Q1 2021 Louisiana-Pacific Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2021, Louisiana Pacific Corporation earnings release Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press. The Star then the one key on.
You touched on the telephone please be advised that today's conference maybe recorded if you have a clock or assistance. Please press Star then zero.
I would now like to turn the conference over to your speaker host.
So erinn Hal Walsh director of Investor Relations. Please go ahead Sir.
Thank you operator, and good morning, everyone. Thank you for joining us today to discuss Lp's results for the first quarter of 2021 as well as our Q2 outlook. My name is they're on hold while I'm Lp's director of Investor Relations.
Joined this morning by Brad Southern Lp's, Chief Executive Officer, and now on Hockey Lp's Chief Financial Officer.
We are hosting a simultaneous webcast. In addition to this conference call and we have uploaded a presentation, which we will refer during this morning's discussion.
We also filed on our 8-K this morning with some additional information all these materials are available on <unk> Investor Relations Web site Www Dot Investor L. P Corp Dot com.
Slides two and three of the accompanying presentation provide notices in detail on our forward looking statements and non-GAAP financial metrics.
Index of the presentation also contains necessary reconciliations that are further supplemented by this morning's 8-K filing.
Rather than reading those statements I will refer to you to the supplemental materials and now I'll turn the call over to Brett.
Thank you Sharon good morning, everyone and thank you for joining us to discuss <unk> results first quarter 2021.
Robust customer demand for all Lp's products has continued driven by ongoing strength in homebuilding and remodeling, resulting in an outstanding quarter per LP.
Mark side net sales grew by nearly 50% versus Q1 of last year to $283 million and EBITDA more than doubled to $90 million.
Smoothed and export finished volumes more than doubled those innovative products, reaching 8% of total smart side volume.
OSB prices continue to decline throughout Q1, with a result that Lp's OSB segment generated extraordinary cash flow.
Bill pay South American segment also had a very strong quarter with 50% more sales and three times more EBITDA in the first quarter of last year.
As a result L. P exceeded $1 billion in sales generated $461 million on EBITDA and $314 million of operating cash flow and earned $3 <unk> per share all of which are quarterly records.
Last quarter, we announced on integrated capacity expansion plan that included converting our mill on hold to mine from <unk> and I will be the sports on.
The restart of our Peace Valley OSB mill in Port St John British Columbia.
And plans to convert our OSB mill in <unk>, Michigan Society, let.
Let me briefly update you on those projects.
Ultra conversion is underway and on schedule. Despite some expected difficulties with travel and contractor access presented by COVID-19 weeks.
We expect to begin smart Sop production at Holt and less on a year from now in late Q1 of next year.
We are excited about the capacity expansion that these investments in homes represent and we are gratified by the enthusiastic responses from local and regional suppliers and community stakeholders.
Given the strength of sport side demand, we are exploring options to accelerate the conversion of scola. We're also evaluating and prioritizing subsequent projects add capacity back conversion and or expansion of existing facilities as well as growing pre finished.
<unk> has a long runway for growth.
Capture share expand addressable markets and execute an aggressive capacity expansion strategy.
Process to resume OSB production is filing is also going quite well.
To complement the small team that has maintained the mill since we idled in the summer of 2019 day.
They have kept the equipment in excellent condition, and we anticipate minimal impediments to restore.
We're also pleased by the number of former employees, who are returning to the mill. We are glad to welcome them back and we look forward to resuming production in early Q3.
Last quarter I spoke about the challenges presented by shortages of MDI resident juice and manufacturer of swaps on.
OSP.
MDI availability has improved significantly and we are essentially back to normal levels of supply with OSB mills once again using planned levels of MDI.
This episode has highlighted the strategic value of having siding and OSB integrated in Lp's portfolio.
Sport side uses MDI exclusively but always speak in use alternate rests on supplies become constrained we were able to allocate scarce MDI from OSB to siding without <unk> siding, we have struggled to achieve another outstanding quarter of growth.
While the MBR supply has improved global shortage of vinyl acetate based adhesives as force decreased production of Tech Shield <unk> radiant barrier sheathing products in the second quarter.
Vinyl acetate supply situation is improving and we expect to be back to normal levels of potential production by the end of the quarter.
However, COVID-19 subsides in North America, and the broader economy rebounds, the permitted supply chain disruptions and type logistics availability are likely to present challenges going forward.
We recognize the difficulties this creates lp's customers, particularly in an environment with such strong demand. We're doing everything we can to mitigate the impact of these issues through strategic sourcing and network optimization, and we're adding smart side on OSB capacity safely efficiently and quickly as possible.
Finally, I am happy to announce that Lps in the initial phases, returning to our national headquarters after more than a year of working from home.
While we are relieved and gratified is slowly getting back to normal I won't technologies for the majority of Lp's mill employees as well as many customers working from home it's not feasible.
While COVID-19 vaccines are not widely available in the U S and Chile back.
As a nation rates continued to lag in Canada, and Brazil situation.
Situation is improving but we are not out of the woods yet.
