Louisiana-Pacific Corporation

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 not like to end the conference over to your speaker today Aaron Howell vice president investor relations and business development please go ahead

Thank you, Operator, and good morning, everyone.

Thank you for joining us to discuss LP's results for the fourth quarter and full year of 2023. My name is Aaron Hovald, and I am LP's Vice President of Investor Relations and Business Development. With me this morning are Brad Southern, LP's Chief Executive Officer, and Alan Hockey, LP's Chief Financial Officer. During this morning's call, we will refer to a presentation that has been posted to LP's IR webpage, which is investor.lpcorp.com. Our 8-K filing, press release, and other materials detailing LP's strategy and sustainable business model are also available there. As usual, today's discussion will contain forward-looking statements and non-GAAP financial metrics, as detailed on slides two and three of the earnings presentation. The appendix of the presentation also contains reconciliations that are further supplemented by this morning's 8-K filing. Rather than reading those materials, I incorporate them herein by reference. And with that, I will turn the call over to Brad.

Thanks, Aaron, and thank you all for joining us to discuss LP's results for the fourth quarter and the full year of 2023. 2023 ended much better than it began for LP and the markets we serve. In the fourth quarter, Siding achieved its highest EBITDA margin of the year. I'm pleased to share that Siding is back on a growth footing, having returned to normal inventory and order flows after a due stocking cycle in the first half of last year. We are well positioned to gain share in R&R and with home builders. Commodity OSB prices fell early in Q4, but rebounded later in the quarter. These factors, along with strong price realization and efficient operations, contributed to an EBITDA result meaningfully above our guided range. Page five of the presentation summarizes some of our results for the quarter and year. LP generated $658 million in sales and $129 million in EBITDA in Q4, bringing the full-year totals to $2.6 billion and $478 million, respectively. This translated into 71 cents of earnings per share in Q4 and $3.22 for the full year. The full-year comparisons are negative, largely due to normalized OSB prices, but LP's businesses demonstrated exceptional management of the elements within our control. 2023 was a year of heavy investment and capacity to enable growth in siding and structural solutions. LP invested $300 million in capital in 2023 for the largest projects being the conversion of our mill in Sagola, Michigan to SmartSide from OSB and the construction of our newest expert finish facility in Bath, New York. These projects were completed safely and efficiently, and both facilities are fully up and running. LP also completed the strategic acquisition of a mill in Wawa, Ontario, which expands our portfolio of future siding conversions. Alan will offer more details on capital allocation, but I will summarize by saying that even after another year of significant investment in smart site and expert finish capacity, the Wawa acquisition, and $69 million return to shareholders via dividends, LP ended 2023 with $222 million in cash on hand and over $770 million in liquidity. Like LP results, the new residential construction markets we serve saw a meaningful recovery in the second half of 2023 after starting the year notably weaker. Affordability challenges persist, but interest rates have fallen over 100 basis points from their peak in Q4. contributing to improved optimism about single-family housing starts. The repair remodeling sector remains softer than new construction, but lower rates and better affordability may encourage more sales of existing homes or offer homeowners the interest rate clarity needed to take on larger home improvement projects. The current consensus for total housing starts is about flat the last year at a bit below 1.4 million, but many forecasters expect a higher single-family mix. Compared to the consensus a year ago, we are cautiously optimistic that this improving outlook will translate into a stronger market for LP in 2024. Regardless of the near-term market, I am very confident LP's strategy positions us well with a strong portfolio of products and a long runway for profitable growth. The durability, beauty, and performance of LP's products solve problems for builders, contractors, and homeowners. We are investing in new capacity and new process technology. This improves our productivity, accelerates product innovation, and enhances our margins. We operate our capacity with discipline and agility, whatever the market brings. And we are prudent stewards of our capital, investing strategically in growth and innovation while returning cash to shareholders. None of this happens without the dedication of LP's people. Our operations teams delivered significantly better efficiency and safety performance in 2023, ending the year with a world-class total incident rate of 0.5. A single injury is too many, but I am incredibly proud of our operations team for this performance. We will never stop working to ensure a safe work environment for everyone at LP. I also want to acknowledge and thank LP's sales and marketing teams for navigating the difficult process of transitioning off a managed order file. As a result of our highly talented teams and the great culture we've built, LP was recognized in 2023 by Newsweek nationally and in Nashville by our local paper, the Tennessean, as a great place to work. Thank you to every LP team member for your contributions in 2023. And with that, Alan will share more details about LP's financial performance in the quarter, as well as our outlook for Q1 in 2024. Thanks, Brad.

