Louisiana-Pacific - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 consolidated net sales were $681M, up 3% year over year; diluted EPS was $0.89; Adjusted EBITDA was $125M, down 4% YoY as lower OSB pricing offset Siding strength.
• Siding net sales rose 9% to $362M on 6% higher prices and 3% higher volumes; OSB net sales fell 2% to $267M on 7% lower prices despite 6% higher volumes.
• Versus prior guidance, LP delivered a clear beat: Q4 consolidated Adjusted EBITDA came in at $125M vs prior guide of $85–$105M; OSB segment EBITDA was $50M vs prior guide of $15–$25M; Siding EBITDA was within the $70–$80M guide at $72M.
• 2025 outlook: Q1 Siding revenue $390–$400M and ~25% EBITDA margin; FY Siding revenue $1.65–$1.7B and ~$415–$425M EBITDA; consolidated FY Adjusted EBITDA $615–$635M; CapEx ~$410M; quarterly dividend raised to $0.28 (+8%).

What Went Well and What Went Wrong

What Went Well

• Siding growth and mix drove margin resiliency: “Siding sales grew by 9%… higher selling prices added another 6 points of revenue growth… we largely reinvested these earnings in selling and marketing and in meal staffing”.
• Strong execution and cost control in OSB despite pricing: “By effectively managing what we can control, the business recovered most of the revenue impact and half of the EBITDA impact… through higher volumes, improved OEE, and efficient raw material utilization”.
• Q4 beat vs guidance and confidence in 2025: “EBITDA should land between $95–$105M [Siding Q1’25]… consolidated Adjusted EBITDA $130–$150M in Q1 and $615–$635M for FY 2025”.

What Went Wrong

• OSB pricing headwind reduced Q4 EBITDA: “Lower prices in the fourth quarter cost the segment about $18 million in both revenue and EBITDA”.
• Higher tax provision impacted YoY EPS despite operational strength: “Increase in Adjusted EBITDA of $5 million (or 4%) and a $15 million increase in tax provision” contributed to only modest net income growth.
• Maintenance timing and inflationary pressures: Q4 included downtime and absorption impacts (Houlton project), and 2025 planning assumes ~$20M inflation (labor and raw materials) that weighs ~1.5–2 pts on Siding margin.

Transcript

Operator (participant)

Good day and thank you for standing by. Welcome to the Q4 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 you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised 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, Vice President of Investor Relations. Please go ahead.

Aaron Howald (VP of Investor Relations)

Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the fourth quarter of 2024 as well as our full year results and our outlook for Q1 and 2025. Hosting the call 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 a 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 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 also contains reconciliations that are further supplemented by this morning's 8-K filing. Rather than reading those materials, I will incorporate them by reference, and with that, over to Brad.

Brad Southern (CEO)

Thanks Aaron and thank you again for joining us today. Q4 was a strong finish to a record year for siding that featured growth, share gains and margin expansion. In 2024, Siding set records for net sales and EBITDA overall, as well as multiple records for ExpertFinish. In OSB, we saw slightly higher market prices than in 2023, but more importantly, the business executed our strategy effectively, grew Structural Solutions, increased operating efficiency and managed capacity with agility and discipline.

Page 5 of the presentation shows financial highlights for the fourth quarter and full year. In Q4 we saw the expected seasonal slowdown as winter weather brought the building season to a close. Compared to the prior year, siding sales grew by 9% in the quarter. For LP as a whole, the net effect of siding growth, a decline in OSB prices and an increase in OSB sales volumes resulted in $681 million in sales, $125 million in EBITDA and $105 million in operating cash flow. After investing $61 million in sustaining maintenance and growth capital LP returned $42 million to shareholders through dividends and share repurchases.

For the full year, siding sales grew by 17% to $1.56 billion thanks to siding growth, slightly higher OSB prices and the margin expansion driven by increased capacity utilization and operating efficiency. We achieved $2.9 billion in sales and $688 million in EBITDA. These represent increases of 14% and 44% respectively. This nearly doubled earnings per share to $5.88. LP used the $605 million in operating cash flow to continue executing our capital allocation strategy by investing $183 million in CapEx and returning $286 million to shareholders via dividends and share repurchases.

Most importantly, we accomplished this safely, ending the year with 0.67 total incident rate. This is considered a world-class TIR, but it's not good enough for LP. We will never stop working to improve our safety performance to ensure no one gets injured while working at LP. As we look forward to 2025, the market is not radically different to what it was a year ago on our call. This time last year we said that we expected 2024 to be a flat year for housing and a soft year for R and R, but we expected both businesses to outperform both markets. This is exactly what happened.

In 2024, total U.S. housing starts were down 4% for the year and 6% in the fourth quarter. LP is overindexed to single family housing which fared better especially in the first half of the year. Single family starts were up 7% for the full year but down 5% in the fourth quarter. It is hard to be precise about the repair and remodeling market, but we estimate that total U.S. R&R expenditures were down low to mid single digits. Against this backdrop, siding revenue grew by 9% in Q4 and 17% for the full year. We saw the resumption of normal seasonal demand patterns in siding as well as broad-based growth in all product categories and in all geographies we serve. This growth is driven by new product innovation, our demand creation efforts, LP superior product offerings and by our amazing teams that make it all happen.

