Q2 2024 Louisiana-Pacific Corp Earnings Call
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Speaker Change: Good day and thank you for standing by. Welcome to the Louisiana Pacific Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session.
Speaker Change: To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To start your question, please press star 1 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Aaron Howald, Vice President, VP, I'm sorry, Investor Relations and Business Development. Please go ahead.
Aaron Howald: Thank you, Operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the second quarter of 2024, as well as our updated outlook.
Aaron Howald: My name is Aaron Howald, and I am LP's Vice President of Investor Relations and Business Development. With me this morning are Brad Southern, LP's Chief Executive Officer, and Alan Haughie, LP's Chief Financial Officer. After prepared remarks, we will take one round of questions.
Aaron Howald: During this morning's call, we will refer to a presentation that has been posted to LP's IR web page, which is investor.lpcorp.com. Our 8K filing, earnings press release, and other materials are also available there, including our recently published 2024 sustainability report.
Speaker Change: As always, I will caution you that today's discussion contains forward-looking statements and non-GAAP financial metrics, as described on Slides 2 and 3 of the earnings presentation.
Speaker Change: The appendix of the presentation also contains reconciliations that are further supplemented by this morning's 8K filing. Rather than reading those statements, I will incorporate them by reference. And with that, I will turn the call over to Brad.
Brad: Thanks, Aaron, and thank you all for joining us this morning.
Brad: LP Siding and OSB Businesses built on a strong first quarter, executing our strategy and delivering continued growth, share gains, and margin expansion in the second quarter of 2024.
Brad: I will summarize a few of the highlights of the quarter, which are detailed on page 5 of the presentation, and discuss the factors that contribute to these results before turning the call over to Alan for more detail on the business's performance in the quarter and an update on capital allocation.
Alan: LP SNET sales in the quarter reached $814 million, up 33% compared to prior year.
Alan: Siding sales grew by 30% in the quarter, the result of 22% higher sales volume and 6% higher prices, both of which were helped by another record quarter for expert finish.
Alan: In OSB, higher prices and improved mix of structural solutions value-added OSB contributed to strong revenue growth. At the same time, leverage from increased volume and operational efficiency improved margins.
Alan: As a result, LP more than doubled adjusted EBITDA, operating cash flow, and adjusted earnings per share compared to the second quarter of 2023.
Alan: With the capacity expansion projects of the past two years now complete, and the new facilities fully operational, CAPEX was a comparatively light $36 million in the quarter. This left a greater proportion of LP's operating cash flow available to return to shareholders.
Alan: Therefore, consistent with our capital allocation strategy, $120 million was spent on dividends and share repurchases through the quarter. Share repurchases have continued since quarter end, as Alan will detail in a moment.
Alan: On the lower left of page 5, you will see some other highlights. First and most importantly, our businesses operated safely. LP wins more than our fair share of industry safety awards. In fact, we were just named the safest company in our category by the APA Engineered Wood Association.
Alan: But the best reward is sending everyone home safely every day. I want to thank our operations teams for achieving an outstanding total incident rate in the second quarter of 0.6.
Unknown Executive: Siding and OSB both delivered impressive operating efficiency in the quarter, which we measure with OE. The repair remodeling market is more difficult to track, but the general consensus is that R&R spending overall is down by mid-single digits compared to last year. In 2024, we expect expert finish to be close to 10% of total siding volume.
Alan: Siding and OSB both delivered impressive operating efficiency in the quarter, which we measure with OEE.
Alan: The siting business held OEE flat at 77% despite the complexity of ramping up a most recent siting conversion in Sagola, Michigan and our Greenfield Prefinished Facility in Bath, New York.
Alan: The OSB business increased OEE by three points compared to last year.
Alan: This high-level operating efficiency was a major contributor to the business's cost performance in the quarter.
Alan: Finally, LP published our 2024 Sustainability Report in July .
Alan: As detailed in the report, SmartSight is significantly more sustainable than competing sighting technologies.
Alan: And most of L.P.'s products are carbon negative. I want to thank everyone at L.P. who contributed to the report and to the impressive story it tells.
Speaker Change: On the left side of page 6 in the presentation, you will see an updated chart showing normalized growth of siding volume and revenue compared to U.S. housing starts.
Speaker Change: The 2024 data for siting reflects the midpoints of our increased guidance for siting growth, while the housing data is based on FACTSAID's consensus for housing starts in 2024, which is currently at 1.4 million.
Speaker Change: As you can see, siting growth continues to exceed that of the underlying housing market as LP gains share in residential construction.
Unknown Analyst: Okay, I understand. Thank you.
Speaker Change: The repair remodeling market is more difficult to track, but the general consensus is that R&R spending overall is down by mid-single digits compared to last year.
Speaker Change: For the record quarter for expert finish or pre-finish siding design for the R&R market, LP siding business also seems to be gaining share in the R&R segment.
Operator: Thank you. One moment for the next question.
