Louisiana-Pacific Corp Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2020 Louisiana-Pacific Corporation Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I'd now like to hand the conference over to your host today, Mr. Aaron Howald, Director of Investor Relations. Please, go ahead, sir.

Thank you, Liz, and good morning, everyone. Thank you for joining us today to discuss Louisiana-Pacific's financial results for the second quarter of 2020, as well as our near-term outlook. My name is Aaron Howald and I'm LP's Director of Investor Relations. I'm joined today by Brad Southern, LP's Chief Executive Officer; and Alan Haughie, Chief Financial Officer. As we have done in the past, we are hosting a simultaneous webcast in addition to this conference call. We have provided a presentation with supplemental materials, to which we will refer during this morning's comments. And finally, we have filed our 8-K this morning with some additional information. The webcast, 8-K and supplemental materials can be accessed at our website. I want to remind all participants on the call about forward-looking statements and the use of non-GAAP financial metrics during this morning's discussion. I will refer you to slides two and three of the accompanying presentation for more detail. The appendix attached to the presentation has some necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning. Rather than reading those statements, I incorporate them herein by reference. And now, I'll turn the call over to Brad.

Thanks, Aaron, and thank you all for joining us this morning. I spent the bulk of my time on the last quarterly call discussing the steps LP was taking in the face of a worsening COVID pandemic. We were preparing to weather significant uncertainty, but we were confident in our liquidity position. This morning, I am pleased that my update will be more positive than many of us might have expected just three months ago. The effects of the pandemic are far from over. But so far, LP has fared better than the downside scenarios we modeled and discussed on the last call. As we know, the housing sector has shown remarkable resiliency. After bottoming out in mid-April, the markets LP serves recovered sharply and show no sign of slowing. Demand for our products rebounded quickly through May and June. OSB prices followed this pattern, falling sharply in April, but climbing in May and ending June close to their Q1 highs. This was a transformative quarter, despite the volatility. Siding achieved the second highest quarterly revenue in the segment's history and the lowest cost of production in three years. The OSB business also demonstrated excellent efficiency and cost control, delivering its best quarterly unit production costs since 2016, with a much richer mix of value-added products. I'll leave the details to Alan, but we finished the second quarter with $129 million in operating cash flow, $97 million in EBITDA and $0.43 of adjusted earnings per share. LP announced this morning that our Board has approved a quarterly dividend of $0.145 per share. On the last call, the three elements of our COVID response that I discussed were safety, liquidity and agility. Let me give you a brief update on each. First and most importantly, safety. I am pleased to report that very few LP employees have tested positive for COVID. Thankfully, all of them have either fully recovered or are recovering and our operations were not significantly impacted in Q2 by cases at our facilities. We will continue to follow expert guidance and stay committed to keeping our employees, vendor partners and customers safe. We are mindful of the human toll of this pandemic. Our hearts go out to those who have lost loved ones and we want to thank all of the first responders and frontline medical workers. As for liquidity, LP generated $129 million of operating cash flow in Q2 and ended the quarter with $259 million of cash on hand. Given current prices and production rates and assuming no sudden reversal of market conditions, we expect even better cash generation in Q3. A significant driver of LP's result for the quarter was the discipline and agility demonstrated by our leadership team's operations, capital management and corporate functions. In mid-March, in response to rapidly slowing demand, we curtailed roughly one-third of April's production of OSB and Siding. By the end of April, we were seeing signs of the demand recovery, as this trend accelerated, both segments added production back in May. And by June our facilities were near 100% capacity. Our improved OEE allowed us to adjust production levels and still achieve exceptionally low production costs. Housing is clearly a bright spot in an otherwise uncertain economy. After steep drops in April housing starts in June were flat with last year. OSB demand and prices are strong and repair and remodel activity is robust. We are also seeing shifts towards single-family homes, movement away from urban cores and increased R&R spending. LP is well positioned to capitalize on all these trends. Alan will share more specific modeling in a few minutes with details about how these trends are reflected in our current expectations for Q3 and beyond. I want to spend a few minutes talking about strategic transformation and execution in the Siding segment. The business exited the fiber product line to focus on higher-margin SmartSide strand, enhanced our retail strategy and launched ExpertFinish, our Prefinish product line. This work showed its value in Q2 helping the segment to grow in a volatile quarter. LP completed the strategic exit from fiber with the sale of the Eastern facility and the conversion of the Roaring River facility to export finished production. This structural change positions the business to focus exclusively on driving growth and innovation of the higher-margin SmartSide strand products. Over the past several quarters, our sales and marketing teams have worked to revitalize our relationships with our retail customers. As a result, LP products have more shelf space and higher brand awareness. For example, LP SmartSide is the number one searched siding brand on at least one major big-box retailer's website. As R&R spending at home centers jumped in Q2, sales of our LP SmartSide through retail channels more than doubled, implying share capture as well as volume growth. This trend shows no sign of slowing so far in our Q3 order intake. Customer demand for recently launched Smooth SmartSide and ExpertFinish has exceeded our expectations. The addition of these two products to our portfolio has enabled us to enhance our distribution in the Northeast. The customer response to ExpertFinish has also been very encouraging. ExpertFinish is well positioned for both new construction and R&R, and it addresses labor constraints by saving the time and cost of painting after installation. This was a remarkable quarter for the Siding segment. With the backdrop of pandemic-induced volatility, the segment delivered continued growth above underlying housing starts, exited lower margin fiber products, demonstrated the value of significantly improved strategic partnerships with our largest customers and drove growth with innovative new products. While Q2 was stronger than we initially expected and the near-term outlook is positive, many risks and uncertainties remain. COVID-19 cases are increasing. Many states are slowing or reversing their reopening plans. So far no new work-from-home orders or declarations of non-essentiality have been issued that impact LP's operations or customers, but that remains a possibility. COVID is likely to create more volatility in the remainder of 2020 and potentially beyond. That said, I'm enormously proud of the grit and resiliency that LP's employees have shown during this unprecedented time. Our teams demonstrated disciplined management of the things we can't control as well as agility in the face of what we cannot predict. LP's results this quarter are a testament to the team's creativity, flexibility and resolve. I want to thank every LP employee for their effort as we work through these extraordinary times. With that, I will turn to Alan for more details on our financial results.

