Louisiana-Pacific Corporation

Ladies and gentlemen, thank you for standing by. A welcome to the first quarter 2021 Louisiana Pacific Corporation earnings release conference call. At this time, all participants are on a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press the start and the one key on your touch-tone telephone. Please be advised that today's conference may be recorded. If you require operating assistance, please press start and zero. I would now like to turn the conference over to your speaker host, Mr. Aaron Hawall, Director of Investor Relations. Please go ahead, sir.

Thank you, Operator, and good morning, everyone.

Thank you for joining us today to discuss LP's results for the first quarter of 2021, as well as our Q2 outlook. My name is Aaron Hawall, and I am LP's Director of Investor Relations. I am joined this morning 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 8K this morning with some additional information. All 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 non-GAAP financial metrics. The appendix of the presentation also contains some necessary reconciliations that are further supplemented by this morning's 8 filing. Rather than reading those statements, I will refer to you to those supplemental materials. And now I'll turn the call over to Brad.

Thanks, Aaron. Good morning, everyone, and thank you for joining us to discuss Robust customer demand for all of LP's products has continued, driven by ongoing strength in home building and remodeling, resulting in an outstanding quarter for LP. SmartSide net sales grew by nearly 50% versus Q1 of last year to $283 million, and EBITDA more than doubled to $90 million. Smooth and expert finish volumes more than doubled, with those innovative products reaching 8% of total SmartSide volume. OSB prices continued to climb throughout Q1, with the result that LP's OSB segment generated extraordinary cash flow. LP's South American segment also had a very strong quarter, with 50% more sales and three times more EBITDA than the first quarter of last year. As a result, LP exceeded $1 billion in sales, generated $461 million in EBITDA, and $314 million in operating cash flow and earned $3.01 per share, all of which are quarterly records. Last quarter, we announced a phased integrated capacity expansion plan that included converting our mill in Holton, Maine from LSL and OSB to SmartSide, the restart of our Peace Valley OSB mill in Port St. John, British Columbia, and plans to convert our OSB mill in Segola, Michigan to Siding. Let me briefly update you on those projects. The Holton conversion is underway and on schedule, despite some expected difficulties with travel and contractor access presented by COVID. We expect to begin SmartSide production at Holton less than a year from now in late Q1 of next year. We are excited about the capacity expansion that these investments in Holton represent, and we are gratified by the enthusiastic responses from local and regional suppliers and community stakeholders. Given the strength of SmartSide demand, we are exploring options to accelerate the conversion of Segola. We're also evaluating and prioritizing subsequent projects to add capacity by conversion and or expansion of existing facilities, as well as growing pre-finishing capacity. SmartSide has a long runway for growth ahead as we innovate, capture share, expand addressable markets, and execute an aggressive capacity expansion strategy. Process to resume OSB production in Peace Valley is also going quite well. I want to compliment the small team that has maintained the mill since we idled it in the summer of 2019. They have kept the equipment in excellent condition and we anticipate minimal impediments to an efficient restart. We're also pleased by the number of former employees who are returning to the mill. We're glad to welcome them back and we look forward to resuming production in early Q3. Last quarter, I spoke about the challenges presented by shortages of MDI, the resident use, and manufacture of SmartSide and OSB. MDI availability has improved significantly, and we are essentially back to normal levels of supply, with OSB mills once again using planned levels of MDI. This episode has highlighted the strategic value of having siding and OSB integrated in LP's portfolio. SmartSide uses MDI exclusively, but OSB can use alternate res. When supplies become constrained, we were able to allocate scarce MDI from OSB to siding, without which siding would have struggled to achieve another outstanding quarter of growth. While the MDI supply has improved, global shortage of vinyl acetate-based adhesives has forced decreased production of TechShield, LP's radiant barrier sheeting product, in the second quarter. The vinyl acetate supply situation is improving, and we expect to be back to normal levels of textual production by the end of the quarter. However, as COVID subsides in North America and the broader economy rebounds, intermittent supply chain disruptions and tight logistics availability are likely to present challenges going forward. We recognize the difficulties this creates for LP's customers, particularly in an environment with such strong demand. We're doing everything we can to mitigate the impact of these issues through strategic sourcing and network optimization, and we are adding SmartSide and OSB capacity as safely, efficiently, and quickly as possible. Finally, I'm happy to announce that LP is in the initial phases of returning to our national headquarters after more than a year of working from home. While we are relieved and gratified to be slowly getting back to normal, I want to acknowledge that for the majority of LP's male employees, as well as many customers, Working from home was not feasible. While COVID-19 vaccines are now widely available in the U.S. and Chile, vaccination rates continue to lag in Canada and Brazil. The situation is improving, but we are not out of the woods yet. The ongoing diligence and care exercised by LP's pandemic response team and mill employees are helping minimize operational impacts from COVID, enabling LP to supply our customers with the products they need to build and renovate homes. I encourage all of them and all of you on the call to continue to exercise appropriate precautions and get vaccinated as soon as possible. LP had a remarkable first quarter, and while challenges remain, very strong housing and R&R markets are resulting in intense demand for SmartSide and OSB, keeping our near-term outlook exceptionally positive. With that, I will turn the call over to Alan for a more detailed discussion of LP's financial results for Q1 and outlook for Q2.

