Q3 2024 Louisiana-Pacific Corp Earnings Call
Good day and thank you for standing by. Welcome to the Q3 2024 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 Q&A session.
To ask a question during this session, you will need to press star 1 on your telephone. You will then hear an automated message advising your hand is raised.
To withdraw your question, please press star 11 again.
Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Aaron Howald, Vice President and Vester of Relations.
Please go ahead.
Aaron Howald: Thank you, operator and good morning everyone. Thank you for joining us to discuss LP's results for the third quarter of 2024, as well as our updated outlook for the fourth quarter and full year. Hosting the call with me this morning, our Brad Southern, LP's Chief Executive Officer, and Alan Haughie, LP's Chief Financial Officer.
Aaron Howald: 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 webpage, which is investor.lpcorp.com. Our 8K filing, earnings press release, and other materials are also available there.
Brad Southern: Thanks Aaron. Thank you all again for joining us today. LP's teams continue to execute our strategy effectively in the third quarter. As a result, siding net sales grew by 22 percent, well above the underlying markets we serve.
Aaron Howald: Siding set new records for sales in EBITDA, helped by ongoing improvements in expert finish margins.
Aaron Howald: Our OSB business operated safely and efficiently with strong price realization to make the most of a sequentially softer price environment.
Aaron Howald: Page 5 of the presentation shows LP's high-level financial results for the quarter. LP generated $722 million in net sales, with 22% siding growth almost completely offsetting the $88 million impact of lower commodity OSB prices.
Aaron Howald: Siding's EBITDA of $123 million was a record.
Aaron Howald: $153 million of EBITDA translated cleanly into $184 million of operating cash flow.
Aaron Howald: We invested this cash in our future growth, with $44 million in capital expenditures in the quarter, before returning $91 million to shareholders through dividends and share repurchases, leaving LP with nearly $900 million of liquidity and a very strong balance sheet.
Aaron Howald: Let me turn briefly to the market and what we are seeing in the channel. The new home construction market is slowing somewhat with the combined effects of the recent rebound in mortgage rates and the approach of colder weather.
Aaron Howald: which is also the current consensus for next year, but the single-family mix remains higher than average. In the new construction market, LP has over-indexed the single-family starts, so it was encouraging to see the run rate for single-family starts back above $1 million in the September census report.
Aaron Howald: Repair remodeling spend is still a few percentage points lower than last year, but the outlook for R&R has improved.
Aaron Howald: The recently published Leading Indicator of Remodeling Activity, published by the Harvard Joint Center for Housing Studies, suggests that R&R spending has bottomed and projects a return to positive year-over-year growth in 2025.
Aaron Howald: Given that about a third of LP SmartSide siding goes for R&R applications, this is a positive development.
Aaron Howald: We believe inventories in the channel are within normal seasonal ranges. OSB inventory is somewhat leaner, which may be contributing to recent strength in commodity prices.
Aaron Howald: Siding inventory is similar in absolute volume to this time last year, but lower in days of sales and consistent with normal seasonal patterns.
Aaron Howald: We have announced a price increase for next year in siding, and that will be a factor as we manage year-end shipments to position ourselves and the channel for a strong start to 2025.
Aaron Howald: Looking forward, interest rates and affordability remain the dominant macroeconomic factors to watch, but housing undersupply and the aging housing stock must ultimately be resolved.
Aaron Howald: We believe that LP is uniquely well-positioned to address these needs, and as a result, we are confident that we will continue to grow siting and structural solutions in 2025 and beyond.
Aaron Howald: Our results demonstrate that LP's strategy is working and reinforce our confidence to invest in future growth, which Alan will speak to in a moment.
Aaron Howald: Before I turn the call over to him, I'll highlight two additional accomplishments from the quarter. First, LP published environmental product declarations for the entire SmartSide trim and signing product portfolio.
Aaron Howald: DCPBs validated by ASTM and International confirm that SmartSide, Expert Finish and Builder Series products are carbon negative, meaning they store more carbon than is emitted throughout their lifecycle.
Aaron Howald: This is made possible by our sustainable use of renewable fiber resources as well as our innovative and efficient manufacturing processes, and I want to thank the LP teams that support this, especially Forestry Operations and our Sustainability Team.
