Louisiana-Pacific Corporation

Good day and thank you for standing by. Welcome to the first quarter 2023 Louisiana Pacific Corporation's earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Aaron Howald.

Thank you, operator.

Good morning, everyone, and thank you for joining us to discuss LP's results for the first quarter of 2023 and our outlook for the second quarter. As the operator said, 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 Souther, 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 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 those statements, I incorporate them herein by reference. The appendix of the presentation also contains reconciliations that are further supplemented by this morning's AK file. And with that, I'll turn the call over to Brad.

Thanks, Aaron, and thank you all for joining us to discuss LP's results for the first quarter of 2023. Q1 demonstrated the value of our strategy in a challenging operating environment and an uncertain housing market. Compared to the first quarter of last year, single-family housing starts fell by almost 30%, and commodity OSB prices fell by more than 75%. Despite this decline, we maintained flat siding sales and generated positive EBITDA in our OSB segment, outperforming the underlying market. We are currently seeing encouraging signs of strength in housing, including improving commodity prices, and I am confident that LP's businesses will continue to outperform the market. Page 5 of the presentation shows highlights for the quarter. be prices far below last year's levels, with the obvious impact on sales, EBITDA, and cash flow. Inflation appears to be easing somewhat, but calls for resins, logs, and freight remain elevated, pressuring margins. LP's businesses responded by outperforming the market, and we continue to invest in our growth. $584 million in sales was about half of the amount from Q1 of last year, with a vast majority of EBITDA of $66 million and earnings per share of $0.34 were much lower than last year, again due to the difficult comp from last year's very high OSB prices. However, our results were above our previous guidance due to disciplined and efficient operations in OSB and flat siding revenue. LP invested $114 million in capbacks in Q1, mostly for the conversion of Seagull with the siding. Alan will discuss cash flow in more detail in a moment, but LP ended the quarter with $126 million in cash and just under $700 million in liquidity. Safety and OEE were key highlights for the quarter. Safety and efficiency can never be taken for granted, especially in the difficult operating climate of a soft market. This makes our safety and OEE performance in the quarter truly remarkable. Both businesses saw a two percentage point increase in OEE, and both businesses had a single recordable injury in the quarter. Our goal, of course, is zero injuries, and two injuries in the quarter is too, too many. But while we work to continuously improve mill safety, it is nice to pause and recognize exceptional performance. In the siding business, our Dawson Creek and Tomahawk mills each achieved one million injury-free work hours. And in OSB, the first quarter was the best quarterly safety We obviously preferred the cash flow to higher OSB prices generated in the first quarter of last year, but it is gratifying to see the value generated by our OSB strategy even in a weaker market. Structural Solutions averaged 46% of OSB volume in Q1, but exited the quarter well above 50% where it has remained. Structural Solutions contributes incremental margin regardless of commodity prices. In terms of capacity, rather than oversupply a soft market, we took market downtime, managing our capacity flexibly. And despite the market-related downtime, as previously mentioned, we improved operational efficiency performance in OSB. As a result of this relentless focus on execution, the OSB segment stayed EBITDA positive despite the lowest prices we have seen since before COVID. I am very proud of the OSB team for the resolve and teamwork demonstrated by their Q1 performance. On slide six, you can see an update on siding product mix and growth relative to the market. On a trailing 12-month basis, single-family starts in the U.S. were down 18%, but siding volume grew by 7%, and prices were higher by 13%, driven by list price increases and improving mix. The pie charts on the right reinforce the improvements in mix within the quarter. While SmartSide volume fell by 9%, expert finished volume grew by 26%. I should point out, just for avoidance of doubt, that while these two charts are on different timeframes, with one being 12 months and the other being Q1, the results are broadly the same over a variety of timescales. Any way you look at it, the story is basically the same. SmartSide is growing faster than the underlying market, and within that, a mix of expert finish and other higher value add products is growing faster still. To illustrate this, slide seven shows normalized growth of volume and revenue for SmartSide strand siding relative to single family housing starts over a longer period of time. As you can see, LP SmartSide is consistently growing well above the underlying housing market, so we're taking share, expanding addressable geographies and market categories, introducing new products, and increasing our focus on the less volatile R&R market segment. The reason for this is clear. LP SmartSide is the best siding product available. It looks great, has the durability to support a 50-year warranty, is easy to install, is carbon negative, and is available primed or pre-finished at a price point that delivers value to installers and homeowners. As a result, we believe we have a long runway for growth ahead of us in siding. To meet this demand, LP will continue to invest in capacity. Slide 8 of the presentation provides an update for our capacity plan for siting. I am happy to announce that LP's former OSB mill in Sagola, Michigan pressed its first board of SmartSite in March. Sagola's conversion adds 330 million square feet of siting capacity, bringing total siting capacity to about 2.3 billion square feet and reducing total OSB capacity to about 4 billion square feet. Speaking of investing in siting capacity, you may have seen our recent press release announcing that LP reached a definitive agreement to acquire the Wawa OSB mill from Forex. I am happy to announce that the transaction was approved last week and closed yesterday. This investment contributes to our siting strategy by adding to our conversion options and increasing our runway for future growth. Wawa is ideally located with access to labor, logistics, and ample sustainable aspen fiber. And we are thrilled to engage with our new employees, the local community, and First Nations there as we begin planning for the project to convert Wawa to manufacturer smart sign. When converted, Wawa will become LP's largest single line siding mill, adding roughly 400 million square feet of capacity and bringing total siding capacity to about 2.7 billion square feet. We will provide more details as the project evolves and with a purchase price of $80 million, our estimates of conversion costs and the lower execution risk associated with the existing facility, we believe this project will generate a higher return than the previously announced expansion of our Holton main facility, which is why Wawa will jump the line ahead of Holton Line 2. We still plan to expand Holton after the Wawa conversion as customer demand continues to grow. Converting Wawa and expanding Holton would bring total siting press capacity to 3 billion square feet. And the remaining conversion and expansion options we have already discussed could eventually bring total siting capacity to about 5 billion square feet, more than double our current size. And this is just press capacity. We continue to invest in growth of expert finish or pre-finish siting with our newest facility in Bath, New York coming online in Q3 of this year. We are investing in our strategy for siding and structural solutions, and we are confident that both have a long runway for future growth. What we are seeing encouraging signs as housing starts so far this year have been above full-year consensus. The housing market is not out of the woods quite yet. Single-family starts were down nearly 30% in Q1 with inflation and mortgage rates impacting affordability, and Q2 is looking roughly the same. However, the encouraging signs in housing are beginning to be reflected in our order files. While channel inventories and siting remain elevated, as is typical in the months following the end of a managed order file, we are past the Q1 peak in inventory. The siting order file has seen a notable uptick in recent weeks. In OSB, inventories are leaner as demand and prices have recently improved. The macroeconomic environment remains challenging and near-term uncertainties remain in the housing and RR markets we serve. But we remain very confident in our strategy, our execution, our high-performance carbon-negative products, and most importantly, all of LP's people will help us continue to outperform the underlying housing market, gain share, and expand the markets we serve. And with that, I'll turn the call over to Alan to discuss LP's results in more detail.

