Louisiana-Pacific Corporation (LPX) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Louisiana-Pacific Corporation 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 follow at that time. [Operator Instructions] As a reminder, this call is being recorded.I would now like to introduce your host for today's conference, Mike Kinney, Treasurer, Director, Investor Relations. Mr. Kinney, you may begin.

Thank you, Sarah, and good morning, everybody. Thank you for joining our conference call today to discuss LP's financial results for the second quarter of 2019. I'm Mike Kinney, Director and LP Investor Relations and Treasurer. I'm joined today by Brad Southern, LP's Chief Executive Officer; and Alan Haughie, LP's Chief Financial Officer.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 have 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. Also, we have filed our 10-Q and 8-K this morning with some supplemental information.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 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 reconciliation 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 as 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 second quarter and update on our growth and efficiency initiatives, following the context of the current market environment and then turn the call over to Alan for a more detailed look at our results.But before I do any of that, I want to take a moment to recognize Mike Kinney. Mike has decided to retire from LP effect at the end of September. Mike joined us in 1985. He was a key member in the move of the financial function from Portland to Nashville. For the past 10 years, Mike led Business Development and Investor Relations.He has played a key role in multiple acquisitions and divestitures and participated in countless Analysts and Investor meetings. He had a responsibility for Treasury last year and most recently effectively served as the Interim CFO during his service period. We appreciate Mike service in many contributions to LP success over the years. I wish him much future happenings.I would also like to acknowledge in addition to the LP team. In June, Nick Grasberger joined our Board of Directors. He is the Chairman and CEO of Harsco Corporation, a global market leader providing environmental solutions for industrial waste streams and innovative technologies for the rail and energy sectors.Nick's financial expertise and executive leadership experience that came a valuable addition to our Board. He brings a compelling record as a successful CEO and CFO. We look forward to his strategic insight as we continue to execute our transformation to a leading building solutions company. We welcome Nick to the LP team.Now we'll move to our second quarter performance highlights of which are shown on Slide 5. This is the most difficult economic climate that we've encountered in the two years since I became LP’s CEO. Compared to 2018, total housing starts were down 3% in the second quarter with single-family starts down 6%. Record setting rainfall through the first half of the year, especially in the South decided as a constraint across our builder and supply chain customers.The continuing shortage of skilled labor has exacerbated this situation, preventing builders from making up for the delay. And this market even growing SmartSide Strand proved to be a challenge, which I'll address in a moment. This challenging market environment makes the transformation underway at LP all the more important. We want to take this opportunity to highlight three areas for our focus on shareholder value is driving improved results.We are creating value through our operating discipline, our growth agenda, and our people. I'll start with the operating discipline within our OSB business. Today, we run our mills to make customer demand producing only for active orders. As a result, our North American OSB sales volumes were down 13% year-over-year, even though for the APA, overall OSB industry productions failed by just 2%.During the first six months of the year, we took sporadic downtime across our entire OSB network in order to match OSB output to customer demand. We did this while maintaining excellent cost control in positive OSB EBITDA through the first six months. But I would not describe this operating scenario as optimal.Therefore, in June and following a thorough review by the OSB team, we decided to remove all commodity OSB production from our Siding mills for the remainder of the year and we decided to indefinitely curtail production at our Peace Valley facility in British Columbia.While regrettable for the dedicated Peace Valley workforce, this decision allows a more systematic management of downtime and improves the efficiency of our remaining network of malls, while reducing fixed operating costs by roughly $2 million per month from September onward. All things considered, this was a rapid and agile response to market conditions and a new approach for LP.As the year progressed, as we will continue matching commodity OSB production to demand at our mills that can downtime even curtailments as needed, which brings me to the second highlight our growth agenda.During our last call, I discussed the organization of our branded value-added OSB products into a family of Structural Solutions designed to solve common construction problems by improving the strength and integrity of a home. In the second quarter, Structural Solutions accounted 42% of total OSB volume sold, compared to 38% a year-ago, moving us closer to our long-term goal of 50%.In June, we acquired Prefinished Staining Product Incorporated or PSPI located in Green Bay, Wisconsin. PSPI has been all framed – prefinished LP SmartSide Trim & Siding for several years. We believe that