Louisiana-Pacific Corporation (LPX) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Louisiana-Pacific Corporation Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker, Mr. Aaron Howald, Director of Investor Relations. Please go ahead.

Thank you, operator. And good morning, everyone. Thank you for joining us to discuss Louisiana-Pacific's financial results for the first quarter of 2020 and a discussion of our outlook, given the COVID-19 pandemic and economic disruptions. 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, Chief Financial Officer.As we have done in the past, we are hosting a simultaneous webcast in addition to this conference call. The webcast can be accessed at our website, www.investor.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 8-K this morning with some additional information.I want to remind all participants on the call about forward-looking statements and our use of non-GAAP financial information during the discussion. I will refer you to Slides two and three 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, I incorporate them by reference.And now I'll turn the call over to Brad.

Thanks, Aaron. And thank you all for joining us this morning. Normally, I would start an earnings call with a high-level overview of our financial results, followed by an update of our ongoing strategic transformation. I'll then turn the call over to Alan for more detail on the quarter, but this is obviously not a normal quarter. We had a strong first quarter, but I will leave the details of our financial results to Alan.This morning, I'm going to spend my time updating you on LP's response to the ongoing COVID-19 pandemic and its subsequent economic impacts, both generally and specific to housing and LP.I believe that LP is well positioned to address the challenges and eventual opportunities that COVID-19 presents. I want to share those details with you. Slide five of the earnings presentation summarizes these steps.Through early March, housing fundamentals were as robust as we have seen in years. Seasonally adjusted housing starts were above 1.5 million, mortgage and unemployment rates were near historic lows and consumer and builder confidence was high.But starting in mid-March, as COVID-19 concerns grew, we saw a slowdown in demand for new homes. This resulted in declining order volumes as our customers saw their demand drop and responded by lowering their inventory positions.LP took immediate steps to protect the health and safety of our employees, customers and contractors, while also adjusting operations and capital allocation to reinforce an already strong balance sheet.The safety of our employees is always our highest priority. Most of our facilities are in jurisdictions that have deemed housing to be essential. This has allowed those facilities to continue to operate, though, in some cases, have reduced schedules.In order to reduce transmission risk at our facilities, we instituted aggressive cleaning, employee screening and social distancing procedures wherever possible. We've also limited access by visitors and contractors and adjusted our shipping and receiving processes to maintain distancing protocols.In Nashville, our corporate office has been under a local Safer at Home order since mid-March, with most employees working from home since March 13. We have adjusted our PTO policies, increased access to online resources and taken other steps to increase communication to minimize the negative impacts on our people.In addition to keeping our employees safe, we have done what we can to help our local communities respond to the crisis as well. Our mills have donated personal protective equipment such as masks, gloves, hazmat suits from our store rooms, and our supply teams have been creative in sourcing increased volumes of PPE for our mills, our employees and our broader communities. I am gratified that productivity and morale have remained high as we adjusted to these new realities.More importantly, we are fortunate to have had very few confirmed cases of COVID-19 among LP employees, all of whom have recovered. These efforts have been coordinated by LP's Pandemic Response Team.I am very grateful for their efforts and good work. As the situation evolves and we see signs of recovery, I will rely on that team to keep us informed of and aligned with the guidelines put in place by all relevant authorities.We have seen a material softening of demand, as had many of our customers, as COVID-19 fears have led to shutdowns, unemployment and general uncertainty. LP took steps to ensure the health of our business by adjusting operations and reinforcing our already strong balance sheet.We ended Q1 with $488 million of cash on hand, including $350 million from a revolving line of credit, which we drew in late March out of an abundance of caution. We amended our credit agreement to provide for an incremental $200 million should we need it. We have no principal payments on our long-term debt due before 2024. I am confident in our balance sheet.As sales have slowed, the Siding and OSB segments are adjusting their operating levels to balance supply and demand and optimize working capital. As difficult as it is to reduce shifts and take market related downtime, we are doing so as efficiently as possible by preserving the upside for the eventual recovery.Regrettably, this has resulted in layoffs for some of our mill employees. Thankfully, increased unemployment benefits and other government programs will ease the burden for them and their families. We hope to welcome them back as soon as customer demand warrants increased production.To further preserve cash, we have reduced our spending on capital projects and suspended share buybacks. We announced at the end of March that we were reducing our planned capital expenditures by 50% to $70 million.Given our Q1 spend of $25 million, this implies a run rate of roughly $15 million per quarter for the remainder of 2020. Our main project is prioritize safety, environmental stewardship and grow the SmartSide ExpertFinish, our recently launched prefinish Siding offer.In terms of our capital allocation strategy, our authorization to buy back $200 million worth of shares remains in effect. We have no plans to buy back shares in 2020. We announced this morning that we are making our regular dividend payment of $0.145.All of our planning has two important things in common: First is informed by extensive scenario analysis that Alan will detail in a moment; second, our adjustments to our CapEx and operating plans are flexible by design.As the situation changes, this can be flexed up or down as future challenges or opportunities emerge and conditions warrant. And of course, the very best way to preserve cash is to generate more of it. Compared to Q1 of 2019, EBITDA and operating cash flow were better by $25 million and $45 million, respectively.No one knows the duration or ultimate effects of the pandemic on our industry or the pace or shape of eventual recovery, but LP's management of this crisis is not predicated on accurate predictions. Our liquidity, strong balance sheet, operational agility and experienced leadership positions LP to weather the current crisis as it evolves, respond to developments as needed and prepared to thrive in the inevitable recovery. I am proud of our employees who are rolling up their sleeves and responding to this crisis. And I'm confident LP will emerge stronger than ever.LP will navigate the next phases of this pandemic with the same priorities and focus that got us here; the safety of our employees, the continued strength of our business and the preservation and growth of shareholder value.Tennessee allowed its state-wide stay-at-home order to expire at the end of April, and we are conducting this call from our offices after a seven week absence. Hopefully, the same will soon be true for everyone on the call.With that, I'll turn the call over to Alan for a more detailed review of our first quarter results and the actions we have taken in response to the COVID-19 pandemic.

