Q3 2023 Louisiana-Pacific Corp Earnings Call
Good day and welcome to the Q3 2023, Louisiana Pacific Corporation 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 to ask a question. During the session you will need to press.
Star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question Press Star. One again. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker, Mr. Aaron <unk>, Vice President of Investor Relations and business development. Please.
Go ahead Sir.
Yeah.
Thank you operator, and good morning, everyone.
Thank you for joining us to discuss Lp's results for the third quarter of 2023 as well as our updated full year outlook. My name is Eric and I am <unk>, Vice President of Investor Relations and business development.
With 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 a presentation that is available on <unk> IR web page, which is investor Doc LP Corp. Dot Com. Our 8-K filing is also available there along with our earnings press release, and other materials detailing LP strategy and sustainable business model.
Today's discussion will contain forward looking statements and non-GAAP financial metrics as described on slide two and three of the earnings presentation appendix.
The appendix of the presentation also contains reconciliations that are further supplemented by this morning's 8-K, I will incorporate that content herein by reference rather than reading the slides.
And with that I'll turn the call over to Brad.
Thanks, Erin and thank you all for joining us to discuss Lp's Q3 results and our full year outlook.
Third quarter was our strongest of the year by far for both siding and OSB.
Also a quarter, which outpaced teams achieved key milestones for growth and sustainability, one of which we were recognized for our continuing focus on building a stronger and more inclusive culture.
Page five of the presentation shows financial highlights for the quarter LP generated $728 million of net sales in the quarter, which was 15% lower than Q3 of last year.
But higher OSB prices and improved sell through of inventory normalization in siding led to a higher overall EBITDA margin than last year with the result that LP earned $190 million in EBITDA, 25% less than Q3 of last year.
As a result LP exceeded the high end of our guidance range. Despite OSB prices falling in September.
The $190 million and EBITDA translated very cleanly to $197 million in operating cash flow and LP ended the quarter with $160 million in cash on hand.
Returning $17 million to shareholders via dividends and investing $49 million in growth and sustaining capital, we repaid our revolving credit facility and ended the quarter with over $700 million in liquidity.
Page seven of the presentation shows siding growth relative to the housing market on a trailing 12 month basis.
Remember that Q3 of 2022 was the best quarter on record for siding volume and revenue as we remained on a managed order file until early December of last year.
Spike is very difficult comp on a trailing 12 month basis smart side sales volume beat single family housing starts by 10 percentage points.
Starts were down 16% siding volume was down only 6% and siding prices were up 8% as you can see in the Pie chart to the right expert finished with stable at 8% of volume in the quarter.
In the first half of 2023 siding sales were dampened by inventory Destocking. After we finally transition from a managed order file late last year Q.
Q3 saw the normalization of sell through rates and inventory levels as expected and despite a market that is facing increasing affordability challenges higher interest rates and elevated economic uncertainty the third quarter saw a sequentially higher volumes and average selling prices in the siding business compared to Q2.
Operator: Good day, and welcome to the Q3, 2023 Louisiana-Pacific Corporation Earnings Conference call. At this time, all participants aren't a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. So withdraw your question, press star 11 again. Please be advised that today's conference is being recorded.
As a result, we believe that the order patterns and channel inventory levels. We are experiencing now are consistent with normal seasonal patterns with minimal lingering headwinds from destocking.
This was not the first time that the siding business has been on a managed order file.
And the inventory digestion period before the resumption of our normal order cadence takes time.
I am proud of the perseverance and dedication that siding sales and operations teams demonstrated as we work through this process before I hand, the call over to Alan I want to mention a few additional accomplishments in the quarter.
Aaron Howald: I would now like to hand the conference over to your speaker, Mr. Aaron Howald, Vice President of Investor Relations and Business Development. Please go ahead, sir. Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the third quarter of 2023, as well as our updated full year outlook. My name is Aaron Howald, and I am LP's Vice President of Investor Relations and Business Development. With me this morning, our Brad Southern, LP's Chief Executive Officer, and Alan Hockey, LP's Chief Financial Officer.
Last month, we officially opened our newest pre finishing facility in vast New York.
This brings enhanced scale efficiency and geographic expansion to expert finish.
I want to officially welcome to Bath team to LP Fathers', a third new facility for the siding business in the past two years after the conversion to open in <unk> and.
I am proud of the safe and efficient execution of all our recent capacity additions in siding and confident that we are well positioned for resumed growth in the diverse markets we serve.
Aaron Howald: During this morning's call, we will refer to a presentation that is available on LP's IR webpage, which is investor.lpcorp.com. Our 8K filing is also available there, along with our Earnings Press release, and other material detailing LP's strategy and sustainable business model. Today's discussion will contain forward-looking statements and non-gap financial metrics as described on slides 2 and 3 of the Earnings presentation. The appendix of the presentation also contains recommendations that are further supplemented by this morning's 8K. I will incorporate that content here and by reference rather than reading the slides.
In the third quarter LP published our third sustainability report as well as environmental product declarations for the structural solutions portfolio of value added OSB products.
Structural solutions products like textural radiant barrier, whether logic sheathing with integrated air and water barrier and legacy flooring, all sequester more carbon, but it's limited during their manufacturing and lifecycle.
Brad Southern: And with that, I'll turn the call over to Brad. Thanks Aaron, and thank you all for joining us to discuss LP's Q3 results in our full year outlook. The third quarter was our strongest of the year, by far, for both citing and OSB.
Our customers and shareholders can be confident that lp's weight of engineered wood products combined with a responsible and sustainable management of forest resources means that <unk> can deliver best in class OSB and siding products, while also having a positive impact on the environment.
Brad Southern: There's also a quarter in which LP's teams achieved key milestones for growth and sustainability, and one of which we will recognize for our continuing focus on building a stronger and more inclusive culture. Page 5 of the presentation shows financial highlights for the quarter. LP generated $728 million in net sales in the quarter, which was 15% lower than Q3 of last year. At higher OSB prices and improved sell-through of inventory normalization and siding led to a higher overall EBITDA margin than last year.
This was most notable inside and we're competing products are made predominantly a cement or vinyl.
When it comes to durable products with great curb appeal and positive impact for builders contractors homeowners in the environment. It is very hard debate lp's portfolio of sustainable and carpet negative engineered wood building solutions Lastly, before I turn the call over to Alan I am happy to say that LP was named by our local newspaper.
The Tennessee and USA today, as a top workplace in middle, Tennessee, and by Newsweek as one of America's greatest workplaces.
Brad Southern: With the result that LP earned $190 million in EBITDA, only 5% less in Q3 of last year. As a result, LP exceeded the high end of our guidance range despite OSB prices falling in September. The $190 million in EBITDA translate the very cleanly to $197 million in operating cash flow and LP ended the quarter with $160 million in cash on hand after returning $17 million to shareholders, the adividends, and investing $49 million in growth and sustaining capital. We repaid our evolving credit facility and ended the quarter with over $700 million in liquidity. Page 7 of the presentation shows siding growth relative to the housing market on a trailing 12-month basis.
<unk> is safe and inclusive culture, where all of our team members feel welcome and encouraged is its own reward while we will never stop trying to improve I am proud of our company and the progress we continue to make.
And with that I will turn the call over to Alan.
Thanks, Brad Slide seven of the presentation shows the third quarter year over year revenue and EBITDA waterfall for siding.
The third quarter of last year. It was a high watermark for both siding volume and revenue and admittedly presents a difficult comp this year.
However, as predicted volumes and prices improved sequentially over the second quarter of this year by 6% and 2% respectively.
On a year over year basis prices were up three percentage points the.
Brad Southern: Remember that Q3 of 2022 was the best quarter on record for siding volume and revenue as we remained on a managed order file until early December of last year, last year. Despite this very difficult cop on a trailing 12-month basis, Mark's side sales volume beat, single-family housing starts by 10 percentage points. Starts were down 16%, the siding volume was down only 6%, and siding prices were up 8%. As you can see in the pie chart to the right, the export finish was stable at 8% of volume in the quarter.
The combined impact of last January list price increase and favorable product mix at a $10 million of revenue and EBITDA.
Volume was down 16% with expert finished holding its ground rather better than <unk>.
I am going to take a moment now to recap the ramp up of conversion cost to trend this year.
The business kind of an embedded ramp up costs of $16 million in the first quarter of this year $10 million in the second quarter and now $8 million this quarter, including $1 million for the recently opened back pre finishing facility.
Brad Southern: In the first half of 2023, siding sales were bampened by inventory destocking after we finally transitioned from a managed order file late last year. G3 solved a normalization of sell through rates and inventory levels. As expected, in despite a market that is facing increasing affordability challenges, higher interest rates, and elevated economic uncertainty, the third quarter solved sequentially higher volumes and average selling prices in the siding business compared to Q2. As a result, we believe that the order patterns and channel inventory levels we are experiencing now are consistent with normal seasonal patterns with minimal lingering headwinds from these stockings. This was not the first time that the siding business has been on a managed order file, and the inventory digestion period before the resumption of the normal order cadence takes time.
This $8 million is $3 million higher than the $5 million, we incurred in the third quarter of last year and it is this $3 million increase this shows up on the waterfall.
Now I mentioned this detail to emphasize the point that our current EBITDA margins are carrying the burden of the weight if you will.
Of these costs.
Moreover, the recently opened <unk> facility will add about $4 million of incremental costs in the fourth quarter as it begins ramping up.
So despite generating a respectable 21% EBITDA margin in the third quarter.
Adding back the embedded $8 million I, just referenced together with $5 million for the dosing press rebuild as shown in the last column of the waterfall, which produced an underlying EBITDA margin of about 24%.
This margin was of course helped by the slowing of inflationary pressures on freight and raw materials, which delivered a $9 million EBITDA tailwind net of wage inflation.
Brad Southern: I am proud of the perseverance and dedication that siding sales and operations teams demonstrated as we work through this process.
Slide eight till the third quarter story for OSB price gains and cost controls more than offset volume reductions, resulting in a small year over year increase in EBITDA. Despite the revenue decline.
Brad Southern: Before I hand the call over to Alan, I want to mention a few additional accomplishments in the quarter. Last month, we officially opened our newest pre-finishing facility in Bath, New York. This brings enhanced scale, efficiency, and geographic expansion to expert finish. I want to officially welcome the Bath team to LP. Bath is a third new facility for the siding business in the past two years after the conversions of hope and encegola.
I know the price drop late in the quarter, notwithstanding higher prices added $28 million of revenue and EBITDA compared to last year.
However, despite higher net prices the overall demand environment was softer than last year with open market volumes, particularly weak.
Brad Southern: I am proud of the safe and efficient execution of all our recent capacity additions in siding and confident that we are well positioned for resumption growth in the diverse markets we serve. In the third quarter, LP published our third sustainability report as well as environmental product declarations for the structural solutions portfolio of value added OSV products. So, our solutions products like text shield, radiant barrier, whether logic is sheeding with integrated air and water barrier, and legacy flooring, all sequester, more carbon that is omitted during their manufacturing and life cycle.
So the volume reduction in the quarter reflects not only the removal of this golar note from the OSV fleet, but also market curtailments in response to the softer demand.
As with siding raw material deflation provided a small tailwind, but the star of the show was cost control, which contributed $11 million of EBITDA and <unk>.
Woods, despite significantly lower volumes, the OSB business run very efficiently as demonstrated not only by the dollars, but by the four percentage point improvement in operating efficiency or OE.
As Brad has already mentioned it was a clean quarter for cash flow as shown on slide nine.
$119 million of EBITDA, producing a $187 million of operating cash flow.
Brad Southern: Our customers and shareholders can be confident that LP's suite of engineered wood products, combined with our responsible and sustainable management of forest resources, means that LP can deliver best-in-class OSV-insiding products, while also having a positive impact on the environment. This is most notable in siding where competing products are made predominantly as cement or vinyl. When it comes to durable products with great curb repeal and positive impact for builders, contractors, homeowners, and the environment, it is very hard to beat LP's portfolio as sustainable and carbon-negative engineered wood-building solutions.
