Good day, and thank you for standing by. Welcome to LP's Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Aaron Howald, Vice President of Investor Relations and Business Development. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the second quarter of 2023, and our outlook for Q3 and the remainder of the year. My name is Aaron Howald, and I am LP's Vice President of Investor Relations and Business Development. Joining me this morning are Brad Southern, LP's Chief Executive Officer; and Alan Haughie, LP's Chief Financial Officer. During this morning's call, we will refer to an accompanying presentation that is available on LP's IR webpage, which is investor.lpcorp.com. Our 8-K filing is also available there, along with our earnings press release and other materials detailing LP's strategy and sustainable business model. Today's discussion will contain certain forward-looking statements and non-GAAP financial metrics, as described on Slides 2 and 3 of the earnings presentation. I will incorporate those slides by reference rather than reading them. The appendix of the presentation also contains reconciliations that are further supplemented by this morning's 8-K filing. And with that, I will turn the call over to Bret.

Thanks, Aaron. Good morning, and thank you all for joining us. I'll briefly describe LP's results for the quarter before I turn my attention to the future and discuss LP's strategy of growth, innovation and efficiency, and how it positions us exceptionally well to benefit, not only from the ongoing rebound in new construction, but also from the improvement in repair and remodeling that we expect will eventually follow. The second quarter ended with encouraging signs of an improving housing market. While single-family starts are down 21% for the first half of the year compared to 2022, May and June saw stronger-than-expected building activity. As housing starts have rebounded, demand for LP's oriented strand board has followed, pushing prices meaningfully higher and improving LP's EBITDA and cash flow outlook. By contrast, the repair and remodeling market appears to be comparatively weak and softening, likely due, at least in part, to constrained home inventory and reduced home sales. Existing home sales, which in a typical year all family starts by 4 or 5:1 are down 23% for the first half of the year, and vacancy rates and active listing counts suggest that trend will persist. The shed market where LP has a dominant share of exterior siding panels, closely follows existing home sales and has been similarly weaker so far in 2023. Against this backdrop, LP generated $611 million in net sales, $93 million in EBITDA, $88 million in operating cash flow and $0.55 in adjusted diluted earnings per share. While our EBITDA performance exceeded guidance from the prior quarter, Siding revenue was lower than expected, which shared the softest component of the Siding business in the quarter. Overall Siding volume dropped 16% versus prior year quarter, roughly equal to the drop in single-family starts for the quarter. Partially offsetting this,…

Thanks, Brad. The waterfall on Page 7 of the earnings deck shows Siding's results for the second quarter compared to the prior year. The reduction in volume is the largest driver of both the year-over-year revenue decline and the revenue guidance miss. This 16% volume decline resulted in $54 million less revenue and $26 million less EBITDA given Siding's high variable margin. Price increases partly offset the volume decline. The combination of list price increases last July and this January lifted net prices by about 6%. Outside of volume and price, other factors in the quarter include continuing mill conversion costs. On our first quarter call, we identified $16 million of such costs embedded within EBITDA. As predicted, that cost has fallen to roughly $10 million this quarter as Sagola ramps up production. $5 million of this is identified on the waterfall and the further $5 million is a repeat cost from last year. Same cost, different mill and so does not pop as a variance but it's there nonetheless. On the plus side, input prices have stabilized and in some cases already falling. Year-over-year, freight costs fell by $4 million, partially offsetting a $6 million headwind from raw material inflation. Thankfully, a much smaller impact than in recent quarters. The resulting EBITDA of $59 million at a margin of 18% would have been 3 points higher, but for the mill conversion and ramp-up costs, which I must stress are entirely discretionary and incurred in the interest of long-term growth. The OSB waterfall on Page 8 is similar to those of previous quarters and that the price change dwarfs all other factors. And as in recent quarters, I will dispense with price and describe the remarkable performance delivered by the OSB team, managing the business safely and efficiently in a…

[Operator Instructions] Our first question comes from Susan Maklari with Goldman Sachs.

My first question is, can you talk a bit about the volumes in Siding as we think about the back half? Any color perhaps on where the channel inventories are? And then as we think about you're increasingly lapping the pricing actions that were taken last year and even earlier this year. Is it fair to assume that a lot of that decline in the back half comes through volumes?