Volume growth enabled margin expansion for siding as we more fully utilized our new capacity at LP's Houlton, Sagola and Bath facilities. As a result of this growth, Siding achieved our long-term EBITDA margin target of 25% for the full year despite a soft market in OSB. Despite housing starts below long-term average demand, the business achieved EBITDA above our long-term cycle average. Thanks to efficient cost control and disciplined capacity management.

The consensus expectation for housing starts in 2025 is looking like another flat year with perhaps a modest rebound in R&R spending. Accordingly, in OSB, LP is planning for another year of operational excellence, cost control and strategic execution. In siding, the focus is on share gains and volume growth. We are seeing encouraging evidence of that growth so far in 2025 with a healthy siding order file that we will detail in our guidance discussion. Accordingly, we are increasing our investments in new product innovation, demand creation and capacity expansion to meet our customers' needs.

2024 was a relatively light year for capital investments. The recent conversions of our Sagola and Houlton mills and the opening of our prefinishing facility in Bath gave us room to grow in siding. As demand continues to increase, we want to ensure that we do not outgrow our siding capacity. That means that 2025 and 2026 will see significantly increased investments in capacity expansion starting later this year.

The next projects will include a second manufacturing line at LP Houlton, starting the next siding expansion project after Bath, and increasing capacity at our existing ExpertFinish pre-finishing facilities. With a significant portion of this work happening in parallel at our historic volume growth rate of about 7% per year and our much higher growth rate for ExpertFinish pre-finish siding, these projects should be completed in time to keep siding capacity utilization within efficient bounds. We would much rather be a little early than late with new capacity and so we are starting now to preserve our ability to grow rather than risking an extended period of allocation like we saw during COVID. As Alan will detail in a few minutes, we expect the siding business to generate over $400 million in EBITDA this year, reinforcing our confidence that siding can comfortably fund its own growth.

The LP team is fully committed to executing our growth strategy and I'm confident that we will continue to innovate new products, gain market share, operate safely and increase the scale and efficiency of our manufacturing network. With that, I will turn the call over to Alan to detail these investments, the financial results and our 2025 outlook, after which we will take your questions.

Alan Haughie (CFO)

Thanks, Brad. As Brad said, the fourth quarter brought the year to a strong finish and as I'll explore in a few minutes, the first quarter of 2025 also seems to be shaping up well. Page seven shows the fourth quarter waterfall for siding. 2024 largely exhibited normal seasonal demand patterns with a sequential drop in volumes in the fourth quarter as building activity faded. Single family starts were down not just seasonally, but also by 5 points year over year. Despite this, siding volumes grew by 3%, beating single family starts by 8 points. Higher selling prices added another 6 points of revenue growth, with roughly half coming from list price increases, half from mix, and we largely reinvested these earnings in selling and marketing and in mill staffing, with the expectation that 2025 demand will require higher production for the full year.

On page eight, siding revenue grew by 17 points, outgrowing the underlying markets. As Brad said, this growth added $230 million in revenue, $79 million of it from prices and $151 million from volume. And it added $143 million in EBITDA, being the flow through of $79 million in price, with $64 million coming from volume. Increased investments in demand creation and mill staffing, partially offset by a $60 million benefit from raw material price deflation, brought 2024 to a close with a 25% EBITDA margin, 500 basis points higher than last year. 2023 we sold just over 1.7 billion sq ft of siding in 2024, which is about 75% of our nameplate capacity. So we have a healthy runway of capacity to grow into while we execute new expansion projects for OSB.

On page 9, lower prices in the fourth quarter cost the segment about $18 million in both revenue and EBITDA. However, by effectively managing what we can control, the business recovered most of the revenue impact as well as half of the EBITDA impact of these lower prices through the combined effects of higher volumes, improved OEE and efficient raw material utilization.

Page 10 shows the full year for OSB. On average, prices were slightly higher year over year, but the $35 million in pricing benefit was overshadowed somewhat by the $106 million in revenue and $55 million in EBITDA from higher commodity and Structural Solutions volumes, helped of course by a three percentage point improvement in OEE, which in essence means that when we ran, we did so more efficiently. Raw material deflation, labor inflation and a hodgepodge of other small items left the year at just under $1.2 billion in net sales and $298 million in EBITDA. The fourth quarter was a bit below our declared cycle average quarterly EBITDA of $60 million, but the year ended well above that level.

Page 11 shows cash flows for the quarter and full year. Both are pretty straightforward, with EBITDA translating cleanly to operating cash flow, helped by a slight decrease in working capital and a normal cash tax rate. We invested to maintain and expand our manufacturing capabilities and returned most of the excess to shareholders, paying $74 million in dividends and $212 million in the year to repurchase shares at a volume weighted average price below $90. LP ended 2024 with $340 million in cash, zero net debt and almost $900 million in total liquidity.

As of February 14, LP has paid an additional $51 million to repurchase roughly 500,000 more shares and this leaves 69.7 million shares outstanding and $187 million remaining under the preexisting share repurchase authorization. Now. LP's guidance for the first quarter and full year of 2025 is on page 12. For siding, the order file continues to be healthy and to be clear, consistent with a typical seasonal rebound early in the year. Now, while there was minimal price lag in January, price realization now fully reflects the annual list price increases. Accordingly, we expect sales growth in the first quarter between 9% and 11% for revenue in the $390-$400 million range. EBITDA should land between $95 and $105 million for an EBITDA margin of about 25%.

