Louisiana-Pacific Corporation (NYSE:LPX) Q1 2023 Earnings Call Transcript

Louisiana-Pacific Corporation (NYSE:LPX) Q1 2023 Earnings Call Transcript May 3, 2023

Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2023 Louisiana-Pacific Corporation Earnings Conference Call. . Please be advised that, today’s conference is being recorded. I would now like to turn the conference over to your speaker today, Aaron Howald.

Aaron Howald: Thank you, operator. Good morning, everyone and thank you for joining us to discuss LP’s results for the first quarter of 2023 and outlook for the second quarter. As the operator said, my name is Aaron Howald, and I am LP’s Vice President of Investor Relations and Business Development. I am joined this morning by Brad Southern, LP’s Chief Executive Officer and Alan Haughie, LP’s Chief Financial Officer. During this morning’s conference call and webcast, we will refer to an accompanying presentation that is available on LP’s IR webpage, which is investor.lpcorp.com. Our 8-K filing is also available there, along with our earnings press release and other materials. Today’s discussion will contain forward-looking statements and non-GAAP financial metrics, as described on Slide 2 and Slide 3 of the earnings presentation.

Rather than reading these statements, I incorporate them herein by reference. The appendix of the presentation also contains reconciliations that are further supplemented by this morning’s 8-K filing. And with that, I will turn the call over to Brad.

Brad Southern: Thanks, Aaron. Thank you all for joining us for LP’s results for the first quarter of 2023. Q1 demonstrated the value of our strategy in a challenging operating environment and an uncertain housing market. Compared in the first quarter of last year, Single-Family housing starts fell by almost 30% and commodity OSB prices fell by more than 75%. Despite this decline, we maintained flat, siding sales and generated positive EBITDA in our OSB segment outperforming the underlying markets. We are currently seeing encouraging signs of strength in housing, including improving commodity prices, and I am confident that LP’s businesses will continue to outperform the market. Page 5 of the presentation shows highlights for the quarter.

In sum, a much softer healthy market drove OSB prices far below last year’s levels. With the obvious impact on sales EBITDA and cash flow. Inflation appears to be easing somewhat. The cost for resins laws and freight remained elevated pressuring margins. LPs businesses responded by outperforming the market, and we continue to invest in our growth. $584 million in sales was about half of the amount from Q1 of last year with a vast majority of this difference, the result of lower OSB prices, EBITDA of $66 million, and earnings per share of $0.34 were much lower than last year, again due to the difficult comp from last year’s very high OSB prices. However, our results were above our previous guidance due to discipline and efficient operations and OSB and flat siding revenue.

LP invested $114 million in CapEx in Q1, mostly for the conversion of Sagola to Siding. Alan will discuss cash flow in more detail in a moment, but LP ended the quarter with $126 million in cash and just under $700 million in liquidity. Siding and OEE were key highlights for the quarter. Safety and efficiency can never be taken for granted, especially in a difficult operating climate of a soft market. This makes our safety and OEE performance in the quarter truly remarkable. Both businesses saw a two-percentage point increase in OEE, and both businesses had a single recordable injury in the quarter. Our fellow course is zero injuries and two injuries in the quarter is too many. But while we work to continuously improve mill safety, it is nice to pause and recognize exceptional performance.

In the siding business, our Dawson Creek and Tomahawk Mills each achieved 1 million injury-free work hours, and in OSB the first quarter was the best quarterly safe results for the segment in more than four years. We obviously preferred the cash flows at higher OSB prices generated in the first quarter of last year, but it is gratifying to see the value generated by our OSB strategy even in a weaker market. Structural solutions average 46% of OSB volume Q1, but exited the quarter well above 50% where it has remained. Structural solutions contributes incremental margin regardless of commodity prices. In terms of capacity rather than oversupply soft market, we took market downtime, managing our capacity flexibly. And despite the market related downtime, as previously mentioned, we improved operational efficiency performance in OSB.