The ongoing diligence and care exercise by Lp's pandemic response team and mill employees are helping minimize operational impacts from COVID-19, enabling <unk> to supply our customers the products they need to build and renovate homes Inc.
<unk> all of them and all of you on the call to continue to exercise appropriate precautions and give backs unaided as soon as possible.
<unk> had a remarkable first quarter from on challenges remain very strong housing and R&R markets, resulting in intense demand for smaller sites and OSP keep our near term outlook exceptionally positive.
With that I will turn the call over to Alan for more detailed discussion of Lp's financial results for Q1 and outlook for Q2.
Thanks, Brent Slide six shows summarized results for the quarter, which much like the fourth quarter clean and straightforward with ongoing smart side growth and higher OSB prices as the most significant drivers.
Compared to the first quarter of last year, and net sales increased by 74% to just over $1 billion.
Driven by 49% growth in small side and over $330 million of significantly higher OSB prices.
The resulting EBITDA of $461 million is more than five times last year's result.
We generated $314 million of operating cash flow, including increased capital investments and heavy spending on logs common practice for LTE in the first quarter.
The $3 <unk> per share of adjusted earnings is 10 times that of the first quarter last year.
In terms of capital allocation, we paid $17 million in dividends from the first quarter and spent $122 million to repurchase two 4 million shares.
We've continued buying back shares through the second quarter and as of the close of business yesterday had just $32 million remaining of our existing $300 million buyback authorization.
<unk> equal that remaining authorization will be exhausted by the end of this week.
Therefore delighted to report that Lp's Board of directors has authorized a further $1 billion share repurchases, which we plan to launch immediately.
Lp's Board also declared a dividend of <unk> 16 per share payable on Genesis.
Slide seven highlights the cleanliness of the quarters from a reporting perspective.
<unk> smart side growth in OSB price appreciation resulted in $93 million and $333 million, respectively of incremental revenue for the quarter.
Compared to which everything else.
Really just a rounding error.
$363 million of the increments OSB pricing 55 percentage of the Incrementals from upside revenue translated into EBITDA.
Everything else aggregating to a net negative $6 million.
Slide eight provides an update on on transformation.
On a trailing 12 month basis small side revenue grew at twice the range of single family housing starts.
And as the table on the range shows.
<unk> growth dominates the first quarter accounting for 53% to $65 million transformation dollars per quarter.
The resin substitution, which Brad referenced earlier accounts from a negative $4 million in efficiency.
Given the small site growth contributes the lion's share of our transformation dollars in the quarter slide nine looks a little deep into that growth.
The bar charts on the line is not to repeat to slide eight. This chart shows is not site rental revenue growth. So just the quarter relative to single family starts the pie charts on the right provides more resolution that the sources of small side growth.
Volume grew by 39% the volume of the more innovative smooth prefinished shrink products grew to 140%.
Such that share of the total volume increased from under 5% to just over 8% the.
The substantially higher average selling prices of these new products also contributed one points to overall price growth in the quarter.
The waterfalls on slides 10, and 11 show year over year revenue and EBITDA growth on the siding and OSB segments for the quarter.
Slide 10 covers siding.
49% revenue growth small size is the result of 39% volume growth compounded by 7% price growth and Thats $93 million of sales from $51 million in EBITDA from an incremental EBITDA margin of 55%.
And sales and marketing efficiencies offset increased costs from freight on the dwindling non recurrence of fiber sales reduced revenue by $20 million and EBITDA by the.
The result, exciting segment EBITDA of $19 million on $285 million of revenue.
And EBITDA margin.
Net.
Slide 11 shows reported in more detail OSP and is dominated by ongoing record high prices.
We estimate the impact and the scarcity on alternate resin substitution at roughly 80 million square feet.
Volume due to reduced operating efficiency.
Yes.
And as Brent said the supply chain for that range. It seems to have stabilized. We will of course continue to monitor that situation on other potential supply chain interruptions closely.
<unk> ability to substitute alternate presence from OSB production, and therefore to be able to strategically allocate all available MDI deciding setup was a perhaps on anticipated benefit of having these segments under the LP umbrella.
OSB prices will continue to grab headlines from show. They don't these results this quarter in no small measure a testament to the agility of the siding and OSB operations team and Lp's strategic sourcing team as they collaboratively navigated MDI shortage.
And as you'll see on the cash flow summary on page 14 of the appendix to the accompanying presentation other than cash taxes, the only meaningful difference between EBITDA and operating cash flow is a substantial increasingly.
And this is almost entirely the result of higher OSB prices raising accounts receivable balances on the normal seasonal accumulation of logs I mentioned earlier.
The bridge from the $314 million of operating cash flow to the net change in cash is similarly on events.
With buybacks capex dividends and payments associated with refinancing our long term debt is the only materializes.
Reconciliations of net income to both adjusted EBITDA and adjusted income on also straightforward with depreciation on a rather large but appropriately proportional provision for taxes is the only items already mentioned.
Slide 12 provides updated guidance for capital expenditures for the year.
As Brett said, we are exploring opportunities to accelerate our siding capacity expansion.