I'll briefly review the results for the siding and the OSB businesses for the fourth quarter and full year, and then offer guidance for EBITDA and capital expenditures. Slide 6 shows siding's quarterly results. Jumping 12 months back in time, the fourth quarter of 2022 was the last quarter in which siding was on a managed order file, and as such, it represents rather a difficult comp. The biggest difference in the year-over-year waterfall is therefore the 15% drop in volume, a corresponding $55 million drop in revenue, and a $26 million drop in EBITDA. On the plus side, Bath and Segola are now fully up and running, resulting in lower conversion and ramp-up costs. This, combined with continued improvements in raw material costs, produced a $13 million EBITDA tailwind. Net of $6 million in inventory, absorption, and other stuff the siding business finished the quarter with $72 million of EBITDA. The EBITDA margin of 22% was the highest of the year, which reinforces our confidence in siding's long-term 25% EBITDA margin target. Now, I won't belabor the four-year waterfall on slide seven, given that we've discussed the most important elements in prior quarters. However, it is perhaps useful to recap that the transition from a managed order file made for a difficult year with respect to volume particularly in the first six months, while inventory is normalized. Nonetheless, the four-year EBITDA of $269 million represents a robust EBITDA margin of 20%, particularly so in light of the carrying costs of new capacity, capacity which, I would like to stress, provides a long runway for growth with meaningfully lower future capex, at least until customer demand necessitates further investments. Slide eight covers the fourth quarter for OSB, While prices fell steeply during the shoulders of the third and fourth quarters, they subsequently recovered and ended the year higher than the prior year, adding about $17 million to year-over-year EBITDA. Volumes were lower in part because of the Segola conversion, but this was partially offset by a significant improvement in operating efficiency. Structural solutions accounted for 52% of OSB volume in the quarter, with value-added products producing $20 million of incremental EBITDA on $39 million of incremental revenue. Lower raw material, mill, and SG&A costs added a $30 million tailwind, resulting in a very respectable $59 million of EBITDA in the quarter. OSB's full year results on slide 9 are dominated by price normalization. But other than that, the year can be summarized as one of lower volume, POS should be offset by higher OEE, lower raw material costs, and lower overhead costs, given the transfer of Segola to the siding business. Taken as a whole, despite volatility quarter to quarter, 2023 was slightly better than the historical cycle average for the OSB business, which shows the power of LP's OSB strategy. Improved efficiency in operations, disciplined capacity management, and the value generated by the consistent incremental uplift from the structural solutions portfolio. Other than the acquisition of Wawa, cash flows for the quarter and year was straightforward, as shown on slide 10. For the year, LP earned $478 million of EBITDA, paid $65 million in cash taxes, and built $93 million of working capital, resulting in $316 million of operating cash flow. After investing $300 million in GAPEX, paying $80 million to acquire the Wawa Mill and returning $69 million to shareholders via dividends, the net outflow of $161 million left us with $222 million in cash. Now, before I transition to guidance, let me anticipate and answer one question. LP's capital allocation strategy is unchanged. We will earn cash, invest in growth, and return cash to shareholders via dividends and share repurchases in that order. LP did not repurchase any shares in 2023, but our motivation to do so is undiminished, and we retain a $200 million authorization from the Board. We will resume share repurchases when our cash flows and cash balances warrant. 2024 should be a year of growth and meaningfully lower capex and siding, so all else equal, share repurchases are very much back on the table. Which brings us to guidance on slide 11. With the inventory stocking behind us and siding back on a growth footing, as well as more historically normal OSB prices, we have improved visibility to offer a full year outlook for both businesses, if you'll forgive some very obvious caveats. In siding, we expect a year of resumed growth and a more normal seasonal order pattern consistent with what we saw in the fourth quarter and have seen so far in 2024. Revenue growth is expected to outpace both the current flat consensus for total U.S. housing starts and the forecast for single-digit declines in repair and remodel. We therefore expect revenue growth of about 8 to 10% for the full year from a combination of volume and price. And this would result in siding revenue of, let's say, $1.45 billion, approaching 2022's record level. An EBITDA margin of around 20%, would result in full year EBITDA for siding of between $280 and $300 million, with reduced investments in capacity partially offset by discretionary increases in selling and marketing. So what does this mean for the first quarter? Well, the expected return to more normal seasonal demand patterns means somewhat higher demand in the second and third quarters compared to the first and the fourth. Accordingly, first quarter sales for siding are expected to be in the range of $340 to $350 million, with EBITDA between $65 and $70 million, assuming an EBITDA margin of about 20%. For OSB, full-year revenue guidance is impossible without a price prediction, which we won't even pretend to offer. Instead, we're going to introduce the concept of cycle average EBITDA spread. This is the EBITDA that the OSB business earns per thousand square feet of volume on average over the cycle. This spread accounts for variations in both selling prices and the cost of production. As demand, and therefore commodity prices, fluctuate, in response, we adjust our capacity utilization, our product mix, our maintenance costs, and other factors. And to illustrate how this distinction can be useful, recall that in the third quarter of 2019, the OSB business achieved break-even EBITDA. And in the first quarter of 2023, we reported a small positive EBITDA. These were very similar outcomes, but at very different nominal selling prices and costs of manufacture. Now, historically, LP's cycle average OSB spreads have been around $60 per thousand square feet of sales volume. This is actually the trailing 10-year average for LP's OSB business, excluding the outlier years of 2021 and 2022 when the spread was actually much higher. Actual commodity price fluctuations result in an EBITDA range with a floor that we've demonstrated can be held above zero when prices are low, such as in the two examples I just cited, and then actually with a very high ceiling when prices rise. So if we take this concept and apply it to current conditions, I would estimate the LP's 4 billion square feet of capacity running at about 85% average utilization at $60 per thousand square feet should generate about $200 million in EBITDA on a cycle average basis. And this is actually very close to the EBITDA we just generated in 2023. To use this concept to construct the outlook for OSB, we'll start with the first quarter and build from there. For the first quarter, We expect shipment volumes to be similar to fourth quarter levels at around 770 to 790 million square feet. So far, random length prices have averaged about $25 higher than the fourth quarter we've just reported. So under that volume assumption, if the OSB price holds, EBITDA on the first quarter should be around $65 to $75 million. We're making no attempt to predict future OSB prices, So our full year outlook for OSB is the sum of the first quarter outlook I just gave, followed by three quarters of cycle average EBITDA. Adding the two businesses together and assuming for simplicity that LP South America's EBITDA covers corporate costs, we expect full year EBITDA of about $495 to $525 million, with the first quarter in the $130 to $145 million range. A quick word on sensitivities. As we are already realizing the January price increase in siding, the most significant sensitivity in that business is volume. Each increase or decrease in volume of 10 million square feet from this baseline would add or subtract about $4 million in EBITDA at typical incremental EBITDA margins. For OSB, sensitivities for incremental volume and price shown in the table are based on the same utilization and EBITDA assumptions used to construct our outlook and would, of course, compound. With respect to capital spending, LP invested heavily in smart side and expert finished capacity in 2022 and 2023. As a result, we have a healthy runway of capacity ahead of us. We will continue to invest in growth this year, albeit on a smaller and more targeted scale compared to recent years. Accordingly, 2024 should see capital investments roughly $100 million lower than 2023, with sustaining maintenance comprising roughly 75% of the total. So in many ways, 2024 is a return to normal. Siding is growing again after something of a destocking hangover. OSB prices are currently in a historically normal range, albeit on the high side of that range. And LP's capital investment in 2024 will be nearly $100 million lower than last year because the Segola, Holton, and Bath projects are complete. And with that, we'll be happy to take your questions.

Thank you.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Keetan Mamtoora from BMO.

Thank you. Good morning, Brad, Alan. Thanks for all the details. Alan, perhaps to start with, when I think about the 2024 siding EBITDA guidance, can you talk about sort of at a high level, what are the key elements as we think from 2023 to 2024, given that in 2023 volume was a big drag, there was probably inefficiencies as you were working through the inventory destocking phase. And then you also have a price increase for this year. So can you talk about just sort of three or four key elements as we think about the bridge?

Sure, Keaton. Thanks for the question. You know, I do want to stress that this is the most comprehensive guidance, to my knowledge, that the company has ever given. And one of the objectives, particularly around the 20% EBITDA margin for siding was to actually convey a sense of comfort. If you think about the volume sensitivities, the margin is obviously heavily impacted, or can be heavily impacted by fluctuations in volume. And so, you know, we're confident that we're going to see a volume increase in 2024, and hence that our EBITDA margin will benefit from that, the presence of that volume uplift. On the question of volume, though, we are expecting and anticipating increases in our expert finished production, which is itself right now, as we grow that business, not necessarily margin accretive. It's profitable, but not to the same degree as the rest of the business, a situation which I have absolutely no doubt will improve as the years progress. We are also investing rather heavily in in selling and marketing, certainly more heavily in 2024 than we did in 2023. And that's largely offsetting the benefits that we get from removal of the rampant costs that you saw in 2023. And secondly, or thirdly, rather, we are actually carrying still, as you will note, in essence, one extra mil in our network. Again, this is a This is a decision that we're making in order to make sure that we have all of our mills, let's say, agile and adept at producing siding product as we move ourselves from 2024 into 2025 and continue future growth. And there is, of course, some labor inflation and freight inflation that we're anticipating. It's by no means certain yet. So they're the factors. I've basically thrown those all in the pot in this guidance that we're giving you. And so I was tempted to say, you know, at least 20% EBITDA margin. But occasionally when I've said at least, we've literally blown the number out of the water. And I don't want to send any signal that I think blowing this number out of the water is on the cards. But I think 20%, given all of these investments we're making and our confidence in the volume uplift is a very safe number.

Understood. No, that's a, that's a helpful context. And, and one more on, on siding, uh, you know, can you talk maybe perhaps back, uh, in terms of how the shed business is performing? I know in the middle of the year, we went through this pretty big tea stocking phase there. What are you seeing in sheds demand?

Yeah. So Keaton, we had a good recovery and shed demand second half of last year. So certainly Q4 was, was okay to good. Right now in our order file, it's probably the weakest sector that we have. I think there was a little bit of inventory built in that shed serving channel in Q4, but it's okay. But right now, it's the weakest part of our order file. But we do not anticipate that carrying out throughout the year. It's just kind of what's happening right now. As you are referencing, I'm sure we'd certainly experience kind of an overhang post-COVID of shed demand being very like first half of this year. We're seeing this year being more of a normal demand tool for that sector. Again, but we did carry a little inventory, well, the channel carried a little inventory across the year that we're working through right now. No worries there, just kind of the current situation in the market.

Understood. Now that's very helpful. I'll jump back in the queue. Good luck. Thank you, Pete.

Thank you. One moment for our next question. Our next question comes from the line of Steven Ramsey from Thompson Research Group.

Hi, good morning.

Maybe to continue the citing sales and marketing spend topic, curious where that spend is focused by product set or customer type, and can you talk to how you're judging the success there? the ROI, the timing between spend to sales?

Yeah. So the two areas of focus, first of all, from a sales resource standpoint, is around new construction and the sales assets that are focused on that segment, along with the technical support that goes into ensuring a smooth transition off the incumbent siding product onto smart side. So we're adding sales resources in support of that push in new construction. And then on the marketing side, the focus there is primarily in repair and remodel. That is a different sales process where contractors are actually convincing a homeowner to reside their house and then to use our product. And that requires a good bit of personalized or consumer-oriented marketing support. And so not all of the increases is there, but certainly the majority of the marketing spend increase is focused on our growth of repair and remodel.

