Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Louisiana-Pacific Corporation Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker for today, Mr. Aaron Howald, Director of Investor Relations. Please go ahead, sir.

Thank you, Sydney. Good morning, everyone, and thank you for joining us today to discuss LP's financial results for the third quarter of 2019. My name is Aaron Howald. I'm LP's Director of Investor Relations. I'm joined today by Brad Southern, LP's Chief Executive Officer; and Alan Haughie, our Chief Financial Officer. As we have done in the past, we are hosting a simultaneous webcast in addition to this public conference call. The webcast can be accessed at our website, www.lpcorp.com. We have also provided a presentation with supplemental materials to which we will refer during this morning's comments. And finally, we have filed our dark 10-Q and 8-K this morning with some supplemental information. I want to remind all participants on the call about forward-looking statements and our use of non-GAAP financial information during our discussion. I will refer you to Slides 2 and 3 of the accompanying presentation for more detail. The appendix attached to the presentation has some necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning. Rather than reading those statements, I incorporate them herein by reference. Now let me turn the call over to Brad.

Thanks, Aaron, and thank you all for joining us this morning. I'll begin today's call with a few highlights from the third quarter and an update on our transformation, particularly with regard to our growth and efficiency initiatives in the context of the current market environment. I will then turn the call over to Alan for a more detailed look at our financial results. First, I want to acknowledge and welcome Nicole Daniel, who recently joined LP as our Senior Vice President, General Counsel and Corporate Secretary. Nicole earned her juris doctorate from Indiana University and has both an impressive legal background and a wealth of senior leader leadership experience. Welcome to LP, Nicole. We are glad to have you on the team. I am pleased to discuss our performance relative to a market that remains challenging, with sluggish housing starts and stagnant OSB pricing. Specifically, I will talk about 4 highlights for the quarter. First, we are ahead of pace to achieve our long-term targets for growth and efficiency. Second, we hit our growth targets for SmartSide Strand, setting records this quarter for sales and for safe operations. Third, we significantly rationalized our OSB production while idling Peace Valley and curtailing OSB production in our Siding mills. And finally, we generated excellent operating cash flow. The difficult housing and price climate I discussed during Q2's earnings call continued into the third quarter. Single-family starts were a little over 3% compared to Q3 of last year. However, on both a year-to-date and trailing 12-month basis, starts were lower than last year. Despite these headwinds, we continue to make progress towards our transformation goals, which I will discuss in more detail shortly. As shown on Slide 5, we grew SmartSide Strand revenue 13% to $213 million, which is another quarterly record.…

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'll be referencing specific pages of our earnings presentation, which has been posted on our Investor Relations website. So first, let's move to Slide 7 for a review of the third quarter, starting with the consolidated income statement. Net sales fell year-over-year by $134 million. The combination of lower OSB prices, which were down on average of 35%; and commodity OSB volumes, which were down 14%, account for $164 million of the revenue decline. However, this was at least partly offset by the 13% growth of SmartSide, which added $25 million to the top line. Gross profit fell by $138 million principally due to the flow-through of the OSB price decline. The benefits from productivity and efficiency improvements were partly offset by lower fixed overhead absorption as a result of downtime and a quite significant reduction in finished goods inventory, more of which in a moment. Selling and administrative costs of $58 million increased by $7 million over the prior year. And as with the first and second quarters, the principal driver of the increase is our continuing investment in sales and marketing, consistent with our growth strategy. Other charges and credits of $9 million comprised of $5 million impairment charge and $4 million of severance charges, $2 million of which relates to the curtailment of our OSB mill in Peace Valley, British Columbia and $2 million for reorganizations within our corporate offices. Nonoperating income and expense of $5 million includes net interest charges of $4 million and other sundry items. And…

[Operator Instructions]. And our first question comes from George Staphos with Bank of America.

