Louisiana-Pacific Corporation

Good day, and thank you for standing by. Welcome to the Q4 2022 Louisiana Pacific Corporation Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference call is being recorded. I would like to turn the conference over today to Aaron Howell, Vice President, Investor Relations.

Thank you, operator.

Good morning, everyone, and thank you for joining us to discuss LP's results for the fourth quarter and full year of 2022, as well as our updated outlook for the first quarter of 2023. As the operator said, my name is Aaron Hohalt, 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 podcast, we will refer to an accompanying presentation that is available on LP's IR webpage, which is investor.lpcorp.com. Our 8K filing is also available there, along with our earnings press release and other materials. Today's discussion will contain forward-looking statements and non-GAAP financial metrics, as described on Slides 2 and 3 of the earnings presentation. Rather than reading these statements, I incorporate them herein by reference. The appendix of the presentation also contains reconciliations that are further supplemented by this morning's 8-K filing. And with that, I will turn the call over to Brad. Thanks, Aaron.

Good morning, everyone, and thank you for joining LP's conference call to discuss our fourth quarter and full-year results. In 2022, LP's 50th year, we delivered record-citing volume and earned $1.4 billion in EBITDA, and returned nearly $1 billion to shareholders, including repurchasing 14 million shares. We also invested in our ongoing transformation by completing the conversion of our Holton Mill, starting the conversion of Segola from OSB to Siding, and growing our capacity to produce expert finish and structural solutions. In Q4, we grew Siding Solutions net sales by 38%, and remained even dot positive in OSV despite prices falling to levels not seen since 2019. Another highlight of the year was publishing our second sustainability report. LP's inherently carbon-negative products and efficient manufacturing processes mean that LP is delivering value to customers, homeowners, and shareholders while also positively impacting communities and the environment every day. It was truly a remarkable year, and I want to thank every LP employee whose contributions helped make it possible. The recent slowdown in housing starts as likely top of mind for most of the audience. So let me address that, starting with a reminder that LP's OSB and siding businesses have very different relationships with that underlying market. Q4 saw 26% fewer single and single-family starts were down 11% for the full year. LP's OSB segment is closely correlated with new residential construction. As a result, after a remarkable year of cash generation, commodity OSB prices fell to near cash cost in Q4 as demand slowed with reduced housing starts. We responded with disciplined management of capacity and exceptional execution by our sales team, which allow the OSB segment to earn $13 million in EBITDA, which is above our algorithmic guidance, given how far prices fell. LP's siding segment, on the other hand, is more specialized, has no connection to commodity prices, and has significantly more diverse channels and end uses, with only about 40% of siding volume going to new residential construction. And we think SmartSide is the best siding fourth quarter and by 26% for the full year. In the fourth quarter, our site and distribution customers continued to order, but some of their customers' pulls slowed. This resulted in an inventory build in the channel of which we were unaware until late December due to the time lag inherent in a managed order file. By quarter end, therefore, most SmartSide products had finally caught up to customer demand bringing lead times and inventories back to more seasonably normal levels. Alan will talk more about that in the guidance section. Looking back, single-family starts grew by 14% from 2020 to 2021, then fell by 11% in 2022, ending essentially flat over two years. Over that same two-year period, we have grown Siding Solutions revenue by more than 50%. Siding is not immune to a housing slowdown, but it has consistently outperformed the underlying market. We are confident this trend will continue as we execute our strategy to grow and take share by focusing on repair and remodel markets and driving product innovation. Let me talk a bit about LP's view of the current market and how we are navigating it. Consensus for total U.S. housing starts for 2023 is around $1.25 million. are 20% lower than 2022, although data released last week was a bit better than this. Most observers expect the housing market will strengthen in the back half of the year, implying that Q1 could see housing starts fall by more than 20% compared to 2022. There is significant uncertainty in housing and R&R markets at the moment, particularly with regard to interest rates and affordability. As a result of this near-term uncertainty, we are seeing softer demand in siding and OSB. But I want to reinforce that LP's strategy is not simply to wait for strong housing stores for high commodity OSB prices. Our strategy is to grow smart side, grow expert finish, grow our exposure in R&R, grow our portfolio of structural solutions, and expand our reach geographically. We will continue to execute on our strategy because we have shown that it delivers value. This strategy is the reason why siting has gained share and consistently outperformed the housing market. As we have said before, we have more than enough flexibility in our production plans and capital projects to respond effectively to short-term weakness and more than sufficient liquidity to continue investing for long-term growth in siting and structural solutions. In the long run, fundamentals remain very strong, with demographics and structural undersupply as tailwinds for new construction and aging housing stocks supporting R&R growth. LP will bridge this short-term gap, protecting against market downside while preserving our ability to benefit when the housing market regains its footing. And we will do it by executing our strategy with disciplined operations and capital allocations. And with that, I will turn it over to Alan to discuss our financial results for the quarter and an update on our capital allocation strategy. Thanks, Brad.

I'll spend a few minutes reviewing LP's performance for the fourth quarter and full year, and then I'll discuss the current market environment and its impact on our near-term outlook. Slide 7 shows siding growth compared to housing starts on a trading 12-month basis. As Brad mentioned, year-over-year. Slide 8 shows the court for signing in more detail. The story is a fairly simple one. List price increases and favorable mix drove net prices 15% higher, while volume grew by 20%. These two factors added $70 million to EBITDA. Inflation of raw materials and freight, costs for conversions, and increased selling and marketing produced a $32 million headlink. In other words, the EBITDA gain from growth was double the negative impact of inflation and investments in future growth. The resulting EBITDA margin increased by 6 points to 23%. Again, in a quarter, when single-family housing starts fell by 26%. Slide 9 tells a similar story for the full year. 14% higher prices and a in selling and marketing. And after $123 million of inflation, EBITDA was $50 million higher than the prior year for a full year EBITDA margin of 23%. And then a year with two press rebuilds, significant inflation, and 11% lower single-family starts. The OSB charts on pages 10 and 11 are dominated by the impact of falling OSB prices and rising raw material costs. There was a $14 million hit from inflation, mostly raw materials, and a $10 million impact from eventually devaluation. Despite this, high-price realization resulted in the OSB segment outperforming our algorithmic guidance and generating $30 million of EBITDA. While the four-year war to the fallen patient margin impacts of the higher value-added structural solutions products. And so these four slides are LP's transformation strategy in a nutshell. OSP prices ebb and flow outside our control, we generate significant amounts of cash when demand and prices are high, and we manage our production capacity with discipline and focus when demand ebbs. Siding, on the other hand, is our growth and value creation market. Slide 12 shows a very high level run forward for the revenue in EBITDA for the quarter. OSB price drops reduced revenue by $120 million. This was almost completely offset by $105 million commodity OSB volume, mostly due to Peace Valley's ramp-up. LPSA, Intecra, and everything else saw revenue fall by a combined $22 million. The EBITDA story in the right-hand column is similar, other than the call-out. In North America, a sum of what we can control, specifically siding growth, structural solutions growth, and OSB volume, netted a $37 million positive EBITDA contribution. It was not enough, however, to offset falling OSB prices and inflationary pressures, With the result, the LLP delivered $100 million in EBITDA in the quarter, lower than the prior year quarter by $178 million. Slide 13 provides the same analysis for the full year. For revenue, $456 million of growth, more than offset the impact of falling OSB prices. For EBITDA, the growth of side A LPSA EBITDA drop, and everything else besides. Page 14 of the presentation shows cash flows for quarter and full year. We began the quarter with $482 million in cash. Operating cash flow of $41 million is the net result of $100 million of EBITDA, plus $29 million in working capital decreases, plus $78 million in taxes. The fourth quarter saw heavy cap expending of $133 million, mostly on the Segola side in conversion and Green Bay expert finish expansion. And after $16 million of dividends and a few other things, our cash balance fell by $99 million, ending the year at $383 million. Finally, if you look at the P&L account on page 17 of the presentation, you will see an $82 million non-operating charge in the quarter. and adjusted earnings to share. And with that, let me move on to the current market dynamics and how LP's strategy helps us respond before transitioning to guidance. As Brad described, and as you all know, there is significant uncertainty in the housing market. LP is investing in growth for smart size, expert finish, LP will continue to manage its mills and discipline to meet customer demand. In signing, we are working through the inventory digestion that has accompanied the transition from a managed order file, and all indications are that inventory is now flowing naturally. In OSB, just as we took market downtime at the end of the quarter, we are constantly assessing customer demand, mill inventories, and OSB prices to balance supply and demand. which I hope and expect is temporary, with the agility to respond up or down as the market evolves. Our capital allocation strategy remains unchanged, though the timing is somewhat cash flow dependent. As a reminder, that strategy is to first earn the cash, then to invest in growth, and only then to return the remainder to stockholders via dividends and shared purchases. In the fourth quarter, as OSP prices and cash flow fell, We have a remaining board authorization for $200 million of repurchases and consistent with our belief that our shares are undervalued, cash flow allows, we'll be back in the market. In terms of liquidity, we retain a $550 million undrawn revolver. We have $350 million of long-term debt at 3.65% due in six years. We intend to protect this very strong balance sheet but use it to execute our strategy. While 2023 is shaping up to be a year and balance sheets with appropriate discipline. For the first quarter, as Brad mentioned, we expect inventory digestion following our transition from a managed order final signing, with the result that revenue for signing solutions is expected to be flat to 5% lower than the first quarter of 2022, with price increases roughly offsetting lower volumes. In OSB, assuming prices remain constant at the level published last Friday by Random Lens, OSB revenue would be down by from fourth quarter levels. With OSP prices at these levels, please bear in mind that LP's algorithmic guidance for OSP revenue reflects currently planned capacity reductions taken to match production to customer demand, and all of these factors would result in a first quarter EBITDA of at least $35 million. Now, given the current uncertainty in the market with regard to four-year housing and repair model demand, it's difficult to offer accurate four-year guidance for deciding revenue growth. However, We are confident that the sign-in segment will outperform the underlying market by a substantial margin. But since the underlying market itself is difficult to predict, we're going to hold off on offering meaningful guidance until our next earnings call, by which point we expect to have greater clarity. Similarly, for full-year CapEx guidance, we will make the investments necessary to grow and outperform the closing comments.

