Louisiana-Pacific - Q1 2024
May 8, 2024
Transcript
Operator (participant)
Good day and thank you for standing by. Welcome to the Q1 2024 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, 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 be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Aaron Howald, LP's Vice President of Investor Relations and Business Development.
Aaron Howald (VP of Investor Relations and Business Development)
Thank you, Operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the first quarter of 2024, as well as our updated outlook. 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 Haughie, 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 web page, which is investor.lpcorp.com.
Our 8-K filing, earnings press release, and other materials are also available there. Today's discussion contains forward-looking statements and non-GAAP financial metrics, as described on slides 2 and 3 of the earnings presentation. The appendix of the presentation also contains reconciliations that are further supplemented by this morning's 8-K filing.
I will incorporate those materials by reference rather than reading them. With that, I'll turn the call over to Brad.
Brad Southern (CEO)
Thanks, Aaron. Good morning, and thank you for joining us to discuss LP's results for the first quarter and our ongoing growth, innovation, and efficient capital allocation. LP's siding and OSB businesses got off to a strong start in 2024 by launching new products, gaining share in new construction and repair and remodeling, and growing strategic partnerships with our customers, all of which contributed to outstanding results in the first quarter. I'm confident that both businesses are poised to build on these gains in the second quarter and beyond.
In the first quarter, LP generated $724 million in sales, a 24% increase over last year. LP earned $182 million in adjusted EBITDA, $116 million more than in Q1 of 2023. Leverage from growth in siding and the combined effect of higher prices and record operating efficiency in OSB drove improved margins.
With the completion of capacity investments in Houlton, Sagola, and Bath, our strong balance sheet has allowed us to resume share repurchases consistent with our capital allocation strategy. Alan will discuss our results in greater detail in a moment, but first I'll provide the operational and strategic highlights for the quarter across our businesses. In the OSB business, commodity prices were meaningfully higher than last year, contributing $62 million in EBITDA. This is, of course, outside our control. However, I am proud to say that the OSB team made the most of this strong demand environment by operating efficiently and safely while delivering a strong mix of value-added structural solution products.
For example, the OSB business achieved a record for operating efficiency in the first quarter, which helped boost sales by about 150 million sq ft compared to last year. More than 75% of this incremental volume was structural solutions.
More importantly, the OSB business delivered these results safely with a total recordable incident rate under 0.3. I also want to take the opportunity to thank the teams at our Peace Valley British Columbia and Maniwaki, Quebec mills for leading the way with outstanding safety, efficiency, and cost control. Siding revenue grew by 9% in the first quarter, which was the compound effect of 5% higher net selling prices and 4% higher volume. Prices were higher due to rapid utilization of our annual price increase plus mixed uplift, primarily from ExpertFinish. Higher capacity utilization from increased sales volume helped siding achieve a 25% EBITDA margin in the quarter. As a result, the siding business exceeded the high end of our guidance ranges for growth and margin.
The chart on the left at page 6 shows normalized growth in siding volume, siding net sales, and total U.S. housing starts of 2010 as the common baseline. The 2024 estimate for siding reflects the midpoint of LP's updated full-year guidance, which Alan will get to in a moment. As you can see, the siding business is back to its historic growth trajectory after the destocking cycle that normally follows the end of a managed order file. In fact, the midpoint of our full-year guidance represents sales volumes above 2021's level and net revenue above 2022's all-time high. By contrast, housing starts reached 1.6 million in 2021, and if the current consensus is accurate, will have fallen by about 9% to 1.45 million in 2024.
Nearly 30% cumulative siding revenue growth over a period in which the underlying market contracted clearly demonstrates pricing power and share gains in the market we serve. The chart on the right shows ExpertFinish as a percentage of overall siding volume and revenue. Starting from 0 in 2019, ExpertFinish has grown to 9% of volume and nearly 14% of revenue in Q1 of this year. If you were able to join us at the International Builders' Show in Las Vegas, you saw our newly launched Brushed Smooth trim and siding, pebble stucco panels, Nickel Gap, and many other new products, all of which should add to the ongoing price mix uplift of ExpertFinish and help drive growth in new residential construction and R&R.
Our siding business is clearly back to our normal growth footing, and LP is leveraging the power of our specialized portfolio to drive additional growth and share gains. For example, we recently announced a strategic partnership with Lennar, one of America's leading and most respected home builders. Through this partnership, LP will provide Lennar with a uniquely broad array of sustainable siding, structural solutions, and OSB products. We also expanded our partnership with the Home Depot, extending the availability of SmartSide trim to Home Depot stores nationwide. These partnerships enhance our strategic customers' ability to build high-quality and beautiful homes for homeowners and make SmartSide available for more R&R contractors. This, in turn, leads to continued growth, share gains, and innovation in siding and OSB.