Thanks, Brad. And again, thank you all for joining us this morning. My prepared remarks today begin with a discussion of LP's results for the first quarter, but like Brad, I'm devoting most of my time to discussing our approach to the second quarter and beyond.As you'll see on Slide six, our strategic transformation continues with a further $13 million generated in the quarter from growth and efficiency. We have now accumulated $81 million, which is clearly at a pace towards our 2021 goal of $165 million.As a result of this and higher OSB prices, EBITDA of $83 million and adjusted net income of $38 million are $25 million and $21 million better than 2019, respectively. Operating cash outflow is $9 million compared with $54 million of outflow in 2019, primarily due to higher EBITDA and lower cash taxes. Ultimately, this all resulted in adjusted diluted earnings per share of $0.34, which is $0.21 better than last year.The earnings per share figure is based on $19 million or 15% fewer shares than last year due to the buybacks in 2019. We didn't buy back any shares in the first quarter. And as Brad said, we currently have no plans to do so in 2020.Our abbreviated income statement on Slide eight shows sales for the quarter up $3 million and cost of sales down $24 million, with a corresponding improvement in gross margin from 14% last year to 18.5% this year. This is primarily the result of higher OSB prices offsetting lower OSB volumes.Due to the pending sale of our East River facility, we have also reclassified the CanExel business associated with that facility out of Siding and into other. Prior periods have been similarly recast to reflect this move. But with and without the reclassification of the CanExel business, deciding EBITDA margin has risen year over year from 18% to 20%.Turning to cash flow. Our normal seasonal working capital pattern involves a substantial increase in log inventory in the first quarter in preparation for spring breakup. We also built significant SmartSide finished goods inventory in anticipation of a very strong second quarter, both of these contributed to a $74 million increase in working capital.Capital spending of only $4 million was $19 million lower than last year. As a reminder, the first quarter of 2019 included spending on the final stages of the Dawson Creek mill conversion. And including our undrawn revolver extension, we currently have $700 million of liquidity.Now turning to the future. Since early March, we've been stress testing our business and our balance sheet under a range of potential scenarios. This has allowed us to take carefully calibrated steps to optimize our liquidity and minimize risk as well as to define contingencies for various magnitudes of upside and downside.The specific areas I will address are capital spending; production and capacity planning; finished goods and raw material inventory; SG&A; and finally, our capital allocation strategy.On our last earnings call, we guided to full year 2020 capital spending of $130 million to $140 million. This is lower than either of the past two years, in part because the Dawson Creek Siding conversion project is now complete. However, it remains the largest addressable component of our cash outlay for the year.LP's engineering and operations teams collaborated to reprioritize the portfolio of projects under several different scenarios. The plans are agile and flexible by design with the ability to increase or decrease spending as the developing situation warrants.As a result of this work, the current planned level of capital spending averages $15 million per quarter for the remainder of the year. To put that in context, during the depths of the housing crash, LP took capital spending to an average of $15 million per year for three years.Cutting that low again could entail risks, not least to our OEE targets on which we have made so much progress. We currently have no plans to make cuts that extreme, but it remains a possible course of action should the economy worsen considerably.Capital planning and production planning are tightly coordinated. So let me now discuss adjustments that businesses have made to operating levels. The slowdown in housing demand that began in March worsened through early April.Housing starts are famously difficult to predict while the consensus estimates for 2020 have dropped by roughly 250,000 or almost 20%. The uncertainty inherent in those estimates has increased.And although softer than pre-COVID levels, demand for some of our products has been more volume for April than we expected, particularly with retailers and DIY remodelers. Of course, balancing supply and demand in a market like this requires discipline and agility.Our operations and supply chain teams have built various scenarios for reduced production with different shift and shutdown patterns and in a more prolonged downturn mill curtailments. The plans all balance, safety, efficiency and flexibility and are