Q4 2019 Earnings Call
Thank you for your patience employees confused standby.
[music].
Ladies and gentlemen, thank you for standby and walk into the Q4 2019, Louisiana Pacific Corporation Earnings Conference call.
This time, all participant lines are in listen only mode.
After the speakers presentation that'd be a question answer session.
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Not at the end the call over to Ehrenhalt. Please go ahead.
Thank you Michelle and good morning, everyone and thank you for joining us today to discuss they'll piece financial results for the fourth quarter and for your 29 to eat.
My name is there and have all been on Nobody's director of Investor Relations I'm joined today by brought southern copies, Chief Executive Officer Hockey Chief Financial Officer, as we have done in the past we're hosting a simultaneous webcast. In addition to this conference call. The webcast can be access our website www dot they'll be cool dot com.
We've also provided a presentation supplemental materials to which we will refer during this morning's call them.
And finally, we have fiber AK this morning with some additional information.
To remind all participants on the call about forward looking statements and argue some non-GAAP financial information during the discussion I.
I will refer you to slides two and three of the accompanying presentation for more detail the appendix attached to the presentation had some necessary reconciliations have been supplemented by the form 8-K filing made this morning, rather than reading those statements I incorporate them here in by reference now I'll turn the older brother, Thanks, Aaron. Thank you all for joining us this morning.
I'll begin today's call with a high level over your borrowers <unk> fourth quarter end the year.
After that I'll provide an update or strategic transformation.
And I will turn call over to Alan for more detailed review of our financial performance [laughter] U.S. housing market has improved somewhat since the third quarter with December being particularly strong single family starts were up 15% compared to Q4 22, but only got one person on the full year basis, how would you.
As housing starts for the year, only 3% compared to 28 team will the bulk of the increase in the multifamily segment.
And we should be prices upon somewhat from Sokolow's would the Q4 average north central benchmark up 3% compared to Q3, but still down <unk> percent compared to Q4 20 or anything.
Despite minimal marking up or siding segment continued its growth trajectory and are always speech segment was EBITDA positive.
We generated $100 million in cash from operations in Q4.
We did or 600 million dollar share buyback announced an increase dividends Fortuna have centsper share and continued to meet and exceed our goals for strategic transformation.
We also ended the quarter was five cents adjusted earnings per share and ended the year with 47 cents of adjusted earnings per share.
Slide five summarizes our progress relative to our transformation goals.
You can see on the grass diplomat.
Family starts grew 1% and 29 team.
176000 288000.
Well I contrast, we grew small shops ran revenue by 11% compared to Q4, 2018, and my 10% on a full year basis, setting quarterly and annual records.
Sustain growth was so little organic market size increase indicates continued market penetration and growing demand for products and repair and remodel so.
This growth is consistent bark guidance, which we reaffirm for 2020.
The table on the right I watched the progress we have made since 2018 monarch strategic transformation.
In addition to the sales growth I imagine slotting also generated $13 million an efficiency gains for a total of $32 million people talking about.
I should also point out that record safety performance in the siding business and I mentioned in Q3 continue throughout Q4.
Safety is a core values, Ross and LP and I am grateful for Im proud of siding teams outstanding performance to close out 29.
All businesses continue to improve operating efficiency, which we measure is overall equipment effectiveness or are we.
We also continued to gain ground on sourcing side.
Coincidentally, Yeah with speech segment also contributed $32 million impact will talk transformation goals in 2019 [laughter].
Whereas sonys impact was predominately from gross I will speak gain $23 million the $42 million through acquisitions.
With these growth impact of $9 million is derived from the continued increase in percentage of high value add structural solutions products.
Which hit 45% must be volume in Q4.
DWP in South America added another $4 million EBITDA gains from efficiency.
For a combined 2019 transformation impact of $68 million.
The three year combined target for growth and efficiency improvement is $165 million.
With one third of the time away out we were a bit over 40% of the white to the goal to remain ahead of pace.
I want to walk you through the financials in more detail in a few minutes, but the combined efforts of the business segments, along with the intense focus on calls resulted in $100 million, an operating cash flow and one corner.
Alan will also discuss some noncash impairment charges, we took in the core.
Those impairments resulted in a reported loss for the year and the corner, but excluding those adjustments or EBITDA was 49 billion for the quarter and $209 million for the year.
I've talked about growth in efficiency, but I want to spend a moment disgusted innovations, we're bringing to market.
We are LP building solutions that means always pushing ourselves to solve our customers' problems in innovative way.