Thanks Brad slide six shows summarized results for the quarter which, much like the fourth quarter are clean and straightforward with ongoing smart side growth and higher osb prices as the most significant drivers. Compared to the first quarter of last year net sales increased by 74% to just over a billion dollars driven by 49% growth in smart side and over 330 million dollars of significantly higher osb prices. The resulting EBITDA, $461 million, is more than five times last year's result. We generated $314 million of operating cash flow, including increased capital investments and heavy spending on logs, common practice for LP in the first quarter. The $3.01 per share of adjusted earnings is 10 times that of the first quarter last year. In terms of capital allocation, we paid $17 million in dividends We've continued buying back shares through the second quarter, and as of the close of business yesterday, had just $32 million remaining of our existing $300 million buyback authorization. All else equal, that remaining authorization will be exhausted by the end of this week. I'm therefore delighted to report that LP's Board of Directors has authorized a further $1 billion of share repurchases, which we plan to launch immediately. LP's Board also declared a dividend of $0.16 per share, payable on June 1. Slide seven highlights the cleanliness of the quarter from a reporting perspective. Continued smart site growth and OSB price appreciation resulted in $93 million and $333 million respectively of incremental revenue for the quarter, compared to which everything else is really just a rounding error. All $333 million of the incremental OSB pricing and 55% of the incremental smart site revenue translated into EBITDA with everything else aggregating to a net negative of $6 million. Slide 8 provides an update on our transformation. On a trailing 12-month basis, SmartSide revenue grew at twice the rate of single-family housing starts. Consequently, and as the table on the right shows, SmartSide growth dominates the first quarter, accounting for 53 of $65 million transformation dollars in the quarter. in efficiency. Given that smart site growth contributes the lion's share of our transformation dollars in the quarter, slide 9 looks a little deep into that growth. The bar chart on the left is not a repeat of slide 8. This chart shows smart site revenue growth for just the quarter relative to single family starts. The pie chart on the right provides more resolution of the sources of smart site growth. And while total volume grew by 39%, the volume of the more innovative As such, their share of the total volume increased from under 5% to just over 8%. The substantially higher average selling prices of these new products also contributed one point to overall price growth in the quarter. The waterfalls on slides 10 and 11 show year-over-year revenue and EBITDA growth in the siding and OSB segments for the quarter. Slide 10 covers siding. 49% revenue growth for SmartSide million in sales and $51 million in EBITDA for an incremental EBITDA margin of 55%. OEE and sales and marketing efficiencies offset increased costs for freight, and the dwindling non-recurrence of fiber sales reduced revenue by $20 million and EBITDA by $2 million. The resulting siding segment EBITDA of $90 million on $285 million of revenue yields an EBITDA margin of 32%. Slide 11 shows the quarter in more detail for OSB and is dominated by ongoing record high OSB prices. We estimate the impact of MDI scarcity and alternate resin substitution at roughly 80 million square feet, or 7% of volume, due to reduced operating efficiency, or OEE. And as Brett said, the supply chain for that resin seems to have stabilized. We will, of course, continue to monitor that situation and other potential supply chain interruptions closely. LP's ability to substitute alternate resins for OSP production and therefore to be able to strategically allocate all available MDI to the siding seven was a perhaps unanticipated benefit of having these segments under the LP umbrella. OSP prices will continue to grab headlines for sure, but LP's results this quarter are in no small measure a testament to the agility of the siding and OSP operations team and LP's strategic sourcing team as they collaboratively navigated the MDI shortage. And as you will see in the cash flow summary on page 14 of the appendix of the accompanying presentation, other than cash taxes, the only meaningful difference between EBITDA and operating cash flow is a substantial increase in working capital. And this is almost entirely the result of high OSB prices, raising accounts, receivable balances, and the normal seasonal accumulation of logs I mentioned earlier. The bridge from the $314 million of operating cash flow to the net change in cash is similarly uneventful. with buybacks, capex, dividends, and payments associated with refinancing our long-term debt as the only material items. Reconciliations of net income to both adjusted EBITDA and adjusted income are also straightforward, with depreciation and a rather large, but appropriately proportional, provision for taxes as the only items I've not already mentioned. Slide 12 provides updated guidance for capital expenditures for the year. As Brad said, we are exploring opportunities to accelerate our siting capacity expansion The Holton conversion, restarting Peace Valley, other growth capital, and a base of sustaining maintenance all together bring our capital expenditures for the full year in the range of $230 to $250 million. In other words, we're raising our capex guidance by about $10 million. Now, with extremely robust housing and repair and remodel markets fueling intense demand for smart side in OSB, our order files give us some visibility into the remainder of the second quarter. For the OSB segment, prices continue to climb, with the result that we believe OSB revenue will be at least 30% sequentially higher in the second quarter than in the first. We also expect another strong quarter of smart side growth, with revenue for the second quarter at least 30% higher than last year, which would mark the fourth consecutive quarter of growth above 20%. Assuming the siding and OSB scenarios I just detail, and given all usual caveats about sudden demand shocks or other unforeseeable events, we expect EBITDA for the second quarter to be at least $580 million, another quarter of record results in outstanding cash flow generation. Before handing the call over for Q&A, I do want to discuss our expectations for four-year revenue growth for SmartSight. Demand continues to be very strong, and we expect to continue running our mills at or near capacity for the remainder of the year. Also, expert finish smooth volume and revenue. However, given the acceleration of growth in the second half of last year, we simply cannot increase year-over-year revenue by much more than 10% in the second half of 2021. So all said, this would bring full-year smart side growth to roughly twice our previous long-term guidance of 10% to 12% per year. And with that, we'll be happy to take your questions.