I should mention that the impacts of the Lennar partnership, newly launched products in siding, and the meaningful increase in OSB prices late in the first quarter had a relatively modest impact on our Q1 results. These factors will largely be felt in the second quarter and beyond, with continued growth driving additional leverage in siding. Accordingly, while macroeconomic uncertainty remains, we are increasing our guidance for growth and margins in the second quarter and full year. With that, I will turn to Alan for more detail on the quarter and our updated outlook before we take your questions.
Alan Haughie (CFO)
Thank you. As Brad said, this was a strong quarter. Higher market prices for OSB drove significant cash generation, while the leverage from increased volumes in both OSB and siding delivered healthy incremental margins. EBITDA of $182 million generated $105 million of operating cash flow, and with the capacity investments in Houlton, Sagola, and Bath behind us, LP returned $32 million of this cash flow to investors in the first quarter through dividends and resumed share repurchases. The waterfall on page seven shows the year-over-year comparison for the siding business. Average selling prices were 5% higher than last year, adding $15 million of EBITDA. Roughly three points of the five points are the result of robust realization of the annual price increase, helped by our minimization of pre-buy late last year.
ExpertFinish and other recently launched products have also seen encouraging uptake, with the resulting positive mix effects on price contributing the remaining two points of the five points. Sales volumes increased by 4% to 399 million sq ft, which I should note is higher than any quarter of last year. The bulk of 4% volume growth came from residential construction and repair and remodel customers. BuilderSeries, which is driving share gains with America's largest home builders, and ExpertFinish, our pre-finished siding designed for repair and remodel contractors, both delivered record quarters for volume and revenue.
This volume growth added $15 million in revenue and $4 million of EBITDA. Now, this is slightly lower incremental EBITDA margin than we might expect from additional volume, largely due to record ExpertFinish volumes. As a reminder, ExpertFinish margins are lower than primed margins, well, they are for now.
While they may be lower, they are improving. The addition of the highly automated Bath pre-finishing facility to LP's ExpertFinish network, in addition to other efficiency gains in manufacturing, contributed to a meaningful improvement in the margin for ExpertFinish compared to this time last year. Of course, as we grow ExpertFinish volumes, further improvements in utilization rates and manufacturing efficiency should continue this positive margin trend. As discussed on prior calls, we are continuing to invest in selling and marketing, incurring an incremental $2 million year-over-year, from which we believe we are already benefiting. This is more than offset by the $4 million benefit from the non-recurrence of last year's mill conversion investments.
Freight costs and raw material prices continue to moderate from last year's levels, with MDI resin being the largest single component of a $10 million EBITDA tailwind from improving raw material prices. While unit costs for paint may have risen, substantial efficiency gains from more automated painting processes at Bath reduced unit paint usage more than enough to offset this. The only red bar on the waterfall is the $7 million of increased mill area overhead. This is simply the addition of Sagola and Bath to the network, as neither were fully staffed or operational in the first quarter of last year.
With Sagola and Bath now fully up and running, as demand grows to fill that capacity, we should see those costs more than offset by the high incremental margin of additional volume. The $19 million of EBITDA represents a margin of 25%.
We've often compared the siding EBITDA margin over time to a rising sine wave with peaks at times of high capacity utilization and low investment, and troughs at times of high investment and low utilization as that new capacity comes online. We believe that what we saw in the first quarter is entirely consistent with this principle, with the business rebounding from last year's trough and growing towards a new higher peak as we fill recently added capacity. Shifting to OSB on page 8, the waterfall is once again dominated by price. Compared to last year, average selling prices were 38% higher, adding $62 million of EBITDA. I should point out that the commodity price gain of 51% is higher than the 25% increase in structural solutions prices, mainly because commodity prices start from a lower base.
However, in general, OSB prices climbed significantly at the end of the first quarter and remained elevated through most of April until our recent pullback. Given the duration of our order files, higher prices at the end of the first quarter have been realized mostly in the second quarter. Sales volumes are also higher in OSB. A record quarter for OAE allowed production increases to meet stronger customer demand. And as Brad said, more than 75% of the incremental OSB volume sold was in Structural Solutions, which accounted for 52% of total OSB sales volume, up 6 points from last year. Now, if you'll indulge me, let me use the data in this chart to briefly demonstrate the value of Structural Solutions in a different way.
Using the price, volume, and EBITDA data on this chart to compare commodity to structural solutions, you'll see that the selling prices for the incremental structural solutions volume, if you do the math, were on average about $55 per 1,000 sq ft higher, and structural solutions EBITDA per 1,000 sq ft was about $25 higher than it was for commodity. Of course, this analysis is imperfect as it's only the year-over-year incremental changes, not the entire population, but it does directionally demonstrate the incremental margin uplift that structural solutions delivers, and therefore it reinforces our strategy of ongoing specialization. As in the siding business, deflation in raw material prices contributed $7 million of EBITDA.
