Louisiana-Pacific Corporation (LPX) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2018 Louisiana-Pacific Corporation Earnings Conference Call. [Operator Instructions] As a reminder, this conference will be recorded for replay purposes. It is now my pleasure to turn the conference over to Mr. Mike Kinney, Director of Investor Relations. Please proceed sir.

Thank you, Haley, and good morning, everybody. Thank you for joining in on our conference call today to discuss LPs financial results for the fourth quarter of 2018 and the full year. I’m Mike Kinney, Director-Investor Relations and Treasurer, and I’m joined today by Brad Southern, LPs Chief Executive Officer; and Alan Haughie, LPs Chief Financial Officer. As we’ve done in the past, we’ve opened up this call to the public via webcast. The webcast can be accessed at www.lpcorp.com. Additionally, to help with the discussion, we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. We will be referencing these slides in our comments this morning. Also we have filed an 8-K this morning with some supplemental information and the presentation. I do want to remind all participants on the call 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 Form 8-K filing, we filed this morning provides the necessary reconciliations. Rather than reading these two statements, I will incorporate them with this reference. Now, let me turn the call over to Brad.

Thanks, Mike and thank you all for joining us this morning. I’ll begin today’s call with a few highlights on the fourth quarter and 2018, provide a strategic update, review our top priorities and provide our view on the current market environment. Before I go further, I would like to take a moment to acknowledge two additions to the LP team. The first is our newly appointed Chief Financial Officer, Alan Haughie, who brings more than 25 years of financial expertise and significant strategic planning leadership experience to LP. We are excited to have him on board as we continue executing on our strategic transformation into a leading building solutions provider. Following my remarks, Alan will take you through our financial results in more detail and our capital allocation strategy followed by the question-and-answer session. As Mike noted, we are providing an expanded earnings presentation this morning, which Alan and I will be referencing throughout the call. We hope you find this to be a helpful addition to our regular earnings materials and of course we welcome your feedback. Second addition to our team, as we announced this morning of Steve Macadam. Steve has joined our Board of Directors. He is the President and CEO of EnPro Industries, a diversified manufacturer of proprietary engineered products using critical applications including ceiling technologies, metal polymers and filament wound bearings. He brings to LP more than 25 years of leadership and operational experience. He has a proven track record of profitably growing businesses in the U.S. and globally and the deep understanding of industrial products manufacturing, product distribution, procurement and team building. I know that Steve will be a valuable addition to our Board and I’ll look forward to benefiting from his advice and expertise. We welcome both Alan and Steve to the team. Feedback of all our shareholders is important to our management team and the board as we transform our business. Over the past several months, we engaged in productive discussions with D. E. Shaw group regarding our strategy, capital allocation priorities and board composition. We were in the process of reviewing our capital allocation policy at the time and had a constructive dialogue with D. E. Shaw about how to construct and execute a strategy that would generate the most impact for our shareholders. We appreciate the support at D. E. Shaw and look forward to their continued engagement as a shareholder. Turning now to Slide 5. Our full year performance was strong and reflected the changes we’re making at LP. We have committed to delivering 12% to 14% growth in SmartSide Strand and to increasing volumes of value added-OSB. I’m pleased to report that we’ve delivered on both commitments with SmartSide Strain growth of 12% for the full year and 10% in the fourth quarter, and full year value-add volume up to 38% of our overall mix in OSB. For the fourth quarter, siding performance was impacted by a number of headwinds, which Alan will discuss in further detail. We remain confident in our long-term 12% to 14% SmartSide growth target. On the product development front in siding, we are excited to note that we have begun to take orders for our new SmartSide smooth strand product, which will be officially rolled out at the International Builders Show later this month. We are encouraged by the opening order volumes we’re seeing and we will begin shipping product later in the quarter. The Dawson Creek conversion remains on time and on budget. This project is an important element in our strategy to increase siding manufacturing capacity to support sales growth. In OSB, our full year performance was solid. However, commodity pricing pressures impacted results for the fourth quarter. Weaker than expected single-family starts contributed to higher channel inventories during the quarter. This dynamic resulted in a soft order file and more market downtime as we adjust to production planning to match demand. OSB pricing, which the low point in December but more recently has recovered in the South as demand has improved. Despite the volume and pricing headwinds in the fourth quarter, we are very encouraged by the continuing traction that we are seeing from our value-add OSB products. Our diverse value-add OSB portfolio drove incremental margin and outperformed housing start growth. Value-add margins generally show greater resilience in declining markets and performed comparably well as the market slowed. Reliability-focused operational improvements drove an increase in OEE, our operating efficiency measure for OSB, to 84%, which is a 4% increase from 2017. For EWP, results for the quarter were impacted by slow demand driven by weakened housing starts. While not a highlight, we consider our performance in EWP to be in line with the industry. Finally, LP South America had a record year, achieving $40 million of EBITDA for the year. Moving to Slide 6. LP is transforming from a commodity producer to a more stable cash-generative business by significantly improving our revenue and EBITDA mix. We remain focused on further improving our business by growing the Siding segment and reducing cost across all businesses. Our cost reduction initiatives are focused on three areas: increasing the efficiency of our mills by improving productivity, run time and quality through our OEE initiatives; applying best practices to our supply chain including procurement, logistics and working capital across $1.1 billion of addressable spend; and optimizing our infrastructure cost. Another important component of our transformation strategy is our shareholder value-focused approach to capital allocation. In that regard, this morning, we announced a new $600 million share repurchase authorization with the first $400 million to be purchased through an accelerated share repurchase program. We also announced a 4% increase in our quarterly dividend. Going forward, over time, we anticipate returning to shareholders at least 50% of operating cash flow in excess of capital spending required to sustain our core business and grow siding and value-added OSB. The long-term capital return program underscores the board’s confidence in LP’s strategy and long-term growth prospects and highlights our commitment to delivering increasing returns to our shareholders. Turning now to Slide 7. We believe LP’s stock price does not reflect the fundamental value of our businesses, and the share repurchases announced today allow us to do something about it. While our current valuation might be appropriate if we were a pure-play OSB company, it does not properly reflect the value inherent in our growing and profitable siding and other value-add businesses nor the other value initiatives outlined on Slide 6 and 7. While we hope our announcements today will improve our valuation, we look forward to capitalizing on the current discounted stock price via share repurchases for the benefit of our long-term shareholders. Alan will provide some further detail on our capital allocation strategy and capital structure priorities later in the call. Before I turn the call over to Alan, I want to take a few moments to discuss our view on housing. According to the fourth quarter Residential Economic Report published by Hanley Wood, the U.S. housing market continues to be significantly undersupplied with high levels of pent-up demand in the lower price ranges. Demographic trends remain favorable as millennials enter the housing market. Offsetting these positives, rising mortgage rates and inflationary pressures in construction are reducing affordability. In summary, we are executing on a range of strategic, operational and financial initiatives to accelerate our transformation into a leading building solutions company. We are optimizing our capital structure to position LP to deliver greater returns to shareholders through the cycle. While we have more work to do, I am encouraged by the progress we made in 2018. With that, let me turn the call over to Alan.