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press the star, then the one key on your touch-tone telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Now, first question coming from the lineup. Mark Winthrop with Seaport Global. Your line is open.

Thank you. Congratulations. Obviously, fantastic times for you. In terms of the alternative growth in siting and some of the things that you're looking at, Can you give us a sense as to what they might represent and perhaps if we can understand the magnitude of volume they could represent and the cost to get it, recognizing that these would be preliminary indications?

Yeah, Mark, I'll talk really three areas of three types of investments we're looking at making for continued growth. And this is not in any priority order. First of all, would be adding additional press capacity at existing facilities that currently make SmartSide. We like the idea of having a trained workforce on the ground. So those locations that have sufficient wood supply to accommodate significant growth, in most cases, I mean, at least doubling of growth. from a press standpoint, we're looking at that as what's called a brownfield scenario. Secondly, even after Segola, we will have Maniwaki and Peace Valley both producing OSB and Aspen wood baskets. And so those two facilities are certainly candidates for conversion. And then finally, what would be more of a greenfield scenario, which is The best example would be the Cook, Minnesota piece of land that we own that has had OSP plant on it in the past as far as greenfielding a siding mill. So honestly, some combination of those three type of opportunities will play out, in my view, over the next 10 years as we continue to grow siding capacity. From a capacity standpoint, I mean, speak generally and not to be overly obvious about things. Converting an existing OSB mill is probably the most, without doubt, the most efficient use of capital because obviously you're utilizing a lot of redundant resources. And then a brownfield facility at an existing location, it wouldn't be, there would be capital efficiency associated with that. You're not buying land. There's certain components of the mill that you would not have to double up on. And then, obviously, more of a greenfield scenario would be the most expensive.

Great. And curious, Valdor didn't get a mention there. Is that no longer a consideration?

Sorry, that's an oversight on my part, which would be a restart of a shutdown facility in Valdor, yeah.

Okay, super. And then, just as a quick follow-up, 32% margins in siting. I know just I think it was last quarter, you increased your expectations on what the business can drive over the long haul. This 32 is a lot higher than even where your longer-term updated view had been. Any thoughts as to how sustainable this type of margin can potentially be?

I would say that the sustainability comes from improved mix, which is why we emphasize so much the new products that We've launched over the last three or four years, which, you know, pre-finished shakes, smooth. I'll carry a premium over what we, you know, over our basic prime product. As I've mentioned before, too, on the call, if we buy us mixed trim, that can be very favorable to price as well. So that's, you know, so we're looking at our innovation strategy as a means to increase margin, and it certainly does. I will say that the constraint on that, as we gain market share, there is a competitive nature, obviously, to a big base of business that we have in lab and panel. And so we are keeping our options open, if that's the right way of saying it, to be competitive when it comes to big builder business and our business at the home centers, which can be a little more competitive from a pricing standpoint. Great. I appreciate the call.

I'll turn it over. Thank you.

Thanks, Mark.

Now, next question coming from the line of Gitan Mamtaro with BMO Capital Markets. The line is open.

Thank you, and congrats, Brad Allen. Obviously, a very strong start to the year. Thank you, Steve. Maybe to... Maybe just coming back to Sagola, you know, I mean, you're talking about kind of pulling forward the timeline of that. Last quarter, you were talking about potentially, you know, 2023 Q3 startup, but sounds like sooner. I'm just curious, you know, given that you've got, you know, Holton going on right now, when is the earliest you could, you know, you could convert that mill, obviously, if demand remains strong?