Thanks, Brad. Well, the second quarter was interesting to put it mildly. It was bookended in April by one of the largest month-over-month decreases in housing starts in a decade and in June by an even larger increase. Random Lengths' OSB prices followed a similarly erratic pattern, falling by one-third from their Q1 highs in the first weeks of the quarter before recovering most of that ground by the end. Builder sentiment, home sales and demand for our products fell suddenly and dramatically, bottoming by mid-April and then rebounding sharply and have continued to climb since. I concluded my comments on last quarter's call with a discussion of LP's potential results based on a 20% drop in single-family housing, a 20% drop in SmartSide volumes and a 30% drop in OSB volumes with flat OSB prices. Under this scenario, we were confident that LP could achieve low double-digit EBITDA. Although it did not constitute guidance, this seemed a very real if conservative scenario. The actual decline in single-family housing starts of 13% was a little better than our modeled number. The demand for both SmartSide and OSB proved much stronger; in fact, SmartSide volumes didn't decline at all, they grew by 3% helped by a surge in demand from retailers which more than offset a decline with distributors. The OSB market turned sharply as housing starts recovered through the quarter with LP's year-over-year production down not 30% but just 16%. Note that our Peace Valley mill, which was idled in the third quarter of 2019, represented roughly 16% of LP's OSB capacity in 2019. And of course, our average OSB price for the quarter increased by 22%. Ultimately, net sales for the second quarter were 7% or $40 million lower than 2019, due not to softness in Siding or OSB, but entirely due to our EWP segment and to the strategic exit from fiber. I'll explain both in a little more depth in a moment. So, in combination with exceptionally low-cost of production and reduced SG&A, EBITDA for the quarter came in at $97 million, still double-digits, but only just. Okay, so we've established that the second quarter was volatile. Slide seven of the presentation shows that our strategic transformation proved robust to that volatility. For the trailing 12 months ended June 30th, SmartSide strand revenue grew at 7% compared to 3% growth in single-family housing starts over the same trailing 12-month period. Furthermore, compared to the first quarter of this year, single-family housing starts were flat, but SmartSide strand revenue grew by 8% quarter-over-quarter. Combining growth, efficiency and sourcing savings, the EBITDA impact of our transformation was $15 million in the second quarter and $28 million year-to-date. For the avoidance of doubt, we exclude from this measure the favorable impacts of market-driven raw material price decreases, about $6 million in the quarter. So, at $96 million of transformation benefits over the last 18 months, we're still ahead of pace to achieve an EBITDA impact of $165 million by the end of 2021. Slide eight shows the summary of profit and loss accounts. While the second quarter sales fell year-over-year by 7%, gross profit increased by 50% to $117 million. The result in gross margin for the quarter of 21% was eight points better than the second quarter of 2019; five points due to OSB pricing and three points due to improved product mix, operational efficiency, and cost controls. Selling, general, and administrative expenses for the quarter were $8 million lower than the prior year largely due to lower support and infrastructure costs. The strategic exit from fiber to focus on SmartSide strand impacted our results in a number of ways. First, the divestiture of CanExel generated $14 million in cash and a modest gain of $2 million. As mentioned on the first quarter call, the historic results of the Siding segment have been recast to exclude CanExel. Second, we have converted our remaining five mills in Roaring River to ExpertFinish. And third, customer acceptance of our strand-based replacements for their fiber-based equivalents has exceeded our expectations. This has resulted in the decision to accelerate the conversion to strand, cease our fiber production and fully dedicate Roaring River to ExpertFinish. As a result, we have written off $10 million of fiber inventory and paid $4 million of fiber assets, and incurred $2 million in severance costs. After interest and taxes, net income was $33 million, more than doubled year-over-year. The resulting adjusted earnings per share was $0.43. And as a result of the share buybacks in 2019, there were 11 million fewer shares outstanding than in 2019. But even adjusting for this difference, earnings per share was higher than the second quarter of 2019 by more than $0.30. Slide nine shows revenue and EBITDA by segment and slides 10 to 13 have waterfalls detailing the year-over-year changes for the second quarter and year-to-date for Siding and OSB. Second quarter sales for Siding of $220 million were $11 million lower than prior year, with $7 million of continued growth in SmartSide strand offset by lower fiber sales of $18 million driven by the accelerated strategic exit from fiber. The resulting Siding segment EBITDA of $51 million for the second quarter was $6 million higher than the prior year and the EBITDA margin has increased from 19.5% in 2019 to 23.2% in 2020. The margin percentages were unaffected by the reclassification of CanExel. Lastly, the revenue for Siding includes a $5 million reserve for potential ExpertFinish returns. During the quarter, we discovered a packaging