anchored around targeted levels of finished goods.In March, we announced reductions for April production of 100 million square feet of OSB and 50 million square feet of Siding. These plans are extended, adjusted and modified on a rolling 2-week basis to respond to changes in customer demand.So far, we have not indefinitely curtailed any mills other than Peace Valley, and none of the changes made to manufacturing capacity would preclude a rapid return to full utilization should demand warrant such.During the first quarter, the Siding segment built significant finished goods inventory in January and February. This allows the Siding segment to continue to meet customer demand even with a reduced production schedule.By virtue of the different storage requirements for OSB and Siding, the OSB segment has a smaller quantity of finished goods inventory relative to its sales volume, but is also managing production to meet finished goods targets.In terms of raw materials inventory, the largest single component is logs. And the first quarter is one of disproportionately large acquisition of logs as our northern mills prepare for spring break-up, during which time many logging roads become impassible and logs cannot be accessed.COVID-19 began impacting the demand just as our pre-break-up log purchases were slowing down. In other words, we entered the second quarter with a healthy supply of logs with a long shelf life [Indecipherable].Fortunately, despite the dislocations caused by COVID-19, we have not seen any significant interruptions in supply for our raw materials, I'm confident that our supply chain team has the matter well in hand.And finally, we are already executing on a plan to reduce overheads and expenses, managed in phases and tied to varying expected durations and levels of economic downturn, which brings me to our capital allocation strategy.We remain committed to returning to shareholders through a combination of buybacks and dividends at least 50% of cash generated after necessary capital spending. As of right now, that commitment is being met through dividend payments.So what does all this mean for the second quarter and beyond? Well, given the number of uncertainties particularly around housing starts and OSB prices, it is difficult to provide meaningful guidance. But I think we can at least describe how, as of today, we think Q2 could play out under a given set of assumptions.Starting with the second quarter of last year as a comparison point, let's assume a year-over-year reduction in single-family housing starts at 20%. Let's further assume that this results in a 20% reduction in SmartSide volume and a 30% reduction in OSB volume, given the idling of Peace Valley since then and the additional downtime already discussed.If we further assume that OSB prices are flat with last year, in other words, close to the bottom of the cycle and the SmartSide prices are also flat with last year, then we would likely see a 25% drop in year-over-year revenue for LP as a whole. At that revenue level, given the capacity and cost management plans I've outlined, we believe that we would still report double-digit EBITDA.Furthermore, given the reductions in revenue and production and the high log inventory levels previously discussed, we will harvest significant working capital. And after funding $15 million of capital spending and $16 million of dividend payments, we expect our global cash balance to rise through the second quarter.So how does this scenario compare to what we've seen in the past few weeks? Well, first, our order intake in April gives us reason to believe that a drop as steep as 20% in SmartSide volume is unlikely; and second, OSB prices have ticked up recently. Friday's North Central price for 3/8 sheathing was $233, meaningfully above our modeled price.Clearly, we're in a very uncertain environment and much can change between now and the end of the second quarter. But what data we do have is just to believe that our models are moderately conservative. All other things being equal and should these conditions persist over the long term, we expect to generate cash flow from operations in excess of capital spending even at lower demand or lower housing starts than the 20% reduction I described a moment ago.I must stress that this does not constitute formal guidance. I mentioned it to provide some context for the second quarter, given what we know today and to show that LP has the operational flexibility to survive a deep and sustained downturn in housing and perhaps more importantly, to emerge well positioned for the eventual recovery.Hopefully, it goes without saying that all of our long-term targets on Slide 13, therefore, remain unchanged. But most importantly, we will do our utmost to ensure the health and safety of our employees as well as that of our customers, vendors, contractors and the communities in which we live and operate.And with that, I'd like to open up the call for Q&A. Operator?

