Louisiana-Pacific Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 14, 2024

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Q4 2023 Louisiana Pacific Corporation 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 your speaker today, Aaron Howald, Vice President, Investor Relations and Business Development.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the Q4 full year of 2023. My name is Aaron Holwald, and I am LP's Vice President of Investor Relations and Business Development. With 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 a presentation that has been posted to LP's IR webpage, which is investor.

Speaker 1

Lpcorp.com. Our 8 ks filing, press release and other materials detailing LP's strategy and business model are also available there. As usual, today's discussion will contain forward looking statements and non GAAP financial metrics as detailed on Slides 23 of the earnings presentation. The appendix of the presentation also contains reconciliations that are further by this morning's 8 ks filing. Rather than reading those materials, I incorporate them herein by reference.

Speaker 1

And

Speaker 2

with that,

Speaker 1

I will turn the call over to Brad.

Speaker 3

Thanks, Aaron, and thank you all for joining us to discuss LP's results for the Q4 and the full year of 2023. 2023 ended much better than it began for LP and the markets we serve. In the Q4, Siding achieved its highest EBITDA margin of the year. I'm pleased to share that Siding is back on a growth footing, having returned to normal inventory and order flows after a destocking cycle in the first half of last year. We are well positioned to gain share in R and R and with homebuilders.

Speaker 3

Commodity OSB prices fell early in Q4 but rebounded later in the quarter. These factors, along with strong price realization and efficient operations contributed to an EBITDA result meaningfully above our guided range. Page 5 of the presentation summarizes some of our results for the quarter year. LP generated $658,000,000 in sales $129,000,000 in EBITDA in Q4, bringing the full year totals to 2,600,000,000 and $478,000,000 respectively. This translated into $0.71 of earnings per share in Q4 and $3.22 for the full year.

Speaker 3

The full year comparisons are negative, largely due to normalized OSB prices, But LP's businesses demonstrate exceptional management of the elements within our control. 2023 was a year of heavy investment capacity to enable growth in Siding and Structural Solutions. LP invested $300,000,000 in capital in 2023 with the largest projects being the conversion of our mill in Segola, Michigan to SmartSide from OSB and the construction of our newest finished facility in Bath, New York. These projects were completed safely and efficiently and both facilities are fully up and running. LP also completed the strategic acquisition of a mill in Wawa, Ontario, which expands our portfolio of future siding conversions.

Speaker 3

Alan will offer more details on capital allocation, but I will summarize by saying that even after another year of significant investment in SmartSide and finished capacity, the Wawa acquisition and $69,000,000 returned to shareholders via dividends, LP ended 2023 with $222,000,000 in cash on hand and over $770,000,000 in liquidity. Like LP results, the new residential construction markets we serve saw a meaningful recovery in the second half of twenty twenty three after starting the year notably weaker. Affordability challenges persist, But interest rates have fallen over 100 basis points from their peak in Q4, contributing to improved optimism about single family housing starts. The repair and remodeling sector remains softer than new construction, but lower rates and better affordability may encourage more sales of existing homes or offer homeowners the interest rate clarity needed to take on larger home improvement projects. The current consensus for total housing It's about flat to last year at a bit below $1,400,000 but many forecasters expect a higher single family mix.

Speaker 3

Compared to the consensus a year ago, we are cautiously optimistic that this improving outlook will translate into a stronger market for LP in 2024. Regardless of the near term market, I'm very confident LP's strategy positions us well with a strong portfolio of products in a long runway for profitable growth. The durability, beauty and performance of LP's products solve problems for builders, contractors and homeowners. We are investing in new capacity and new process technology. This improves our productivity, accelerates product innovation and enhances our margins.

Speaker 3

We operate our capacity with discipline and agility whatever the market brings. And we are prudent stewards of our capital, investing strategically in growth and innovation while returning cash to shareholders. None of this happens without the dedication of LP's people. Our operations teams delivered significantly better efficiency and safety performance in 2023, ending the year with a world class total incident rate of 0 point 5, the single injury is too many, but I'm incredibly proud of our operations team for this performance. We will never stop working to ensure a safe work environment for everyone at LP.

