Louisiana-Pacific Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 13 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Louisiana Pacific Corporation Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to turn the conference to your speaker for today, Aaron Hollweld, 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 Q2 of 2024 as well as our updated outlook. My name is Aaron Howald, 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. After prepared remarks, we will take one round of questions.

Speaker 1

During this morning's call, we will refer to a presentation that has been posted to LP's IR webpage, which is investor. Lpcorp.com. Our 8 ks filing, earnings press release and other materials are also available there, including our recently published 2024 Sustainability Report. As always, I will caution you that today's discussion contains forward looking statements and non GAAP financial metrics as described on Slides 23 of the earnings presentation. The appendix of the presentation also contains reconciliations that are further supplemented by this morning's 8 ks filing.

Speaker 1

Rather than reading those statements, I will incorporate them by reference. And with that, I will turn the call over to Brad.

Speaker 2

Thanks, Aaron, and thank you all for joining us this morning. LP Siding and OSB is built on a strong Q1, executing our strategy and delivering continued growth, share gains and margin expansion in the Q2 of 2024. I will summarize a few of the highlights of the quarter, which are detailed on Page 5 of the presentation and discuss the factors that contributed these results before turning the call over to Alan for more detail on the business' performance in the quarter and an update on capital allocation. LP's net sales in the quarter reached $814,000,000 up 33% compared to prior year. Siding sales grew by 30% in the quarter, the result of 22% higher sales volume and 6% higher prices, both of which were helped by another record quarter for Expertfinish.

Speaker 2

In OSB, higher prices and improved mix of structural solutions value added OSB contributed to strong revenue growth. At the same time, leverage from increased volume and operational efficiency improved margins. As a result, LP more than doubled adjusted EBITDA, operating cash flow and adjusted earnings per share compared to the Q2 of 2023. With the capacity expansion projects of the past 2 years now complete and the new facility is fully operational, CapEx was a comparatively light $36,000,000 in the quarter. This left a greater proportion of LP's operating cash flow available to return to shareholders.

Speaker 2

Therefore, consistent with our capital allocation strategy, $120,000,000 was spent on dividends and share repurchases through the quarter. Share repurchases have continued since quarter end as Alan will detail in a moment. On the lower left of Page 5, you will see some other highlights. 1st and most importantly, our business is operated safely. LP wins more than our fair share of industry safety awards.

Speaker 2

In fact, we were just named the safest company in our category by the APA Engineered Wood Association. But the best reward is sending everyone home safely every day. I want to thank our operations teams for achieving an outstanding total incident rate in the 2nd quarter of 0.6%. Siding and OSB both delivered impressive operating efficiency in the quarter, which we measure with OEE. The Siding business held OEE flat at 77% despite the complexity of ramping up the most recent Siding conversion in Segola, Michigan our Greenfield prefinished facility in Bath, New York.

Speaker 2

The OSB business increased OEE by 3 points compared to last year. This high level operating efficiency was a major contributor to the business' cost performance in the quarter. Finally, LP published our 2024 sustainability report in July. As detailed in the report, SmartSide is significantly more sustainable than competing siding technologies and most of LP's products are carbon negative. I want to thank everyone at LP who contributed to the report and to the impressive story it tells.

Speaker 2

On the left side of Page 6 in the presentation, you will see an updated chart showing normalized growth of siding volume and revenue compared to U. S. Housing starts. The 2024 data for siding reflects the midpoints of our increased guidance for siding growth, while the housing data is based on FactSet's consensus for housing starts in 2024, which is currently at 1,400,000. As you can see, siding growth continues to exceed that of the underlying housing market as LP gains share in residential construction.

Speaker 2

The repair and remodeling market is more difficult to track, but the general consensus is that R and R spending overall is down by mid single digits compared to last year. For the record quarter for expert finish, our pre finish siding design for the R and R market, LP Siding business also seems to be gaining share in the R and R segment. In 2024, we expect export finish to be close to 10% of total Siding volume. And given its higher price point, the 10% of volume, expert finish would account for roughly 14% of Siding revenue. Expert finish margins improved in the quarter as well, helping Siding to achieve a 25% EBITDA margin in the quarter.

Speaker 2

We believe we have a long runway for growth and share gains in the new construction, R and R and off-site segments of the Siding business and with both Primed and Prefinished SmartSide. And we intend to continue developing new products, expanding our addressable markets and executing our sales and operations strategies to drive future growth. And with that, I will turn the call over to Alan for more detail on LP's financial performance in the quarter before taking your questions.

