Q2 2021 Louisiana-Pacific Corp Earnings Call
Patients.
[music].
Good day, and thank you for standing by and welcome to the Louisiana Pacific Corp, Q2, 2000, Antonio 1 earnings 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 the question. During the session you will need to press star.
For 1 on your telephone please be advised the today's conference is being recorded.
And the require any further assistance please press star zero and.
I'd now like to hand, the conference over to your Speaker today, Erin Cobalt Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. Thank you for joining us today to discuss Lp's results for the second quarter of 2020, 1 as well as our outlook for the third quarter. My name is air and hotel and I'm Lp's director of Investor Relations I'm joined this morning by Brad Southern Lp's, Chief Executive Officer, and Allen Hockey Chief Financial Officer and.
In addition to this morning's conference call, we're hosting of simultaneous webcast and we have uploaded the presentation to which we will refer during the discussion. We also filed our 8-K. This morning with some additional information all of these materials are available on <unk> Investor Relations website, Www Dot investor The LP Corp Dot com.
Slides, 2 and 3 of the accompanying presentation provide notices and detail regarding forward looking statements and non-GAAP financial metrics. The appendix of the presentation also contains the necessary reconciliations that are further supplemented by this morning's 8-K filing rather than read these statements I incorporate them herein by reference and finally in today's discussion and materials.
We refer to siding solutions, where he would previously have said smart value. This is and expanded descriptor, which in addition to smart side also includes newly developed and exciting products with different branding I should stress that this modification is consistent with and therefore does not require any recasting of the.
Previously reported growth numbers for smart sidestream side of it and with that I'll turn the call over to Brett.
Okay.
Thanks, Erin and good morning, everyone. Thank you for joining us to discuss <unk> results for the second quarter of 2021.
Q2 was another remarkable quarter for LP building solutions all of our segments set records for sales and EBITDA and the second quarter with over 150000 of housing starts and June single family of mix over 70% and repair and remodel and the state equally robust. We are encouraged the demand for <unk> products remain very.
Strong.
Because of all sales slide 6 of the accompanying presentation net sales for Q2 reached $1.3 billion.
More than 140% over Q2 of last year, which was of course of weak comp due to the onset of COVID-19 EBITDA.
The EBITDA was $684 million generating $457 million and operating cash flow.
And $4.74 and earnings per share.
So adding solutions growth as a significant component of these results. The slide 7 illustrates siting solutions includes prime the Prefinished smart side as well as innovative strand siding products sold under other brand names and.
Revenue for siding solutions grew by 39% compared to last year. This is composed of 27% volume growth compounded by 9% price growth.
In addition to market penetration and share gains, citing is growing through product innovation.
Most innovative and of value added subset of siting solutions, which include sports sides smoothed shakes and expert finish and Lp's, new builder series siding combined for 9% of total volume in Q2.
This is compared to 6% last year and these new products contributed more than a point of the 9% price increase.
And for Lp's OSB segment extraordinary prices generated impressive cash flows, but also overshadowed important gains and structural solutions volume.
OSB prices have pulled back in recent weeks and we have not wavered from our strategy of growing structural solutions and supplying market demand with the agility.
In fact, and Q2, we grew structural solutions as a percentage of total OSB volume by 5 points compared to prior year.
While not driving our strategy of OSB prices do of course continue to be a significant driver of lp's cash flow and share repurchases.
Which Alan will update you and a few minutes.
LP South America segment also had a very strong quarter with OSB and siding price increases more than offsetting raw material cost inflation and south American sales, almost double and EBITDA tripled compared to last year.
Let me briefly update you on our capacity expansion projects, beginning with the siding conversion and host.
While the zero calls, particularly steel have been subject to inflationary pressures of the project is on schedule and.
We expect the began smart sop production halted and late Q1 of 2022.
We continue to work to accelerate the solar conversion and where.
We're currently planning the storage smart side of production, there and the first quarter of 2023.
Finally, we are implementing projects to optimize our production and distribution processes that should result in incremental gains of production capacity across our mills.
As for Lp's Peace Valley, OSB Mill I'm happy to announce the Peace Valley price is first board of OSB and late June.
We have received EPA certification and are shipping product, including tax shield radiant barrier the significant contributor of the structural solutions growth.
The thank the team that maintained peace valley, so diligently while it was idled and congratulate them and everyone else, who contributed to the safe and efficient resumption of production of Peace Valley.
