Q3 2021 Louisiana-Pacific Corp Earnings Call
Thank you for standing by and welcome to Louisiana Pacific Third quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session. We will ask you to limit yourself to.
One question and one follow up to ask a question during the session you will need to press star one on your Touchtone telephone. Please be advised that today's conference is being recorded should you require any further assistance. Please press star zero I would now like to hand, the conference over to your host Investor Relations Erin whole Walt.
Okay.
Thank you operator, and good morning, everyone. Thank you for joining us today to discuss Lp's results for the third quarter of 2021 as well as our outlook for the fourth quarter. My name is Erin halt 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 Lp's, Chief Financial Officer.
In addition to this morning's conference call, we are hosting a simultaneous webcast and we have uploaded a presentation to which we will refer during this morning's discussion. We also filed our 8-K. This morning with some additional information slides.
Slides, two and three of the accompanying presentation provide notices and detail regarding forward looking statements and non-GAAP financial metrics. The appendix of the presentation also contains some necessary reconciliations that are further supplemented by this morning's 8-K filing rather than reading. These statements I incorporate them herein by reference before I turn the call over to Brad and Alan I am happy to announce.
That we published an environmental product declaration for smart side last week, we have known for years that smart side performs very well and looks great as the ETD demonstrates it is also classified as carbon negative, making it exceptionally sustainable, especially when compared to alternative citing substrates LP is also expected to publish its first ESG report later in <unk>.
Remember, including SaaS disclosures sustainability is a core value at LP and we're excited to share our story.
<unk> is available on <unk> web site and our ESG report will be published soon and with that I will turn the call over to Brad.
Thanks Aaron.
Morning, and thank you for joining us to discuss Lp's results for the third quarter of 2021.
Despite a significant OSB price correction in the quarter and ongoing inflation and supply chain challenges LP delivered its second best quarter ever siding sales grew at 19% LP South America in AWP set all time quarterly records in the OSB business continues to generate impressive cash flows.
Our California based outside advanced framing system business with gross profit positive in the quarter and continues to gain customer acceptance and operational momentum.
Demand for LPG products remain robust and our capacity expansion projects at Holton in peace Valley are off schedule.
We also strengthened our strategic relationships with key customers.
Including being named partner of the year in our category by the home depot.
As you will see on slide five of the presentation sales for siding solutions increased by 19%.
Another record quarter made possible by strong demand and exceptional performance by the siding operations team.
Siding efficiently produced and shipped over 430 million square feet and more importantly, they did so safely without a single recordable injury in the quarter.
The fastest growing components of the siding portfolio, our innovative products like export finished prefinished siding smooth siding and shapes, we shipped more than four times the volume of those products compared to Q3 of last year.
These newer products contributed significantly to the segments price growth in the quarter.
OSB sales were up over $230 million from last year, but down sequentially as OSB prices corrected early in the quarter.
Since the recent low in August random lengths OSB prices have steadily increased supported by consistently strong demand.
The engineered wood products segment had another record quarter with twice the sales revenue and more than four times. The EBITDA of the same quarter last year.
South America also had a very strong quarter with more stable OSB prices than seen in North America compared to Q3 of last year sales in South America increased almost 70% and EBITDA more than tripling.
As we have seen recently LP South America is capable of significant cash flow generation and we are reinvesting that cash in South America to grow capacity and improve in order to stay ahead of steadily growing demand.
The siding conversion project that Holton remains on schedule with production expected to begin in the first quarter of next year.
<unk> has discontinued production of laminated strand lumber and OSB production will seats. This week to begin the last phases of the conversion process.
Inflation aerie pressures have impacted the houlton projects somewhat particularly the price of steel, but the long term nature of material and labor contracts for the project at blended these inflationary pressures somewhat.
I want to thank the team there for keeping the conversion process safe and I'll schedule.
The Peace Valley restart has also gone exceptionally well.
Grateful to the local milled leadership as well as the OSB operations and support functions for a safe and efficient restart.
The mill is ahead of its planned ramp up curve and produced just over 100 million square feet in Q3.
With housing starts consensus higher now than when we announced the restart there is no question that the market needs the mill's output.
