Louisiana-Pacific Corporation

Good day, and thank you for standing by. Welcome to the fourth quarter and full year 2021 Louisiana Pacific Corporation 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 this session, you will need to press Start 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press Start and 0. I would now like to hand the conference over to your host today, Aaron Howald, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Michelle, and good morning, everyone. Thank you for joining LP Building Solutions today to discuss our results for the fourth quarter and full year of 2021, as well as our outlook for Q1 and the full year. My name is Aaron Howald, and I am LP's Vice President of Investor Relations and Business Development. I'm joined this morning by Brad Southern, LP's Chief Executive Officer, and Alan Hockey, LP's Chief Financial Officer. During this morning's conference call and webcast, we will refer to an accompanying presentation available on LP's IR webpage, which is www.investor.lpcorp.com, where you will also find our earnings press release, 8K, and other materials. Slides two and three of the presentation provide notices in detail regarding forward-looking statements and non-GAAP financial metrics. Rather than reading those statements, I incorporate them herein by reference. The appendix of the presentation also contains some necessary reconciliations that are further supplemented by this morning's 8K filing. And with that, I turn the call over to Brad.

Thanks, Aaron. Good morning, everyone, and thank you for joining us to discuss LP's financial results for the fourth quarter and full year 2021. Q4 was a strong finish to a record year for LP Building Solutions. Customer demand for SmartSide and structural solutions persisted throughout the quarter with no sign of typical holiday slowdown. With U.S. housing permits in December reaching a seasonal run rate of 1.9 million, demand shows no sign of slowing. I'll therefore begin with an update on our substantial investments in capacity. For siding, progress continues on the Holton, Maine conversion project with production expected to begin next month. We rebuilt the press in our Swan Valley Manitoba mill in October and were rewarded in January with an all-time monthly production record. LP also announced plans to build our fourth and to date largest expert finish facility at a site in Bath, New York. In OSB, production at Peace Valley was 10% ahead of the ramp-up plan established following its restart in July, providing much-needed structural panels to our West Coast customers. I want to thank our engineering, operations, and local mill teams for the ongoing success of these projects. In Q4, we significantly ramped up the rate of capital investment, spending a total of $121 million. For context, total CapEx in 2021 was $254 million, roughly half of which was for strategic growth. So, almost half of the year's spend occurred in Q4. The rate of CapEx spend for Q4 was not a one-time outlier. In 2022, LP will aggressively increase our investments and capacity with plans to spend over $400 million in CapEx to drive growth and innovation. Along with the soon-to-be-completed Holton conversion, later this year we will start the Segola, Michigan conversion with siding production expected in Q1 of 2023. In a few minutes, Alan will give you a preview of our long-term capacity strategy for SmartSide and ExpertFinish. This will be the first year in which we have worked on two parallel site and capacity addition projects, but it won't be the last. We are currently narrowing the list of candidates for capacity expansion projects to follow SOGOA, and we have begun the process of securing long lead time items necessary for these projects. In the OSB segment, While we are not increasing volume, we will invest in the specialized equipment and process technologies necessary to accelerate the shift from commodity OSB to value-added structural solutions like TechShield, FlameBlock, WeatherLogic, and Legacy Flooring. And we will continue to invest in demand generation through sales and marketing and customer training as we gain, share, and expand addressable markets. Slide 5 highlights LP's financial results for the fourth quarter. In Q4, LP generated $1 billion in net sales and over $300 million in EBITDA. This was 7% lower than prior year due to investments in growth, raw material inflation, and slightly lower OSB prices. This resulted in $200 million of operating cash flow and adjusted earnings per share of $2.24. LP returned almost $330 million to shareholders in Q4, mostly through share repurchases. This completed the $1 billion authorization for share repurchases, leaving $500 million in remaining authorizations. Alan will provide more detail about our capital allocation strategy and execution in a few minutes, but I should point out that the adjusted earnings per share I just mentioned is higher than last year despite lower net income due to a much lower share count. Before I summarize the full-year financial results, slide 6 shows more detail about siding growth relative to the underlying housing market, as well as the growth of the highest value-added products in the siding portfolio. On a trailing 12-month basis, single-family starts in the United States increased by 13% from $991,000 to $1.1 million. Siding solutions revenue grew at double this rate, increasing 27% in 2021. In November, Siding Solutions broke another record by surpassing $1 billion in annual revenue before ending the year at almost $1.2 billion. For context, $1 billion is close to the revenue that LP's much larger OSB business would generate at pre-COVID cycle average prices. This achievement marks a significant milestone in our strategic transformation. Siding revenue growth is a compounded result of 16% volume growth and a 9% increase in prices. The price increase includes the positive mix effect of growth in expert finish, shakes, corners, and other innovative siding products. As you can see in the pie charts at the right, while total volume grew by 16%, the volume within this innovative subset of the siding portfolio nearly doubled. reaching 10% of total volume in 2021. This 10% of volume delivered 14% of the segment's revenue for the year, helping Siding grow at twice the rate of the underlying market. As I said a few minutes ago, we intend to double down on our investments in capacity, equipment, innovation, and sales and marketing to continue to grow SmartSide. Slide 7 shows LP's extraordinary results for the full year. In 2021, all business segments set records for sales and EBITDA, which totaled $4.6 billion and $2 billion, respectively. The resulting adjusted earnings per share was almost $14. After substantial investments in capacity, innovation, and sales and marketing, LP returned nearly all of the $1.5 billion in operating cash flow to investors through share buybacks and dividends. While demand for new construction and repair and remodeling projects is projected to continue for some time, 2022 will surely bring new challenges. We have seen some hopeful signs of moderation, but inflation continues to exert upward pressure on prices for raw materials freight. Global supply chain disruptions continue to threaten availability of some raw materials. But I have never been more confident in the creativity and dedication of our team and the sustainable business model we are building. I will close by stressing that our success is built by our people. The work for talent is real, and LP aspires to be recognized as a safe, welcoming, and rewarding place to work for anyone and everyone who has the talent and desire to join our team. At LP, we are growing and transforming by investing in all our assets, including our most important one, LP's 4,800 employees. And so to say thank you for an unforgettable year and a job well done, LP has substantially increased retention bonuses, retirement plan matches, and discretionary profit-sharing contributions for employees. And with that, I will turn the call over to Alan to discuss Q4 and full-year results for the siting and OSB segments and to update you all on LP's capital allocation strategy.