Prefinished Siding market will continue to grow significantly and acquiring PSPI provides us with facilities, capability and expertise to enter this market.PSPI will operate as part of LP Siding business and has been renamed LP Green Bay. The PSPI acquisition is a significant step for our goal of launching a national LP SmartSide branded Prefinished Siding Solution at next year's International Builders' Show.You will call at the beginning of this year we added two new products for our growing portfolio, Smooth SmartSide Strand and the LP WeatherLogic air and water barrier shaping. In June, we started production of our third launch of the year LP Elements Performance Fencing, a significant innovation in the fencing industry.Using SmartSide Strand technology, we now offer the first and only Engineered Wood fits in product. Commercial shipments began in July and we are committed to making LP Elements Fencing, a game changer for the installers and homeowners, which bring me to perhaps the most important aspect of our growth strategy, SmartSide Strand.It is rare to achieve a consistent double-digit growth in the building industry. Since it was launched in 1997, LP SmartSide Trim & Siding has been one of the industry's biggest success stories above both homebuilding and repair remodel. I was therefore disappointed by the 3% revenue growth we posted this quarter.Having been in this business for most of my career, I know all too well that a growth curve can be lumpy. At the outset of the year, we projected annual growth of 12% to 14% per SmartSide Strand guiding to the lower end of the range on the expectation of flat housing, but housing hasn't been flat.Single-family housing starts fell by 3% in the first quarter and we posted a healthy 13% growth to help our customers pre-buying ahead of our March price increase. This was followed by a 6% drop in single-family housing in the second quarter, which is often pull through demand from builders and contractors and ultimately slowed our growth.We believe that about 40% of SmartSide revenue is tied to single-family housing. While in perfect as a market indicator for SmartSide, single-family starts provides a useful guide to underlying demand over the long-term, which are comparing our growth single-family housing starts on a trailing 12-month basis as shown on Slide 6.By this measure, single-family housing starts were falling by 3%, while SmartSide has grown by 10%. In other words, over the last 12 months, we have grown 13 points faster than the closest underlying market indicator, which is quite remarkable.However, with permits also falling off recently, we are expecting year-over-year housing activity to be only marginally better in the second half. We are seeing some resilience in the repair remodel markets, which are outperforming new construction and we've remain more bullish on that sector as increasing home values and overall home equity continued to drive investment in remodeling, which will continue to benefit our Siding business.Our growth expectations for the second half of the year, therefore remain unchanged namely 12% revenue growth on the assumption of flat house. So at 8% growth in the first six months, we are lowering our full-year growth expectations for SmartSide Strand to 10%. Well the likelihood of a slower housing market for the foreseeable future. We're also lowering our long-term growth target from 12% to 14% to 10% to 12%.Our Siding growth strategy remains unchanged and includes strategically targeting key customers and channels with an expanded product portfolio such as prefinished and Smooth Siding and accelerating growth in the less cyclical repair and remodel cycle. We have a talented high performing team executing our Siding sales and marketing strategy. And I have every confidence they will continue to outperform the market, which brings me to the third highlight our people.I'm immensely proud of the dedication and commitment shown by everyone and LP to drive our strategic agenda forward. Thanks to their efforts. This quarter, we have added a further $9 billion in overall equipment effectiveness and supply chain improvements bring our total for the first six months to $17 million.In the first quarter, we report an OEE improvement of almost five points over 2018 and have achieved similar improvement through the second quarter. OEE is our measure of manufacturing efficiency and this improvement was again the largest single contributor for the $9 million of operational efficiencies generated this quarter. This brings me more confident than ever that we will make appropriate our 2021 efficient seeing improvement goal of $75 million.Our teams achieved this by having the encouraged to challenge previously accepted norms by striving to make LP a better company, a better performer, and a better place to work. And perhaps most important of all, we are acting like owners by doing everything in our power to execute in a challenging market. Given the downtime of both OSB inside the mills during the second quarter, cost for universally contained not only in operations, but also in our corporate functions.When combined with the growth of SmartSide Strand and Structural Solutions, we are ahead of target delivering $44 million for our 2021 goal of $165 million EBITDA improvement. This progress comes amid a challenging economic environment which saw a third consecutive quarter of declining housing stars and OSB prices falling by almost 50% year-over-year. Despite the market here at LP, we will remain focused on executing our strategy and driving shareholder value through our operating discipline, our growth agenda and our people.And on that note, I'll turn the call over to Alan for a detailed review of our second quarter results.

