Louisiana-Pacific Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Louisiana Pacific Corporation fourth quarter and full year 2020 earnings results conference call. At this time, all participant lines are in a 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Aaron Howald, Director, Investor Relations. Thank you. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Thank you for joining us today to discuss LP's results for the fourth quarter and full year of 2020, as well as our Q1 outlook. My name is Aaron Howald, and I'm LP's Director of Investor Relations. I'm joined today by Brad Southern, LP's Chief Executive Officer, and Alan Hockey, LP's Chief Financial Officer. We are hosting a simultaneous webcast in addition to this conference call, and we have uploaded a presentation to which we will refer during this morning's discussion. We also filed our 10-K this morning with some additional information. All of these materials are available on LP's investor relations website, www.investor.lpcorp.com. Slides two and three of the accompanying presentation provide notices and detail about forward-looking statements and the use of non-GAAP financial metrics. The appendix of the presentation also contains some necessary reconciliations that are further supplemented by this morning's 10-K filing. Rather than reading these statements, I will refer you to these supplemental materials. And now, I'll turn the call over to Brad.

Thanks, Aaron, and thank you all for joining us this morning to discuss LP's results for the fourth quarter and full year 2020. As you all know, the housing and repair and remodel markets that LP serves continue to show remarkable resiliency despite the ongoing COVID-19 pandemic, and demand for our products has remained very strong. Q4 was another record for SmartSide, as sales increased by 30% to $259 million, and Siding EBITDA nearly doubled year-over-year to $77 million. OSB prices remained exceptionally high throughout the quarter, resulting in $250 million in EBITDA for the OSB segment. All business segments continue to demonstrate outstanding cost control. As a result, LP ended 2020 with $2.8 billion in sales, $781 million in EBITDA, $660 million in operating cash flow, and $4.31 in earnings per share. It was a very strong ending to a uniquely challenging year that leaves LP well-positioned for continued growth. Two years ago, we introduced a strategic transformation plan for LP. That plan included a three-year target of $165 million in cumulative EBITDA improvements from growth, operating efficiency, and strategic sourcing. Today, I am proud to announce that we have exceeded this target a year ahead of schedule with $177 million in cumulative impact delivered in only two years. I want to stress that we measure these results using normalized OSB and raw material prices, so this achievement is not merely an artifact of unusually high OSP prices or favorable movements in the cost of logs or resins. Rather, it is the result of the incredible dedication, creativity, and great of ourselves, operations, logistics, and sourcing teams. Having achieved significantly greater efficiency, we will not only hold those gains but raise the bar as we continue to drive our growth and value creation strategy. Today, to build on our progress and to accelerate LP's transformation, I am pleased to announce a series of interconnected strategic initiatives. First, in order to supply growing demand, we are announcing a two-phase capacity expansion strategy for SmartSide. Phase one will be the conversion of our mill in Holton, Maine, from the production of laminated strand lumber and OSB to SmartSide. Holton is ideally located for SmartSide production because of its access to an ample and sustainable aspen wood basket and its proximity to the large and underpenetrated repair and remodel market along the east coast of the United States. Holton will add roughly 220 million square feet of SmartSide capacity with production beginning early in 2022. With Holton converting to SmartSide, we will cease LSL manufacturing there sometime this year. a change that has contributed to a broader re-evaluation of our product portfolio. Due to the loss of LSL from our EWP portfolio, coupled with our inability to consistently earn the cost of capital in EWP, we have decided to evaluate strategic options for our remaining engineered wood products business. Phase two of the SmartSide capacity expansion strategy will be the conversion of our OSB mill in Sagola, Michigan. Sagola is currently producing OSB and will continue to do so until it is converted to SmartSide manufacturing. Although the precise timing has yet to be determined, if demand for SmartSide continues to grow at historic rates, we will need to begin to work on the Segola conversion soon after siding production begins at Holton. This will require OSB production at Segola to cease sometime in mid to late 2023. These two new facilities will add roughly 520 million square feet of additional smart site capacity and remove roughly 670 million feet of OSP capacity. There is still a long runway for further siting growth after these conversions with several potential expansions of existing facilities as well as other conversion opportunities. In