As a result of this relentless focus on execution, the OSB segment state EBITDA positive despite the lowest prices we have seen since before COVID. I am very proud of the OSB team for resolve and teamwork demonstrated by their Q1 performance. On Slide 6, you can see an update on siding product mix and growth relative to the market. On a trailing 12-month basis, Single-Family starts in the U.S. were down 18%, but siding volume grew by 7% and prices were higher by 13%, driven by list price increases in improving mix. The pie charts on the right, reinforce the improvements in mix within the quarter, while smart side volume failed by 9%, expert finished volume grew by 26%. I should point out, just for the avoidance of doubt, while these two charts are on different timeframes with one being trailing 12-months and the other being Q1.

The results are broadly the same over a variety of time scales. Any way you look at it, the story is basically the same. Smart side is going faster than the underlying market, and within that, the mix of expert finish and other higher value add products is growing faster still. To illustrate this, Slide 7 shows normalized growth of volume and revenue for SmartSide, Trim, and Siding relative to Single-Family housing starts over a longer period of time. As you can see, healthy SmartSide is consistently growing well above the underlying housing market. So, we’re taking share, expanding addressable geographies and market categories, introducing new products, and increasing our focus on the less volatile all in all market segment. The reason for this is clear.

LP SmartSide is the best siding product available. It looks great as the durability to support a 50-year warranty. Is easy to install, is carbon negative, and is available primed or prefinished at a price point that delivers value to installers and homeowners. As a result, we believe we have a long runway for growth ahead of us in society. To meet this demand, LP will continue to invest in capacity. Slide 8 of the presentation provides an update for our capacity plan for siding. I am happy to announce that LPs Former OSB mill in Sagola, Siding press its first Board of SmartSite in March. Sagola’s conversion adds 330 million square feet of siding capacity, bringing total — capacity to about 2.3 billion square feet and reducing total OSB capacity to about 4 billion square feet.

And speaking of investing in siding capacity, you may have seen our recent press release announcing that LP reached definitive agreement to acquire the Wawa OSB mill from Forex. I’m happy to announce that the transaction was approved last week and closed yesterday. This investment contributes to our siding strategy by adding to our conversion options and increasing our runway for future growth. Wawa is ideally located access to labor, logistics and ample sustainable Aspen fiber, and we are thrilled to engage with our new employees, the local community and first nations there as we begin planning for the project to convert Wawa to manufacture smart sign. When converted, Wawa will become LPs largest single line siding mill, adding roughly 400 million square feet of capacity and bringing total siding capacity to about 2.7 billion square feet.

We will provide more details as the project evolves and with the purchase price of $80 million, our estimates of conversion costs, and the lower execution risk associated with the existing facility. We believe this project will generate a higher return than the previously announced expansion of our Houlton main facility, which is why Wawa will jump the line ahead of Houlton Line two. We still plan to expand Houlton after the Wawa conversion as customer demand continues to grow. Converting Wawa and expanding Houlton would bring total siding press capacity to 3 billion square feet and the remaining conversion and expansion options we have already discussed could eventually bring total siding capacity to about 5 billion square feet more than double our current size.

And this is just press capacity. We continue to invest in growth of expert, finish our pre-finished siding with our newest facility and Bethany your work coming online in Q3 of this year. We are investing in our strategy for siding and instructional solutions, and we’re confident that both have a long runway for future growth. What we are seeing encouraging signs as housing starts so far this year have been above full-year consensus, the housing market is not out of the woods quite yet. Single-Family starts were down near nearly 30% in Q1 with inflation and mortgage rates impacting affordability, and Q2 is looking roughly the same. However, the encouraging signs and housing are beginning to be reflected in our order files while challenging and siding remain elevated, as is typical in the months following the end of a managed order file.

We are past the Q1 peak in inventory. The siding order file has seen a notable uptick in recent weeks. And OSB inventories are leaner as demand prices have recently improved. The macroeconomic environment remains challenging and near-term uncertainties remain in the housing and on our markets, we serve. We will remain very confident in our strategy, our execution, our high-performance carbon negative products. Most importantly, all LPs people will help us continue to outperform the underlying housing market, getting share and expand the markets we serve. And with that, I’ll turn the call over to Alan to discuss LP’s results in more detail.

