Louisiana-Pacific Corporation (LPX) Q3 2023 Earnings Report, Transcript and Summary

Good day. And welcome to the Q3 2023 Louisiana-Pacific Corporation 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 your speaker, Mr. Aaron Howald, Vice President of Investor Relations and Business Development. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the third quarter of 2023 as well as our updated full year outlook. My name is Aaron, and I am LP's Vice President, Investor Relations and Business Development. With 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 a presentation that is available on LP's IR web page, 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 forward-looking statements and non-GAAP financial metrics as described on Slides 2 and 3 of the earnings presentation. The Appendix of the presentation also contains reconciliations that are further supplemented by this morning's 8-K. I will incorporate that content here in my reference rather than reading the slides. And with that, I'll turn the call over to Brad.

Thanks, Aaron, and thank you all for joining us to discuss LP's Q3 results and our full year outlook. The third quarter was our strongest of the year by far for both Siding and OSB. It was also a quarter in which LP's teams achieved key milestones for growth and sustainability, one of which we will recognize while continuing focus on building a stronger and more inclusive culture. Page 5 of the presentation shows financial highlights for the quarter. LP generated $728 million in net sales in the quarter, which was 15% lower than Q3 last year at higher OSB prices and improved sell-through and inventory normalization and Siding led to a higher overall EBITDA margin than last year with the result that LP earned $190 million in EBITDA, only 5% less in Q3 of last year. As a result, LP exceeded the high end of our guidance range despite OSB prices falling in September. The $190 million in EBITDA translated very cleanly to $187 million in operating cash flow and LP ended the quarter with $160 million in cash on hand after returning $17 million to shareholders via dividends and investing $49 million in growth and sustaining capital. We repaid our revolving credit facility and ended the quarter with over $700 million in liquidity. Page 7 of the presentation shows Siding growth relative to the housing market on a trailing 12 month basis. Remember the quarter on record for Siding volume and revenue as we remained on a managed order file until early December of last year. Despite this very difficult comp on a trailing 12 month basis, SmartSide sales volume beat single family housing starts by 10 percentage points. Starts were down 16% but Siding volume was down only 6% and Siding prices were up 8%. As you can see in the pie chart to the right, ExpertFinish was stable at 8% of volume in the quarter. In the first half of 2023, Siding sales were dampened by inventory destocking after we finally transitioned from a managed order file late last year. Q3 saw the normalization of sell through rates and inventory levels. As expected and despite a market that is facing increasing affordability challenges, higher interest rates and elevated economic uncertainty, the third quarter saw sequentially higher volumes and average selling prices in the Siding business compared to Q2. As a result, we believe that the order patterns and channel inventory levels we are experiencing now are consistent with normal seasonal patterns with minimal lingering headwinds from destocking. This was not the first time that the Siding business has been on a managed order file, and the inventory digestion period before the resumption of a normal order cadence takes time. I am proud of the perseverance and dedication that Siding sales and operations teams demonstrated as we work through this process. Before I hand the call over to Alan, I want to mention a few additional accomplishments in the quarter. Last month, we officially opened our newest prefinishing facility in Bath, New York. This brings enhanced scale, efficiency and geographic expansion to ExpertFinish. I want to officially welcome the Bath team to LP. Bath is a third new facility for the Siding business in the past two years after the conversions of Holton and Sagola. I am proud of the safe and efficient execution of all our recent capacity additions in siding and confident that we are well positioned to resume growth in the diverse markets we serve. In the third quarter, LP published our third sustainability report as well as environmental product declarations for the Structural Solutions portfolio of value added OSB products. Structural Solutions products like TechShield Radiant Barrier, WeatherLogic sheating with integrated air and water barrier and Legacy flooring all sequester more carbon than is emitted during their manufacturing and life cycle. Our customers and shareholders are confident that LP's suite of engineered wood products combined with our responsible and sustainable management of forest resources means that LP can deliver best-in-class OSB and siding products while also having a positive impact on the environment. This is most notable in Siding where competing products are made predominantly of cement or vinyl. When it comes to durable products with great curb-appeal and positive impact for builders, contractors, homeowners and the environment, it is very hard to beat LP's portfolio of sustainable and carbon negative engineered wood building solutions. Lastly, before I turn the call over to Alan, I'm happy to say that LP was named by our local newspaper The Tennessean and U.S.A. TODAY as the top workplace in Middle Tennessee and by Newsweek as one of America's Greatest Workplaces, building a safe and inclusive culture where all of our team members feel welcome and encouraged to his own reward. And while we will never stop trying to improve, I am proud of our company and the progress we continue to make. And with that, I will turn the call to Alan.

