Louisiana-Pacific Corporation (NYSE:LPX) Q4 2022 Earnings Call Transcript

Louisiana-Pacific Corporation (NYSE:LPX) Q4 2022 Earnings Call Transcript February 21, 2023

Operator: Thank you for standing by. Welcome to the Q4 2022 Louisiana-Pacific Corporation Earnings Conference Call. Please be advised that today’s conference call is being recorded. I would like to turn the conference over today to Aaron Howald, Vice President, Investor Relations.

Aaron Howald: Thank you, operator. Good morning, everyone and thank you for joining us to discuss LP’s results for the fourth quarter and full year of 2022 as well as our updated outlook for the first quarter of 2023. 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 podcast, 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 Slides 2 and 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. Good morning, everyone and thank you for joining LP’s conference call to discuss our fourth quarter and full year results. In 2022, LP’s 50th year, we delivered record siding volume and earned $1.4 billion in EBITDA and returned nearly $1 billion to shareholders, including repurchasing 14 million shares. We also invested in our ongoing transformation by completing the conversion of our Houlton mill, starting the conversion of Sagola from OSB to siding and growing our capacity to produce export finish and structural solutions. In Q4, we grew Siding Solutions net sales by 38% and remain EBITDA positive in OSB despite prices falling to levels not seen since 2019. Another highlight of the year was publishing our second sustainability report.

LP’s inherently carbon-negative products and efficient manufacturing processes, meaning that LP is delivering value to customers, homeowners and shareholders while also positively impacting communities and the environment everyday. It was a truly remarkable year and I want to thank every LP employee whose contributions help make that possible. The recent slowdown in housing starts is likely top of mind for most of the audience. So let me address that, starting with a reminder that LP’s OSB and siding businesses have very different relationships with that underlying market. Q4 saw 26% fewer single-family starts than in Q4 of 2021 and single-family starts were down 11% for the full year. LP’s OSB segment is closely correlated with new residential construction.

As a result, after a remarkable year of cash generation, commodity OSB prices fell to near cash cost in Q4 as demand slowed to reduce housing starts. We responded with disciplined management of capacity and exceptional execution by our sales team, which allowed the OSB segment to earn $13 million in EBITDA which is above our algorithmic guidance given how far prices fell. LP Siding segment, on the other hand, is more specialized, has no connection to commodity prices and has significantly more diverse channels and end users, with only about 40% of siding volume going to new residential construction and we think SmartSide is the best siding product available. As a result, siding has consistently outperformed the underlying housing market with net sales increasing by 38% in the fourth quarter and by 26% for the full year.

In the fourth quarter, our siding distribution customers continue to order, but some of their customers’ pulls slowed. This resulted in inventory build in the channel of which we were unaware until late December due to the time lag inherent in a managed order file. By quarter end, therefore, most SmartSide products have finally caught up to customer demand bringing lead times and inventories back to more seasonably normal levels. Alan will talk more about that in the guidance section. Looking back, single-family starts grew by 14% from 2020 to 2021, then fell by 11% in 2022, ending essentially flat over 2 years. Over that same 2-year period, we have grown Siding Solutions revenue by more than 50%. Siding is not immune to a housing slowdown, but it has consistently outperformed the underlying market.

We are confident this trend will continue as we execute our strategy to grow and take share by focusing on repair and remodel markets and driving product innovation. Let me talk a bit about LP’s view of the current market and how we are navigating it. Consensus for total U.S. housing starts for 2023 is around $1.25 million or 20% lower than 2022, although data released last week was a bit better than this. Most observers expect the housing market will strengthen in the back half of the year implying that Q1 could see housing starts fall by more than 20% compared to 2022. There is significant uncertainty in housing and R&R markets at the moment, particularly with regard to interest rates and affordability. As a result of this near-term uncertainty, we are seeing softer demand in siding and OSB.

But I want to reinforce that LP’s strategy is not simply to wait for strong housing starts for high commodity OSB prices. Our strategy is to grow SmartSide, grow ExpertFinish, grow our exposure in R&R, grow our portfolio of structural solutions and expand our rates geographically. We will continue to execute on our strategy, because we have shown that it delivers value. This strategy is the reason why siding has gained share and consistently outperformed the housing market. As we have said before, we have more than enough flexibility in our production plans and capital projects to respond effectively to short-term weakness and more than sufficient liquidity to continue investing for long-term growth in siding and structural solutions. In the long run, fundamentals remain very strong with demographics and structural undersupply as tailwinds for new construction and aging housing stock supporting R&R growth.

LP will bridge the short-term gap protecting against market downside while preserving our ability to benefit when the housing market regains its footing. And we will do it by executing our strategy with disciplined operations and capital allocation. And with that, I will turn it over to Alan to discuss our financial results for the quarter and an update on our capital allocation strategy.