Alan Haughie: Thanks, Brad. As outlined already, the U.S. housing and the broader macroeconomic environments are significantly more challenging than at this time last year. But I’m happy to report that, LP responded by focusing on the factors within our control. We exceeded all components of our first quarter guidance, while the market numbers dominating the quarter of a 29% drop in Single-Family housing starts and a nearly 80% drop in North Central randomized prices for commodity OSB. I’ll refer to Slides 9 and 10 in the presentation to describe just how LP Siding and OSP segment navigated the quarter before moving on to discuss LP’s liquidity and capital allocation including a little more on wild well. Slide 9 shows the first quarter year-over-year revenue and EBITDA comparison for Siding.

Volume was down 9%, a spread of 20 points over the drop in Single-Family starts and this is due to the combined effects of ongoing share gains, expanded addressable markets, and the fact that the majority, about 60% of Siding products served with the primary model market and shared applications. And while overall volumes may have declined, ExpertFinish volumes did not, rather they increased by 26% year-over-year which also helped the mix component of price. The $27 million reduction in volume, at roughly a 50% variable margin cost the segment $14 million of EBITDA. Siding’s average selling prices were 10% higher than the first quarter of last year, roughly 6 points of the 10-point increase are from list price increases, namely the combined effect of this January’s increase and last year’s mid-year increase, with the rest coming from a favorable mix and lower rebates.

So as expected, higher prices helped to offset the volume drop, and as it turned out they completely offset it. This was also a quarter of heavy investments in future capacity. Mill conversion costs were up $6 million year-over-year, but I need to dissect that statement. This year, we actually incurred $10 million converting Sagola to Siding, but at the same time last year, we incurred $10 million converting Houlton Society. So, one $10 million conversion cost was basically replaced with another. All that shows up on the waterfall, therefore, is $6 million of unabsorbed operating cost of Houlton, while we proceed with what is turning out to be a slow ramp-up, given current market conditions. But this means that the business is actually carrying $16 million of embedded cost, that is $10 million of Sagola conversion plus $6 million of uncovered cost of ultimate, all in the interest of future growth.

This cost was about 5 percentage points of EBITDA margin in the first quarter. Our second margin headwind came from raw material inflation. Compared to the first quarter of last year, inflation cost died in $14 million of EBITDA. Now inflation ramps have quickly joined the second quarter of year. So, while prices remain elevated, we do expect year-over-year comparisons to begin to ease going forward. So again, in a quarter of high inflation, much lower housing starts, lower volumes and the impact of converting and ramp pick-ups Segola. The siding segment delivered $67 million in EBITDA for a margin of 20%, and to demonstrate the long-term potential of the segment, even with all else sequel adding back either the $16 million of mill ramp-up and conversion costs or the $17 million of inflationary impact will reveal an EBITDA margin above 25%.

The OSB waterfall on slide 10 is inevitably dominated by price changes. This year, the bar is red, and given that prices have returned to Earth, and while the largest number on the bar by far is the $470 million drop in revenue in EBITDA due to these low prices, it’s also where I’ll spend the least time. Rather than price, the story of the quarter is how well the team responded to this much softer environment by managing with efficiency and discipline and delivering positive EBITDA on this very challenging environment. The majority of LPs, OSB is consumed in new residential construction and disproportionately by Single-Family home construction. With Single-Family starts down 29% in the quarter, LPs, OSB volume was down proportionately production was lower year-over-year by nearly 300 million square feet, which is about 30% in nameplate capacity, including a $100 million down due to the conversion of Sagola from OSB deciding.

The remaining volume reduction of roughly 200 million square feet resulted from LPs market curtailment, which minimized the cost and freight impact on the OSB network, we concentrated in our highest cost and most remote yields. While commodity volume was essentially flat, structural solutions volume was down 154 million square feet. Now, this may be a reflection of increased price sensitivity among builders looking for ways to keep homes affordable for their customers. However, our price realization was very strong, in large part because structural solutions prices held up significantly better than commodity prices. So, while commodity prices were down 76% year-over-year, structural solutions prices fell by only 58%. And so, in this market, the OSB segment managed both capacity and costs with both discipline and focus to generate this positive $5 million of EBITDA, which brings me to cash flow and capital allocation.