Thanks, Brad. As outlined already, the U.S. housing and the broader macroeconomic environment are significantly more challenging than at this time last year. But I'm happy to report that LP responded by focusing on the factors within our control. We exceeded all components of our first quarter guidance, while the market numbers dominating the quarter are the 29% drop in single-family housing starts and a nearly 80% drop in North Central randomized prices for commodity OSB. I'll refer to slides 9 and 10 in the presentation to describe just how LP siding and OSB segments navigated the quarter before moving on to discuss LP's liquidity and capital allocation, including a little more on Wawa. Slide 9 shows the first quarter year-over-year revenue and EBITDA comparison for siding. The volume was down 9%, a spread of 20 points over the drop in single-family starts. And this is due to the combined effects of ongoing share gains, expanded addressable markets, and the fact that the majority, about 60%, of siding products served the repair and remodel market and shed applications. And while overall volumes may have declined, expert finish volumes did not. Rather, they increased by 26% year-over-year, which also helped the mixed components of price. The $27 million reduction in volume, at roughly a 50% variable margin, cost the segment $14 million a piece of data. Siding's average selling prices were 10% higher than the first quarter of last year. Roughly six points of the 10-point increase are from list price increases, namely the combined effect of this January's increase and last year's mid-year increase, with the rest coming from favorable mix and lower rebates. So as expected, higher prices helped offset the volume drop, and as it turned out, they completely offset it. This was also a quarter of heavy investment in future capacity. Mill conversion costs were up $6 million year-over-year, but I need to dissect that statement. This year, we actually incurred $10 million converting Segola to siding, but at the same time last year, we incurred $10 million converting Houghton to siding. So, one $10 million conversion cost was basically replaced with another. All that shows up on the waterfall, therefore, is $6 million of unabsorbed operating costs at Houghton, while we proceed with what is turning out to be a slow ramp-up given current market conditions. But this means that the business is actually carrying $60 million of embedded costs, that is $10 million of Segola conversion plus $6 million of uncovered costs at Horton, all in the interest of future growth. And this cost was about 5 percentage points of EBITDA margin in the first quarter. A second margin headwind came from raw material inflation. Compared to the first quarter of last year, inflation costs died in $14 million of EBITDA. Now, inflation ramped up quickly during the second quarter of last year, so while prices remain elevated, we do expect year-over-year comparisons to begin to ease going forward. So again, in a quarter of high inflation, much lower housing stocks, lower volumes, and the impact of converting and ramping up Segola, the siding segment delivered $67 million in EBITDA for a margin of 20%. And to demonstrate the long-term potential of the segment, even with all else equal, Adding back either the $16 million of mill rent up and conversion costs or the $17 million of inflationary impact, we build an EBITDA margin above 25%. The OSB waterfall on slide 10 is inevitably dominated by price changes. This year, the bar is red, given that prices have returned to earth. And while the largest number on the bar, by far, is the $470 million drop in revenue in EBITDA due to these low prices, it's also why I'll spend the least time Rather than price, the story of the quarter is how well the team responded to this much softer environment by managing with efficiency and discipline and delivering positive EBITDA on this very challenging environment. The majority of LP's OSB is consumed in new residential construction and disproportionately by single-family home construction. With single-family staff down 29% in the quarter, LP's OSB volume was down proportionately. Production was lower year-over-year by nearly 300 million square feet, which is about 30% of the main plate capacity, including $100 million down due to the conversion of Segola from OSB to Siding. The remaining volume reduction of roughly 200 million square feet resulted from LP's market curtailment, which, to minimize the cost and freight impact on the OSB network, we concentrated in our highest cost and most remote mills. While commodity volume was essentially flat, structural solutions volume was down 154 million square feet. Now, this may be a reflection of increased price sensitivity among builders looking for ways to keep homes affordable for their customers. However, our price realization was very strong, in large part because structural solutions prices held up significantly better than commodity prices. So, while commodity prices were down 75% year over year, structural solutions prices fell by only 58%. And so in this market, the OSB segment managed both capacity and cost with both discipline and focus to generate this positive $5 million of EBITDA. Which brings me to cash flow and capital allocation. Referring now to slide 11, LP began the quarter with $383 million in cash and generated $66 million of EBITDA. The first quarter of every year is typically one of working capital bills. And the $144 million of outflow due to working capital breaks down roughly as follows. $45 million of log inventory was gathered in preparation for spring breakup in Northern Mills, together with $25 million of finished goods billed across the network, for a total of $80 million of inventory billed. We also paid about $60 million in year-end accruals, including $30 million of customer rebates. All of this is typical first quarter activity. After paying $33 million in taxes, we had an operating cash outflow of $119 million. The first quarter's capital spend of $114 million will most likely be our heaviest in 2023 due to the inclusion of the Sagola conversion and the Bath New York refinishing facility. The resulting drop in cash of $257 million still left LP with $126 million of cash at quarter end. The second quarter is shaping up to be very different for capital allocation, so perhaps a preview is in order. As is typically the case, in the second quarter, working capital should be a source of cash, largely due to inventory consumption. And CapEx should also be lower than the first quarter, by about $20 million. And as Brad mentioned, LP recently announced the acquisition of the Wawa OSB facility from Frorex for $80 million. This has been financed entirely using existing funds. So we're very excited about this acquisition, which significantly enhances our sighting growth strategy, and we're very happy to have the Wildware employees join our team as we prepare it to be our next sighting north. We also made the difficult decision to close Intecra. We're disappointed that the deteriorating housing environment in Northern California necessitated this action, and we regret the impact that the closure will have on the Intecra team. But ultimately, we determined that L3's capital is better invested in our coal businesses. As a result, in the second quarter, we expect to report a non-cash write-down of remaining Integra assets of roughly $25 million as we wind down the business over the course of the quarter. Which brings me to guidance in slide 12. The housing market remains uncertain, despite green shoots as the spring building season ramps up. Publicly traded home builders have referenced encouraging strength in their order patterns. However, with total staff down, This can only mean that smaller builders are seeing reduced demand. Mortgage applications remain quite sensitive to interest rates, and stubbornly high prices present a continued challenge to affordability. As a result, we still lack sufficient clarity to offer full-year guidance. Our best read of our current order files suggests that Siding's second quarter revenue will be similar to that of the first quarter. And this would mean volumes being down year over year, but substantially outperforming the anticipated drop and single-family housing staff. Year-over-year price increases will, again, partially offset the volume drop, such that second quarter revenue for siding is expected to be no worse than 5% lower year-over-year. For OSB, prices have improved recently, such that if we assume prices hold flat at current levels, the OSB business would expect to see revenues of about 20% sequentially higher than the first quarter. This assumes increased operating rates based on current demand. Under these assumptions, LP total EBITDA for the second quarter would be at least $80 million. So let me conclude with this. LP's strategy is to grow the specialty components of our business, thereby reducing our dependence on cyclical housing styles and volatile commodity prices. With OSB prices where they were over the last two years, almost any strategy would have resulted in tremendous cash flow. Perhaps a better test of our strategy is a market more like the one we have now. A 30% drop in single-family staff presents a truer test of whether SmartSide can continue to outperform the market by taking share without simply relying on the rising tide of housing. It's also an opportunity to demonstrate that LP's OSB segment can break even at recent low prices by the combined effects of disciplined capacity management, efficient operations, and maintaining a consistently positive incremental contribution from structural solutions. And lastly, it's a test of LP's capital allocation and business development strategies, as well as our resolve to use our strong balance sheet to invest in these strategies when opportunities arise, not simply when we're flush with cash. The first quarter of 2023 was the first such test, and surely it won't be the last. But LP responded by demonstrating our commitment to our strategy and the value it can deliver. And with that, we'll be happy to take your questions.

Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Our first question comes from Mark Weintraub with Seaport Research Partners. You may proceed.

Thank you. A couple questions on siting. One is, You talked about some positive indications order file wise, but it doesn't look like you're assuming much in the way of volume improvement from the first quarter to the second quarter. First of all, is that a, am I right making that assumption? And maybe if you could provide a little bit more color on the thought process there, if that is indeed the case.

Yes, Mark, you're right. And while we are seeing some strengthening in the order file, we are still working through elevated inventory levels within the channel. And so the revenue that our channel partners are seeing is not yet fully impacting our order file. And we believe it's going to take most of Q2 to work through that elevated inventory level within the channel.