Aaron Howald: Last, and most importantly, LP was notified in August that we had earned the 2023 Safest Company Award from APA, the Engineering Wood Association.
Aaron Howald: This is the 12th time in the 16-year history of the award program that LP has won the Safest Company designation.
Aaron Howald: Five of our males also won individual safety recognitions.
Aaron Howald: I want to thank and congratulate every LPT member for this recognition and challenge us all to keep building upon LP's high-performance safety culture.
Aaron Howald: Safety is a core value for all of us at LP, and while we are pleased with the honor, we won't rest on our laurels.
Aaron Howald: And with that, I will turn the call over to Alan for more detail on our results and guidance before we take a round of questions.
Alan Haughie: Thanks, Brad. As usual, slides seven and eight of the presentation show third quarter year-over-year variances in net sales and EBITDA for the siding and OSB businesses.
Alan Haughie: Both are fairly straightforward, with the exception of some timing wrinkles and siding that I'll spend a bit more time on before I move on to our updated guidance for the full year.
Alan Haughie: This year-over-year growth is the result of 6% higher average selling prices and 15% volume growth.
Alan Haughie: Roughly half of the 6% price improvement was the result of annual list price increases, with the other half due to favorable mix.
Aaron Howald: Expert finish comprised 9% of volume in the quarter, contributing significantly to this positive price mix.
Aaron Howald: The incremental volume generated EBITDA at a 44% contribution margin, that is $24 million of EBITDA from volume divided by $54 million of revenue from increased volume.
Aaron Howald: When we include price, the contribution to EBITDA on incremental revenue was 61%. You can find that by adding $22 million of price to both the numerator and denominator in the previous calculation.
Aaron Howald: And this healthy conversion is exactly what we should expect from the business as it continues to grow into recently added primed capacity at Segola, Halton, and expert finish capacity at Bath.
Aaron Howald: Investments in sales and marketing, mostly boots on the ground with the sales team, totaled six million dollars more than prior year and are helping LP's siting business continue to grow despite flat housing and lower year-over-year repair and remodel expenditures.
Aaron Howald: And raw material and freight costs were roughly in line with last year.
Aaron Howald: In the other column, the far right, the first and simplest item is a $5 million EBITDA benefit from the non-recurrence of last year's press rebuild at Dawson Creek.
Aaron Howald: The remaining $8 million benefit is the net of a handful of smaller puts and takes, but one item does bear mentioning as it will impact the fourth quarter.
Aaron Howald: A maintenance project in our Houghton Mill that was planned for September was pushed into October because of delays in equipment delivery caused by the East Coast Pulse Strike.
Aaron Howald: The project is currently underway and it will require about four weeks of downtime.
Aaron Howald: The total cost and production impact in the second half of the year is unchanged.
Aaron Howald: But the delay pulled production forward into the third quarter and pushed costs into the fourth.
Aaron Howald: The delayed cost and inventory absorption effect of extra production boosted third quarter EBITDA by a bit over $5 million and added probably a point to the EBITDA margin.
Aaron Howald: Now, I mention this only because all else equal, one could reasonably assume that this pull-forward might create a corresponding reduction in our fourth-quarter EBITDA outlook. Happily this is not the case, as I will detail in a moment when I get to our updated guidance.
Aaron Howald: On slide 8, I'm sure you'll all be relieved to note that the OSB waterfall is far simpler, so I won't belabor it.
Aaron Howald: Commodity prices were lower, reducing year-over-year sales in EBITDA by $88 million. Variances from higher volumes, incremental margins, structural solutions, raw material and labor inflation were all immaterial by comparison.
Aaron Howald: But the story this chart doesn't tell very well is that the combined impacts of OEE, cost control and strong price realization allowed the OSB business to outperform the small increase in our algorithmic guidance implied by modestly higher random lengths prices late in the quarter.
Aaron Howald: Slide 9 shows a similarly straightforward quarter of cash flow. This $184 million of operating cash flow includes $44 million of working capital inflows, mostly from accounts receivable.
Aaron Howald: And $73 million of share repurchases brought shares outstanding to almost exactly $70 million as of the 1st of November.
Aaron Howald: We also made a locally funded $17 million investment in a non-consolidated joint venture in South America.