Thanks, Brad, and thank you all for joining us. As Brad said, 2021 was indeed a remarkable year. Looking forward, in 2022, we plan to build on the momentum of our ongoing transformation by increasing our investments in growth, and I'll detail these plans in a moment. But first, let's delve a little deeper into the fourth quarter. The waterfall on slide 8 shows the changes to sidings, revenue, and EBITDA compared to last year. Revenue increased by $22 million, or 9%. And this was the net result of a 2% decrease in sales volumes, more than offset by an 11% increase in average selling prices. And this increase is the combination of list price increases, reduced discounts and rebates, and the ongoing positive mixed effects of expert finish and other high value added components. The drop in sales volume, as foreshadowed during our third quarter earnings call, was unrelated to demand, but was rather the result of lower production due to the major planned outage for the press rebuild at our mill in Manitoba. In fact, the 2% decrease in volume is rather impressive, given that the month-long outage in October at one of our largest mills represents nearly 10% of Siding's normal quarterly production. The cost of this press rebuild accounts for the lion's share of the $12 million of maintenance expense in the waterfall. Another subject we introduced in our previous earnings call was our continuing investment in demand creation and production capacity, totaling $25 million in the quarter. This includes $5 million of increased selling and marketing investment, $8 million for the Halton conversion, and $12 million of maintenance costs, the bulk of which, as I said a moment ago, was the press rebuild in October. The last and largest bar on this waterfall chart is a $29 million hit to EBITDA from inflation. Of this, $21 million reflects raw material prices, with resins and associated chemical inputs being the bulk of the increase. Higher fuel costs also drove about $4 million of increased freight costs. The remainder of this inflation is mostly related to wages and incentives. Now, we have seen some recent normalization of these input costs, but it is likely that resin and freight prices will remain above 2020 levels for some time. The resulting EBITDA margin for the quarter was therefore 17%. However, absent the $25 million of discretionary investments, Siding's fourth quarter EBITDA margin would have been 26%, which is, of course, why we continue to invest in our growth. Now, the net result of all this growth and investment, as shown on slide 9, is a full-year EBITDA margin of 25% for Siding. This actually meets its long-term margin target, which was set at this level to accommodate the ebbs and flows associated with milk conversions and other investments that generate future growth. Therefore, ending the year at 25%, despite a milk conversion, a press rebuild and ongoing raw material inflation is remarkable and made possible by strong customer demand, which drove the 27% revenue growth and very efficient manufacturing operations which in turn delivered the necessary operating leverage. I won't belabor the full-year waterfall, but if you'll forgive a slight oversimplification, the EBITDA benefit of volume growth more than offset investments in future growth, primarily manufacturing, infrastructure, and sales and marketing, while the EBITDA benefit of increased prices more than offset raw material, freight, and wage inflation. and it should go without saying that we strive to retain those price and volume increases, sustained as necessary by ongoing investments, whereas inflation is, with any look, temporary. Page 10 shows the fourth quarter results for OSB compared to the prior year. Although prices for the quarter were down sharply from the summer's record highs, the trend in the fourth quarter was one of steady increases, followed by a marked acceleration late in December. Ultimately, Revenue in EBITDA fell by just $19 million in the quarter due to prices. Conversely, total volume for the quarter was 120 million square feet higher than last year, with 100 million square feet more commodity volume and 20 million square feet more structural solutions. This is mostly due to the Peace Valley restart. The combined impact of this increased volume and favorable mix resulted in an additional $57 million of revenue and $43 million of EBITDA. Much like the siding segment, OSB saw increased prices for resins and other raw materials as well as freight. Availability of logistics, particularly rail in the northwest, also raised freight costs as we were forced to switch to truck freight, in some cases at higher cost. These challenges have continued into the first quarter of this year, particularly in British Columbia, where lack of rail cars has forced intermittent downtime at Arpys Valley Mill in order to manage finished goods inventory. For the year, the OSB waterfall on page 11 is dominated by price, clearly not shown to scale, which added over $1.1 billion of revenue in EBITDA and rather overwhelms the other elements on the chart. In the four-year waterfall, it's easy to be dazzled by price, while the volume from Peace Valley all but wipes out the volume losses caused by MDI shortages earlier in the year. Prices may have hit record levels in 2021, but the supply chain challenges the business overcame to deliver product, and therefore these results should not be underestimated. Page 12 shows the major drivers of the year-over-year change in revenue in EBITDA for the entire corporation for the fourth quarter. Focusing on the EBITDA column, OSB volume, siding growth, and improved results in South America and EWP added a combined $86 million of EBITDA, almost perfectly offsetting the impact of inflation in