Okay. You mentioned that there was about $10 million in startup costs in the segment in the first quarter. Is something along those lines or what's anticipated for the second quarter? And really what I'm sort of trying to figure out is why the $80 million guide, and I realize it's $80 million plus for the second quarter, given that we're going to be higher, presumably, In OSB, you talked about the 20% improvement in revenue. And I guess I would have thought that we get some, well, again, maybe specifically, is there also startup costs inciting in the second quarter?

It's a great question, Mark.

There are some startup costs inciting in the second quarter, but they will be lower than the first quarter. And yes, to sort of offset that, to answer the question. There is inevitably some conservatism built into the $80 million.

Okay, very good. I'll hand it over for now. Thanks so much.

Thank you. Our next question comes from Ketam M. Toro with BMO Capital Markets. You may proceed.

Thank you. Brian or Alan, can you give some additional color on how the Sheggs business did in Q1?

Sure, Keith. I would say the shed business is probably one of our slower performing segments right now. There was, I would say of all the segments that we played in during COVID, I do think there was some pull forward demand in shed. We have seen some more recent recovery there, but as a mix of our portfolio, it's certainly underperforming at the moment, the rest of the portfolio.

Understood. And then switching to the VAWA conversion, Alan, is there any way to think about at a high level, you know, how would you have us think about sort of the additional conversion costs that might be there for the conversion to siding?

Yeah, we're still working through. Obviously, we have only just acquired it yesterday. Obviously, we did some due diligence. So we're still working through what those numbers would be. But if you think about the fact that the return, the IRR of this project, will be similar to the Holton 2 conversion, and this will be slightly bigger, then there's obviously going to be some sizable conversion capex. The moment we have those numbers nailed down, we'll be happy to share them just as we did with the Holton 2 numbers.

But it will be sizable.

Got it. Okay. And how are you thinking about the timing of the VavaMill at this point?

Currently thinking that it would be Q4, a current model, just to give you a benchmark, Q4 2026. Let's do it. That's right, isn't it? I got a strange, Aaron's pulling a face at me. Might as well share the room. It'll be demand dependent. It will, of course. That's our working model right now.

Sorry, which year did you say, Aaron? 2026. 2026? Okay, got it. I'll jump back in the queue. Thank you.

Thank you. Our next question comes from Paul Quinn with RBC. You may proceed.

Yeah, thanks very much, guys. Just wondering what the state of Wawa is. I mean, I know the company was trying to convert it back from the telecom. Is it functioning OSP mill at this point, or is it closed, or how much work is entail just to get it back to an OSB mill?

Yes. Thanks, Paul. I'll take that. This is Aaron. It's going to be a substantial amount of work to get it to the point that it's a functioning OSB mill. The advantage for us is that the current state of the construction project is kind of ideal for us to step in and redirect that conversion so that we can convert it efficiently to siding. So it's not currently producing OSB. It would be a while before it could if we planned to do so. But we've got a fair amount of work to do to kind of complete the project and complete it as a siting volume.

Okay. That's helpful. And then just over on X percent, it's great to hear that it's up 26 percent. Just wondering what percentage of overall siting volume that represents now, and what's the operating rate for the X percent finish lines that you've got going right now?

The operating rates for the lines are pretty low. A, from an OEU standpoint, we're learning how to produce that product, but also the capacity there is relatively inexpensive, so we're ramping into that, and certainly when we have the bath mill on in Q3, we're going to have plenty of capacity there. There has been times in our order file, especially last year, where we were constrained with the expert finish capacity, and while those can be tight now, Currently, we're okay as far as that balance between capacity and sales at the moment, but we certainly need the Bath New York plant to come on and we need to be running those lines better. And then as far as your question on mix of an expert finish, it's about 9%. Okay, that's great.

With respect to your builder series line, you know, one of your competitors back in the market with their stem planks, just wondering if you noticed any drop in order file on that, you know, given also the weak single family build.

No, I would say not. We have not seen a drop in the order file that I would directly, you know, attribute to that. I will say the competitive environment for new deals is certainly stepped up. the competitive nature there, given that reintroduction, but not necessarily, as far as I know, translated into a loss of any volume we had secured previously.

Okay, great. And the last one for me, just on South America, can we expect any change through the balance of 23 from that segment?

Yeah, I think it's pretty consistent with how it performs in Q1. I mean, there'll be some ups and downs as we go through the year. And we're hoping to see some strengthening in the underlying economy, especially in Chile, throughout the year, but we're not ready to call that right now.

Great. Thanks, guys. Best of luck. Thank you.

Thanks, Paul.

Thank you. Our next question comes from Susan McClary with Goldman Sachs. You may proceed.

Thank you. My first question is on siting. You obviously are realizing some nice pricing there. You did mention that the channel still has some inventory that they'll work through in the second quarter. How are you thinking about the dynamics of price versus volume if those inventories do stay elevated longer? Are you willing to take some of that down or what will be the plan there?

Yeah, we are not contemplating a price decline from a priceless standpoint, Susan. We've never done that in the at least 20 years or so I've been associated with the siding business. The way that plays out dynamically in the market is as we negotiate primarily builder or contractor deals, obviously volume can be secured sometimes with back-end rebates, especially with the larger builders and the large regional builders. And so as the environment gets more competitive, the negotiating power moves a little bit more into the end-use customer realm. And so it can get manifested in our rebate strategy as far as securing new business. But there's no plan at all to lower list pricing across our signing portfolio.

Okay, that's helpful. And then thinking about the CapEx guide that you've put out, suggest that perhaps in the second quarter you could see your cash from ops higher than your CapEx spend. Can you talk a little bit about how you're thinking about capital allocation, any appetite to bring back the buybacks at this point, and anything else we should be thinking about there?

I don't think, given that CapEx may be lower than our operating cash from Q2, but we will be paying $80 million for Wawa. So there will be pretty heavy investment outflows in the second quarter. And so I don't just – if I look at the cash patterns that I think we'll see for the remainder of 2023, I'm more inclined, should there be a modest upside in cash flow, to use that for the operations. I don't – based on trends I'm seeing today, I don't see share buybacks for the remainder of this year. But I just hope I'm playing wrong.

Okay. Thank you, Alan, and good luck with everything.

Thank you.

Thank you. Our next question comes from George Staffos with Bank of America. You may proceed.

Thanks, everyone. Good morning. Thanks for the details. Hey, Alan, Brad, can you talk a bit about lead times on press equipment and what you'd be needing to convert Wawa? I know on kind of traditional press equipment, at one point in time in the last year, I think lead times from what we were hearing You know, we're in the 18-month time frame. I would imagine that has, you know, lessened in the last year or so. You know, but if you put the order in today, when would you be able to start bolting the equipment down on the factory floor from what you could share with us?

Well, just let me talk generally. I mean, there is a press in Wawa that we're planning to use. So there's not an issue only coming from the press, which is meaningful to the timing of this project. George, to your point. And then one of the things that we're looking at now is we have been in the process of securing orders and materials still in fabrication time for the Holton Line 2 conversion. Sure. The work that we'll do this quarter is to understand how much of that can be transferred over to the Wawa project. mill conversion directly as far as the engineering goes. And so I would say that I'm not, at this moment, I'm not really concerned about timing any more than I would have been about Holton Line 2 because of what we're having to do in Wawa. And I'll just, a little bit of color there. The Holton Line 2 was a pretty complex conversion for us because we kind of used all the easy space other than the greening on Holton Line 1. So there was a complexity element there that was not there on Holton Line 1, or even in Segola for that matter. So it kind of makes these two projects somewhat similar as far as potential timing if we wanted to ramp them up as quickly as possible.