For the full year, although we currently expect flat housing starts, we nonetheless anticipate revenue growth of 7 to 9 points, bringing revenue to between $1.65 billion and $1.7 billion. EBITDA should be between $450 and $425 million for an EBITDA margin again of around 25% for OSB.

Assuming random length prices are flat to last Friday's published levels, we would expect first quarter EBITDA to land between $35 and $45 million. For future quarters we offer no estimate of OSB prices and merely revert to cycle average. As a reasonable approach to modeling the longer term EBITDA potential of the OSB business, I should note that while we're using the same algorithm to estimate cycle average EBITDA, the inclusion of 2024 data does increase that cycle average EBITDA slightly from $60-$65 per 1,000 sq ft, which is reflected in the outlook for the second through the fourth quarters. Finally, for the avoidance of doubt, we have insufficient clarity about them to incorporate any tariff impacts in our guidance. The first quarter and full year guidance therefore assumes the current state continues now.

If siding growth proceeds on this trajectory, we will need new press capacity sometime in the next two to three years and we'll need additional pre finishing capacity somewhat sooner. The chart on page 13 shows this schedule of capacity additions that will be necessary to meet demand under these scenarios. As a result, 2025 will be a year of significant investment. We expect to spend about $200 million in growth capital largely in the second half of 2025, and 2026 will also most likely be a year of heavy investment with two expansion projects in parallel. As Brad mentioned, we'll have more specifics on timing, total project costs and expected returns in coming quarters. Sustaining maintenance is also increasing in 2025, with some green end modernization projects in OSB designed to improve efficiency, yield, and most importantly, safety, so in conclusion, 2024 was a strong year.

We executed our growth strategies and that execution generated over $600 million in operating cash flow, which we invested to maintain and enhance our manufacturing capabilities, generate more demand for our products, and to develop and reward our people. And we return the rest to shareholders consistent with our capital allocation strategy. We believe we have a strategy that works, a record of solid execution and a robust balance sheet. All of which gives us confidence that we're very well positioned to make the most of what the housing and repair remodel markets have to offer and to invest further in more product innovation, growth, capacity expansion and shareholder returns. And with that, I'll open the call for Q and A operator.

Operator (participant)

Certainly. 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, and please stand by while we compile our Q and A roster. One moment for our first question. Our first question will be coming from Michael Roxland of Truist Securities. Your line is open, Michael.

Michael Roxland (Managing Director in Equity Research)

Thank you Brad, Alan and Aaron for taking my questions. Congrats on a strong finish to the year. I'm wondering if you could comment. You know, obviously siding demand is, as. You've noted, continuing to be strong. Could you comment on the Lennar pull through and help us think about the cadence of that growth this year?

Brad Southern (CEO)

Yeah, so I would say we have ramped into like full contract execution with Lennar. You know, there was a ramp up period after the deal was signed. We didn't get all the homes immediately, obviously. So we're running at full scale with them and we're in the second year of that agreement and I would say it's at or exceeded at or have exceeded our expectations as far as volume pull through.

Michael Roxland (Managing Director in Equity Research)

Would you say? I mean at or exceeded, but you would say it's more the latter than the admin that it's, you know, it's performed.

Brad Southern (CEO)

Yeah, it's performed as expected. Yes. Sorry for any confusion. I mean we were contracted for a certain amount of homes and we've gotten those homes and I mean a little extra here and there but you know, materially it's within the bounds of the agreement.

Michael Roxland (Managing Director in Equity Research)

Got it. Okay. And just, you know, second question I. Has, given the weakness or what had been weakness in commodity OSB, have. You shifted any more of the production? To Structural Solutions which should be, which are more margin accretive and are you handicapped in any way for making a. Large shift to Structural Solutions from commodity. OSB, particularly as you look to build. How about BuilderSeries given, you know, tie-in cross-sell opportunities?

Alan Haughie (CFO)

Yeah, we do have to invest to continue to grow Structural Solutions. From a manufacturing standpoint, those investments tend to be small, especially relative to siding conversion and fairly quick to execute. So there are times that we run into some constraints around product availability and Structural Solutions, but that's very rare. So yeah, you're right. As commodity pricing. Flattens out or is below trend lines. We really enjoy that incremental margin we get from Structural Solutions. And our strategy is to continue to sell, have a strategy to pull those SKUs through distribution and capture that margin. And that's been a key part of our strategy. I'm proud of where we were in 2024 and we have plans to grow on that in 2025.

Michael Roxland (Managing Director in Equity Research)

Thanks very much.

Brad Southern (CEO)

Welcome.

Operator (participant)

And one moment for our next question.Our next question comes from Ketan Mamtora of BMO Capital Markets. Your line is open.

Ketan Mamtora (Director in Building Products Equity Research)

Good morning and thanks for taking my question. Perhaps to start with on siding, can you talk about sort of the EBITDA and the margin level in siding for 2025? Clearly the ExpertFinish business is growing quite nicely. We know that is, that is a higher price point. Products should be margin enhancing. Can you talk about a couple of offsetting factors that may be keeping margins at the same level? Is it SG&A? Is it anything else?