Thanks, Alan. As Alan detailed, we are working through the effects of catching up to the siting order file, and we are managing OSB capacity to match current market demand. I don't want to minimize the near-term challenges these factors present as we enter a period of softer housing starts. The market is still quite uncertain, and housing starts and R&R activity have never been easy to predict. However, there are a few things we are very confident must eventually be resolved. Second, the age of the average house in the U.S. suggests a very long runway for growth in R&R. And third, we know that we have the best products and team in the industry. LP's siding segment has a long history of outperforming the underlying market and gaining share, and that will continue. And we will manage our OSB capacity, our CapEx plans, and our balance sheet with discipline so that we can continue to outperform the market and deliver results for our shareholders. 2022 was an incredible year. 2023 has started with market conditions different than what we have experienced the past two and a half years. However, we are not resting on our laurels. As we bring our first 50 years to a close, I have never been more confident that LP will build on our record of growth, innovation, and sustainability to deliver shareholder value in our next 50 years.

And with that, we will be happy to take your questions.

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. One moment while we compile the Q&A roster. Our first question today will be coming from George Saffos of Bank of America. Your line is open.

Hi, everyone. Good morning. Thanks for taking my questions and thanks for the details. Brad Allen, I know it's difficult, but is there a way to assess for us what your production stance is right now in siting relative to takeaway? Are you still, I'm assuming, producing at a lower rate relative to demand just to clear inventories, or have you largely gone through that and you're producing, as far as you can tell, pretty much in line with takeaway? And in terms of first quarter, Thank you for the guidance points, recognizing it's very difficult given all the moving parts and the volatility related to pricing with OSB. Is there a way for you to give us a bit more color in terms of how you see OSB and Siding stacking up in that more than $35 million guidance? Thank you.

So, George, let me start with the production question around Siding. So, just keep in mind that Holton has been, you know, year and is, you know, right at or close to production, had the capability to produce at full production. We have governed that volume back a little bit in Holton as we went into Q4 and beginning of Q, well, more so actually in Q1. And so we are, you know, to answer the question for running the siding plants at full production other than Holton where we have decided to water pool through a little bit better.

And the second question, George, was could we give color around the $35 million? Yes, I think we owe you that. Bear in mind, please, that the number I'm about to quote for OSB is predicated algorithmically on OSB prices of last Friday holding flat. So the 35 roughly breaks down as follows, and it is rough, about $50 million from signing, about negative 10 from OSB, and then everything else, including a bit of conservatism, perhaps LPSA offsetting culprit of minus 5. So plus 50 for siding, minus 10 for OSB, minus 5 for everything else, 35 million.

Thanks, Alan. And the last one I'll turn it over. You mentioned, you know, you have the flexibility to push ahead or delay as needed in terms of your capacity ramp in siding. What will be the key mile markers for you relative to how quickly you go ahead or decide to pull back? You know, one of your peer companies talked about some weakness they were seeing in repair and model activity. You know, is that going to be, you know, whether it's dollars of revenue or commentary out of the big box retailers, what will you be looking to and what should we be looking at as analysts engaging that? Thank you. I'll turn it over.

So, George, let me just say for press production, we're full steam ahead on bringing Segola up to full gear by the end of the year. We see no reason to back off at all on the path forward for Segola startup, which added a significant amount of press capacity. Similarly, in Bass, New York, we're full steam And then as we get to the next tier of volume from a press capacity standpoint, that would be Holton Line 2, and then various options on expert finish. We'll just be looking at the market as we go through the year, looking at ultimately what we feel like growth will be for this year, and apply that well, and also look over what we expect for housing the next couple years, and those will inform our We're still actively involved in engineering and design for expert finish capacity beyond Bath. As we've talked about on the call previously, we have begun procurement for different capital components for Holton Line 2, but we haven't delayed anything. We haven't had to make decisions. and our capacity to spend around the reality of what we're saying in the order file.

Thank you. Welcome.

Thank you. One moment while we prepare for the next question. And our next question will be coming from Keaton Matura of BMO. Your line is open.

Thank you. Good morning, Brad, Alan, Aaron. First question, coming back to siding, Alan, in your prepared remarks, you talked about meaningfully outperforming the broad market. Is there a way to think about either in terms of sensitivity or if there is a better way to think about sort of the degree of outperformance or sort of volume growth at different housing stocks level? I'm just trying to understand What is the best way to think about volume in the siting business, recognizing that there is still a lot of uncertainty?

Yeah, it's a great question, and it's a very hard question to answer, particularly given the experience over the last couple of years we've been on a managed order file. But very highly. we outperform on a revenue basis the underlying market by, let's say, 8 to 10 percentage points of growth. And so a simple way of articulating that, and I say the underlying market, we've only really got one clear marker of the market, and that's single family housing. And so if single family housing were, let's say, to be down 10%, then I would argue that we should be able to grow our revenue above that. And that model, you might expect flat revenue year-over-year. Of course, it depends on what happens in R&R and to what extent that's impacted by the single-family housing startups. And I would argue and I'd like to think that at 10% housing decline, we might actually see some strength in repair and remodel, and maybe that would be better. So it's flexible. R&R and housing don't necessarily move in tandem, but we use as a simple working model 8 to 10 points better than the market. However, whatever that market marker ends up being. And we believe we have a long history of being able to do that through market share gains partly driven by our innovations.

Got it. Now that's helpful perspective. And Alan, perhaps I missed it. Did you talk about sort of 2023 CapEx guidance?

No, I didn't quite specifically. It's very hard to give guidance without being able to discuss it in a sort of open forum like this. So, you know, the last, I think, Last couple of quarters, I've guided to – I said that 2023 will be a figure closer to $500 million. I'm obviously going to lower that guidance a bit. But let me tell you what our working model is as of today, and I'm happy to do that because it indicates the range. I would say our working model for CapEx, this is not a projection, this is basically describing what we see and the level of flexibility we think would be wise. Our working model is in a range of $350 to $450 million of CapEx in 2023. It's hard to say, as Brad said, where that will land because we will use the flexibility that we have. Q1 CapEx will be pretty heavy. $120 to $125 million of Q1 CapEx. That would be fairly heavy, and we have a number of commitments for long-term items that we intend to play our head with. Of course, we're bringing scale up, so there's absolutely no slowdown there.

Understood. No, that's very helpful. I'll jump back in the queue.

Good luck. Thank you. One moment while we prepare for the next question. Our next question is coming from Susan Makary of Goldman Sachs.

Your line is open.