For OSB, the other bucket is mostly the non-recurrence of last year's aggressive cost control efforts in the face of very weak demand and depressed prices at that time, including the deferral of most non-essential maintenance and capital work. While this may have kept the business EBITDA positive a year ago and demonstrated impressive operational flexibility, we are now back on a more regular footing for operations. As a result, we have resumed more normal maintenance spending. The $19 million of EBITDA generated in the quarter, coincidentally the same as the siding business, represents an EBITDA margin of 29%. Slide 9 shows substantially improved year-over-year cash flow. The operating cash flow this year is almost equal and opposite to this time last year, with an inflow of $105 million this year compared with an outflow last year of $119 million.
This boils down to two obvious factors: higher EBITDA and significantly less working capital build. When it comes to uses of this improved operating cash flow, the completion of the Sagola and Bath investments resulted in substantially lower capital investments this year. Consistent with our stated capital allocation strategy, and as Brad stated, we're generating cash and have resumed share repurchases. Speaking of which, as of May 8th, we've spent $50 million in share buybacks so far in 2024, including the $13 million spent in the first quarter. LP's board of directors has approved an increase of $250 million to our remaining authorization, bringing the total authorization for share repurchases to $400 million as of today. With roughly $800 million in liquidity, LP has more than enough dry powder to support future growth and shareholder returns.
Which brings me to our updated guidance on slide 10. In foresight, the strong first quarter demand has continued into the second quarter and even accelerated. As a result, we now expect revenue in the second quarter to be in the range of $380-$400 million, representing revenue growth of somewhere between 20%-25%. I'm sure you'll remember, and we can scarcely forget, that the second quarter of last year represents the weakest comparable for the year and therefore magnifies the rebound somewhat. This incremental volume would sustain EBITDA margins in the order of 25%, resulting in EBITDA for the quarter of $95-$105 million. Accordingly, we're raising our guidance for full-year revenue growth by 300 basis points to a range of 11%-13%, and increasing our full-year EBITDA expectations to the $340-$360 million range for an EBITDA margin of around 23%.
For OSB, if we assume OSB prices remain at current levels, we would expect EBITDA in the range of $125-$135 million in the second quarter. For the full-year guidance, we're modeling but not predicting cycle average for the second half of the year. As a result, our full-year EBITDA guide of $315-$325 million is the sum of the first quarter actuals, the second quarter guidance, and then the second half at cycle average as defined on slide 10. Basically, the same method we introduced last quarter, but with updated numbers, obviously. Assuming for simplicity that LPSA and corporate net to zero, this brings our full-year EBITDA guidance to $655-$685 million, or about $150 million higher than our previous full-year outlook.
In summary, it was a strong quarter and a strong start to the year that leaves both businesses exceptionally well positioned to continue executing our strategy of growth, specialization, and transformation. With that, we'll be happy to take your questions.
Operator (participant)
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. One moment for questions. Our first question comes from Kurt Yinger with D.A. Davidson. You may proceed.
Kurt Yinger (Analyst)
Great. Thanks, and good morning, everyone. I just wanted to start off on siding. I guess if volume's kind of the biggest lever on margins and we see kind of a sequential uplift Q2 versus Q1, what kind of constrains additional margin expansion versus what we just saw? I guess as you're looking to the back half as well, based on the implied guide, anything to keep in mind from a cost of production or maybe SG&A perspective that we didn't kind of fully realize in Q1?
Alan Haughie (CFO)
Yeah. Hey, good morning. This is Alan speaking. Well, nothing really. There are a few product introductions. Brushed Smooth and Nickel Gap siding will be increasing the volumes of those, and they will be slightly inherently less efficient than current primed production. We are growing ExpertFinish, and as we've said, the ExpertFinish margins are themselves lower than primed. And to be honest, we like to give ourselves, well, call it the operating room to swing for the fences. And if that means, as an example, adding additional selling and marketing spend, which we may choose to do, or with this kind of volume growth, possibly accelerating some of the preparations for the restart of Wawa, this 23% EBITDA margin guide gives us the room to do that, and still, we believe, hit that commitment, so.
Kurt Yinger (Analyst)
Got it. Okay. That makes sense. Thanks for that, Alan. And then second, just on the Lennar announcement, was hoping you could talk a little bit more about what type of opportunities you see this opening up for siding specifically. And we've kind of seen some testimonials around the business you do with them in the Midwest. I believe you guys do well here in the Mountain West as well. I guess how should we think about kind of what's incremental related to what you've announced?
Brad Southern (CEO)
Well, there's a significant piece of incremental volume over what we've done with them from a siding perspective historically. So basically, what's happening, Kurt, is we were assigned new geographies that we're currently servicing with our siding portfolio. And that's pretty much across the country, but obviously, not every region, not every sub region was converted, but a significant amount of the volume was. So the opportunity for us is just to expand the geographic reach of particularly our new construction products into the field, into distribution, as Lennar, it becomes the main vehicle to drive demand for that BuilderSeries portfolio.