Over the last 12 months, we added smooth and expert finish pre finished siding to expand our offering and reach.
We are addressing labor shortages with our structural solutions products that site builders time like weather logic complain blog.
And temporary helps address constraints and framing labor and productivity by utilizing the efficiency of factory automation.
Our products exist on a spectrum of value our strategy is to drive our products and ultimately our males up that spectrum from commodity I will be the structural solutions from our speed deciding on prime to create vanish.
We are innovating in executing to bring value to our customers and our shareholders.
20, octane once a year challenging market dynamics, including flat single family housing and the lowest almost be prices, we have seen in years.
We responded with relentless execution I'm extremely proud of the results of our efforts. We grew smartside strand revenue, 10% managing production and cost and I must be inlaws innovative solutions like smoothed siding expert finish and opened our new automated intact selling.
Our transfer me transformation is making us better and more resilient as we push our products and our mills up the value spectrum.
We have demonstrated that we're consistently growing siding in a flat market and make a wisby segment profitable at the bottom of always to be quite cycle.
We are cautiously optimistic that market will continue to improve between 20 and I'm confident that our transformation is making LP more agile better able to thrive in any market.
With that I'll turn the call over to Alan for more detailed review of our fourth quarter and year end result in the major themes that program.
Thanks, Brad and good morning to everyone joining us on the line.
Today I'll be covering three main themes first I'll provide a summary of l. piece financial performance for the fourth quarter and full year.
Second I'll describe Lps ongoing transformation through the lens of our cash flow generation and that's the transition to phase two of our capital allocation strategy.
And finally before taking questions I'll discuss healthys outlook for Twentytwenty and beyond.
As you can see on slide seven of the accompanying presentation LP had net sales of $537 million for the fourth quarter and $2.3 billion for the year down 52, and $518 million respectively.
For the full quarter always be price and volume declines of $38 million and $48 million, respectively, partly offset by $20 million or 11% smartside growth and $16 million of growth in either DWP.
For the full year, it must be price and volume declines were $416 million under hundred $83 million respectively.
Again, partly offset by Smartside gross of $73 million or 10%.
We reported gross profits of $70 million for the fourth quarter and $303 million for the year.
If we normalize that must be prices than last year's fourth quarter gross margin of 16% would have been 10% against we improved three points. This year to 13% looks like in the transformation benefits, including growth in smartside, but im about to describe in more detail.
Selling general and administrative expenses were flat for the quarter, but up 22 million when $1 million for the year.
This reflects increased investments in sales and marketing to drive, citing growth much of which started late in 2018, hence the flattening of spending in the fourth quarter year over year comparison.
We recorded $86 million of impairments in the quarter, including $47 million for non operating assets.
Following the decision to idle peace valley, the removal of that must be predictions from siding mills and with increased operating efficiencies active as females. These nonoperating assets have moved lower in the pecking order as candidates for future production. Therefore within the timeframe as the remaining life of the plant and equipment, the unlike to generate meaningful cash flow.
The remaining $39 million relates to assets used in the production of laminated strand lumber and LSB and they need to be P. segment.
Changes to be please distribution network in the year won a significant net positive to the segment did have the effect to reducing LSL demand expectations.
I should point out that the impairments does that imply that these facilities and no longer candidates for future can version to siding mills some of them. They remain attractive options. It simply the cash flow generation from those conversions, while significant would likely occur beyond the window of the remaining asset life.
As a result of these charges LP reported a full quarter net loss of $51 million on a net loss of $5 million for full year absent the impairments and with an average of 115 million shares outstanding mortgage.
A moment when I discuss the share repurchases adjusted diluted EPS was five cents for the quarter on 37 cents for the year.
Slide eight desegregate revenue and EBITDA to the business segment level I'll discuss sales briefly before moving to the EBITDA multiples.
Writing segment sales were $230 million the dip from the third to fourth quarters, a familiar pattern that follows the seasonality is about building industry for the decrease was smaller machine. Historically in fact this was a record sales fourth quarter for the siding segment not just for Smartside.
He is deciding segment generated $963 million in sales, which is 21 million more dollars within 2018, we've got a consumer smartside strand more than offsetting reductions and no SP fiber and kind of excel.
They must be segment generated $172 million in sales for the quarter and $777 million for the year.
Acting year via declines of $83 million for the quarter and $528 million for the yeah I'll go into more detail in a moment, but it is striking that the price component of the reduction sales is larger than the correspondent EBITDA decreases in both at quarter end. The year. This further demonstrates a significant progress on cost inefficiencies and they must be segment.