And previous quarterly calls I have discussed shortages of resin and adhesives as well as lp's operational responses to mitigate the impacts of these disruptions.
As the broader economy continues its uneven recovery, we expect intermittent supply chain challenges to continue LP strategic sourcing team is working diligently to minimize disruptions. This includes collaborating with our operations teams to allocate any scarce inputs consistent with our transformation strategy as we did with M D.
Hi, Rez and the first quarter.
Most categories of raw materials, and they'll pay consumed saw significant price decreases and 2020 as demand for oil and sectors of the economy more severely impacted by Covid and housing.
Many of those sectors are now rebounding, but the result, the demand and therefore prices are increasing and so.
Some cases availability has been hampered by supply chain interruptions elsewhere as was the case with certain resins.
Raw material prices are now back of 2019 levels or in some cases above.
Consumer and producer price indices is generally trend upward.
The situation is fluid we expect these inflationary pressures to persist for some time as the U S economy recovers and grows.
Before I turn the call over to Alan to review, our financial performance in more detail.
To briefly preview some planned enhancements to Lp's ESG disclosures.
We recently completed environmental product declaration for sports side siding, we believe the smart side looks and performs better than competing alternatives we have.
Also believed the data shows that smart side of significantly more sustainable with a much smaller carbon footprint.
And coming quarters, we plan to disclose additional information and the sustainability accounting standards board of SaaS the framework.
Sustainability is central to our transformation strategy and LP. We believe we have a good story of detail and we look forward to telling you.
With that and I will turn the call over to Alan for more detailed discussion of Lp's financial results for Q2 and update on our share repurchases and our outlook for Q3.
Thanks, Brad and good morning.
As Brett as already said all segment set new records for revenue and EBITDA and the second quarter.
<unk> solutions revenue grew by 39% and OSB and AWP prices was significantly higher in both north and South America and <unk>.
Direct sales for AWP, and the El PSA doubled compared to last year with the combined EBITDA more than tripling.
And the Integra delivered a record 324 units for $22 million of revenue.
10 fold increase over the last year.
As a result LP generated $1.3 billion in sales and $684 million of EBITDA.
$457 million of operating cash flow.
And $4.74, and adjusted earnings per share.
Hey, Jay 2 of the presentation summarizes the year over year comparisons from revenue and EBITDA at the high level.
And inflationary pressures and wages raw materials, and freight, especially when compared the softer prices last year produced and EBITDA headwind of $24 million.
Maintenance and other spending accounted for the remaining $71 million.
The waterfalls on slides 9 and 10 show year over year revenue and EBITDA comparisons for the siding and OSB segments.
Siting solutions saw volume growth of 27% price growth of 9% from revenue growth of 39%.
This generated an additional $81 million of revenue and $53 million of EBITDA and incremental EBITDA margin of 65%.
Notably the 9% and price increase and the quarter includes full percentage points from annual list price increases and 3 points on the bank debt that is from reduced discounts and rebates.
The highest value added subset of products, which includes expert finished smooth shakes and build the series punches well above its weight in terms of price accounting for just 9% of total volume, but over 100 basis points of the year over year.
The price increase.
The $4 million, increasing the selling and marketing costs represents the ongoing return to pre COVID-19 levels of spend consistent with our growth strategy and reflects the anniversary of reductions made last spring.
With OA.
Still impressive 88 percentage of total siding transformation impact is $81 million and revenue of $50 million and EBITDA.
Costs associated with the <unk> conversion and making the first defense and this waterfall with $1 million into it and the second quarter.
We have the last vestiges of the discontinued find the sales this quarter with $10 million less revenue, but only $1 million less EBITDA.
This brings us to second quarter revenue for the segment of $291 million and increase of 32% and EBITDA of $77 million and increase of 51% for and EBITDA margin for the segment of 27%.
Slide 10 shows the quantity and more detailed for OSB and it's obviously not the scale as OSB price increases dwarfs. The other elements of the waterfall, adding $554 million and year over year revenue and EBITDA.
Volume was up about 8% driven by structural solutions growth.
Hi, unscheduled downtime reduced OE, each of 86%, which contributed to the $18 million unfavorable production costs.
The OSB segment was also impacted by input and freight cost inflation and lastly, the restart of peace valley cost of $7 million and the quarter.
The net result of these factors dominated as I said by price.
Increases in sales and EBITDA of $574 million and $519 million, respectively, and yet another quarter of extraordinary cash flow generation.