There's certainly a volume uplift that we're beginning to realize with the Lennar orders, but also as we experience the geographic expansion that this opportunity provides, and it'll provide for even more growth of BuilderSeries as we pick up accompanying lumber dealers that have to carry the product in order to service Lennar.
Kurt Yinger (Analyst)
Got it. Okay. Well, that's great to hear. Appreciate the color guides, and good luck here in Q2.
Brad Southern (CEO)
Thank you. Thanks, Kurt.
Kurt Yinger (Analyst)
Thank you.
Operator (participant)
One moment for questions. Our next question comes from Mark Weintraub with Seaport Research Partners. You may proceed.
Mark Weintraub (Analyst)
Thank you. First, congrats. Obviously, very good quarter. In fact, I think a lot better than you had originally anticipated. And so I'm sort of wanting to get a little bit more color, if possible. On the siding EBITDA margin, I think you had been guiding something below 20%, and you end up basically at 25%. What was different? What played out differently than you had expected?
Alan Haughie (CFO)
I'll take this one. The answer is almost everything. Let me use pricing was certainly better in the sense that in both in terms of mix and in terms of the impact that I mentioned in my prepared remarks with the effect of the prebuy. But also, we've spent the whole of last year talking about carrying the investment of additional mills through into 2024. And the benefits of that showed in that when we had a minor uptick in volume, there was essentially no real change in labor to absorb that volume. So at least during Q1, we got additional revenue at what I'll call throughput, revenue minus material costs because the labor was already in place.
And so that's not necessarily an easy thing to manage or predict, but fundamentally, that's one of the features that happened in Q1, which is one of the collateral benefits of us doing all of that preparation for what we're calling the upswing through 2023. So positioned us really well to make maximum value out of the revenue. We also had better-than-expected raw material performance. So pricing, efficiency, and raw materials. In other words, almost everything. And when we were on the call three months ago, this trend was just beginning to emerge, but it was not fully apparent at that time. But it was certainly emerging, which I think we tried to convey a degree of, let's call it, confidence in our numbers that obviously was ultimately very much justified.
Mark Weintraub (Analyst)
Great. Obviously, the right way to go in terms of versus guidance, etc. Maybe just following up a little bit on Kurt's question. I mean, you are embedding what would be a relatively sharp decline in margins in the second half, and you alluded to some types of actions, kind of, I guess, prep work that might be entailed. Can you maybe give us a little bit more color on that? Or is there also a relatively good chance that we end up with some upside surprises we saw in the first quarter as we think about the second half of the year? Sorry, in EBITDA margins, for example.
Alan Haughie (CFO)
The short answer is yes. The longer answer is that the one I just gave to Kurt, fundamentally, yes. It gives us the operating room to swing for the fences, and we're confident that we'll hit at least 23%. And that's fundamentally it, Mark. So the answer is yes.
Mark Weintraub (Analyst)
All right. I appreciate it. Thank you.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Susan Maklari with Goldman Sachs. You may proceed.
Susan Maklari (Analyst)
Thank you. Good morning, everyone. My first question is just on broader demand trends in siding. Can you talk a bit about how the quarter came together? This relative strength that you're seeing into the spring feels like it's a bit in contrast to what we're hearing in some of the other larger ticket discretionary-type product categories. I guess, can you talk a bit about how much do you think is company-specific and relative to some of the new products and the initiatives that you have versus the broader siding space? How do you think about the sustainability of this as we go forward into the back half of the year?
Brad Southern (CEO)
Yeah. Susan, great question. So we feel really good, certainly given the guidance we've put in place for Q2 about the sustainability of this for the short term anyway. But let me tell you why I'm equally excited about the long-term sustainability of the growth. And look, I do want to caveat that is that I believe for our siding order file, we're back into a normal cadence of seasonality. So that's going to play into the quarter-over-quarter type of comparisons. But fundamentally, what's happened over the last 18 months or so are three things. One, the new product development has been real, and we've launched products that our customers have been asking for, the type of products. Alan mentioned this as far as the pricing. The success of those product launches from a demand standpoint has been resounding.
So those new products open up new opportunities for demand that wasn't there before. When you don't have Smooth ExpertFinish and somebody wants smooth, you're locked out of that market. So that has expanded our market just through the new product development. Let's keep in mind that in our world, ExpertFinish and BuilderSeries are still relatively new to what we're doing from a demand standpoint. So having access to the big national builders with a BuilderSeries and then having a viable nationwide ExpertFinish product offering, it really creates demand opportunities that didn't exist in the business, say, three years ago. Second to that is the work we have done in repair and remodel to establish contractor and distribution relationships in support of the go-to-market strategy for ExpertFinish. Repair and remodel has been a relatively new endeavor for us.
