Louisiana-Pacific Corporation

Good day and thank you for standing by. Welcome to the Louisiana Pacific Corporation Q2 2021 Earnings Conference Call. At this time, all participants 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, Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Thank you for joining us today to discuss LP's results for the second quarter of 2021, as well as our outlook for the third quarter. My name is Aaron Howald, and I'm LP's Director of Investor Relations. I'm joined this morning by Brad Southern, LP's Chief Executive Officer, and Alan Hockey, Chief Financial Officer. In addition to this morning's conference call, we are hosting a simultaneous webcast, and we have uploaded a presentation to which we will refer during the 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 regarding 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 8K filing. Rather than read these statements, I incorporate them herein by reference. Finally, in today's discussion and materials, we refer to citing solutions where we would previously have said SmartSide. This is an expanded descriptor, which, in addition to SmartSide, also includes newly developed strand citing products with different branding. I should stress that this modification is consistent with and therefore does not require any recasting of any previously reported growth numbers for SmartSide strand siding. And with that, I'll turn the call over to Brad.

Thanks, Aaron, and good morning, everyone.

Thank you for joining us to discuss LP's results for the second quarter of 2021. Q2 was another remarkable quarter for LP Building Solutions. All our segments set records for sales and EBITDA in the second quarter. With over 150,000 housing starts in June, single-family mix over 70%, and repair and remodel indices equally robust, we are encouraged that demand for LP's products remain very strong. As you will see on slide six of the accompanying presentation, net sales for Q2 reached $1.3 billion, more than 140% over Q2 of last year, which was, of course, a weak comp due to the onset of COVID-19. EBITDA was $684 million, generating $457 million in operating cash flow and $4.74 in earnings per share. Siding solutions growth is a significant component of these results. as slide 7 illustrates. Siding Solutions includes primed and pre-finished smart side, as well as innovative strand-based siding products sold under other brand names. Revenue for Siding Solutions grew by 39% compared to last year. This is composed of 27% volume growth compounded by 9% price growth. In addition to market penetration and share gains, Siding is growing through product innovation. the most innovative and value-added subset of siding solutions, which includes SmartSide Smooth, Shakes, and Expert Finish, and LP's new Builder Series siding combined for 9% of total volume in Q2. This is compared to 6% last year, and these new products contributed more than a point to the 9% price increase. For LP's OSB segment, extraordinary prices generated impressive cash flows but also overshadowed important gains in structural solutions volume. OSB prices have pulled back in recent weeks, but we have not wavered from our strategy of growing structural solutions and supplying market demand with agility. In fact, in Q2, we grew structural solutions as a percentage of total OSB volume by five points compared to prior quarter. While not driving our strategy, OSB prices do, of course, continue to be a significant driver of LP's cash flow and share repurchases, about which Alan will update you in a few minutes. LP's South America segment also had a very strong quarter, with OSB inciting price increases more than offsetting raw material cost inflation. South American sales almost doubled and even tripled compared to last year. Let me briefly update you on our capacity expansion projects, beginning with the siding conversion in Holton. While material costs, particularly steel, have been subject to inflationary pressures, the project is on schedule. We expect to begin smart side production in Holton in late Q1 of 2022. We continue to work to accelerate the sagola conversion, and we are currently planning to start smart side production there in the first quarter of 2023. Finally, we are implementing projects to optimize our production and distribution processes that should result in incremental gains in production capacity across our mills. As for LP's Peace Valley OSB mill, I'm happy to announce that Peace Valley pressed its first board of OSB in late June. We have received APA certification in our shipping product, including TechShield Radiant Barrier, a significant contributor to structural solutions growth. I want to thank the team that maintained Peace Valley so diligently while it was idled, congratulate them and everyone else who contributed to the safe and efficient resumption of production at Peace Valley. In previous quarterly calls, I have discussed shortages of resin and adhesives, as well as LP's operational responses to mitigate the impacts of these disruptions. As the broader economy continues its uneven recovery, we expect intermittent supply chain challenges to continue. LP strategic sourcing teams is working diligently to minimize disruptions. This includes collaborating with our operations teams to allocate any scarce inputs consistent with our transformation strategy, as we did with MDI resin in the first quarter. Most categories of the raw materials LP consumes saw significant price decreases in 2020 as demand fell in sectors of the economy more severely impacted by COVID than housing. Many of those sectors are now rebounding with the result that demand and therefore prices are increasing. In some cases, availability has been hampered by supply chain interruptions elsewhere, as was the case with certain residents. Raw material prices are now back at 2019 levels or in some cases above. Consumer and producer price indices can generally trend upward. The situation is fluid, but we expect these inflationary pressures to persist for some time as the U.S. economy recovers and grows. Before I turn the call over to Alan to review our financial performance in more detail, I want to briefly preview some plan enhancements to LP's ESG disclosures. We recently completed an environmental product declaration for SmartSide siding. We believe that SmartSide looks and performs better than competing alternatives. We also believe the data shows that SmartSide is significantly more sustainable with a much smaller carbon footprint. In coming quarters, we plan to disclose additional information on the Sustainability Accounting Standards Board, or SASB, framework. Sustainability is central to our transformation strategy at LP. We believe we have a good story to tell, and we look forward to telling it. With that, I will turn the call over to Alan for a more detailed discussion of LP's financial results in Q2, an update on our share repurchases, and our outlook for Q3.

