Louisiana-Pacific Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 12 speakers on the call.

Operator

Good day, and welcome to the Q3 2023 Louisiana Pacific Corporation Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your Speaker, Mr. Aaron Howwald, Vice President of Investor Relations and Business Development.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the Q3 of 2023 as well as our updated full year outlook. 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 Hockey, LP's Chief Financial Officer. During this morning's call, we will refer to a 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 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. I will incorporate that content herein by reference rather than reading the slides.

Speaker 1

And with that, I'll turn the call over to Brad.

Speaker 2

Thanks, Aaron, and thank you all for joining us to discuss LP's Q3 results and our full year outlook. The Q3 was our strongest of the year by far for both Siding and OSB. It was also a quarter in which LP's teams achieved key for growth and sustainability, one of which we will recognize for our continuing focus on building a stronger and more inclusive culture. Page 5 of the presentation shows financial highlights for the quarter. LP generated $728,000,000 in net sales in the quarter, which was 15% lower than Q3 of last year.

Speaker 2

But higher OSV prices and improved sell through and inventory normalization in Siding led to a higher overall EBITDA margin than last year, with the result that LP earned $190,000,000 in EBITDA, Only 5% less in Q3 of last year. As a result, LP exceeded the high end of our guidance range despite OSB prices falling in September. The $190,000,000 in EBITDA translated very cleanly to $187,000,000 in operating cash flow NLP ended the quarter with $160,000,000 in cash on hand after returning $17,000,000 to shareholders via dividends and investing $49,000,000 in growth and sustaining capital. We repaid our evolving credit facility and ended the quarter with over $700,000,000 in liquidity. Page 7 of the presentation shows siding growth relative to the housing market on a trailing 12 month basis.

Speaker 2

Remember that Q3 of 2022 was the best quarter on record for siding volume and revenue as we remained on a managed order file until early December of last year. Despite this very difficult comp, on a trailing 12 month basis, SmartSide sales volume beat single family housing starts by 10 percentage points. Starts were down 16%, but siding volume was down only 6%, And siding prices were up 8%. As you can see in the pie chart to the right, export finish was stable at 8% of volume in the quarter. In the first half of twenty twenty three, Siding sales were dampened by inventory destocking after we finally transitioned from a managed order file late last year.

Speaker 2

Q3 saw the normalization of sell through rates and inventory levels. As And despite a market that is facing increasing affordability challenges, higher interest rates and elevated economic uncertainty, The 3rd quarter saw sequentially higher volumes and average selling prices in the Siding business compared to Q2. As a result, we believe that the order patterns and This was not the first time that the Siding business has been on a managed order file and the inventory digestion period before the resumption of the normal order cadence takes time. I am proud of the perseverance and dedication that Siding's sales and operations teams demonstrated as we work through this process. Before I hand the call over to Alan, I want to mention a few additional accomplishments in the quarter.

Speaker 2

Last month, we officially opened our newest prefinishing facility in Bath, New York. This brings enhanced scale, efficiency and geographic expansion to Expertfinish. I want to officially welcome the Bath team to LP. Bath is a 3rd new facility for the Siding business in the past 2 years after the conversions of Holton and Segola. I am proud of the safe and efficient execution of all our recent capacity additions in siding and confident that we are well positioned for resumed growth in the diverse markets we serve.

Speaker 2

In the 3rd quarter, LP published our 3rd sustainability report as well as environmental product declarations for the Structural Solutions portfolio of value added OSB products. Structural Solutions products like TechShield Radiant Barrier, WeatherLogic Sheathing with Integrated Air and Water Barrier And legacy flooring all sequester more carbon than is emitted during their manufacturing and lifecycle. Our customers and shareholders can be confident that LP's suite of engineered wood products combined with our responsible and sustainable management of forest resources means that LP can deliver best in class OSB and Siding products while also having a positive impact on the environment. This is most notable in siding where competing products are made predominantly of cement or vinyl. When it comes to durable products with great curb appeal And positive impact for builders, contractors, homeowners and the environment, it is very hard to beat LP's portfolio of Lastly, before I turn the call over to Alan, I'm happy to say That LP was named by our local newspaper, The Tennessean and USA Today as the top workplace in Middle Tennessee and by Newsweek as one of America's greatest workplaces.