issue that caused aesthetic damage to some pieces during shipping and handling. The reserve reflects our estimate of the full cost of pending returns and replacements of the impacted inventory. We addressed the issue quickly and I'm proud of the way our Siding team is handling this. I'm even more gratified by the feedback from our customers who have shown understanding and support for our swift response. Second quarter sales for OSB of $204 million were $5 million more than the prior year due to 16% lower volumes offset by 22% higher prices. OSB EBITDA of $46 million was $49 million higher than the prior year, including $37 million of price increases. The remaining $12 million of increased EBITDA is largely a result of the OSB leadership team's relentless drive for operational efficiencies and cost control. Second quarter sales for EWP of $79 million were $28 million below the prior year. The decrease is attributable to three factors. First, the second quarter of 2019 was a period of transition between major distributors and saw increased volumes to build inventory, hence a difficult year-over-year comp; second, a government declaration that despite OSB manufacturing in Québec remaining essential, I-Joist manufacturing was deemed not to be, thus hurting our joint venture in the province; and third, demand for EWP products simply did not recover through the quarter as strongly as OSB and Siding, resulting in price concessions. Predictably, the lion's share of the working capital reduction came from Siding inventory of finished goods and raw materials. Capital spending was held to $15 million in line with the reduced spending plan. During the quarter, we also repaid the entire credit line of $350 million, paid dividends of $17 million, and generated $24 million through the sale of CanExel and made cash in the corporate-owned life insurance policy. We ended the quarter with strong liquidity of over $800 million comprising cash of $259 million, and an expanded undrawn $550 million line of credit. With respect to capital allocation, our strategy remains the same. We maintain our commitment to return to shareholders over time at least 50% of the cash generated from operations after investments necessary to sustain our assets and execute our strategy. More simply put, we'll return excess cash to shareholders once we've generated it. On the last call, we announced that we did not plan to buy back any shares in 2020, but the better 2020's cash generation gets, the closer we'll get to reversing that decision, which brings us to our outlook for the third quarter and beyond. On our first quarter call, we attempted to provide some indication of our second quarter results and delay any potential liquidity concerns, given the market signals we were receiving at that time. As we've already said, once before on this call, we promised double-digit EBITDA and we delivered it. In many ways, the economy is as uncertain now as it was three months ago, except this time it is bullish as opposed to bearish. And perhaps the question to ask is not how bad will it get, but how long will it stay good. So we'll communicate how we're running the business and monitoring trends and impacts. For OSB, we currently see thin inventories in the channel and no let-up in demand. All our mills are running close to flat out except for idled Peace Valley. Through July, our utilization rate was above 90% with the unit cost of production comparable or better than in the second quarter. Factoring in necessary downtime for preventative maintenance, we expect to produce and sell roughly 900 million square feet of OSB in the quarter. This will be roughly 8% less than in the third quarter of 2019, largely due to the idling of Peace Valley midway through the quarter last year. I've already mentioned that the order book for SmartSide strand is strong and all indications are that we will post revenue growth in the high single digits for SmartSide in the third quarter, partly offset, of course, by lower fiber sales. Please note that manufacturing or customer disruptions caused by COVID could still materially impact our third quarter results and we feel that it would be even more premature to offer commentary on the fourth quarter. With respect to capital spending, under more normal circumstances, we might resume some of the deferred projects. But given travel restrictions and other COVID related challenges, we doubt we could spend more than $50 million in the remainder of the year compared to our current projection of $30 million. Given the extraordinary volatility of the second quarter and especially the dire early projections for COVID, the recovery in housing demand and OSB prices is remarkable. While we cannot control prices, I want to echo Brad and praise the agility and dedication of all LP employees, who worked so diligently to control costs as they produce and delivered our products. So before we take your questions, I want to end on a word of caution. The market appears very strong. But given the volatility of the past five months, we remain cautious about the future impacts of COVID. We also need to bear in mind that several of our OSB mills are in areas with rising COVID case numbers. Though COVID has yet to cause production interruptions at our mills, and we are working diligently to prevent this, we cannot preclude the possibility. That said, we'll continue to do everything in our power to manage the factors under our control with the continued safety of LP's employees, customers and vendors as our highest priority. And with that, I'll hand the call over.