Okay, that's perfect. And then on the siting margin outlook, you have a consistent 20% on slide 11 for both Q1 and the full year. But just going midpoint to midpoint, looks like about 100 bps of improvement. Just curious how you think about the cadence through the year, how seasonality plays into that and volume uptake off of the higher base of production.

Yeah, well, the second and third quarters are obviously going to see, if this plays out, higher volumes year over year than first and fourth quarters most likely. So my anticipation is But if the margin peaks, it'll, well, I'm not sure, but certainly I think second and third quarters will be healthy EBITDA margins.

That's great. Thank you.

Given the extra volume.

Thank you. One moment for our next question. Our next question comes from the line of George Staffos from Bank of America Securities, Inc.,

Thanks very much. Hi, everyone. Good morning. Aaron Allen, Brad. Thanks for the details. I had a question on siding margin as well and sort of the investment that you're making this year on marketing and selling. You know, is there much of a lag between when you ultimately expect to get the volume and the investment that you need to support the volume growth that you're expecting? Said differently, should we expect... the selling, general administration, the marketing to move more or less in tandem with the incremental volume and the incremental margin. That's question number one. Question number two, and I'll jump back in queue. Can you talk to us, recognizing it's very difficult to project anything in OSB, what would you be looking to in terms of structural solutions as a percentage of the overall mix when we're all said and done with 24? Thank you.

George, let me, on these additional sales and marketing spend, the impact of that spend is not instantaneous. It's an investment in support of our CapEx investment we've made over the last three or four years. We did consciously cut back on sales and marketing spend as we were in a managed order file. Obviously, there wasn't an immediate need for demand creation. And any demand that would have been created, we would have had trouble satisfying. And so we're seeing this this year really is a return to the more in line with our prior COVID rate, plus added emphasis around the two segments that I mentioned before, where we have historically been under penetrated and not had to have either the sales assets or the level of marketing spend that we anticipate to support a repair and remodel. But I would consider, you know, from a marketing standpoint, you know, you create, I mean, just at a high level, you create an impression, you create some brand equity in anticipation of that creating, you know, demand that you feel later on. And then on the sales side, yeah, some of these technical support staff that we add can have an immediate impact, but really that's more or less helping us with volume we've already converted. The more strategic sales investments, it takes a few months to hire them, a few months to train them, and then a few months for them to start being effective out in the field. So I would say most of this incremental sales and marketing spend, maybe other than the technical sales support, is going into demand creation that will fill, best case, late this year, probably more into next year.

OK, but bottom line, there will be a bias in terms of incremental and overall EBITDA margin. You know, attention to the upside as the year progresses would be my takeaway, both because the seasonal pickup in volume and then even as we get into fourth quarter, some of that investment you've already made. And so you should be getting the benefit of that later in the year. Not trying to be too precise, but just conceptually, is that right? Or would you disagree with any of that?

No, I agree with that. Conceptually, yeah. And then if they don't think I'm sorry, the question. I'll go both. That was a big question. If you want to come back to the side in question, we certainly can. But on the structural solutions, you know, mid 55, I mean, between 50 and 60%, I think is a realistic goal for this year. I'd love to see 55%. You know, we do, we do. Manage that for margin, more so than for volume. But certainly our strategy is to get volume growth as well. And so our ability to push that volume is somewhat dependent on the current price level and our enthusiasm about margin management. But a realistic goal would probably be 53%, 54%, and then an upside goal, maybe 55%, 56%.

Okay. Thank you, Brad. I'll turn it over.

Thank you. One moment for our next question. Our next question comes from the line of Susan McClary from Goldman Sachs. Thank you. Good morning, everyone.

My first question is on siting. You had mentioned on the last quarter call that you were limiting the amount of pre-buy ahead of the January price increase. I guess one, was that a success? And two, given that, how are you thinking about the order files as we are coming into this year and the channel inventories and what that could suggest for the volumes in that segment as we think about the next couple of quarters?

We did limit pre-buy volume to basically the average purchases over the prior nine months for our customers. So we had essentially none to minimal pre-buy or pre-buy in the December, volume for January. So I feel really good about how we carried that across the year. And I feel good about the first six weeks activity in our order file. And I feel there always is some seasonal inventory build this time of year in siding as people come back from the holidays in anticipation of the spring build, especially now that we're also in the pre-finished business. But I would call the seasonal build right now in the channel normal, COVID normal. And so we feel good about pace of our order file. and we feel good about for inventory levels are now in the channel and our own inventory is at the middle level.

Okay, that's helpful. And then perhaps a higher level question. As we think about the potential that rates will come down as we move through the year, and that could drive some pickup in existing home sales, How are you thinking about what that could mean for the business? And any thoughts on the timing around that increase in the turnover in housing relative to when it could come through to the actual results?

Susan, I think an interest rate reduction this year would have a significant impact on housing. I think that the short term would be more emotional. perhaps than economic. Just the movement downward, I think, would provide some home buyers the confidence to move into the market. I do think that over a period of time, it could free up some existing homes to go on the market for homeowners that have been kind of hesitant in this interest rate environment to make that move. That won't necessarily translate into new home construction. I mean, it wouldn't at all. but it's certainly the housing that would be on the market. So I think for this year on new construction, the impact would be maybe a little more emotional or feel good than it is really the economics changing. But I think for 2025, it could be a very powerful driver of demand. And then secondly, on the repair and remodel, a residing project is a high dollar project that You know, it's highly likely to be financed instead of paid, you know, out of savings. And so I do think that interest rate reductions have a more immediate impact on repair and remodel by just making those projects more affordable for a homeowner. So if we get that reduction, I think it would provide new construction some tailwind. Maybe it would be more impactful for 25. I think for repair and remodel, that impact could be immediate for us.

Okay, thank you for the color. It's helpful, and good luck with everything.

Thanks, Susan.

Thank you. One moment for our next question. Our next question comes from the line of Matthew McKellar from RBC Capital Markets.

Hi, good morning. Thanks for taking my questions. Maybe first just setting aside the price increases. Are you able to talk to how you'd expect next shift from what I assume would be more expert finish and potentially more builders series product year over year to affect average selling price and siding in 2024?

Yeah, so I think it's certainly our focus this year is around growing our builder series and our expert finish brands, one for expert finish repair and remodel builder series for new construction, the builder series. It depends on the SKU, but typically that is a price point item to a certain extent. So that would be a damper on average price as that volume increases, not necessarily on margin, but on price. And then for expert finish, that sells for a much higher pricing. And so that would be weighting our revenue up if we get more expert finish. I'm not – I think there's probably more opportunity from a net for the expert finish to have a bigger impact positively than builder series would have negatively, but we'll have to see how that plays out as we go through the year. So maybe mix would be a slight positive upside to the year compared to 23.

Okay, that's helpful. Thanks for that. And then next – In new home construction, can you talk about what the tone is like from your customers in that segment? And with that, do you have a view at this point on whether housing starts by regional builders should trend much differently than housing starts across the industry?

Yeah. So I would say, you know, just giving the exposure that we have to conferences and one-on-one conversations, I think that, you know, Maybe in the middle of fall last year, I felt more pessimistic about this year from a builder standpoint. I think the mood there to strengthen through Q4 and certainly the tone right now is pretty solid. Obviously, the conversations around rate reduction has a positive impact on sentiment there or on the mood. but the large national builders that we partner with are certainly optimistic about this year. They've put infrastructure in place to sell through this year and are anticipating growth. I was surprised to hear in a conference I was in in Q4, or maybe it was in January, anticipating some strengthening from the regional builders just because There's such a need for new home construction because the existing homes aren't on the market. I mean, at the end of the day, there is only so much the national builders can do in the moment, you know, as they continue to grow. And also, you know, post-COVID, there has been some capability for the regional builders to get the permitting, get the infrastructure in place, where they're maybe not as efficient at that as the big builder, but they have been working on it. So overall, I think we could see some recovery or some growth at the regional level. Honestly, that placed our existing sweet spot inside, and we've always had a really good presence there. You couple that with continued growth at the national builder level, we could really play out for a good year for us in new construction.