And Aaron had mentioned when the question had come up and Alan was answering about you know, when you expect it to be starting up and it's going to be demand-specific, which in turn means, you know, you're going to be looking at certain metrics in terms of triggering when you'll go forward. If you were in our seat, what, you know, level of housing or repair model would be kind of the go-no-go or the go signal in terms of starting up the, you know, accelerating the conversion and going forward?

Well, I would say just from an acceleration standpoint, I would say the earliest we could do that, if we was kind of all out on it, was having probably board approval later this year, you know, from a design standpoint. And then at least a year from that point to get it converted and then operating from zero, you know, since it's not making anything now, unlike all our other, you know, conversions. So we're looking, you know, to Alan's point, 25, 2025 probably as the earliest, maybe middle of 2025, perhaps due to a 2025, but more realistically, 2026. And so from a market standpoint, if housing got back to where it was 12 months ago, the quicker that happens, the more pressure it's going to be on us to convert that mill. But I will say the Segola mill is a significant conversion for us that we're just getting started on right now as far as selling it out. And as Alan mentioned in his remarks, we're still not fully utilizing Holton Line 1 yet. So we do have significant capacity coming online right now. So I'm not too concerned about us. I mean, other than a spike in new home construction after this kind of uncertain environment we're in today, you know, I'm not too concerned about our ability to miss a window there and voila.

Thanks, Brett. One last question for me on siting. So you talked a little bit about, I guess, to some degree, some pickup and competitive activity given, you know, one of your peers' reintroduction of one of their product lines that's a little bit more, if you will, affordable. Specifically within your product categories, are you seeing more demand for builder series and more momentum there? How would your volumes have shaken out, or how did they shake out in the first quarter between builder series and the other perhaps higher-end products and siding? Thank you.

George, that's a kind of complex question because we play in so many different segments. But if I would just say within the lap siding category, builder series is outgrowing the non-builder series product. And I really attribute that, I mean, from a volume standpoint, obviously it's off a smaller base, but also the strength right now in housing is with the bigger national builders and the large regional builders, which tend to be, you know, or it's not tend to be, which is the target of our builder series. with a big builder, that's going to tend to put a lap volume more into that category than into our traditional lap siding, 16-foot lap siding product. Now, a whole different story on R&R and expert finish where it's mostly 16-foot, but certainly within that built single-family construction, new construction category, lap siding, the strength is in the builder series.

Thank you, Brett. Thank you.

Our next question comes from Michael Roxon with Truist Securities. You may proceed.

Thanks, Brad, Alan, Aaron. Congrats on a very good quarter.

Thank you.

Thanks, Mike. Alan, last quarter you provided some color around the EBITDA bridge by segment. I'm just wondering if you could do the same this quarter as it relates to the $80 million, at least $80 million in EBITDA that you are and just help us frame how signing and OSB stack up in that guidance, please.

Yeah, I want to just sort of revisit Q1 from the principal reason that I broke the EBITDA down by segment was because the number was fundamentally so low that we got it to $35 million. I didn't want anyone to think that that was signing's unique performance, so I wanted to call out the expectation, at least at that point, that we might have negative EBITDA in signing. Sorry, slip of the tongue, that we might have negative EBITDA in OSB, which turned out not to be the case. So with the $80 million, I will at least give you this. Deciding performance is going to be similar-ish. If you think about my answer to Mark Weintraub's question that opened the Q&A session, it's going to be similar-ish to Q1. And as is normal, if you look at our Q1 results, you'll see that corporate and South American EBITDAs kind of broadly set off. So I think without being drawn further, I think I've given you almost everything.

You need to know the analysis of that $80 million without actually saying it explicitly. So I've tracked again.

We don't mind you being very explicit.

Call us again.

Thank you. The second question, I want to get a sense of how you guys are thinking about the Segola ramp, particularly given that you slowed Holton last quarter. You mentioned you still want to work down inventories to the balance of the year. So how are you thinking about ramping given those conditions?

Just generally speaking, when we're in the process of ramping a mill up like Segola or like Holton last year, We do like to push the volume there to give the machinery and the crews the opportunity to learn how to make siding. So we'll be, as we go through this year, the tendency for us is going to want to match their capability of putting folders in there. And then, which is what we're doing now, as Seagull is coming up, we're backing off a little bit on Holton as a priority, given the need to balance production. So that is kind of a color on how we think about Segovia. I will say, other than that, we would probably kind of spread, if we have to take production-related downtime, we spread that across the system, generally speaking, and some of that is due to the fact that these mills have special type of skew Some plants can or cannot make certain skews, so that will tend to spread the downtime around a little bit. But directly to your question, we will prioritize volume into Civilla this year if they ramp that mill up.

Got it. Thanks very much, and good luck in TQ.

Thank you. Thanks, Mike.

Thank you. Our next question comes from Sean Stewart with TD Securities. He may proceed.

Thank you. Good morning, everyone. Just one question, and appreciating you've just rolled out your 2023 CapEx budget, but that number's a little bit more conservative than we were forecasting, which I guess makes sense given the re-sequencing of deciding growth initiatives. Would it be fair to say, as you look into 2024, that you would expect CapEx to ramp up a little bit as you get into, I guess, Wawa spend to convert that asset and and start to think about the next stage after that. Is that a fair assumption as we look ahead to 2024?

Let me take a hint from Aaron. It's obviously market dependent, but I'll duck and learn new tricks. But it is one of the things we tried to convey with the broad range of capital guidance that I gave last quarter, which was broader and larger than the numbers that are in our press release right now. Yeah, there's a huge amount of capital flexibility. And I hope, quite frankly, that yes, we see increased capital spending in 2024 compared to our current projection for 2023. Okay.

Entirely plausible. Understood. The rest of my questions have been answered. Thanks very much, guys.

Thank you. Thanks, Sean.

Thank you. Our next question comes from Mark Weintraub with Seaport Research Partners. You may proceed.

Thank you. Not wanting to get too much into the weeds, but it's sort of interesting. I would have thought that Wawa might have serviced similar markets to Holten, and maybe just some color, kind of geographic product mix of how you imagine the Wawa project proceeding relative to what you were thinking about Holten second line and what implications might we want to be thinking through as to how the second line at Holton would progress, if indeed that were the case.

So the two advantages Wawa has over the plan that we had for Holton 2, one is the size of the press, the capability of the project will be a lot greater, as I think was in the prepared comment, to be one of our larger, will be our largest one-line site email. So that volume really helps make the decision about that as the next mill over Holton. But then also the central location and the wood basket for Wawa also provides a second advantage. And so in that, I want to say that, but more so than anything, it was just the assumed financial return on the two projects swayed us to putting Wawa in front of Holton. I certainly believe Houlton will be the next conversion after Wawa is up and running. The advantage for Houlton is that access to the eastern seaboard where we're under-penetrated, but obviously we've got a lot of capacity on Houlton 1 for the near-term satisfaction of that demand. Mark, to answer your question, the production size, the capability, or the capacity of the facility in Wawa and the quality of the wood basket there. And the central location helps on the overall freight standpoint.

Fair point. So basically it can serve as a broader geography than Halton is one point. And then also, I guess, so in terms of the panel or lap focus, is there a bias for the Wawa facility like there was for Halton?

No. Wawa will be very flexible across both potentially, both for both panel and lab. And so we haven't made the decision on which of those products to emphasize as far as the finishing capability of the facility, but it provides flexibility there.

Super. Thanks so much.

Thank you. And this concludes the Q&A session. I'd now like to turn the call back over to Aaron Howald for any closing remarks.

Okay. Thanks, Josh. With no further questions, we'll bring the first quarter earnings call for Healthy Building Solutions to close. I look forward to catching up with you all soon. Thank you very much. Thank you. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. you I'm going to add a new layer. I'm going to add a new layer to this layer. Thank you. music music Thank you. Good day, and thank you for standing by. Welcome to the first quarter 2023 Louisiana Pacific Corporation's earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Aaron Hoewald.