Peace Valley will also contribute to our structural solutions strategy is a significant producer of Tech shield radiant barrier as we work to transform our portfolio away from commodity OSB to hire more can structural solutions.
The resulting financial performance for Q3 are summarized on page six of the presentation.
<unk> businesses generated a combined $1 $2 billion in sales $522 million in EBITDA and $3 87 in earnings per share.
We returned over $400 million to shareholders via dividends and share repurchases all of it from free cash flow generated in the quarter. Our board of directors declared an <unk> 18 per share dividend and as Alan will detail authorized a further 500 million for share repurchases.
Supply chain interruptions and inflationary pressures are presenting headwinds, while we have benefited from higher OSB prices. Some of those gains are now being offset by higher prices and tight availability for resins and freight where we have seen meaningful price increases.
We are working to minimize these impacts by partnering with our suppliers balancing cost and risk with agile inventory management and seeking alternate sources of supply for a possible I am proud and confident in our strategic sourcing and operations teams as they navigate these challenges.
I want to talk about how we are responding that these inflationary pressures.
When faced with raw material scarcity, we have consistently allocated limited resources to the most strategic applications.
Because our OSP business has maintained the flexibility to use various resin types, we've been able to shift MTI resins deciding in order to maintain production product quality and growth.
Freight flatbed trucks are in tight supply we have the ability to convert shipments from truck to rail and we have our own small trucking fleet, both of which contributed to record siding shipments in the quarter.
We can't predict the duration of these supply chain challenges, but our teams will continue to work diligently to minimize their impact.
Before I turn the call over to Alan to review, our financial performance in more detail I want to announce two changes to Lp's executive leadership team.
First Neil Sherman, who joined LP in 1994 and has served as executive Vice President and General manager of LP siding business. Since January of 2017 will transition deleted tegra as its president.
Neil has done a tremendous job of growing LP siding business and he is exactly the kind of leader integra needs to reach its potential as an innovative and disruptive building technology.
Second adjacent ring Bloom, who joined <unk> in 2004 and has served as the executive Vice President and General manager of Lp's OSB in AWP businesses. Since January 2017 will succeed Neil as EVP and general manager of the siding business.
Jason has been instrumental in transforming lp's OSB business, increasing its operational agility and efficiency, while shifting the focus from commodity products to value added structural solutions.
Jason is rejoining the siding business, where he previously held leadership position with our sales team. So he is very familiar with the smart side customer base and value proposition.
Neil and Jason's leadership of siding and OSB has been critically important to lp's ongoing strategic transformation.
I am extremely grateful for their contributions and I am confident they will continue to deliver outstanding results in their new roles.
Both of them have built world class teams that lead and execute their business strategies and I know neither team will skip a beat during this transition.
Both Jason and Neil will remain in their current roles for a brief transition period until we appointed a new EVP and general manager for OSB in AWP, a process that we hope to complete soon.
With that I will turn the call over to Alan for more detailed discussion of Lp's financial results for the third quarter as well as an update on our capital allocation strategy and our outlook for Q4 and the full year.
Thanks, Brad.
Before I dive into the financial results for the quarter I'd like to add my personal thanks, and congratulations to both kneeland, Jason healthy results for the past several quarters, even is due in no small part to their leadership and I am confident that will be equally impactful in their new roles.
As Brett said, the third quarter of 2021 was Lp's second best quarter ever page.
Page seven of today's presentation summarizes these results compared to the third quarter of last year.
Revenue increased by 53% from almost $800 million last year to $1 $2 billion. This year.
Just over half of this increase $225 million was the result of higher OSB prices.
Writing at a $49 million to achieve WP, South America, and Tegra collectively added a further $148 million and maybe.
EBITDA increased by 19% year over year from $273 million to $522 million.
OSB prices in siding growth added $225 million, a $31 million respectively.
South America, and AWP added a further $60 million.
However, inflation in wages raw materials, and freight costs increased by $58 million compared to last year's deflationary environment and costs for the Hilton conversion in the peace Valley reached out totaled $10 million in the quarter.
The waterfall on slide eight at year over year revenue and EBITDA detailed for the siding segment.
Siting solutions revenue grew by 19% with both volume and price increasing by 9% year over year.
