Louisiana-Pacific Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2020 Louisiana Pacific Corporation earnings conference call. At this time, all participant lines are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star, then 1 on your telephone keypad. Please be advised that today's conference may be recorded. If you require operator assistance, please press star, then 0. I'd now like to hand the conference over to your host today, Mr. Aaron Howald, Director of Investor Relations. Please go ahead, sir.

Thank you, Liz, and good morning, everyone. Thank you for joining us today to discuss Louisiana Pacific's financial results for the second quarter of 2020, as well as our near-term outlook. My name is Aaron Howald, and I am LP's Director of Investor Relations. I'm joined today by Brad Southern, LP's Chief Executive Officer, and Alan Hockey, Chief Financial Officer. As we have done in the past, we are hosting a simultaneous webcast in addition to this conference call. We have provided a presentation with supplemental materials to which we will refer during this morning's comments. And finally, we have filed our 8K this morning with some additional information. The webcast 8K and supplemental materials can be accessed at our website, www.investor.lpcorp.com. I want to remind all participants on the call about forward-looking statements and the use of non-GAAP financial metrics during this morning's 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 8K filing we made this morning. Rather than reading those statements, I incorporate them herein by reference, and now I'll turn the call over to Brad.

Thanks, Aaron, and thank you all for joining us this morning. I spent the bulk of my time on the last quarterly call discussing the steps LP was taking in the face of a worsening COVID pandemic. We were preparing to weather significant uncertainty, but we were confident in our liquidity position This morning, I am pleased that my update will be more positive than many of us might have expected just three months ago. The effects of the pandemic are far from over, but so far, LP has fared better than the downside scenarios we modeled and discussed on the last call. As we know, the housing sector has shown remarkable resiliency. After bottoming out in mid-April, the market's LP serves recovered sharply and show no sign of slowing. Demand for our products rebounded quickly through May and June. OSB prices followed this pattern, falling sharply in April but climbing in May and ending June close to their Q1 highs. This was a transformative quarter despite the volatility. Siding achieved the second highest quarterly revenue in the segment's history and the lowest cost of production in three years. The OSB business also demonstrated excellent efficiency and cost control, delivering its best quarterly unit production costs since 2016 with a much richer mix of value-added products. I'll leave the details to Alan, but we finished the second quarter with $129 million operating cash flow, $97 million in EBITDA, and $0.43 of adjusted earnings per share. LP announced this morning that our board has approved a quarterly dividend of 14.5 cents per share. On the last call, the three elements of our COVID response that I discussed were safety, liquidity, and agility. Let me give you a brief update on each. First and most importantly, safety. I am pleased to report that very few LP employees have tested positive for COVID. Thankfully, all of them have either fully recovered or are recovering. and our operations were not significantly impacted in Q2 by cases at our facilities. We will continue to follow expert guidance and stay committed to keeping our employees, vendor partners, and customers safe. We are mindful of the human toll of this pandemic. Our hearts go out to those who have lost loved ones, and we want to thank all the first responders and frontline medical workers. As for liquidity, LPG generated $129 million of operating cash flow in Q2, and ended the quarter with $259 million of cash on hand. Given current prices and production rates, and assuming no sudden reversal of market conditions, we expect even better cash generation in Q3. A significant driver of LP's results for the quarter was the discipline and agility demonstrated by our leadership team's operations, capital management, and corporate functions. In mid-March, in response to rapidly slowing demand, We curtailed roughly one-third of April's production of OSB and siding. By the end of April, we were seeing signs of a demand recovery. As this trend accelerated, both segments added production back in May, and by June our facilities were near 100% capacity. Our improved OEE allowed us to adjust production levels and still achieve exceptionally low production costs. Housing is clearly a bright spot in our otherwise uncertain economy. After steep drops in April, housing starts in June were flat the last year. OSB demand, prices are strong, and repair and remodel activity is robust. We are also seeing shifts towards single-family homes, movement away from urban cores, and increased R&R spending. LP is well-positioned to capitalize on all these trends. Alan will share more specific modeling in a few minutes with details about how these trends are reflected I want to spend a few minutes talking about strategic transformation and execution in the siting segment. The business exited the fiber product line to focus on higher margin smart side strand, enhanced our retail strategy, and launched expert finish, our pre-finished product line. This work showed its value in Q2, helping the segment to grow in a volatile quarter. LP completed the strategic exit from fiber with a sale of the East River facility and the conversion of the Roaring River facility to expert finished production. This structural change positions the business focus exclusively on driving growth and innovation for the higher market and smart-size SRAM products. Over the past several quarters, our sales and marketing teams have worked to revitalize our relationships with our retail customers. As a result, LP products have more shelf space and higher brand awareness. For example, LP SmartSide is the number one siding brand on at least one major big box retailer's website. As on our spending at home centers jumped in Q2, sales of LP SmartSide through retail channels more than doubled, applying share capture as well as volume growth. This trend shows no sign of slowing so far in our Q3 order intake. Customer demand for recently launched Smooth SmartSide in expert finish has exceeded our expectations. The addition of these two products to our portfolio has enabled us to enhance our distribution in the Northeast. The customer response to Expert Finish has also been very encouraging. Expert Finish is well-positioned for both new construction and R&R, and it addresses labor constraints by saving the time and cost of painting after installation. This was a remarkable quarter for the siting segment. With a backdrop of pandemic-induced volatility, The segment delivered continued growth above underlying housing starts, exited lower-margin fiber products, demonstrated the value of significantly improved strategic partnerships with our largest customers, and drove growth with innovative new products. While Q2 was stronger than we initially expected and the near-term outlook is positive, many risks and uncertainties remain. COVID-19 cases are increasing. Many states are slowing or reversing their reopening plan, So far, no new work-from-home orders or declarations of non-essentiality have been issued that impacts LP's operations or customers, but that remains a possibility. COVID is likely to create more volatility in the remainder of 2020 and potentially beyond. That said, I'm enormously proud of the grit and resiliency that LP's employees have shown during this unprecedented time. Our teams demonstrated disciplined management of the things we can't control, as well as agility in the face of what we cannot predict. LP's results this quarter are a testament to the team's creativity, flexibility, and resolve. I want to thank every LP employee for their effort as we work through these extraordinary times. With that, I will turn to Alan for more details on our financial results. Thanks, Brad.