raw materials, freight, and wages, costs for Halton and Peace Valley, and other major maintenance spending. I should mention that these results are helped by ongoing improvements in the EWP business, particularly through our enhanced pricing strategy designed to protect margins from volatile input prices, chiefly lumber and OSB. This strategy contributed to EWP's impressive $27 million of EBITDA for the fourth quarter, bringing its full-year EBITDA to $95 million, four times its 2020 results. This strategy continues to bear fruit, with LVL and IJOS price increases implemented as recently as last month. Furthermore, last week LP announced the sale of its 50% stake in an IJOS joint venture for $50 million. In 2021, that 50% equity stake generated about $11 million in EBITDA, which is about twice its cycle average. The supply and distribution agreements associated with the joint venture will continue in place with those impacts showing up in the OSB and EWP segments as before. LP South America also had a very strong finish to the year. Although OSB prices there are generally less volatile than in North America, the near tripling of South America's EBITDA to $130 million was overwhelmingly from price. And while the lion's share of the increased capital investment in 2022 will be in North America, our South American business is in the early stages of a multi-year self-funded capacity expansion. A summary of cash flows on slide 13 serves as a useful reminder of our capital allocation strategy. In 2021, we earned $2 billion of EBITDA. After paying $420 million in cash taxes, funding a modest increase in working capital, quite frankly, we could have used more, and paying $30 million in interest and other assorted stuff, we generated nearly $1.5 billion of operating cash flow. Of this, we invested over $250 million in CapEx, with the Houghton Mill conversion by far the largest single component. We then devoted $1.3 billion to the repurchase of 21 million shares at a volume-weighted average price of $61.5, and paid $66 million in dividends. Our balance sheet, therefore, remains extremely strong. We ended the year with $370 million of cash on hand, and therefore zero net debt, and an undrawn revolver of $550 million. Our best investment is unquestionably in our own transformation. But as long as our shares continue to trade at a discount to our intrinsic value, we believe that the next best use of cash is to return it to shareholders who share repurchases and regular dividends. And speaking of dividends, LP's board approved a 22% increase in our quarterly dividends to 22 cents per share. A word or two now about our investment plans for 2022, summarized on slide 14. As Brad said earlier, we will be completing the Houghton conversion this year, as well as starting the conversion of Segola, making 2022 a landmark year as the first year in which LP will work on two siding capacity additions. And we're already in the planning stages for additions beyond Segola, including spending on long lead time items. Total spending in 2022 on all these milk conversions accounts for almost half the $400 to $430 million slated for CapEx in 2022. Other strategic growth capital of $80 to $90 million includes, among other things, further expansion of our pre-finishing capability. We're currently able to finish roughly 5% our press capacity and we plan to nearly double that pre-finishing capacity in 2022 then double it again over the subsequent two years to that end in december we announced the purchase of a site in bath new york where we plan to build our fourth expert finish facility while we build the bath facility we will simultaneously expand our existing expert finish facilities in green bay st louis and roaring river we're also exploring options for a facility in the northwest strategically located to finish smart site produced at Dawson Creek. Our long-term target is to pre-finish as much as 30% of siding capacity. But remember that we're also expanding siding capacity to meet customer demand. So we are chasing a rising target. With respect to guidance for sales and EBITDA, in the first quarter, we expect siding revenue will be about 10% of the prior year, with price accounting for most of the growth, as Holton will not begin its ramp-up until March. Combination of additional capacity later in the year, list price increases, and the mixed effect of expert finish and other high-value-added siding products should generate full-year revenue for 2022, which is at least 15% higher than in 2021. As I'm sure you're all aware, OSB prices have been climbing steeply for the past several weeks. Without attempting to predict future prices, I will offer outlook predicated on the assumption that OSB prices remain flat at last Friday's published levels. Under that assumption, revenue for the OSB segment in the first quarter would be about 40% above that of the fourth quarter of 2021. The total company EBITDA implied by these levels of growth is at least $500 million. However, all businesses are encountering difficulties in transportation logistics, with fuel prices pushing freight costs higher and availability remaining challenged. We have been forced to take intermittent downtime at Peace Valley due to truck and rail logistics, but we're working through that. Logistics challenges are less likely to force production curtailments in the siding segment as the product can be stored outdoors. Downside risk to our outlook is therefore largely attributable to logistics, and to a lesser extent, raw material availability and continued inflation. However, absent a significant external economic shock, demand for siding, OSB, and EWP seems unlikely today. to let up anytime soon. And with that, I'd like to open the call for Q&A.