Speaker 3

I also want to acknowledge and thank LP sales and marketing teams for navigating the difficult process of transitioning off a managed order file. As a result of our highly talented teams and the great culture we've built, LP was recognized in 2023 by Newsweek nationally And in Nashville, by our local paper, the Tennessee Inn is a great place to work. Thank you to every LP team member for your contributions in 2023. And with that, Alan will share more details about LP's financial performance in the quarter as well as our outlook for Q1 and 2024. Thanks, Brad.

Speaker 3

I'll briefly review the results for the Siding and the OSB businesses for the Q4 and full year

Speaker 2

and then offer guidance for EBITDA and capital expenditures. Slide 6 shows Siding's quarterly results. Jumping 12 months back in time, the Q4 of 2020 through was the last quarter in which Siding was on a managed order file. And as such, it represents rather a difficult comp. The biggest difference in the year over year waterfall is therefore the 15% drop in volume, a corresponding $55,000,000 drop in revenue and a $26,000,000 drop in EBITDA.

Speaker 2

On the plus side, Bath and Segola are now fully up and running, resulting in lower conversion and ramp up costs. This combined with continued improvements in raw material costs produced a $13,000,000 EBITDA tailwind. Net of $6,000,000 in inventory absorption and other stuff, The Siding business finished the quarter with $72,000,000 of EBITDA. The EBITDA margin of 22% was the highest of the year, which reinforces our confidence in Siding's long term 25% EBITDA margin target. Now I won't belabor the full year waterfall on Slide 7 given that we've discussed the most important elements in prior quarters.

Speaker 2

However, it is perhaps useful to recap that the transition from a managed order file made for a difficult year with respect to volume, particularly in the 1st 6 months while inventory is normalized. Nonetheless, the full year EBITDA of $269,000,000 represents a robust EBITDA margin of 20%, Particularly so in light of the carrying costs of new capacity, capacity which I would like to stress provides a long runway for growth with meaningfully lower future CapEx, at least until customer demand necessitates further investments. Slide 8 covers the Q4 for OSB. While our prices fell steeply during the shoulders of the 3rd and 4th quarters, they subsequently recovered and ended the year higher than the prior year, adding about $17,000,000 to year over year EBITDA. Volumes were lower in part because of the Segola conversion, This was partially offset by a significant improvement in operating efficiency.

Speaker 2

Structural solutions accounted for 52% of OSB volume in the quarter with value added products producing $20,000,000 of incremental EBITDA on $39,000,000 of incremental revenue. Lower raw material, mill and SG and A costs added a $30,000,000 tailwind resulting in a very respectable $59,000,000 of EBITDA the quarter. OSB's full year results on Slide 9 are dominated by price normalization, But other than that, it can be summarized as one of lower volume partially offset by higher OEE, lower raw material costs and lower overhead costs given the transfer of Segola to the Siding business. Taken as a whole, despite volatility quarter to quarter, 2023 was slightly better than the historical cycle average for the OSB business, which shows the power of LP's OSB strategy, improved efficiency and operations, disciplined capacity management and the value generated by the consistent incremental uplift from the Structural Solutions portfolio. Other than the acquisition of Wawa, cash flows for the quarter year was straightforward as shown on Slide 10.

Speaker 2

For the year, LP earned $478,000,000 of EBITDA, paid $65,000,000 in cash taxes and built $93,000,000 of working capital resulting in $316,000,000 of operating cash flow. After investing $300,000,000 in CapEx, Paying $80,000,000 to acquire the Wah Wah Mill and returning $69,000,000 to shareholders via dividends, the net outflow of $161,000,000 left us with $222,000,000 in cash. Now before I transition to guidance, let me anticipate and answer one question. LP's capital allocation strategy is unchanged. We will earn cash, invest in growth and return cash to shareholders via dividends and share is in that order.

Speaker 2

LP did not repurchase any shares in 2023, but our motivation to do so is undiminished

Speaker 3

And we retain a $200,000,000

Speaker 2

authorization from the Board. We will resume share repurchases when our cash flows and cash balances warrant. 2024 should be a year of growth and meaningfully lower CapEx and Siding. So all else equal, share repurchases are very much back on the table, which brings us to guidance on Slide 11. With the inventory destocking behind us and siding back on a growth footing as well as more historically normal OSB prices, we have improved visibility to offer a full year outlook for both businesses, if you'll forgive Some very obvious caveats.