Thanks, Brad, and good morning. As Brad has already said, all segments set new records for revenue and EBITDA in the second quarter. Citing solutions, revenue grew by 39%, and OSB and EWP prices were significantly higher in both North and South America. In fact, sales for EWP and LPSA doubled compared to last year, with their combined EBITDA more than tripling. And Intecra delivered a record 324 units for $22 million of revenue, a tenfold increase over last year. As a result, LP generated $1.3 billion in sales, $684 million of EBITDA, $457 million of operating cash flow, and $4.74 in adjusted earnings per share. Page 8 of the presentation summarizes the year-over-year comparisons for revenue and EBITDA at a high level. Inflationary pressures in wages, raw materials, and freight, especially when compartmentalized, headwind of $24 million. Maintenance and other spending account for the remaining adverse $31 million. The waterfalls on slides 9 and 10 show year-over-year revenue and EBITDA comparisons for the sliding and OSB segments. Sliding solutions saw volume growth of 27% and price growth of 9% for revenue growth of 39%. This generated an additional $81 million of revenue and $53 million of EBITDA, an incremental EBITDA margin of 65%. Notably, the 9% price increase in the quarter includes four percentage points from annual list price increases and three points on the back end, that is, from reduced discounts and rebates. The highest value added subset of products, shapes, and builder series punches well above its weight in terms of price, accounting for just 9% of total volume, but over 100 basis points of the year-over-year price increase. The $4 million increase in selling and marketing costs represents the ongoing return to pre-COVID levels of spend, consistent with our growth strategy, and reflects the anniversary of reductions made last spring. With OEE flat to prior year at a still impressive 88%, The total siding transformation impact is $81 million in revenue and $50 million in EBITDA. Costs associated with the halter conversion are making their first appearance in this waterfall, with $1 million incurred in the second quarter. We have the last vestiges of the discontinued fiber sales this quarter, with $10 million less revenue but only $1 million less EBITDA. This brings us to second quarter revenue for the segment of $291 million, an increase of 32%, and EBITDA of $77 million, an increase of 51%, for an EBITDA margin for the segment of 27%. Slide 10 shows the quarter in more detail for OSB and is obviously not to scale as OSB price increases dwarf the other elements of the waterfall, adding $554 million in year-over-year revenue and EBITDA. Volume was up about 8%, driven by structural solutions growth. High unscheduled downtime reduced OEE to 86%, which contributed to the $18 million of unfavorable production costs. The OSB segment was also impacted by input and freight cost inflation. And lastly, the restart of Peace Valley cost us $7 million in the quarter. The net result of these factors, dominated, as I said, by price, Our increases in sales and EBITDA are $574 million and $519 million, respectively, and yet another quarter of extraordinary cash flow generation. As Brad mentioned, and as you have all seen, supply chain interruptions are impacting many industries. In some cases, those disruptions impact building products specifically, and in others, the impact is more widespread, particularly when it involves precursor materials consumed upstream by our suppliers or their suppliers. Freight demand has also increased, driving costs higher, all of which is reflected in the siding and OSB waterfall charts to the tune of $8 million for raw materials and $12 million for freight across the two segments. Recall that last year saw significant drops in the same cost categories from which the housing industry benefited while demand elsewhere dropped. Now, as the broader economic recovery is underway, raw material prices have flattened and are climbing. On a blended unit cost basis, non-wood wall materials were down