Louisiana-Pacific Corporation (LPX) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Louisiana-Pacific Corporation's Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be provided at that time. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to introduce your host for today's conference, Executive Vice President and Chief Financial Officer, Sallie Bailey. Ma'am?

Thank you very much, James and good morning. Thank you for joining our conference call to discuss LP's financial results for the third quarter of 2017. I am Sallie Bailey, LP's Chief Financial Officer; and with me today are Brad Southern, LP's Chief Executive Officer; as well as Mike Kinney and Becky Barckley, our primary Investor Relations contacts. I'll begin the discussion with a review of the financial results for the third quarter and first nine months of 2017; this will be followed by some comments on the performance of the individual segments and selective balance sheet items. After I finish my remarks, Brad will discuss the general market environment in which LP has been operating, and provide his perspective on our operating results as well as give some thoughts on the outlook. As we've done in the past, we've opened up this call to the public and are doing a webcast. The webcast can be accessed at www.lpcorp.com. Additionally, to help with the discussion, we've provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I will be referencing these slides in my comments this morning, both of which are available on our website. We filed our 10-Q as well as an 8-K this morning with some supplemental information. I want to remind all the participants about the forward-looking statements comment on Slide 2 of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information included on Slide 3 of the presentation. The appendix attached to the presentation has some of the necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning. Rather than reading these two statements, I incorporate them with this reference. Today, I'll begin my comments by reporting on our safety performance. In the third quarter of 2017, we experienced a total incident rate of 0.55, and of the 12-month rolling average total incident rate of 0.51. LP continues to be among the safest companies in our industry. We are reporting our best quarter since the second quarter of 2005, just over 12 years ago, and a lot has changed since 12 years and before I go into the details of this quarter's results, I'd like to make a few comparisons. The second quarter of 2005, we reported sales of $692 million and segment operating profit of $180 million. Our OSB segment produced 1.4 billion square feet of product and represented 58% of the total sales and 81% of the total segment operating profit. The Siding segment represented 18% of the sales and 9% of the total operating profit. Now let's compare that profile with the financial results we announced today. We are reporting some $118 million in sales and segment operating profit of $190 million. Our OSB segment produced 1.1 billion square feet of OSB, 300 million less square foot than the second quarter of 2005. OSB segment represented 49% of the company's total operate -- total third quarter sales and 66% of the total segment operating profit. OSB's contribution to LP's third quarter results remained significant, but the real story about our third quarter earnings compared to 2005 is the shift of the portfolio towards the Siding segment. LP's financial profile today looks a lot more like a billion products company than it has in the past. And with that, let me go into the details. Moving to Slide 4 of the presentation for discussion of third quarter 2017 consolidated results; as I mentioned in my opening remarks, we are reporting net sales of $718 million for the third quarter of 2017, a 20% increase from the net sales of $596 million reported in the third quarter of 2016. And the third quarter reported a net income of $110 million or $0.75 per diluted share compared to net income of $66 million or $0.45 per diluted share in the third quarter of 2016. The adjusted income from continuing operations for the quarter was $102 million or $0.70 per diluted share based upon a normalized tax rate of 35% as compared to $47 million or $0.32 per diluted share reported in the third quarter of 2016. Adjusted EBITDA from continuing operations was $192 million from the quarter compared to $111 million in the third quarter of 2016. For the first nine months, we are reporting net sales of $2 billion, a 20% increase from the net sales of $1.7 billion reported in the first nine months of 2016. The first nine months recorded net income of $259 million or $1.77 per diluted share compared to net income of $108 million or $0.74 per diluted share on the first nine months of 2016. These income from continuing operations for the first nine months was $235 million or $1.60 per diluted share based upon a normalized tax rate of 35% as compared to $97 million or $0.67 per diluted share reported in the first nine months of 2016. Adjusted EBITDA from continuing operations was $468 million compared to $262 million in the same period of 2016. Moving on to Slide 5 and a review of our segment results; starting with Siding. This segment includes our Smart Siding CanExel Siding products, as well as OSB produced at our Hayward, Wisconsin operation. The Siding segment reported sales of $226 million, a 16% increase from the third quarter of 2016; operating of $53 million and adjusted EBITDA of $61 million, an increase of $20 million from the third quarter of 2016. For the quarter, SmartSide average sales prices were up 5% due to change in product mix and the impact of the price increases we've discussed on calls during the year. Sales volumes were 6% higher due to demand in key markets. We did produce about 65 million square feet of OSB in the segment during the third quarter of 2017 compared to 