Thank you, operator.

Good morning, everyone, and thank you for joining us to discuss LP's results for the first quarter of 2023 and our outlook for the second quarter. As the operator said, my name is Aaron Hoewald, and I am LP's Vice President of Investor Relations and Business Development. I'm joined this morning by Brad Souther, 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 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 two and three of the earnings presentation. Rather than reading those statements, I incorporate them herein by reference. The appendix of the presentation also contains reconciliations that are further supplemented by this morning's AK file. And with that, I'll turn the call over to Brad.

Thanks, Aaron, and thank you all for joining us to discuss LP's results for the first quarter of 2023. Q1 demonstrated the value of our strategy in a challenging operating environment and an uncertain housing market. Compared to the first quarter of last year, single-family housing starts fell by almost 30%, and commodity OSB prices fell by more than 75%. Despite this decline, we maintained flat siding sales and generated positive EBITDA in our OSB segment, outperforming the underlying market. We are currently seeing encouraging signs of strength in housing, including improving commodity prices, and I am confident that LP's businesses will continue to outperform the market. Page 5 of the presentation shows highlights for the quarter. drove OSB prices far below last year's levels, with the obvious impact on sales, EBITDA, and cash flow. Inflation appears to be easing somewhat, but calls for resins, logs, and freight remain elevated, pressuring margins. LP's businesses responded by outperforming the market, and we continue to invest in our growth. $584 million in sales was about half of the amount from Q1 of last year, with a vast majority of this OSB prices. EBITDA of $66 million and earnings per share of $0.34 were much lower than last year, again due to the difficult comp from last year's very high OSB prices. However, our results were above our previous guidance due to disciplined and efficient operations in OSB and flat siding revenue. LP invested $114 million in capbacks in Q1, mostly for the conversion of Seagull with the siding. Alan will discuss cash flow in more detail in a moment, but LP ended the quarter with $126 million in cash and just under $700 million in liquidity. Safety and OEE were key highlights for the quarter. Safety and efficiency can never be taken for granted, especially in the difficult operating climate of a soft market. This makes our safety and OEE performance in the quarter truly remarkable. Both businesses saw a two percentage point increase in OEE, and both businesses had a single recordable injury in the quarter. Our goal, of course, is zero injuries, and two injuries in the quarter is too, too many. But while we work to continuously improve mill safety, it is nice to pause and recognize exceptional performance. In the siding business, our Dawson Creek and Tomahawk mills each achieved one million injury-free work hours. We obviously prefer the cash flow to higher OSB prices generated in the first quarter of last year, but it is gratifying to see the value generated by our OSB strategy even in a weaker market. Structural Solutions averaged 46% of OSB volume in Q1, but exited the quarter well above 50% where it has remained. Structural Solutions contributes incremental margin regardless of commodity prices. In terms of capacity, rather than oversupply a soft market, we took market downtime, managing our capacity flexibly. And despite the market-related downtime, as previously mentioned, we improved operational efficiency performance in OSB. As a result of this relentless focus on execution, the OSB segment stayed EBITDA positive despite the lowest prices we have seen since before COVID. I am very proud of the OSB team for the resolve and teamwork demonstrated by their Q1 performance. On slide six, you can see an update on siting product mix and growth relative to the market. On a trailing 12-month basis, single-family starts in the U.S. were down 18%, but siting volume grew by 7%, and prices were higher by 13%, driven by list price increases and improving mix. The pie charts on the right reinforce the improvements in mix within the quarter. While SmartSide volume fell by 9%, expert finish volume grew by 26%. I should point out, just for avoidance of doubt, that while these two charts are on different timeframes, with one being 12 months and the other being Q1, the results are broadly the same over a variety of timescales. Any way you look at it, the story is basically the same. SmartSide is growing faster than the underlying market, and within that, a mix of expert finish and other higher value-add products is growing faster still. To illustrate this, slide seven shows normalized growth of volume and revenue for SmartSide strand siding relative to single-family housing starts over a longer period of time. As you can see, LP SmartSide is consistently growing well above the underlying housing market, so we're taking share expanding addressable geographies and market categories, introducing new products, and increasing our focus on the less volatile R&R market segment. The reason for this is clear. LP SmartSide is the best-signing product available. It looks great, has a durability to support a 50-year warranty, is easy to install, is carbon negative, and is available primed or pre-finished at a price point that delivers value to installers and homeowners. As a result, we believe we have a long runway for growth ahead of us in siting. To meet this demand, LP will continue to invest in capacity. Slide eight of the presentation provides an update for our capacity plan for siting. I am happy to announce that LP's former OSB mill in Sagola, Michigan pressed its first board of SmartSide in March. Sagola's conversion adds 330 million square feet of siting capacity, bringing total siting capacity to about 2.3 billion square feet and reducing total OSB capacity to about 4 billion square feet. Speaking of investing in siting capacity, you may have seen our recent press release announcing that LP reached a definitive agreement to acquire the Wawa OSB mill from Forex. I am happy to announce that the transaction was approved last week and closed yesterday. This investment contributes to our siting strategy by adding to our conversion options and increasing our runway for future growth. Wawa is ideally located with access to labor, logistics, and ample sustainable Aston fiber. And we are thrilled to engage with our new employees, the local community, and First Nations there as we begin planning for the project to convert Wawa to manufacturer SmartSide. When converted, Wawa will become LP's largest single-line siding mill, adding roughly 400 million square feet of capacity and bringing total siding capacity to about 2.7 billion square feet. We will provide more details as the project evolves, and with a purchase price of $80 million, our estimates of conversion costs and the lower execution risk associated with the existing facility, we believe this project will generate a higher return than the previously announced expansion of our Holton main facility, which is why Wawa will jump the line ahead of Holton Line 2. We still plan to expand Holton after the Wawa conversion as customer demand continues to grow. Converting Wawa and expanding Holton would bring total siting press capacity to 3 billion square feet. And the remaining conversion and expansion options we have already discussed could eventually bring total siting capacity to about 5 billion square feet, more than double our current size. And this is just press capacity. We continue to invest in growth of expert finish or pre-finish siting with our newest facility in Bath, New York coming online in Q3 of this year. We are investing in our strategy for siding and structural solutions, and we are confident that both have a long runway for future growth. What we are seeing encouraging signs as housing starts so far this year have been above full-year consensus. The housing market is not out of the woods quite yet. Signal family starts were down nearly 30% in Q1 with inflation and mortgage rates impacting affordability, and Q2 is looking roughly the same. However, the encouraging signs in housing are beginning to be reflected in our order files. While channel inventories and siting remain elevated as is typical in the months following the end of a managed order file, we are past the Q1 peak in inventory. The siting order file has seen a notable uptick in recent weeks. In OSB, inventories are leaner as demand and prices have recently improved. The macroeconomic environment remains challenging and near-term uncertainties remain in the housing and honor markets we serve. We remain very confident in our strategy, our execution, our high-performance, carbon-negative products, and most importantly, all of LP's people will help us continue to outperform the underlying housing market, gain share, and expand the markets we serve. And with that, I'll turn the call over to Alan to discuss LP's results in more detail.