Great, thanks very much. That's all from me. I'll turn it back.

Thank you. One moment for our next question. Our next question comes from the line of Mark Weintraub from Seaport Research Partners.

Thank you. Alan, I appreciate the qualitative drivers behind the siting margin. changes. I was hoping maybe that we could get a little bit more color on how that translates into the quantitative 20%, which I guess is a little bit lower than my back of the envelope would come out. But obviously, there's lots of stuff you guys know I don't. And so maybe open-ended would what you can add to the conversation at this point? Otherwise, I have kind of more pointed questions too.

I'm not sure which one I prefer. Let me give you a couple of big numbers that are in this. And I'm going to give you ranges. So high level, the selling and marketing investment is $15 to $20 million year over year. And the mill reversal, the mill investment reversal is $15 to $20 million reversing. We are adding other elements of SG&A around, you know, development of new products and the rest of the sort of infrastructure and deciding business of any region of, say, $10 million. And we're anticipating inflation, which can change, of course, except for the labor part of maybe $20 million or so. So there's some big ticket items that are sort of more discreet They are, in some instances, manageable, such as the selling and marketing investment. And that's probably about as much detail as I'm willing to give.

That's super helpful. Maybe two, is it that one shouldn't use like the 50% on incremental margins, which is sort of what you pens out on the anything new above and beyond, you know, on the sensitivities chart you provide for the increase in volumes that you've you've embedded in the guide?

Given those big-ticket items I've called out, if you use the incremental margins, it should all work. The risk of going further and giving you a roll forward. Based on, and something we're not going to be particularly forthcoming yet on, because there is a relationship between the two on how volume and price break down within that revenue guide. It's simply too early in the year for us to give a reasonable call on that. But if you make your volume and price assumptions and use the sensitivity accordingly, you should get something in there.

Yeah, and so I guess that was the last question which I had, and maybe you sort of embedded it in your answers. The first one was, and then is pricing, would that be discrete? And if we're getting 2% additional pricing, that should be incremental to the EBITDA. Or did you just say that's sort of embedded in the incremental pricing? margin analysis?

No, it's not. It's not embedded in the incremental margin. The incremental margin discussion is always purely volume, a pre-existing mix. So, yes, the pricing is incremental to revenue and EBITDA.

All right. Super. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Sean Stewart from TD Securities.

Thanks. Good morning. Question on the OSB cycle average you're giving, which seems to make sense. But you're talking about an 85% operating rate assumption that underlies that, which isn't great. And I guess what I'm wondering is if you can speak to the shape of the cost curve in your OSB portfolio and thoughts on potential asset closures above and beyond siting conversions over the long run, the possibility on that front for the company.

Well, I'll do the cost shape of the cost curve. It's pretty flat, Sean. Obviously, we have some mills that are higher cost and lower cost, and that's how we rationalize uh capacity when we do take the downtime but um uh you know it's probably unmeasurable at the four billion foot level we had a shift back at mount walkie or something like that on a cost standpoint so um pretty flat cost curve and then you know obviously we've learned how to um move that the capacity or the production up and down pretty efficiently so that the cost of of downtime isn't great either. So, yeah, flat cost curve for us and relatively flat for the industry, at least when we do the analysis. You know, earlier in my career, I was in the paper business where the cost curves could be pretty steep, and that's certainly not the case in OSB.

But you would... Sir, go ahead.

For utilization, the 85% is the trail and tenure actual average utilization. So it's very consistent with historical.

Okay. Thanks for that. Second question, on the growth capex of 50, 60 million in 2024, can you give us an idea of where that's being focused? Is it a few specific projects, a broad array of projects across several assets? Any detail on that front?

It's everything and everywhere. The biggest single item is investment in structural solutions enhancements for the value-added OSB, but it's a bunch of small projects. There's no major project that I can really call out.

Okay. And again, 80% of that

the strategic projects are basically inside it. Got it.

Understood. Okay. Thanks very much. That's all I have.

Thank you. One moment for our next question. Our next question comes from the line of Kurt Yinger from DA Davidson.

Great. Thanks, and good morning, everyone. I was just curious, you know, how important is builder series itself to your objectives to grow in the new residential construction segment? And I guess along those lines, you know, what has been kind of the primary feedback from production builders with that product to date? And what do you think is most important in terms of really hitting a tipping point and better penetrating that specific customer set going forward?

Yeah. So, The builder series is very important to our growth objectives for our segment and for the company. It provides a competitive alternative for the big builder and new construction, of course. The reception upon use has been very good. It is a very workable product and certainly easier to install than the competitive product that we're going up against. So the reception has been good. The key is trial and getting the product. There's an incumbent product that we're having to compete against. And that is a long sales process. These aren't something that a decision is not made weekly. exciting a builder is going to use. It's a long sales process. I'll tell you, we have a great value proposition with Builder Series standalone, but as we couple that with structural solutions and even our commodity OSB, which is also a valuable part of the home builder's package, we bring a heft to sales process around these big builders that you know incorporates all the products we make in north america and we're finding traction with that as we couple siding with the structural solutions portfolio and as i mentioned even with commodity osb uh you know we are a meaningful supplier have been a meaningful supplier to the big builder for a long time in our osb um business and so bringing a siding solution to that relationship we're finding to be um very helpful that the relationship that we build through our OSB business is helpful in the sales process for signing. So, you know, we're getting started. I feel good about the progress we've made since we launched Builder Series. I have a tremendous amount of confidence in the product. I have a lot of confidence that once we get the trial, once we get some usage and conversion, the product's going to be sticky because the installer is going to love the product as we've experienced across our portfolio for 25 years. And we're very under-penetrated at the national builder level. So all that volume's incremental to us, and as those builders continue to grow and gain market share, this provides us a real, a large opportunity to continue this growth story that we've been working on for the past 15 years in siding.

Understood. Appreciate the color there, Brad. And then just for my second one, I mean, bigger picture on siding margins, it sounds like the increase in investment in sales and marketing and SG&A this year is kind of getting back to normal as opposed to kind of a one-off step up. There's a pretty large gap still between 20% and call it the mid-20s target for the segment. I'm just kind of curious if you could talk about the timeline for getting back to those targeted siding EBITDA margins and whether that's possible prior to another conversion coming up to the extent that demand warrants it.

Good question. Yeah, it's eminently possible before another mill comes up because the fundamental drag on the EBITDA margin right now is the fact that we're running with one extra mill in the network. the margins will become healthier as we successfully fill that mill with new high-priced product. So yeah, it is possible that we could enjoy good movement towards 25% as we fill them, the capacity we have. As we've said, the significant amount of our capacity additions are behind us and now in operation. So we are carrying that fixed costs, and we're carrying it because we're very confident that the volume needed by those mills to run profitably is very much in our future.

Got it. And just one quick follow-up. I mean, sequentially, side EBITDA margins look kind of down in Q1 versus... You know, Q4, it looks like volume could be flat, maybe a little bit better. You'll have the price increase. I mean, is that all just kind of the increase in selling and marketing that's, you know, weighing it down Q1 versus Q4 or anything else to call out there?

No, that's it.

Okay. Thank you. The labor inflation, yeah, with January 1st wage increases and so on, things like that. Nothing other than what you might call normal economics. Thanks, Ellen.

Thank you. At this time, I would now like to turn the conference back over to Aaron Howald for closing remarks.

Okay. Thank you, Operator. No more questions. We'll end there. But before I do, let me briefly remind everyone that LP will be hosting an Investor Day in Las Vegas at the International Builder Show two weeks from today on the 28th of February, starting at 10 o'clock in the morning local time. The event will be in-person only with no simultaneous webcast, but we will record it and post the recording to the IR webpage pretty soon thereafter. So if you're interested in attending, check the IR webpage for details or reach out and contact me. And with that, we'll close the call. Thank you, everyone, and we hope to see you in Vegas.

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

Thank you. Hello. you Thank you. Thank you.