As Brad mentioned and as Youll seen supply chain interruptions of impacting many industries and some cases, those disruptions and building products, specifically and I know that the impact is more widespread particularly when it involves pre cost of materials consumed upstream by our suppliers for the suppliers.
Freight demand has also increased driving costs higher.
All of which is reflected in the siding and OSB waterfall charts to the tune of $8 million for raw materials and $12 million for freight across the 2 segments.
Recall that last year, so significant drops and the same cost categories from which the housing industry benefited from demand elsewhere drops now of the broader economic recovery is underway raw material prices of flattened and are climbing.
On a blended unit cost basis, non wood raw materials were down about 6% in 2020 compared to 2019, but are now up about 13% and 2021 compared to 2020.
This represents and inflationary CAGR compound annual growth rate of about 4% over the period.
We expect inflationary pressures to continue and they are reflected in our third quarter guidance.
1 of the potential contribute to supply chain concerns of the fires in British Columbia, and elsewhere and the west so far our employees and facilities of safe and we've seen minimal interruptions to inbound and outbound and shipping.
We will of course continue to monitor the situation closely the safety of our highest priorities.
Let me turn to Lp's capital allocation strategy, which remains to return to shareholders over time at least 50% of cash flow from operations and excess of investments for clients to sustain our core businesses and growth siting solutions OSB structural solutions.
And the second quarter of 2021, we returned $481 million to shareholders through a combination of $465 million and share repurchases and $16 million and dividends.
Furthermore, since the end of June we spent an additional $140 million on buybacks.
Leaves $572 million remaining under the current $1 billion authorization.
And since helped the embarked on its strategic transformation. We've returned over $1.8 billion to shareholders repurchasing more than 50 million shares and bringing the current share count so a bit on the $95 million.
In order to consistently reflect the ongoing signing growth from the decrease in share count driven by aggressive share repurchases L. B has declared a midyear increase and the quarterly dividend of 13% or <unk> <unk> per share raising it from 16th of share 18 cents per share.
Slide 13 shows updated guidance for full year capital investments as well as revenue and EBITDA guidance for the third quarter.
We now anticipate spending $95 million in 2020, 1 and so the whole and conversion and increase of 10 million of of prior guidance largely due to increased costs for steel labor.
The remainder of the project costs will be incurred and early 2022.
Spending for the growth capital is expected to be $45 million, and we anticipate spending about $120 million and sustaining maintenance for full year total capital outlay of $270 million.
This assumes continued easing of travel restrictions and contract and availability the reversal of which could result in some execution risk.
Which brings me to the revenue and EBITDA outlook.
For <unk> solutions for the third quarter should see year over year revenue growth of around 10%, which would be another quarterly record despite the much stronger comparator.
This will however, and bring the business very near to full production capacity with the result of revenue growth for the remainder of the year will be primarily driven by price increases and mix shifts.
And if we assume 10% year over year revenue growth for the second half of this year, citing solutions revenue growth will hit 24% for the year, which is double of long term guidance.
The combined effects of the Hilton conversion out of the growth projects increased selling amongst the investment and input cost inflation will result in third quarter EBITDA being below last year's.
But on a trailing 12 month basis still.
And still expect the EBITDA margin to meet our long term guidance of 25%.
For the ISP segment, although prices of exceptionally volatile right now our order file gives us some near term visibility.
We also tend to lack of price movements, both when Theyre ryzen.
And when they are falling with the.
Therefore, guiding to OSB revenue being roughly 10% sequentially lower and the second quarter.
This includes the assumption the random lengths prices stay flat from last friday's print throughout the remainder of the quarter.
And while this is obviously not the prediction of future OSB prices, we hope it's a useful characterization of the impact of price movements. So far.
And so with further caveats about the sudden changes in demand raw material price and availability of the unforeseeable events, we expect the EBITDA for the third quarter to be at least $513 million.
Which will not be another quarterly record for LP, but will be second only to the quarter. We've just finished reported.
And with that we'll be happy to take your questions.
As a reminder to ask the question you will need to press star 1 on your telephone to withdraw.
All of your question press the pound key.
So you please limit yourself to 1 question and 1 follow up question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of John Babcock from Bank of America. Your line is now open.
Hey, good morning, and congrats on the quarter and I guess.
Sorry, now I was wondering how youre working with signing customers in light of some of the capacity constraints you have and the second half of this year.
I mean do you expect some of those customers to go elsewhere or might this demand shifting to 2022, when you hold and running.
We can provide and that would be useful.