So Susan, let me start with the inventory question. So yes, we're still experiencing higher inventories than what would have been normal pre-COVID in our opinion. Those inventories worked down, say, really starting in March through the second quarter. But for certain parts of our distribution channel, they're still elevated higher than we would like to see, though I do think we'll work through all that in Q3. From a pricing standpoint, just to remind everyone, we did do a price increase midyear last year and the beginning of this year. So all that price that will be lapping in your terminology that midyear last year price increase during Q3, and then we'll obviously enjoy the increase that we had this year. So the revenue guidance that we have given does incorporate those two price increases, but doesn't anticipate another mid-year price increase.

Okay. And then perhaps turning to the margin in Siding. Can you give any color on how you're thinking about the cost structure in the back half? Any potential relief in terms of raw materials, transportation, that could come through in there? And as you think about that coming through, is it possible that we could see those second half margins in Siding moving closer to perhaps that 20% range even as the volumes continue to be lower?

Well, that's a tough call, Sue. Certainly, we are seeing raw material costs -- some raw material cost relief, which is beginning to show through. We -- I did mention the existence of a press rebuild in Q3, specifically so that -- kind of so that wasn't treated as being sort of incremental because we will have the fall off from Q2 to the second half of some of the ramp up costs to be kind of replaced by the cost of the press rebuild. And then the -- so there's nothing sort of particularly unusual that we're modeling in the cost base within Siding of the second half of the year.

Okay...

There's a little bit of relief on raw materials.

Yes. Are you seeing that there's some year-over-year deflation that could come through on those raws and maybe transportation as well?

Certainly a good tailwind there.

Our next question comes from Michael Roxland with Truist Securities.

Can you -- just following up with Siding, can you help us think about the future volume growth in Siding? Obviously, should demand, which I think is about 20% of your mix, was notably weaker this quarter. Demand was also pulled forward during COVID. So just trying to figure out how you see demand shaping up in Siding on a go-forward basis? And look what type of growth we should ultimately expect maybe on channel inventory is clear?

Yes. So we're optimistic about growth going forward in Siding. And if you think about all the work and effort and product innovation that has gone into start with our ExpertFinish, prefinish program, the facility that we're building in Bath, New York, to provide East Coast volume in an efficient way, we really feel like we're positioned well. And from -- starting with a pretty low market share in the repair and remodel area outside of the Midwest to really grow that repair and remodel through our ExpertFinish penetration across the country. And then from -- we launched BuilderSeries early last year, and that's a product that is focused on the large national builders, who, we all know, are taking market share in this current environment. And we feel like that really positions us well to grow with -- because within new construction, we are underpenetrated with large national builders. And now that we have this product in place, really encouraged that as housing continues to improve, as the large builders continue to take share, we're really in a fine position from a competitive product standpoint to take advantage of that growth. So we're super optimistic about the portfolio. And let me just add 1 other thing. We are -- we do have an initiative to place lap and trim at consumer retail, which is another area where we've been very underpenetrated historically. So all that really gives us a lot of confidence to believe that, after this year, we're going to be back on that solid growth rate that we've enjoyed over the last decade in Siding. And plus, we've got 200 salespeople whose job it is and whose comp is related to growing Siding. And so we feel like we've got the right product. We've got a good brand, a really, really good value proposition, and we've got a sales force that is in the process of transitioning from two years of operating under a managed order file to actively selling and picking up market share. So super excited about continued growth in Siding over the midterm to long-term time horizon.

Just in terms of your forecast, does your forecast in terms of Siding growth still assume that shares comprise 20% of the mix? Or is the growth predicated more on new construction in areas -- other areas where you may be under penetrating?

Yes. I would say that still around that. I want make one little caveat. We do have to estimate that somewhat because some of the shared SKUs or accessed by the shed manufacturers through regular two-step distribution. But certainly, we can kind of tail from our panel sales. And during COVID, as we talked about, and that was a really strong part of our portfolio. And while -- I mean when you look at panel sales this year versus 2019, it's still going to be way up, but it is certainly off of what we experienced during COVID. And so that -- I would say that is certainly a weak market right now. We feel like we're holding our own everywhere else. But that one -- that's going to -- the first half in shed was extremely weak, and the second quarter actually caught us by surprise how weak it was. Matt, I don't think there's any long-term -- I'm sorry, just one more. I don't think there's any long-term issues with shed. Historically there, we've had -- we've been able to grow market share in shed during kind of downward trend periods in shed. Well, our panel market share is pretty dominant there. So we're going to -- we're in a position where we have to ride through the ups and downs in the shed market because of our ability to gain market share, at least with panel product in shed is pretty low right now given our position.