Alan Haughie (CFO)

Yeah, thanks Ketan for the question. I'm sure that's a bit of a burning question. I do want to say, so I'm going to be sort of try and be a little thoughtful and careful in my response. This is the first time that we've guided to a 25% EBITDA margin for the siding business. So I do want to try and sort of answer the question in reverse. The volume leverage and the price flow through that you're used to seeing on our waterfalls that you see in the Q4 and the 2024 full year waterfalls, they're expected to continue, let's say the pure volume conversion of revenue to EBITDA at about 40% and of course price flows through 100%. So we get that kind of blended volume and price flow through of about 65%. But so thank you for the question, but we're not harvesting.

It's way too early in LP's growth trajectory for us to even consider that. So the costs that are included in this full-year guide, there's about $20 million of inflation that now a third of that's labor, so that's certain. The remainder is, let's call it raw materials, and I will admit that's largely speculative. There is about $10 million-$15 million closer to the high end of additional selling and marketing expense. And so yes, in order to generate future business as well as help secure this year's growth, we are continuing to invest in adding selling and marketing dollars. And I've said it before on sort of broad public calls and individual discussions, we encourage this. We encourage.

Discretionary selling and marketing investments in order to generate future growth. I will say that the push into repair and remodel does require, let's call it a higher level of marketing dollars. Per foot of business gained. Then again, further on the discretionary side, there's roughly $5 million of, let's call it, engineering costs and staffing associated with the capacity expansions and some additional mill staffing, very much in the hope that the market or that market share gains give us further growth on top of the amount that we've guided to. So we are certainly, as always building in.

The necessary discretionary spending that would help us overachieve, and there's about a 1.5-2 percentage point margin impact from all of that stuff that I just described. What's not included. We have not assumed any material price mix favorability. It's too early to know whether or not ExpertFinish will progress in the year. We're obviously optimistic, but it always feels a bit reckless to just basically take that as a given, given the fact that 2025, as a housing market, is going to be challenging. It's a flat market in housing and probably down in R and R, so this is definitely a market share gain year and we can't always predict where and quite how and when those market share gains will occur, so that's the answer.

Ketan Mamtora (Director in Building Products Equity Research)

Thanks, Alan. That's very helpful and very detailed, so appreciate it. And then switching to kind of siding capacity expansion on Houlton Line Two, can you share with us at this point kind of what kind of capacity expansion you are planning and what kind of total investments will be online to?

Brad Southern (CEO)

Yeah, Keaton. That'll add about 300 million feet of volume. The Houlton expansion would be adding a parallel manufacturing line to the existing mill. So adding a forming line and a press. I don't think we've gotten into the details precisely of how expensive that's going to be. I haven't yet. But the returns are consistent with previous expansion projects that we've had. So as we get closer to that and have more specifics about timing and things like that, we'll, we'll be able to share that.

Alan Haughie (CFO)

Ketan. I would just say from a manufacturing standpoint, we'd be focusing that line on lap and trim capacity versus panel.

Ketan Mamtora (Director in Building Products Equity Research)

Got it. That's very helpful. I'll jump back in the queue. Good luck in 25.

Alan Haughie (CFO)

Thank you, Keith.

Operator (participant)

One moment for our next question.Our next question will be coming from Susan Maklari of Goldman Sachs. Your line is open, Susan.

Charles Perron (VP of Equity Research)

Thank you. Good morning, this is Charles Perron in for Susan.

Brad Southern (CEO)

Today your voice has gone down a couple of octaves, Susan.

Charles Perron (VP of Equity Research)

Yeah, no, maybe first I want to ask about the siding guide and the implication for the volume outperformance versus the market. Where do you see the biggest opportunity for growth and outperformance across new construction R and R and maybe shed as we look into 2025?

Brad Southern (CEO)

Yeah, good question. We're really expecting volume growth across all product offerings this year. When we compare to 2024, there probably is some recovery volume or percentage in shed. Shed was rather weak, especially first half of last year. So fortunately that's back to normal. It's now a little strong right now. So that to be if any one sector is kind of leading the Growth that it's shown at the moment, but we're expecting above-market growth across all sectors: retail, the builder, new construction, as well as repair and remodel. We're also looking at it across all geographies. We're off to a good start, and the visibility we have into order files is really strengthening everywhere.

Charles Perron (VP of Equity Research)

Gotcha. That's good color. Maybe can we talk about also the raw material and freight expectations for 2025? I think on siding you alluded for $20 million inflation. What does it imply for price costs and how would potential tariff impact your siding cost structure as we think about the year ahead?

Alan Haughie (CFO)

I'll take the easy one first and then we'll avoid the second one. The $20 million I referenced does include about, I don't know, $8 million or so of labor inflation. So that's as it were, certain that's already been given and gifted as it were. And the rest is raw material. And there will be, we think we'll see increases in paper overlay costs mostly offset by reductions in MDI costs. So there is some potential for raw material inflation. But I will admit that piece is broadly speculative. I can't point to anything in particular. Most of our major raw material other than wood are indexed to various derivative products that go into it. So. We have to do some kind of forecasting around benzene cost, oil cost. To do these analysis. So that's the analysis that we did that drove the assumptions around the price increases for raw materials other than wood.