Assigning team shipped phone to the 32 million square feet of smart side of the third quarter.
Made possible by a remarkably efficient production and shipping in response to unrelenting demand.
Frankly shipments of 432 million square feet in a quarter is more than we thought possible prior to the additional capacity of Hilton coming online next year.
On the cost side, we have accelerated our investments in selling and marketing after sharply curtailing the last yea joined Covid.
We intend to continue investing at this rate in the fourth quarter and beyond.
To drive demand creation, particularly for expert finish in anticipation of the whole startup.
Oh E improved to 89% for a net transformation impact of $33 million in EBITDA.
Inflation of raw materials, mostly resin and paper added $18 million of costs and freight costs increased by $10 million.
After running our mills at near maximum capacity for more than a year, we completed some necessary sustaining maintenance projects at a total cost of $7 million in the quarter.
One such project that began at quarter end and is now almost complete is a press rebuild at our siding mill and Swan Valley amount of TOBA <unk>.
The impact of which will mostly be felt in the fourth quarter.
We also incurred $3 million of conversion costs of holding the.
The resulting EBITDA of $73 million is that flow down $3 million from 2020, bringing the quarterly EBITDA margin to 23% or 27% on a year to date basis.
The charts on slide nine show that revenue for siding solutions continues to grow faster than the single family housing starts on a trailing 12 month basis with siding revenue growing by 33% while starts increased by 23%. The pie charts show continued growth in innovative siding products like X, but finished smooth siding.
<unk> shakes in corners.
Third quarter. These new higher value added products made up 10% of siding volume, 15% of siding revenue and country reputed three points of the 9% price increases for the segment.
Slide 10 shows the quarter in more detail for our OSP business.
OSB prices fell steeply in the first weeks of the third quarter before stabilizing in August and are down sequentially from record highs, however, compared to last year higher prices added $225 million of revenue and EBITDA.
On our last quarterly call, we guided to OSP revenue being about 10% below the second quarter or around $700 million provided that OSB prices remain steady at the levels published the previous Friday by random lengths.
Because we now know of course prices continued to fall from that point before rebounding by.
By quarter end, the actual average weekly random lengths price for 716th Sheathing was approximately $100 lower than it would have been had prices remained flat after our last call.
And at roughly a 1 billion square feet of quarterly capacity, the $100 price difference, but in Playa revenue difference of about $100 million.
Yielding an adjusted estimate of about $600 million in revenue, which it turns out is precisely the resulting third quarter revenue.
Again swamps other factors in the OSB waterfall, but I will address the other components briefly.
<unk> was up in the quarter due to production at Peace Valley offsetting the one time costs associated with its restart.
E <unk> in the quarter was down compared to the prior year, partly due to resin substitutions and partly due to maintenance and production issues, resulting in a $4 million hit to EBITDA.
The same inflationary pressures, we discussed society also impacted OSB with resident and freight inflation costing $15 million and $11 million in the quarter respectively.
I wouldn't normally point this out but the freight variances abnormally large this quarter. So I should note that we're citing is typically sold at delivered prices freight costs in OSB are generally pass through therefore, the OSB freight cost increase in the quarter is offset within the price component with no net EBITDA impact.
So OSP ended the quarter with $600 million in revenue $381 million in EBITDA and another remarkable quarter of cash generation.
And while not shown a waterfall charts, AWP and LP, South America had remarkable quarters, as well with strong demand and pricing more than offsetting increases in raw material costs.
Which brings me to a summary of cash flows in the quarter and a capital allocation update.
Operating cash flow was a little over $500 million in the third quarter after $68 million and capital spending we returned $416 million to shareholders comprising $599 million in share repurchases and $17 million in dividends and we ended the quarter with cash balance is essentially unchanged.
LP repurchased six 8 million shares during the third quarter, ending the quarter with $90 2 million shares outstanding.
As of yesterday, we have spent a further $156 million since quarter end, we purchased $2 5 million more shares.
This brings the remaining balance of our $1 billion authorization to $157 million and our current number of shares outstanding as of right now to slightly under $88 million.
