Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2021 Louisiana-Pacific Corporation Earnings Release Conference Call. Please be advised today's conference may be recorded. I would now like to hand the conference over to your speaker host, Mr. Aaron Howald, Director of Investor Relations. Please go ahead, sir.

Thank you, operator. And good morning, everyone. Thank you for joining us today to discuss LP’s results for the first quarter of 2021 as well as our Q2 outlook. My name is Aaron Howald, and I'm LP's Director of Investor Relations. I'm joined this morning by Brad Southern, LP's Chief Executive Officer; and Alan Haughie, Chief Financial Officer. We are hosting a simultaneous webcast in addition to this conference call and we have uploaded a presentation to which we will refer during this morning's discussion. We also filed our 8-K this morning with some additional information. All these materials are available on LP’s investor relations website. Slides 2 and 3 of the accompanying presentation provide notices and detail of our forward-looking statements and non-GAAP financial metrics. The appendix of the presentation also contains some necessary reconciliations that are further supplemented by this morning’s 8-K filing. Rather than reading those statements, I will refer you to those supplemental materials. And now I'll turn the call over to Brad.

Thanks, everyone. Good morning, and thank you for joining us to discuss LP’s results for the first quarter of 2021. Robust customer demand for all of LP’s products has continued, driven by ongoing strength in home building and remodeling, resulting in an outstanding quarter for LP. SmartSide net sales grew by nearly 50% versus Q1 of last year to $283 million, and EBITDA more than doubled to $90 million. Smooth and ExpertFinish volumes more than doubled, with those innovative products reaching 8% of total SmartSide volume. OSB prices continued to decline throughout Q1, leading to LP’s OSB segment generating extraordinary cash flow. LP’s South American segment also had a very strong quarter, with 50% more sales and three times the EBITDA than the first quarter of last year. As a result, LPX slated $1 billion in sales, generated $461 million in EBITDA and $314 million in operating cash flow, and earned $3.1 per share, all quarterly records. Last quarter, we announced a phased, integrated capacity expansion plan that included converting our mill in Houlton, Maine from LSL and OSB to SmartSide. The restart of our Peace Valley OSB mill in Fort St. John, British Columbia, and plans to convert our OSB mill in Sagola, Michigan, have been decided. Let me briefly update you on those projects. Houlton conversion is underway and on schedule, despite some expected difficulties with travel and contractor access presented by COVID. We expect to begin SmartSide production at Houlton less than a year from now, in late Q1 of next year. We are excited about the capacity expansion that these investments in Houlton represent, and we are gratified by the enthusiastic responses from local and regional suppliers and community stakeholders. Given the strength of SmartSide demand, we are exploring options to accelerate the conversion of Sagola. We're also evaluating and prioritizing subsequent projects to add capacity by conversion and/or expansion of existing facilities, as well as growing pre-finishing capacity. SmartSide has a long runway for growth ahead as we innovate, capture share, expand addressable markets, and execute an aggressive capacity expansion strategy. The process to resume OSB production in Peace Valley is also going quite well. I want to compliment the small team that has maintained the mill since we idled it in the summer of 2019. They have kept the equipment in excellent condition and we anticipate minimal impediments to an efficient restart. We're also pleased by the number of former employees who are returning to the mill. We're glad to welcome them back. And we look forward to resuming production in early Q3. Last quarter, I spoke about the challenges presented by shortages of MDI, the resin used in manufacturing SmartSide and OSB. MDI availability has improved significantly, and we are essentially back to normal levels of supply, with OSB mills once again using planned levels of MDI. This episode has highlighted the strategic value of having siding and OSB integrated in LP’s portfolio. SmartSide uses MDI exclusively, but OSB can use alternate resins. When supplies become constrained, we were able to allocate scarce MDI on OSB siding. Without pre-siding, we would have struggled to achieve another outstanding quarter of growth. While the MDI supply has improved, a global shortage of vinyl acetate-based adhesives has forced decreased production of TechShield, LP’s radiant barrier sheathing product, in the second quarter. The vinyl acetate supply situation is improving, and we expect to be back to normal levels of TechShield production by the end of the quarter. However, as COVID subsides in North America and the broader economy rebounds, decremental supply chain disruptions and tight logistics availability are likely to present challenges going forward. We recognize the difficulties this creates for LP’s customers, particularly in an environment with such strong demand. We're doing everything we can to mitigate the impact of these issues through strategic sourcing and network optimization. And we are adding SmartSide and OSB capacity as safely, efficiently, and quickly as possible. Finally, I am happy to announce that LP is in the initial phases of returning to our national headquarters after more than a year of working from home. While we have all been gratified as we are getting back to normal, I want to acknowledge that for the majority of LP’s mill employees, as well as many customers, working from home was not feasible. While COVID-19 vaccines are not widely available in the U.S. and Chile, vaccination rates continue to lag in Canada and Brazil. The situation is improving, but we are not out of the woods yet. The ongoing diligence and care exercised by LP’s pandemic response team and mill employees are helping minimize operational impacts from COVID. And they want LP to supply our customers with the products they need to build and renovate homes. I encourage all of them and all of you on the call to continue to exercise appropriate precautions and get vaccinated as soon as possible. LP had a remarkable first quarter and all challenges remain very strong housing in our markets resulting in intense demand for SmartSide and OSB, keeping our near-term outlook exceptionally positive. With that, I will turn the call over to Alan for a more detailed discussion of LP’s financial results for Q1 and outlook for Q2.

