Louisiana-Pacific Corporation (NYSE:LPX) Q3 2023 Earnings Call Transcript

Louisiana-Pacific Corporation (NYSE:LPX) Q3 2023 Earnings Call Transcript November 1, 2023

Louisiana-Pacific Corporation beats earnings expectations. Reported EPS is $1.62, expectations were $1.39.

Operator: Good day. And welcome to the Q3 2023 Louisiana-Pacific Corporation Earnings Conference Call [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Aaron Howald, Vice President of Investor Relations and Business Development. Please go ahead, sir.

Aaron Howald: Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP’s results for the third quarter of 2023 as well as our updated full year outlook. My name is Aaron, and I am LP’s Vice President, 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. During this morning’s call, we will refer to a presentation that is available on LP’s IR web page, which is investor.lpcorp.com. Our 8-K filing is also available there along with our earnings press release and other materials detailing LP’s strategy and sustainable business model. Today’s discussion will contain forward-looking statements and non-GAAP financial metrics as described on Slides 2 and 3 of the earnings presentation.

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The Appendix of the presentation also contains reconciliations that are further supplemented by this morning’s 8-K. I will incorporate that content here in my reference rather than reading the slides. And with that, I’ll turn the call over to Brad.

Brad Southern: Thanks, Aaron, and thank you all for joining us to discuss LP’s Q3 results and our full year outlook. The third quarter was our strongest of the year by far for both Siding and OSB. It was also a quarter in which LP’s teams achieved key milestones for growth and sustainability, one of which we will recognize while continuing focus on building a stronger and more inclusive culture. Page 5 of the presentation shows financial highlights for the quarter. LP generated $728 million in net sales in the quarter, which was 15% lower than Q3 last year at higher OSB prices and improved sell-through and inventory normalization and Siding led to a higher overall EBITDA margin than last year with the result that LP earned $190 million in EBITDA, only 5% less in Q3 of last year.

As a result, LP exceeded the high end of our guidance range despite OSB prices falling in September. The $190 million in EBITDA translated very cleanly to $187 million in operating cash flow and LP ended the quarter with $160 million in cash on hand after returning $17 million to shareholders via dividends and investing $49 million in growth and sustaining capital. We repaid our revolving credit facility and ended the quarter with over $700 million in liquidity. Page 7 of the presentation shows Siding growth relative to the housing market on a trailing 12 month basis. Remember the quarter on record for Siding volume and revenue as we remained on a managed order file until early December of last year. Despite this very difficult comp on a trailing 12 month basis, SmartSide sales volume beat single family housing starts by 10 percentage points.

Starts were down 16% but Siding volume was down only 6% and Siding prices were up 8%. As you can see in the pie chart to the right, ExpertFinish was stable at 8% of volume in the quarter. In the first half of 2023, Siding sales were dampened by inventory destocking after we finally transitioned from a managed order file late last year. Q3 saw the normalization of sell through rates and inventory levels. As expected and despite a market that is facing increasing affordability challenges, higher interest rates and elevated economic uncertainty, the third quarter saw sequentially higher volumes and average selling prices in the Siding business compared to Q2. As a result, we believe that the order patterns and channel inventory levels we are experiencing now are consistent with normal seasonal patterns with minimal lingering headwinds from destocking.

This was not the first time that the Siding business has been on a managed order file, and the inventory digestion period before the resumption of a normal order cadence takes time. I am proud of the perseverance and dedication that Siding sales and operations teams demonstrated as we work through this process. Before I hand the call over to Alan, I want to mention a few additional accomplishments in the quarter. Last month, we officially opened our newest prefinishing facility in Bath, New York. This brings enhanced scale, efficiency and geographic expansion to ExpertFinish. I want to officially welcome the Bath team to LP. Bath is a third new facility for the Siding business in the past two years after the conversions of Holton and Sagola.

