mix? Or is the growth Predicated more on new construction and areas other areas where you may be underpenetrated.

Speaker 2

Yes. I would say it's still around that. I want to make one little caveat. We do have to estimate that somewhat because some of the Shed SKUs are accessed by the shed manufacturers through regular 2 step distribution. But certainly, We can kind of tell from our panel sales.

Speaker 2

And during COVID, as we talked about, that was a really strong Part of our portfolio and while I mean when you look at panel sales this year versus 2019, it's still going to be way up, But it is certainly off of what we experienced during COVID. And so that I would say that is certainly a weak market right now. We feel like we're holding our own everywhere else, but that one that's going to the first half And shed was extremely weak. And the 2nd quarter actually called us by surprise how weak it was. I mean, I don't think there's any long term I'm sorry, just one more.

Speaker 2

I don't think there's any long term issues with shed. Historically there, we've had when we've been able to grow market share and share during kind of downward trend periods in share. Our panel Market share is pretty dominant there. So we're going to we're in a position where we have to ride through the ups and downs in the shed market Our ability to gain market share, at least with panel product and share is pretty low right now given our position.

Speaker 5

Got it. Appreciate all the color. And then one final question before I turn it over. Just in terms of pricing on the side, you mentioned obviously it's up year over year, but sequentially pricing was down. Can you just provide some color on what drove the decline in a sequential basis?

Speaker 5

Is it a mix factor, is Just trying to get into why pricing would decline sequentially?

Speaker 3

Yes, it was mostly it was entirely Mix of products within the portfolio, but they drove it down. It wasn't a function of list price increases or anything like that,

Speaker 1

Just mix.

Speaker 5

Got it. Thank you very much and good luck in the second half.

Speaker 6

Thanks, Michael.

Operator

Thank you. One moment for our next question. And our next question comes from the line of George Daphos with Bank of America Securities. Your line is open.

Speaker 6

Hi, everyone. Good morning. Thanks for all the details. A couple of, sort of micro questions to start and then I had some other questions on Siding. So, you called down capital spending a bit And then comparing the slides 1Q versus 2Q, there's both some trimming both on the conversion And also strategic growth capital, obviously, maybe with the year proceeding a little bit less quickly than you would have expected, that'd be natural.

Speaker 6

But if there's any other color you could share in terms of Why those numbers moved? And then on the $16,000,000 of OSB patent related claims, if you could Remind us what's behind that, recognizing it's now in the past, but what was in those figures and drove the settlement claim? So

Speaker 3

let me start in order then. With the CapEx, there's a little bit of modest trimming, but the majority of this is that we were Fairly conservative on both the upfront payments we may need to make for Huawei as well as payments to which we were committed For Halton 2, prior to us putting Huawei next in line and therefore delaying, Halton 2 by virtue of Huawei going in front of that. So The team has done a sort of an excellent job in negotiating our way out of some of the payments that we would have had to make for Halton too. And That's primarily that conservatism in Wawa and negotiating our way out to certain payments for Alba 2 were the primary reasons for

Speaker 6

Got it. And on the patent claim?

Speaker 3

Yes, I'm not really at liberty to disclose a great deal. It was I just yes, thank you. I can't disclose the detail. But it's the matter is closed and behind us. And this is settled.

Speaker 3

And then in case it's not clear, it relates to something within the OSB business.

Speaker 6

Okay. Now we'll leave it there. Can you talk to us a bit about how the distribution strategy has evolved presiding over the last couple of years, and are there any reasons again, and answering some of the earlier questions, a lot of the weakness And 2Q is with sheds, we get it. But are you finding your distribution strategy is allowing you to grow at the PACE, you want are you how does your distro strategy compare with some of the other signing companies? So any changes, Any needs to change tactics at all?

Speaker 6

How does it compare versus peers?