Thank you. [Operator Instructions] Our first question will come from Ketan Mamtora with BMO Capital Markets. Please go ahead.

Thank you. Thanks for taking my question. First question, Alan, maybe to just start off sort of on Q2. You said your assumption of 20% reduction in Siding volumes looks too much. Maybe just sort of give us some sense on what your volumes have been in April? Are they down sort of in the teens, maybe high single digits and maybe on OSB as well?

Certainly, yes, I'm willing to supply an answer here. We're seeing ourselves down in, I would say, the high single digits, so not even in a double-digit percentage decrease right now.Now I will say, and we all know that this could change at any moment, but we are, I would say, very heartened by the demand we're seeing for SmartSide, which, as I said, is significantly exceeding our downside case right now.And OSB - your second question was on OSB. Again, with OSB, it's more a question of basically reacting to what our customers tell us in terms of the balance of, let's say, pricing demand. So as we've said before, we're not pushing any product into the market that the market doesn't demand.And I would say that the downtime that we've taken would at least, at this point, appear to have, I'd say, helped the recent recovery in prices. But again, it's hard to predict the future.

Got it. And then maybe just the curtailments that you all had taken in April, both in OSB and in Siding, is it fair to say that at this point, they've continued into May?

So Ketan, we're - as Alan said on the prepared remarks, we're doing operational planning weekly with a significant update every two weeks. We are carrying curtailments over into June, but not at the levels - I'm sorry, over into May, but not at the levels that we did in April.Let me speak to that on two points there. What we saw in late March and April, I believe, was definitely a slowdown in demand, but also a lowering of inventory in the channel. So that caused a great deal of downtime in the month of April.Once the distributor inventory stabilized, we saw strength in both the OSB and Siding order file. So the downtime that will be taken is currently has scheduled for May or not as significant as the downtime we took in April. And then as we look into June, obviously, we'll match our downtime to the order file.

Got it. That’s very helpful and then just last one, and I'll turn it over. Just on the CapEx, can you just remind us how much would be kind of just the maintenance CapEx, if you all had to cut it down further?And then just thoughts around how you think about dividend in this scenario? Obviously, it's an evolving situation, but any thoughts around dividend will be helpful.

So you know, I am certainly comfortable that the current level of CapEx spending that we've guided to is sustainable for a while. You'll recall, the past couple of years, we've talked about the press rebuild program we've gone through in OSB. We've had that largely behind us. There's still a couple of mills more that we need to do.We've done - made some significant progress on another major component, which is a dryer upgrade series of projects that we had scheduled. And then as you know, we've - with the conversion of the Dawson Mill, a significant amount of capital went into that conversion, and we had that behind us.I do think we could. It's possible we could make another cut in the 50 to 60s - to half to two thirds of the remaining from where we are today. We would not want to sustain at that level for very long, but for a year, I would be comfortable with another set of cuts.That would pretty much eliminate all upgrade projects and have us really just focused on safety, environmental stewardship and a very high priority for us is maintaining our ability to convert the pre-finished program that we're doing in Siding.As far as the dividend, that's something we will look at quarter-to-quarter. As we see the economy roll out, the realities of our order file, the realities of pricing in OSB, there's a lot of different inputs to go into our thinking about the dividend. Obviously, we've decided to pay it this quarter.And so it's a - but it's a multivariable look at where we're at the moment, and then what we see in the immediate future around our order file. And then also, I guess, Ketan, if we get more clarity and some bit more consensus on what the recovery curve is going to look like, as it pertains to housing, that would also definitely inform how we view the dividend.