Holton conversion restarting peace valley other growth.
Growth capital on the base of sustaining maintenance altogether bring on capital expenditures for the full year in the range of $230 million to $250 million.
In other words, we are raising our capex guidance by about $10 million.
And with extremely robust housing and repair and remodel markets fueling intense demand for smart signed an OSB our order files give us some visibility into the remainder of the second quarter.
For the OSB segment prices continued to decline with the result that we believe OSB revenue will be at least 30% sequentially higher in the second quarter than in the first.
We also expect another strong growth with small sized growth with revenue for the second quarter at least 30% higher than last year, which would mark the fourth consecutive quarter of growth above 20%.
Assuming the siding and OSB scenarios I, just detailed and given all the usual caveats about sudden demand shocks on the on.
Foreseeable events we.
We expect EBITDA for the second quarter to be at least $580 million.
Another quarter of record results on outstanding cash flow generation.
Before handing the call over for Q&A I do want to discuss on expectations for full year revenue growth.
Demand continues to be very strong and we expect to continue running our mills and so on the capacity for the remainder of the year.
So expert finish smooth and shakes should continue to grow as a percentage of total small side volume and revenue.
However, given the acceleration of booked in the second half from last year, we simply cannot increase year over year revenue by much more than 10% from the second half of 2021.
So what we said this would bring full year small site growth terrific twice, our previous long term guidance.
Cynthia.
And with that we'll be happy to take your questions.
Thank you, ladies and gentlemen, if you would like to ask a question at this time. Please press. The Star then the one key on your Touchtone telephone to withdraw your question from the pattern key placed on line will be compile the Q&A roster.
Now first question coming from the line of.
Mark Weintraub with Seaport Global your line is open.
Thank you congratulations obviously fantastic times for you.
In terms of the alternative growth in siding and some of the things that you're looking at can you give us a sense as to what they might represent and prop.
Perhaps if we can understand.
The magnitude of it.
Volume they could represent in the cost to get it recognizing that these would be preliminary indications.
Yeah, Mark I'll talk.
Really free areas.
Three types of investments, we're looking at making per <unk>.
Continued growth.
And this is not an unique priority order first of all we'd be adding additional press capacity at existing facilities.
Currently make smart side wed.
We like the idea of having trained workforce on the ground. So those locations that have sufficient wood supply to.
To accommodate.
Significant growth in most cases that means at least doubling of growth from a price standpoint, we're looking at that is what's called a brownfield.
Scenario.
Secondly, we even after <unk>.
We'll have men on walkie and peace Valley both.
<unk> OSP.
Aspen Wood baskets and so those two facilities are certainly candidates for conversion and then finally.
What would be more of a greenfield scenario, which is.
The Best example would be the Cook, Minnesota.
<unk> of land that we own that would that has had OSB plant on the in the past as far as Green building a siding mill so.
Honestly some combination of those three type of opportunities.
Play out in my view over the next 10 years as we continue to grow siding capacity.
From a capacity standpoint.
Speak generally and not to be overly obvious about things.
Converting an existing OSB mill is probably the most of it.
Now the most efficient use of capital.
Because obviously, you're utilizing a lot of redundant resources and then a brownfield facility at an existing location that wouldn't be there.
There would be capital efficiency associated with that or not but not buying land or certain components of the mill that would not have to double up on.
And then obviously on more of a greenfield scenario would be the most expensive.
Great I'm curious Val d'or. It didn't get mentioned there is that no longer a consideration or.
Sorry, that's an oversight on my part.
<unk> startup shutdown facility.
<unk> yeah.
Okay Super and then just as a quick follow up 32% margin in siding I know just I think it was last quarter you increased your expectations on what the business can drive over the long haul.
This 30 twos, a lot higher than even where your longer term update that you had been any thoughts as to how sustainable this type of margin can potentially be.
Yes, I would say that the sustainability comes from improved mix, which is the while we've emphasized so much the new products that.
We've launched over the last three or four years, which.
Prefinished shakes.
Smoothed all carry a premium over what we overall base.
Basic prime product.
As I've mentioned before on the call. If we if we bias mixed trend that can be very favorable to price as well.
So thats so were looking at.
Our innovation strategy as a means to incur.
Increased margin and it certainly does.
On the constraint on that as we gain market share there is a competitive nature, obviously to a big base of business that we have in Latin panel and so we are keeping our <unk>.
<unk> opened a best <unk> way of saying to.
To be competitive when it comes to big builder business and our business at the home centers, which can be a little more competitive on a from a pricing standpoint.
Great I appreciate the color I'll turn it over thank you.
Thanks, Paul.
And our next question coming from the line of gets on Manta with BMO capital markets. Your line is open.
Thank you and congrats Brian Allan obviously, a very strong start to the year.
Maybe two.
Maybe just coming back to solar.
I'm talking about kind of pulling forward the timeline of that last quarter you were talking about.
Potentially 2023, Q3 startup, but sounds like sooner I'm. Just curious you know given that you've got holton going on right now when is the earliest you could.
You would convert that men, obviously if demand remains strong.