Alan Haughie: Thanks Brad. I will spend a few minutes reviewing LP’s performance for the fourth quarter and full year and then I will discuss the current market environment and its impact on our near-term outlook. Slide 7 shows siding growth compared to housing starts on a trailing 12-month basis. As Brad mentioned, the disconnect was even more pronounced in the fourth quarter. The pie charts to the right show the mix of the most specialized siding products, primarily with ExpertFinish and Shapes. Although the percentage of total volume shrunk by 1 percentage point, this is an artifact of the exceptional 20% growth of overall volume, which was admittedly magnified by the soft comp. Resulting from a press rebuild in the fourth quarter of 2021, ExpertFinish revenue grew by 65% year-over-year.

Slide 8 shows the quarter for siding in more detail. The story is a fairly simple one. List price increases and favorable mix drove net prices 15% higher, while volume grew by 20%. These two factors added $70 million to EBITDA. The inflation of raw materials and freight costs for conversions and increased selling and marketing produced a $32 million headwind. In other words, the EBITDA gain from growth was double the negative impact of inflation and investments in future growth. The resulting EBITDA margin increased by 6 points to 23%, again, in the quarter from single-family housing starts fell by 26%. Slide 9 tells a similar story for the full year. 14% higher prices and 11% volume growth added $212 million of EBITDA, partially offset by $31 million of discretionary investments, meaning no conversion costs in selling and marketing.

And after $122 million of inflation, EBITDA was $50 million higher than the prior year for a full year EBITDA margin of 23%. By netting here with two press rebuilds, significant inflation and 11% lower single-family starts. The OSB charts on Pages 10 and 11 are dominated by the impact of falling OSB prices and rising raw material costs. The volume reduction is caused by market curtailment late in the quarter resulted in $61 million of lower EBITDA in the fourth quarter of 2021, $11 million from commodity OSB and $50 million from higher-priced structural solutions. There was a $14 million hit from inflation, mostly raw materials and a $10 million impact from inventory devaluation. Despite this, high-price realization resulted in the OSB segment outperforming our algorithmic guidance, generating $30 million of EBITDA.

While the full year waterfall on Page 11 is again dominated by price inflation, I do want to highlight that the $65 million of increased EBITDA from Structural Solutions growth more than offset the $41 million impact from lower commodity volume. This shows the incremental margin impacts of the higher value-add Structural Solutions products. And so these four slides are LP’s transformation strategy in a nutshell. OSB prices ebb and flow outside our control, we generate significant amounts of cash when demand and prices are high and we manage our production capacity with discipline and focus on demand. Siding on the other hand is our growth and value creation engine, specialized products, steady prices and our long runway for continued growth well above the underlying market.

Slide 12 shows a very high level roll forward for the revenue and EBITDA for the quarter. OSB price drops reduced revenue by $120 million. This was almost completely offset by $105 million or 38% of siding growth, a remarkable accomplishment for the Siding team. OSB market curtailment and the losses for Sagola’s OSB capacity further reduced revenue by $37 million and $19 million respectively partly offset by $13 million from increased commodity OSB volume, mostly due to Peace Valley’s ramp up. LPSA and everything else saw revenues fall by a combined $22 million. The EBITDA story in the right-hand column is similar other than the callout in North America, some of what we can control specifically siding growth, Structural Solutions growth and OSB volume netted a $37 million positive EBITDA contribution.

It was not enough however to offset falling OSB prices and inflationary pressures with the result that LP delivered $100 million in EBITDA in the quarter lower than the prior year quarter by $178 million. Slide 13 provides the same analysis for the full year for revenue of $456 million of growth more than offset the impact of falling OSB prices. For EBITDA, the growth of Siding and Structural Solutions produced $294 million of EBITDA compared to 2021. Other than OSB prices, this $294 million was almost enough to offset the combined impact of inflation, the cost of mill conversions, Sagola’s view for outage for conversion to signing, LPSA’s EBITDA drop and everything else presides. Page 14 of the presentation shows cash flows for the quarter and full year.

We began the quarter with $482 million in cash. Operating cash flow of $41 million is the net result of $100 million of EBITDA plus $29 million of working capital decreases, less $78 million in taxes. The fourth quarter saw heavy CapEx spending of $133 million mostly on the Sagola siding conversion and Green Bay ExpertFinish expansion. And after $16 million of dividends and a few other things, our cash balance fell by $99 million, ending the year at $393 million. Finally, if you look at the P&L account on Page 17 of the presentation, you will see an $82 million non-operating charge in the quarter. This includes the $78 million non-cash charge resulting from the settlement of our defined contribution pension plan. This charge is omitted from the EBITDA and adjusted earnings per share.

