LOUISIANA-PACIFIC CO

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Transcript : Louisiana-Pacific Corporation, Q3 2022 Earnings Call, Nov 01, 2022

01/11/2022 | 16:00

Presentation Operator Message
Operator (Operator)

Good day, and thank you for standing by. Welcome to the Third Quarter Louisiana-Pacific Corporation Earnings Conference Call. [Operator Instructions]

Please be advised 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. Please go ahead.

Presenter Speech
Aaron Howald (Executives)

Thank you, operator. Good morning, everyone, and thank you for joining us to discuss LP's results for the third quarter of 2022 as well as our updated outlook for the fourth quarter and full year. As the operator said, my name is Aaron Howald, and I am LP's Vice President of Investor Relations and Business Development. I'm joined this morning by Brad Southern, LP's Chief Executive Officer; and Alan Haughie, LP's Chief Financial Officer. .

During this morning's conference call and webcast, we will refer to an accompanying presentation that is available on LP's IR webpage, which is investor.lpcorp.com. Our 8-K filing is also available there, along with our earnings press release and various other materials.

Statements regarding non-GAAP financial metrics and forward-looking statements are available on Slides 2 and 3 of the earnings presentation. And the appendix also contains reconciliations that are further supplemented by this morning's 8-K filing. Rather than reading those statements, I incorporate them herein by reference. And with that, I will turn the call over to Brad.

Presenter Speech
William Southern (Executives)

Thanks, Aaron. Good morning, everyone, and thank you for joining us to discuss LP's results for the third quarter and our full year outlook. As you all know, the third quarter saw a significant slowdown in single-family housing starts which no doubt contributed to the normalization of OSB prices. This is a challenge for commodity OSB results, but also provides an opportunity to demonstrate the value of LP's transformation against the backdrop a slowdown in new residential construction.

LP's strategic focus on the repair and remodel market segment and higher value-added specialty products drove continued growth. In fact, the Siding segment generated more revenue than the OSB segment in Q3. And within OSB, the majority of the revenue came from the more specialized structural solutions portfolio. Our disciplined capital allocation strategy continues to prioritize and support investment in the capacity necessary to enable future growth. .

Pages 5 and 6 of the presentation show some high-level results for the quarter. LP earned $200 million in EBITDA in the quarter and received about another $200 million in net proceeds from the EWP sale. In Q3, we invested $86 million in capital projects to drive future growth and returned $341 million to shareholders, the bulk of which was spent to repurchase 5.6 million shares. LP ended the quarter with a very strong balance sheet, including $482 million in cash and over $1 billion in available liquidity.

Page 7 shows more detail on Siding Solutions growth. Recall, only about 40% of Siding volume goes into the single-family new construction with a growing majority dedicated to R&R shares and other DIY applications. Through Q3, single-family starts fell by about 5% on a trailing 12-month basis. In contrast, Siding Solutions volume grew by 6% and price increased by 13% over the past 12 months.

Comparing only the third quarter, single-family starts were down 18% compared to last year, but Siding sales grew by 27%, with SmartSide and ExpertFinish both setting new records for volume and price in the quarter.

In both Siding and Structural Solutions, product innovation continues to drive growth. In Siding, new products made up 11% of volume and generated 15% of Siding's revenue in the quarter. ExpertFinish and BuilderSeries are the fastest-growing product categories within Siding, where ExpertFinish volume grew by 48%. Structural Solutions volume grew by 10% compared to prior year quarter. The newest addition to the Structural Solutions portfolio, NovaCore Insulated Sheathing officially launched last week. NovaCore launch is a priceless product not connected to random wins.

LP is committed to making the investments necessary to continue this growth and innovation. Slide 8 shows an update on our strategic capacity planning. Houlton remains ahead of schedule and should finish the year running near full rate of capacity. Sagola, Michigan, which is the next Siding press capacity addition after Houlton will cease OSB production this week to start the final phases of the conversion process.

This will remove roughly 420 million square feet of OSB capacity and once fully up and running at about 320 million -- Siding capacity annually, bringing total Siding capacity to about 2.3 billion square feet. Sagola is expected to produce SmartSide in Q1 of next year and should ramp up at about the same rate that Houlton has progressing from panel and soffit than ultimately to lap and trim with roughly linear ramp-up from start to full production run rate over 3 to 4 quarters.

For ExpertFinish, the expansion of LP's finishing facility in Green Bay is nearly complete. The latest project in Bath, New York will add ExpertFinish capacity in the strategically important Northeastern market. This project remains on schedule with production expected to begin in Q2 of 2023.