Ethan I would say.
The earliest we could get production from that mill would be probably a year after the houlton star.
Startup, which should be Q1 of 2023 give me a little latitude on that as we continue to work on the engineering, but we are.
On a parallel path, obviously with a huge focus on Holton first.
But we.
We intend to bring that book to convert that facility over to siding.
As quickly as we can given the work Thats ahead of us to do the consulting conversion first.
We target Q1 on 2023, and then we'll continue to update you on the calls is that either moves forward on a quarter or back a quarter or two given.
What we need to do from a demand standpoint, but also as we were.
Refinery engineering work on solar.
Yeah.
Got it Thats helpful.
And then maybe.
Talked about kind of demand has remained strong in both OSB and siding maybe talk about what.
The order backlog look like for this time of day in both OSB and siding.
They are extremely strong on both products throw AWP in there as well.
On the.
I mean, just it's unprecedentedly strong.
But it's always strong in Q2, so that's.
Seasonality has kicked in.
But there has been no weakening in the order file on any of our three well I'll throw South America in there too.
Any of our core businesses, but very strong order volume.
Got it and then just final question around capital allocation balance sheet isn't based on physician Q2 cash will be on a very.
Clearly robust as well and you've Alan just mentioned that the $1 billion authorization announced our plan to launch a suite of what is that right.
I'll start off talking about.
The cadence around share repurchase as you know I'm not asking about sort of specific quarterly guidance.
But given the strong balance sheet.
I'll start on what is the right way to think about kind of leverage for LP.
On the way you think about deploying cash.
Purchases.
So.
Keith.
Our balance sheet as you mentioned is very strong.
Our balance sheet will be strong after we execute this share repurchase authorization. So.
There is.
Our view my view, specifically, we're not risking the company at all by this $1 billion certainly.
Doable from a cash generation standpoint on will.
Ill remind you this is an authorization.
Not a plan to spend it so we've got some flexibility if things were to slow down later in the year or next year, but obviously our plan is to deploy that.
On that authorization promptly to begin the deployment promptly.
The rationale behind us behind the share repurchase as a capital allocation tool is that even at.
$70 share price, which I don't know if we're there at the moment I don't have it in front of me, but we were getting on the call are still fine and Allen Bancshares. This and certainly our board is we're still believe.
We are significantly undervalued.
So we feel that Theres a good justification just on that note to buy back shares.
Not only just because we have the margin.
And so on.
Our rationale behind that is that that.
It remains a good investment for our shareholders to be an aggressive share repurchase mindset at LP.
And then Paul.
Reassure our shareholders that we will be prudent about that in and on <unk>.
Deploy it.
On a way that makes sense given the economic reality of the time, but then again I'm very I feel.
I am very bullish about the next four quarters for the housing repair and remodel and LP. So we anticipate spending that money over the next one.
I don't want to set a timeframe, but we plan to begin using that authorization immediately and will.
Probably buy back shares from AR.
<unk> standpoint about on the pace that we've been doing it over the past year or so.
Got it very helpful. Good luck on the back half of the right.
Thank you Keith.
Okay.
Our next question coming from the line of John Becker with Bank of America. Your line is open.
Hey, good morning, Thanks for taking my questions.
Just starting out I was wondering if you might be able to just talk a little bit about I mean, obviously like you've seen.
Tremendous growth in smart side, and so on that point, if you could kind of talk about how you know that.
Maybe influencing the visibility of your brand and an ability to kind of grow off of that I mean, obviously over time, you can get more more scale as you grow and have more have on market share, but wanted to get a sense for how this is ultimately helping to maybe compound growth to some extent if that's correct.
On.
And it's funny I was as you were asking the question I wrote down as a no compounding, but then you said the word before.
Before I do it but that is certainly.
Brand equity and credibility of the brand comes with scale.
And it comes with.
Maybe call it broad scale penetration in several different kinds of markets.
Our present or our position in retail.
Maybe sort of brand.
The consumer of the Diyer sees on <unk>.
We value that a lot we value our position on the retail websites.
A lot of business moving from.
The big box retailers.
Repair and remodel.
Yes.
From them for a re sized project is typically a project that's sold in the hull and so a consumer brand on a contractor.
Educate and convince on consumer.
From a bigger level, yet our kitchen table about that.
Using smart side as a way to build brand credibility and then finally.
As we expand on the builder.
That really allows us to access a contracted price installing siding.
So and then we could go on with other examples.
Hey.
Tom.
Being a brand that has that kind of wide opportunity to be exposed and then taking advantage of that.
I believe it does provide a compounding effect.
And then add on top of that.
Our launch with excellent finish and the ability to access from a pre finished side of the market somewhat.
On assignments on I was talking about repair and remodel.
Really also brings an aesthetic appeal to the to the brand that moves it beyond.
Contract from consumers that kind of it is.
Just the prime product.
So.
This has been the fruit of past investments in marketing and sales that we've made.
And talked about on a lot of these calls we continue to really focus on that and make sure that we support the brand.
Way that insurers future growth in non spec one more point on that.