And congratulations on the progress. Brad, Alan, if you could talk a little bit quickly on Siding pricing and realization. And you'd mentioned that there is a swing in rebates from 2Q to 3Q, which explains a lot of the change in price realizations. Could you comment at all as to whether there's any change within mix, whether you're responding to any competitive activity? It wouldn't appear to be, at least from your formal remarks on volume. But for what it's worth, realization, a little bit lower than we were modeling. I just want to say that if there's anything else beyond rebates in that. And then I had a quick follow-on.

Yes. George, mix was an issue in the quarter. We did have a higher proportion of our sales go into our retail channel, which tends to be more skewed to our panel product, which is a little lower pricing than our lap and trim. So there was definitely a mix component. Alan talked about the rebate catch-up. And then I would say from other discounting and sales incentives, they were pretty normal for what we're doing at this time of year. But mix definitely played a component in it, along with the rebates.

So it would be fair to say that, on the one hand, you had a little bit more in the way of retail because of just what's happening in terms of starts versus, I guess, DIY and repair/remodel activity. Would that be what was driving that? And it sounds like you weren't -- you didn't need to respond significantly, if at all, measurably to any increase in competitor capacity in the siding market, which obviously has been an ongoing question this year for your business.

George, I would say, as far as competitive situations as it relates to lap and trim, that usually isn't something that is priced at point of sale. So it's not like we feel that in a quarter. It's more reflective of what we have to do on the rebate side. So we address the competitive situation through rebate and incentives that show up kind of -- no, they show up in our net pricing that we report but more of a subtraction from our gross price than immediate type of a response to competitive situations. And just the original part of your comments, I'd -- it's true that -- well, first of all, we've had really good growth at retail this year. And then -- and relative to what we're seeing in overall housing growth, there's a little bit of a skew towards selling more into retail relative to what we've done in the past from a growth standpoint.

And our next question comes from Chip Dillon with Vertical Research.

Yes. This could be, I guess, either Brad or Alan, you mentioned, I think, if I heard you right that if we assume the 1 90 North Central price, that cash from operations might actually exceed the $80 million you originally modeled, which obviously, attest to the efficiencies you've gained. The question I had, though, is we've seen in recent months a pretty big divergence between Southeast and Western Canadian OSB prices from that benchmark. So I didn't know if you could add some color to how maybe that might make it more of a challenge or maybe it won't as the case might be.

Well, I would say from a guidance standpoint, we haven't got -- we're sticking with what Alan has said. We haven't got to the point where we're differentiating between the regions. But no question, Chip. There's been that divergence, especially prior to the last couple of weeks of price movement. And if you think about the capacity, especially that we took out of our Siding mills that are usually selling into that North Central region, there's been -- it's been less competitive than in the regions that we had lower pricing. And so -- and I think some of these recent moves around capacity coming out of the market is going to have pricing across the regions even out a little bit more to what we've seen in the prior 3 or 4 months. But from us being refined enough to make that distinction on the guidance based on regional differences, we're okay sticking with what we said before.

Okay. That's super helpful. And then just one quick follow-up. You now, I guess, are not making -- or at least in the third quarter, OSB in the Siding segment, which I assume is reflective largely of Dawson making it up its learning curve. But if you could talk a little bit about how we could see the OSB production in that segment evolve as you do your next conversion. Obviously, I would imagine that you would continue to make OSB at your Siding mills as you -- until you fill that mill up with Siding demand.

Yes. First of all, let me back up and just get us all grounded on our capabilities for OSB production in Siding. So we can currently make OSB at 3 locations: Hayward, Swan and Dawson. That's where we can make OSB competitive. I guess technically, we could make it at all the other mills, but in reality, those are the 3 places that we put OSB capacity. But with that said, especially on a delivered basis, when you look at our current network of OSB mills in our OSB business, those would be the 3 highest-cost places to make OSB in our current system overall. So as we looked at rationalizing production this year as an absolute need for what we needed to do, and we ran a network optimization. And that's what led us to the decision to remove the OSB from those operations so that we could put the volume there into lower-cost OSB assets like Sagola. So that is the removal of OSB volume from our Siding is in response to our current market conditions. Obviously, we would rather be running OSB in those facilities when OSB pricing allows us to do so. So when we convert the next mill, it's a little bit depending on what that mill is, but we would certainly aspire to having OSB flexibility at the converted mill; and if not, retaining in the rest of the SmartSide system so that we could balance production across the whole system.