Speaker 2

Building a safe and inclusive culture for all of our team members feel welcome and encouraged is its own reward. While we will never stop trying to improve, I am proud of our company and the progress we continue to make. And with that, I will turn the call over to Alan.

Speaker 3

Thanks, Brad. Slide 7 of the presentation shows the Q3 year over year revenue and EBITDA for Siding. The Q3 of last year was a high watermark for both Siding volume and revenue and admittedly presents a difficult comp this year. However, as predicted, volumes and prices improved sequentially over the Q2 of this year by 6% and 2%, respectively. On a year over year basis, prices were up 3 percentage points.

Speaker 3

The combined impact of last January's list price increase Favorable product mix added $10,000,000 of revenue and EBITDA. Volume was down 16% with Expo Finish holding its ground rather better than primed. I'm going to take a moment now to recap the ramp up of conversion cost trend this year. The business carried embedded ramp up costs $16,000,000 in the Q1 of this year, dollars 10,000,000 in the 2nd quarter and now $8,000,000 this quarter, including $1,000,000 for the recently opened Bath Pre Finishing Facility. This $8,000,000 is $3,000,000 higher than the $5,000,000 we incurred in the 3rd quarter of last year and it is this $3,000,000 increase that shows up on the waterfall.

Speaker 3

Now I mentioned this detail to emphasize the point that our current EBITDA margins are Carrying the burden or the weight, if you will, of these costs. Moreover, the recently opened Bathurst facility will add about $4,000,000 of incremental costs in the Q4 as it begins ramping up. So despite generating a respectable 21% EBITDA margin in the 3rd quarter, Adding back the embedded $8,000,000 I just referenced together with $5,000,000 for the Dawson press rebuild as shown in the last column of the waterfall which produced an underlying EBITDA margin of about 24%. This margin was of course helped by the slowing of inflationary pressures on freight and raw materials, which delivered a $9,000,000 EBITDA tailwind net of wage inflation. Slide 8 tells the Q3 story for OSB, where price gains and cost controls more than offset volume reductions resulting in a small year over year increase in EBITDA despite the revenue decline.

Speaker 3

An OSB price drop late in the quarter notwithstanding, higher prices added $28,000,000 of revenue and EBITDA compared to last year. However, despite higher net prices, the overall demand environment was softer than last year with open market volumes particularly weak. And so, the volume reduction in the quarter reflects not only the removal of the Segola Mill from the OSB fleet, but also market curtailments in response to this softer demand. As with Siding, raw material deflation provided a small tailwind, but the star of the show was cost control, which contributed $11,000,000 of EBITDA. In other words, despite significantly lower volumes, the OSB business ran very efficiently, as demonstrated not only by the dollars, by the 4 percentage point improvement in operating efficiency or OEE.

Speaker 3

As Brad has already mentioned, it was a clean quarter for cash flow as shown on Slide 9, With $190,000,000 of EBITDA producing a $187,000,000 of operating cash flow, we spent $49,000,000 in growth and maintenance Capital returned $17,000,000 to shareholders via the quarterly dividend and repaid the $30,000,000 draw on our revolver. As a result, cash balances increased by $90,000,000 in the quarter to end September at $160,000,000 Cash has continued to increase subsequently Currently stands at a little over $200,000,000 Finally, let me discuss our updated full year outlook on Slide 10. With respect to CapEx, having already spent $236,000,000 so far in 2023, the 4th quarter Will likely look a lot like the Q3 for capital spending. The bulk of the near term growth and conversion capital is behind us with Segola and Bass now up and running, So the 4th quarter spend will mostly be on sustaining maintenance. Siding revenue for the 3rd quarter largely met our internal expectations, So we are reiterating the guidance we provided on our Q2 call that we expect a full year Siding revenue decline of about 10%, which implies a 4th quarter revenue decline of about 16%.

Speaker 3

For OSB, we will continue to offer algorithmic revenue guidance Based on the assumption that OSB prices remain at the levels published by Random Lengths last Friday. Under this price model and accounting for market downtime, We would expect OSB revenue to be down 30% sequentially compared to the Q3. Under these assumptions, including the start up costs of the Bath $60,000,000 $80,000,000 Now before we take your questions, please allow me to anticipate 1. We're not yet in a position to offer revenue or EBITDA guidance for 2024, but our capital allocation strategy remains unchanged as well the flexibility with which we deploy capital to invest in capacity. If the housing and repair and remodel markets are basically flat next year, As most forecasters currently anticipate.