Thanks, Brad. Slide 6 shows summarized results for the quarter, which, much like the fourth quarter, are clean and straightforward, with ongoing SmartSide growth and higher OSB prices as the most significant drivers. Compared to the first quarter of last year, net sales increased by 74% to just over $1 billion, driven by 49% growth in SmartSide and over $330 million of significantly higher OSB prices. The resulting EBITDA of $461 million is more than five times last year’s result. We generated $314 million of operating cash flow, including increased capital investments and heavy spending on logs, which is common practice for LP in the first quarter. The $3.01 per share of adjusted earnings is 10 times that of the first quarter last year. In terms of capital allocation, we paid $17 million in dividends in the first quarter and spent $122 million to repurchase 2.4 million shares. We've continued buying back shares through the second quarter. As of the close of business yesterday, we had just $32 million remaining of our existing $300 million buyback authorization. All else equal, that remaining authorization will be exhausted by the end of this week. I am therefore delighted to report that LP’s Board of Directors has authorized a further $1 billion in share repurchases, which we plan to launch immediately. LP’s Board also declared dividends of $0.16 per share payable on June 1. Slide 7 highlights the cleanliness of the quarter from a reporting perspective. Continued SmartSide growth and OSB price appreciation resulted in $93 million and $333 million, respectively, of incremental revenue for the quarter compared to which everything else is really just a rounding error. All $333 million of the incremental OSB pricing and 55% of the incremental SmartSide revenue translated into EBITDA with everything else aggregating to a net negative $6 million. Slide 8 provides an update on transformation. On a trailing 12-month basis, SmartSide revenue grew at twice the rate of single-family housing starts. Consequently, and as the table on the right shows, SmartSide growth dominates the first quarter accounting for $53 million of $65 million transformation in the quarter. The resin substitutions, which Brad referenced earlier, account for the negative $4 million in efficiency. Given that SmartSide growth contributes to the lion's share of our transformation dollars in the quarter. Slide 9 looks a little deeper into that growth. The bar chart on the left is not a repeat of Slide 8. This chart shows SmartSide revenue growth for just the quarter relative to single-family starts. The pie chart on the right provides more resolution of the sources of SmartSide growth. Our total volume grew by 39%. The volume of the more innovative, smooth pre-finished shake products grew by 140%, and as such their share of the total volume increased from under 5% to just over 8%. The substantially higher average selling prices of these new products also contributed one point to overall price growth in the quarter. The waterfalls on Slides 10 and 11 show year-over-year revenue and EBITDA growth in the Siding and OSB segments for the quarter. Slide 10 covers Siding. 49% revenue growth for SmartSide is the result of 39% volume growth compounded by 7% price growth, and that's $93 million in sales and $51 million in EBITDA for an incremental EBITDA margin of 55%. OEE and sales and marketing efficiencies offset increased costs for freight, and the dwindling non-recurrence of fiber sales reduced revenue by $20 million and EBITDA by $2 million. The resulting Siding segment EBITDA of $19 million on $285 million of revenue yields an EBITDA margin of 32%. Slide 11 shows the quarter in more detail for OSB, which is dominated by ongoing record high OSB prices. We estimate the impact of MDI scarcity on alternate resin substitution at roughly 80 million square feet, or 7% of volume due to reduced operating efficiency. As Brad said, the supply chain for that resin seems to have stabilized. We will continue to monitor that situation and other potential supply chain interruptions closely. Our feasibility to substitute alternate resins for OSB production and therefore to allocate all available MDI to the Siding segment was a perhaps an anticipated benefit of having these segments under the LP umbrella. OSB prices will continue to grab headlines for sure, but LP’s results this quarter are no small measure a testament to the agility of the Siding and OSB operations team, as they navigated the MDI shortage. As you will see in the cash flow summary on Page 14 of the appendix, the accompanying presentation, other than cash taxes, the only meaningful difference between EBITDA and operating cash flow is a substantial increase in working capital, which is almost entirely the result of high OSB prices, raising accounts receivable balances, and the normal seasonal accumulation of logs I mentioned earlier. The bridge from the $314 million of operating cash flow to the net change in cash is similarly uneventful. With buybacks, CapEx, dividends, and payments associated with refinancing our long-term debt being the only material items. Reconciliations of net income to both adjusted EBITDA and adjusted income are also straightforward, with depreciation and a rather large but appropriately proportional provision for taxes as the only items not already mentioned. Slide 12 provides updated guidance for capital expenditures for the year. As Brad said, we are exploring opportunities to accelerate our Siding capacity expansion, and the Houlton conversion, the restart in Peace Valley, and the growth capital for maintenance, all together bring our capital expenditures for the full year in the range of $230 million to $250 million. In other words, we're raising our CapEx guidance by about $10 million. With extremely robust housing and repair and remodel markets fueling intense demand for SmartSide and OSB, our order file gives us visibility into the remainder of the second quarter. For the OSB segment, prices continue to climb, and we believe OSB revenue will be at least 30% sequentially higher in the second quarter than in the first. We also expect another strong quarter of SmartSide growth with revenue for the second quarter at least 30% higher than last year, marking the fourth consecutive quarter of growth above 20%. Assuming the conditions for Siding and OSB scenarios I just detailed, and given all usual caveats about sudden demand shocks or other unforeseeable events, we expect EBITDA for the second quarter to be at least $580 million—another quarter of record results and outstanding cash flow generation. Before handing the call over for Q&A, I do want to discuss our expectations for full year revenue growth for SmartSide. Demand continues to be very strong and we expect to continue running our mills at full capacity for the remainder of the year. Our expert finish, smooth, and shakes should continue to grow as a percentage of total SmartSide volume and revenue. However, given the acceleration of growth in the second half of last year, we cannot increase year-over-year revenue by much more than 10% in the second half of 2021. This would bring full year SmartSide growth to roughly twice our previous long-term guidance of 10% to 12% a year. And with that, we'll be happy to take your questions.