Well, the second quarter was interesting, to put it mildly. It was bookended in April by one of the largest month-over-month decreases in housing starts in a decade, and in June by an even larger increase. Random lengths OSB prices followed a similarly erratic pattern, falling by a third from their Q1 highs in the first weeks of the quarter, before recovering most of that ground by the end. Builder sentiment, home sales, and demand for our products all slowed suddenly and dramatically, bottomed by mid-April and then rebounded sharply and have continued to climb since. I concluded my comments on last quarter's call with a discussion about these potential results based on a 20% drop in single-family housing, a 20% drop in smart-side volumes, and a 30% drop in OSB volumes with flat OSB prices. Under this scenario, we were confident that LP could achieve low double-digit EBITDA. Although it did not constitute guidance, this seemed a very real, if conservative, scenario. The actual decline in single-family housing starts at 13% was a little better than our model number, but demand for both SmartSide and OSB proved much stronger. In fact, SmartSide volumes didn't decline at all. They grew by 3%, helped by a surge in demand from retailers, which more than offset a decline with distributors. The OSB market turned sharply as housing starts recovered through the quarter, with LP's year-over-year production down not 30%, but just 16%. Note that our Peter Valley mill, which was idled in the third quarter of 2019, represented roughly 16% of LP's OSB capacity in 2019. And of course, our average OSB price for the quarter increased by 22%. Ultimately, net sales for the second quarter were 7% or $40 million lower than 2019, due not to softness in siding our OSB, depth in a moment. So in combination with exceptionally low cost of production and reduced SG&A, EBITDA for the quarter came in at $97 million. Still double digits, but only just. Okay, so we've established that the second quarter was volatile. Slide 7 of the presentation shows that our strategic transformation proved robust to that volatility. For the trailing 12 months ended June the 30th, smart side strand revenue grew at 7% compared to 3% growth in single family housing starts over the same More, compared to the first quarter of this year, single-family housing starts were flat, but smart-sized strand revenue grew by 8% quarter-over-quarter. Combining growth, efficiency, and sourcing savings, the EBITDA impact of our transformation was $15 million in the second quarter and $28 million year-to-date. For the avoidance of doubt, we exclude from this measure the favorable impacts of market-driven raw material price decreases, about $6 million in the quarter. So, at 96 million dollars of transformation benefits over the last 18 months, we're still ahead of pace to achieve an EBITDA impact of 165 million dollars by the end of 2021. Slide 8 shows the summary profit and loss accounts. While the second quarter sales fell year over year by 7 percent, gross profit increased by 15 percent to 117 million dollars. The resulting gross margin for the quarter of 21% was 8 points better than the second quarter of 2019, 5 points due to OSB pricing, and 3 points due to improved product mix, operational efficiency, and cost controls. Selling, general, and administrative expenses for the quarter were $8 million lower than prior year, largely due to lower support and infrastructure costs. The strategic exit from Fiverr to focus on SmartSide Strand impacted our results in a number of ways. First, the divestiture $2 million. As mentioned on the first quarter call, the historic results of the siding segment have been recast to exclude CanXL. Second, we have converted our remaining fiber mill at Roaring River to expert finish. And third, customer acceptance of our strand-based replacements for their fiber-based equivalents has exceeded our expectations. This has resulted in the decision to accelerate the conversion to strand, seesaw fiber production and As a result, we have written off $10 million of fiber inventory, compared $4 million of fiber assets, and incurred $2 million in severance costs. After interest and taxes, net income of $33 million, more than doubled year over year. The result in adjusted earnings per share was 43 cents. And as a result of the share buybacks in 2019, there were 11 million fewer shares outstanding than in 2019. But even adjusting for this difference, earnings per share was higher than the second quarter of 2019 by more than 30 cents. Slide 9 shows revenue in EBITDA by segment, and slides 10 to 13 have waterfalls detailing the year-over-year changes for the second quarter and year-to-date for siding and OSB. Second quarter sales for siding of $220 million were $11 million lower than prior year, with $7 million of continued growth in smart site strand, offset by lower fiber sales of $18 million, driven by the accelerated strategic exit from fiber. The resulting siding segment EBITDA, $51 million for the second quarter, is $6 million higher than the prior year, and the EBITDA margin has increased from 19.5% in 2019 to 23.2% in 2020. The margin percentages were unaffected by the reclassification of CanXL. Lastly, the revenue for siding includes a $5 million reserve for potential expert finish returns. The reserve reflects our estimate of the full cost of pending returns and replacements of the impacted inventory. We addressed the issue quickly and I'm proud of the way our siding team is handling this. I'm even more gratified by the feedback from our