addition to serving our growing customer demand, these conversions will also position the mills for years of growth and improved stability which will benefit Holton's and Sagola's employees, their families, and their broader communities. We are thrilled to welcome L.P. Holton to the Smart Size Family of Mills and look forward to converting Sagola soon after. Finally, since we idled our Peace Valley OSB mill in Fort St. John, British Columbia, we have kept the mill ready with the intention to reopen it when we were confident the sustainable market demand would be sufficient to absorb its capacity. The consensus for 2021 housing starts has climbed for the past several months and is now near 1.5 million. On a seasonally adjusted basis, December starts were 1.6 million and permits were 1.7 million, suggesting continued strength in new residential construction. At these levels of starts, with channel human towards extraordinarily thin, it is clear that our customers need additional volumes. Looking further into the future, long-term demographic data and a structural undersupply of housing suggest continued tailwinds for demand. As a result, we have begun the process to restart production of OSB at Peace Valley. Our goal is for Peace Valley to become a low-cost leader in the industry. Our flexible and disciplined operating strategy remains unchanged. Restarting Peace Valley increases our ability to meet intense customer demand and will add to our strategic options for balancing OSB supply and demand with discipline, agility, and efficiency. With its production of text shield and long links, P-Styler will also help us reach our goals for structural solutions as a percentage of total volume. Since we have been keeping the mill ready for an eventual restart, the cost for its own production shall not exceed $12 million. We have begun the necessary engineering, capital, and rehiring planning to support the restarts. The earliest expectation for a first press load is sometime in Q3, full production capacity about a year later. We will continue to monitor the housing outlook, OSP demand, and channel inventories to gauge proper timing for the restore. As I said previously, continued siding growth will require more frequent mill conversions. As a result, as Pace Valley resumes full production as a low-cost leader, It enables our phased capacity expansion plans for SmartSide while maintaining our current OSB market share. Slide 7 of the company presentation shows more detail on our phased and integrated capacity strategy. Blue and orange lines show LP's expected OSB and SmartSide capacity over time in millions of square feet. Hold to the shutdown is conversion to SmartSide. and its ramp up to full capacity are shown as A, C, and E on the graph. Peace Valley will begin production at point B sometime after Holton ceases making both LSL and OSB in preparation for conversion. Peace Valley should then reach full production a year later at point B. Sagola, Michigan will be the next siding mill after Holton. Sagola's conversion will add roughly 300 million square feet of smart site capacity and removed roughly 420 million square feet of OSB capacity. While the exact timing of Sogola's conversion to SmartSide is still to be determined, the graph illustrates initial SmartSide production in the second half of 2023, which is consistent with an annual demand growth rate of 11%. Timing for all these steps is based on the assumption that OSB demand and SmartSide growth continue and that the capital projects are completed on schedule. Should demand slow, which we do not currently anticipate, any or all of these steps can be delayed at minimal cost. There is little room to significantly accelerate the Holtner conversion or the Pace Valley Restore as both of these projects are already underway. The Segola conversion, on the other hand, could be brought forward somewhat should demand growth accelerate. The plan, once fully implemented, will increase total smart site capacity by roughly 520 million square feet or a little over 30%. The net effect of Holton and Segola's conversion and a Peace Valley restart will increase LP's OSB capacity by less than 100 million feet. More importantly, each of these initiatives will accelerate LP's ongoing transformation, grow our portfolio of smart-sized structural solutions, and improve our operational agility as we meet increasing customer demand. 2020 was a year of incredible hurdles that uniquely tested our ability to adapt and work together. However, I'm incredibly proud of how LP employees came together to not only survive, but thrive as a company. In the face of adversity, LP delivered strong results. As we turn our attention to a new year, we are focused on meeting customer demand for LP products. We are excited to share our plans to execute a multiple-year smart site capacity expansion project and Restart Peace Valley is part of our disciplined and agile approach to OSV operations. This acceleration of our growth and value creation strategy will build on LP's growing momentum as we transform into a building solutions leader. And with that, I'll turn the call over to Alan Hockey for more details on our financial results and an update on our capital allocation strategy.