Thank you. Good morning, everyone. My first question is talking a bit about the pricing environment for siting. First of all, I guess, can you give us any update on the success that you've seen with that increase that you announced in March? I believe it was late last year, effective in early January. And then in this environment with volumes moving lower, how do you think about price versus volume? What's the ability to continue to hold the pricing that you've realized? And would you be willing to think about the volume versus price a little differently, given where we are from a macro and a housing perspective?

Susan, for the first question, I would say just as consistent with the way we've done it in the past, there could be a little lingering effect through Q1 of realization, but predominantly all of it was accepted in the marketplace, so we have minimal concerns there. And then for the price-volume tradeoff, generally, siting doesn't work that way. I mean, we're pricing it in the distribution. I don't think most siding jobs are a cost play to start with, and so we feel like we're pricing the product according to the value that it warrants in the market, and our distribution partners have done a good job of getting that price through the channel. Now, I do want to say there is an exception to that, and that is around a Obviously, we are part of that game, and we are active in continuing to process those kind of opportunities now. That can result in a rebate pattern that chips away at that list price increase for specific customers and for large volume type of deals. I would just say for the year, we should expect to see by the time we get to the second quarter that January price increase has worked its way into our P&L.

Okay. That's very helpful. And then turning to the OSB segment, you talked a bit about some production curtailments there. Can you give us more color on some of those locations and how you're thinking about holding production as we think about where pricing may move for OSB through the year?

Yeah, Susan, I'm not going to go through mill by mill and talk about what we did. I would say, I would describe it this way in general, and Q4 was pretty general across our entire system. With downtime, you know, that is somewhat easier to do during the holiday season. And so we, you know, it was widespread. distribution of downtime late in Q4 to try to match demand. And then as we come into the Q1 and everybody comes back from the holidays, it is more targeted around meal cost and including transportation. And so in Q1, the downtime will be a little bit more concentrated, but we'll be taking as needed in order to match demand.

Okay, thank you, and good luck.

Thank you, Susan.

Thank you. One moment while we prepare for the next question. Our next question is coming to Mike Rollins of CHOICE. Your line is open.

Thank you. Good morning, Brad, Alan, and Erin. Thank you for taking my questions. On siting, I'm realizing that we can give an excess inventory. And as you've mentioned, you've transitioned away from a managed order file. But I'm just trying to get a sense that what gives you the confidence that siting will continue to grow as the economy softens, home equity value declines, unemployment increases. And the premise of the question is this, you know, you grew the siting business during an economic and housing upcycle, and it really has yet to be stress tested during a down cycle. In addition, R&R, likely grew more than normal the last few years given work from home. People obviously during COVID building out decks, building sheds, other things during their lunch break. So there's a risk that R&R could actually slow more given the backdrop as consumers choose to focus, let's say, on more small ticket items. So I'm just trying to get a sense of how you're framing sliding in the current environment.

So Michael, the risk that you describe around just some kind of macro R&R spin is real. And then, as we've talked about in our prepared remarks, the outlook for new construction is uncertain, to say the least right now, kind of all over the board, depending on the analysts that you look at. And so, yeah, the underlying market certainly will impact the results for citing volume growth as we go through this year. No question about it. But where I disagree with you is the point about the business not being stress tested. You know, during other periods of downtime of housing slowing or housing going down, we've consistently outpaced the market on volume growth and certainly on revenue growth. And so I think, and the reason we've been able to do that is, first of all, our portfolio is pretty highly diversified, given the exposure to non-housing and even non-repair and remodel segments like shed and positions in retail. And then also, over the past five to seven years, we've done a really good job around product innovation that has opened up new opportunities for us, and that's why we show that slide in our deck. that is new products. So the fact that we have an expert finish kind of just coming into any kind of significant market position now, R&R could be down, but because of our market share being pretty low in R&R and the fact that we're essentially in the last phases of introducing our expert finish to the market, We see a lot of upside to that from a market share standpoint. Again, we can overcome, if R&R is down, but siting R&R is down 10% this year, we're going to feel that, but we are confident that we still have the ability, given how well our product performs, given the innovation that we've been able to bring to market in the last five years or so, and given... Depending on the geography and the segment, relative, you know, lower penetration rates at certain parts of the country in certain segments, you know, we're confident that we're going to fill up a Segola facility. From a press standpoint, we're confident we're going to have to continue to build expert finish capacity, and we're confident we're going to grow, but that growth can be gauged somewhat by the underlying R&R and single-family start market. But we're all in on gaining market share. And I'll just make one final remark. Historically, this is a general statement, but historically, we've actually picked up more market share in a down market that market share. So I'm not saying I'm excited about a down market at all, but I do believe it brings opportunity for customers to shop around a little bit. And given how well our product performs once we get a trial, that can bode pretty well for us over the long term.

Got it. Thank you for the comment. Just one quick follow-up on that. You mentioned lower penetration rates in certain parts of the country and segments Can you provide a little bit more color about, you know, what parts of the country and what segments have lower penetration rates that you're trying to increase your share in?

Yeah, so let me just, in general, so geographically, in the center of the country, north to south, so Texas up to Minnesota, we've got, you know, good market share there. But once you go east of Texas and the south up the Atlantic seaboard, a lot of opportunity That's the reason we've converted Houston and Maine, and it's the reason we're building expert finish capacity in New York and expanding the capacity that we have in North Carolina for expert finish. So there's an opportunity there. And then I would say that in pockets of the Pacific Northwest, there's some good markets for us there historically, but there's still opportunities for growth, particularly with expert finish.

Got it. And then just one last question before turning it over. Obviously, you have a large shareholder, which slightly increased its stake last quarter to slightly under 10%. Obviously, you've been doing a good job in terms of reorienting the portfolio to higher growth, higher value-add product. Do you see more shareholder value being created through the involvement of the shareholder?

Well, Maybe reputationally it helps a little bit, but I don't think there's any direct, we haven't noticed any direct, you know, improved shareholder value as a result of that. But, I mean, we're proud to have it, I'll tell you that. But, you know, I think any, yeah, so not directly, but I would assume that the credibility that brings to our strategy cannot hurt.

Gotcha. Good luck in 2023. Thank you.

Thanks, Mike.

Thank you. One moment while we prepare for our next question. Our next question is coming from Mark Weindrup of Seaport. Your line is open.

Thanks, guys.

So for first quarter, if I'm doing my math right, you seem to be pointing to order of magnitude 16% EBITDA margins for the siding business. So I was hoping to get a little bit of color on some of the variables that play, because obviously below the types of ranges you've been achieving beforehand. In particular, how much in the way of like startup or conversion costs related to the GOLA might be included in there? how much of this is kind of just fixed absorption, higher cost, and what other variables might we want to contemplate besides, you know, what other variables might we want to contemplate?

Yeah, good question, Mark.

Let me articulate this in the context of a year-over-year for Q1. Year-over-year, we basically said that we think offset. And that would fundamentally leave zero EBITDA impact. What you're left with, high level, is, you know, last year's EBITDA of 83, dropping to the figure I quoted of 50, so it's a $30 million drop. About 20 and change of that is raw material costs, the carryover of raw material inflation. Now, as we all know, normally that would be offset with pricing, and technically it is, except for the fact that in Q1 volumes are down. So to unravel it differently, yes, with volumes being down, one of the problems of having a profitable product is that when your volumes are down, you make less money. And as I've said more than once on calls like this, we enjoy a high variable margin on our selling products. So yes, when volumes are down year over year, there's a heavy EBITDA impact of 45 to 50% of the revenue drop caused by volume. So the way I look at it is pricing and volume, EBITDA impacts basically net off. We're left with 20 and change of raw material. with the conversion of Segola and other projects. And those do put a, let's call it a strain on EBITDA. It's the right strain, in my opinion. So $10 million of investments and stuff and about 20 and change of raw material with pricing and volume impacts offsetting in EBITDA.

Great, thank you. And I realize this is tough and lots of moving pieces, but did you have any assessment as to how much of the volume weakness is either, you know, you sold a little bit ahead of time or destocked. It's kind of really maybe the same thing. And so really trying to get a sense of, let's just say conditions were to remain similar to what they are. Would you, what type of volume weakness improvement might you expect on a go forward basis? I guess what I'm really sort of just trying to get a sense of is kind of ranges for volume expectations, recognizing you don't want to give a full year estimate given all these uncertainties. But if there's some like sort of sensitivity analysis you can provide to us under the different macro situations of where you might think volume and siting might come out, that'd be super helpful.