Got it. Very helpful. Good luck. I’ll turn it over.

Thank you, Ketan.

Thank you. Our next question comes from George Staphos with Bank of America. Please go ahead.

Good morning. This is actually John Babcock, on the line for George. I did just want to follow-up, though, on the kind of demand side here. I was wondering if you - I mean, I think you mentioned that, I guess, demand right now is down kind of in the high single digits, at least in Siding.I was wondering if you'd kind of break that down a little bit by end market. Is it - is that a repair and remodel holding it up? And also then generally if you could kind of talk about what sort of trends you're seeing in the repair and remodel side?

Yes. John, that's a great question. Let me talk about it in two dimensions. There's a geographic mix and a segment mix. And obviously, we have a national program in Siding. We sell in all states and provinces in Canada. And so there's been pockets of strength just across the board in certain regions, especially in the south. But fortunately, in SmartSide, we have good market share, and especially in the Southwest area, the Texas market, the middle part of the South.So we've seen relatively strong pulls from really - I'm going to keep - let me say this again, relatively strong pulls from distributors that have not been impacted by any work-related orders to shut down. We've seen extreme weakness, obviously, in the ones where there's been limitations on either building construction or actually the distributors themselves have had to close down.And you see - you could pretty much look at the map, the COVID outbreak map, and even the lighter areas of infection, we've seen good demand relative to the rest of the country.Okay. On the segment side, obviously, new home construction has been directly impacted by COVID. We are seeing extremely strong pulls from the home centers. All three of them, we have significant positions in, and we've seen really good pulls across the nation and in all three of the main consumer retail outlets for building products.And as you've mentioned, we also have seeing good volumes in repair and remodel, I would say, primarily driven by our conversion to our in-house pre-finish. That's been very well received, and we have distributors that are building new positions in that product as we launched it at the beginning of the year.So there probably has been some inventory build as we've secured new distribution due to that brand of pre-finished product. But, again, the demand there has been strong. So the bright spots have been retail and repair/remodel as it relates to our pre-finished program.

Okay. That's helpful. And then kind of the next question I had. I mean, I know kind of in the past, Siding, I guess, has been viewed to be beneficial in part because prices have tended to hold up well through the cycle.Have there been any sort of variances or discounts offered on the Siding front? And then lastly, if you could just kind of talk about EWP, and what kind of drove the strength there? Because it seems like that was a good spot during the quarter.

Yeah. So on Siding pricing, most of the pricing adjustments, all the pricing adjustments we make are usually on the back end through a rebate program. And it is really early to be making a comment. Most of those programs are annual programs with a quarterly true-up, let's call it. And I would say, right now, it's pretty normal to what we're seeing. No - certainly, no extreme swings either way. Just let me mention some - a lot of those rebates are volume dependent. And so as volumes growth slows, the rebate payout has a potential action to be less.So - but I would just - to answer your question directly, say, a little change in that back-end rebate percentages, so that has not impacted the Siding pricing. On the EWP side, we actually saw relative strength in that order file, early on when Siding and OSB were falling off a little bit. We do have new distribution pretty much nationally for that product. And compared to prior year, we were kind of in flux.We have a lot more stability in order patterns there. That order file, I'd say, most recently has kind of come out on to match up a little bit more with OSB, which has been a fall off. But still relatively good volumes for EWP, and in the scenario range that Alan talked about for Siding and OSB minus 10 to minus 25 compared to prior year where we're at right now.

Perfect. Thank you.