Thanks, Brent. Slide 8 shows summarized results for the quarter, which are very clean and straightforward. Net sales increased by 60% to $860 million, primarily due to 30% growth of SmartSide and $246 million of higher OSB prices. The resulting EBITDA of $328 million is seven times last year's result and translated nearly dollar for dollar to operating cash flow $321 million, with the benefit of $45 million in tax refunds. We further lowered our year-end share counts to 106 million shares after spending $171 million in the quarter to buy back a little over 5 million shares, and with taxes as the only meaningful adjustment to net income, adjusted earnings per share was $2.01 compared to U.S. GAAP earnings per share of $2.34. Slide 9 is the same data for the full year and is much the same story, just with bigger numbers. Net sales increased by 21% to $2.8 billion, and EBITDA increased to $781 million, which is four times last year's result. We grew smart side revenue by 15%, earned $481 million of revenue in EBITDA from higher OSB prices, and generated $659 million, in operating cash flow. Capital spending of $77 million ended up being about half our original pre-COVID guidance for 2020. The vast majority of this $77 million was spent on sustaining maintenance, which typically runs in the $80 to $100 million range per year. As a result, we ended the year with $535 million in cash after paying $65 million in dividends and $200 million to repurchase shares. Slide 10 adds detail to the EBITDA impact from growth and efficiency through LP's ongoing strategic transformation. As Brad said, we exceeded our three-year target of $165 million in cumulative EBITDA impact a year early, with $107 million from growth and $71 million from efficiency. And this is a result of truly remarkable performance by our sales, operations, and sourcing teams, especially given the challenges of 2020. But this is a race with no finish line, so we intend to hold these gains and add to them in 2021 and beyond. Slide 11 shows an ultra-high-level roll-forward of revenue and EBITDA for the fourth quarter compared with 2019. The main takeaway here is that higher OSB prices and 30% smart-side growth tell us all we need to know about the quarter. Everything else basically nets to zero. Having said that, and while not shown here, our South America segment had a record quarter, with $15 million of sales and $13 million of EBITDA, representing increases of 32% and 62% respectively, even after adverse currency movements. The waterfalls on slides 12 and 13 detail the year-over-year revenue and EBITDA growth in the siding and OSB segments for the quarter. Slide 12 covers siding. In broad strokes, the 30% revenue growth for the quarter reflects a 95% increase in retail revenue and a 20% increase in distribution revenue. With an incremental margin of 51 cents on each additional dollar of revenue, this $59 million of smart site growth produced $30 million of additional EBITDA. With lower SG&A and higher OEE, more than offsetting the discontinuation of Fiverr, the site and segment EBITDA margin increased by 12 percentage points, to 30%. I should mention here that 2021 will be a year of increased investment in both selling and marketing and preventative maintenance to support future growth. So this margin is probably something of a high watermark. However, given the operating leverage and pricing power inherent in the business, we are raising our long-term target for deciding EBITDA margin by five percentage points to 25%. On slide 13, Very high market demand for OSB pushed prices to record levels, adding $246 million of revenue in EBITDA in the quarter, which rather overshadows both the continued excellence of our cost control and the growth of structural solutions, which rose to 49% of total OSB volume. We are therefore raising our long-term target of structural solutions volume as a percentage of total OSB volume by 5 percentage points to 55%. However, during the fourth quarter, we experienced interruptions in the supply chain for MDI, the primary resin used in the manufacture of SmartSide, OSB, and LSL. These issues were triggered by the impact of severe weather on MDI manufacturers in the U.S. Gulf Coast area. While MDI supply remains constrained, we are prioritizing MDI to SmartSide, substituting alternate phenolic resins for OSB, and curtailing LSL production until availability The use of phenolic resins in OSP lowers line speeds, which we estimate lost us $8 million of potential revenue and $3 million of potential EBITDA in the fourth quarter. Turning to slide 14 and some commentary on 2021. As you might expect, given our capacity and growth plans, this will be a year of investment. The Halton conversion will cost about the same as the Dawson conversion in 2018. That is about $130 million. roughly $80 to $85 million of that $130 million will be spent in 2021, with the remainder in 2022. We have other strategic growth projects totaling $30 to $35 million that will enable us to accelerate our rollout of new products, and we have our typical base level of about $100 million in sustaining maintenance. And as Brad mentioned, the capital required for a Peace Valley restart should be around $10 million at most. As a result, we expect capital expenditures for the year to be in the range $220 to $230 million. A word now about capital allocation. Our strategy remains unchanged. We will continue to return to shareholders at least 50% of cash from operations in excess of capital expenditures required to execute our strategy once that cash has been generated. So, given that we ended the year with $535 million in cash, with a $300 million share buyback authorization from our board, we will be re-entering the market to continue buying back shares in a matter of days. Now, I concluded my comments last quarter by saying that, absent unexpected reversals in demand or the general housing outlook, the fourth quarter would look a lot like the third. Given accelerating smart site growth and rebounding OSB prices, That turned out to be a bit conservative. But we have similar visibility into our order file today, so I can share the following. Halfway through this first quarter of 2021, OSB prices are at least 15% higher than the fourth quarter of 2020 on similar volumes. SmartSide revenue is trending seasonally higher than the fourth quarter on pace for at least 35% growth compared to the first quarter of 2020. Should these trends continue, and absent COVID outbreaks or sudden reversals in logistics, raw material availability, or OSB prices, we expect EBITDA for the first quarter of 2021 to be at least $380 million. And with that, we will be happy to take your questions.