And with that, let me move on to the current market dynamics and how LP’s strategy helps us respond before transitioning to guidance. As Brad described, and as you all know, there is significant uncertainty in the housing market LP is investing in growth for SmartSide, ExpertFinish, Structural Solutions to meet customer demand. As we said before, we have significant flexibility to delay the timing of capacity expansion projects should we anticipate that current market softness is likely to continue. However, we also have more than enough liquidity to withstand to the temporary reduction in cash flow that reduced customer demand would imply. LP will continue to manage its mills and discipline to meet customer demand. In siding, we are working through the inventory digestion that as a company that transitioned from a managed order file and all indications are that inventory is now slowing naturally.

In OSB, just as we took market downtime at the end of the quarter, we are constantly assessing customer demand, mill inventories and OSB prices to balance supply and demand. I am confident that this strategy will allow us to manage this period of decreased demand which I hope and expect is temporary with the agility to respond up or down as the market evolves. Our capital allocation strategy remains unchanged though the timing is somewhat cash flow dependent. As a reminder, that strategy is to first own the cash then to invest in growth and only then to return the remainder to stockholders via dividends and share repurchases. In the fourth quarter, as OSB prices and cash flow fell, we did not repurchase any shares, leaving our share count at about $72 million.

We have a remaining Board authorization for $200 million of repurchases and consistent with our belief that our shares are undervalued, cash flow allows will be back in the market. In terms of liquidity, we retained a $550 million undrawn revolver. We have $350 million of long-term debt at 3.625% during 6 years. We intend to protect this very strong balance sheet, but use it to execute our strategy. While 2023 is shaping up to be a year of negative cash flow, at least in the current housing consensus in OSB prices, we will manage our CapEx and balance sheet with appropriate discipline. In the first quarter, as Brad mentioned, we expect inventory digestion following our transition from a managed or final siding with the result that revenue for Siding Solutions is expected to be flat to 5% lower than the first quarter of 2022, with price increases roughly offsetting lower volumes.

In OSB, assuming prices remain constant at the level published by , OSB revenue would be down by about 20% sequentially from fourth quarter levels. With OSB prices at these levels, please bear in mind that LP is offering the guidance for OSB revenue reflects total capacity reductions taken to match production to customer demand. And all of these factors would result in a first quarter EBITDA of at least $35 million. Now given the current uncertainty in the market with regard to full year housing and repair and remodel demand, it’s difficult to offer accurate full year guidance for Siding revenue growth. However, we are confident that the Siding segment will outperform the underlying market by a substantial margin. But since the underlying market itself is difficult to predict, we are going to hold off on offering meaningful guidance until our next earnings call by which point we expect to have greater clarity.

Similarly, for full year CapEx guidance, we will make the investments necessary to grow and outperform the underlying market. As I said, we have significant flexibility in our CapEx plans and more than enough liquidity to adjust up or down as we gain more data about customer demand. And now I’d like to hand it back to Brad for some closing comments.

Brad Southern: Thanks, Alan. As Alan detailed, we are working through the effects of catching up the Siding order file and we are managing OSB capacity to match current market demand. I don’t want to minimize near-term challenges these factors present as we enter a period of softer housing starts. The market is still quite uncertain in housing starts and R&R activity have never been easy to predict. However, there are a few things we are very confident about. First, there is structural undersupply of homes in the U.S. This undersupply must eventually be resolved. Second, the age of the average house in the U.S. suggests a very long runway for growth in R&R. And third, we know that we have the best products and team in the industry.

The LP Siding segment has a long history of outperforming the underlying market and gaining share and that will continue. And we will manage our OSB capacity, our CapEx plans and our balance sheet with discipline so that we can continue to outperform the market and deliver results for our shareholders. 2022 was an incredible year. 2023 has started with market conditions different than what we have experienced the past 2.5 years. However, we are not resting on the laurels as we bring our first 50 years to a close, I have never been more confident that LP will build on our record of growth, innovation and sustainability to deliver shareholder value in our next 50 years. And with that, we will be happy to take your questions

Q&A Session

Operator: Thank you. Our first question today will be coming from George Staphos of Bank of America. Your line is open.

George Staphos: Hi, everyone. Good morning. Thanks for taking my questions and thanks for the details. Brad, Alan, I know it’s difficult, but is there a way to assess for us what your production stance is right now in siding relative to takeaway. Are you still €“ I’m assuming producing at a lower rate relative to demand just to clear inventories? Or are you now €“ have you largely gone through that and you’re producing as far as you can tell, pretty much in line with takeaway. And in terms of first quarter, thank you for the guidance points, recognizing it’s very difficult given all the moving parts and the volatility related to pricing with OSB. Is there a way for you to give us a bit more color in terms of how you see OSB and siding stacking up in that more than $35 million guidance? Thank you.