Thanks, Brad. As outlined already, the U.S. housing and the broader macroeconomic environment are significantly more challenging than at this time last year. But I'm happy to report that LP responded by focusing on the factors within our control. We exceeded all components of our first quarter guidance, while the market numbers dominating the quarter are the 29% drop in single-family housing starts and a nearly 80% drop in North Central randomized prices for commodity OSB. I'll refer to slides 9 and 10 in the presentation to describe just how LP's siding and OSB segments navigated the quarter before moving on to discuss LP's liquidity and capital allocation, including a little more on Wawa. Slide 9 shows the first quarter year-over-year revenue and EBITDA comparison for siding. The volume was down 9%, a spread of 20 points over the drop in single-family starts. And this is due to the combined effects of ongoing share gains, expanded addressable markets, and the fact that the majority, about 60%, of siding products served the repair and remodel market and shed applications. And while overall volumes may have declined, expert finish volumes did not. Rather, they increased by 26% year-over-year, which also helped the mixed components of price. The $27 million reduction in volume, at roughly a 50% variable margin, cost the segment $14 million of EBITDA. Siding's average selling prices were 10% higher than the first quarter of last year. Roughly six points of the 10-point increase are from list price increases, namely the combined effect of this January's increase and last year's mid-year increase, with the rest coming from favorable mix and lower rebates. So as expected, higher prices helped offset the volume drop, and as it turned out, they completely offset it. This was also a quarter of heavy investment in future capacity. Mill conversion costs were up $6 million year-over-year, but I need to dissect that statement. This year, we actually incurred $10 million converting Segola to siding, but at the same time last year, we incurred $10 million converting Halton to siding. So, one $10 million conversion cost was basically replaced with another. All that shows up on the waterfall, therefore, is $6 million of unabsorbed operating costs at Halton, while we proceed with what is turning out to be a slow ramp-up given current market conditions. But this means that the business is actually carrying $60 million of embedded costs. That is $10 million of Segola conversion plus $6 million of uncovered costs at Houghton, all in the interest of future growth. And this cost was about five percentage points of EBITDA margin in the first quarter. A second margin headwind came from raw material inflation. Compared to the first quarter of last year, inflation costs died in $14 million of EBITDA. Now, inflation ramped up quickly during the second quarter of last year, so while prices remain elevated, we do expect year-over-year comparisons to begin to ease going forward. So again, in a quarter of high inflation, much lower housing stocks, lower volumes, and the impact of converting and ramping up Segola, the siding segment delivered $67 million in EBITDA for a margin of 20%. And to demonstrate the long-term potential of the segment, even with all else equal, Adding back either the $16 million of mill ramp up and conversion costs or the $17 million of inflationary impact, we build an EBITDA margin above 25%. The OSB waterfall on slide 10 is inevitably dominated by price changes. This year, the bar is red, given that prices have returned to earth. And while the largest number on the bar, by far, is the $470 million drop in revenue in EBITDA due to these low prices, it's also why I'll spend the least time Rather than price, the story of the quarter is how well the team responded to this much softer environment by managing with efficiency and discipline and delivering positive EBITDA on this very challenging environment. The majority of LP's OSB is consumed in new residential construction and disproportionately by single-family home construction. With single-family staff down 29% in the quarter, LP's OSB volume was down proportionately. Production was lower year-over-year by nearly 300 million square feet, which is about 30% of the main plate capacity, including $100 million down due to the conversion of Segola from OSB to Siding. The remaining volume reduction of roughly 200 million square feet resulted from LP's market curtailment, which, to minimize the cost and freight impact on the OSB network, we concentrated in our highest cost and most remote mills. While commodity volume was essentially flat, structural solutions volume was down 154 million square feet. Now, this may be a reflection of increased price sensitivity among builders looking for ways to keep homes affordable for their customers. However, our price realization was very strong, in large part because structural solutions prices held up significantly better than commodity prices. So, while commodity prices were down 75% year over year, structural solutions prices fell by only 58%. And so in this market, the OSB segment managed both capacity and cost with both discipline and focus to generate this positive $5 million of EBITDA. Which brings me to cash flow and capital allocation. Referring now to slide 11, LP began the quarter with $383 million in cash and generated $66 million of EBITDA. The first quarter of every year is typically one of working capital bills. and the $144 million of outflow due to working capital breaks down roughly as follows. $45 million of log inventory was gathered in preparation for spring breakup in Northern Mills, together with $25 million of finished goods billed across the network, for a total of $80 million of inventory billed. We also paid about $60 million in year-end accruals, including $30 million of customer rebates. All of this is typical first quarter activity. After paying $33 million in taxes, we had an operating cash outflow of $119 million. The first quarter's capital spend of $114 million will most likely be our heaviest in 2023 due to the inclusion of the Sagola conversion and the Bath New York refinishing facility. The resulting drop in cash of $257 million still left LP with $126 million of cash at quarter end. The second quarter is shaping up to be very different for capital allocation, so perhaps a preview is in order. As is typically the case, in the second quarter, working capital should be a source of cash, largely due to inventory consumption. And CapEx should also be lower than the first quarter, by about $20 million. And as Brad mentioned, LP recently announced the acquisition of the Wawa OSB facility from Forex for $80 million. This has been financed entirely using existing funds. So we're very excited about this acquisition, which significantly enhances our site and growth strategy, and we're very happy to have the WildWire employees join our team as we prepare it to be our next siding wall. We also made the difficult decision to close Intecra. We're disappointed that the deteriorating housing environment in Northern California necessitated this action, and we regret the impact that the closure will have on the Intecra team. But ultimately, we determined that LPCapital is better invested in our core businesses. As a result, in the second quarter, we expect to report a non-cash write-down of remaining Integra assets of roughly $25 million as we wind down the business over the course of the quarter. Which brings me to guidance in slide 12. The housing market remains uncertain, despite green shoots as the spring building season ramps up. Publicly traded home builders have referenced encouraging strength in their order patterns. However, with total staff down, This can only mean that smaller builders are seeing reduced demand. Mortgage applications remain quite sensitive to interest rates, and stubbornly high prices present a continued challenge to affordability. As a result, we still lack sufficient clarity to offer full-year guidance. Our best read of our current order files suggests that Siding's second quarter revenue will be similar to that of the first quarter. And this would mean Boeing is being down year over year, but substantially outperforming the anticipated drop in single-family housing starts. Year-over-year price increases will, again, partially offset the volume drop, such that second quarter revenue for siding is expected to be no worse than 5% lower year-over-year. For OSB, prices have improved recently, such that if we assume prices hold flat at current levels, the OSB business would expect to see revenues of about 20% sequentially higher than the first quarter. This assumes increased operating rates based on current demand. Under these assumptions, LP total EBITDA for the second quarter would be at least $80 million. So let me conclude with this. LP's strategy is to grow the specialty components of our business, thereby reducing our dependence on cyclical housing styles and volatile commodity prices. With OSB prices where they were over the last two years, almost any strategy would have resulted in tremendous cash flow. Perhaps a better test of our strategy is a market more like the one we have now. A 30% drop in single-family staff presents a truer test of whether SmartSide can continue to outperform the market by taking share without simply relying on the rising tide of housing. It's also an opportunity to demonstrate that LP's OSB segment can break even at recent low prices by the combined effects of disciplined capacity management, efficient operations, and maintaining a consistently positive incremental contribution from structural solutions. And lastly, it's a test of LP's capital allocation and business development strategies, as well as our resolve to use our strong balance sheet to invest in these strategies when opportunities arise, not simply when we're flush with cash. The first quarter of 2023 was the first such test, and surely it won't be the last. But LP responded by demonstrating our commitment to our strategy and the value it can deliver. And with that, we'll be happy to take your questions.

Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Our first question comes from Mark Weintraub with Seaport Research Partners. You may proceed.

Thank you. A couple questions on siting. One is, You talked about some positive indications order file-wise, but it doesn't look like you're assuming much in the way of volume improvement from the first quarter to the second quarter. First of all, am I right making that assumption? And maybe if you could provide a little bit more color on the thought process there, if that is indeed the case.

Yes, Mark, you're right. And while we are seeing some strengthening in the order file, we are still working through elevated inventory levels within the channel. And so the revenue that our channel partners are seeing is not yet fully impacting our order file. And we believe it's going to take most of Q2 to work through that elevated inventory level within the channel.