Thank you. Now first question coming from the line of Mark Weintraub with Seaport Global. Your line is now open.

Thank you. Congratulations, obviously fantastic times for you. In terms of the alternative growth in Siding and some of the things that you're looking at, can you give us a sense as to what they might represent? And perhaps if we can understand the magnitude of volume they could represent and the costs to get it, recognizing that these would be preliminary indications?

Yes, Mark. I'll talk really about three areas of investment we're looking at making for continued growth and this is not in any priority order. The first of all would be adding additional press capacity at existing facilities that currently make SmartSide. We'd like the idea of having a trained workforce on the ground, so those locations that have sufficient wood supply to accommodate significant growth — in most cases, that means at least doubling growth from a press standpoint. We're looking at that as what's called a brownfield scenario. Secondly, even after Sagola, we will have Maniwaki and Peace Valley both producing OSB, and aspen wood baskets. So, those two facilities are certainly candidates for conversion. Finally, there could be a more Greenfield scenario, which is the best example of the cook Minnesota piece of land that we own that has had an OSB plant on it in the past as far as greenfielding a Siding mill. So honestly, some combination of those three types of opportunities will play out in my view over the next 10 years as we continue to grow Siding capacity. From a capacity standpoint, I mean speaking generally and not to be overly obvious about things, converting an existing OSB mill is probably the most efficient use of capital because obviously you're utilizing a lot of redundant resources and then a brownfield facility at an existing location. That wouldn't be that would be capital efficiency associated with that, but not buying land, and there are certain components of the mill that would not have to double up one. Obviously, a more Greenfield scenario would be the most expensive.

