Q2 2023 Louisiana-Pacific Corporation Earnings Call
[music].
Okay.
Good day, and thank you for standing by and welcome to the L. P. Second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone you will then.
An automated message advising your hand this race to remove yourself from the queue. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to Aaron.
Vice President of Investor Relations and business development may begin.
Yeah.
Thank you operator, and good morning, everyone. Thank you for joining us to discuss Lp's results for the second quarter of 2023, and our outlook for Q3 and the remainder of the year. My name is Aaron halt and I'm Lp's, Vice President of Investor Relations and business development.
Joining me. This morning are Brad Southern Lp's, Chief Executive Officer, and Allen Hockey Lp's, Chief Financial Officer.
During this mornings call we will refer to an accompanying presentation that is available on Lp's IR webpage, which is investor L. P Corp Dot com.
Our 8-K filing is also available there along with our earnings press release, and other materials E. Tailing L P strategy and sustainable business model today.
Today's discussion will contain certain forward looking statements and non-GAAP financial metrics as described on slides two and three of the earnings presentation.
We will incorporate those slides by referenced rather than reading them. The appendix of the presentation. Also contains reconciliations that are further supplemented by this morning's 8-K filing.
And with that I will turn the call over to Brett.
Thanks, Sarah and good morning, and thank you all for joining us.
I'll briefly describe lp's results for the quarter before I turn my attention to the future and discuss Lp's strategy of growth innovation and efficiency and our positions us exceptionally well to benefit not only from the ongoing rebound in new construction, but also from the improvement in repair and remodeling that we expect would actually follow.
The second quarter ended with encouraging signs of an improving housing market.
Single family starts are down 21% for the first half of the year compared to 2020 to May and June saw stronger than expected building activity.
As housing starts have rebounded demand for Lp's oriented Strand Board has followed.
<unk> prices meaningfully higher and improving lp's, EBITDA and cash flow outlook.
By contrast, the repair and remodeling market appears to be comparatively weak and saucony likely due at least in part to constrained home inventory and reduced wholesales.
Existing home sales, which in a typical year outnumber starts by four or five to one are down 23% for the first half of the year.
If I could see rates and active listing count suggest that trend will persist.
The shed market for LP has a dominant share of exterior siding panels closely follows existing home sales and has been similarly weaker so far in 2023.
Against this backdrop LP generated $611 million in net sales.
$93 million and EBITDA of $88 million in operating cash flow and 55 and adjusted diluted earnings per share.
While our EBITDA performance exceeded guidance from the prior quarter, citing revenue was lower than expected with shared the softest component of the siding business in the quarter.
Overall siding volume dropped 16% versus prior year quarter, roughly equal to the drop in single family starts for the quarter.
Partially offsetting the siding prices were 6% higher than prior year with the result that net sales were 11% below prior year.
On slide six you can see that while single family starts dropped 22% on a trailing 12 month basis.
Starting volume was flat Saudi prices were up 11%.
Comparing the first half of 2020 created first half of 2019 before the pandemic.
<unk> revenue has grown at a compound annual rate of 14%.
Over the same four year period single family starts were essentially flat. The first half of this year is certainly softer compared to the coverage year consulting was on allocation the siding growth consistently exceeds that of the underlying market.
A bright spot for the quarter was expert finished pre finished siding, which saw flat volume in Q2 compared to prior year. Despite the general R&R slowdown.
Our newest export finished facility located in Bath, New York will open in Q3.
Bringing increased automation and improved efficiency to outpace prepayment starting production.
To support ongoing product innovation in the second quarter LP opened our new innovation Center at the natural Resource Research Institute in collaboration with the University of Minnesota to work.
The innovation center will accelerate our development of high performance and sustainable building solutions.
We're also happy to announce the introduction of two new additions to the siding product portfolio. The new products are a brush smooth expert finished flat and pebble stucco panels. These new offerings, we're tying smart sides durability efficiency of installation and industry leading sustainability.
And will help us gain share in markets that prefer a base aesthetic characteristics.
Okay.
For the OSB segment, the ongoing improvement in single family New construction has led to increased demand for OSB, which has in turn led to higher prices given.
Given the two to three week OSB order file the price increases in the last days of Q2 will mostly be reflected in Q3.
But impressive operating efficiency and a sequentially higher structural solutions mix of 54% healthy OSB business contribute $37 million in EBITDA in Q2.
Both businesses have done an impressive job so far this year operating efficiently despite lower capacity utilization as we manage our operating footprint with discipline.