Charles Perron (VP of Equity Research)

Got it. Thank you guys.

Brad Southern (CEO)

Yeah, and there's no assumptions. Nothing that we've talked about as far as the cost assumes any tariffs are placed on raw material flows.

Operator (participant)

One moment for our next question.Our next question will be coming from Sean Steuart of TD Cowen. Sean, your line is open. Thanks.

Sean Steuart (Managing Director)

Good morning everyone. A couple questions. Want to revisit tariff exposure? Can you give us a sense of your approach in engaging with customers on OSB and siding? If and when tariffs materialize, is the intention to try and pass it on? And complete or to fully offset the tariff in terms of pricing? And Brad, I'm just wondering if you can speak to, I guess. Your perspective on demand elasticity and tension in the market, the ability to pass those tariffs on and how much of a supply response might be needed for both OSB and siding.

Brad Southern (CEO)

Well, you know, for OSB, it's a traded commodity so you know, there's not a direct way to pass cost onto the customer in OSB other than through at the trading floors. And that'd be, I mean, you know how that works. So there's, you know, the price of OSB will be the price of OSB and the cost structure. A cost structure change to the industry that's due to tariffs will reset the cost curve and price will be where price will be. You know, it's hard to know what the impact will be on siding with the information that we have today. As you know, we do have two siding mills in Canada. We have the ability to move volume around in our network.

You know, there's some things we can do on the supply chain to optimize the supply chain if tariffs were to change the dynamics there. So we would, you know, we certainly have done scenario planning around what we would do and how we would go about doing it, but we haven't gotten to a situation yet where we've really put a number on it because of the lack of clarity. We've had minimal. I mean obviously customers are aware that the industry would be significantly impacted across the board by particularly Canadian tariffs, but we haven't gotten into any level of discussion around how that would get manifested from a siding perspective.

Sean Steuart (Managing Director)

Thanks for that, Brad. And I wanted to revisit the 2025 siding sales growth. Targets that you provided. The 7%-9% sales growth. And maybe I'm paraphrasing here, tell me if I'm right and if there's any nuance to it. But 7%-9% reflects market share gains in still a very difficult housing environment. In a more normalized scenario where we potentially get a bit of an uplift in housing. Is 10% annual sales growth a feasible number for you guys? And when you're thinking about longer term growth, whether it's Houlton 2 or expansion beyond that, is that the premise of the longer term sales growth potential for that segment?

Brad Southern (CEO)

Sean? I would. Yeah. So certainly single family housing recovery along with broader, which would, I mean to get a little more detail, which would probably drive increased R and R spend if we got existing home sales as. A part of that. Well, let me back up even more. If mortgage rates were lower and the housing market took off across the board, we would see increases in single-family construction, we would see increases in R and R spend and that would provide a really nice tailwind that we haven't had since the COVID tailwind, which was the tailwind of all tailwinds.And that would certainly push the addressable market, real time addressable market for us up and allow us to grow at a higher growth rate than what we're seeing in a year where we're kind of expecting the market to be flat.

And that also inciting probably gives you a little more pricing opportunity, which means that the revenue you get maybe another point on the revenue as a result of that. So yeah, if your question is would a recovering and stronger housing market and R&R market allow us to go above 7%-9% growth? Yeah, it would. And both helping volume and pricing, I believe.

Alan Haughie (CFO)

And just to point about capacity investments, our biggest fear in Nashville is that we would be being late to that party. So we've got to make sure that we have the capacity because we are convinced that it is going to happen at some point and we need to be ready.

Sean Steuart (Managing Director)

Understood. That's all I have for now. Thanks very much.

Brad Southern (CEO)

Welcome. Thanks, Sean.

Operator (participant)

One moment for our next question.Our next question will be coming from Steven Ramsey of Thompson Research Group. Your line is open. Steven.

Steven Ramsey (Deputy Director of Research)

Hi, good morning. Maybe to start with the order file inciting the encouraging. If I recall, this is what you guys were seeing a year ago early in 2024. I'm curious what the makeup of the order file now is compared to a year ago and if it's tell you anything different compared to a year ago. When you think about the portfolio between SmartSide BuilderSeries and ExpertFinish,

Brad Southern (CEO)

I would say the only material difference in the order file strength this quarter versus year ago was we have seen stronger shed pulls this year than we had last year in the first quarter. Other than that, The other single family or big builder retail and R and R are consistent with what we were seeing Q1 of last year, and the same thing's true geographically, if that's of interest.

Steven Ramsey (Deputy Director of Research)

Okay, that's helpful. And then secondly, OSB margins. This has been on a positive trajectory over the last year or two. Is there an assumption that it stays on that kind of trajectory in 2025? Or maybe another way to ask it, is it less of a margin headwind in 2025 than it was last year even as it's increasing?

Alan Haughie (CFO)

We basically assumed in our guide and our budgeting that we kind of make slow progress in 2025. Still improving, but we're adding capacity at a rate. That will drag on that a little. But it's improving definitely, but not quite by the same amount as in 2024. That's our modeling assumption anyway.