Got it. Appreciate all the color. Then one final question before turning it over. Just in terms of pricing on the side, you mentioned, obviously, it's up year-over-year, but sequentially, pricing was down. Can you just provide some color on what drove the decline on a sequential basis? Is it a mix factor? Is it concessions? Just trying to get a sense of why you would pricing would decline sequentially?

Yes, it was mostly -- it was entirely mix, mix of product within the portfolio that drove it down there. It wasn't a function of list price increases or anything like that, just mix.

And our next question comes from the line of George Staphos with Bank of America Securities.

A couple of sort of micro questions to start, and then I had some other questions on Siding. So you called down capital spending a bit. And comparing the slides 1Q versus 2Q, there's both some trimming both on the conversion and also strategic growth capital, obviously, maybe with the year proceeding a little bit less quickly than you would have expected that would be natural. But if there's any other color you could share in terms of why those numbers moved? And then on the $16 million of OSB patent-related claims, if you could remind us what's behind that, recognizing it's now in the past, but what was in those figures and drove the settlement claim?

So let me start in order then with the CapEx. There's a little bit of modest trimming, but the majority of this is that we were fairly conservative on both the upfront payments we may need to make for Wawa as well as payments to which we were committed for Houlton 2 prior to us putting Wawa next in line, and therefore, delaying Houlton 2 by virtue of Wawa going in front of that. So the team has done a sort of an excellent job in negotiating our way out of some of the payments that we would have had to make for Houlton 2. And that's primarily -- that conservatism in Wawa and negotiating our way out of certain payments for Houlton 2 were the primary reasons for the reduction in capital. Good news...

Got it. And on the patent claim?

Yes, I'm not really at liberty disclose a great deal. It was I just -- yes, thank you. I can't disclose the details. But it's -- the matter is closed and behind us and is settled. And then in case it's not clear, it relates to something within the OSB business.

Okay. Now we'll leave it there. Can you talk to us a bit about how the distribution strategy has evolved for Siding over the last couple of years? And are there any reasons, again, in answering some of the earlier questions, a lot of the weakness in 2Q is with sheds, we get it. But are you finding your distribution strategy is allowing you to grow at the pace you'd want? Are you -- how does your distro strategy compare with some of the other siding companies? So any changes, any needs to change tactics at all, how does it compare versus peers?

Yes. Great question, George. So going into COVID in 2019, let me just take a macro view -- macro answer to that question and then move to our strategy. So pro retailer, well, there's consolidation going on in the channel, and pro retailers and other one-step market access vehicles through consolidation and grown in importance. Traditionally, we have been a two-step distribution as our primary means of accessing the builder and contractors historically. And look, two-step distribution is still really important to us. But our ability to access the large national builders through the pro retail channel really speaks to a need to have a more direct relationship, more direct sales into pro retail. And by the way, and not that this is ever that controversial, but also similarly for the one steppers that access repair and remodel. So we had an initiative going into 2019 of placing reloads in strategic urban populations and having a more direct access for certain parts of our portfolio to access national builders and contractors. Obviously, during COVID, and the demand for the product, we put that initiative on hold, and we do everything we could do just to keep up with the orders. But as product became available this year and we had inventory internally, we have stepped up the pace of this kind of reload strategy in the marketplace to have the more direct access. So while there -- and there can be some pain associated with that, right? As we build that infrastructure to access that directly, I'm confident that, that is going to pay off in the long term as we continue to execute our big builder strategy and our repair and remodel strategy. And as you implied in your question, that is consistent with what other large specialty manufacturers have done over the years to make sure the market access is keeping up with the times. And as Alan said -- now I am not -- I don't -- in no way want to imply that this year's volume is somehow constrained by lack of distribution quality or anything like that. We have really good distribution in place. But we are in this transitionary period where we're going more direct with the pro retailer and one stepper for R&R. And so that -- because we have the inventory available to do that and open these reloads. So it is a bit of a transitionary period for us. But in the long run, I believe it's going to pay off, or we wouldn't be doing it.