So Mark, let me start there and then Alan can add maybe some color to this.

So in the context of gauging where we are today, and I'm talking about Q1, relative to the market condition, we guided 30% growth in Q4 and got 38. We had a price increase January 1. We were on managed order file, which means customers were ordering six to eight weeks or longer out in our managed order file situation. And so I do believe that there was some order pulled forward into Q4 that that drove an outstanding Q4 growth relative to what we were guiding to when we talked to you guys late October, first of November. And so I think that you've got to kind of look at the two quarters combined to understand kind of what's happened there. And then as we look in Q2, there's a bit of that gauging, you know, where are we really going to pull throughs, which have been kind of hard to understand because there was that inventory bill at the end of the quarter. But I think we are right now, it feels like right now in our order file, we are beginning to see where we're servicing true demand. And I think, you know, as Alan, I think, mentioned in his repair remarks, when we get to I know this doesn't help you in the meantime, but when we get to the next call, and we'll have a really good feel for that, it's just that the uncertainty around what was being pulled out of distribution from, say, January 1 until a week or so ago has been difficult for us to gauge because there was an inventory build as a result of what I've just spoken to.

So I don't know, Alan. I don't think I should have, yeah.

Great. That's great. I get squeezed in real quickly because you did note another big inflation year over year impact. It seems like some folks are seeing lower wood costs in other different businesses. I mean, there's been some optimism, maybe resin comes down a little bit. When might we start? Are we not seeing that yet in siding? And when might that start showing up?

So on the resin side and basically all materials other than wood, those major materials frames are contracted and there's a contract price, which is based on some derivative of oil, but it is a lag. But if we continue to see oil prices fall and even some of that have fallen, it's already happened, we haven't realized yet. certainly could be helpful for a margin this year. We certainly are not seeing any more increases in that area. And then on the wood side, same thing, a big driver for us, we're buying pulpwood, so a big driver for us is diesel as far as just getting the wood into the facilities. But I will say structurally, we have experienced some price increases in us having to go further to procure wood, given some of the restrictions on harvesting in Canada. So you may not be surprised. From an OSB perspective, that's where we're looking at for some downtime. But I think costs will moderate as we go through the year, certainly on the resin side, and we're having to just really manage hard on the wood side to bring those costs down. Relief with basal pricing would be certainly helpful there.

Much appreciated. Thanks, Brad.

Thank you. One moment while we prepare for the next question. Our next question is coming from Kurt Hinger. of DA Davidson, your line is open.

Great, thank you and good morning everyone. Just starting off on the OSB segment, any thoughts on the relative weakness and structural solutions versus commodity volumes in Q4 and do you think that reflects maybe timing differences in terms of prices declining or kind of a larger trend we should be aware of in terms of those products perhaps being less in demand in a weaker commodity pricing environment.

Yes, we certainly saw from an overall volume standpoint those go down. I just think primarily the market got so competitive in Q4 as folks were kind of rationalizing inventory and production. We certainly saw a fall off there. I am totally optimistic on the long term about our ability to grow structural solutions. But I do think in both directions, in a strong up market, it's easier to push structural solutions into the market. In a hard down market, given how pricing can lag around certain flooring skews, those skews can really become disadvantaged against more commodity products. And so I think we have to be careful about gauging where we are, both on the upside and downside of structural solutions, because that kind of value proposition can get out of kilter from a pricing standpoint when the market's moving. So it's something that we're keeping an eye on, but I do believe the strategy is sound. We did grow it, obviously, from an annual standpoint. And just like I had mentioned earlier with siding, we've introduced some really exciting new SKUs that give us an opportunity to continue to grow that.

Got it. Okay, that makes sense. And then just for my second, there was a question earlier around pricing, and you alluded to kind of the volume discounts and rebate program with builders. But, you know, one of your competitors, I guess, had some interesting comments in regards to kind of the pricing dynamic there and perhaps just getting more aggressive. I mean, do you have any thoughts around that dynamic as it relates to SmartSide? And maybe you could also just touch on the success that you've seen with the builder series introduction.

We're excited about the progress we made last year with the builder series. We're excited about some wins that we've had recently and some ongoing negotiations that are happening now. But it is competitive. I mean, there's no question about it. That's the reason we engineered a product, you know, specifically for that channel or that end use. And so as the market slows, you know, there's certainly, that's a competitive landscape right there where, you know, big builders have a negotiating leverage given the volume that they'll consume and the market share that they've gained, you know, during COVID. So, but unlike In our history, we now have a product that is very competitive there, that is very aesthetically pleasing. Once it is trialed, it tends to be accepted and there's a stickiness to it. We're going to continue to grow that, but you point out correctly that that is a competitive landscape. Unlike probably any other we operate in where price can be a dominant driver, sometimes even not necessarily what we view as the entire value proposition. But I feel good about the way we're positioned to win there, but we won't win them all. Right.

Okay. Well, appreciate the details. I'll turn it over. Thank you.

Thank you.

Thank you. One moment while we prepare for the next question.

Our next question will come from Paul Quinn of RBC.

Your line is open.

Yeah, thanks very much. Morning, guys. Just one of your siding competitors signed contracts with 24 of the 25 top U.S. builders to supply hard siding. Just wondering, you know, how you expect that to affect your builder series. Also, they've also reintroduced their low-priced stem plank product. Just wondering if That's going to have a material headwind on the growth of Builder Series.

As I just mentioned, it's a very competitive field around big builder lap siding. But I really feel like the product that we introduced, Paul, that Builder Series is a superior product to everything that's out there for that application. We were able to price it competitively. I mean, to win our share of the opportunities. But, you know, it's a negotiated deal. It's a lot of volume involved. And, you know, we'll kind of have to see how it plays out this year. But the market share we gained last year is sticky. And then, so, I mean, I think I'm confident that we can battle head-to-head with anybody around that type of business now, given that we have this product. And I'm also confident that once a builder tries the product, they're going to really like it because it's superior to their alternative hard sidings. But circle back around. It's a competitive landscape, and sometimes you can win off a price, and sometimes the price gets to a point where we don't want the business anymore, and then we have to walk away or we lose it because we bid too high for it.

Got it. Thanks for that. And then just over on Expert Finish, if you could give us an idea what that margin boost is on that product. I mean, it's great to see the growth. Just wondering how that affects the overall margin profile.

Yes, significant price boost associated with expert finish. The margin boost today isn't that material. But as we get these newer lines up in Bath and the expansion that we've contemplated out west, the line we just added to Green Bay, the margin boost from expert finish is ahead of us. But currently with our Reported margin is out of inventory. It's pretty much a wash right now.

Okay, great. Best of luck, guys. Thanks. Thank you. Please follow.

Thank you. One moment while we prepare for our next question. Our next question is coming from Sean Stewart of TD Securities. Your line is open.

Thank you. Good morning. And thanks for all the thoughtful answers to the questions. I just have one. And it's with respect to the share buyback program. And Alan, I think your wording was you could remain, you could finish off that program subject to cash flow supporting it and with potentially a tempered CapEx outlook. Is there an implication there that you forego the share buyback activity for the foreseeable future? And presuming your thoughts on intrinsic value haven't really changed, I guess your intent to stay active on that program in light of share price weakness we've seen of late.

I want to reiterate something. It's a great question. Thank you. We don't buy opportunistically. So the opportunity to buy back shares. But we put investment in the business first, as I repeat my mantra, that we put investment in the business first and we don't buy opportunistically. So we do maintain that discipline that we have to have the cash already generated to engage in buybacks. I'm sure that point will come. I just can't predict when.

Understood. The rest of my questions have been answered. Thanks very much.

Thank you. This concludes today's Q&A session. I would like to turn the call back over to Aaron Howell for closing remarks. Please go ahead.

Okay. Thank you, operator, and thank you, everyone, for joining us. We are at the hour, and there are no further questions, so we will bring the fourth quarter earnings call for Healthy Zoning Solutions to a close. Thank you very much for joining us, and we'll look forward to speaking with you again soon.

This concludes today's conference call. Thank you all for joining and please enjoy the rest of your day. you Thank you.

music music Thank you.

Good day, and thank you for standing by. Welcome to the Q4 2022 Louisiana Pacific Corporation Earnings Conference Call. At this time, all participants are in our 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference call is being recorded. I would like to turn the conference over today to Aaron Howell, Vice President, Investor Relations.