We spent $49 million and growth and maintenance capital returned $17 million to shareholders via the quarterly dividend and repaid the $30 million draw on our revolver as.
As a result cash balances increased by $19 million in the quarter to end September at $160 million.
<unk> has continued to increase subsequently and currently stands at a little over $200 million.
Finally, let me discuss our updated full year outlook on slide 10.
With respect to Capex.
Having already spent $236 million so far in 2023, the fourth quarter will likely look a lot like the third quarter for capital spending.
Brad Southern: Lastly, before I turn the call over to Alan, I'm happy to say that LP was named viral local newspaper The Tennis Singing and USA Today is a top workplace in middle Tennessee. And by Newsweek is one of America's greatest Places. Building a safe and inclusive culture where all of our team members feel welcome and encouraged to this own reward. While we will never stop trying to improve, I am proud of our company and the progress we continue to make.
The bulk of the near term growth and conversion capital is behind us with Golar and back now up and running so the fourth quarter spend will mostly be on sustaining maintenance.
Citing revenue for the third quarter largely met our internal expectations. So we are reiterating the guidance we provided on our second quarter call that we expect a full year siding revenue decline of about 10%, which implies a fourth quarter revenue decline of about 16%.
Alan Hockey: And with that, I will turn the call over to Alan. Thanks, Brad. Slide 7 of the presentation shows the third quarter year of a year of revenue and EBITL waterfall for siding.
OSB, we will continue to of algorithmic revenue guidance based on the assumption that OSB prices remain at the levels published by random links last Friday.
Alan Hockey: The third quarter of last year was a high watermark for both siding volume and revenue and admittedly presents a difficult compass here. However, as predicted, volumes and prices improved sequentially over the second quarter of this year by 6% and 2% respectively. On a year-over-year basis, prices were up 3% each points. The combined impact of last January's list price increase and favorable product makes added $10 million of revenue and EBITL. Volume was down 16%, with expert finish holding its ground rather better than primed.
Under this price model and accounting for market downtime, we would expect OSP revenue to be down 30% sequentially compared to the third quarter.
Under these assumptions, including the startup cost of the battery Prefinished facility I referenced earlier and some maintenance expenses in both businesses. We would expect total company fourth quarter EBITDA to be between 60% to $80 million.
Now before we take your questions. Please allow me to anticipate water.
Alan Hockey: I am going to take a moment now to recap the ramp up and conversion cost trend this year. The business carried embedded ramp up costs of $16 million in the first quarter of this year, $10 million in the second quarter, and now $8 million this quarter, including $1 million for the recently opened-a-bath pre-finishing facility. This $8 million is $3 million higher than the $5 million we incurred in the third quarter of last year, and it is this $3 million increase that shows up on the waterfall.
We're not yet in a position to offer revenue or EBITDA guidance for 2024, but our capital allocation strategy remains unchanged as well the flexibility with which we deploy capital to invest in capacity.
The housing and repair and remodel markets are basically flat next year as most forecast is currently anticipate then so golan Bath provide lp's siding business with sufficient capacity to press and pre finishing of smart side to meet demand.
Alan Hockey: Now, I mentioned this detail to emphasise the point that our current EBITL margins are carrying the burden or the weight, if you will, of these costs. Moreover, the recently opened-bath facility will add about $4 million of incremental costs in the fourth quarter as it begins ramping up. So, despite generating a respectable 21% EBITL margin in the third quarter, adding back the embedded $8 million I just referenced, together with $5 million for the Dawson Press rebuild, as shown in the last column of the waterfall, would produce an underlying EBITL margin of about 24%. This margin was, of course, helped by the slowing of inflationary pressures on freight and raw materials, which delivered a $9 million EBITL tellwind net of wage inflation.
And when might we start converting the recently are quite wawa facility deciding well the answer as established on prior calls is when the market demands it.
We don't know exactly when that will be but we have sufficient capacity liquidity and most importantly flexibility to be responsive to demand when that time codes.
And in the meantime, our capital allocation strategy remains to earn cash invest in our growth is needed and return a significant amount of the remainder to shareholders.
And with that we'll be happy to take a round of questions.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Alan Hockey: Slide 8 tells the third quarter story for OSB, where price gains and cost controls more than offset volume reductions, resulting in a small year of year increase in EBITL despite the revenue decline. I know as the price drop late in the quarter notwithstanding, higher prices added $28 million of revenue in EBITL compared to last year. However, despite higher net prices, the overall demand environment was softer than last year, with open market volumes particularly weak.
At a time restraints, we ask that you. Please limit yourself to one question and one follow up question. Please standby, while we compile the Q&A roster.
And our first question will come from the line of Mark Weintraub with Seaport Research partners. Your line is open.
Thank you.
The first question.
If we think about the fourth quarter siding margins.
Alan Hockey: And so, the volume reduction in the quarter reflects not only the removal of the seagull and off on the OSB fleet, but also market cutelments in response to the softer demand. As with siding, raw material distillation provided a small tailwind, but the star of the show was cost control, which contributed $11 million of EBITL. In other words, despite significantly lower volumes, the OSB business ran very efficiently, as demonstrated not only by the dollars, but by the 4% each point improvement in operating efficiency or OEE.
I guess, we're going to have Bob against us, but kind of order of magnitude.
How should we think about it being relative to the third quarter.
Oh, yes.
Given that volumes in the fourth quarter. If we hit this this forecast are going to be lower than the third quarter and the business has a high variable margin.
Then.
Even excluding the best cost EBITDA margin would have been at a lower than Q3, and then of course as we add on as you pointed out.
Alan Hockey: As Brad has already mentioned, it was a clean quarter for cash flow as shown on slide 9, with $190 million of EBITL producing a $187 million of operating, in cashflow. We spent $49 million in growth and maintenance capital. We turned $70 million to share holders via the quarterly dividend and repaid the $30 million draw on our revolver. As a result, cash balances increased by $90 million in the quarter to end September at $160 million. Cash has continued to increase subsequently and currently stands at a little over $200 million.
The basketball side low the margin a little bit more.
So the.
The closest approximation.
Two the siting Q4 performance closest approximation is probably Q2 of this year.
Similar ish in terms of.
Most of the drivers.
<unk>.
Got it and I believe that was about 18%, 19% EBITDA margins in Q2.
Yes that was Q2, so the closest approximation I'm not necessarily committing to that number but the closest approximation the shape of the quarters very similar yes, okay. Thank you and then.
Alan Hockey: Finally, let me discuss our updated four-year outlook on slide 10. With respect to CapEx, having already spent $236 million so far in 2023, the fourth quarter will likely look a lot like the third quarter for capital spending. The bulk of the near-term growth and conversion capital is behind us with Segola and Bathnall up and running, so the fourth quarter spend will mostly be on sustaining maintenance. Siding revenue for the third quarter largely met our internal expectations, so we are reiterating the guidance we provided on our second quarter call that we expect to fully assiding revenue decline of about 10%, which implies a fourth quarter revenue decline of about 16%.
We're thinking about next year.
Assuming youre not moving forward with Wawa and <unk> startup costs there.
I guess I'm kind of unlikely.
Can we add that 38 million of <unk>.
Startup cost with the Golar press rebuilds.
Expansion et cetera.
When we bridge 24 versus 23 or would you suggest we think about it differently from that.
I'd like to suggest.
Just thinking about it slightly differently. So a poll proportion of those costs are permanently embedded that a fixed cost of having the facilities now of course that sets us up.
Alan Hockey: For OSB, we will continue to offer algorithmic revenue guidance based on the assumption that OSB prices remain at the levels published by Random Legs last Friday. Under this price model and accounting for market downtime, we would expect OSB revenue to be down 30% sequentially compared to the third quarter. Under these assumptions, including the start-up costs of the Bathnall pre-finished facility I referenced earlier, and some maintenance expenses in both businesses, we would expect total company fourth quarter EBITDA to be between $60 million and $80 million.
To be able to bring on.
Incremental volume very efficiently because of that fixed cost infrastructure is largely already in place. So the real way to think about it is those embedded costs set us up to potentially have a tight variable incremental margin on additional volume next year.
That's the way to think about it so that that but it means that as volume comes on those cost still needs to be added again, because they are already embedded in our current run rate.
Okay.
Alan Hockey: Now before we take your questions, please allow me to anticipate one. We're not yet in a position to offer revenue or EBITDA guidance for 2024, but our capital allocation strategy remains unchanged, as will the flexibility with which we deployed capital to investing capacity. If the housing and repair and remodel markets are basically flat next year, as most forecasters currently anticipate, then Sir Gilbert and Bath provide LP Siding Business with sufficient capacity to press and pre-finish enough smart side to meet demand.
It's an investment that I say this a lot I know, it's an investment in the future.
That allows us to immediately.
Recognize the EBITDA from.
From incremental volume when we get it.
Okay, so but.
None of that $38 million have been quasi one time it should all be viewed as somewhat.
Yes.
Yes, I am being a little bit a little bit cagey. Some of it's embedded in some of its one time because some of the costs.
He is a good example of our ramp up costs when you're ramping up we have to we know we don't make a great product. So some of the product that gets produced as we ramp up is essentially scrapped as we as we learn to run efficiently. So some of those costs are indeed, those those startup costs.
Alan Hockey: And when might we start converting the recently acquired while our facility deciding? Well, the answer, as established on prior calls, is when the market demands it. We don't know exactly when that will be, but we have sufficient capacity, liquidity, and most importantly, flexibility to be responsive to demand when that time comes. And in the meantime, our capital allocation strategy remains to earn cash, invest in our growth as needed, and return a significant amount of the remainder to shareholders.
A bit too early for me to commit to a precise separation youre right some of those.
Inherent inefficiencies that would not be repeated the rest is fixed cost infrastructure that will be.
Thank you.
Unknown Executive: And with that, we'll be happy to take a round of questions. Thank you.
Thank you one moment for our next question.
Operator: As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.
Okay.
And that will come from the line of Kurt Yinger with D. A Davidson your line is open.
Operator: Through the time restraints, we ask that you please limit yourself to one question and one follow-up question.
Great. Thanks, and good morning, everyone.
I guess it seems kind of wrapped up this inventory normalization in Q3 any thoughts on how much of a headwind that's going to ultimately posed to volumes this year and and how of incoming orders trended as you've gone from kind of Q3 Q4 here.
Mark Weintraub: Please stand by while we compile the Q&A roster, and our first question will come from the line of Mark Weinthrob with Seaport Research Partners. Your line is out. Thank you.
Mark Weintraub: The first question, if we think about the fourth quarter siding margins, I guess we're going to have baths against us, but kind of order of magnitude, how should we think about it being relative to the third quarter? Oh, yeah, given that volumes in the fourth quarter, if we hit this, this forecast are going to be lower than the third quarter and the business of the high available margin, then, you know, even excluding the bath costs, the EBITDA margin, one of the lower than Q3, and then of course, as we add on, as you point out, the bath costs are lower than margin, a little bit more, so, you know, the closest approximation to the siding Q4 performs closest approximation is probably Q2 of this year.
Yes.
So from for Q4 2023.
<unk>.
Okay.
It's not the easiest thing to settle on a number for what the headwind was but if you look at.
Historical sales if you look at some of the inventory reporting we're getting now from distribution.
Can be as much as 100 million feet of volume that was sold last year and then moved out of the channel this year.
<unk>.
Is called when caused the headwind that you may.
<unk>.
As far as where we are today, we do have all customers back in the order file routinely.
On a normal cadence.
Based on history, and so we feel good that across the board across all different channels that we've worked through the inventory situation and we are seeing.
Mark Weintraub: Similar wish in terms of most of the drivers. Got it, and I believe that was about 18% to 19% EBITDA margins in Q2. Yeah, that was Q2, so closest approximation, I'm not necessarily committing to that number of the closest approximation, the shape of the court is very similar.
Real demand flow back through.
Consumer demand flowing back through to our order file.