In that space, there are still one-step distribution regions where we have been underpenetrated, and we have built out that infrastructure to a large extent last year, and now we're able to leverage that. There's still opportunities there. That's why we've done what we've done geographically, putting these ExpertFinish facilities in market. Then finally, we're just getting started with the big builder. The Lennar deal certainly is a watershed moment for us, but there's 20 other targets that we have that we're actively working on.
We see opportunities to continue to gain market share in that space as well. So it certainly feels very sustainable. Just let me round off that answer by saying, right now for this year, shed has really not been a driver to incremental volume growth this year and kind of the way inventory situation worked out last year.
So we're expecting some pickup in shed, certainly over where we were the first three or four months of this year, the remainder of the year, which adds a little bit of fuel to our order file as well because that has been a weak spot. So we feel good about the sustainability. There'll be rocks in the road as we get maybe to Q4, Q1 next year as people begin to manage inventories with a little more aggressiveness as they approach year-end. But we feel good about what we saw in Q1 being sustainable growth, not just any kind of one-off trend.
Susan Maklari (Analyst)
Okay. That's great color. Thank you, Brad. Then just following up on siding, the sales and marketing spend actually came in well below what we had anticipated. I guess, can you just talk about what drove that? And are you still expecting the $15-$20 million in marketing for the full year?
Yes. Look, those costs are ramped up too. You just can't turn the spigot on immediately. Programs get built and then executed as we get closer to the building season. Then as probably all companies that you cover face, as we try to add salespeople, it's easy to budget for that. It's a little bit harder to find the talent, onboard the talent, and start paying the salaries. The sales organizational adds that we have in place have gone slower than we would have liked. From a marketing standpoint, we're building up to the spend levels that we've talked about on prior calls.
Alan Haughie (CFO)
That's essentially a sort of more detailed version of the answer I tried to give around EBITDA margin in the second half. Hopefully, we will succeed in spending the selling and marketing dollars that we are planning to do so, which has a bit of a margin drag compared to Q2 of this year sorry, Q1 of this year, where so far we haven't spent as much as you might have expected or that we would have liked.
Susan Maklari (Analyst)
Okay. All right. That's great color. Thank you both, and good luck with everything.
Brad Southern (CEO)
Thanks, Susan. Thank you.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Ketan Mamtora with BMO. You may proceed.
Ketan Mamtora (Analyst)
Thank you, and congrats on a strong quarter. Maybe the first question, can you talk a little bit about sort of how big is BuilderSeries today? I would imagine fairly small. But where do you expect it to be over the next, let's say, three years? And similar for ExpertFinish, how big do you expect that to be as well?
Brad Southern (CEO)
Ketan, you're correct. BuilderSeries is smaller than ExpertFinish, on the order of a couple of percentage points of volume. How big we expect it to be remains to be seen, but there may be a hint of that in the earnings deck that Brad referred to earlier. ExpertFinish started at zero in 2019, and it was 9% of revenue this quarter, 14% sorry, 9% of volume, 14% of revenue. BuilderSeries is at a different price point, and so it won't have quite the same mix effect, but it is another example of new product development in the siding business that reaches new customers in new markets. And we fully expect the take-up for that to continue to grow.
Alan Haughie (CFO)
The good thing about BuilderSeries, as we've mentioned before, it drags along a whole host of other highly profitable products as well. It creates its own halo.
Ketan Mamtora (Analyst)
Yep. Nope. That makes sense. And then, Alan, you talked about sort of ExpertFinish margins being below primed for now, at least. So as we look out and this is not a next quarter or 2024 question, but as you think about the next two, three years, when do you think that relationship flips with ExpertFinish margin?
Alan Haughie (CFO)
You threw me a softball there. So I'm going to say yes, in the next two-three years, I hope. That's a reasonable, if rather bland, goal. But yeah, there is still work to be done, and we're still in the process of automating. We have a highly competent leadership in that group making great strides. I mean, the variable margin, as I said, for which I'm not going to disclose at this point, but the variable margin that we earned on ExpertFinish in this first quarter was significantly higher in the first quarter of last year.
And again, to sort of return to one of the earlier themes, we didn't bank on that when we gave our Q1 guidance. And so that aspect of the business actually performed slightly better in our Q1 reported performance than we expected. So we're making strides.
But as you can imagine, it will be a situation of two steps forward, one step back. So we don't necessarily take all of the improvements in Q1 and kind of project them in perpetuity. So it is an ongoing process of us learning how to do this. But I'm delighted with the progress we're making so far.
Ketan Mamtora (Analyst)
Got it. Okay. That's very helpful. Good luck. I'll jump back in the queue.
Brad Southern (CEO)
Thank you.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Mike Roxland with Truist Securities. You may proceed.
Mike Roxland (Analyst)
Thank you, Brad, Alan, and Eric for taking my questions. Congrats on a solid quarter.
Brad Southern (CEO)
Thank you. Thanks, Mike.