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As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Babcock from Bank of America. Your line is now open.

Hey, good morning, and thanks for taking my questions. Sorry, no, I was just wondering if you could talk a little bit about, so you shared some information on the Holton Mill, you know, just, you know, what's attractive about the Ciccola Michigan Mill, you know, whether that's the wood basket or other factors, and also I was wondering if you might be able to provide some sense as to what that conversion might cost.

Okay. John, did you ask the first part of that question was some of the specifics about why Holton and then why Ciccola? Was that the...

Yeah, sorry, I didn't ask that well. I mean, basically I was just wondering with regards to Segola, you know, what makes that middle attractive for a signing conversion, you know, just because I don't remember that being mentioned in the past. And then, you know, also if you could just kind of talk about the capital costs for that.

Okay. So from a Holton standpoint, probably the primary – The attractive part of it, or number one on the list, is the fact that it's located in the northeast. As we've mentioned on earlier calls, you know, we are targeted repair and remodel as a key focus area for growth in siting, and that northern and mid-Atlantic region of the U.S. is a really strong repair and remodel for siting, a very strong repair and remodel market. So that is what really got us focusing in on Holton. And then also, you know, we do, you know, we do net present values of these conversions. And, you know, to a certain extent, Holton was more optimal for us because of the LSL capacity there, not producing the kind of returns that we see in our OSB mills. From a Cibola standpoint, great wood basket as well. You know, we do like making siding in the central part of the country. It's pretty, you know, most of our mills are there, but that central location allows us to access the west coast, the central part of the US and the east pretty efficiently. And also the press size for that mill is a good press size for siding conversion. I would say from a capital standpoint, just look back at what we spent on Dawson and Swan. It's a very similar mill configuration. to what we have in Sagola. And while we haven't made the decision on the finishing capability, we want to put into that plan because that can impact capital costs. If you plan around the range of what it costs us to convert Swan and Dawson, that would be good guidance for where we are right now.

Okay, thanks for that. And then With regards to the Peace Valley OSB mill, I was just wondering if you might be able to provide some sense as to, you know, first of all, you know, why this was one of the mills that was curtailed a little while ago, you know, just so we have a little bit of kind of just a remembrance around that. And then also just generally how we should think of the economics of that. And, you know, on a report-based site, are you going to consider whether or not to keep that, you know, running? It sounds like it is something that you have in your longer-term plans, but just on some work on that.

John, that's a great question. So at the time, two factors on the shutdown decision that are worth mentioning. First of all, at the time of the shutdown, the Western Canadian OSV pricing zone was one of the worst zones, if not the worst zone, for selling at OSV. There was a good bit of capacity added to that region over the last decade or so. And so we were looking at really low pricing there. And then, candidly, we have struggled from a cost standpoint. management standpoint at that mill in the past. And so when we look at those two together, it was a rather, I mean, it wasn't a slammed up decision when we looked at our network on which mill to shut down, but it certainly, you know, became rather obvious through the analysis that that's where we wanted to concentrate the shutdown. And also being one of our larger mills with a capacity of 800 million square feet, you know, it was a significant reduction in volume Now, why are we confident for starting it up? Well, the pricing dynamics has changed, you know, across the various OSP regions, but also the $10 million in capital and the $12 million overall we're planning to spend to restart the mill is focused on some of the bottlenecks that we've experienced in that facility that had limited our ability to hit the cost position that we want to. You know, with the scale of that mill, It should be, and it was originally designed to be one of the low-cost mills in the OSB industry, certainly within our network. And we're confident, given our experience with OEE across our other facilities, and I will bit of a detail, but also our experience over the last couple of years in reducing the cost at Peace Valley Sister Mill, which is our Clark County, Alabama mill, we're in a position to get that mill to be a very low-cost producer in our network and overall with the OSP network. So we're starting this mill up with the expectation that we would run it for a long time. And as we look forward into the next down turn, we would look overall at our entire network and optimize accordingly. But our expectation is we can get Peace Valley to a really good cost position.

And just adding to that, will you have any notable change in the product mix that comes out of that facility?

Not from the time when we shut it down. It's been a really good tech shield mill for us, and we basically lost a good bit of that volume on the West Coast because it was inefficient for us to replace it all from the east. And then that's also a long press, so we make long-length panels there. that is unique for us. We can only do that in Clark and Peace Valley. So we are excited about bringing those structural solutions products back into the portfolio on the West Coast, you know, with our Peace Valley operation.

All right. Thanks for that. And then just last question before I turn it over. I was just wondering, you know, you've done really well with the transformation targets and achieving, you know, both your growth and efficiency goals there. You know, might you be able to provide some color on how you're thinking about that for the year ahead. I think you've touched already enough on the growth side of things, but on the efficiency side, it might be useful to have some more color there.

Well, the combined target for this year, and this includes the siting growth, though, the combined target is $75 million of improvement for this year, and we certainly have plans to extend that beyond this year. I want you to know. We still have an OSB in siting this is from memory a little bit, but two to three percentage points improvements in OEE out there just to get us across the board into the 90% OEE, which is our original target for both businesses. And then we're also always working on sourcing savings. So I want to be clear that we're reporting that we hit year three target in year two, but that annual kind of pace that we're on, far as improvement, we are expanding fully into the future. And we'll continue to discuss that on these calls. But, you know, when we talk about siding growth, structural solutions growth, improvements in OEE, and sourcing savings. Those are the four key areas. There's a little bit of SG&A management in there as well. But those are the four key drivers that have got us where we are today and where we continue to focus as we move into the future.

Very helpful, thanks.

Welcome, John.

Thank you. Our next question comes from the line of Keetan Mamtoro from B&O Capital Markets. Your line is now open.

Thank you. Brad Allen, congrats on a very strong finish to the year. Thank you. First question. Can you talk about the growth that you saw in Q4 and maybe, you know, fiscal year 2020 in expert finish? I know you wanted to get it, you know, over the next few years, you know, maybe a quarter or a third of your total sales. Can you just remind us where it is in terms of your total sales right now in siding?