Thank you. If you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And our first question comes from the line of Susan McClary with Goldman Sachs. Your line is open. Please go ahead.

Thank you. Good morning, everyone. I think it's still morning. Thank you for taking the questions. My first question is, you know, can you talk a little bit about, you know, the housing backdrop and how you're seeing demand coming through as we think about the spring and builders, you know, really looking to ramp inventory and especially with the big publics forecasting a lot of community account growth this year and presumably, you know, some meaningful increase in inventory with that

Yes, Susan, just confirming everything that you said about the optimism with the public builders around their order files for the year and their ability to continue to grow volume and inventory through the year. I'm hearing the same thing on the calls or scripts that I've read and a conference that I attended recently. So we're very optimistic about the housing forecast for the rest of this year and beginning to get optimistic about carrying over into the following year, just given all the momentum. And then as that relates to our order files, in all three of our North American businesses, order files remain very strong. We continue to be on a managed order file in siting and have been now for almost a year and a half. And from an OSB perspective, it continued very strong order intake weekly. So, and then same for EWP. So, we're seeing that strong housing market translate into consistent strong order patterns across our North American businesses.

Okay, that's helpful. And then, you know, you talked a little bit about the continued headwinds that you're seeing on the raw materials side. Can you give us a little bit more color on the resins what you're seeing there. And, you know, I know you had sort of transitioned to some other inputs in your commoditized or more commoditized products to compensate for some of those headwinds that you're seeing. Can you talk a little bit about where you are with that and how you're thinking about the overall inflationary environment as we think about 2022?

So, Susan, we are back. You know, the premium resin that we use is MDI, and then we can move OSB. especially the commodity skews over to phenolic. So we're back to running a full allocation of our MDI resins in both siding and OSB. So availability currently is not an issue. But obviously, as you remember, if that becomes an issue as we move through the year, we do have the ability to flex back to PF resin if needed. And then as far as resin pricing, we're looking at increases between 10% and 20% year over year. Those prices are resin pricing. And for MDI, it's indexed to benzene or oil derivatives. And so we're pretty much locked in to seeing that MDI pricing rise as we see oil prices rise. But we're more concerned about price inflation right now than availability.

Okay. Okay. Well, that's good to hear. Thank you, and good luck with everything.

Thank you, Susan.

Thank you. And our next question comes from the line of Keith Mentor with BMO Capital Markets. Your line is open. Please go ahead.

Thank you. Good morning, Brad, Alan, Aaron. Okay. Good morning, Keith. First question, maybe start with the deciding capacity options that you're looking at beyond Sagola. Brad, would it be possible to give us some sense of what are the options that you are considering and the timeline that you are thinking?

Sure, Keaton. So we're looking at multiple scenarios for that next tranche of volume. in no particular order. One option is to add press capacity or add a press at an existing siding mill. The second set of scenarios is to convert one of our two remaining aspen using OSV mills over to siding. And then third would be, you know, more of a greenfield capacity expansion where we build a new facility. Each of those have different capital efficiency parameters. And then each of them have different ramp-up parameters. I really like the idea of adding a press to existing siding capacity or siding mills because we get instant knowledge on how to manufacture the product from a quality standpoint that decision obviously is based on primarily on wood availability and then land availability around the facility just a capability to expand um you know when we look at converting existing os females to siding uh obviously we have well we already have the labor in place a little bit more challenging as we ramp into the quality parameters And as you know, Keeton, our two remaining facilities, Maniwaki and Peace, are rather large presses, larger than any mill we've yet to convert. So we're trying to work through how the complexity comes from those larger mill conversions. And then finally, from a greenfield, probably the least capital efficient means of securing new siding capacity, but we are intrigued by the, for the first time, engineering a facility just to make siding versus in the past adapting an existing OSB technology over to siding. So there's plus and minuses for each of those three scenarios, and that's exactly what we're working through in order to get to a decision on the capacity expansion after Segola. As far as timing, I could see us talking publicly about that decision later this year, probably late this year, because we are looking at needing that production ramping up in 2024. So we're all hands on deck working through those scenarios, and we expect to be able to talk a little more with a little more certainty about what we've chosen to do as we get in the second half of this year.