Ethan, I would say, you know, The earliest we could get production from that mill would be probably a year after the Holton startup, which would be Q1 of 2023. Give me a little latitude on that as we continue to work on the engineering. But we are on a parallel path, obviously with a huge focus on Holton first. But we intend to bring that, to convert that facility over to siting you know, as quickly as we can, given the work that's ahead of us to do the whole conversion first. So let's, why don't we target Q1 of 2023, and then we'll continue to update you on the causes that either moves forward a quarter or back a quarter to given, A, what we need to do from a demand standpoint, but also as we refine our engineering work on Sedola.

Got it. That's helpful. And then, you know, maybe, you know, you talked about kind of demand has remained strong in both OSB and siding. Maybe talk about kind of, you know, what do the order backlogs look like, you know, for this time of the year in both OSB and siding?

Yeah, they're extremely strong in both products. I'll throw EWP in there as well. I mean, just it's unprecedentedly strong, but it's always strong in Q2. So, I mean, that's... The seasonality has kicked in, but there's been no weakening in the order file in any of our three. Well, I'll throw South America in there, too, in any of our four businesses, but very strong order files.

Got it. And then just a final question around capital allocation. You know, balance sheet is in a very strong position. Q2 cash will be? you know, kind of really robust as well. And you've, you know, Alan just mentioned that, you know, with the $1 billion authorization announced, you are planning to launch this week. What is the right way of sort of thinking about, you know, the cadence around share repurchases? You know, I'm not asking about sort of specific, you know, quarterly guidance, but given the strong balance sheet, you know, sort of what is the right way to think about kind of leverage for LP and, and the way you think about deploying cash for repurchases?

So, you know, Keaton, our balance sheet, as you mentioned, is very strong. Our balance sheet will be strong after we execute this share repurchase authorization. So, you know, there's, you know, in our view, in my view specifically, we're not risking the company at all by this billion dollars. doable from a cash generation standpoint. I will remind you it is an authorization, not a plan to spend it. So we've got some flexibility if things were to slow down later in the year or next year. But obviously our plan is to deploy that authorization promptly to begin the deployment promptly. The rationale behind the share repurchase as a capital allocation tool is that even at $70 share price, which I don't know if we're there at that moment. I don't have it in front of me, but we were at the beginning of the call. I still think, and Alan, I think, shares this, and certainly our board, we still believe we're significantly undervalued. And so we feel that there's a good justification just on that note to buy back shares, not only just because we have the money, And so our rationale behind that is that it remains a good investment for our shareholders to be in an aggressive share repurchase mindset at LP. And then always reassure our shareholders that we will be prudent about that and deploy it in a way that makes sense given the economic reality of the time. But then again, I'm very I'm very bullish about the next four quarters for the housing, repair and remodel, and LP. So we anticipate spending that money over the next, well, I don't want to set a time frame, but we plan to begin using that authorization immediately, and we'll probably buy back shares from a dollar standpoint about on the pace that we've been doing it over the past year or so.

Got it. Very helpful. Good luck in the back half of the year, Brian. Thank you, Keith.

Our next question coming from the line of John Backup with Bank of America. Your line is open.

Hey, good morning, and thanks for taking my questions. I guess just starting out, I was wondering if you might be able to just talk a little bit about, I mean, obviously, like you've seen, Tremendous growth in the smart side. And so, you know, on that point, you know, if you could kind of talk about how, you know, that's, you know, maybe influencing in the visibility of your brand and ability to kind of grow off of that. I mean, obviously, over time, you can get more scale as you grow and, you know, have more market share. But, you know, I wanted to get a sense for how this is ultimately helping to maybe compound growth to some extent, if that's correct. Yeah.

And it's funny, as you were asking the question, I wrote down as a note compounding, and then you said the word before I did. But that is certainly brand equity and credibility of the brand comes with scale. And it comes with broad, maybe call it broad scale, which is penetration in several different kinds of markets. Our position in retail makes it a brand that the consumer, the DIYer, sees. We value that a lot. We value our position on the retail websites where a lot of business is moving for the big box retailers. Repair and remodel for a re-side project is typically a project that's sold in the home. And so a consumer brand and a contractor can, you know, educate and convince a consumer, you know, kind of figuratively at their kitchen table about, you know, using SmartSide as a way to build brand credibility. And then finally, you know, as we expand with the builder, you know, that really allows us to access a contractor-based selling side. So, and then we could go on with other examples But, you know, being a brand that has that kind of wide opportunity to be exposed and then taking advantage of that, you know, I believe does provide a compounding effect. And then, you know, on top of that, our long-term expert finish and the ability to access, you know, the pre-finish side of that market, which is, you know, somewhat hard. or the same as when I was talking about repair and remodel, really also brings an aesthetic appeal to the brand that moves it beyond the contractor or consumer thinking of it as just a prime product. So this has been the fruit of past investments in marketing and sales that we've made and talked about on a lot of these calls. We continue to really focus on that and make sure that we support the brand in a way that ensures future growth. One more point on that is one of the things that we've learned through the COVID experience is you can effectively do that online. I think our contract customers have moved to getting educated about or got more comfortable being educated about brand and installation, et cetera, online. The consumer certainly has. And then once again, the big box retailer is really educating the public on how to source building products by starting online. And so we do have a strong focus there and I'm really pleased with the progress we've made so far. Okay, thanks.