Thank you, operator.

Good morning, everyone, and thank you for joining us to discuss LP's results for the fourth quarter and full year of 2022, as well as our updated outlook for the first quarter of 2023. As the operator said, my name is Aaron Hohalt, 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 podcast, we will refer to an accompanying presentation that is available on LP's IR webpage, which is investor.lpcorp.com. Our 8K filing is also available there, along with our earnings press release and other materials. Today's discussion will contain forward-looking statements and non-GAAP financial metrics, as described on Slides 2 and 3 of the earnings presentation. Rather than reading these statements, I incorporate them herein by reference. The appendix of the presentation also contains reconciliations that are further supplemented by this morning's 8-K filing. And with that, I will turn the call over to Brad.

Thanks, Aaron. Good morning, everyone, and thank you for joining LP's conference call to discuss our fourth quarter and full-year results. In 2022, LP's 50th year, we delivered record-citing volume and earned $1.4 billion in EBITDA, and returned nearly $1 billion to shareholders, including repurchasing 14 million shares. We also invested in our ongoing transformation by completing the conversion of our Holton Mill, starting the conversion of Segola from OSB to Siding, and growing our capacity to produce expert finish and structural solutions. In Q4, we grew Siding Solutions net sales by 38%, and remain EVA.positive in OSV despite prices falling to levels not seen since 2019. Another highlight of the year was publishing our second sustainability report. LP's inherently carbon-negative products and efficient manufacturing processes mean that LP is delivering value to customers, homeowners, and shareholders while also positively impacting communities and the environment every day. It was truly a remarkable year, and I want to thank every LP employee whose contributions helped make it possible. The recent slowdown in housing starts is likely top of mind for most of the audience. So let me address that, starting with a reminder that LP's OSB and siding businesses have very different relationships with that underlying market. Q4 saw 26% fewer single-family starts and single-family starts were down 11% for the full year. LP's OSB segment is closely correlated with new residential construction. As a result, after a remarkable year of cash generation, commodity OSB prices fell to near cash cost in Q4 as demand slowed with reduced housing starts. We responded with disciplined management of capacity and exceptional execution by our sales team, which allow the OSB segment to earn $13 million in EBITDA, which is above our algorithmic guidance, given how far prices fell. LP's siting segment, on the other hand, is more specialized, has no connection to commodity prices, and has significantly more diverse channels and end uses, with only about 40% of siting volume going to new residential construction. And we think SmartSite is the best siting product net sales increasing by 38% in the fourth quarter and by 26% for the full year. In the fourth quarter, our site and distribution customers continued to order, but some of their customers' pulls slowed. This resulted in the inventory build in the channel, of which we were unaware until late December, due to the time lag inherent in a managed order file. By quarter end, therefore, most SmartSide products had finally caught up to customer demand bringing lead times and inventories back to more seasonably normal levels. Alan will talk more about that in the guidance section. Looking back, single-family starts grew by 14% from 2020 to 2021, then fell by 11% in 2022, ending essentially flat over two years. Over that same two-year period, we have grown Siding Solutions revenue by more than 50%. Siding is not immune to a housing slowdown, but it has consistently outperformed the underlying market. We are confident this trend will continue as we execute our strategy to grow and take share by focusing on repair and remodel markets and driving product innovation. Let me talk a bit about LP's view of the current market and how we are navigating it. Consensus for total U.S. housing starts for 2023 is around $1.25 million. are 20% lower than 2022, although data released last week was a bit better than this. Most observers expect the housing market will strengthen in the back half of the year, implying that Q1 could see housing starts fall by more than 20% compared to 2022. There is significant uncertainty in housing and R&R markets at the moment, particularly with regard to interest rates and affordability. As a result of this near-term uncertainty, we are seeing softer demand in siding and OSB. But I want to reinforce that LP's strategy is not simply to wait for strong housing stores for high commodity OSB prices. Our strategy is to grow smart side, grow expert finish, grow our exposure in R&R, grow our portfolio of structural solutions, and expand our reach geographically. We will continue to execute on our strategy because we have shown that it delivers value. This strategy is the reason why siting has gained share and consistently outperformed the housing market. As we have said before, we have more than enough flexibility in our production plans and capital projects to respond effectively to short-term weakness and more than sufficient liquidity to continue investing for long-term growth in siting and structural solutions. In the long run, fundamentals remain very strong, with demographics and structural undersupply as tailwinds for new construction and aging housing stocks supporting R&R growth. LP will bridge this short-term gap, protecting against market downside while preserving our ability to benefit when the housing market regains its footing. And we'll do it by executing our strategy with disciplined operations and capital allocations. And with that, I will turn it over to Alan to discuss our financial results for the quarter and an update on our capital allocation strategy. Thanks, Brad.

I'll spend a few minutes reviewing ALP's performance for the fourth quarter and full year, and then I'll discuss the current market environment and its impact on our near-term outlook. Slide 7 shows siding growth compared to housing starts on a trading 12-month basis. As Brad mentioned, year over year. Slide 8 shows the court for signing in more detail. The story is a fairly simple one. List price increases and favorable mix drove net prices 15% higher, while volume grew by 20%. These two factors added $70 million to EBITDA. Inflation of raw materials and freight, costs for conversions, and increased selling and marketing produced a $32 million headlink. In other words, the EBITDA gain from growth was double the negative impact of inflation and investments in future growth. The resulting EBITDA margin increased by 6 points to 23%. Again, in a quarter, when single-family housing starts fell by 26%. Slide 9 tells a similar story for the full year. 14% higher price selling and marketing. And after $123 million of inflation, EBITDA was $50 million higher than the prior year for a full-year EBITDA margin of 23%. And then a year with two press rebuilds, significant inflation, and 11% lower single-family starts. The OSB charts on pages 10 and 11 are dominated by the impact There was a $14 million hit from inflation, mostly raw materials, and a $10 million impact from eventually devaluation. Despite this, high-price realization resulted in the OSB segment outperforming our algorithmic guidance and generating $30 million of EBITDA. While the four-year war to perform shows the incremental margin impact of the higher value-added structural solutions products. And so these four slides are LP's transformation strategy in a nutshell. OSP prices ebb and flow outside our control, we generate significant amounts of cash when demanding prices are high, and we manage our production capacity with discipline and focus when demand ebbs. Siding, on the other hand, is our growth and the line market. Slide 12 shows a very high-level run forward for the revenue at EBITDA for the quarter. OSB price drops reduced revenue by $120 million. This was almost completely offset by $105 million, or 38% of silent growth, a remarkable accomplishment for the silent team. commodity OSB volume, mostly due to Peace Valley's ramp-up. LPSA, Intecra, and everything else saw revenue fall by a combined $22 million. The EBITDA story in the right-hand column is similar other than the call-out. In North America, some of what we can control, specifically siding growth, structural solutions growth, and OSB volume, netted a $37 million positive EBITDA contribution. It was not enough, however, to offset falling OSB prices and inflationary pressures, with the result that LB delivered $100 million in EBITDA in the quarter, lower than the prior year quarter by $178 million. Slide 13 provides the same analysis for the full year. For revenue, $456 million of growth more than offset the impact of falling OSB prices. For EBITDA, the growth of side A and LPSA's EBITDA drop, and everything else besides. Page 14 of the presentation shows cash flows for quarter and full year. We began the quarter with $482 million in cash. Operating cash flow of $41 million is the net result of $100 million of EBITDA plus $29 million in working capital decreases, less $78 million in taxes. The fourth quarter saw heavy capex spending of $133 million, mostly on the Segola siding conversion and Green Bay expert finish expansion. And after $16 million of dividends and a few other things, our cash balance fell by $99 million, ending the year at $383 million. Finally, if you look at the P&L account on page 17 of the presentation, you will see an $82 million non-operating charge in the quarter. the data and adjusted earnings to share. And with that, let me move on to the current market dynamics and how LP's strategy helps us respond before transitioning to guidance. As Brad described, and as you all know, there is significant uncertainty in the housing market. LP is investing in growth for smart size, expert finish, LPE will continue to manage its mills and discipline to meet customer demand. In signing, we are working through the inventory digestion that has accompanied the transition from a managed order file, and all indications are that inventory is now flowing naturally. In OSB, just as we took market downtime at the end of the quarter, we are constantly assessing customer demand, mill inventories, and OSB prices to balance supply and demand. which I hope and expect is temporary, with the agility to respond up or down as the market evolves. Our capital allocation strategy remains unchanged, though the timing is somewhat cash flow dependent. As a reminder, that strategy is to first earn the cash, then to invest in growth, and only then to return the remainder to stockholders via dividends and shared purchases. In the fourth quarter, as OSP prices and cash flow million. We have a remaining board authorization for $200 million of repurchases, and consistent with our belief that our shares are undervalued, cash flow allows, we'll be back in the market. In terms of liquidity, we retain a $550 million undrawn revolver. We have $350 million of long-term While 2023 is shaping up to be a year of negative cash flow, at least at the current housing consensus and OSB prices, we will manage our capex and balance sheets with appropriate discipline. For the first quarter, as Brad mentioned, we expect inventory digestion following our transition from a managed order final signing, with the result that revenue for signing solutions is expected to be flat to 5% lower than the first quarter of 2022, with price increases roughly offsetting lower volumes. In OSB, assuming prices remain constant at the level published last Friday by RandomLens, OSB revenue would be down by about 20% sequentially from fourth quarter levels. With OSB prices at these levels, please bear in mind that LP's algorithmic guidance for OSB revenue reflects currently planned capacity reductions taken to match production to customer demand. And all of these factors would result in a first quarter EBITDA of at least $35 million. Now, given the current uncertainty in the market with regard to full-year housing and repair and remodel demand, it's difficult to offer accurate full-year guidance for deciding revenue growth. However, we are confident that the siding segment will outperform the underlying market by a substantial margin. But since the underlying market itself is difficult to predict, we're going to hold off on offering meaningful guidance until our next earnings call, by which point we expect to have greater clarity. Similarly, for full-year CapEx guidance, We will make the investments necessary to grow and outperform the underlying market. As I said, we have significant flexibility in our CapEx plans and more than enough liquidity to adjust up or down as we gain more data about customer demand. And now, I'd like to hand back to Brad for some closing comments.