While the current market environment for repair and remodeling and citing might be softer than anticipated our commitment to our strategy is unwavering.
We will continue to grow through innovation manage our capacity with discipline and efficiency and preserve our strong balance sheet that lets us invest in our future.
Our strategy is working and we will continue to invest in capacity to produce and deliver the best siding and structural solutions products in the industry.
The acquisition of what will become our next siding mill and Wawa, Ontario is an example of this.
We are pleased with the progress we have made integrating the wawa team into LP starting business, we are engaging with the local community and first nations as we prepared sustainably harvest local aspen fiber.
And we have begun the engineering work necessary to prepare <unk> to become a state of the our siding mill. So that we can meet growing customer demand.
Our capital allocation strategy gives us the flexibility to adjust the timing of investments in growth to match customer demand decoupled from the volatile cash flow generated from OSB price fluctuations.
Before I turn the call over to Alan I want to conclude by spending a moment talking about safety, which is a core value at LP.
Our goal is zero injuries, and while we will never be perfect. We work every day to continuously improve safety at LP.
We were recently notified the L. P. One to 2022 safest Company award from API to engineered Wood Association.
This is the 11th time in 15 years of Lps earned this award for.
Safety is not about winning awards, it's about building a culture, where we look out for ourselves and each other so we can all go home to our families safely every single day.
I'm happy to say that Lp's safety performance in Q2 has continued to build on our safety legacy.
The second quarter of 2023 LP siding business had a single recordable injury.
The rest of our North American employees, including the OSB business in all corporate functions in the quarter without a single recordable injury.
That means LP team members in North America completed almost 2 million work hours with only one recordable injury.
One is too many and we will learn from it and improve but we are incredibly proud of this result, and I know that every employee shares my commitment to being safest company in our industry.
And with that I will turn the call over to Alan for a more detailed review of the financial results before we take your questions.
Thanks, Brad the waterfall on page seven of the Navy's deck shows sightings results for the second quarter compared to the prior year.
The reduction in volume as the largest driver of both the year over year revenue decline in the revenue guidance Miss.
The 16% volume decline resulted in $54 million less revenue and $26 million less EBITDA, given the sidings high variable margin.
Price increases, partly offset the volume decline a combination of list price increases last July and this January lifted net prices by about 6%.
Outside of volume and price and other factors in the quarter include continuing mill conversion costs.
Our first quarter call, we identified $16 million of such costs embedded within EBITDA at.
As predicted that cost has fallen to roughly $10 million this quarter as to golar ramps up production.
$5 million of vessels identified on the waterfall and a further $5 million is it repeat cost from last year same cost different mail and so it does not as the variance credits than otherwise.
On the plus side input prices have stabilized and in some cases already falling year over year freight costs fell by $4 million.
Partially offsetting a $6 million headwind from raw material inflation, thankfully a much smaller impact than in recent quarters.
The resulting EBITDA of $59 million at a margin of 18% would have been three points higher but for the mill conversion and ramp up costs, which I must stress are entirely discretionary and incurred in the interest of long term growth.
The OSB waterfall on page eight are similar to those of previous quarters and that the price change dwarfs all other factors.
And as in recent quarters, I will dispense with price and describe the remarkable performance delivered by the OSB team managing the business safely and efficiently in a challenging market environment.
Commodity volume was down 12% year over year with market curtailments and the removal of singular partially offset by substantial improvements in operating efficiency.
Structural solutions mix was up sequentially and year over year accounting for 54% of second quarter volume.
As the inciting raw material inflation plateaued and is receding from any input cost curious.
Perhaps most impressive the OSB business achieved a 5% reduction in cash cost of production compared to the second quarter of last year, despite volumes being nearly 20% level.
The $17 million benefit from lower cost of production combined with $4 million in freight savings and the transfer of <unk> to golar overhead to the siding business added $32 million of year over year EBITDA benefit in the quarter more than offsetting all of our non price factors.
This highlights the considerable value of our strategy of operating OSB efficiently, while maximizing the incremental contribution from the structural solutions portfolio.
Cash flow is shown on slide nine as expected it improved sharply in the second quarter with a net outflow of $56 million compared with a $257 million outflow in the first quarter.
Clearly that absent the $80 million payment for the Wawa facility cash flow would have been positive in the quarter, even with ongoing investments in singular fast and other maintenance and growth capital spending.