Thanks Brad. In addition to reviewing the consolidated results for the quarter, I'll be providing high-level revenue and EBITDA bridges between this year and last year for the Siding and OSB segments and briefly updating you on the progress of our capital allocation plan. Throughout my prepared remarks, I will be referencing specific pages of our earnings presentation, which was posted on our Investor Relations website.Moving to Slide 8 for a review of the second quarter, starting with the consolidated income statement. Net sales fell year-over-year by $223 million. A drop in North American OSB prices of 44% from the second quarter of 2018 was the cause of $166 million of the decline.North American OSB volume reductions of 30% account for most of the remainder. The primary reasons for the volume decline our market related downtime and the conversion of our Dawson Creek mill from OSB deciding production. However, the generally soft market impacted the entirety of our portfolio. Even SmartSide Strand volumes were flat year-over-year.Therefore, our growth of 3% for SmartSide Strand all came from pricing. We’ve despite its low growth $200 million of SmartSide Strand revenue set a new quarterly record. Gross profit fell by $183 million, $166 million of which is of course the OSB price. The remainder of the drop reflects the impact of generally lower volumes of set by productivity and efficiency improvements, selling and administrative costs of $58 million increased by $8 million over the prior year.The largest single driver of the increases are continuing investment in sales and marketing consistent with our growth strategy. There is also some temporary cost application due to our infrastructure alignment. Of the charges and credits of $3 million includes $4 million of income due to a reduction in warranty reserves and $1 million of insurance recoveries. These were partly offset by $2 million of severance charges, including $1 million due to the indefinite curtailment of production at our Peace Valley mill in British Columbia.The non-operating income and expense of $4 million includes net interest charges of $2 million plus various other non-operating items. So with a tax provision of $3 million, we produce $15 million of income from continuing operations. As a reminder, when we executed the $400 million accelerated share repurchase on February 21, our bankers delivered 80% of the number of shares, this $400 million would have bought at that time. That is about 12 million shares.The remaining shares will be delivered subject to an adjustment for the final number. We purchased no later than the end of the third quarter. So the 124 million of weighted average shares used to calculate the second quarter earnings per share on a diluted basis fully reflects the 12 million shares delivered so far. Therefore, we are reporting $0.14 per diluted share compared to $0.111 per diluted share in the second quarter of 2018. After removing the warranty income and the severance charges and then normalizing the tax rate on non-GAAP earnings per share is $0.11.I won't discuss the year-to-date numbers in any great depth. Other than to observe that our second quarter results is almost a replica of our first quarter results. And when we removed the first quarter gain on the consolidation of Integra, our non-GAAP earnings per share for the first six months is $0.23 basically twice that of the first quarter.In other words, the fundamentals of the business have been stable over the last two quarters. Naturally, the year-over-year comparison for the second quarter is worse, but then it is being compared with the period in 2018 during which OSB prices at their most recent peak, which brings me to a key theme we explored when announcing our capital allocation plan back in February. That is the financial strength of our portfolio.The tables on Slide 9 show revenue and EBITDA by segment for the quarter and year-to-date. I have already mentioned that non-GAAP income and earnings share are basically the same in the first and second quarters. This is hardly surprising given that EBITDA is almost the same. $53 million in the second quarter compared to $58 million in the first.Thereby producing $111 million for the first six months as shown on the slide, but there was a significant difference between the quarters that I wish to highlight. While revenue and EBITDA, OSB a fallen sequentially from the first of the second quarter the opposite is true for Siding and for EWP as it happens. SmartSide Strand sales in particular was 7% higher in the second quarter than in the first.Now this includes the benefit of the March price increase and normal seasonal demand patterns, but the fact remains the quarter-over-quarter, both volume and price increased for SmartSide Strand while the opposite is true for OSB. As a result, Siding accounted for 87% of total company EBITDA in the second quarter compared to 73% in the first quarter.In other words, over a period of falling OSP volumes and prices, we bought a temporary inefficiency of increasing our Siding capacity at Dawson, increasing our investment in selling and marketing and caring duplicable for cost as we realigned our infrastructure. All of which is discretionary and because our portfolio demonstrably produces healthy EBITDA earnings and operating cash flow, even in periods of low OSB prices and slow housing. We can afford to relentlessly pursue our transformation agenda and in turn seed further growth. That is the strength of our portfolio.Now before discussing, Siding and OSB further, I'll briefly cover the performance of EWP in South America. EWP second quarter revenue of $107 million is $7 million lower than last year due to $3 million of adverse pricing and $3 million of lower volumes on OSB and plywood.However, increased joint venture income and OEE improvements largely offset the price impact resulting in the second quarter EBITDA of $10 million being just $1 million lower than 2018. In South America, revenue was impacted by the weakening of the Chilean peso against the dollar, which largely offset local volume increases. The economic climate also drove prices and hence EBITDA lower.As a reminder, we now allocated a significant portion about 75% in fact, of our hitherto unallocated SG&A costs to the businesses to further drive line management accountability. We reconciled the quarterly detail for 2018 in an 8-K filed with the SEC in February.Slide 10, shows the second quarter revenue and EBITDA for Siding. The bars on the waterfall represent the year-over-year EBITDA impacts and where relevant, the corresponding revenue changes are shown in orange text below