Steven Ramsey (Deputy Director of Research)

Great. Thank you.

Operator (participant)

One moment for our next question. Our next question will be coming from Mark Weintraub of Seaport Research Partners. Your line is open, Mark.

Mark Weintraub (Senior Analyst and Head of Business Development)

Thank you. First, Alan, just one point of clarification. So when you were talking on the siding margin bridge, you mentioned price mix. Flattish. Was that just mix? Are you still? Should we. Are we still building like 3% on?Price from list price adjustments?

Alan Haughie (CFO)

Oh, yes, yes, yes. What I meant was that this year we enjoyed something closer to six. I don't model that additional mix benefit. So yeah, the underlying price increases exactly that. Yes.

Mark Weintraub (Senior Analyst and Head of Business Development)

Gotcha. So we do get that, let's say $45 million or something. And then second. So you spoke on.Citing how you've been driving the market share gain through innovation and demand creation efforts. And last year we had Lennar, Home Depot; you had the smooth side introduction. Although maybe that falls into this year more. Maybe can you talk a little bit? More about, more specifically, what some of the items that are going to help drive it this year will be that are perhaps new and different?

Brad Southern (CEO)

We would invite anybody to come by our booth in Las Vegas next week and take a look at the new products that we've launched and talked about. Also some new things that we have on board, things around coloring for our pre finish, some really interesting product expansion there. Obviously, to your point, having the full portfolio smooth in market all of this year, including January, is a nice add compared to last year at this time. Innovation has been a key to all the growth we've gotten, particularly after we've come off allocation.

Some of that work was done before COVID but the BuilderSeries and ExpertFinish growth, as we've talked about, Mark, has been phenomenal. So we certainly innovation will continue to play a big part in our growth story because that increases our addressable market with customers that we have. The easiest customer to sell. And then, as far as expanding customers, we are continuing to make inroads around builders both large, medium size, and small. And then on the R and R side, that's a contractor play. And the number is how many loyal contractors do you have pushing and installing your product. And that's a big part of the marketing spend increase that Alan talked about is in support of that initiative.

That's just a steady, constant execution play that will never end. I mean, there is a lot of siding contractors and North America and we are selling to a rather small percentage of them. And so the opportunity there is huge. And it's just an annual localized execution that we're encouraged by the progress that we've made. I'm encouraged about what we've learned about how to do that. And that's given us a lot of confidence that we'll be able to continue to grow as we gain that expertise, round out the portfolio of products. In the case of R&R remodel, continue to strengthen distribution and create a recognizable brand that's beautiful and works well and customers want and contractors want to install.

Mark Weintraub (Senior Analyst and Head of Business Development)

Thank you, Brad. And then just lastly, I know you've. Had efforts underway to try to get a better sense of where customer inventories are. Two parts. One, where are you in that process? Do you feel that you now do have a much better sense of where customer inventories and sidings tend to be or are and where are they currently?

Brad Southern (CEO)

Yeah, so we'll never have perfect visibility, but we have way better visibility than we've ever had, and over the last couple years, it's gotten a lot better and we are normal for where we would expect to be here in the middle of February, which is a little on the high side because coming out, coming into the year, distributors tend to want to build some inventory in anticipation of the spring selling season, and so it's a, you know, there's more in the channel now than there was 30 days ago, but normal given, you know, where we are as relations to the, in relationship to the home building season and the busy season for R and R contractors being able to get back outside and get to work, so we're pleased with our inventories are.

I'm very pleased with the way we were able to manage that with the cooperation of our distribution base through the price increase and across year end as well.

Mark Weintraub (Senior Analyst and Head of Business Development)

Thanks so much.

Operator (participant)

One moment for our next question. Our next question will be coming from Matthew McKellar of RBC Capital Markets. Your line is open.Matthew.

Matthew McKellar (VP)

Good morning. Thanks for taking my questions. Just looking at your siding capacity slide, am I correct in thinking this implies you'll start investing in another siding line essentially as you complete the expansion at Houlton? And with that I recognize there are lots of moving parts here, but how would you think about what the trough for siding margins looks like as you work through this next capacity cycle?

Brad Southern (CEO)

I'll talk a little bit about the execution. Aaron can join in, he's part of that team and then Alan can speculate on margin. With a double execution. You know, I've been part of siding for 20 years or so, 25 years. It's the first time if we end up doing it, which we certainly believe that's going to be required. We'll be running two parallel expansion projects not completely overlapped. We're going to start Houlton first but then move into the second one after that and it's going to be pretty intense. We are staffing, as Alan talked about, up our engineering group in anticipation of that. A lot of that work will be executed with contract engineers. But we are increasing our in-house capability as well.

It's pretty exciting to be in a position now given our scale where 10% growth leads to, you know, us being in kind of a continual expansion mode versus more of a batch process that we've had in the past. So that provides good continuity on expertise, good continuity with vendors that are a big part of those expansions. So yeah, we'll be starting Houlton and talking specifically about that soon and then shortly after that have a decision made on where the second or the next capacity expansion goes as we mentioned in the prepared comments. We have a lot of options and we're narrowing those options today and. Future tariff situation will have an impact on that decision obviously because we have opportunities or options in both Canada and in. The U.S.