Got it okay.
That's very helpful.
I guess as you look at.
Across some of the different products within smart side expert finish the builder series, maybe some of the volume that was going into the shed manufacturers that was weaker earlier in the year.
Alan Hockey: Okay, thank you, and then as we're thinking about next year, assuming you're not moving forward with Wawa and the startup costs there, which I guess seem kind of unlikely, can we add that 38 million of startup costs with the goal of press rebuild the bath expansion, et cetera, when we bridge 24 versus 23, or would you suggest we think about it differently from that? I'd like to suggest thinking about it slightly differently, so the proportion of those costs are permanently embedded, they're the fixed cost of having the facilities.
I guess are there any parts of that that you're particularly excited about kind of growing mid next year, notwithstanding a big change in kind of the macro demand environment or what do you see as kind of the biggest kind of above market growth drivers.
Over the next 12 months.
So Kurt.
Just say for the.
Sick of this question that.
New home construction is flat next year R&R R&R spend is flat next year. We're excited I'm excited about the opportunity to gain market share.
Alan Hockey: Now, of course, that sets us up to be able to bring on incremental volume very efficiently because of its fixed cost infrastructure is largely already in place. So the real way to think about it is those embedded costs set us up to potentially have a high variable incremental margin on additional volume next year. That's the way to think about it, so they're there, but it means that as volume comes on, those costs don't need to be added again because they're already embedded in our current run rate. And it's an investment, and I say this a lot, I know it's an investment in the future that allows us to immediately recognize the EBITDA from incremental volume when we get it.
Repair and remodel due to our expert finish.
Growth <unk>, New York facility, the Houlton plant behind it it's making product for that eastern seaboard and area where.
It's a highly active repaired siding repair and remodel market, but one where we are underpenetrated.
So as we build capability and capacity there and scale.
Theres, just a lot of opportunity for market share gains.
And then on the new construction side, we continue to.
Go to market with our builder series portfolio of products, which which provides us a competitive offering for the builder and while we have dipped.
Alan Hockey: Okay, so, but would none of that 38 million have been quasi one time, it should all be viewed as embedded or. Yeah, I'm being a little bit a little bit cagey, some of it's embedded and some of it's one time because some of the costs that has a good example of a ramp up cost when you're ramping up, we have to, we know we don't make a great product, so some of the product that gets.
Depending on the geography decent to good market share with smaller the smaller regional builders.
Our underpenetrated when it comes to the more national players and we're excited about the possibility for builder series to compete in that environment very mean.
Meaningful way.
To gain market share next year, there as well.
Alan Hockey: Produce as we ramp up is essentially a scrap as we as we learn to run efficiently, so some of those costs are indeed those those very start up costs, but it's a bit too early for me to commit to a precise separation. You're right that some of those are inherent inefficiencies that would not be repeated the rest is fixed cost infrastructure that will be. Thank you.
Sure, we already have really high market share there.
But we're looking at tweaking that are getting a few more points, but I think the meaningful growth above overall market growth for us over the next five years or so is going to be an expert finished the repair and remodel and then with <unk>.
Operator: One moment for our next question.
The bigger builders.
Okay Alright.
Alright, thanks for the color I appreciate it and good luck here in Q4 guys.
Thanks Kurt.
Thank you one moment for our next question.
Kurt Yinger: And that will come from the line of Kurt Yinger with D.A. Davidson. Your line is open. Great thanks and good morning everyone. I guess as he's kind of wrapped up this inventory normalization. The normalization in Q3, any thoughts on how much of a headwind that's going to ultimately pose to volumes this year and how the incoming orders trended as you've gone from kind of Q3 to Q4 here. Yeah, well, so from for Q for 2023, you know, we're, you know, it's not, it's not the easiest thing to settle on the number for what the headwind was.
And that will come from the line of Michael Rock slammed with <unk> Securities. Your line is open.
Thank you Brad.
And Darren for taking my questions.
I just wanted to follow up on Curt's question.
In terms of <unk>.
Market share and how you intend to gain market share.
It seems like one of your siding competitors are gaining share with homebuilders.
It would be very vocal about it.
You also mentioned last quarter that you were a little under penetrated with the large national builders, you just mentioned that again.
Ryan here.
Dan your approach with the builders, what youre doing to gain share.
I'm from.
Market conditions, and what had been Destocking is there anything constraining you from gaining more notable share with the builders.
Kurt Yinger: But if you look at historical sales, if you look at some of the inventory reporting we're getting now from distribution, you know, it can be as much as a hundred million feet of volume that was so last year and then moved out of that. The channel this year, which has caused the headwind that you've mentioned. As far as where we are today, you know, we do have all customers back in order file routinely, you know, like an on a normal cadence, you know, based on history.
No.
There's no constraint.
US being new generally new to that.
Net sales cycle, let me caveat that a little bit because we've had decent.
Through with our trim portfolio of products with national builders for a while so it's not it's not like that's alien to us to sell into the big National builders also very strong.
Kurt Yinger: And so we feel good that across the board across all different channels that we've worked through the inventory situation and we were seeing, you know, real demand flow back through the consumer demand flowing back through to our order file. Got it. Okay, that's, that's very helpful. And then I guess as you look at, you know, across some of the different products within smart side, you know, expert finish, the builder series, maybe some of the volume that was was going into the shed manufacturers that was weaker earlier in the year.
Market share there on the OSB side, so the relationships exist with these big National public builders, primarily for our history of selling OSB products through that through that channel, but the key to us has been as <unk>.
Having a competitive product, which we do now.
The fact that we know we believe.
The product is more than competitive with superior and so.
But it's a long sales cycle.
<unk>.
In these in these kind of deals and we've been working those hard all through this year and are optimistic about the progress we've made and as we look forward into next year, we see that opportunity for growth as I've already mentioned.
Kurt Yinger: I guess are there any parts of that that you're particularly excited about kind of growing next year, notwithstanding a big change and kind of the macro demanded environment or what do you see as kind of the biggest kind of above market growth drivers over the next 12 months. Yeah, so current, you know, if you would just say for the sake of this question that new new home constructions flat next year on our on our spin is flat next year.
We are building off from a lap siding standpoint, we're building off a very small base and so the big National builders.
The ability for us to grow that what for us would be substantially.
We're pretty encouraged about but it'll take time.
But the good thing about these deals they are multi year or at least single year at least and so there is some assurance and surety of supply once.
Kurt Yinger: We're excited. I'm excited about the opportunity to gain market share in repair and remodel due to our expert finish. Growth, the bath, New York facility, the health and plant behind it, it's making, you know, product for that eastern seaboard, an area where is a is a highly active repair, citing repair and repair model market, but one where we are under penetrated. So as we build capability and capacity there and scale. You know, there's just a lot of opportunity for market share gains and then on the new construction side that we continue to, you know, go to market with our builder series portfolio of products, which can provide us competitive offering for the builder and while we have depending on the geography decent to good market share with smaller, the smaller regional builders.
Once you are able to retain it.
Get it.
Got it I appreciate the color and then just one quick follow up on your competitors I believe one is that with a signing price increase in early January is that something that maybe you could use to your advantage and maybe in terms of trying to gain share use that against them as day.
My understanding had been pretty aggressive with their pricing with with builders over the last 12 to 15 months or so.
Well there is there are still I answered a little bit more generally then.
Against this one competitor I mean, obviously when it comes to big.
Big programs.
<unk>.
Cost of the whole package is critical to the success there.
So.
Kurt Yinger: We are under penetrated when it comes to the more national players and we're excited about the possibility for builder series to compete in that environment in a very meaningful way and us to gain market share next year there as well. You know, shed, we already have really high market share there. We're looking at tweaking that or getting a few more points, but I think the meaningful growth above overall market growth for us over the next five years is going to be an expert finish through repair and remodel and then with the bigger builder. All right, thanks for the color, Brad, appreciate it, you good luck here at Q4 guys. Thank you, thanks for. Thank you.
So yes.
If a competitor has a higher price than us.
That box gets ticked in our favor as we work these deals.
But typically that kind of always gets worked out in the back end anyway, and so really where we're trying to compete is off our value proposition, which is the quality of the product the aesthetics of the product and the ease of installation and.
And so.
That's that's how we lead and then obviously, though at the end of the day, we've got to be competitive on price as well.
And as I've mentioned, probably 100 times that already.
Already four or five times on this call. We finally have a product.
We're able to be competitive on pricing as well as bringing all of the other advantages of our smart side to the builder conversation.
Kurt Yinger: One moment for our next question. And that will come from the line of Michael Roxland with truest securities. Your line is open. Thank you, Brad, Alan and Aaron for taking my questions. I just want to follow up on Kurt's question in terms of market share and how you intend to gain market share. You know, it seems like one of your side competitors are gaining share with home builders and continue to be very vocal about it.
Got it thanks, very much and good luck in fourth Q.
Hey, Michael Thanks, Mike.
Thank you one moment our next question.
And that will come from the line of Susan Mcclary with Goldman Sachs. Your line is open.
Thank you good morning, everyone. Thanks for taking the questions.
Good morning, My first question is.
Last quarter, you had mentioned that you saw a fairly substantial decline in shed demand during that quarter and that was part of what was going through that siding segment is there anything thats changed or that is impacting the business as you think about the fourth quarter guide there.
Kurt Yinger: You also mentioned last quarter that you're a little underpenetrated with the large national builders. You just mentioned that again, Brad, here. So as well understand your approach with the builders, what you're doing to gain share. And you know, aside from, you know, more conditions and what had been these documents, are anything constraining you from gaining more notable share with the builders? No, there's no constraint other than us being generally new to that, you know, that sell cycle.
No.
<unk> business has rebounded a good bit from what we reported for what would have been Q2.
Results.
Our call that back to more of a normal cadence there I do think theyre just overall demand in that channel has been suppressed this year a little bit given.
Kurt Yinger: Let me, let me, and I want to caveat that a little bit because we've had decent flow through with our trim portfolio of products with with national builders for a while. So it's not like that's alien to us to sell into the big national builders. There's also very strong market share there on the OSB side. So the relationships exist with these big national public builders, primarily for our history of selling OSB products through that through that channel.
I'll Act as it was last year, but we feel good.
We reiterate all of those customers are also back on our order file.
So we are seeing polls and shared and then typically so the.
There is a little bit more of a coal this time.
From now on as folks build some inventory in preparation of the bills. They do have product to sell in the spring.
Kurt Yinger: But the key to us has been is having a competitive product, which we do now. In fact, we know we believe that the product is more than competitive, it's superior. And so, you know, but it's a long sell cycle, you know, in these kind of deals. And we've been working those hard all through this year and are optimistic about the progress we've made. And as we look forward in the next year, you know, we see that opportunity for growth as I've already mentioned.
So typically late Q4 early Q1 are pretty strong.
Product Poles in that segment, we're expecting similar.
Expecting to see that increase in demand as we look forward.
So I would call it back to normal, though I will say compared to all the other channels normal is probably still a little less than what the kind of demand we were seeing in 2021 and 2022.
Kurt Yinger: And you know, we are building off from a lap, citing standpoint, we're building off a very small base. And so with the big national builders, so they're the ability for us to grow that, what for us would be substantially is, you know, what we're pretty encouraged about. But it's a tight time. But, you know, the good thing about these deals is that they are, you know, multi-year, or at least single year, at least. And so there is some insured, insuredy of supply once, you know, once you're able to retain it or get it. I appreciate the color.
Okay.
Sure.
I wanted to add something for the general audience as well.
Q4 revenue guide for siding does include the fact that we are limiting pre buy in advance of January.
January price increase.
Policy, so that we don't.
Have a repeat of.
Of last year.
<unk>.
And limited our ability to read the market. So the Q4 guide does include a limit on the pre buy.
Okay. That's helpful. Thank you for that.