Okay. You mentioned that there was about $10 million in startup costs in the segment in the first quarter. Is something along those lines or what's anticipated for the second quarter? And really what I'm sort of trying to figure out is why the $80 million guide, and I realize it's $80 million plus for the second quarter, given that we're going to be higher, presumably, In OSB, you talked about the 20% improvement in revenue. And I guess I would have thought that we get some, well, again, maybe specifically, is there also startup costs inciting in the second quarter?

It's a great question, Mark.

There are some startup costs inciting in the second quarter, but they will be lower than the first quarter. And yes, to sort of offset that, to answer the question. There is inevitably some conservatism built into $80 million.

Okay, very good. I'll hand it over for now. Thanks so much.

Thank you. Our next question comes from Ketam M. Toro with BMO Capital Markets. You may proceed.

Thank you. Brian or Alan, can you give some additional color on how the Sheds business did in Q1?

Sure, Keith. I would say the shed business is probably one of our slower performing segments right now. There was, I would say of all the segments that we've played in during COVID, I do think there was some pull forward demand in shed. We have seen some more recent recovery there, but as a mix of our portfolio, it's certainly underperforming at the moment, the rest of the portfolio.

Understood. And then switching to the VAWA conversion, Alan, is there any way to think about at a high level, you know, how would you have us think about sort of the additional conversion costs that might be there for the conversion to siding?

Yeah, we're still working through. Obviously, we have only just acquired it yesterday. Obviously, we did some due diligence. So we're still working through what those numbers would be. But if you think about the fact that the return, the IRR of this project, will be similar to the Holton 2 conversion, and this will be slightly bigger, then there's obviously going to be some sizable conversion capex. The moment we have those numbers nailed down, we'll be happy to share them just as we did with the Holton 2 numbers.

But it will be sizable.

Got it. Okay. And how are you thinking about the timing of the VavaMill at this point?

Currently thinking that it would be Q4, a current model, just to give you a benchmark, Q4 2026. Let's do it. That's right, isn't it? I got a strange, Aaron's pulling a face at me. Might as well share the room. It'll be demand dependent. It will, of course. That's our working model right now.

Sorry, which year did you say, Aaron? 2026. 2026? Okay, got it. I'll jump back in the queue. Thank you.

Thank you. Our next question comes from Paul Quinn with RBC. You may proceed.

Yeah, thanks very much, guys. Just wondering what the state of Wawa is. I mean, I know the company was trying to convert it back from the telecom. Is it functioning on speed mill at this point, or is it closed, or how much work is entailed is to get it back to an OSB mill.

Yes. Thanks, Paul. I'll take that. This is Aaron. It's going to be a substantial amount of work to get it to the point that it's a functioning OSB mill. The advantage for us is that the current state of the construction project is kind of ideal for us to step in and redirect that conversion so that we can convert it efficiently to siding. So it's not currently producing OSB. It would be a while before it could if we planned to do so. but we've got a fair amount of work to do to kind of complete the project and complete it as a siting mill.

Okay, that's helpful. And then just over on expert finish, great to hear that it's up 26%. Just wondering what percentage of overall siting volume that represents now, and what's the operating rate for the expert finish lines that you've got going right now?

The operating rates for the lines are pretty low while we continue to – A, from an OED standpoint, we're learning how to produce that product, but also the capacity there is relatively inexpensive, so we're ramping into that, and certainly when we have the bath mill on in Q3, we're gonna have plenty of capacity there. There has been times in our order file, especially last year, where we were constrained with the expert finish capacity, and while those can be tight now, Currently, we're okay as far as that balance between capacity and sales at the moment, but we certainly need the Bath New York plant to come on and we need to be running those lines better. And then as far as your question on mix of an expert finish, it's about 9%. Okay, that's great.

With respect to your builder series line, you know, one of your competitors back in the market with their stem planks, just wondering if you noticed any drop in order file on that, you know, given also the weak single family build.

No, I would say not. We have not seen a drop in the order file that I would directly, you know, attribute to that. I will say the competitive environment for new deals is certainly stepped up. the competitive nature there, given that reintroduction, but not necessarily, as far as I know, translated into a loss of any volume we had secured previously.

Okay, great. And the last one for me, just on South America, can we expect any change through the balance of 23 from that segment?

Yeah, I think it's pretty consistent with how it performs in Q1. I mean, there'll be some ups and downs as we go through the year. We're hoping to see some strengthening in the underlying economy, especially in Chile, throughout the year, but we're not ready to call that right now.

Great. Thanks, guys. Best of luck. Thank you.

Thank you, Paul.

Thank you. Our next question comes from Susan McClary with Goldman Sachs. You may proceed.

Thank you. My first question is on siting. You obviously are realizing some nice pricing there. You did mention that the channel still has some inventory that they'll work through in the second quarter. How are you thinking about the dynamics of price versus volume if those inventories do stay elevated longer? Are you willing to take some of that down, or what will be the plan there?

Yeah, we are not contemplating a price decline from a priceless standpoint, Susan. We've never done that in the At least in 20 years or so, I've been associated with a siding business. The way that plays out dynamically in the market is as we negotiate primarily builder or contractor deals, obviously volume can be secured sometimes with back-end rebates, especially with the larger builders and the large regional builders. And so as the environment gets more competitive, the negotiating power moves a little bit more into the end-use customer realm. And so it can get manifested in our rebate strategy as far as securing new business. But there's no plan at all to lower list pricing across our signing portfolio.

Okay, that's helpful. And then thinking about the CapEx guide that you've put out, Suggest that perhaps in the second quarter you could see your cash from ops higher than your CapEx spend. Can you talk a little bit about how you're thinking about capital allocation, any appetite to bring back the buybacks at this point, and anything else we should be thinking about there?

I don't think, given that CapEx may be lower than our operating cash from Q2, but we will be paying $80 million for Wawa, so there will be pretty heavy investment outflows in the second quarter. And so I don't just – if I look at the cash patterns that I think we'll see for the remainder of 2023, I'm more inclined, should there be a modest upside in cash flow, to use that for the operations. I don't – based on trends I'm seeing today, I don't see share buybacks for the remainder of this year. But I just hope I'm playing wrong.

Okay. Thank you, Alan, and good luck with everything.

Thank you.

Thank you. Our next question comes from George Staffos with Bank of America. You may proceed.

Thanks, everyone. Good morning. Thanks for the details. Hey, Alan, Brad, can you talk a bit about lead times on press equipment and what you'd be needing to convert Wawa? I know on kind of traditional press equipment, at one point in time in the last year, I think lead times from what we were hearing You know, we're in the 18-month time frame. I would imagine that has, you know, lessened in the last year or so. You know, but if you put the order in today, when would you be able to start bolting the equipment down on the factory floor from what you could share with us?

Well, just let me talk generally. I mean, there is a press in Wawa that we're planning to use. So there's not an issue only coming from the press, which is meaningful to the timing of this project. George, to your point. And then one of the things that we're looking at now is we have been in the process of securing orders and materials still in fabrication time for the Holton Line 2 conversion. Sure. The work that we'll do this quarter is to understand how much of that can be transferred over to the Wawa project. mill conversion directly as far as the engineering goes. And so I would say that I'm not, at this moment, I'm not really concerned about timing any more than I would have been about Holton Line 2 because of what we're having to do in Wawa. And now just a little bit of color there. The Holton Line 2 was a pretty complex conversion for us because we kind of used all the easy space and the existing equipment other than the greening on Holton Line 1. So there was a complexity element there that was not there on Holton Line 1, or even in Segola for that matter. So it kind of makes these two projects somewhat similar as far as potential timing if we wanted to ramp them up as quickly as possible.