Brad Southern: So George, let me start with the production question around siding. So just keep in mind that Houlton has €“ been Houlton line one ramped up all through last year and is right at or close to production €“ have the capability to produce at full production. We had a governed that volume back a little bit in Houlton as we went into Q4 and the beginning of Q1 well more so actually in Q1. And so we are €“ the answer to the question is we’re running a siding plants at full production other than Houlton, were we going to have decided to take some capacity out there just to try to match the order pull through a little bit better.

Alan Haughie: And then the second question, George, was could we give color around the $35 million. Yes. I actually agree with you on that. Bear in mind, please, that the number I am about to quote for OSB is based predicated out algorithmically on OSB prices of last Friday holding flat. So the $35 million roughly breaks as follows, rough about $50 million from siding, about negative $10 million from OSB. And then everything else, including a bit of conservatism, perhaps, LPSA offsetting corporate of minus $5 million, so plus $50 for siding, minus $10 million for OSB, minus $5 million for everything else. $35 million.

George Staphos: Thanks. Alan. And the last one, I’ll turn it over. You mentioned you have the flexibility to push ahead or delay as needed in terms of your capacity ramp in siding. What will be the key mile markers for you relative to how quickly you go ahead or decide to pull back? One of your peer companies talked about some weakness that we’re seeing in repair remodel activity, is that going to be €“ whether it’s dollars of revenue or commentary out of the big box retailers? What will you be looking to? And what should we be looking at as analysts engaging that? Thank you. I will turn it over.

Brad Southern: So George, on the €“ let me just say for press production, we’re full steam ahead on bringing Sagola up the full year by the end of the year. We see no reason to back off at all and the path forward for Sagola start-up, which added a significant amount of press capacity. Similarly, in Bath, New York, we’re full staying ahead on that production for ExpertFinish. And then as we get to the next tier of volume from a press capacity standpoint, that would be hold on line two and then various options on ExpertFinish, we will just be looking at the market as we go through the year, looking at ultimately what we feel like growth will be for this year and apply that well and also look over what we expect for housing the next couple of years.

And those will inform our decision on whether to €“ or what kind of pace to continue that capacity expansion. We’re still actively involved in engineering and design for ExpertFinish capacity beyond that. And as we’ve talked about on the call previously, we have begun procurement for different capital components for Houlton Line 2. But we haven’t €“ we’re not €“ we haven’t delayed anything. We haven’t had many decisions on beginning to actually put still on the ground or for foundations. And as we get to the spring and summer, we will have a better feel for what the market is looking like in the near-term, and then we will govern our capacity spend around the reality of what we’re seeing in the order file.

George Staphos: Thank you.

Brad Southern: Welcome.

Operator: Thank you. And our next question will be coming from Ketan Mamtora of BMO. Your line is open.

Ketan Mamtora: Thank you. Good morning, Brad, Alan, Aaron. First question, coming back to Siding, Alan, in your prepared remarks, you talked about meaningfully outperforming the broad market. Is that a way to think about either in terms of sensitivity or if there is a better way to think about sort of the degree of outperformance or sort of volume growth at different housing starts level? I’m just trying to understand what is the kind of €“ what is the best way to think about volume in the Siding business, recognizing that there is still a lot of uncertainty?

Alan Haughie: Yes, it’s a great question, and it’s a very hard question to answer, particularly given that our experience over the last couple of years, we put on a managed to order file. But very high level of sufficiently for periods of time, we believe that we outperform on a revenue basis, the underlying market by let’s say, 8 to 10 percentage points of growth. And so a simple way of articulating that. And I say the underlying market, we’ve only really got one clear marker of the market, and that’s single-family housing. And so single-family housing will, let’s say, to be down 10%. And I would argue that we should be able to grow our revenue above that. And that model, you might expect flat revenue year-over-year. Of course, it depends on what and to what extent that’s impacted by the housing €“ single- family housing starts.

And I would argue, and I’d like to think that a 10% housing decline, we might actually see some strength in repairment model, and maybe that will be better. So it’s flexible, the housing don’t necessarily move in tandem, but we use it as a simple working model 8 to 10 points better than the market. However, whatever that market ends up being €“ and we believe we have a long history of all able to do that through market share gains, partly driven by our innovations.

Ketan Mamtora: Got it. No, that’s helpful perspective. And Alan, perhaps I missed it. Did you talk about sort of 2023 CapEx guidance?

Alan Haughie: No, I didn’t quite specifically. And it’s very hard to give guidance in €“ without being able to discuss it in a sort of open form like this. So last €“ I think last couple of quarters, I’ve guided to €“ I said the 2023 will be a figure closer to $500 million. I’m obviously going to lower that guidance a bit. But let me tell you what our working model is as of today, and I’m happy to do that because it indicates that the range. I would say our working model for CapEx. This is not a projection. This is basically describing what we see and the level of flexibility we think would be wise. Our working model is in the range of $350 million to $450 million of CapEx in 2023. It’s hard to say, as Brad said, where that will land because we will use the flexibility that we have.