Great question, So we've been working really well.
Allocated order file.
Late last year.
And so we've done a really good job of interacting with customers and understanding their order needs early in the early in the process.
And the producing to those orders and and allocating that the volume across our entire network.
And given the our ability to grow the volume even under.
And that manage order file scenario I think we've done a really good job of meeting our customers' needs and I'll say what hasn't happened Jon is from customers have been unable as we have.
2 brief to bill any kind of safety stock for extra.
Thanks for inventory either at or below patients for and the channel we've been running and our customer has been running sort of tight.
No.
Feel good about our ability to.
Provide product into the market.
But we haven't been able to do since the Covid shutdown in Q2 of last year.
And build safety stock and.
And the extra inventory and the channel.
So and so even though.
The quarter over quarter.
<unk> moderates, we're still selling high volume of siding. So I feel good about our ability to source of the market.
And until we get the Houlton mill up and running supplying extra net for production.
And I don't believe at least our distributor level.
Any significant substitution going on and I think we've got a really good focus on making sure we supply the distributors the skus they need the source.
Provide the product in the local markets.
And if there were some any substitute substitution happening it would be a deeper and the supply chain and.
Deal directly with if there is.
The product shortages.
The build of our contracts level.
Based on our growth.
And I feel really good about.
The meeting the level of demand.
And that our product is enjoying in the marketplace right now of supply and it will be a little bit restricted to growth now and Bob.
Year over year growth until we get holton up and running.
And when you look at the step change, we've made and volume that's going into the market on a quarterly basis and feel really good about where we're at.
Okay, that's very helpful and.
And the next question can you just talk about the demand environment and what's the right now we're across the customer inventories are and the channel and your initial thoughts on the sharp drop in OSB price of the last week and where do you think the market is going from here.
Well I certainly we can provide some extra compromise on what's been published and random around the weaknesses of retail and we have seen that certainly with our retail pulls were a little less exposed there than some of our competitors, but we still given our scale we.
Hi, good bit of volume into retail that has been very weak.
All of them.
And I'll tell you about half of what we think would be normal right now of some of that may be related to the fourth of July holiday season, but I do think spur.
Especially when you compare it to the prior 12 months or so on the consumer dollar buyback of 1 other places and the wood products aisle at home depot and lowes of versus what it would what was happening a year ago.
So we see witness there we have really not seen weakness and demand for our for the rest of our.
Channel partners.
But candidly there is some hesitancy and distribution now to take any kind of serious position given the fall and OSB pricing. There, obviously expecting that maybe that could biopsy for next week and they do this week.
So the.
And what we're what we're feeling and our order file is.
Distributors and just.
Buying to meet and very short term needs to just replenishment type orders and theres not a lot of anthem.
And those of you have some and the distribution channel.
Build any excess inventory given where pricing.
So even though some of the those retail pulls per week, which makes commodity volume available of the call.
All of the pricing falls, there's hasnt hesitancy and distribution to build inventory given the fact of.
And it could be cheaper next week so.
Basic and let me let me summarize the question the answer to your question this way.
Certainly we can confirm the weaknesses with retail poles.
But given the underlying strength of the housing.
And then really repair and remodel and the <unk>.
Well, we feel good about demand.
Exist and distribution.
There is a hesitancy of occupancy the recent trend of price.
Okay and then.
And I get that.
And the kind of brings me to the next question and I guess first of all of the congestion.
Talk about how peace valley as Brian It sounds like and you just started that up in June if you can.
The providing of sort of update on what sort of run rate you guys are at now and also here of having any trepidation of regarding the timing of that start up I mean, recognizing the.
I guess, there is some weakness and the retail channel but.
Overall, I mean is there sufficient demand out there to kind of keep that running and then and just kind of last piece of question and I think in the past you had said that he expected the maybe get around 115 of 200 million square feet out of that mill. This year, but I think that assumes perhaps a little bit later of the startup and the end of June so any of.
Dates on that.
No.
We're sticking with the $150 million to $200 million for the year, even though we started up as you mentioned a few weeks earlier than originally planned.
So we do feel good about our decision there obviously just 1 question for given the pricing movements. Since we started the build up but if you look at underlying the.
Housing start forecast and we feel good about 1.5 to 1.
1.6 and at least.
The near term view of for <unk>.
And it starts on the land.
And if you work the math on the half and truthful and EBITDA production. That's the reason we started it up I just want to reiterate.
And so we've said in the patent we did not start.