Michael Roxland: And then just one quick follow up on your competitors. I believe one is out with a citing price increase in early January. Is that something that maybe you could use to your advantage? And maybe in terms of trying to gain cheer, use that against them as they, as they might understand them, I'm pretty aggressive with their pricing with builders over the last 12 to 15 months or so. Well, there's, there's, I answered out a little bit more generally than then against this one competitor.
And then maybe turning to OSB for a minute.
When you think about that segment and it's one of the more recent trends there they seem like they're a bit in contrast to what we are seeing from especially the large big public builders and their tone is that you think about 2024 can you just comment a bit about the channel inventories in OSB.
Including perhaps some of your structural solution products in there and how youre thinking about the potential for those volumes.
Michael Roxland: I mean, obviously when it comes to these big programs, price or cost of the whole package is critical to the success there. And so, you know, so, yeah, I mean, if a competitor has a higher price than us, and that's that box gets ticked in our favor as we work these deals. But typically that kind of always gets worked out in the back end anyway. And so really where, you know, we're trying to compete is off our value proposition, which is the quality of the product, the aesthetics of the product and ease of installation.
The news over the fourth quarter and maybe even into the early parts of 2024.
Well inventory situation in the channel for OSB remains.
I would say normal to slightly lean at the currently as of today and that can change pretty quickly in the OSB World I know you understand but.
Unlike siding really never was.
Any meaningful.
OSB inventory build I mean, it can happen over a two or three weeks at a time.
Michael Roxland: And so, you know, that that's what that's how we lead. And then obviously though at the end of the day, we've got to be competitive on price as well. And as I've mentioned, probably, you know, a hundred times that already four or five times on this call, we finally have a product, you know, we're able to be competitive on pricing as well as bringing all the other advantages of a smart side into the builder conversation. Thank you. Thank you very much and good luck for Q.
Typically.
Our our order file, but staying pretty normal right now so.
Haven't we're not extending it or not shortening it.
So I feel good about where inventories are.
I do think there is going to be some seasonal component to demand with the builder beginning Thanksgiving the week of Thanksgiving through probably the first couple of weeks of January that's normal, but what we've seen historically.
The pre Covid you before COVID-19.
Unknown Executive: Good morning. Thank you.
Susan Maklari: One moment for our next question, and that will come from the line of Susan Maklari with Goldman Sachs. Your line is open. Thank you. Good morning, everyone. Thanks for taking the questions. Good morning. My first question is, you know, last quarter you had mentioned that you saw a fairly substantial decline in shed demand during that quarter, and that was part of, you know, what was going through that citing segment. Is there anything that's changed or that is impacting the business as you think about the fourth quarter, God there?
Crude all seasonality up for us so I.
I would not be surprised to see the OSB demand.
Klein.
Again around the Thanksgiving timeframe typically our channel partners are going to want across the year with leaner inventories as they can kind of live with and so we also get a little bit of that negatively impacting demand and then you know we typically get a pop once folks we're back from the holidays and then.
Looking forward to the spring building season, so I am expecting.
For both siding and OSB for this to normal seasonality to return. This year, we have not had that in over the last three winters.
Susan Maklari: No, the shed business has rebounded a good bit from what reported for what would have been Q2 results. I would call that back to more of a normal cadence there. I do think they're from just overall demand in that channel has been suppressed this year a little bit given how active it was last year, but we feel good. Goldman reiterate all those customers are also back in order file. And so we are seeing, you know, polls and shed, and then typically so the, there is a little bit more of a poll this time from from now on as folks build some inventory and preparation of the bills they do to have product to sell in the spring.
So we're planning accordingly, we obviously have the ability to respond in both businesses either up or down.
Yes.
Real real demand becomes apparent but I can see.
Personally see building slowing.
Middle of November to Middle of January.
Okay. That's really helpful color. Thank you both and good luck with everything.
Okay. Thanks.
One moment for our next question.
And that will come from the line of Keith <unk> with BMO. Your line is open.
Good morning, everyone.
And then just one quick clarification to what you just said so should I read this.
Susan Maklari: And so typically like you forward a cute early Q1 or pretty strong product polls in that segment. We're expecting similar, let me expect you to see that increase in demand as we look forward. And so I would call it back to normal, though I will say compared to all the other channels normal is probably still a little less than what the kind of demand we were seeing in 2021 and 2022.
You guys are already out in the market with the January price increase in siding.
Yes.
We have communicated to.
To the channel.
Our price increase is coming we will be communicating those are.
Highly tailored by region by channel.
So that that specific communication, but going out over the next couple of weeks.
It is.
Susan Maklari: Okay, I wanted to add something for the general audience as well. The Q4 revenue guide for siding does include the fact that we are limiting pre buy in advance of January price increase partly so that we don't have a repeat of last year where we were a limited ability to read the market. So the Q4 guide does include a limit on pre buy. Okay, that's helpful. Thank you for that. And then maybe during the OSB for a minute, when you think about that segment and it's one of the more recent trends there, they seem like they're a bit in contrast to what we are seeing from especially the large big public builders and and their tone as they think about 2024.
It is a January one price increase and as Alan mentioned.
We're doing it a little different this year and the way we are implementing that historically, we have allowed our channel partners to buy.
110% of their.
Kind of normal purchases prior 64, or six months or something like that we'll pick a timeframe and as you can about 110% we're doing this year.
Only about a 100% of your prior purchase history.
As a way to.
Mitigate the probability of us building.
Pre buys impacting Q4 positively in Q1 negatively and also that allow us to realize pricing quicker.
On the on that volume. So so yes increase is being announced for January one and the other meaningful piece of news there is that the way, we're kind of trying to manage the pre buy out of existence actually Bob.
Susan Maklari: Can you just comment a bit about the channel inventories in OSB, including you know, perhaps some of your structural solution products in there. And how you're thinking about the potential for those volumes to move over the fourth quarter maybe even into the early parts of 2024. Well, look at the inventory situation in the channel for OSB remains normal to slightly lean, currently, as of today. That can change pretty quickly in the OSB world.
Limiting our purchases prior to the price increase.
Got it that's very helpful and then just.
Just one quick follow up on on OSB.
What was your operating rate in Q3 and.
But it's fair to assume that those curtailments that are outside of solar continues into Q4.
Susan Maklari: I know you understand, but unlike sighting, there's really never was any meaningful OSB inventory build. I mean, it can happen over for two or three weeks at a time, but typically, our order file is staying pretty normal right now, so we're not extending it, we're not shortening it. And so I feel good about where inventory are. I mean, I do think there's going to be some seasonal component to demand with the builder beginning Thanksgiving, the week of Thanksgiving through probably the first couple weeks of January.
So we were running about 80% of capacity of ran about 80% capacity in Q3.
And in Q4, we're planning for that or a little lower.
I would say.
Probably with more downside than upside.
The way I responded to <unk> question.
We really see a demand slowdown.
Latter half of the quarter, we will plan to take more capacity out as we balance our capacity to demand but.
Susan Maklari: That's normal, but what we've seen historically, you know, the pre-COVID before COVID, you know, screwed all seasonality up for us. So we, you know, I would not be surprised to see the OSB demand decline, you know, but again, around the Thanksgiving timeframe, typically the channel partners are going to want to cross the year with its lean inventories as they can kind of live with. And so we also get a little bit of that negatively impacting demand.
So thats how were planning.
To operate during the quarter and we will make sure that we satisfy our customers' needs, but not but not get out of balance to that.
<unk> that were feeling in the in our order file.
Got it that's very helpful I'll jump back in the queue. Good luck.
Thank you.
Thank you one moment our next question.
Susan Maklari: And then, you know, we typically get a pop once folks are back from the holidays and then start looking forward to spring a building season. So I'm expecting for both sighting and OSB for this normal seasonality to return this year, we have not had that in over the last three winters. So we're planning accordingly. We obviously have the ability to respond in both businesses either up or down as the man real real demand becomes apparent. But I can't see personally see a building slowing, you know, from middle of November to middle January. Okay, that that's really helpful color. Thank you both and good luck with everything. Thank you.
Okay.
That will come from the line of Sean Stewart with TD Securities. Your line is open.
Thank you and good morning, everyone.
Question on input costs can you give us a sense of variance versus Q3 for fiber and resin that's embedded in the Q4 guidance and any context on trends you're seeing headed into 2024 on that front.
Well generally speaking trends are favorable.
As we head into Q4 and into 2020 full but we're cautious forecast us. So we generally don't bacon.
Any sort of further improvement, meaning we assume that input costs are going to hold roughly at current levels as we forecast from Q3 to Q4, so if they improve this tailwind there.
Ketan Mamtora: One moment for our next question. And that will come from the line of Kate and Mantora with BMO. Your line is open.
Okay. Thanks for that.
And just.
One question on on modeling the siding price realizations this quarter improved a little bit sequentially, which is encouraging how much of that is just a mix issue as the inventory bubble progressed through the quarter.
Brad Southern: Good morning, everyone. Hey, I'll just one quick clarification to what you just said. So should I read this as you guys are already out in the morning? Can you give us a moment for the January price increase in sighting? Yeah, so that keep and we we have communicated to the channel. A price increase is coming. We'll be communicating, you know, those those are highly tailored by region by channel. And so that that specific communication be going out over the next couple weeks.
Was there anything more to it than that and seeing that modest improvements sequentially.
Yeah.
Yes, it's mostly.
It is mostly mix.
So.
Strong distribution business relative which has particularly the pricing expert finish up nicely things like that so there was no <unk>.
Q2 to Q3 price increase so it's fundamentally the.
Brad Southern: It is a January one price increase. And as Alan mentioned, we're doing it a little different this year in the way we're implementing that historically we have allowed our channel partners to buy 110% of their kind of normal purchases like prior 60 prior six months or something like that. We'll pick a time frame and say you can buy 110%. We're doing this year. You can only buy 100% of your prior purchase.
Continuation of that favorable mix in Q2 to Q3.
Got it.
Okay rest of my questions have been answered thanks, very much guys.
Thank you one moment our next question.
And that will come from the line of George Staphos with Bank of America. Your line is open thanks.
Thanks, very much hi, everyone. Good morning, Thanks for the details.
Brad Allen I Wonder.
Brad Southern: History, as a way to mitigate the probability of us building a pre-biasc impacting Q4 positively and Q1 negatively, and also that allows us to realize pricing quicker on that volume. So, yes, an increase is being announced for January 1, and the other meaningful piece of news there is that are the way we're kind of trying to manage the pre-biasc out of existence actually by limiting the purchases prior to the price increase.
Talk a little bit about siding. So you mentioned that you are.
Eliminating the ability for your customers to buy somewhat ahead of your price increase.
Coming in January are there any other changes that you're making.
Is any of your commercial strategy or distribution strategy that you could rely on an open my call.
Two continue to progress into next year and Relatedly.
With and one of the other analysts I think Mike was talking about.
Peers also saying that Theyre growing you want to grow market share with large builders you have the builders.
Alan Hockey: Got it, that's a helpful prize. And then, just one quick follow-up on OSB. What was your kind of operating rate in Q3? And whether it's fair to assume that those good ailments that you are still outside of the goal of continues into Q4. So, we were running about 80% of capacity or rain, about 80% capacity in Q3. And in Q4, we're planning for that a little lower. I would say, probably with more downside and upside, as the way I responded to Sue's question, if we really see demand slowdown in a latter half of the Q4, we'll plan to take more capacity out as we balance our capacity to demand. That's how we're planning to operate during the Q4, and we will make sure that we satisfy our customers in need, but not get out of balance to that demand that we're feeling in our order file.
Serious product how do you ultimately make the progress you want to make towards that 25% margin.
George Staphos: Got it, I jump back in the queue, good luck. Thank you. One moment for our next question.
Given that product would typically have I would imagine, perhaps a little bit lower margin and you are trying to gain share I know, it's going to be around.
Selling the value, but wanted to hear additional thoughts here. So any any changes in the commercial strategy and how do you get to the margin you want.
Given what you want to get to in terms of your share with builders. Thank you.
Yeah. So let me do the commercial first.
And I would say that.
During COVID-19 being on allocation for all of two years, maybe a little more than 24 months.