Well, Keith, it's about 5% of our total sales in siding. It was our fastest growing – product line in siding, obviously from a small base, but it grows basically from 0 to 5% and it is a clear focused area for us for this year and onward as we continue to grow in the repair and remodel segment.

Got it. And how much headroom do you have in terms of capacity with the three facilities that you currently have for pre-finish siding?

Yeah, that's a good question. Certainly, we have enough headroom, you know, for this year's budget to hit it. But, Keith, and the thing about that is those additional paint lines, either at our existing, pre-existing facilities or Greenfield, are relatively inexpensive and quick startup type, you know, capital projects. And so... I don't ever see any issue with us being constrained on pre-finish capacity as we move forward. Let me just add on to that question that, you know, given the fact that we will have Holton making lap siding next year, you know, we will have a decision to make on where to concentrate that northeast production for pre-finish. We haven't decided on that yet. And that solution could include our continuing to do it in our North Carolina facility. But, you know, really focusing in on that as we go through the year and understanding the optimal place to produce that will be important to us. But, you know, don't think of pre-finished capacity as being certainly a financial constraint for us because it's pretty easy to add on lines at our existing facilities, and they all have the space where we can do that pretty efficiently.

Got it. And then last question, you know, you have 30 to 35 million capex on, you know, strategic growth projects. And I thought I heard Alan also talk about some new products. So maybe if you can just highlight those two things, you know, what you're looking at in 2021 and beyond in terms of some of the new product launches.

Yeah, well, one of the larger consumers of this strategic capital, you know, other than Holton, conversion is we make a shake product out of strand siding that we've currently been making that product in our North Carolina facility. We make the panels for that product, the substrate for that product at Swan River, Manitoba. And so we're going to put a shake machine in Swan to help to increase the capacity, significantly increase the capacity of our shape product. And also, obviously, that puts it in a little more central location as far as reaching the West Coast and the upper Midwest. And that is a really – it's a beautiful product and a really high-margin product for us. And so that would be a really good example of how we're using capital this year to grow the product portfolio.

Got it. That's very helpful. I'll turn it over. Good luck in 2021. Thank you, Keaton.

Thank you. Our next question goes in the line of Mark Connolly from Stevens. Your line is now open.

Thanks. Just two things. Are your WeatherLogic and FlameBlock products available in all of the markets where you sell OSP? I assume that TechShield isn't because the value would vary by region, but I'm just curious about the rest of your structural solutions.

Yeah. FlameBlock, yes, is available in all regions. And WeatherLogic has been a little bit constrained, more from a capacity standpoint than any kind of geographic limitations. But we're going into this year with full capability to supply the market for WeatherLogic. There was some constraints last year, though.

Okay, okay. That's helpful. And then just quickly, on the business that you're exiting, the cybersecurity and mechanics, how much of that business were you able to convert over to SmartSight Strength I'm just trying to understand how much of your strand business was able to capture existing, you know, customers or if it all had to come from now.

Mark, that's a good question. So from a can-excel standpoint, while pre-finish is obviously a focus area for us, you may recall that product line is in kind of an Eastern Canadian and European focus. And we haven't. really focused on that or made a hard push to convert that business. I'm not saying we're not picking up some around the edges, but that's not been a focused area for us. Conversely, for the fiber production, especially the fiber production that was in retail, that has been a focused area. We did not want to lose the shelf space that we had earned over the years for the fiber panel that we had in there. And so we have that volume when we can over the spring. Understood. Very helpful. Thank you.

Thank you. Our next question goes to the line of Paul Quinn from RBC Capital Markets. Your line is now open.

Yeah, thanks very much. Great results. Maybe just spend a couple minutes on sliding here. Just take a look at slide 7 with the capacity additions. It looks like your graph is based off that 11% volume CAGR. You did the 26% in Q4 and 13% in 2020, so are we being conservative on the 11%? Is it accelerating? Is it decelerating?

Well, Paul, obviously it's accelerating over the last little while and as we look into next quarter, I don't think 35% is sustainable year over year. The changes that we've made in distribution and the new products that we've offered from a volume standpoint, I think 11 is a good number. We are watching from a timing standpoint, that very closely and adjust the CIGOLA timing accordingly if we feel like that we're up to the more 15% annual volume growth right now. I'm talking not just revenue. Obviously, volume is what's important for capacity. So, I mean, I feel good about where we are from the timing of the halting conversion. I mean, I wish that was a little bit bigger mill, you know, to convert. But that's the reason for going ahead and getting started on Sagolas. I feel good about it, but, you know, as you point out, there's not a lot of headroom from a capacity standpoint if we're continuing to grow volume at a 15% rate or so over the next couple years. We would stay pretty tight until we could get the Sagola conversions.

Okay, great. And then maybe, Grady, you could give us some color just on where you're seeing that regional volume growth, and then also what's anticipated for the finishing end at Holton?