Speaker 3

Thanks, Brad. As Brad said, it was a strong quarter. And as the waterfall charts on the next two pages of the presentation show, it was also a refreshingly straightforward one in terms of year over year comparisons. Page 8 shows the performance of Siding compared to the Q2 of 2020 3. With last year's capacity addition projects and channel inventory destocking both now behind us, the waterfall tells a story of volume growth, price increases and some much anticipated operating leverage.

Speaker 3

Sales volumes grew by 22% boosted by share gains in new residential construction and repair and remodel and a record quarter in export finish, All admittedly riding on a relatively soft comparable. But this higher sales volume generated $71,000,000 in additional revenue and $28,000,000 of EBITDA at an incremental EBITDA margin of almost 40% before considering the impact of price increases. Speaking of which, list price increases and favorable mix combined roughly equally towards 6% in higher prices worth $24,000,000 Increases in selling and marketing investments were almost fully funded by the non recurrence of last year's mill conversions, resulting in a net $2,000,000 of investment costs, while lower logs and resin prices supplied a useful $5,000,000 tailwind. Finally, as a result of ramping up the more automated pre finishing facility in Bath, New York and investments in similarly advanced equipment in our Green Bay pre finishing facility, there has been, as Brad said, a significant improvement in export finish margins over last year. Now export finish margins are not yet equivalent to the business average, but they're getting closer and closer.

Speaker 3

Incidentally, this improvement shows up in other costs on the waterfall because our methodology is to value changes in volume at the prior year margin. The net result of all this is $415,000,000 in revenue, up $95,000,000 with a near doubling of EBITDA to $105,000,000 And naturally, this pushed Siding's EBITDA margin up by 7 points to 25%. The waterfall on Page 9 also tells a simple and effective story of consistent execution by the OSB team. Prices were 34% higher than last year adding $73,000,000 in both sales and EBITDA. Unlike siding, OSB prices are largely outside our control.

Speaker 3

But what the OSB team can control, however, is volume, mix and operating efficiency. Unlike Siding, the OSB team delivered an exceptional quarter on all of these fronts. Sales volumes in the quarter were 100,000,000 square feet higher than last year, made possible in part by an impressive 3 percentage point increase in operating efficiency. 52% of volume in the quarter was higher value added structural solutions. This incremental volume generated an additional $40,000,000 in net sales and $23,000,000 in EBITDA.

Speaker 3

OSB ended the quarter with $351,000,000 in sales and $125,000,000 in EBITDA. And as Brad mentioned earlier, they did so safely. Clean quarters of sales growth and operational excellence in both Siding and OSB make for a similarly straightforward cash flow as Slide 10 shows. After starting the quarter with $244,000,000 in cash, LPN $229,000,000 in EBITDA, pay $59,000,000 in taxes and saw a seasonally normal reduction in working capital that brought in a further $39,000,000 With the resulting $212,000,000 in operating cash flow, we executed our capital allocation strategy as we have consistently done investing $36,000,000 in CapEx returning $120,000,000 to shareholders. During the quarter, we paid $102,000,000 to repurchase 1,200,000 shares at an average price a little over $84 per share.

Speaker 3

The $17,000,000 in other investing and financing is mostly the sale of LP's 50% ownership of a joint venture, a remnant of our investment in Entekra. And for avoidance of doubt, this gain was excluded from adjusted EBITDA as you can see in the reconciliation in the appendix. And LP ended the Q2 with $317,000,000 in cash. As of yesterday, the 6th August, LP has paid a further $64,000,000 for share repurchases, bringing outstanding shares to about $70,300,000 and a remaining Board authorization as of yesterday of $270,000,000 which brings me to guidance on Slide 11. I'd like to briefly remind you that when we updated our guidance on our Q1 earnings call, we increased the full year guidance for Siding by the sum of the Q1 beat and the increase in the 2nd quarter outlook.