And not plan and of course Barclays dialing up the cost of current.
The current pricing at the time of the decision.
And the pace dialing up the calls we felt like the long term outlook housing strong enough, where we need to stop mill.
And our customer demand and we are.
We still feel good about that decision.
And we feel good about the near term outlook for housing.
For terming several years into the future. So we plan to continue to run that unit up to go away.
And we really believe that volume is going to be needed.
And with our channel partners next year.
And I'll just say yes.
And that that decision has been.
Very much supported by our channel partners to say the cycle playing out for the next several quarters.
Thank you see of need for that volume and.
And we're flat.
We're not backing off of that segment at all.
Okay, great. Thanks for all the details.
Okay.
And.
Thank you. Our next question comes from the line of Suzanne Mcclary from Goldman Sachs. Your line is now open.
Thank you good morning, everyone and congrats on a great quarter.
Thank you Susan.
And my first question is around the margins and siding.
And continues to progress and getting closer to being up and running can you help to give us some color on the cadence of how we should be expecting the margins to come through over the next couple of quarters.
Yes. This is Alan.
This 1 we will fundamentally see the.
The margin of at least the costs of the Hilton conversion hit at the margin and primarily in Q4 and Q1.
That said some of the shoulders of the year as mobile will experience those.
Those costs.
Thank you. Our next question comes from the line of Keith and Montara from BMO capital markets. Your line is now open.
Thank you.
Brian I was just curious you know and I look at it.
Kind of mentioned.
And the retail demand and OSB Eaton, we can barely hear you sorry to interrupt you can you can you address that question much better. Thank you. Thank you thought here sorry about that.
I was just curious how you're seeing.
On the retail side are you seeing of similar slowdown, even and siding or has that demand.
Held up better.
And good question, and we have seen a slowdown and pulse and slotting.
And that slowed down.
<unk> began later than it did and OSP and has not been quite as severe but it has it has.
Yes.
And back to John's question that has allowed us to allocate more production volume and the distributions since we're all of a match the work.
Gotcha.
Is it sort of more of kind of broad based and non fair enough.
Demand slow down or is it sort of more you know kind of distributors.
And looking to reduce the inventory position.
Okay.
Thank you.
<unk>.
We're looking at reducing their inventory position comes I don't think there was a lot of inventory and the channel and a penny.
Excess inventory and the channel at the beginning of the price fall and thank the channel and for mainly.
Over the.
All of this year, so I think from it.
For the distributor standpoint, its just the hesitancy to.
And to buy any more than what's absolutely needed given the expectation that you might have the pricing will be lowered of more than it is today.
And Thats, just a normal pattern that we see and anytime pricing turns down.
Best of instrument dramatically as the hazard.
The last few weeks.
Conversely keys, and when it's going up.
There is a lot of the stamp the Dubai.
The day clarify this call being higher for us So we kind of see that acceleration happening on both ends.
When the when the price language really stable and either up or down.
Did that answer your question Keaton.
Thank you. Our next question comes from the line of Mark Weintraub from Seaport Research. Your line is now open.
Thank you.
I Wonder if Kevin's question was a little bit more on the siding side by the actually and and whether or not.
The the weakness was perhaps the distributors pulling back inventory, which I assume not so much the case, but and that same vein.
Are you seeing anything and the shed business, which I guess is a bit more DIY sometimes.
So mark that's a good question and.
Certainly.
And let me make sure I want to make sure unclear about.
Answering the question on signing question.
And so for siding.
As we mentioned the retail calls have slowed not as dramatically as and OSB.
And there are.
I'd say the shed a lot of share smaller shed manufacturers do source product from retail.
I am sure. There is that has contributed to the slowdown, but I want to say Conversely for our larger more national or regional share manufacturer for share of distributors. The coals remained strong.
The weakness has really been only.
And the segment, we would call of DIY.
That segment does include some of the outwash it production got it.
Yes.
And I'm going to cut off of I don't jump and real fast.
The real quick.
Also when you were talking on the OSB.
Assuming that prices are flat here does that reflect the kind of debt thats as good as I guess as any or is that just methodological and you're you're not.
Maybe asking the question differently and what is your.
The best guess as to what's going to happen in OSB and the next month or 2 and what will be the key drivers to look at.
Yes.
Well, the key driver supply and demand.
Mark on the milestone I'm not comfortable at all forecast and pricing.
And so so that's.
And the answer to the first question is it just the method of providing the guidance that we did we had the anchor OSB pricing somewhere and so we exited all of the last published.