And then I did notice that you had a pretty sizable increase in SmartSide pricing this quarter. Can you just remind us what the price increase was or price increases that have been announced for that product?

Yeah, we announced 4% to 6% across the board in that variety of regions. It varies by region. It varies by SKU, but 4% to 6% overall. And what we're realizing now is maybe 3% to 4% overall, and then the mixed change. has been very positive, added about another percent on that pricing. So I would say we've probably gotten a little bit stronger price realization on the back end of the increase than we've gotten in prior years, but it's just the strength of the demand right now has been able to hold on, allowed us to hold on some of that list pricing that we increased at the beginning of the year. So I would, from a, You know, from a modeling standpoint, I would say to carry over, you know, where we are right now and give us a little bit of leeway on mix, you know, that would be a pretty good way of looking at the rest of the year as far as our price increase realization.

That's useful. And then as far as overall demand for both siding and OSP, can you just, you know, remind me, you know, when that tends to peak seasonally? I think it's sometime during the summer, but, you know, what is kind of the typical seasonal pattern here?

Yeah, John, you know, really, in my experience here, and most of my time I was in siding a little bit in OSB, really that September, October, historically in siding has been really good. I think that's also true for OSB is people move into the winter and try to button up some jobs and get the houses siding or sheave. So we've typically seen really good seasonal demand now. Had that demand plateau in the summer has kind of hit a constant rate of of construction, and then we would generally see a little surge in demand September, October, as people were trying, as I was mentioning, what I think was people trying to complete some jobs before the winter weather hit. So we're certainly historically in a really good time of the season right now, and we're expecting to see continued very strong order files at least until October. But given the lack of inventory, in the channel right now for both OSB siting and throw EWP in there as well. I anticipate that even in the winter, we'll see pretty good order files as distributors and dealers take that opportunity to rebuild some inventory, looking into probably what we expect to be a strong building season next year as well.

That's really helpful. And then just last question before I turn it over. The South America results were clearly quite strong. I was wondering on that point, if you might be able to talk about the sustainability of this level of EBITDA.

Yeah, you know, from a volume standpoint, I feel really good about the sustainability. And we're doing some, you know, in the scale of things, it's not big dollars, but we're doing a major, some major mill improvements down there, just from a little extra capital spend that we've allocated down there for the next couple of years. So I see the capacity of South America growing significantly over the next 18 months or so. And we're seeing really good market growth, market size growth down there. And some of that is attributed to good economies, especially in Chile, but also our expansion into Argentina, Peru, and Colombia has really helped as well. So we've diversified the markets a little bit. Look, there is a pricing component of that as well. I mean, it is in no way directly tied to North America, but when things are as tight as they are right now in North America, the pressure from imports in South America diminishes and gives us a little more pricing strength in that kind of environment. We have seen price improvement down there as well. Historically, we've been able to retain that, but it's hard for me we've seen good price appreciation and really good volumes down there. Yeah. Thanks, Pat.

Our next question coming from the lineup, Sean Stewart with TD Securities. Your line is now open.

Thank you. Good morning. A couple of questions. Alan, wondering if you can speak to SG&A. It was kept in check to a surprising extent relative to our expectation given top line strength. Can you give context on SG&A trend this quarter and sustainability of these levels going forward?

Yeah, sure. One thing to bear in mind is that this time last year, we significantly cut SG&A as we entered the COVID environment. And that had the benefit, if you like, of giving us a new muscle. Um, so as certainly as we, uh, sort of stepped back up our necessary spending on things like selling and marketing, we don't necessarily replicate the, uh, the cost in exactly the same manner. So we've got some, what you might call unexpected and implicit efficiencies. Um, we are looking to, to increase our, uh, selling and marketing, um, expenditure, particularly for siding as we go forward through the remainder of the year. But to put it in context, that's already sort of baked into the Q2 guidance that we gave you. So there will be an increase in SG&A as we continue to invest in the future of the siding business, but that's really the only fundamental change that you'll see. Okay, understood.

On EWP, you had indicated last quarter that you were undertaking a strategic review for the business. Can you give us any update on how that process has evolved, if at all, over the last quarter?

It has evolved. I'm pleased with the progress and the response. We've had quite a bit of interest in the business. There's nothing to share today. We're just in some discovery phase as far as the process that we're – that we've launched and having some very interesting discussions about the future of that business. You know, we are focused on continuity of the business because typically what we think is going to happen is the acquirer will inherit our distribution base. This is also our distribution base for siting and to a large extent structural solutions. So, you know, continuity is important to us. is one of the components for getting out of that business, and that's certainly a factor that we're talking to the interested parties about. But good progress within the quarter, and we'll continue to report out when we can.