Mike Roxland (Analyst)
I just want to get a sense. Can you talk about the degree to which you produced OSB through siding, if any? Because I recall at your investor day in February, you mentioned some optionality to increase production of OSB should market conditions warrant. I think you mentioned 50% of your siding mills had that capability or ability to produce OSB. So given the run-up in OSB prices and the more minus let's say the more minus ramp in siding capacity, I'm wondering if you took advantage of that capability. Yeah. Let me speak to that strategically. So as you know, over a multi-year period, we've converted OSB mills to siding. In the larger OSB mills that we've converted, we've tended to retain the ability to produce OSB.
Brad Southern (CEO)
The reason for that is when a new siding mill comes online in our network, we don't typically have the immediate demand to fill the facility up. While we may not maintain the ability to make OSB in the current mill we're converting, we do maintain it in our system. We retain that as a mechanism to basically cover the semi-fixed cost in a facility where we have staffed up for siding production so that we have the plant and the network capability to take advantage of what happened in Q1 and what we foresee happening in Q2. We're able to fill the idle time with OSB production.
It is done primarily as a cost optimization, say, in our siding business so that we don't have idle assets or idle labor costs waiting on the order file for siding to improve.
And just to ease any concerns there and just let me go a little bit more detail how that's handled internally. We transfer that OSB production to our OSB segment at standard cost. And so the revenue for that OSB is recognized in our OSB business, but obviously and the OSB segment cost is at standard cost of manufacturing siding. So we want to try to because we're trying to keep the segment revenue cleaned by product, not by location of manufacturing. So in the first quarter so we are making we did make OSB in our siding network in the first quarter. In the big picture, it's a minimal amount. This is from memory, but most all that production goes into the North Central region where we don't currently have OSB assigned capacity.
We're selling into a market where we would not normally be present if we were relying only on our OSB network. It is not opportunistic based on OSB pricing. It is opportunistic based on capacity availability in our siding network so that we can cover the semi-variable or semi-fixed cost, as I mentioned earlier, and keep the labor force active doing something constructively. Happy to take a follow-up question, Mike, if that didn't cover the nature of your question, but just wanted to provide a kind of a little bit of a detail around why we do that strategically.
Mike Roxland (Analyst)
No, that's extremely helpful, Brad. Thank you. Just one question if one could follow up on that. So the way it's booked is that using the cost structure of the siding mills, but you're capturing the revenue as the revenue is reported within the OSB, but using the cost structure out of the siding segment.
Brad Southern (CEO)
Yeah, exactly. The revenue and any margin gain over standard cost is recognized in OSB. But certainly, Mike, we get the reason we do it is that there is a cost reduction or whatever cost offset that happens in our siding business that provides it helps the EBITDA margin in our siding business because we're getting that cost transfer at standard, and that is helpful. So it's a cost optimization help in our siding or EBITDA margin help in siding. And then depending on the pricing of OSB, it can be a significant add to our OSB EBITDA.
Alan Haughie (CFO)
I also think that by virtue of doing this, we don't have to reconfigure the siding network and the staffing as much as we would otherwise do. And we can keep the idea of the siding business is it's a growth business. When we hire people at the mills, the idea is that you come and work at a siding mill, and the shift pattern never goes down, and that we continue to recruit people. And we like to try and stick to that. And then we can gain experienced crews capable of then doing exactly what we just described happened in Q1, which is adding additional siding volume and not needing to add shifts because the shifts are trained and capable, and they can pump out volume when it comes in.
It's got a great sort of collateral benefit to the future efficiency of the siding business because it's set itself up for that success.
Brad Southern (CEO)
Yeah. That's a great point. And just to add a little detail, so we spent on these mill conversions that we've experienced recently and the cost associated with that, there's a great deal of training that goes into those transitions because look, when you're manufacturing OSB, that is not an aesthetic. There's not an aesthetic quality parameter within the realm of reason for OSB. It's a big part of the cost of downgrade in a siding mill. So the training that happens in those facilities is a major investment. So we're making a major investment in the workforce.
And so just to be simplistic about it, what we don't want to do is convert a mill and then not have the immediate siding volume to run the mill and have to lay off or do a shift with the staff reduction to meet that demand. So OSB helps us retain some consistency in operations at these facilities after we make these sizable investments and conversions.
Alan Haughie (CFO)
On Investor Day, and when we're meeting with investors and you guys personally, we'll talk about why we think the whole is greater than the sum of the parts if you use sum of the parts analysis. This is one of the reasons that each business has, and there's a symbiotic benefit from being able to do this. That's one of the reasons why the whole is greater than the sum of the parts.
Mike Roxland (Analyst)
Got it. That's great, Colin. One last question, and I'll turn it over. Do you recall then just when you look at your OSB segment, how much of either revenue or EBITDA came from running the siding mills on OSB to accomplish that? And would it be fair to say that as you progress through the duration of this year, the contributions to siding mills should lessen as you run more siding product itself?