Good day, and thank you for standing by. Welcome to Q4 2023 Louisiana Pacific Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during 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, Vice President, Investor Relations and Business Development. Please go ahead.

Thank you, Operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the fourth quarter and full year of 2023.

My name is Aaron Howald, and I am LP's Vice President of Investor Relations and Business Development. With me this morning are Brad Southern, LP's Chief Executive Officer, and Alan Hockey, LP's Chief Financial Officer. During this morning's call, we will refer to a presentation that has been posted to LP's IR webpage, which is investor.lpcorp.com. Our AK filing, press release, and other materials detailing LP's strategy and sustainable business model are also available there. As usual, today's discussion will contain forward-looking statements and non-GAAP financial metrics as detailed on slides two and three of the earnings presentation. The appendix of the presentation also contains reconciliations that are further supplemented by this morning's AK filing. Rather than reading those materials, I incorporate them herein by reference. And with that, I will turn the call over to Brad.

Thanks, Aaron, and thank you all for joining us to discuss LP's results for the fourth quarter and the full year of 2023. 2023 ended much better than it began for LP and the markets we serve. In the fourth quarter, Siding achieved its highest EBITDA margin of the year. I'm pleased to share that Siding is back on a growth footing, having returned to normal inventory and order flows after a reduced stocking cycle in the first half of last year. We are well positioned to gain share in R&R and with home builders. Commodity OSB prices fell early in Q4, but rebounded later in the quarter. These factors, along with strong price realization and efficient operations, contributed to an EBITDA result meaningfully above our guided range. Page five of the presentation summarizes some of our results for the quarter and year. LP generated $658 million in sales and $129 million in EBITDA in Q4, bringing the full year totals to $2.6 billion, and $478 million, respectively. This translated into 71 cents of earnings per share in Q4 and $3.22 for the full year. The full year comparisons are negative, largely due to normalized OSB prices, but LP's businesses demonstrated exceptional management of the elements within our control. 2023 was a year of heavy investment and capacity to enable growth in siting and structural solutions. LP invested $300 million in capital in 2023 for the largest projects being the conversion of our mill in Sagola, Michigan to SmartSide from OSB and the construction of our newest expert finish facility in Bath, New York. These projects were completed safely and efficiently, and both facilities are fully up and running. LP also completed the strategic acquisition of a mill in Wawa, Ontario, which expands our portfolio of future siding conversions. Alan will offer more details on capital allocation, but I will summarize by saying that even after another year of significant investment in SmartSide and Expert Finish Capacity, the Wawa acquisition, and $69 million return to shareholders via dividends, LP ended 2023 with $222 million in cash on hand and over $770 million in liquidity. Like LP results, the new residential construction markets we serve saw a meaningful recovery in the second half of 2023 after starting the year notably weaker. Affordability challenges persist, but interest rates have fallen over 100 basis points from their peak in Q4, contributing to improved optimism about single-family housing starts. The repair remodeling sector remains softer than new construction, but lower rates and better affordability may encourage more sales of existing homes or offer homeowners the interest rate clarity needed to take on larger home improvement projects. The current consensus for total housing starts, it's about flat the last year at a bit below 1.4 million, but many forecasters expect a higher single family mix. Compared to the consensus a year ago, we are cautiously optimistic that this improving outlook will translate into a stronger market for LP in 2024. Regardless of the near-term market, I am very confident LP's strategy positions us well with a strong portfolio of products and a long runway for profitable growth. The durability, beauty, and performance of LP's products solve problems for builders, contractors, and homeowners. We are investing in new capacity and new process technology. This improves our productivity, accelerates product innovation, and enhances our margins. We operate our capacity with discipline and agility, whatever the market brings. And we are prudent stewards of our capital, investing strategically in growth and innovation while returning cash to shareholders. None of this happens without the dedication of LP's people. Our operations teams delivered significantly better efficiency and safety performance in 2023, ending the year with a world-class total incident rate of 0.5. A single injury is too many, but I am incredibly proud of our operations team for this performance. We will never stop working to ensure a safe work environment for everyone at LP. I also want to acknowledge and thank LP sales and marketing teams for navigating the difficult process of transitioning off a managed order file. As a result of our highly talented teams and the great culture we've built, LP was recognized in 2023 by Newsweek nationally and in Nashville by our local paper, the Tennessean, is a great place to work. Thank you to every LP team member for your contributions in 2023. And with that, Alan will share more details about LP's financial performance in the quarter, as well as our outlook for Q1 in 2024.