Combined with the results of VW, PLP Assai fourth quarter, EBITDA was $49 million and $209 million for the.
The next it was a waterfall charts compare segment revenue and EBITDA to prior periods I'll start with deciding segment on page nine.
I'm sure you'll share my delight. The this is rob as simple as much greener than the third quarter version.
Sidings fourth quarter EBITDA on 2018 was $34 million. Since then smartside revenues growing 11%, adding $5 million in EBITDA sales and marketing expenses were flat on the anniversary of our increased level of investment.
So some inefficiency added another $2 million, an EBITDA for a total transformation benefits of $7 million.
Absorption I must be volumes and prices can excel and everything else netted to $1 million for total increase in EBITDA of $8 million and the components of the $17 million revenue increase what's your base EBITDA wonderful.
The full year deciding what four on slide 10 includes a few additional varium items, primarily because the costs associated with the dose conversion of Dawson Creek and the effects of reduced LSB prices and volumes somewhat offset the positive impact of 10% annual growth in small side.
As Brian mentioned, the transformation contributed $32 million in EBITDA with growth deficiency in sourcing gains, partly offset by increased sales and marketing remaining reductions from 2018, we discussed at length on prior calls.
Page 11 shows the always be waterfall comparing year over year revenue and EBITDA changes for the full quarter I always be price and volume declines relative to 2018 accounted for $79 million in revenue decreases and $48 million of reduced EBITDA.
Structural solutions mix increased seven points to 45% of always be volume can telling peace valley added $8 million, but total transformation impact of $11 million the absorption relates to market Donna downtime accounted for $5 million offset by the change in venture users.
Hi, guys talk shows the full year, what fourth I would be and again, it's a story of steep declines and always be prices, an outstanding progress and operational efficiency agile capacity management and structural solutions growth.
As Brian mentioned, not only did the LSB segment produced $32 million or transformation benefits and 2019, but also $15 million an operating cost reductions given LSB prices in 2019, we consider the $10 million of EBITDA for the yet to be an outstanding result.
Before turning to cash flow I would summarize our segment performance as follows citing continues to grow with stable margins and is more than kapler funding by its own expansion and Lps increased dividend. The always be segment ended the I was with positive EBITDA and he at which we hope so the bottom of the RSP price trough.
Which brings us to cash flow detailed on page 13.
Highlights are $100 million of cash flow from operations in the fourth quarter, bringing us to $159 million for the year form a sufficient to fund capital spending of $163 million.
Which is why the dropping out these cash balance of $697 million.
It's almost exactly the same amount that LP returned to shareholders in 2019.
LP started 29 team with nearly $19 million in cash phase one of Lps capital allocation plan was to rightsize the cash balance by returning a significant amount of capital to shareholders over the course of the yeah. We bought by 25.3 million shares at an average price of 25.2 dollars per share.
Which is too close to a perfect square for me to let pass without comment.
We also paid 13 enough centsper share in dividends each quarter totaling another $65 million as I share count decline through the year.
Well, we introduced our capital allocation plan a year ago, we placed a stake in the ground.
Namely that we could generate much high operating cash flows even at low SB prices than we did a few short years ago to frame. This commitment. We stated if the random lengths 716th I must be price for 2019 work to be $200 per thousand square feet than we would generate operating cash flow over $140 million with a sensitivity of plus on.
Minus $30 million of cash flow for every $10 difference between the always be price its benchmark of $200.
Slide 14 charts, our progress on this commitment the target when flex to the actual LSB price of $194 per thousand square feet becomes $92 million of cash flow.
But we also promised a $100 million an annual cash flow improvements from growth in efficiency by Twentytwenty won an average of 33 mean million dollars per year.
So after adjusting for always be prices, our cash flow target for 2019 becomes $92 million plus $33 million improvement $425 million.
But as always reported that we are ahead of pace in generating EBITDA my transformation and the cash flow proves it against this 125 million dollar target, we generated $159 million.
I should point out with the indefinite settlement of Peace Valley, the sensitivity of our future cash flow to both rising and falling I must be prices has tightened and $30 million for each 10 dollar change you know obviously price to $25 million for each tend to change. This translates to a new 2090 normalized cash flow from operations at $347 million.
Assuming a cycle every joe as be price of $260, an increase of $27 million over our 2018 benchmark of $320 million of cash flow.