Brad Southern (CEO)
Yeah, Mike, I would say that the amount of the year-over-year volume increase in the OSB business enabled by OSB production in the siding mills was pretty minimal. It was between a quarter and a third of the year-over-year increase. And so it has a positive impact, but not a dramatic one. I guess I would characterize the siding impact the same way. It helps us be ready for the upside, but it's not a huge amount of volume. And mostly, the increase in the OSB business was enabled by the combination of very strong OEE operating efficiency as well as a fair amount of overtime in those facilities.
So the bulk of the uplift came from OSB. And obviously, that's where the benefit accrues as well. Mike, let me just add one level of detail to the answer to your question.
We do tend to contract that volume out of siding just because we want to know there's a market there. So typically, once we've done that for the year, that volume is pretty consistent quarter to quarter. Now, if we get into a situation where siding demand requires full production, we can do some things in our OSB business to cover that contract volume. But it should be expected that we would run some OSB in our siding system the rest of this year. Then we get to next year, and we look at that volume and say, "What do we need?" But typically, we do contract that volume just to make sure we have a home for it and we're not having to put all that volume on the open market.
Mike Roxland (Analyst)
Got it. Extremely helpful. Thank you for all the coloring, and good luck in 2Q.
Alan Haughie (CFO)
Thank you. Thanks, Mike.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Stephen Ramsey with TRG. You may proceed.
Brian Biros (Analyst)
Hey, good morning. This is actually Brian Biros on for Stephen. Thanks for taking my questions. First one on siding. I guess just any commentary on the channel inventory there of the LP SmartSide, the ExpertFinish, BuilderSeries. Is it healthy for this time of year and for the raised outlook, or is this kind of maybe a tailwind to help 2H?
Brad Southern (CEO)
I would say the inventories look. It's hard to remember what normal was after COVID and then coming off the order file. Even with my memory cells not being what they used to be, we are back to a more normal seasonal pattern on inventories. So I would characterize today's inventory levels as normal, but normal being a little high because distribution has certainly brought in products like ExpertFinish in anticipation of a strong summer season. Typically, historically, distribution builds inventory beginning February through April, May, and then that inventory is worked down till October timeframe. We feel really good that the product's moving through. There's no strange order inventory build anywhere in the channel.
I just want to be transparent about that. That means probably a little higher levels than it will be in November, but healthy for the level of demand that we're experiencing in our order file. We do not have concerns about any inventory build in the channel affecting, I mean, certainly next quarter, which we've guided to.
Brian Biros (Analyst)
Okay. Understood. And then maybe secondly, on the setting margins of, I think, it's 23% now versus 20% prior, really a major jump sales guide going from $1.45-$1.5 now. You repeatedly stated before, volumes, obviously, have a major impact on margin. I guess how much of that margin raise here is volume and mix helping the sales, or anything else of the kind of initiatives and better efficiencies at the plants and things like that? Thank you.
Brad Southern (CEO)
Look, production volume is a huge driver to these margins, let's be clear. And so as we continue to kind of at least outperform our expectations around sales volume and lever that into incremental production at our facilities, there's tremendous that's very beneficial to our margins. And then as Alan mentioned, given the health of the order file, our sales, our price increase that we implemented in January went through really quickly and has held very strong, has some stickiness to it.
So we're confident there. And then somewhat unexpectedly, the level of resin MDI price fall has been additive as well. But look, any kind of long-term view of margin for this business is going to be primarily driven by our ability to get price, our ability to improve mix, and our ability to run these facilities full or close to full.
Just keep in mind, like with Sagola, when Sagola's up and fully running and functional and optimized out, that is a big siding mill. So these siding mills that we add to our system lower our average cost because of the scale they provide. Similar things happening in Bath on ExpertFinish. So we're in a growth phase and have been for a while where the incremental growth can still come with incremental margins because of the efficiency that's inherent in these large mill conversions and then ultimately inherent in us filling up the system.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Sean Stewart with TD Cowen. You may proceed.
Sean Stewart (Analyst)
Thanks. Good morning, everyone. A couple of easy ones for you. With siding momentum, clearly, very much on track yet. Any updated thoughts on Wawa in terms of timing and capital costs to move that project forward?
Brad Southern (CEO)
Yeah, thanks, Sean. The update is that we continue on a weekly basis to evaluate our expectations for demand growth. It's never a perfect process of timing new capacity additions to perfectly match demand, but it is something we evaluate very, very frequently and consistently. I think really the only thing concrete we can give you is that certainly, our expectation is earlier than it was six months ago. And the more we see this uptake of volume and the faster we fill Sagola and the faster we fill Bath, the sooner we're going to want more capacity. Probably with no impact on CapEx this year, just given that our guidance has stayed the same. So there'll be nothing significant from a CapEx perspective this year.