Thanks, Brad. I'll briefly review the results for the siting and the OSB businesses for the fourth quarter and full year. and then offer guidance for EBITDA and capital expenditures. Slide 6 shows Siding's quarterly results. Jumping 12 months back in time, the fourth quarter of 2022 was the last quarter in which Siding was on a managed order file. And as such, it represents rather a difficult comp. The biggest difference in the year-over-year waterfall is therefore the 15% drop in volume, a corresponding $55 million drop in revenue, and a $26 million drop in EBITDA. On the plus side, Bath and Segola are now fully up and running, resulting in lower conversion and ramp-up costs. This, combined with continued improvements in raw material costs, produced a $13 million EBITDA tailwind. Net of $6 million in inventory, absorption, and other stuff, the siding business finished the quarter with $72 million of EBITDA. The EBITDA margin of 22% was the highest of the year. which reinforces our confidence in Siding's long-term 25% EBITDA margin target. Now, I won't belabor the four-year waterfall on slide seven, given that we've discussed the most important elements in prior quarters. However, it is perhaps useful to recap that the transition from a managed order file made for a difficult year with respect to volume, particularly in the first six months, while inventory is normalized. Nonetheless, The four-year EBITDA of $269 million represents a robust EBITDA margin of 20%, particularly so in light of the carrying costs of new capacity, capacity which, I would like to stress, provides a long runway for growth with meaningfully lower future capex, at least until customer demand necessitates further investments. Slide 8 covers the fourth quarter for OSB. While prices fell steeply during the shoulders of the third and fourth quarters, They subsequently recovered and ended the year higher than the prior year, adding about $17 million to year-over-year EBITDA. Volumes were lower in part because of the Segola conversion, but this was partially offset by a significant improvement in operating efficiency. Structural solutions accounted for 52% of OSB volume in the quarter, with value-added products producing $20 million of incremental EBITDA on $39 million of incremental revenue. Lower raw material, mill, and SG&A costs added a $30 million tailwind, resulting in a very respectable $59 million of EBITDA in the quarter. OSB's full year results on slide 9 are dominated by price normalization, but other than that, the year can be summarized as one of lower volume, partially offset by higher OEE, lower raw material costs, and lower overhead costs, given the transfer of Segola to the siding business. Taken as a whole, despite volatility quarter to quarter, 2023 was slightly better than the historical cycle average for the OSB business, which shows the power of LP's OSB strategy. Improved efficiency in operations, disciplined capacity management, and the value generated by the consistent incremental uplift from the structural solutions portfolio. Other than the acquisition of Wawa, cash flows for the quarter and year was straightforward, as shown on slide 10. For the year, LP earned $478 million of EBITDA, paid $65 million in cash taxes, and built $93 million of working capital, resulting in $316 million of operating cash flow. After investing $300 million in GAPEX, paying $80 million to acquire the Wawa Mill, and returning $69 million to shareholders via dividends, the net outflow of $161 million left us with $222 million in cash. Now, before I transition to guidance, let me anticipate and answer one question. LP's capital allocation strategy is unchanged. We will earn cash, invest in growth, and return cash to shareholders via dividends and share repurchases in that order. LP did not repurchase any shares in 2023, but our motivation to do so is undiminished, and we retain a $200 million authorization from the board. we will resume share repurchases when our cash flows and cash balances warrant. 2024 should be a year of growth and meaningfully lower capex and siding. So all else equal, share repurchases are very much back on the table. Which brings us to guidance on slide 11. With the inventory stocking behind us and siding back on a growth footing, as well as more historically normal OSB prices, We have improved visibility to offer a full year outlook for both businesses, if you'll forgive some very obvious caveats. In siding, we expect a year of resumed growth and a more normal seasonal order pattern consistent with what we saw in the fourth quarter and have seen so far in 2024. Revenue growth is expected to outpace both the current flat consensus for total US housing starts and the forecast for single digit declines in repair and remodel. We therefore expect revenue growth of about 8% to 10% for the full year from a combination of volume and price. And this would result in siding revenue of, let's say, $1.45 billion, approaching 2022's record level. An EBITDA margin of around 20% would result in full year EBITDA for siding of between $280 and $300 million, with reduced investments in capacity partially offset by discretionary increases in selling and marketing. So what does this mean for the first quarter? Well, the expected return to more normal seasonal demand patterns means somewhat higher demand in the second and third quarters compared to the first and the fourth. Accordingly, first quarter sales for siding are expected to be in the range of $340 to $350 million, with EBITDA between $65 and $70 million, assuming an EBITDA margin of about 20%. For OSB, full year revenue guidance is impossible without a price prediction, which we won't even pretend to offer. Instead, we're going to introduce the concept of cycle average EBITDA spread. This is the EBITDA that the OSB business earns per 1,000 square feet of volume on average over the cycle. This spread accounts for variations in both selling prices and the cost of production. As demand, and therefore commodity prices, fluctuate, In response, we adjust our capacity utilization, our product mix, our maintenance costs, and other factors. And to illustrate how this distinction can be useful, recall that in the third quarter of 2019, the OSB business achieved break-even EBITDA. And in the first quarter of 2023, we reported a small positive EBITDA. These were very similar outcomes, but at very different nominal selling prices and costs of manufacture. Now, historically, LP cycle average OSB spreads have been around $60 per thousand square feet of sales volume. This is actually the trailing 10-year average for LP's OSB business, excluding the outlier years of 2021 and 2022 when the spread was actually much higher. Actual commodity price fluctuations result in an EBITDA range with a floor that we've demonstrated can be held above zero when prices are low, such as in the two examples I just cited, and then actually with a very high ceiling when prices rise. So if we take this concept and apply it to current conditions, I would estimate the LP's 4 billion square feet of capacity running at about 85% average utilization at $60 per thousand square feet should generate about $200 million in EBITDA on a cycle average basis. And this is actually very close to the EBITDA we just generated in 2023. To use this concept to construct the outlook for OSB, we'll start with the first quarter and build from there. For the first quarter, we expect shipment volumes to be similar to fourth quarter levels at around 770 to 790 million square feet. So far, random length prices have averaged about $25 higher than the fourth quarter we've just reported. So under that volume assumption, If the OSB price holds, EBITDA in the first quarter should be around $65 to $75 million. We're making no attempt to predict future OSB prices, so our full year outlook for OSB is the sum of the first quarter outlook I just gave, followed by three quarters of cycle average EBITDA. Adding the two businesses together and assuming for simplicity that LP South America's EBITDA covers corporate costs, we expect full-year EBITDA of about $495 to $525 million, with the first quarter in the $130 to $145 million range. A quick word on sensitivities. As we are already realizing the January price increase in siding, the most significant sensitivity in that business is volume. Each increase or decrease in volume of 10 million square feet from this baseline would add or subtract about $4 million in EBITDA at typical incremental EBITDA margins. For OSB, sensitivities for incremental volume and price shown in the table are based on the same utilization and EBITDA assumptions used to construct our outlook and would, of course, compound. With respect to capital spending, LP invested heavily in smart side and expert finished capacity in 2022 and 2023. As a result, we have a healthy runway of capacity ahead of us. We will continue to invest in growth this year, albeit on a smaller and more targeted scale compared to recent years. Accordingly, 2024 should see capital investments roughly $100 million lower than 2023, with sustaining maintenance comprising roughly 75% of the total. So in many ways, 2024 is a return to normal. Siding is growing again after something of a destocking hangover. OSB prices are currently in a historically normal range, albeit on the high side of that range. And LP's capital investment in 2024 will be nearly $100 million lower than last year because the Segola, Holton, and Bath projects are complete. And with that, we'll be happy to take your questions.

Thank you.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Keetan Mamtoora from BMO.

Thank you. Good morning, Brad, Alan. Thanks for all the details. Alan, perhaps to start with, when I think about the 2024 siding EBITDA guidance, can you talk about sort of at a high level, what are the key elements as we think from 2023 to 2024, given that in 2023 volume was a big drag, there was probably inefficiencies as you were working through the inventory destocking phase. And then you also have a price increase for this year. So can you talk about just sort of three or four key elements as we think about the bridge?

Sure, Keaton. Thanks for the question. You know, I do want to stress that this is the most comprehensive guidance, to my knowledge, that the company has ever given. And one of the objectives, particularly around the 20% EBITDA margin for siding was to actually convey a sense of comfort. If you think about the volume sensitivities, the margin is obviously heavily impacted, or can be heavily impacted by fluctuations in volume. And so, you know, we're confident that we're going to see a volume increase in 2024, and hence that our EBITDA margin will benefit from that, the presence of that volume uplift. On the question of volume, though, we are expecting and anticipating increases in our export finished production, which is itself right now, as we grow that business, not necessarily margin accretive. It's profitable, but not to the same degree as the rest of the business, a situation which I have absolutely no doubt will improve as the years progress. We are also investing rather heavily in selling and marketing, certainly more heavily in 2024 than we did in 2023. And that's largely offsetting the benefits that we get from removal of the rampant costs that you saw in 2023. And secondly, or thirdly, rather, we are actually carrying still, as you will note, in essence, one extra mil in our network. Again, this is a This is a decision that we're making in order to make sure that we have all of our mills, let's say, agile and adept at producing siding product as we move ourselves from 2024 into 2025 and continue future growth. And there is, of course, some labor inflation and freight inflation that we're anticipating. It's by no means certain yet. So they're the factors. I've basically thrown those all in the pot in this guidance that we're giving you. And so I was tempted to say, you know, at least 20% EBITDA margin. But occasionally when I've said at least, we've literally blown the number out of the water. And I don't want to send any signal that I think blowing this number out of the water is on the cards. But I think 20%, given all of these investments we're making and our confidence in the volume uplift is a very safe number.

Understood. No, that's a, that's a helpful context. And, and one more on, on siding, uh, you know, can you talk maybe perhaps back, uh, in terms of how the sheds business is performing? I know in the middle of the year, we went through this pretty big tea stocking phase there. What are you seeing in sheds demand?

Yeah. So Keaton, we had a good recovery and shed demand second half of last year. So certainly Q4 was, was okay to good. Right now in our order file, it's probably the weakest sector that we have. I think there was a little bit of inventory built in that shed serving channel in Q4, but it's okay. But right now, it's the weakest part of our order file. But we do not anticipate that carrying out throughout the year. It's just kind of what's happening right now. As you are referencing, I'm sure we'd certainly experience kind of an overhang post-COVID of shed demand being very like first half of this year. We're seeing this year being more of a normal demand tool for that sector. Again, but we did carry a little inventory, well, the channel carried a little inventory across the year that we're working through right now. No worries there, just kind of the current situation in the market.

Understood. No, that's very helpful. I'll jump back in the queue. Good luck. Thank you, Pete.

Thank you. One moment for our next question. Our next question comes from the line of Steven Ramsey from Thompson Research Group.

Hi, good morning.

Maybe to continue the citing sales and marketing spend topic, curious where that spend is focused by product set or customer type, and can you talk to how you're judging the success there? the ROI, the timing between spend to sales?

Yeah. So the two areas of focus, first of all, from a sales resource standpoint, is around new construction and the sales assets that are focused on that segment, along with the technical support that goes into ensuring a smooth transition off the incumbent siding product onto smart side. So we're adding sales resources in support of that push in new construction. And then on the marketing side, the focus there is primarily in repair and remodel. That is a different sales process where contractors are actually convincing a homeowner to reside their house and then to use our product. And that requires a good bit of personalized or consumer-oriented marketing support. And so not all of the increases is there, but certainly the majority of the marketing spend increase is focused on our growth of repair and remodel.