And if that isn't a convincing demonstration of Lps transformation that I don't know watches.
This time last year, we promise that once the $638 million of buybacks will complete we would over time, we tend to shareholder at least 50% of cash flow from operations in excess of cole capital investments. So with this phase when complete some cash balances return to a level more appropriate for Lps liquidity and investment needs. We can formally begin phase II Nobel peace capital allocate.
One strategy.
Step is a 7% increasing the quarterly dividends from 13 off Centsper share to 14, and how sense and in addition, Lps Board of directors approved a new 200 million dollar share repurchase program, the initiation of which will depend on our level of excess cash flow through twentytwenty.
Which brings us to appease outlook for Twentytwenty and beyond which you'll see summarized on slide 15, we expect capital expenditures to be in the range of 100, and Thats $240 million in 2020.
And with 2019, seeing 10% growth and Smartside strength cells in a flat housing market. This gives us confidence to reconfirm, 10% to 12% annual growth for Twentytwenty and beyond.
Longer term and having generated $68 million of additional EBITDA growth inefficiency in 2019, we're confident that will meet or exceed 20 121 target of $165 million.
The conversion of Dawson Creek complete the siding segment has ample capacity for growth and so we continue to expect long term EBITDA margins for the segment to be at least 20%.
2019 strong cash flow from operations of $159 million showed the LP is transformation is robust and sustainable and as I said before we committed to returning 50% of cash flow in excess of necessary capital and other investments.
Right and I'll be glad to answer any questions you may have.
As a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key.
Please standby, we've compiled the Q and a roster.
Our first question comes from George Staphos of Bank of America. Your line is open.
Hi, Thank you and thanks for all the details I had two or three question then I'll turn it over our first of all you had mentioned something about the fourth quarter margin comparison, when you make some adjustments.
Being up I think you sit around 300 basis points. If you had mentioned the details on the conference call I'd missed it in the formal remarks, you could just go through that again that'd be helpful. Secondly, I I'm guessing the answer going to be you're not terribly concerned, but shouldnt volumes remain where they've been as opposed to hopefully improving in terms of housing and then yes.
Be is there any sort of source of of consternation or headwind relative to getting to the transformation goals by 2021, I know you said, you're confident but if you could provide a bit more color in terms of why volume wouldn't be a factor that'd be helpful. And then lastly on conversion I am not tree. In addition to comment what mill might be more or less.
Cycling down the road when you ultimately get to that sort of happy problem of running out of capacity and smart Smartside, but you could you give us a bit more thoughts given the impairments, where we're sort of what methodology will you'll use to look at the next conversion. Thank you.
Okay I'll start with the first one.
The margin conversion if you look at the 2018 fourth quarter result, we had net sales of 589 gross profit of 90 for the year over year price decline alone and always be was $38 million. So if you take 599.
On 18 revenue back out $38 million, you got to new baseline sales figure you take $94 million of growth gross profit Backout $38 million you got any gross profit I guess vital and by the other and you get 10%. So thats the normal I got it.
Yes on that so that takes 16% in Fyeighteen, 10% and then gross profit. This quarter. This year has said that himself.
Secondly, you asked about do.
Does.
Lower volume in any way.
[noise] give us any concern over achievement of our operating efficiency goals I would say not in the slightest.
The the to the point being our siding business is continuing to grow.
Our Oh, we improvements are as it were on target full I would say, adding additional capacity.
Across our existing mills so right.
The the with the volume.
Still with such a significant volume of but Oh, SB, citing production Dassault ample opportunities for us to continue improving and no we're highly confident and.
And and be able to achieving these goals and George I'll just add to that.
Part of that question my have been based almost on the closure of Peace Valley within this time horizon, there was a fairly significant.
Plan for improvement at that facility a lot there was a lot opportunity for improved over the peace Valley.
That was in our original numbers, but because of our success across the rest of our system with our we.
Initiative, we're confident we can still hit the original numbers that we guided to even without that middle in our system.
Thank you for that that was.
Yes, and then on the siding capacity conversion question.
Really not much change since we've talked about at last quarter.
We are looking at needed capacity, given our current volume growth in our current mix assumptions sometime probably like 2022, which would mean investment would start 2021 with the bulk of that investment probably actually being in 2022.
So backing up from there than we would be.
Contemplating board approval in public announcement about the location.
Either Q4 Q2 for this year Q1 next year.
I should say this call for the for the call last call the year.
And in 2020.
But in but all the options we have been considering are still under consideration as we move forward.