Speaker Change: In 2024, we expect Expert Finish to be close to 10% of total siding volume. And given its higher price point, at 10% of volume, Expert Finish would account for roughly 14% of siding revenue.
Speaker Change: Expert finish margins improved in the quarter as well, helping Siding to achieve a 25% EBITDA margin in the quarter.
Speaker Change: We believe we have a long runway for growth and share gains in the new construction, R&R, and off-site segments of the siding business, and with both primed and pre-finished smart sides.
Speaker Change: And we intend to continue developing new products, expanding our addressable markets, and executing our sales and operations strategies to drive future growth.
Speaker Change: And with that, I will turn the call over to Alan for more detail on LP's financial performance in the quarter before taking your questions.
Alan: Thanks, Brad.
Alan: As Brad said, it was a strong quarter, and as the waterfall charts on the next two pages of the presentation show, it was also a refreshingly straightforward one in terms of year-over-year comparisons.
Alan: Page 8 shows the performance of siding compared to the second quarter of 2023. With last year's capacity addition projects and channel inventory stocking both now behind us, the waterfall tells a story of volume growth, price increases, and some much-anticipated operating leverage.
Speaker Change: Sales volumes grew by 22%, boosted by share gains in new residential construction and repair and remodel, and a record quarter in-expo finish.
Speaker Change: All admittedly riding on a relatively soft comparable. But this higher sales volume generated $71 million in additional revenue and $28 million of EBITDA at an incremental EBITDA margin of almost 40% before considering the impact of price increases.
Speaker Change: Speaking of which, list price increases and favorable mix combined roughly equally towards 6% in higher prices worth $24 million.
Speaker Change: Increases in selling and marketing investments were almost fully funded by the non-recurrence of last year's mill conversions, resulting in a net $2 million of investment costs.
Speaker Change: while lower logs and resin prices supply the useful $5 million tailwind.
Speaker Change: Finally, as a result of ramping up the more automated pre-finishing facility in Beth, New York, and investments in similarly advanced equipment in our Green Bay pre-finishing facility, there has been, as Brad said, a significant improvement in expert finish margins over last year.
Speaker Change: Now, expert finish margins are not yet equivalent to the business average, but they're getting closer and closer.
Brad: Incidentally, this improvement shows up in other costs on the Waterfall because our methodology is to value changes in volume at the prior year margins.
Brad: The net result of all this is $415 million in revenue, up $95 million, with a near doubling of EBITDA to $105 million.
Brad: And, naturally, this pushed Siding's EBITDA margin up by 7 points to 25 percent.
Brad: The waterfall on page 9 also tells a simple and effective story of consistent execution by the OSB team.
Brad: Prices were 34% higher than last year, adding $73 million in both sales and EBITDA.
Brad: Unlike siding, OSB prices are largely outside our control. But what the OSB team can control, however, is volume, mix, and operating efficiency. And like siding, the OSB team delivered an exceptional quarter on all of these fronts.
Unknown Executive: Sales volumes in the quarter were 100 million square feet higher than last year, made possible in part by an impressive 3 percentage point increase in operating efficiency. The $17 million in other investing and financing is mostly the sale of LP's 50% ownership of a joint venture, a remnant of our investment in, which brings me to guidance on slide 11. I'd like to briefly remind you that when we updated our guidance on our first quarter earnings call, we increased the four-year guidance for siding by the sum of the first quarter beat and the increase in the second quarter outlook.
Unknown Executive: Answer the speaker and see if that helps. Let me know if it does. So if you take the growth that we've reported, about half of that I would attribute to single-family new construction. Look, let me just back up.
Brad: Sales volumes in the quarter were 100 million square feet higher than last year, made possible in part by an impressive 3 percentage point increase in operating efficiency.
Brad: 52% of volume in the quarter with higher value-added structural solutions, this incremental volume generated an additional $40 million in net sales and $23 million in EBITDA.
Brad: OSB ended the quarter with $351 million in sales and $125 million in EBITDA, and as Brad mentioned earlier, they did so safely.
Speaker Change: Clean quarters of sales growth and operational excellence in both siding and OSB make for a similarly straightforward cash flow, as slide 10 shows.
Speaker Change: After starting the quarter with $244 million in cash, LPN $229 million in EBITDA, paid $59 million in taxes, and saw a seasonally normal reduction in working capital that brought in a further $39 million.
Speaker Change: With the resulting $212 million in operating cash flow, we executed our capital allocation strategy as we have consistently done, investing $36 million in CapEx and returning $120 million to shareholders.
Speaker Change: During the quarter, we paid $102 million to repurchase 1.2 million shares at an average price a little over $84 per share.
Speaker Change: The $17 million in other investing and financing is mostly the sale of LP's 50% ownership of a joint venture, a remnant of our investment in Intecra.
Unknown Executive: At that time, we had insufficient visibility to adjust guidance for the second half. So, assuming the year plays out as I've just described, and as usual, treating LPSA earnings and corporate expenses as mutually offsetting, total EBITDA for LP in the third quarter would be in the 105 to $125 million range, and full year EBITDA would be between 580 and $620 million.