Thank you. Our first question comes from Ketan Mamtora of BMO Capital. Your line is open.

Thank you. Good morning, Brad, Alan. Congrats on a good quarter.

Good morning, Ketan.

First question, maybe just starting on the Siding business. You said that business continues to remain strong. You've given sort of high single-digit revenue growth for Q3. Can you talk about how July is trending relative to that outlook that you have? Is it in line with that number? Is it a little better? Any thoughts and color there will be helpful.

Yes. It's in line with the guidance that Alan gave or it's a little stronger, but certainly no weakness at all compared to what we've been talking about this morning.

Got it. And then if you can talk a little bit about how some of the end market trends have been within that, sort of, new residential versus R&R? And if there are any regions that are kind of doing better than what you were expecting, particularly given that we've seen a rise in cases in the south?

Yes. Great question, Ketan. Let me do segment first and then I'll do geography. So from a segment standpoint, as we've mentioned, we had a really, really strong retail pull all through Q2. Those retail pulls have continued into Q3. If you speak of Q2, the geographic strength you could overlay a map of where there were the most restrictive measures around construction put in place. We obviously suffered in those places. In the areas where building was deemed essential and distribution was not limited from the fact that they had to shut down because of local restrictions, we were able to maintain a good product flow. Particularly, I would say after April. Everything kind of paused in late March and April as people were trying to figure things out. But geographically speaking, we were strong where building was deemed essential and was able to continue to progress. Right now with most of the U.S. opened back up, we are seeing strengths really across all regions. And with, Ketan, as far as I'm aware no, other than micro areas, no states or large regions being affected directly by COVID. You asked about repair and remodel versus single-family; we've seen strength in both. And I would say that the actually probably R&R stayed a little bit stronger early in the quarter. So I think that R&R contractors continue to try to solicit and execute jobs where they can do that. I think that's also somewhat attributable to why the retail pulls have been so strong for us. I think there are some R&R contractors sourcing product there. And then the final segment related comment I'll make, I do want to clarify this because there was a question, I don't know if it was you Ketan or someone else that asked me last quarter about the Shed segment. And I had said that that was surprisingly soft for us. And literally, like the next week after the earnings call, it has really gotten strong again. We had those customers come back into our order file with pretty strong demand. So again, after whatever the date of our call last quarter until now, we've seen two very good pulls in the Shed segment.

Got it. That's very helpful, Brad. And then one question from my side before I turn it over. On the capital allocation side, net leverage is down to sort of only 0.3 times. We've seen a pretty big surge in OSB prices. Just talk about kind of how you are thinking about particularly on the share repurchase side, Alan talked about a little earlier. But sort of how do you think about kind of preserving liquidity and kind of looking at share repurchases?

Yes certainly. It’s Alan. Ketan, looking at the trends that we're seeing in the markets right now with overall market performance OSB prices, it would look likely, wouldn't it? If we assume the continuing of the current trends through the end of the year that we will build sufficient cash or significant cash through the third and fourth quarters should these trends continue. Therefore on that assumption, and I think first quarter share buybacks would seem a reasonable assumption. So think of it as the sort of shoulders of the year depending on the rate of cash generation through the second half of the year. With basically, I use this sort of simplistic formula to describe that. For the first six months of the year we're sort of saying plus $10 million. So that calculation would imply a $10 million excess right now. So it really depends on the cash flow generation we see in the second half of the year. And as Brad said, all indications are the third quarter cash flows will be bigger than second quarter cash flows. So we're optimistic that the return to the market is on the horizon.