Speaker 3

Then Segola and Bath provide LP's Siding business with sufficient capacity to press and pre finish enough SmartSide to meet demand. And when might we start converting the recently acquired Wawa facility to Siding? Well, the answer as Established on prior calls is when the market demands it. We don't know exactly when that will be, but we have sufficient capacity, liquidity and most importantly, flexibility to be responsive to demand when that time comes. And in the meantime, our capital allocation strategy remains to earn cash, Invest in our growth as needed and return a significant amount of the remainder to shareholders.

Speaker 3

And with that, we'll be happy to take a round of questions.

Operator

Please standby while we compile the Q and A roster. And our first question will come from the line of Mark Weintraub with Seaport Research Partners. Your line is open.

Speaker 4

Thank you. First question, if we think about the 4th quarter Siding margins, I guess we're going to have bath against us, but kind of order of magnitude, how should we think about it being relative to The Q3.

Speaker 3

Yes. Given that volumes in the 4th quarter, If we hit this forecast, they're going to be lower than the Q3 and the business has a high available margin. Then even excluding the BAF costs, the EBITDA margin would have been a little lower than Q3. And then of course, as we add on, as you point out, The BAF costs are lower the margin a little bit more. So the closest approximation To the siding Q4 performance, closest approximation is probably Q2 of this year.

Speaker 3

Similarish In terms of most of the drivers.

Speaker 4

Got it. And I believe that was 19% EBITDA margins in Q2?

Speaker 3

Yes, that was Q2. So closest approximation, I'm not necessarily committing to that number, but the closest Proximation, the shape of the quarter is very similar.

Speaker 4

Okay. Thank you. And then, as we're thinking about next year, Assuming you're not moving forward with Wah Wah and any start up costs there, which I guess seem kind of unlikely, Can we add that $38,000,000 of start up costs with Segola, press rebuilds, The Bath expansion, etcetera, and when we bridge 2024 versus 2023 or would you suggest we think about it differently from that?

Speaker 3

I'd like to I suggest thinking about it slightly differently. So a proportion of those costs are permanently embedded. They're the fixed cost of having the facilities. Now of course that sets us up to be able to bring on incremental volume Very efficiently because of their fixed cost infrastructure is largely already in place. So the real way to think about it is those embedded costs set us up To potentially have a high variable incremental margin on additional volume next year.

Speaker 3

That's the way to think about it. So they're there, but it means that as volume comes on, those costs don't need to be added again because they're already embedded in our current run rate. And It's an investment and I say this a lot, I know it's an investment in the future That allows us to immediately recognize the EBITDA from incremental volume when we get it.

Speaker 4

Okay. So but would none of that $38,000,000 have been quasi one time? It should all be viewed as embedded or?

Speaker 3

Yes. I'm being a little bit cagey. Some of it's embedded and some of it's one time because some of the costs Here's a good example of a ramp up cost. When you're ramping up, we have to we know we don't make A grade products. So some of the product that gets Produce as we ramp up is essentially scrapped as we learn to run efficiently.

Speaker 3

So some of those costs are indeed those very startup costs. But it's a bit too early for me to commit to a precise separation. You're right that some of those are inherent inefficiencies that would not be repeated. The rest is fixed cost infrastructure. There will be.

Speaker 4

Okay. Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Kurt Yinger with D. A. Davidson.

Operator

Your line is open.

Speaker 5

Great and thanks and good morning everyone. I guess as you've kind of wrapped up this Inventory normalization in Q3, any thoughts on how much of a headwind that's Ultimately posed volumes this year and how have incoming orders trended as you've gone from kind of Q3 to Q4 here?

Speaker 2

Yes. Well, so from for 2023, It's not the easiest thing to settle on a number for what the headwind was. But if you look at Historical sales, if you look at some of the inventory reporting we're getting now from distribution, it can be as much as 100,000,000 feet of Volume that was sold last year and then moved out of the channel this year, which has And caused the headwind that you mentioned. As far as where we are today, we do have all customers back in the order file Routinely, like on a normal cadence based on history. And so we feel good that across the board, across all different channels that we've worked through the inventory situation and we're seeing No real demand flow back through consumer demand flowing back through to our order file.