Speaker Change: We continue to see typical seasonal patterns in demand, which usually means that the fourth quarter delivers weaker sales volumes as the building season winds down.
Speaker Change: As always, this is not a price prediction, just an attempt to offer useful modeling.
Speaker Change: For the fourth quarter and full year OSB outlook, and to reflect the reality that OSB demand and prices rarely increase meaningfully in the fourth quarter, we will extend the flat-from-Friday-prior approach through year-end.
Speaker Change: And with that, we'll be happy to take your questions.
Speaker Change: Thank you. As a reminder, if you'd like to ask a question, please press star 1-1 on your telephone. We also ask that you wait for your name and company to be announced before proceeding with your question. We ask that you limit yourself to one question and one follow-up.
Operator: One moment for the first question.
Speaker Change: And our first question will be coming from Steven Ramsey of Thompson Research Group. Your line is open.
Unknown Analyst: Good morning. Maybe start with Q2, citing even a margin just slightly above the first quarter despite much higher sales. Maybe talk to the puts and takes. I'm sure some of that is the expert finished growth, which I know is an incremental drag if that volume is growing better than the core smart side product, but just overall, the puts and takes.
Steven Ramsey: Good morning. Maybe to start with the Q2.
Speaker Change: citing even a margin just slightly above the first quarter despite much
Steven Ramsey: Higher Sales. Maybe talk to the puts and takes. I'm sure some of that is the experts.
Speaker Change: finished growth, which I know is an incremental drag if that volume is growing better than the core SmartSide product. But just overall the puts and takes on the Q1 to Q2 siding EBITDA margin.
Unknown Executive: Sure. There's not a great deal to add. You've captured one of the factors.
Speaker Change: Sure. There's not a great deal to add. You captured one of the factors. The expert finish margin is significantly improving, but it's below the average. We have, in some instances, added shifts.
Speaker Change: Other than that, there's nothing really of any great significance, other than, as you said, expert finished growing, slight addition of labor, and changes in top line mix.
Speaker Change: Particularly now coming in from Lennar, but we do have initiatives with several national and large regional corporations to secure additional volume there.
Lenore: I'm with the Builders' Shares Committee, so I am, that's directly measurable.
Lenore: have pulled along as a result of the Builders' Charities Lab product, you know, being, allowing us to secure a position with the builders.
Lenore: And the second part of your question, we expect continued success there as we move through the rest of this year and into next year.
Speaker Change: That's helpful. Thank you.
Speaker Change: Thank you. One moment for the next question.
Speaker Change: And our next question will be coming from Kurt Yinger of D.A. Davidson. Your line is open.
Kurt Inger: All right, thank you and good morning, everyone.
Kurt Yinger: Brad, I just wanted to follow up on the last comment around the strength in the big builder business.
Kurt Yinger: Is that primarily, you know, a builder series dynamic at this stage, just that product, or are you seeing
Speaker Change: You know, solid takeaway on prime product as well and kind of big builder as we think about it should be sort of a collection of those products as opposed to just builder series.
Speaker Change: Dead on, Kurt. The Builder Series LAP certainly makes us competitive, or has helped to make us competitive from a LAP standpoint.
Speaker Change: Generally speaking, the house is also trimmed, the soffit is ours, any panel or shape product that is used is an LP product.
Speaker Change: And we are seeing, you know, in the regions, in the geographic regions, where we are seeing success that is measurable, you know, directly from civil rights.
Speaker Change: The fact that bringing in a traditional market share pulls those other products along as well.
Speaker Change: So, yes, we've got good growth on Builder Series, we've got good growth on all primed SKUs that go into the single-family NUCs for the rest of this year.
Speaker Change: Okay.
Speaker Change: That makes sense. And then, on the expert finish front, I mean, the answer seems kind of obvious, but I'll ask it anyways, I mean, does the performance and strength that you're seeing there, are you seeing any offset from lower volume to others who might have been
Speaker Change: You know, pre finishing the products themselves and selling them under a different brand name. And then, you know, on the margin front, how should we
Speaker Change: sort of ring fence the long-term vision in terms of what expert finish should be. Is it reasonable to think that, you know, just given the price point, it could be
Speaker Change: higher than the company average over time or just given, you know, the operations and infrastructure around pre-finishing operations, you know, is meeting the company average kind of where your head's at at this stage.
Speaker Change: Yeah, so the first part of that question is a good one around, I think, Kurt, what you're asking, are we cannibalizing
Speaker Change: Historical.
Kerwin: historical partners that were pre-finishing our product.
Kerwin: or Prime Product and selling it. And we've certainly, some of that has happened.
Kerwin: with as we've gone into this expert finish initiative, but we still have
Kerwin: a significant amount of lap siding going into other pre-finishers, you know, for conversion. So I would say certainly as a whole, our addition of expert finish on our portfolio has been overall additive to our lap sails.