Next question comes from the line of Ketan Mamtora with BMO.

Perhaps starting with Q2's Siding volume drop. Is there any way you can quantify -- you've mentioned several times that the shared business was weak. Can you quantify how much volumes in the shed business were down in Q2? And has that trend changed at all so far in Q3?

Yes. Well, fortunately, there has been a little -- there has been a shift where some of those shed manufacturers are back in our order file, which is where it was very little of that activity in the first half, particularly in Q2. So we have seen a bit of a strengthening there. And then as far as the quantifying the amount down, about -- we were down about 20% over prior, say, first half volumes in shed versus prior year. And look, it's a -- we're estimating our shed business to be somewhere around 30% of our volume. Again, it's hard to get too fine a point on it because some of it goes through distribution. But just given the weakness in the direct shed and direct shed distributors volumes that we've seen in the second half and our conversations with shed manufacturers, that segment is down significantly.

Got it. That's helpful. And then as my follow-on, can you give us some sense in terms of the inventory destocking that you saw in Siding, how much kind of that impacted your volumes in Q2? Or to put it differently, can you give us some sense of sell-through trends, the underlying customer demand in Siding in Q2, and what you are seeing there?

Yes. So sell-through demand at our distribution, given the best information we have, which isn't 100%, has been -- obviously been stronger than our sales into distribution because we do know the inventories have been worked down since March. And so the sell-through is going to be healthier than what we're experiencing right now. And again, as you know, Ketan, and you've been following us for a while, once that -- once we get to a stable inventory situation in distribution, then all that volume will show up in our order file. We're just not doing that today. I will just add a little color to it. It is complex right now. I think distribution is still trying to figure out what the new normal inventory level should be given the COVID experience, given the fact that throughout COVID, I don't mean to keep speaking to COVID, but during that period of time, I just saw that two-year period, the introduction of ExpertFinish, which carries a lot -- requires a lot more inventory to carry a color palette, our distribution and us, LP, were trying to figure out what is the right amount of inventory needed to service the market. So I think there's -- some of that uncertainty is playing into the order strategy of our distributors. But once again, once we get to a point where we're -- all folks are comfortable with the inventory level, then we'll see that direct sale -- that sell-through showing up in our order file. But it certainly has been a contributing factor in the first half to our overall volume. It's just the inventory level that we've had to work through.

Our next question comes from the line of Sean Steuart with TD Securities.

I won't ask any Siding questions. I think those have covered there. On CapEx, Alan, you touched on some of the nuance with the Houlton payments being deferred. Can you give us a sense as you look at to 2024, the spending on siding conversions next year, how that would stack up versus $120 million to $130 million this year?

It is actually genuinely too early for me to make a good call on that. Good call though, right now as we're developing our plans probably similar is my go call right now. No significant change. It's a weak answer but that's closer to the truth, thankfully.

That's good enough for me. Another question on OSB. Brad, I'd be interested in your thoughts on the run we've seen year-to-date, but especially of late, it feels like new home construction is surprised versus muted expectations. But your perspective on what's driven the run we've seen and at what point do you consider industry supply growth as a mitigating factor that could undermine the momentum we've seen of late?