And today, we can announce 2 more capacity additions in the Siding business. Pending final approvals from state and local regulators and other stakeholders, we will build on the success of the Houlton conversion project by expanding that mill. This project will add a new forming line in press with Houlton joining Hayward as our second 2-line Siding facility. New Siding production there should begin in mid to late 2024 and will more than double Houlton's capacity improving the utilization of shared green in and finishing processes. Houlton's second line will bring total siding press capacity to roughly 2.6 billion square feet.

To accelerate ExpertFinish growth, we plan to add a new facility in Washington state to better serve the growing prefinished Siding markets in the Pacific Northwest. Compared to the 2021 capacity baseline for ExpertFinish, expansion over our existing prefinished facilities plus new capacity at the New York and Washington sites puts LP on a path to more than double prefinishing capacity by the end of 2023. And we are on pace to double ExpertFinish capacity again by 2025. These projects will add scale, efficiency and geographic range while simultaneously driving down cost.

We believe that the long-term fundamentals for housing and R&R remain very favorable despite near-term turbulence, and we are investing to meet that demand. Given our current visibility into order files, inventory levels and the capacity expansions that I just outlined, we anticipate remaining on managed order file prime products, at least until Sagola provides meaningful volume in Q2 of next year and potentially throughout 2023 for ExpertFinish.

In order to ensure that we can generate value over the long term, we remain focused on enhancing our sustainable business model. This includes long-term access to responsibly manage fiber resources, efficient production processes that minimize waste and emissions, carbon-negative products that sequester for more CO2 than is emitted in their manufacture and distribution and building a team that is welcoming and inclusive broadly have the talent and desire to contribute to LP's growth.

We plan to publish our second sustainability report tomorrow. So stay tuned for more detail about our sustainability performance and strategy.

As we look towards Q4 and next year, inflationary pressures continue to provide headwinds. Alan will provide more detail on this in a moment, but so far, LP's growth continues to more than offset the cost impact of raw material and wage inflation.

Mortgage rates of 7% or more -- worse than affordability, especially for first-time homebuyers. And this is likely a contributing factor for softening housing starts. But as we head into a potentially weaker housing market, I remain optimistic about 2 factors: First, I remain bullish about the long-term fundamentals for housing and, repair and remodeling. And second, I am more convinced than ever that LP's strategy of growing Siding and Structural Solutions and managing our capital and capacity with discipline is the right approach in any market. And with that, I will turn the call over to Alan for a more detailed review of the quarter before we take your questions.

Presenter Speech
Alan J. Haughie (Executives)

Thanks, Brad. As we've said, the third quarter of 2022 set new records for Siding. Despite general economic headwinds and slowing single-family housing starts, LP continues to grow Siding and Structural Solutions, and that growth continues to offset the impacts of raw material and wage inflation.

The waterfall on Slide 9 provides a summary of revenue and EBITDA compared to the third quarter of last year for Siding. Revenue grew year-over-year by $82 million or 27% to $394 million. Prices were 16% higher due to the combined effect of 2 list price increases in the past 3 quarters in addition to the mix uplift from ExpertFinish. These higher prices added $51 million of revenue and EBITDA.

Volumes were 9% higher as a result of the Houlton mill's ongoing ramp-up as well as continued improvement in overall equipment effectiveness, or OEE, which rose 2 points over last year. Volume growth contributed $31 million of revenue and $12 million of EBITDA. Inflation produced $32 million of direct cost headwinds, of which $23 million was in raw materials and $7 million in freight. And the final $14 million of cost increases largely relates to sustaining maintenance at the mills together with increased prices for MRO materials.

But in summary, growth in price, which we believe are permanent, more than offset inflation, which we hope is not. The result was a rather healthy $90 million in EBITDA at 23% margin.

Slide 10 shows the waterfall for the OSB business. The growth story is broadly consistent with that of Siding with increases in Structural Solutions volume offsetting raw material and wage inflation. But this similarity is overshadowed by the drop in commodity OSB prices, which reduced year-over-year revenue and EBITDA by $252 million. The final $20 million EBITDA headwind on the waterfall reflects increased maintenance costs and the impact of somewhat reduced OEE.

The resulting $130 million in EBITDA slightly outperformed our algorithmic guidance, in part due to favorable price realization, without which the impact of falling commodity prices would have been more severe.