54 million square feet in the third quarter of 2016. In general, production and sales of OSB and the Siding segment are at very similar levels in any given quarter. The Siding segment reported sales of $671 million for the first nine months of 2017, an increase of 15% from $583 million reported in the first nine months of 2016. The Siding segment reported operating income of $142 million compared to $104 million and adjusted EBITDA of $166 million as compared to $125 million from the same period of 2016. SmartSide sales volumes were up 8% for the first nine months of 2017 compared to the same period in 2016 with prices up 4% for SmartSide. Turning to Slide 6; OSB reported net sales for the third quarter of 2017 of $351 million, up 24% from $282 million in the third quarter of 2016. OSB reported operating income of $126 million compared to income of $67 million in the third quarter of 2016. Adjusted EBITDA from continuing operations was $142 million compared to $83 million in 2016. Sales volumes were lower by 3%. Pricing for OSB was higher by 29%, which resulted in improved operating results by $79 million. Partially offsetting the higher sales prices were increases in manufacturing costs due to downtime related to capital and maintenance project, the impact of higher raw material costs and an appreciated Canadian dollar. For the first nine months of 2017, OSB recorded operating income of $289 million on sales of $944 million compared to $127 million on $752 million of sales in the first nine months of 2016. For the first nine months, we reported adjusted EBITDA of $335 million compared to $172 million in the first nine months of 2017. Sales volumes were lower by 1% and sales prices were higher by 27%. The impact of higher sales price on OSB operations was $200 million for the first nine months of 2017 compared to the same period last year. Please turn to Slide 7 of the presentation which shows the results of our Engineered Wood Products segment. This segment includes I-Joist, Laminated Strand Lumber, Laminated Veneer Lumber, OSB produced at our Houlton, Maine facility, plus other-related products. This segment also includes the sale of I-Joist and LVL products produced by the Abitibi joint venture or under a sales arrangement with Murphy Plywood. The Engineered Wood Products segment recorded sales of $98 million in the third quarter of 2017, up from $81 million in the third quarter of 2016. EWP reported income of $6 million in the third quarter of 2017 as compared to breakeven in the third quarter of 2016. For the third quarter of 2017, adjusted EBITDA from continuing operations was $10 million as compared $4 million in the third quarter of 2016. The improvement in the segment's result this quarter was related to higher sales volumes of LVL and LSL, which were up 12% and higher sales volumes of I-Joist, which were up 6% compared to same quarter last year. Price increases we've discussed on earlier calls also positively impacted the segment's result this quarter. Pricing was up 6% in LVL/LSL and up 9% in I-Joist. For the first nine months, sales were $274 million, up from $231 million in 2016. The segment's operating income in the first nine months was $12 million as compared to a loss of $2 million in the first nine months of 2016 and adjusted EBITDA improved to $24 million from $9 million in the first nine months of 2016. Moving on to Slide 8 of the presentation; for the quarter our South American segment recorded sales of $38 million, about $6 million higher than the $32 million reported in the third quarter of 2016. Operating income was $6 million and adjusted EBITDA was $8 million for the third quarter of 2017, which was about $2 million higher than the third quarter of 2016. Volumes in Chile were up 12% and up 9% in Brazil compared to the same quarter last year. Due to depreciation of dollar relative to local currencies, pricing was up 3% in Chile and 7% in Brazil. However, in local currency, Chile's pricing was flat and Brazil's pricing was higher by 4%. For the first nine months, our South American segment recorded sales of $115 million as compared to $103 million in the first nine months of 2016. Operating income was $60 million compared to $15 million in the first nine months of 2016, and adjusted EBITDA increased to $23 million, up $1 million from the same period in 2016. Total selling, general and administrative expenses were $49 million in the third quarter of 2017, about $2 million higher than the same quarter in 2016. For the first nine months, selling, general and administrative expenses were $145 million, approximately $9 million higher than the first nine months of 2016. The increase in these expenses is primarily due to higher compensation expense, some software maintenance agreements and expenses associated with our strategy review which Brad will discuss during his comment. Interest expense net was lower by $4 million in the third quarter of 2017 as compared to the third quarter of 2016. For the first nine months of 2017, interest expense net was $12 million lower than same period in 2016. The reduction relates both to lower interest cost due to refinancing of the outstanding debt last year and higher income due to higher cash balances. Please refer to Slide 9 of the presentation; as of September 30, 2017, we had cash, cash equivalents investments and restricted cash of $868 million, working capital of $1 billion. Capital expenditures for the first nine months of 2017 were $81 million. We do project capital expenditures for 2017 will be in the range of $155 million to $165 million. While we have not completed our 2018 budget, I do anticipate that our capital expenditures budget for 2018 will be in the range similar to 2017, $175 million to $200 million. The conversion of bonds [ph] into a Siding mill will be the largest planned expenditure. And with that, I'll turn the call over to Brad for his comments.