Okay. Thank you all turn it over.
Our next question comes from Mark Connelly of Stephens, Inc. Your line is open.
Thank you two things have you now rolled out this siding product and all the markets you intend to and with the the pre finished business that you picked up can you just give us an update on how your satisfaction with how bringing that in house has gone.
On the smooth.
Let's move to offering is is in all markets, but not all skews in all markets Theres a theres a.
A large initiative this year around.
Increasing number of skews that we offer insmed.
The allowance and there's still plenty of upside growth.
Available for us around or endorsement offering.
On the pre finish we have launched that product out of our two of our pre finished facilities that are up and running now the order fall from that is very strong.
Where we are.
Currently meeting the demand projections. There. So we are in a start up especially for the facility that was located in Saint Louis that we restarted before our pre finished right. So but all indications from all of a customer interest on our very strong and right now we're kind of trying to keep up with a waterfall by increased production.
But were very very very happy with the launch there and there and the reception about launch that we received the builder show.
That's great just one more question when you were in New York at at the stock Exchange, Brad you talked about having some.
Targets for how much LSL volume you'd need to really make that business curious wait now you've changed things around and reduce your your overall LSL expectations, how does that net out in terms of the profitability.
Opportunity in that business.
That's a great question.
With the distribution change that we made last year.
We have seen a movie.
Back to more more of that on demand being filled by LPL.
And that has shown up in art.
BP numbers last year.
We we are LTL is a good product from us from a margin standpoint, so from Brett we're not really all that upset about that transfer back.
But obviously Mike.
We have taken a step backwards and filling up the capacity of Holton causes.
The mix change to more LPL sales.
Okay. Thank you.
Our next question comes from Keaton Mamtora of BMO capital markets. Your line is open.
Thank you good morning bride Alan.
Hi, Kevin.
First question.
And your order books, and <unk> and I'm kind of inventories in the China for this time of the yard.
Yes, good one I'll just go through all three of the businesses, we usually get questions. Bob ended the call on all always always be inside and but let me start when they WP very strong order files right now for E.W.P. business.
We're pretty much booked about two to three weeks and they WP always speed is also strong again two to three week waterfall.
Pro SB.
And we and distributors and dealers are reporting.
Currently lean inventories throughout the channel and I was hoping.
For siding softer than we would like right now and I'm going back to go into the little bit of detail around that.
You know, we we did have a good Q4.
Ordering on siding there was some.
I will say some some extra buying in Q4 as some of our big alone.
Had a rebate tiers annual rebate tiers that with some extra volume they get yet we saw a little more activity around that and in December as these distributors.
Try to hit the rebate tiers also we made a change this year and we've talked about this on the call previously, but we made a change on the timing of our price increase.
The last few years, we've been raising prices motion.
Most customers on March 1st.
And that and what that what has happened there as we've gotten really good strong.
Pre buy activity in February and then we would see a softening when she first part of Q2.
At this year, we had the majority of our price increases go into effect January 1st so.
That also led to some pre buy activity we allowed.
Hundred 12% or.
112% of prior decembers orders as a limit.
And not all customers if at some did.
And so we're going through what we all right now in the waterfall is really working through some of that pre buy that occurred in December and we're not true that yet.
I do want to speak to the reason for the move of the price increase.
Dave movement.
We have.
We decided this year to structure our channel incentives.
Just to more of a quarterly incentive plan and just an annual incentive plan.
And we did that for the primary reason is trying to smooth now some of the kind of artificial buying that we see it to ended the year associated with those.
Most folks trying to hit their their year end two year rebates.
And we're trying to kind of incentivize a more consistent order pattern quarter to quarter and we felt like in order to do that up in order to implement this you implement that this year and have and habit viable in Q1, we needed to get the order.
The price increase skewing of order activity out of the way in December versus Karen it out over into the middle first quarter.
Okay to more of an answer.
And then you ask in your question, but I just thought I would cover all three businesses, while we were on it.
And just one follow up on that so.
Much price increase.
Well this year inciting.
No.
Just a normal but the 4% to 6% depending on the skew.
4% to 6%.
Right.
Cadence of.
The next couple of quarters do you expect to get back.
Yes.
Because of the move up to the January.
For the effective date, where we're seeing order shift there probably Bob partly by now if not a little earlier in February so they will they won't pay some some ramp up of the pricing and in Q1, but when we get the Q2, we should be foot havent fully implemented.