Referring now to slide 11, LP began the quarter with $383 million in cash and generated $66 million of EBITDA. The first quarter of every year is typically one of working capital build, and the $144 million of outflow due to working capital breaks down roughly as followed, $45 million of log inventory was gathered in preparation for spring break-up in Northern Mills together with $25 million of finished goods build across the network for a total of $80 million of inventory build. We also paid about $60 million a year in accruals, including $30 million of customer rebates. All of this is typical first quarter activity. After paying $33 million in taxes, we had an operating cash outflow of $119 million. The first quarters capital spend of $114 million will most likely be our heaviest in 2023.

Due to the inclusion of Sagola conversion and the bath New York refinishing facility. The resulting drop in cash of $257 million still left LP with $126 million of cash at quarter end. The second quarter is shaping up to be very different for capital allocation, so perhaps a preview is in order, as is typically the case. In the second quarter, working capital should be a source of cash, largely due to inventory consumption. The CapEx should also be lower than the first quarter by about $20 million. And as Brad mentioned, LP recently announced the acquisition of the Wawa OSB facility from Forex for $80 million. This has been financed entirely using existing funds, so we’re very excited about this acquisition, which significantly enhances our fighting growth strategy.

And we’re very happy to have the while where employees join our team as we prepare it to be our next fighting norm. We also made the difficult decision to close Entekra. We’re disappointed that the deteriorating housing environment in Northern California necessitated this action, and we regret the impact that the closure will have on the Entekra team. But ultimately, we determined that LP’s capital is better invested in our core businesses. As a result, in the second quarter, we expect to the corporate cost a noncash write-down of remaining Entekra assets of roughly $25 million as we wind down the business over the course of the quarter. Which brings me to guidance on Slide 12. The housing market remains uncertain despite green shoots as the spring building season ramps up.

Publicly traded home builders have referenced encouraging strength in their order patterns. However, with total starts down, this can only mean that smaller builders are seeing reduced demand. Mortgage applications remain quite sensitive to interest rates and stubbornly high prices presents continued challenge to affordability. As a result, we still lack sufficient clarity to offer full-year guidance. Our best read of our current order files suggests that Siding’s second quarter revenue will be similar to that of the first quarter. And this would mean volumes being down year-over-year but substantially outperforming the anticipated drop in Single-Family housing starts. Year-over-year price increases will, again, partially offset the volume drop such that second quarter revenue for Siding is expected to be no worse than 5% lower year-over-year.

For OSB, prices have improved recently such that if we assume prices hold flat at current levels, the OSB business would expect to see revenues of about 20% sequentially higher than the first quarter. This assumes increased operating rates based on current demand. Under these assumptions, LP’s total EBITDA for the second quarter would be at least $80 million. So, let me conclude with this. LP’s strategy is to grow the specialty components of our business, thereby reducing our dependence on cyclical housing starts and volatile commodity prices. With OSB prices where they were over the last two years, almost any strategy would have resulted in tremendous cash flow. Perhaps a better test of our strategy is a market more like the one we have now a 30% drop in Single-Family starts presents a truer test of whether SmartSide can continue to outperform the market by taking share without simply relying on the rising tide of housing.

It’s also an opportunity to demonstrate that LP’s OSB segment can break even at recent low prices by the combined effects of disciplined capacity management, efficient operations and maintaining a consistently positive incremental contribution from Structural Solutions. And lastly, it’s a test of LP’s capital allocation and business development strategies as well as our resolve to use our strong balance sheet to invest in these strategies when opportunities arise, not simply when we’re flushed with cash. The first quarter of 2023 was the first such test and, surely, it won’t be the last. But LP responded by demonstrating our commitment to our strategy and the value it can deliver. And with that, we’ll be happy to take your questions.

Q&A Session

Operator: Our first question comes from Mark Weintraub with Seaport Research Partners. You may proceed.

Mark Weintraub : Thank you. Couple of questions on Siding. One is, you talked about some positive indications order file-wise, but it doesn’t look like you’re assuming much in the way of volume improvement from the first quarter to the second quarter. First of all, is that — am I right making that assumption? And maybe if you could provide a little bit more color on the thought process there, if that is indeed the case.