Thanks, Alan. As Alan detailed, we are working through the effects of catching up to the signing order file, and we are managing OSB capacity to match current market demand. I don't want to minimize the near-term challenges these factors present as we enter a period of softer housing starts. The market is still quite uncertain, and housing starts and R&R activity have never been easy to predict. However, there are a few things we are very confident about. First, there is a structural undersupply of homes in the U.S. This undersupply must eventually be resolved. Second, the age of the average house in the U.S. suggests a very long runway for growth in R&R. And third, we know that we have the best products and team in the industry. LP's siding segment has a long history of outperforming the underlying market and gaining share, and that will continue. And we will manage our OSB capacity, our CapEx plans, and our balance sheet with discipline so that we can continue to outperform the market and deliver results for our shareholders. 2022 was an incredible year. 2023 has started with market conditions different than what we have experienced the past two and a half years. However, we are not resting on our laurels. As we bring our first 50 years to a close, I have never been more confident that LP will build on our record of growth, innovation, and sustainability to deliver shareholder value in our next 50 years.

And with that, we will be happy to take your questions.

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. One moment while we compile the Q&A roster. Our first question today will be coming from George Saffos of Bank of America. Your line is open.

Hi, everyone. Good morning. Thanks for taking my questions, and thanks for the details. Brad Allen, I know it's difficult, but is there a way to assess for us what your production stance is right now in siting relative to takeaway? Are you still, I'm assuming, producing at a lower rate relative to demand just to clear inventories, or have you largely gone through that and you're producing, as far as you can tell, pretty much in line with takeaway? And in terms of first quarter, Thank you for the guidance points recognizing it's very difficult given all the moving parts and the volatility related to pricing with OSB. Is there a way for you to give us a bit more color in terms of how you see OSB and Siding stacking up in that more than $35 million guidance? Thank you.

George, let me start with the production question around Siding. Just keep in mind that Holton has been, you know, Holton Line 1 ramped up all through last year and is, you know, right at or close to production, had the capability to produce at full production. We have governed that volume back a little bit in Holton as we went into Q4 and beginning of Q1, well, more so actually in Q1. And so we are... to answer the question for running the siding plants at full production other than Holton where we have decided to take some capacity out there just to try to match the order pull through a little bit better.

The second question, George, was could we give color around the $35 million? Yes, I think we owe you that. Bear in mind, please, that the number I'm about to quote for OSB is based, is predicated algorithmically on OSB prices of last Friday holding flat. So the 35 roughly breaks down as follows, and it is rough, about $50 million from signing, about negative 10 from OSB, and then everything else, including a bit of conservatism perhaps, LTSA offsetting corporate of minus 5. So plus 50 for signing, minus 10 for OSB, minus 5 for everything else.

Thanks, Alan. And the last one, I'll turn it over. You mentioned you have the flexibility to push ahead or delay as needed in terms of your capacity ramp in siding. What will be the key mile markers for you relative to how quickly you go ahead or decide to pull back? One of your peer companies talked about some weakness they were seeing in repair and model activity, you know, is that going to be, you know, whether it's dollars of revenue or commentary out of the big box retailers, what will you be looking to and what should we be looking at as analysts engaging that? Thank you. I'll turn it over.

So, George, on the Let me just say for press production, we're full steam ahead on bringing Segola up to full gear by the end of the year. We see no reason to back off at all on the path forward for Segola startup, which added a significant amount of press capacity. Similarly in Bass, New York, we're full steam ahead on that production for expert finish. And then as we get to the next tier of volume from a press capacity standpoint, that would be Holton Line 2, and then various options on expert finish. We'll just be looking at the market as we go through the year, looking at ultimately what we feel like growth will be for this year, and apply that well, and also look over what we expect for housing the next couple years, and those will inform You know, we're still actively involved in engineering and design for expert finish capacity beyond Bath, and as we've talked about on the call previously, you know, we have begun procurement for different capital components for Holton Line 2, but we haven't, you know, we're not, we haven't delayed anything. governor capacity spend around the reality of what we're seeing in the order file.

Thank you. Welcome.

Thank you. One moment while we prepare for the next question. And our next question will be coming from Keaton Matura of BMO.

Your line is open. Thank you. Good morning, Brad, Alan, Aaron. First question, you know, coming back to siding, Alan, in your prepared remarks, you talked about meaningfully outperforming the broad market. Is there a way to think about, you know, either in terms of sensitivity or if there is a better way to think about, you know, sort of the degree of outperformance or sort of, you know, volume growth at different housing stocks level? I'm just trying to understand What is the best way to think about volume in the siding business, recognizing that there is still a lot of uncertainty?

Yeah, it's a great question, and it's a very hard question to answer, particularly given the experience over the last couple of years we've been on a managed order file. But very highly that we outperform on a revenue basis the underlying market by let's say eight to ten percentage points of growth. And so a simple way of articulating that and I say the underlying market we've only really got one clear marker of the market and that's single-family housing. And so if single-family housing were, let's say, to be down 10%, then I would argue that we should be able to grow our revenue above that. And that model, you might expect flat revenue year-over-year. Of course, it depends on what happens in R&R and to what extent that's impacted by the single-family housing startups. And I would argue, and I'd like to think, that at 10% housing decline, we might actually see some strength in R&R. in repair and remodel, and maybe that would be better. So it's flexible. The two R&R and housing don't necessarily move in tandem, but we use it as a simple working model, 8 to 10 points better than the market, however, whatever that market marker ends up being. And we believe we have a long history of being able to do that through market share gains, partly driven by our innovations.

Got it. Now that's helpful perspective. And Alan, perhaps I missed it. Did you talk about sort of 2023 CapEx guidance?

No, I didn't quite specifically. It's very hard to give guidance without being able to discuss it in a sort of open forum like this. So, you know, the last, I think, Last couple of quarters I've guided to, I said that 2023 will be a figure closer to $500 million. I'm obviously going to lower that guidance a bit, but let me tell you what our working model is as of today, and I'm happy to do that because it indicates the range. I would say our working model for CapEx, and this is not a projection, this is basically describing what we see and the level of flexibility we think would be wise. Our working model is in a range of $350 to $450 million of CapEx in 2023. It's hard to say, as Brad said, where that will land because we will use the flexibility that we have. Q1 CapEx will be pretty heavy. I'm willing to quote a number of something like $120 to $125 million of Q1 CapEx. That will be fairly heavy, and we have a number of commitments for long-term items that we intend So there's no, absolutely no slowdown there.