We consciously cut back on our marketing spend.
We were sold out and so.
We will focus more on.
Assets and resources that helped us optimize our order file versus getting into this.
And market share gain mindset.
So as we roll into next year and put putting our budgets together, we're going to be more.
Allocate more resources to <unk>.
Man creation, and a growth mindset versus how we've managed the business over the last couple of years and that will be certainly in support of our builder series products as well as our repair and remodel products and everything what we do in retail.
Across the board really leaning into.
George Staphos: And that will come from the line of Sean Stewart with TD Securities. Your line is open. Thank you.
The new market conditions here, which is.
Flat to slightly growing housing market, we need to get more aggressive on share gains.
Paul Quinn: Good morning, everyone. Question on input costs. Can you give us a sense of variance versus Q3 for fiber and resin that's embedded in the Q4 guidance and any context on trends you're seeing headed into 2024 on that front? Well, generally speaking trends are favorable as we head into Q4 and 2024, but we're cautious forecasters, so we generally don't make any further improvement, meaning we assume that input costs are going to hold roughly at current levels as we focus on Q3 to Q4.
On the margin question Europe generally right about the way Youre thinking about.
<unk> siding sold into the big builder will say compared to prior years, though and I've mentioned this several times on the call.
The builder series was engineered to be competitive there. So it's not a ginormous margin hit for us to skew volume, there, but really where the offsetting.
To offset any margin that we.
Have to give up to secure our big builder business first of all repair and remodel is not that way, it's a value sale, we're selling expert finish.
Paul Quinn: So if they improve this tailwind there. Okay, thanks for that. And just one question on modeling that deciding price realizations, this quarter improved a little bit sequentially, which is encouraging. How much of that is just a mix issue is the inventory bubble progressed through the quarter. Is there anything more to it than that in seeing that modest improvement sequentially? Yeah, it's mostly, it is mostly mixed. So, you know, strong distribution business relative, which has particularly the pricing, expert finish hold of nicely, things like that.
And the opportunity to gain market share through also growing our I'm, sorry, Mark again margin by increasing our market share and repair and remodel can kind of be a significant offset second to all of that.
As an example.
Ample and the manufacturing side, so golar Texel Golar take vast New York both of those are large mills high scale mills low cost mills compared to our average and so as we as we ramp up those.
Bigger.
Bigger pressing facilities or pre finishing facilities. We're also.
Paul Quinn: So, it's, there was no Q2 to Q3 pricing increase, so it's fundamentally the continuation of that whole mix from Q2 to Q3. Got it. Okay, rest of my questions have been answered. Thanks very much, guys. Thank you. One moment for our next question.
The opportunity for <unk>.
Cost reduction that is make that will meaningfully impact.
Our margins going forward so.
It is a constant area of management and analysis around.
Pricing margin cost reduction OE.
Brad Southern: And that will come from the line of George Staphos with Bank of America. Your line is open. Thanks very much. Hi everyone. Good morning. Thanks for the details. Brad Nellon, I wanted to talk a little bit about the sighting. So, you mentioned that you were eliminating the ability for your customers to buy somewhat ahead of your price increase coming in January. Are there any other changes that you're making with any of your commercial strategy or distribution strategy that you could relay on an open mic call, you know, to continue to progress into next year.
And we've gotten way more sophisticated on how we manage pricing.
Channel by customer in some cases.
So I'm confident that we'll manage it well, but I'll make will be confident that.
Our ability to get meaningful margin in this business is not going to be.
We've always had a spread of low margin to higher margin.
The skus in our portfolio.
If we add.
Pathetic, let's say builder series is on the lower side of that and we've got plenty of opportunities on the upper side of our portfolio to gain margin, especially when you couple that with a more efficient operating platform.
Brad Southern: And, and one of the other analysts I think Mike was talking about, you know, your peers also saying that they're growing. You want to grow a market share with the large builders. You have the builders serious product. How do you ultimately make the progress you want to make towards a 25% margin given that product would typically have, I would imagine, you know, probably a little bit lower margin, and you're trying to gain share.
Sure Brad.
Just quickly on distribution any change in terms of the way Youre going approached 24 versus 23 or.
Brad Southern: I know it's going to be around selling the value, but want to hear additional thoughts there. So, any any changes in the commercial strategy and how to, you know, get to the margin you want, you know, given what you want to get to in terms of your share with builders. Thank you.
Pretty much the same approach and from my vantage point, maybe simplistically, maybe a little bit more of a one step versus two step. Thank you guys. Good luck in the quarter.
Yes, George you know we've talked about.
We have set up Dcs and some major metric metropolitan areas to provide more of a direct model.
That is that that was largely driven by the focus on the builder.
Brad Southern: So, let me do the commercial first. And I would say that, you know, during COVID, being on allocation for all of two years, maybe a little more than 24 months, you know, we consciously cut back on our marketing spin. As we were sold out, you know, and so we were focused more on on, you know, assets and resources that helped us optimize out of order five versus, you know, getting into this into a growth and market share gain mindset.
Other other customers benefit of that as well so I would say that is not new for 24. It was new for 'twenty three.
But we will continue to focus on optimizing that and pushing volume through that more direct path and we're only doing that to be more efficient.
Delivering.
More efficient from a cost standpoint.
Responsiveness delivering product.
Strategic customers that need that level of service in August honestly.
Brad Southern: So, as we were all into next year, you know, and putting our budgets together, you know, we're going to be more, you know, allocate more resources to demand creation and a growth mindset versus how we've managed the business over the last couple of years. And that will be certainly in support of our builder series products, as well as our repair and remodel products. And everything what we do in retail, you know, across the board, really leaning into the, you know, the the new market condition here, which is in a flat to slightly growing housing market, you know, we need to get more aggressive on share gains.
Some cost advantage.
But as we look into 2024, no major changes in the way, we're going to market other than continued growth.
<unk> got more direct selling model.
Okay. Thank you Brett.
Thank you Alan.
Sure.
Thank you one moment our next question.
And that will come from the line of Paul Quinn with RBC capital markets. Your line is open.
Yes, thanks, very much morning, guys.
Sounds like that the two big levers to run a successful setting operation or this penetration and the big builders in the rollout of experts finish so just on the big builders is there.
Brad Southern: On the margin question, you're generally right about the way you're thinking about lap-siding sold into the big builder. I will say compared to prior years, though, and I've mentioned this several times on the call, you know, the builder series was engineered to be competitive there. So, it's not a ginormous margin hit for us to, you know, skew volume there, but really where they're all setting two offsets to any margin that we, you know, have to give up to secure big builder business.
I can kind of.
<unk> million dollars on what Youre doing on builder series in theory.
Regional penetration.
Difference like Youre, making more.
Dancing in the south and the northeast and in terms of the manufacturing of that product is that done at all your siding mills are only a couple.
On the manufacturing side parts done at our 24.
Brad Southern: First of all, repair and remodel, it's not that way. It's a value sale. We're selling expert finish, you know, and the opportunity to gain market share through also growing our I'm sorry, more again, margin by increasing our market share and repair remodel can be a significant offset. Second to all that is segoa as an example in the manufacturing side, you know, segoa, tech segoa, or tech baths in New York. Both of those are large mills, high scale mills, low cost compared to our average.
Yes, 24 foot press Mills Dawson Creek Britta.
British Columbia being <unk>.
Primarily where we're sourcing it now so golar will have that capability does have that capability, obviously little bit closer to market, there as well, which will help on the cost and margin side, but it's the it's the most recent presses that we have converted which are 24 foot in length because that.
To remind everybody of the builder series is 12 foot our normal last SKU historically has been <unk>.
Okay, and then you asked about penetration well you know with the big National builders you'd have to go where they are.
Brad Southern: College. And so as we ramp up, these bigger pressing facilities or pre-finishing facilities, we're also seeing an opportunity for cost reduction that is made that will meaningfully impact our margins going forward. It is a constant area of management and analysis around pricing, margin, cost reduction, OEE, and we've gotten way more sophisticated on how we manage pricing by channel, by customer in some cases. So I'm confident that we'll manage it well, but I'm equally confident that our ability to get meaningful margin in this business is not going to be, you know, we've always had a spread of low margin to higher margin skews in our portfolio.
If you look at the smile of the country, that's where a lot of the housing starts that are.
Being driven by the big National builders are in that Smile.
Have had historically good.
Pretty good penetration in the Texas.
Colorado markets, just because of our smart sides history, there, so where we're focused on penetration would be.
More south central Southeast Atlantic Seaboard as opportunities for us to really gain market share.
And just to round out the question, Paul I would say on that.
The central part of the country. We've been we have been strong there even with our 16 foot product offering with built where the bigger builders. So obviously.
That would be a sweet spot for us to pick up incremental business, but the big the big potential.
Opportunities for us to gain volume in south central Southeast and mid Atlantic.
Brad Southern: You know, if we add it, hypothetically say, builder series is on the lower side of that. We've got plenty of opportunities on the upper side of our portfolio to gain margin, especially when you couple that with a more efficient operating platform.
Okay. That's great and then just on the export finished either earn or how should we think about that progression of margin uplift in volume through that.
Brad Southern: Sure, Brad, just quickly on distribution any change in terms of the way you're going to approach 24 versus 23 or pretty much the same approach. And, you know, from my vantage point, maybe simplistically maybe a little bit more of a one step versus two step. Thank you guys. Good luck in the quarter. Yeah, George, you know, we've talked about, we have set up DCs and some major metropolitan areas to provide more of a direct model that is that that is largely driven by the focus on the builder, though other other customers benefit off that as well.
Do you expect that to be slow and steady gains through 'twenty four into 'twenty five.
Yes, it's probably more more more slow and steady than big Bang other than to say.
The finishing line we've put in to Bath, which we put a similar line into our existing facility in Green Bay.
And we are seeing.
Economies of scale.
Is that are.
Exceeding expectations and so as we ramp those up but that will be somewhat of a step change in margin I think by the time.
You run it through.
All of the siding, we sell in a quarter it might be a little bit harder to see but its common and.
Brad Southern: So I would say that is not new for 24. It was new for 23, but we will continue to focus on optimizing that and pushing volume through that more direct path and we're only doing that to be more efficient to do in delivering more efficient from a cost standpoint and responsiveness delivering product. You know, into strategic customers that need that level service and obviously, you know, and some cost advantage. But that, but I would, but as we look into 2024, no major changes in the way we're going to market other than continued growth, you know, and that that more direct selling model. Thank you, Brad. Thank you all. Here.
Unknown Executive: Thank you.
As we learn how to do this at scale and we just see a lot of opportunity for.
Incremental margin above that.
<unk> margins, we're enjoying today.
Okay and then just lastly, if you can.
At our South American lift on the week in the quarter, what can we expect going forward.
Yes.
South America right now, it's a good solid business it cannot economically across that whole continent. Unfortunately, right now there is a lot of political and economic unrest.
So, we're when and where we can but there is no no alarms.
From a market share standpoint.
I mean honestly from kind of is.
Operator: One moment for our next question. And that will come from the line of Paul Quinn with RBC capital markets. Your line is open. Yeah, thanks very much. Morning guys. It sounds like the two big levers to run a successful signing operation of this penetration of the big builders and the rollout of experts finish. Just some of the big builders. Is there just so I can kind of increase my knowledge on what you're doing on builder series.
Chaotic.
It might be a little bit too strong of a word.
Chaotic economies down there.
Or kind of discouraging import volumes there so.
From that standpoint.
A little bit helpful, but pricing is really challenging and all the countries. There we have taken a significant.
Capacity outages.
Across our operations down there and so where we are.
Operator: Is there a regional penetration difference? Like you know, or you're making more gains in the in the south and the northeast and in terms of the manufacturing of that product is that gun out all your sliding mills are only a couple. On a manufacturing side, Paul is done in our 24 foot press mills, Dawson Creek, British Columbia being primarily where we're sourcing it now. So go up, we'll have that capability, or it does have that capability, obviously a little bit closer to market there as well, which will help on the cost of margin side.