Q1 CapEx will be pretty heavy. I’m willing to quote a number of something like $120 million to $125 million of Q1 CapEx the but that will be fairly heavy. And we have a number of commitments for long lead time items that we intend to play ahead with. And of course, we’re creating spilled up. So there is no €“ absolutely no slowdown there.

Ketan Mamtora: Understood. No, that’s very helpful. I’ll jump back in the queue. Good luck.

Operator: Thank you. Our next question is coming from Susan Maklari of Goldman Sachs. Your line is open.

Susan Maklari: Thank you. Good morning, everyone. My first question is talking a bit about the pricing environment for Siding. First of all, I guess, can you give us any update on the success that you’ve seen with that increase that you announced in €“ I believe it was late last year, effective in early January. And then in this environment, with volumes moving lower, how do you think about price versus volume? What’s the ability to continue to hold the pricing that you’ve realized? And would you be willing to think about the volume versus price a little differently given where we are from a macro and a housing perspective.

Brad Southern: Susan, for the first question, we were able to implement our price increase January 1. I would say just as consistent with the way we’ve done it in the past, there could be a little lingering effect through Q1 of realization, but predominantly all of it was accepted in the marketplace. So we have minimal concerns there. And then for the price volume trade-off, generally, siding doesn’t work that way. I mean, there is €“ we’re pricing in the distribution. I don’t think most citing jobs are a cost play to start with. And so we feel like we’re pricing the product equivalent to the value-add warrants in the market and our distribution partners have done a good job of getting that price through the channel. Now I do want to say there is an exception to that and that is around of large national builder deals, which typically do require some back-end rebates.

And obviously, we’re part of that game and we are active in and continuing to process those kind of opportunities now. And that can result in a rebate pattern that ships away at that list price increase for specific customers and for large volume type of deals. But I’ve got €“ I would just say, for the year, we should expect to see by the time we get to the second quarter that January price increase has worked its way into our P&L.

Susan Maklari: Okay. That’s very helpful. And then turning to the OSB segment, you talked a bit about some production curtailments there. Can you give us more color on some of those locations and how you’re thinking about holding production as we think about where pricing may move for OSB through the year?

Brad Southern: Yes, Susan, I’m not going to go through mill by mill and talk about what we did. I would say €“ I would describe it this way and Q4 was pretty general across our entire system. With downtime that is somewhat easier to do during the holiday season. And so we €“ it was a widespread distribution of downtime late in Q4 to try to match demand. And then as we come into the Q1 and everybody comes back from the holidays, it is more targeted around mill cost and including the transportation and so in Q1, the downtime will be a little bit more concentrated, but we will be taking as needed in order to match demand. Thank you,

Susan Maklari: Okay, thank you and good luck.

Brad Southern: Thank you, Susan.

Operator: Thank you. Our next question is coming from Mike Roxland of Truist. Your line is open.

Mike Roxland: Thank you. Good morning, Brad, Alan and Aaron. Thank you for taking my questions. Just on Siding, realizing give an excess inventory and as you’ve mentioned, you’ve transitioned away from a managed order file I’m just trying to get a sense of what gives you the confidence that Siding will continue to grow as the economy softens, home equity value declines, unemployment increases? And the premise of the question is this, you grew the Siding business during an economic and housing up cycle, and it really has yet to be stress tested during a down cycle. In addition, R&R likely grew more than normal in the last few years, given work from home people, obviously, during cold building out building sheds, other things during the lunch break.

So there is a risk that R&R could actually slow more given the backdrop and as consumers choose to focus on, let’s say, on more small ticket items. I’m just trying to get a sense of how you’re framing Siding in the current environment.

Brad Southern: Yes. So Michael, so you the risk that you described around just some kind of macro R&R spend is real. And then we €“ as we talked about in our prepared remarks, the outlook for new construction is uncertain to say the least right now kind of all over the board depending on the analysts that you look at. And so the underlying market certainly will impact the results for Siding volume growth as we go through this year. No question about it. But where I disagree with you is the point about the business not being stress tested during other periods of downtime of a housing slowing or housing going down. We’ve consistently outpace the market on volume growth and certainly on revenue growth. And so I think €“ and the reason we’ve been able to do that is, first of all, our portfolio is pretty highly diversified given the exposure to non-housing and even non-repair and remodel segments like shed and in positions in retail and then also over the past 5 to 7 years.

