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spk34: Good day, and thank you for standing by. Welcome to the Louisiana Pacific Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To answer your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Aaron Holdwell, Vice President, VP, I'm sorry, Investor Relations and Business Development. Please go ahead.
spk30: Thank you, Operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the second quarter of 2024, as well as our updated outlook. My name is Aaron Holdwell, 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. After prepared remarks, we will take one round of questions. 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 8K filing, earnings press release, and other materials are also available there, including our recently published 2024 sustainability report. As always, I will caution you that today's discussion contains forward-looking statements and non-GAAP financial metrics, as described 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 statements, I will incorporate them by reference. And with that, I will turn the call over to Brad.
spk15: Thanks, Aaron, and thank you all for joining us this morning. LP Siding and OSB Businesses built on the strong first quarter Executing Our Strategy and Delivering Continued Growth, Share Gains, and Margin Expansion in the Second Quarter of 2024. I will summarize a few of the highlights of the quarter, which are detailed on page five of the presentation, and discuss the factors that contributed to these results before turning the call over to Alan for more detail on the business's performance in the quarter and an update on capital allocation. LP's net sales in the quarter reached $814 million, up 33% compared to prior year. Siding sales grew by 30% in the quarter, the result of 22% higher sales volume and 6% higher prices, both of which were helped by another record quarter for expert finish. In OSB, higher prices and improved mix of structural solutions, value-added OSB, contributed to strong revenue growth. At the same time, leverage from increased volume and operational efficiency improved margins. As a result, LP more than doubled adjusted EBITDA, operating cash flow, and adjusted earnings per share compared to the second quarter of 2023. With the capacity expansion projects of the past two years now complete and the new facilities fully operational, CapEx was a comparatively light $36 million in the quarter. This left a greater proportion of LP's operating cash flow available to return to shareholders. Therefore, consistent with our capital allocation strategy, $120 million were spent on dividends and share repurchases through the quarter. Share repurchases have continued since quarter end, as Alan will detail in a moment. On the lower left of page five, you will see some other highlights. First and most importantly, our business is operated safely. LP wins more than our fair share of industry safety awards. In fact, we were just named the safest company in our category by the APA Engineered Wood Association. But the best reward is sending everyone home safely every day. I want to thank our operations teams for achieving an outstanding total incident rate in the second quarter of 0.6. Siding and OSB both delivered impressive operating efficiency in the quarter, which we measure with OEE. The siding business held OEE flat at 77% despite the complexity of ramping up the most recent siding conversion in Segola, Michigan, and our Greenfield prefinished facility in Bath, New York. The OSB business increased OEE by three points compared to last year. This high-level operating efficiency was a major contributor to the business's cost performance in the quarter. Finally, LP published our 2024 sustainability report in July. As detailed in the report, SmartSight is significantly more sustainable than competing sighting technologies, and most of LLP's products are carbon negative. I want to thank everyone at LP who contributed to the report and to the impressive story it tells. On the left side of page six in the presentation, you will see an updated chart showing normalized growth of sighting volume and revenue compared to U.S. housing starts. The 2024 data for sighting reflects the midpoints of our increased guidance for sighting growth While the housing data is based on fact sets, consensus for housing starts in 2024, which is currently at 1.4 million. As you can see, siting growth continues to exceed that of the underlying housing market as LP gains share in residential construction. The repair remodeling market is more difficult to track, but the general consensus is that R&R spending overall is down by mid-single digits compared to last year. For the record quarter for expert finish or pre-finish siting designed for the R&R market, LP siding business also seems to be gaining share in the R&R segment. In 2024, we expect expert finish to be close to 10% of total siding volume. And given its higher price point, at 10% of volume, expert finish would account for roughly 14% of siding revenue. Expert finish margins improved in the quarter as well, helping siding to achieve a 25% EBITDA margin in the quarter. We believe we have a long runway for growth and share gains in the new construction, R&R, and offsite segments of the siding business, and with both primed and prefinished smart side. And we intend to continue developing new products, expanding our addressable markets, and executing our sales and operations strategies to drive future growth. And with that, I will turn the call over to Alan for more detail on LP's financial performance in the quarter before taking your questions. Thanks, Brad.
spk25: As Brad said, it was a strong quarter. And as the waterfall charts on the next two pages of the presentation show, it was also a refreshingly straightforward one in terms of year-over-year comparisons. Page 8 shows the performance of siding compared to the second quarter of 2023. With last year's capacity addition projects and channel inventory stocking both now behind us, the waterfall tells a story of volume growth, price increases, and some much anticipated operating leverage. Sales volumes grew by 22%, boosted by share gains in new residential construction and repair and remodel, and a record quarter in expert finish, all admittedly riding on a relatively soft comparable. But this higher sales volume generated $71 million in additional revenue and $28 million of EBITDA at an incremental EBITDA margin of almost 40% before considering the impact of price increases. Speaking of which, List price increases and favorable mix combined roughly equally towards 6% in higher prices worth $24 million. Increases in selling and marketing investments were almost fully funded by their non-recurrence of last year's mill conversions, resulting in a net $2 million of investment costs, while lower logs and resin prices supplied a useful $5 million tailwind. Finally, as a result of ramping up the more automated pre-finishing facility in Bath, New York, and investments in similarly advanced equipment in our Green Bay pre-finishing facility, there has been, as Brad said, a significant improvement in export-finish margins over last year. Now, export-finish margins are not yet equivalent to the business average, but they're getting closer and closer. Incidentally, this improvement shows up in other costs on the waterfall because our methodology is to value changes in volume at the prior year margin. The net result of all this is $415 million in revenue, up $95 million, with a near doubling of EBITDA to $105 million. And naturally, this pushed Siding's EBITDA margin up by 7 points to 25%. The waterfall on page 9 also tells a simple and effective story of consistent execution by the OSB team. Prices were 34% higher than last year, adding $73 million in both sales and EBITDA. Unlike siding, OSB prices are largely outside our control. But what the OSB team can control, however, is volume, mix, and operating efficiency. And like siding, the OSB team delivered an exceptional quarter on all of these fronts. Sales volumes in the quarter were 100 million square feet higher than last year, made possible in part by an impressive three percentage point increase in operating efficiency. 52% of volume in the quarter with higher value-added structural solutions This incremental volume generated an additional $40 million in net sales and $23 million in EBITDA. OSB ended the quarter with $351 million in sales and $125 million in EBITDA. And as Brad mentioned earlier, they did so safely. Clean quarters of sales growth and operational excellence in both siding and OSB make for a similarly straightforward cash flow, as slide 10 shows. After starting the quarter with $244 million in cash, LP earned $229 million in EBITDA, paid $59 million in taxes, and saw a seasonally normal reduction in working capital that brought in a further $39 million. With the resulting $212 million in operating cash flow, we executed our capital allocation strategy as we have consistently done, investing $36 million in CapEx and returning $120 million to shareholders. During the quarter, we paid $102 million to repurchase 1.2 million shares at an average price a little over $84 per share. The $17 million in other investing and financing is mostly the sale of LP's 50% ownership of a joint venture, a remnant of our investment in Intecra. And for avoidance of doubt, this gain was excluded from adjusted EBITDA, as you can see in the reconciliation in the appendix. And LP ended the second quarter with $317 million in cash. As of yesterday, the 6th of August, LP has paid a further $64 million for share repurchases, bringing outstanding shares to about $70.3 million and a remaining board authorization, as of yesterday, of $270 million. Which brings me to guidance on slide 11. I'd like to briefly remind you that when we updated our guidance on our first quarter earnings call, we increased the full year guidance for siding by the sum of the first quarter beat and the increase in the second quarter outlook. At that time, we had insufficient visibility to adjust guidance for the second half. But 90 days hence, with a citing order file that continues to be robust, we can now offer updated outlook through the year end. As Brad said earlier, demand for SmartSide continues to outperform a moderately weak repair and remodel market. But based on new volume records for both primed and pre-finished SmartSide in the second quarter, we now expect year-over-year revenue growth in the third quarter of between 16% and 18%, for revenue between 390 and $410 million. An EBITDA margin of about 25% would yield siding EBITDA in the third quarter at between 95 and $105 million. We continue to see typical seasonal patterns in demand, which usually means that the fourth quarter delivers weaker sales volumes as the building season winds down. If the third quarter turns out as we expect and typical seasonal demand patterns emerge, the resulting full-year revenue growth for siding in 2024 would be between 14% and 16% to a bit above $1.5 billion. Increased volume should boost the EBITDA margin up a point or so from our prior guidance to about 24%, yielding full-year EBITDA for siding between $355 and $375 million. In summary, this is a beaten race for siding with a third quarter that so far looks very much like the second. OSB is a different story. Prices fell significantly at the end of the second quarter. The bulk of that will be felt in LP's third quarter due to the time lag in our order file. And assuming prices remain flat at last Friday's levels, published by Random Length, the OSB business would earn somewhere between $10 and $20 million in EBITDA in the third quarter. As always, this is not a price prediction, just an attempt to offer useful modeling. For the fourth quarter and full year OSB outlook, and to reflect the reality that OSB demand and prices rarely increase meaningfully in the fourth quarter, we will extend the flat from Friday prior approach through year end. Therefore, holding prices flat at current levels and assuming seasonally lower OSB volumes would imply EBITDA for the fourth quarter of about $10 million below that of the third quarter. So assuming the year plays out as I've just described, And as usual, treating LPSA earnings and corporate expenses as mutually offsetting, total EBITDA for LP in the third quarter would be in the $105 to $125 million range, and full-year EBITDA would be between $580 and $620 million. And with that, we'll be happy to take your questions. Thank you.