about 6% in 2020 compared to 2019, but are now up about 13% in 2021 compared to 2020. This represents an inflationary CAGR, or compound annual growth rate, of about 4% over the period. We expect inflationary pressures to continue, and they are reflected in our third quarter guidance. One potential contributor to supply chain concerns are the fires in British Columbia and elsewhere in the West. So far, our employees and facilities are safe, and we've seen minimal interruptions to inbound and outbound shipping. We will, of course, continue to monitor the situation closely, with safety as our highest priority. Let me turn to LP's capital allocation strategy, which remains to return to shareholders cash flow from operations in excess of investments required to sustain our core businesses and growth-siding solutions at OSB Structural Solutions. In the second quarter of 2021, we returned $481 million to shareholders through a combination of $465 million in share repurchases and $60 million in dividends. Furthermore, since the end of June, we've spent an additional $140 million on buybacks, which leaves $572 million remaining under the current $1 billion authorization. And since LP embarked on its strategic transformation, we've returned over $1.8 billion to shareholders, repurchasing more than 15 million shares and bringing the current share count to a bit under 95 million. In order to consistently reflect ongoing signing growth and the decrease in share count driven by aggressive share repurchases, LP has declared a mid-year increase in the quarterly dividend 13% or $0.02 per share, raising it from $0.16 a share to $0.18 per share. Slide 13 shows updated guidance for full-year capital investment as well as revenue and EBITDA guidance for the third quarter. We now anticipate spending $95 million in 2021 for the Holton conversion, an increase of $10 million over prior guidance, largely due to increased costs for steel and labor. The remainder Spending for other growth capital is expected to be $45 million, and we anticipate spending about $120 million on sustaining maintenance for full-year total capital outlay of $270 million. This assumes continued easing of travel restrictions and contractor availability, the reversal of which could result in some execution risk. Which brings me to the revenue and EBITDA outlook. For siding solutions, the third quarter should see year-over-year revenue growth of around 10%, which would be another quarterly record despite the much stronger comparator. This will, however, bring the business very near to full production capacity, with the result that revenue growth for the remainder of the year will be primarily driven by price increases and mix shifts. And if we assume 10% year-over-year revenue growth for the second half of this year, However, the combined effects of the Halton conversion and other growth projects, increased selling and marketing investment, and input cost inflation will result in third quarter EBITDA being below last year's. But on a trailing 12-month basis, we still expect the EBITDA margin to meet our long-term guidance of 25%. For the OSB segment, although prices are exceptionally volatile right now, our order file gives us some near-term visibility. We also tend to lag price movements, both when they are rising and when they are falling. We're therefore guiding to OSB revenue being roughly 10% sequentially lower than the second quarter. This includes the assumption that randomness prices stay flat from last Friday's print throughout the remainder of the quarter. And while this is obviously not a prediction of future OSB prices, we hope it's a useful characterization of the impact of price movements so far. And so, with further caveats about certain changes in demand, raw material price and availability, or other unforeseeable events, we expect EBITDA for the third quarter to be at least $530 million, which will not be another quarterly record for LP, but will be second only to the quarter we've just finished reporting. With that, we'll be happy to take your questions.