Thank you. Our next question will come from Steve Chercover with D.A. Davidson. Please go ahead.

Thanks and good morning. So yes, Random Length on Friday, as you mentioned, was pretty strong. And I'm just wondering, how would you characterize inventories through the system? And is there a potential for perhaps a short squeeze as we head into - as the hammers get going?

Inventories in the channel are lean. Obviously, we talked about liquidity a lot on our call or our prepared remarks. And I think our distributor partners are looking at it the same way, not looking to build any unneeded product inventories. And as I mentioned before, we certainly saw a drawdown in channel inventories, March and April. So I would expect any significant move up in homebuilding or repair, remodel demand to fall directly into strengthening order files.And it's hard to understand, sorry, Steve, it's hard to understand. I mean, it's impossible to understand the impact of COVID. It is very regional. But going into a spring building season, I would say that inventories in the channel are relatively low.

Yes. Thanks for elaborating. So actually, this is not my next question, but do you feel that you're far better positioned than you were in 2008. I mean, back then, you were hoarding cash, but you just sold trees. How do you feel about LP's just position?

Steve, I was with LP then and it does feel differently in several ways. Let me, first of all, our Siding business is at least double the size of revenue, more than double the EBITDA as we've been able to increase margins in that business. As we've talked about on previous question here, the pricing is relatively stable for that product, for the whole segment.So while you can get volume swings, it's not matched by the pricing swings that we see in OSB. So we've got a cash generating part of our - a significant cash generating part of our business that's 2x or more the size it was in 2008.You will also recall, I think, at least those that were following us then, we had three significant capital projects underway during the beginning of the downturn we were building two OSB mills and converting an LSL mill in Houlton, Maine. So we had a pretty significant outflow of CapEx leading up to that - or had just been completed, and we were in start-up mode at those facilities, depending on which one we're talking about.And so - and then I would say finally, our OSB business, because of the conversions we've done of OSB mills over deciding, there's two less OSB mills in our system than there was in 2008, just from a mill conversion. And obviously, with the closing or the indefinite curtailment of the Peace Valley last year, we have less volume there.So we're more nimble on the OSB side or have a better higher percentage of value-add OSB, which could be helpful at this time. And I think we're in a position because of the size of our scale of our OSB business to move around downtime and better match up supply with demand than we were when we had a much more commodity-focused system back in 2008.Also these are little adds now. Our South America business is about double the size. And then our EWP business has been able to be EBITDA positive now for six or eight quarters in a row. So we don't have that big negative hanging overs as well that...

That adds up.

Over a year.

Sure. Not to mention that we were probably overbuilt by two million houses 12 years ago and probably under built by a couple million now. Okay. My last question is actually - hopefully, it's not a weird one, but I kind of like the optionality of Entekra and who knows how COVID is going to impact all this.But I mean, do you feel that Entekra might be a beneficiary if, because of COVID, we want to build in kind of a hermetically sealed environment? Or conversely, is that a negative because they can't get the social distancing within Entekra?

Steve, great question. So I'll only do - on the pros that I see are many, and I think dominate the cons, but I want to mention a con. From a pro standpoint, the facility, the Entekra model is highly automated relative to what's out there today as far as wall panelization systems.So social distancing is very much in align with the way that plan is configured. So the idea that we could reduce the risk of spread of COVID by moving to an Entekra type system is very much a positive for. So I see it as - overall as a positive. I have thought about, though, one of the things we were addressing within Entekra was the idea that construction labor - on-site construction labor could be limited. I think with - I would propose a hypothesis that there might be some folks that have been working in service industry that may look on framing as a more secure mode of earning a living as we come out of this.So I think we could free up some labor for that, but I'm still very bullish about the Entekra system over the medium to long term being able to prevail over on-site construction, especially in high labor cost markets.

Got it. Okay. Thank you. Stay safe.

Thank you.

Thank you. Our next question will come from Sean Steuart with TD Securities. Please go ahead.

Thanks, good morning. A couple of questions. When you qualify a strong pull from home centers, does that mean treading water in the current context or actual year-over-year growth for Siding and OSB from that channel?

Well, Sean, let me say, I was speaking specifically to Siding and its positive year-over-year growth.