Speaker 2

In siding, we expect a year of resumed growth in a more normal seasonal order pattern consistent with what we saw in the Q4 and have seen so far in 2024. Revenue growth is expected to out pace both the current flat consensus for total U. S. Housing starts and the forecast for single digit declines in repair and remodel. We therefore expect revenue growth of about 8% to 10% for the full year from a combination of volume and price.

Speaker 2

And this would result in Siding revenue of, let's say, dollars 1,450,000,000 approaching 20 22's record level. An EBITDA margin of around 20% would result in full year EBITDA for Siding of between $280,000,000 $300,000,000 with reduced investments in capacity partially offset by discretionary increases in selling and marketing. So what does this mean for the Q1? Well, the expected return to more normal seasonal demand patterns means somewhat higher demand in the second and third quarters compared to the 1st and the 4th. Accordingly, 1st quarter sales for Siding are expected to be in the range of $340,000,000 to $350,000,000 with EBITDA between $65,000,000 $70,000,000 assuming an EBITDA margin of about 20%.

Speaker 2

For OSB, full year revenue guidance is impossible without a price prediction, which we won't even pretend to offer. Instead, we're going to introduce the concept of cycle average EBITDA spread. This is the EBITDA that the OSB business earns per 1,000 square feet of volume on average over the cycle. This spread accounts for variations in both selling prices and the cost of production. As demand and therefore commodity prices fluctuate, in response, we adjust our capacity utilization, our product mix, our maintenance costs and other factors.

Speaker 2

And to illustrate how this distinction can be useful, recall that in the Q3 of 2019, The OSB business achieved breakeven EBITDA. And in the Q1 of 2023, we reported a small positive EBITDA. These were very similar outcomes, but at very different nominal selling prices and cost of manufacture. Now historically, LP's cycle average OSB spreads have been around $60 per 1,000 square feet of sales volume. This is actually the trailing 10 year average for LP's OSB business, excluding the outlier years of 2021 2022 when the spread was actually much higher.

Speaker 2

Actual commodity price fluctuations result in an EBITDA range with a floor that we've demonstrated can be held above 0 when prices are low, such as in the two examples I just cited and then actually with a very high ceiling when prices rise. So if we take this concept and apply it to current conditions, I would estimate the LP's 4,000,000,000 square feet of capacity Running at about 85% average utilization at $60 per 1,000 square feet should generate about $200,000,000 in EBITDA on a cycle average basis. And this is actually very close to the EBITDA we just generated in 2023. To use this concept to construct the outlook for OSB, we'll start with the Q1 and build from there. For the Q1, We expect shipment volumes to be similar to 4th quarter levels at around 770,000,000 to 790,000,000 square feet.

Speaker 2

So far, random length prices have averaged about $25 higher than the Q4 we've just reported. So under that volume assumption, If the OSB price holds, EBITDA in the Q1 should be around $65,000,000 to $75,000,000 We're making no attempt to predict future OSB prices, so our full year outlook for OSB is the sum of the Q1 outlook I just gave, followed by 3 quarters of cycle average EBITDA. Adding the 2 businesses together and assuming for simplicity that LP South America's EBITDA corporate costs, we expect full year EBITDA of about $495,000,000 to $525,000,000 with the Q1 in the 130 $145,000,000 range. A quick word on sensitivities. As we are already realizing the January price increase in Siding, The most significant sensitivity in that business is volume.

Speaker 2

Each increase or decrease in volume of 10,000,000 square feet from this baseline would add or subtract about $4,000,000 in EBITDA at typical incremental EBITDA margins. For OSB, Sensitivities for incremental volume and price shown in the table are based on the same utilization and EBITDA assumptions used to construct our outlook and would of course compound. With respect to capital spending, LP invested heavily in SmartSide and expert finish capacity in 20222023. As a result, we have a healthy runway of capacity ahead of us. We will continue to invest in growth this year, albeit on a smaller and more targeted scale compared to recent years.

Speaker 2

Accordingly, 2024 should see capital investments roughly $100,000,000 lower than 2023 with sustaining maintenance comprising roughly 75% of the total. So in many ways, 2024 is a return to normal. Siding is growing again after something of a destocking hangover. OSB prices are currently in a historically normal range, albeit on the high side of that range And LP's capital investment in 2024 will be nearly $100,000,000 lower than last year because the Segola, Holton and Bass projects are complete. And with that, we'll be happy to take your questions.