Our board of Directors has declared a quarterly cash dividend of <unk> 18 per share and authorized a further $500 million for ongoing share repurchases, bringing our total repurchase authorization as of today to a little over $650 million.
Slide 11 shows updated guidance for full year capital investment as well as revenue and EBITDA guidance for the fourth quarter.
We are lowering our full year capex guidance slightly to account for longer lead times and contractor availability issues, while holding remains on schedule and the completion of some of the smaller projects may Unfortunately be pushed into early 2022.
Raw materials, and logistics, particularly flatbed freight continued to exhibit tight supply and elevated prices.
We are currently able to procure all the resin and other raw materials that we need inflationary pressures may dampen margins somewhat in the near term for wholesalers.
With respect to siding on the last call, we guided to revenue growth of 10% for the second half of the year and a full year EBIT margin of about 25%.
Despite the business growing in the third quarter at twice the rate necessary to hit that guidance I'm reiterating both aspects of that guidance today and here's why while the price growth experienced in the third quarter is certainly sustainable similar volume growth in the fourth quarter is unlikely simply because of the much needed maintenance projects, especially the press <unk>.
Bold at Swan Valley have temporarily lowered production the EBITDA margin in the fourth quarter would probably have been similar to that at the third quarter with.
With price increases once again offsetting raw material inflation, if not for two factors. The first is the lower production capacity. The loss volume has a high variable margin of around 50% and the second is the cost of other investments, we're making for future growth increased selling and marketing the houlton conversion of the Swan press rebuild another critical.
Maintenance and growth projects designed to Derisk and deemed Buffalo operations will add roughly $25 million of discretionary costs in the fourth quarter.
Although these actions will result in an EBITDA lower than both the third quarter of this year and the fourth quarter of last year.
The resulting full year EBITDA margin still meets our long term targets of 25%, which was set at that level precisely because of the need to make periodic investments such as these.
Now we're confident that these actions position the business very well for additional growth in 'twenty to 'twenty, two particularly when <unk> comes online.
OSB is somewhat simpler with volume increases from peace valley, partially offsetting sequentially lower OSB prices.
Provided the quarter to date average OSB price holds throughout the fourth quarter, the resulting OSB revenue will be down about 30% sequentially from the third quarter.
So in conclusion, given the usual caveats about sudden changes in demand unexpected changes in raw material price or availability or other unforeseeable factors, the resulting EBITDA for the fourth quarter should be somewhat above $200 million.
And with that we'll be happy to take your questions.
As a reminder to ask a question you will need to press star one on your telephone again Thats Star one on your touched on telephone to ask a question to withdraw your question. Please press the pound key please press the pound key again, we ask that you limit yourself to one question and one follow up please standby while we can.
Compile the Q&A roster.
Our first question comes from the line of.
T Tam montara.
<unk> capital markets. Your line is open.
Thank you and good morning.
Wanted to come back though to siding.
Just talk to you.
And can you talk a little bit about kind of what you are seeing on the on the underlying demand side. It sounds like what you said was the volume drop is even more because of the press gene based on the capacity curtailments that you guys are having right now.
So can you address that initially, but then I had a follow on.
Yes, Keith.
Good morning.
The.
Demand for smart side is strong still we're still on a managed order file situation, which means really all of this year and probably extending at least into Q1 or Q2 of next year, where on a managed order file so we're selling to production.
As evidenced in Q3, we were able to produce more than expected in sale and move all of that volume.
Q4, with the with the <unk>.
Downtown that we outlined.
Happening in Q4, we will have less production than we are selling at that production. So demand remains strong.
We are selling all incremental production, we could sell more than we produced if we had it.
So from a demand standpoint, we're in really good shape and will be I believe a.
Very tight situation until the second half of next year, when hilton's up and running competently.
Got it that's very helpful and then.
Turning to EWC, Brad can you provide an update.
On that in terms of the sale process any any rethinking strategy given how strong that business has been recently.
So great question, Keith and we're very proud of.
The performance of that business. This year, particularly last quarter, we have worked hard over the last three or four years to two.
Increased margins in the business and throughput, which has driven some of the margin improvement.
But we still are involved in the process around strategic options for the AWP business.
And we're still active.
In that in that process. So.