One of the things that we've learned through.
Through the COVID-19 experience is you can effectively do that online.
I think our contractors.
Contract customers have moved to getting educated about or got more comfortable being educated about brand and installation et cetera online consumers certainly has and then once again the big box retailers really educating the public on how to how to source building products by starting on.
In line.
We do have a strong focus there and I'm really pleased with the progress so far.
Okay. Thanks, and then I did notice that you had a pretty sizable increase in the smart side pricing. This quarter can you just remind us what.
The price increase was on price increases that have been announced for that product.
Yes, we are.
We announced.
4% to 6% across the board in <unk>.
Alrighty of regions.
It varies by region, it varies by SKU, but 4% to 6% overall.
And.
We have been.
We have been.
We are realizing now maybe three to four overall and then the mix change has been a very possible added about another percent moments on pricing.
So I would say, we've probably got a little bit stronger price realization.
On the.
Back end of the increase.
Got in prior years, but it is just.
The strength of the demand right now.
<unk> been able to hold all allowed us to hold on some of that list pricing that we can increase at the beginning of the year.
So on.
It's from us from a modeling standpoint, I would say from carryover.
Where we are right now and give us a little bit of leeway on mix.
There will be a pretty good way of looking at the rest of the year as far as our price increase realization.
Let's just call and then as far as overall demand for boats siding and OSB can you just.
Remind me when that tends to peak seasonally I think it's sometime during the summer, but what is kind of a typical seasonal pattern here.
Yeah, John you know really for in my experience here on most demand tunnels and siding a little bit on OSB really.
September October.
Historically in siding has been really good I think Thats also true for OSB is.
People move into the winter and try to button up some jobs and get get the houses cited where she so we've typically seen really good seasonal demand nail that.
That demand plateau in the summer is kind of hit a constant rate of of construction and then we would generally see a little surge in demand September October.
As <unk> mentioned China.
What I think was people trying to.
Some jobs before the winter weather hit so.
We're certainly on a historically on a really good Tom on the season right now and we're expecting to see continued very strong order files at least until October.
But given the.
The lack of inventory in the channel right now for both OSB siding from AWP in there as well.
I anticipate that even in the winter, we will see pretty good order files is as.
Distributors and dealers take that opportunity to rebuild some inventory looking into what we expect to be a strong building season next year as well.
That's very helpful. And then just last question before I turn it over on the South American results were clearly quite strong in.
On that point, if you might be able to talk about the sustainability of some of the EBITDA.
Yes from a volume standpoint, I feel really good about the sustainability and we're doing some.
And the scale of things from Big dollars, but we're doing a major some major mill improvements down there just from.
A little extra capital spend.
We've allocated down there for the next couple of years, so while I'll say the capacity.
South America growing.
Significantly over the next 18 months or so and we're seeing really good market growth market size growth down there.
And some of that is attributable attributed to good economies, especially in Chile, but also our expansion into Argentina, Peru and Colombia.
Has really helped as well so it's diversified.
On the market's a little bit.
There is a pricing component of that is when I look at it is in no way directly tied to North America, but when when things were as tight.
As they are right now in North America.
Pressure from imports on South America, diminishes and it gives us a little more pricing.
Strength in that kind of environment. So that we have seen price improvement down there as well.
Historically, we have been able to retain that.
It's hard for me to predict it that would be true in the future but.
We've seen good price appreciation and really good volumes down there.
Yes.
Yes, Thanks, Matt.
And our next question coming from the line of Sean Stewart with TD Securities. Your line is now open.
Thank you good morning, a couple of questions Alan.
Wondering if you can speak to SG&A. It was kept in check to surprising extent relative to our expectation given the top line strength can you give context on SG&A trend this quarter and sustainability of these levels going forward.
Yes sure.
One thing to bear in mind is that this time last year, we significantly cut.
G&A as we as we entered the COVID-19 environment and that net.
The benefit if you like.
<unk>.
Giving us a new muscle so as suddenly as we sort of step.
Step back up unnecessary spending on things like selling or marketing, we don't necessarily replicate.
The cost in exactly the same manner. So we got some point you might call unexpected implicit efficiencies.
We are looking to increase.
Selling and marketing.
Expenditure with particular within.
Siding as.
As we go forward through.
The remainder of the year.
But.
In context, that's already baked into the Q2 guidance that we gave you so that will be an increase in SG&A as we continue to invest in the in the future.
On the siding business, but that's really the only fundamental change that you'll see.
So on.
Okay understood.
On AWP you had indicated last quarter that you were undertaking a strategic review for the business can you give us any update on how that process has evolved if at all over the last quarter.
Has evolved I am pleased with the progress on the response, we've had quite a bit of interest in the business.
Nothing to share today were just some.
Discovery phase and as far as the <unk>.
Process that were.
<unk>.
We've launched and having some very interesting discussions about about the future of that business.
We are focused on continuity of the business because typically what we think is going to happen as they acquire.
And per our distribution base is all Saar distribution base per siding total large extent structural solutions. So on.
Continuity is important to us.