Pedaling really hard to hold our own in South America waiting for all of that the term.
Our 25 years down there, it's been that way a little bit cyclical economies.
Can get out of kilter, and that's certainly happening right now so we're optimistic.
On the long term, but I think we should be thinking about next year being somewhat similar to this year as far as the the earnings potential down there as we work through these economic headwinds that are facing basically all of the economies. We operate in down there can I add one other thing on the risk of opening I kind of was.
We did transfer and Texas assets to South America, and the cost of transferring them packing shipping and everything.
Operator: But it's the most recent presses that we have converted, which are 24 foot in length, because to remind everybody that the builder series is 12 foot, or normal last few historically has been 16. Okay, and then you ask about penetration. Well, you know, with the big national builders, you have to go where they are. And if you look at the smile of the country, that's where a lot of the housing starts that are being driven by the big national builders are in that smile.
Non capitalized.
And therefore.
Cost of doing so is reflected in the EBITDA, that's $2 million to $3 million in Q3 that was that quote.
The traditional face that a one off.
But we left it in their EBITDA, because the cooperations with moving equipment about as a whole. So there's no reason not to include it in EBITDA so that.
<unk> made.
A tough environment in the past slightly less and it really is.
Operator: You know, we have had historically good, pretty good penetration in the Texas Colorado markets, but just because of a smart side's history there. So where we're focused on penetration, it'd be the more South Central, South East Atlantic Seaboard is opportunities for us to really gain market share. And just to round out that question, Paul, I would say from the central part of the country, we've been we've had been strong there, even with our 16 foot product offering with build with a bigger builders.
Okay, great. Thanks for the color and best of luck.
Thank you. Thank you thanks Paul.
Thank you that concludes today's question and answer session I would now like to turn the call back over to Mr. Aaron Howald for any closing remarks.
Okay. Thank you operator with no further questions. We will end the call. There. Thank you for joining <unk> for our third quarter earnings call stays safe and we'll look forward to connecting again soon thanks, everyone.
Thank you all for participating. This concludes today's program you may now disconnect.
Operator: So obviously we're, you know, that would be a sweet spot for us to pick up incremental business, but the big the big potential opportunities for us to gain volume is in South Central, South East and Mid Atlantic. Okay, that's great. And then just on the expert finish rider or R&R, how should we think about that progression of margin uplift and volume through that to expect that to be slow and steady gains through 24 into 25.
Operator: Yeah, it's probably more, more, more slow and steady than big bang other than to say, and we did the finishing line we put into bath, which we put a similar line into our existing facility in Green Bay. Man, we're seeing economies of scale that are exceeding expectations. And so as we ramp those up, that there will be somewhat of a step change in margin. I think by the time, you know, you run it through all the signing it we sell in a quarter might be a little bit harder to see, but it's coming.
Okay.
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Operator: And, and as we learn how to do this at scale, and we just see a lot of opportunity for incremental margin above, you know, the decent mark margins we're enjoying today. Continent, unfortunately, right now there's a lot of political and economic unrest. So we're winning where we can that there's no no alarms from from market share standpoint. I mean, honestly, from kind of as chaotic, if that might be a little bit too strong of a word, but the chaotic economies down there are kind of discouraging import volumes there.
Okay.
Operator: So from that standpoint, you know, it's been a little bit helpful, but pricing is really challenging and all the countries there. We have taken a significant capacity outages. But across our operations down there, and so, you know, we are peddling really hard to hold our own in South America, waiting for all that to turn. You know, in our 25 years down there, it's been that way a little bit, a cyclical economies can get out of kilter and that's certainly happening right now.
Operator: So we're optimistic on the long term, but I think we should be thinking about next year being somewhat similar to this year. As far as the earnings potential down there, if we walk through these economic headwinds that are facing, but basically all the economies we operate in down there. Could I add one other thing, the risk of opening a can of words, we did transfer antichrist assets to South America and the cost of transferring and packing, shipping and everything is non-capitalizable.
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Operator: If you're interested, and therefore, the cost of doing so is reflected in a wee bit now. That's $2 to $3 million in Q3 that was a quote. I use the traditional phrase that are one off, but we left it in the wee bit down because the corporations are always re-equipment about as a whole. There's no reason not to include it in wee bit down. So that put a made a top environment appears slightly worse than it really is.
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Operator: Okay. Great. Thanks for the color and that's like. Thank you. Thanks, Bob. Thank you. That concludes today's question and answer session. I would now like to turn the call back over to Mr. Aaron Howold for any closing remarks. Okay. Thank you, operator. With no further questions, we'll end the call there. Thank you for joining LP for our third quarter earnings call. Stay safe and we'll look forward to you connecting against it. Thanks, everyone. Thank you all for participating. This concludes today's program. You may now disconnect. Thank you.
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Good day.
And welcome to the Q3 2023, Louisiana Pacific Corporation 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 to ask a question. During this session you will need to press star one one on your telephone you will then hear an automated message.
Rising your hand is right.
Jay Your question Press Star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker, Mr. Aaron <unk>, Vice President of Investor Relations and business development. Please go ahead Sir.
Okay.
Thank you operator, and good morning, everyone.
For joining us to discuss Lp's results for the third quarter of 2023 as well as our updated full year outlook. My name is Aaron and I am <unk>, Vice President of Investor Relations and business development.
With 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 a presentation that is available on Lp's IR webpage, which is investor Dot <unk> Dot com. Our 8-K filing is also available there along with our earnings press release, and other materials detailing lp's strategy and sustainable business model today.
Today's discussion will contain forward looking statements and non-GAAP financial metrics as described on slide two and three of the earnings presentation.
Appendix of the presentation also contains reconciliations that are further supplemented by this morning's 8-K, I will incorporate that content herein by reference rather than reading the slides.
And with that I'll turn the call over to Brad.
Thanks, Erin and thank you all for joining us to discuss Lp's Q3 results and our full year outlook.
The third quarter was our strongest of the year by far for both siding and OSB was also a quarter, which lp's teams achieved key milestones for growth and sustainability, one of which we were recognized for our continuing focus on building a stronger and more inclusive culture.
Page five of the presentation shows financial highlights for the quarter <unk> generated $728 million in net sales in the quarter, which was 15% lower than Q3 of last year, but.
But higher OSB prices and improved sell through of inventory normalization in siding led to a higher overall EBITDA margin than last year with a result that LP earned $190 million in EBITDA, 25% less than Q3 of last year.
As a result LP exceeded the high end of our guidance range. Despite OSB prices falling in September.
The $190 million and EBITDA translated very cleanly to $197 million in operating cash flow and LP ended the quarter with $160 million in cash on hand, after returning $17 million to shareholders via dividends and investing $49 million in growth and sustaining capital.
We repaid our revolving credit facility and ended the quarter with over $700 million in liquidity.
Page seven of the presentation shows siding growth relative to the housing market on a trailing 12 month basis.
Remember that Q3 of 2022 was the best quarter on record for siding volume and revenue as we remained on a managed order file until early December of last year.
Spite this very difficult comp on a trailing 12 month basis smart side sales volume beat single family housing starts by 10 percentage points.
<unk> were down 16% siding volume was down only 6% and siding prices were up 8% as you can see in the Pie chart to the right expert finished with stable at 8% of volume in the quarter.
In the first half of 2023 siding sales were dampened by inventory Destocking. After we finally transition from a managed order file late last year.
Q3 saw the normalization of sell through rates and inventory levels as expected and despite a market that is facing increasing affordability challenges higher interest rates and elevated economic uncertainty the third quarter saw a sequentially higher volumes and average selling prices in the siding business compared to Q2.
As a result, we believe that the order patterns and channel inventory levels. We are experiencing now are consistent with normal seasonal pattern with minimal lingering headwinds from destocking.
This was not the first time that the siding business has been on a managed order file and the inventory digestion period before the resumption of our normal order cadence takes time.
I am proud of the perseverance and dedication that siding sales and operations teams demonstrated as we worked through this process before I hand, the call over to Alan I want to mention a few additional accomplishments in the quarter.
Last month, we officially opened our newest pre finishing facility in vast New York.
Unknown Executive: [inaudible] I'm right, I'm not[inaudible] I'm not sure if I'm right[inaudible] I'm right I'm right, I'm not sure[inaudible] I'm right, I'm not sure if I'm right[inaudible][inaudible] John Paul Quinn, Paul Quinn, Susan Maklari Paul Quinn, Paul Quinn, Susan Maklari, Mark Paul Quinn, Paul Quinn, Susan Maklari, Mark Paul Quinn, Paul Quinn, Susan Maklari, Mark Weintraub, Paul Quinn, Susan Maklari, Mark Weintraub Paul Quinn, Susan Maklari, Mark Weintraub, Paul Quinn, Susan Maklari, Mark Weintraub, Paul Quinn Good day, and welcome to the Q3, 2023 Louisiana-Pacific Corporation earnings conference call.
This brings enhanced scale efficiency and geographic expansion to expert finish I.
Operator: At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, I would like to ask you a question. In the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded.
I want to officially welcome to Bath team to LP Batheja third mint facility for the siding business in the past two years after the conversion to open in <unk> and.
Aaron Howald: I would now like to hand the conference over to your speaker, Mr. Aaron Howald, vice president of investor relations and business development. Please go ahead, sir. Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the third quarter of 2023, as well as our updated full year outlook. My name is Aaron Howald, and I am LP's vice president of investor relations and business development. With me this morning, our Brad Southern, LP's chief executive officer and Alan Hockey, LP's chief financial officer.
Aaron Howald: During this morning's call, we will refer to a presentation that is available on LP's IR webpage, which is investor dot LP corp dot com. Our AK filing is also available there, along with our earnings press release and other material detailing LP strategy and sustainable business model. Today's discussion will contain forward looking statements and non-gap financial metrics as described on slides two and three of the earnings presentation. The appendix of the presentation also contains recommendations that are further supplemented by this morning's AK. I will incorporate that content here and by reference rather than reading the slides.
I am proud of the safe and efficient execution of all our recent capacity additions in siding and confident that we are well positioned for resumed growth in the diverse markets we serve.
In the third quarter LP published our third sustainability report as well as environmental product declarations for the structural solutions portfolio of value added OSB products.
Structural solutions products like textural radiant barrier, whether logic sheathing with integrated air and water barrier and legacy flooring, all sequester more carbon that is emitted during their manufacturing and lifecycle.
Brad Southern: And with that, I'll turn the call over to Brad. Thanks, Aaron. Thank you all for joining us to discuss LP's Q3 results in our full year outlook. The third quarter was our strongest of the year by far for both citing and OSB. There's also a quarter in which LP's teams achieved key milestones for growth and sustainability, and one of which we were recognized for our continuing focus on building a stronger and more inclusive culture.
Our customers and shareholders can be confident that lp's weighted engineered wood products combined with a responsible and sustainable management of forest resources means that <unk> can deliver best in class OSB and siding products, while also having a positive impact on the environment.
This was most notable inside and we're competing products are made predominantly of cement or vinyl.
When it comes to durable products with great curb appeal and positive impact for builders contractors homeowners in the environment. It is very hard to be lp's portfolio of sustainable and carpet negative engineered wood building solutions Lastly, before I turn the call over to Alan I am happy to say that LP was named by our local newspaper.
Brad Southern: Page five of the presentation shows financial highlights for the quarter. LP generated 728 million dollars in net sales in the quarter, which was 15% lower than Q3 of last year. At higher OSB prices and improved sell through an inventory normalization and citing led to a higher overall EBITDA margin than last year. With the result that LP earned 190 million dollars in EBITDA, only 5% less in Q3 of last year. As a result, LP exceeded the high end of our guidance range despite OSB prices falling in September.
The Tennessee and USA today, as a top workplace in middle, Tennessee, and by Newsweek as one of Americas greatest workplaces built.
Building, a safe and inclusive culture, where all of our team members feel welcome and encouraged is its own reward while we will never stop trying to improve I am proud of our company and the progress we continue to make.