But in both businesses, inflationary pressures were driven primarily by natural gas and benzene, which are key inputs for resins, overlays, paints and waxes; and by crude oil, which increases the cost of freight, both inbound and outbound.

Page 11 aggregates these impacts to show a high-level summary for LP as a whole. The largest single factor is, of course, commodity OSB prices. The $18 million in revenue and $12 million in EBITDA from increased commodity OSB volume is largely the difference in Peace Valley's output as it has ramped up over the past year. Siding growth, net of selling and marketing investments added $60 million in EBITDA, and Structural Solutions growth added $24 million, from which, for the purposes of this analysis, I will deduct $7 million, representing the lost opportunity to sell commodity volume instead of higher-margin Structural Solutions.

North American inflationary costs, including the inflationary components of the other mill costs listed in the waterfalls, results in a $65, million headwind. The net positive $12 million of EBITDA, that is $77 million from growth against $65 million of inflation, shows that, once again, LP's growth has offset inflation. And when raw material and freight prices normalize, then all else equal, the potential for margin enhancement is substantial.

South America, referred to on the slide as LTSA, saw similar raw material inflation, and demand appears to be slowing more meaningfully than in North America. With constant dollar exchange rates, revenue fell year-over-year by $12 million or 16%, and EBITDA fell by $17 million.

Slide 12 shows cash flow for the quarter, and it tells a story of very consistent capital allocation. LP generated $200 million in EBITDA from continuing operations plus another $14 million from EWP in July. Taxes in some working capital movements, this produced $195 million in cash -- in cash flow.

The divestiture of the EWP segment produced another $206 million in proceeds. And as Brad said, we essentially took this inflow of around $400 million, invested what we needed in the business and returned the balance to shareholders. Cash at quarter end was almost flat, hovering just under $500 million. So when combined with our undrawn revolver, we ended the quarter with over $1 billion of liquidity.

I also want to point out that third quarter share buybacks have lowered LP's share count to 71.7 million, a reduction of 50% from the end of 2018 when repurchase activity began in earnest. Furthermore, the $1.72 in adjusted diluted earnings per share would have been $0.37 per share or 22% lower had it not been for share repurchases over the past 12 months.

And while the lower OSB prices we are experiencing right now may have reduced the magnitude of cash flows with the result that share repurchases will slow proportionately, our capital allocation strategy remains unchanged. We will continue to earn cash, invest in growth and return the balance to shareholders, specifically in that order.

Slide 13 shows guidance for the fourth quarter and full year. With work accelerating on converting the Sagola OSB and noticing production, the fourth quarter will be the highest for CapEx this year, bringing us somewhere between $400 million and $420 million in total spending for 2022. Just under $200 million of that spend was for the Houlton and Sagola mill conversions, and we'll ultimately spend just under $100 million on other growth projects to expand capacity in ExpertFinish and Structural Solutions and between $120 million and $130 million in sustaining maintenance.

And as Brad said earlier, we continue to add siding capacity with the planned expansion of Houlton. Now adding a new forming line and press at Houlton will be substantially more expensive than converting an existing mill. As such, an early preview of CapEx for 2023 would seem to be in order. The expansion of Houlton is expected to cost in the order of $400 million with a rate of return of about 30%. Spending on that project will significantly ramp up in the latter part of 2023 with the result that total CapEx next year will likely be closer to $500 million than this year's $410-ish million. And there is substantial flexibility in the system to delay these capital outlays should circumstances warrant.

However, demand for Siding remains strong, and we expect year-over-year sales growth in the fourth quarter of at least 30%. And taking demand as a given, this growth is enabled by the additional capacity from Houlton's continuing ramp-up as well as the nonrecurrence of a press we built in the fourth quarter of last year, which provided an admittedly soft comparison, and this will bring full year Siding revenue growth to about 24%.

OSB prices have been essentially flat for the past several weeks. And if we assume that they maintain their current levels, we expect OSB revenue to fall by about 30% sequentially quarter-over-quarter. In addition to price reductions, revenue in the fourth quarter will be impacted by lower output due to Sagola's conversion deciding, the interruption caused by a fire at Clark County in October and typical year-end maintenance outages. The result of all this would be a fourth quarter EBITDA for LP as a whole of around $100 million. And within that $100 million, we expect Siding EBITDA of at least $85 million for a fourth quarter Siding margin of around 23%. And with that, I'll turn the call back over to the operator for Q&A.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] And our first question comes from Susan Maklari from Goldman Sachs.