the EBITDA bars.We have group to the growth in SmartSide Strand, the marketing investment that supports future growth as the efficiency savings together under the heading Transformation impact in order to monitor and report our progress in this and future quarters. It is these same numbers that were summarized earlier on Slide 6.As a reminder, during the second quarter of 2018, our Dawson Creek mill in British Columbia was producing OSB, whereas this year, it is ramping up production as a newly converted Siding mill.Although, the cost of the ramp up are actually on budget this quarter, we are nonetheless bearing $6 million of unrecovered labor and overhead costs compared to 2018, which is an improvement on the $9 million incurred in the first quarter.In addition to the volume lost as a result of the Dawson conversion, Siding, revenue and EBITDA both suffered due to low OSB prices on the decision to take some OSB related downtime. Together, these factors cost Siding $6 million of EBITDA year-over-year.Despite these headwinds and weaker CanExel in fiber performance, the Siding EBITDA margin is actually a respectable 19%, close to our long-term target 20%. If we exclude the cost of the Dawson ramp up, which is by definition temporary, the EBITDA margin would have been closer to 22%. That is $52 million of EBITDA divided by $238 million of revenue.Slide 11 shows the year-to-date sales and EBITDA waterfalls for the Siding. The highlights are the $18 million of year-to-date Transformation impact on the $16 million headwind from OSB pricing volume and they're heavy, but temporary $15 million burden of the Dawson ramp up.Looking forward, the removal of commodity OSB production from our Siding mills will lower Siding segment revenue and EBITDA in the second half by about $16 million and $4 million respectively. The majority of the impact will be felt in the third quarter given that Dawson Creek was undergoing conversion and therefore out of commission joined the fourth quarter of 2018.And on the subject of the Dawson ramp up, having spent the first few months producing software, we have progressed to lap the more recently panel production. The third quarter will therefore show a further reduction in uncovered costs while the fourth quarter is actually expect it to show a year-over-year benefit.Slide 12 shows the second quarter revenue and EBITDA waterfall for the OSB segments. Commodity OSB volumes fell by 17%, including the impact of 100 and – 105 downtime days, 73 of them market related. For reference, this is 32 more down days resulting in 6%. Let me say that again. This is 32 more down days resulting in 6% less production than in the first quarter and 72 more than in the second quarter last year.As a result, this year's second quarter utilization rate was 84%, compared with 91% last year. Structural Solutions pricing fell 38%, compared to a 49% drop, a commodity OSB prices. The Transformation impact call out for OSB includes $3 million of EBITDA due to increase volumes of Structural Solutions as well as improvements in OEE in sourcing of a combined $4 dollars.Cost reductions and mill efficiency have been paramount given the widespread downtime taken in the quarter. The result of which was an accumulation of operating and logistics efficiencies across the segment, totaling $8 million net of inflation. All of which leads to an EBITDA loss of $3 million.Slide 12 shows the year-to-date revenue and EBITDA waterfall for OSB. Highlights our OSB's $13 million of transformation impact and Structural Solutions volumes rising to 42% of total OSB volume, compared to 38% for the first six months of 2018 and of course EBITDA for the first six months is small but positive.Looking forward, on June 13, we announced the indefinite curtailments of OSB production at our mill in Peace Valley, British Columbia, for the stated capacity of 800 million square feet.We estimate the associated severance costs will be $4 million and have a closure, costs to be about $2 million. As previously noted, $1 million of this severance was charged in the second quarter. And as Brad has already mentioned, this action will reduce monthly operating costs by at least $2 million per month from September onwards.Our second quarter year-to-date cash – and year-to-date cash flows are summarized on Slide 14. With minimal networking capital movements in the quarter, we converted our EBITDA of $53 million into operating cash flow of $54 million. Year-to-date, operating cash flow, however, is flat. Normal seasonal working capital build from the first quarter will continue to be released through the remainder of the year though.When we introduced our capital plan in February, we guided to a range of operating cash flows for 2019 that was dependent on a variety of OSB prices. We are comfortably operating ahead of this guidance. We have our stated goal of generating a $165 million of additional EBITDA from growth and efficiency in 2021. After adjusting for labor inflation and taxes, this $165 million should produce $100 million of incremental annual cash flow over three years. Our progress on this transformation in 2019 is and will continue to be reflected an improved cash flow.For example, should the Random Lengths 7/16's OSB price ultimately average $190 per 1,000 square feet for 2019; we believe that our cash from operations will comfortably exceed the $110 million we would have modeled for that price.We had a quiet quarter with respect to share buybacks at least from the company's perspective. The $400 million accelerated share repurchase we executed in the first quarter is still active and will be contractually complete no later than the end of the third quarter. So we ended the second quarter with $362 million in cash resulting in net debt of zero, and when including our recently upsized and redated $350 million revolver, we have over $700 million of liquidity. Although, we’ve not determined the precise mechanism yet, we remain committed to paying the final $200 million of the $638 million of share repurchases outlined in our capital plan in 2019.Before I turn the call over for Q&A, Slide 15 provides some limited guidance for 2019 and beyond. The changes from prior guidance saw the reduction in our SmartSide Strand growth rates for 2019 and beyond. We still expect double-digit growth closer to 10% in 2019 and then 10% to 12% range beyond that, both predicated on slower housing. We are also tightening our capital spending to a range of $160 million to $170 million for the year. And lastly, I'd like to personally thank Mike for his assistance over the last six months.And with that, I'll open the call for Q&A. Operator?