It's one of the components for from getting out of that business.
That's certainly a factor that we're talking with.
To the to the interested parties about.
But good good progress within the quarter and we will continue to report out when we can.
Understood.
That's all I have the rest of my questions have been on so thanks very much.
And our next question coming from the line of Kurt Yinger with D. A Davidson your line is open.
Yes, good morning, everyone and thanks for taking my questions.
I just wanted to start off on the competitive dynamics in siding I mean, what would you kind of consider the one or two things that have been most impactful in terms of your ability to gain share here in the last year and as we look ahead to the next couple of years I mean are those factors any different or what do you think is kind of highest on.
Priority list there.
Okay. So looking back the last 12 months or so with a good market share gains as we've mentioned before.
Our position at retail has been very very beneficial to us we've seen incredible growth there along with the <unk>.
On the depot Lowe's a minority minority.
<unk> reported closing depots growth that they have seen so our position there was was really good.
Also.
The rebound in the shed business, which is another big panel consumer for US has been extremely strong.
And then I would say overall.
Just the strength in housing.
Has also been very positive for us and I believe we've picked up some market share gains there as well, but the bigger market share gains have come through our position in retail and in <unk>.
Sure looking forward however.
Our launch of smooth and Prefinished is certainly focused on market share gain and repair and remodel and while there is we do have geographic strength. There we do not have broad national strength from repair and remodel. So theres a lot of opportunity in front of us to grow in the repair and remodel segment.
What's the reason behind the innovation and then our other focus area for us for where we believe we are currently underpenetrated with the large national builder and we've got a product that we're launching this year to help us address that along with other other sales and marketing strategies associated with that.
So.
So I think.
Let me just back up from that specific answer than just to say I think one of the strength of our siding business is the diversity of channels that we sell into and the divert.
The strength and diversity of our product.
Portfolio, we're just we're not solely dependent on growing lap siding.
Because of our position in panel.
So it.
Dependent on growing panel because of our position in <unk>.
And then as we add products like pre finish and shakes it expands and Diversifies our product portfolio.
We can we can take advantage of opportunities when they arise in these different segments.
That really has been historically, a long term historic strength of the portfolio and I think it's going to serve us well as we expand it in and look at further market penetration and this good market environment.
Got it.
Helpful color and then.
I guess my second one when you talk about perhaps accelerating the cycle of conversion. If we were to see OSB markets remained strong not necessarily kind of where things stand today, but they remain strong how would you think about potentially back filling.
What type of <unk>.
SB capacity you'd lose with the Golar.
Well.
Just to remind you Curt that was that was <unk>.
<unk> thinking around part of the justification for restarting pace Valley was the the integrated way, we looked at capacity expansion across the two businesses and so.
We feel like we're addressing especially the customers in that Midwest part of the country that we can access from based valley. So.
With Peace Valley startup planned for later this year second half of this year, we want to have that facility up and running fully by the time, we start bringing <unk> down so that that was really how.
We are addressing it is through peace valley on startup and then continued improvement across our entire OSP network.
But we're really focused on the growth in siding.
And.
And so golar as the next great idea in front of us as far as doing that so we're pretty single minded in getting that mill up and running as quickly as possible.
And our expectation is that our <unk> market share, though will be protected by the startup of peace Valley.
Got it Okay makes sense good luck here in Q2.
Thank you.
And our next question coming from the line of Mark Connelly with Stephens, Inc. Your line is open.
Hey, Good morning. This is John rider on for Mark.
So first question when you look at this period of tight supply in OSB has it changed your thinking about how OSB inventory should be managed by their on your side or between you and distributors.
And as working capital gotten too lean here.
Theres no cash there's no question that working capital has gotten very lean and one could argue too lean.
If we if we being us and our channel partners.
Had been able to foresee the rebound.
And product demand in May and June July of last year, obviously, we would not have taken the mill downtime that we've taken and I would assume our distributor partners would not have brought their inventories down as well so I don't.
I don't know if this will change the way the industry looks at inventory management.
On.
Because.
I think we're all trying to rebuild inventories back to some kind of normal level, but it is it is on.
As evidenced that the caution that went into.
The cash generation mindset that we all had.
In late spring of last year early spring of last year.
Is really.
Could it put us in a position to struggle to keep up with demand. So I think it's more.
At nominally.
And then a long term.
Change in philosophy around working capital.
Okay. Okay, that's really helpful and then.
Then.
We're hoping you could talk a bit more about your ESG programs were.
Seeing rising scrutiny of environmental claims, particularly in Europe, right now and you clearly have a good sustainability story.
We're curious what sort of ESG targets, we have set for OSB and siding and how you think you stack up on the.
Nothing material space.
Well, let me, let me start by saying I think we stack up very very well given given our footprint.
The sustainability of our wood procurement.
Mindset of our strategy and we are working on.
Right now.
Setting some other type of ESG environmental targets and we're in the data collection out right now because obviously this will be a data driven exercise for us.
We are we are focused on it we have reconfigured our board committees.
Provide board oversight.
To this and are seeing.
The ports.