Understood. That's all I have. The rest of my questions have been answered. Thanks very much.

Our next question coming from the lineup. Kurt Younger with DA Davidson. Your line is open.

Yes. Good morning, everyone, and thanks for taking my questions. I just wanted to start off on the competitive dynamics in siting. I mean, what would you kind of consider the one or two things that have been most impactful in terms of your ability to gain share here in the last year? And as we look ahead to the next couple years, I mean, are those factors any different, or what do you think is kind of highest on the priority list there?

Okay. So, you know, looking back the last 12 months or so with the good market share gains, as, as we've mentioned before, you know, our position at retail has been very, very beneficial to us. We've seen incredible growth there along with the, you know, how Depot Lowe's and Menards, well, Menards doesn't report, but Lowe's and Depot's, um, growth that they have seen. So our position there was, was really good. Um, Also, the rebound in the shed business, which is another big panel consumer for us, has been extremely strong. And then I would say overall, just the strength in housing has also been very positive for us. And I believe we've picked up some market share gain there as well. But the bigger market share gains have come through our position in retail and in shed. Looking forward, however... Our launch is smooth and pre-finished, is certainly focused on market share gain and repair and remodel. And while there is, we do have geographic strength there, we do not have broad national strength in repair and remodel. So there's a lot of opportunity in front of us to grow in the repair and remodel segment, which is the reason behind the innovation. And then our other focus area for us, or we believe we're currently under-penetrated, is with a large national builder. And we've got a product that we're launching this year to help us address that along with other, you know, other sales and marketing strategies associated with that. So, you know, so I think, you know, let me back up from that specific answer. And just to say, I think one of the strengths of our siting business is the diversity of channels that we sell into and the divert and the strength and the diversity of our product portfolio. We're not solely dependent on growing lap siding because of our position in panel. We're not solely dependent on growing panel because of our position in trim. And then as we add products like pre-finish and shakes, it expands and diversifies that product portfolio where we can take advantage of opportunities when they arise in these different segments. And that really has been a long-term historic strength of the portfolio, and I think it's going to serve us well as we expand it and look at further market penetration in this good market environment.

Got it. That's a very helpful color. And then I guess my second one, when you talk about perhaps accelerating the Segola conversion, if we were to see OSB markets remain strong, not necessarily – where things stand today, but they remain strong. How would you think about potentially backfilling what type of OSB capacity you'd lose with Segola?

Well, just to remind you, Kurt, that was our thinking around part of the justification for restarting Peace Valley was the integrated way we looked at capacity expansion across the two businesses and And so, you know, we feel like we're addressing, especially the customers in that Midwest part of the country that we can access from Peace Valley. So, you know, with Peace Valley, you know, startup plan for later this year, second half of this year, we want to have that facility up and running fully by the time we start bringing Segola down. So that was really how we are addressing it is through Peace Valley startup and then continued OEE improvement across our entire OSB network. But, you know, we're really focused on the growth in siting and, you know, and Segola is the next great idea in front of us as far as doing that. So, you know, we're pretty single-minded in getting that mill up and running as quickly as possible. And, you know, our expectation is that our OSB market share, though, will be protected by the startup of Pace Valley.

Got it. Okay. Makes sense. Well, good luck here in Q2.

Thank you.

Our next question coming from the line of Mark Connolly with Stevens Inc. Your line is open.

Hey, good morning. This is John Ryder on for Mark. So our first question, when you look at this period of tight supply in OSB, Has it changed your thinking about how OSB inventory should be managed, whether on your side or between you and distributors? And has working capital gotten too lean here?

There's no question that working capital has gotten very lean, and one could argue too lean. If we, being us and our channel partners, had been able to foresee the rebound And product demand in May and June, July of last year, obviously we would not have taken the mill downtime that we had taken. And I would assume our distributor partners would not have brought their inventories down as well. So I don't know if this will change the way the industry looks at inventory management. because I think that we're all trying to rebuild inventories back to some kind of normal level, but it is evidence that the caution that went into the cash generation mindset that we all had in late spring of last year or early spring of last year has really put us in a position to struggle to keep up with demand. So I think it's more of an anomaly than a long-term change in philosophy around working capital.

Okay. Okay. That's really helpful. And then we're hoping you could talk a bit more about your ESG programs. We're seeing rising scrutiny of environmental claims, particularly in Europe right now, and you clearly have a good sustainability story. We're curious what sort of ESG targets you have set for OSB and siding and how you think you stack up in the building materials space.