Thanks, Brad. First, I want to thank both Brad and the board for the opportunity to join LP at this time, and I’m very excited to be part of the transformation that is underway here. I’ll begin my discussion with a review of the financial results for the fourth quarter of 2018. I’ll then discuss the performance of the individual segments, our capital allocation plans and our guidance heading into 2019. Throughout my prepared remarks, I will be referencing specific pages of our earnings presentation, which was posted on our Investor Relations website and filed in an 8-K this morning. Moving to Slide 9 for a discussion of the fourth quarter performance and full year 2018. We reported net sales of $589 million for the fourth quarter 2018, a decrease of $122 million in the prior year. $95 million of the drop is directly tied to lower OSB prices and the further $16 million to lower OSB volumes, the vast majority of which are reflected in the OSB segment. A generally soft fourth quarter market reduced EWP sales by $60 million in the quarter. However, despite similar headwinds, siding sales increased by $1 million, boosted by a 10% increase in SmartSide strand revenue. Gross profit in the fourth quarter also fell by $122 million in the prior year with the $95 million of OSB price reductions flowing directly through. The remaining $25 million of reduced gross margin comprises lower volumes in OSB and EWP, the impact of downtime plus inventory valuations and increased raw material costs across the business. Selling and administrative costs in the fourth quarter increased by $11 million in the prior year with the largest single driver being increased sales and marketing spend to support future growth in siding. We did record a fixed asset impairment charge of $11 million in the quarter relating to a previously idled facility. Other operating charges include $5 million in severance relating to reorganizations within our corporate offices and $5 million related to property damage sustained by our Wilmington, South Carolina facility during Hurricane Florence. Non-operating income of $1 million in the fourth quarter is $9 million better than the prior year due to lower pension charges and foreign currency. As a result, net income was $17 million or $0.12 per diluted share compared to net income of $131 million or $0.89 per diluted share in the fourth quarter 2017. For the year, revenue increased $94 million over 2017, $79 million of which is due to the 12% growth in Strand Siding. OSB pricing added a further $32 million, which was partly offset by lower OSB volumes of $17 million. Gross margin for the year was impacted by increased raw material costs and downtime, some of them logistics related especially earlier in the year. Selling and administrative costs increased by $18 million for the year, reflecting largely the same drivers as the fourth quarter. Non-operating expenses of $32 million for the year were $21 million better than in 2017, again as a result of the non-recurrence of pension charges, foreign currency impacts and higher interest income on a large and growing cash balance. Moving on to Slide 10 for a review of our segment performance. I will discuss Siding in more detail after briefly covering the other segments. OSB reported 29% lower sales than the fourth quarter of 2017, with pricing accounting for about $92 million of the reduction, the remainder being lower volumes. In addition to market downtime in the quarter, we saw increases in raw material costs, primarily resin. Compared to the fourth quarter of 2017, our OSB production was lower by about $100 million or roughly 10%. EWP sales were down $60 million from the fourth quarter of 2017. EBITDA came in at $2 million, lower by $5 million compared to the prior year. And as Brad noted, the decline in EWP sales was driven by weaker housing starts, resulting in lower volumes across all product lines, although we maintained most of our price increases from earlier in the year. Slightly lower sales and EBITDA in our South American business was driven by lower prices and reduced volumes due to the slowing housing market in Chile and general economic weakness across all of South America. Please note that the appendix of the earnings presentation includes individual segment results showing the price and volume variances for the various product lines. And starting in 2019, we will be allocating a significant portion of our hitherto unallocated SG&A cost to the businesses to further drive line management accountability. We’ve included a view of our full year 2018 segment EBITDA both before and with the revised reporting in the appendix of the earnings presentation. We also filed quarterly detail in an 8-K filed with the SEC this morning. Now let’s turn to Slide 11 for a more detailed discussion of the fourth quarter performance of the Siding segment. Sales for the Siding segment of $213 million were actually flat with the fourth quarter of last year, although it was something of a mixed bag between Siding and OSB. We saw an $8 million increase in overall Siding sales including 10% SmartSide strand growth. And even with weakness in the housing market, SmartSide strand increased volume by 5% and price by 5%. However, OSB negatively impacted Siding segment revenue and EBITDA by $8 million and $6 million, respectively, $3 million of which was price. And Siding also recognized $8 million of costs due to increased downtime at our fiber and CanExel facility. These headwinds notwithstanding, we continued to invest in the business through additional marketing of $5 million to support both our efforts to increase penetration of the repair and remodel market and new product introductions. And finally, the Dawson conversion costs us an additional $2 million over last year. Looking forward, we will be ramping up production at Dawson Creek during 2019 and plan to continue investing and selling and marketing as we introduce new products and penetrate new markets in Siding. Therefore, as we consider the underlying performance of the segments and our ability to execute in our Siding growth strategies, we remain confident in and continue to maintain our long-term strand Siding growth target of 12% to 14% and an EBITDA margin of at least 20% for the segment as a whole. To complete the review of 2018 performance, Slide 12 summarizes our sources and uses of cash for the year. We began 2018 with $928 million of cash and generated $511 million of cash flow from operations. We invested $215 million in capital projects, an increase of $66 million over 2017, largely due to the Dawson Creek mill conversion, and this left us with over $1.2 billion of funds for other uses. We put some of these towards furthering our strategic objectives by investing $45 million in Entekra, an off-site framing manufacturer. But the most substantial use of funds in 2018 was a return of almost $300 million to shareholders. A decade had passed since we last paid dividends or repurchased shares. And in 2018, we did both, reflecting the board’s belief in the company’s sustainable and growing base of non-commodity building solutions and, consequently, its ability to fund the regular dividend. As of December 31, all but $38 million of the $150 million authority granted by the board for share repurchases in 2018 remain unspent. And as of this morning, only $3 million remains. So in a highly cash positive year and after returning substantial funds to shareholders, we ended 2018 still with $878 million of cash. And of course, we still have access to a $200 million revolving credit line. Now in his prepared comments, Brad described LP’s ongoing transformation into a building solutions provider with a profitable and growing Siding business and lower reliance on commodity OSB. Turning to Slide 14, we’re already seeing the results of our transformation strategy, especially as they relate to the shifting mix in commodity OSB to Siding and value-add products. To demonstrate this change, we