spk34: As a reminder, if you'd like to ask a question, please press star 11 on your telephone. We also ask that you wait for your name and company to be announced before proceeding with your question. We ask that you limit yourself to one question and one follow-up. One moment for the first question. And our first question will be coming from Stephen Ramsey of Thompson Research Group. Your line is open.
spk27: Good morning.
spk28: Maybe to start with the Q2, Not citing EBITDA margin just slightly above the first quarter despite much higher sales. Maybe talk to the puts and takes. I'm sure some of that is the expert finished growth, which I know is an incremental drag if that volume is growing better than the core smart side product. But just overall, the puts and takes on the Q1 to Q2 citing EBITDA margins.
spk25: Sure. There's not a great deal to add. You captured one of the factors. The expert finish margin is significantly improving, but it's below the average. We have, in some instances, added shifts to help make sure that we keep lead times healthy. And the mix changes slightly in terms of the top line in terms of pricing, and that obviously affects the margin a little bit, but Other than that, there's nothing really of any great significance other than, as you said, expert finished growing, slight addition of labor, and changes in top line mix.
spk28: Okay, that's helpful. And then also thinking on citing the builder series rollout, just curious on general updates on how that is going with the current partnership with Lennar and how you're thinking about potential partnerships with other large builders, how that could play out over the second half and into next year.
spk15: We're very pleased with the growth in the first series product line, particularly from now coming in from Lennar. But we do have initiatives with several other national and large regional to secure additional volume there. Only with the Builder Series 3 volume that's directly measurable to be competitive with the big builder. We are seeing really good product pickup in those regions as well. Tram and soffit SKUs are pulled along as a result of the Builder Series Lap product being allowing us to secure a position with the builders so um you know the growth you know a lot of the growth that we're seeing currently uh on siding can be attributed directly to the big builder initiative that we have and we expect we and the second part of your question we expect continued success there as we move through the rest of this year into next year that's helpful thank you welcome
spk34: Thank you. One moment for the next question. And our next question will be coming from Kurt Yinger of D.A. Davidson. Your line is open. Great.
spk32: Thank you, and good morning, everyone. Brad, I just wanted to follow up on the last comment around the strength in the big builder business. Is that primarily, you know, a builder series dynamic at this stage, just that product, or are you seeing, you know, solid takeaway on prime product as well and kind of big builder as we think about it should be sort of a collection of those products as opposed to just builder series?
spk15: Yeah, dead on, Kurt. You know, the builder series lap certainly makes us competitive or has helped to make us competitive from a lap standpoint. But, you know, as we are successful converting builders with our lap offering and builder series, we have generally speaking the house is also trimmed the soffit is ours any panel or shake product that you use is an lp product and we are seeing you know in the regions in the geographic regions where we are seeing success that is measurable you know directly The fact that additional market share pulls those other products along as well. So, yes, we've got good growth on builder series, but we've got good growth on all primed SKUs that go into single-family new construction this year.
spk32: Okay. Makes sense. And then on the expert finish front, I mean, the answer seems kind of obvious, but I'll ask it anyways. I mean, does the performance and strength that you're seeing there, are you seeing any offset from lower volume to others who might have been pre-finishing the products themselves and selling them under a different brand name? And then on the margin front, how should we sort of ring fence the long-term vision in terms of what expert finish could be? Is it reasonable to think that, you know, just given the price point, it could be, you know, higher than the company average over time or just given, you know, the operations and infrastructure around pre-finishing operations, you know, is meeting the company average kind of where your head's at at this stage?
spk15: Yeah, so the first part of that question is a good one around I think, Kurt, what you're asking, are we cannibalizing historical partners that were pre-finishing our product, our prime product and selling it? And certainly some of that has happened as we've gone into this expert finish initiative, but we still have a significant amount of lap siding going into other pre-finishers for conversion. So I would say certainly as a whole, Our addition of expert finish on our portfolio has been overall additive to our lab sales. But certainly there has been some cannibalization that fits the impact there. But certainly positive. On the margin side, if you recall, we used to have a CanXL product line in Eastern Canada at the time. It's one of the highest margin products in the entire LPE portfolio. And I certainly believe that expert finish can be above at or should be an above product margin for us. You know, it will be, and we're getting there. You know, with Alan reporting, we're getting to be where it's kind of dragged any longer. It will be, you know, it is one of those things, though, that as we ramp into the incremental volume, at times there will be inefficiencies associated with those that continue growth. that might delay the ultimate achievement of higher than average margin for expert finish. But our expectation is ultimately that's where we'll end up. We should be getting paid more than normal margin amounts to paint the product, given the quality of the end product as a result of our finishing. Right.
spk32: Okay. That makes total sense. Thanks, Brad, for the color and alternative
spk34: Thank you. One moment for the next question. And our next question will be coming from Mark Weintraub of Seaport Research Partners. Your line is open.
spk29: Thank you. First, congrats. Very strong quarter. Good outlook. One question is, actually we had this big D-stock inciting last year. Do you think customers have just continued to hold inventories very low? or do some of the strength potentially represent some restock to say more normal levels or how would you have us think about that?
spk15: I would say that we discussed this internally a bunch and we feel like we are at normal inventory levels for this time of year and normal being prior to last year, back in the days when things were normal, which Mark was kind of a long time ago given we were on allocation and COVID and all that. But we feel good about current inventory situations as far as our distributor partners. I mean, we are still in the building season, so product's moving, and inventories are being maintained. But there has been no material build in inventory, nor do I believe it's necessarily light. I just think it's where it needs to be right now to service the market conditions that we have in Siding.
spk29: Okay, thank you. Good on expert finish, great on the builder series. Any update on the smooth smart side initiative?
spk15: Yeah, I mean, those products have been launched. It's a significant, there was some of a, I won't say significant, but a meaningful part of the NOR program was the availability of smooth. And then that is a key component to our East Coast pre-finish or expert finish strategy. And so we're pleased with that new product. We'll continue to innovate around that product and others that are needed, especially in the repair and remodel SKU selection for the homeowner. But it's going well, and we're pleased with the sales of that product so far this year.
spk29: Super. And then just last, kind of tie two together. So if I look at the full year guide for siting, I know you said it's seasonally weaker, but I think the math is it goes from 100 million at the midpoint to like 70 million of EBITDA for 4Q. Seems pretty like a pretty steep drop off. So I was curious if there's anything else embedded there, maybe just a bit of conservatism. And then also just I know you made some OSB in the siting operations in the first quarter. I'm guessing you did in the second quarter too, maybe a bit more color on what happened there and or whether you're assuming now that OSB is weaker. whether there's OSB still being produced in siding in the second half of the year. Thanks a lot.