Thank you, Sallie, and good morning, everyone. As Sallie reported, we had a very good quarter with strong earnings in all businesses. In Siding, we had record results, setting a new quarterly record for earnings and a new Q3 record for SmartSide sales volume and revenue. In OSB, we had our best earnings quarter since Q2 2005 and had record quarterly sales for FlameBlock and legacy flooring as we continue to grow our value-add product mix in OSB. FlameBlock is our fire-rated sheeting [ph] that helps contractors build fire-rated wall assemblies and roof decks faster and at a lower cost. Legacy is the industry's strongest and stiffest sub [ph] for panel. In EWP, we had our best quarter since Q1 2007. Our OSB and Siding businesses results were driven by higher pricing, sales volume and mix improvement. In EWP, we realized improved pricing and volume across all product lines and have benefited from a strong focus on cost reduction. Volume growth allowed us to add production shifts to our LVL operations in Wilmington, North Carolina and Golden British Columbia. In South America, we realized good earnings growth compared to Q3 last year, driven by higher sales volume and improved pricing from our Brazilian operations. Once again, I will highlight SmartSide revenue growth. Our year-over-year growth is 12%. We are increasing our number of stocking lumber dealers and one-step distributors because we continue to convert builders, remodelers and shed manufacturers to our full line SmartSide offering. Next, I will discuss our housing outlook for 2017 and 2018 and report on the impact of Hurricanes Harvey and Irma. We're having a great year in all North American base businesses despite 2017 housing starts continuing to trend lower than earlier expectations. Consensus is that we will end the year around 1.2 million starts versus 1.28 million we expected. Fortunately for us, most of the shortfall to expectation is in multi-family. I would characterize the housing recovery is challenged. From the positive side, employment growth is driving increased housing demand. Unfortunately, this demand is outpacing construction due to labor and land availability constraints. Another emerging constraint is starter home affordability. Potential entry level homebuyers are seeing mortgage rates and home prices rise. Home price inflation is being driven by rising builders cost from material and labor. As a result, I foresee and we are planning for continued steady and modest housing growth into 2018. LP was impacted by Hurricanes Harvey and Irma, and I'll start by saying that our thoughts and prayers remain with the folks in Texas, Louisiana, Florida and Puerto Rico impacted by the storms as they continue the recovery and rebuilding effort. We have two OSB mills in Southeast Texas located in Jasper and Carthage. We had minimal property damage at the facilities but did experience a two-day power outage at Jasper. After both hurricanes, we experienced logistics-related delivery disruption as available equipment was either trapped in the impacted areas or available equipment was diverted to the relief efforts. In both events to date, the damage has resulted in mostly cleanup and repair related work rather than rebuild. Our biggest concern is that the current skilled labor shortage will become even tighter as the rebuild effort appropriately diverse resources away from new home construction. One difference we experienced between Harvey and Irma is that panel demand spiked as Florida prepared for the anticipated wind-related damage. This demand spike depleted channel inventories. After the storm, the pool of the replenishment spike drew inventory and production from surrounding zones moving the market substantially. By quarter end, our sales force reported channel inventory still lean for OSB, normal for EWP and slightly below normal for SmartSide. Now I'll provide you an update on capital deployment and planning. We closed on our acquisition of International Barrier Technologies on October 13. The integration is going well, we are consolidating Barrier into our OSB business. As mentioned earlier, we had record FlameBlock sales in Q3 and are focused on growing this value-add specialty product. The mill expansion project at our Pengpu [ph] Chile mill is proceeding on-time and on-budget with a start-up planned for Q3 2018. We have begun the conversion of our Dawson Creek OSB mill to SmartSide. We are expecting to spend around $130 million on this project. Our project team is currently focused on outside civil engineering work, including earthwork and foundations. Critical lead time equipment has been ordered, we will integrate Dawson Creek into the Siding business segment starting in January 2018. We will continue to run fully on OSB until the fourth quarter when we take downtime for deciding conversion and related equipment tie-ins. We will start up on SmartSide production in Q1 2019. Our executive team continues to work through a comprehensive strategy review. We will continue our aggressive growth strategy in our SmartSide business and see growing potential for further penetration in the repair and remodel sector. In OSB, we will grow our value-add specialty mix while driving operational excellence and margin improvement. In EWP, we are validating the attractiveness of our LVL and I-Joist business and understand that we have to improve margins in LSL through better price management and asset utilization at our Houlton, Maine LSL mill. In South America, we will grow more aggressively in Chile and Brazil, complementing this with growth in Peru and Argentina. Our strategic focus is profitable, stable specialty products growth that diversifies us away from commodity OSB. Based on the strategy work, we are aligned on our capital priorities. First, the SmartSide capacity expansion and manufacturing flexibility. As I mentioned earlier, we are in the process of converting our Dawson Creek mill from OSB to Siding. Second, is OSB cost reduction and incremental specialty products capability. Our OSB team is very focused on increasing the capacity and lowering cost in our OSB mills through improved operational effectiveness and efficiency. Third, is South America capacity expansion. Our South American business continues to grow as the conversion of building practices moves from masonry to stick-frame construction. Fourth, is opportunistic adjacency acquisitions that support our business strategies. Similar to the acquisition of Barrier, we continue to look for adjacency acquisitions that will move our profile more towards specialty product offering. Fifth, is return of capital to shareholders either through a regular dividend or share repurchases. We continue to evaluate reinstating a dividend who will use our 2018 budgeting process to refine and evaluate an appropriate share repurchase and dividend strategy. And with that, I'll turn the call back over to Sallie.