Aaron Howald: This venture, already well-established, specializes in off-site construction of modular social housing. And this should help stimulate and sustain demand for LP's products, address chronic undersupply of housing in the region, and support the ongoing shift in South American building practices from bricks and cement
Aaron Howald: to more sustainable and seismically robust engineered wood.
Aaron Howald: Siding's fourth quarter EBITDA should be between 70 and 80 million dollars. This would deliver full year EBITDA in the 390 to 400 million dollar range for a margin of about 25 percent, which is our long-term target.
Aaron Howald: In other words, continued strength in the siding order file has allowed us to increase the full year growth and margin expectations for siding by about a point each compared to last quarter's full year guidance.
Aaron Howald: In OSB, random lengths prices have climbed a bit in the fourth quarter but we expect the typical seasonal downtime to impact volumes and incorporating these factors and using our normal approach for OSB, assuming prices stay flat at current levels, we would expect OSB EBITDA in the fourth quarter in the 15 to 25 million dollar range.
Aaron Howald: Adding this all up, and as usual, netting off South America's EBITDA with unallocated corporate costs, we now believe that LP's full year 2024 EBITDA will be between $655 and $675 million.
Aaron Howald: an increase of about $65 million compared to the midpoint of our guidance from August and $30 million of this is coming from siding.
Aaron Howald: CapEx for the year should come in around 200 million dollars and as Brad said growth and share gains give us continued confidence to invest in new siding capacity.
Aaron Howald: As a result, while we won't yet offer revenue or EBITDA guidance for 2025,
Aaron Howald: We do expect CAPEX for the next two years to be meaningfully higher than this year's as we launch the next siding expansion project.
Aaron Howald: including...
Aaron Howald: $100 million to $125 million dedicated to the next siding mill, most of which should land in the third and fourth quarters.
Aaron Howald: In summary, it was another strong quarter for LP. We executed our strategy safely and we're well positioned to see continued growth and margin expansion in 2025 and beyond.
Aaron Howald: And with that, we'll be happy to take a round of questions.
Speaker Change: Thank you. At this time, we will conduct the question and answer session. Each participant will be allowed one question and a follow-up question. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.
Speaker Change: Our first question comes from the line of Susan McClary of Goldman Sachs. Your line is now open.
Susan Mcclary: Thank you. Good morning, everyone. Thanks for taking the questions.
Speaker Change: Good morning, sir.
Susan Mcclary: Good morning.
Susan Mcclary: And maybe starting on, you know, Alan's comments on CapEx, I guess, can you talk a little bit about what you're seeing in the business and how you're thinking about the demand that will come through over the next several years that has driven the decision to perhaps invest in the next wave of capacity additions and siting?
Speaker Change: Sure, so we obviously are very pleased with the growth we've seen this year in SmartSide.
Speaker Change: The recovery from a disappointing year last year, and as we project forward, and at any reasonable growth rate, we're now getting to a point where we are
Susan Mcclary: you know, really looking at that next wave of capacity that we're going to need.
Susan Mcclary: We do try to stay ahead of production, so we don't mind bringing on capacity a little bit early in order to minimize the chances of going on any kind of allocation.
Susan Mcclary: So that is, given the growth this year, that's resulted in us stepping up the planning for our next.
Speaker Change: significant capacity expansion, as Alan or I mentioned in the in the call, I guess both of us did, we are looking at that investment next year, beginning that investment next year.
Speaker Change: And that would get us up and running, you know, either late 2026 or in 2027, depending on the timing and how the year plays out next year as far as site and growth.
Speaker Change: Okay, that's helpful. And then maybe just thinking about price for 2025, you know, you mentioned that you saw half of the lift is quarter coming from MIX versus on a like for like basis. But as you think about putting pricing through for next year, can you just talk a little bit about the range that's expected and how you're managing the inventories heading into that increase?
Speaker Change: Sure. So, you know, we're back to kind of the historical normal price increase environment that we, you know, that we were experiencing pre COVID. So we're out currently with a gross price increase depending on skew and region of four to 5%.
Speaker Change: We believe we'll net around three as at least a good way to plan for next year. That excludes any kind of mixed change next year.