spk25: Yeah, thanks, Mark. Part of the answer ties to the question you asked about Rush Smooth. We're ramping up production of Rush Smooth in the fourth quarter, given its success. And again, rather like Expert Finish, it is currently an inefficient manufacturing process, given that it's in its infancy. So there is some non-material capital investment planned next year to help us automate that process more efficiently. So part of the drag is that. Another aspect is that we did, as I said in an answer to an earlier question, add labor to the signing network in Q2, which would be maintained through Q3 and through Q4, with Q4 being a slightly lighter, most likely a lighter revenue quarter. That labor is going to be diverted to some essential maintenance, including a month down at one of our mills to replace a furnace. I was chatting to one of the engineers about this, and he used the perfect phrase. He said, we don't have to do this now, but in 2025, we'll wish we did if we don't, and therefore, that's what we're doing. Thirdly, yeah, there was some OSB production inside in Q1, a lot less in Q2, less in Q3, and and at that level stay roughly where it is in control. But if that's not, that's a million dollars or so, but by no means the lion's share of the change in EBITDA. It's mostly the maintenance and the brush and spoon costs. And as you gave me the out, so I'll take it. And yes, of course, we try to give out a target that we're confident would be sort of a bit of conservatism.
spk34: Much appreciated. Thank you. Thank you. One moment for the next question. Our next question will be coming from Mike Roxland of Truist Securities. Your line is open.
spk36: Thank you, Brad, Alan, and Aaron for taking my questions, and congrats on a good cord despite the backdrop. First question I had was just in terms of the, is selling and marketing expenses. You mentioned increasing headcount, adding additional selling and marketing expenses. I'm just wondering how much you incurred in the quarter and what's left to spend in the balance of the year.
spk25: Oh, gosh. Well, we added about $5 million of selling and marketing costs year over year in Q2. How much is left to spend depends on the opportunities. I would like to see us continue investing in it for relatively... heavy rates, so I think you should expect to see similar type year-over-year variances for the remainder of the year, and they're fundamentally baked into the forecast.
spk36: And at that point now, do you think that you're fully staffed or correlated to meet the selling demand that's out there, or is this something that's going to be ongoing, particularly as you continue to grow your innovation, your pipeline, and the like?
spk15: Yeah, you should expect the absolute number to continue to grow. This market share strategy that we have requires contractor-builder conversions, which requires human interaction. And so we're going to support our sales team appropriately, both on the sales front and the technical group behind that provides instruction on installation. And then also, as we continue to grow Expert Finish, which means higher market share and aspirations for even higher market share in repair and remodel, that does require marketing support. That's an in-home sale initiative, straight interaction with the consumer. As R&R becomes a bigger part of our mix, that segment requires a bigger investment in marketing. We should expect absolute growth in our sales and marketing expense, but hopefully find leverage if you ratio that against revenue. Obviously, there should be a good bit of leverage there. But we're not done investing in sales and marketing. We're not done. So those two things go hand in hand.
spk36: Got it. Thank you for the comment. And just one quick one on OSB. Could you share where your OSB operating rate stood in 2Q, where it stands currently, where do you think the industry stands, and really any sense that curtailments could be forthcoming as prices continue to be under pressure here? Thank you.
spk25: The operating rate in Q2 of this year is around about 86%, I believe. We're forecasting it to be slightly lower in Q3.
spk15: And we will run our OSB business to match our customers' demand and do everything within our power for inventories to stay. Actually, in OSB, I would call it slightly lean right now. And so we will match our capacity going into Q4 and beyond to the customer demand.
spk35: Got it. Good luck in the second half. Thank you.
spk34: Thank you. One moment for the next question. And our next question will be coming from Sean Stewart of TD Cal when your line is open.
spk33: Thank you. Good morning. A couple questions. With respect to the siting business, given the positive momentum and positive revision guidance or guidance revision, rather, for that segment, Brad, can you give us a sense of what you would need to see either in terms of margins at the segment or with respect to order file pull to to make the decision on the next capacity expansion for that segment?
spk15: Yes, Sean. We are beginning to talk about that more robustly than we were six months ago. Certainly, we want to be in a situation to stay ahead of demand. This year, our reporting has been a really good year as far as growth, and we expect to continue to build on that next year. So we are actively back into the scenario planning around the next incremental capacity. As we learn about which SKUs are growing, that informs the configuration of the next expansion. And that puts into play not only Wawa, but some of our existing facilities where an additional press line may be the best the best way to to um to get the next incremental capacity so we're actively in the planning stage there um not spending any significant or meaningful capex yet as part of that that but um you know this year's growth has you know has put that back on the planning horizon for us and and um you know if we're you know as we look into next year which we're not obviously at all haven't done the budget yet or certainly not giving guidance to, you know, but we could see us beginning to do engineering for the next expansion, you know, sometime next year.
spk33: Thanks for that detail. And appreciating you don't give 2025 guidance, but with the current footprint, can you give us a sense of how much incremental volume and siting you expect to be able to produce and ship with the current footprint beyond what's implied in 2024 guidance?
spk15: I would say, you know, because we are not fully shipped at all the facilities because of the, you know, the pullback last year. So I would say we could probably, from where we are today, add capacity around shift additions that would give us another 200 to 300 million feet of capacity. So, you know, we've got a good bit of headroom given the fact that we just converted Holton and Segola, Segola being a big facility as well. So it's not like we're, at all on edge, but we do want to stay ahead of it, Sean, as you know, to try to not go back into a managed order file situation like we were in two years ago.
spk33: That makes sense. Okay, that's all I have for now. Thanks very much. You're welcome.
spk34: Thank you. One moment for the next question. And our next question will be coming from Matthew McKellar. of RBC Capital Markets. Your line is open.
spk37: Hi, thanks for taking my questions. First, I'd like to ask if you have an updated view on how high siding margins can go before the next capacity addition. I think we previously talked about 25%. We've been there for a couple of quarters. We got into the same range. Expert finish margins seem to be improving pretty rapidly. So just any updates on that front would be helpful. Thank you.
spk25: yeah it's a great question one that i'm reluctant to answer um so as you know we try to give ourselves more than enough room to to to operate what we what we describe as this rising sine wave um and uh um at this point in time particularly given the introduction of brush smooth which i said is going very well but at this point is relatively inefficient we're making great gains in expert finish i think we are with increasing certainty capable of hitting this 25% mark with this excess capacity that we're carrying. So yeah, the trend is upwards, Matt, but I'm not willing to commit yet on where that upside is. I think that we need to see how the next few capacity additions play out and the timing of those. Yeah, probably best if I don't say any more on that.
spk37: okay thanks uh fair enough and then just one last cleanup for me i was wondering if you have any color you could give around uh expected impact to your exciting production levels and margins as a result of the new forestry plan under development in the swan valley manitoba area yeah good good question um you know that's something we're actively working i would say from a deciding margin or for that matter oh it's been you know
spk15: There is a cost associated with those management plans, but it's really not material to the numbers that we talk about on these costs. It's a sustainable realm of normal as far as the impact that . Thanks very much for the help.
spk37: I'll turn it back.
spk07: Thanks.
spk34: Thank you. And one moment for the next question. Our next question will be coming from Jeff Stevenson of Loop Capital. Your line is open.
spk19: Hey, thanks for taking my questions, and congrats on the nice quarter. I was wondering if you could talk about whether there was any variance in siting demand trends in the Home Center channel compared with your overall siting results, and then also how we should think about your expanded partnership with Home Depot regarding your trim product. you know, as far as an impact on channel demand moving forward.
spk15: Yeah, so we did see meaningful growth, year-over-year growth in our retail business. We expect that momentum to continue in Q3. Some of that has been just strength and panel that has been historic skew there. But as you have mentioned, the trim placement and particularly in the Home Depot, has been all incremental volume for us. And that has been a meaningful part of the growth that we saw in Q2 and expect to see in Q3. So we're continuing to grow with the Home Center, particularly Home Depot, by being a good partner as far as adding SKUs there, particularly around trim, some lap in certain places. And that has gotten us in a position where We have the ability to grow with Home Depot beyond just the traditional panel play that has been a historic basis of the relationship. And I guess you were asking a little bit, are we seeing cannibalization as a result of that? And the answer is not of any, not seeing, the tram order file is so strong right now across the board that I don't think there has been any significant loss of cannibalization. It's giving us the ability to have the product presented to a customer base that we probably didn't have access to the product. contribution in lumber yards.