Operator

Thank you. Our first question comes from the line of Ketan Mamtora from BMO.

Speaker 4

Thank you. Good morning, Brad, Alan. Thanks for all the details. Alan, perhaps to start with, when I think about the 2024 Siding EBITDA guidance, can you talk about sort of at a high level, what are the sort of the key elements as we think from 2023 to 2024, given that in 2023 volume was a big drag, there was probably inefficiencies as you were working through the inventory destocking phase. And then you also have a price increase for this year.

Speaker 4

So can you talk about just sort of 3 or 4 key elements as we think about the bridge?

Speaker 2

Sure, Ketan. Thanks for the question. I do want to stress that this is the most comprehensive guidance To my knowledge, if the company has ever given. And one of the objectives, particularly around the 20% EBITDA margin Siding was to actually convey a sense of comfort. If you think about the volume sensitivities, The margin is obviously heavily impacted or can be heavily impacted by fluctuations in volume.

Speaker 2

And We're confident that we're going to see a volume increase in 2024, and hence that our EBITDA margin will benefit from that, the presence of that volume uplift. On the question of volume though, we are Expecting and anticipating increases in our export finished production, which is itself right now As we grow that business, not necessarily margin accretive, it's profitable, but not to the same degree as the rest of the business, A situation which I have absolutely no doubt we will improve as the years progress. We are also investing rather heavily In selling and marketing, certainly more heavily in 2024 than we did in 2023. And that's largely offsetting the benefits that we get from removal of the ramp up costs that you saw in 2023. And secondly, thirdly rather, we are actually carrying still as you will note, in essence, One extra mill in our network.

Speaker 2

Again, this is a decision that we're making in order to make sure that we have All of our mills, let's say, agile at a depth at producing siding product as we move ourselves from 2024 into 2025 and continued future growth. And there is of course, Some labor inflation and freight inflation that we're anticipating, that's no means by no means certain yet. So they're the factors. I've basically thrown those all in the pot in this guidance that we're giving you. And so I was tempted to say at least 20% EBITDA margin, but occasionally when I've said at least, we've literally blown the number out of the water and I don't want to any signal that I think blowing this number out of the water is on the cards, but I think 20%, given all of these investments we're making And our confidence in the volume uplift is a very safe number.

Speaker 4

Understood. No, that's very helpful And one more on Siding. Can you talk maybe perhaps Brad in terms of how the business is performing. I know in the middle of the year, we went through this pretty big destocking phase there. What are you seeing in sheds demand?

Speaker 3

Yes. So Ketan, we had a good recovery in shared demand second half of last year. So certainly, Q4 was okay to good. Right now in our order file, it's probably the weakest sector that we have. I think there was a little bit of inventory build in that shed serving channel in Q4, but it's okay.

Speaker 3

But right now, it's the weaker as part of our order file, but we do not anticipate that carrying out throughout the year. It's just kind of what's happening right now. As you are referencing, I'm sure We'd certainly experienced kind of an overhang post COVID of shed demand being very like first half of this year, we're seeing this year being more of a normal demand pool for that sector. Again, but we did carry a little inventory well, This channel carried a little inventory across the year that we're working through right now. No worries there, just kind of the current situation in the market.

Speaker 4

Understood. No, that's very helpful. I'll jump back in the queue. Good luck.

Speaker 3

Thank you, Piyush.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Steven Ramsey From Thompson Research Group.

Speaker 5

Hi, good morning. Maybe to continue the siding sales and marketing spend topic, Curious where that spend is focused by product set or customer type. And can you talk to how you're judging the success there, The ROI, the timing between spend to sales?

Speaker 3

Yes. So the two areas of focus, First of all, from a sales resource standpoint is around new construction and the sales Assets that are focused on that segment along with the technical support that goes into ensuring a smooth transition off the incumbent Siding product on to SmartSide. So we're adding sales resources in support of that push in new construction. And then on the marketing side, the focus there is primarily in repair and remodel. That is a different sales process where contractors are actually convincing a homeowner to reside their house and then to use our product.

Speaker 3

And that requires a good bit of personalized or more consumer oriented marketing support. And so the not all of the increases is there, but certainly the majority of the marketing spend increase is focused on our growth to repair and remodel.