Okay. And a question on the overhead savings program. Can you give us any quantification of your targets pulling fixed costs out of the system?

Not yet. I think it'll be a bit premature on this call at the moment, Sean. So it'd be a bit premature.

Okay. The rest of my questions have been answered. Thanks very much.

Thank you. Our next question will come from Mark Weintraub with Seaport Global. Please go ahead.

Thank you. A few follow-ups. First, on the Siding business, can you give us an update on what you're seeing in the sheds part of the business?

As I was talking about the segments, shed is a very important segment for us, given our volume of panel. We have seen a relative weakness there. It would be one of the ones that I would call neutral to down compared - certainly down to what we expected it to be this year, and I would have to say down versus prior year as well.Typically, those systems are - that volume is in big block orders as distributors put in inventory in anticipation of the spring and summer building season for shed. And while we've had - definitely had some big block orders placed, not so - certainly not to the amount we had budgeted.

That's always a little surprising. I would have thought that might have been a place of relative strength. You know if that's your customer destocking because of uncertainty versus what the end customer is doing or is it just really hard to get a read on that?

Mark, I would - thank you. I would say it's our customers destocking. I can't speak to the underlying demand out.

Okay. And in terms of the second quarter, you'd kind of walked through a scenario, kind of a downside scenario and suggested that even in that case, you'd expect double-digit EBITDA. Double-digit is a pretty wide range. Can you kind of give us any sense whether you're talking a low double digit, medium double digit, high double digit?

I will go so far as to say medium double digit, whatever that means, relative to the level of EBITDA we reported last year.

Okay. And I interpret that as $30 million to $70 million of EBITDA. And obviously, this is that fair?

$30 million to $70 million, no, we reported in the region of $53 million, $50 million of EBITDA last year. And I will - and bear in mind, the scenario I painted was very pessimistic on SmartSide sales. And as I said, we're running well ahead of that and also very pessimistic on OSB prices, which are running very well ahead of that.

Great. Thank you. And then just lastly, on the Siding business and thinking about incremental margins on revenue, obviously, it's a 20% EBITDA margin business. Is - can you give us a sense of what incremental margins on new or lost revenue might typically be expected to be?

Yeah. I would - it all - again, it all depends on the efficiency of our cost control, both in terms of the way we manage our mill capacity and downtime and the way we manage our SG&A for that business.But I would say that the conversion rate - let's use lost dollars, the conversion rate on any downside, think of it in the sort of 30%-ish incremental margin range, 30% of every incremental dollar, that's a pretty conservative way to look at it.

Thank you.

Thank you. [Operator Instructions] Our next question will come from Mark Connelly with Stephen. Please go ahead.

Hey, good morning. This is John Rider, on for Mark. Our first question is around the Brazil business. And does this economic turn affect the way you're thinking about Brazil's market strategic significance to LP? And would you consider exiting the market given the difficulties we have seen with OSB there even in stronger economic times?

Yes. Good question, John. We have shifted a significant portion of that volume to Asian export over the past three to four years. And that - honestly, that volume has held up well. It was really good strong last year and has held up so far this year.And so as we've been able to balance overall weakness and candidly our inability to convert that market to stick build homes like we were able to do in Chile to make that mill more of an export-focused facility. And under that scenario, it has been a contributor to us.

Okay. That's really helpful. Thank you. And then just our second question just around R&R channels in Siding. Are you pretty well established in the R&R channels versus where you want them to be? And we're not looking for a forecast near term, but if R&R doesn't pick up relatively to new construction, how well positioned are you to capture that growth?

That's a good question. Know that we are not positioned like we'd like to be, we are very much working on that, but it's a huge focus for us and has been for a couple of years. The reason that we - the primary reason we decided to bring pre-finishing in-house and have our own national branded product was that the major national repair and remodel type distributors wanted to have a national program with a national company.And so our move into pre-finished was primarily driven by our need to strengthen our network of distribution for repair and remodel, which is underway. So this is really a year of a transitionary year of us really establishing a much more significant presence with really good distributor partners nationally as far as repair and remodel. So there's work to do there, but our plans are in place and being executed. And would you remind me the second part of your question?