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. We ask that you please limit yourselves to one question and one follow-up question. 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 congrats on the quarter. You know, I guess just starting out, I was wondering how you're working with signing customers in light of some of the capacity constraints you have in the second half this year. I mean, do you expect some of those customers to go elsewhere, or might this demand shift into 2022 when you have Holden running? You know, any call you can provide on that would be useful.

Great question. So we've been working really with an allocated order file since late last year. And so we've done a really good job of interacting with customers, understanding their order needs early in the process, then producing those orders and then allocating that volume across our entire network. And, you know, given our ability to grow the volume even under that managed order file scenario, you know, I think we've done a really good job of meeting our customers' needs. I'll say what hasn't happened, John, is our customers have been unable, as we have been, to agree to build any kind of safety stock or extra inventory, either at our bill locations or in the channel. We've been running, us and our customers have been running so tight. So I feel good about our ability to provide product into the market. What we haven't been able to do since the COVID shutdown And so even though the quarter over quarter growth moderates, we're still selling a high volume of siding. So I feel good about our ability to source the market until we get to holding mill up and running, supplying extra production. And I don't believe, at least our distributor level, that there's any significant substitution going on. I think we've got a really good focus on on making sure we supply the distributors the SKUs they need to source or to provide product in their local markets. You know, if there's any substitution happening, it would be deeper in the supply chain than we deal directly with if there is, you know, product shortages at the builder or contract level. But based on our growth, you know, I feel really good about meeting the level of demand that, you know, that our product is enjoying in the marketplace right now with supply. And, you know, it will be a little bit restrictive to growth now, year-over-year growth, until we get Holton up and running. But, you know, when you look at the step change we've made in volume that's going into the market on a quarterly basis, you know, I feel really good about where we're at.

Okay. That's very helpful. And the next question, can you just talk about the demand environment in OSB right now where customer inventories are in the channel and your initial thoughts on the sharp drop in OSB prices last week and where you think the market is going from here?

Well, certainly we can provide some extra confirmation on what's been published in random around the weaknesses of retail. We have seen that certainly with our retail pulls. We're a little less exposed there than some of our competitors. We supply a good bit of volume into retail. That has been very weak. I mean, I'll tell you about half of what we think would be normal right now. Some of that may be related to the Fourth of July holiday season, but I do think, especially when you compare it to the prior 12 months or so, the consumer dollar may be going other places than the wood product style at Home Depot and Lowe's versus what was happening a year ago. So we see weakness there. We have really not seen weakness in demand for the rest of our channel partners. But candidly, there is some hesitancy in distribution now to take any kind of serious position given the fall in OSB pricing. They're obviously expecting that maybe they could buy it cheaper next week than they do this week. So You know, what we're feeling in our order file is distributors just buying to meet very short-term needs, just replenishment-type orders. There's not a lot of enthusiasm in the distribution channel, you know, to build any excess inventory given where pricing is. So even though, you know, some of those retail pulls are weak, which makes commodity volume available, to build inventory given the fact that it could be cheaper next week. So my basic, let me summarize the question, the answer to your question this way. Certainly we can confirm the weaknesses with retail pulls, but given the underlying strength of housing and really repair and remodel in the city as well, we feel good about demand that exists and distribution, but there is a hesitancy present price.

Okay. And then, you know, I guess that kind of brings me to the next question. You know, I guess, you know, first off, you can just talk about how Peace Valley is running. It sounds like you started that up in June. If you can provide any sort of update on, you know, what sort of run rate you guys are at now. And also, if you're having any, you know, trepidations regarding the timing of this startup, I mean, recognizing, you know, I guess there is some weakness in the retail channel. But, you know, overall, I mean, is there – sufficient demand out there to kind of keep that running. And then just kind of last piece to this question, you know, I think in the past you had said that you expected, you know, to maybe get around 150 to 200 million square feet out of that mill this year. But I think that assumes, you know, perhaps a little bit later of a startup in the end of June. So any updates on that?