Kerwin: But certainly there has been some cannibalization, you know, that's the impact there.
Kerwin: But certainly positive. On the margin side, if you recall, we used to have a CanXcel product line in eastern Canada at the time. It was one of the highest margin products in the entire LP portfolio.
Kerwin: And I certainly believe that expert finish can be above, at, or should be, and above
Kerwin: Product module for us.
Kerwin: You know, it will be, and we're getting there, you know, with Alan reporting, we're getting to be where it's at.
Kerwin: It is one of those things, though, that as we ramp into the incremental volume, at times there will be inefficiencies associated with that continued growth that may delay the ultimate future. Thank you. Thank you.
Speaker Change: Achievement of higher than average margin for expert finish. But our expectation is ultimately that's where we'll end up. They should be, we should be getting paid more than normal margin amounts to paint the product given the quality of the end product as a result of our finishing.
Speaker Change: Right, okay, that makes total sense. Thanks, Brad, for the color and I'll turn it over.
Speaker Change: Thank you. One moment for the next question.
Speaker Change: And our next question will be coming from Mark Weintraub of Seaport Research Partners. Your line is open.
Mark Weintraub: Thank you. First, congrats. Very strong quarter. Good outlook.
Speaker Change: What question is, obviously we had this big de-stock in siding last year.
Mark Weintraub: Do you think customers have just continued to hold inventories very low?
Mark Weintraub: or does some of the strength potentially represent some restock to, say, more normal levels, or how would you have us think about that?
Speaker Change: I would say that we discussed this internally a bunch, and we feel like we are at normal inventory levels.
Speaker Change: for this time of year and normal being prior to last year back in the days when things were normal.
Mark Weintraub: which Mark was kind of a long time ago given we were on allocation and COVID and all that.
Speaker Change: As far as our distributor partners, I mean, you know, we are still in the building season, so product's moving and, you know, inventories are being maintained, but there has been no, you know, no material build in inventory, nor do I believe it's necessarily light. I just think it's where it needs to be right now.
Speaker Change: to service the market conditions that we have in Siding.
Speaker Change: Okay, thank you and then
Speaker Change: Good on Expert Finish, great on the Builder Series, any update on the Smooth Smart Side initiative?
Speaker Change: Yeah, I mean, those products have been launched, that's a significant, some of a, I don't want to say significant, but a meaningful part of the LENAR program was that the availability is smooth, and then that is a key component to our East Coast pre-finish, or expert finish strategy.
Speaker Change: And so we're pleased with that new product. We'll continue to innovate around that product and others that are needed, you know, especially in the repair, remodel, SKU selection for the homeowner, but it's going well and we're pleased with the sales of that product so far this year.
Speaker Change: Super. And then just last, kind of tie two together. One,
Speaker Change: So, if I look at the four-year guide for siting, I know you said it's seasonally weaker, but I think the math is it goes from 100 million at the midpoint to like 70 million of EBITDA for 4Q.
Speaker Change: It seems like a pretty steep drop-off, so I was curious if there's anything else embedded there, maybe just a bit of conservatism. And then also, I know you made some OSB in the siding operations in the first quarter. I'm guessing you did in the second quarter too, maybe a bit more color on what happened there and or whether you're assuming now that OSB is weaker, whether there's OSB still being produced in siding in the second half of the year. Thanks a lot.
Speaker Change: Thanks Mark. The actual, the part of the answer that ties to the question you asked about Rush Smooth, we're ramping up production of Rush Smooth in the fourth quarter given its success. And again, rather like Expert Finish, it is currently an inefficient manufacturing process given that it's
Speaker Change: It's in its infancy, so there is some non-material capital investment planned next year to help us automate that process.
Speaker Change: more efficiently. So part of the drag is that. Another aspect is that we did, as I said in answer to an earlier question,
Speaker Change: have labored to the signing network in Q2, which would be maintained through Q3 and through Q4, with Q4 being a slightly lighter
Speaker Change: most likely a lighter revenue quarter, that labor is going to be diverted to some essential maintenance, including, you know, a month down at one of our mills to replace a furnace. I was chatting to one of the engineers about this and he said
Speaker Change: The perfect phrase, he said, we don't have to do this now, but in 2025, we'll wish we did if we don't, and therefore.
Speaker Change: That's what they do. That's what we're doing.
Speaker Change: Thirdly, there was some OSB production inside ENQ1, a lot less in ENQ2, less in ENQ3, and that level is staying roughly where it is in Q1.
Speaker Change: But that's not, that's a million dollars or so, but by no means the lion's share of the change.
Speaker Change: It's mostly the maintenance and the bushes.
Speaker Change: by
Speaker Change: And as you gave me the out, so I'll take it. And yes, of course, we try to give out a target that we're confident with.
Speaker Change: A little bit of conservators and bankers.
Speaker Change: As always.
Speaker Change: Much appreciated. Thank you.