Great. Thank you, Brad. And James, if we could, we'd like to go to the queue for questions.

[Operator Instructions] Our first question comes from Mark Connelly with Stephens. Your line is open.

Thank you. Two things; can you talk about the geographic coverage of Siding relative to OSB in that South? And maybe give us a sense of how much opportunity the storm damage might have to help you broaden Siding's footprint?

Yes. So we have national coverage into Canada for SmartSide sales. Across the Southeast, we have major market share in all markets, stronger. We are stronger in Texas than in Florida. Our SmartSide offering has good positioning in Dallas and in the Houston area, weaker penetration into Florida coast, primarily that is more of a stuck-co [ph] or masonry-type market versus our wood-based sidings. So stronger in Texas than in Florida.

And are you doing anything in Texas to expand availability to take advantage of this? Or is the footprint already big enough to handle any sort of surge you might get?

We have a very good distribution footprint in Texas and in the Houston area, in particular, so we're not having to do anything to get additional product into that market.

Super. And just one more question, we're hearing a lot about cost inflation across the material sector in general; can you tell us what you're seeing in your non-wood input cost, especially resin and labor?

Yes, sure Mark. First, I'd like to say we're pleased to have you back as one of our analysts. So thank you for that.

Me, too.

And for following us. Our story in the third quarter of 2017 really isn't different from what we've been saying all year. We do think that there are cost increases someplace between $25 million to $30 million and most of that is resin and wax related. There's a little bit associated with our -- in our Siding business with overlay paper and zinc borate, and we're seeing very little inflation on wood cost and to the extent we're seeing them, I'd say it's primarily driven by foreign exchange in Canada.

Okay. And on the resin, is there anything different in Latin America happening there?

No. They experience the same price and cost inflating as we do here. We have pretty much the same resin suppliers in both places, North America as well as South America.

Thank you.

Thank you. Our next question comes from Ketan Mamtora from BMO Capital Markets. Your line is open.

Thank you. First question, this is more of a clarification; so do you have any Dawson Creek capital in 2017?

Yes, we do. I think the majority of it is going to come in '18. It's hard to tell you exactly how much is in '17 because a lot of it is got to come this quarter. So -- can you assess again, in three months I will have a better answer.

Okay, that's fine. And then do you have any update on kind of the sequencing for Cook and Val-d'Or [ph]? I know last quarter, Brad, you have given sort of a sense of the high level. But if you have any update, I'd be curious.

No real update, Ketan. I'll just say that we continue to look at both and to speak to the relative advantages of each of the two sides. For Val-d'Or, that's a 16-foot press and, obviously, has the equipment in place from its time running OSB for norboard [ph], that press would be a very good trend and lap press for us. And then on the Cook side, which would basically be almost a Greenfield situation for us, we would design a press configuration for optimal Siding production. So as we look by those two opportunities, if we continue to grow our lap and trend business, more aggressively they're growing panel that would have us lean toward a Val-d'Or conversion first. If that was to grow more evenly across our skew mix, that might would put us back at Cook. So the decision for us is to continue to watch the relative mix change as we have this growth, and that will push us through either Val-d'Or start-up or Cook start up first.

Got it, that's helpful. And then, again thanks for -- you laid out kind of the return on capital allocation and how you guys think about it; but if I were to just think about dividend, share repurchases -- just help us frame when you think about dividends, is that more along the lines of regular or variable is also still on the table? And then share repurchases, you're kind of preferences among the three?

We're still looking at everything, Ketan. Obviously, we understand with our balance sheet, the expectation there; but we do like both dividend and share repurchases as a potential way to return capital to our shareholders and we'll be discussing that with our Board in February.

Got it. That's very helpful. I'll turn it over. Good luck in Q4 and into '18.

Thank you.

Thank you. Our next question comes from James Armstrong with Armstrong Investment. Your line is open.

Good morning. First question is actually on the inventory, though I appreciate you touched on it in your remarks. Inventories in the channel, are they only lean in the south or inventory is generally tight everywhere for OSB? Could you give us a little more color there?

And I'll just -- I'm reporting on what we hear from our sales folks but we see its tight inventories across all regions, or I'll say lean inventories across all regions, not just in the South.

Okay, that's fair. And then you gave a little bit of a housing outlook. Do you believe that housing starts will grow fast enough to absorb the amount of capacity coming over the next 12 months in OSB given the ramp up times and just given your history?

Yes. If we continue to see the kind of growth that we've had the last couple of years in housing, particularly the more skew, the single-family, which is what we expect and what we are seeing now. I do believe the capacity can be absorbed by slightly anticipated growth over the next couple of years. Obviously, that depends on the timing of the start-ups and the efficiency of the start-ups. And we know there will be a lot of variation in that given our experience on restarting mills but right now we're comfortable that in '18 and '19, we should see the additional capacity to be absorbed by demand growth.

Okay. And then one quick one; are all your U.S. OSB facilities operating at full shifts currently or do you still have room to add shifts anywhere?

No, we're running full shifting at all North and South American plants.

Perfect. Thank you very much.

Thank you. Our next question comes from Steven Chercover with Davidson. Your line is open.

Thanks, good morning. I was actually under the impression that we were going to hear something on the capital allocation may be even today; so when is this 2018 budget expected to be complete?

We're reviewing it on Monday and we'll be reporting it to our Board at the February Board meeting.

Got it. Okay, well we'll wait for another quarter. And then on Siding, I can see that your prices were up but when I do the math, it doesn't seem that way. So is there really dramatic mix element?

Steve, I'm not -- what math -- can you help us out with what math you're doing?

Well, I mean, I look at the blended volume that you gave us and then get the revenues; I just can't make it work without seeing Siding prices go down, but maybe we can take that offline.

Okay. May I suggest that you walk through that with Mike and/or me.

I'd be happy to do so. All right, that's all I had. Thank you.

Okay, thanks.

Thank you. Our next question comes from Gail Glazerman with ROE. Your line is open.