have compared sales and EBITDA in 2018 to sales and EBITDA in 2015 on an apples-to-apples basis by resetting both years to an OSB price of $260, our estimate in the cycle average price. This normalization has the effect of significantly raising sales and EBITDA for 2015 while significantly lowering them for 2018. And please note that this rebasing is for illustrative purposes only. It’s not precise and reflects our best attempt at comparing performance between two very different years at a normalized OSB price. And while we continue to expect variability on a quarter-to-quarter basis, such as we experienced in the fourth quarter, the long-term trends of increasing SmartSide strand sales and the value-add OSB are clear. We’re confident that as we continue to shift, we will begin to drive more consistent and sustainable results, greater growth opportunities and a stronger margin profile. And this strategic transformation is also evident in improved cash flow from operations since 2015 as shown on Slide 15. For example, we estimate that rebasing the 2018 cash flow from operations to an OSB price of $260 would have the effect of reducing after-tax cash flow by roughly $180 million assuming a 25% tax rate. Further adjustments for taxes, pensions and interest income, as detailed in the footnote, reduced 2018 cash flow by a further $11 million to produce a normalized 2018 cash from operations of $320 million. We estimate that the apples-to-apples normalized cash flow in 2015 would have $120 million – sorry, $112 million lower than in 2018 at the same OSB price. Furthermore, we estimate that each $1 change in the average annual OSB price is worth $3.8 million of EBITDA, all other things being equal. And assuming a 25% cash tax rate on incremental EBITDA, every $10 change in OSB price would therefore change after-tax cash from operations by almost $30 million. So if we ratchet our cash from operations along a range of OSB prices, use increments of $50, then the cash generative ability of the company in 2018 at an OSB price of, say, $200 is an estimated $140 million per year compared with an estimated $28 million in 2015. This acutely demonstrates that we now have a base business capable of generating significant operating cash flow even at lower commodity OSB prices. And finally, given that these cash flow scenarios are all anchored around our 2018 performance, they do not include over $100 million of opportunities for increased cash flow that we’re anticipating from growth and efficiency improvements over the next three years. And included within this $100 million cash flow opportunity are $75 million of EBITDA efficiency improvements we are specifically targeting by 2021, as outlined on Page 16. We continue to focus on improving our OEE. As Brad noted, we’ve made significant progress in 2018 and are optimistic about our potential going forward. By 2021, we are targeting sustainable OEE of 90% or more. A steady-state annual EBITDA improvement from reaching this goal is $40 million, assuming the improvement manifests in increased throughput. We believe there are many opportunities to optimize our supply chain by applying best practices to our logistics and procurement areas, and we’re targeting an additional $8 million of EBITDA per year for the next three years at least, accumulating to roughly $25 million of annual improvement for 2021. And the process of transferring HR, payroll and accounting services from our satellite offices to Nashville is well underway. The next phase of our infrastructure alignment should enable our businesses to focus only on value-added activities that drive profitability. As a result, infrastructure support functions are being optimized with the aim of delivering improved service at a lower cost. And this infrastructure optimization is due to be completed by 2021, by which time we anticipate the steady savings to be $10 million. However, as we build the teams in Nashville in 2019, there will be some temporary duplication of costs. And so as a result of LP’s improved business mix and a more stable cash flow profile, we are transitioning to a more efficient capital plan with an increased focus on returning cash to shareholders. Slide 17 outlines this point. As previously mentioned, we ended 2018 with $878 million of cash on the balance sheet. After a comprehensive review of the liquidity needs in the business, we believe our maximum liquidity requirement is roughly $400 million, comprising $200 million of cash and $200 million of revolving capacity. We further believe that our permanent debt load could be increased to twice our current average trailing five-year EBITDA, which would add $300 million in liquidity. And given the transformation of the business over the last three years, we expect that trailing average to increase through 2019 and 2020. Setting aside the $200 million cash buffer, the $678 million of excess cash and adding $300 million of potential additional debt brings expected excess liquidity to $1,028,000,000. As Brad mentioned, this morning, we announced that our Board of Directors has authorized a 4% increase in our quarterly dividend and an additional stock repurchase authorization of up to $600 million. When combined with the $38 million already spent into 2019, the new repurchase authorization is expected to result in LP repurchasing $638 million of stock during 2019. When completed, this will bring the total amount returned to shareholders since the second quarter of 2018 to $1 billion. Going forward, we are committed to returning cash to shareholders while continuing to execute our growth strategy. Therefore, over time, we anticipate returning at least 50% of cash from operations in excess of capital incurred to sustain our core business and grow Siding and value-added OSB. As a guide, we anticipate spending roughly $80 million per year on capital projects to sustain the business in its present form and maintain its profitability. We also typically identify on average between $40 million and $50 million of growth projects per year with returns in excess of 30% compared to a hurdle rate of 16%. The third category of spending revolves around our ongoing efforts to increase efficiency and reduce the cost of production. To that end, we anticipate spending between $30 million and $50 million per year, in what we term return projects. Before I turn the call over for Q&A, Slide 18 provides some limited guidance for 2019 and beyond. Combining the three categories of capital investment described in our capital allocation plan, we expect to spend between $150 million and $180 million in 2019 in capital. And though not anticipated in 2019, we would likely exceed this range in a year with a significant mill conversion. We remain committed to growing strand Siding revenue of 12% to 14%, although we are guiding to the low end of that range in 2019 given the current view of flat housing starts. And we continue to target an EBITDA margin of at least 20% for the overall Siding business. In support of this growth, we intend to continue our investment in selling and marketing of Siding business in 2019. Overall equipment effectiveness is a primary focus in OSB, and we are targeting a further increase of 1.7 points from 83.7% in 2018 to 85.4% in 2019. Depending on whether this improvement results in additional throughput or cost reduction, it is expected to generate between $5 million and $10 million of incremental EBITDA. And given the progress made increasing value-add OSB revenue in 2018, longer term, we’re targeting over 50% of OSB segment sales to be from value-added product offerings. In conclusion, we’re confident in our ability to generate positive cash flow from operations even at the low OSB prices discussed, and this in turn gives us the confidence to return significant cash to shareholders along the lines discussed without in any way compromising our ability to invest in and grow the business. With that, I’ll open the call for Q&A. Operator?