Speaker 3

Got it.

Speaker 5

Okay. That's very helpful. And then

Speaker 4

I guess as you look at across

Speaker 5

some of the Different products within SmartSide, Expert Finish, the Builder Series, maybe some of the volume that Was going into the shed manufacturers that was weaker earlier in the year. I guess, are there any parts of that that you're Particularly excited about kind of growing next year notwithstanding a big change in kind of the macro demand environment or What do you see as kind of the biggest kind of above market growth drivers over the next 12 months?

Speaker 2

So Kurt, if you let's just say For the sake of this question that new home construction is flat next year, R and R spend is flat next year. We're excited. I'm excited about the opportunity to gain market share in repair and remodel due to our export finish Growth, the Bath New York facility, the Holton plant behind it is making product for the Eastern Seaboard, an area where It's a highly active repair siding repair and remodel market, but one where we are underpenetrated. So as we build capability and Capacity there and scale, there's just a lot of opportunity for market share gains. And then on the new construction side, We continue to go to market with our builder series portfolio of products, which provides us competitive offering for the builder.

Speaker 2

And while we have, Depending on the geography, decent to good market share with smaller the smaller regional builders. We are underpenetrated when it comes to the more national Players and we're excited about the possibility for Builder Series to compete in that environment in a very meaningful way And us to gain market share next year there as well. Shed, we already have really high market share there. There's we're looking at tweaking that or getting a few more points. But I think the meaningful growth above Overall market growth for us over the next 5 years or so is going to be in expert finish through repair and remodel And then with the bigger builders.

Speaker 6

Okay.

Speaker 5

All right. Thanks for the color, Brad.

Speaker 6

Appreciate it and good luck here in Q4 guys. Thank you. Thanks, Kurt.

Operator

Thank you. One moment for our next question. And that will come from the line of Michael Roxlund with Chua Securities. Your line is open.

Speaker 7

Thank you, Brad, Alan and Aaron for taking my questions. I just wanted to follow-up on Kurt's question In terms of market share and how you intend to gain market share, it seems like one of your solid competitors are gaining share with homebuilders and continue You also mentioned last quarter that you're a little underpenetrated with the large national builders. You just mentioned that again, Brad, here. So I just want to understand your approach with the builders, what you're doing to gain share? And aside from Market conditions and what had been destocking, is there anything constraining you from gaining more notable share with the builders?

Speaker 2

No, there's no constraint other than us being new generally new to That sales cycle, let me and I will caveat that a little bit because we've had decent pull through with our Trem portfolio of products with national builders for a while. So it's not like that's alien to us To sell into the big national builders also very strong market share there on the OSB side. So the relationships exist with these big national public builders, primarily through our history of selling OSB products through that channel. But the key to us has been is having a competitive product, which we do now. The fact that we know we believe that The product is more than competitive.

Speaker 2

It's superior. And so but it's a long sales cycle And these kind of deals, and we've been working those hard all through this year and are optimistic about the progress we've made. And as we look forward in the next year, we see that opportunity for growth as I've already mentioned. And we are building off from a lap Siding standpoint, we're building off a very small base. And so we're the big national builders.

Speaker 2

So the ability for us to grow that, What for us would be substantially is we're pretty encouraged about. But it will take time, But the good thing about these deals is that they are multiyear or at least single year at least. And so there is some surety of supply Once you're able to retain it or get it. Got it. I appreciate the color.

Speaker 7

And then just one quick follow-up on your Competitors, I believe one is out with a sliding price increase in early January. Is that something that maybe you could use to your advantage And maybe in terms of trying to gain share, use that against them as they've my understanding have been pretty aggressive with their pricing with builders over the last 12 to

Speaker 2

Well, there's I answered that a little bit more generally And I guess this one competitor. I mean, obviously, when it comes to these big programs, price or Cost of the whole package is critical to the success there. And So yes, I mean, if a competitor has a higher price than us, that box gets ticked in our favor as we work these deals. But typically that kind of always gets worked out in the back end anyway. And so really where we're trying to compete is off our value proposition, which is the quality of the product, the aesthetics of the product and the ease of installation.