customers who have shown understanding and support for our swift response. Second quarter sales for OSB of $204 million were $5 million more than prior year due to 16% lower volumes offset by 22% higher prices. OSB EBITDA of $46 million was $49 million higher than prior year, including $37 million of price increases. The remaining $12 million of increased EBITDA is largely a result of the OSB leadership team's relentless drive for operational efficiencies and cost control. Second quarter sales for EWP of $79 million were $28 million below prior year. The decrease is attributable to three factors. First, the second quarter of 2019 was a period of transition between Second, a government declaration that despite OSB manufacturing in Quebec remaining essential, IJOS manufacturing was deemed not to be, thus hurting our joint venture in the province. And third, demand for EWP products simply did not recover through the quarter as strongly as OSB and Siding, resulting in price concessions. Which brings us to cash flow on page 14. We began the quarter with $488 million in cash, including what at the time was a full draw on our $350 million revolving credit line. EBITDA of $97 million and $34 million in cash from working capital decreases, less $2 million in interest payments, resulted in $129 million of operating cash flow. Predictably, the lion's share of the working capital reduction came from siding inventory of finished goods and raw materials. Capital spending was held to $15 million in line with the reduced spending plan. During the quarter, we also repaid the entire credit line of $350 million, paid dividends of $70 million, and generated $24 million through the sale of CanXL and made cashing in a corporate-owned life insurance policy. We ended the quarter with strong liquidity of over $800 million, comprising cash of $259 million, and an expanded, undrawn $550 million line of credit. With respect to capital allocation, our strategy remains the same. We maintain our commitment to return to shareholders over time at least 50% of the cash generated from operations after investments necessary to sustain our assets and execute our strategy. More simply put, we'll return excess cash to shareholders once we've generated it. On the last call, we announced that we did not plan to buy back any shares in 2020, but the better 2020's cash generation gets, the closer we'll get to reversing that decision. which brings us to our outlook for the third quarter and beyond. On our first quarter call, we attempted to provide some indication of our second quarter results and delay any potential liquidity concerns given the market signals we were receiving at that time. As I've already said once before on this call, we promised double-digit EBITDA and we delivered it. In many ways, the economy is as uncertain now as it was three months ago, except this time it's bullish as opposed to bearish. And perhaps the question to ask is not how bad will it get, but how long will it stay this good? So we'll communicate how we're running the business and monitoring trends and impacts. For OSB, we currently see thin inventories in the channel and no let-up in demand. All our mills are running close to flat out, except for the idled Peace Valley. Through July, our utilization rate was above 90%, with unit cost of production comparable or better than in the second quarter. Factoring in necessary downtime for preventative maintenance, we expect to produce and sell roughly 900 million square feet of OSB in the quarter. This will be roughly 8% less than in the third quarter of 2019, largely due to the idling of Peace Valley midway through the quarter last year. I've already mentioned that the order book for SmartSide Strand is strong, and all indications are that we will post revenue growth in the high single digits for SmartSide in the third quarter, partly upset, of course, by lower fiber sales. Please note that manufacturing or customer disruptions caused by to offer commentary on the fourth quarter. With respect to capital spending, under more normal circumstances, we might resume some of the deferred projects, but given travel restrictions and other COVID-related challenges, we doubt we could spend more than $50 million in the remainder of the year compared to our current projection of $30 million. Given the extraordinary volatility of the second quarter and especially the dire early projections for COVID, the recovery in housing demand in OSB prices is remarkable. While we can't control prices, I want to echo Brad and praise the agility and dedication of all LLP employees who worked so diligently to control costs as they produced and delivered our products. So before we take your questions, I want to end on a word of caution. The market appears very strong, but given the volatility in the past five months, we remain cautious about the future impacts of COVID. We also need to bear in mind that several of our OSB mills are in areas with rising COVID case numbers. Though COVID has yet to cause production interruptions in our mills, We cannot preclude the possibility. That said, we'll continue to do everything in our power to manage the factors under our control, with the continued safety of LP's employees, customers, and vendors as our highest priority. With that, I'll hand the call over.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchtone telephone. Again, if you'd like to ask a question, please press star then 1. One moment for our first question. Our first question comes from Keaton Mantora of BMO Capital. Your line is open.