Speaker 3

At that time, we had insufficient visibility to adjust guidance for the second half. But 90 days hence, with a siding order file that continues to be robust, we can now offer updated outlook through the year end. As Brad said earlier, demand for SmartSide continues to outperform a moderately weak repair and remodel market. But based on new volume records for both primed and the prefinished SmartSide in the second quarter, we now expect year over year revenue growth in the Q3 of between 16% 18% for revenue between $390,000,000 $410,000,000 and EBITDA margin of about 25% would yield Siding EBITDA in the 3rd quarter of between $95,000,000 $105,000,000 We continue to see typical seasonal patterns in demand, which usually means that the 4th quarter delivers weaker sales volumes as the building season winds down. If the 3rd quarter turns out as we expect and typical seasonal demand patterns emerge, the resulting full year revenue growth for Siding in 2024 would be between 14% 16% to a bit above $1,500,000,000 Increased volume should boost the EBITDA margin up a point or so from our prior guidance to about 24%, yielding full year EBITDA for Siding between $355,000,000 $375,000,000 In summary, this is a beaten raise for Siding with a Q3 that so far looks very much like the second.

Speaker 3

OSB is a different story. Prices fell significantly at the end of the second quarter. The bulk of that will be felt in LPs Q3 due to the time lag in our order file. And assuming prices remain flat at last Friday's levels published by Random Lengths, the OSB business would earn somewhere between $10,000,000 in the Q3. As always, this is not a price prediction, just an attempt to offer useful modeling.

Speaker 3

For the Q4 and full year OSB outlook and to reflect the reality that OSB demand and prices rarely increased meaningfully in the Q4, we will extend the flat from Friday prior approach through year end. Therefore, holding prices flat at current levels and assuming seasonally lower OSB volumes would imply EBITDA for the Q4 of about $10,000,000 below that of the 3rd quarter. So assuming the year plays out as I've just described and as usual treating LPSA earnings and corporate expenses is mutually offsetting, total EBITDA for LP in the 3rd quarter would be in the $105,000,000 to $125,000,000 range and full year EBITDA would between $580,000,000 $620,000,000 And with that, we'll be happy to take your questions.

Operator

Thank And our first question will be coming from Steven Ramsey of Thompson Research Group. Your line is open.

Speaker 4

Good morning. Maybe to start with the Q2, Siding EBITDA margin just slightly above the Q1 despite much higher sales. Maybe talk to the puts and takes. I'm sure some of that is the expert finished growth, which I know is an incremental drag if that volume is growing better than the core SmartSide product, but just overall the puts and takes on the Q1 to Q2 Siding EBITDA margin?

Speaker 3

Sure. There's not a great deal to add. You captured one of the factors. The expert finish margin is significantly improving, but it will be below the average. We have in some instances added shifts to help make sure that we keep lead times healthy.

Speaker 3

And the mix changes slightly in terms of the top line in terms of pricing and that obviously affects the margin a little bit. But other than that, there's nothing really of any great significance other than, as you said, expert finished drawing, slight addition of labor and changes in top line mix.

Speaker 4

Okay. That's helpful. And then also thinking on citing the builder series rollout, just curious on general updates on how that is going with the current partnership with Lennar and how you're thinking about potential partnerships with other large builders, how that could play out over the second half and into next year?

Speaker 2

Eric, we're very pleased with the growth in our Facilities product line, particularly incremental coming in from Lennar. But we do have initiatives with certain national and large regional portals to secure additional volume there. Only the builder shares to feed volume that's theoretically measurable, but we're very competitive with the big builder. We are seeing really good product pick in those regions as well. Our trim and soffit SKUs pulled along as a result of the builder charities lap product allowing us to secure a position with the builders.

Speaker 2

So the growth a lot of the growth that we're seeing currently on siding can be attributed directly to the big builder initiative that we have. And we expect and the second part of your question, we expect continued success there as we move through the rest of this year into next year.

Speaker 4

That's helpful. Thank you.

Speaker 1

Welcome.

Operator

Thank you. One moment for the next question. And our next question will be coming from Kurt Yinger of D. A. Davidson.

Operator

Your line is open.

Speaker 5

Great. Thank you and good morning everyone. Brad, I just want to follow-up on the last comment around the strength in the big builder business. Is that primarily a builder series dynamic at this stage, just that product? Or are you seeing solid takeaway on prime product as well and kind of big builder as we think about it to be sort of a collection of those products as opposed to just builder series?

Speaker 2

Yes, dead on, Kirk. The builder series lap certainly makes us competitive from or help to make us competitive from a lap standpoint. But we're as we are successful converting builders with our lap offering and builder series, we have generally speaking, the house is also trimmed, the soffit is ours, any panel or shake product that is used as an LP product. And we are seeing in the regions in the geographic regions where we are seeing success that is measurable directly the fact that additional market share pulls those other products along as well. So yes, we've got good growth on builder series.