And our next question comes from Mark Connelly with Stephens.

Brad, recent stories are blaming old people for not moving out of their houses. And it seems to me that if that's the new trend, that it simply means that the market needs more low-priced homes than high-priced homes and not enough is getting built. So if that is the new trend, how does that affect your profitability in OSB and Siding? I assume you take a modest hit on square footage, but would there also be a material shift in your Siding demand if houses got smaller?

Well, certainly, if the house is smaller, it's going to use less OSB and Siding, that's by definition.

But is your average house materially bigger right now? I mean is it going to be a material hit to you if the average house in America gets bigger? Where do you sit on that curve now?

Maybe just clarify the question a little bit.

Well, I'm just -- I'm really just trying to get a sense of how big your average siding start is now. Is it materially bigger than the starter home? Or -- I'm just trying to get a sense of this, if this is going to be a big issue.

Got you. Okay. So I would say our -- the average home that SmartSide goes on day is bigger than the starter home. We typically start -- I mean I'm making a real generalization, but typically, starter homes are vinyl. And so as you move up the value equation on home size, that's where we tend to play more competitively from a hard siding standpoint. So yes, I agree that -- I mean this is just my experience, but I would agree that the average SmartSide home is larger than -- well, maybe not above average, but it's certainly not a starter home, typically a starter home. So if the market was to swing to a heavy -- a lot bigger proportion of smart -- of starter homes, then the size of the home would be smaller, and we would need to be more competitive there against vinyl. And the way you get competitive against vinyl, not necessarily is always about price but by offering a product offering that can be beneficial to a homeowner in a starter home and thus, the move into prefinish and some of the other specialty SKUs that we're working on in our SmartSide business.

That makes sense. Just a related question, in general, are the siding margins that you experienced in repair and remodel significantly different? You talked about rebating. I'm just wondering, do you spend materially more marketing in the R&R channel than you do in the new home channel?

We definitely spend more in the R&R channel than in the new construction channel or the retail channel, without a doubt. It's more of a consumer sell than what we see in new home construction. But I will say also, there's probably a little richer mix because there's going to be much more lap and trim compared to panel. So we do benefit on a margin and pricing standpoint because of mix. And as we move into prefinish and get -- and able to retain the incremental margin associated with a prefinished solution, which we want to play really well in repair and remodel, the opportunity -- and we look at repair and remodel as a higher cost to serve but also higher margin at the end of the day because of the prefinished opportunities that exist there.

And our next question comes from Ketan Mamtora with BMO Capital Markets.

First question, Brad or Alan, can you talk a little bit about sort of your OSB order books? And what you see in terms of inventory in the channel for this time of the year?

Yes. Sure. We're out of 2 to 3 weeks, which is normal for us, keeping right now. As everybody on this call knows, we had a really nice rally a couple -- the last couple of weeks in OSB pricing. The reason -- one of the -- from a demand standpoint, the reason for that rally was inventories were very low 2 or 3 weeks ago. And I think there was a scramble to rebuild those as some of the production came off-line. And so there has been some return to normalcy in inventory in the channel, but I would say it's currently still below normal for this time of year. But because the distributors and dealers are just playing it so close to the vest up to 2 or 3 weeks ago, there's been a little bit of scrambling in an attempt to rebuild inventory levels.

Got it. That's very helpful. And then just one other question on the Engineered Wood business, can you talk about how you are thinking of the business long term? I mean year-over-year EBITDA through the first 9 months is still down. There's new capacity that's coming into the market in the U.S. South. Just talk about kind of -- is this business really core to LP?