Question
Susan Maklari (Analysts)

My first question is looking at the Siding business. Can you talk a little bit about channel inventories there and what you're seeing just in terms of overall order rates? We've heard from a lot of building product companies these last couple of weeks that things are obviously starting to moderate on the ground. So can you just help us understand better what you're seeing there and contrasting your growth relative to what's happening in the broader industry? .

Answer
William Southern (Executives)

Susan, we're still on managed order file. And as I mentioned in the prepared remarks, expect to stay on managed order file at least through Q1 of next year. And so right now, our demand pools are still strong. Channel inventories and Siding remain on the lean side of where we would like them to be for this time of the year. And so from that standpoint -- and look, it's hard when we're oversold or on managed order file, you're not sure how much more you could sell if you had it. But currently, the strength of the order file remains pretty stable. And these additions to capacity, particularly the Houlton, is going to provide us incremental volume to sell over the next several quarters. And so the managed order file situation could change. But as of today, it's still a very healthy order file. .

Question
Susan Maklari (Analysts)

Okay. That's helpful. And then following up, can we talk a little bit more about inflation and the supply chain and how you're thinking about those costs coming through over the next couple of quarters. And the ability to sustain price as the macro and as housing does moderate to hold the margins that you've been seeing, especially in the Siding segment? .

Answer
William Southern (Executives)

Yes, Susan, I feel good. As Alan mentioned in his remarks, we -- our Siding pricing historically for the last 20 years or so has been very sticky. Once we get it, we've essentially never given it up. Especially on the price list, sometimes -- and to respond to competitive situations, we can work around with rebates to specific customers. But I mean, I feel good about the pricing that we've gotten this year. We are planning to go out January with another 3% to 5% list price increase announcement, and it will help offset some of the late -- this year's later inflation that we're experiencing now.

So I don't anticipate us using price to generate demand next year. That's typically not how this product goes to market. And I feel like our price-to-cost ratio is going to stay kind of where it's at. It's always a matter of timing. Inflation can get ahead of our ability to get the price increase through the channel and et cetera. But so far, we've been able to keep up with it, and I anticipate being able to do that in the first part of next year as well.

Question and Answer Operator Message
Operator (Operator)

And the next question is from Sean Steuart with TD Securities.

Question
Kasia Trzaski Kopytek (Analysts)

It's actually Kasia on the line filling in for Sean. Sticking with the price theme, just a follow-up on the realizations this quarter for Siding. I think they were up 5% relative to Q2 I know you implemented price hikes of 2% to 3% on July 1. Can you comment on what factor mix played this quarter? .

Answer
William Southern (Executives)

Actually, you broke up right at the last part of -- the last sentence of your question.

Question
Kasia Trzaski Kopytek (Analysts)

No problem. Sorry about that, Brad. I'm just wondering if you would comment on to what extent mix played a role this quarter.

Answer
William Southern (Executives)

Yes. Mix can play a role, but most of that price increase was attributed to the major price increase. So maybe 1% mix, but the rest was all from raised pricing. .

Question
Kasia Trzaski Kopytek (Analysts)

Okay. And I know you commented on buybacks or return activity slowing down a bit just in tandem with commodity markets slowing down. But can you -- just remind us how much you have left on your current program? I think it was $600 million authorization. How much is left right now, if anything, and any share buyback activity in Q4 to date? .

Answer
William Southern (Executives)

We have $200 million remaining on the authorization, and there's no -- been no share buybacks to date this quarter.

Question and Answer Operator Message
Operator (Operator)

And our next question comes from George Staphos with Bank of America Securities.

Question
George Staphos (Analysts)

Congratulations on the progress. I wanted to ask first question on the supply chain and costs. Are you seeing any kind of if you will, green shoot in recovery and improvement, especially on labor, especially on freight? And then related -- and there are no guarantees in life, we won't hold you to this, but is your expectation that -- if things go as planned, we don't see a material drop-off in demand in Siding. Sagola comes up the curve as you'd expect, that you can maintain your current level of margin or maybe get to the 25% next year? How would you have us think about those 2 questions? .

Answer
William Southern (Executives)

Well, on the supply chain, yes, we are seeing freight, trucking free up more than we've experienced all year. And so that has certainly really improved availability of freight and also somewhat impacted cost. On the labor side, I mean, we're still fighting to maintain staffing in our operations group and, to a certain extent, in sales. But I would say, it's not -- certainly not gotten any worse in the second half of the year.