Speaker 2

We've got good growth on all prime SKUs that go into single family new business, but also this year. Okay.

Speaker 5

That makes sense. And then on the expert finish front, I mean, the answer seems kind of obvious, but I'll ask it anyways. I mean, does the performance and strength that you're seeing there, are you seeing any offset from lower volume to others who might have been pre finishing the products themselves and selling them under a different brand name? And then on the margin front, how should we sort of ring fence the long term vision in terms of what Expertfinish should be? Is it reasonable to think that just given the price point, it could be higher than the company average over time or just given the operations and infrastructure around pre finishing operations, is meeting the company average kind of where your head is at this stage?

Speaker 2

Yes. So the first part of that question is a good one around, but I think, Kurt, what you're asking are we cannibalizing historical partners that were pre finishing our product, our prime product and selling it. And I mean, certainly, some of that has happened as we've gone into this expert finish initiative, but we still have a significant amount of lap siding going into other pre finishers for conversion. So, I would say, certainly as a whole, our addition of expert finish on portfolio has been overall additive to our lap sales. But certainly, there has been some cannibalization that's the impact there, but certainly positive.

Speaker 2

On the margin side, look for Mark, if you recall, we used to have a Canexcel product line in Eastern Canada at the time, one of the highest margin products in the entire LP portfolio. And I certainly believe that Expert Village can be above or should be an above product margin for us. It will be and we're getting there. As Alan reported, we're getting to be where it's quite a drag any longer. It will be it is one of those things that as we ramp into incremental volume, at times there will be inefficiencies associated with those that continued growth that may delay the ultimate achievement of higher than average margin for expert finish.

Speaker 2

But our expectation is ultimately that's where we'll end up. They should be we should be getting paid more than normal margin amounts to paint the product given the quality of the end product as a result of our finishing.

Speaker 6

Right.

Speaker 5

Okay. That makes total sense. Thanks, Brad, for the color and I'll turn it over.

Operator

Thank you. One moment for the next question. And our next question will be coming from Mark Weintraub of Seaport Research Partners. Your line is open.

Speaker 6

Thank you. First, congrats, very strong quarter, good outlook. One question is, obviously, we had this big destock in Siding last year. Do you think customers have just continued to hold inventories very low? Or do some of the strength potentially represent some restock to say more normal levels?

Speaker 6

Or how would you have us think about that?

Speaker 2

I would say that we discussed this internally a bunch and we feel like we are at normal inventory levels for this time of year and normal being prior prior to last year back in the days when things were normal, which was kind of a long time ago given we were on allocation and COVID and all that. But we feel good about current inventory situations as far as our distributor partners. I mean, we are still in the building season, so products moving and inventories are being maintained. But there has been no material build in inventory, nor do I believe it's necessarily light. I just think it's where it needs to be right now to service the market conditions that we have in Siding.

Speaker 6

Okay. Thank you. And then, good on Expert Finish, great on the Builder Series. Any update on the Smooth Smart Side initiative?

Speaker 2

Yes. I mean, those products have been launched. That's a significant there was some of a I won't say significant, but a meaningful part of the NOR program was the availability of SMOVE. And then that is a key component to our East Coast pre finish or expert finish strategy. And so we're pleased with that new product.

Speaker 2

We'll continue to innovate around that product and others that are needed, especially in the repair, remodel SKU selection for the homeowner, but it's going well and we're pleased with our with the sales of that product so far this year.

Speaker 6

Super. And then just last, kind of tie 2 together. 1, so if I look at the full year guide for Siding, I know you said it's seasonally weaker, but I think the math is it goes from $100,000,000 at the midpoint to like $70,000,000 of EBITDA for 4Q. Seems pretty like a pretty steep drop off. So I was curious if there's anything else embedded there, maybe just a bit of conservatism.

Speaker 6

And then also just, I know you made some OSB in the Siding operations in the Q1. I'm guessing you did in the Q2 too, maybe a bit more color on what happened there and or whether you're assuming now that OSB is weaker, whether there is OSB still being produced in Siding in the second half of the year? Thanks a lot.

Speaker 3

Yes. Thanks, Mark. The actual part of the answer ties to the question you asked about BRUSH SMOVE. We're ramping up production of BRUSH SMOVE in the Q4 given its success. And again rather like export finish, it is currently an inefficient manufacturing process given that it's in its infancy.