Thank you. Good morning, Brad Allen. Congrats on a good quarter. Good morning, Keaton. First question, maybe just starting on the siding business, you know, you said that business continues to remain strong. You've given, you know, sort of high single-digit revenue growth for Q3. Can you talk about kind of how July is trending relative to that, you know, sort of outlook that you have? Is it sort of in line with that number? Is it a little better? Any thoughts in color there will be helpful.

It's in line with the guidance that Alan gave, and it's a little stronger. Certainly no weakness at all compared to what we've been talking about this morning.

Got it. And then, you know, if you can talk a little bit about, you know, how kind of some of the end market strengths have been within that sort of new resi versus R&R, and if there are any regions that are, you know, kind of doing better than what you were expecting, particularly given that, you know, we've seen a rise in cases in the south.

Yeah, great question, Keith. Let me do segment first, and then I'll do geography. So from a segment standpoint, as we've mentioned, we had a really, really strong retail pulls off of Q2. Those retail pulls have continued into Q3. Speaking of Q2, the geographic strength, you could overlay a map of where there were the most restrictive areas, measures around construction were put in place. We obviously suffered in those places. In areas where building was deemed essential and distribution was not limited from the fact that they had to shut down because of local restrictions, we were able to maintain a good product flow, particularly I would say after April. Everything kind of paused in late March and April as people were trying to figure things out. But geographically speaking, we were strong where building was deemed essential and was able to continue to progress. Right now, with most of the U.S. open back up, we are seeing strengths really across all regions. And with, you know, As far as I'm aware, other than micro areas, no states or large regions being affected directly by COVID. You asked about repair and remodel versus single family. We've seen strength in both, and I would say that actually probably R&R stayed a little bit stronger early in the quarter, so I think the R&R contractor to try to solicit and execute jobs where they can do that. I think that's also somewhat attributable why the retail pulls have been so strong for us. I think there are some R&R contractors sourcing product there. And then the final segment related comment I'll make, because I do want to clarify this, because there was a question, I don't know if it was you, Keaton, or someone else that asked me last quarter about the shed segment, and I had said that that was surprisingly soft for us. And literally, like, the next week after the earnings call, it really got strong again. We had those customers come back into our order file with a pretty strong. So, you know, again, after whatever the date of our call, last quarter to now, we've seen good to very good pulls in the shed segment.

Got it. That's very helpful, Brian. And then, One last question from my side before I turn it over. On the capital allocation side, net leverage is down to only 0.3 times. We've seen a pretty big surge in OSP prices. Just talk about how you are thinking about, particularly on the share repurchase side, Alan talked about a little earlier, but sort of how do you think about, you know, kind of having sort of preserving liquidity and kind of, you know, looking at charity purchases?

Yeah, certainly. Looking at the trends that we're seeing in the markets right now with overall market performance, OSB prices, it would look likely, wouldn't it, if we assume the continuing of the current trends through the end of the year, that we will build sufficient cash or significant cash through the third and fourth quarters should these trends continue. Therefore, on that assumption, I think first quarter share buybacks would seem a reasonable assumption. So think of it as the sort of shoulders of the year, depending on the rate of cash generation for the second half of the year. We're basically on – I use this sort of simplistic formula to describe that. For the first six months of the year, we're, you know, sort of say plus $10 million. So that calculation would imply a $10 million excess right now. So it really depends on the cash flow generation we see in the second half of the year. And as Brad said, all indications are the third quarter cash flows will be bigger than second quarter cash flows. So we're optimistic here. the return to the market is on the horizon.

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

Thank you. Our next question comes from John Babcock of Bank of America. Your line is open.

Hey. Good morning, and thanks for taking my questions. Starting out, you know, obviously we've seen the dislocations applying demand for OSB, and, you know, given that, I'd like to get a sense for how well you've been able to match production with demand inciting. And then also, if you could share how much of your siding sales are currently coming from smooth products, that would be helpful as well.

Okay. Well, matching – okay, the first question, just to clarify, John, was the supply-demand balance, supply-demand production balance for siding. Is that correct?

That's right, yeah. Essentially, you know, just because, I mean, we've seen that production has, you know, had a hard time keeping up with demand and OSB and, I want to get a sense for how well you've been able to, you know, keep that production matched with the demand and signing.

Got it. Yeah, I understand. We've been stretched to keep up with the order file and signing. You know, when we came off of the downtime that we took in April, the order file strengthened quicker than we thought. Fortunately, we had some finished goods inventory that we had built in Q1 that we were able to pull upon. You'll probably see that. I guess you'll see that in the numbers. But we are running all our siding mills at full production, only on siding, running no OSB, in our attempt to keep up with the order file. But the order file is stretching out a little bit beyond our ability to produce right now. We've had to lengthen delivery schedules in siding.

Okay. And might you be able to provide any color on how much your sales are coming from the smooth products yet at this point? Sure.

You know, I don't have that in front of me, but it's going to be single-digit percentages still, John. We're still getting placement for that product into its second year.

Okay. Thanks for that. And I also noticed that OSB value-added volumes were down a bit, and maybe that's just because of in-market exposure. But could you talk about the drivers there and also how volumes for the value-added products have trended more recently? Okay.

Yes, certainly. Part of the drop is because Peace Valley did manufacture some tech shields, so we relinquished a little bit of that when we made the decision to close Peace Valley or idle Peace Valley this time last year. But the high commodity prices right now do put a little bit of downward pressure on some of the commodity products that are essentially where builders are making a trade-off. As by way of example, if If OSB's $250 a thousand square foot and TechShield's $300, then they'll happily buy TechShield. But when that price rises for commodity to $350, they're a little less willing to pay that very high premium. So it does cause a little bit of a mix shift, just modest. But that is the factor that puts a little bit of a drag on.