We’ve done a really good job around product innovation that has opened up new opportunities for us, and that’s why we show that slide in our deck about the percentage of the revenue that is new products. So the fact that we have an ExpertFinish kind of just coming into any kind of significant market position now. R&R could be down, but because of our market share being pretty low in R&R and the fact that we’re essentially in the last phases of introducing our ExpertFinish to the market. We see that €“ we see a lot of upside to that from a market share standpoint. Again, we can’t overcome R&Rs down, of Siding R&R down 10%. This year, we’re going to feel that. But we are confident that there is still €“ we still have the ability, given how well our product performs given the innovation that we’ve been able to bring to market in the last 5 years or so.

And given depending on the geography and the segment, relative lower penetration rates in certain parts of the country in certain segments, we are confident that we’re going to fill up as a go facility. From a press standpoint, we’re confident we’re going to have to continue to build ExpertFinish capacity, and we’re confident we’re going to grow. But that growth can be gauged somewhat by the underlying R&R and single-family historic market. But we’re all in on gaining market share and I’ll just make one final remark. Historically, this is a general statement, but historically, that we’ve actually picked up more market share in a down market in the upmarket and have been able to hold that market share. So I’m not say excited about a down market at all.

But I do believe that it brings opportunity for customers to shop around a little bit. And given the €“ how well our product performs once we get a trial, that can bode pretty well for us over the long-term.

Mike Roxland: Got it. Thank you. Just one quick follow-up on that, just you mentioned lower penetration rates in certain parts of the country and segments. Can you provide a little bit more color about what parts of the country and what segments have lower penetration rates that you’re trying to increase your share?

Brad Southern: Yes. So let me just €“ in general, so geographically, in the center of the country, north to south, so Texas up to Minnesota, and we’ve got good market share there. But if you once you go east of Texas and the South of the Atlantic Sea Board, a lot of opportunity there for both new construction and repair remodel at the reason €“ we’ve converted Houlton in Maine and three more building ExpertFinish capacity in New York and expanding the capacity that we have in North Carolina for ExpertFinish. So there is an opportunity there. And then I would say that there is been pockets of the Pacific Northwest, there are some good markets for us there historically, but there is still opportunity for growth, particularly with ExpertFinish.

Mike Roxland: Got it. And then just one last question before turning it over. Obviously, you have a large shareholder which slightly increased its stake last quarter to slightly under 10%. Obviously, you’ve been doing a good job in terms of reorienting the portfolio to higher growth, higher value-add products. Do you see more shareholder value being created through the involvement of the shareholder?

Brad Southern: Well, maybe reputationally, it helps a little bit, but I don’t think there is any direct and we haven’t noticed any direct improve shareholder value as a result of that. But I mean, we’re proud to have it. I’ll tell you that. But I think any €“ so not directly, but I would assume that the credibility that brings to our strategy cannot hurt.

Mike Roxland: Got it. Good luck in 2023.

Brad Southern: Thank you.

Alan Haughie: Thanks Mike.

Operator: Thank you. Our next question is coming from Mark Weintraub of Seaport. Your line is open.

Mark Weintraub: Thanks guys. So, for first quarter, if I am doing my math right, you seem to be pointing to order of magnitude 16% EBITDA margins for the siding business. So, I was hoping to get a little bit of color on some of the variables at play, obviously below the types of ranges you have been achieving beforehand. In particular, how much in the way of like start-up or conversion costs related to Sagola might be included in there? How much of this is kind of just fixed absorption higher cost and what other variables might we want to contemplate besides that €“ what other variables might we want to contemplate?

Alan Haughie: Yes. Good question, Mark. Let me articulate this in the context of a year-over-year for Q1. Year-over-year, we basically said that we think more or less pricing and volume will offset and that would fundamentally leave zero EBITDA impact. What you are left with high level is last year’s EBITDA of $83 million dropping to the figure at close to $50 million drop. About $20 million unchanged of that is raw material costs, the carrier and raw material inflation. Now, as we all know, normally that would be offset with pricing. And technically, it is except for the fact that in Q1 volumes are down, so differently, yes, with volumes being down. One of the problems of having profitable product is that when your volumes are down, you make less money.

And as I have said, more than months on calls like this, we enjoy a high variable margin on the outstanding products. So yes, when volumes are down year-over-year, there is a heavy EBITDA impact of 45% to 50% of the revenue drop caused by volume. So, the way I look at it is pricing and volume, EBITDA impacts basically net off, we are left with $20 million and change of raw material and then $5 million to $10 million of yes, continuing investments. So, that’s really how it compares year-over-year. We are planning on with the conversion of Sagola and other projects. And those do put a, let’s call it, a strain on the EBITDA. But it’s the right strain, in my opinion. So, $10 million of investments in stuff and about $20 million and change of raw material with pricing and volume impacts offsetting in EBITDA.