spk19: Right. No, thanks for the color there. And then you mentioned that price mix was roughly an equal contributor to the 6% growth in the second quarter. Would you expect a similar contribution from price and mix as we move through the back half of the year? Would one be more than the other?
spk25: We kind of It's hard to predict the mix aspect. The 3% net from list price increases, yes, that's relatively safe. The mix is a little more variable depending on the mix of products. So I think it'll be our friend whether it's as much as three points is so demand specific that it's hard to predict with any great precision. There'll be some. It'll be positive.
spk18: Okay, understood. Thank you.
spk34: Thank you. One moment for the next question. Our next question will be coming from the line of George Stoffels of Bank of America Securities. Please go ahead.
spk31: Hi, thanks so much. Thanks for taking my questions, guys. You mentioned the progress that you're seeing in expert and the progress you're seeing with builder series. Would it be possible for you to give us some additional color, and perhaps you already did, and I missed it, in terms of the guidance raised How much of that was from the progress that you're seeing in single family and your progress there and also then within repair model? Similarly, you talk about the share gains. Is there a way to give us some order of dimension? Sounds like you're doing very well with expert. How much of that is coming, again, from single family, from builder versus repair model and that distribution channel? And then, you know, questions that we've received today from from investors is it possible at all recognizing it's an open mic conference call to talk about where you think you're getting your share relative to other products that are in the market is it more coming from you know vinyl is it more coming from fiber cement anything that you would have us take away from that okay so let's speak to the where's the growth coming from question first and i would say when you look at the
spk15: you know, the growth we got, I would put about, I mean, in general terms, George, about half of that growth. Hey, Brad, your phone is cutting out on our side. I don't know if you... I'll answer to the speaker and see if that helps. Let me know if it does. So if you take the growth that we reported, about half of that I would attribute to single-family new construction. Look, let me just back up. There's a little growth in there at shed and in retail. But the meaningful growth is about half and half between single-family new construction. And I would say about half of that is driven by the initiatives around the big builder focus that we have. And then the other for that would be repair and remodel, which is just you know, converting contractors and getting the siding installed on homes. That's a regional initiative there. But certainly, you know, we would not have had as good a quarter before casting as good a Q3 if it wasn't for the success we're seeing in single-family new construction or a primary model. The shed in retail has just been a nice little bump to have year over year. Where is it coming from? I would say it's coming from across the board. You know, there is still opportunities, particularly in repair and remodel, but certainly also in new construction as we compete against vinyl. And I would think most of the success in repair and remodel is probably against vinyl. On the single family new construction side, then you get into some competitive hard sidings as well as vinyl as the competition. And so, you know, as we gain share there, you know, it's coming from someone. If it's not coming from growth with an existing big builder customer, but obviously what we would be replacing would be either vinyl or competitive hard side. But there's still, you know, a lot of opportunity to go head to head against vinyl with, you know, with our product being certainly an upgrade. grade perceived upgrade to vinyl or being not perceived actually a upgrade to vinyl and so we have competitive there because that's where the big market share is so there's a lot of focus on you know on us you know making sure we have and can't explain our in in a good way the value proposition you know against vinyl but also against other hard sidings just closing the loop and i think i know the answer but if if basically you're getting half of the progress from
spk31: single family and half from repair model, would that also be the equivalent driver of the guidance raise within siding? And then separate, and I'll turn it over, can you remind us what's left to attack in OEE in terms of margin opportunity across the businesses if trends are as you expect over the next year? And I recognize there are no guarantees in life. What could that mean for your profit dollars, Alan, over the next year or two years? Thank you.
spk15: I'll answer the yes on the revised Q3. It is predicated on the strength we're seeing in the repair and remodeling, single family construction order filed, and there is still upside on OEE, and I'll challenge Alan to articulate that.
spk25: Since we've quoted EBITDA numbers that relate to percentage point increases in OEE, and I'm reluctant to do so today, the way to think about OEE is that what it can fundamentally allow us to do is is meet thresholds in terms of shifts. And so it's obviously more efficient when we're managing our capacity up or down to be able to generate more OSP output without adding a shift and or we're lowering output to be able to take out a whole shift. And OEE gives us that leverage. And as you can imagine, I've discussed it before, it's leverage that we don't sort of use in the siting business The idea with the siding business is to try and maintain this sort of more consistent, stable and growing workforce as we grow volumes. But it's the opportunities it gives us to operate the system with increased flexibility and we make braver decisions a little earlier in terms of taking up capacity when we feel demand's not there. To my mind, that's the real benefit of OEE and of course that manifests itself in terms of increased operating performance, but I'm going to refrain from reintroducing a pure EBITDA dollar against a percentage point of OEE.
spk15: George, I'll just add to that, you know, what's been remarkable about our OEE journey to me is as we, you know, we're way ahead of where we thought we would be five years ago, but we still see opportunity for improvement as, you know, and so it's kind of probably will be a never-ending journey of finding ways to be more efficient and more productive. And of course, CapEx helps that. It could actually increase the baseline. And then when we launch a new product, like brush, smooth, and siding, there's all kind of OEE opportunity there because we learn to make the product more efficiently. So we're on a never-ending continuous journey on OEE. And I feel like we'll be talking about that 10 years from now and still see plenty of opportunity. That's kind of the beauty of the industry and the way that our machines work at the facilities. To some degree, it's the beauty of growth.
spk31: But anyway, thank you guys. I'll turn it over.
spk35: Amen.
spk34: Thank you. One moment for the next question. And our next question will be coming from the line of Susan McClary of Golden Sacks. Your line is open.
spk23: Good morning, everyone. Thanks for taking the question. I wanted to start with digging a little bit more into the R&R side of things. Can you just give some perspective on what you're hearing around the consumer and sellout trends on the ground? And what level of sellout do you think the channel is positioned for in the back half given the inventories that they're carrying?
spk15: Well, I think the channel is adequately stocked for the second half for any reasonable demand expectation on repair and remodel. So I have no concerns about ability to serve, and I don't have concerns about there being any kind of overstocking in repair and remodel. One-step distributors are experts in managing inventory in that channel. Look, I do believe demand is dampened for siting. A sided remodel is a big-ticket expense, many times financed. And so, you know, with interest rates where there are, with the economic uncertainty that's out there, there is, I think, R&R spend for a reside is constrained. So I'm really proud of the fact that we're seeing the growth that we are seeing because that has to mean, and that hypothesis is true, that that's market share gain. But, you know, with interest rate reductions, if that happens, if we get through, you know, as Erin and I were talking about this morning, a soft landing or a quasi-soft landing, the pent-up demand around potential residing projects could be pretty significant. So I think we're in a really good position to have our product commercialized, building credibility around the offering, expanding geographically our access to market through picking up some really high-quality distribution to where when we see repair and remodel spend come back and financing loosen up a little bit so that a homeowner can afford to do a big-ticket remodel on siding, we're going to be in a really good position. And that's why we're so encouraged about the future for our siding businesses. Repair and remodel, we're so underpenetrated From a market share standpoint, if we continue to be able to gain market share while the market also gets stronger, that sets us up for some really good growth over the next several years.
spk23: Okay. That's very helpful. And then you did see a bit of a raw material tailwind this quarter. Can you talk about the outlook from that perspective and how we should think about that flowing through the next couple quarters?
spk13: Yeah.
spk25: It may be a little, maybe it may not be quite as positive as it has been in Q2 for the remainder of the year, but we still expect a raw material tailwind. Okay. Primarily resident logs, so we're optimistic.
spk23: Okay. All right. Thank you for the color, both, and good luck with everything.
spk34: Thank you. Thank you. Thank you. That does conclude today's Q&A session. I would like to turn the call back over to Aaron for closing remarks. Please go ahead.
spk30: Okay.
spk34: Thank you, Operator.
spk31: With one round of questions, we're going to call those there and give everybody a couple minutes back in their day. Stay safe, and we'll look forward to connecting with you again. Thank you very much.
spk34: Thank you, everyone, for joining today's conference call. You may disconnect. Thank you. Thank you. Thank you. Thank you. Thank you. you Good day, and thank you for standing by. Welcome to the Louisiana Pacific Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To throw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Aaron Haldwald, Vice President, VP, I'm sorry, Investor Relations and Business Development. Please go ahead.