That's very helpful, Brian. And then so just as a follow-up to that, where does that leave Valdor and the Cook amongst the option list, Brian?

So, Keaton, we have sold the Valdor facility, so that is no longer an option for us. But when I speak about possible greenfield, that obviously would include the Cook land as it really would be a really ideal place for us. Got it.

Uh, that's helpful. And then, so, uh, just one sort of near term question on 2022, when you talk about sort of siding revenue growth of 15%, considering the mix shift and the price increases, what is, uh, sort of embedded within the guidance around volume growth for FY 2022? Yeah. Hi. Um,

This is Alan. We have, remember, we have a roughly, take that 15, it's sort of eight to nine points of price and the balance being volume with obviously a ramp up through the second half of the year as Holtman comes online. That's roughly how to think about it. Obviously, we tend to, we have tended to overperform on both the volume and the price when I give stats like that. But think of it as roughly 50-50 with a slightly greater emphasis on price and volume.

Got it. And this price also includes the makeshift benefits. So this is not all list price increases. Is that correct? Correct. Yep. Got it. That's very helpful. I'll turn it over. Good luck. Thank you.

Thank you. And our next question comes from the line of John Babcock with Bank of America. Your line is open. Please go ahead.

Hey, good morning. Actually, just quickly following up on some of the discussion there on some of the projects that you're looking at for the next round of capacity additions and siding. You know, at this point, I assume that especially given the lengthy backlogs for machinery, have you already started to make purchases or at least get into contracts around some of that, or is it really too early to comment there?

No, John. We are doing engineering and have purchase orders in place for equipment associated with that next facility. So there will be, no matter which scenario, there's certain equipment we know that we will need, and we have begun the process of securing that equipment. And the equipment or the factory space for the equipment to be fabricated. So we're active there.

Okay. So you still have flexibility, though, in terms of that equipment and which of those different options you decide to pursue. It's not like you fully made up the decision at this point and you'll announce it later this year.

Yeah.

The stuff that we're, say, pre-buying now would be equipment that would be needed no matter the scenario that we choose.

We're getting, again, we're doing this so frequently now that there are a number of aspects of the projects that are the same. And so we can, in simple terms, sort of bulk buy for more than one mil's worth of those aspects. Gotcha.

And then just on the CapEx guidance for the year, I was wondering, could you break down how much of that $190 to $200 million on the mil conversions is going to Holden and Segola this year? And then also, What will be left for Segola in 2023?

I don't think we've disclosed that. Think of it as about 50-50. No, 75. Think of it as sort of three-quarters of that money will be for Segola and the remainder will be for the remainder of Houghton and some long lead items. So a little under three-quarters of it will be for Segola.

Okay, great. And then just last question before I turn it over. Earlier on the call, you talked about moving, or rather making investments to move some capacity from the commodity side of OSB into the specialized area. Any sense, I mean, could you provide us any color in terms of how much volume you might be able to move into the specialized OSB with those investments? And then also, you know, if you already have demand for those investments, any commentary around that would be useful.

So, John, we're running our structural solutions mix for 2022 is just above 45% of our total production in our OSB business. We see a lot of upside to that over the next several years and have plans in place to aggressively grow that business. And so, you know, working off a base of 45%, you know, we certainly are targeting being in the mid-50s by the end of next year. I'm sorry, by the end of this year. And yeah, honestly, from getting it into the market, you know, it helps when the market's tight. We can be a little more directive on the volumes to sell through our contracting system. And so we are using this tight market to facilitate the conversion to our value-add portfolio. Okay. Thank you.

Thank you. And our next question comes from the line of Mark Weintraub with Seaport Research Partners. Your line is open. Please go ahead.

Thank you. First, maybe a bigger picture-type question. Congratulations. Fantastic year. So congrats to everybody at LP on that. Housing, obviously, is doing really well. permit data, et cetera, is now above normalized type levels. You're now accelerating your growth and your spend. Can you contextualize how important is what happens to housing from here versus the innovation and the product mix opportunities and repair, remodel, and how you're conceptualizing what are the key drivers to the success of your strategy going forward? I'm just trying to get how important is it that housing stays at very elevated levels versus some of the other factors that you think are going to be bedrock to the future of Louisiana Pacific?