Yeah, so the Holton will be a lap and trim, primarily a lap and trim plate for us, so the 16-foot product. And then where we're seeing the growth in distribution across the board in all geographies, And then what's been really, really helpful for us, and we've talked about this, Paul, but over the last couple quarters, the retail business, as Alan reported, has really been unbelievably strong. From a growth standpoint, we've done a really good job of getting shell space there, retaining it, and then adding SKUs. So that's been very helpful. And then our shed business, after being really, really, really slow at the beginning of COVID, has really taken off. And so we're moving a lot of panel through distribution to get it into the shed, into the shed manufacturer. So, you know, I would say lap and trim in the new construction and R&R has been a little, a little stronger than we would expect it. And then the panel products through retail and in the shed have just been really, really strong.

All right. Yeah, and just lastly, over the last three or four years, you've introduced a number of new products into that signing segment with a smooth product. You've got WeatherLogic. You've got Tricent Fencing. Just wondering what you're seeing. What are the big takeaways from that? What's worked? What hasn't? Where do you go with new product launches?

Okay, let me back up to what's worked, and then I'll look forward. I mean, what's really been Really, really solid for us on the OS3 side has been legacy flooring and flame block has been really good. We learn from the WeatherLogic experience. We really need to have a rounded portfolio of that product, which we rounded that out last year. So we feel really good about it. I mean, we had good growth in WeatherLogic last year, but somewhat constrained by us not having a full portfolio. We've remedied that and are really ready to rock and roll that product all the way. to move into this year. On the siting side, man, there's been a lot of good prospects. You know, when you're talking about smooth and pre-finishes from a really small base, but the market acceptance of that and really the need as we push into R&R has made the growth of it really strong. And I foresee continued strong percentage growth And those products, again, because of the smaller base. But, you know, to go from zero to 5% penetration with expert finish, I'm calling that a win. And so, you know, it's – so let me back up and look forward. You know, really, to get the kind of double-digit growth that we talk about in signing, we've got to continue to be really innovative. You know, fortunately, our product is very adaptive to innovation. And so as we continue to build out the portfolio of repair and remodel type products, which, by the way, Shake is one of those that I've mentioned earlier, and then really focusing in on getting competitive on the big builder side with a product that we're going to be launching this year. Those are the kind of really targeted new products that can either fill an edge or provide a real platform for growth. And there's no end in sight to our innovation initiative here because, again, You know, that's how you get double-digit volume growth is through a big emphasis on new products. So what I'm communicating is there's not an end game on new products in SmartSci. We've got to really continue to be innovative to hit these numbers, and we intend to be so. Excellent. Thanks for the help, and best of luck. Thanks, Paul.

Thank you. Our next question comes in the line of Mark Weintraub from C-Corp Global. Your line is now open.

Thank you. Brad, in 2020, I think you produced about 3.54 billion square feet of OSB, just under 1.4 billion in siding. With the various actions that you're taking, assuming demand is very strong, as it certainly seems to be, How much OSB do you think you could be producing in 21 and similarly for SmartSide?

Okay. So, you know, there was some downtime that we had in OSB in Q2 and anticipating COVID-related issues that didn't really materialize.

So for OSB potential capacity in 2021-21, is, Aaron, go ahead. Yeah, the COVID downtime is about 100 million feet in total, only taken out. And the capacity for 2021 will be similar, plus whatever ramp up we see in Peace Valley.

And then on the siding side, we've got basically the capacity is about 400 million square feet a quarter. We do have a press rebuild at SWAN scheduled for Q3 that could take that bill down for potentially for a month at including the ramp-up time. But other than that, you know, that's the only schedule, big schedule downtime we have other than the ordinary maintenance downtime.

Okay. And just to make sure I'm reading the slide seven right, so is Peace Valley, does that ramp begin at about mid-year, or when is that ramp scheduled to begin?

So for this chart and really more of the The earliest we can see production in Peace Valley is Q3, and there wouldn't be a lot in Q3. So we're really looking at Q4 as the first full ramp-up quarter. And then, you know, as I mentioned, sometime late Q3 or Q4 of 2022 is when we would be expecting to get some full capacity there.

Okay, great. And then... On the cap allocation question, thanks for all the color, et cetera. So last year, cash from operations, $660 million. If I look at what you've laid out, the $230 million, $220, $230 for CapEx, you have a $300 million share repurchase authorization, and then dividends are order of magnitude $70 million a year. That gets to about $600 million. right now you're doing even better than last year as per your first quarter guidance. If you are generating anywhere close to or even more than what you did last year, what do you think happens with the cash flow above that $600 million that's sort of been allocated already?

Yeah, we still believe that the company is significant. value, so we will continue with our shareholder-focused strategy of fundamentally returning excess cash to shareholders. And it's your rise in your assumption that the current $300 million share buyback authorization could well be exhausted rather rapidly.