Mark Weintraub: Great. Thank you. And I realize this is tough and lots of moving pieces. But did you have any assessment as to how much of the volume weakness is either you sold a little bit ahead of time or destock is kind of really maybe the same thing and so really trying to get a sense of let’s just say conditions were to remain similar to what they are. Would you €“ what type of volume improvement might you expect on a go-forward basis. I guess what I am really sort of just trying to get a sense of is kind of ranges for volume expectations, recognizing you don’t want to give a full year estimate given all these uncertainties, but if there is some like sort of sensitivity analysis you can provide to us under the different macro situations of where you might think volume and siding might come out, that would be super helpful.

Brad Southern: So, Mark, let me start there, and Alan can add maybe some color to this. But €“ so in the context of gauging where we are today, and I am talking about Q1 relative to the market condition. We guided 30% growth in Q4 and got 38%. We had a price increase January 1. We were all managed order file, which means customers are ordering six weeks to eight weeks or longer out in our managed order cost situation. And so I do believe that there was some order pull forward into Q4 that allowed €“ that drove an outstanding Q4 growth relative to what we were guiding to when we talked to you guys late October, first November. And so I think that we have got to kind of look at the two quarters combined to understand kind of what’s happened there.

And then as we look into Q2, there is a bit of that gauging what are really on pull-throughs, which have been kind of hard to understand because there was the inventory build at the end of the quarter. But I think we are right now €“ it feels like right now in our order file, we are beginning to see where we are servicing true demand. And I think, as Alan, I think mentioned in his prepared remarks, when we get to €“ I know this doesn’t help you in the meantime. But when we get to the next call, we will have a really good feel for that. It’s just that the uncertainty around what was being pulled out of distribution from, say, January 1, until a week or so ago has been difficult for us to gauge because there was an inventory build as a result of what I have just spoken to.

So, I don’t know Alan, if you

Alan Haughie: There’s isn’t anything I should add to that.

Mark Weintraub: Great. And just squeezing real quickly because you did note another big inflation year-over-year impact it seems like some folks are seeing lower wood costs in other different businesses. I mean there has been some optimism, maybe resin comes down a little bit. When might we start €“ are we not seeing that yet in siding? And when might that start showing up?

Brad Southern: So, on the resin side and basically, just to say all materials other than wood, those major material streams are contracted and there is a contract price which is based on some derivative of oil, but it is a lag. And so €“ but if we continue to see oil prices fall and even some that we have €“ some of that have fallen as already happened. We haven’t realized yet. Certainly, it could be helpful for margin this year. We certainly are not seeing any more increases in that area. And then on the wood side, same thing, a big driver for us, and we are buying pulp wood. So, a big driver for us is based as far as us getting the wood into the facilities. And but I will say structurally, we have experienced some price increases and to service our Canadian mills due to us having to go further to procure wood, given some of the restrictions on harvesting in Canada.

And so you may not be surprised us were from an OSB perspective, that’s where we are looking at some downtime. But I think costs for moderate mark as we go through the year, certainly on the resin side, and we are having to just really manage hard on the wood side to bring those costs down. But relief with diesel pricing would be certainly helpful there.

Mark Weintraub: Much appreciate. Thanks guys.

Operator: Thank you. And our next question is coming from Kurt Yinger of D.A. Davidson. Your line is open.

Kurt Yinger: Great. Thank you and good morning everyone. Just starting off on the OSB segment, any thoughts on the relative weakness in Structural Solutions versus commodity volumes in Q4? And do you think that reflects maybe timing differences in terms of prices declining or kind of a larger trend we should be aware of in terms of those products, perhaps being less in demand, weaker commodity pricing environment?

Brad Southern: Yes. We certainly saw from an overall volume standpoint, those go down. I just think primarily the market got so competitive in Q4 as folks were kind of rationalizing inventory and production. We certainly saw a falloff there. I am totally optimistic on the long-term about our ability to grow Structural Solutions. But I do think €“I think in both directions in a strong market, it’s easier to push structural solutions into the market in a hard down market, those €“ given where how pricing could lag around certain product SKUs. We can really become that those SKUs could really become disadvantaged against more commodity products. And so I think we have to be careful of the about gauge and where we are, both on the upside and downside of Structural Solutions because of that kind of value the value proposition we get out of kilter from a pricing standpoint when the market is moving.

So, it’s something that we are keeping an eye on, but I do believe the strategy is sound. We did grow it, obviously, from an annual standpoint. And just like I had mentioned earlier with siding, we have introduced some really exciting new SKUs to give us an opportunity to continue to grow that.