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

This is actually John Babcock on for George. I guess just want to start out congratulating Mike on his retirement and wish you the best.

Thanks John.

And then just kind of with regards to my first question, I really want to start out on Siding, I mean, you kind of already talked a little bit about what kind of drove the revision in 2019 and also the long-term outlook. But I was wondering if you could give a little bit more color on kind the longer-term outlook and why you think the 10% to 12% makes more sense versus 12% to 14%?

Yes. John, so the main driver for that lowering guidance long-term per Siding is our expectation that the housing recovery has slowed and will continue to be rather flat to slight increases versus a little more aggressive housing recovery that we had forecasted over the past couple of years. So we're adjusting down primarily as results of what we're seeing with the overall economy and specifically as it relates to the housing recovery.

Okay. Thank you. And then also with regards to SmartSide volumes, it looks like they were relatively flat in the second quarter, was that primarily driven by the overall weaker building season or were there inventory or other factors that might've been impacting growth there?

Two things, definitely there was an inventory build that we talked about on the last call associated with the pre-buy in front of our March 1 price increase. So we did have a really good shipment quarter in Q1 and built some inventory in the channel. And then as we got into Q2 and we saw the wakening in housing, but also do want to stress again, as I hit in my comments, a very wet, especially early half of the quarter.We just did not see the pull through out of our distributor base that would result in reordering in Q2. And so just two points to conclude that answer. One is the pre-buy or the inventory build that did happen in Q1 and then the insufficient pull through in Q2 to result in reordering from our distribution customers back into LP.

Okay. And then just kind of two other quick questions. First of all, just on Siding again, with a slower growth that you're seeing now, I mean, are you having any challenges in pushing through the price increases from earlier this year or is that still progressing as planned?

The price increases have been progressing as planned. I would just kind of guide you to kind of how we ended up over the last couple of – or last year in particular with pricing. We usually have been over the long-term, averaging 2% to 4% recovery and pricing as we get to the end of the year. And I would guide within that range for this year as well.

Okay. Thanks for that. And then just last question before I turn it over. You talked about taking some market related downtime in OSB. I was wondering if you could quantify that. And also did you take any equivalent downtime in Siding?

John, I think Alan said that we took – in Q2, we had 105 days and then compared to 70 in Q1 and that compared to last year Q2 was 34 days. And the way we – we don't really look at it from a Siding perspective in terms of down days because we're making up the difference in OSB. Although, we did take some in OSB, I don't think we've really quantified that externally.

Okay. Thank you. I'll turn it over.

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

Good morning. First of all, Mike, it's been a real pleasure working with you and good luck, whatever comes next.

Thanks, Ketan.

Brad just coming back to Siding, do you think in your view the competitive dynamics in Siding has changed at all? And I'm more focused on medium term rather than just what's happening in 2019. I guess 2019, we appreciate the housing headwinds. But outside of that, do you think competitive dynamics have changed?

Ketan, I don't think competitive dynamics has changed significantly. I mean, obviously from the fiber cement side of our competition, we are aggressively pursuing the same in markets. So that kind of fight has been going on for several years. And while tactics and strategies change a little bit, I don't see the dynamic changing a whole lot over the last six months especially.And then I would say from a hard Siding perspective, so fiber cement and composite wood where both really focused on converting vinyl, the market share vinyl siding over to a more hard sidings and that's continues to be a focus for us. And I don't really think the dynamics has changed there too much either. So we're out there fighting every day for increased market share.We're doing that by upgrading distribution, by offering new products, by creating end user demand through our marketing programs. And that's been a fairly successful strategy for us in the past and we're continuing on that, continuing to execute that strategy with really nicely evolving product portfolio with the addition to Smooth and with our foray into pre-finished Siding. So I would say I wouldn't characterize this quarter as being a significant competitive issue. It's just really more of a market related slowdown.

Got it. That's helpful color. And then just as my follow-up, and then if I look at the slide that you have on transformation and under this growth bucket, can you just help me understand sort of at a high level without getting into specifics obviously at this stage. But when you talk about this $19 million target in just growth, what are the key sort of buckets that you guys are thinking about? So is it something like PSPI included in that? Is that how I should be thinking?