Great, and curious, the Outdoor didn't get a mention there is that no longer a consideration?

Sorry, that's an oversight on my part, which would be a restart of a shutdown facility in Outdoor, yes.

Okay. Super. And then, just as a quick follow-up, 32% margins in Siding, I know just, I think it was last quarter, you increased your expectations on what the business can drive over the long haul, that this 32s a lot higher than even where your longer-term updated view had been, any thoughts as to how sustainable this type of margin can potentially be?

I would say that the sustainability comes from improved mix, which is the fall we emphasize so much the new products that we've launched over the last three or four years, which pre-finished shakes, smooth, they carry a premium over our basic prime product. As I've mentioned before on the call, if we biased next to trim, that can be very favorable to price as well. So that's — we're looking at our innovation strategy to increase margin, and it certainly does. We'll say that the constraint on that is we gain market share. There is a competitive nature, obviously, to a big base of business that we have in lap and panel. And so we are keeping our options open if that's the right way of saying it to be competitive when it comes to big builder businesses and our business at the home centers, which can be a little bit more competitive from a pricing standpoint.

Right. I appreciate the color. I'll turn it over. Thank you.

Thanks, Mark.

And our next question comes from the line of Ketan Mamtora with BMO Capital Markets. Your line is now open.

Thank you. And congrats, Brad, Alan, obviously a very strong start to the year. Maybe to – maybe just coming back to Sagola, I mean, you're all talking about kind of pulling forward the timeline of that. Last quarter you were talking about potentially 2023 Q3 startup, but sounds like sooner. I'm just curious, given that you've got Houlton going on right now, when is the earliest you could convert that mill if demand remains strong?

Ketan, I would say that the earliest we could get production from that mill would be probably a year after Houlton's startup, which would be Q1 of 2023. Give me a little latitude on that as we continue to work on the engineering. But we are on a parallel path, obviously, with a huge focus on Houlton first, but we intend to convert that facility over to Siding as quickly as we can, given the work that's ahead of us to do the Houlton conversion first. So let's target Q1 of 2023, and then we'll continue to update you on causes that either moves forward a quarter or back a quarter, depending on what we need to do from a demand standpoint, but also as we refine our engineering work on Sagola.

Got it. That's helpful. And then, maybe you talked about kind of demand has remained strong in both OSB and Siding. Maybe talk about kind of what do the order backlog looks like for this time of the year in both OSB and Siding?

Yes. They're extremely strong in both products through EWP in there as well. The unprecedented strength is always strong in Q2. So, I mean, that's the seasonality has kicked in, but there's no weakening in the order file at any of our three wood facilities, South America included, in any of our four businesses that have very strong order files.

Got it. And then just final question around capital allocation, balance sheet is in a very strong position. Q2 cash will be kind of fairly robust as well. And you've — Alan just mentioned that the $1 billion authorization announced your plan to launch the suite. Kind of what is the right way to think about the cadence around share repurchases? I'm not asking about specific quarterly guidance, but given the strong balance sheet, what is the right way to think about kind of leverage for LP and the way you think about deploying cash for repurchases?