Thanks, Brad. Slide 7 of the presentation shows the third quarter year-over-year revenue and EBITDA waterfall for Siding. The third quarter of last year was a high watermark for both Siding volume and revenue and admittedly, presents a difficult comp this year. However, as predicted, volumes and prices improved sequentially over the second quarter of this year by 6% and 2% respectively. On a year-over-year basis, prices were up 3 percentage points. The combined impact of last January's list price increase and favorable product mix added $10 million of revenue and EBITDA. Volume was down 16% with ExpertFinish holding its ground rather better than primed. I'm going to take a moment now to recap the ramp-up and conversion cost trend this year. The business carried embedded ramp-up costs of $16 million in the first quarter of this year, $10 million in the second quarter and now $8 million this quarter, including $1 million for the recently opened Bath prefinishing facility. This $8 million is $3 million higher than the $5 million we incurred in the third quarter of last year and it is this $3 million increase that shows up on the waterfall. Now I mentioned this detail to emphasize the thing that our current EBITDA margins are carrying the burden or the weight, if you will, of these costs. Moreover, the recently opened Bath facility will add about $4 million of incremental costs in the fourth quarter as it begins ramping up. So despite generating a respectable 21% EBITDA margin in the third quarter, adding back the embedded $8 million I just referenced together with $5 million for the Dawson press rebuild, as shown in the last column of the waterfall, would produce an underlying EBITDA margin of about 24%. This margin was, of course, helped by the slowing of inflationary pressures on freight and raw materials, which delivered a $9 million EBITDA tailwind net of wage inflation. Slide 8 tells the third quarter story for OSB, where price gains and cost controls more than offset volume resulting in a small year-over-year increase in EBITDA despite the revenue decline. An OSB price drop late in the quarter notwithstanding higher prices added $28 million of revenue and EBITDA compared to last year. However, despite higher net price, the overall demand environment was softer than last year with open market volumes, particularly weak. And so the volume reduction in the quarter reflects not only the removal of the Sagola and Bath from the OSB fleet but also market curtailments in response to the softer demand. As with siding raw material deflation provided a small tailwind but the star of the show was cost control, which contributed $11 million of EBITDA. In other words, despite significantly lower volumes, the OSB business run very efficiently as demonstrated not only by the dollars, but by the 4 percentage point improvement in operating efficiency or OEE. As Brad has already mentioned, it was a clean or cash flow, as shown on Slide 9, with $190 million of EBITDA producing a $187 million of operating cash flow. We spent $49 million in growth and maintenance capital, returned $17 million to shareholders via the quarterly dividend and repaid the $30 million draw on our revolver. As a result, cash balance increased by $90 million in the quarter to end September at $160 million. Cash has continued to increase subsequently and currently stands at a little over $200 million. Finally, let me discuss our updated full year outlook on Slide 10. With respect to CapEx, having already spent $236 million so far in 2023, the fourth quarter will likely look a lot like the third quarter for capital spending. The bulk of the near term growth and conversion capital is behind us with Sagola and Bath now up and running, so the fourth quarter spend will mostly be on sustaining maintenance. Siding revenue for the third quarter largely met our internal expectations, so we are reiterating the guidance we provided on our second quarter call that we expect a full year Siding revenue decline of about 10%, which implies a fourth quarter revenue decline of about 16%. For OSB, we will continue to offer algorithmic revenue guidance based on the assumption that OSB prices remain at the levels published by Random Lengths last Friday. Under this price model and accounting for market downtime, we would expect OSB revenue to be down 30% sequentially from the quarter. Under these assumptions, including the start up costs of the Bath prefinished facility I referenced earlier and some maintenance expenses in both businesses, we would expect total company fourth quarter EBITDA to be between $60 million and $80 million. Now before we take your questions, please allow me to anticipate one. We're not yet in a position to offer revenue or EBITDA guidance for 2024, but our capital allocation strategy remains unchanged as well the flexibility with which we deploy capital to invest in capacity. If the housing and repair and remodel markets are basically flat next year, as most forecast has currently anticipated, then Sagola and Bath provide LP Siding business with sufficient capacity to press and prefinish enough SmartSide to meet demand. And when might we start converting the recently acquired Wawa facility for Siding? Well the answer, as established on prior calls, is when the market demands it. We don't know exactly when that will be but we have sufficient capacity, liquidity and most importantly, flexibility to be responsive to demand when that time comes. And in the meantime, our capital allocation strategy remains to earn cash, invest in our growth as needed and return a significant amount of the remainder to shareholders. And with that, we'll be happy to take a round of questions.