Speaker Change: The price increase is effective January 1 and we will be limiting
Speaker Change: sales in December so that we don't get we have to try to minimize pull forward as a result of the price increase and you know set ourselves in our in our
Speaker Change: distribution base up for a really good, you know, Q1 as far as sales goes. So that's the current plan and we're executing to it. And as I mentioned, we are out with that price increase. So it is in the market now.
Speaker Change: Okay, that's a helpful caller. Thank you. Good luck with everything.
Speaker Change: Thank you. You're welcome.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Michael Roxlin of Truist Securities. Your line is now open.
Michael Roxlin: Yeah, thank you Brad, Alan, and Aaron for taking my questions and congrats on a very strong quarter.
Michael Roxlin: First question I have is that on SmartScience has continued to gain share, what has been the competitive response from PharmaCement and Final? Have you seen increasing price pressures as they try to retain or win back some share? And what has been LP's response?
Speaker Change: Well, look, we're competing in a very competitive environment. That's always been the case. My 25 years of working.
Speaker Change: and the Around the Smart Side business. And so I would say the competitive situation is normal. And so when we're negotiating deals with big builders, obviously there's a counterparty that's trying to hold on to business.
Speaker Change: And so that, that typically, the kind of, from a pricing standpoint that is managed through back end rebates for most of the customers. But I would say right now still kind of normal as far as what we have to do in order to secure this business.
Speaker Change: Because I think primarily what's beginning to be realized in the market more and more is just the value proposition of the product, you know, it is superior to the substrates that you've mentioned there, and that's, you know, that is as much of the reason we're winning as any pricing concessions.
Speaker Change: Got it. Okay, thanks for that, Brad. And then just quickly on Segovia, Holton, and some of the mills that you may have not been running fully, what's your, given that you do tend to add capacity, what's the outlook into, I guess one, where do those mills currently operate?
Speaker Change: And two, where do you expect them to operate next year that would warrant you to bring on, or aim to bring on new capacity, call it a year and a half, two years from now?
Speaker Change: Thank you. Yeah, Mike, this is Aaron. I'll take a whack at that. In Q3, our volume was $460 million on a nameplate capacity of 2.3, so that annualizes out to utilization in the high 70s to 80% range.
Speaker Change: Of course, with seasonality, Q2 and Q3 will tend to be a little bit heavier than Q1 and Q4. So if that pattern continues, you know, you just sort of project that forward and that gives us the confidence that we'll need capacity in the timeframe that Brad mentioned earlier.
Speaker Change: Segola and Holton and Bath are all running very well, you know, and but but they exist within a system and so their their capacity utilization is a function of product mix and geographic demand patterns and lots of other factors but we're very pleased with the ramp-up.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Sean Stewart of TD Cohen. Your line is now open.
Sean Stewart: Thanks, good morning, and congrats on a very good result. Brad, wondering if you can give some context on citing expansion options as you look ahead as we start to build CapEx in 2025 and 2026 into our forecast.
Speaker Change: whether it's expansion at existing sites, WAWA, what you're thinking of in terms of
Speaker Change: the best option for adding supply.
Brad Southern: Yeah, great question. So let me just remind the audience of the options that we have. We do have two remaining Aspen-based OSB mills, one in Quebec, one in British Columbia.
Brad Southern: that is a potential.
Speaker Change: future potential conversion option for us. We do have the idle facility in Wawa, Ontario that we're studying in detail. And then we have options at existing siding mills to add press lines.
Speaker Change: And so all those are still on the table for this next wave of capacity. What will drive the decision will be, first of all, the feasibility of converting
Speaker Change: either of the two Aspen-based mills in Canada. Those are large press.
Speaker Change: setups, and in either case, Manilwaukee or Peace Valley would be by far the biggest press existing in our siting operation.
Speaker Change: And so that, there is some technical things we'd need to work out to make that a feasible
Speaker Change: conversion at this time. And then we have Wawa and adding a press line at our existing facility. I like both of those options.
Speaker Change: What will drive the decision there will be capital efficiency.
Speaker Change: As it relates to those two, you know, Walla Walla would essentially be a mill startup for us where adding a press line might be a little bit more
Speaker Change: less capital intensive, but then also weighing into that, you know, we now run our siding.