Speaker 2

Great question, George. So going into COVID in 2019, let me just take a macro view macro answer to that question and move to our strategy. So pro retailer, well, there's consolidation going on in the channel and pro retailers And other one step market access vehicles through consolidation have grown in importance. Traditionally, we have been a 2 step distribution is our primary means of accessing the builder and contractors Historically, and look, 2 step distribution is still really important to us. But our ability to access the large national builders Through the pro retail channel, really speaks to a need to have a more direct relationship, more direct sales And by the way, and not that this is ever that controversial, but also similarly For the, one steppers that access repair and remodel.

Speaker 2

So we had an initiative going into 2019 Placing reloads in strategic urban populations and having a more direct access for certain parts of our portfolio to access National Builders and contractors. Obviously, during COVID and the demand for the product, we put that initiative on hold, and we We did everything we could do just to keep up with the orders. But as product became available this year and we had inventory internally, We have stepped up the pace of this kind of reload strategy in the marketplace to have the more direct access. So, Plough, and there can be some pain associated with that, right? As we build that infrastructure To access that directly, I am confident that, that is going to pay off in the long term As we continue to execute our big builder strategy and our repair and remodel strategy.

Speaker 2

And as you implied in your question, That is consistent with what other large specialty manufacturers have done over the years to make sure the market access Yes. It's keeping up with the times. And just let me say, so no, I am not I didn't in no way want to imply that this year's Volume is somehow constrained by lack of distribution quality or anything like that. We have really good distribution in place, We are in this transitionary period where we're going more direct with the pro retailer and one step for R and R. And so that because we have the inventory available to do that and open these reloads, so it is a bit of a transitionary period for us.

Speaker 2

But in the long run, I believe it's going to pay off

Speaker 3

or we wouldn't be doing it.

Speaker 6

For sure, Brett. Okay, thanks. I'll turn it over and come back. Thank you.

Speaker 7

Thank you. You're welcome.

Operator

One moment for our next question, please. Question comes from the line of Khatun Mamtora with BMO. Your line is now open.

Speaker 7

Good morning and thank you for taking my question. Perhaps starting with Q2's siding volume drop, is there any way you can quantify You've mentioned several times that the shed business was weak. Can you quantify how much volumes in the shed business Now we're down in Q2 and has that sort of trend changed at all so far in Q3?

Speaker 2

Yes. Well, fortunately, there has been a little there has been a shift where some of those shed manufacturers back in our order file, which is where there was very little of that activity in the first half and particularly in Q2. So We have seen a bit of a strengthening there. And then as far as the quantifying the amount down, About we were down about 20% over prior, say, first half volumes in Shad versus prior year. And look, it's we're estimating our shed Business to be somewhere around 30% of our volume in 20 5.

Speaker 2

Again, it's hard to get too fine a point on it because some of it goes through distribution. Just given the weakness in the direct shed and direct shed distributors volumes That we've seen in the second half and our conversations with shed manufacturers, that segment is down significantly.

Speaker 7

Got it. That's helpful. And then as my follow on, can you Can you give us some sense in terms of the inventory destocking that you saw in Siding, How much kind of that impacted your volumes in Q2? Or to put it differently, Can you give us some sense of sell through trends, the underlying customer demand in siding in Q2 and what you are seeing there?

Speaker 2

Yes. So sell through demand at our distribution, Given the best information we have, which isn't 100%, has been obviously been stronger than our sales in the distribution Because we do know the inventories have been worked down since March. And so the sell through is going to be healthier than what we're experiencing Right now, and again, as you know, Ketan, I mean, you've been following us for a while. Once that once we get to a stable Inventory situation and distribution, then all of that volume will show up in our order file where it's not doing that today. I will just add a little color to it.