[Operator Instructions] And our first question will come from the line of Mark Weintraub with Seaport Research Partners.

The first question, if we think about the fourth quarter Siding margins, I guess, we're going to have Bath against us. But kind of order of magnitude, how should we think about it being relative to the third quarter?

Given that volumes in the fourth quarter, if we hit this forecast, are going to be lower than the third quarter, and the business has a high available margin, then even excluding the Bath costs, the EBITDA margin would have been a little lower than Q3. And then, of course, as we add on, as you point out, the Bath costs that will lower the margin a little bit more. So the closest approximation to the Siding Q4 performance closest to approximation is probably Q2 of this year, similar-ish in terms of most of the drivers.

And I believe that was at 18% to 19% EBITDA margins in Q2?

Yes, that was Q2. So closest to approximation. I'm not necessarily committing to that number but closest approximation, the shape of the quarter is very similar.

And then as we're thinking about next year, assuming you're not moving forward with Wawa and any start-up costs there, which I guess seems kind of unlikely. Can we add that $38 million of start-up costs with Sagola, press rebuilds, the Bath expansion, et cetera, when we bridge 24 versus '23, or would you suggest we think about it differently from that?

I'd suggest thinking about it slightly differently. So a proportion of those costs are permanently embedded, they're the fixed cost of having the facilities. Now of course that sets us up to be able to bring on incremental volume very efficiently, because the fixed cost infrastructure is largely already in place. So the real way to think about it is those embed costs set us up to potentially have a high variable incremental margin on additional volume next year, that's the way to think about it. So they're there, but it means as volume comes on, those costs don't need to be added again, because they're already embedded in our current run rate, and it's an investment. And I say this a lot, I know it's an investment in the future that allows us to immediately recognize the EBITDA from incremental volume when we get it.

But would none of that $38 million have been quasi onetime it should all be viewed as embedded or…

I'm being a little bit cagey, some of it's embedded and some of it is onetime, because some of the costs that -- here's a good example on the ramp-up cost. When you're ramping up, we have to -- we know we don't make a great product. So some of the product that gets produced as we ramp up is essentially scrapped as we learn to run efficiently. So some of those costs are indeed those very start-up costs, but it's a bit too early for me to commit to a precise separation. You're right that some of those are inherent inefficiencies that would not be repeated. The rest is fixed cost infrastructure, that will be.

[Operator Instructions] And that will come from the line of Kurt Yinger with D.A. Davidson.

I guess as you've kind of wrapped up this inventory normalization in Q3, any thoughts on how much of a headwind that's going to ultimately pose to volumes this year? And how have incoming orders trended as you've gone from kind of Q3 to Q4 here?

Well, so for 2023, it's not the easiest thing to settle on a number for what the headwind was. But if you look at historical sales, if you look at some of the inventory reporting we're getting now from distribution, it can be as much as 100 million feet of volume that was sold last year and then moved out of the channel this year, which has caused the headwind that you've mentioned. As far as where we are today, we do have all customers back in order file routinely like on a normal cadence based on history. And so we feel good that across the board, across all different channels that we've worked through the inventory situation and we're seeing real demand flow back through -- consumer demand flowing back through to our order file.