In addition to spending $74 million on Capex, and acquiring Wawa LP paid $17 million in dividends and paid $12 million in cash taxes.
We ended the quarter with $30 million drawn on our revolver, leaving us with about $600 million of liquidity.
Cash flow has continued to improve in recent weeks in large part due to increased OSB prices.
With the result that the revolver has now been fully paid down.
Lp's capital allocation strategy is unchanged as is our commitment to it.
We'll continue to earn cash invest in growth and return a significant portion of the remainder to investors via dividends and share buybacks in that order.
With the goal of producing a great lap siding and best starting soon the bulk of 2023 Capex is behind us. So the rate of expenditure should be significantly lower in the back half of the year.
As a reminder, LP retained $200 million in board authorization for share repurchases.
And as OSB prices and cash flows improve.
So too does the probability of share buybacks.
Now it was a busy quarter regarding the reconciliation of net income to both EBITDA and adjusted net income. So let me spend a moment to describe three items that appear on slide 10 of the presentation covering in this instance, the net income to EBITDA reconciliation.
Creating top to bottom on the slide.
First item of note is a $21 million tax provision.
We decided to perpetuate a $45 million of cash from LP assay in the second quarter. This means that we can obviously no longer assert that cash held in South America is permanently invested that which triggers the obligation to book a tax inventory to reflect the potential tax we would pay if and only if we choose to repatriate the remainder.
<unk> cash.
That charge was about $22 million 5 million of which relates to the $45 million actually repatriated, leaving $17 million of the $22 million charge is a noncash entry.
The next item on the list is a $17 million.
The operating charge of which $60 million relates to the resolution and settlement of a patent dispute within the OSP business.
And finally, you will note $34 million in business exit charges in the quarter. This refers to integra, they exited of which was referenced on our first quarter earnings call and it's mostly noncash.
Which brings us to guidance.
I've already mentioned the near completion of 2023 major capital projects. So that's why I'll stop.
Remaining expenditures for the year should bring full year capex to about $300 million imply.
Implying roughly $110 million of spending in the second half of the year with a roughly 60 40 split between growth and sustaining maintenance.
With reference to siding growth.
In previous quarters, the long lead times, resulting from our managed order file enabled greater near term visibility and made quarterly revenue guidance, both useful and meaningful.
But the combined effects of moving off from any store to file and our increased focus on one step distribution has resulted in a new normal order file of roughly two weeks.
Now while this makes us much more responsive to our customers. It also makes quarterly revenue is predictable.
So we will take a longer term focus going forward first recall that the third and fourth quarters of last year set records for siding volume and revenue.
While we expect second half revenue to be roughly 5% higher than first half revenue.
This will result in a year over year decline in the second half of 12% to 13% and therefore full year siding revenue decline of roughly 10%.
With respect to OSB the rapid increase in OSB prices also complicates our algorithmic approach to revenue guidance in part because lp's price realization tends to lag price movements in either direction.
That being said if we assume that prices remained flat at last Fridays levels published by random lengths and if we adjust for a lifetime and used by our order file and other factors.
We would expect OSP revenue to be at least 50% higher sequentially compared to the second quarter of this year.
And it should go without saying that just for the avoidance of doubt. This is not a price prediction million assumption for modeling purposes.
Under these assumptions and including the cost of a third quarter press rebuild in siding as well as some maintenance in the OSB business deferred from earlier in the year.
We would expect total company EBITDA to be between 160 and $180 million in the third quarter.
And with that we'll be happy to take your questions.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press star one again, please wait for your name to be announced we ask that you. Please limit your questions to one with one follow up please standby, while we compile the Q&A roster.
One moment for your first question.
Okay.
Our first question comes from Susan Mcclary with Goldman Sachs. Your line is now open.
Thank you good morning, everyone. Thanks for taking the questions.
Sure.
My first question.
Okay.
Good morning, Ken.
Can you talk a bit about that.
<unk> in siding as we think about the back half any color, perhaps on where the channel inventories are and then as we think about.
You increasingly lapping the pricing actions that were taken last year and even earlier. This year is it fair to assume that a lot of that decline in the back half comes through volumes.
So Susan let me start with the inventory question. So yes, we are still experiencing.
Higher inventories than what would have been normal pre COVID-19 in our opinion.
Inventories were worked down say really starting in March through through the second quarter, but for certain.
Parts of our distribution channel they are still elevated higher than we would like to see though I do think we will work through all of that in Q3.
From a pricing standpoint, just to remind everyone. We did do a price increase midyear last year and the beginning of this year. So.