Brad Southern: Yes, Mark, you’re right. And while we are seeing some strengthening in the order file, we are still working through elevated inventory levels within the channel. And so, the revenue that our channel partners are seeing is not yet fully impacting our order file. And we believe it’s going to take most of Q2 to work through that elevated inventory level within the channel.

Mark Weintraub : Okay. And then you mentioned that there was about $10 million in start-up costs in the segment in the first quarter. Is something along those lines? Or what’s anticipated for the second quarter? Really what I’m sort of trying to figure out is why the $80 million guide, and I realize it’s $80 million plus for the second quarter, given that we’re going to be higher presumably in OSB, you talked about the 20% improvement in revenue. And I guess I would have thought that we get some — well, again, maybe specifically what — is there also start-up costs in Siding in the second quarter?

Alan Haughie: It’s a great question, Mark. There are some start-up costs in Siding in the second quarter, but they are — they will be lower than the first quarter. And yes, to sort of offset, to answer the question, there is inevitably some conservatism built into the $80 million.

Operator: Our next question comes from Ketan Mamtora with BMO Capital Markets. You may proceed.

Ketan Mamtora: Thank you. Brad or Alan, can you give some additional color on how the shed business did in Q1?

Brad Southern: Sure, Ketan. I would say the shed business is probably one of our slower-performing segments right now. There was, I would say, of all the segments that we’ve played in during COVID, I do think there was some pull forward demand in shed. We have seen some more recent recovery there. But as a mix of our portfolio, it’s certainly underperforming at the moment, the rest of that portfolio.

Ketan Mamtora: Understood. And then switching to the Wawa conversion. Alan, is there any way to think about, at a high level, how would you have us think about the additional conversion cost that might be there for this — for the conversion to Siding?

Alan Haughie: Yes. We’re still working through — obviously, we have only just acquired it yesterday. Obviously, we did some due diligence. So, we’re still working through what those numbers would be. But if you think about the fact that the return, the IRR of this project is — will be similar to the Houlton two conversion, and this will be slightly bigger, then there’s obviously going to be some sizable conversion CapEx. The moment we have those numbers nailed down, we’ll be happy to share them just as we did with the Houlton two numbers, but it will be sizable.

Ketan Mamtora: Got it. Okay. And how are you thinking about the timing of the Wawa mill at this point?

Alan Haughie: Totally thinking that it would be Q4. At current model, just to give you a benchmark, Q4 2026. I got a strange — Aaron is pulling a face at me…

Aaron Howald: I might as well share the room.

Brad Southern: It will be demand dependent…

Alan Haughie: It will, of course, but that’s our working model right now.

Ketan Mamtora: Sorry, which year did you say, Alan?

Alan Haughie: 2026.

Ketan Mamtora: 2026. Okay. Got it.

Operator: Our next question comes from Paul Quinn with RBC. You may proceed.

Paul Quinn: Thanks, so much, guys. Just wondering what the state of Wawa is. I mean I know the company was trying to convert it back from the power plant. Is it functioning OSB mill at this point or is it closed? Or how much work is entailed to get it back to an OSB mill?

Aaron Howald: Yes. I’ll take that. This is Aaron. It’s going to be a substantial amount of work to get it to the point that it’s a functioning OSB mill. The advantage for us is that the current state of the construction project is kind of ideal for us to step in and redirect that conversion so that we can convert it efficiently to Siding. So, it’s not currently producing OSB. It would be a while before it could if we plan to do so. But we’ve got a fair amount of work to do to kind of complete the project and complete it as a Siding mill.

Paul Quinn: Okay. That’s helpful. And then just over on ExpertFinish, great to hear that it’s up 26%. Just wondering what percentage of overall Siding volume that represents now? And what’s the operating rate for the ExpertFinish lines that you’ve got going right now?

Brad Southern: The operating rates for the lines are pretty low. While we continue to — a, from an OEE standpoint, we’re learning how to produce that product. But also, the capacity there is relatively inexpensive. So, we’re ramping into that. And certainly, when we have the Bath mill on in Q3, we’re going to have plenty of capacity there. There has been times in our order file, especially last year, where we were constrained with ExpertFinish capacity. And while those can be tight now currently, we’re okay as far as that balance between capacity and sales at the moment. But we certainly need the Bath, New York, line to come on and we need to be running those lines better. And then as far as your question on mix of ExpertFinish, it’s about 9%.