I think strategically there really hasn't been a change in the way, we evaluate that business being part of our portfolio. Though we are very proud of the way the business team has perform improving margin and obviously, if we get if we do get to a sale that's going to that's going to help on the valuations alive.
So, but no no change in strategic prioritization with AWP business, even given the good performance in Q3.
Got it that's very helpful I'll jump back in the queue. Thanks.
Thanks Keith.
Thank you. Our next question comes from Mark Weintraub.
Seaport Research your question please.
Congrats first on a very strong third quarter.
Just following up a little bit more on the siding business.
Have you gone through the process of negotiating pricing for next year with customers, yet and can you give us a sense of how that is playing out and relatedly.
I know, you've got holton, starting up and et cetera, and that there can be a lifecycle to the EBITDA margin curve, but.
Are you.
Relatively confident that we can see the 25% type EBITDA margins in siding in 2022 as well.
So on the pricing question first Mark we have not gone to market yet with our price increase strategy for next year I'll just remind to.
The audience that we typically in our planning this year to time, our price increase for January one and so we will be communicating that later in November and December to the market.
<unk>.
So we haven't gotten feedback on that but we feel confident about our ability to.
To get some pricing next year given the.
The demand situation for the product and then as we look into next year and the.
The margin profile.
We're still guiding to 25% and I think that's a good margin.
For us to focus on next year, and we have a lot going on next year on the cost side with.
The completion and startup of the Houlton Mill and then we will begin this ago process later in the years and we've got some raw material <unk>.
Headwinds, especially compared to where we were at the beginning of this year, but I think given our given our pricing strategy given.
Sure.
Consistently improving mix around pricing.
I feel good about that 25% margin guidance for next year.
Great. Thank you and then also just had a quick follow up your AWP, obviously very very strong performance also in South America.
I'm trying to get a sense as to how much of that you think it's step change.
And reflective of the growth and changes in that business versus cyclical and then somewhat related to because this is sort of not deciding and not the OSB.
So Neil is taking over and Tegra, which is interesting obviously ran the siding business.
What does that potentially say if anything about.
What you think integra potentially can can become in time and maybe if you can give us some help on that.
Sure, Let me start with South America.
Really proud of the business improvement really over the last three years, particularly this year Mark. There is no question. Some of that margin is aided by the pricing world wide price always be the price of OSB in North America, you can imagine that.
Imports to South America diminished from North America, when we had the kind of pricing environment. We had up here this year, which allows us to push price down there.
Do think there is a ratchet up in performance in South America, but.
I do believe there'll be some pricing moderation.
As we see the decline in pricing or experienced the decline in pricing in North America, but the magnitude of price increase and the magnitude of price decrease in South America. Historically has been a lot less volatile than what we've seen.
In North America so.
So, but I do think we should expect some moderation of margin down there now there is a component of that margin improvement, though that is sustainable and that's the operational aspect of the business.
Historically that has been our poorest OE division. If you type types include siting in North American OSB as divisions or segments, they've made really good improvement over the past year and Theres a lot of room for future improvement and then we also have.
Pretty aggressive for the scale of that business capital.
And the reinvestment strategy down there.
Primarily focused on improved machine reliability and so there is room for us to continue to improve South America from a cost standpoint, and then I guess, there's a little bit of wait and see on how pricing kind of gets into equilibrium and I don't think we will know that for a quarter or two.
In South America, but we'll obviously continue to report out on that.
One integra Integra is very strategic to us.
I really am pleased with the progress we've made in that business over this past year, but I think speaking a step change.
A step change needed.
I believe we have validated market acceptance Ive said that on this call before but we really have to bring a level of competence in to just the overall operations of that business.
And the delivery of the value proposition. So we made a couple of moves in the quarter we went.
When I mentioned on the call, we did but one of our very experienced plant managers into the desktop facility. That's now the plant manager and then as we've talked about.
Neil over there'd be precedent. So we see this as a very significant.
A strategic opportunity for us we think the timing is right.
To really put some concentrated resources on it obviously Neil has a great track record over his tenure and citing of growing that business of building a really strong team.
That was capable of doing that.
We want to kind of lift and place him over in <unk>.
They see the same kind of.
Rapid business improvement.