Random lengths and then I guess.
And I would say for from you guys are trying to forecast the quarter you have to the overlay your expectations for what I was the pricing will do the rest of the quarter.
At the.
The variance for what we have guidance.
And.
From a spoke towed.
And how we see channel inventories from us.
And how we see our.
Feeling as far as the quarter pulls from retail.
And that's really.
And this kind of conversations of comfortable having but I'm not comfortable and translate that into the price for us.
Understood I appreciate it thank you.
Yes.
And let me to say for for those that did not get the ask a follow up.
Get back in the queue, we'll be happy to typos.
It's not our intent is all of the.
And people from good follow up question.
Thank you. Our next question comes from the line of Sean Steuart from TD Securities. Your line is now open.
Thanks, and good morning.
Question on the Capex guidance the $270 million.
Figure for this year is up a little bit from the midpoint of the range you provided a quarter ago and it looks like most of the increment is is.
And as higher sustaining maintenance capex.
And I'm wondering if you can give us context, if that's just general cost inflation feeding into that if there was anything specific to this year is of $120 million.
The higher the number we should be thinking about it is the the sustaining part of that Capex going forward.
Yes. This is Alan.
I'll take that 1 does is it the good.
Question, there are 2 factors playing into it 1 is and.
Inflation and the other is the scarcity of availability of engineers and contractors. This is causing us to pull ahead whenever we.
We feel that we can to secure the necessary expertise and the work. So there's a little bit of both factors really fundamentally caused by the same economic conditions for the expansion at the moment.
Okay, and just a quick follow up.
Engineered wood products, and South America, and both strong top line growth there as well for those segments. This quarter and those are less transparent markets can you give us a sense of how prices are trending into the third quarter for those segments.
Yeah. So let me start with AWP, that's the price list and not.
<unk> products and our products here other than.
And do self supply of within that segment.
By far and put our LVL and and I voiced our analysis of our sort of off price list.
And we've done a good job for us.
With our margins there given the price inflation on the input material as well.
While for OSB.
For the year.
And typically we're able to offer from the some of that as prices are falling.
Kind of like OSB prices the way of flags.
So and the near term feel good about price and there, but obviously as input prices continue to fall a little bit of competitive pressure.
And our AWP segment as the go forward.
This competitive pressure to maintain some rates.
Reasonable margin level and.
And South America, it's really interesting market down there typically and our 20 years of experience of OSB price I guess is much more stable.
And.
And while we've enjoyed good price it down there this year.
<unk> been the magnitude of price decrease seen in the states.
And obviously, the kind of price and we've seen the North America.
<unk> influence for.
And the ability to get pricing and South America and a little.
Easier.
But if you look at the past, it's been a lot stickier as well.
No.
And we're in new territory, given the magnitude of the price.
Change in North America over past years of kind of hard to predict.
And for that.
What that cash.
Foreshadows for South America, but I will say in the past for the network.
To maintain price and once again I won't get it.
But I do feel like at some point, there could be sort of competitive pressure down there.
<unk>.
From North America price to go down there.
Price involves a lot.
And I think for the near term several quarters, where and really good shape from a margin standpoint, and South America.
And then just like 1 of the comment the here. We're also running of that operations, probably as good as we have and 2 of 3 years operationally.
The cost position down there other than.
There has been raw material price increases, but our mill system is running.
And as well as it has and a long time and we're doing some investments down there to make it even better so the the <unk>.
Mid term outlook for <unk>.
South America business is really good.
Thanks for that detail much appreciate it.
Sure.
Thank you. Our next question comes from the line of Paul Quinn from RBC Capital markets. Your line is now open.
Yes, thanks, very much morning, guys, maybe just start and siding and yet it sounds like customers will be almost from the allocation until you get holding up but where are you guys. In terms of your pre finishing capacity and is that something that you need to spend some of our money onto the increase that capability.
Well great question.
We did review that with our board last week and got approval for continued expansion of our pre finished capacity both.
Within some of the facilities that we're currently manufacturer and we're looking at growth and the northeast.
We're actively looking for location there.
Startup of Prefinished operation the service of our northeast segment and.
And in conjunction with the houlton expansion or hoped and conversion.
And so the bulk of the growth has been phenomenal.
And.
It has stretched our capacity and pre finished.
Unfortunately.
And that's part of the sustaining growth capital that.
Alan talked to on the slide.