And then I guess as you look at across some of the different products within SmartSide, ExpertFinish, the BuilderSeries, maybe some of the volume that was going into the shed manufacturers that was weaker earlier in the year. I guess, are there any parts of that, that you're particularly excited about kind of growing next year, notwithstanding a big change in kind of the macro demand environment, or what do you see as kind of the biggest kind of above market growth drivers over the next 12 months?

So Kurt, if you -- would just say for the sake of this question that new home construction is flat next year on our spend is flat next year, we're excited, I'm excited about the opportunity to gain market share in repair and remodel due to our ExpertFinish growth, the Bath, New York facility, the Holton plant behind that’s making product for the Eastern seaboard, an area where it's a highly active Siding repair and remodel market, but one where we are underpenetrated. So as we build capability and capacity there and scale, there's just a lot of opportunity for market share gains. And then on the new construction side, we continue to go to market with our BuilderSeries portfolio of products, which provides us a competitive offering for the builder. And while we have, depending on the geography, decent to good market share with the smaller regional builders, you're underpenetrated when it comes to the more national players. And we're excited about the possibility for BuilderSeries to compete in that environment in a very meaningful way and us to gain market share next year there as well. Shed, we already have really high market share there. We're looking at tweaking that or getting a few more points. But I think the meaningful growth above overall market growth for us over the next five years or so is going to be in the ExpertFinish through repair and remodel and then with the bigger builders.

[Operator Instructions] And that will come from the line of Michael Roxland with Truist Securities.

I just wanted to follow up on Kurt's question in terms of market share and how intend to gain market share. It seems like one of your siding competitors are gaining share with homebuilders and continues to be very vocal about it. You also mentioned last quarter that you're a little underpenetrated with the large national builders you just mentioned that again, Brian, here. So I just want to understand your approach with the builders doing to gain share? And aside from market conditions and what have been destocking, is there anything constraining you from gaining more notable share with the builders?

No, there's no constraint other than us being generally new to that sales cycle. Let me -- and I will caveat that a little bit, because we've had decent pull through with our TRIM portfolio of products with national builders for a while, so it's not like that's alien to us to sell into the big national builders, also very strong market share there on the OSB side. So the relationships exist with these big national public builders primarily through our history of selling OSB products through that channel. But the key to us is having a competitive product, which we do now. The fact that we know we believe the product is more than competitive, it's superior. And so -- but it's a long sales cycle in these kind of deals and we've been working those hard all through this year and are optimistic about the progress we've made. And as we look forward into next year, we see that opportunity for growth, as I've already mentioned. And we are building off from a Siding standpoint, we're building off a very small base, and so with the big national builders. So the ability for us to grow that what for us would be substantially is we're pretty encouraged about, but it will take time. But the good thing about these deals is they are multiyear or at least a single year, at least, and so there is some surety of supply once you're able to retain it or get it.

And then just one quick follow-up on your competitors, I believe one is out with a Siding price increase in early January. Is that something that maybe you could use your advantage and maybe in terms of trying to gain share, use that against them as they've -- my understanding, have been pretty aggressive with their pricing with builders over the last 12 to 15 months or so?

Well, there's -- I answered that a little bit more generally than against just one competitor. I mean, obviously, when it comes to these big programs, price or cost of the whole package is critical to the success there. And so yes, I mean, if a competitor has a higher price than us and that box gets ticked in our favor to work these deals but typically, that kind of obviously gets worked out in the back end anyway. And so really, where we're trying to compete is off our value proposition, which is the quality of the product, the aesthetics of the product and the ease of installation. And so that's how we lead. And then, obviously, though, at the end of the day, we've got to be competitive on price as well. And as I've mentioned, probably 100 times already four or five times on this call, we finally, have a product we're able to be competitive on pricing as well as bringing all the other advantages of SmartSide to the builder conversation.

[Operator Instructions] And that will come from the line of Susan Maklari with Goldman Sachs.

My first question is last quarter you had mentioned that you saw a fairly substantial decline in shed demand during that, and that was part of what was going through that Siding segment. Is there anything that's changed or that is impacting the business as you think about the fourth quarter guide there?