And then we're very very blessed to have a strong bench of Jason.
So portions of his career associated with particularly with the sales side of our siding business.
So.
I feel really good about Jackson's ability to continue the good performance in siding as well so.
But it does I guess the nature for questions. What does this say about integra SaaS that we'd see it as a huge opportunity and we're really getting serious about getting our manufacturing competency. So that we can continue to grow that business.
Great.
We'll probably just one will probably we will have revenue in the business of around $100 million. This year of integra with close to breakeven EBITDA.
Particularly in the second half of the year. So you know I mean.
$100 million.
From zero Zero 18 months ago does show the revenue generation capacity of this business and so we're excited about turning that into.
Our growth engine.
That is creating value.
And that's that's neil's job is to is to get that done as quickly as possible.
Thank you.
Thank you. Our next question comes from Paul Quinn of RBC capital markets. Please go ahead.
Yeah. Thanks, guys good morning.
I really appreciate all the.
The extra detail on the guidance, so just maybe to start with siding.
If I'm working on my numbers to try to get to what your guidance is it suggests revenues of around $270 million.
Q4, as well as EBITDA around $50 million, which.
I'm keeping price flat.
Cost up a bit volumes, they've got to come down to about 4% is that in the realm of possibility.
Yep.
You've kind of nailed it that yes, okay, and then does that volume drop in Q4 does that bounce back in Q1 and Q2.
Yes, yes, very much so.
The easiest way to think about Q1, the highest level as the Q1 next year ought to be up sort of a facsimile of the quarter. We've just reported Q3.
Given that we hold and wont be online.
So the capacity will go back to what it was in Q3 with <unk>.
Maintenance projects, including Swan Valley press rebuild behind us.
Okay, and then one of the big.
Programs that you've got it is really on its pre finished side, maybe you could give us some details of the growth of <unk> in Q3.
Yeah, we're seeing really good growth.
Paul and really supporting that with our capital capital investment strategy behind it.
I would say, we're also constrained on paint capacity right now.
The smart side because of the good growth we've had there so were.
Aggressively pursuing both in plant capacity increases on facilities that we currently operate but also.
As we've mentioned on the last call a greenfield location in the northeast to support the startup of Holton.
Actually Paul we also saw are seeing good growth in the west.
We're very pleased about that a little bit surprised by the market acceptance out there. So we're also pursuing some capacity expansion plans for the west.
So I would say hitting on all cylinders as far as our export finished market acceptance and.
Like the rest of the business trying to catch up a little bit on the capacity side, but we feel really good about the progress we made there over the last two years.
Okay, Great and then just.
Switching over to South America.
Pretty very strong results, there and Brad you mentioned further investment in that investment.
All around the operations to get that OE up or is there or is there some kind of plan to add further capacity down in that market.
It's both Paul we are we are doing.
OE related maintenance capital lets call. It we do have.
<unk>, especially with the second line that we put in an pangu, we getting to a level of detail, but I'll go ahead.
Train of thought.
We started that press up and but not at full capacity there were some other constraining elements in the mill that we wanted to.
Validate that we could sell the volume before we make that incremental investment and we're doing that now so there is a component of the <unk>.
Capacity.
Capital investment down there that is increasing capacity.
Okay. Thanks, very much that's all ahead that's one.
Thanks, Paul.
Thank you. Our next question comes from Sean Stewart of TD Securities. Your line is open.
Yes.
Thank you good morning.
Just one question for me on the Capex plan, you touched on equipment lead times contractor shortages.
And you trim the budget for this year.
I guess two part question the inflation that you're seeing.
How does it affect the overall returns for siding conversions from your perspective.
And any initial thoughts on 2022 Capex guidance as you move ahead.
At the heart of the singular conversion project.
Alright, thanks for the questions I would say raw material inflation is a drop in the ocean when it comes to the returns.
On the siding conversions so it.
Means that I'm occasionally a little bit off on one of my forecasts, but it's just noise.
No impact on our returns really.
For 2022.
Yeah.
Logistics and any other sort of practical constraints. Aside 22 is going to be a high investment yet we're still working on our plans but.
With any luck.