And the incremental investment required there is and the world and the world of OSB and siding convergence.
Relatively small.
And we're learning kind of the technology that we want to utilize and on pre finish if you recall.
First 2 for rise where through acquisitions and those too.
For our companies had different systems in place. So we're in the process of standardizing that across our platform and.
And as I mentioned.
And of the Greenfield facility and the northeast.
There will be continued investment and pre finished as we grow it.
And we should be talking about that many years of home and we're.
Well on a white of our second phase there.
We I would say the the acquisition.
The strategy that we had it was really testing our ability to make.
Mike of products sell of product and market the product we feel really good about all 3 of those sites right. Now so we're really doubling down on our prefinished strategy and feel really good about our ability to grow that profitably over the.
Over the long term.
Okay, and then over at 1 of your competitors and the siding side has come up with some pretty innovative product lines.
Particularly 1 with the stucco right now and look to do breakdown of the way is that something that you guys have looked at and the ability due to the morph and a different.
Look alikes.
Yep.
We we had of stucco panel.
Several years ago, we're not selling and tactically any longer.
It was.
Really mid 2 product, but required some pretty sophisticated.
Contract for learning.
And so we struggle from.
The final finding time to get that.
The training in place and and.
The contractors are converted over to that system that was there was would have been very economical of required of pretty substantial change and the way the stockpile material supply.
Probably weight per day.
And that answer so forgive me, but.
But that is something that we have looked at we decided the 12% and other areas.
After our trials being the big opportunity for us but.
No and certain regions of the car.
For the stock goes up as a predominant of siding and and.
And I would say we are not in a position from now and capitalize on that we're way more focused on the pre finished and ancillary products around pre finish like corner pieces and that kind of thing and then our second focus area right now is really.
And our penetration with the big builder and with our builder series, citing that we launched this year, we believe really gives us the competitive advantage with the big builder.
And so that's that's where we see the.
The significant growth coming over the over the next several years for us.
Great. That's all I had good luck guys. Thanks.
Thanks, Paul.
Thank you. Our next question comes from the line of Kurt Yinger from D. A Davidson your line is now open.
Great. Thanks, and good morning, everyone.
I just wanted to follow up on the pre finish side could you just talk about what percentage of of your pre finish volume you internalize now and then.
About the long term opportunity there what kind of makes sense in terms of.
And your own pre finishing capabilities versus what you might still want to lean on your channel partners in terms of that product.
Yes, that's a good question.
And last year, and our Investor day and.
Our long term target is 30% of our mix of being pre finished.
Describe a little bit how we see that playing out over the next several years so.
We have gone national.
Moving to cite the caveat that primarily focused in the east.
We do have.
We are expanding sort of in the west.
Without with the standard color palettes.
11 of 12 colors under our export finished brand that we feel like us and makes us.
Very attractive partner for regional and National 1 set of distributors of 2 step distributors. So this is a national play with the standard color set.
Net.
The backhaul the LP brain on debt.
We think really positions us well to grow percentage now behind that and the east Theres always going to be of market for custom colors and.
Even.
And some skus that we manufactured from.
And we're not pre finished.
So we're working through is partnering with the local pre finishers to be that.
So the top supplier and partner the cycle too.
Through the through the custom color of the science.
Primary.
Mitch Thank you Phil for Us and in some cases pre finishers are actually selling our <unk>.
11, and 12 standard of colors, and and supplementing their production.
Supplementing that with their production with the cost and colors and the west right now.
Pretty much all of that is being all of our ex.
Expert finish and all of the custom colors are being serviced by independent pre finishers, so but and the east we are trying to keep all of that export finished production in house.
So I could see of playing out the way or we have a big net.
<unk> network and good manufacturing around expert finished to supply the national market, but always have some position with local pre finishers that are doing custom colors on our substrate.
And I'll just 1 other 1 other caveat for that for that answer is I would also think that will also be pre finishers the choose just the independently.
Pre finish our prime product under their brand name and.
And sale of that as well the <unk>.
Substrate is so easy and such a good substrate the pain that is.
And it currently is the substrate of choice for the independent pre finisher.
Got it okay, that's really helpful. Thanks.
And just on the strategic growth Capex of 45 million and this year could you just touch on any noteworthy projects within that and then I.
Separately as we think about the next couple of years.
How do you guys think about or plan for them.
I guess capacity creep or unlocking incremental capacity within the existing siding business is that something where you can gain kind of a low single digit percentage based on a certain level of spending or any color there would be great.