Speaker 2

And That's how we lead. And then obviously though at the end of the day, we've got to be competitive on price as well. And as I've mentioned probably 100 times already 4 or 5 times on this call, we finally have a product where we're able to be competitive On pricing as well as bringing all the other advantages of SmartSide to the builder conversation.

Speaker 7

Got it. Thanks very much and good luck in 4Q.

Speaker 6

Thank you, Michael. Thanks, Mike.

Operator

Thank you. One moment for our next question. And that will come from the line of Susan Maklari with Goldman Sachs. Your line is open.

Speaker 8

Thank you. Good morning, everyone. Thanks for taking the questions. Good

Speaker 3

morning, Sue.

Speaker 8

Good morning. My first question is, Last quarter you had mentioned that you saw a fairly substantial decline in shed demand during that quarter and that was part of What was going through that Siding segment? Is there anything that's changed or that is impacting the business as you think about the Q4 guide there?

Speaker 2

No, the shed business has rebounded a good bit from what we reported for What would have been Q2 results, I would call that back to more of a normal cadence there. I do think there Just overall demand in that channel has been suppressed this year a little bit given how active it was last year, But we feel good about and reiterate all those customers are also back in our order file. And so we are seeing pulls in shed. And then typically, so there is a little bit more of a pull This time from now on as folks build some inventory in preparation of the builds they do to have product to sell in the spring. And so typically late Q4 to early Q1 are pretty strong product pools in that segment.

Speaker 2

We're expecting similar expecting to see that increase in demand as we look forward. And so I would call it back to normal, Though I will say compared to all the other channels, normal is probably still a little less than what the kind of demand we were seeing in 2021 2022.

Operator

Okay. That's helpful.

Speaker 3

So can I just Sure? I wanted to add something for the general audience as well. The Q4 revenue guide for Siding does include the fact that we are limiting pre buy in advance of January price increase, Partly so that we don't have a repeat of last year, where we Well, it limited our ability to read the market. So the Q4 guide does include a limit on pre buy.

Speaker 8

Okay. That's helpful. Thank you for that. And then maybe turning to OSB for a minute, when you think about that Segment and sort of the more recent trends there, they seem like they're a bit in contrast to what we are seeing from especially the large Big public builders and their tone as they think about 2024. Can you just comment a bit about the channel inventories in OSB, including perhaps some of your structural solution products in there.

Speaker 8

And how you're thinking about the potential for those volumes to move over the Q4 or maybe even into the early parts of 2024?

Speaker 2

Well, look, the inventory situation for in the channel for OSB remains, I would say normal to slightly lean at the currently as of today. That can change pretty quickly in the OSB world, so I know you understand. But unlike Siding, there really never was any meaningful OSB inventory build. I mean, it can happen Over for 2 or 3 weeks at a time. But typically, our order file is staying Pretty normal right now.

Speaker 2

So we're not having we're not extending it. We're not shortening it. And so I feel good about where inventories are. I mean, I do think there's going to be some seasonal component to demand with the builder beginning Thanksgiving The week of Thanksgiving through probably the 1st couple of weeks of January, that's normal of what we've seen historically. The pre COVID before COVID It screwed all seasonality up for us.

Speaker 2

So we I would not be surprised to see the OSV demand Declined, again, around the Thanksgiving timeframe. Typically, our channel partners are going to 1 across the year with its lean inventories as they can kind of live with. So we also get a little bit of that negatively impacting demand. And then we typically get a pop once folks are back from the holidays and then start looking forward to spring building season. So I'm expecting for both Siding and OSB for this normal seasonality to return this year.

Speaker 2

We have not had that And over the last three winters, so we're planning accordingly. We obviously have the ability to respond in both businesses Either up or down as demand real demand becomes apparent, but I can see I personally see building slowing from middle of November to middle of January.

Speaker 8

Okay. That's really helpful color. Thank you both and good luck with everything.

Speaker 3

You're welcome. Thanks.

Operator

Thank you. One moment for our next question. And that will come from the line of Ketan Mamtora Touro with BMO, your line is open.