Well, it's core to LP. As I've mentioned before, the distributor base that we sell our EWP into are the same distributors, the same customers for Structural Solutions and for our Siding business. And so -- and it does make the portfolio offering that we have to the channel more relevant by being in the EWP business. But as I've also said in the past, that's no excuse for not earning the cost of capital. And so we continue to work on that within the business. You know, Ketan, we've done a lot around SG&A reduction. We've done a lot around pricing in that business, and we continue to work within our mills with our OEE initiative to drive efficiency. So we do definitely have a target of return -- that business getting to where it's returning the cost of capital. And I -- and we've made good progress against that goal, but there's still work to do.

And our next question comes from Mark Weintraub with Seaport Global.

A couple of real quick ones. First, if you could just let us know -- since you're not making OSB in the Siding segment anymore, at least for now, in the fourth quarter and the first half of this year, what would the transfer to OSB segment have been in those periods? It was $4 million in the period just ended.

Given as being working backwards through time, $1 million less each quarter. So about $3 million in the second and $2 million in the first, something like that.

Okay. And the fourth quarter of last year?

I'll have to get back to you on that one.

Okay. Sure. And then second, are the finished goods inventory now at levels where you want them to be in the Siding business?

Yes. Yes.

Great. Third, can you update us on the rebates? Are we still seeing -- is it a fair place to expect we're still up like those 2%-type rebates? Or have market dynamics changed at all since the -- in the last few weeks, months?

Well, I mean, market dynamics haven't significantly changed. I mean the rebate -- the majority of the rebate in the third quarter was actually a sort of a catch-up to a year-to-date basis. So the pricing and the rebate impact, if you take Q3 as a discrete quarter, was a little better than it looks.

And our next question comes from Sean Steuart with TD Securities.

A couple of questions. Are you at a point where you can provide any guidance on 2020 CapEx plans and maybe some detail on specific discretionary initiatives?

Yes. I mean, it will be lower than the projected maximum of $160 million in 2019. At the moment, I would say a very safe number to work on for 2020 is about $140 million.

And would there be any exciting conversion capital in that number?

Nothing significant in there. No.

Okay. Second question, there was reference in the notes to a $5 million impairment to a Canadian facility that you expect to sell within the next year. Any context you can provide there?

Not yet for confidentiality reasons. So I would say it's a small facility that we're looking at that we're most likely going to disposal.

And our next question comes from Steve Chercover with D.A. Davidson.

So I think maybe Ketan touched on why prices are down in Engineered Wood. But on a percentage basis, profits are down more than revenues, which I think is surprising since presumably the cost for OSB used for web stock is down a lot. Can you help us reconcile that?

Well, I think I would say that the component of total raw materials cost in EWP represented by web stock is small enough that, that impact was not surprising to us. There's a significant amount of raw materials other than that web stock. And so while the cost reduction of the OSB is helpful to our I-Joist manufacturer, it has less of an impact on the other components of the EWP business.

Okay. So is it fair to say that it really didn't run that well in the quarter?

I'm sorry. I didn't catch that. Can you repeat the question?

Operationally, I mean. Clearly, you've made some good progress in OSB with the lowest production cost in two years. But you couldn't say the same thing for EWP. Is that accurate? That it ran well?

It is accurate that we cannot say we've made as much progress in EWP as we have in OSB. And I will say, just to kind of dive another level of detail, we still -- the LSL production in EWP is a very volume-sensitive mill. It's a big mill, has a lot of fixed costs. And so as we -- the mix component of that product into our EWP business can have a pretty big impact on overall profitability for the quarter. Our EW -- our I-Joist and LVL business remains okay, but we do have quarter-to-quarter swings in LSL production that can really impact earnings. So I'm saying when it looks funky, Steve, it's usually a mix change that's associated with LSL.

Okay. And then just one on the transformation in OSB. I mean you basically found, to paraphrase you, about a mill's worth of capacity thus far, and we still got another 2 years to go. You think there's another mill to be found?