Paul Quinn: Okay. That’s great. And just with respect to your BuilderSeries line, one of your competitors back in the market with their son planks, just wondering if you noticed any drop-in order file on that, given also the weak Single-Family build.

Brad Southern: No, I would say not. We have not seen a drop in the order file, but I would directly attribute to that. I will say the competitive environment for new deals has certainly stepped up, the competitive nature there, given that reintroduction, but not necessarily, as far as I know, translated into a loss of any volume we had secured previously.

Paul Quinn: Okay. Great. And the last one for me. Just on South America. Can we expect any change through the balance of ’23 from that segment?

Brad Southern: Yes. I think it’s, I think, pretty consistent with how it performed in Q1. I mean there’ll be some ups and downs as we go through the year, and we’re hoping to see some strengthening in the other underlying economy, especially in Chile throughout the year, but we’re not ready to call that right now.

Operator: Our next question comes from Susan Maklari with Goldman Sachs. You may proceed.

Susan Maklari: Thank you. My first question is on Siding. You obviously are realizing some nice pricing there. You did mention that the channel still has some inventory that they’ll work through in the second quarter. How are you thinking about the dynamics of price versus volume if those inventories do stay elevated longer? Are you willing to take some of that down? Or what will be the plan there?

Brad Southern: Yes. We are not contemplating a price decline from a price list standpoint, Susan. We’ve never done that in the at least 20 years or so I’ve been associated with the Siding business. I will talk that — the way that plays out dynamically in the market is as we negotiate primarily builder or contractor deals. Obviously, volume can be secured sometimes with back-end rebates, especially with the larger builders and the large regional builders. And so, as we — as the environment gets more competitive, the kind of the negotiating power moves a little bit more into the end-use customer realm, and so it can get manifested in our rebate strategy as far as securing new business. But there’s no plan at all to lower list pricing across our Siding portfolio.

Susan Maklari: Okay. That’s helpful. And then thinking about the CapEx guide that you’ve put out, it suggests that perhaps in the second quarter, you could see your cash from ops higher than your CapEx spend. Can you talk a little bit about how you’re thinking about capital allocation? Any appetite to bring back the buybacks at this point? And anything else we should be thinking about there?

Alan Haughie: I don’t think — given that CapEx may be lower than our operating cash flow in Q2, but we will be paying $80 million for Wawa. So, there will be pretty heavy investment outflows in the second quarter. And so, I don’t — just if I look at the cash patterns that I think we’ll see for the remainder of 2023, I’m more inclined should there be a modest upside in cash flow to use that for the operations. I don’t — based on trends I’m seeing today, I don’t see share buybacks for the remainder of this year. But I just hope I’m plain wrong.

Operator: Our next question comes from George Staphos with Bank of America. You may proceed.

George Staphos: Hi, Alan, good morning, thanks for the detail. Alan, Brad, can you talk a bit about lead times on press equipment and what you’d be needing to convert Wawa? I know on kind of traditional press equipment, at one point in time in the last year, I think lead times from order hearing, we’re in the 18-month time frame. I would imagine that has lessened in the last year or so. But if you put the order in today, when would you be able to start bolting the equipment down on the factory floor from what you could share with us?

Brad Southern: Well, just let me talk generally. I mean there is a press in Wawa that we’re planning to use. So that it’s not an issue called leave time from the press, which is meaningful to the timing of this project, George, to your point. And then what we’re — one of the things that we’re looking at now is we have been in the process of securing orders and material steel fabrication time for the Houlton line two conversion. The work that we’ll do this quarter is to understand how much of that can be transferred over to the Wawa mill conversion directly as far as the engineering goes. And so, I would say that — and I’m not — at this moment, I’m not really concerned about timing any more than I would have been about Houlton line two because of what we have to do in Wawa.

And I’ll just — a little bit of color there. The Houlton line two was a pretty complex conversion for us because we kind of used all the easy space and the existing equipment other than the on Houlton line 1. So, there was a complexity element there that was not there on Houlton line 1 or even for — in Sagola for that matter. So, it kind of makes these two projects somewhat similar as far as potential timing if we wanted to ramp them up as quickly as possible.