Speaker 9

Good morning, everyone. Hey, Alan, just one quick clarification to what you just said. So should I read this As you guys are already out in the market for the January price increase on siding?

Speaker 2

Yes. I'll answer that, Ketan. We have communicated to the channel a price increase It's coming. We'll be communicating those are highly tailored by region, by channel. And so that Specific communication will be going out over the next couple of weeks.

Speaker 2

It is a January 1 price increase. And as Alan mentioned, We're doing it a little different this year in the way we're implementing that. Historically, we have allowed our channel partners to buy 110% of their kind of normal purchases like prior 60 prior 6 months or something like that. We'll pick a time frame and then say you can buy 110%. We're doing this year, you can only buy 100% of your prior purchase history As a way to mitigate the probability of us building our pre buys Impacting Q4 positively and Q1 negatively.

Speaker 2

And also that allows to realize pricing quicker with On that volume. So yes, increase is being announced for January 1. And the other meaningful piece of news there is that we're of the way we're kind of trying to manage the pre buy out of existence actually by Limiting the purchases prior to the price increase.

Speaker 9

Got it. That's very helpful, Brian. And then Just one quick follow-up on OSB. What was your kind of operating rate in Q3? And Whether it's fair to assume that those curtailments that you all took outside of Segola Continues into Q4.

Speaker 2

We were running about 80% of capacity or ran about 80 And in Q4, we're planning for that or a little lower. I would say probably with more downside than upside as The way I responded to Sue's question, if we really see a demand slowdown in the Latter half of the quarter, we'll plan to take more capacity out as we balance our capacity to demand. But That's how we're planning to operate during the quarter, and we will make sure that we Satisfy our customers' needs, but not get out of balance to that demand that we're filling in our order file.

Speaker 9

Got it. That's very helpful. I'll jump back in the queue. Good luck.

Speaker 3

Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Sean Steuart with TD Securities. Your line is open.

Speaker 6

Thank you. Good morning, everyone. Question on input costs. Can you give us a sense of variance versus Q3

Speaker 5

For fiber and resin that's embedded in

Speaker 6

the Q4 guidance and any context on trends you're seeing headed into 2024 on that front?

Speaker 3

Well, generally speaking, trends are favorable as we head into Q4 and 2024, but We're cautious forecasters. So we generally don't bake in any sort of further improvement, meaning we assume that Input costs are going to hold roughly at current levels, as we forecast from Q3 to Q4. So if they improve, there's a tailwind there.

Speaker 6

Okay. Thanks for that. And just one question on modeling. The siding price realizations this quarter improved a little bit Sequentially, which is encouraging, how much of that is just a mix issue as the inventory bubble progressed through the quarter? Was there anything more to it than that in seeing that modest improvement sequentially?

Speaker 3

Yes, it's mostly it is mostly mix. So Strong distribution business relative, which has particularly good pricing, expert finish held nicely, things like that. So it's There was no Q2 to Q3 price increase. So it's fundamentally the continuation of that favorable mix from Q2 to Q3. Got it.

Speaker 6

Okay. Rest of my questions have been answered. Thanks very much guys.

Operator

Thank you. One moment for our next question. And that will come from the line of George Staphos with Bank of America. Your line is open.

Speaker 10

Thanks very much. Hi, everyone. Good morning. Thanks for the details. Brad and Alan, I wanted to talk a little bit about Siding.

Speaker 10

So you mentioned that you are Eliminating the ability for your customers to buy somewhat ahead of your price increase coming in January. Are there any other changes that you're making with any of your commercial Strategy or distribution strategy that you could relay on an open mic call to continue to progress into next year. And relatedly, With and one of the other analysts, I think Mike was talking about, your peers also saying that they're growing. You want to grow market share with large builders. You have the Builders series product.

Speaker 10

How do you ultimately make the progress you want to make towards that 25% margin Given that product would typically have, I would imagine, perhaps a little bit lower margin and you're trying to gain share. I know it's going to be around Selling the value, but want to hear additional thoughts there. So any change in the commercial strategy and how do you get to the margin you want, given what you want to get to in terms of your share with builders? Thank you. Yes.