And Aaron had mentioned when the question had come up and Alan was answering about you know, when you expect it to be starting up and it's going to be demand-specific, which in turn means, you know, you're going to be looking at certain metrics in terms of triggering when you'll go forward. If you were in our seat, what, you know, level of housing or repair model would be kind of the go-no-go or the go signal in terms of starting up the, you know, accelerating the conversion and going forward?

Well, I would say just from an acceleration standpoint, I would say the earliest we could do that if we was kind of all out on it was having probably board approval later this year, you know, from a design standpoint. And then at least a year from that point to get it converted and then operating from zero, you know, since it's not making anything now, unlike all our other mill conversions. So we're looking... to Alan's point, 2025 probably as the earliest, maybe middle of 2025, perhaps due to a 2025, but more realistically, 2026. And so from a market standpoint, if housing got back to where it was 12 months ago, I could see us in a, the quicker that happens, the more pressure it's going to be on us to convert that mill, but I will say the Segola mill is a significant conversion for us that we're just getting started on right now as far as selling it out. And as Alan mentioned in his remarks, we're still not fully utilizing Holton Line 1 yet. So we do have significant capacity coming online right now. So I'm not too concerned about us. I mean, other than a spike in new home construction, you know, after this kind of uncertain environment we're in today, you know, I'm not too concerned about our ability to miss a window there and voila.

Thanks, Brett. One last question for me on siting. So you talked a little bit about, I guess, to some degree, some pickup and competitive activity given, you know, one of your peers' reintroduction of one of their product lines. That's a little bit more, if you will, affordable. Specifically within your product categories, are you seeing more demand for builder series and more momentum there? How would your volumes have shaken out, or how did they shake out in the first quarter between builder series and the other perhaps higher-end products and siding? Thank you.

George, that's a kind of complex question because we play in so many different segments. But if I would just say within the lap siding category, builder series is outgrowing the non-builder series product. And I really attribute that, I mean, from a volume standpoint, obviously it's off a smaller base, but also the strength right now in housing is with the bigger national builders and the large regional builders, which tend to be, you know, or it's not tend to be, which is the target of our builder series introduction. So as we see that continued strength end up with a big builder, that's going to tend to put a lap volume more into that category than into our traditional lap siding, 16 foot lap siding product. Now, a whole different story on R&R and expert finish where it's mostly 16 foot, but certainly within that built single family construction, new construction category, lap siding, the strength is in the builder series.

Thank you, Brett. Thank you.

Our next question comes from Michael Roxon with Truist Securities. You may proceed.

Thanks, Brad, Alan, Aaron. Congrats on a very good quarter.

Thank you. Thanks, Mike.

Alan, last quarter you provided some color around the EBITDA bridge by segment. I'm just wondering if you could do the same this quarter as it relates to the $80 million, at least $80 million in EBITDA that you are and just help us frame how signing and OSB stack up in that guidance, please.

Yeah, I want to just sort of revisit Q1 from the principal reason that I broke the EBITDA down by segment was because the number was fundamentally so low that we got it to $35 million. I didn't want anyone to think that that was Siding's unique performance, so I wanted to call out the expectation, at least at that point, that we might have negative EBITDA in Siding.

Sorry, slip of the tongue, that we might have negative EBITDA in OSB, which turned out not to be the case.

So with the $80 million, I will at least give you this. Deciding performance is going to be similar-ish. If you think about my answer to Mark Weintraub's question that opened the Q&A session, it's going to be similar-ish to Q1. And as is normal, if you look at our Q1 results, you'll see that corporate and South American EBITDA kind of broadly set off. So I think without being drawn further, I think I've given you almost everything.

You need to know the analysis of that $80 million without actually saying it explicitly. So I've tracked again.

We don't mind you being very explicit.

Call us again.

No problem. Thank you. The second question, I want to get a sense of how you guys are thinking about the Segola ramp, particularly given that you slowed Holton last quarter. You mentioned you still want to work down inventories to the balance of the year. So how are you thinking about ramping given those conditions?

Just generally speaking, when we're in the process of ramping a mill like Segola or like Holton last year, We do like to push the volume there to give the machinery and the crews the opportunity to learn how to make siding. So we'll be, as we go through this year, the tendency for us is going to want to match their capability by putting folders in there. And then, which is what we're doing now, as Seagull is coming up, we're backing off a little bit on Holton as a priority, given the need to balance production. So that is kind of a color on how we think about Segovia. I will say, other than that, we would probably kind of spread, if we have to take production-related downtime, we spread that across the system, generally speaking, and some of that is due to the fact that these mills have special type of skew Some plants can or cannot make certain skews, so that will tend to spread the downtime around a little bit. But directly to your question, we will prioritize volume into Civilla this year if they ramp that mill up.

Got it. Thanks very much, and good luck in TQ.

Thank you. Thanks, Mike.

Thank you. Our next question comes from Sean Stewart with TD Securities. He may proceed.

Thank you. Good morning, everyone. Just one question, and appreciating you've just rolled out your 2023 CapEx budget, but that number's a little bit more conservative than we were forecasting, which I guess makes sense given the re-sequencing of deciding growth initiatives. Would it be fair to say as you look into 2024 that you would expect CapEx to ramp up a little bit as you get into, I guess, Wawa spend to convert that asset and and start to think about the next stage after that. Is that a fair assumption as we look ahead to 2024?

Let me take a hint from Aaron. It's obviously market dependent, but an old dog can learn new tricks. But it is one of the things we tried to convey with the broad range of capital guidance that I gave last quarter, which was broader and larger than the numbers that are in our press release right now. Yeah, there's a huge amount of capital flexibility. And I hope, quite frankly, that yes, we see increased capital spending in 2024 compared to our current projection for 2023. Okay.

Entirely plausible. Understood. The rest of my questions have been answered. Thanks very much, guys.

Thank you. Thanks, Sean.

Thank you. Our next question comes from Mark Weintraub with Seaport Research Partners. You may proceed.

Thank you. Not wanting to get too much into the weeds, but it's sort of interesting. I would have thought that Wawa might have serviced similar markets to Holton. Maybe just some color, kind of geographic product mix of how you imagine the Wawa project proceeding relative to what you were thinking about Holton second line and what implications might we want to be thinking through as to how the second line at Holton would progress, if indeed that were the case.

So the two advantages Wawa has over the plan that we had for Holton 2, one is the size of the press, the capability of the project will be a lot greater, as I think was in the prepared comment, to be one of our larger, will be our largest one-line site email. So that volume really helps make the decision about that as the next mill over Holton. But then also the central location and the wood basket for Wawa also provides a second advantage. And so in that, I want to say that, but more so than anything, it was just the assumed financial return on the two projects swayed us to putting Wawa in front of Holton. I certainly believe Houlton will be the next conversion after Wawa is up and running. The advantage for Houlton is that access to the eastern seaboard where we're under-penetrated, but obviously we've got a lot of capacity on Houlton 1 for the near-term satisfaction of that demand. Mark, to answer your question, the production size, the capability, or the capacity of the facility in Wawa and the quality of the wood basket there. And the central location helps on the overall freight standpoint.

Fair point. So basically it can service a broader geography than Halton is one point. And then also, I guess, so in terms of the panel or lap focus, is there a bias for the Wawa facility like there was for Halton?

No. Wawa will be very flexible across both potentially, both both panel and lab and so we're not happy you know we haven't made the decision on which of those products to emphasize as far as the finishing capability the facility but we but it provides flexibility there super thanks so much thank you and this concludes the q a session i'd now like to turn the call back over to aaron howald for any closing remarks okay thanks josh with no further questions we'll bring the uh

first quarter earnings call for Healthy Building Solutions to close. I look forward to catching up with you all soon. Thank you very much. Thank you. Thank you.

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