John, I just want to follow that by saying it's not – There's no way of de-emphasis on our part of our strategy. We still are supporting those products from a marketing standpoint. But as Alan's mentioning, in these very volatile, let's be pricey markets, sometimes the easiest thing for a builder to do or a contractor is just make sure they have enough commodity volume in inventory. I mean, that becomes a priority for them. So their order pattern can change a little bit because of the volatility. But from a long-term perspective, we're still laser-focused on Okay.

Thank you. And then also on OSB, I was wondering if you just really want to get your thoughts on what it would take to get capacity added back, you know, in the industry. Obviously, like a decent bill was curtailed earlier this year, and, you know, the market is still very uncertain. And so I wanted to get your thoughts on what ultimately might cause that capacity to kind of come back.

Well, you know, we have one mill idled in our system. I'm going to speak to how we'll make the decision around that. As was mentioned before, we see it as a demand-driven decision, not a price-driven decision. If you look at where housing starts, we believe housing starts end up this year. It's going to be pretty much level to last year when this production was taken out because of, at that time, demand capacity imbalances. And so we don't see us – we do not plan to bring Peace Valley up until we see a 1.4 3.5 to 1.45 housing starts on the horizon and believe that that's sustainable. So we are focused on evidence of underlying demand needing the capacity for Peace Valley Restart. We're not basing it on a price outlook.

Understood. Thank you.

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

Hey, this is actually Marcus on for Paul. Hi, Marcus. On OSB markets, they've been on quite a bit of a run here, and I know you don't have a crystal ball, but what kind of sustainability do you see to the current rally?

Well, you know, it's August. Building is strong across the U.S., You know, we're running full out. I would imagine the industry is pretty close to that. And I think as long as demand for the product is flowing into construction, there's no really reason for there to be a softening in it. You know, I think, you know, obviously where pricing is today is kind of record high. So, you know, I think the direction is downward over time. just giving her a wrap, but we're not seeing any weakness in our order file to lead us to expect softening of demand anytime soon. Anytime soon being in the next few months. Typically, when we get to Thanksgiving, Thanksgiving to New Year's, we see a softening and typically some price abatement during that season, but It's not something that's on the immediate horizon, at least in our order file.

All right, that's helpful. And then maybe on the siding business, it's had a nice rebound versus your expectations in May, and you did take a bit of downtime there in Q2. Have your customers been able to secure all the products they need? Or maybe put another way, is the supply chain adequately stocked right now?

You know, the supply chain – As we were taking downtime in April, the supply chain also pulled inventories down in anticipation of the softening of demand. And so it has been tight with our customers on sidings from their inventory standpoint. And then as we ramp the mills back up, our ability to meet demand and provide enough product for them to also be able to rebuild their inventories to a more normal level has been a challenge. And that's why I spoke, I think it was to Keaton's question, about a lengthening in our order and our delivery schedule as a result.

All right, that makes sense. And then the EWP businesses faced a few headwinds here. What are you seeing in the market today, and what are some of the opportunities for the business over the next 12 to 18 months?

Actually, our order file in EWP is really, really strong, too. So we're seeing something are seeing a nice pickup of demand there. Just as a reminder, though, we use OSB and lumber in the making of I-joys, so the raw material cost into I-joys manufacturing is really up. By the way, veneer cost is up, too, for LBL. So I see a good outlook from a demand perspective. scenario for that business in the near term, but there's going to be margin squeezes, you know, as a result of the raw material price increases that we've been seeing and enjoying on the OSB side.

All right. That's all I have. Best of luck in the quarter. Okay. Thanks.

Thank you. Our next question is from Mark Conley of Business Inc. Your line is open.

Hey, good morning. This is John Ryder. I'm from MARC. First question for you. We had been hearing a lot about labor issues before COVID started and certainly is now probably a bit more of an issue for builders. Have you seen more interest coming through for Intecra?

We have. As you notice, Northern California Bay Area play from a market standpoint, and while that You know, that really hurt us in Q2 as the order file pretty much evaporated as those districts did close down. We are seeing good inquiries, and from a startup perspective, a good order file volumes for the next couple of quarters at Integra.

Okay, thanks. That's a good caller. And then a second one here. Has the rollout of smart side to more geographies gone as well as you had hoped, and has COVID changed the way you're thinking about distribution at all?

Our audio was garbled a little bit. Would you repeat that question again?

Yeah, sorry about that. Has the rollout of smart side to more geographies gone as well as you had hoped, and has COVID changed the way you've thought about distribution at all?

COVID has not changed our thinking about distribution. Obviously, you know, the emphasis can change quarter to quarter or over a six-month period as, for instance, retail, you know, demand really gets strong. So we have to be able to flex to, you know, where there's pull for our product. But I really like – I'm going to speak to an exception here in a second, but I really like our distribution structure. in retail, our access to the R&R market, which was really, really facilitated and continues to be facilitated by our expert finish rollout. And then we've had good two-step distribution into new construction for a while, though we did upgrade it last year. But what has been a key to a region we have been weak in, which is the northeast, is getting the smooth and pre-finished product line launch. So those two launches, smooth last year and expert finish this year, has made us a much more attractive supplier into Northeast distribution. So we've been able to bring on some higher quality distribution into Northeast that we're really glad to see, and I think it's going to be key to us growing in that region we've been historically weak in.

Great. Thank you very much.