Dissipating and then setting high expectations for advanced from Bayer. So we will be coming back later in the year to set set out specific targets around.
Other ESG parameters other than just wood procurement sustainability.
<unk>.
I will mention just from concept standpoint.
We have a really good story you know when your when Youre nailing siding on the side of the house for the fifth year warranty or your sheathing, our house from nailing a sheet of carbon.
The house so we're.
I believe we won't have a really good story.
One on make sure that the data that we reported is accurate and ended the goals, we set a reasonable and something that we can we can do in and deliver on.
But that work is underway and.
If youll give us another quarter or two we will we will be back with a robust discussion on that before the end of the year.
Yeah.
Great. Thank you.
And our next question coming from the line of Paul Quinn with RBC capital markets. Your line is open.
Yes, thanks, very much good morning, guys.
Hey, Paul.
And it just wow, what a quarter, but.
Yeah.
Even more robust in Q2, just maybe start on the smart side.
Business just wondering what your what your.
That order file is it thats drawing that you would have a potential for a second price increase in 'twenty, one or is that something you don't want to do and you really want to gain market share.
Well theres pricing strength in the product offering right now.
And so I mean on price increases something thats always on our mind would be clear about that.
There's various ways of getting that and one of them kind of hinted to earlier on the question about the price realization is working on the backend rebate part of it.
And so.
I'm going to say, we're taking advantage of the strength.
Demand strength right now to manage prices I think appropriately, but we have to be competitive and while there can be short term.
Opportunities for pricing at the end of the day in most all cases were essentially going to get bid against the competitive substrate and so.
Maintaining our competitive position even in the time of tight demand is something that we're mindful of especially with a builder at least.
The agreements.
At least multi quarter, if not multi year and so on.
We are focused on.
Maintaining a competitive price situations because we are focused on on gaining.
Gaining market share.
On a non being a little bit too faced on that answer because we also take advantage of it whenever we can get price we can get it but we don't do that foolishly and we want to make sure that we maintain our competitive position and that our distributors from dealer partners can be competitive as well. So it's a balancing act I guess is the right way to.
To answer it and it's something that we're really.
Managing daily.
Okay. That's fair and then just on the margin uplift in <unk> and smart side was pretty impressive is that solely to do with.
The higher percentage of pre finish or is that is that is that cost reductions in the segment as well.
Okay.
We've had.
We run the facilities full out now and.
The operating leverage for the OSB and siding both is very strong.
Paul on the margin.
<unk> million feet of.
Product is the production that we sell out of siding.
Very high margin so.
It is it is.
Really amazing what the what the mill profitability can be.
Youre sold out and running at full production.
So it's it's.
<unk>.
The price increase certainly helped but.
<unk>.
Overall operating efficiency is a key to that.
Okay, and then just over on OSB, you've got Peace Valley, starting up in the second half of the year, maybe you could give us an idea of what kind of volume do you expect to.
He would be able to ship to the market in 'twenty. One is that can be a slow start or a faster start and then <unk>.
See if you can give us.
Date on in Tegra.
Yes, so we're looking at about 150 million feet in Q3.
I'm sorry for in all of 'twenty, one out of Peace Valley. So for the second half of the year 150 million feet.
And then in Tegra, we continue to be very pleased with the order file at Integra.
We are in the process of validating the models are getting that ever increasing order file through the facility I think a challenge for us there.
I will say.
Spend on one part of our business, where labor availability as we startup that facility has been a little bit more a lot more of a challenge in our more mature facilities, maintaining a work force is what I mean.
Then on that from a profit standpoint that business has been challenged by the rising lumber prices.
Free months.
With the builders have a lag on the <unk>.
Paas growth.
And that's been that's obviously hurt us but.
Market validation pulse.
Paul is very solid for Integra, we're still figuring out how to how to meet the order volume continues to rise the way it has.
So aggressively and then we're also trying to figure out how to properly price the product on these kind of highly volatile times force lumber price.
But I'm encouraged by what we're doing strategically there.
But.
But we're still it's still a startup business thats for sure.
And Nomura immediate capital required.
No we do some minor working capital.
Provisions for them, but no.
No immediate capital.
Any way meaning.
Yes.
Thanks, a lot Brad.
Youre welcome.
And our next question coming from the line of Mark Wilde with Bank of Montreal. Your line is open.
Good morning, Brad Good morning, Alan.
Hey, Mark.
Brad I'm just curious if you can.
Just thinking about the OSB market overall right now.
If we were to see housing starts continue to move up and let's say, we moved up to 2 million starts is the capacity there to serve 2 million starts.
Yes.
No.
The capacity.
After that startup of peace and shambaugh would be.
1617, probably so we're looking at that.
So yes.
When you think about it this way more in 2007 2006, the industry was serving two 2 million.
Start.
Housing market and we have shut we shut down.
And didn't start back up two or three facilities.
And converted.
Three years or so to siding and then look at all of the permanently shuttered plants.
No there hasnt been on <unk>.
All said and Greenfields.
Get us back to that level. So the industry's more of a 151617 with creep taken advantage creep in there so.