Speaker Change: Thank you. One moment for the next question.
Speaker Change: Our next question will be coming from Mike Roxland of Choice Securities. Your line is open.
Mike Roxlin: Thank you Brad, Alan, and Aaron for taking my questions and congrats on a good court despite the backdrop.
Mike Roxland: First question I had was just in terms of the selling and marketing expenses. You mentioned increasing headcount, adding additional selling and marketing expenses. I'm just wondering how much you incurred in the quarter and what's left to spend in the balance of the year?
Speaker Change: Oh gosh, well we added about $5 million to selling our marketing costs year over year in Q2. How much is left to spend?
Speaker Change: Depends on the opportunities. I would like to see us continue to invest in it over the last couple of years.
Speaker Change: I think you should expect to see similar type year-over-year variances for the remainder of the year, and they're fundamentally baked into the forecast.
Speaker Change: And at that point now, do you think that you're fully staffed accordingly to meet the design demand that's out there, or is it something that's going to be ongoing, particularly as you continue to grow your innovation, your pipeline, and the like?
Speaker Change: Yeah, you should expect the absolute number to continue to grow.
Speaker Change: Market share strategy that we have.
Speaker Change: requires contractor-builder conversions, which requires human interaction.
Speaker Change: We're going to support our sales team appropriately, both on the sales front and the technical group behind that provides instruction on installation.
Speaker Change: And then also, as we continue to grow X per finish, which means higher market share and aspirations for even higher market share.
Speaker Change: in Repair and Remodel, that does require, you know, marketing support. Those are, that's an in-home sale initiative, straight, you know, straight with interaction with the consumer. And so the, you know, as R&R becomes a bigger part of our mix.
Speaker Change: That segment requires a bigger investment in marketing.
Speaker Change: And so, we should expect absolute growth in our sales and marketing expense, but hopefully find leverage when, if you ratio that against revenue. Obviously, there should be a good bit of leverage there.
Speaker Change: But we're not done investing in sales and marketing.
Speaker Change: We're not done here, Mark. So, those two things go hand in hand.
Speaker Change: Got it, Brett. Thank you for the call. And just one quick one on OSB. Could you share where your OSB operating rate stood in 2Q, where it stands currently, where do you think the industry stands, and really, any sense that curtailment could be forthcoming as prices continue to
Speaker Change: to be under pressure here.
Speaker Change: Thank you.
Speaker Change: The operating rate in Q2 of this year is around about 86%, I believe. We're forecasting it to be slightly lower in Q3.
Speaker Change: And we will run our OSB business to match our customers' demand.
Speaker Change: and and do everything within our power for inventories to stay actually in OSB I would call it slightly lean right now and so the the we will match our capacity going into Q4 and beyond to
Speaker Change: to the customer demand.
Speaker Change: Got it. Good luck in the second half.
Speaker Change: Thank you.
Speaker Change: Thank you. One moment for the next question.
Speaker Change: And our next question will be coming from Sean Steuart of TD Cal when your line is open.
Unknown Executive: The expert finish margin is significantly improving, but it's below the average. We have, in some instances, added shifts to help make sure that we keep lead times healthy. And the mix changes slightly in terms of the top line in terms of pricing, and that obviously affects the margin a little bit.
Sean Steuart: Thank you, good morning. A couple questions. With respect to the siding business, given the positive momentum and positive revision guidance, or guidance revision rather, for that segment,
Brad: Brad, can you give us a sense of what you would need to see either in terms of margins at the segments or with respect to order file pull to make the decision on the next capacity expansion for that segment?
Brad: Yes, Sean, we're, you know, we...
Brad: are beginning to talk about that more robustly than we were six months ago.
Brad: And so, certainly, we want to be in a situation to stay ahead of demand. This year, as we are reporting, has been a really good year as far as growth, and we expect to continue to build on that next year.
Brad: So, you know, we are actively back into the scenario planning around the next incremental capacity.
Speaker Change: That, you know, as we learn about which skus are growing, that informs, you know, the configuration of the...
Speaker Change: The configuration of the next expansion, and that puts into play not only Wawa, but some of our existing facilities where an additional press line may be the best way to get the next increment of capacity.
Speaker Change: So we're actively in the planning stage there.
Speaker Change: Not spending any significant or meaningful capex yet as a part of that but
Speaker Change: This year's growth has put that back on the...
Speaker Change: The planning horizon for us and
Speaker Change: You know, as we look into next year, which we're not, obviously, at all, haven't done the budget yet, or certainly not giving guidance to, you know, but we could see us beginning to do engineering for the next expansion, you know, sometime next year.
Speaker Change: Thanks for that detail, and appreciating you don't give 2025 guidance, but with the current footprint, can you give us a sense of how much incremental volume and siding you expect?
Speaker Change: I would say, you know, because we are not fully shifted all the facilities because of the, you know, the pullback last year. So I would say we could probably, from where we are today, add capacity around shift additions that would give us another two to three hundred million feet.