Speaker 5

Okay, that's perfect. And then on the Siding margin outlook, you have a consistent 20% on Slide 11 for both Q1 and the full year. But just going midpoint to midpoint, looks like about 100 bps of improvement. Just curious how you think about the cadence through the year, how seasonality plays into that and volume uptake off of the higher base of production?

Speaker 2

Yes. Well, the 2nd and third quarters are obviously going to see if this plays out higher volumes year over year than 1st and 4th quarters most likely. So my anticipation is that the if the margin peaks it will well, I'm not sure, but certainly I think 2nd and third quarters will be healthy EBITDA margins. That's great. Thank you.

Speaker 2

Given the extra volume.

Operator

Our next question comes from the line of George Staphos from Bank of America Securities Inc.

Speaker 6

Thanks very much. Hi, everyone. Good morning, Aaron, Alan, Brad. Thanks for the details. I had a question on Siding margin as well and The investment that you're making this year on marketing and selling, is there Much of a lag between when you ultimately expect to get the volume and the investment that you need to support the volume growth that you're expecting.

Speaker 6

Said differently, should we expect the selling, general administration, the marketing to move more or less in tandem With the incremental volume and the incremental margin, that's question number 1. Question number 2 and I'll jump back in queue. Can you talk to us recognizing it's very difficult to project anything in OSB. What would you be looking to in terms of Structural Solutions as a percent of the overall mix when we're all said and done with 24? Thank you.

Speaker 3

George, let me on these additional sales and marketing spend, the impact of that spend is not instantaneous. It's an investment in support of our CapEx the CapEx investment we've made over the last 3 or 4 years. We did Consciously cut back on sales and marketing spend as we were in managed order file. Obviously, there wasn't immediate need for demand creation. And any demand that would have been created, we would have had trouble satisfying.

Speaker 3

And so we're seeing this year really as a turn to the more in line with our prior COVID rate plus Added emphasis around the 2 segments that I mentioned before where we have historically been underpenetrated and not had to have either the sales assets or the level of marketing spend that we anticipate to support or repair and remodel. But I would from a marketing standpoint, you create I mean, just at a high level, you create impressions, you create some brand equity in anticipation of that creating demand that you feel later on. And then on the sales side, yes, some of these technical support staff that we add can have an immediate impact, but really that's more or less Helping us with volume we've already converted. The more strategic sales investments take it takes A few months to hire them, a few months to train them and then a few months for them to start being effective out in the field. So I would say most of this incremental sales and marketing spend, maybe other than the technical sales support, is going into demand creation that will fill best case late this year, probably more into next year.

Speaker 6

Okay. Bottom line, there'll be a bias in terms of incremental and overall EBITDA margin. Attention to the upside as the year progresses would be my takeaway both because of the seasonal pickup in volume And then even as we get into Q4, some of that investment you've already made. And so you should be getting the benefit of that later in the year. Not trying to be too precise, but just conceptually, is that right?

Speaker 6

Or would you disagree with any of that?

Speaker 3

No, I agree with that conceptually, yes. And then I'll go I'll go both of those big questions, if you want to come back to the siding question, can, but on the structural solutions, mid-fifty 5 percent I mean, 0.50% 60% think it's a realistic goal for this year. I'd love to see 55%. We do manage that for margin more so than for volume, but certainly our strategy is to get volume growth as well. And so we'll Our ability to push that volume is somewhat dependent on the current price level and our enthusiasm about margin management, but a realistic goal will probably be 53%, 54% and then upside goal, maybe 55%, 56%.

Speaker 3

Okay.

Speaker 6

Thank you, Brad. I'll turn it over.

Operator

Our next question comes from the line of Susan Maklari from Goldman Sachs.

Speaker 7

Thank you. Good morning, everyone. My first question is on the last quarter call that you were limiting the amount of pre buy ahead of the January price increase. I guess, 1, was that a success? And 2, given that, How are you thinking about the order files as we are coming into this year and the channel inventories and what that could suggest for the volumes in that segment as we think about the next couple of quarters?