We will be spending significantly more than $250 million next yet provided weakness, we can get the economy and the logistics network in the U S to assist us in that so we will be aiming for higher.
The completion of the Houlton mill and.
Our significant investment in the solar mill so.
Almost continuous investment in siding capacity is.
The theme for the next couple of years.
Understood. Thanks, Alan that's all I had.
Yes.
Thank you. Our next question comes from John Babcock Bank of America. Please go ahead.
Hey, good morning, I guess, just back to the side and again I apologize for kind of nailing it down but.
And then just as far as like selling and marketing can you kind of talk about.
Why why invest now in that.
Especially when you're a short production and why not wait a quarter or two.
Good question, there's two components to the growth in sales and marketing expense in siding and one of them is we cut it pretty severely Q2 of last year. So some of that is just a recovery back to somewhat of a normal run rate that we had been on.
We've obviously cut at Q2 of last year thinking that we would not be experiencing.
The reality of what the.
The COVID-19 impact on housing, but also.
Just just to calibrate us all the Prefinished strategy the export finished strategy.
One is very different from selling into new home construction.
Ultimately the decision is made on siding choice in the home with a home Cuomo owner deeply involved in that so it's a bit more of a consumer sale.
So our marketing expense is primarily focused about building brand identity around pre finished around.
Export finished brand supporting.
Parent remodel contractor base around making that sale.
And just getting that exposure and placement that we need to be a national.
<unk> as far as pre finished siding. So it is.
Added step historically with what we've done.
Marketing percentage stamp, our marketing dollar standpoint, but very consistent with what is required in order to have an effective on prepay.
Repair and remodel presence in siding.
Now.
What part of your question was well I think the nature of that question John was <unk>.
Oversold now so it's now the time to be spending at we think so it does take a little while to build that kind of brand credibility and with the investments we're making around capacity expansion. We do want to be ahead of that a little bit on the marketing side so that when.
That comes up, particularly on the East coast Big repair and remodel market and then solar following that.
We've got some momentum on the sales and marketing side, the marketing side in particular to support that extra capacity.
It's a judgment game honestly around how and when and the magnitude of that marketing spend but I feel like we do have a credible a very credible team that knows how to spend those dollars wisely, so I'm confident of that.
The any mistake would be maybe we'd get ahead of it a little bit, but I do feel like it's a minimal investment compared to the size of the capacity expansion capital and.
Makes it makes a lot of sense given our.
Our recent history of.
Sales growth in our ability to to support that kind of level of spend in support of the brand.
Okay. Thanks for that and then just my last question on AWP, how much more pricing will have to be realized from the announcements that you've made so far.
Youre asking prices that are in.
Yes.
Flow through though.
Yes, I mean, obviously you had a pretty decent price realization thats last quarter, just kind of.
Wondering like how much is left for the fourth quarter and potentially into <unk> next year.
Yes.
There is nothing left on the upside given the decline, especially for I joists in lumber and OSB pricing.
The.
The competitive pressure.
Downward not upward any longer John okay.
Okay. Thank you that's all I had.
Mhm.
Thank you. Our next question comes from Kurt Yinger D. A Davidson your question. Please.
Thanks, and good morning, everyone.
Just wanted to start off on siding production capacity looking into 'twenty two holton.
Colton, we will start contributing maybe a bit of volume in Q1, but realizing there's a ramp up curve. There can you just help us frame what's realistic in terms of volume growth over next year is getting another 160 million square feet out of the system to grow double digits possible.
Yes, I would say.
I mean.
We haven't seen the budget for next year.
For our siding business, but.
If you take 150 million additional square feet.
<unk> in square feet and Ben.
Allow some improvement with OE and our existing.
Footprint, we could see that kind of growth going into next year, we'll have a little better feel for that on the next call, but I mean, we are expecting for for productive capacity to be improved next year.
For no other reason than Colton I would say just to just expect minimal contribution in Q1, I think we'll begin to see some in Q2, and then credible production manufacturing in Q3 and Q4 of next year. So the second half.
We should have some incremental volumes with some meaningful incremental volume to sell.
Got it okay that makes sense and then switching to the OSB side.