Just if do you think you're pretty well positioned to capture that potential growth?

Yeah. I think we are well positioned. We could be better positioned, and we're working on that. But I don't believe we're - we should expect our revenue growth in repair and remodel to be on par to whatever happens nationally. And we're not at a disadvantage there.But you've heard me mention several times, we really, really are pleased with our two step distribution network that does feed into repair and remodel, but it's more focused on new construction. We need to get that same type of quality distribution in place on the repair and remodel side, and we're working on that.

Okay. That’s great. Thank you very much.

Thank you. Our next question will come from Paul Quinn with RBC Capital Markets.

Thank you. Good morning, guys. Hey, just question there, maybe starting on South America. Just at a high level, it was a weaker quarter than I expected. What happened in the quarter? And how is April trending?

Well, you're saying that - you said LP, say, was a little weaker than you expected? We did get hit certainly on the inventory line with, sorry, on the revenue line with exchange movements. The weakening of the currency significantly hurt revenue by about $7 million rolling through from the first quarter of last year to the first quarter of this year, and that had a corresponding impact on EBITDA also.That may have been the primary driver in it being a little weaker than you expected. Volumes were down slightly. Everything else was kind of relatively well controlled. So it's probably currency that's the principal driver of, if you're surprised by, the results there.

Okay. And then April, how is that shaping?

Well, they also have a COVID situation there that's, I would call it, similar to what we're experiencing here as far as magnitude. And so they have seen some impacts to their budgeted volume, but the business is operating. It's deemed essential down there, and I would say we're having a normal, I'd say, normal quarter so far for South America, or for Chile in particular.

All right. And then just moving on to Siding. One of your major Siding competitors pre-announced last night they seem pretty strong on double-digit volume growth in North America. Just wondering if you were - do you think you're losing market share in North America? Or are you still taking share from some of the smaller, I guess, competitors?

Yeah. Paul, I would - I'm not aware of any kind of significant losses from a market share standpoint. Again, our growth in repair and remodel is all incremental volume to us and it's coming from somewhere. The growth that we're seeing at retail often comes from added shelf space that is coming from replacing other people, not always Siding, but other SKUs in the home centers. And then given the strength of our distribution in single-family, I don't see - I'm not aware of any market loss there - market share losses.I think that it's just - I know if we're looking at projected growth rates and the fact that we've withdrawn our guidance for Siding, it's just kind of muddled right now to figure out what's going on. But I would say that from a market share - being aware of market share losses, I'm not aware of any significance.

Thanks for the clarification. And best of luck.

Okay, Paul.

Thank you. And our next question will come from Ketan Mamtora with BMO Capital Markets. Please go ahead.

Thank you. Brad, just one more on the Siding side. Are you seeing any change in sort of the competitive dynamics there, particularly on the vinyl side? I would imagine that the cost should be down quite significantly. So I was just curious if you are seeing sort of any competitive pressures there just because their cost profile, I would imagine, is much lower now.

Ketan, that's a good point. Low end vinyl Siding is going to be - get very price competitive - would be able to get very price competitive in this environment with oil prices. That's a valid point. We're typically not competing on that low end, however, because we couldn't at previous oil prices.And as - I think I've mentioned on this call before, if a homeowner wants the most lease expensive Siding, they're going to get vinyl, and vinyl Siding is the product for them. We try to position ourselves as the hard siding mark-up as far as quality goes with our R&R contractor partners.Then they - our R&R contractors are going to carry a vinyl and a hard siding and try to move the homeowner up the value spectrum as they're moving to a hard siding. So I would say, I'm not worried about loss of market share on the low end of vinyl because we could compete there anyway.High-end vinyl will also become more competitive. So that would be unreasonable to think there's not going to be a little more competitive pressure around that marginal high-end vinyl sale in our sale. But we've got to continue to sell on our value proposition. The product is beautiful. And I'm still pretty bullish on our ability to grow that disproportionate to market growth.

Appreciate the thoughts, Brad. Thank you. And good luck.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to management for any further remarks.

Thank you. And I'll just say I hope everybody on the call stays safe, and has a good rest of your quarter. And we'll talk to you again in about three months. So take care, everyone.

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