spk30: Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the second quarter of 2024, as well as our updated outlook. My name is Aaron Haldwald, 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. After prepared remarks, we will take one round of questions. 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 8K filing, earnings press release, and other materials are also available there, including our recently published 2024 sustainability report. As always, I will caution you that today's discussion contains forward-looking statements and non-GAAP financial metrics, as described 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 statements, I will incorporate them by reference. And with that, I will turn the call over to Brad.
spk15: Thanks, Aaron, and thank you all for joining us this morning. LP Siding and OSB Businesses built on the strong first quarter Executing Our Strategy and Delivering Continued Growth, Share Gains, and Margin Expansion in the Second Quarter of 2024. I will summarize a few of the highlights of the quarter, which are detailed on page five of the presentation, and discuss the factors that contributed to these results before turning the call over to Alan for more detail on the business's performance in the quarter and an update on capital allocation. LP's net sales in the quarter reached $814 million, up 33% compared to prior year. Siding sales grew by 30% in the quarter, the result of 22% higher sales volume and 6% higher prices, both of which were helped by another record quarter for expert finish. In OSB, higher prices and improved mix of structural solutions, value-added OSB, contributed to strong revenue growth. At the same time, leverage from increased volume and operational efficiency improved margins. As a result, LP more than doubled adjusted EBITDA, operating cash flow, and adjusted earnings per share compared to the second quarter of 2023. With the capacity expansion projects of the past two years now complete and the new facilities fully operational, CapEx was a comparatively light $36 million in the quarter. This left a greater proportion of LP's operating cash flow available to return to shareholders. Therefore, consistent with our capital allocation strategy, $120 million was spent on dividends and share repurchases through the quarter. Share repurchases have continued since quarter end, as Alan will detail in a moment. On the lower left of page five, you will see some other highlights. First and most importantly, our business is operated safely. LP wins more than our fair share of industry safety awards. In fact, we were just named the safest company in our category by the APA Engineered Wood Association. But the best reward is sending everyone home safely every day. I want to thank our operations teams for achieving an outstanding total incident rate in the second quarter of 0.6. Siding and OSB both delivered impressive operating efficiency in the quarter, which we measure with OEE. The siding business held OEE flat at 77% despite the complexity of ramping up a most recent siding conversion in Segola, Michigan, and our Greenfield prefinished facility in Bath, New York. The OSB business increased OEE by three points compared to last year. This high level of operating efficiency was a major contributor to the business's cost performance in the quarter. Finally, LP published our 2024 sustainability report in July. As detailed in the report, SmartSight is significantly more sustainable than competing sighting technologies, and most of LLP's products are carbon negative. I want to thank everyone at LP who contributed to the report and to the impressive story it tells. On the left side of page six in the presentation, you will see an updated chart showing normalized growth of sighting volume and revenue compared to U.S. housing starts. The 2024 data for sighting reflects the midpoints of our increased guidance for sighting growth while the housing data is based on FACSAT's consensus for housing starts in 2024, which is currently at $1.4 million. As you can see, siting growth continues to exceed that of the underlying housing market as LP gains share in residential construction. The repair remodeling market is more difficult to track, but the general consensus is that R&R spending overall is down by mid-single digits compared to last year. For the record quarter for expert finish or pre-finish siting designed for the R&R market, LP siding business also seems to be gaining share in the R&R segment. In 2024, we expect expert finish to be close to 10% of total siding volume. And given its higher price point, at 10% of volume, expert finish would account for roughly 14% of siding revenue. Expert finish margins improved in the quarter as well, helping siding to achieve a 25% EBITDA margin in the quarter. We believe we have a long runway for growth and share gains in the new construction, R&R, and offsite segments of the siding business, and with both primed and prefinished smart side. And we intend to continue developing new products, expanding our addressable markets, and executing our sales and operations strategies to drive future growth. And with that, I will turn the call over to Alan for more detail on LP's financial performance in the quarter before taking your questions. Thanks, Brad.
spk25: As Brad said, it was a strong quarter, and as the waterfall charts on the next two pages of the presentation show, it was also a refreshingly straightforward one in terms of year-over-year comparisons. Page 8 shows the performance of siding compared to the second quarter of 2023. With last year's capacity addition projects and channel inventory stocking both now behind us, the waterfall tells a story of volume growth, price increases, and some much-anticipated operating leverage. Sales volumes grew by 22%, boosted by share gains in new residential construction and repair and remodel, and a record quarter in expert finish, all admittedly riding on a relatively soft comparable. This higher sales volume generated $71 million in additional revenue and $28 million of EBITDA at an incremental EBITDA margin of almost 40% before considering the impact of price increases. Speaking of which, List price increases and favorable mix combined roughly equally towards 6% in higher prices worth $24 million. Increases in selling and marketing investments were almost fully funded by the non-recurrence of last year's mill conversions, resulting in a net $2 million of investment costs, while lower logs and resin prices supplied a useful $5 million tailwind. Finally, as a result of ramping up the more automated pre-finishing facility in Bath, New York, and investments in similarly advanced equipment in our Green Bay pre-finishing facility, there has been, as Brad said, a significant improvement in expert finish margins over the last year. Now, expert finish margins are not yet equivalent to the business average, but they're getting closer and closer. Incidentally, this improvement shows up in other costs on the waterfall because our methodology is to value changes in volume at the prior year margin. The net result of all this is $415 million in revenue, up $95 million, with a near doubling of EBITDA to $105 million. And naturally, this pushed Siding's EBITDA margin up by 7 points to 25%. The waterfall on page 9 also tells a simple and effective story of consistent execution by the OSB team. Prices were 34% higher than last year, adding $73 million in both sales and EBITDA. Unlike siding, OSB prices are largely outside our control. But what the OSB team can control, however, is volume, mix, and operating efficiency. And like siding, the OSB team delivered an exceptional quarter on all of these fronts. Sales volumes in the quarter were 100 million square feet higher than last year, made possible in part by an impressive three percentage point increase in operating efficiency. Fifty-two percent of volume in the quarter was higher value added structural solutions This incremental volume generated an additional $40 million in net sales and $23 million in EBITDA. OSB ended the quarter with $351 million in sales and $125 million in EBITDA. And as Brad mentioned earlier, they did so safely. Clean quarters of sales growth and operational excellence in both siding and OSB make for a similarly straightforward cash flow, as slide 10 shows. After starting the quarter with $244 million in cash, LPN $229 million in EBITDA, paid $59 million in taxes, and saw a seasonally normal reduction in working capital that brought in a further $39 million. With the resulting $212 million in operating cash flow, we executed our capital allocation strategy as we have consistently done, investing $36 million in CapEx and returning $120 million to shareholders. During the quarter, we paid $102 million to repurchase 1.2 million shares at an average price a little over $84 per share. The $17 million in other investing and financing is mostly the sale of LP's 50% ownership of a joint venture, a remnant of our investment in Intecra. And for avoidance of doubt, this gain was excluded from adjusted EBITDA, as you can see in the reconciliation in the appendix. And LP ended the second quarter with $317 million in cash. As of yesterday, the 6th of August, LP has paid a further $64 million for share repurchases, bringing outstanding shares to about $70.3 million and a remaining board authorization, as of yesterday, of $270 million. Which brings me to guidance on slide 11. I'd like to briefly remind you that when we updated our guidance on our first quarter earnings call, we increased the full year guidance for siding by the sum of the first quarter beat and the increase in the second quarter outlook. At that time, we had insufficient visibility to adjust guidance for the second half. But 90 days hence, with a citing order file that continues to be robust, we can now offer updated outlook through the year end. As Brad said earlier, demand for SmartSide continues to outperform a moderately weak repair and remodel market. But based on new volume records for both primed and pre-finished SmartSide in the second quarter, we now expect year-over-year revenue growth in the third quarter of between 16% and 18%, for revenue between 390 and 410 million dollars. An EBITDA margin of about 25% would yield siding EBITDA in the third quarter at between 95 and 105 million dollars. We continue to see typical seasonal patterns in demand, which usually means that the fourth quarter delivers weaker sales volumes as the building season winds down. If the third quarter turns out as we expect and typical seasonal demand patterns emerge, the resulting full-year revenue growth for siding in 2024 would be between 14% and 16% to a bit above $1.5 billion. Increased volume should boost the EBITDA margin up a point or so from our prior guidance to about 24%, yielding full-year EBITDA for siding between $355 and $375 million. In summary, this is a beaten race for siding with a third quarter that so far looks very much like the second. OSB is a different story. Prices fell significantly at the end of the second quarter. The bulk of that will be felt in LP's third quarter due to the time lag in our order file. And assuming prices remain flat at last Friday's levels, published by Random Length, the OSB business would earn somewhere between $10 and $20 million in EBITDA in the third quarter. As always, this is not a price prediction, just an attempt to offer useful modeling. For the fourth quarter and full year OSB outlook, and to reflect the reality that OSB demand and prices rarely increase meaningfully in the fourth quarter, we will extend the flat from Friday prior approach through year end. Therefore, holding prices flat at current levels and assuming seasonally lower OSB volumes would imply EBITDA for the fourth quarter of about $10 million below that of the third quarter. So assuming the year plays out as I've just described, And as usual, treating LPSA earnings and corporate expenses as mutually offsetting, total EBITDA for LP in the third quarter would be in the $105 to $125 million range, and full-year EBITDA would be between $580 and $620 million. And with that, we'll be happy to take your questions.