Got it. That’s very helpful. I’ll turn it over. Good luck in the back half of the year.

Thank you.

Thank you, Ketan.

Thank you. Our next question comes from John Babcock of Bank of America. Your line is open.

Good morning and thanks for taking my questions. Starting out, obviously we've seen the dislocations play in demand for OSB. And given that, I'd like to get a sense for how well you've been able to match production with demand in Siding. And then also, if you could share how much of your Siding sales are currently coming from the Smooth products, that would be helpful as well.

Okay. Well matching – the first question just to clarify, John, was the supply/demand balance – supply – demand production balance for Siding. Is that correct?

That's right. Yes. Essentially just because I mean we've seen that production has had a hard time keeping up with demand in OSB. And I want to get a sense for how well you've been able to keep that production matched with the demand in Siding.

Got it. Yes I understand. We've been stretched to keep up with the order file in Siding. When we came off of the downtime that we took in April, the order file strengthened quicker than we thought fortunately. We had some finished goods inventory that we had built in Q1 that we're able to pull upon. You'll probably see that in the numbers. But we are running all our Siding mills at full production only on Siding running no OSB and our intent to keep it with order file. But the order file is stretching out a little bit beyond our ability to produce right now, so we've had to lengthen delivery schedules in Siding.

Okay. And might you be able to provide any color on how much your sales are coming from the Smooth products at this point?

Yes. I don't have that in front of me but it's going to be single-digit percentages still, John. It's still, we're still getting placement for that product into its second year.

Okay. Thanks a lot. And then also, I noticed that OSB value-added volumes were down a bit and maybe that's just because of end market exposure. But could you talk about the drivers there and also how volumes for the value-added products have trended more recently?

Yes. So part of the drop is because Peace Valley did manufacture some TechShield. So we increased a little bit of that when we made the decision to close or idle Peace Valley this time last year. But the very high commodity prices right now do put a little bit of downward pressure on some of the commodity products that essentially where builders are making a trade-off. You could as by way of example if OSB's $250, 1000-square foot and TechShield's $300 then they'll happily buy TechShield. But when that price rises for commodity to $350, they're a little less willing to pay that very high premium. So it does cause a little bit of a mix shift, just modest, but that is the factor that puts a little bit of a drag on.

But John, I want to clarify that we are not downplaying this aspect of our strategy. We continue to support those products from a marketing perspective. However, as Alan mentioned, in these volatile repricing markets, builders and contractors often prioritize ensuring they have sufficient commodity volume and inventory. This can lead to changes in their ordering patterns due to the volatility. Nevertheless, from a long-term perspective, we remain committed to increasing our value-add percentages.

Thank you. Regarding OSB, I would like to hear your thoughts on what it would take for capacity to return to the industry, considering a significant amount was curtailed earlier this year and the market remains uncertain. What do you think might ultimately lead to that capacity coming back?

We currently have one mill idled in our system. I won’t discuss how we will make the decision on that. As we have mentioned previously, we view it as a demand-driven decision rather than a price-driven one. If you assess the housing starts, we believe they will end this year at levels similar to last year when this production was reduced due to a mismatch between demand and capacity. Therefore, we do not plan to restart Peace Valley until we see housing starts at around 1.35% to 1.45% on the horizon, and we believe that level is sustainable. Our focus is on evidence of underlying demand, which will determine the capacity needed for the restart of Peace Valley, rather than relying on price predictions.

Understood. Thank you.

Thank you. Our next question comes from Paul Quinn of RBC Capital Markets. Your line is open.

This is actually Marcus on for Paul.

Hi, Marcus.

On OSB markets, they've been on quite a bit of a run here. And I know you don't have a crystal ball. But what kind of sustainability do you see to the current rally?

Well, it's August. Building is strong across the U.S. We're running full out. I would imagine the industry is pretty close to that. And as I think, as long as demand for the product is flowing into construction, there's no really reason for there to be a softening in it. I think obviously where pricing is today is kind of record highs. So I think the direction is downward over time, just given where we're at. But we're not seeing any weakness in our order file to lead us to expect softening of demand any time soon and anytime soon being in the next few months. But typically when we get to Thanksgiving to New Year's, we see it softening and typically some price abatement during that season. But it's not something that's on the immediate horizon, at least in our order file.