And then as far as overall cost, because of the way that most of our big supply contracts are indexed to a base material and most of those are in some way associated with oil and benzene directly, we currently haven't seen any green shoots on cost reductions. But obviously, we're watching oil closely. And if that -- if it was to trend downward, there could be some opportunities for some cost relief next year, though, we are currently not seeing that.

And then as far as margin for next year at the 25% rate, with the Sagola ramp-up, there will certainly be inefficiencies associated with that. We have not finalized our -- back to the cost, our raw material input costing for next year as far as our budget process. We have decided to initiate a beginning-of-the-year price increase. So I mean, I think we can -- well, depending on the ramp-up of Sagola, and depending on no incremental cost increases around raw material, we may get back to more around the 25% rate. But -- and there's a lot of unknowns around that number, again, given the uncertainty about the Sagola ramp-up and raw material inflation.

But I will say this. I feel good about what we're doing on the stuff we can't control, specifically around pricing. We've been demonstrating good price discipline in Siding and getting it where and when we can. So -- and we'll continue to focus on that as far as protecting our margins.

Question
George Staphos (Analysts)

Two other questions on Siding, and I'll turn it over. So first of all, can you talk about the ability of the fiber basket around Houlton to take on that second line? Maybe it's a nonevent, but if you could just give us a bit of parameters there. And then when you're done with Houlton, I want to say, in your prepared remarks, you said you're going to have -- along with the other pre-finishing investments that you're making, you're going to have additional offering scale. If you could kind of go back through what the additional capabilities you'll have in Siding when you're done with Houlton line 2 and with the other prefinishing operations, that would be great. .

Answer
William Southern (Executives)

Yes. So first of all, one of the primary reasons that we're expanding in Houlton is because of the availability of the wood basket. They are very good. Over the years, there has been some wood-related manufacturing loss in the Maine area -- in the state of Maine. So the pulpwood wood basket up there is good. Aspen wood basket, which we prefer is very good as well. And so that was one of the drivers to deciding to expand the production in Houlton.

And then as far as the -- just a reminder of the expansions that we're doing in the Siding business, so particularly as it relates to pre-finish, we have manufacturing facilities for prefinish in Green Bay, which we are currently adding coating lines in. We have a facility in St. Louis, a facility in North Carolina. We're building a large facility in Bath, New York, which will be expandable by adding paint lines. And then we mentioned the facility that we're just beginning to do the engineering on in the state of Washington.

Where I see opportunity for further growth past Washington as far as capacity is in the central part of the country, west of St. Louis. And then I feel like with our facility in North Carolina and then the addition of Bath, New York, we'll have the East Coast fairly well covered.

So certainly, as we continue to grow Siding press capacity additions or expansions will be critical to the growth beyond Houlton line 2. And then the prefinished growth is a little easier because, once we get a basic infrastructure in place, we'll be able to just add paint lines at the existing facilities in order to increase capacity. And in the big picture, those are relatively low capital items, those additional paint lines. So that capacity can be added pretty efficiently.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] And our next question comes from Kurt Yinger with D.A. Davidson.

Question
Kurt Yinger (Analysts)

Just wanted to start off on the outlook for OSB to be down 30% sequentially on sales. With some of the noise around Sagola and the Clark County mill, could you, I guess, help us think about how much of that is price versus volume embedded in that? .

Answer
Alan J. Haughie (Executives)

So the Sagola capacity, this is Alan. The Sagola capacity is about a little over 400 annually. We shut it down now that's going to be call it, $100 per quarter, but less than that because we're mid quarter. So price is likely to be a larger component of that than volume. But there is some volume coming out as a combination of Sagola and typical quarter end maintenance outages that are common this time of year.

Question
Kurt Yinger (Analysts)

Got it. Okay. And then I guess a 2-parter on Houlton. As you think about getting the facility positioned for production in mid to late 2024, how much of the pacing of that work will kind of be dependent on the macro? And if you get to the point and everything is ready to go but the demand isn't there to justify a startup, how would you think about additional fixed costs associated with that mill and just expanding the capacity, but not necessarily running it?

Answer
William Southern (Executives)

That's a good question. And so obviously, where we are today, it would be easy to delay the Houlton line 2 capacity expansion if we had some outlook that was dire around Siding, which we currently don't have. As we get closer to beginning construction and all that stuff, it gets harder to push those back, especially when it comes to the purchases will be made early.

Let me back up a little bit from that answer to explain that because machinery and presses and the [ Boston ] plates are so tight, we are actively engaged in doing as much procurement as we can early in order to secure those -- that material and and the necessary manufacturing of that equipment.