Okay. That's all you have Brendan just always be can you just remind us or are you know on in Q4.
Operating rate and how many down.
Yes, I'll I'll take the that down days.
And we took.
Something in the region all under the 20 527 down days.
92 of those down days, what peace Valley being down the vast majority remained at was at one mill on money walking mill other than that must be mills running plateau.
Yes.
That's a that's helpful. And then just one last question before dawn into one.
Okay.
It was a 19, citing EBITDA margin.
Uh huh.
You know.
The issue is not yet.
And between the you think you would get any person kind of EBITDA margin number.
[laughter] I think we'll certainly move towards it.
I'm going to I haven't I have no actually committed to a a citing margin number four foot boat twentytwenty, but given that.
I will be production and the stay always be sales out out of that segment now so it's a let's call. It a cleaner segment. The the biggest single step up that we've we saw or likely to see and sales and marketing a good in 29. So we're riding on the higher base. We we certainly anticipate rising margins in two.
On T. 20, and not having the dawson's, Florida in there as well.
Margin help just from a cost standpoint, but also we will have a little richer well a lot richer mix coming out of that facility.
Because you there's there's some startup board associate sales associated with any kind of mill conversion.
Yeah.
Hi, I'm on slide 10, so Dawson.
<unk>.
And it looks like the fixed cost absorption portion.
So is it fair to say that all else equal.
Yeah.
And then I'm going to.
From 2019.
It's it's.
Not to expect those variances to Rica, yes.
Oh, Okay. That's very helpful. I've done it well good luck and Twentytwenty. Thank you. Thank you.
Again, if you'd like to ask a question. Please press Star then one.
Our next question comes from Steve Sure cover of Davidson. Your line is open.
Thanks, Good morning, everyone.
Oh it launched they receive.
So I'm just a.
A couple guys have tried to slice. It. This I also wanted to get your full you're operating rate no S.B. and and really just to drill down what would you say your.
You're a west be capacity is if you had the opportunity to run full and that does not mean restarting any mothballed facilities, but just run what you have.
[noise], So Steve let me speak to the the differential in running.
Masterpiece Valley.
So when we for the second half of last year, we rent, we well once we once piece valleys came out.
And we moved some volume around we were able to run the lowest be system pretty much full other than the down days Alan smoke too except for we were only run in <unk>. We run it you know in those are fortunate operations.
Moving into this year, we we <unk>, we have acquired some export business, that's allowing us to add that <unk> <unk> <unk>, we have added <unk> or in the process of adding a four shift back amount of walking. So we're we're in a in a position.
Currently where we'll be running the system pretty much full <unk> and reporting to y'all market related down days that we take but our our in our current intent with our infrastructure.
<unk>.
X.O.S.B. production in the siding males. So I'll just remind you the only place for running siding right now in our <unk> I'm, sorry, running I was being our siding business right now is in Dos and we did hold all we did transfer some of the west coast retail business out appeased into Dawson, we shut down p., so there's a little bit.
To always be there, but other than that will be <unk> with our intent is to try to run the R.O.S.B. segment of it you know pretty much at full capacity.
Assuming that there's there's a demand from that product in the marketplace.
That would mean you know a whole reason for rationalizing production last year at Peace Valley and out of our <unk> out of our siding mill out of our U.W.P. me on hold and was to try to run our system more full this year, but but I'll want to Reunderwrite. We we were only do that if the demand is there.
For for <unk> for for production and then when you ask about what does that mean for us from a capacity standpoint without pay <unk> you you should you could.
I'm thinking about our system capacity to be around 3.7 billion square the the three legs.
And that's what I thought, but then when we look at the the cash flow transformation and you give us a leverage saying a 10 dollar change equals $25 million annually. After removing piece I just thought hmm with the simple answer would be 2.5 billion I don't think that's the right.
Pasadena.
No I I'm I'm, a little confused as to be so part of the confusion. There is the apples and oranges comparison to create the basis 716 basis, and then there's a taxi component for that yet to that cash flow.
Duty as well yeah, Okay, gotcha, but I got explained that there I'm, hoping that if you if there's a footnote on the bottom of that slide in minuscule font. We can we can always I'll post calls elaborate or elaborate on that.
That <unk> that they nocturnal management, which Alex explained about I'll I'll have to put on my bifocals and go through that.
Specifically, the guy and so they have to do it yeah [laughter]. Thank you and just one other quick one on E.W.P. So.
The the mill, where you're taking the charge and I recognize it still functional it is that halting and have you seen much him back from the new very large facility in South Carolina.