Matthew McKellar (VP)

All right, thank you, Brad.

Alan Haughie (CFO)

At the risk of going out on a limb. I think we're more likely to be having when we're in the throes of this sort of parallel expansion, having a conversation not dissimilar to this one about margins, but I think it. Will be closer to why the hell. Aren't margins rising as opposed to why are they falling? It's more likely that you might see us absorbing again additional the benefits of additional growth with. The headwind that comes from margin expansion. So I would like to believe that our scale has reached a point where that sort of rising sine wave has a higher minimum than before.

Matthew McKellar (VP)

Great. Thanks very much for all that color. Excellent for me just sticking with your capacity plans and talking to the investment in Green Bay. Aside from the incremental capacity shown on the slide, how should we think about other improvements you hope to derive from your investments? In particular thinking about potential automation opportunities and with them cost savings.

Brad Southern (CEO)

Let me start on the prefinish as you mentioned, it's just remarkable how fast that technology is advancing. And look, we started out basically doing prefinish grunt work, so there was a lot of opportunity for us to increase investment and get better throughput and automation. And we're certainly doing that in ExpertFinish. And a little bit for us it's been somewhat the delay maybe has been good because the technology's advanced so much that we've really been able to see significant efficiency gains as we've added capacity. So I think there's way more to come.

On the ExpertFinish side as we continue to scale that business. We are still relatively small in the big picture of pre-finished manufacturing and every increment of capacity that we add will be significantly more efficient than our average efficiency gain. That's a little bit. There's not quite that opportunity on the press side of the business though we do have. Active projects around. Automation of our finishing operation, which tends to be more highly labor intensive.

In cases from a safety standpoint, more hands-on that technology is advancing as well, particularly in the packaging area and so we see opportunities there. I think those margins will be more. Maybe less obvious to see at any one period of time, just part of an overall continuous improvement effort, and then I'll just close that by saying one of the most exciting things though is this second. Line after Houlton could give us an opportunity to really the first time for us to be designing almost an entire mill footprint for siding production versus an OSB production line that gets converted. And you know, we've Houlton line two will have some of that element in it, but the one after that will most probably be almost like a greenfield, even if it's at a current location of an existing siding mill.

And so the opportunity for us to design specifically the entire footprint of the mill for siding production versus forcing it in on an existing OSB mill is going to be more capital intensive. But the opportunity and the efficiencies that we could design in will be pretty interesting. So more to come as we learn about that. But I do see that as an opportunity for another step change in margin, at least that facility when it comes online at full production.

Matthew McKellar (VP)

Thanks very much. I'll turn it back.

Operator (participant)

One moment for our next question. Our next question will be coming from Kurt Yinger of DA Davidson. Your line is open, Kurt.

Kurt Yinger (Senior Vice President and Senior Research Analyst)

Great. Thanks and good morning everyone. I just wanted to circle back on. Lennar, and I'm curious as that business. Has ramped and you've executed against the. Regarding, if there have been any surprises or big learnings that you can kind of take and look to. Leverage as you continue to pursue other. Larger builders in the space.

Brad Southern (CEO)

Not really any surprises. It's been executed as planned, more or less in normal course of business. I guess the learning, this is not a learning that surprised us, but what we've been good at with Lennar is making sure that their contractor base is trained up, technically able to install our siding the first time they do it in a very efficient and. Beautiful way. And so with the technical support that's gone in to this conversion, let's call it that for them, has been significant on our part. And we understand now that a key part of the selling process with the builder is not to win the procurement battle for that business. But then it quickly becomes an execution play around.

Educating the installer base and making sure that we have local distribution in place to serve every one of. Their. Developments and their work. There were cases where that was not true with some of the business that we garnered from Lennar and other builders that we've won in. So it is an execution game once you get the agreement. And of course Lennar was a big one for us. So the learnings there certainly will translate well into how we approach future opportunities in that area.

Kurt Yinger (Senior Vice President and Senior Research Analyst)

Is it fair to think that, I mean, given how important kind of the contractor training or technical details of installation would be that as you grow in scale and you convert some of these bigger builders, the next conversion is a little bit easier because that contractor base is just naturally? More aware of installation and whatnot.

Brad Southern (CEO)

No doubt, the wider we cast our net in both R and R and new construction. And by the way, there's installers that do both, depending on where the strength of the market is. Locally, every contractor we get, we have the opportunity to train up as a contractor that now knows how to install our product. And we believe and have evidence that they become advocates for our product because of the ease of installation.

And so there's a stickiness there. And then that also translates into, you know, this has been historic for us. But as we grow the business, both R and R and new construction and open up new distribution, you know, the channel makes money off our product. And so that creates some loyalty and they're going to sell what the contractor wants. But it does strengthen our overall effort beyond just the framework of that one deal in the case of a builder or that one contractor that you convert, you know, on the R and R side. So, I mean, I mentioned, you know, building scale for ExpertFinish, but we're also building scale with distribution, and the contractor base is probably more valuable than the scale you build. We build on the operations side.

Kurt Yinger (Senior Vice President and Senior Research Analyst)

Okay. All right. Appreciate the color. Thank you.

Brad Southern (CEO)

You're welcome.