Good question. You should include something like PSPI. Yes, the major growth engine within this 2021 target is the growth of SmartSide Strand and associated products. Things like fencing, things like our foray into pre-finishing. The second two components are growth in South America and then the growth across these structural solutions, what was formally referred to as a value added OSB. So think of this as the significant value-added components of our portfolio growing over the next three years.

Understood. That's very helpful. I'll turn it over.

So Ketan, if we look at – go back to the bridges, that kind of builds into the – how you're looking at the growth and the efficiency.

Gotcha. That's helpful Mike. Thank you.

Thank you. Our next question comes from the line of Mark Connelly with Stephens Inc. Your line is now open.

Yes. Hey, good morning. This is actually John Rider on for Mark. So our first question is, so we're currently not hearing a lot about input cost inflation right now. And we were just hoping you could give us some idea of what you're thinking about inflation for inputs in the second half?

Yes. And this is Alan here, yes, we did see similar to our competitors, a reduction in resident costs in the first half of the year. And we are anticipating that say a modest increase investment costs through the remainder of the year. But that was the principal input costs change year-over-year, worthy of note.

Okay, helpful.

John, yes, so John that if you look how we're thinking about it is the – from the residence, everything other than wood, it'll be a slight benefit or like as you said, Alan and then where we're seeing a little bit more of than from the wood perspective that that'll be a little bit worse than what it was last year.

Okay. That's great. Thank you. And then just our second question just has to do with PSPI, we're just curious how it was running and then if there was – any additional plans to expand the business fall?

So the integration is going really well in that business. That plant is located relatively close to our Siding mill in Tomahawk, Wisconsin. So we've been able to use some of our supervisory folks from Tomahawk to assist in the integration. We've had some maintenance and engineering folks into the facility to do some upgrades and optimization of the operations.We have been able to put a lot of volume into that, obviously from our – with our current distribution base. And then we are really, really pleased with the quality of the people that that came along with that acquisition that are helping us really refine our ongoing strategy around prefinished, especially on the operations side. And so integration is going well and we are currently evaluating other expansion options particularly on the east part of the United States.

Great. Thanks. I'll turn it over.

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

Thank you. First, my thanks for all the help over the years. Good luck.

Thanks Mark.

And in terms of the second half of the year in Siding, what type of visibility would you say you've got on that at this juncture? And can you give us a sense as to what you saw in July and the first part of August?

Yes. So yes, we're – a good month and to the second – to the third quarter. And I would say our order activity is returned to more normal levels. I do think the product is begun to move, it really began moving. It's late in the second quarter through distribution, which resulted in the order file strengthening somewhat here at LP. So we feel a lot better about what we're seeing in Q3 and how we felt this time, three months ago as we were looking at Q2.

And can you give us an update on how the new introductions, the Smooth product as well as the push to repair, remodel, how that's been proceeding?

Yes. Well the Smooth product intake was very good. We are working on the – currently shifting the – I guess the repurchases after the first – initial introductory orders replaced. So that that products moving along well.On the prepared remodel that was predicated really on us getting the Smooth going, which we have, and then this foray in the pre-finish is really integral to that repair and remodel strategy. We feel like it's very important to have – we have learned that is very important to have an LP branded prefinished product rather than just relying on our prefinished partners to supply that product. We want to have obviously a national footprint with our brand and that so we can serve as the large one step person and are the two steps – national two-step distributors.So our move into prefinished has really intend to accelerate our penetration into repair and remodel. So I mean it's a new channel for us. Mark as you know, but I feel like the moves around the product was really important to us getting positioned where we could be successful there as we learn how to market and sound to that channel as well.

Thanks. And one last one, if you could. Given the lower housing outlook and hence the reduced longer-term growth rate you're expecting in a Smart Strand? What implications, if any, does that have on how you think about the timing and the conversion projects that that you have under review?

Sure. It certainly affects, the growth rate we assume does impact the timing for the next mill conversion, just remind on this call that is also predicated on the mix of that growth. Our mills are can both lean towards panel production or lap and trim production. And so we have to watch that closely. And so – but I mean, obviously more like a slower long-term growth assumption does impact the timing.And so we're looking at probably from where we were a year ago, as with our higher expectations for housing grow. We've probably bought ourselves another six months or so of the ability to evaluate what our best options are or they are. But we are currently; we are actively evaluating our options around the next expansion. But the timing will be predicated on your assumptions around growth.

Do you still expect, I think you had at one point suggested by the end of this year, you tell us what the next move would be. Does that get pushed back potentially six months or should we still expect it for the end of the year?

Yes. Great. That's going to get pushed back six months. I could expect us maybe solidifying a little bit around our options like this year and then we're ready to go public with it sometime next year.