Speaker 3

So there is some non material capital investment planned next year to help us automate that process more efficiently. So part of the drag is that. Another aspect is that we did, as I said in an answer to an earlier question, add labor to the siding network in Q2, which would be maintained through Q3 and through Q4 with Q4 being a slightly lighter most likely a lighter revenue quarter. That labor is going to be devoted to some essential maintenance including a month down at one of our mills to replace a furnace. I was chatting to one of the engineers about this and he used as a perfect phrase, He said, we don't have to do this now, but in 2025 we'll wish we did if we don't.

Speaker 3

And therefore, that's what they do. Well, that's what we're doing. Thirdly, yes, there was some OSB production in Siding in Q1, a lot less in Q2, less in Q3. And that level stayed roughly where it is in Q4. But if that's not that's $1,000,000 or so, but by no means the lion's share of the change in EBITDA.

Speaker 3

It's mostly the maintenance and the bushes and costs. And as you gave me the outs, I'll take it. And yes, of course, we try to give out a target and we're confident we could be a little bit of conservatism as always.

Speaker 6

Much appreciated. Thank you.

Operator

Thank you. One moment for the next question. Our next question will be coming from Mike Roxanne of Tuohy Securities. Your line is open.

Speaker 7

Thank you, Brad, Alan and Aaron for taking my questions and congrats on a good quarter despite the backdrop. First question I had was just in terms of the selling and marketing expenses. You mentioned adding increasing headcount, adding additional selling and marketing expenses. I'm just wondering how much you incurred in the quarter and where that what's left to spend in the balance of the year?

Speaker 3

Oh gosh. We added about $5,000,000 of selling and marketing costs year over year in Q2. How much is left to spend? It depends on the opportunities. I would like to see us continue to invest in a relatively heavy rate.

Speaker 3

So I think you should expect to see similar type year over year variances for the remainder of the year and that fundamentally baked into the forecast.

Speaker 7

And at that point now, do you think that you're fully staffed accordingly to meet the signed demand that's out there? Or is this something that's going to be ongoing, particularly as you continue to grow your innovation, your pipeline and the like?

Speaker 2

Yes. Dan, you should expect the absolute number to continue to grow. This market share strategy that we have requires contractor builder conversions, which requires human interaction. And so we're going to support our sales team appropriately, both on the sales front and the technical group behind that provides a structure on installation. And then also as we continue to grow extra finish, which means higher market share and higher and aspirations for even higher market share in repair and remodel.

Speaker 2

That does require marketing support. Those are that's an in home sale initiative, straight with interaction with the consumer. And so as R and R becomes a bigger part of our mix, that segment requires a bigger investment in marketing. And so we should expect absolute growth in our sales and marketing expense, but hopefully find leverage when if you ratio that against revenue. I mean, obviously, there should be a good bit of leverage there.

Speaker 2

But we're not done investing in sales and marketing.

Speaker 3

We're not done investing in marketing.

Speaker 2

So those two things go hand in hand.

Speaker 7

Got it, Brad. Thank you for the color. And then just one quick one on OSB. Could you share where your OSB operating rate stood in 2Q? Where it stands currently?

Speaker 7

Where does the where do you think the industry stands? Really any sense that curtailments could be forthcoming as prices continue to be under pressure here? Thank you.

Speaker 8

Yes. The operating rate

Speaker 3

in Q2 of this year is around about 86%, I believe. We're forecasting it to be slightly lower in Q3.

Speaker 2

And we will run our OSB business to match our customers' demand and do everything within our power for inventories to stay. Actually in OSB, I would call it slightly lean right now. And so the we will match our capacity going into Q4 and beyond to the customer demand.

Speaker 7

Got it. Good luck in the second half.

Speaker 2

Thank you.

Operator

Thank you. One moment for the next question. And our next question will be coming from Sean Steuart of TD Cowen. Your line is open.

Speaker 9

Thank you. Good morning. A couple of questions. With respect to the Siding business, given the positive momentum and positive revision guidance or guidance revision rather for that segment, Brad, can you give us a sense of what you would need to see either in terms of margins at the segments or with respect to order file pull to make the decision on the next capacity expansion for that segment?