Speaker 2

It is complex right now. I think distribution is still trying to figure out what the new normal inventory level should be Given the COVID experience, given the fact that throughout COVID, I don't mean to keep Speaking to COVID, but during that period of time, I just saw that 2 year period. The introduction of Expert Finish, which carries a lot requires a lot more inventory To carry the color palette, our distribution and us, LP, are trying to figure out what is the right amount of inventory Needed to service the market. So I think there's some some of that uncertainty is playing into the order strategy of our distributors. But once again, once we get to a point where all folks are comfortable with the inventory level, then we'll see That direct sale that sell through is showing up in our order file, but it certainly has been a contributing factor in the first half To our overall volume, it's just that inventory level that we've had to work through.

Speaker 7

Got it. That's helpful perspective. I'll jump back in the queue. Thank you.

Operator

Thank you.

Speaker 2

Thank you, Keith.

Operator

One moment for our next question. Our next question comes from the line of Sean Steuart with TD Securities. Your line is now open.

Speaker 8

Thank you. Good morning. I won't ask any siding questions. I think those have uncovered there. On CapEx, Alan, you touched on some of the nuance with the Holton payments being deferred.

Speaker 5

Can you give us a sense as

Speaker 8

you look ahead to 2024, The spending on Siding conversions next year, how that would stock up versus $120,000,000 to $130,000,000 this year?

Speaker 3

It is actually genuinely too early for me To make a good call on that, gut call though, right now, as we're developing our plans, probably similar, It's my gut call right now. No significant change. It's a weak answer, but that's closest to the truth, thankfully.

Speaker 8

That's good enough for me. Another question on OSB. Brad, I'd be interested in your thoughts on the run we've seen Year to date, but especially of late, it feels like new home construction is surprised versus Nudent expectations, but your perspective on what's driven the run we've seen and at what point do you consider industry Apply growth as a mitigating factor that could undermine the momentum we've seen of late?

Speaker 2

Well, I think What we've experienced this year has been manufacturers and LP coming into the year predicting a soft housing market and Gearing production plans, and then speaking for what we did, gearing our production plans accordingly and then having stronger than Pretty much every month stronger than expected housing forecast. I'll also say unlike Siding, OSB inventories were lean coming into the year as distributors work those inventories down. And so Minimal to low not minimal, but low inventories in the channel, say, in February, so that when the building season hit And was stronger than anticipated. There was some scrambling for volume. And it's I mean, even as big as the OSB Businesses, the industry, I mean, once distribution gets behind on inventory but sales are strong, It's difficult to catch up and that translates into pricing.

Speaker 2

So when I just I'll just say, I have Listen, I've predicted OSB pricing to our Board of Directors and got it wrong every time the last 6 years. I can no longer I even pretend that I know what's going to happen tomorrow with OSB pricing, but I would just say we're this is August and We've got 3 more months of really good housing, building and construction weather ahead of us. Typically, September October are really strong. Demand months in this industry for both OSB and Siding. And so we feel good about The outlook for the next little while, I'm not saying the pricing can't bounce around up or down given the elevated levels that we're seeing today.

Speaker 2

But I mean, the channel is still pretty tight and I feel good about our near term outlook for OSB. And then I think once we get to Thanksgiving, we'll have to reassess and we're already doing that analysis of what we're going to do In order to match our capacity to the demand that we see in our order file, but so we can I guess we'll talk about that on the next call, but I feel good about the outlook in the near term as far as the demand to capacity situation for our production and for the industry?

Speaker 8

That's great detail. Thanks very much. That's all I have.

Operator

Thank you. One moment for our next question please. Our next question comes from the line of Kurt Yinger With D. A. Davidson, your line is now open.

Speaker 9

Great. Thanks and good morning everyone.

Speaker 5

I just wanted to stick with

Speaker 9

OSB here. Good morning for a minute. Yes, I think you referenced some kind of deferred maintenance and some market curtailments. Maybe that was primarily a Q1 comment, but can you just help us kind of frame what the upside could be in terms of OSB volumes In the back half of the year and then just on Peace Valley specifically, I mean, how is production going at that mill? Any recent impacts from wild

Speaker 2

We've had no, start the easy answer first. We've had no wildfire related Downtime at any of the Canadian mills. And then we've had some fire In the area, but not anything that's impacted wood flow or our ability to produce. We are running Three shifts in Peace Valley, 3 in Manawaki and forecast no change of that throughout the rest of this year. And then as we at any given time, in our production planning as we see demand weaken, We're not putting unneeded volume into the market.