All right. That's helpful. And then maybe on the Siding business, it's had a nice rebound versus your expectations in May. And you did take a bit of downtime there in Q2. Have your customers been able to secure all the products they need? Or maybe put another way, is the supply chain adequately stocked right now?

The supply chain pulled down inventories in April as we took downtime, anticipating a decline in demand. This has created tight conditions for our customers in the Siding sector regarding their inventory levels. As we ramp up the mills again, meeting demand and providing enough products for our customers to rebuild their inventories to a normal level has been a challenge. That’s why I mentioned the need to extend our order and delivery schedule.

All right. That makes sense. And then, the EWP business has faced a few headwinds here. What are you seeing in the market today? And what are some of the opportunities for the business over the next 12 to 18 months?

Actually our order file in EWP is really, really strong too. So we're seeing a nice pickup of demand there. And just as a reminder, though we use OSB and lumber in the making of I-Joists. So the raw material cost into I-Joist manufacturing, is really by the way the near-cost is up too for LVL. And so I see a good outlook from a demand scenario for that business in the near-term, but there's going to be margin squeezes as a result of the raw material price increases that we've been seeing and enjoying on the OSB side.

All right. That’s all I had. Best of luck in the quarter.

All right. Thanks.

Thank you. Our next question is from Mark Connelly of Stephens Inc. Your line is open.

Hey, good morning. This is John Rider on for Mark. First question for you. We have been hearing a lot about labor issues before COVID started, and certainly is now probably a bit more of an issue for builders. Have you seen more interest coming through for Entekra?

Yes. As you've observed, the Northern California Bay Area was impacted from a market perspective. This significantly affected us in Q2 as our order backlog nearly disappeared with the district closures. However, we are now seeing strong inquiries and good order volume for the upcoming quarters that didn't materialize earlier.

Okay. Thank you. That's good color. And then second one here. Has the rollout of SmartSide in more geographies gone as well as you had hoped? And has COVID changed the way you're thinking about distribution at all?

Our audio was a bit garbled. Could you please repeat the question?

Yeah. Sorry about that. Has the rollout of SmartSide to more geographies gone as well as you had hoped? And has COVID changed the way you've thought about distribution at all?

COVID has not altered our perspective on distribution. The focus can shift from quarter to quarter as retail demand strengthens. We need to be flexible to respond to the demand for our products. I appreciate our retail distribution structure, especially our access to the R&R market, which has been greatly enhanced by the rollout of ExpertFinish. We have also maintained strong two-step distribution into new construction, which we further improved last year. A significant development in the Northeast has been the launch of the Smooth and Prefinished product lines. These two launches, Smooth last year and ExpertFinish this year, have made us a more appealing supplier in Northeast distribution, allowing us to establish higher quality distribution partners in a region where we have historically struggled, and I believe this will be crucial for our growth there.

Great. Thank you very much.

Thank you. Our next question comes from Sean Steuart of TD Securities. Your line is open.

Thanks. Good morning. A couple of questions. On Peace Valley, it sounds like the decision there is exclusively related to your demand outlook or housing start outlook, with regards to a potential restart. Is there any issue with fiber availability in BC that could affect that decision as well?

There is – sure. I mean, the fiber availability in BC is an issue. And for us at Peace it's never been a supply constraint, but it has been a pricing constraint. So when we look at the competitive positioning of that mill, I mean this would be relative to a restart analysis that we would do. We have to make sure that we can get the margins we need to justify starting that up and getting a return on capital. So that's been something that we've dealt when all the mills are operating and it is a factor in the restart decision. But right now I would not say fiber cost per loan would be a significant obstacle to a restart nor would supply of fiber be a significant obstacle to restart. But it is a factor that we would consider as we contemplate the potential margins of that mill during a startup.

Okay. Thanks for that. The second question is on SG&A. There was a positive trend relative to your sales base this quarter with a decline in SG&A percentage. You touched on a few of the factors in the prepared comments. I guess I'm just trying to gauge the sustainability of that progress and how much of it might have been related to spending cuts around initial pandemic concerns that we could see a recurrence of that spend coming back? Any guidance you can give on the SG&A side?