Well, let me start by saying, I think we stack up very well, given our footprint, the sustainability of our wood procurement mindset or strategy. And we are working on right now setting some other type of ESG environmental targets. And we're in the data collection mode right now, because obviously this will be a data-driven exercise for us. We are focused on it. We have reconfigured a board committee to provide board oversight to this and are seeing, you know, in the participating and then setting high expectations for advancement there. And so we'll be coming back later in the year to set out, you know, specific targets around other ESG parameters other than just wood procurement sustainability. I will mention just from a concept standpoint, I feel like we have a really good story. When you're nailing siding on the side of a house for the 50-year warranty or you're sheathing a house, you're nailing a sheet of carbon to the house. I believe we're going to have a really good story, but we want to make sure that the data that we report is accurate and And that the goals we set are reasonable and something that we can do and deliver on. But that work is underway. And if you'll give us another quarter or two, we'll be back with a robust discussion on that before the end of the year. Great.

Thank you.

Our next question coming from the line of Paul Quinn with RBC Capital Markets. Your line is open.

Yeah, thanks very much. Morning, guys. Hey, Paul. Just wow, what a quarter, and it looks even more robust than Q2. Just maybe start on the smart side business. Just wondering what your – that order file, is it that strong that you would have a potential for a second price increase in 21, or is that something you don't want to do and you really want to gain market share?

Well, there's pricing strength in the product offering right now. And so, I mean, the price increase is something that's always on our mind. We'll be clear about that. You know, there's various ways of getting that. And one of them is kind of hinted to earlier on the question about the price realization is working on the back-end rebate part of it. And so, you know, I'm going to say we're taking advantage of the strength. with the demand strength right now to manage prices, I think appropriately, but we have to be competitive. And while there can be short-term, you know, opportunities for pricing at the end of the day, in most all cases, we're eventually going to get bid against a competitive substrate. And so, you know, we're maintaining a competitive position, even in the time of tight demand is something that we're mindful of, you know, especially with a builder, you know, these, these, these, The agreements are at least multi-quarter, if not multi-year. And so we are focused on maintaining a competitive price situation because we are focused on gaining market share. I know I'm being a little bit too faced on that answer because we also take advantage of whenever we can get price, we can get it. But we don't do that foolishly, and we want to make sure that we maintain a competitive position and that our distributors and dealer partners can be competitive as well. So it's a balancing act, I guess, is the right way to answer it, and it's something that we're really managing daily.

Okay, that's fair. And then just on the margin uplift in SmartSide, which is pretty impressive, is that solely to do with – a higher percentage of pre-finish, or is that cost reductions in this segment as well?

Yeah, it's both. You know, we've had a – you know, we run the facilities full out now, and, you know, the operating leverage for OSB and siting both is very strong. So, you know, Paul, on the margin, on that last million feet of product, the production that we sell out of siting, at a very high margin. So it is really amazing what the mill profitability can be when you're sold out and running a full production. And so the price increase certainly helped, but that over-operating efficiency is a key to that.

Okay, and then just over on OSB, you've got Peace Valley starting up in the second half of the year. Maybe you could give us an idea of what kind of volume you expect to be able to ship to the market in 21. Is that going to be a slow start or a faster start? And then lastly, if you could give us an update on Intecra.

Yeah, so we're looking at about 150 million feet in Q3. I'm sorry, in all of 21 out of Peace Valley, so for the second half of the year. 150 million feet. And then Intecra, we continue to be very pleased with the order file at Intecra. You know, we are in the process of validating the model as far as getting that ever-increasing order file through the facility. I think a challenge for us there. You know, I will say that's been one part of our business where labor availability has As we start up, that facility has been a little bit more, a lot more of a challenge in our more mature facilities. Maintaining a workforce is what I mean. And then from a profit standpoint, that business has been challenged by the rising lumber prices, you know, that the agreements with the builders have a lag on the pricing pass-through. And that's been, that's, you know, it's obviously hurt us. But market validation is, Paul is very solid for Intecra. We're still figuring out how to meet the water violence that continues to rise the way it has so aggressively. And then we're also trying to figure out how to properly price the product in these kind of highly volatile times as far as lumber pricing. But I'm encouraged by what we're doing strategically there. But it's still a startup project. business, that's for sure. And no more immediate capital required? No, we do some minor working capital provisions for them, but no immediate capital. There's any way of meeting. Thanks a lot, Brad. You're welcome.

Our next question coming from the line of Mark Wildwood, Bank of Montreal. Your line is open.

Good morning, Brad. Good morning, Alan. Hey, Mark.

Brad, I'm just curious.

If you just think about the OSB market overall right now, if we were to see housing starts continue to move up, and let's say we moved up to 2 million starts, is the capacity even there to serve 2 million starts? No.

The capacity after the startup of Peace and Shambhal would be 1.6, 1.7, probably. So we're looking to be... So, yeah. When you think about it this way, Mark, in 2007, 2006, the industry was serving a 2 million start housing market. And we shut down and didn't start back up two or three facilities and converted three or so to siting. And then, you know, if you look at all the permanently shuttered plants since then, you know, there hasn't been an offset in grain fields to get us back to that level. So the industry, you know, more of a 1.5, 1.6, 1.7 with creep taking advantage, you know, creep in there. So it could be tight for a while.