Speaker 2

Yes, Sean. We are beginning to talk about that more robustly than we were 6 months ago. And so the certainly, we want to be in a situation to stay ahead of demand this year as our reporting has been really good year as far as growth and we expect to continue to build on that next year. So we are actively back into the scenario planning around the next incremental capacity. As we learn about which SKUs are growing, that conforms the configuration of the next expansion.

Speaker 2

And that puts into play not only Wawa, but some of our existing facilities where an additional press line may be the best way to get the next incremental capacity. So we're actively in the planning stage there, not spending any significant or meaningful CapEx yet as part of that. But this year's growth has put that back on the planning horizon for us. And as we look into next year, which we're not obviously at all haven't done the budget yet or certainly not giving guidance to, but we could see us beginning to do engineering for the next expansion sometime next

Speaker 9

year. Thanks for that detail. And appreciating you don't give 2025 guidance, But with the current footprint, can you give us a sense of how much incremental volume in siding you would expect to be able to produce and ship with the current footprint beyond what's implied in 2024 guidance?

Speaker 2

I would say because we are not fully shipped at all the facilities, but because of the pullback last year. So I would say we could from where we are today at capacity around shift additions that would give us another 20000000 to 30000000 feet of capacity. So we've got a good bit of headroom given the fact that we just converted Holton into GOL. GOL will be in a big facility as well. So it's not like we're at all on edge, but we do want to stay ahead of it, Sean, as you know, to try to not go back into a manage order file situation like we were in 2 years ago.

Speaker 9

That makes sense. Okay, that's all I have for now. Thanks very much.

Operator

Thank you. One moment for the next question. And our next question will be coming from Matthew McKellor of RBC Capital Markets. Your line is open.

Speaker 10

Hi, thanks for taking my questions. First, I'd like to ask if you have an updated view on how high Siding margins can go before the next capacity addition. I think we previously talked about 25%. You've been there for a couple of quarters. You're guiding to the same range.

Speaker 10

Expert finish margin seems to be improving pretty rapidly. So just any updates on that front would be helpful. Thank you.

Speaker 3

Yes. It's a great question, well, that I'm reluctant to answer. So as you know we try to give ourselves more than enough room to operate what we describe as this rising sine wave. And at this point in time particularly given the introduction of RocheSmooth which I said is going very well, but at this point is relatively inefficient. We're making great gains in Expertfinish.

Speaker 3

I think we are with increasing certainty capable of hitting this 25% mark with this excess capacity that we're carrying. So yes, the trend is upwards, Matt, but I'm not willing to commit yet on where that upside is. I think that we need to see how the next few capacity additions play out and the timing of those. So yes, probably best to say any more than that.

Speaker 10

Okay. Thanks. Fair enough. And then just one last cleanup for me. I was wondering if you have any color you could give around expected impact of starting production levels and margins as a result of the new forestry plan under developments in the Swan Valley, Manitoba area?

Speaker 2

Yes, good question. That's something we're actively working with, I would say, from a siding margin or that matter of what's been there is cost associated with those management plans, but it's really not material to the numbers we talk about on this call. Normal as far as the impact that

Speaker 10

Thanks very much for the help. I'll turn it back.

Speaker 3

Thanks.

Operator

Thank you. And one moment for the next question. Our next question will be coming from Jeff Stevenson of Loop Capital. Your line is open.

Speaker 11

Hi, thanks for taking my questions and congrats on the nice quarter. I was wondering if you could talk about whether there was any variance in Siding demand trends in the home center channel compared with your overall Siding results? And then also how we should think about your expanded partnership with Home Depot regarding your trim product as far as an impact on channel demand moving forward?

Speaker 2

Yes. So we did see meaningful growth year over year growth in our retail business We expect that momentum to continue in Q3. Some of that has been just strengthened panel that has been historic skew there. But as you have mentioned, the trim placement in the in particularly in the Home Depot has been all incremental volume for us. And that has been a meaningful part of the growth that we saw in Q2 and expect to see in Q3.

Speaker 2

So as we're continuing to grow with the home center, particularly Home Depot, by being good partner as far as that excuse there, particularly around trends, some lapping certain places. And that has gotten us in a position where we have the ability to grow with Home Depot beyond just the traditional panel play that has been off the historic basis of the relationship. And I guess you were asking a little bit, are we seeing cannibalization as a result of that? And the answer is not of any not seeing the tram order file is so strong right now across the board that I don't think there has been any significant loss of our channels. Stores and depots still, strong DIY still, a strong DIY or ultra small crack contractor customer base there, so small in scale.