spk34: Thank you. As a reminder, if you'd like to ask a question, please press star 11 on your telephone. We also ask that you wait for your name and company to be announced before proceeding with your question. We ask that you limit yourself to one question and one follow-up. One moment for the first question. And our first question will be coming from Stephen Ramsey of Thompson Research Group. Your line is open.
spk27: Good morning.
spk28: Maybe to start with the Q2 Not citing EBITDA margin just slightly above the first quarter despite much higher sales. Maybe talk to the puts and takes. I'm sure some of that is the expert finished growth, which I know is an incremental drag if that volume is growing better than the core smart side product. But just overall, the puts and takes on the Q1 to Q2 citing EBITDA margins.
spk25: Sure. There's not a great deal to add. You captured one of the factors. The expert finish margin is significantly improving, but it's a bit below the average. We have, in some instances, added shifts to help make sure that we keep lead times healthy. And the mix changes slightly in terms of the top line in terms of pricing, and that obviously affects the margin a little bit, but Other than that, there's nothing really of any great significance other than, as you said, expert finished growing, slight addition of labor, and changes in top line mix.
spk28: Okay, that's helpful. And then also thinking on citing the builder series rollout, just curious on general updates on how that is going with the current partnership with Lennar and how you're thinking about potential partnerships with other large builders, how that could play out over the second half and into next year.
spk15: We're very pleased with the growth in the product line, particularly coming in from Lennar. But we do have initiatives with several other national and large regional hurdles to secure additional volume there. Only with the Builder Series 3 volume that's directly measurable to be competitive with the big builder, we are seeing really good product pick-up in those regions as well. Tram and soffit SKUs are pulled along as a result of the Builder Series Lap product being allowing us to secure a position with the builders. So a lot of the growth that we're seeing currently on siding can be attributed directly to the big builder initiative that we have. And the second part of your question, we expect continued success there as we move through the rest of this year and into next year.
spk26: That's helpful. Thank you.
spk15: You're welcome.
spk34: Thank you. One moment for the next question. And our next question will be coming from Kurt Yinger of D.A. Davidson. Your line is open. Great.
spk32: Thank you, and good morning, everyone. Brad, I just wanted to follow up on the last comment around to strengthen the big builder business. Is that primarily, you know, a builder series dynamic at this stage, just that product, or are you seeing, you know, solid takeaway on prime product as well and kind of big builder as we think about it should be sort of a collection of those products as opposed to just builder series?
spk15: Yeah, dead on, Kurt. You know, the builder series lap certainly makes us competitive or has helped to make us competitive from a lap standpoint. But, you know, as we are successful converting builders with our lap offering and builder series, We have, generally speaking, the house is also trimmed. The soffit is ours. Any panel or shake product that you use is an LP product. And we are seeing, you know, in the regions, in the geographic regions where we are seeing success that is measurable, you know, directly on the building. So we can be in that, but it can be treated differently. The fact that additional market share pulls those other products along as well. So, yes, we've got good growth on builder series, but we've got good growth on all primed SKUs that go into the single-family new construction this year. Okay.
spk32: That makes sense. And then on the expert finish front, I mean, the answer seems kind of obvious, but I'll ask it anyways. I mean, does the performance and strength that you're seeing there, are you seeing any offset from lower volume to others who might have been pre-finishing the products themselves and selling them under a different brand name? And then on the margin front, how should we sort of ring fence the long-term vision in terms of what expert finish could be? Is it reasonable to think that, you know, just given the price point, it could be, you know, higher than the company average over time or just given, you know, the operations and infrastructure around pre-finishing operations, you know, is meeting the company average kind of where your head's at at this stage?
spk15: Yeah, so the first part of that question is a good one around, I think, Kurt, what you're asking, are we cannibalizing historical partners that were pre-finishing our product, our prime product and selling it? And certainly some of that has happened as we've gone into this expert finish initiative, but we still have a significant amount of lap siding going into other pre-finishers for conversion. So I would say certainly as a whole, Our addition of expert finish on our portfolio has been overall additive to our lap sales. But certainly there has been some cannibalization that's impacted there. But certainly positive. On the margin side, if you recall, we used to have a CanXL product line in Eastern Canada at the time. It's one of the highest margin products in the entire LPE portfolio. And I certainly believe that expert finish can be above at or should be an above product margin for us. You know, it will be, and we're getting there. You know, with Alan reporting, we're getting to be where it's kind of dragged any longer. It will be, you know, it is one of those things, though, that as we ramp into the incremental volume, at times there will be inefficiencies associated with those that continue growth. that may delay the ultimate achievement of higher than average margin for expert finish. But our expectation is ultimately that's where we'll end up. We should be getting paid more than normal margin amounts to paint the product, given the quality of the end product as a result of our finishing. Right.
spk32: Okay. That makes total sense. Thanks, Brad, for the color, and I'll turn it over
spk34: Thank you. One moment for the next question. And our next question will be coming from Mark Weintraub of Seaport Research Partners. Your line is open.
spk29: Thank you. First, congrats. Very strong quarter. Good outlook. What question is... Obviously, we had this big D-stock inciting last year. Do you think customers have just continued to hold inventories very low? or do some of the strength potentially represent some restock to say more normal levels or how would you have us think about that?
spk15: I would say that we discussed this internally a bunch and we feel like we are at normal inventory levels for this time of year and normal being prior to last year, back in the days when things were normal, which Mark was kind of a long time ago given we were on allocation and COVID and all that. But we feel good about current inventory situations as far as our distributor partners. I mean, we are still in the building season, so product's moving and inventories are being maintained. But there has been no material build in inventory, nor do I believe it's necessarily light. I just think it's where it needs to be right now to service the market conditions that we have in sighting.
spk29: Okay, thank you. Good on expert finish, great on the builder series. Any update on the SMU SmartSide initiative?
spk15: Yeah, I mean, those products have been launched. It's a significant, there was some of a, I won't say significant, but a meaningful part of the NAR program was the availability of SMU. And then that is a key component to our East Coast pre-finish or expert finish strategy. And so we're pleased with that new product. We'll continue to innovate around that product and others that are needed, especially in the repair and remodel SKU selection for the homeowner. But it's going well, and we're pleased with the sales of that product so far this year.
spk29: Super. And then just last, kind of tie two together. So if I look at the full year guide for siting, I know you said it's seasonally weaker, but I think the math is it goes from 100 million at the midpoint to like 70 million of EBITDA for 4Q. Seems like a pretty steep drop off. So I was curious if there's anything else embedded there, maybe just a bit of conservatism. And then also just, I know you made some OSB in the siting operations in the first quarter. I'm guessing you did in the second quarter too, maybe a bit more color on what happened there and or whether you're assuming now that OSB is weaker. whether there's OSB still being produced in siding in the second half of the year. Thanks a lot.