We're sticking with the 150 to 200 million for the year, even though we started up, as you mentioned, a few weeks earlier than originally planned. John, we do feel good about our decision there. Obviously, it's a little questionable given the pricing movements since we started to build up. But if you look at the underlying housing stock forecast, we feel good about 1.5 to 1.6 being at least a near-term view of where housing stocks are going to land. And if you work the math on that, the industry is going to need that production. That's the reason we started it up. I just want to reiterate things that we've said in the past, we did not start, we did not plan or start Peace Valley up because of the current pricing. At the time of the decision, we started Peace Valley up because we felt like the long-term outlook for housing was strong enough where we needed that mill to meet our customer demand. And we still feel good about that decision. And we feel good about the near-term outlook for housing. Near-term being several years into the future, so We plan to continue to run that mill, get it up and going, because we really believe that volume is going to be needed with our channel partners next year. And I'll just say that that decision was very much supported by our channel partners as

Okay, great. Thanks for all the details.

Thank you. Our next question comes from the line of Suzanne McCleary from Goldman Sachs. Your line is now open.

Thank you. Good morning, everyone, and congrats on a great quarter.

Thanks, Suzanne.

Yeah, my first question is around the margins and sitings. As Holton continues to progress and getting closer to being up and running, can you just help to give us some color on the cadence of how we should be expecting the margins to come through over the next couple quarters?

Yeah, this is Alan here. I'll take this one. We'll fundamentally see the margin, or at least the costs of the Holton conversion hit the margin primarily in Q4 and Q1. That's on the shoulders.

those costs.

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

Thank you. Brad, I was just curious, you know, when I look at, you know, you kind of mentioned weakness in the retail demand in OSB.

Keaton, we can barely hear you. Sorry to interrupt you. Can you, can you, Aaron, is this better? Much better. Thank you. Thank you.

Sorry about that. I was just curious. Are you seeing, you know, on the retail side, are you seeing a similar slowdown even in siting, or has that demand held up better?

Good question. And we have seen a slowdown in pulse and siting. That slowdown cadence began later than it did in OSB. and has not been quite as severe, but it has happened, yes. And back to John's question, that has allowed us to allocate more production volume into distribution since we're on a managed order file.

Gotcha. So is it sort of more kind of broad-based kind of demand slowdown or is it sort of more kind of distributors looking to reduce their inventory position?

Okay, I don't think distributors are looking at reducing their inventory position because I don't think there was a lot of inventory in the channel, any excess inventory in the channel at the beginning of the price fall. I think the channel has remained lean over all this year. So I think from a distributor standpoint, it's just a hesitancy to buy any more than what's absolutely needed given the expectation they may have that pricing will be lower tomorrow than it is today. And that's just a normal pattern that we see any time pricing, you know, turns down, especially as dramatically as it has over the past few weeks. You know, commercially, when it's going up, you know, there's a lot, there's a stampede to buy today because everybody's going to be higher tomorrow. So we kind of see that acceleration happening on both ends. when the price line gets really steep on either up or down. Did that answer your question, Keaton?

Thank you. Our next question comes from the line of Mark Wintraw from Seaport Research. Your line is now open.

Thank you. I wonder if Dean's question was a little bit more on the siting side, actually, and whether or not the weakness was perhaps the distributors pulling back inventory, which I assume not so much the case. But in that same vein, are you seeing anything in the sheds business, which I guess is a bit more DIY sometimes?

So, Mark, that's a good question, and Certainly, let me make sure, yeah, I want to make sure I'm clear about if I'm answering an OSD question or a siting question. So for siting, as we mentioned, the retail pulls have slowed not as dramatically as an OSD. And there are, you know, I would say that shed, a lot of shed, smaller shed manufacturers do source product from retail. So I am sure that has contributed to the slowdown. But I want to say conversely, for our larger, more national or large regional shed manufacturers or shed distributors, the pull remains strong. So the weakness has really been only, you know, in the segment we would call DIY. But that segment does include some DIY shed production. Got it.

Yeah. And I'm going to cut off if I don't jump in real fast. Okay. So real quick, just also when you're talking on the OSB, assuming that prices are flat here, does that reflect kind of that that's as good a guess as any, or is that just methodological and you're not maybe asking the question differently? What is your best guess as to what's going to happen in OSB in the next month or two and what will be the key drivers to look at?