Haley, if you could take the questions, please.

Yes. Thank you. [Operator Instructions] Our first question comes from George Staphos of Bank of America Merrill Lynch. Your line is now open.

Good morning. This is actually John Babcock on the line for George. Just want to quickly follow up. So the $75 million in EBITDA opportunity, which I think was generally pretty clear, but I think you mentioned another $25 million. And I just want to get a sense or get a little bit more clarity on that. I think I might have missed a couple of the numbers there. Thanks.

Hi. This is Alan speaking. Hello? Yes, the $75 million comprises $40 million from the OEE improvement, $25 million from sourcing savings and $10 million from the infrastructure optimization. However, on the previous slide, we mentioned that there will obviously be about $10 million per year of inevitable legroom and benefits inflation. So that would deduct $30 million from the $75 million because it’s pretty much certain to give $45 million of net EBITDA improvement. Then, of course, the $100 million of cash flow number comes from taking that $45 million, adding, let’s say, roughly $90 million of EBITDA from growth over the next three years should we achieve it, will give $135 million of EBITDA, maybe tax effect that at 25% to get to about $100 million. That’s the math.

Got you. Okay. That’s actually very helpful. Then the next question, I mean, just with this capital allocation plan. I mean, I think you talked a little bit about the impact of price and ultimately how you’re kind of thinking about the cycle. Just want to get a sense for the operations right now and how close you are to breakeven in, say, a 2009-type downturn, particularly in OSB, and then also how you’re kind of thinking about your margins right now at sort of downturn in Siding.