spk25: Yeah, thanks, Mark. Part of the answer ties to the question you asked about Rush Smooth. We're ramping up production of Rush Smooth in the fourth quarter, given its success. And again, rather like Expert Finish, it is currently an inefficient manufacturing process, given that it's in its infancy. So there is some non-material capital investment planned next year to help us automate that process more efficiently. So part of the drag is that. Another aspect is that we did, as I said in an answer to an earlier question, add labor to the siting network in Q2, which would be maintained through Q3 and through Q4, with Q4 being a slightly lighter, most likely a lighter revenue quarter. That labor is going to be diverted to some essential maintenance, including a month down at one of our mills to replace a furnace. I was chatting to one of the engineers about this, and he used the perfect phrase. He said, we don't have to do this now, but in 2025, we'll wish we did if we don't, and therefore, that's what we're doing. Thirdly, yeah, there was some OSB production inside in Q1, a lot less in Q2, less in Q3, and and that level staying roughly where it is in control. But that's not, that's a million dollars or so, but by no means the lion's share of the change in EBITDA. It's mostly the maintenance and the brush and smooth costs. And as you gave me the out, so I'll take it. And yes, of course, we try to give out a target that we're confident would be sort of the bit of concern.
spk29: Much appreciated. Thank you.
spk34: Thank you. One moment for the next question. Our next question will be coming from Mike Roxland of Truist Securities. Your line is open.
spk36: Thank you, Brad, Alan, and Aaron for taking my questions, and congrats on a good cord despite the backdrop. First question I had was just in terms of the, is selling and marketing expenses. You mentioned increasing headcount, adding additional selling and marketing expenses. I'm just wondering how much you incurred in the quarter and what's left to spend in the balance of the year.
spk25: Oh, gosh. Well, we added about $5 million to selling and marketing costs year over year in Q2. How much is left to spend depends on the opportunities. I would like to see us continue to be investing in it for relatively... heavy rates, so I think you should expect to see similar type year-over-year variances for the remainder of the year, and they're fundamentally baked into the forecast.
spk36: And at that point now, do you think that you're fully staffed or correlated to meet the sign demand that's out there, or is this something that's going to be ongoing, particularly as you continue to grow your innovation, your pipeline, and the like?
spk15: Yeah, you should expect the absolute number to continue to grow. This market share strategy that we have requires contractor-builder conversions, which requires human interaction. And so we're going to support our sales team appropriately, both on the sales front and the technical group behind that provides instruction on installation. And then also, as we continue to grow Expert Finish, which means higher market share and aspirations for even higher market share, in repair and remodel, that does require marketing support. That's an in-home sale initiative, straight interaction with the consumer. And so as R&R becomes a bigger part of our mix, that segment requires a bigger investment in marketing. And so we should expect absolute growth in our sales and marketing expense. hopefully find leverage when when if you ratio that against revenue there are obviously there should be a good bit of leverage there but uh but we're not done investing in sales and marketing so those two things go hand in hand got it thank you for the call and then just one quick one on on osb
spk36: Could you share where your OSB operating rate stood in 2Q, where it stands currently, where do you think the industry stands, and really any sense that curtailment could be forthcoming as prices continue to be under pressure? Thank you.
spk25: The operating rate in Q2 of this year is around about 86%, I believe. We're forecasting it to be slightly lower in Q3.
spk15: And we will run our OSB business to match our customers' demand and do everything within our power for inventories to stay. Actually, in OSB, I would call it slightly lean right now. And so we will match our capacity going into Q4 and beyond to the customer demand.
spk35: Got it. Good luck in the second half. Thank you.
spk34: Thank you. One moment for the next question. And our next question will be coming from Sean Stewart of TD Cal when your line is open.
spk33: Thank you. Good morning. A couple questions. With respect to the siting business, given the positive momentum and positive revision guidance or guidance revision, rather, for that segment, Brad, can you give us a sense of what you would need to see either in terms of margins at the segment or with respect to order file pull to to make the decision on the next capacity expansion for that segment.
spk15: Yes, Sean. We are beginning to talk about that more robustly than we were six months ago. And so, certainly, we want to be in a situation to stay ahead of demand. This year, our reporting has been a really good year as far as growth, and we expect to continue to build on that next year. So we are actively back into the scenario planning around the next incremental capacity. As we learn about which SKUs are growing, that informs the configuration of the next expansion. And that puts into play not only Wawa, but some of our existing facilities where an additional press line may be the best the best way to to um to get the next increment of capacity so we're actively in the planning stage there um not spending any significant or meaningful capex yet as part of that that but um you know this year's growth has you know has put that back on the planning horizon for us and and um you know if we're you know as we look into next year and which we're not obviously at all haven't done the budget yet or certainly not giving guidance to, you know, but we could see us beginning to do engineering for the next expansion, you know, sometime next year.
spk33: Thanks for that detail, and appreciating you don't give 2025 guidance, but with the current footprint, can you give us a sense of how much incremental volume and siting you expect to be able to produce and ship with the current footprint beyond what's implied in 2024 guidance?
spk15: I would say, you know, because we are not fully shipped at all the facilities because of the, you know, the pullback last year. So I would say we could probably, from where we are today, add capacity around shift additions that would give us another 200 to 300 million feet of capacity. So, you know, we've got a good bit of headroom given the fact that we just converted Holton and Segolla being a big facility as well. So it's not like we're at all on edge, but we do want to stay ahead of it, Sean, as you know, to try to not go back into a managed order file situation like we were in two years ago.
spk33: That makes sense. Okay, that's all I have for now. Thanks very much. You're welcome.
spk34: Thank you. One moment for the next question. And our next question will be coming from Matthew McKellar. of RBC Capital Markets. Your line is open.
spk37: Hi, thanks for taking my questions. First, I'd like to ask if you have an updated view on how high siding margins can go before the next capacity addition. I think we previously talked about 25%. We've been there for a couple of quarters. We got into the same range. Expert finish margins seem to be improving pretty rapidly. So just any updates on that front would be helpful. Thank you.
spk25: yeah it's a great question one that i'm reluctant to answer um so as you know we try to give ourselves more than enough room to to to operate what we what we describe as this rising sine wave um and uh um at this point in time particularly given the introduction of brush smooth which i said is going very well but at this point is relatively inefficient we're making great gains in expert finish i think we are with increasing certainty capable of hitting this 25% mark with this excess capacity that we're carrying. So yeah, the trend is upwards, Matt, but I'm not willing to commit yet on where that upside is. I think that we need to see how the next few capacity additions play out and the timing of those. Yeah, probably best if I don't say any more on that.
spk37: okay thanks uh fair enough and then just one last cleanup for me i was wondering if you have any color you could give around uh expected impact to your exciting production levels and margins as a result of the new forestry plan under development in the swan valley manitoba area yeah good good question um you know that's something we're actively working i would say from a deciding margin or for that matter oh it's been you know
spk15: There is a cost associated with those management plans, but it's really not material to the numbers that we talk about on these costs. It's a sustainable realm of normal as far as the impact that . Thanks very much for the help.
spk37: I'll turn it back.
spk07: Thanks.
spk34: Thank you. And one moment for the next question. Our next question will be coming from Jeff Stevenson of Loop Capital. Your line is open.
spk19: Hey, thanks for taking my questions, and congrats on the nice quarter. I was wondering if you could talk about whether there was any variance in siting demand trends in the Home Center channel compared with your overall siting results, and then also how we should think about your expanded partnership with Home Depot regarding your trim product. you know, as far as an impact on channel demand moving forward.
spk15: Yeah, so we did see meaningful growth, year-over-year growth in our retail business. We expect that momentum to continue in Q3. Some of that has been just strength and panel that has been historic skew there. But as you have mentioned, the trim placement and particularly in the Home Depot, has been all incremental volume for us. And that has been a meaningful part of the growth that we saw in Q2 and expect to see in Q3. So we're continuing to grow with the Home Center, particularly Home Depot, by being a good partner as far as adding SKUs there, particularly around trim, some lap in certain places. And that has gotten us in a position where We have the ability to grow with Home Depot beyond just the traditional panel play that has been a historic basis of the relationship. And I guess you were asking a little bit, are we seeing cannibalization as a result of that? And the answer is not of any, not seeing, the tram order file is so strong right now across the board that I don't think there has been any significant loss of cannibalization. Placing that, placing stores at Depot still, you know, it's a strong DIY still, a strong DIY, our ultra-small contractor customer base there. And so it's small in scale. So it's giving us the ability to have the product presented to a customer base that we probably didn't have access to the product, you know, as it was... contribution in lumber yards.