Well, the key driver is supply and demand, but, Mark, I'm not comfortable at all forecasting pricing. I mean, so – but the answer to the first question, is it just the method of providing the guidance that we did? You know, we had to anchor holistic pricing somewhere, and so we anchored it on the last published, you know, random links. And then, you know, I guess – You know, say for you guys that are trying to forecast a quarter, you know, you have to overlay your expectations for what OSD pricing will do the rest of the quarter, you know, as a variance to what we guide to. And, you know, I spoke to, you know, how we see channel inventories. I spoke to how we see or what we're feeling as far as order pulls from retail. And that's really, you know, those kind of conversations I'm comfortable having, but I'm not comfortable translating that into a price forecast.

Understood. Appreciate it. Thank you.

Yeah. Let me just say for those that did not get to ask a follow-up, if you get back in the queue, we'll be happy to

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

Thanks. Good morning. A question on the CapEx guidance. The $270 million figure for this year is up a little bit from the midpoint of the range you provided a quarter ago, and it looks like most of the increment is higher sustaining maintenance CapEx. And I'm wondering if you can give us context if that's just general cost inflation feeding into that, if there's anything specific to this year is 120 million or higher. The number we should be thinking about is the sustaining part of that capex going forward.

Yeah, this is Alan here. I'll take that one. It's a good question. There are two factors playing into it. One is inflation. And the other is the scarcity of availability of engineers and contractors is causing us to pull ahead whenever we feel that we can to secure the necessary expertise and the work. So there's a little bit of both factors really fundamentally caused by the same economic conditions that we're experiencing at the moment.

Okay. And just a quick follow-up. Engineered wood products in South America, both strong top-line growth there as well for those segments this quarter. Those are less transparent markets. Can you give us a sense of how prices are trending into the third quarter for those segments?

Yeah, so let me start with EWP. That's a price list and not a traded product or product sale other than we do sell some plywood in that segment, which is based on random. But our, you know, LDL and iJoyce are announcing our price list. We've done a good job, you know, with our margins. They are given the price inflation on the input material, which is lumber, OSB, and veneer. And typically, we're able to hold onto some of that as prices start falling. You know, it's kind of like OSB prices can lay at lags. So, you know, in the near term, feel good about pricing there, but obviously as input prices continue to fall, there'll be competitive pressure observed in our EWT segment as we go forward. There's competitive pressure to maintain some reasonable margin level. In South America, it's a really interesting market down there. Typically, in our 20 years of experience, OSP pricing is much more stable. And while we've enjoyed good pricing down there this year. It's not been the magnitude of price increase that we've seen in the States. But obviously, the kind of pricing we've seen in North America has influenced or made the ability to get pricing in South America a little easier. But if you look at the past, that has been a lot stickier as well. So we're in new territory now. Given the magnitude of the price change in North America over the past year, it's kind of hard to predict what that foreshadows for South America. But I will say in the past, we've been able to really maintain pricing once we've been able to get it up. But I do feel like at some point, there could be some competitive pressure down there if imports from North America are able But I think for the near term, several quarters, we're in really good shape from a margin standpoint in South America. And just like one other comment there, we're also running that operations probably as good as we have in two or three years operationally. So our cost position down there, other than, you know, there has been raw material price increases, but our mill system is running well. as well as it has in a long time. And we're doing some investments down there to make it even better. So the midterm outlook for our South America business is really good.

Thanks for that detail. Much appreciated.

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

Yeah, thanks very much. Morning, guys. Maybe just start on siding, and it sounds like customers will be almost on allocation until you get holding up, but where are you guys in terms of your pre-finishing capacity, and is that something that you need to spend some more money on to increase that capability?

Well, great question. We did review that with our board last week and got approval for continued expansion of our pre-finished capacity, both on Within some of the facilities that we're currently manufacturing, we're looking at growth in the northeast. So we're actively looking for a location there to start up a pre-finished operation to service our northeast segment, you know, in conjunction with the Holton expansion or Holton conversion. And so, you know, the growth has been phenomenal. You know, it has stretched our capacity in pre-finish. You know, fortunately, and that's part of this sustaining growth capital that Alan talked to on the slide. You know, the incremental investment required there in the world of OSB and siting conversions is relatively small. We're learning, you know, kind of the technology that we want to utilize in our pre-finish. You know, if you recall, our first two forays were through acquisitions, and those two paint systems in place. So we're in the process of standardizing that across our platform. And, you know, as I mentioned, preparing the green filler facility in the northeast. So there will be continued investment and pre-finish as we grow it. So we should be talking about that many years to come. And we're well on our way to our second phase there. I will say the acquisition strategy that we had It was really testing, you know, our ability to make a product, sell a product, and market a product. We feel really good about all three of those things right now. So we're really doubling down, you know, on our pre-finish strategy and feel really good about our ability to grow that profitably over the long term.