Good morning. If always the inventories are lean, can you give a little bit perspective on what's been driving the press weakness that's been reported last few weeks?

Well, I think it's a response to the enormous spike that we've got with -- after the hurricanes. What we're seeing -- I believe the pricing that were peaked were unsustainable and our customers at that point leaned our inventories down, obviously, not wanting to take a position at the higher prices. We've seen relatively steady demand and that we are able to move some volume, but the pricing is heavily discounted from the peak. So I would characterize Gail, what we've seen in the price movement is a movement more towards normal pricing versus the spike that we had related to the hurricanes. I mean, pricing right now is where I would have expected it to be if you'd ask me a week or two before the hurricanes hit.

Okay. Any sense to that the clients are kind of stabilizing at this point or do you think there will still be some pressure?

Yes. I hate to say, I think I would -- after last week's strong movement, I would not want to forecast stabilization quite yet. There was a lot of momentum down last week as you know.

Okay. And then can you maybe get some further thought and color on how you think this shift to rebuilding in Texas and Florida might impact overall housing activity next year? And along with that -- with labor shortages, are you starting to hear more noise from customers about products that might take labor out of the process?

Okay. Yes, that's a great question. Let me first speak to maybe the regional -- the implications for us as Houston and Florida move into rebuilding next year. We do have a good Siding position in Southeast Texas, and I was expecting as the houses get dried out and rebuilding starts, we could see a uptick in our housing demand -- I'm sorry, in our Siding demand related to the repair of the exterior part of the homes in Houston; not so much in Florida where as I mentioned before, the kind of exterior siding used is not conducive to our Wood-like Sidings. Now I think maybe a little bit of an offset of that is the limited labor availability in both markets. I think we'll see labor move more to the repair side of the construction labor move to repair versus new home construction. So I would not be surprised see some softness in the Houston new home construction market next year, which could be a bit of offset to what we've seen in repair and remodel. I do believe -- now backing up to the -- just -- the global labor issue or limitations that exist for new home construction, we -- and I'm sure many folks are looking at trying to make products that are easier to install. We know our SmartSide offering does that today with lower waste and less labor required to install the Siding. And so it can't get us an advantage but builders are looking for solutions that overcome the limitations they're facing on labor, and our product development is focused on that and I'm sure others are as well.

Okay, thank you.

Thank you. Our next question comes from Chip Dillon with Vertical Research. Your line is open.

Good morning. First question is on the CapEx; you mentioned that's going to be a bit low, maybe 20% lower -- 15% to 20% lower than you thought it would be at mid-year for the year. And I'm just wondering, is the delay having anything to do with lining up equipment and engineers or is it just that you are more deliberate in what you're planning to do with the capital?

I'd say Chip, more than the latter than the former. I think that -- for example, Dawson Creek, Brad walked through where we were in the engineering of that mill conversion. When we started the year, we would've thought that we would have spent more at Dawson Creek than we actually have. And I think it's just a reflection of making sure that we're putting the right capital in the right place and you will be hearing us talk more and more about value engineering as we begin to look for ways to build -- convert I should say OSB mills, deciding on mills at lower cost.

Okay, that's helpful. And then, Brad, I'm sure you're enjoying the football season so far, it will be interesting to see what happens in early December and January. But…

I don't want to jinx on it, [indiscernible].

What I was going to ask you, you mentioned how the Dawson Creek conversion -- as we see it phase into SmartSide in '19 would basically get you through '21. And I just would appreciate you refreshing us, does the growth you're looking at that would take you into position and into more capacity after '21, is that predicated on sort of a normal -- I guess, we describe it as around 1.5 million start environment, with may be a little over 1 million single-family homes? Or is that part of it and is a part of it also assuming some continued growth in market share, and maybe some of the other uses like the shed business?

Yes. So two factors go into how we evaluate our future -- forecast our future growth and while Siding can be more of a repair and remodel skew than our OSB, it's still dependent on housing starts. So single-family starts really helps that, it -- obviously, it helps also if it's in the regions where we're strong, which is the Pacific Northwest, North Central, the Texas market is really good for us in Siding. So its single-family growth is biased there, it helps; but we do plan to continue to get our disproportionate share of market share growth, we're really focused on repair and remodel where we're under penetrated. And then, obviously, shed and our panel business at the big retail stores helps as well. So it's a combination of the single-family, starts and our market share growth in other segments which we -- and we plan to continue our market share growth and then we'll just have to see how single-family starts play out. But we are -- to just align with the question, we are forecasting that over the next three or four years to get to about 1.5 million starts. So we're not -- it's not -- our growth is not predicated on 1.7 million or 1.8 million housing starts, we're using a little bit moderate number, about 1.5 million.

Okay, that's helpful. And the last thing is, the last two times that I can at least see that we've had this -- a fairly sharper run up in OSB prices as you go from the second quarter into the third, it seemed like you had what looks like the biggest lag in your realizations to at least looking at the benchmark. And I know that obviously, your regions are different, etcetera but it seemed to be the two times that you most deviated from that, and then there was always a catch up in the fourth quarter. So maybe you could just talk a little bit about that and how much is there a lag overall? I mean, I've always understood say two/three weeks or so between what is printed in random links and what's actually crossing your P&L?