Speaker Change: And our next question will be coming from Matthew.
Unknown Analyst: Okay, that's helpful. And then also, thinking about the builder series rollout, just curious about general updates on how that is going with the current partnership with Lennar and how you're thinking about potential partnerships with other large builders, how that could play out over the second half and into next year.
Speaker Change: Aloha
Speaker Change: And at this point in time, particularly given the introduction of Brush Smooth, which I said is going very well, but at this point...
Speaker Change: is
Speaker Change: We're making great gains in expert finish. I think we are.
Speaker Change: I'm not willing to commit yet on where that upside is.
Speaker Change: I'm
Matt: I think that we need to see how the next few capacity additions play out and the timing of those.
Speaker Change: Okay, thanks. Fair enough. And then just one last cleanup for me. I was wondering if you have any color you could give around expected impact of deciding production levels and margins as a result of the new forestry plan under development in the Swan Valley, Manitoba area?
Speaker Change: Yeah, good question. You know, that's something we're actively working on. I would say from a deciding margin, or for that matter, OUS, you know, there is a cost associated with those management plans.
Speaker Change: Thanks very much for the help. I'll turn it back.
Speaker Change: Thank you.
Speaker Change: I was wondering if you could talk about whether there was any variance in siting demand trends in the home center channel compared with your overall siting results.
Speaker Change: And that has been a meaningful part of the growth that we saw in Q2 and expect to see in Q3.
Speaker Change: and that has gotten us in a position where we have the ability to grow with Home Depot beyond just the traditional panel play that has been a historic basis of the relationship.
Speaker Change: And I guess you were asking a little bit, are we seeing cannibalization as a result of that? And the answer is not of any.
Speaker Change: No, I'm not seeing, the tram waterfowl is so strong right now across the board that I don't think there has been any significant loss of, uh, or, of, uh, animals other than chandeliers.
Speaker Change: Pleasant Stores Depot, that's a strong DIY still, a strong DIY or ultra-small contractor.
Speaker Change: a customer base there, and so it's small in scale, so it's giving us the ability to have the product presented to a customer base that we probably didn't have access to the product, you know, as it was coming in through a
Speaker Change: with Prohibition and Lumberyards.
Speaker Change: Thanks for the color there. And then you mentioned that price mix was roughly an equal contributor to the 6% growth in the second quarter. Would you expect a similar contribution from price and mix as we move through the back half of the year? Would one be more than the other?
Speaker Change: We kind of...
Speaker Change: It's hard to predict the mix aspect, you know, the 3% net from list price increases. Yes, that's relatively safe. The mix is a little more variable depending on the mixture of products. So I think it'll be our friend, whether it's as much as three points.
Speaker Change: It's so demand-specific that it's hard to predict with any great precision. They'll become. It'll be positive.
Speaker Change: Okay, understood. Thank you.
Speaker Change: Thank you. One moment for the next question.
Speaker Change: Our next question will be coming from the line of George Staphos of Bank of America Securities. Please go ahead.
George Staphos: All right, thanks so much. Thanks for taking my questions, guys.
Speaker Change: You mentioned, you know, the progress that you're seeing in expert and the progress you're seeing...
Speaker Change: with Builder Series.
George Staphos: Would it be possible for you to give us some additional color, and perhaps you already did, and I missed it.
George Staphos: In terms of the guidance raised, how much of that was from the progress that you're seeing in single family and your progress there and also then within repair model?
Speaker Change: Similarly, you talk about the share gains. Is there a way to give us some order of dimension? It sounds like you're doing very well as an expert. How much of that is coming, again, from single-family, from builder versus...
Speaker Change: Repair Model and that distribution channel. And then, you know, questions that we've received today from investors. Is it possible at all, recognizing it's an open mic,
Speaker Change: conference call to talk about where you think you're getting your share relative to other products that are in the market. Is it more coming from, you know, vinyl? Is it more coming from fiber, cement, anything that you would have us take away from that?
Speaker Change: Okay, so let's speak to the where's the growth coming from question first and I would say when you look at the growth we got, I would put about, I mean in general terms, Georgia, about half of that growth,
Speaker Change: Hey Brad, your phone is cutting out on our side. I don't know if you can hear me.
Brad: I'll go closer to the speaker and see if that helps. Let me know if it does.
Brad: So if you take the growth that we've reported, about half of that I would attribute to
Unknown Executive: There's a little growth in there at Shedd in retail, but the meaningful growth is about half and half between single-family new construction. And I would say about half of that is driven by the initiatives around the big builder focus that we have. The shed and retail has just been a nice little bump to have year over year. Where is it coming from?
Speaker Change: Single-family new construction. Look, let me just back up. There's a little growth in there at Shedd and in retail, but the meaningful growth.
Speaker Change: is about half and half between single-family new construction, and I would say about half of that is driven by the initiatives around the big builder focus that we have.
Speaker Change: And then the other for that would be repair and remodel, which is just, you know, converting contractors and getting the siding installed on homes. That's a great initiative there.