Okay. And just remind me, like 100,000 starts is what, like a billion and a half square feet?

Mark, this is Aaron Howell. The two rules of thumb to keep in mind are about 100,000 starts consumes about a billion feet of OSB, and you have to adjust that for the single-family mix. So a single-family start consumes about three times as much OSB and siding as a multifamily start. So the market we're in right now is single-family mix north of 70%. You want to adjust that billion feet per 100,000 starts upwards a little bit to account for that.

Okay. And then, Brad, I'm just curious.

I mean, we're so far beyond anything that we have ever seen in terms of both lumber and OSB pricing. Are you guys sensing any areas in the market where you think there's some demand disruption taking place or demand deferral taking place right now?

Well, yeah, demand deferral, yes. I think there's – I mean – I know a guy who wants to build a deck and he's not going to build a deck until lumber prices come down. So yeah, there's one person who's delaying a job that I specifically know. But I do think that there is an issue around that from an affordability standpoint for projects and maybe even some housing starts. And I think there could be some housing starts deferred just from an availability standpoint. I don't currently believe there's demand destruction going on yet. The panel exports, there's a little bit more coming in than in the past, but most other local markets are pretty strong. We're starting to see that in South America. I believe it's similar in Europe. And so what we haven't hit yet is any kind of substitution threat, but I think we have to be realistic and think there probably is some deferral happening either due to affordability or lack of availability of immediate supply.

Okay. All right. And the last one for me, I just, I think a quarter or two ago, you mentioned that you were trying to do some of the downstream products, like I think siding products down in the Latin American business. Just any update on the, you know, the uptake of those kinds of products in the Latin American market? I know kind of changing building preferences, changing building codes is not always an easy thing to do.

Yeah, so let me, you know, we are actively working that in Brazil, where it is harder, and Chile's building codes have adapted, so we're, that's not a constraint in Chile, and not in Argentina either, but in Brazil it certainly is. Just quickly to explain the It is highly local in Brazil, so you can't do a macro change in building. It's harder to do a macro change, so you end up having to almost project by project basis. What we would consider change in code is what's required down there. We've got a team working on that. It's successful, but it's slow. In Chile, building codes were not an issue as far as that conversion. But our focus down there is really growing our smart side business. Because of the fact that we've been capacity constrained in the past and the margins for OSB have been really good down there historically, we really haven't had an EBITDA incentive to grow SIDI. But as we've increased press capacity down there, it's opened up some opportunities for us to look at expanding the portfolio. And while we've Mark, we've sold siding down there since the startup of the Pangapuhi 20 years ago. It really hasn't been as much of a focus area as it's going to be in the future. Because as we've grown our market share for sheathing, we are pushing up against some constraints there. And we see a siding as the next really good growth platform for us down in South America. where perhaps the sheathing will be more of a growth with the market versus growth and market share. Okay. I'm encouraged by our opportunity there, especially, you know, the other, just, you know, kind of put a period on that. And we're very underpenetrated in Argentina, Peru, and Colombia, which do use wood construction. So there also is a geographic growth element to our strategy down there.

Okay, very good. Thanks.

Now, next question coming from the line of Mark Winthrop with Seaport Global. Your line is open.

Thank you. One just quick follow-up. We've got a pretty incredible variation geographically in OSB pricing right now, you know, with the random length, at least Western Canada at $1,600.00. a couple of regions more in the 1200s, some regions in the 1000-type area. Any thoughts on why there's these enormous spreads and any implications?

Yeah, Mark, this is Aaron. As you know, in more typical times, when you see regional spreads start to open up, OSB gets shipped around the continent to address those arbitrage opportunities, and that happens when there's available wood. Their demand is so strong in just about every market that's consuming OSB now that there really isn't as much, there isn't enough available wood to address that. And so in more normal times, if we saw prices this different region to region, you'd see a wave of OSB heading west to satisfy those marks. The only way that's possible now is by starving building in the southeast. And so it's just less possible now.

So why wouldn't prices in the southeast, etc., why wouldn't they just quickly go towards that $1,600 price in western Canada?

Well, they typically would in an environment where wood was leaving the southeast to satisfy the west coast demand. That would create scarcity in the southeast, and those prices would tend towards equilibrium. But that phenomenon is is less likely to happen in an environment where there is so little available product that there isn't extra to ship. It's all contracted out. Exactly. Now, part of the other issue, Mark, is that the product is so scarce that the open market transactions themselves are less common, which means that there's less data to be reported, which further reduces the opportunity for that arbitrage to be recognized and reflected in prices.

Got it. Thank you.

Yep.

Well, with no further questions, that will end our conference.

Yeah. With no further questions, we'll end there. Thank you for joining us to discuss our results for the first quarter of 2021. We'll look forward to talking to you soon.

Have a great day and stay safe, everyone.

Ladies and gentlemen, that's the conference for today. Thank you for your participation. You may now disconnect.