Speaker 2

So we shift downtime around in our system just giving The cost situation or the demand situation in that given week, and so we'll continue to run that balancing act as we go through the year. And it has been part of each quarter's operating plan, moving downtime around, And that's how we'll run for the rest of the year. And when you say second half versus first half, I mean, if demand is higher in the second half, we'll run more production. But when you look at the half of the year, again, let's just keep in mind, November December can be live from a demand standpoint. And typically and there's really no typical as the year, But typically, we do take downtime around the Christmas holiday season as we as demand slows and then we give You use that time and you do some maintenance work.

Speaker 2

So we'll be planning as I mentioned earlier, we'll be doing that planning Throughout the rest of the year, and we'll make the right moves to make sure we have the right balance as we proceed into early next year.

Speaker 9

Got it. Okay. Thanks for that. And then just my second question, I mean, at a high level, can you maybe just talk about What you think kind of annualized Siding volumes or maybe from an operating rate perspective, what that would need to look like Kind of excluding some of these short term factors to get back to that kind of long term goal of 25% EBITDA margins?

Speaker 3

The simple answer is, So as we if you think about the take a look at the Q2 waterfall, the EBITDA margin is so volume dependent. And so if you were to Take, I can't say I've actually done the math, but it's relatively simple. If you take that Q2 waterfall and you add back the volume At that high variable margins, you're very close to that. So, but for The volume decline this year, we'd be at that rate. And that, as we all know, is temporary.

Speaker 3

This is a business that's on a growth trajectory. Therefore, that growth will deliver the margins that we've committed to.

Speaker 9

Okay. Thanks for that, Alan. Good luck here in Q3, guys.

Speaker 1

Thanks, Kurt. Thanks, Kurt.

Operator

Thank you. One moment for our next question. Our next question will come from the line of Mark Weintraub with Seaport Research Partners. Your line is open.

Speaker 10

Thanks. Maybe following up a little bit on your answer, Alan, to the last question. One difference obviously is you now have Segola as well. And your EBITDA margins, for For a number of different reasons, we're not 25% last year either. And I guess, I'm Just trying to sort through with all these different moving parts, if I look at where including Segola your capacity would be and Kind of the indicated volumes for this year, I think you're kind of 70% recognizing against the goal is not really able to run full this year.

Speaker 10

But And so kind of the first question is like, how do you think through the volume increase to that point where You are at pretty healthy utilization rates and where you need Wawa as Capacity to be available. Can you sort of just walk us through the thinking there?

Speaker 3

I'm going to try because I'm not sure I fully understand the question and it can be a dangerous thing to let my mouth run when I'm not sure I fully understand the question, but I'm going to make the attempt. So as we two things, if we look at our business right now, as I tried to point out, we are maintaining we're ramping up Segola, So that we are in a position to benefit from the volume of the upside and the growing market, and the growth that is coming. And we're carrying that cost deliberately. So we're already Carrying some of the costs of that, essentially future growth. When we do bring on Segola, yes, you're right.

Speaker 3

That will add A fixed cost base in advance of the volume as always happens, but it will be a smaller proportion of the whole. So the bigger we get, It's hard to run at a faster rate, bear with me on this, than 1 extra, 1 mill being ramped up per year. And so the larger we get, if you bear with me on the logic with one extra mill being added to the fleet per year, let's imagine that's our long term trajectory. That extra mill will be a small portion of the whole and the remainder of the business will continue to harvest those high margins. And we mustn't forget The continued pricing power of the business and the mix shift towards exposed finish and so on, but also, will continue to enhance the margin.

Speaker 3

And we should not forget our ability as I think we're demonstrating right now to run our mills extremely efficiently again.