So John, I’m not exactly sure how to approach the question, but are you asking how we’re thinking about performance in a hard OSB downturn? Is that the…

Yes. That’s right. And also Siding as well, if you could.

Sure. Well, as we’ve mentioned before on the call, a hard OSB downturn, while would most likely be related to a single-family housing decline or flattening, about 35% to 40% of our Siding goes into new construction. So we have 60% of that in other channels. So we feel like we are buffered from a significant volume decline or, in fact, we still believe there’s market share opportunity for us even in a down market. And as you know, that product is also priced off a list versus commodity pricing. So we feel like the Siding segment would hold up very well in a down housing market. As far as OSB, we’ve worked really hard on improving our OSB performance. And in fact, in one of the slides Alan showed, we feel like we’re at least $100 million better as a company on overall performance given our cost structure today and the growth in Siding that we’ve seen since the last downturn. So we very much believe, in a hard OSB downturn, the company as a whole could still remain profitable.

Okay. Thanks for the color there. Then the last question before I turn it over, I just want to get a sense for how the OSB markets are feeling at this juncture. Obviously, we get to read the Random Lengths and some of the commentary there but wanted to get your color as well. And then also any color you could provide on inventories and the channel would be great.

Yes. So there definitely was an inventory build in December, early January. You’ve seen at Random over the last three or four weeks start printing up kind of single digits every week, which we’re pleased to see. We have seen demand respond back in the South as the weather has been a little bit better than in the North. And of course, that’s where we’ve seen the price increases, the report in Random. We’re still seeing – not impressive for us in the northern part of the country as they continue to battle with the winter weather. But overall, inventories are adjusting back to normal after the build. In late Q4, our commodity order file was out into March. So we’re moving wood now pretty readily even with slight increases in pricing. So I would say the market is moving back into bound from an inventory standpoint after the weak Q4 and the associated weather delays to housing recovery. And we just feel good as the weather improves across the country that we’re going to continue to see those inventories move back to normal and the order files strengthening, as we have begun to see in our OSB business.

And I’m sorry, just one quick one. Just on – you talked a little bit about some market downtime during the quarter. Can you provide some sense as to how much you took and particularly how that compares to 4Q 2017?

John, I’ll have to get the number of days to you. Yes, I don’t have those right in front of me.

Okay. All right. Thanks guys.

Our next question comes from Mark Connelly of Stephens. Your line is now open.

Thank you. Brad, if we could just stay on this pricing issue. We’ve heard a lot about better discipline in the last several quarters. Are you seeing the channels operating differently or product moving through the channels more? Because certainly, we’re not seeing a big difference in the way OSB prices respond to market weakness. Is that just because new capacity is swamping producers’ ability to keep thing in balance? Or is it because there’s just not enough visibility to respond quickly?

Yes. So I think there’s two drivers to the decline in OSB pricing in the second half of the year. I mean, obviously, the new mill capacity that came online over the last 18 months is now – is in the market. And then I think in – as we move into Q4, as has been reported, there was a slowing in housing and new home construction. So we did see a decline in demand. We did see our channel partners backing off orders for OSB. I think there was extremely negative sentiment around housing. As far as just the emotion in the market in late Q4 and early Q1, I think while it’s not directly related, I don’t think the government shutdown helped that sentiment at all. And so I just think that the – and then we had the normal winter weather cycle. So I think the demand – the capacity that entered the market in 2018 associated with a real decline in housing, which resulted in decline in OSB demand, just set the market up to see the severe declines that we’ve seen. So first of all, as we see demand increase and housing get its feet back up underneath at the beginning of the spring, I believe we’ll continue to see pricing recovery early in the year, but that’s my view and we’ll have to see how it plays out.

Mark, one other point, just in answering John’s question as well, in Q4, we took almost 100 days of downtime, Q4 of 2018 And then compared to Q4 of 2017, that was almost doubled.

Okay, that’s helpful. And just one more question. In the past, you’ve described the M&A prospects as tuck-ins and complementary to the Siding distribution channel. Is that unchanged in this new strategic review?

Yes. I wouldn’t want to use the word adjacent. And so – and I would apply that to both our OSB business – our value-add OSB business and Siding. And then obviously, we have this joint venture, very small relative to our size investment in Entekra. But adjacent acquisitions or adjacent M&A that makes sense as far as our current core strategy is how we would prioritize our M&A.

That’s super helpful. Thank you.

Our next question comes from Ketan Mamtora of BMO Capital Markets. Your line is now open.

Good morning. Thanks for taking my question. First question on Siding’s long-term growth target of 12% to 14%, and this is a two-part question. One, Brad, what do you think is a reasonable volume assumption of growth here? In 2018, volumes were up about 5%. And I’m not just looking at 2019, but as you look out over the next two, three, four years, what do you think is a reasonable volume assumption? And second, do you think you can raise pricing every year? 2018 was kind of 5%, which is well in excess of inflation. So how do you kind of think about this over the medium term?