Speaker 2

So it's giving us the ability to have the product presented to a customer base that we probably didn't have access to the product as it was contribution in lumber yards.

Speaker 11

Right. Thanks for the color there. And then you mentioned that price mix was roughly an equal contributor to the 6% growth in the 2nd quarter. Would you expect a similar contribution from price and mix as we move through the back half of the year? Would one be more than the other?

Speaker 3

We kind of it's hard to predict the mix aspect. The 3% net from list price increases. Yes, that's relatively safe. The mix is a little more variable depending on the mix of products. So I think it will be our friend, whether it's as much as 3 points is so demand specific that it's hard to predict with any great precision.

Speaker 3

They'll become it will be positive.

Speaker 11

Okay, understood. Thank you.

Operator

Thank you. One moment for the next question. Our next question will be coming from the line of George Staphos of Bank of America Securities. Please go ahead.

Speaker 8

Hi, thanks so much. Thanks for taking my questions guys. You mentioned the progress that you're seeing in Expert and the progress you're seeing with Builder Series, would it be possible for you to give us some additional color and perhaps you already did, but and I missed it. In terms of the guidance raise, how much of that was from the progress that you're seeing in single family and your progress there and also then within repair model? Similarly, you talk about the share gains.

Speaker 8

Is there a way to give us some order dimension? It sounds like you're doing very well with Expert. How much of that is coming again from single family, from builder versus repair model and that distribution channel? And then questions that we've received today from investors, is it possible at all recognizing it's an open mic conference call to talk about where you think you're getting your share relative to other products that are in the market? Is it more coming from vinyl?

Speaker 8

Is it more coming from fiber cement? Anything that you would have us take away from that?

Speaker 2

So let's speak to the where's the growth coming from question first. And I would say when you look at the strong growth we got, I would put about, mean, in general terms, George, about half of that growth

Speaker 8

and Hey, Brad, your phone is cutting out on our side. I don't know if you

Speaker 2

Log us to the speaker and see if that helps. Let me know if it does. So the if you take the growth that we've reported about half of that, I would attribute to single family new construction. Look, let me just back up. There's a little growth in there at shared and in retail, okay.

Speaker 2

But the meaningful growth is about half and half between single family new construction. And I would say about half of that is driven by the initiatives around the big builder focus that we have. And then the other for that would be repair and remodel, which is just to transfer here converting contractors and getting the siding installed on homes. That's a regionally initiative there. But certainly, the we would not have had as good a quarter before casting as good a Q3 if it wasn't for the success we're seeing in single family new construction or repair remodel.

Speaker 2

The shed in retail has just been a nice little bump to have year over year. Where is it coming from? I would say it's coming from across the board. There is still opportunities, particularly in repair, remodel, but certainly also in new construction as we compete against final. And I would think most of the success in repair and remodel is probably against final.

Speaker 2

On the single family new construction side, then you get into some competitive hard sidings as well as vinyl as the competition. And so, as we gain share there, it's coming from someone, if it's not coming from growth with an existing a big builder customer. But obviously, what we would be replacing would be either vinyl or our competitive part side. But there's still a lot of opportunity to go head to head against vinyl with our product being certainly an up grade perceived upgrade to vinyl or being not perceived, actually a upgrade to vinyl. And so we have competitive there because that's where the big market share is.

Speaker 2

So there's a lot of focus on us making sure we have and can explain in a good way the value proposition against vinyl, but also against other hard sidings.

Speaker 8

Just closing the loop and I think I know the answer, but if basically you're getting half of the progress from single family and half from repair model, would that also be the equivalent driver of the guidance raise within Siding? And then separate and I'll turn it over. Can you remind us what's left to attack an OEE in terms of margin opportunity across the businesses if trends are as you expect over the next year and I recognize there are no guarantees in life. What could that mean for your profit dollars, Alan, over the next year or 2 years? Thank you.

Speaker 2

I'll answer the yes. On the revised Q3 guidance is predicated on the strength we're seeing in the repair and remodel and single family new construction order filed. And there is still upside on OEE and I'll challenge Alan to articulate that.