Okay, and then over one of your competitors on the side-in side has come up with some pretty innovative product lines, you know, particularly one with Stucco right now and look to do down the way. Is that something that you guys have looked at and do you have the ability to morph into different lookalikes?

Yeah. We had a Stucco panel several years ago. We're not selling it actively any longer. It was a really minty product that required some pretty sophisticated contractor learning And so we struggled from, you know, finding time to get that training in place and contractors converted over to that system that would have been very economical but required a pretty substantial change in the way the stucco materials applied. Probably way more detail than you're looking for in that answer, so forgive me. That is something that we have looked at. We decided to focus in other areas. We didn't see that after our trials being a big opportunity for us. But, you know, as you know, in certain regions of the country, stucco is a predominant siding. And I would say we are not in a position right now to capitalize on that. We're way more focused on the pre-finished. And ancillary products around pre-finished, like corner pieces and that kind of thing, And then our second focus area right now is really increasing our penetration with the big builder, with our builder series siding that we launched this year that we believe really gives us a competitive advantage with the big builder. And so that's where we see the significant growth coming over the next several years for us.

Great. That's all I have. Good luck, guys. Thanks. Thank you. Thanks, Paul.

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

Great. Thanks, and good morning, everyone. I just wanted to follow up on the pre-finish side. Could you just talk about what percentage of your pre-finish volume you internalize now, and then as you think about the long-term opportunity there, what kind of makes sense in terms of, you know, your own – pre-finishing capabilities versus what you might still want to lean on your channel partners in terms of that product?

Yeah, that's a good question. And I think we said last year in our investor day that our long-term target is 30% of our mix being pre-finished. And let me describe a little bit how we see that playing out over the next several years. So, you know, we have gone national, let me just say the caveat of that, primarily focused in the east. So we do have, we are expanding in the west. But with a standard color palette of 11 or 12 colors under our expert finish brand that we feel like makes us, you know, a very attractive partner for regional and national one-step distributors and two-step distributors. So this is a national play with a standard color color set backed by the LP brand that we think really positions us well to grow pre-finished. Now, behind that in the east, there's always going to be a market for custom colors and even some SKUs that we manufacture prime that were not pre-finished. So what we're working through is partnering with the local pre-finishers to be that – that a supplying partner that's able to do the custom colors, let's say, is the primary niche they can fill for us. And in some cases, those pre-finishers are actually selling our 11, 12 standard colors and then supplementing their production, supplementing that for their production with the custom colors. In the West right now, We are pretty much, all of that is being, all our expert finish and all of the custom colors are being serviced by independent prefinishers. So, but in the east, we're trying to keep all that expert finish production in-house. So, I could see it playing out to where we have a big national network and good manufacturing around expert finish to supply the national market, but always have some position with our local pre-finishers that are doing custom colors on our substrate. One other caveat to that answer is I also think there will also be pre-finishers that choose just to independently pre-finish our prime product under their brand name and sell that as well. The substrate is so easy and such a good substrate to paint that it currently is a substrate of choice or the independent prefinisher.

Got it. Okay. That's really helpful. Thanks. And just on the strategic growth capex of $45 million this year, could you just touch on any noteworthy projects within that? And then, I guess, separately, as we think about the next couple years, how do you guys think about or plan for – I guess, capacity creep or unlocking incremental capacity within the existing siding business? Is that something where you can gain kind of a low single-digit percentage based on, you know, a certain level of spending or any color that would be great? Yeah.