I am proud of the safe and efficient execution of all our recent capacity additions in siding and confident that we are well positioned to resume growth in the diverse markets we serve. In the third quarter, LP published our third sustainability report as well as environmental product declarations for the Structural Solutions portfolio of value added OSB products. Structural Solutions products like TechShield Radiant Barrier, WeatherLogic sheating with integrated air and water barrier and Legacy flooring all sequester more carbon than is emitted during their manufacturing and life cycle. Our customers and shareholders are confident that LP’s suite of engineered wood products combined with our responsible and sustainable management of forest resources means that LP can deliver best-in-class OSB and siding products while also having a positive impact on the environment.

This is most notable in Siding where competing products are made predominantly of cement or vinyl. When it comes to durable products with great curb-appeal and positive impact for builders, contractors, homeowners and the environment, it is very hard to beat LP’s portfolio of sustainable and carbon negative engineered wood building solutions. Lastly, before I turn the call over to Alan, I’m happy to say that LP was named by our local newspaper The Tennessean and U.S.A. TODAY as the top workplace in Middle Tennessee and by Newsweek as one of America’s Greatest Workplaces, building a safe and inclusive culture where all of our team members feel welcome and encouraged to his own reward. And while we will never stop trying to improve, I am proud of our company and the progress we continue to make.

And with that, I will turn the call to Alan.

Alan Haughie: Thanks, Brad. Slide 7 of the presentation shows the third quarter year-over-year revenue and EBITDA waterfall for Siding. The third quarter of last year was a high watermark for both Siding volume and revenue and admittedly, presents a difficult comp this year. However, as predicted, volumes and prices improved sequentially over the second quarter of this year by 6% and 2% respectively. On a year-over-year basis, prices were up 3 percentage points. The combined impact of last January’s list price increase and favorable product mix added $10 million of revenue and EBITDA. Volume was down 16% with ExpertFinish holding its ground rather better than primed. I’m going to take a moment now to recap the ramp-up and conversion cost trend this year.

The business carried embedded ramp-up costs of $16 million in the first quarter of this year, $10 million in the second quarter and now $8 million this quarter, including $1 million for the recently opened Bath prefinishing facility. This $8 million is $3 million higher than the $5 million we incurred in the third quarter of last year and it is this $3 million increase that shows up on the waterfall. Now I mentioned this detail to emphasize the thing that our current EBITDA margins are carrying the burden or the weight, if you will, of these costs. Moreover, the recently opened Bath facility will add about $4 million of incremental costs in the fourth quarter as it begins ramping up. So despite generating a respectable 21% EBITDA margin in the third quarter, adding back the embedded $8 million I just referenced together with $5 million for the Dawson press rebuild, as shown in the last column of the waterfall, would produce an underlying EBITDA margin of about 24%.

This margin was, of course, helped by the slowing of inflationary pressures on freight and raw materials, which delivered a $9 million EBITDA tailwind net of wage inflation. Slide 8 tells the third quarter story for OSB, where price gains and cost controls more than offset volume resulting in a small year-over-year increase in EBITDA despite the revenue decline. An OSB price drop late in the quarter notwithstanding higher prices added $28 million of revenue and EBITDA compared to last year. However, despite higher net price, the overall demand environment was softer than last year with open market volumes, particularly weak. And so the volume reduction in the quarter reflects not only the removal of the Sagola and Bath from the OSB fleet but also market curtailments in response to the softer demand.

As with siding raw material deflation provided a small tailwind but the star of the show was cost control, which contributed $11 million of EBITDA. In other words, despite significantly lower volumes, the OSB business run very efficiently as demonstrated not only by the dollars, but by the 4 percentage point improvement in operating efficiency or OEE. As Brad has already mentioned, it was a clean or cash flow, as shown on Slide 9, with $190 million of EBITDA producing a $187 million of operating cash flow. We spent $49 million in growth and maintenance capital, returned $17 million to shareholders via the quarterly dividend and repaid the $30 million draw on our revolver. As a result, cash balance increased by $90 million in the quarter to end September at $160 million.