So, Ketan, the balance sheet, as you mentioned, is very strong. Our balance sheet will be strong after we execute this share repurchase authorization. So there's — in our view, we're not risking the company at all by this $1 billion, which is certainly doable from a cash generation standpoint. I will remind you there's an authorization; we are not planning to spend it. So we've got some flexibility if things were to slow down later in the year or next year. But obviously, our plan is to deploy that authorization promptly. The rationale behind the share repurchase as a capital allocation tool is, even at $70 a share price, which I don't know if we're there at that moment, but we were at the beginning of the call, I still think, and Alan, I think shares this and certainly our Board, we still believe we're significantly undervalued. So, we feel that there's a good justification just on that note to buy back shares, not only just because we have them on you. Our rationale is that it remains a good investment for our shareholders to be in an aggressive share repurchase mindset at LP, and then reassure our shareholders that we will be prudent about that and deploy it in a way that makes sense given the economic reality of the time. But then again, I feel I'm very bullish about the next four quarters for housing repair and remodel in LP. We anticipate spending that money over the next, well, I don't want to set a timeframe, but we plan to begin using that authorization immediately. And we'll probably buy back shares from a dollar standpoint about on the pace that we've been doing it over the past year or so.

Got it. Very helpful. Good luck in the back half of the — Brad.

Thank you, Ketan.

Our next question comes from the line of John Babcock with Bank of America. Your line is now open.

Hey, good morning. And thanks for taking my questions. I guess just starting out, I was wondering if you might be able to, you just talk a little bit about, I mean, obviously, like you've seen tremendous growth in SmartSide. And so, on that point, if you could kind of talk about how that's maybe influencing the visibility of your brand and ability to kind of grow off of that. I mean, obviously, over time and you can get more scale as you grow and have more market share. But want to get a sense for how this is ultimately helping to maybe come down and grow it to some extent, if that's current?

And it's funny, I was— as you were asking the question I wrote down as a note compounding, and then you said the word before I did, but that is certainly brand equity and credibility of the brand comes with scale. And it comes with broad, maybe call them broad scale, which is penetration in several different kinds of markets, our position in retail. It makes it a brand that the consumer DIY sees we value that a lot. We value opposition on the retail websites for a lot of businesses moving for the big box retailers. Repair and remodel, this is for a resized project, is typically a project that sold in the home. A consumer brand and a contractor can educate and convince a consumer, kind of figuratively, at every kitchen table about using SmartSide as a way to build brand credibility. And then finally, as we expand with the builder that really allows us to access a contractor-based solving side. So, and then we could go on with other examples, but the being a brand that has that kind of wide opportunity to be exposed, and then taking advantage of that, does provide a compounding effect. And then, that on top of that, our launch of the expert finish and the ability to access the pre-finish side of that market, which somewhat of our assignments when I was talking about repair and remodel, really brings an aesthetic appeal to the brand that moves it beyond just a prime product. So, this has been the fruit of past investments in marketing and sales that we've made and talked about on a lot of these calls. We continue to focus on that and make sure that we support the brand in a way that it ensures future growth. And I'll spend one more point on that. As you know, one of the things that we've learned through the COVID experiences, you can effectively do that online. I think our contractors — contract customers have moved to getting educated about or got more comfortable being educated about brand and installation, etc., online. The consumer certainly has. Big box retailers are really educating the public on how to source building products by starting online. And so we do have a strong focus there, and I'm really pleased with the progress so far.

Okay, thanks. And then I did notice that you had a pretty sizable increase in the SmartSide pricing this quarter. Can you just remind us what the price increase was or price increases that have been announced for that product?

Yes, we announced a 4% to 6% across the board in that variety of regions. It varies by region, varies by SKU, but 4% to 6% overall. And we've been well— what we're realizing now maybe three to four overall, and then the mix change has been very possible added about another percent on that pricing. So I would say we've probably gotten a little bit stronger price realization on the backend of the increase than we've gotten in prior years, but it's just the strength of the demand right now has allowed us to hold on to some of that list pricing we increased at the beginning of the year. So, from a modeling standpoint, I would say carryover, where we are right now, and give us a little leniency on mix. There'd be a pretty good way of looking at the rest of the year as far as a price increase realization.

That's useful. And then as far as overall demand for both Siding and OSB, can you just remind me when that tends to peak seasonally? I think at some time during the summer, but what is kind of a typical seasonal pattern here?

Yes, John, really for — in my experience here and most of my time, I was in Siding a little bit in OSB, really that September, October historically in Siding has been really good. I think that's also true for OSB, as people move into winter, trying to button up some jobs and get the house Siding or sheeted. So we've typically seen really good seasonal demand nail that demand plateau in the summer has kind of hit a constant rate of construction. And then we would generally see a little surge in demand September, October as people were trying to complete some jobs before the winter weather hits. So we're certainly in a — historically at a really good time of the season right now. And we're expecting to see continued very strong order files at least until October. Given the lack of inventory in the channel right now for both OSB, Siding and through EWP in there as well, I anticipate that even in the winter, we'll see pretty good order files as distributors and dealers take that opportunity to rebuild some inventory. They're looking into—we expect to have a strong building season next year as well.