So, just as far as the $45 million and the products that are highlights there, one was where we are pretty much automating the manufacture of a smart side shape product. We're putting that capability in our plant in Manitoba. It would be highly productive. Shakes are one of the most highest-priced, highest-margin products that we manufacture. We're excited about that capital project. That capital project, from memory, is about half of that $45 million, too. It was a relatively high-cost finishing investment, but very high margin in returns. Secondly, automating our three-dimensional corner. So we're taking trim and making corner pieces. So think of it as the three-dimensional corner piece. So that capital is part of our innovative growth. And then I've talked about pre-finish as well. Now, on the second part of your question about how do we invest beyond Holton for extra productivity, First of all, there's some environmental projects, one of which we got approved in this past board meeting, that frees up some capacity that was otherwise limited because of permitting levels in one of our mills in Michigan. But also, we're really looking at, under this managed order file situation, of running kind of what does optimal mix look like within a production facility, And running, you know, if we're able to optimize the productivity around so that we get more volume out, obviously we're able to service the market, you know, with more volume. So we're really working with our customers to make sure we can understand what their skew needs are, and then we can work with them in a way that optimizes our production footprint. You know, it allows us to get, and let's just say a percent or two, we're talking about deciding growth, a percent or two incremental volume out, you know, that could be really meaningful in a quarter. So that is an all hands on deck initiative right now within our siting business, given the fact that we will be capacity constrained, you know, probably up until the Q2 of next year when Olson's up and running, you know, with some respectability. So, you know, so let me just back up a little bit, summarize the answer this way. You know, the strategic capital other than meal conversions for siding are either focused on product innovation and typically for very high return SKUs that we manufacture or to tweak productivity so that we can get more out of our current system. And we feel good about our ability to do that over the next several quarters to support the growth that we're seeing in our siding business.

Got it. Okay. Well, appreciate all the color, Brad, and good luck here in the back half, guys. Thank you.

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

Thank you. Brad, I had a question on siding. If inflation continues to remain high as we move through the back half of the year, How do you think about pricing strategically, you know, particularly in light of, you know, covering additional costs?

We are – it's a great question. It's a topic of conversation in almost all meetings where we interact with our siting team. I mean, obviously, you know, we've tried to – I've tried over the years to be consistent in our price increases that we've brought out to the market. Input cost does inform the decision there. You know, the historical guidance that we've given around margin informs that decision as well. And historically, in years of high raw material price increases, we have been able to realize higher pricing. I'm just talking about historically. Now, as Paul mentioned, we're in a very competitive situation. environment, you know, both from vinyl and from other hard sidings. And so there is certainly a competitive positioning component of our pricing strategy that can be skew-specific and regionally-specific and channel-specific. So while we have, you know, while the pricing discussion is informed by raw material price escalation, that is only one factor that It goes into our overall strategy about how to price each of our SKUs in each of our selling regions. So, Keaton, does that answer your question or provide some color to how we think about it?

Yes, it did. I do have a follow-up, though, but that's helpful. Brad, on the EWP side, you know, a couple of quarters back, I talked about looking at options. Any update there?

So we're still actively involved with evaluating strategic options. I guess the process is maybe a little slower than I was hoping it would be six months ago when we first announced this. But it's active, Keaton, and we're looking at alternatives and evaluating options there. The focus for us is to – we are – I mean, it would be easier if we didn't have somewhat of a self-composed constraint, which we're trying to hold the system together. We believe LDA and iChoice together, with under the Solid Start brand, that we know there's value there to our channel partners, which also our channel partners in SIDI and structural solutions. So, you know, that's probably causing, making us go a little bit longer as far as evaluating options because we do feel like there's some value to our channel department holding the business together versus keeping selling, you know, each individual plan off one by one. So we're being somewhat selective on, you know, the options that we're looking at because of that desire of ours.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Aaron Howald for closing remarks.

Okay, thank you, everyone. Seeing no more questions, we will conclude the second quarter earnings call for LP Building Solutions there. Stay safe, and we'll look forward to speaking with you again soon. Thank you, Operator.

This concludes today's conference call. Thank you for participating. You may now disconnect.