Speaker Change: But certainly, we would not have had as good a quarter before casting as good a Q3 if it wasn't for the success we're seeing in single family new construction repair and remodel.
Speaker Change: The shed in retail has just been a nice little bump to have year over year.
Unknown Executive: I would say it's coming from across the board. You know, there are still opportunities, particularly in repair and remodel, but certainly also in new construction as we compete against vinyl. And I would think most of the success in repair and remodel is probably against vinyl. On the single-family new construction side, then you get into some competitive hard sidings as well as vinyl as the competition. And so, you know, as we gain share there, you know, it's. But they're still...
Speaker Change: Where is it coming from? I would say it's coming from across the board. You know, there is still opportunities.
Speaker Change: Particularly in repair and remodel, but certainly also in new construction as we compete against vinyl. And I would think most of the success in repair and remodel is probably against vinyl.
Speaker Change: On the single-family new construction side, then you get into some competitive hard sidings as well as vinyl as the competition. And so, you know, as we gain share there, you know, it's...
Speaker Change: Coming from someone if it's not coming from growth with an existing a big builder customer but obviously what we would be replacing would be either vinyl or a competitive hard side.
Speaker Change: But they're still...
Speaker Change: You know, a lot of opportunity to go head-to-head against vinyl with, you know, with our product being certainly an upgrade, perceived upgrade to vinyl, or being, not perceived, actually, a upgrade to vinyl.
Speaker Change: And so we have to be competitive there, because that's where the big market share is. So there's a lot of focus on us making sure we have, and can explain in a good way, the value proposition against vinyl, but also against other hard sidings.
Speaker Change: Just closing a loop, and I think I know the answer, but if basically you're getting half of the progress from
Speaker Change: Single-family and half-family repair model.
Speaker Change: be the equivalent driver of the of the guidance rays within siding and then
Speaker Change: Separate, and I'll turn it over.
Speaker Change #100: Can you remind us what's left?
Speaker Change #100: to attack an OEE in terms of margin opportunity across the businesses if trends are as you expect over the next year. And I recognize there are no guarantees in life. What could that mean for your profit dollars, Alan, over the next year or two years? Thank you.
Alan: I'll answer the yes on the...
Alan: The revised Q3.
Alan: My guidance is predicated on the strength we're seeing in the repair and remodel and single-family new construction order filed.
Speaker Change #101: There is still upside on OE, and I'll challenge Alan to articulate that. How many times since we've quoted EBITDA numbers that relate to percentage point increases?
Alan: I'm reluctant to do so today. The way to think about OEE is that what it can fundamentally allow us to do is meet thresholds in terms of shifts.
Alan: It's obviously more efficient when we're managing our capacity up or down to be able to generate more OSD output without adding a shift, and we're lowering output to be able to take out a whole shift.
Alan: Give us that leverage and as you can imagine it discussed it before it's leverage that we don't sort of use in the siding business Because the idea with the siding business
Alan: I maintain this.
Alan: sort of more consistent, stable, and growing workforce.
Alan: as with their volumes, but it's the opportunities it gives us.
Alan: to be to operate the system with increased flexibility and we make braver decisions a little earlier in terms of taking up capacity when we feel demand not there. To my mind that that's the real benefit of OEE and of course that manifests itself in terms of increased
Alan: Operating Performance. But I'm going to refrain from reintroducing a pure EBITDA dollar against a percentage point.
Alan: George, I'll just add to that, you know what's been remarkable about our OEE journey to me is as we, you know, we're way ahead of where we thought we would be five years ago.
George: But we still see opportunity for improvement as...
Speaker Change #103: It probably will be a never-ending journey of finding ways to be more efficient and more productive.
Speaker Change #104: CAPEX helps that. It could actually, you know, increase the baseline.
Speaker Change #104: And then when we launch a new product, like Brush Smooth and Siding, there's all kinds of OEE opportunities there because we learn to make the product more efficiently.
Speaker Change #104: We're on a never-ending, continuous journey on OEE, and I feel like we'll be talking about that ten years from now, and still see plenty of opportunity. That's kind of the beauty of the industry and the way our machines work at the facilities.
Speaker Change #105: Thank you. One moment for the next question.
Speaker Change #106: And our next question will be coming from the line of Susan Maklari of Golden Sachs. Your line is open.
Unknown Executive: in particular now coming in from Lennar, but we do have initiatives with several other national and large regional corridors to secure additional volume there.
Unknown Analyst: Just closing the loop, and I think I know the answer, but if basically you're getting half of the progress from single family and half from repair model, would that also be the equivalent driver of the guidance raised with incitement? And then separately, and I'll turn it over to you, can you remind us what's left to attack in OEE in terms of margin opportunity across the businesses if trends are as you expect over the next year? And I recognize that there are no guarantees in life. What could that mean for your profit dollars, Alan, over the next year or two years? Thank you.