That's a great question, Sean. Let me break it down into three parts. We made some staff reductions due to COVID and the expected changes in demand and order pace. Additionally, we executed some rational adjustments at the national office, where we are still mostly operating remotely. Consequently, some support roles are currently underutilized. We also had several open positions and implemented a hiring freeze that will remain for the foreseeable future, likely through the next budget cycle. This has resulted in some functional staff reductions. Our travel costs have significantly decreased as well, further reducing overall personnel expenses due to COVID. The second aspect is that we reduced staff in our sales department, as sales personnel couldn't meet with customers. Much of our sales support involves in-person training at dealer and distributor sites, which has been challenging with restrictions on group gatherings. We've shifted much of that training online, which has proven to be more efficient. I anticipate that SG&A expenses will rebound as our operations gradually resume and our sales volume increases, allowing us to better support our customers with training and other necessary resources. The third area is marketing. We re-evaluated our marketing expenditures, particularly in Siding, where we've seen significant increases over the past few years. We’ve reset our approach to align with the current environment, focusing on online marketing and product knowledge rather than printing materials for distribution. This adjustment in our marketing spend is likely to persist through the year, but I believe it will eventually return with increased enthusiasm as we expect a recovery. Overall, we felt it was essential to enhance our online presence given the restrictions on face-to-face interactions. I realize this is a lengthy response, so let me add one more thing. This discussion does not factor in the support we are providing for our ExpertFinish launch, which requires a lot of product samples for customers to see and experience firsthand. We've made robust investments in that launch because we see a significant opportunity there. Typically, when contractors are trying to convince homeowners to choose our hard siding products, it necessitates a greater level of marketing support compared to most of our other sales efforts.

That’s a tremendous detail. Thanks very much. Appreciate it.

Probably too much. Sorry about that.

Our next question comes from Mark Weintraub with Seaport Global. Your line is open.

Thank you. With OSB pricing changing in an unprecedented way, I was hoping we could get some assistance in understanding the impacts from mix or potential lags. If we look at random length pricing, it is currently more than $200 per 1000 square feet higher than the second quarter average. Even in July, it's about $180 higher in some regions like North Central. I understand there may be reasons why we shouldn't simply assume that if prices stay at this level, we can just multiply $180 by the volume. Could you walk us through the biggest factors that might cause the price change to differ from what we observe in random length pricing?

Let me address two important points. First, when we discuss the increasing OSB market, it's essential to remember that our contract volume, which accounts for 60% to 70% of our total volume depending on the situation, is tied to contracts that were priced a week or two ago according to Random Lengths. This means there will be a delay in our contract volume as prices rise. Additionally, there are occasions when Random includes adders, particularly for flooring, and the reported flooring prices are not increasing as quickly as the commodity prices. This is largely a reporting issue. We strive to maintain alignment in our open market order file, but Random sometimes exhibits lags in flooring pricing compared to commodity pricing, which affects our contract volume. These discrepancies in how Random collects and reports data can negatively impact us in a rising market, leading to a delay in realized prices. Mark, we've noted this lag in almost every rising market I've participated in since I joined these calls, as we don't capture the full benefit as quickly when working with Random.

How far out are your order files? In my discussions with others, I've gotten the impression that the timelines are extended, which might result in longer than usual lags. However, I don't necessarily view that as a negative since we're already experiencing upward trends. This means that we will still benefit from current pricing, but it will likely reflect around mid-August instead of immediately. How long are your order files at the moment?

We work hard and maintain discipline with a 2- to 3-week order file. Although it's tempting to extend that, especially with current pricing, we prefer to consistently sell volume into the market each week. Therefore, we have adhered to a 2 to 3-week order file throughout this period and plan to continue doing so.

Okay. Great. And last thing I'm maybe putting you on the spot if I can a little bit. Given what we've seen and given your comments that you don't see any reason for softening in the relatively near term next couple of months of significance, is there any reason that one would see that your EBITDA in the quarter given higher volumes in Siding, given what we've seen in pricing, plus the more volume in OSB wouldn't be comfortably double what we saw in the second quarter?

Comfortably double I like that. I can accept that. The range that you're mentally trying to push us to is reasonable, Mark here, given all the caveats that you introduced in your own question.

Thank you. Our next question comes from Steve Chercover of D.A. Davidson.

Thanks. Good morning. Sean Steuart kind of scooped my question on Peace Valley, but I did have a question on the wood pricing. I mean, has any of the competing buyers of wood left the market? Or in order to get the pricing down to a level that you're comfortable, do you have to negotiate with the crown or the province in order to permanently reduce fiber cost?

Yes. The Peace Valley wood cost is a good question, Steve? Picking up...

Yes.

Yes, your comments are accurate. It's a crown license where we harvest. However, it's important to note that from the crown's perspective, the focus is on sawtimber, which holds more value. As users of pulpwood, we sometimes find that our situation isn't significantly affected. Consequently, there isn't strong pressure to raise prices from a provincial standpoint, nor is there much room to negotiate them down. You're correct that the only way to find relief is through modified agreements with the crown or by improving delivery costs, or by ensuring we source wood closer to the mill. We have implemented these strategies in Peace Valley. However, the stumpage price is regulated by the provincial governments in Canada where we operate.