And so from a cost standpoint, on the equipment, it gets harder and harder to lay. I mean really beginning right now as we place those orders, where we could push is around the construction labor as far as erecting it. So it'll be something we can talk about as we go through next year, quarter-to-quarter. But obviously, once we get Sagola up and going over the next couple of quarters, it will be all hands on deck getting Houlton line 2 up. And we are expecting to need that capacity. Great. 2-part question. I forgot the second part.

Question
Kurt Yinger (Analysts)

No, that's all right. I mean, I guess the last one is just you talked about the fiber basket. But outside of that, Were there any other kind of big factors that chose you to go with the Houlton expansion versus some of the other kind of capacity alternatives that you've talked about? .

Answer
William Southern (Executives)

The biggest thing was timing. We felt like or know that our ability to get that mill up and running with a second line, given the infrastructure that is in place there, certainly was quicker than any of the OSB conversions we could have done and order of magnitude faster than doing a greenfield. And so that was really the driving factor.

I'll add 2 others. First is the quality of the workforce at our Houlton facility is very high. This past evidence of that is how well Houlton line 1 conversion is going. So we really have a lot of confidence about our ability to execute both on the construction and the ramp-up phase of that project. And then thirdly, being in the Northeast, again, gives us a little more geographic diversity versus the central part of the country where we're really concentrated as far as manufacturing. And it also complements our repair and remodel push, of which Northeast, Mid-Atlantic all down the East Coast, it's a really, really good repair and remodel market and with us adding the prefinished capacity in Bath, New York, and obviously, that will be very efficient transportation between Houlton and Bath. So all those -- that and a few more criteria really. I mean in the context of our alternatives make Houlton plant kind of a no-brainer for us.

Question and Answer Operator Message
Operator (Operator)

And our next person is Mark Weintraub with Seaport Research Partners.

Question
Mark Weintraub (Analysts)

2 lines of inquiry. First, on the Houlton expansion, if I heard right, $400 million in capital, I think, Alan, you mentioned a 30% type return and also suggested that it was about 300 million square foot of incremental capacity. So I guess the question was -- so if I take the $400 million and kind of simplistically, say, well, [ 300 ]-- so am I going to have $120 million plus of EBITDA increment. And then if I look at the average pricing you have in your Siding right now, that would be really high margins, 50% type margins. Now of course, it could be this is a sweeter mix and so has higher average prices. Or is it really low cost? I mean can you just help us out in kind of understanding how the economics work as you see it for the Houlton expansion? .

Answer
Alan J. Haughie (Executives)

You kind of got it right, Mark. So you're right about the very high margin of -- an independent Siding mill, given the progress we've made on pricing and mix and so on. Fundamentally, high level delivers about a 50% EBITDA margin in isolation as a mill. Now the business doesn't deliver 50% EBITDA margin right now because we obviously have a set of fixed costs and selling costs and marketing costs and so on, aren't necessarily included in that analysis. So yes, the mill economics you described are right, and there's significant operating leverage we get from adding another mill into an already effective network. .

Question
Mark Weintraub (Analysts)

Okay. Great. And then on the fourth quarter guidance, well, maybe what might be, can you give us where your OSB prices average quarter-to-date and currently are relative to the third quarter? .

Answer
Aaron Howald (Executives)

Well, Mark, this is Aaron. The price is in the guide using the algorithm approach that we've stuck with the past several quarters and why random lengths print from last Friday. I think the North Central was about 350 on 716 basis last Friday. So the guide assumes that for modeling purposes that, that remains stable at that level.

Question
Mark Weintraub (Analysts)

And so is that roughly a $50 or $60 decline from what you would have averaged in the third quarter?

Answer
Alan J. Haughie (Executives)

Yes, that's about right.

Answer
William Southern (Executives)

Again pretty close, Mark. Your math is good.

Question
Mark Weintraub (Analysts)

Okay. So -- and then down 30% in revenue, just want to make sure. So basically, am I expecting like a 10% or so decline from volumes or something else? Because I'm down.

Answer
Aaron Howald (Executives)

Yes. I think it was Kurt's question earlier about volume. I'll just remind you that Sagola comes out this week. And then we made finally, for the first time in about 3 years, have a little bit of breathing room at the end of the year to take some maintenance-related downtime around the holidays. And the combination of those effects would account for roughly the level of volume that you assume in terms of full port volume, both of which factors are incorporated in our other than guidance .