Speaker Change: A Portfolio as a Network.
Speaker Change: geographically with customers, that can swing us regionally into favoring capacity at a mill in Holton, Maine versus a mill in Ontario versus a mill in Sagola, Michigan versus a mill in Dawson Creek, British Columbia.
Speaker Change: And so all that, we're still in the preliminary phase of planning that out from a network optimization, capital efficiency. What we'll probably be doing soon is ordering some of the, or getting approval from our board to order some of the equipment that is kind of site agnostic.
Speaker Change: And then, when we get into the middle part of next year, that's when we'll really have to be sharpening the pencils on location and making a commitment to where. But at this point, that decision has not been made. But we've got a ton of great options. That's the point.
Speaker Change: and we will make the decision based on net present values of the incremental capacity that we need.
Speaker Change: That's great detail. Thanks for that. My second question, Brad, is a hypothetical one. Wondering if there are any internal views if Trump wins the election and proceeds with a blanket.
Speaker Change: tariff on imports. Is there any internal view on...
Speaker Change: I guess your exposure to Canadian panel and our imports of Canadian panels into the US, would the USMCA protect against that? Loaded question but wondering if you have any internal views on that.
Brad Southern: Let me just, the one thing that I think that we should be transparent about, I don't really have a view on it impacting panel flow across the border, OSB or siding.
Speaker Change: We do, we do.
Speaker Change: Get a significant portion of our MDI from a source in China
Speaker Change: And while we have been working through the tariff issues and, you know, the economics around that as part of a, you know, over the past
Speaker Change: Well, since Trump took office and Biden kept the, you know, the tariffs in place.
Speaker Change: in the near term, but, I mean, who knows? So we'll respond accordingly, but, you know, there's, I mean, there would be.
Speaker Change: certainly an impact on OSB pricing if all of a sudden Canadian OSB couldn't blow into the U.S. and so there would be a lot of offsets of kind of understanding what the true impact of that would be but we're not planning on that being an issue.
Speaker Change: you know, whoever wins the election. But keeping an eye on imported raw material from China could be impactful to the industry, and it would be impactful for us as it relates to MDI purchases.
Speaker Change: Understood. That's all I have. Thanks very much.
George Staphos: George Staphos
Speaker Change: Thank you for your time. Thank you.
George Staphos: Thank you.
Speaker Change: Our next question comes from the line of Stephen Ramsey of Thomson Research Group. Your line is now open.
Stephen Ramsey: Good morning. I have a couple of questions on Builder Series, the first one being,
Stephen Ramsey: the attached rates.
Stephen Ramsey: on that product have been very strong.
Speaker Change: year-to-date. First, is this something that could have upsides on these attach rates as you look into 2025? And then maybe just stepping back, is Builder Series a net benefit to NICS for these attach rates?
Speaker Change: Well, first of all, let me take it into 2025. Yes, we are expecting continued.
Speaker Change: success with that as we build credibility with the big builder base.
Speaker Change: and continue to work on becoming the choice for builders. And those talks are ongoing. We're getting our share of wins in those talks. And so, yeah, I see.
Speaker Change: Builder Series growth being a meaningful part of our growth story for next year.
Speaker Change: And then, you know, the
Speaker Change: The second part of your question, I think, is, you know, on the attached rates, you know, that does pull through.
Speaker Change: trim and soffit and some panel cells into the builder channel and even into distribution. And you know those typically, at least for trim, are higher margin items for us. And so while I would say builder series is kind of
Speaker Change: margin neutral to us as part of our portfolio. The pull through on the other SKUs that that are sold along with our lap siding, which is builder series, especially as it relates to trim, can be margin accretive to us.
Speaker Change: and Aaron Howald.
Aaron Howald: Okay, that's helpful. And then on OSB structural shipments, those being lower than commodity shipments for the last two quarters, kind of what is driving this in the near term? And then how are you thinking that this dynamic shapes up in Q4 and heading into next year?
Speaker Change: Yeah, I mean we're still we're really focused on growing our structural solutions as a percent of our portfolio
Speaker Change: I mean that can change, it does change quarter to quarter as, and frankly as big builder business pulls commodity OSV for one thing, but also we do manage that around margins and so.