Kurt Yinger: Got it. Okay. That makes sense. And then just for my second, there was a question earlier around pricing and you alluded to kind of the volume discounts and rebate program with builders. But one of your competitors, I guess had some interesting comments in regards to kind of the pricing dynamic there and perhaps just getting more aggressive. I mean do you have any thoughts around that dynamic as it relates to SmartSide. And maybe you could also just touch on the success that you have seen with the builder series introduction.

Brad Southern: Yes. We are excited about the progress we made last year with the builder series. We are excited about some wins that we have had recently and some ongoing negotiations that are happening now. But it is competitive. I mean there is no question about it. That’s the reason we engineered a product specifically for that channel or that end use. And so as the market slows €“ there is certainly that’s a competitive landscape right there where big builders have negotiating leverage given the volume that they will consume and the market share that they have gained during COVID. So €“ but unlike in our history, we now have a product that is very competitive there. That is very esthetically pleasing. It is €“ once it is trialed.

It seems to €“ tends to be accepted and there is stickiness to it. So, we are going to continue to grow that. But you pointed out correctly that, that is a competitive landscape, unlike probably any other we operate in, where price can be a dominant driver sometimes even not necessarily what we view as the entire value proposition. But I feel good about our €“ the way we are positioned to win there, but we won’t win them all.

Kurt Yinger: Right. Okay. Well, appreciate the details. I will turn it over. Thank you.

Brad Southern: Thank you.

Operator: Thank you. Our next question will come from Paul Quinn of RBC. Your line is open.

Paul Quinn: Yes. Thanks very much. Good morning guys. Just one of your siding competitors signed contracts with 24 to 25 top U.S. builders to supply hard siding. Just wondering how you expect that to affect your builder series. Also, they have also reintroduced their low price Cemplank product. Just wondering that’s going to have a material headwind on sort of the growth of builder series?

Alan Haughie: Yes. As I have just mentioned, it’s a very competitive field around big builder lap siding. But I really feel like the product that we introduced, Paul, that BuilderSeries is a superior product of everything that’s out there for that application. We are able to price it competitively, I mean to win our share of the opportunities. But it’s a negotiated deal. It’s a lot of volume involved. And we will kind of have to see how it plays out this year, but the market share we gained last year is sticky. And then €“ so I mean, I think I am confident that we can battle head-to-head with anybody around that type of business now given that we have this product. And I am also confident that once a builder tries the product they are going to really like it because it’s superior to their alternative hard sidings.

But I don’t circle back around, it’s a competitive landscape and sometimes you can win off a price €“ and sometimes the price gets too and fro, we don’t want the business anymore. And then we have to walk away or we lose it because we bid too high for it.

Paul Quinn: Got it. Thanks for that. And then just over on ExpertFinish, if you could give us an idea of what that margin boost is on that product. I mean it’s great to see the growth. Just wondering how that affects the overall margin profile?

Brad Southern: Significant price post associated with ExpertFinish, the margins those today isn’t that material, Paul. But as we get these newer lines up in bath and the expansion that we have contemplated out West, the facility, the line we just added at Green Bay. There is a €“ the margin boost from ExpertFinish is ahead of us. But it’s currently in our €“ with our reported margin, it’s kind of immaterial. It’s pretty much a wash right now.

Paul Quinn: Okay. Great. Best of luck guys. Thanks.

Operator: Thank you. Our next question is coming from Sean Steuart of TD Securities. Your line is open.

Sean Steuart: Thank you. Good morning and thanks for all the thoughtful answers to the questions. I just have one, and it’s with respect to the share buyback program. And Alan, I think your wording was you could remain €“ you could finish off that program subject to cash flow supporting it and with potentially a tempered CapEx outlook. Is there an implication there that you forgo the share buyback activity for the foreseeable future? And presuming your thoughts on intrinsic value haven’t really changed, I guess your intent to stay active on that program in light of share price weakness we have seen of late?

Alan Haughie: I want to reiterate something. It’s a great question. Thank you. We don’t buy opportunistically. So, yes, like this, one might imagine, I wish we take the opportunity to buy back shares. But we put investments in the business first as I will repeat my mantra, that we put investments in the business first, and we don’t buy opportunistically. So, we do maintain that discipline that we have to have the cash already generated to engage in buybacks. And I am sure that point will come, I just can’t predict well.

Sean Steuart: Understood. And the rest of my questions have been answered. Thanks very much.

Alan Haughie: Thank you.

Operator: Thank you. This concludes today’s Q&A session. I would like to turn the call back over to Aaron Howald for closing remarks. Please go ahead.

Aaron Howald: Okay. Thank you, operator and thank you everyone for joining us. We are at the hour and there are no further questions. So, we will bring the fourth quarter earnings call for LP Building Solutions to a close. Thank you very much for joining us, and we look forward to speaking with you again soon.

Operator: This concludes today’s conference call. Thank you all for joining, and please enjoy the rest of your day.