Cash has continued to increase subsequently and currently stands at a little over $200 million. Finally, let me discuss our updated full year outlook on Slide 10. With respect to CapEx, having already spent $236 million so far in 2023, the fourth quarter will likely look a lot like the third quarter for capital spending. The bulk of the near term growth and conversion capital is behind us with Sagola and Bath now up and running, so the fourth quarter spend will mostly be on sustaining maintenance. Siding revenue for the third quarter largely met our internal expectations, so we are reiterating the guidance we provided on our second quarter call that we expect a full year Siding revenue decline of about 10%, which implies a fourth quarter revenue decline of about 16%.

For OSB, we will continue to offer algorithmic revenue guidance based on the assumption that OSB prices remain at the levels published by Random Lengths last Friday. Under this price model and accounting for market downtime, we would expect OSB revenue to be down 30% sequentially from the quarter. Under these assumptions, including the start up costs of the Bath prefinished facility I referenced earlier and some maintenance expenses in both businesses, we would expect total company fourth quarter EBITDA to be between $60 million and $80 million. Now before we take your questions, please allow me to anticipate one. We’re not yet in a position to offer revenue or EBITDA guidance for 2024, but our capital allocation strategy remains unchanged as well the flexibility with which we deploy capital to invest in capacity.

If the housing and repair and remodel markets are basically flat next year, as most forecast has currently anticipated, then Sagola and Bath provide LP Siding business with sufficient capacity to press and prefinish enough SmartSide to meet demand. And when might we start converting the recently acquired Wawa facility for Siding? Well the answer, as established on prior calls, is when the market demands it. We don’t know exactly when that will be but we have sufficient capacity, liquidity and most importantly, flexibility to be responsive to demand when that time comes. And in the meantime, our capital allocation strategy remains to earn cash, invest in our growth as needed and return a significant amount of the remainder to shareholders. And with that, we’ll be happy to take a round of questions.

Operator: [Operator Instructions] And our first question will come from the line of Mark Weintraub with Seaport Research Partners.

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Q&A Session

Mark Weintraub: The first question, if we think about the fourth quarter Siding margins, I guess, we’re going to have Bath against us. But kind of order of magnitude, how should we think about it being relative to the third quarter?

Alan Haughie: Given that volumes in the fourth quarter, if we hit this forecast, are going to be lower than the third quarter, and the business has a high available margin, then even excluding the Bath costs, the EBITDA margin would have been a little lower than Q3. And then, of course, as we add on, as you point out, the Bath costs that will lower the margin a little bit more. So the closest approximation to the Siding Q4 performance closest to approximation is probably Q2 of this year, similar-ish in terms of most of the drivers.

Mark Weintraub: And I believe that was at 18% to 19% EBITDA margins in Q2?

Alan Haughie: Yes, that was Q2. So closest to approximation. I’m not necessarily committing to that number but closest approximation, the shape of the quarter is very similar.

Mark Weintraub: And then as we’re thinking about next year, assuming you’re not moving forward with Wawa and any start-up costs there, which I guess seems kind of unlikely. Can we add that $38 million of start-up costs with Sagola, press rebuilds, the Bath expansion, et cetera, when we bridge 24 versus ’23, or would you suggest we think about it differently from that?

Alan Haughie: I’d suggest thinking about it slightly differently. So a proportion of those costs are permanently embedded, they’re the fixed cost of having the facilities. Now of course that sets us up to be able to bring on incremental volume very efficiently, because the fixed cost infrastructure is largely already in place. So the real way to think about it is those embed costs set us up to potentially have a high variable incremental margin on additional volume next year, that’s the way to think about it. So they’re there, but it means as volume comes on, those costs don’t need to be added again, because they’re already embedded in our current run rate, and it’s an investment. And I say this a lot, I know it’s an investment in the future that allows us to immediately recognize the EBITDA from incremental volume when we get it.