Unknown Executive: Product margin for us, you know, it will be, and we're getting there with Alan reporting, we're getting to be where it's kind of drag anymore, it will be. It is one of those things, though, that as we ramp into the incremental volume, at times, there will be inefficiencies associated with those that continue to grow that may delay the ultimate achievement of higher than average margin for expert finish. But our expectation is that, ultimately, that's where we'll end up. They should be; we should be getting paid more than normal margin amounts.
Unknown Executive: I would say that we discussed this internally a bunch, and we feel like we are at normal inventory levels for this time of year, and normal being prior to last year, back in the days when things were normal, which was kind of a long time ago, given we were on allocation and COVID and all that. But we feel good about our current inventory situations, as far as our distributor partners are concerned. I mean, we are still in the building season, so product's moving, and inventories are being maintained. But there has been no material build up in inventory, nor do I believe it's necessarily light. I just think it's where it needs to be right now to service the market conditions that we have inside.
Unknown Executive: at the perfect phrase. He said, we don't have to do this now, but in 2025, we'll wish we did if we didn't. And therefore, that's what they do. Well, that's what we're doing. Thirdly, yeah, there was some OSB production inside in Q1, a lot less in Q2, and less in Q3. And that level is staying roughly where it by no means does the line show.
Unknown Executive: But we're not done investing in sales and marketing.
Susan Mcclary: Good morning, everyone. Thanks for taking the question.
Operator: Good morning. I have a couple questions.
Susan Mcclary: I wanted to start with digging a little bit more into the R&R side of things. Can you just give some perspective on what you're hearing around the consumer and sellout trends on the ground? And what level of sellout do you think the channel is positioned for in the back half, given the inventories that they're carrying?
Speaker Change #108: Well, I think the channel is adequately stocked for the second half for any reasonable demand and expectation on repair and remodel.
Speaker Change #108: So I have no concerns about ability to serve, and I don't have concerns about there being any kind of overstocking in a repair environment. I mean, one-step distributors are experts in managing inventory in that channel.
Speaker Change #109: Many times financed.
Speaker Change #110: And so, you know, with interest rates where they are, with the economic uncertainty that's out there, there is, I think, an R&R spin for a reside is constrained.
Speaker Change #110: So I'm really proud of the fact that we're seeing the growth that we're seeing because that has to mean that that hypothesis is true, that that's market share gain.
Speaker Change #110: But you know, with interest rate reductions, if that happens...
Speaker Change #110: If we get through, you know, as Aaron and I were talking about this morning, a soft landing or a quasi-soft landing.
Aaron Howald: The pent-up demand around potential siding, re-side projects could be pretty significant. So, I think we're in a really good position to have our product commercialized.
Aaron Howald: Building credibility around the offering, expanding geographically our access to market through picking up some really high-quality distribution.
Aaron Howald: to where when we say repair, remodel,
Aaron Howald: Spend come back and financing loosen up a little bit so that a homeowner can
Aaron Howald: you know, afford to do a big-ticket remodel also. I think we're going to be in a really good position.
Aaron Howald: And that's why we're so...
Aaron Howald: You know, encouraged about the future for our siding businesses, repair and remodel just were so underpenetrated from a market share standpoint.
Aaron Howald: If we continue to be able to gain market share, while the market also gets stronger, that sets us up for some really good growth over the next several years.
Speaker Change #111: Okay, that's very helpful. And then you did see a bit of a raw material tailwind this quarter. Can you talk about the outlook from that perspective and how we should think about that flowing through the next couple quarters?
Speaker Change #112: Yeah, it may not be quite as positive as it has been in Q2 for the remainder of the year, but we still expect a raw material tailwind. Okay.
Speaker Change #113: resident logs, so we're optimistic.
Speaker Change #114: Okay. All right. Thank you for the color, both, and good luck with everything.
Speaker Change #115: Thank you. Thank you.
Speaker Change #115: Thank you. That does conclude today's Q&A session. I would like to turn the call back over to Aaron for closing remarks. Please go ahead.
Aaron Howald: Okay, thank you, Operator. We've one round.
Speaker Change #116: We're going to call those there and give everybody a couple minutes back of their day. Stay safe, and we'll look forward to connecting with you.
Unknown Analyst: of RBC Capital Markets. Your line is open.
Unknown Analyst: Good morning, everyone. Thanks for taking the time to answer the question.
Unknown Executive: With increasing certainty, capable of hitting this 25% mark with this excess capacity that we're carrying. So yeah, the trend is upwards, Matt, but I'm not willing to commit yet on where that upside is. I think that we need to see how the next few capacity additions play out and the timing of those. Yeah, probably better not to say any more than that.
Operator: many times by now.
Operator: Thank you. And one moment for the next question.
Operator: Thank you everyone for joining today's conference call. You may disconnect.
Unknown Executive: Yeah, so we did see meaningful growth, year over year growth, in our retail business. Produced by the U.S. Department of State
Speaker Change #116: www.globalonenessproject.org
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