All of that price that will be lapping to Europe , and your terminology that midyear last year price increase during Q3, and then we will obviously enjoy the increase that we had this year.
So the revenue guidance that we have given.
Does incorporate those too.
Price increases, but doesn't anticipate another major price increase.
Okay.
Then perhaps turning to the to the margin in siding can you give any color on how youre thinking about the cost structure in the back half.
Any potential relief in terms of raw materials transportation that could come through in there and as you think about that coming through is it possible that we could see those second half margins in siding moving closer to perhaps that 20% range, even as the volumes continue to be lower.
Well, that's a tough call. So certainly we are seeing raw material.
The cost of raw material cost relief, which is beginning to show through.
We did mention the existence of a press rebuild in Q3.
Specifically, so that kind of so that wasn't treated as being sort of incremental because we will have the falloff from Q2 to the second half of some of the ramp up costs.
To be kind of replaced by.
The cost of the press rebuild.
And then.
So there is nothing.
So that's particularly unusual.
And the cost base within siding for the second half of the year.
Okay.
Yes, there's a little bit of relief on raw materials, yes.
Are you seeing that there's some year over year deflation that could come through on those raws and maybe transportation as well.
Okay.
Yes, yes, okay. So thats certainly a good a good tailwind.
Yes, Okay alright, thank you for the color good luck with everything.
Okay. Thank you.
One moment for our next question.
Our next question comes from Michael Rocklin with choice Securities. Your line is now open.
Thank you Brad Allen Aaron for taking my questions.
Can you just finally exciting can you help us think about the future.
Future volume growth in siding, obviously, you know should demand, which I think is about 20% of your mix was notably weaker this quarter.
<unk> was also pulled forward during COVID-19. So just trying to figure out how you can how you see demand shaping up.
I think on a go forward basis, what type of growth, we should ultimately expect maybe one channel inventories clear.
Yes, so we're optimistic about growth going forward in siding.
Think about all the work and effort in product innovation that has gone into.
Start with our expert finished Prefinished program.
The facility that we're building a vast new York to provide east coast volume an inefficient way.
Where we're really feel like we're positioned well and starting with a pretty low market share and the repair and remodel area outside of the Midwest.
To really grow that a repair and remodel through our export finished penetration across the country.
And then from we launched builder series, our early last year and Thats a product that is focused on the long.
<unk> National builders.
Yes.
We all know are taking market share in this current environment and we feel like that that really positions us well to grow with calls within new construction. We are underpenetrated with large national builders and now that we have this product in place really encourage that as housing continues to improve.
<unk> is a large builders continue to take share really.
Find position from a competitive product standpoint to take advantage of that growth.
So.
So we're super optimistic about the portfolio and let me just add one other thing. We are we do have an initiative to place lap and trim down at consumer retail, which is another area, where we've been very underpenetrated historically.
So all of that really gives us a lot of confidence to believe that.
After this year, we're going to be back on that that solid growth rate that we've enjoyed over the last decade in siding.
And plus we've got 200 sales people, whose job it is and who's comp is related to growing siding and so we feel like we've got the right product. We've got a good brand a really really good value proposition and we've got a sales force that is in the is in the process of transitioning from two years of operating.
Under a managed order file to actively selling and picking up market share. So super excited about the continued growth in siding.
Over the midterm to long term time horizon.
Thanks, Brian just in terms of your forecast.
Forecast in terms of selling growth's still assuming that sheds comprised 20% of the mix of it was the growth.
Dedicated more on new construction and in areas other areas, where you may be underpenetrated.
Yes, I would say, it's still around that Mike one little caveat, we do have to estimate that somewhat because some of the shed skews our access by the shed manufacturers through regular two step distribution.
Certainly we can kind of tail from our panel sales.
<unk>.
During Covid is as we've talked about and that was a really strong part of our portfolio and clout.
When you look at panel sales this year versus 2019 is still going to be way up but it is certainly off of what we experienced during COVID-19 and so I.
I would say that that is certainly a weak market right now.
We feel like we're holding our own everywhere else.
But that one that's going to the.
The first half and shared was extremely weak in the second quarter actually caught us by surprise how weak it was.
I don't think Theres any long term, yes, I am sorry, just one more I don't think theres any long term issues with shared historically there we've.
We've had we've been able to grow market share and share during kind of Dallas downward trend periods and shed.