Mark, that's a great question. And, you know, as we've reported before, right now, we estimate that 40% of the volume in our siding business goes into new construction, almost all that single-family construction. We have a little bit of multifamily, but it's not really material. And so, you know, 60% of the portfolio right now is, and for a while, has been focused on repair and remodel, retail, and the shed business. As you know, we are, and as we reported on this call, we're investing heavily in pre-finished assets. I mean, honestly, the Holton, Maine area. Mill conversion is primarily a repair and remodel play given where that mill is geographically and some of the capability that we're engineering into that facility. And so we are really focused on growing our market share and repair and remodel that we believe it can be a little bit correlated to home construction, but not for residing projects, generally speaking. So yeah, I mean, the strength of the housing New construction certainly provides a tailwind to our siding business. And that selling into new construction is a competency that our company has for the last 50 years. But our whole strategy around siding is really focused on leveraging the opportunity in repair and remodel. And that requires both. elevated SG&A, which we've talked about, but also, you know, improved innovation. And I think we're demonstrating our ability to match our innovation expertise to the needs of the market. And so we will not, you know, we are focused on growing the siding business and we do not use the housing, you know, the long-term or any negativity around someone's forecast on housing to to back off for that commitment. Now, in reality, would a down housing year be reflected in our results for siding? Certainly it would, because we do have pretty good penetration into the new home construction, but our strategy is focused on diversifying away from that dependency.

Great, thank you. And then just as one follow-up, when we think of IRRs for the various paths you're taking, the mill conversions, versus the other strategic growth capital and sort of the bands of confidence. Is there much variation or is it fairly similar? I mean, in particular, for instance, are there pre-finished? Is that like a very high probability, very high return type of expenditure? Any color you can give us on that.

That's a great question. Yeah, let me talk high level, Mark, and then we can, you know, follow up questions if you to get to the detail that you're looking for. But if you think about, you know, given our company's capital intensity, when you do anything with a press, rebuild it or create one, you know, create one in a greenfield scenario and compare that to the investment required for pre-finish, the capital intensity of the pre-finish incremental investment is very low in LP's world. Yet the you know, the price and margin enhancement is relatively large. And so, you know, we see high returns for our investment in pre-finish and with the risk being to our ability to sell out that production. But, you know, it is – but given the low capital intensity, there's kind of room for error there. And a lot of the cost ends up being variabilized in those pre-finish facilities. so we can kind of match the ramp up curve to the spin there. So those pre-finish products, projects are higher return. When we look at other ancillary, like the shape line that we installed at our mill in Swan, those again, we tend to be investing right now in some rather high valued, high priced, higher margin, skews that can generate a lot of return compared to just a base kind of press type of a mill conversion IRR. So the gamut on these innovation returns go from average to high, depending on the specialization of the new product and our ability to garner price. Now, let me just speak a little bit about the scenarios around mill conversions or capacity ads. in siding. If we do a grain-filled mill for siding, that's going to be the lower of the three returns on our options. Next would be adding a press line because we would be buying a new press if we add a press line in an existing facility. So higher returns in grain-filled but lower returns than a pure mill conversion like we've done historically because basically we're utilizing a press that's in place if we do a mill conversion. So That's how you should think about the mill conversion returns, rating them, and then you should think about these repair and remodel focused incremental investments around innovation to be relatively high returns compared to mill conversion.

I guess, Brad, just as one thought, it would strike me that the opportunity cost, though, if you're converting an existing OSP press might be pretty high so that adding it an existing mill a new press might in fact be the highest return. Did I misunderstand what you were saying?

That's a great point, Mark. It depends on, and it's something that we certainly debate internally. Right now, the return on conversion in OSB mills would be pretty low given the margin right now in our OSB business. So that's a really good point. But historically, when we've looked at those mill conversions in light of the sustainable, consistent margin related to our siding business, you know, even with the opportunity cost, we have felt that those are good investments, really good investments. And then, you know, historically, Mark, that's been in the context of us ramping up Clark County or Peace Valley, you know, in our OSP business. We've been able to offset those conversions with more efficient OSP mills coming online. So historically, I've been very pleased with those decisions we've made around the mill conversions, but it's a different, you know, it's a different, we're at a different place now looking forward for the point you made, but also a little more problematic of converting these larger OSD presses over to siding usage has us looking at opportunities where the siding volume becomes more incremental to us rather than a substitute for, you know, or a replacement for OSB production. Great.

Appreciate the details. Thank you.

Thank you. And our next question comes from the line of Paul Quinn with RBC Capital Markets. Your line is open. Please go ahead.

Yeah, thanks very much. Good morning, gentlemen. I guess the first question I got is Val Dorr. I think, Brad, you said you sold the mill. I haven't seen a press release. I'm just wondering, I mean, that was the mill that you swapped with Norward back in 2016 with the idea to bring it up. What changed that strategy and what do you sell it for and to who?

Well, I might have got ahead of myself there, Paul, but we do have a purchase agreement and the and we are selling it to a company that cannot make OSP there. So it's a facility or a land sale primarily, and it's a work in progress right now.

Okay. Well, that's good news. Maybe back on SWAN, just when you did that conversion, I think it was back in 2015, did you rebuild the press at the time or – I guess maybe the press rebuild that you've done now, does that give you more production than the 350, or does that lower your cost, or does it do both?