Okay, that's perfect. And then on the siting margin outlook, you have a consistent 20% on slide 11 for both Q1 and the full year. But just going midpoint to midpoint, looks like about 100 bps of improvement. Just curious how you think about the cadence through the year, how seasonality plays into that and volume uptake off of the higher base of production.

Yeah, well, the second and third quarters are obviously going to see, if this plays out, higher volumes year over year than first and fourth quarters most likely. So my anticipation is that if the margin peaks, it'll, well, I'm not sure, but certainly I think second and third quarters will be healthy EBITDA margins.

That's great. Thank you. Given the extra volume.

Thank you. One moment for our next question. Our next question comes from the line of George Staffos from Bank of America Securities, Inc.,

Thanks very much. Hi, everyone. Good morning. Aaron Allen, Brad. Thanks for the details. I had a question on siding margin as well and sort of the investment that you're making this year on marketing and selling. You know, is there much of a lag between when you ultimately expect to get the volume and the investment that you need to support the volume growth that you're expecting? Said differently, should we expect... the selling, general administration, the marketing to move more or less in tandem with the incremental volume and the incremental margin. That's question number one. Question number two, and I'll jump back in queue. Can you talk to us, recognizing it's very difficult to project anything in OSB, what would you be looking to in terms of structural solutions as a percentage of the overall mix when we're all said and done with 24? Thank you.

George, let me, on these additional sales and marketing spend, the impact of that spend is not instantaneous. It's an investment in support of our CapEx investment we've made over the last three or four years. We did consciously cut back on sales and marketing spend as we were in a managed order file. Obviously, there wasn't an immediate need for demand creation. And any demand that would have been created, we would have had trouble satisfying. And so we're seeing this this year really is a return to the more in line with our prior COVID rate, plus added emphasis around the two segments that I mentioned before, where we have historically been under penetrated and not had to have either the sales assets or the level of marketing spend that we anticipate to support a repair and remodel. But I would consider, you know, from a marketing standpoint, you know, you create, I mean, just at a high level, you create impressions, you create some brand equity in anticipation of that creating, you know, demand that you feel later on. And then on the sales side, yeah, some of these technical support staff that we add can have an immediate impact, but really that's more or less helping us with volume we've already converted. The more strategic sales investments, it takes a few months to hire them, a few months to train them, and then a few months for them to start being effective out in the field. So I would say most of this incremental sales and marketing spend, maybe other than the technical sales support, is going into demand creation that will fill, best case, late this year, probably more into next year.

Okay. But bottom line, there'll be a bias in terms of incremental and overall EBITDA margin. You know, attention to the upside as the year progresses would be my takeaway, both because the seasonal pickup in volume and then even as we get into fourth quarter, some of that investment you've already made. And so you should be getting the benefit of that later in the year. Not trying to be too precise, but just conceptually, is that right? Or would you disagree with any of that?

No, I agree with that, conceptually, yeah. And then, I'm sorry, the question, I'll go, most of those big questions, if you want to come back to the siding question, we certainly can, but on the structural solutions, you know, mid-55, I mean, between 50 and 60 percent, I think, is a realistic goal for this year. I'd love to see 55 percent. You know, we do, we do manage that for margin, more so than for volume. But certainly our strategy is to get volume growth as well. And so we'll end up, you know, our ability to push that volume is somewhat dependent on, you know, the current price level and our enthusiasm about margin management. But a realistic goal would probably be, you know, 53, 54%, and then an upside goal, maybe 55, 56%.

Okay. Thank you, Brad. I'll turn it over.

Thank you. One moment for our next question. Our next question comes from the line of Susan McClary from Goldman Sachs. Thank you.

Good morning, everyone. My first question is on siting. You had mentioned on the last quarter call that you were limiting the amount of pre-buy ahead of the January price increase. I guess one, was that a success? And two, given that, how are you thinking about the order files as we are coming into this year and the channel inventories and what that could suggest for the volumes in that segment as we think about the next couple quarters?

We did limit pre-buy. pre-buy volume to basically the average purchases over the prior nine months for our customers. So we had essentially none to minimal pre-buy or pre-buy in the December, volume for January. So I feel really good about how we carried that across the year. And I feel good about the first six weeks activity in our order file. And I feel there always is some seasonal inventory build this time of year in siding as people come back from the holidays in anticipation of the spring build, especially now that we're also in the pre-finished business. But I would call the seasonal build right now in the channel normal, COVID normal. And so we feel good about pace of our order file. and we feel good about for inventory levels are now in the channel and our own inventory is at the middle level.

Okay, that's helpful. And then perhaps a higher level question, as we think about the potential that rates will come down as we move through the year, and that could drive some pickup in existing home sales, How are you thinking about what that could mean for the business? And any thoughts on the timing around that increase in the turnover in housing relative to when it could come through to the actual results?

Susan, I think an interest rate reduction this year would have a significant impact on housing. I think that the short term would be more emotional. perhaps than economic. Just the movement downward, I think, would provide some home buyers the confidence to move into the market. I do think that over a period of time, it could free up some existing homes to go on the market for homeowners that have been kind of hesitant in this interest rate environment to make that move. That won't necessarily translate into new home construction. I mean, it wouldn't at all. But it's certainly the housing that would be on the market. So I think for this year on new construction, the impact would be maybe a little more emotional or feel good than it is really the economics changing. But I think for 2025, it could be a very powerful driver of demand. And then secondly, on the repair and remodel, a residing project is a high dollar project that You know, it's highly likely to be financed instead of paid, you know, out of savings. And so I do think that interest rate reductions have a more immediate impact on repair and remodel by just making those projects more affordable for a homeowner. So if we get that reduction, I think it would provide new construction some tailwind. Maybe it would be more impactful for 25. I think for repair and remodel, that impact could be immediate for us.

Okay, thank you for the color. It's helpful, and good luck with everything.

Thanks, Susan.

Thank you. One moment for our next question. Our next question comes from the line of Matthew McKellar from RBC Capital Markets.

Hi, good morning. Thanks for taking my questions. Maybe first just setting aside the price increases. Are you able to talk to how you'd expect next shift from what I assume would be more expert finish and potentially more builders series product year over year to affect average selling price and siding in 2024?

Yeah, so I think it's certainly our focus this year is around growing our builder series and our expert finish brands, one for expert finish repair and remodel builder series for new construction. The builder series, it depends on the SKU, but typically that is a price point item to a certain extent. So that would be a damper on average price as that volume increases, not necessarily on margin, but on price. And then for expert finish, that sells for a much higher pricing. And so that would be weighting our revenue up if we get more expert finish. I'm not – I think there's probably more opportunity from a net for the expert finish to have a bigger impact positively than builder series would have negatively, but we'll have to see how that plays out as we go through the year. So maybe mix would be a slight positive upside to the year compared to 23. Okay, that's helpful.

Thanks for that. And then next – In new home construction, can you talk about what the tone is like from your customers in that segment? And with that, do you have a view at this point on whether housing starts by regional builders should trend much differently than housing starts across the industry?

Yeah. So I would say, you know, just giving the exposure that we have to conferences and one-on-one conversations, I think that, you know, Maybe in the middle of fall last year, I felt more pessimistic about this year from a builder standpoint. I think the mood there to strengthen through Q4 and certainly the tone right now is pretty solid. Obviously, the conversations around rate reduction has a positive impact on sentiment there or on the mood. But the large national builders that we partner with are certainly optimistic about this year. They've put infrastructure in place to sell through this year and are anticipating growth. I was surprised to hear in a conference I was in in Q4, or maybe it was in January, anticipating some strengthening from the regional builders just because There's such a need for new home construction because the existing homes are on the market. At the end of the day, there is only so much the national builders can do in the moment as they continue to grow. Also, post-COVID, there has been some capability for the regional builders to get the permitting, get the infrastructure in place. They're maybe not as efficient at that as the big builder, but they have been working on it. So overall, I think we could see some recovery or some growth at the regional level. Honestly, that placed our existing sweet spot in Sinai. We've always had a really good presence there. You couple that with continued growth at the national builder level, we could really play out for a good year for us in new construction.