Okay. Thank you.

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

Thanks. Good morning, everybody.

Hi, Steve.

So first of all, I'm really glad you didn't blame the year-over-year decline in results on weather. But that said, do you think it did have an impact on the uptake for OSB or particularly for Siding?

Thank you for saying. We didn't blame it on the weather and what we say that same thing to our sales people at our QBR. But certainly is do that looked – there's minimal excess labor in the contractor community right now. So when you lose a data rain, it's in the past maybe that could be made up by adding shifting or adding some personnel that just isn't available right now.And we have some really heavy rains, especially in the Southeast, that would shutdown a job site, wouldn't be possible to work through those rain showers. So it had an impact and I'll say some of the evidence we have internally anecdotal is that as those regions of the country have dried out, we starting to see some really good pulls out of distribution. So, I certainly think that had an impact on both OSB and Siding and EWP to a certain extent though we were kind of able to work through those.

Great. Thanks. And then CapEx I think is elevated at $160 to $170 and presumably that's because of the Dawson conversion. Can you remind us, I guess, would a baseline maintenance spend would be and I'm sure that even in these conditions you've got some pretty high return projects that are still compelling enough to proceed on?

Yes, Alan here. I'd say that baseline maintenance is in the region of $80 million or so. But I'd also like to try, but I feel as though we've kind of lowered the guidance $150 to $180 was the range of tightened out to $161, $170, I think will come in at the low end of that tightened range. But you're right –let's say if these OSB conditions persist, a further reduction in CapEx is possible.

Okay. And if I could sneak in one more. Are there any adjacent product lines you'd like to pursue, like cross-laminated timber or laminated beams, and if so, would the engineered wood products division have earned its right to grow?

The engineered wood products division has not earned its right to grow, has earned its right to continue to improve on existing operations with existing products. When we talk about adjacencies as far as M&A, we're really looking at two big categories. Stage one is adjacencies in Siding, particularly that would be focused on accelerating our penetration to repair and remodel.And then in OSB, we have been very successful with our acquisition of the FlameBlock Technology, so opportunities to enhance the structural solutions with value-add product offering in OSB through either coating, laminating, cutting, grooving or doing something to our commodity substrates that allows us to turn that into a value-add OSB product is something we'd be interested in as well. But in EWP, we're really, really focused on just continuing to turn that business around and having it earned the cost of capital on a consistent basis based on the platform of operating on right now.

Very good. Many thanks.

You’re welcome.

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

Yes. Good morning, Brad, Alan and Mike. And Mike, all the best to you. Thanks for all your help.

Thanks Chip.

First question is just to make sure I understand this. Since at least March, your cash flow statement shown over $400 million for buybacks. But just to be fair, you've kind of shown the full impact of buying back roughly 15 million shares to the ASR on your cash flow statement, but you haven't been able to capture that in your – when you show us what your diluted average shares are in the income statements. So somewhere in the next three months or so, we're going to see 3 million shares more or less disappear. Is that the way to think about it without any incremental or significantly incremental cash?

That's correct, Chip. Yes. The 3 million shares is of course, I guess at this point in time, but, yes. The principal used outline is correct.

Got you. And the lower the stock is the more shares go away and the higher, the fewer shares go away if there's no cash true-up right?

Yes, there will be – our intention is not to have a cash true-up, but to make this cash set and then have the additional shares delivered to us, yes.

Okay. And then I think if I just make sure I got this right. You're committed to another $200 million in buybacks from the time the ASR ends, which could be as late as the end of September through year end.

Correct.

Okay. Great. And then next question is, I know you were talking about tightening up the CapEx range for the year. Maybe I missed it, but did you address sort of directionally what you see CapEx doing next year? Thinking about all the moving pieces with the EBITDA and efficiency improvement programs and perhaps the conversions, et cetera?

We haven't addressed that yet, Chip. And that's probably – I'm going to be cautious just to that – probably a subject for the next earnings call right now.

Okay. And then the last one is, and I should've looked at the balance sheet, but do you have any more of these timber sales years ago that's still on your balance sheet or are they all off now?

They're all gone, Chip.

Got you. Okay. That makes life easy. All right, thanks very much.

Thanks.

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

Yes. Thanks very much. Good morning, guys and congratulations Mike.

Good morning, Paul.

Hey, maybe I just start on – you've got a major competitor in the Siding business that does color at plants and it looks like with PSPI that's color off offsite. Just wondering what your strategy is with color and the whole pre-finished inside and is that something that will be a major focus for LP going forward here?