Well, I think the what we've experienced this year has been manufacturers and LP coming into the year predicting a soft housing market and kind of gearing production plans speaking for what we did, gearing our production plans accordingly. And then having stronger than -- pretty much every month, stronger-than-expected housing forecast. I'll also say, unlike Siding, OSB inventories were leaning coming into the year as distributors work those inventories down. And so minimal to low -- not minimal, but low inventories in the channel, say, in February, so that when the building season hit and was stronger than anticipated, there was some scrambling for volume. And it's -- I mean even as big as the OSB business is the industry -- I mean, once distribution gets behind on inventory, but sales are strong, it's difficult to catch up and that translates into pricing. So when I just -- I'll just say, I have -- listen, I've predicted OSB pricing to our Board of Directors and got it wrong every time the last six years. I can no longer even pretend that I know what's going to happen tomorrow with OSB pricing. But I would just say we're -- this is August, and we've got three more months of really good housing building and construction weather ahead of us. It's typically September and October are really strong demand months in this industry for both OSB and Siding. And so we feel good about the outlook for the next little while. I'm not saying the pricing can't bounce around up or down given the elevated levels that we're seeing today. But I mean, the channel is still pretty tight. And I feel good about our near-term outlook for OSB. And then I think once we get to Thanksgiving, we'll have to reassess, and we're already doing that analysis of what we're going to do in order to match our capacity to the demand that we see in our order file. But -- so we -- I guess we'll talk about that on the next call, but I feel good about the outlook in the near term as far as the demand and capacity situation for our production and for the industry.

And next question comes from the line of Kurt Yinger with D.A. Davidson.

I just want to stick with OSB here for a minute. I think you referenced some kind of deferred maintenance and some market curtailments. Maybe that was primarily a Q1 comment, but can you just help us kind of frame what the upside could be in terms of OSB volumes in the back half of the year? And then just on Peace Valley specifically, I mean, how is production going at that mill? Any recent impacts from wildfires or anything like that?

We've had no -- start with the easy answer first. We've had no wildfire-related downtime at any of the Canadian mills. And then we've had some fire in the area, but not anything that's impacted wood flow or our ability to produce. We are running three shifts in Peace Valley, three in Milwaukee and forecast no change of that throughout the rest of this year. And then as we -- at any given time, in our production planning, as we see demand weaken. We're not putting unneeded volume into the market. So we shift down time around in our system just given the cost situation or the demand situation in that given week. And so we'll continue to run that balancing act as we go through the year, and it has been part of each quarter's operating plan, moving downtime around, and that's how we'll run for the rest of the year. And when you say second half versus first half, I mean if demand is higher in the second half, we'll run more production. But when you look at the half of the year, again, let's just keep in mind, November and December can be wide from a demand standpoint. And typically -- and there's really no typical as to the year. But typically, we do take downtime around the Christmas holiday season as we -- as demand slows. And then we give -- use that time to do some maintenance work. So we'll be planning -- as I mentioned earlier, we'll be doing that planning throughout the rest of the year and we'll make the right moves to make sure we have the right balance as we proceed into early next year.

Got it. Okay. And then just my second question. I mean, at a high level, can you maybe just talk about what you think kind of annualized Siding volumes? Or maybe from an operating rate perspective, what that would need to look like kind of excluding some of the short-term factors to get back to that kind of long-term goal of 25% EBITDA margins?

The simple answer is, the -- we're so -- as we -- if you think about -- take a look at the Q2 waterfall, it's -- the EBITDA margin is so volume dependent. And so if you were to take -- I can't say I've actually done the math, but it's relatively simple. If you take that Q2 waterfall and you add back the volume at that high variable margins, you're very close to that. So -- but for the volume decline this year, we'd be at that rate. And that, as we all know, is temporary. This is a business that's on a growth trajectory, and therefore, that growth will deliver the margins that we've committed to.

Our next question will come from the line of Mark Weintraub with Seaport Research Partners.

Maybe following up a little bit on your answer, Alan, to the last question. I mean one difference, obviously, is you now have Sagola as well, and your EBITDA margins, for a number of different reasons, we're not 25% last year either. And I guess I'm just trying to sort through with all these different moving parts, if I look at where, including Sagola, your capacity would be in kind of the indicated volumes for this year, I think you're kind of 70%, recognizing against the goal is not really able to run full this year, but -- and so kind of the first question is like, how do you think through the volume increase to that point where you are at pretty healthy utilization rates? And where you need Wawa as capacity to be available? Can you sort of just walk us through the thinking there?