No, the shed business has rebounded a good bit from what we reported for what would have been Q2 results. I will call that back to more of a normal cadence there. I do think the -- or just overall demand and that channel all has been suppressed this year a little bit given how active it was last year. But we feel good and I’ll reiterate all of those customers are also back on our order file, and so we are seeing pulls in shed. And then typically -- so there is a little bit more of a call this time from now on as folks build some inventory and prep of the builds they do to have product to sell in the spring. And so typically late Q4 to early Q1 are pretty strong product pulls in that segment. We're expecting similar -- expecting to see that increase in demand as we look forward. And so I would call it back to normal though I will say compared to all the other channels, normal is probably still a little less than what the kind of demand we were seeing in 2021 and 2022.

I have to add something for the general audience as well. The Q4 revenue guide for Siding does include the fact that we are limiting prebuy in advance of January price increase, partly so that we don't have a repeat of last year where we limited our ability to reap the market. So the Q4 guide does include a limited on prebuy.

And then maybe turning to OSB for a minute. When you think about that segment, and sort of the more recent trends there, that you think they're a bit in contrast to what we are seeing from especially the large big public builders and their tone as they think about 2024? Can you just comment a bit about the channel inventories in OSB, including perhaps some of your structural solution products in there? And how you're thinking about the potential for those volumes to move over the fourth quarter or maybe even into the early parts of 2024?

Well, look, inventory situation in the channel for OSB remains, I would say, normal to slightly lean currently as of today, that can change pretty quickly in the OSB world. So I know you understand. But I would -- unlike Siding, there's really never was any meaningful OSB inventory build. I mean it can happen for two or three weeks at a time, but typically, our order file is staying pretty normal right now. So we're not having -- we're not extending it, we’re not shortening it. And I feel good about where inventories are. I mean I do think there's going to be some seasonal component to demand with the builder beginning Thanksgiving, the week of Thanksgiving through probably first couple of weeks of January, that's normal of what we've seen historically. The pre-COVID, before COVID screwed all seasonality up for us. So I would not be surprised to see the OSB demand decline, again, around the Thanksgiving time frame. Typically, our channel partners are going to one across the year with its lean inventories as they can kind of live with. So we also get a little bit of that negatively impacting demand. And then we typically get a pop once folks are back from the holidays and then they start looking forward to the spring building season. So I'm expecting for both Siding and OSB for this normal seasonality to return this year. We have not had that over the last three winters, so we're planning accordingly. We obviously have the ability to respond in both businesses either up or down as real demand becomes apparent. But I can see and personally see building slowing from middle of November to middle of January.

[Operator Instructions] And that will come from the line of Ketan Mamtora with BMO.

Alan, just one quick clarification to what you just said. So should I read this as you guys are already out in the market with the January price increase on Siding?

We have communicated to the channel, a price increase is coming. We’ll be communicating -- those are highly tailored by region, by channel. And so that specific communication will be going out over the next couple of weeks. It is a January 1 price increase. And as Alan mentioned, we're doing it a little different this year in the way we're implementing that. Historically, we have allowed our channel partners to buy 110% of their kind of normal purchases like prior six months or something like that. We'll pick a time frame and so you can buy 110%. We're doing this year -- going to buy 100% of your prior purchase history as a way to mitigate the probability of us building prebuys impacting Q4 positively and Q1 negatively. And also that allow us to realized pricing quicker on that volume. So yes, increase is being announced for January 1. And the other meaningful piece of news there is that we're of the way we're kind of trying to manage the prebuy out of existence actually by limiting the purchases prior to the price increase.

And then just one quick follow-up on OSB. What was your kind of operating rate in Q3? And whether it's fair to assume that those curtailments that you all took outside of Sagola continues into Q4?

So we were running about 80% of capacity or ran about 8% capacity in Q3. And in Q4, we're planning for that or a little lower, I would say probably with more downside than upside. As the way I responded to Sue's question, if we really see a demand slowdown in the latter half of the quarter, we'll plan to take more capacity out as we balance our capacity to demand. But that's how we're planning to operate during the quarter and we will make sure that we satisfy our customers' needs but not get out of balance to that demand that we're feeling in our order file.

[Operator Instructions] And that will come from the line of Sean Steuart with TD Securities.