Speaker 3

Sometimes since we've quoted EBITDA numbers that relate to percentage point increases in OE and we're looking to do so today. The way to think about OE is that what it can fundamentally allow us to do is meet thresholds in terms of shifts. And so it's obviously more efficient when we're managing our capacity up or down to be able to generate more OSB output without adding a shift and or we're lowering up to be able to take out a whole shift. And OEE gives us that leverage. And as you can imagine, I've discussed it before, leverage that we don't sort of use in the Siding business because the idea with the Siding business is to try and maintain this sort of more consistent stable and growing workforce as we grow volumes.

Speaker 3

But it's the opportunities it gives us to be to operate the system with increased flexibility and we make braver decisions a little earlier in terms of taking up capacity when we feel demand is not there. To my mind that's the real benefit of OEE and of course that manifests itself in terms of increased operating performance. But I'm going to refrain from reintroducing pure EBITDA dollar against percentage point of OEE.

Speaker 2

George, I'll just add to that. What's been remarkable about our OEE journey to me is, as we we're way ahead of where we thought we would be 5 years ago, but we still see opportunity for improvement as and so it's kind of probably will be a never ending journey of finding ways to be more efficient and more productive. And of course, CapEx helps that. It could actually increase the baseline. And then when we launch a new product like brush, smooth and siding, there's all kind of OE opportunity there because we would learn to make the product more efficiently.

Speaker 2

So we're on a never ending continuous journey on OEE. And I feel like we'll be talking about that 10 years from now and still see plenty of opportunity. That's kind of the beauty of the industry and the way that our machines work at the facilities.

Speaker 8

To some degree, it's the beauty of growth. But anyway, thank you guys. I'll turn it

Speaker 2

over. Yes.

Operator

Thank you. One moment for the next question. And our next question will be coming from the line of Susan MacLery of Goldman Sachs. Your line is open.

Speaker 12

Good morning, everyone. Thanks for taking the question. I wanted to start with digging a little bit more into the R and R side of things. Can you just give some perspective on what you're hearing around the consumer and sellout trends on the ground? And what level of sellout do you think the channel is positioned for in the back half given the inventories that they're carrying?

Speaker 2

Okay. Well, I think the channel is adequately stocked for the second half for any reasonable demand expectation on repair and remodel. So I have no concerns about ability to serve and I don't have concerns about there being any kind of overstocking in repair and remodel. One step distributors are experts in managing inventory in that channel. But I think I do believe demand is dampened for siding remodel is a big ticket expense, many times financed.

Speaker 2

And so with interest rates where there are, with the economic uncertainty that's out there, there is, I think, R and R spend for our re side is constrained. So I'm really proud of the fact that we're seeing the growth that we are seeing because that has to be and if that hypothesis is true that that's market share gain. But with interest rate reductions, if that happens, if we get through, as Aaron and I talked about this morning, a soft landing or quasi soft landing, the pent up demand around potential siding reside projects could be pretty significant. So I think we're in a really good position to have our product commercialized, building credibility around the offering, expanding geographically our access to market through picking up some really high quality distribution to where when we see repair and remodel spend come back and financing loosen up a little bit so that a homeowner can afford to do a big ticket remodel on siding, we're going to be in a really good position. And that's why we're so encouraged about the future for our siding siding business is repair and remodel just as we're so under penetrated from a market share standpoint.

Speaker 2

If we continue to be able to gain market share while the market also gets stronger, that sets us up for some really good growth over the next several years.

Speaker 12

Okay. That's very helpful. And then you did see a bit of a raw material tailwind this quarter. Can you talk about the outlook from that perspective and how we should think about that flowing through over the next couple of quarters?

Speaker 3

Yes. It may be a little maybe it may not be quite as positive as it has been in Q2 for the remainder of the year, but we still expect a raw material tailwind.

Speaker 12

Okay.

Speaker 3

Resin and logs. So we're optimistic.

Speaker 12

Okay. All right. Thank you for the color both and good luck with everything.

Speaker 6

Thank you. Thanks, Susan.

Operator

Thank you. That does conclude today's Q and A session. I would like to turn the call back over to Aaron for closing remarks. Please go ahead.

Speaker 1

Okay. Thank you, operator. With one round of questions, we're going to call those

Speaker 8

there and give everybody a couple of minutes back in today.

Speaker 3

Stay safe and we look forward to connecting

Speaker 9

with you. Thank you very much.

Operator

Thank you everyone for joining today's conference call. You may disconnect.

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Earnings Conference Call
Louisiana-Pacific Q2 2024
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