Ketan, I’m going to just stick with the guidance on revenue growth versus breaking that out by volume and price. It changes. As you know, when we report, it changes year to year. Sometimes we get a little more volume. Sometimes we get a little more price. And pretty – consistently, we’ve been able to guide in that 12% to 14% range. But let me expand on that for the nature of your question. I feel like – and I do want to not discount the fact that our Siding business does benefit from strong housing growth. As I mentioned earlier, it’s 40% of our mix. And we like it in Siding when housing starts are strong. We do see the impact in our order file. And it allows us to really guide to the higher end of that 12% to 14% growth when we see housing strong. But for the rest of the segment, the other 60%, our market share in those segments, other than shed and retail, is relatively low. And so our strategy for the remaining 60% and for single-family is to grow market share. And so a big part of our success will be driven by our ability to continue to have market share gains across all the segments that we play in. And we still see opportunities to do that within the segments we’ve discussed. We see opportunities to do that where we’re underpenetrated geographically. And then for this launch of our smooth product, we see opportunities to grow in areas where in the past we haven’t had the product offering that we’re looking for. And I’ll just say the other thing that gives us confidence around that is, Ketan, as you know, we do have a very broad product offering in Siding, lap panel, trim, soffit, fascia, multiple types of panels. And so we are able to take advantage of that portfolio by segment, by geography in ways that – or we can find growth opportunities and not necessarily always having to win with lap siding. So I’m confident in the 12% to 14% because of our underpenetration in most segments, our ability to garner market share and the strength of our product offering. So that’s why we continue to guide there. And as I’ve mentioned before on this call, at some point, 12% to 14% gets to be a big number as our absolute revenue continues to grow. And so I don’t think that for – at some point, we may have to come back and guide to a smaller percentage, but that’s certainly not where we’re at today.

All right. That’s very helpful color. And then just turning to the board addition, Steve Macadam. We actually know Steve. And just for perspective, I think he had helped from rethinking the containerboard industry in late 1990s in terms of how producers talk about supply and running the mills. I’m curious, Brad, if you’ve had the chance to talk to Steve about this and if this has any implications at all for the OSB industry.

So Steve and I have had numerous discussions as we’ve onboarded him on the board. I want to add, Ketan, one other thing that is not mentioned, in our – at least in my prepared comments. Steve also was CEO for BlueLinx, a major distributor in our channel and a big customer of ours. So he also brings to us really in-depth channel knowledge and experience that’s beneficial, too. But just let me answer the question this way. I also spent half of my career in the containerboard business. You may not know that. So while I wasn’t the CEO like Steve was, I do understand that business pretty well and had studied it intensively. And I think there’s lessons to be learned by studying industries that – or companies that improve within the industry and how they go about doing that. And we had studied that as far as how it impacts what we think about operations here at LP. And I’m sure Steve will use that experience and others that he has to help us continue to execute our strategy.

All right. That’s very helpful color. I’ll turn it over. Good luck in 2019 and ahead.

Thanks.

Thank you. Our next question comes from Steve Chercover of D.A. Davidson. Your line is now open.

Thanks. Previous callers really drilled into some of the things I want to talk about. But you didn’t mention Entekra whatsoever. And I’m just wondering how that’s coming along and whether that is still a growth area given the new strategic priorities.

It is a potential growth – a possible growth area for us. That’s obviously why we’ve made the investment. We are in the process of constructing the fully automated facility in California, the first one. We’re just continuing to run the pilot plant there. And for this year, we’re really in more or less in the prove-out phase to understand how to build and construct one of those facilities. And – but I will say from a market acceptance standpoint, there’s a lot of curiosity from customers about the possibilities there. And as we line up the operations and get product in market, we’ll be able to talk more robustly about what we’re seeing there. But we’re still in early phases of really constructing that first big automated facility in Northern California.

Okay. Thank you. And then on the previous line of questioning, 60% of your Siding is dedicated to the not new home construction, but very little is to repair and remodel. Could you size the market opportunity in repair and remodel discretely?

There’s – sorry about that, there’s – the repair and remodel side of the siding market is big or bigger than in single-family new construction market. And obviously, it’s much more resilient in a downturn because when people aren’t building homes, they’re generally having to reside homes. And then from a market share standpoint, we’re in the single-digit market share. So we see a substantial opportunity and upside in repair and remodel. And that’s why we’re focused on it. And by the way, we also feel like our product is really a good – a very, very good alternative there. And we feel like the move into this new product line will help us grow there. So we see it as a big part of our future growth strategy and a real opportunity. Just for your knowledge, we’ve got pretty good market share in the middle part of the country, the Midwest. So we’ve been successful there. We’ve got some really good channel partners that work with us to grow market share, and we’ve seen nice growth there. So really, this is – our plans and our investment that we’re making this year is to take that model and move to broader geographic penetration outside of the Midwest. So there’s still opportunity in the Midwest, but where we’re very low penetrated is on the Eastern shore and the southern part, southwest part of the U.S., and that’s where our focus is.

Thank you, Brad.

Welcome.

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

Good morning. Alan, welcome to the call and to this industry. First of all, I think it’s crazy not to acknowledge what you guys are doing this morning. This is fantastic to hear. But I believe you did in the fourth quarter is it looks like you bought 3% of your stock when people were literally throwing it in the trashcan. So I think that’s very impressive. Along those lines, just so we can kind of keep up, while we have a share count on average for the quarter, we don’t really know where we stand either as of this morning or at year-end. If you could just tell us where the starting – so we can get a gauge of the starting point. And I believe the dilution addition is somewhere around a couple of million shares. But I’m guessing you guys are somewhere down in the 138 million share range right now on a basic basis.

I’m told that’s a very accurate guess on your part. Yes.

Good job, Chip.