Understood. No, that's very helpful. I'll jump back in the queue.

Good luck. Thank you. One moment while we prepare for the next question. Our next question is coming from Susan of Goldman Sachs.

Your line is open.

Thank you. Good morning, everyone. My first question is talking a bit about the pricing environment for siting. First of all, I guess, can you give us any update on the success that you've seen with that increase that you announced in, I believe it was late last year, effective in early January? And then in this environment with volumes moving lower, how do you think about price versus volume? What's the ability to continue to hold the pricing that you've realized? And Would you be willing to think about the volume versus price a little differently given where we are from a macro and a housing perspective?

Susan, for the first question, we were able to implement our price increase January 1. I would say just as consistent with the way we've done it in the past, there could be a little lingering effect through Q1 of realization, but predominantly all of it minimal concerns there. And then for the price volume trade-off, generally, siting doesn't work that way. I mean, we're pricing it in the distribution. I don't think most siting jobs are a cost play to start with. And so, you know, we feel like we're pricing the product equivalent to the value that it warrants in the market. And our distribution partners have done a good job of getting that price through the channel. I do want to say there is an exception to that, and that is around large national builder deals, which typically do require some back-end rebates. And obviously, we are part of that game, and we are active in continuing to process those kind of opportunities now. And that can result in a rebate pattern that chips away at that list price increase for specific customers and for large volume type of deals. But I would just say for the year, we should expect to see by the time we get to the second quarter that January price increase has worked its way into our P&L.

Okay. That's very helpful. And then turning to the OSB segment, You talked a bit about some production curtailments there. Can you give us more color on some of those locations and how you're thinking about holding production as we think about where pricing may move for OSB through the year?

Okay, thank you. Yeah, Susan, I'm not going to go through mill by mill and talk about what we did. I would say, I would describe it this way, and Q4 was pretty general across our entire system. with downtime, that is somewhat easier to do during the holiday season. And so, it was widespread distribution of downtime late in Q4 to try to match demand. And then as we come into the Q1 and everybody comes back from the holidays, it is more target around meal cost and including transportation. And so in Q1, the downtime will be a little bit more concentrated, but we'll be taking as needed in order to match demand.

Okay. Thank you, and good luck.

Thank you, Susan.

Thank you. One moment while we prepare for the next question. Our next question is coming to Mike Rolex. of choice. Your line is open.

Thank you. Good morning, Brad, Alan, and Erin. Thank you for taking my questions. Just on siting, I'm realizing that as we can give an excess inventory, and as you've mentioned, you've transitioned away from a managed order file, but I'm just trying to get a sense that what gives you the confidence that siting will continue to grow as the economy softens, home equity value declines, unemployment increases? And the premise of the question is this, you know, It grew the signing business during an economic and housing up cycle, and it really has yet to be stress tested during a down cycle. In addition, R&R likely grew more than normal the last few years, given work from home and people obviously during COVID building out decks, building sheds, other things during their lunch break. So there's a risk that R&R could actually slow more given the backdrop as consumers choose to focus, let's say, on more small ticket items. So I'm just trying to get a sense of how you're framing fighting in the current environment.

Yes, so Michael, so the risk that you describe around just some kind of macro R&R spin is real. And then, you know, as we've talked about in our prepared remarks, the outlook for new construction is uncertain, to say the least right now, kind of all over the board, depending on the analysts that you look at. And so, yeah, the underlying market certainly will impact the results for citing volume growth as we go through this year. No question about it. But where I disagree with you is the point about the business not being stress tested. You know, during other periods of downtime of housing slowing or housing going down, we've consistently outpaced the market on volume growth and certainly on revenue growth. And the reason we've been able to do that is, first of all, our portfolio is pretty highly diversified, given the exposure to non-housing and even non-repair and remodel segments like shed and positions in retail. And then also, over the past five to seven years, we've done a really good job around product innovation that has opened up new opportunities for us, and that's why we show that slide. the revenue that is new products. So the fact that we have an expert finish kind of just coming into any kind of significant market position now, R&R could be down, but because of our market share being pretty low in R&R and the fact that we're essentially in the last phases of introducing our expert finish to the market, We see that, we see a lot of upside to that from a market share standpoint. Again, we can't overcome, you know, if R&R is down, if siding R&R is down 10% this year, we're going to feel that, but we are confident that there's still, we still have the ability, given how well our product performs, given the innovation that we've been able to bring to market in the last five years or so, and given, you know, Depending on the geography and the segment, relative, you know, lower penetration rates in certain parts of the country in certain segments, you know, we're confident that we're going to fill up the Sagola facility. From a press standpoint, we're confident we're going to have to continue to build expert finish capacity, and we're confident we're going to grow, but that growth can be gauged somewhat by the underlying R&R and single-family start market. But we're all in on gaining market share. And I'll just make one final remark. Historically, and this is a general statement, but historically, we've actually picked up more market share in a down market than in an up market and then been able to hold that market share. So I'm not saying I'm excited about a down market at all, but I do believe it brings opportunity for customers to shop around a little bit. And given how well our product performs once we get a trial, that can bode pretty well for us over the long term.

Got it, Brett. Thank you for the comment. Just one quick follow-up on that. You mentioned lower penetration rates in certain parts of the country and segments. Can you provide a little bit more color about, you know, what parts of the country and what segments have lower penetration rates that you're trying to increase your share in?

Yeah, so let me just, in general, so geographically in the center of the country, north to south, so Texas up to Minnesota, we've got, you know, good market share there. But once you go east of Texas and the south up the Atlantic seaboard, a lot of opportunities and repair and remodel that's the reason we've converted hulston in maine and it's reason we're building expert finish capacity in new york and expanding the capacity that we have in north carolina for expert finish so there's an opportunity there but then i would say that in pockets of the pacific northwest uh there's some good markets for us there historically but there's still opportunities for growth particularly with expert finish got it and then just one last question before turning it over um

Obviously, you have a large shareholder, which slightly increased its stake last quarter to slightly under 10%. Obviously, you've been doing a good job, you know, in terms of reorienting the portfolio to higher growth, higher value-add product. Do you see more shareholder value being created through the involvement of the shareholder?

Well... Maybe reputationally it helps a little bit, but I don't think there's any direct, we haven't noticed any direct, you know, improved shareholder value as a result of that. But, I mean, we're proud to have it, I'll tell you that. But, you know, I think any, yeah, so not directly, but I would assume that the credibility that brings to our strategy cannot hurt.

Gotcha. Good luck in 2023. Thank you.

Thanks, Mike.

Thank you. One moment while we prepare for our next question. Our next question is coming from Mark Weindrup of Seaport. Your line is open.

Thanks, guys.

So for first quarter, if I'm doing my math right, you seem to be pointing to order of magnitude 16% EBITDA margins for the siding business. So I was hoping to get a little bit of color on some of the variables that play, because obviously below the types of ranges you've been achieving beforehand. In particular, how much in the way of like startup or conversion costs related to the GOLA might be included in there? how much of this is kind of just fixed absorption, higher costs, and what other variables might we want to contemplate besides, you know, what other variables might we want to contemplate?

Yeah, good question, Mark.

Let me articulate this in the context of a year-over-year for Q1. Year-over-year, we basically said that we think asset. And that would fundamentally leave zero EBITDA impact. What you're left with, high level, is, you know, last year's EBITDA of 83, dropping to the figure I quoted of 50, so it's a $32 million drop. About 20 and change of that is raw material costs, the carryover of raw material inflation. Now, as we all know, normally that would be offset with pricing, and technically it is, except for the fact that in Q1 volumes are down. So to unravel it differently, yes, with volumes being down, one of the problems of having a profitable product is that when your volumes are down, you make less money. And as I've said more than once on calls like this, we enjoy a high variable margin on our selling products. So yes, when volumes are down year over year, there's a heavy EBITDA impact of 45 to 50% of the revenue drop caused by volume. So the way I look at it is pricing and volume, EBITDA impacts basically net off. We're left with 20 and change of raw material carrying on with the conversion of Segola and other projects, and those do put a, let's call it a strain on EBITDA. It's the right strain, in my opinion. So $10 million of investments and stuff, and about 20 and change of raw material with pricing and volume impacts offsetting in EBITDA.