Thank you.

So yes, that cash will ultimately be returned. We're not going to hold cash here.

Thanks a lot.

Welcome, Mark.

Thank you. Our next question comes from the line of Kurt Yinger from DA Davidson. Your line is now open.

Yes, thanks, and good morning, everyone. Just starting on deciding business and growth, as we look back, I guess, at the back half and the Q1 guide, is there any way to kind of bucket some of the different drivers there between what you would view as underlying market growth, distribution wins, or benefits from new product introductions?

Yeah. Well, this is a bit of an estimate on my part, but I would say the underlying growth that's happening right now across new construction, repair, and remodel could be in the range of that 20% year over year. And then what's accelerated the growth for us above that has been the strength in retail and the strength and shed. Does that answer your question, Kurt?

Yeah, that's very helpful.

From a percentage standpoint, the growth and expert finish and our penetration in R&R is, from a percentage standpoint, also is disproportionate because it's off a smaller base. Right. Right.

Okay. That makes sense. And I guess just sticking with expert finish and growing that out, is that something where you need the finishing assets in each geographic market? And could you just remind us what markets I guess you introduced that in in 2020 and where you're really looking to expand that here this year?

Yeah, great question. So we started – With our first manufacturing base in Green Bay, Wisconsin, obviously near our mill network, then we quickly expanded with a facility in St. Louis, and then we expanded within our facility at Roaring River, North Carolina. So that's the current footprint, and you can tell from that footprint we're very focused on the eastern part of the U.S., including the upper Midwest, but all things east. We do sell pre-finished in the West, but we use an independent pre-finished network there that we have relationships with. Right now, we've made that decision because just the geographic expanse of the West Coast has made it. That is a more logical step for us currently. So our focus in the near term is on the East Coast with our footprint and And if you think about what I just described, that's why us understanding the best way to access that northeastern segment is something we're working on. But that's the current network. And we would be and are looking at options to acquire facilities in place or build our own. But overall, I would say that other than Upper part of the Northeast, we're not really limited in our ability to grow pretty finished right now in the East because we get pretty good coverage from our network, our existing network.

Got it. So that would be something that distribution would just have it branded as their product. And to the extent you chose to, you know, add capabilities in certain markets, you could bring that under – kind of the LP banner, is that the right way to think of it?

Yeah, so Expert Finish is, you know, everything we sell out of the facilities we have, the three that I mentioned, is branded Expert Finish, sold as one LP product offering into the distribution network that we have. On the West Coast, those tend to be more their brand, and, you know, like they'll say, SmartSight, their brand, coded smart side. So we make it, we want to control the brand name and do, and that's how we've been operating to date.

Okay, makes sense. And lastly, and I apologize if I missed this, but you talked about Holton's OSB capacity at about 250 million square feet. What's the right way to think about what that mill was actually producing? Is it similar to that?

No, it was less than that. Go ahead. Kurt, this is Aaron. That mill produced both laminated strand lumber and OSB, and the volumes of those ebbed and flowed. But it has been a while since Holton produced its full capacity as oriented strand board. We're just describing that capacity in apples-to-apples terms so that people really understand the context of the capacity impacts of that conversion.

Got it. All right. Appreciate the color, guys, and good luck here in Q1. Thanks. Thanks.

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

Thank you. Good morning. Just a couple of follow-ups. I appreciate all the thoughtful answers so far. On the siding conversion front, I mean, it doesn't sound like you guys have really seen any cost inflation for these conversion projects and a bit of an apples to oranges comparison. But in the lumber industry, we have seen inflation for large-scale sawmill rebuilds. So I'm wondering on any context you can give there, and then you touched on your NPV analysis for these types of projects, and I'm curious if you can disclose how returns on the capital you're deploying to these conversions have trended. I assume it's positive, but any context you can give on how those returns have moved over time for these types of projects?

Sure. Well, from the capital cost inflation. I mean, obviously that is a factor in these rebuilds. But, you know, even though we kind of have found this range of conversion costs have been pretty consistent, there's a lot of moving parts within the project between the different facilities and what we have to do from a building standpoint or in the case of Holton, we're part of this press rebuild that the other two projects didn't require. at time of conversion. And so, it's funny, we kind of hit on this $120 to $140 million, but we've gotten there on each of the last three conversions from a different way. So, you know, I would say that in some cases, that inflation's been offset by maybe less of a scope, you know, in the subsequent project, but it's not a material. I do want to say, no, it's not a material really escalated from an inflationary standpoint. From a return standpoint, these conversions have been great. You know, for two reasons. One is, you know, our ability to continue to get pricing hasn't always been baked into all pro forma as aggressively as we've been able to get it. And then because of the strength of our siding growth, you know, we've really filled these plants up really quickly, you know, from a, from a utilization standpoint. And so, you know, they've been really good returns. And I think those returns, you know, there's evidence of that. If you do ROIC on our siting segment, you know, it's really strong. So we like these conversions. And, you know, typically, as is the case with the two we announced today, we're converting rather high-cost OSB mills And then because of the scale of a mill like Sagola, it's going to be a really low-cost siding mill. So we get that kind of double whammy of taking a high-cost OSB mill and turning it into a high-return siding mill.