Well, I should think that without wanting to provide you with wood below fair market, they have a vested interest in for the community to have that mill running and the taxes associated with it. So hopefully you get the market conditions that allow it to reopen. I also had a quick question...

I want to be clear that the issue with restarting Peace Valley is not related to operating costs. This was not the reason for shutting it down. The primary concern is the plant's margin issues, as it is situated far from the markets it serves in the western U.S. The cost of delivery to the West Coast made that plant the least competitive in our system, which ultimately led to its closure. I just wanted to clarify that.

Yes. And I doubt there's anything you're going to be able to do to change that in our lifetime.

Exactly, yes.

Plate tectonics are slow. So quick question on sawtimber markets. So they're doing better year-over-year and that's despite Brazil to the best of my knowledge being a real COVID hotspot. And I recognize that the operations aren't necessarily there but it's a big market. So is that simply price? Or are there operating improvements you're also enjoying? Are you accessing export markets? What's going on down there?

We experienced a combination of factors. Last year, we advanced a mill start-up in that region, which has contributed positively. We also have favorable prior year comparisons from a cost perspective. Our export business has proven to be strong and resilient, supporting us despite the challenges faced by both the Chilean and Brazilian economies. While those economies have faced some constraints, we've been able to keep our mills operational due to our solid export position. Additionally, towards the end of the quarter, we noticed an improvement in our ability to set prices for export volumes as U.S. prices increased, which has led to margin improvements for our export volumes. This increase seems to be partly because of the markets becoming less attractive to U.S. manufacturers as U.S. prices recover.

Terrific. Okay. Thanks for taking my call and stay safe.

Thank you.

Thank you. Our next question comes from Mark Wilde of Bank of Montreal. Your line is open.

Hi, Brad. Just a couple of follow-ons. One on that Brazilian business. Is that Brazilian mill primarily domestic? Or is that still export? I think that the Brazilian adoption of OSB has been a little slower from a building code standpoint than you guys would hope for.

Yes, Mark, I don't have those numbers in front of me, but I would estimate that it's 40% to 60% export, depending on specific factors, though it's a high export mill for steel.

Okay. And then how is just how is domestic demand in both Brazil and Chile just with both countries have been hit pretty hard by COVID?

Pretty good over in the second quarter. Domestic demand was actually up in Chile. It was up like 11% in Chile, rather surprising under the circumstances that it was. Then LPSA is actually selling and producing more Siding products as well and that significantly helped the volume year-over-year.

Okay. And then just one other one. Is it possible to get a little bit of an update just on the Siding extension initiatives in terms of like how volume is rolling? And I'm not only thinking of like the expert finish, but also some of the other like structural products or current products that you had that you talked about rolling out.

ExpertFinish is meeting or exceeding our expectations, and it has been well received by our customers. Our Smooth product is performing as anticipated, and we are introducing new SKUs to it, including a panel offering. On the OSB side, the FlameBlock product is continuing to grow successfully. We have increased production at our Clark County, Alabama facility, which is designed to produce long lengths of 10 feet, greatly enhancing our portfolio. We are also developing a roof product that will further strengthen our offerings for weather-resistant OSB, which is essential for our distribution strategy. The WeatherLogic product is still in its launch phase as we finalize our portfolio. In the last two years at trade shows, we showcased our fencing product, which, despite starting from a small base, is gaining acceptance among distributors and experiencing impressive percentage growth. However, we know that growth from a low starting point can lead to extraordinary percentages, and we are seeing that now. I am proud of our progress in finding distribution for this non-traditional product, even though it has taken longer than anticipated. Overall, the market varies depending on the launch phase, with some products, like ExpertFinish, being accepted quickly, while others, like fencing, require more time. To summarize, Smooth and ExpertFinish are highlights, FlameBlock is performing well, but we still have work to do with Fencing and the WeatherLogic product.

Okay. Would you think, Brad, what we had three or four years if we just think about things like ExpertFinish, should we be able to see a discernible margin lift in the entire Siding segment as that becomes a bigger and bigger piece of the pie?

Yes. ExpertFinish is a very high market product.

Okay. All right. I’ll turn it over. Good luck for second half.

Thanks.

Thank you.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Haughie for any closing remarks.

Okay. Thank you everyone. This concludes the second quarter earnings call for Louisiana-Pacific. Stay safe and we'll look forward to speaking with you again sometime in November to discuss our Q3 results. Thanks everyone.

Ladies and gentlemen, this does conclude today's conference. Thank you for participating. And have a great day.