Hey, Paul, that was – we did not rebuild the press when we converted it, though we did identify the need for that conversion, but we had been so tight on – I think we kept pushing the conversion price down, so we just couldn't any longer. And so this is – in fact, this was the first rebuild of that press – in that plant since the plant started up as an MSB mill however long ago. When we do those press rebuilds, they're not primarily done for or not done at all for incremental production, but we have been able to find the opportunities for increased volume out of those presses, and basically that comes from reduced press time and improved reliability. And then one of the bigger advantages, too, is we see a real marked improvement in quality, and that's around fitness control. So when you take a little better control technology, obviously very much improved ability to control the press and opening and closing speeds and that kind of stuff, we do tend to get single-digit improvements in capacity as a result of that. But The biggest thing is less downtime, less maintenance time in the press that leads to the higher production. We used to think of these press rebuilds as like zero return projects. They probably don't consistently hit our cost of capital, but they approach it given the improved technology that's available on these new presses.

Okay, that's really helpful. Maybe just on the EWP sales process, just wondering if the sale of your JBI choice helps that and where you're sitting in that process.

Yeah, Paul, this is Aaron. It should help that process. It certainly adds clarity in terms of the transaction perimeter. And just to be clear, what we sold as part of the joint venture was our 50% equity stake in the EBITDA of the joint venture. It was fairly complicated, involving an OSB supply agreement and an iJoyce distribution agreement, both of which continue. But yeah, all else equal, it should simplify and clarify the ongoing EWP process.

As Aaron mentioned, Paul, the complexity of that JV, which has been a great investment for us, did murk the waters when we tried to explain how the business operated to potential buyers. So having that clarity going forward we think is going to expedite our strategic evaluation of that business.

Okay. Sounds good. Last one for me. You mentioned South America capacity expansions. Maybe you could give us some details of what the plan is there.

Yeah. Primarily what we're doing there is improving press reliability at those facilities as well and overall reliability. We did put a second press in Pangapooee. two or three years ago, but did not put drying capacity as an example to utilize all the press because we didn't need that volume. And so there's deep bottlenecking, lower capital intensity deep bottlenecking projects that we can implement to get the second press up to full capacity. That's what we're speaking to. We are evaluating other geographic locations. for expansion in South America. And those are primarily dependent on our ability to develop markets around those facilities. And then obviously overall economic health of the economies down there. But I'm very optimistic about our ability to grow in South America through either what I'll call organic growth, which is the bottlenecking or existing operations. And then eventually, as we have done over the years, finding new geographies where a stick frame construction is becoming more predominant and we can be a supplier into that. For example, Argentina, great wood basket, you know, slowly transitioning to more stick frame construction. Colombia is another good place, obviously rife with a lot of political issues right now that would prohibit us building a facility there. But as those economies and those housing markets mature, you know, we like that environment and have done well down there, as you know, know how to operate in South America. We're cautious about expansion, but when we see an opportunity, we want to lean into that.

Great. Best of luck. Thanks for the detail. Cheers. Thanks, Paul.

Thank you. And our next question comes from the line of Kurt Inger with DA Davidson. Your line is open. Please go ahead.

Great. Thanks, and good morning, everyone. I just wanted to start off on siding margins. It sounded last quarter like, you know, despite some of the cost pressures with conversions and discretionary investments, maybe that 25% margin target was a reasonable expectation for 22. I'm curious if your thoughts around some of those items have changed at all and whether that's still an achievable hurdle.

Yeah, I would say it is. It will be dependent, obviously, on the unknown factor of raw material price inflation and whether or not, and I'm not saying there would be, but whether or not there was a reaction from us in terms of price, that power always exists, as well as the pace of and the expense of the milk conversions. So those known factors, known controllable factors in terms of the rate at which we choose to invest in growth, as well as that slight unknown in terms of raw material inflation. But fundamentally, I would argue that the performance we've demonstrated so far puts an updraft to our long-term EBITDA margin target of 25%. That's beginning to look a little conservative in the long run.

Got it. Okay, that's helpful. And, Brad, you touched on still being on a managed order file and siting. As we get into the second half of 22 and Holton moves towards kind of full production capabilities, do you see the potential at all to start rebuilding channel inventories? And, you know, as you speak to customers and consider where channel inventories are today versus – where they could be if production was a constraint or what you would consider normal. Is there any way to size that gap?

Kurt, I would say given what I know today about the Holton startup curve and our current order situation and the fact that it's February and things are really, really tight right now, I don't see us getting us and our channel partners inventories back to a normal level until – this time next year. I think it's going to take, I think we're going to be tight all year as we ramp into Holton. And I really believe it's going to be the Sagola production that kind of puts us over the top or catches us back up. Now, look, we'll continue to update y'all on that every quarter. But, you know, we are very tight and we're just getting into the spring building and remodeling season. And Holton, you know, will speak You know, Holton's starting up next month. You know, it'll be minimal, you know, grade A production in Q2. I mean, obviously some. So it'll really be Q3 and Q4 until we start seeing a significant impact of that incremental production. And, you know, Kurt, where I'm coming from is then maybe in December, January, we build some channel inventory, some much-needed channel inventory as we prepare for, you know, the spring season next year. But my belief is we're going to be tight all year in siting.