Speaker 10

Right. All good points and absolutely kind of that embedded cost is impacting the margin quite a bit this year As you wrap up, Segola. I guess sort of the heart of the question was, there's so many of these moving parts that it's I realize it's difficult to answer, but How do you see the track to the what would be a significant increase in volume? And so I mean, how much of it is a function that you think destock I know if you can quantify how much destock is Suppressing, how much sheds is under normal? And then once we adjust for those two factors, How long in a kind of normal growth environment if it's flat housing does it take us to get to the points where your system is Fully utilized.

Speaker 10

I realize it's probably unfair to ask that question on the fly like this, but I tried.

Speaker 3

Thank you. It is unfair and I'm going to half answer it. So just as you're being unfair, yes, I'll be unfair and say, our long term growth Algorithm or promise to everybody listening is that we'll grow something like 8 to 10 points better than the market. And we still believe that's the case. The definition of the market may be a bit hazy from time to time, but in the long over the long run, Just as we have over the last decade, we're highly confident in that growth trajectory as well as the pricing power of the product.

Speaker 3

So, we are Highly confident in our long term strategy being able to deliver that growth. We that's it. Stop that. Not in my mouth, I'll shut it.

Speaker 10

And I'll stop too. Thanks, Alan.

Operator

And our next question comes from the line of Paul Quinn with RBC Capital Markets.

Speaker 11

Great. Thanks guys. Good morning. Maybe just following up on this thesis of growing 8% to 10 Better than market. That's sort of the guidance for 2023 is down 10% on revenues.

Speaker 11

So if we flip That thesis around, do you feel quite comfortable that you're shrinking less fast than the rest of the competition? Or put it another way, How are you doing when you sit back relative to the other competition in the siding, how well are you performing?

Speaker 2

Paul, I'll take it if you allow me, I'll take that in 3 parts. So shed, And let's just say roughly, I mean, we've been throwing out numbers, about a third of our business, Just for illustrative reasons, we are our competitors in SHED, We're no worse off than anybody else because that market is down. We have dominant market share For panel, for the panel component of Shed. Our repair and remodel, our expert finish, I feel good about the fact I think we are taking share this year And that product, given that we're holding our own from a revenue standpoint, So I feel like share gain is possible there. Now the more interesting one is new construction.

Speaker 2

I feel good about our position with new construction and that we're holding our own, if not gaining share with the Where our strength has been historically, which is the smaller or regional builders, with a big builder, We are we launched a product, as you know, builder series, in order to have a competitive position there. And we are taking market share there, but from a tiny starting point. So we can't ring a bell about that one saving us right now because of the market share that we had with lab siding at the big builder It was pretty low 18 months ago, but the product that we have there is competitive. And It's a competitive landscape to play in, but we are recording wins there that I feel like demonstrates our ability to gain market share there. It's not enough at this point in time from a volume standpoint to overcome shed being down like it has It's not enough to overcome.

Speaker 2

Housing starts being down the way they're down year over year. But for the long term, it plays well with our ability to position ourselves Take advantage of the coming upswing in housing.

Speaker 3

All

Speaker 11

right. That's helpful. And then just any change in South America for the balance of the year versus first half?

Speaker 2

Our team down there feels like the second half It'd be a little stronger than the first half, but I think for modeling purposes, Paul, just replicate it, you'll be pretty accurate. And then hopefully, there's a little upside to that.

Speaker 1

All right. That's all I had. Best of luck. Thank you, Paul. Thanks.

Operator

Thank you. And that concludes our Q and A portion. I would now like to hand the conference back to Mr. Aaron Holwall for closing comments. Okay.

Speaker 1

Thanks, Norma, and thanks, everyone, for joining us this morning. With no more questions, we'll bring the Q2 call for LP Building Solutions to a close. Have a great day, stay safe, and we'll look forward to talking to you soon.

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Earnings Conference Call
Louisiana-Pacific Q2 2023
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