I'm going to try because I'm not sure I fully understand the question and it can be a dangerous thing to let my mouth run while I'm not sure I fully understand the question, but I'm going to make the attempt. So as we -- two things. If we look at our business right now, and as I try to point out, we are maintaining -- we're ramping up Sagola so that we are in a position to benefit from the volume of the upside in the growing market and the growth that is coming. And we're carrying that cost deliberately. So we're already carrying some of the costs of that, essentially future growth. When we do bring on Sagola, yes, you're right. That will add a fixed cost base in advance of the volume has always happened, but it will be a smaller proportion of the whole. So the bigger we get, it's hard to run at a faster rate, bear with me on this, than one extra -- one mill being ramped up per year. And so the larger we get, if you bear with me on the logic, with one extra mill being added to the fleet per year, let's imagine that's our long-term trajectory, that extra mill will be a small proportion of the whole and the remainder of the business will continue to harvest those high margins. And we mustn't forget the continued pricing power of the business and the mix shift towards ExpertFinish and so on that also will continue to enhance the margin. And we should not forget our ability, as I think we're demonstrating right now, to run our mills extremely efficiently again.

Right. All good points. And absolutely, kind of that embedded cost is impacting the margin quite a bit this year as you ramp Sagola. I guess sort of the heart of the question was, there're so many of these moving parts that it's -- I realize it's difficult to answer, but how do you see the track to what would be a significant increase in volume? And so I mean, how much of it is a function that you think destock? And I don't know if you can quantify how much destock is suppressing? How much sheds is under normal. And then once we adjust for those two factors, how long in a kind of normal growth environment, if it's flat housing, does it take us to get to the points where your system is fully utilized? I realize it's probably unfair to ask that question on the fly like this, but I tried.

Thank you. It is unfair, and I'm going to half answer it. And so just as you are being unfair, yes, I'll be unfair and say, our long-term growth algorithm or promise to everybody listening is that we'll grow something like 8 points to 10 points better than the market. And we still believe that's the case. The definition of the market may be a bit hazy from time to time, but in the -- over the long run, just as we have over the last decade, we're highly confident in that growth trajectory as well as the pricing power of the product. So we are highly confident in our long-term strategy, being able to deliver that growth. We let it stop there, not let my mouth run further.

And our next question comes from the line of Paul Quinn with RBC Capital Markets. Paul Quinn - RBC Capital Markets, Research Division – Director of Paper and Forest Products & Paper and Forest Products Analyst Maybe just following up on this thesis of growing 8% to 10% better than market. The sort of the guidance for '23 is down 10% on revenues. So if we flip that that thesis around, do you feel quite comfortable that you're shrinking less fast than the rest of the competition? Or put it in another way, how are you doing when you sit back relative to the other competition in the siding, how well are you performing?

I'll want to take -- if you allow me, I'll take that in three parts. So shed, and let's just say roughly -- I mean we've been throwing out numbers, about 1/3 of our business just for illustrative reasons. We are our competitors in shed. We're no worse off than anybody else because that market is down. We have dominant market share for the panel component of shed. Repair and remodel or ExpertFinish, I feel good about, but I think we are taking share this year in that product, given that we're holding our own from a revenue standpoint. So I feel like share gain is possible there. Now the more interesting one is new construction. I feel good about our position in new construction and that we're holding our own, if not gaining share, with -- for our strength has been historically, which is the smaller or regional builders. With the big builder, we are -- we launched a product, as you know, BuilderSeries in order to have a competitive position there. And we are taking market share there, but from a tiny starting point. So we can't ring a bell about that 1 saving us right now because of the market share that we had with lap siding at the big builder was pretty low 18 months ago. But the product that we have there is competitive. And it's a competitive landscape to play in, but we are recording wins there that I feel like demonstrates our ability to gain market share there. It's not enough at this point in time from a volume standpoint to overcome shed being down like it has been. It's not enough to overcome housing starts being down the way they're down year-over-year. But for the long term, it plays well with our ability to position ourselves to take advantage the coming upswing in housing.

All right. That's helpful. And then just any change in South America for the balance of the year versus the first half?

Our team down there feels like the second half could be a little stronger than the first half. But I think, for modeling purposes, Paul, just replicate it you'll be pretty accurate. And then hopefully, there's a little upside to that.

And that concludes our Q&A portion. I would now like to hand the conference back to Mr. Aaron Howald for closing comments.

Okay. Thanks, Norma, and thanks, everyone, for joining us this morning. With no more questions, we'll bring the second quarter call for LP Building Solutions to a close. Have a great day. Stay safe, and we look forward to talking to you soon.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.