It could be it could be tight for a while.
Okay, and just remind me like 100000 starts is what like a 1 billion and a half square feet.
Yes, Mark this is Eric.
Two rules on to keep in mind are about 100000 starts consumes about 1 billion feet of OSB and you have to adjust that from the single family mix. So a single family start consumes about three times as much OSB and siding is on multifamily start.
So the market we're in right now.
Single family mix north of 70%.
Do you want to adjust that 1 billion feet per 100000 starts upwards, a little bit too to account for that.
Okay, and then Brian just curious I mean.
We're so far beyond anything that we have ever seen in terms of both lumber and OSB pricing are you guys sensing any areas in the Mark on where you think there is some demand disruption taking place or demand deferral, taking place right now.
Well, yes demand deferral, yes, I think there is there is.
I mean.
I know, a guy who wants to build a dedicated on it.
Build a deck until lumber prices come down so I guess there is one person.
The buy in a job.
Typically no.
I do think that there is an issue around that from an affordability standpoint from projects.
Four.
And then maybe even some housing starts.
I think there could be some housing starts deferred just from an availability standpoint adult currently believe there is demand destruction going on yet.
That export.
Panel exports as a little bit more coming in than in the past most other local markets are pretty strong we're starting to see on that in South America.
Believe it's similar in Europe, and so I don't we haven't hit yet is any kind of substitution threat.
But I think we have to we have to be realistic and think there probably is some deferral happening either due to affordability or lack of availability of immediate supply.
Okay, Alright, and then last one from me I, just I think a quarter or two ago. You mentioned that you were trying to do some of the downstream products.
Siding products down in our Latin American business, just any update on the.
The uptake of those kinds of products on the Latin American market, I know kind of changing building preferences changing building codes as net or is it an easy thing to do.
Yes, So let me.
We are actively working that in Brazil.
It is harder.
Chile the building code to have adapted so we're that's not a constraint in Chile.
And not in Argentina, either but in Brazil, certainly is.
Just quickly to explain that.
It is highly local and per sale. So you can't like do a macro change in build it is harder to a macro change. So you end up having to kind of almost project by project basis.
What we would consider change of code.
What's required down there we've got a team working on that.
And.
If successful, but it's slow.
In Chile.
<unk> codes were not an issue as far as that conversion.
But our focus down there has really grown our farm side business.
Because of the fact that we've been capacity constrained in the past and the margin for OSB have been really good down there historically.
We really havent had.
EBITDA incentive to growth siding, but as we've increased press capacity down there. It's opened up some opportunities for us to look at expanding the portfolio.
We've always felt siding down their startup.
20 years ago, it really hasn't been as much of a focus areas is going to be on the future.
As we've grown our market share for sheathing.
We are pushing up against some some constraints there.
And we see a siding is the next really good growth platform for stand on South America.
Perhaps achieving moving more of our growth with the market versus growth in market share.
Okay. That's helpful. Tom on encouraged.
I'm encouraged by our opportunity there, especially.
The other.
Kind of put a period on that.
We're very underpenetrated in Archer, Argentina, Peru, and Colombia, which are which do have.
Use wood construction. So we got there also is a geographic growth element to our strategy down there.
Okay very good thanks.
Mhm.
And our next question coming from the line of Mark Winter with Seaport Global Your line is open.
Thank you one quick follow up.
Got it pretty incredible variation geographically in OSB pricing right now.
The random on at least Western Canada, <unk> hundred a couple of regions more on the 1200 some regions in the 1000 type area any thoughts on why there was these enormous spreads any implications.
Yes, Mark. This is this is Aaron as you know that in.
More typical times when you see regional spreads start to open up.
OSB gets shipped around the continent to address those arbitrage opportunities.
And that happens when there is available there.
Demand is so strong and just about every market that's consuming OSD now that there really isn't as much there isn't enough available would to address so in more normal times.
If we saw prices is different region to region you'd see a wave of OSB heading west to satisfy this marks the only way that's possible now as by starving building in the southeast.
And so it's just less possible now.
Yeah.
So why and why wouldnt prices in the southeast et cetera, why wouldn't they just quickly go towards that $600 price in Western Canada.
So they typically would.
In an environment, where wood with leaving the southeast to satisfy the western the west coast demand that would create scarcity in the southeast and those prices would tend towards equilibrium.
But but that phenomenon is less likely to happen in an environment, where there is so little available product that there is an extra to ship.
That's just all contracted out.
Exactly going on now.
Part of the other issue Mark is that the.
Sure.
The product is so scarce.
Open market transactions themselves are less common which means that there's less data to be reported which means that.
Further reduces the opportunity for for that arbitrage to be recognized.
<unk> and prices.
Got it thank you.
Yes.
Okay.
Yes.
Well with no further questions.
That will have a question will end our conference.
Yeah.
With no further questions. We will end there. Thank you for joining us to discuss our results from first quarter of 2021.
We'll look forward to talking to you soon have a great day and stay safe everyone.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
Okay.
[music].
Okay.
[music].