There's a lot of opportunity. There is a lot of opportunity in there, Steve. And we -- and as we've talked about in the past, there's minimal capital associated with funding that mill. I mean there's some capital that's associated with it. It's primarily really just running really well. And so all you're really doing is adding variable costs. So we are really focused on our growth in OSB being a result of OEE, and then there's still a lot of room to answer your question.

And our next question comes from Paul Quinn with RBC Capital Markets.

Just a high-level question on SmartSide, if you could break down that end-use demand between home and, I guess, outside the home. And then within the home, what portion is new home? Or what portion is R&R?

So what we said for a long time, about 40% -- we estimate about 40% SmartSide volume goes into new home construction. And that leaves 60%, obviously. 100 minus 40 is 60. About -- we've got 20% to 30% of the remainder going into retail, into the shed segment and then 20% to 30% into repair and remodel in some form or other. And those are -- we don't have direct visibility into that because it goes into distribution, but that's our estimate on where the product ends up.

Okay. And then as Dawson's in start-up, maybe you could give us an idea of timing for the next mill conversion. Does that take us out at least through 2021?

Yes. Paul, I think we'll be talking probably more specifically -- be in a position late next year to talk specifically about location. And then, as Alan mentioned in the CapEx guidance, we would currently think we'll begin spending capital on the conversion in 2021 for a late-2021, early-2022 production.

And we have a follow-up question from Mark Weintraub with Seaport Global.

One quick one on marketing expense. I think you mentioned that you're kind of at a high point seasonally. What type of expectations in terms of the trajectory for marketing should we be thinking about in Siding?

In general, continued increases. I mean the marketing is supporting our drive into repair/remodel and prefinishing. So as we've said, we are continuing to grow Siding and continuing to invest in that growth. We have some sufficient confidence in it, but we believe the returns on these marketing dollars will be excellent.

Okay. And then lastly, in the slide at the end, you talk about returning about 50% of cash above and beyond what's needed to sustain the core business and growth, Siding. Can you give us -- is there any sense you can give us as to how to think about what that number to sustain the business and grow Siding is?

Yes. Certainly. And I'm -- it's somewhere -- it's about $120 million to $130 million a year, was our rough estimate that included necessary maintenance and the relevant elements of growth capital.

And we have a follow-up question from Chip Dillon with Vertical Research.

Yes. Just an update on your plans for buybacks. You had mentioned, I think a year or so ago, when you first started talking about your new capital allocation that you would eventually incur a meaningful amount of net debt. But as long as you had a revolver in place, you were good to do that. So I just was curious if you're continuing to -- what -- kind of some guidance in terms of how much you might be looking to buy back in the next quarter to next year?

Well, that's a little -- pushing me to say a little more than I'm willing to say at the moment, Chip. So we will be completing the $600 million buyback, obviously and...

By year-end?

Yes. Yes. And thereafter, we have -- so when we release our fourth quarter results, that's the point at which I'll give further clarity on how we see -- what we see our next tranche of development being. So it's a little early for me to come out with that right now.

All right. That's super helpful. And just a quick follow-up. Of the -- that means you basically have $120 million left for the fourth quarter. Was there any reason you couldn't have been buying back stock up until now? I'm not sure what your like lockups are or quiet periods are.

No. Not really. Other than post the last earnings call. But I will say this, and 2 days ago, the share price was $29 change and $30 or so. I don't consider the difference between $30 yesterday and $24 that we bought our shares back at -- over the third quarter as being a meaningful difference. I still consider the stock to be significantly undervalued. And the -- our buyback activity is not in any way related to an assessment of the share price. I don't consider the share price to be high.

And I'm not showing any further questions at this time. I will now turn the call over to Aaron Howald, Director of Investor Relations for any further remarks.

Okay. Thank you, everyone. This concludes our earnings call for Q3. We look forward to speaking with you again sometime in February to discuss our fourth quarter results. Back over to you, Sydney.

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.