That is holton to to to confirm <unk> currently we haven't.
But we're going to [laughter], so but as of today, we haven't really been impacted by that.
Okay. Thank you best wishes this year.
I don't know.
And next question comes from Mark line trap of Seaport, you're <unk>.
Thank you I I just wanted to clarify as we think about that bridge inciting from 2019 to 2020, so totally understood. Presumably we don't have the 18 million and converge and then wrap costs at peace Valley, So that hopefully as incremental.
To 2020 versus 2019, I I'm not sure, though that the absorption that's not necessarily something we I, though to our 2020 is it <unk>, we simply don't go backwards from that point, Yeah. He acquired by my <unk> Yeah right.
<unk> Yep, Okay, just just wanted to clarify on that.
And then.
And then <unk> you talked about stable margins. So <unk> well, we do have that price increase so hopefully there's a chance that actually there could be I I. This is I I guess at the at the citing price versus costs type level, but maybe we can get a little help there, but and the other.
It looks like volume growth every 10 per cent of volume increase we saw you know 11% was 5 million. So if you've got 10% for a year on smartside that probably translate to about 20 million is that that are reasonable way.
To think about yeah.
And it are there.
Sorry go ahead.
Are there any other significant.
Components are likely to to move the bridge substantially as we think about 2020 versus 2019 and fighting.
Okay. So there are there a couple when you you you you carry the comments on stable margins.
Stable was just a conservative way of saying consistent them growing you know I'm not trying to argue the them that we don't foresee a margin increasing deciding what I used the word stable. So yeah, yeah, but you have questions valid yes, the the pricing volumes should should both contribute to an increased knowledge in your mess around the volume conversion.
<unk>.
Was was pretty pretty good we may as we go through the to invest.
<unk> in sales and marketing efforts. So again, we may you you may see some of that margin contribution dampened by that but at the same time were continuing to chase efficiency improvements in if you.
Even though the two and not related if you look at the the waterfall for the full yeah. On siding, then you see that efficiency savings basically offset the marketing dollars. So I don't see why we shouldn't see the same <unk> everything aligns and we continue to be as successful as they have thing that we would say.
Ourselves being able to offset increase tells a mouse with efficiency gains letting the.
Price and volume impact so small side gross way through to the bottom line or things being equal. So we'll optimistic about the the the profit conversion in 2020 exciting.
Super that very very helpful. And then lastly, <unk> I think the the first commercial facility was going to ramp than the latter part of last year can give us any sense as to how that's going we're certainly thing interest in the the home builder community too.
Focus on some of these off site builder, so and update would be appreciative yeah.
Yeah. Some more we we did stored up the facility in white shoe for we are still in a sort of mode I would <unk> well I I know that we're about 80% of where we want to be from just the the a number of machines that are running their <unk> each of the machines are.
Also in their own ramp up her you know these kind of a little bit of discrete manufacturing there versus continuous.
We do we are targeting to have you know to be is essentially fully functional by March and there'll be some ramp up after that but we could you know this isn't.
<unk> process hard more males. It you know the the the learning curve should be pretty quick.
The order fall is very strong from the business compared to our capacity today. So we're encouraged by market acceptance in northern California, and really you know when we get to the to to time frame you know we'll be in a position to really evaluate you know what that what the more longer term potential the plan.
Horizontal return on capital profitability goes, but so far everything that's going well around the start up around the order fall and I was hitting the you know the interim start up metric. So we had employees to gauge <unk>, how we're we're coming up and learning her.
Super Thank you.
Our next question comes from Paul Quinn of RPC capital markets airline is open.
Yeah, Thanks, very much morning, guys.
<unk> Hey, just a couple of easy question is one one on the export side to to move Maniwaki from three shifted for shift where where where are you selling those additional sheets.
It's an export [noise].
Is that it's south American expert to support the market or is that a <unk>.
The Vietnam.
Vietnam right and then just at a high level I mean, you've got a major citing competitor that's growing about the same level that you're growing which is you know pretty pretty significant and just wonder if we seen any changes in the overall, citing market you know at any other uses between you know brick final and.
Continue to take market share and where you where do you expect your market share percentage should be at the end of 19.
So <unk>, let me take a good question about the competitive you know substrates. There you know I think both us in our competitor are really focused on the vinyls opportunity against vinyl, particularly in the repair and remodel sector, which is why we moved to smooth while we moved.