George Staphos: And Aaron had mentioned when the question come up and Alan was answering about when you expect it to be starting up and it’s going to be demand specific, which in turn means you’re going to be looking at certain metrics in terms of triggering when you’ll go forward. If you were in our seat, what level of housing or repair model would be kind of the go, no-go or the go signal in terms of starting up the — accelerating the conversion and going forward?

Brad Southern: Well, I would say just from an acceleration standpoint, I would say the earliest we could do that, if it was kind of all out on it, was having probably Board approval later this year from a design standpoint, and then at least a year from that point to get it converted and then operating from zero. It’s just not making anything now unlike all our other mill conversions. So, we’re looking — to Alan’s point, ’25 — 2025, probably at the earliest, maybe middle of 2025, perhaps Q2 of 2025, but more realistically, 2026. And so, from a market standpoint, if housing got back to where it was 12 months ago, I could see us in — the quicker that happens, the more pressure it’s going to be on us to convert that mill. But I want to say the Sagola mill is a significant conversion for us that we’re just getting started on right now as far as selling it out.

And as Alan mentioned in his remarks, we’re still not going to utilize Houlton line 1 yet. So, we do have significant capacity coming online right now. So, I’m not too concerned about us — I mean other than a spike in new home construction after this kind of uncertain environment we’re in today, I’m not too concerned about our ability to miss a window there in Wawa.

George Staphos: One last question for me on Siding. So, you talked a little bit about, I guess, to some degree, some pickup in competitive activity given one of your peers’ reintroduction of one of their product lines, that’s a little bit more, if you will, affordable. Specifically, within your product categories, are you seeing more demand for BuilderSeries and more momentum there? How would your volumes have shaken out or how did they shake out in the first quarter between BuilderSeries and the other, perhaps, higher end products in Siding? Thank you.

Brad Southern: Yes. George, that’s a kind of complex question because we play in so many different segments. But if I would say within the lap Siding category, BuilderSeries is outgrowing the non-BuilderSeries product. And I really attribute that — I mean from a volume standpoint, obviously, it’s of a smaller base, but also the strength right now in housing is with the bigger national builders and the large regional builders, which tend to be — or which is not tend to be, which is a target of our BuilderSeries formal introduction. So, as we see that continued strength in the — with the big builder, that’s going to tend to put lap volume more into that category than into the — into our traditional lap Siding — 16-foot lap Siding product. Now a whole different story on R&R and ExpertFinish, where it’s mostly 16 foot. But certainly, within that, build Single-Family new construction category, flat Siding show in BuilderSeries.

Operator: Our next question comes from Michael Roxland with Truist Securities. You may proceed.

Mike Roxland : Congrats on a very good quarter. Alan, just last quarter, you provided some color on the EBITDA bridge by segment. I’m just wondering if you could do the same this quarter as it relates to the $80 million — at least $80 million in EBITDA that you are forecasting. Just help us frame how Siding and OSB stack up in that guidance, please?

Alan Haughie: Yes. One — just to sort of revisit Q1 from this, the principal reason that I broke the EBITDA down by segment was because the number was fundamentally so low as we guided to $35 million. I didn’t want anyone to think that, was Siding’s unique performance. So, I wanted to call out the expectation, at least at that point that we might have negative EBITDA in Siding — sorry, that we might have negative EBITDA in OSB, which turned out not to be the case. So, with the $80 million, I’ll at least give you that the Siding performance is going to be similar-ish, if you think about my answer to Mark Weintraub’s question that opened the Q&A session. It’s going to be similar-ish to Q1. And as is normal, if you look at our Q1 results, you’ll see that corporate and South American EBITDA kind of offset rather.

So, I think without being drawn further. I think I’ve given you almost everything. You need $80 million without actually saying it explicitly. So, I’m trapped again, but…

Mike Roxland : We don’t mind being — you being very explicit. So…

Alan Haughie:

Mike Roxland : This is — the second question, just wanted to get a sense of how you guys are thinking about the Sagola ramp, particularly given that you slowed Houlton last quarter. You mentioned you still want to work down inventories through the balance of the year. So how is that — how are you thinking about ramping given the — given those conditions?