Sean Stewart (Analyst)
Understood. Second question is just on OSB industry capacity growth. There's still a lot on deck the next 2-3 years. And Brad, I'd be interested in any updated thoughts you have on the likelihood that all these projects come to fruition and constraints on bringing that supply into the market at the pace that's been suggested by all these announcements: capital constraints, labor constraints, other issues along those lines?
Brad Southern (CEO)
Yeah. Yeah. I'll just say that in our own experience, too, it takes longer than planned initially when you talk about the complexity now of getting permitting and some of the social issues related to mill locations. So I mean, then secondly, the market has to be there, one would think, for all of these to go forward as planned. So we're keeping an eye on it. We can't control, obviously, what our competitors do with capacity expansion. But I do kind of take the long view on some of these more ones that are on the board and don't have a lot of momentum behind them yet. But there's a couple coming online that's going to have some volume in the market later this year.
But we feel good about the rest of the year in our OSB business, and we'll manage our capacity to meet our customers' demand in the most efficient way we can. I just don't want to speculate too much about what our competitors are going to do because I don't know for one thing. But I will say, so far, it's taken longer than initially announced and planned on by all the folks that have tried to bring capacity online.
Sean Stewart (Analyst)
Yeah. Understood. That's all I have. Thanks very much, guys.
Alan Haughie (CFO)
Thanks, Sean.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Matthew McKellar with RBC Capital Markets. You may proceed.
Matthew McKellar (Analyst)
Hi. Thanks. Good morning. Could you provide any color on how much of the bump to your siding sales guidance for the year you would attribute specifically to the partnership with Lennar you announced last month and maybe the expansion and trim at Home Depot you noted versus a broader outlook for stronger sales across the business?
Brad Southern (CEO)
No, I would say both of those were in our thinking when we originally gave guidance back last quarter. And so we haven't really added because of those two things that I mentioned in my script, we haven't added demand because of that. It's just what we're responding to is the overall strength in our order file up until last Friday, last time we got a report. And that demand that we're feeling is across basically all sectors with a little bit of not so much in shed, as I mentioned earlier. It's just across the board, orders from distribution that is creating the optimism that we have about the outlook for siding.
But we did not up it, just to be specific. The guidance increase was not because we signed the Lennar deal or we signed the Home Depot deal.
Those deals are long time coming, and we had some visibility into that when we guided last quarter.
Matthew McKellar (Analyst)
Thanks. Very helpful. The rest of my questions have been asked. I'll turn it back. Thank you.
Alan Haughie (CFO)
Thank you. Thanks, Matt.
Operator (participant)
Thank you. One moment for questions. Our next question comes from George Staphos with Bank of America. You may proceed.
Lucas Hudson (Analyst)
Hi. This is actually Lucas Hudson on for George Staphos. He is currently traveling. Congrats on the quarter, guys, and thank you for the details. If you guys could just walk me through the siding trends and how they vary between pro contractor and do-it-yourself along with home center and distributors, please.
Brad Southern (CEO)
Hey, that was a little bit hard to understand the question, but let me say it back to you. So the different routes to markets, or what differences are we seeing from a demand standpoint across those different routes to market? Was that the question?
Lucas Hudson (Analyst)
Yeah. Yeah. Just the overall demand trends between a pro contractor, do-it-yourself, home center, and distributors, please.
Brad Southern (CEO)
Okay. So home center demand for the new products that we have put in place, particularly things like trim, very good. Panel business, not a driver to incremental volume, but a strong basis for volume, which, by the way, most of our home center volume, to be clear, is panel. So that's kind of reflective of what we're seeing in shed. For new construction, where we have had market access, it is strong. Where we are opening new regions as a result of the deals we've discussed, it's high percentage growth off of a low base. So a lot of opportunity there.
And then for repair and remodel, I feel really good about that. But that is kind of one of these compounding incremental opportunities where as we add contractors and we add access to market through one-step distribution, that kind of builds upon itself as far as compounding growth.
So that's certainly, as represented in the ExpertFinish numbers, a key driver to the incremental volumes that we're seeing. So let me take a step back and say good new construction growth, both at the distribution and end-user area. Good growth in repair and remodel at the contractor and distribution level there as well. And then for the home centers, kind of steady as it goes, but not with new products, which are really moving well through the consumer retail channel.
Lucas Hudson (Analyst)
Okay. Thanks for the color. That's all I have. Thank you, and good luck in Q2.
Alan Haughie (CFO)
Thank you.
Brad Southern (CEO)
Thank you.
Alan Haughie (CFO)
Thank you.
Operator (participant)
Thank you. I would now like to turn the call back over to Aaron Howald for any closing remarks.
Aaron Howald (VP of Investor Relations and Business Development)
Okay. Thank you, everyone. That concludes our prepared remarks and round of questions and answers. So we'll bring the call to a close there. Thank you for joining us to discuss Q1 results and our updated outlook for Q1 and for the full year of 2024. Stay safe, and we'll look forward to connecting again soon.
Operator (participant)
Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.