Got it. Okay. And maybe just to follow up on that, I mean, when, you know, it's not a unique phenomenon to you or siting specifically, but, you know, when you speak to your customers and channel partners, what is kind of the feedback you get on just those production constraints? And do you see any kind of competitive implications that have come from it?

Well, yeah, I mean, certainly at times of tight supply, a contractor has to make a decision on finishing a product, and a lot of that depends on availability. So what we're trying to do with our managed order file is be very strategic about where we supply production is to strategic customers, and I mean all the way down the channel, not just our distribution partners, so they are very important, so that we are – in the areas where we see opportunities for future growth, those channels are being rewarded with the volume that they need. So we're having to be very strategic about that. It does give us an opportunity from a SKU optimization standpoint to focus on the SKUs that we see have a long-term future in our portfolio. And so it's a weekly, monthly grind to make sure that we're supplying all the material we can into the strategic customer partners that will set us up for future growth. I personally don't think there's been any long-term damage done. I mean, we're still putting a lot of volume into the market based on the growth rates that we've seen. But when you're oversold, you never know, could I have sold one more truckload this week or 1,000 more truckloads this week. You're just oversold. And it's not a position that we want to be in, and that's why we're making the capital investment to get ahead of that. But, you know, it bothers me to be in a managed order file because you never know what your market share gains could be if you were unconstrained. But that's the reality of where we are today, and we're just trying to manage it in a very thoughtful way and aligning with the customers that we see a we see being there for us in the future. Okay.

All right. Well, appreciate all the color guys, and good luck here in Q1. Thank you.

Thank you. And our next question comes from the line of John Tumazos with Very Independent Research. Your line is open. Please go ahead.

Thank you for taking my question. The European prices... that we can derive from the Wes Fraser disclosures, appeared to rise in the December quarter after rising sharply in September and June. Your Latin American realizations appear to fall slightly in the fourth quarter and are lower than your North American realizations as we can derive from your statements. Could you describe competition in South America for OSB? Who's as big as you? Who's notable? In Europe, there's Chronospan and other panel producers. Some of them put the lacquer on the counters and sell finished products. But could you just characterize the competition outside North America It's curious that the European prices are still rising, for example. Just trying to understand the market and the world.

John, the competition right now in South America is primarily and dominantly import volume from either Europe, the U.S. at times, and Asia. And that depends on the SKU. And it's getting a little bit of detail, but the South American market as non-APA panels are a pretty big part of the volume. So the quality parameters aren't as robust as for all the portfolio as they are in North America. And so depending on the kind of international economics around OSB, that import volume can be – competitive to pricing or not. So generally speaking, our South America pricing is more stable when pricing is stronger in the U.S. because the U.S. imports into South America go away. Or in any European volume that may be coming in, it's more biased coming into U.S. and South America. So generally speaking, that's how we see the trend, though somewhat like Europe, There's an insulation factor there built into OSB pricing in South America, primarily due to the freight associated with getting the product into the continent. So, you know, we see more stable prices in South America over our 20-year history there, but it certainly is influenced by the relative pricing in North America at the time. That's kind of what dominates the market as far as imports.

Thank you.

You're welcome.

Thank you. And our last question will come from the line of Sean Stewart with TD Securities. Your line is open. Please go ahead.

Thanks. Good morning, everyone. Just one quick one for me. Brad, you touched on the strides the company's making with the structural solutions value-added product within the OSB segment. any update you can give us on your ability to decouple the pricing for those products from the weekly random likes print? I'm just trying to gauge the relative stability in those products versus the commodity OSB.

Well, you know, Sean, in all honesty, they're still pretty tied to each other. For most of the SKUs in our structural solutions portfolio, there is some, some, direct link back to random links as it's sold as a premium to that price. Now, for some of those SKUs, we do get monthly adjustments or multiple-week adjustments, not the annual week-to-week adjustments to those, which actually can hurt us in a rising OSP market. But other than our flame block SKUs, most of our portfolio is some way tied to random. So what you'll see over time is the price for our OSV is going to vary and somewhat proportional to random, but we've got this built-in margin stability that comes from the structural solutions portfolio.

Understood. Thanks for all the detailed answers. Appreciate it. You're welcome.

Thank you, and this does conclude today's question and answer session, and I would like to turn the conference back over to Aaron Howald for any further remarks.

Okay, thanks, Michelle. It looks like we're out of time, maybe one minute long, so we'll call it there and conclude the fourth quarter and full year earnings call for LP Building Solutions. Thanks, everybody, and we'll look forward to talking again soon. Have a great day and be safe.

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