It sounds like maybe Youre kind of ahead of plan on Peace Valley production is it fair to think is that Mel ramp you can get another couple of hundred million square feet of OSB volume in 2022, as well or is there anything from a maintenance or downtime perspective, maybe playing some catch up there.
That could be an offset to keep in mind.
Now that's a reasonable assumption for next year, so to speak capacity just make sure you're factoring into holton won't be there at all and that we will probably take us to go down in Q4, so there'll be a little bit of a minus on the <unk> more than a little bit of minus in Q4 as we.
Work on that conversion.
Okay. That's a good reminder of it and then just lastly.
With the Allendale announcement recently I was hoping you could maybe just refresh us on how you think about OSB M&A.
For you guys in the past I think you've talked about only being of interest. If there was a future siding opportunity that came with them they'll but any any change there with your view.
The industry fundamentals or the flexibility of the balance sheet, where it stands now.
There's not a lot of change there Kurt.
I mean, obviously we're interested in.
I mean, we would look at almost any opportunity.
The primary.
Screener would be.
We believe it was enable us to convert that mill eventually too.
Deciding which would mean it would need to be in Aspen mill. So we're very interested in adding aspen capacity to our network.
We're a lot less interested in southern yellow pine.
Commodity OSB manufacturing.
Okay makes sense, alright, well I appreciate all the color Brad and good luck here in Q4 guys. Thank you. Thank you.
Thank you. Our next question comes from Susan Mcclary of Goldman Sachs. Your question. Please.
Thank you good morning, everyone and congrats on a good quarter.
My first question is can you talk a little bit to the availability of resins and veneers and how youre thinking about that as we look to 2022.
Yes resins are critical to both of our businesses in North America and.
We've been doing a lot of work on trying to secure supply for.
Next week.
For next year next quarter, it has been pretty volatile, but really.
I'm really proud of the flexibility we've shown within our system and the way we've reallocated MDI resin in particular.
To optimize our specialty production, particularly as it pertains to siding.
Susan I think next year is going to continue to be challenging.
So far we've had minimal downtime other than at Holton with our LVL line as a result of of resin.
Shortages, but I think we're going to have to continue to stay very agile as we worked through next year and we'll just have to see what the winter weather brings to the Gulf Coast, which was.
Cause the problem last year with the freezes in Texas.
But I would say right now where we feel good about where we're at but we do know that any disruption in the supply chain could cause us to.
To be very flexible.
Fortunate for US I think this is true most OSB manufacturers, but we can convert from MDI to phenolic for our commodity production and we have not had any issues really securing phenolic resins. So we've got a good.
A good backup plan.
Though we would rather be running those meals with the MDI reticence, particularly in support of our structural solutions growth.
Yeah. Okay. That's very helpful color and then can you just talk a little bit too inventory levels, especially as we think about OSB and AWP as we think about some of the activity on the ground from a housing perspective into the end of this year and then the <unk>.
Theres kind of gearing up for the spring selling season, where things stand.
A good question I would say, obviously given the pricing moderation in the last three months or so there's been some some return to a quasi normal inventory levels.
I would still characterize them as lean.
If you look historically, but certainly not as clean as it was six months ago.
So.
We go into the winter.
Theres typically or historically.
A lull between thanks.
Thanks, Kevin.
In January the new year around building it building.
New construction multifamily construction stay strong I could see the supply chain remaining on the lean side of normal.
If we'd get a slowdown.
In construction over that period of time.
Typically be weather related if it happens we could see.
More of a return to a normal inventory situation by the time, we get to the new year I don't see any scenario, where the channel gets heavy with inventory.
I think I, just think there's too much catch up to do given how we started this year for that to for that to happen and I think housing demand is strong as well but.
But certainly more theres more.
Inventory available in the channel than there was six months ago, but I would just still call. It on the lean side.
Okay. That's very helpful color. Thank you and good luck. Thank you.
Thank you at this time I would like to turn the call back over to Aaron <unk> for our remarks Sir.
Okay. Thank you Latif and thank you everyone for joining us this morning for Lps third quarter earnings call. There are no more questions in queue. So we will conclude the call. There. Please stay safe and we'll look forward to speaking with you again soon.
This concludes today's conference call. Thank you for participating you may now disconnect.
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