Speaker 3

Listen, we did limit the pre buy volume to basically the average purchases over the prior 9 months for our customers. So we had essentially 9 to minimal pre buy or pre buy into December Volume for January, so I feel really good about how we carry that across the year and I feel good about the 1st 6 weeks activity in our order file. And I feel there always is some seasonal inventory build this time of year in siding as People come back from the holidays in anticipation of the spring build, especially now that we're also in the prefinished business. But I would call seasonal build right now in the channel normal, pre COVID normal. And so we feel good about It's for order file and we feel good about our inventories level inventory levels are now in the channel and our own inventories at the mill level.

Speaker 7

Okay. That's helpful. And then perhaps a higher level question. As we think about the potential that rates will come down as we move through the year and that could drive some pickup in existing home sales. How are you thinking about what that could mean for the business and Any thoughts on the timing around that increase in the turnover in housing relative to when it could come through to the actual results?

Speaker 3

Susan, I think interest rate reduction this year would have a I think we have a significant impact on housing. I think that kind of the short term would be more emotional Perhaps an economic, just the movement downward, I think, would provide some homebuyers confidence that it's to move into the market. I do think that over a period of time, it could free up some existing homes to go on the market for homeowners that have been Kind of hesitant in this interest rate environment to make that move. That won't necessarily translate into new home construction. Mean, it wasn't at all, but it's certainly the housing that would be on the market.

Speaker 3

So I think for this year, On new construction, the impact would be making a little more emotional or feel good than it is really the economics changing. But I think Over for 2025, it could be a very powerful driver of demand. And then secondly, on the repair and remodel, A residing project is a high dollar project that is highly likely to be financed instead of paid in out of savings. And so I do think that interest rate reduction will have a more immediate impact On repair and remodel by just making those projects more affordable for a homeowner. So if we get that reduction, I think it would provide new constructions on tailwind, maybe it will be more impactful for 20 25.

Speaker 3

I think for a payroll remodel that the impact could be immediate for us.

Speaker 7

Okay. Thank you for the color. It's helpful and good luck with everything.

Speaker 3

Thanks, Susan.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Matthew McEller from RBC Capital Markets.

Speaker 8

Hi, good morning. Thanks for taking my questions. Maybe first just setting aside the price increases, are you able to talk to how you would expect mix shift from what I assume would be more expert finish and potentially more builders series product year over year to affect average selling price in Siding in 2024?

Speaker 3

Yes. So I think it's certainly our focus this year is around growing our builder series And our Expert Finish brand is one for Expert Finish Repair and Remodel builder series for the construction. The builder series It depends on the SKU, but typically that is a price point item to a certain extent. So that would be a damper on average price as that volume increases, not necessarily on margin, but on price. And then for expert finish, that sells for a much higher pricing.

Speaker 3

And so that would be waiting our revenue up if we get more expert finish. So I'm not I think there's probably more opportunity from a net net for the export finish to have a bigger impact positively than Builder Series would have negatively, but we'll have to see how that plays out as we go through the year. So maybe mix would be a slight positive upside to the year compared to 2023.

Speaker 8

Okay, that's helpful. Thanks for that. And then next, in new home construction, can you talk about what the tone is like from your customers in that segment? And with that, Do you have a view at this point on whether housing starts by regional builders should trend much differently than housing starts across the industry?

Speaker 3

Yes. So I would say, just giving the exposure that we have to conferences and on a 1 on 1 conversations, Thanks, Seth. Maybe in the middle of fall last year, I felt like there was some I felt more pessimistic about this year from a builder standpoint. I think the move there to strengthen through Q4 and certainly the tone right now It's pretty solid. Obviously, the conversations around rate reduction has a positive impact on sentiment there or on the mood.

Speaker 3

But the large national builders that we partner with are certainly optimistic about this year. They've put infrastructure in place to sell through this year and are anticipating growth. I do I'm surprised to hear in a conference I was in Q4 or maybe it was in January, Anticipating some strengthening from the regional builders just because there's such a need for new home construction Because the existing homes are on the market and they're I mean, at the end of the day, there is only so much the national builders can do in the moment As they continue to grow and also post COVID, there has been some capability for the regional builders to get the permitting, get the infrastructure in place, where they're maybe not as efficient at that as a big builder, but they have been working on it. So overall, I think we could see some recovery or some growth at the regional level. Honestly, that placed our existing sweet spot inside.

Speaker 3

We've always had a really good presence there. You couple that with continued growth At the national builder level, we could really play out for a good year for us in new construction.