Mark Weintraub: But would none of that $38 million have been quasi onetime it should all be viewed as embedded or…

Alan Haughie: I’m being a little bit cagey, some of it’s embedded and some of it is onetime, because some of the costs that — here’s a good example on the ramp-up cost. When you’re ramping up, we have to — we know we don’t make a great product. So some of the product that gets produced as we ramp up is essentially scrapped as we learn to run efficiently. So some of those costs are indeed those very start-up costs, but it’s a bit too early for me to commit to a precise separation. You’re right that some of those are inherent inefficiencies that would not be repeated. The rest is fixed cost infrastructure, that will be.

Operator: [Operator Instructions] And that will come from the line of Kurt Yinger with D.A. Davidson.

Kurt Yinger: I guess as you’ve kind of wrapped up this inventory normalization in Q3, any thoughts on how much of a headwind that’s going to ultimately pose to volumes this year? And how have incoming orders trended as you’ve gone from kind of Q3 to Q4 here?

Brad Southern: Well, so for 2023, it’s not the easiest thing to settle on a number for what the headwind was. But if you look at historical sales, if you look at some of the inventory reporting we’re getting now from distribution, it can be as much as 100 million feet of volume that was sold last year and then moved out of the channel this year, which has caused the headwind that you’ve mentioned. As far as where we are today, we do have all customers back in order file routinely like on a normal cadence based on history. And so we feel good that across the board, across all different channels that we’ve worked through the inventory situation and we’re seeing real demand flow back through — consumer demand flowing back through to our order file.

Kurt Yinger: And then I guess as you look at across some of the different products within SmartSide, ExpertFinish, the BuilderSeries, maybe some of the volume that was going into the shed manufacturers that was weaker earlier in the year. I guess, are there any parts of that, that you’re particularly excited about kind of growing next year, notwithstanding a big change in kind of the macro demand environment, or what do you see as kind of the biggest kind of above market growth drivers over the next 12 months?

Brad Southern: So Kurt, if you — would just say for the sake of this question that new home construction is flat next year on our spend is flat next year, we’re excited, I’m excited about the opportunity to gain market share in repair and remodel due to our ExpertFinish growth, the Bath, New York facility, the Holton plant behind that’s making product for the Eastern seaboard, an area where it’s a highly active Siding repair and remodel market, but one where we are underpenetrated. So as we build capability and capacity there and scale, there’s just a lot of opportunity for market share gains. And then on the new construction side, we continue to go to market with our BuilderSeries portfolio of products, which provides us a competitive offering for the builder.

And while we have, depending on the geography, decent to good market share with the smaller regional builders, you’re underpenetrated when it comes to the more national players. And we’re excited about the possibility for BuilderSeries to compete in that environment in a very meaningful way and us to gain market share next year there as well. Shed, we already have really high market share there. We’re looking at tweaking that or getting a few more points. But I think the meaningful growth above overall market growth for us over the next five years or so is going to be in the ExpertFinish through repair and remodel and then with the bigger builders.

Operator: [Operator Instructions] And that will come from the line of Michael Roxland with Truist Securities.

Michael Roxland: I just wanted to follow up on Kurt’s question in terms of market share and how intend to gain market share. It seems like one of your siding competitors are gaining share with homebuilders and continues to be very vocal about it. You also mentioned last quarter that you’re a little underpenetrated with the large national builders you just mentioned that again, Brian, here. So I just want to understand your approach with the builders doing to gain share? And aside from market conditions and what have been destocking, is there anything constraining you from gaining more notable share with the builders?

Brad Southern: No, there’s no constraint other than us being generally new to that sales cycle. Let me — and I will caveat that a little bit, because we’ve had decent pull through with our TRIM portfolio of products with national builders for a while, so it’s not like that’s alien to us to sell into the big national builders, also very strong market share there on the OSB side. So the relationships exist with these big national public builders primarily through our history of selling OSB products through that channel. But the key to us is having a competitive product, which we do now. The fact that we know we believe the product is more than competitive, it’s superior. And so — but it’s a long sales cycle in these kind of deals and we’ve been working those hard all through this year and are optimistic about the progress we’ve made.