Question and Answer Operator Message
Operator (Operator)

And our next person is Mike Roxland from Truist Securities. Go ahead

Question
Michael Roxland (Analysts)

So sorry about that. Just a quick question on the broader housing market. Are you seeing -- are there any pockets of strength? So we know the housing market, obviously, is rolling over. Builders are -- the cancelation rates are higher. Is there any -- are there any markets -- you've noted in terms of -- you've noted Brad, that your Siding has held up relatively well. Are there any markets that are particularly showing strength relative to the decline that we're seeing more broadly in the national market?

Answer
William Southern (Executives)

So within the market for single-family new construction, generally speaking, south and stronger than North. So -- and that we're seeing that in our pools in both OSB and Siding. Some of that may be weather related as we get into the fall season, and we'll see as a place through November and December, how the South is impacted but, relatively speaking, stronger in the south and in the north. .

Question
Michael Roxland (Analysts)

Got you. Okay. And then just on the BuilderSeries, which tends to be one of the fastest-growing components of Siding. I'm just giving the stress that many builders are facing, how has that product particularly fared is demand is still strong? Or have you seen some trading given the just a slowdown in housing?

Answer
William Southern (Executives)

Demand is still really strong for that. Obviously, I will be careful about percentage growth -- percentage growth when last year was zero, so it makes it for a very high percentage growth. But we're very pleased with that launch. And I do believe, given some of the costing pressure, cost pressure and labor availability issues, the product was engineered to address both of those. And so it's put us in a position, particularly with the larger builders to have a value proposition that's pretty attractive. And so we have been very well pleased with the conversations that have led to orders and then the outlook for that product given -- I mean, honestly, given this environment.

So I mean, obviously, that will be -- if housing is way down next year, that will provide a headwind to that product. But I will say, from a market share standpoint, I feel like we've got an opportunity to increase significantly our market share with large national and regional builders.

Question
Michael Roxland (Analysts)

Got it. And then just one final question. Just on order files, I think last quarter, you mentioned Siding on allocation, I think you reiterated that earlier, again line of sight in terms of order files a 4, 6 weeks in Siding OSB, you're not seeing any order weakness, but you had line of sight to 2 to 4 weeks out. Any change in terms of the order books and your order files in both Siding and OSB.

Answer
William Southern (Executives)

Not really, but certainly not in OSB, I would call the market pretty balanced right now. And obviously, that's showing up in the pricing reported in random lengths. And then in Siding, it's a similar thing. We're allocating orders. So we're 6-plus weeks out on the order file. And so we're pretty much in the same place that we were last quarter as far as that outlook for Siding and the strength of the order file.

Obviously it is -- yes, I'm just going to close. I mean it can be busy. That's not as a simple answer as OSB because the managed order file situation kind of controls the length of the order file. We're controlling that now. So it shouldn't be surprising that, that kind of 6 weeks is where we've been since how we're managing the order file, for whatever that's worth.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] And our next question is from John Tumazos from John Tumazos Very Independent Research LLC.

Question
John Tumazos (Analysts)

A few months ago, I had the pleasure of putting SmartSide on my house, which I'm very pleased with. It costs me installed $11,000 per 1,000 square feet versus your sales realization in the 800s. And I bought prefinish so maybe it costs a few hundred dollars more than that. And the crew of 6 people worked about 22 hours, and they worked hard. They were good. And it struck me that there's other applications like the people that use lasers to measure before they install granite countertops or the TV ad for the formats in your car that are laser measured or the bath tub fixtures, things like that, that there's a lot of potential to improve the precision of installation of SmartSide through the implementation of technology. And if you improve the productivity of the installers by 10%, it might enable you to charge $1,000 more for SmartSide since what matters to the customer's installed cost. Could you just talk a little bit about your efforts to train installers and improve productivity in that phase of the value added, which would enable you to charge more for the product.

Answer
William Southern (Executives)

John, well, first of all, thank you for putting SmartSide on your house. I'm pleased to hear it went well. That is certainly a testament to the product and to your installer kind of in the direction that your question is focused. We do actively work with a set of contractors. We have various loyalty programs we provide both online and in-person training in depth from an installer product because, as John has mentioned, we want to expect that experience to be really, really well for the homeowner for them to see the siding put up efficiently and it being beautiful and functional once it's installed.