Okay. I just want to make sure I got that right. And that would be – well, so that’s sort of before the little $3 million stub plus the $600 million that you’re doing, including the $400 million accelerated?

Yes, right.

Okay. Okay. That’s very helpful. And then if you could just share with us a little bit, maybe update us on where we stand with the conversion process. I know, Brad, you’ve been very good about giving us that road map, especially with the two other facilities that could possibly be involved in the conversions of both Val-d’Or and Cook, I believe. And just sort of give us a road map of where your latest thinking is in terms of that timing, especially given that housing has been a little slower than what we would have thought in the last year or so.

Yes. Chip, so first of all, let me just repeat that we’re making good progress with our conversion in Dawson Creek and should be producing siding there late Q1. So that conversion is going well. And as I mentioned last quarter, that’s where our engineering focus is focused right now, I used the word twice, to make sure we have a good start-up there. Just to remind our audience here that, that’s a really strategic conversion for us because it’s our first mill on the West Coast where we’ve been able to grow our market share there pretty aggressively over the last decade. So really excited about what that mill is going to do for us and the logistic savings that will come from having that presence on the West Coast. As far as the next mill conversion, we will get very into that once we free up some of the engineering resources that we have focused on the Dawson start-up. We are continuing to – it really is a matter of looking at our growth models, looking at how or what SKUs are growing and the relative growth rates between the different SKUs. There is some – there is also a geographic component of that, of course, just like we had in Dawson. And so I think we’ll be in a position, I would say, Chip, probably no earlier than Q4 this year. We’ll be talking about it probably no later than – so Q1 – late this year or first part of next year, I believe, we will be in a position where we have enough information to make the decision on where we want to go and what that means as far as scale and CapEx expectations. So we’re nine months away from making that decision.

Okay. That’s very helpful. Thank you.

Thanks, Chip.

Thank you. Our next question comes from Mark Weintraub of Seaport Global. Your line is now open.

Thank you. First, on the siding business, a couple. The pricing for this year, is that now – have those negotiations largely concluded at this point for SmartSide?

Yes. We have a price increase announced in the market for March 1, and we’re allowing a pre-buy of up to 10% of last year’s volume, which is currently underway. And then we’ll be rolling out that price in March 1. And it’s, Mark, very similar to the pricing we put out in the market last year.

Okay. So I mean, last year, I know the price was up 5% or so on average. Is that a type of indicator I should take from that last comment or not necessarily?

We’re out 5% to 7% depending on the SKU in the region, which is exactly how we went out last year.

Okay, super. Thank you. And then if you could, you noted that the Roaring River and the East River that those were likely temporary headwinds. Can you kind of explain a little bit what happened there? And is that behind us? Or are we still working through at this juncture?

Yes. The Roaring River – both occurred in Q4. It’s been separate – those are two separate mills, really almost two separate businesses. So for Roaring River, if you recall, Mark, we talked about earlier, we did some pretty aggressive pricing in the market related to the SKUs that come out of that facility earlier in the year as we – along our strategy of economic profit generation for our mills. And volume was impacted by those prices – that price increase. But our overall profitability for the mill improved as a result of the moves we made there. And we just – but we did see that mill get disproportionately hit with weak orders in Q4. And so that resulted in the incremental market downtime that we saw in Q4. Q1 for that business is a little bit better, but we’re going to continue to take downtime in that facility as we see – as we continue to work through this increased pricing that we put in the market. As far as CanExel, CanExel had a relatively tough year from a volume standpoint. It’s a very small business, and inventory swings matter in that business. So we feel like we had pulled some orders into 2017 that had to be worked out of inventory in 2018. We feel like that mill is much better balanced going into 2019. So I don’t expect to see that kind of negative production carry over into 2019 like it did in Q4 2018 where we just had to take some downtime to get inventories where we need them to be.

Okay. Great. Understood. And on the – you indicated that 2019 would be another year with selling and marketing spend at elevated levels as you’re introducing the new products, et cetera. Can you bracket roughly – we had the $5 million, I think you’d highlighted the $5 million hit in 4Q year-over-year. How should we think about 2019 versus 2018? Or what’s the best way to think about the financial impact from the marketing spend in 2019?

Hi. This is Alan here. We will be spending further. I don’t want to go out and quote a figure for the marketing spend, but it should – we should be generating sufficient growth in the Siding business to offset the increased marketing. So we do still expect the growth to fund the marketing when we take those two pieces together.

Yes. I think, Mark, the way to think about it is that is inherent in the guidance around EBITDA margin in siding.

Understood. And then, obviously, the 20%-plus is on the restated platform of the way you talk about the business.

With the allocated SG&A, yes.

Yes. I mean – and thank you for bringing that up because we had been 20%-plus, and that was before the allocation as well. And if you look at the allocation in the businesses with Siding and OSB in particular, it’s about a 3% difference. So that – if you think about it, that – to be at 20% after the allocation is really – before would have been about 23%, but that’s a good point.

Got it. And then just very last thing, how does the accelerated share repurchase work, if you could?

Well, in essence, what basically happens is we will deliver relatively soon $400 million of cash to our bank, in essence. And they manage – they basically manage over a period of time the stock repurchase and execute it. So we basically are committed at the point that we execute the agreement and deliver the funds.

Okay. Great. And limitations based on the amount of trade. So it’s going to be a typical accelerated share repurchase program where it’s going to be a function of you being able to buy a certain amount of stock each day?