Yes. So Paul, let me just – as you know our major competitor generally speaking is producing their products relatively close to market given their manufacturing technology where we are fairly centralized into the central part of the U.S. and Canada.So we tend to be a little farther or not a little, but the plane out further from the market in these markets than they are. So in transporting, Prefinished Siding long distances can be an issue around the finish, quality. And so we would prefer to – we're pursuing a strategy of having our prefinished operations closer to market.So that we're first of all can tailor the offering to the local needs, but also we're shipping, our primed prefinished long ways, and then the final mile is a prefinished product, ship closer to market. That's the primary driver that strategy, not knowing – not speaking at all about the competitor, but we also feel like – for us, it's a little more capital optimal to do that outside of our infrastructure. But we'll play that out as we continue to make these investments and see the kind of returns that we can generate off of these in market prefinished years.

Okay. So that makes sense. Given the distance of all, so does that therefore mean that you'll luckily have at some point 8 to 10 regional prefinishers close to the markets?

Yes. I want to divide that the country in half, when you go from Eastern U.S., where the population centers are closer together. Also, that housing stock is older, where there's a more mature, repairing prefinished repair and remodel market, which is the Eastern U.S.I could see us having – I don't know if it would take that meaning, Paul, but several prefinishers regionally into east. On the west side, where prefinished repair and remodel isn't quite as popular yet. I see us working with our independent prefinished base to align around that for the foreseeable future.

Okay. Then just on OSB, we've seen weak pricing throughout the year based off the slowdown in housing. When the announcements of curtailments of your mill as well as an in Norbord mill was announced, we saw a blip up in pricing. That's since come off, but now we're starting to see the shuts you expect to sort of mild recovery and OSB prices for the balance of the year?

Paul, I'm not very good, as you well know of forecasting OSB pricing. But I'll say this, we shut our mill down, Wednesday of last week at – have a little bit of a TechShield blanks on the ground that we're going to continue to convert. But we're done from a press standpoint, producing product to piece.I think the competitors mill, they run in a few more weeks if – call their announcement. But anyway, and I think we'll see a pickup in demand as we've moved through August, September and October is as folks do take advantage of what normally is a drier fall weather to either finish up some houses or get some housing started.So I could see demand being stronger and Q3, let's say, than it was in the first half, which, favorably impact the demand capacity or ratio. But how that plays out in the channel and around pricing, it's really hard to predict. But I do, I'll answer your question by saying I could see the demand capacity ratio getting a little bit better in Q3 as the shutdowns are concluded and housing picks up a little bit as people try to take advantage of typically as good weather through October.

That's fair enough. And then maybe just lastly, if you could just remind us where you're at with your Integra JV and my understanding is the first plants being built right now, just wonder what the progress is and what the order file looks like?

Yes. Well, the order file for our current plant, which is the power plant is really strong and so the demand has not been an issue to date, we are in the process of installing the manufacturing equipment they are currently. And we looked – there's going to end up being – a little bit of a complex facility, but the think of it as having three lines for external wall to manufacturer external walls.We'll have the first line up and go on as we move into Q4 so late Q3, early Q4. And we'll start that ramp up Q4 and Q1 of next of next year. And if the past holds, or it won't be a problem getting orders, you will be more constrained by our ability to ramp that manufacturing up. And we'll keep updating you on that as we get a little closer to reality. But that's how it's looking right now.

Okay, great. That's all I had. Thanks guys. Best of luck.

Thank you. We do a follow-up question from the line of Ketan Mamtora with BMO Capital Markets. Your line is now open.

Thank you. Brad, just one more on the Siding side. Can you talk a little bit about how the outdoor shed businesses doing and what kind of market share you have there. And what kind of room you have further grow that business?

Ketan, now would say that – from a market share standpoint, it's probably our highest market share of any of the channels that we play in or in markets that we play in just to our past success there and the product is really perfect for that shed environment. But with that said, there's still a lot of opportunity for growth. I would say our market shed, it's obviously there's not a lot of great statistics on shed manufacturing, but I would, it's less than 50%. I'm certainly well into the double digits, but less than 50%.So it gives us – so we're really focused on that that opportunity as cost like I said, the product's great for it. That tends to be good margin business for us and so we have a real focus on continuing to grow in that channel. So good progress so far since we initiated that almost 10 years ago now, but there's still a lot of room for improvement and anybody that drives around, at least the part of the country out from in the Southeast, we still see a lot of plywood sheds that need to be converted over to SmartSide. So we're working on that.

Got it. That's very helpful. I'll turn it over. Good luck in the back half of the year.

Thank you, Ketan.

Thanks.

Thank you. And this concludes today's question-and-answer session. I’d now like to turn the call back to Mike Kinney for any further remarks.

Thank you, Sarah. And I think that was our last question. So if you have any questions, feel free to give Becky and I will be available anytime. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.