Yeah, So just as far as the 45 billion and.
Product for the products that are highlights there of 1.
We are pretty much automating the the manufacturer of the spark side shape product for putting that.
The capability and our plan and and Manitoba.
And it will be highly productive shakes for 1 of the most highest price highest margin products that we manufacture we're excited about the capital project.
Couple of project for memories about and for that $45 million.
It's the.
Hi.
Relative to the high cost finishing.
And the investment, but very high margin and returns.
<unk> automating.
3 dimensional corners, so we're taking trim and.
And making quarter pieces, so think of it of the 3 dimensional corner pace.
So of that capital is.
As part of the.
Our innovative growth and then talked about pre finished as well now on the second part of your question about how do we invest.
Beyond Holton.
The extra productivity first of all of Theres, some environmental projects, 1 of which we got approved and the passport meeting that frees up some capacity that was otherwise limited because of permitting levels of 1 of our mills and Michigan.
But also we're really looking at under this manage order file situation.
Of running the kind of.
The optimal optimal mix look like within our production facility and running.
If we're able to optimize the productivity.
Round, so that we get more volume out of obviously, we're able to service the market.
With more volume so we're really working with our customers to make sure. We can understand what they are skewed needs are and then we can work with them and a way that optimize our production footprint.
It allows us to get and let's just say a percent or 2 and we're talking about signing growth a percent or 2 incremental volume out that could be really meaningful in the quarter.
And.
And then and that is of all hands on deck initiative right now within our siding business given the fact that we will be capacity constrained probably up until the Q2 of next year when opens up and running.
With some respectability so so.
Let me just back up a little bit summarize the answer this way the.
The strategic capital other than mill conversions for siding or each of focused on product innovation.
And.
And typically for very high return Skus that we manufacturer or the tweet productivity. So that we can get more out of our current system and and we.
Still good about our ability to do that over the next several quarters to book.
To support the growth that we're seeing and our siding business.
Got it okay, well I appreciate all the color Brad and good luck here and the back half guys.
Okay. Thank you.
Thank you. Our next question comes from the line of Keeton Montara from BMO capital markets. Your line is now open.
Thank you.
Brad I had a question on siding.
If the if inflation continues to remain high as the move through the back half of the year how.
How do you think about pricing strategically you know, particularly and in light of non covering additional costs.
We are.
Great question, that's a topic of conversation and almost all of meetings with Korea and rapidly signing team obviously.
We're trying to.
Over the years B.
Consistent and our price increases that we brought out to the market input cost does and for the decision there.
The historical guidance that we've given around margin and forms that decision as well.
And historically.
And and years of high raw material price increases, we have and able to realize higher price and lets talk about historically.
Now.
And as.
Paul mentioned, we are in a very competitive environment.
And both from vinyl and from other hard sidings and so there is certainly the competitive positioning and component of our pricing strategy and it can be skewed specific and regionally specific and channel specific.
So while we have while all of the <unk>.
<unk> discussion is informed by raw material price escalation.
That is only 1 factor and so it goes into our overall strategy about how to price for each of our skus and each of our selling regions.
And so does.
Thanks for your question on cloud and some color of how we think about it yes. It did I do have a follow up though.
But that's helpful.
Brian on the AWP side.
A couple of quarters back and talked about looking at options any update there.
And so.
The actively involved with.
Evaluating strategic options.
And I guess the process this might be a little slower than I was hoping it with the 6 months ago.
First of all.
Announced this but it's active keaton and we're we're looking at alternatives and evaluating options there the focus for us.
<unk>.
We are.
And it would be easier if we didn't have somewhat of a self imposed constraint, which we're trying to hold the system together and we believe LVL and I joist together.
With under the <unk> brand, we know theres value there to our channel partners many of which are.
So our channel partners in Saudi and structural solutions, so that's probably causing.
And that got us a little bit longer as far as evaluating options because we do feel like.
There is some value to our channel corporate volume.
And the business together versus key cell and each individual plan off 1 by 1.
So we're being somewhat selective of 1.
The the.
The options that we're looking at for cost of that desire of ours.
Thank you at this time line is showing no further questions I would like to turn the call back over to Aaron <unk> for closing remarks.
Okay. Thank you everyone seeing no more questions. We will conclude the second quarter earnings call for LP building solutions there Stacy.
Stay safe and we'll look forward to speaking with you again soon thank you operator.
This concludes today's conference call. Thank you for participating you may now disconnect.
[music].