And so the marketing spend that we have is -- and for most purposes, directed at making sure that our contractor base is enabled to understand the product and install it efficiently. There is a lot of opportunity for product enhancement around this R&R Siding market related to labor efficiency. I mean, if you think about it, the whole concept of prefinish is one of those where you're eliminating the secondary step of painting when it's on the wall, but the opportunity for us to do things as far as accessories related to improving that efficiency, like the 3-dimensional corners that we've launched over the last couple of years to save a big labor staff, those kind of products really can provide the contractor with an efficiency that allows them to better utilize this labor, lower the cost of an install. And then, ultimately, our objective is to increase the profitability of both us and the contractor as part of that sales process.

So you're dead on. I mean, your observation of watching that Siding being installed and the ideas around continued improvement in product innovation and service innovation that improves the efficiency of that is certainly one of the most attractive features of the repair and remodel segment that we're playing in now. And we want to get really good at turning those value propositions into profit for our sales and the contractor banks that supports our product.

Question
John Tumazos (Analysts)

I could continue. Do you think it's fair for your mill realization to be on the order of one-tenth of the installed cost to the customer. Do you think that the distributors -- the demand for your product is so high that the distributors are getting in or installers and an ordinate markup? .

Answer
William Southern (Executives)

No, I don't believe -- I think fair is a complex word in business transactions, but I do believe we -- look, we have really good distributor partners that over the years, we have actively upgraded to specialty to more of a specialty focused network. And we are proud that our business model is centered around providing opportunities for profitability throughout the channel and with our contractor base. And ultimately, to have that product delivered efficiently enough so that you decided to install it on your home given the price that you were closed.

So there's no -- right now, we don't feel compelled in any way to trying to take margin out of the channel as a means to improving our profitability. We want to improve our profitability by working on the cost that we can control directly and by managing pricing.

Question
John Tumazos (Analysts)

And let me add, the hurricane Ian past 10 miles south of me 2 months after the job was done and everything held up good.

Answer
William Southern (Executives)

Glad you're safe.

Question and Answer Operator Message
Operator (Operator)

And our next question is from Paul Quinn with RBC Capital Markets.

Question
Paul Quinn (Analysts)

Okay. Just a question on Houlton when you get Line 2 up. If the demand is not there for Siding, you can still run OSB, right? .

Answer
William Southern (Executives)

Yes. Paul, we'll have the -- we've run OSB online -- 1 at Houlton historically. And then we also have the ability to run OSB at various other mills in our system. And so when -- if there was a need to do that as far as not being able to ramp up into all that volume immediately and the OSB market could handle it, historically, we've run OSB in our system pretty efficiently. Now I can't be like that. The last time we've done that, it's probably 3 years ago. Certainly, haven't run any since COVID, but we do maintain the ability to do that. And there was a previous question about fixed cost coverage, and that's why we do that is to be able to maintain machine productivity as we grow our Siding demand to meet the ultimate capacity that we have in place. .

Question
Paul Quinn (Analysts)

Great. Yes, I thought you had that flexibility. On the ExpertFinish, you mentioned, Brad, you'll double it by the end of '24, and then double it again by the end of 2025. What are those 2 things in terms of the percentage of Siding capacity that you'll be able to do an ExpertFinish? Like doubling by the end of '24, does it to get you to 10%. And then again, does it get to 20% of your capacity? .

Answer
William Southern (Executives)

Yes. That would give us about 15% of capacity over that period of time.

Question
Paul Quinn (Analysts)

Okay. And then just lastly, any update on Integra?

Answer
William Southern (Executives)

Yes. So the Integra update I'll give is that we continue to look to optimize the facility in Modesto, but all given where we are right now with our capacity expansion in Siding and our Structural Solutions, we are no longer viewing that platform as a big opportunity for growth. Some of that also related to the near-term outlook for housing.

So we're going to continue to work on improving the profitability of the Integra facility. But I feel like our capital allocation is better spent now given the returns, Alan has talked about, we're able to demonstrate by further investment into Siding in our OSB Structural Solutions in our OSB OEE program. So -- we still have work to do to optimize Modesto, but we're not seeing that Integra business model is providing the necessary returns for us to be very excited about in the long term.

Question and Answer Operator Message
Operator (Operator)

I will now turn it back over to Aaron Howald for closing comments.

Answer
Aaron Howald (Executives)

Okay. Thank you, operator, and thank you, everyone, for joining us to discuss LP's results for the third quarter of 2022 close there. Stay safe, and we will also close there. Stay safe and we will look forward to speaking with you all again soon. .

Question and Answer Operator Message
Operator (Operator)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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