Understood. And the last question for me, the 25% EBITDA margin for siding that you're targeting, which is higher over time, Is the increment there just that much more market tension and your ability to move prices higher over the long run? Or is it optimization of operations and taking unit costs down over time? Any context on what's driving that gradual improvement to the margin trend?

It's great. Both things. There's three parts to that answer. First is our ability to continue to get price improvement every year. Secondly, our OE initiative around siting has been just outstandingly executed, so we're running the mills much more efficiently. And then thirdly, back to the previous answer, we are converting, adding mills to our network over the last two that have been relatively low-cost mills into the network. So once we get a mill like Dawson up and running, Our overall cost profile for the network is lowered by that. And, well, and then a fourth part of that answer is that also this office has provided some logistics optimization around being present on the West Coast. So we get a logistics optimization or improvement as well. So it just comes from, you know, the investment pays off from a cost standpoint. And then, you know, our ability to get pricing historically has both, you know, spread the margin for us very nicely. I would add that, you know, the business has phenomenal operating leverage.

And if you look at the fourth quarter waterfall as well as the four-year waterfall that's in the appendix and look at the ratio of the EBITDA generated that we isolate from SMAS, with price banks into it. And it's fundamentally that growth at that rate producing that EBITDA that is, in another way, pushing the underlying long-term margin higher.

Yep. That's useful context. Thanks very much.

Welcome.

Thank you. Our next question comes from the line of Keaton Montoro from BMO Capital Markets. Your line is now open.

Thank you again. Maybe coming back to siding, can you tell us if you've announced any price increase on siding for 2021 and its guests, how is that progressing?

Yeah, we announced a price increase key term that was effective January 1, and, you know, we do it by skew, by geography, but just think about it in the 3% to 5% range, and we've been Overall, we've been successful getting that price.

Got it. And was there any sort of pre-buy in the Q4 numbers? I know in the past you'll have allowed something like 110% of Q4's allocation. How was it this time?

Well, Keaton, we were so tight. Look, we had a great Q4 and a great December, but I wouldn't call that move-up volume. I mean, obviously, they're going to Distributors are rightly so. We're going to try to get orders in prior to the price increase. We're so stretched right now from an order management standpoint that there was not significant volume moved out of January into December as a result of that. We're running so tightly right now that there's not a lot of opportunity for us. That certainly didn't happen in December.

Got it. And then, you know, obviously with what you've announced today with Holton and Cervola, I'm just curious kind of, you know, sort of any updated thoughts around Veldor and the cook projects that you have talked about in the past and how are you, you know, thinking about those options that you all have?

Well, Keith, we plan to continue to grow siding beyond the Sagola conversion, and we will continue to look at all available options for the next bill after all that. I mean, we do own a nice plant site in Cook, as you know. We own a facility in Val d'Or, Quebec. We also have, I'll just remind the audience, a OSV mill in Maniwaki, Quebec that uses Aspen, and then we have Peace Valley. We also have expansion opportunities within our current mill network. And finally, there are other people that own OSP mills and Aspen wood baskets that we have periodic conversations with. So all those will be on the table as we think about beyond the Segola conversion, and which we are doing. I mean, it's getting to a point now with our growth where, you know, every couple of years now we want to be needing to do one of these. And so it's a very active conversation and all options will remain available to us as we look beyond the Seville conversion.

Got it. That's helpful. And then just one last question. You know, obviously we've seen a big rally in a lot of, you know, sort of wood product commodities. whether it's lumber, it's OSP, it's plywood, are you seeing any signs that this big rally is starting to have any negative impact on demand?

Keith, I hear from listening to housing experts and listening in or reading the transcript from the builders that obviously Product inflation can become an issue around affordability, especially for the first-time homebuyer. That makes sense to me when I hear people talk about that risk, but we're not seeing that from a demand standpoint being in any way impacting the business right now. And, you know, look, the inventories are as lean as they can be, and it's the middle of February. So when we get to the spring building season, which is, you know, tomorrow basically, as soon as we get this fall out here in the south, you know, it might be one of the constraints that is out there for the industry, but I think there's just so much momentum right now that we're going to, you know, the kind of growth that people are forecasting, you know, I see an avenue to that kind of growth over the next couple years. So So I hear it, and I believe it. I believe it can be an issue, but we're certainly not seeing evidence of that in our order file.

Got it. I appreciate all your thoughts. Good luck in 2021. Thank you, Keaton.

All right. Thank you, everyone. There appear to be no more questions in the queue, and so we will conclude the fourth quarter on your end, Ernie's call for healthy building solutions there. Stay safe, everyone, and we'll look forward to speaking with you again soon. Thank you, operator.

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