Speaker Change: Margin, a creative to us, but when that's not, then we could go back to more commodity-type sales.
Aaron Howald: So, we're going to see the trend of structural solutions as part of our portfolio is going to continue to increase, but quarter-to-quarter, there are variations, and that can happen as the price and margin dynamics.
Aaron Howald: commodity OSB greater than, you know, than what we would like in the moment. But ultimately, you know, we're focused on a strategy to grow that. And I'm sure we'll be successful there. But in reality, there can be swings as it relates to what our customers want at the time.
Speaker Change: Makes sense, thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Matthew McKellar of RBC Capital Markets. Your line is now open.
Matthew Mckellar: Hi, good morning. Thanks for taking my questions.
Matthew Mckellar: The Q4 citing revenue guidance implies you'd be down something like 13% quarter over quarter at the midpoint, I think, which would be unusually, I think, poor sequentially at the Q4 compared to what you've done historically.
Matthew Mckellar: Is there anything you're seeing in the order file that suggests your recent pattern of sort of outperforming normal revenue seasonality should reverse?
Speaker Change: No, I'm not sure there's anything unusual here, but if you look back over the last couple of years, you referenced normal. I'm not sure what normal is. And I think that's the challenge we face. If you look at the profile of revenue in 2023, that was definitely abnormal. And we were, as it were,
Matthew Mckellar: coming out of the de-stocking and generally speaking, bucking the seasonality trend. So what you're seeing reflected in Q4 right now and our Q4 guidance is a return to a more
Matthew Mckellar: seasonally normal pattern, if we jump back four or five years, as well as, as Brad mentioned earlier in his response to one of the questions, us making sure that we effectively manage
Matthew Mckellar: demand relative to the January 1st price increase. They're the principal factors that make this Q4 compared to Q3 look a little starker.
Speaker Change: Okay thanks very much for that color and last one for me just I mean recognizing it's a somewhat smaller part of your business
Speaker Change: How material do you expect to pick up in South American volumes to be with the investment in the modular housing business you've noted, and could you just provide a bit more color around why this was an attractive investment for LP?
Speaker Change: Yeah, well, the South America strategy from day one has been a conversion strategy away from masonry type of construction this this investment kind of
Speaker Change: You know, really is strategic for us in that this joint venture partner is a major manufacturer of modular housing and integrated all the way through to the sale of that and the real estate development.
Aaron Howald: So it's a very strategic partner. They've been a large customer for us. So immediately, there won't be a significant incremental volume because we have been supplying, essentially supplying that product anyway.
Aaron Howald: But as we look at continuing to grow the share of stick-built homes across South America, that's where we see the strategic fit.
Aaron Howald: And so this is a long-term play. We'll be happy to speak to it quarter to quarter as we get further into it. But materially, it won't impact what we're doing this quarter or probably next year. Because again, we've had that business secured for a pretty long time.
Speaker Change: Okay, thanks very much. I'll turn it back.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Mark Weintraub of Seaport Research Partners. Your line is now open.
Mark Weintraub: Thank you. Congrats on another very good quarter.
Mark Weintraub: So, what I was hoping to get a little bit more color on is if we look at that 17% volume increase that you're projecting for siding year over year, is it possible to give us a sense as to what it looks like in the categories R&R, single family, sheds?
Mark Weintraub: Yeah
Speaker Change: So let me just say, directionally, the strength has been in new construction and R&R. That has driven...
Speaker Change: essentially all of this growth, you know, above trendline. The retail business has been okay.
Speaker Change: And Expert Finish, granted off a smaller base, those growth percents have been a significant upside to the year.
Speaker Change: And then Brad, how much, is there a way that you can assess how much is a function of...
Speaker Change: Same store sales growth versus your expanding distribution base.
Speaker Change: Yeah, so let me take that by segment. So for new construction
Speaker Change: Having the big builder credibility that's come along with some of these deals that we've been able to get to this year does bring around not necessarily
Speaker Change: Not two-step distribution ads, but it does bring lumberyard ads in the geographic areas.
Speaker Change: where we're gaining new business with the builder.
Speaker Change: If so, say it.
Speaker Change: That new lumber yard distribution is incremental, and then that usually means an inventory build, a small inventory build, because these aren't two-steppers, but an inventory build.