Our panel market share's pretty dominant there. So we're going to we're in a position where we have to ride through the ups and downs in the shed market because of our ability to gain market share at least with panel product and share is pretty low right now given our position.
Got it appreciate all the color and then one final question before turning it over just in terms of pricing on the sites you mentioned, obviously, it's up year over year, but sequentially pricing was down can.
Can you just provide some color on what drove the decline in sequential basis.
This isn't a mixed factors concession just trying to get into why you with pricing declined sequentially.
Yes. It was it was mostly it was entirely mix.
Mix of products within within the portfolio that they drove it down it wasn't a function of list price increases or anything like that.
Just mix.
Got it thank you very much and good luck in the second half.
Thanks, Michael.
Thank you.
Our next question.
And our next question comes from the line of George Staphos with Bank of America Securities. Your line is open.
Hi, everyone. Good morning.
Thanks for all the details.
Couple of.
Sort of a micro question to start and then I had some other questions on siding. So.
You called down capital spending a bit.
And comparing the slides <unk> versus <unk>.
There is both some <unk>.
Trimming both on the conversion and also strategic growth capital, obviously, maybe with the year preceding a little bit less quickly than you would have expected that would be natural but if there's any other color you could share in terms of why those numbers have moved and then on the $16 million of OSB patent related claims if you could.
Mind us what's behind that recognizing it's now in the past, but what was in those figures and drove that.
The settlement claim.
So let me start in order then.
Capex.
There's a little bit of modest trimming, but the majority of this is that.
Fairly conservative on both the upfront payments, we may need to make for Wawa.
As well as payments to which we're committed.
And to try it to us putting wawa next in line and therefore delay in houlton too by virtue of Wawa getting in front of that so the team has done a sort of an excellent job in negotiating our way out of some of the payments that we would have had to make.
Following that.
Primarily that conservatism and wawa and negotiating our way out certain payments volatile too were the primary reasons for the further reduction in capital.
Good news on.
Got it.
The patent claim.
Yes.
Liberty disclose a great deal it was it was that.
Okay.
Yeah. Thank you hi, Collyn I cant disclose that yet.
Okay.
The matter is closed and behind us.
As I said.
Yes.
And then <unk> it relates to.
Something within the OSB business.
Okay.
Well.
Leave it there can you talk to us a bit about how the distribution strategy has evolved for signing over the last couple of years.
And.
Are there any reasons again and answering some of the earlier questions a lot of the weakness in <unk> is with sheds, we get it but.
Are you finding your distribution strategy is allowing you to grow at the pace you want or how does your distress strategy compare with some of the other signing companies. So.
Any changes any needs to change tactics at all how does it compare versus peers.
Yes, great question George.
Going into Covid in 2019.
Let me just take a macro view macro.
Answer to that question and then move to our strategy. So.
Crow retailer well, there's consolidation going on in the channel and pro retailers and other one step.
Market access vehicles.
Consolidation of grown in importance.
Traditionally we have been on a two step distribution as our primary means of.
Accessing the builder contractors.
Historically analytics two step distribution is still really important to us, but our ability to access the large national builders through the pro retail channel.
Really speaks to a need to have a more direct relationship more direct sales into pro retail and up and by the way and not that this has ever.
That controversial, but also similarly for.
For the one steppers that access repair and remodel. So we had an initiative going into 2019 of placing reloads and strategic.
Urban populations and having a more direct.
Access for certain parts of our portfolio to access national builders.
And contractors argue.
Obviously during COVID-19 and the demand for the product we put.
That initiative all hold in.
Every time, we can do just to keep up with the orders.
As product became available this year and we had inventory internally, we have stepped up the pace of.
This kind of reload strategy in the marketplace to have a more direct access so.
No.
So cloud and there can be some pain associated with that.
As we build that infrastructure to access that directly.
<unk>.
Confident that is going to pay off in the long term as we continue to execute our big builder strategy and our repair and remodel strategy.
As you.
Slide in your question that is consistent with what other large specialty manufacturers have done over the years to make sure the market access is.
Is keeping up with the tops and this let me say so no.
I am not.
In no way want to imply that this this years volume is somehow constrained by lack of distribution.
Quality or anything like that we have really good distribution in place, but we are in this transition aerie period, where we're going more direct with the pro retailer and and and one step or for R&R and so that that because we have the inventory available to do that and open. These reloads. So it is bit of a transition every period for us.
But in the long run I believe it's going to pay off.
Wouldn't be doing it.
Oh for sure Brett.