Brad Southern: Just generally speaking, when we’re in the process of ramping a mill like Sagola or like Houlton last year, we do like to push the volume there to give the machinery and the crews the opportunity to learn how to make Siding. So, we’ll be — as we go through this year, the tendency is — for us is going to be — it’s going to want to match their capability by putting orders in there. And then — which is what we’re doing now. As Sagola is coming up, we’re backing off — just back off a little bit on Houlton as a priority, given the need to balance production. But — so that is kind of a color on how we think about Sagola. I will say, other than that, we would probably — we would kind of spread — if we have to take production-related downtime, we spread that across the system, generally speaking, and some of that is due to the fact that these mills have special type of SKU capability.

So, some plants can or cannot make certain SKUs. So that will tend to spread the downtime around a little bit. So, I mean — but directly to your question, we will prioritize volume into Sagola this year to ramp that mill up.

Operator: Our next question comes from Sean Steuart with TD Securities. You may proceed.

Sean Steuart: Thank you, good morning, everyone. Just one question, and appreciating you just rolled out your 2023 CapEx budget, but that number is a little bit more conservative than we were forecasting, which I guess makes sense given the resequencing of Siding growth initiatives. Would it be fair to say, as you look into 2024, that you would expect CapEx to ramp up a little bit as you get into, I guess, Wawa spend to convert that asset and start to think about the next stage after that. Is that a fair assumption as we look out to 2024?

Alan Haughie: Let me take a hint from Aaron. It’s obviously market dependent. But I’ll dunk and learn new tricks. But it is — one of the things we tried to convey with a broad range of capital guidance that I gave last quarter, which was broader and larger than the numbers that are in our press release right now, yes, there’s a huge amount of capital flexibility. And I hope, quite frankly, that yes, we see increased capital spending in 2024 compared to our current projection for 2023 entirely plausible.

Operator: Our next question comes from Mark Weintraub with Seaport Research Partners. You may proceed.

Mark Weintraub: Thank you. Not wanting to get too much into the weeds, but sort of interesting. I would have thought that Wawa might have serviced similar markets to Houlton. Maybe just some color, kind of geographic product mix of how you imagine the Wawa project proceeding relative to what you were thinking about Houlton second line? And what implications might we want to be thinking through as to how the second line at Houlton would progress if indeed that were the case?

Brad Southern: So, the two advantages Wawa has over or — I mean the plan that we had for Houlton 2. One is the size of the press and the capability of the project will be a lot greater as I think what was in the prepared comments to be one of our larger — will be our largest one-line Siding mill. So that volume really helps make the decision about that as the next mill over Houlton. But then also the central location and the wood basket for Wawa is, it also provides a second advantage. And so, when we — so — and that, I want to say that — but more so than anything, it was just the assumed financial return on the two projects swayed us to putting Wawa in front of Houlton. We certainly believe Houlton will be the next conversion after Wawa is up and running.

The advantage for Houlton is that access to the Eastern Seaboard, where we’re underpenetrated. But obviously, we’ve got a lot of capacity on Houlton 1 for the near-term satisfaction of that demand. So — but Mark, to answer your question, it’s the production size, the capability or the capacity of the facility in Wawa and the quality of the wood basket there, and the central location helps on the front from an overall freight standpoint.

Mark Weintraub: So basically, it can service a broader geography than Houlton is one point. And then also, I guess — so in terms of the like panel or lap focus, is there a bias for the Wawa facility like there was for Houlton?

Brad Southern: No, Wawa will be very flexible across both — potentially for both panel and lap. And so, we’re not — we haven’t made the decision on which of those products to emphasize as far as the finishing capability of the facility, but it provides flexibility there.

Operator: And this concludes the Q&A session. I’d now like to turn the call back over to Aaron Howald for any closing remarks.

Aaron Howald: Okay. Thanks, Josh. With no further questions, we’ll bring the first quarter earnings call for LP Building Solutions to close. We look forward to catching up with you all soon. Thank you very much.

Brad Southern: Thank you.

Alan Haughie: Thank you.

Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.