Thank you. Our next question comes from Sean Stewart of TD Securities. Your line is open.

Thanks. Good morning. A couple of questions. On Peace Valley, it sounds like the decision there is exclusively related to your demand outlook or housing start outlook with regards to a potential restart. Is there any issue with fiber availability in BC that could affect that decision as well?

There is a, sure. I mean, the fiber availability in BC is an issue. And for us at Peace, it's never been a supply constraint, but it has been a pricing constraint. So when we look at the competitive positioning of that mill, I mean, this would be relative to a restart analysis that we would do. We have to make sure that we can get the margins we need to justify starting that up and getting a return on capital. That's been something that we dealt with while the mill was operating, and it is a factor in the restart decision. But right now, I would not say fiber cost alone would be a significant obstacle to a restart, nor would supply of fiber be a significant obstacle to a restart. But it is a factor that we would consider as we contemplate potential margins of that mill during the startup.

Okay. Thanks for that. The second question is on SG&A. There was a positive trend relative to your sales base this quarter with decline in SG&A percentage. You touched on a few of the factors in the prepared comments. I guess I'm just trying to gauge the sustainability of that progress and how much of it might have been related to spending cuts around initial pandemic concerns that we could see a recurrence of that spend coming back? Any guidance you can give on the SG&E side?

That's a good question, and let me talk about it in three buckets. We did some staff reduction relative to COVID and the expectations around demand and order velocity. But also, you know, some rational things we did here at the national office where we're still predominantly working from home. And so some of the support positions we had here would just be underutilized at this point. We also had some open positions and some new open positions. We also had some existing open positions that would have been in prior quarters. And we put a hiring freedom in place, which is still – in place and will be in place for a while, probably at least into next budget season. So we've had some functional staff reduction as a result. Obviously our travel expense is way down and all kind of that supporting people cost is way down given COVID. Second bucket is we did do a reduction in force on ourselves. area. Again, we were looking at a time where salespeople couldn't be in front of customers. We do a lot of product knowledge type sales support, which is very hands-on training at dealer and distributor locations. That's been very problematic, having 20 or 40 contractors come in for hands-on training. training session. We've moved a lot of that to online, which is more efficient from a manning situation. I could see us that SG&A will come back as things continue to get open, especially given our sales volume and the fact that we're going to support our customers with training and other things they need from our sales force. The third area has been marketing. Once again, we took a pretty serious look at that spin, especially in siting, where we've had large increases over the past two or three years. And I would say we did a little bit of a reset, understanding that the environment has changed there, and where we've emphasized online support of our marketing and product knowledge type of literature. I mean, obviously we're not printing a lot of pieces to hand out to folks. So it was an adjustment in our marketing spin to fit to the time that I think we'll carry through the rest of this year. But that spin will come back, and it will come back enthusiastically as we see and believe there's a return to it. But I just think we just felt like given the environment we were working in and the restrictions we had on face-to-face contact with customers, We needed to emphasize our online presence, and that was just a much more efficient way to access customers to some of the stuff we had been working on previously. I want to say one more. I know that's probably a lot longer answer than you were looking for, but let me make one more point there. All that excludes the support we put around our expert finish launch. A pre-finish launch requires a lot of samples. People want to see the product. People want to touch the product, experience the product up close. So we have supported that launch robustly and will continue to do so just because we see such an opportunity there. And then the reality of that sales process is typically a contractor is in a home, you know, trying to convince a person to put a hard siding on their house, and we want that hard siding to be ours, and that requires, you know, a higher level of marketing support than in most of our other sale activities.

That's tremendous detail. Thanks very much.

I appreciate it. Probably too much. Sorry about that.

Thank you. Our next question comes from Mark Weintraub with C4 Global. Your line is open.

Thank you. With pricing and OSB moving just in unprecedented manners here, I was hoping we maybe could get a little bit of help in understanding impacts from mix and or potentially lags. Because if you look at the random length pricing, for instance, it's right now, you know, more than $200 per thousand square feet higher than the second quarter average. And even if we average in July, it's like $180 north central higher than some of the other regions. I'm sure there are reasons that one shouldn't just, if we were to assume prices stayed here, you shouldn't just pencil in 180 and times it by the volume. But maybe if you could just walk us through what are some of the biggest factors that would cause the price change to deviate from what we see in random lengths.

Let me speak to two things that are top of mind for me, and then Alan, please go ahead. because we do talk about this a lot. So first of all, when we're talking about a rising OSB market, just keep in mind that our contract volume, which is, you know, depending on the situations, you know, 60% to 70% of our volume is in some type of contract situation. But those contracts are priced prior a week or two ago randomly. So we're going to get a lag. on our contract volume as prices increase. And then the other noticeable thing from our mix standpoint is sometimes Random will have the adders, especially on flooring, or the flooring pricing report, reported flooring prices aren't rising as quickly as the commodity prices. I think that's primarily a reporting issue I know for our open market quarter file, we try to obviously keep those things in sync. For some reason, random sometimes will have, we'll see lags there in the flooring pricing relative to the commodity pricing, which shows back up to our contract volume. So there's these nuances relative to the way random, I guess, gathers their data and reports. It can impact us negatively in a rising market. So it's... it will definitely cause a lag in realization in a rising market. And, you know, Mark, we've reported that in almost every rising market I've been a part of since I've been on these calls, is we just don't get it all as quickly as it's reported randomly.