Okay. Thanks, I'll turn it over and come back in queue. Thank you.
Welcome one moment for our next question please.
Question comes from the line of <unk> <unk> with BMO. Your line is now open.
Good morning, and thank you for taking my question.
Starting with Q2's fighting volume drop is there any way you can quantify.
You mentioned several times that the shed businesses Meek.
Can you quantify how much volumes in the shed business.
We're down in Q2 and has that.
Glenn changed at all so far in Q3.
Yes.
Fortunately there has been a little but there has been a shift towards some of those shared manufacturers are back in our order file.
There was very little of that activity in the first half and particularly in Q2. So we have seen a bit of a strengthening there.
And then as far as the.
Quantifying the amount down.
About we were down about 20% over prior year first half volumes.
Shared versus prior year.
Look at the.
We are.
We're estimating our shed business to be somewhere around 30% of our volume 25 again, it's hard to get too fine a point on it because some of it goes through distribution, but just given the weakness in the <unk> and the direct set direct shared indirect shed distributors volumes that we've seen.
In the second half.
And our conversations with shed manufacturers that that segment is down significantly.
Got it that's helpful and then as my follow up.
Can you.
Can you give us some sense in terms of.
The inventory Destocking that you saw in siding how months.
In all kind of that impacted you all volumes.
In Q2 or to put it differently.
Can you give us some sense of central trends underlying customer demand in siding.
Q2, and what you are seeing there.
Yes so.
Sell through the sell through demand at our distribution.
Given the best information, we have which isn't 100% has been obviously been stronger than our sales into distribution because we do know the inventories have been worked down.
March and so the.
The sell through is going to be healthier than what we're experiencing right now.
And again as you know Keith you've been following us for a while once that once we get to a stable.
Inventory situation and distribution all of that volume will show up in our order file where it's not where it's not doing that today.
I will just add a little color to it as complex right now I think distribution is still trying to figure out what the new normal inventory level should be given given the COVID-19 experience given the fact that.
Throughout the Covid don't mean keep speaking the COVID-19, but during that period of time, which you saw that two year period. The introduction of expert finish which carriers a lot requires a lot more inventory to carry the color palette.
Our distribution and Nols.
I was trying to figure out what is the right amount of inventory needed to service the market. So I think there are some some of that uncertainty is playing into that.
The order strategy.
Our distributors.
But once again once we get to a point, where we are.
All folks are comfortable with the inventory level, then we'll see that.
Direct sale sell through showing up in our order file, but it certainly hasnt been a contributing factor in the first half two.
Our overall volume, it's just that the inventory level that we've had to work through.
Got it that's helpful perspective, I'll jump back in the queue. Thank you.
Thank you Mike Your cable one woman for our next question.
Our next.
Comes from the line of Sean Stewart with TD Securities. Your line is now open.
Thank you good morning.
I won't ask any siding questions any closing I'm covered there.
On Capex, Alan you touched on some of the nuance with the houlton payments being deferred can.
Can you give us a sense as you look at 2024.
Spending on siding conversions next year, how that would stock up versus $120 million to $130 million. This year.
And.
Ed.
It is actually genuinely too early for me to make a good call on that.
Coal, though right now.
As we're developing our plans probably similar.
It might get a call right now no no significant change.
And so we can say, but that's closest to that closer to the truth thankfully.
That's good enough for me.
Another question on OSB.
Be interested in your thoughts on the run we've seen.
Year to date, but especially of late.
It seems like new home constructions.
Versus muted expectations, but your perspective on what's driven the run we've seen and.
At what point do you consider industry supply growth.
As a mitigating factor that could undermine the momentum we've seen of late.
Well I think what we've experienced this year has been.
Manufacturing.
<unk> and LP coming into the year predicting a soft housing market and kind of gearing production plans.
What we did gearing our production plans accordingly, and then having stronger than pretty much every month the stronger than expected housing forecast also say unlike siding.
OSB inventories were lean coming into the year as distributors work those inventories down.
And so minimal minimal to low not minimal, but low inventories in the channel.
In February so that when the building season hit and was stronger than anticipated.
There was some scrambling for volume and.
Even as big as the OSB business is the industry I mean, once distribution gets behind on inventory, but sales were strong.
It's difficult to catch up and that translates into pricing so.
Just I'll just say.
I have two.
Listen I've predicted OSB pricing to our board of directors.
Got it wrong every time the last six years. So it can no longer even pretend that I know what's going to happen.