Great, thanks very much. That's all for me. I'll turn it back.

Thank you. One moment for our next question. Our next question comes from the line of Mark Weintraub from Seaport Research Partners.

Thank you. Alan, I appreciate the qualitative drivers behind the siting margin. changes. I was hoping maybe that we could get a little bit more color on how that translates into the quantitative 20%, which I guess is a little bit lower than my back of the envelope would come out. But obviously, there's lots of stuff you guys know I don't. And so maybe open-ended would what you can add to the conversation at this point. Otherwise, I have kind of more pointed questions too.

I'm not sure which one I prefer. Let me give you a couple of big numbers that are in this. And I'm going to give you ranges. So high level, the selling and marketing investment is $15 to $20 million year over year. And the mill reversal, the mill investment reversal is $15 to $20 million reversing. We are adding other elements of SG&A around, you know, development of new products and the rest of the sort of infrastructure and deciding business of any region of, say, $10 million. And we're anticipating inflation, which can change, of course, except for the labor part of maybe $20 million or so. So there's some big ticket items that are sort of more discreet They are, in some instances, manageable, such as the selling and marketing investment. And that's probably about as much detail as I'm willing to give.

That's super helpful. Maybe two, is it that one shouldn't use like the 50% on incremental margins, which is sort of what you pens out on the anything new above and beyond, you know, on the sensitivities chart you provide for the increase in volumes that you've you've embedded in the guide?

Given those big ticket items I've called out, if you use the incremental margins, it should all work at the risk of going further and giving you a roll forward. Based on, and something we're not going to be particularly forthcoming yet on, because there is a relationship between the two on how volume and price break down within that revenue guide. It's simply too early in the year for us to give a reasonable call on that. But if you make your volume and price assumptions and use the sensitivity accordingly, you should get something in there.

Yeah, and so I guess that was the last question which I had, and maybe you sort of embedded it in your answers. The first one was, and then is pricing, would that be discrete? And if we're getting 2% additional pricing, that should be incremental to the EBITDA. Or did you just say that's sort of embedded in the incremental pricing? margin analysis?

No, it's not. It's not embedded in the incremental margin. The incremental margin discussion is always purely volume, a pre-existing mix. So, yes, the pricing is incremental to revenue inhibitor.

All right. Super. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Sean Stewart from TD Securities.

Thanks. Good morning. Question on the OSB cycle average you're giving, which seems to make sense. But you're talking about an 85% operating rate assumption that underlies that, which isn't great. And I guess what I'm wondering is if you can speak to the shape of the cost curve in your OSB portfolio and thoughts on potential asset closures above and beyond siting conversions over the long run, the possibility on that front for the company.

Well, I'll do the cost shape of the cost curve. It's pretty flat, Sean. Obviously, we have some mills that are higher cost and lower cost, and that's how we rationalize uh capacity when we do take the downtime but um uh you know it's probably unmeasurable at the four billion foot level if we had a shift back at mount walkie or something like that on a cost standpoint so um pretty flat cost curve and then you know obviously we've learned how to move that the capacity or the production up and down pretty efficiently so that the cost of of downtime isn't great either. So, yeah, flat cost curve for us and relatively flat for the industry, at least when we do the analysis. You know, earlier in my career, I was in the paper business where the cost curves could be pretty steep, and that's certainly not the case in OSB.

But you wouldn't... Sir, go ahead.

For utilization, the 85% is the trailing 10-year actual average utilization. So it's very consistent with historical.

Okay. Thanks for that. Second question, on the growth capex of 50, 60 million in 2024, can you give us an idea of where that's being focused? Is it a few specific projects, a broad array of projects across several assets? Any detail on that front?

It's everything and everywhere. The biggest single item is investment in structural solutions enhancements for the value-added OSB, but it's a bunch of small projects. There's no major project that I can really call out.

Okay. And again, 80% of that

the strategic projects are basically inside it. Got it.

Understood. Okay. Thanks very much. That's all I have.

Thank you. One moment for our next question. Our next question comes from the line of Kurt Yinger from DA Davidson.

Great. Thanks, and good morning, everyone. I was just curious, you know, how important is builder series itself to your objectives to grow in the new residential construction segment? And I guess along those lines, you know, what has been kind of the primary feedback from production builders with that product to date? And what do you think is most important in terms of really hitting a tipping point and better penetrating that specific customer set going forward?

Yeah. So, The builder series is very important to our growth objectives for our segment and for the company. It provides a competitive alternative for the big builder and new construction, of course. The reception upon use has been very good. It is a very workable product and certainly easier to install than the competitive product that we're going up against. So the reception has been good. The key is trial and getting the product. There's an incumbent product that we're having to compete against. And that is a long sales process. These aren't something that a decision is not made weekly. which siding a builder is going to use and so you know it's a long sales process it uh you know it i'll tell you we we we have a great value proposition with builder series standalone but as we couple that with structural solutions and even our commodity osb which is you know also a valuable part of the home builders uh package you know we we bring a heft to the sales process around these big builders that incorporates all of the products we make in North America. And we're finding traction with that as we couple siding with the structural solutions portfolio, and as I mentioned, even with the commodity OSB. We are a meaningful supplier, have been a meaningful supplier to the big builder for a long time in our OSB business. And so bringing a siding solution to that relationship, we're finding to be very helpful that the relationship that we build through our OSB business is helpful in the sales process for siting. So, you know, we're getting started. I feel good about the progress we've made since we launched Builder Series. I have a tremendous amount of confidence in the product. I have a lot of confidence that once we get the trial, once we get some usage and conversion, the product's going to be sticky because the installer is going to love the product as we've experienced across our portfolio for 25 years. And we're very under-penetrated at the national builder level. So all that volume's incremental to us, and as those builders continue to grow and gain market share, this provides us a real, a large opportunity to continue this growth story that we've been working on for the past 15 years and siding.

Understood. Appreciate the color there, Brad. And then just for my second one, I mean, bigger picture on siding margins, it sounds like the increase in investment in sales and marketing and SG&A this year is kind of getting back to normal as opposed to kind of a one-off step up. There's a pretty large gap still between 20% and call it the mid-20s target for the segment. I'm just kind of curious if you could talk about the timeline for getting back to those targeted siding EBITDA margins and whether that's possible prior to another conversion coming up to the extent that demand warrants it.

Good question. Yeah, it's eminently possible before another mill comes up because the fundamental drag on the EBITDA margin right now is the fact that we're running with one extra mill in the network. the margins will become healthier as we successfully fill that mill with new high-priced product. So yeah, it is possible that we could enjoy good movement towards 25% as we fill them, the capacity we have. As we've said, the significant amount of our capacity additions are behind us and now in operation. So we are carrying that fixed costs, and we're carrying it because we're very confident that the volume needed by those mills to run profitably is very much in our future.

Got it. And just one quick follow-up. I mean, sequentially, side EBITDA margins look kind of down in Q1 versus... You know, Q4, it looks like volume could be flat, maybe a little bit better. You'll have the price increase. I mean, is that all just kind of the increase in selling and marketing that's, you know, weighing it down, Q1 versus Q4, or anything else to call out there?

No, that's it.

Okay. Thank you. The labor inflation, yeah, with January 1st wage increases and so on, things like that. Nothing other than what you might call normal economics. Thanks, Ellen.

Thank you. At this time, I would now like to turn the conference back over to Aaron Howald for closing remarks.

Okay, thank you, Operator. No more questions will end there, but before I do, let me briefly remind everyone that LP will be hosting an Investor Day in Las Vegas at the International Builder Show two weeks from today on the 28th of February, starting at 10 o'clock in the morning local time. The event will be in-person only with no simultaneous webcast, but we will record it and post the recording to the IR webpage pretty soon thereafter. So if you're interested in attending, check the IR webpage for details or reach out and contact me. And with that, we'll close the call. Thank you, everyone, and we hope to see you in Vegas.

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