Speaker 8

Great. Thanks very much. That's all for me. I'll turn it back.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Mark Weintraub from Seaport Research Partners.

Speaker 9

Thank you. Alan, I appreciate the qualitative drivers behind the Siding margin changes. I was hoping maybe that we could get a little bit more color on how that translates into the quantitative 20%, which I guess is a little bit lower than my back of the envelope would come out. But obviously there's lots of stuff You guys know I don't. And so maybe if you maybe open ended, What you can add to the conversation at this point?

Speaker 9

Otherwise, I have kind of more pointed questions too.

Speaker 2

I'm not sure which one I prefer. Let me give you a couple of big numbers that are in this. And I'm going to give you ranges. So high level, the selling and marketing investment is $15,000,000 to $20,000,000 year over year and the mill reversal, the mill investment reversal is $15,000,000 to $20,000,000 reversing. We are adding other elements of SG and A around development of new products and the rest of the sort of infrastructure in the Siding business up in the region of say $10,000,000 And we're anticipating inflation, which can change of course, except for the labor part of maybe $20,000,000 or so.

Speaker 2

So there's some big ticket items that are sort of more discrete. They are In some instances manageable such as the selling and marketing investment and that's probably about as much detail as I'm willing to give.

Speaker 9

That's super helpful. Maybe 2, is it that one shouldn't use like the 50% On incremental margins, which is sort of what you penciled out on the anything new above and beyond on the sensitivity chart you provide For the increase in volumes that you've embedded in the guide or is

Speaker 2

Given those big ticket items I'd call that, if you use the incremental margins, It should all work. The risk of going further and giving you a

Speaker 3

call forward.

Speaker 2

Okay. Based on and something we're not going to be particularly forthcoming yet on because there is a relationship between the 2 on how volume and price breakdown within that revenue guide. It's simply too early in the year for us to give a reasonable call on that. But if you make the volume and price assumptions and use the sensitivity accordingly, you should get

Speaker 9

Yes. And so I guess that was the last question which I had and maybe you sort of embedded it in your answers. The first one was And then if the pricing would that be discrete and if we're getting 2% additional pricing that should be incremental to the EBITDA Or did you just say that sort of embedded in the incremental margin analysis?

Speaker 2

No, it's not embedded in the incremental margin. That's about the incremental margin is always purely volume, so at pre existing mix. So yes, the pricing is incremental, revenue and EBITDA.

Speaker 9

All right. Super. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Sean Steuart from TD Securities.

Speaker 10

Thanks. Good morning. Question on the OSB cycle average You're giving, which seems to make sense. But you're talking about an 85% operating rate assumption that underlies that, Which isn't great. And I guess, what I'm wondering is if you can speak to the shape of the cost curve in your OSB portfolio And thoughts on potential asset closures above and beyond siding conversions over the long run, the possibility on that front for the company?

Speaker 3

Well, I'll do the shape of the cost curve. It's pretty flat, Sean, obviously, we have some mills that are our cost are lower cost, but at the end, that's how we rationalize capacity when we do take the downtime. But it's Probably unmeasurable at the $4,000,000,000 foot level. We had to shift back to Milwaukee or something like that from a cost standpoint. So Pretty flat cost per, and then obviously, we've learned how to move that capacity or the production up and down pretty efficiently, so the cost of downtime isn't great either.

Speaker 3

So yes, flat cost curve for us and relatively flat for the industry, at least when we do the analysis. Earlier in my career within the paper business where the cost curves could be pretty steep and that's certainly not the case in OSB.

Speaker 6

But you would have to say

Speaker 2

As a utilization Sir, go ahead.

Speaker 1

For utilization, the 85% is very is the trailing 10 year actual average utilization. So it's very consistent with historical.

Speaker 10

Okay. Thanks for that. Second question on the growth CapEx of $50,000,000 to $60,000,000 in 2024. Can you give us an idea of where that's Being focused, is it a few specific projects, a broad array of projects across several assets, any detail on that front?

Speaker 2

Gotcha. It's everything and everywhere. We are the biggest single item is investment and structural solutions enhancements for the value added OSB. But It's a bunch of small projects. There's no major project that I can't really call out.

Speaker 2

Okay. Thanks, Natalia. But again, 90% of so 80% of that The strategic projects are basically inside it.

Speaker 10

Got it. Understood. Okay, thanks very much. That's all I have.