Question on input costs. Can you give us a sense of variance versus Q3 for fiber and resin that's embedded in the Q4 guidance, and any context on trends you're seeing headed into 2024 on that front?

Well, generally speaking, trends are favorable as we head into Q4 and 2024. But we're cautious forecasters, so we generally don't bake in any sort of further improvements, meaning we assume that input costs are going to hold roughly at current levels as we forecast from Q3 to Q4. So if they improve there's tailwind there.

And just one question on modeling. The Siding price realizations this quarter improved a little bit sequentially, which is encouraging. How much of that is just a mix issue as the inventory bubble progressed through the quarter, is there anything more to it than that and seeing that modest improvement sequentially?

Yes, it is mostly mix. So strong distribution business relative -- which has particularly good pricing, ExpertFinish health nicely, things like that. So there was no Q2 to Q3 price increase, so it's fundamentally the continuation of that favorable mix from Q2 to Q3.

[Operator Instructions] And that will come fine of George Staphos with Bank of America.

I wanted to talk a little bit about siding. So you mentioned that you were eliminating the ability for your customers to buy somewhat ahead of your price increase coming in January. Are there any other changes that you're making with any of your commercial strategy or distribution strategy that you could relay on an open mic call to continue the progress into next year? And relatedly, with -- and one of the other analysts, I think Mike was talking about, your peers also saying they're growing. You want to grow market share with the large builders. You have the BuildersSeries product. How do you ultimately make the progress you want to make towards the 25% margin given that product would typically have, I would imagine, perhaps a little bit lower margin and you're trying to gain share. I know it's going to be around selling the value, but I want to hear additional thoughts there. So any change in the commercial strategy and how do you get to the margin you want, given what you want to get to in terms of your share with builders?

So let me do the commercial first. And I would say that during COVID, being on allocation for all of two years, maybe a little more than 24 months, we've constantly cut back on our marketing spend as we were sold out. And so we will focus more on assets and resources that helped us optimize our order file versus getting into a growth and market share gain mindset. And so as we roll into next year and putting our budgets together, we're going to be more -- by allocating more resources to demand creation and a growth mindset versus how we've managed the business over the couple of years, and that will be certainly in support of our BuilderSeries products as well as our repair and remodel products. And everything of what we do in retail across the board really leaning into the new market condition here, which is in a flat to slightly growing housing market we need to get more aggressive on share gains. On the margin question, you're generally right about the way you're thinking about lab siding sold into the big builder. I will say, compared to prior years, though, and I've mentioned this several times on the call, the BuilderSeries was engineered to be competitive there. So it's not a ginormous margin hit for us to skew volume there but really where the offsetting -- two offsets to any margin that we have to give up to secure a big builder business. First of all, repair and remodel, it's not that way, it's a value sell. We're selling ExpertFinish, and the opportunity to gain market share through also growing our -- again, margin by increasing our market share and repair and remodel can be a significant offset. Second to all that, as an example, on the manufacturing side, ex Sagola or take Bath, New York, both of those are large mills, high scale mills, low cost mills compared to our average. And so as we ramp up these bigger pressing facilities or pre-finishing facilities, we're also seeing opportunity for cost reduction that will meaningfully impact our margins going forward. So it is a constant area of management and analysis around pricing, margin, cost reduction, OEE. And we've gotten way more sophisticated on how we manage pricing by channel, by customer, in some cases. So I'm confident that we'll manage it well. But I'm equally confident that our ability to get meaningful margin in this business is not going to be -- we've always had a spread of low margin to higher margin SKUs in our portfolio. If we add hypothetically, say, BuilderSeries is on the lower side of that, we've got plenty of opportunities on the upper side of our portfolio to gain margin, especially when you couple that with a more efficient operating platform.

Brad, just quickly on distribution. Any change in terms of the way you're going to approach '24 versus '23 or pretty much the same approach? And from my vantage point, maybe simplistically, maybe a little bit more of a one step versus two step?

George, you know we've talked about, we have set up DCs in some major metropolitan areas to provide more of a direct model,t hat is largely driven by the focus on the builder, the other customers benefit off that as well. So I would say that is not new for '24, it was new for '23, but we will continue to focus on optimizing that and pushing volume through that more direct path. And we're only doing that to be more efficient in delivering more efficient from a cost standpoint and responsiveness, delivering product into strategic customers that need that level of service and honestly some cost advantage. But as we look into 2024, no major changes in the way we're going to market other than continued growth in that more direct selling model.