Tomorrow with OSB pricing, but I would just say this is this is August .
<unk> got three more months of really good housing building and construction weather ahead of us.
It's typically September and October are really strong.
Demand.
In this industry for both OSB and siding.
And so we.
We feel good about the outlook for the next little while I'm, not saying the pricing cat bounce around up or down given the elevated levels that we're seeing it today, but I mean, the channel still pretty tight and.
And I.
I feel good about our near term outlook for OSB, and then I think once we get to Thanksgiving.
We'll have to reassess and we're already doing that analysis of what we're going to do in order to match our capacity to the demand that we see in our order file.
But and so I guess, we'll talk about that on the next call but.
I feel good about the outlook in the near term as far as the.
Demand and capacity situation for our production and for the industry.
That's great detail. Thanks, very much that's all I have.
Thank you one moment for our next question. Please.
Our next question comes from the line of Kurt Yinger with D. A Davidson your line is now open.
Great. Thanks, and good morning, everyone.
I just wanted to stick with <unk> here good morning for a minute.
I think you referenced some kind of deferred maintenance and some market curtailments, maybe that was primarily a Q1 comment but.
Can you just help us.
Kind of frame, what the upside could be in terms of OSB volumes in the back half of the year and then just on Peace Valley, specifically I mean.
How is production going at that Melanie any recent impacts from wildfires or anything like that.
We've had no.
The AZ.
So we've got no wildfire related.
Downtime.
Any of the Canadian Mills.
Had some fire.
In the area, but not anything that's impacted would flow our ability to produce.
We are running.
Three shifts in peace Valley three in Milwaukee.
And forecast no change of that throughout the rest of this year and then as we at any given time.
And our production planning as we see demand weaken.
We're not we're not putting.
And needed volume into the market. So we shipped downtime around in our system, just given the cost situation or the demand situation and that given week and so we will continue to run that balancing act as we go through the year and it has been part of each quarter's operating plan.
Moving moving downtime around.
And that's how we will run for the rest of the year.
When you say second half versus first half I mean, if demand is higher in the second half we will run more production.
But when you look at the half of the year again.
Keep in mind.
And December can be fly from a demand standpoint typically.
And there is really no typical OSB year, but typically we do take downtime around the Christmas holiday season.
As we as demand slows in and then we give.
Use that use that timing and do some maintenance work. So we'll be planning as I mentioned earlier, we'll be doing that planning throughout the rest of the year and we'll make the right moves to make sure. We have the right balance as we proceed into enter into early next year.
Got it okay. Thanks for that and then just my second question I mean at a high level.
Can you maybe just talk about what you think kind of annualized siding volumes or maybe from an operating rate perspective, what that would need to look like kind of excluding some of these short term factors to get back to that kind of long term goal of 25% EBITDA margins.
That's the simple answer is.
They were so.
If you think about the take a look at the Q2 <unk> debt.
The EBITDA margin is so volume dependent and so if you were to take.
Accounts have actually done the math, but it's relatively simple if you take that Q2.
Waterfall and you add back the volume at that high variable margins you are very close to that so.
But for the volume decline this year, we'd be at that rate.
As we all know.
As temporary this is a business that's on a growth trajectory and therefore that growth.
We'll deliver the margins that we've committed to.
Okay. Thanks for that Alan Good luck here in Q3 guys.
Okay. Thanks, Kurt Thank you one moment for our next question.
And our next question will come from the line of Mark <unk>.
Wineshop with Seaport Research partners. Your line is open.
Thanks.
Maybe following up a little bit on your answer to the last question I mean, one difference obviously as you know have the golar as well.
And in your EBITDA margins for a number of different reasons were not 25%.
Last year either.
And I guess, what I'm, just trying to square that with all these different moving parts.
If I, if I look at where including to go like your capacity would be in kind of the indicated volumes for this year I think youre kind of 70% recognizing against the goal is not really able to run full this year, but.
And so kind of the first questions like.
How do you think through the volume increase to that point, where you are at.
Pretty healthy utilization rates, and where you need wawa as.
Capacity to be available can you sort of just walk us through.
The thinking there.
I'm going to try it because I'm not sure I fully understand the question that it can be a dangerous thing to let my mouth Road, one I'm not sure I fully understand the question.
I'm going to make the attempt so as weak.
Two things if you look at our business right now as I tried to point out we are maintaining we're ramping up to golar.
So that we are in a position to benefit from the value of the upside in a growing market.
And the growth that is coming.