That's a great question. And so -- we're about 70% contracted in our OSB sales volume. And those contracts are priced two-week prior random. So for 70% of production, we're two weeks late on pricing. And then you can have other things impact the other 30% based on customer pick up and that kind of thing. And we're really impacted is when pricing is moving, not only moving strongly in the quarter but when it's continuing to move across quarter-end, so you're getting price movement past the close of the quarter, that's where we're seeing a bigger differential in the price realization. We've done all the math on it, what we reported today is the math works out when you look at our contracted volume where we stood at of the quarter and what pricing was moving across the end of the quarter.

Okay. And maybe just a re-clarification; let's say you ship on a Wednesday or a Thursday, I'm assuming you're using a Friday print. So a Wednesday or Thursday shipment, for example, might actually be more like 2.5 weeks since we really don't get a date to accept that weekend unless you're using midweek and you're doing to that degree of detail.

Now that's a good point, it's priced on Friday, two weeks prior but then it can ship all through the next week.

All right, that's very helpful. Thank you very much.

Thank you. Our next question comes from George Staphos with Bank of America Merrill Lynch. Your line is open.

Thanks for sharing the details and congratulations on the progress. I just wanted to follow-up on that last Q&A you were doing with Chip. So Brad, as pricing is, say, moving higher over the balance of the quarter and then extends into the prior -- into the subsequent quarter, excuse me, what's the timing effect that will then affect your realizations relative to what we might calculate? Why would it matter that trajectory into the end of the quarter relative to what your average would be?

George, the way to think about it is, the last two weeks of September pricing will be in the first two weeks of October. So...

Okay. So it's just that…

That's the previous way to think about it. So if you take just the average, you're going to -- like if you're doing an average, you might want to shift your averaging sort of -- for any given quarter to start in the third week.

And George, I'll just -- some of the point of my comment about moving across end of the quarter is we're going to see price rises in Q4 for the pricing at the beginning because it was still moving up, at the two weeks prior to close of the third quarter. The momentum last into the subsequent quarter.

No, I got you. I was overthinking there, I got some mechanics on that. I appreciate you going through the remedial there. Second thing, again on price realization, there was nothing though on realizations within any region that varied from your expectations; we're off a bit but I think it was just because of that latter effect you were talking about and also regional differences; was there anything from what you were seeing in the regions that varied some realizations published what you think published in the indices?

No. We had normal -- we followed the regions, the regional reporting normally. You know, George, [indiscernible] ended that, everything else would be kind of minor.

Okay. Now one thing I heard you say Brad, and it's no different than what you said in the past; next year you expect to invest a bit amongst all things on improving some of your capacity within OSB. Could you give us a figure in terms of what you think you might be able to flex the existing base production for 2018? Would it be a 2%, 3%? Would it vary much by region?

Well, I'm not prepared to give you a number yet. We'll have a better feel for that when we do our budget over the next month or so but what we're looking at is improved operational effectiveness in our mills. I think I said before towards that we underinvested in our OSB business through the downturn as we were skewing capital to fund our siding growth. So we had some opportunities for modest capital investment across our mills system that we feel that can really help productivity. And obviously, in this margin environment, those kind of capital projects have a very high return. So we're going to be deploying our capital next year focused on productivity improvements. As we continue to convert OSB mills over to the Siding, what's left behind are better OSB mills, our most productive and largest OSB mills. So we'll continue to invest in those to get incremental production out over the next several years. I think there is more than a one-year opportunity here. So we'll be reporting out more on that as we work through the numbers, but there is real opportunity there for us.

Thanks for that Brad. Recognizing the labor and for that matter insurance and recovery constraints on rebuilding activity and to some degree, on single-family construction, can you at this juncture based on what you're contracts in the field are saying, offer up a square footage perhaps increasing demand that was created by the storms, obviously, not in any one year, I'm not going to expect a time but say over two or three-year period, what incremental demand was created both for OSB and for Siding from what happened in September?

I can't quantify it, but I'd tell you my view is; we're not planning for any kind of a big difference or swing in volume. I think in Houston, the repair/remodel, when I'm speaking of siding, for repair, remodel versus new construction, we could kind of -- be at a wash there; I mean, the timing could be offset a little bit but I think we we'll see -- if repair and remodel are strong there, we'll get our share of data. If labor skews over to new construction, we'll be good at there as well. And then in Florida, I mean, there could be some incremental panel demand as the repair and reconstruction effort gets underway. But I think in the scheme of things; that will just kind of be lost in the growth numbers we see for OSB. So we're not really planning on it to have a major impact over the next two or three years other than what we were already expecting as far as the man pulled for both businesses.

Okay. I will turn over there and get back in queue. Thank you.

Thank you. Our next question comes from Paul Quinn with RBC Capital Markets. Your line is open.

Good morning. Just wanted to try to figure a Q4 here in terms of volumes, especially on the OSB side seasonality, as well as maintenance downtime. If I look back over the last five years, it sort of rough and dirty anywhere from 5% to 10% down. Can you help us sort of shore up that number?

When we look at Q4 as you know, we do tend to take downtime, maintenance-related downtime later in the year kind of lined up that around the Christmas holiday break. We're planning to do the same thing this year; look, we have opportunities from a demand perspective to shorten some of those downtimes and sell that volume, we will. But right now, I'd say it's fairly normal to what you've seen in the past as more requirement for maintenance downtime.