Speaker 2

So let me do the commercial first. And I would say that During COVID, being on allocation for all of 2 years, maybe a little more than 24 months, We consciously cut back on our marketing spend as we were sold out. And so We were focused more on assets and resources that helped us optimize that order file versus Getting into this into a growth and market share gain mindset. And so as we roll into next year and pulling our budgets together, We're going to be more allocate more resources to demand creation And a growth mindset versus how we've managed the business over the last couple of years and that will be certainly in support of our builder series products as well as our repair and remodel products and everything what we do in retail across the board really leaning into The new market condition here, which is in a flat to slightly growing housing market, We need to get more aggressive on share gains. On the margin question, you're generally right about the way you're thinking about Lap Siding sold into the big builder.

Speaker 2

I will say compared to prior years though, and I've mentioned this several times on the call, The builder series was engineered to be competitive there. So it's not a ginormous margin hit for us to skew volume there. But really where the offsetting to offsets to any margin that we have to give up to Secure big builder business, 1st of all, repair and remodel, it's not that way. It's a value sell. We're selling expert finish.

Speaker 2

And the opportunity to gain market share through also growing our I'm sorry, gain margin By increasing our market share and repair and remodel can be a significant offset. 2nd to all that, Yes, Segola, as an example on the manufacturing side, Segola, take Segola or take Bath, New York, both of those are large mills, High scale mills, low cost mills compared to our average. And so as we ramp up These bigger pressing facilities or pre finishing facilities, we're also We see an opportunity for cost reduction that will meaningfully impact our margins going forward. So it is a constant area of management and analysis around Pricing, margin, cost reduction, OEE, and we've gotten way more on how we manage pricing by channel, by customer in some cases. So I'm confident that we'll manage it well, but I'm equally confident that our ability to get meaningful margin in this business is not going to be We've always had a spread of low margin to higher margin SKUs in our portfolio.

Speaker 2

If we add hypothetically say builder series is on the lower side of that, we've got plenty of opportunities on the upper side For our portfolio to gain margin, especially when you couple that with a more efficient operating platform.

Speaker 10

Sure. Brett, just quickly on distribution, any change in terms of the way you're going to approach 'twenty four versus 'twenty three or Pretty much the same approach and from my vantage point maybe simplistically maybe a little bit more of a 1 step versus 2 step. Thank you, guys. Good luck in the quarter.

Speaker 2

Yes. George, we've talked about We have set up DCs in some major metropolitan areas to provide more of a direct model. That is largely driven by the focus on the builder, Though other customers benefit off that as well. So I would say that is not new for 2024, it was new for 2023, But we will continue to focus on optimizing that and pushing volume through that more direct path, and we're only doing that To be more efficient in delivering more efficient from a cost standpoint and responsiveness, delivering product Into strategic customers that need that level of service and obviously and some cost advantage. But that but I would but as we look into 2024, no major changes in the way we're going to market other than continued growth That more direct selling model.

Speaker 10

Thank you, Brett. Thank you, Allen. Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Paul Quinn with RBC Capital Markets, your line is open.

Speaker 11

Yes. Thanks very much. Good morning, guys. It sounds like the 2 big levers To run a successful signing operation of this penetration of the big builders and the rollout of experts finished. So just on the big builders, is there Just so I can kind of increase my knowledge on what you're doing.

Speaker 11

On Builder Series, is there a regional penetration Difference like you're making more gains in the South than the Northeast. And in terms of the manufacturing of that product, Is that done at all your siding mills or only a couple?

Speaker 2

On the manufacturing side, parts Done at our 24 foot press mills at Dawson Creek, British Columbia being Primarily where we're sourcing it now, Segola will have that capability or does have that capability, obviously, A little bit closer to market there as well, which will help on the cost and margin side. But it's the most recent presses that we have Converted, which are 24 foot in length because that to remind everybody, the builder series is 12 foot. Our normal lab SKU historically has been 16. Okay. And then you asked about penetration.

Speaker 2

Well, with the big national builders, you have to go where they are. And if you look at the smile of the country, that's where a lot of the housing starts that are being driven by the Big national builders are in that smile. We have had historically good, pretty good penetration in the Texas, Colorado markets, just because of SmartSide's history there. So where we're focused on penetration, it'd be More South Central, Southeast Atlantic Seaboard has opportunities for us to really gain market share. And just to round out that question, Paul, I would say from the central part of the country, we've been we have Been strong there even with our 16 foot product offering with bigger builders.