And how far out are your order files? I guess in conversations I've had with some other folks, I've gotten a sense that they are so far out that maybe the lags would be longer than normal, which I'm not sure is a negative here, by the way, because it started just the way it's been going up. That means you're still going to get all of the pricing we see now, just it'll show up maybe in middle of August instead of right now. But how long are your order files currently?

You know, we really work hard and stay disciplined to a two- to three-week order file. We try, you know, and it's tempting sometimes, especially in pricing like this, to go longer. But we want to be selling volume into the market every week. So we have stuck to a two- to three-week order file all through this and plan to continue to do that.

Okay, great. And the last thing, I'm maybe putting you on the spot if I can a little bit. Given what we see and given your comments that you don't see any reason for softening in the relatively near term next couple of months of significance, is there any reason that one would see that your EBITDA in the quarter, given higher volumes in signings, given what we've seen in pricing plus the more volume in OSB, wouldn't be comfortably double what we saw in the second quarter?

Comfortably double. I like that. I can accept that. The range that you're mentally trying to push us to is reasonable, Mark, given all the caveats that you introduced in your own question.

Okay.

Thank you.

Thank you. Our next question comes from Steve Chercover of DA Davidson. Your line is open.

Thanks and good morning. Shawn Stewart kind of scooped my question on Peace Valley, but I did have a question on the wood pricing. I mean, has any of the competing buyers of wood left the market or in order to get the pricing down to a level that you're comfortable, do you have to negotiate with the crown or the province in order to, you know, permanently reduce the fiber cost?

Yeah, the Pace Valley wood cost is the question, Steve, picking up on. So, look, it's a little – your comments are, you know, factual. It's a crown license where we harvest, but just keep in mind – Really, from a crown perspective, the emphasis is on salt timber. That's where the value of those forests are. Us being a user of pulpwood, we can sometimes get – I mean, it's kind of lost in rounding from that standpoint. So there's not as much – so while there's not as much pressure to – increase those prices from a provincial standpoint, there's also not a lot of opportunity to go in and negotiate it down. But you're right. The only way to get relief there is through modified agreements with the Crown or to work at it on your delivery costs, draw in and make sure you're sourcing wood closer to the mill, all of which have been strategies we've employed in But the stoppage price is controlled by the provincial governments in Canada where we operate.

Well, I should think that, you know, without wanting to provide you with wood below fair market, they have a vested interest in for the community to have that mill running and the taxes associated with it. So, well, hopefully you get the market conditions that allow it to reuse. I also have a quick question.

I just want to make sure. Let me be clear. I don't want to. I don't want to leave the call without just saying it again. The issue with restarting Peace Valley is not an operating cost issue, just to be clear. It is, nor the reason for shutting it down. Obviously, you look at where's your best margin. The margin issues for that plant, for us, it's so remote from the markets that it's served in the western U.S. So really the issue is, that makes that plant uncompetitive or the least competitive in our system, which is why we shut it down, was because of just the cost of delivery to the West Coast. So just to clarify that.

Yeah, and I doubt there's anything you're going to be able to do to change that in our lifetime.

Exactly, yeah. Exactly, yeah.

Plate tectonics is slow. So quick question on South America. So they're doing better year over year, and that's despite Brazil, to the best of my knowledge, being a real COVID hotspot, and I recognize that the operations aren't necessarily there, but it's a big market. So is that simply price, or are there operating improvements you're also enjoying there? Are you accessing export markets? What's going on down there? Yeah.

It's a little of all three, but we did have a mill startup down there last year that we're far along on, so we've got some, from a cost standpoint, some prior year comps that are favorable to us when you're looking at comparative numbers. Secondly, we have a really good export business down there that has been resilient and has been very helpful as both the Chilean economy and the Brazilian economy has been I would say constrained, not to a standstill, but there has been headwinds in both economies. We've been able to continue to operate the mills because of our good export position. And then finally, and I would say later in the quarter, we did start seeing our ability to impact pricing on export volume as the price in the U.S. arose. So we've got some market improvement as price-related on export volume as a result of, I'm assuming, as a result of those markets being less attractive to U.S. manufacturers as the U.S. price recovered.

Terrific. Okay, thanks for taking my call, and stay safe. Thank you. Thank you.

Our next question comes from Mark Lauder of Bank of Montreal. Your line is open.

Hi, Brad. Just a couple of follow-ons. One on net Brazilian businesses. Is that Brazilian mill primarily domestic or is that still export? I think that the, you know, Brazilian adoption of OSB has been a little slower from a building code standpoint than you guys would hope for.

Yeah. Mark, I don't have those numbers in front of me, but I'm going to say it's 40% to 60% export depending on – but it's high as a high export mill or still, yeah.

Okay. And then how is domestic demand in both Brazil and Chile? Both countries have been hit pretty hard by COVID.

Pretty good. In the second quarter, domestic demand was actually up in Chile, like 11% in Chile. Rather surprising under the circumstances that it was. And LPSA is actually selling and producing more siding product as well on that. significantly helped the volume in the area.

Okay. And then just one other one. Is it possible to get a little bit of an update just on the siding extension initiatives in terms of, like, how volume is rolling? And I'm not only thinking of, like, the expert finish, but also some of the other, you know, like structural products or trim products that you've talked about rolling out.