Well, it would be – I mean, we’re not doing that. It’s not in our hands. It’s in theirs.

It’s totally – once it’s in the bank’s hands, they will do it. Yes.

Okay. All right. Thanks.

Thank you. Our next question comes from Kasia Kopytek of TD Securities. Your line is now open.

Hi. Good morning, everyone. It’s Kasia from TD. Mike, I think you referenced about 100 days of downtime in OSB in Q4. Have you guys needed to take downtime in the New Year?

Well, Kasia, that’s a good question. We continue to make sure that the – our supply is matching our demand that we see. And obviously, Q1 has been a little bit slower, as Brad said. And I think that over the last few weeks, you’ve seen things pick up a bit. And so we have been responsive to the demand that we’ve seen in the market.

Okay. Thanks. And Brad or Alan, on Slide 15, where you referenced $100 million-plus of cash flows by 2021, appreciating you said that, that includes a $75 million in incremental EBITDA. So for the growth in siding in South America of approximately $25 million, are you assuming anything beyond the Dawson conversion in that number?

No. Specifically, no.

Dawson – that next mill was what Brad talked about. So in reality, that will take us two to three years to fill out Dawson, and then we will have the next conversion ready wherever that might be.

Right. Okay. Fair enough. And then if you could just maybe give a bit of context on what happened at EWP this quarter – or last quarter rather and just an outlook, if you could.

So EWP is 90% to 95% of maybe – 95% correlated with single-family new construction – or new construction, some that does go into multi-family. And the softening in the overall housing market was a direct hit in that business as far as demand. So it’s primarily sales-driven decline in Q4.

And Kasia, remember, that mill – we have two LVL mills in that segment. And the Wilmington mill was down pretty much all the quarter as a result of the hurricane. So that had an impact, which we recorded in the other operating charges. And that obviously, impacted the business as well as the customer churn.

Okay. So that charge, that’s not included in the adjusted EBITDA, correct?

Correct.

Correct.

Okay. And then so given you’re assuming sort of flat housing starts for 2019, so performance in that business roughly is similar to last year more or less, I mean, absent hurricanes and things of that nature?

I would agree with that. Yes.

Okay.

Remember, Kasia, from a raw material standpoint, to the degree raw materials are down and to the degree you can hold the price, that should be a benefit.

Right. Fair enough. Okay. Thanks very much.

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

Yes. Thanks very much. Just questions around OEE. Maybe you could help me just understand the parameters around it. What – it sounds like you said 84% in 2018 and it was up almost 4%. What’s best-in-class? And then how do you reconcile this 1 percentage point in OEE equals $6 million in profit or $3 million in less cost?

Paul, it’s a great question on best-in-class. And I’ll just tell you, I don’t know. There’s not a lot of information – information about manufacturing in general or big industry segments. What we’re doing right now is we’re benchmarking against internal best. And so our target for our system is 90% OEE. And then when we hit that in 2021, we’ll be raising the bar. But I honestly don’t know where that would stack. I mean, I think that would stack us up very well, but I can’t be comparative as to how that would compare to other players within the industry. So what we’re doing – we’ve really based off of internal benchmarking by area of where our plants performed the best and build a composite view of what that should be like in our near-term targets of 90% range.

Okay. So it sounds like a 6% increase in the OEE is going to get you to that 90% over the next three years. Why is the 2019 guidance only 1.7 points?

Because it’s an ongoing – you mean why don’t we hit guidance at 90% in 2019? It’s a difficult process improving OEE. This company has made outstanding progress, in my opinion, from what I’ve seen. But it is a journey improving OEE. It’s certainly not something that can be achieved overnight. Does that answer the question clearly?

Yes. It just sounds like you did the 3.9 points in 2018, and it sounds like you’re setting yourself up for almost half that in 2019.

Well, what I would say, Paul, is that the low-hanging fruit is going to be easier to get. So that’s going to – that additional increment is going to get tougher and tougher as you continue to get to that 90%.

Okay. That’s fair. And then maybe just moving on to the introduction on the smooth siding product. What do you think that overall opportunity is in the marketplace? Like what are you missing? Is that like 20% or 25% of the market?

Well, for lap siding, I would say yes. There’s not a lot of – I mean, there’s some – let me just say for lap siding, yes, 20% to 25%. And it’s geographically – as you know, Paul, it’s geographically concentrated, more Northeast, mid-Atlantic, at least in the eastern part of the country. And so it should open up geographies that we’ve struggled to penetrate aggressively as a result of having it. But it’s called primarily player out in the lap market and a little bit in the trim – on the trim side.

Okay. And then just the last question I had was just on the lower liquidity requirement that you now figure you need, that $400 million, does that suggest that you do the Val-d’Or project over Cook just because of the lower CapEx required?

That would not – no, that would not be – I mean, if that return for that project was higher for whatever reason, obviously, it would point us that way. But this isn’t – we don’t believe we’re in any way constrained from a liquidity standpoint to continue to make the investments we need to make. Whatever is optimal as far as converting mills to siding.

Thanks very much. I like that answer.

Okay, Paul.

Thanks, Paul, and thank you, Haley. I think that was the last question. And so thank you, everybody, for the call. And Becky and I will be available for calls over the next few days. So please call if you have any questions. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may now disconnect. Everyone, have a wonderful day.