Operator

Our next question comes from the line of Kurt Yinger from D. A. Davidson.

Speaker 11

Great. Thanks and good morning everyone. I was just curious, how important is builder series itself to Your objectives to grow in the new residential construction segment and I guess along those lines, what has been kind of the primary feedback from production builders with that product to date and what do you think is most important in terms of really hitting a tipping point and better penetrating that specific customer set going forward?

Speaker 3

Yes. So the Builder Series is very important to our growth objectives as a for our segment and for the company. It is a it provides a competitive alternative for the big builder in new construction, of course. The reception upon use has been very good. It is a very workable product and certainly These are installed in the competitive product that we're going up against.

Speaker 3

So the reception has been good. The key is trial and getting the product there's an incumbent product that we're having to compete against. And so the and that is a long sales process. These aren't something that is a decision is not made weekly on which siding builders want to use. And so it's a long sales process.

Speaker 3

I'll tell you, we have a great value proposition with builder series, standalone, but as we couple that with Structural Solutions and even our commodity OSB, which is also a valuable part of the homebuilders package, we bring a heft to the sales process around these big builders that incorporates all of the products we in North America, and we're finding traction with that as we couple siding with the Structural Solutions portfolio. And as I mentioned, even with the commodity OSB, We are a meaningful supplier have been a meaningful supplier to the big builder for a long time in our OSB business. And so bringing A siding solution to that relationship, we're finding to be very helpful. The relationship that we've built through our OSB business helpful in the sales process for Siding. So we're getting started.

Speaker 3

I feel good about the progress we've made Since we launched Builder Series, I have a tremendous amount of confidence in the product. I have a lot of confidence that once we get the trial, once we get Some usage at conversion, the products going to be sticky because the installers going to love the product as we've experienced across our portfolio for 25 years. And we're very under penetrated at the national builder level. So all that volume is incremental to us and as those builders continue to grow and gain market share, this provides us a real a large opportunity to continue this growth story that we've been working on for the past 15 years in Siding.

Speaker 11

Understood. Appreciate the color there, Brad. And then just for my second one, I mean, bigger picture on Siding margins, it sounds like The increase in investment in sales and marketing and SG and A this year is kind of getting back to normal as opposed to kind of a one off step up. There's a pretty large gap still between 20% and call it the mid-20s target for the segment. I'm just kind of curious if you could talk about the timeline for getting back to those targeted siding EBITDA margins and whether that's possible prior to another conversion coming up to the extent that demand warrants it?

Speaker 11

Yes.

Speaker 2

Good question. Yes, it's eminently possible before another mill comes up because the fundamental drag on the EBITDA margin right now is the fact that we're running with 1 extra mill in the network, which and so The margins will become healthier as that As we successfully fill that mill with new high priced product. So, yes, I am It is possible that we could enjoy certain good movement towards 25% As we fill them the capacity we have. As we've said, the significant amount of our capacity additions are behind us and now in operation. So we are carrying that fixed costs and we're carrying it because we're very confident that the volume needed by those mills to run profitably is very much in our future.

Speaker 11

Got it. And just one quick follow-up. I mean, Sequentially, Siding EBITDA margins look kind of down in Q1 versus Q4. It looks like volume could be flat, maybe a little bit better. You'll have the price increase.

Speaker 11

I mean, is that all just kind of the increase in selling and marketing that's weighing it down Q1 versus Q4 or anything else to call out there?

Speaker 2

No, that's it. Okay. The labor inflation with January 1st pricing wage increases and so on, things like that. Nothing other than what you might call normal economics.

Operator

Thank you. At this time, I would now like to turn the conference back over to Aaron Howald

Speaker 1

Okay. Thank you, operator. If no more questions, we'll end there. But before I do, let me briefly remind everyone that LP will be hosting an Investor Day in Las Vegas at the International Builder Show, but 2 weeks from today on the 28th February starting at 10 o'clock in the morning local time. The event will be in person only with no simultaneous webcast, but we will record it and post the recording to the IR webpage pretty soon thereafter.

Speaker 1

So if you're interested in attending, check the IR webpage for details or reach out to contact me. And with that, we'll close the call. Thank you, everyone, and we hope to see you in Vegas.

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Earnings Conference Call
Louisiana-Pacific Q4 2023
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