Speaker 2

So obviously, we're that would be a sweet spot for us to pick up Incremental business, but the big potential opportunities for us to gain volume is in South Central, Southeast and Mid Atlantic.

Speaker 11

Okay, that's great. And then just on the expert finish side or R and R, how should we think about that progression Margin uplift and volume through that, do you expect that to be slow and steady gains through 2024 into 2025?

Speaker 2

Yes, it's probably more slow and steady than Big Bang other than to say The finishing line we've put in to Bath, which we put a similar line into our existing facility in Green Bay, And we're seeing economies of scale, that's the right term, that are exceeding expectations. And so as we ramp those up, there will be somewhat of a step change in margin. I think by the time You run it through all the signing that we sell in the quarter, it might be a little bit harder to see, but it's coming. And as we learn how to do this at scale, we just see a lot of opportunity for incremental margin above The decent margins were enjoying today. Okay.

Speaker 11

And then just lastly, if you could, South America looked a little weak in the quarter, What can we expect going forward?

Speaker 2

Yes. South America right now is a good solid business Economically across that whole continent, unfortunately, right now, there's a lot of political and economic unrest. So we're winning where we can. There's no alarms from a market share standpoint. I mean, honestly, from kind of as chaotic, It might be a little bit too strong of a word, but the chaotic economies down there are kind of discouraging import volumes So from that standpoint, that's been a little bit helpful.

Speaker 2

The pricing is really challenging in all the countries there. We have taken a significant capacity outages across our operations down there. And so we are peddling really hard to hold our own in South America, waiting for all that to turn, which On our 25 years down there, it's been that way a little bit cyclical economies can get out of kilter and that's certainly happening right now. So we're optimistic on the long term, but I think we should be thinking about next year being somewhat similar to this year as far as The earnings potential down there as we work through these economic headwinds that are facing basically all the economies we operate in down there.

Speaker 3

Could I add one other thing? At the risk of opening a can of worms, we did transfer Entekra's Assets to South America and the cost of transferring, unpacking, shipping and everything is non capitalizable, if you're interested and therefore The cost of doing so is reflected in the EBITDA. That's $2,000,000 to $3,000,000 in Q3. That was a quote, I use the traditional phrase that a one off, But we left it in their EBITDA because the corporation is always moving equipment about as a whole. So there's no reason not to include it in EBITDA.

Speaker 3

So That made a tough environment appear slightly worse than it really is.

Speaker 11

Okay, great. Thanks for the color and best of luck.

Speaker 6

Thank you, Paul. Thank

Operator

you. That concludes today's question and Answer Session. I would now like to turn the call back over to Mr. Aaron Hallwald for any closing remarks.

Speaker 1

Okay. Thank you, operator. With no further questions, we'll end the call there. Thank you for joining LP for our Q3 earnings call. Stay safe and we'll look forward to connecting again soon.

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Key Takeaways

  • LP reported Q3 net sales of $728 million (-15% y/y) but generated $190 million in EBITDA (-5%) and $187 million in operating cash flow, exceeding guidance despite OSB price declines.
  • The Siding segment saw sequential volume and price improvements (+6% and +2% vs Q2), with SmartSide volumes down only 6% y/y despite single-family starts falling 16%, and the new Bath, NY prefinishing facility was brought online.
  • In OSB, higher prices added $28 million to EBITDA and cost controls contributed $11 million, driving a slight y/y EBITDA increase at an 80% operating rate and a four-point improvement in efficiency.
  • LP closed Q3 with $160 million in cash and over $700 million in liquidity, invested $49 million in growth and sustaining capital, returned $17 million to shareholders, and expects full-year capex of $300–325 million.
  • For Q4, LP expects Siding revenue to decline about 16% y/y and OSB revenue to fall about 30% sequentially at current prices, reiterates full-year Siding down ~10%, and plans to focus on flexible capital deployment, market-share gains in repair & remodel and national builders, and its sustainability initiatives.
A.I. generated. May contain errors.
Earnings Conference Call
Louisiana-Pacific Q3 2023
00:00 / 00:00