Brad Southern: The 190 million dollars in EBITDA translate the very cleanly to a 197 million operating cash flow and LP ended the quarter with 160 million dollars in cash on hand after returning $17 million to shareholders, the adividends and investing $49 million in growth and sustaining capital. We repaid our evolving credit facility and ended the quarter with over 700 million dollars, in the Quiddity.
And with that I will turn the call over to Alan.
Thanks, Brad.
Seven of the presentation shows the third quarter year over year revenue and EBITDA waterfall for siding.
The third quarter of last year was a high watermark for both siding volume and revenue and admittedly presents a difficult comp this year.
However, as predicted volumes and prices improved sequentially over the second quarter of this year by 6% and 2% respectively.
Brad Southern: Page 7 of the presentation shows citing growth relative to the housing market on a trailing 12-month basis. Remember that Q3 at 2022 was the best quarter on record for siding volume and revenue as we remained on a managed order file until early December of last year. Despite this very difficult comp on a trailing 12-month basis, Mark's five sales volume, indeed, single-family housing starts by 10 percentage points. Starts were down 16 percent, but siding volume was down only 6 percent, and siding prices were up 8 percent.
On a year over year basis prices were up three percentage points. The combined impact of last January list price increase and favorable product mix at a $10 million of revenue and EBITDA.
<unk> was down 16% with expert finished holdings ground, rather better than <unk>.
I'm going to take a moment now to recap the ramp up of conversion cost to trend this year.
Business kind of at embedded ramp up costs of $16 million in the first quarter of this year $10 million in the second quarter and now $8 million this quarter, including $1 million for the recently opened it back pre finishing facility.
Brad Southern: As you can see in the pie chart to the right, expert finish was stable at 8 percent of volume in the quarter. In the first half of 2023, siding sales were banned by inventory stocking, and we finally transitioned from a managed order file late last year. Q3 solved the normalization of sell-through rates and inventory levels. As expected, in despite a market that is facing increasing affordability challenges, higher interest rates, and elevated economic uncertainty, the third quarter solved sequentially higher volumes and average selling prices in the siding business compared to Q2.
$8 million is $3 million higher than the $5 million, we incurred in the third quarter of last year and it is this $3 million increase this shows up on the waterfall.
Now I mentioned this detail to emphasize the point that our current EBITDA margins are carrying the burden of the weight. If you will of these costs.
Moreover, the recently opened <unk> facility will add about $4 million of incremental costs in the fourth quarter as it begins ramping up.
So despite generating a respectable 21% EBITDA margin in the third quarter.
Brad Southern: As a result, we believe that the order patterns in channel inventory levels we are experiencing now are consistent with normal seasonal patterns with minimal lingering headwinds from these stockings. This was not the first time that the siding business has been on a managed order file, and the inventory digestion period before the resumption of the normal order cadence takes time. I am proud of the perseverance and dedication that siding sales and operations teams demonstrated as we work through this process.
Adding back the embedded $8 million I, just referenced together with $5 million for the Dawson press rebuild as shown in the last column of the waterfall, which produced an underlying EBITDA margin of about 24%.
This margin was of course helped by the slowing of inflationary pressures on freight and raw materials, which delivered a $9 million EBITDA tailwind net of wage inflation.
Brad Southern: For I hand the call over to Al and I want to mention a few additional accomplishments in the quarter. Last month, we officially opened our newest pre-finishing facility in Bath, New York. This brings enhanced scale, efficiency, and geographic expansion to expert finish. I want to officially welcome the Bath Team to LPE. Bath is a third new facility for the siding business in the past two years after the conversions of Holt and Insegola.
Slide eight till the third quarter story for OSB price gains and cost controls more than offset volume reductions, resulting in a small year over year increase in EBITDA. Despite the revenue decline.
I know the price dropped late in the quarter, notwithstanding higher prices added $28 million of revenue and EBITDA compared to last year.
However, despite higher net prices the overall demand environment was softer than last year with open market volumes, particularly weak.
Brad Southern: I am proud of the safe and efficient execution of all our recent capacity additions and siding and confident that we are well positioned for resumed growth in the diverse markets we serve. In the third quarter, LPE published our third Sustainability Report, as well as environmental product declarations for the structural solutions portfolio of value added OSV products. Structural solutions products like text shield, gradient barrier, weather logic sheeding with integrated air and water barrier, and legacy flooring all sequester more carbon than it is emitted during their manufacturing and life cycle.
And so the volume reduction in the quarter reflects not only the removal of the Golar note from the OSV fleet, but also market curtailments in response to the softer demand.
As with siding raw material deflation provided a small tailwind for the star of the show was cost control, which contributed $11 million of EBITDA.
The wood, despite significantly lower volumes, the OSB business run very efficiently as demonstrated not only by the $1, but by the four percentage point improvement in operating efficiency or OE.
As Brad has already mentioned it was a clean quarter for cash flow as shown on slide nine.
With $119 million of EBITDA, producing a $187 million of operating cash flow.
Brad Southern: Our customers and shareholders can be confident that LPE's suite of engineered wood products, combined with our responsible and sustainable management of forest resources, means that LPE can deliver best in class OSV insiding products while also having a positive impact on the environment. This is most notable in siding for competing products from a predominantly cement or vinyl. When it comes to durable products with great curb repeal and positive impact for builders, contractors, homeowners and the environment, it is very hard to beat LPE's portfolio as a sustainable and carbon-negative engineer wood building. Solutions.
We spent $49 million and growth and maintenance capital returned $17 million to shareholders via quarterly dividend and repaid the $30 million draw on our revolver.
As a result cash balances increased by $19 million in the quarter to end September at $160 million.
Cash has continued to increase subsequently and currently stands at a little over $200 million.
Finally, let me discuss our updated full year outlook on slide 10.
With respect to Capex.
Having already spent $236 million so far in 2023, the fourth quarter will likely look a lot like the third quarter for capital spending.
Brad Southern: Lastly, before I turn the call over to Alan, I'm happy to say that LP was named by our local newspaper, The Tennessee and, and USA Today, is a top work place in Middle Tennessee. And by Newsweek is one of America's greatest workplaces. Building a safe and inclusive culture where all of our team members feel welcome and encouraged is its own reward. While we will never stop trying to improve, I am proud of our company and the progress we continue to make.
The bulk of the near term growth and conversion capital is behind us with Golar and back now up and running so the fourth quarter spend will mostly be on sustaining maintenance.
Citing revenue for the third quarter largely met our internal expectations. So we are reiterating the guidance we provided on our second quarter call that we expect a full year, citing a revenue decline of about 10%, which implies a fourth quarter revenue decline of about 16%.
Alan Hockey: And with that, I will turn the call over to Alan. Thanks, Brad. Slide seven of the presentation shows the third quarter year of a year revenue and EBITL waterfall for siding. The third quarter of last year was a high watermark for both siding volume and revenue, and admittedly presents a difficult compass year. However, as predicted, volumes and prices improved sequentially over the second quarter of this year by 6% and 2% respectively.
OSB, we will continue to of algorithmic revenue guidance based on the assumption that OSB prices remain at the levels published by random lengths last Friday.
Under this price model and accounting from market downtime, we would expect OSP revenue to be down 30% sequentially compared to the third quarter.
Under these assumptions, including the startup costs of the pre finished facility I referenced earlier and some maintenance expenses in both businesses. We would expect total company fourth quarter EBITDA to be between 60% to $80 million.
Alan Hockey: On a year-over-year basis, prices were up 3% each point. The combined impact of last January's list price increase and favorable product mix added $10 million of revenue in EBITL. Volume was down 16%, with expert finish holding its ground rather better than primed. I'm going to take a moment now to recap the ramp up and conversion cost trend this year. The business carried embedded ramp up costs of $16 million in the first quarter of this year, $10 million in the second quarter, and now $8 million this quarter, including $1 million for the recently opened-a-bath pre-finishing facility.
Now before we take your questions. Please allow me to anticipate water.
We're not yet in a position to offer revenue or EBITDA guidance for 2024, but our capital allocation strategy remains unchanged as well the flexibility with which we deploy capital to invest in capacity.
Alan Hockey: This $8 million is $3 million higher than the $5 million we incurred in the third quarter of last year, and it is this $3 million increase that shows up on the waterfall. Now, I mentioned this detail to emphasize the point that our current EBITL margins are carrying the burden or the weight, if you will, of these costs. Moreover, the recently opened-a-bath pre-finishing facility will add about $4 million of incremental costs in the fourth quarter as it begins ramping up.
The housing and repair and remodel markets are basically flat next year as most forecast is currently anticipate then so golan Bath provide lp's siding business with sufficient capacity to press and pre finishing of smart side to meet demand.
And when might we start converting the recently are quite wawa facility deciding well the answer as established on prior calls is when the market demands. It we don't know exactly when that will be but we have sufficient capacity liquidity and most importantly flexibility to be responsive to demand when that time codes.
Alan Hockey: So, despite generating a respectable 21% EBITL margin in the third quarter, adding back the embedded $8 million I just referenced together with $5 million for the Dawson Press Rebuild, as shown in the last column of the waterfall, would produce an underlying EBITL margin of about 24%. This margin was, of course, helped by the slowing of inflationary pressures on freight and raw materials, which delivered a $9 million EBITL tailwind net of wage inflation.
And in the meantime, our capital allocation strategy remains to earn cash invest in our growth is needed and return a significant amount of the remainder to shareholders.
And with that well.
I'll be happy to take a round of questions.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again due to time restraints. We ask that you. Please limit yourself to one question and one follow up question.
Alan Hockey: Slide 8 tells the third quarter story for OSB, where price gains and cost controls more than offset volume reductions, resulting in a small year of year increase in EBITL despite the revenue decline. I know as the price dropped late in the quarter notwithstanding, higher prices added $28 million of revenue in EBITL compared to last year. However, despite higher net prices, the overall demand in the environment was softer than last year, with open market volumes particularly weak.
Please standby, while we compile the Q&A roster.
And our first question will come from the line of Mark Weintraub with Seaport Research partners. Your line is open.
Thank you.
The first question.
If we think about the fourth quarter siding margins.
Alan Hockey: And so, the volume reduction in the quarter reflects not only the removal of the seagull and off from the OSB fleet, but also market cutelments in response to the softer demand. As with siding, raw material deflation provided a small tailwind, but the star of the show was cost control, which contributed $11 million of EBITL. In other words, despite significantly lower volumes, the OSB business ran very efficiently, as demonstrated not only by the dollars, but by the four percentage point improvement in operating efficiency or OE.
I guess, we're going to have back against us, but kind of order of magnitude.
How should we think about it being relative to the third quarter.
Oh, yes.
Given that volumes in the fourth quarter. If we hit this this this forecast they're going to be lower than the third quarter and the business has a high variable margin.
Then.
Even excluding the best cost EBITDA margin would have been at a lower than Q3, and then of course as we add on as you pointed out.
Alan Hockey: As Brad has already mentioned, it was a clean quarter for cash flow as shown on slide 9, with $190 million of EBITDA, producing a $187 million of operating cash flow. We spent $49 million in growth and maintenance capital. We turned $70 million to share holders via the quarterly dividend and repaid the $30 million draw on our revolver. As a result, cash balance is increased by $90 million in the quarter to end September at $160 million. Cash has continued to increase subsequently and currently stands at a little over $200 million.
The basketball side of low the margin a little bit more.
So the.
The closest approximation.
Two the sighting Q4 performance closest approximation is probably Q2 of this year.
Similar ish.
<unk>.
Most of the drivers.
Got it and I believe that was about 18%, 19% EBITDA margins in Q2.
Yes that was Q2, so the closest approximation I'm not necessarily committing to that number but the closest approximation the shape of the quarters very similar yes, okay. Thank you and then.