spk19: Right. No, thanks for the color there. And then you mentioned that price mix was roughly an equal contributor to the 6% growth in the second quarter. Would you expect a similar contribution from price and mix as we move through the back half of the year? Would one be more than the other?
spk25: We kind of It's hard to predict the mix aspect, the 3% net from list price increases. Yes, that's relatively safe. The mix is a little more variable depending on the mixture of products. So I think it'll be our friend, whether it's as much as three points is so demand-specific that it's hard to predict with any great precision. They'll be come. It'll be positive.
spk18: Okay, understood. Thank you.
spk34: Thank you. One moment for the next question. Our next question will be coming from the line of George Stoffels of Bank of America Securities. Please go ahead.
spk31: Hi, thanks so much. Thanks for taking my questions, guys. You mentioned the progress that you're seeing in expert and the progress you're seeing with builder series. Would it be possible for you to give us some additional color, and perhaps you already did, and I missed it, in terms of the guidance raised How much of that was from the progress that you're seeing in single family and your progress there and also then within repair model? Similarly, you talk about the share gains. Is there a way to give us some order of dimension? Sounds like you're doing very well with expert. How much of that is coming, again, from single family, from builder versus repair model and that distribution channel? And then questions that we've received today from investors, is it possible at all, recognizing it's an open mic conference call, to talk about where you think you're getting your share relative to other products that are in the market? Is it more coming from vinyl? Is it more coming from fiber, cement, anything that you would have us take away from that?
spk15: Okay, so let's speak to the where's the growth coming from question first. And I would say when you look at the wrong growth we got, I would put about, I mean, in general terms, George, about half of that growth. Hey, Brad, your phone is cutting out on our side. I don't know if you... I'll answer to the speaker and see if that helps. Let me know if it does. So if you take the growth that we've reported, about half of that I would attribute to single-family new construction. Let me just back up. There's a little growth in there at shed and in retail. But the meaningful growth is about half and half between single-family new construction. And I would say about half of that is driven by the initiatives around the big builder focus that we have. And then the other for that would be repair and remodel, which is just you know, converting contractors and getting the siding installed on homes. That's a regional initiative there. But certainly, you know, we would not have had as good a quarter before casting as good a Q3 if it wasn't for the success we're seeing in single-family new construction and repair and remodel. The shed in retail has just been a nice little bump to have year over year. Where is it coming from? I would say it's coming from across the board. You know, there is still opportunities, particularly in repair and remodel, but certainly also in new construction as we compete against vinyl. And I would think most of the success in repair and remodel is probably against vinyl. On the single family new construction side, then you get into some competitive hard sidings as well as vinyl as the competition. And so, you know, as we gain share there, you know, it's coming from someone. It's not coming from growth with an existing big builder customer. But obviously, what we would be replacing would be either vinyl or competitive hard side. But there's still, you know, a lot of opportunity to go head-to-head against vinyl with, you know, with our product being certainly an upgrade. grade perceived upgrade to vinyl or being not perceived actually a upgrade to vinyl and so we have competitive there because that's where the big market share is so there's a lot of focus on you know on us you know making sure we have and can't explain our in in a good way the value proposition you know against vinyl but also against other hard sidings just closing the loop and i think i know the answer but if if basically you're getting half of the progress from
spk31: single family and half from repair model, would that also be the equivalent driver of the guidance raise within siding? And then separate, and I'll turn it over, can you remind us what's left to attack in OEE in terms of margin opportunity across the businesses if trends are as you expect over the next year? And I recognize there are no guarantees in life. What could that mean for your profit dollars, Alan, over the next year or two years? Thank you.
spk15: I'll answer the yes on the revised Q3. It is predicated on the strength we're seeing in the repair and remodeling, single-family construction order filed, and there is still upside on OEE, and I'll challenge Alan to articulate that.
spk25: Since we've quoted EBITDA numbers that relate to percentage point increases in OEE, and I'm reluctant to do so today, the way to think about OEE is that what it can fundamentally allow us to do is is meet thresholds in terms of shifts. And so it's obviously more efficient when we're managing our capacity up or down to be able to generate more OSD output without adding a shift and or we're lowering output to be able to take out a whole shift. And OEE gives us that leverage. And as you can imagine, I've discussed it before, it's leverage that we don't sort of use in the siding business The idea with the siding business is to try and maintain this sort of more consistent, stable and growing workforce as we grow volumes. But it's the opportunities it gives us to operate the system with increased flexibility and we make braver decisions a little earlier in terms of taking up capacity when we feel demand's not there. To my mind, that's the real benefit of OEE and of course that manifests itself in terms of increased operating performance, but I'm going to refrain from reintroducing a pure EBITDA dollar against the percentage point of OEE.
spk15: George, I'll just add to that, you know, what's been remarkable about our OEE journey to me is as we, you know, we're way ahead of where we thought we would be five years ago, but we still see opportunity for improvement as, you know, and so it's kind of probably will be a never-ending journey of finding ways to be more efficient and more productive. And of course, CapEx helps that. It could actually increase the baseline. And then when we launch a new product, like brush, smooth, and siding, there's all kind of OEE opportunity there, because we would learn to make the product more efficiently. So we're on a never-ending, continuous journey on OEE. And I feel like we'll be talking about that 10 years from now and still see plenty of opportunity. That's kind of the beauty of the industry and the way that our machines work at the facilities. To some degree, it's the beauty of growth.
spk31: But anyway, thank you guys. I'll turn it over. Amen.
spk34: Thank you. One moment for the next question. And our next question will be coming from the line of Susan McClary of Golden Sachs. Your line is open.
spk23: Good morning, everyone. Thanks for taking the question. I wanted to start with digging a little bit more into the R&R side of things. Can you just give some perspective on what you're hearing around the consumer and sellout trends on the ground? And what level of sellout do you think the channel is positioned for in the back half given the inventories that they're carrying?
spk15: Well, I think the channel is adequately stocked for the second half for any reasonable demand expectation on repair and remodel. So I have no concerns about ability to serve, and I don't have concerns about there being any kind of overstocking in repair and remodel. I mean, one-step distributors are experts at managing inventory in that channel. Look, I think that I do believe demand is dampened for siding work. A sided remodel is a big-ticket expense, many times financed. And so, you know, with interest rates where there are, with the economic uncertainty that's out there, there is, I think, R&R spend for a reside is constrained. So I'm really proud of the fact that we're seeing the growth that we are seeing because that has to mean, and if that hypothesis is true, that that's market share gain. But, you know, with interest rate reductions, if that happens, if we get through, you know, as Erin and I were talking about this morning, a soft landing or quasi-soft landing, the pent-up demand around potential residing projects could be pretty significant. So I think we're in a really good position to have our product commercialized, building credibility around the offering, expanding geographically our access to market through picking up some really high-quality distribution to where when we see repair and remodel spend come back and financing loosen up a little bit so that a homeowner can afford to do a big-ticket remodel on siding, we're going to be in a really good position. And that's why we're so encouraged about the future for our siding businesses. Repair and remodel, we're so underpenetrated From a market share standpoint, if we continue to be able to gain market share while the market also gets stronger, that sets us up for some really good growth over the next several years.
spk23: Okay. That's very helpful. And then you did see a bit of a raw material tailwind this quarter. Can you talk about the outlook from that perspective and how we should think about that flowing through the next couple of quarters?
spk13: Yeah.
spk25: It may be a little, maybe it may not be quite as positive as it has been in Q2 for the remainder of the year, but we still expect a raw material tailwind. Okay. Primarily resident logs, so we're optimistic.
spk23: Okay. All right. Thank you for the color, both, and good luck with everything.
spk34: Thank you. Thank you. Thank you. That does conclude today's Q&A session. I would like to turn the call back over to Aaron for closing remarks. Please go ahead.
spk31: Okay. Thank you, Operator. With one round of questions, we're going to call those there and give everybody a couple minutes back in their day. Stay safe, and we'll look forward to connecting with you again. Thank you very much.
spk34: Thank you, everyone, for joining today's conference call. You may disconnect.
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