Okay. Then just on the Dawson Creek conversion, if you could tell us the dates there, how much OSB production you lose as you go through the conversion? Or maybe another way to ask it is, what do you think you will produce out of that mill in '18?

I think we'll run normal OSB production through the first three quarters. And then there could be a little bit of volume run in Q4 just -- till we time the shutdown but basically, Paul, we'll just plan on this -- I would plan on running the three solid quarters of OSB at Dawson.

Okay, that's helpful. And then just lastly; just on -- I think when me enjoyed the Analyst Day at Hayward, you're making some progress on making a smooth finish to SmartSide product, just wondering if you can report on progress on that?

We are working on it. We have product on test fences that are showing the performance of the product or proving out the performance of the product. When we get those test results in, which we do not have yet, we'll move to the next stage gate as far as developing that product. I'll say it's promising but obviously, we want to make sure we get the formulation and the quality right before we launch anything and that's takes some testing time.

Right. So if those tests go well, is that something a product that you will introduce in '18 or is that 19? Just to try to get a gauge on the development.

I think it could be late '18, early '19 launch, depending on how well the testing goes.

Great, thanks very much. That's all I had. Best of luck.

Thank you. Our next question comes from Shawn Stewart with TD Securities. Your line is open.

Thanks, good morning. Just one question, you guys have seen a large improvement in your net cash balance even as you've ramped up CapEx; and I appreciate you looking at options for returning capital to shareholders. But can you give us an update on how you're thinking has evolved regarding on optimal capital structure for LP over the cycle?

Sure, Sean. I think as much as we are pleased with the progress that we've made moving increasing the Siding business, we still see the impact as we've been discussing today of the volatility OSB business on our earnings. So at this point, we're still talking about minimum cash balances of $300 million along with the capital allocation items that Brad went through.

Okay. Rest of my questions have been answered. Thanks very much.

Thank you. Our next question comes from John Tumazos [ph]. Your line is open.

Thank you very much. Could you elaborate a little more on your strategies for Engineered Wood in Latin America with the improved profitability? Is there opportunity to develop those businesses or little more now they're doing a little better?

I'll start with South America. We have opened our sales office in Peru this year and are moving product out of both, Chile and Brazil into the Peruvian market. We see that country has severe housing shortage, affordable housing especially. So we see a lot of opportunity to sell into Peru and, obviously, be the dominant player there. Argentina is another country that has a lot of huge opportunity for both, OSB and our Siding products. We are also shipping -- currently shipping of volume out of Chile in Brazil and Argentina and are in the process of establishing a sales office there. I could see in the future the potential for having an OSB mill in Argentina, that market is large enough and they have a wood basket that would supported obviously, that would be down the road, but worrying looking very strategically continuing to grow in South America by opening sales office in down the road potentially adding production in countries other than Chile and Brazil. And I should also mention there is a huge opportunity in Brazil, a country with another very large housing shortage. And as that economy recovers, we're looking at growing aggressively there with our existing production or adding production as needed. For EWP business, we really like what we're seeing, as I mentioned in my comments, with our LVL and I-Joist, large as profitability this year, we are third largest player in that market and are constantly looking at ways to get higher utilization out of the assets that we have and we will continue to work on that and we can turn our LSL operation around and have it be contributing we could have a really good potential to grow EWP in a profitable way. And we are very focused on that improved utilization at our plants, aggressive cost control in the business and pricing when we're able to get in the marketplace.

Thank you.

Thank you. Our next question comes from Mark Weintraub with Buckingham Research. Your line is open.

Good morning, a few quick follow-ons. First, Sallie, you mentioned that $300 million of cash balances, presumably that's from a liquidity concern perspective. How about from a net debt perspective or some other metrics to give us a sense of where you think given that Siding is a much bigger part of the business that used to be, the balance sheet can be overtime?

Yes Mark, I think that's a fair question but I think the best way to address the capital structure question is to address them in the context of the capital allocation conversations that Brad has talked about. We'll give more color of that when we talk with you in February.

Fair enough. And maybe on the topic too; in the past, I think that when you had share repurchase, it was viewed as almost a form of dividend and there wasn't necessarily an opportunistic approach taken to buy stock when it was cheap necessarily. New management in place, is that still the thought process on share repurchase that it's not something where you guys are trying to time purchases or might you have a different philosophy this go-around?

Well, Mark, to be honest with you, you took the words out of my mouth which are -- that neither Brad nor I were in these positions when the company had those prior active -- was actively in the market repurchasing. And so I think as I've mentioned, we're taking this opportunity to really thoroughly look at all the various alternative we have, both around dividend as well as share repurchases.

And just philosophically speaking, do you have a bias as to viewing it as a weighted -- almost dividend money back to shareholders or do you think of share repurchases a more opportunistic way of rewarding shareholders?

Well, in the past when I've been involved with share repurchase plans, they have always been opportunistic.

Okay, great. And then lastly, if I could; just on the pricing -- OSB pricing and it's very helpful. So it sounds like basically, it's -- that last two weeks of the prior quarter through to the last two weeks of the last month. But does it make any difference if you have full order files, etcetera, in terms of when the product is getting sold and priced? Or it really that doesn't make a difference because of the product is being price when it gets shipped and even if you have strong order files, they get shipped on a steady basis?