Alan Hockey: Finally, let me discuss our updated full year outlook on slide 10. With respect to CapEx, having already spent $236 million so far in 2023, the fourth quarter will likely look a lot like the third quarter for capital spending. The bulk of the near-term growth and conversion capital is behind us with Segola and Beth now up and running, so the fourth quarter spend will mostly be on sustaining maintenance. Siding revenue for the third quarter largely met our internal expectations, so we are reiterating the guidance we provided on our second quarter call that we expect a full year siding revenue decline of about 10%, which implies a fourth quarter revenue decline of about 16%.
As we're thinking about next year.
Assuming youre not moving forward with Wawa and <unk> startup costs there.
I guess I'm kind of unlikely.
Can we add that $38 million of.
Startup costs with the goal press rebuilds, the Bath expansion et cetera, and when we bridge 24 versus 23 or would you suggest we think about it differently from that.
I'd like to suggest thinking about it slightly differently. So a poll proportion of those costs are permanently embedded that a fixed cost of having the facilities now of course that sets us up.
Alan Hockey: For OSB, we will continue to offer algorithmic revenue guidance based on the assumption that OSB prices remain at the levels published by random links last Friday. Under this price model and accounting for market downtime, we would expect OSB revenue to be down 30% sequentially compared to the third quarter. Under these assumptions, including the startup costs of the Beth pre-finished facility I referenced earlier, and some maintenance expenses in both business, we would expect total company, fourth quarter EBITDAF to be between 60 and 80 million dollars.
To be able to bring on incremental volume very efficiently because of that fixed cost infrastructure is largely already in place. So the real way to think about it is those embedded costs set us up to potentially have a tight variable incremental margin on additional volume next year.
That's the way to think about it so bad that but it means that as volume comes on is cost still needs to be added again, because they are already embedded in our current run rate.
It's.
Alan Hockey: Now before we take your questions, please allow me to anticipate one. We're not yet in a position to offer revenue or EBITDA guidance for 2024, but our capital allocation strategy remains unchanged, as will the flexibility with which we deployed capital to investing capacity. If the housing and repair and remodel markets are basically flat next year, as most forecasters currently anticipate, then Sir Gill and Bath provide LP siding business with sufficient capacity to press and pre-finish enough smart side to meet demand.
It's an investment that I say this a lot I know it is an investment in the future that that allows us to immediately.
Denies the EBITDA from.
From incremental volume when we get it.
Okay, so, but none of that $38 million have been quasi one time it should all be viewed as somewhat.
Yes.
Yes, I'm being a bit I'm being a little bit a little bit cagey. Some of it's embedded in some of its one time because some of the costs.
He is a good example of a ramp up cost when you're ramping up we have to we know we don't make a great product. So some of the product that gets produced as we ramp up is is essentially scrapped as we as we learn to run efficiently. So some of those costs are indeed, those those startup costs.
Alan Hockey: And when might we start converting the recently quite well-off facility to siding? Well, the answer, as established on prior calls, is when the market demands it. We don't know exactly when that will be, but we have sufficient capacity, liquidity, and most importantly, flexibility to be responsive to demand when that time comes. And in the meantime, our capital allocation strategy remains to earn cash, invest in our growth as needed, and return a significant amount of the remainder to shareholders.
A bit too early for me to commit to a precise separation youre right some of those.
Inherent inefficiencies that would not be repeated the rest is fixed cost infrastructure that will be.
Thank you.
Operator: And with that, we'll be happy to take a round of questions. Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question.
Thank you one moment for our next question.
Okay.
And that will come from the line of Kurt Yinger with D. A Davidson your line is open.
Great. Thanks, and good morning, everyone.
Operator: Houston. Please stand by while we compile the Q&A roster.
I guess that seems kind of wrapped up this inventory normalization in Q3 any thoughts on how much of a headwind that's going to ultimately posed to volumes this year and how of incoming orders trended as you've gone from kind of Q3 to Q4 here.
Mark Weintraub: And our first question will come from the line of Mark Weintraub with Seaport Research Partners. Your line is open. Thank you. The first question, if we think about the fourth quarter siding margins, I guess we're going to have baths against us, but kind of order of magnitude. How should we think about it being relative to the third quarter? Oh, yeah, given that volumes in the fourth quarter, if we hit this, this, this forecast, they're going to be lower than the third quarter and businesses are high available margin.
Mark Weintraub: Then, you know, even excluding the bath costs, the EBITDA margin would have been a lower than Q3. And then of course, as we add on, as you point out, the bath costs are lower than margin a little bit more. So, you know, the closest approximation to the siding Q4 performs closest to approximation is probably Q2 of this year. Similar wish in terms of most of the drivers. Got it. And I believe that was about 18 to 19% EBITDA margins in Q2. Yeah, that was Q2. So closest to approximation. I'm not necessarily committing to that number of the closest approximation. The shape of the court is very similar. Okay, thank you.
Yes.
So from for Q4 2023.
<unk>.
Okay.
It's not it's not the easiest thing to settle on a number for what the headwind was but if you look at.
Historical sales if you look at some of the inventory reporting we're getting now from distribution.
Can be as much as 100 million feet of volume bit worse was sold last year, and then moved out of the channel this year.
<unk>.
I mean cause the headwind that you mentioned.
As far as where we are today, we do have all customers back in the order file routinely.
On a normal cadence.
Based on history.
So we feel good that across the board across all different channels that we've worked through the inventory situation and we are seeing.
Real demand flow back through.
Consumer demand flowing back through to our order file.
Got it okay.
That's very helpful.
I guess as you look at yes.
Across some of the different products within smart side expert finish the builder series, maybe some of the volume that was going into the shed manufacturers that was weaker earlier in the year.
Alan Hockey: And then as we're thinking about next year, assuming you're not moving forward with Wawa and the startup costs there, which I guess seem kind of unlikely. Can we add that 38 million of startup costs with the gola, press rebuild, the bath expansion, et cetera. And when we bridge 24 versus 23, or would you suggest we think about it differently from that? I'd like to suggest thinking about it slightly differently. So, the proportion of those costs are permanently embedded.
I guess are there any parts of that that you're particularly excited about kind of growing next year, notwithstanding a big change in kind of the macro demand environment or what do you see as kind of the biggest kind of above market growth drivers.
Over the next 12 months.
So Kurt.
Just say for the sake of this question that.
New home construction is flat next year R&R R&R spend is flat next year.
Alan Hockey: They're the fixed cost of having the facilities. Now, of course, that sets us up to be able to bring on incremental volume very efficiently because they've fixed cost infrastructure is largely already in place. So the real way to think about it is those embedded costs set us up to potentially have a high variable incremental margin on additional volume next year. That's the way to think about it. So they're there, but it means that as volume comes on, those costs don't need to be added again because they're already embedded in our current run rate.
We're excited I'm excited about the opportunity to gain market share.
Repair and remodel due to our expert finish.
Growth the <unk>, New York facility, the Houlton plant behind it is making product for that eastern seaboard and area where it's.
It's a highly active repaired siding repair and remodel market, but one where we are underpenetrated.
As we build capability and capacity there and scale.
Theres, just a lot of opportunity for market share gains.
Alan Hockey: And it's an investment and I say this a lot. I know it's an investment in the future that allows us to immediately recognize the EBITDA from incremental volume when we get it. Okay. So, but would none of that 38 million have been quasi one time? It should all be viewed as embedded or. Yeah, I'm being a little bit cagey. Some of it's embedded and some of it's one time because some of the costs that here's a good example of a ramp of costs when you're ramping up, we have to we know we don't make a great product.
And then on the new construction side, we continue to.
Go to market with our builder series, a portfolio of products, which which provides us a competitive offering for the builder and while we have the.
Depending on the geography decent to good market share with smaller the smaller regional builders, we are underpenetrated when it comes to the more national players.
Alan Hockey: So some of the product they get. Produced as we ramp up is essentially as scrapped as we as we learn to run efficiently so some of those costs are indeed those those very startup costs but I'm a bit too early for me to commit to a precise separation. You're right that some of those are inherent inefficiencies that would not be repeated. The rest is fixed cost infrastructure that will be. Okay, thank you.
And we're excited about the possibility for builder series to compete in that environment in a very meaningful.
Meaningful way.
Operator: Thank you. One moment.
To gain market share next year, there as well.
Sure, we already have really high market share there.
But we're looking at tweaking that are getting a few more points, but I think the meaningful growth above overall market growth for us over the next five years or so.
That's going to be an expert finished the repair and remodel and then with.
Where the bigger builders.
Okay Alright.
Alright, thanks for the color Brad appreciate it and good luck here in Q4 guys.
Kurt Yinger: For our next question. And that will come from the line of Kurt Yinger with D.A. Davidson. Your line is open. Great. Thanks. And good morning, everyone. I guess as he's kind of wrapped up this inventory normalization in Q three. Any thoughts on how much of a headwind that's going to ultimately pose to volumes this year? And. And how have incoming orders trended as you've gone from kind of Q three to Q four here?
Thank you thanks Kurt.
Thank you one moment for our next question.
And that will come from the line of Michael <unk> with <unk> Securities. Your line is open.
Thank you Alan and Darren for taking my questions.
I just wanted to follow up on Curt's question.
Kurt Yinger: Yeah, well, so from for Q for 2023, you know, we're, you know, it's not, it's not the easiest thing to settle on the number for what the headwind was but if you look at historical sales, if you look at some of the inventory reporting we're getting now from distribution. You know, it can be as much as a hundred million feet of volume that was so last year and then moved out of the channel this year, which has caused the headwind that you've mentioned.
In terms of.
Market share and how you intend to gain market share. It seems like one of your siding competitors are gaining share with homebuilders.
Could you just be very vocal about it.
You also mentioned last quarter that you were a little under penetrated with the large national builders, you just mentioned that again.
Ryan here.
Kurt Yinger: As far as where we are today, you know, we do have all customers back in the order file routinely. You know, like an on a normal cadence, you know, based on history, and so we feel good that across the board across all different channels that we've worked through the inventory situation and we were seeing, you know, real demand flow back through consumer demand flowing back through to our order file. Got it.
Kurt Yinger: Okay, that's, that's very helpful and then I guess as you look at, you know, across some of the different products within smart side, expert finish, the builder series, maybe some of the volume that was was going into the shed manufacturers that was weaker earlier in the year. I guess are there any parts of that that you're particularly excited about kind of growing next year, notwithstanding a big change and kind of the macro demanded environment or what do you see as kind of the biggest kind of above market growth drivers over the next 12 months.
Kurt Yinger: So current, you know, if you would just say for the sake of this question that new new home construction flat next year on our on our spin is flat next year. We're excited. I'm excited about the opportunity to gain market share in repair and remodel due to our expert finish. Growth, the bath, New York facility, the health and plant behind it, it's making, you know, product for that Eastern seaboard, an area where it's a highly active repair, citing repair and repair model market, but one where we are under penetrated.
Kurt Yinger: So as we build capability and capacity there and scale, you know, there's just a lot of opportunity for market share gains. And then on the new construction side that we continue to, you know, go to market with our builder series portfolio of products, which can provide us competitive offering for the builder. And while we have depending on the geography decent to good market share with smaller, the smaller regional builders, we are under penetrated when it comes to the more national players.
Kurt Yinger: And we're excited about the possibility for builder series to compete in that environment in a very meaningful way and us to gain market share next year there as well. You know, Shad, we already have really high market share there, we're looking at tweaking that or getting a few more points. But I think the meaningful growth above overall market growth for us over the next five years is going to be an expert finish through repair and remodel and then with the bigger builders. All right, thanks for the color, Brad. Appreciate it. You good luck here at Q4 guys. Thank you. Thanks for. Thank you.
Michael Roxland: One moment for our next question. And that will come from the line of Michael Roxland with Truest Securities. Your line is open. Thank you, Brad. Alan and Aaron for taking my questions. I just want to follow up on Kurt's question. In terms of market share and how you intend to gain market share. It seems like one of your side competitors is gaining share with home builders. It can be very vocal about it. You also mentioned last quarter that you're a little under penetrated with the large national builders. You just mentioned that again, Brad, here.