Speaker Change: and then pull through, and then ancillary sales to the customer that we ink, but also, if you've got placement at the lumberyard, you're getting sales to other builders and contractors that you just didn't have access to the product before.
Speaker Change: Securing contractor loyalty is a big part of what we're doing with these incremental marketing and sales spans, but that also is accompanied by continued growth in our one-step distribution geographic channel exposure, and so that has been something that, coming out of allocation, we've really been focused on.
Speaker Change: So, while we're gaining market share ultimately with contractors and R&R and builders and new construction, there is the added benefit and somewhat necessary reality of adding distribution as we go along.
Speaker Change: next year potentially going to also benefit significantly from this? Or maybe how should we be thinking about these two drivers, almost the single stores versus the expanded base?
Speaker Change: For R&R...
Speaker Change: I would say we're still underexposed enough to where we will continue to add one-step distribution locations as XPERT finish and becomes more available through our capacity expansion. That will be a significant part of our growth.
Speaker Change: probably for the next several years, as we grow that market share, because we still have pockets of geographical weakness where we don't have strong distribution there.
Speaker Change: And then for the traditional channel of the market to new construction,
Speaker Change: I think that will be localized around...
Speaker Change: regional wins with the big builder and then and then the necessary lumber yard ads that have to go to support those wins so that might might not be
Speaker Change: quite as significant as landing on Lenore has been this year to that, but there still is opportunities for further penetration within the channel in both those areas.
Speaker Change: Super, appreciate it. I'll leave it there. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Ketan Mamtora of BMO Capital Markets. Your line is now open.
Ketan Mamtora: Good morning and congrats on a very strong quarter, especially in siding.
Ketan Mamtora: Maybe just sticking with the siding expansion, Brad, in the past you've also talked about
Speaker Change: You know, the product categories within siding where you see growth would also be one of the factors in deciding where you expand capacity.
Speaker Change: Is that still one of the factors or is that becoming less of a factor, you know, given your size now?
Brad Southern: That's a good point. That is a factor. And as some, as you know, Keaton, some of the mills that we have converted Dawson in particular, I know, I'm sorry.
Ketan Mamtora: Swann, the Swann Mill and Sagola Mill are...
Ketan Mamtora: have large presses that are conducive to panel production.
Ketan Mamtora: where Holton was a smaller mill, more conducive to lap and trim and soffit production. And so when I speak of those opportunities around the press size and around the location, we will be looking at the skew distribution or profile as we make the decisions.
Ketan Mamtora: The more, you know, the more we are looking at lap and trim as where we need volume
Speaker Change: The less appealing a larger press size may be to us, and the more that may swing us.
Speaker Change: back to adding a press line, kind of a specialized press line at an existing facility.
Speaker Change: So that is, it certainly is a factor.
Speaker Change: And just given all we've talked about in the last few calls, and this call in particular, the growth really is in lap and trim more so than in panel right now, which would kind of push us to a more specialized setup as far as the next mil conversion.
Speaker Change: That's very helpful. And then just one more on siding. Outside of seasonality, Brad, as you look at sort of demand factors or drivers,
Speaker Change: Are you seeing, you know, kind of anything as you move through Q3 and October?
Speaker Change: you know, if things are either starting to look a little bit better in terms of
Speaker Change: you know order activity or kind of still the same and there's uncertainty or how how would you characterize in terms of you know uh sort of activity?
Speaker Change: Good okay to good this late in the season, of course weather, you know weather patterns have been warm across
Speaker Change: the country, so that certainly helped.
Speaker Change: So, I mean, it's just been a really, really solid year across the board, and we're continuing to see, you know, given the season that we're in, you know, a nice order file.
Speaker Change: and I don't really don't see that.
Speaker Change: being a ton of risk of that given, you know, the price increase that we have announced now. So, you know, we feel good as we, I mean, as we reflected in our guidance about the rest of the year and as we get closer to next year, we're feeling better and better about, you know, what we'll be able to execute to next year.
Speaker Change: Got it. That's very helpful. Good luck. And I'll jump back in the queue.
Speaker Change: Thank you. Our next question comes from Kurt Jinger of D.A. Davidson.