Operator (participant)

One moment for our next question.And our next question will be coming from George Staphos of Bank of America Securities. Your line is open, George.

George Staphos (Managing Director)

Thanks very much. Hi, everyone. Good morning. Thanks for the details. You know, given the success with SmartSide, it doesn't sound like you need to make any changes, but does it come a time in the horizon where the marketing advertising maybe needs to change or changes because of the scale and the acceptance of the product, recognizing it's right now much more of a technical sale, you're working on the installer, and that's been working just fine. But does national advertising or something like that ever come into play at this? The next two to three years?

Brad Southern (CEO)

Yeah, I would say, George, for the next two to three years. What's been working for us and what we're increasing our investment in is having boots on the ground on our sales force. So being, you know, having folks selling, actively selling our product every day and supporting that for the technical sales discussion, which I won't repeat. And then, you know, from an R and R standpoint, where we've had success is really more on focused local markets where we've gone into areas and where we do consumer advertising, but at a local level and a local basis using local media.

And then we're doing that in places where we have distribution, we have contractors that are on board. And then we follow that groundwork, let's say that foundation with focused local marketing, we're seeing really, really good results. And so I'm, you know, the markets change over the years, my opinions have changed, but I do think that this is more of a local selling. There's more value, more return on local selling, local brand awareness than there is on national programs. That's my personal view. But. And it can be changed with evidence otherwise that it could. We could accelerate growth with more of a national branding opportunity. But I like what we're doing locally and it's really been something that we've seen the results of as we executed that.

George Staphos (Managing Director)

And it's working. And at the same time you have to stage it with your ability to produce and meet the demand. So I mean, that all makes sense.

Brad Southern (CEO)

Exactly, Exactly.

George Staphos (Managing Director)

I'm sorry, Alan, did you have a comment there? No.

Alan Haughie (CFO)

Brad agreeing with you sounds good.

George Staphos (Managing Director)

In terms of the next line, what are the lead times such that if you're going to be producing around 2029, you need to actually start to have the orders in place to the equipment dealers? And what kind of inflation, maybe or maybe not, are you seeing in terms of press capacity versus what we've seen in the past per 1,000 sq ft?

Brad Southern (CEO)

Yeah. So let me just kind of give A comment on where we're at and then Aaron can comment kind of on what we're seeing as far as down the road. But we've started securing pieces and parts of what we need to do for both holes in line one. And actually for equipment or orders that we could file that we could place at our location-agnostic that has begun. We've gotten, you know, preliminary approval. We've got approval from the board for Houlton, but preliminary approval from the board to start the pre buys, let's call it securing factory time and fabrication time or steel and in some cases beginning the fabrication of the equipment. So that has started.

You know, the inflationary impact has been significant over the past couple of mill conversions. Houlton, Sagola and now this one. We're not seeing increases in inflationary issues there other than I would say more normal. But compared to what it cost to do these projects pre Covid, it's significantly more expensive. And then I think Aaron can speak more to the specifics of where we are on the two projects and what.We're seeing,

Aaron Howald (VP of Investor Relations)

Y`es, inflation is certainly a factor, but the nature of the projects are also changing. So Sagola and Houlton were conversions of existing plants. The Houlton Line 2 is an expansion. So we're not converting a press, we're actually adding a press. So the nature of the products, also the nature of the projects themselves can drive some changes in the total cost. Fortunately, the other thing that's inflating is siding price. So the cost of the projects go up, but the returns stay very healthy because we've got pricing power for the specialized product that we're producing at those mills. In terms of timing, as Brad said, you know, some of the items are longer lead time and site agnostic.

And so it makes sense to secure that capacity now because there's not a huge amount of production capacity for some of these specialized pieces of equipment. And we're pretty confident that if we continue to grow at the historical volume CAGR that we've seen over the past several years, that we'll have capacity ready in time, that we minimize the risk of another extended period of a managed order file.

George Staphos (Managing Director)

Understood. My two last questions and I'll turn it over. I wouldn't expect it would be a factor since you didn't really call it out, but with shed growing a little bit more quickly this year, is that any kind of impact on the margin trend? It would maybe take a few basis points off of margin because of mix. And then in terms of maintenance, can you remind me, are there any specific cadence factors we should be considering as we're modeling out the quarters? Thank you very much.

Brad Southern (CEO)

On the shed, it would tend to be lower than average price but not lower than average margin. So not a margin hit, but we'd see a pricing hit.

Alan Haughie (CFO)

And then as always, Q4 will be. The heaviest in terms of maintenance, projects, and spending. George?

Brad Southern (CEO)

Yeah, and we've got a few projects this year that are maybe a little larger than normal, but they're in the OSB business, not the siding business. So you won't see large maintenance projects being a source of perturbation in the siding margin this year.

George Staphos (Managing Director)

Yeah, knock on wood. Knock on wood. Thanks very much. Good luck on the quarter.

Operator (participant)

Thank you. I'm showing no further questions. I would now like to turn the conference back to Aaron Howald for closing remarks.

Aaron Howald (VP of Investor Relations)

Okay, thank you everyone for joining us with no further questions. We'll end the call there. Stay safe and come and see us next week in Las Vegas and see some of the new products that we were talking about driving our growth in 2025.

Operator (participant)

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