[Operator Instructions] And that will come from the line of Paul Quinn with RBC Capital Markets.

It sounds like the two big levers to run a successful Siding operation are this penetration of the big builders and the rollout of ExpertFinish. So just on the big builders, is there -- just so I can kind of increase my knowledge on what you're doing. On BuildersSeries, is there a regional penetration difference, like are you making more gains in the South and the Northeast? And in terms of the manufacturing of that product, is that done at all of your siding mills or only a couple?

On the manufacturing side, Paul, it’s done in our 24 foot press mills Dawson Creek, British Columbia being primarily where we're sourcing it now. Sagola will have that capability or does have that capability. Obviously, a little bit closer to market there as well which will help on the cost of margin side. But it's the most recent presses that we have converted, which are 24 foot in length because that to remind everybody to BuilderSeries is 12 foot. Our normal last SKU historically has been 16. And then you ask about penetration. Well, with the big national builders, you have to go where they are, and if you look at the smile of the country, that's where a lot of the housing starts that are being driven by the big national builders are in that smile. We have had historically good -- pretty good penetration in Texas, Colorado markets, just because of SmartSides history there. So where we're focused on penetration, it'd be the more South Central, Southeast Atlantic seaboard as opportunities for us to really gain market share. And just to round out that question, Paul. I would say from the central part of the country, we have been strong there, even with our 16-foot product offering with the bigger builders. So obviously, that would be a sweet spot for us to pick up incremental business. But the big potential opportunities for us to gain volume is in South Central, Southeast and Mid-Atlantic.

Just on the ExpertFinish side or R&R, how should we think about that progression margin uplift in volume through that? Is that -- do you expect that to be slow and steady gains through '24 into '25?

Yes, it's probably more slow and steady than [Big Ben] other than to say and the finishing line we've put in to Bath, which we put a similar line into our existing facility in Green Bay. And we are seeing economies of scale that are exceeding expectations. And so as we ramp those up, there will be somewhat of a step change in margin. I think by the time you run it through all the Siding that we sell in the quarter, it might be a little bit harder to see but it's common. And as we learn how to do this at scale and we just see a lot of opportunity for incremental margin above the decent margins we're enjoying today.

And then just lastly, if you could -- South America looked a little weak in the quarter. What can we expect going forward?

South America right now, it's a good solid business economically across that whole continent. Unfortunately, right now, there's a lot of political and economic unrest. So we’re winning where we can, there's no alarms from a market share standpoint. I mean, honestly, from kind of as a chaotic -- not be a little bit too strong of a lower, but the chaotic economies down there, our kind of discouraging your volumes there. So from that standpoint, that's been a little bit helpful. The pricing is really challenging in all the countries there. We have taken significant capacity outages across our operations down there. And so we are pedaling really hard to hold our own in South America, waiting for all that to term, which in our 25 years down there, it's been that way a little bit cyclical economies can get out of kilter and that's certainly happening right now. So we're optimistic on the long term. But I think we should be thinking about next year being somewhat similar to this year as far as the earnings potential down there as we walk through these economic headwinds that are facing basically all the economies we operate in down there.

Can I add one other thing, the risk of opening a can of worms. We did transfer Entekra's assets to South America and the cost of transferring and packing, shipping and everything is noncapitalizable. You're interested and therefore the cost of doing so is reflected in the EBITDA, that's $2 million to $3 million in Q3 that was a quote I use the traditional freight that a lot of but we left it in their EBITDA because the corporation is always equipment about as a whole. So there's no reason not to include an EBITDA. So that put -- made a top environment appear slightly worse than it really is.

That concludes today's question-and-answer session. I would now like to turn the call back over to Mr. Aaron Howald for any closing remarks.

Okay. Thank you, operator. With no further questions, we'll end the call there. Thank you for joining LP for our third quarter earnings call. Stay safe, and we look forward to connecting again soon. Thanks, everyone.

Thank you all for participating. This concludes today's program. You may now disconnect.