And we're carrying that cost.
Deliberately.
So we're all we're already carrying some of the cost of that essentially future growth. When we do bring answer Golar, yes, you're right that will that will add.
Our fixed cost base in advance of the volume as always happens, but it will be a smaller proportion of the whole so.
So the bigger we get.
It's hard to run at a faster rate.
With me on less than one one extra one mill being ramped up per year.
And so the larger we get.
If you bear with me on the logic with one extra mill being added to the fleet per year, let's imagine thats, our long term trajectory that extra mill will be a small proportion of the hull and the remainder of the business will continue to harvest those high margins and we mustn't forget the continued pricing power of the business and the mix shift towards Xpress finished and so on that also.
We'll continue to announce the larger.
And we should not forget our ability as I think we are demonstrating right now to run our mills extremely efficiently again.
All good points and absolutely kind of that embedded cost is impacting the margin quite a bit this year.
As you ramp to go I guess sort of the heart of the question was.
Theres. So many of these moving parts and it's I realize it's difficult to answer but.
<unk>.
How do you see the track to what would be a significant increase in volume and so I mean, how much of it is a function that you think destock and I know if you can quantify how much destock is suppressing how much sheds is under normal and then.
Once we adjust for those two factors how long in our kind of normal growth environment. If it's flat housing does it take us to get to.
The points, where your system is fully utilized.
It's probably unfair to ask that question on the fly like this but I tried.
Thank you.
I'm, sorry, I haven't got a half handset.
So just as you are being a <unk> I'll be unfair in say a long term growth.
Algorithm, our promise to everybody listening is that will grow somewhere around eight to 10 points better than the market.
And we still believe that's the case the definition of the market may be a bit hazy from time to time, but in the long over the long run.
Just as we have over the last decade, we're highly confident in that and that growth trajectory as well as the pricing power of the products. So so.
Well.
Highly confident in our long term strategy being able to deliver that growth.
I'll start that and I'll, let my mouth, a bunch of it.
And I'll stop there thanks Alan.
Thank you one moment for our final question.
And our next question comes from the line of Paul Quinn with RBC capital markets.
Okay, great. Thanks, guys. Good morning, maybe just following up on that thesis.
Thesis.
Growing 8% to 10% better than market.
The guidance.
Guidance for 'twenty three is down 10% on revenues. So if we split that.
That thesis around again or do you feel quite comfortable that you're shrinking less faster than the rest of the competition or put it. Another way how are you doing when you sit back relative together compensating the siding and how well they're performing.
I'll take it if you allow me I will take that in three parts so shared.
And let's just say roughly yes, we've been throwing out numbers, but a third of our business.
Just for illustrative reasons.
We are.
Our competitors and shed.
No no worse off than anybody else because of it.
That market is down we have dominant market share for panel for the panel component of sure.
Our repair and remodel our expert finished I feel good about that I think we are taking share this year and that and that with that product given that we're holding our own.
From a revenue standpoint.
So I feel like share gain as possible, they're now the more interesting one as is new construction.
I feel good about our position with new construction and that we're holding our own if not gaining share with the where our strength.
<unk> has been historically, which is the smaller or regional builders.
With our big builder.
We are we launched a product as you know builder series in order to have a competitive position there and.
We are taking market share there, but from a tiny starting point.
So we can't avail about that one saving us right now because of the.
The market share that we had with lap siding at the big builder was pretty low 18 months ago, but the product that we have there is competitive and.
It is.
It's a competitive landscape deploy Ian but we are recording wins there.
Yes.
That I feel like demonstrates our ability to gain market share there it's not enough at this point in time from a from.
Our volume standpoint to overcome shed being down like it has been it's not enough to overcome housing starts being down the way they were down year over year, but for the long term it plays well with our ability to position ourselves to take advantage of the other coming upswing in housing.
Alright.
And then just any change in South America for the balance of the year versus the first half.
No.
Our team down there feels like the second half could be a little stronger than the first half, but I think for modeling purposes apologist.
Replicated youll be pretty accurate and then hopefully there is a little upside to that.
Alright, that's all I had best of luck.
Thank you Paul.
Thank you and that concludes our Q&A portion I would now like to hand, the conference back to Mr. Aaron <unk> for closing comments.
Okay. Thanks, Norma and thanks, everyone for joining us this morning with no more questions, we'll bring in the second quarter call for LP building solutions to a close.
Have a great day stay safe and we'll look forward to talking to you soon.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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