<unk> Oh, why they have done the same as far as pretty having a pre finish offering.
So I think you know the the the opportunity loose for.
For us that we've seen as far as continued growth is around you know for further penetration against final.
Personally.
Don't see on a macro status as being directly competitive against break and other substances except.
When you get two conversations around affordability. So why can't I don't have direct evidence of this I do know that you know our last hodding offering the would be more economically advantageous sightings in brick and so as we look at affordability continuing to be an issue with builders. We you know you know.
Perhaps there's an opportunity for growth there, but clearly what we're focused on it was repairing remodel as a as a engine for growth.
And and targeting that against a vinyl as as well we're focused on.
Okay. So the vinyl focused continues and and what do you think you're runways against final do you think do you think that's five years, you think that's 10 years plus.
I think it's a 10 year runway you know so some of that does depend on on oil pricing. We you know we were more competitive when they're raw material pricing goes up.
And so there's you know we've you know we used to being the bottle business up pretty familiar with that so you know that can can change it at least from an economics change the mindset, but we're we're focused on the aesthetic sell as we've talked about before and I mean, I really feel why us having being able to control.
Branded and so manufactured.
National pre finish line is really could be an accelerated or penetration and apparently model.
Okay and the last question I had just on the feature conversion I mean, you guys are taking a look at a couple options and part of that depends on the growth in whether whether it's a four H.G.A. sheets July products are trim, where where do you see most of that growth in 19 like what <unk>, what it's a stronger market and can you help us over that yeah.
<unk> the the the pre Finnish.
And smooth initiatives that we have <unk> <unk> pretty finished his I laughed play Oh as you know.
So the the.
You know that mean, there's some trend that goes along with that there's honestly very little panel, it's pretty finished.
So you know, we're we're expecting to see dramatic growth in our you know make pretty finishes where to start you know you can get a bit big percentages, when you're starting with from zero, but but you know as we as we really.
You know figure out <unk> see the penetration that we would get there's a real opportunity for us to see growth in in the lab and have some trampled along with that and I'm, just saying that relative to what we've seen in the past with panel.
Yeah fair enough, thanks, very much guys specialist.
[noise] again to ask a question that star one.
And next question comes from Sean Stewart F.T.V. Securities. Your lines open. Thanks. Good morning, one question on the O.S.B. segment, you've you've seen.
Steady progress in your structural solutions specialty volumes and I'm. Just wondering if you can give us an update on how the pricing dynamic for those products decouples from.
Random links print and any context, you can give on price premiums you're getting for those types of products.
And this this this big showing in general is is there. It's it's a wide spectrum of value enhancing opportunities and so let me bound it and then I'll talk about the products in between.
You know Techshield, which is our largest structural solutions skew is is.
Try to directly all ad or to random and so we so the the you know total margin on that product varies with changes in random the margin that we'd get from the AD or is it more as much much more stable.
But <unk> clearly, they're still you know consistent variation between the selling price of.
Techshield in in the selling price of commodity on the other extreme we have our flameblock all frame, which we sell off of list price you won't really not competing against a west Billboard but not at all again, so as being that's were able to price against Morgan and those prices or or or stables, what we see inside him and then in between.
Perhaps the best examples or is to use there's a legacy flooring, which is is a high premium flooring and that price neat it tends to be more stable in that it's it's adjusted typically quarterly, but but <unk> you know big quarterly swings and random does impact.
The pricing on legacy because ultimately it's competing against perhaps more mid range Oh, it's big flooring in it that get gets to be too. Large then you know there's the likelihood that the contract per builder will fall back through that mid range flowing product mccall's or the the value got there so.
So there's so it's a range in in I'm, just this to be transparent, you'll still <unk>, our largest volume structural solutions skewed. So we we still have a fairly large part of that 45% no more biased to being in some way correlated with random or you know the effort in and.
Focus that we're putting into two or two or innovation pipeline, though is to launch products like legacy like where the logic like flameblock and that can separate us overtime from this dependency that we have on random variation randomly <unk>.
That's a that's very useful thanks to the context, that's only <unk>.
[noise] [noise] there no further questions like trying to call back over <unk> pretty close talking mikes.
Okay. Thank you everyone with no more questions. This conclude earnings call for Q. for we'll look forward to speaking with you all again sometime in may to discuss our results for the first quarter of 2020.
And that that back over you Michelle Thank you.
You're welcome ladies and gentlemen, <unk> conference call. Thank you for participating you mean now disconnect everyone have a great that.
Oh.
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