Great, thank you. And I realize this is tough and lots of moving pieces. But did you have any assessment as to how much of the volume weakness is either, you know, you sold a little bit ahead of time or destocked? It's kind of really maybe the same thing. And so really trying to get a sense of, let's just say conditions were to remain similar to what they are. would you, what type of volume improvement might you expect on a go-forward basis? I guess what I'm really sort of just trying to get a sense of is kind of ranges for volume expectations, recognizing you don't want to give a full year estimate given all these uncertainties, but if there's some like sort of sensitivity analysis you can provide to us under the different macro situations of where you might think volume and siting might come out, that'd be super helpful.

So Mark, let me start there and then Alan can add maybe some color to this.

So in the context of gauging where we are today, and I'm talking about Q1, relative to the market condition, we guided 30% growth in q4 and got 38 we had a price increase January 1 we were on managed order file which means customers are ordering you know six to eight weeks or longer out in our managed order file situation and so I do believe that there was some order pull forward in the q4 that that drove an outstanding Q4 growth relative to what we were guiding to when we talked to you guys late October, first of November. And so I think that you've got to kind of look at the two quarters combined to understand kind of what's happened there. And then as we look in Q2, there's a bit of that gauging, you know, where are we really on pull-throughs, which have been kind of hard to understand because there was the inventory bill at the end of the quarter. But I think we are right now, it feels like right now in our order file, we are beginning to see, you know, where we're servicing true demand. And I think, you know, as Alan, I think, mentioned in his repair remarks, when we get to I know this doesn't help you in the meantime, but when we get to the next call, and we'll have a really good feel for that, it's just that the uncertainty around what was being pulled out of distribution from, say, January 1 until a week or so ago has been difficult for us to gauge because there was an inventory build as a result of what I've just spoken to.

So I don't know, Alan, if you can take that up. I don't think I should have, yeah.

Great. That's great. I get squeezed in real quickly because you did note another big inflation year over year impact. It seems like some folks are seeing lower wood costs in other different businesses. I mean, there's been some optimism, maybe resin comes down a little bit. When might we start? Are we not seeing that yet in siding? And when might that start showing up?

So on the resin side and basically all materials other than wood, those major materials frames are contracted and there's a contract price, which is based on some derivative of oil, but it is a lag. But if we continue to see oil prices fall, and even some of that have fallen, it's already happened, we haven't realized yet, certainly could be helpful for a margin this year. We certainly are not seeing any more increases in that area. And then on the wood side, same thing, a big driver for us, and we're buying pulpwood, so a big driver for us is diesel as far as just getting the wood into the facilities. But I will say structurally, we have experienced some price increases having to go further to procure wood, given some of the restrictions on harvesting in Canada. You may not be surprised. From an OSB perspective, that's where we're looking at some downtime. I think costs remoderate, Mark, as we go through the year, certainly on the resin side. We're having to just really manage hard on the wood side to bring those costs down. Relief with basal pricing would be certainly helpful there.

Much appreciated. Thanks, Brad.

Thank you. One moment while we prepare for the next question. Our next question is coming from Kurt Hinger. Your line is open.

Great. Thank you, and good morning, everyone. Just starting off on the OSB segment, any thoughts on the relative weakness and structural solutions versus commodity volumes in Q4? And do you think that reflects maybe timing differences in terms of prices declining or kind of a larger trend we should be aware of in terms of those products perhaps being less in demand? in a weaker commodity pricing environment.

Yes, we certainly saw from an overall volume standpoint those go down. I just think primarily the market got so competitive in Q4 as folks were kind of rationalizing inventory and production. We certainly saw a fall off there. I am totally optimistic on the long term about our ability to grow structural solutions. But I do think in both directions, in a strong up market, it's easier to push structural solutions into the market. In a hard down market, given how pricing can lag around certain flooring skews, those skews can really become disadvantaged against more commodity products. And so I think we have to be careful about gauging where we are, both on the upside and downside of structural solutions, because that kind of value, the value proposition can get out of kilter from a pricing standpoint when the market's moving. So it's something that we're keeping an eye on, but I do believe the strategy's sound. We did grow it, you know, obviously from an annual standpoint, and just like I

grow that got it okay that makes sense and then just for my second you know there was a question earlier around pricing and you alluded to kind of volume discounts and rebate program with builders but you know one of your competitors I guess had some interesting comments in regards to kind of the pricing dynamic there and perhaps just getting more aggressive I mean do you have any thoughts on around that dynamic as it relates to SmartSide and maybe you could also just touch on the success that you've seen with the builder series introduction.

We're excited about the progress we made last year with the builder series. We're excited about some wins that we've had recently and some ongoing negotiations that are happening now. But it is competitive. I mean, there's no question about it. That's the reason we engineered a product specifically for that channel or that end use. And so as the market slows, you know, there's certainly – that's a competitive landscape right there where, you know, big builders have a negotiating leverage given the volume that they'll consume and the market share that they've gained, you know, during COVID. So – but unlike – In our history, we now have a product that is very competitive there, that is very aesthetically pleasing. Once it is trialed, it tends to be accepted and there's a stickiness to it. We're going to continue to grow that, but you point out correctly that that is a competitive landscape. Unlike probably any other we operate in where price can be a dominant driver, sometimes even not necessarily what we view as the entire value proposition. But I feel good about the way we're positioned to win there, but we won't win them all. Right.

Okay. Well, appreciate the details. I'll turn it over. Thank you. Thank you.

Thank you. One moment while we prepare for the next question.

Our next question will come from Paul Quinn of RBC.

Your line is open.

Yeah, thanks very much. Morning, guys. Just one of your siding competitors signed contracts with 24 of the 25 top U.S. builders to supply hard siding. Just wondering, you know, how you expect that to affect your builder series. Also, they've also reintroduced their low-priced stem plank product. Just wondering if That's going to have a material headwind on the growth of Builder Series.

As I just mentioned, it's a very competitive field around big builder lap siding. But I really feel like the product that we introduced, Paul, that Builder Series is a superior product to everything that's out there for that application. We were able to price it competitively. I mean, to win, you know, our share of the opportunities. But, you know, it's a negotiated deal. It's a lot of volume involved. And, you know, we'll kind of have to see how it plays out this year. But the market share we gained last year is sticky. And then so, I mean, I think I'm confident that we can battle head-to-head with anybody around that type of business now, given that we have this product. And I'm also confident that once a builder tries the product, they're going to really like it because it's superior to their alternative hard sidings. But circle back around. It's a competitive landscape, and sometimes you can win off a price, and sometimes the price gets to a point where we don't want the business anymore, and then we have to walk away or we lose it because we bid too high for it.

Got it. Thanks for that. And then just over on Expert Finish, if you could give us an idea what that margin boost is on that product. I mean, it's great to see the growth. Just wondering how that affects the overall margin profile.

Yes, significant price boost associated with expert finish. The margin boost today isn't that material. But as we get these newer lines up in Bath and the expansion that we've contemplated out west, the line we just added to Green Bay, the margin boost from expert finish is ahead of us. But currently with our Reported margin, it's out of inventory. It's pretty much a wash right now.

Okay, great. Best of luck, guys. Thanks. Thank you.

Thank you. One moment while we prepare for our next question. Our next question is coming from Sean Stewart of TD Securities. Your line is open.

Thank you. Good morning. And thanks for all the thoughtful answers to the questions. I just have one. And it's with respect to the share buyback program. And Alan, I think your wording was you could remain, you could finish off that program subject to cash flow supporting it and with potentially a tempered CapEx outlook. Is there an implication there that you forego the share buyback activity for the foreseeable future and presuming your thoughts on intrinsic value haven't really changed um i guess your intent to stay active on that program um in light of share price weakness we've seen of late um i want to reiterate something it's a great question thank you um we don't buy up to opportunistically

to buy back shares. But we put investment in the business first, as I repeat my mantra, that we put investment in the business first and we don't buy opportunistically. So we do maintain that discipline that we have to have the cash already generated to engage in buybacks. I'm sure that point will come, but I just can't predict when.

Understood. The rest of my questions have been answered. Thanks very much.

Thank you.

This concludes today's Q&A session. I would like to turn the call back over to Aaron Howell for closing remarks. Please go ahead.

Okay. Thank you, operator, and thank you, everyone, for joining us. We are at the hour, and there are no further questions, so we will bring the fourth quarter earnings call for Healthy Zoning Solutions to a close. Thank you very much for joining us, and we'll look forward to speaking with you again soon.

This concludes today's conference call. Thank you all for joining and please enjoy the rest of your day.