Well, I would say expert finish is at or above expectations for, you know, a few months in, but it's very well received by our customer base. Our smooth product is pretty much where we have – where we expected it to be at the end of year one. We are adding SKUs to that, so we have a panel offering now in smooth and other SKU additions that we've done there. On the OSB side, the flame block product has had really good, continues to grow. We are on the weather logic, the weather wrap OSB. We've ramped up production at our facility in Clark County, Alabama, which has a mill that we can make long lengths down at 10 foot, which has enhanced that portfolio immensely. We are working on a roof product. that will really shape out that portfolio offering for weather-resistant OSB. And it's critical from a distribution standpoint to have that product in our portfolio. So that weather logic is still kind of in launch mode as we round out the portfolio. And then finally, if you were at the show the last two years, you saw our fencing product. And while it's from a very small base, we are computing – good distributor acceptance of that product as well. And we're seeing growth rates like a percentage basis that are really, really high. But as we all know, a percentage growth off of a base of zero is infinity. And so we're seeing some of that right now. But I really am proud of the way we have found distribution for that kind of non-traditional product in our portfolio. It's taken us a little bit longer than we would have liked, but it's beginning to pay off. So I would say, you know, market's a little bit all over the board, depending on where we are on the launch phase of these products. Some get accepted quicker, like expert finish. Some take longer, like fencing. But, okay, so let me summarize it by this. Smooth. Expert finish is a highlight. Lane block is a highlight. smooth is where we want it to be, work to do on fencing and work to do on the weather logic on product.

Okay. Would you think that over the next three or four years, if we just think about things like expert finish, should we be able to see a discernible margin lift in the entire siting segment as that becomes a bigger and bigger piece of the pie?

Yes. Expert finish is a very high margin product.

Okay. All right. I'll turn it over. Good luck the second half.

Thank you. Again, if you'd like to ask a question, please press star, then 1. Our next question comes from Keaton Mantora of BMO Capital. Your line is open.

Thank you. Just one other question on sort of the OSB capacity. I was just curious, Brad, how much additional room do you have at your existing OSB mills to increase, you know, kind of production or capacity? and, you know, what kind of capital investment that could take. I'm just trying to sort of understand kind of, you know, sort of investment of existing mills to increase, you know, modest capacity versus kind of bringing on Peace Valley. Kind of how do you think about those two?

Yeah, well, we did add, we did go to full shifting at this Q2 at Manawaki. That was the only mill that wasn't running full shifting, so that's now... That was an increase of capacity there. And then the rest of the capacity, well, so there are two other opportunities. One is OED, which we talked about a bunch over the last couple of years. And there's still room to go there that we've made really, really good progress in showing up in our numbers. But we still have two to four percentage points of opportunity in the near term on OED. And then after that, it comes back to our capital program. where we have done extensive press upgrades during this two or three years of good runs in OSB. And now we're moving our upgrade opportunities into the dryer refurbishing in our mills. So there's always going to be capital projects that are available. When I was working in the paper side of the business, early in my career, we called it CREEP. And I think OSB certainly The OSP industry, and LP in particular, has an opportunity for CREEP through the use of capital. And also, I'm not going to call it CREEP because it's hard work management to get that OEE number up. But, you know, we should be seeing, you know, single-digit increases in capacity when our capital program is robust, as it has been over the last few years, and we have these opportunities in OEE to improve. to increase throughput. And that's what we're, you know, keeping the cheapest capacity we have is the capacity that exists today. And so getting more out of those assets is a key part of our plan of improving our margins around OSB.

Got it. That's awesome. And then on the siting side, Brad, When do you have to decide, you know, on kind of the next project that you may have, whether it's the Valdor one or the Brownfield and Cook, and, you know, if there is any updated thought process along that?

Yeah, so based on our current view of siding growth and, as I mentioned, also mix this very critical input to the timing, For instance, we have a lot of panel capacity right now in the business because of the way we configure Dawson and Swan. But, you know, we want to make sure we have plenty of lap and trim for expert finish. But depending on the mix, that can influence the necessary timing. But given where we are today and a mixed state, you know, similar to where it is today, we would be looking – we'd be wanting to have new capacity – operating by mid to late 2022, which means we would be seeking board approval around the middle of next year. And identifying the location, making that final decision, which again will be somewhat mixed-based, and then getting approval and announcing that publicly middle next year, I could say probably this board meeting or the next one, that kind of timing.

Got it. And then, Brad, which mill is better suited to producing more lap?

Between those two options that you mentioned, Valdor would be the better lap mill.

Got it. Okay, that's very helpful. I'll turn it over. Good luck into the back half of the year.

Sorry, go ahead. Well, the reason is it has a 16-foot press, which is kind of dialed in for lap and trim. That's the reason Valdor would be optimal there.

Got it. That's very helpful. Thank you very much.

Okay. Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Hathi for any closing remarks.

Okay. Thank you, everyone. This concludes the second quarter earnings call for Louisiana Pacific. Stay safe, and we'll look forward to speaking with you again sometime in November to discuss our Q3 results. Thanks, everyone.

Ladies and gentlemen, this does conclude today's conference. Thank you for participating and have a great day.