Speaker Change: Your line is now open.
Kurt Jinger: Great, thanks and good morning everyone.
Kurt Jinger: You know, without trying to pin you down on 2025 guidance, I'm curious with kind of the visibility you have
Speaker Change: on the builder series and big builder side, some of the expanded stocking positions you've discussed. How does that play into your thoughts around?
Speaker Change: a goal or potential level of kind of market outperformance as we look into next year with the inciting business.
Speaker Change: Well, you know, if you look at the outlook for single family or for new construction starts next year, it's flat. We're not, we're not planning to be flat.
Speaker Change: And so, you know, I think the momentum that we've generated this year, having the capacity and being off allocation, you know, we're feeling better and better about next year. I mean, there's all kind of...
Speaker Change: We've got political risk. We've got tariff risk. I mean, there's all kind of potential headwinds. But we feel like the value proposition for our product is very strong as we continue to get exposure.
Speaker Change: in the field with with contractors and and builders that credibility around the product offering is Beginning to is growing as well
Speaker Change: And so, you know, I feel like kind of pre-COVID growth rates.
Speaker Change: that we enjoy, you know, the 8-10% is certainly something we should be able to execute to. I mean, I'm not guiding for next year, but that would be the kind of historical pattern we've had.
Speaker Change: And, you know, we'll get more specific about it on the next call, but, you know, I feel good about that, you know, but we'll have to take a good, you know, solid look at the headwinds that we, that we,
Speaker Change: that we see over the next two or three months as we make that call for how we guide next year.
Speaker Change: Right.
Speaker Change: Right, no, I appreciate that. And the comment on value proposition kind of ties into my next question. I mean, clearly we haven't seen it at all yet, but with the affordability challenges,
Speaker Change: and efforts by builders to kind of take cost out.
Speaker Change: Does that change the dynamic for premium materials like your own and conversion from maybe less expensive substrates than we've seen historically?
Speaker Change: I'm just curious if you have any high-level thoughts around that in the current backdrop.
Speaker Change: Yeah, the affordability, I think, does play a little bit to the strength of vinyl siding. Ultimately, this is purely a cost play vinyl siding.
Speaker Change: is the product that a contractor builder should choose.
Speaker Change: But, you know, when you have things like our pre-finished siding now, which expert finish is going into new construction, so you eliminate...
Speaker Change: The painting step in new construction, that can help the affordability.
Speaker Change: of a home and then, you know, as we, the labor savings that is realized from, and, well, primarily the labor savings that is realized.
Speaker Change: They realize that, and that's what strengthens the value proposition that I spoke to earlier and makes us confident that this penetration that we've been enjoying the past 12 months is something that we can grow off of next year.
Speaker Change: Could you maybe just level set on kind of the one-time maintenance or project impact kind of embedded within that?
Speaker Change: yeah yeah I'll do it I'll do it with reference to q3 though I'm gonna
Speaker Change: The
Speaker Change: reduction that we intended to do in Q4 and we did in Q3. We did the opposite in Q3. So let's shift $5 million between those two, right? So I'm going to take 123, knock off five,
Speaker Change: from Q3 and get 118. I'm going to take that 5 and add it on to the midpoint of our range for Q4, which would be 75 plus 5, so $80 million. Leaves us about $38 million to explain. About $30 million of that...
Speaker Change: would be the impact of the lower volume in from Q3 to Q4.
Speaker Change: Q4. And that's the principal difference also, even though you didn't ask, between the Q4 EBITDA and the Q1 EBITDA, very similar revenue levels but a lower EBITDA, because in Q1 of this year we were not taking that downtime and building inventory, and in Q4 we're taking that necessary downtime and depleting inventory.
Speaker Change: So you get that sort of a double whammy from negative absorption on inventory as well as the necessary downtime.
Speaker Change: Got it. Okay, that's perfect. Appreciate the call. We'll do 25. Sorry, spoke over you then.
Speaker Change: Thank you. I'm showing no further questions at this time, so I would like to turn it back to management for closing remarks.
Speaker Change: Okay operator, thank you very much and thank you everyone for joining us. With no further questions, we'll bring the call to a close. Everyone stay safe and we'll look forward to speaking you again next quarter.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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