That's a good question. We have the opportunity in any pricing environment to either shorten or extend our order file to try to time pricing a little bit. What we do here at LP is we try to maintain the two to three week order file under all market circumstances. So we do not tend to play, extend your order file or shorten it to time to market, we try to be more consistent than that with our customers and not play that game. I know other manufacturer do and it's debatable which is the best strategy but what we've tried to do the last couple of years is just maintain that two to three week order file pattern that allows us to do better planning internally, and then we're not probably any better timing the pricing market than anybody else. So we've -- we have and continue to operate that way through this year. But I do know that other manufacturers in a rising market have taken the opportunity to extend their order files a little bit, but we did not do that.

Thank you.

Thank you. We do have a follow-up from George Staphos. Your line is open.

Thanks for taking the follow-on. First of all, in terms of siding, I didn't pick up anything in your remarks, Brad, that's suggesting you were anything other than really pleased with the development of the business. Were you happy with the volumes in the quarter? Were you happy with your share development? Were there any regions or for that matter, competitive reactions there were a little bit different than you would have expected? That's number one. And then in EWP, not that it's huge for you but one of your peers had to correct some product in the field in recent months; has that if anything given you a little bit of extra ability to grow in that market? Why or why not? Thank you guys, and good luck in the quarter.

I'll address Siding first. Sallie and I both trying not to get too caught up into quarter-to quarter growth in Siding though we were pleased that we set a record for Q3 sales in the quarter. But for year-to-date, I'm very pleased with the growth in siding. As I reported -- it's a record, we're maintaining that 12% revenue growth that we've talked about in the past and it's just been a really exceptional year for us. As far as the issues with our competitors playing resistant I-Joist, there has been probably some product movement as a result but it's minimal, that's a very a very low volume skew for us. And so any impact it's had on earning is imperceptible in our EWP business. What we're doing in EWP is focusing on asset utilization, cost control and managing pricing really aggressively and that's what turned around EWP business for us.

Thank you. We do have another follow-up from Ketan Mamtora. Your line is open.

Thank you for taking my follow-on. Just a couple of quick ones; one, and perhaps I missed this, but what drove the 3% year-over-year decline in OSB volumes?

Well, Ketan, as you know, and as Brad already mentioned, we're pretty much are operating at our OSB full shift. So any decline or any change in volumes is really going to be pretty limited and we do have some capital maintenance during the quarter, which I did not mention as it related to volume but I did mention in terms of the impact on the results.

Got it, that's helpful. And just one last one, obviously, you all had a very good quarter in Siding, so congrats on that. But just walk us through what drove the margin upside just quarter-over-quarter and year-over-year, it's pretty big jump?

So in SmartSide, on our Siding business, mix is very important. So as we -- and whenever we grow our strand sales or our OSB sales at this market, that's going to cause some margin expansion; but also the way we manage price in that business this year, we've got the full effect of our earlier price increase incurring in Q3 and for the entire quarter. So the pricing as well is a bit of a mix change helped us there.

And CanExel did really well during the third quarter, Ketan, which is part of the mix change that's Brad's referencing. You can see that in terms of -- not so much the volume in second quarter and third quarter but certainly in the price. And if you look overall, year-to-date CanExel volume is up 12% and the pricing is up 2%.

Yes, thank you. And then I just about going from Q3 to Q4, any seasonal things like mix that I should keep in mind?

Well, keep in mind that Siding is seasonal, usually Q2 and Q3 are our best quarters. And so we should see some moderation in volume in Q4. But -- so when you do your comparisons compared to Q4 last year, not the Q3 this year.

Got it. That's very helpful. I really appreciate all the color. Thank you.

Thank you. And our final question comes from Chip Dillon with Vertical Research. Your line is open.

Yes, I just have a real quick one and I think I know the answer but -- I know Sallie, when you all unwound from the timber [ph] contracts in the last year, I think there was like a $90 million tax bill. And I see your expense taxes so far are about that with no deferred tax number on the cash flow statement. So I just want to know, have you paid those taxes already?

Yes. We paid them; some in the second quarter, some in the third quarter.

Okay. So as we think about the future, barring maybe tax credits that may come across from some of your investments, your cash tax rate and your book tax rates sort of approximately be the same?

Well, no because we still have a valuation allowances in Canada.

Okay, all right.

I meant NOLs; I said value, I meant NOLs.

NOLs. Could you have a rough -- what the magnitude is?

I don't remember what it is, Chip. But we can look into it when you and Mike have your update, we can get you the numbers.

Thanks.

Thank you. No further questions.

All right. Well, James, if you could provide the replay number, I sure would appreciate it. And I'd like to thank everybody for participating in our call. And as always, Mike and Becky are here to follow-up on any questions you may have. And, thank you and we hope you all have a great rest of the day.

Thank you. Ladies and gentlemen, if you would like to have a replay of this conference, you may dial 1-800-585-8367 with the conference code of 99182539. Once again, that number is 1-800-585-8367 with the conference code of 99182539. Thank you very much. That does conclude today's conference and you may all disconnect. Have a wonderful day.