That’s very helpful. And then just last question before I turn it over—the South American results were clearly quite strong. And I was wondering on that point if you might be able to talk about the sustainability of the EBITDA?

Yes. From a volume standpoint, they're really good about the sustainability, and we're doing some in the scale of things. It's not big dollars, but we're doing major mill improvements down there just from a little extra capital spend that we've allocated down there for the next couple of years. So, I'll see the capacity of South America growing significantly over the next 18 months or so. We're seeing really good market growth — market size growth down there, and some of that is attributed to good economies, especially in Chile, but also our expansion into Argentina, Peru, and Colombia has really helped as well. So, we've diversified the markets a little bit. Look, there is a pricing component of that as well. I mean, it is in no way directly tied to North America, but when things were as tight as they are right now in North America, the pressure from imports in South America diminishes, and it gives us a little more pricing strength in that kind of environment. So we have seen price improvement down there as well. Historically, we've been able to retain that. But it's hard for me to predict that that'll be true in the future, but we've seen good price appreciation and really good volumes down there.

Yes, thanks, Brad.

Our next question comes from the line of Sean Steuart with TD Securities. Your line is now open.

Thank you. Good morning. A couple of questions, Alan, wondering if you can speak to SG&A, it was kept in check to surprising extent relative to our expectations given the top line strength. Can you give context on SG&A trend this quarter and sustainability at these levels going forward?

Yes, sure. One thing to bear in mind is that this time last year, we significantly cut SG&A as we entered the COVID environment and that necessarily had the benefit of giving us a new muscle. So as we sort of stepped back up, unnecessary spending on selling and marketing, we don't necessarily replicate the cost in exactly the same manner. So we got some what you might call unexpected and implicit efficiencies. We are looking to increase selling and marketing expenditure with particularly within Siding as we go forward through the remainder of the year. But to put it in context, that's already baked into their Q2 guidance that we gave you. So there will be an increase in SG&A as we continue to invest in the future of the Siding business, but that's really the only fundamental change that you'll see.

Okay, understood. On EWP, you had indicated last quarter that you were undertaking a strategic review for the business. Can you give us any update on how that process has evolved, if at all, over the last quarter?

As evolved, I'm pleased with the progress and the response we've had quite a bit of interest in the business. There's nothing to share today. We're just in some discovery phase and having some very interesting discussions about the future of that business. We are focused on continuity of the business because typically what we think is going to happen is they acquire a little impaired or distribution base is also our distribution base for Siding and to a large extent structural solutions. So continuity is important to us as one of the components for getting out of that business. That's certainly a factor that we're discussing with the interested parties. Good progress within the quarter and we'll continue to report out when we can.

Understood. That's all I have. The rest of my questions have been answered. Thanks very much.

And our next question comes from the line of Kurt Yinger with D.A. Davidson. Your line is now open.

Yes. Good morning, everyone. And thanks for taking my questions. I just wanted to start off on the competitive dynamics in Siding. I mean, what would you kind of consider the one or two things that have been most impactful in terms of your ability to gain share here in the last year? And as we look ahead to the next couple of years, I mean, are those factors any different or what do you think is highest on the priority list there?

Okay, so looking back over the last 12 months or so with good market share gains as we mentioned before, our position at retail has been very, very beneficial to us. We've seen incredible growth along with depots lows and the growth that they have seen. So our position there has been really good. Also, the rebound in the shared business, which is another big panel consumer for us, has been extremely strong. Finally, I'll say overall that the strength in housing has also been very positive for us, and I believe we've picked up some market share gains there. But the bigger market share gains have come through our position in retail and in shared. Looking forward, however, our launch of smooth and prefinished is certainly focused on market share gains and repair and remodel. While there is, we do have geographic strength, we do not have broad national strength in repair and remodel. So, there's a lot of opportunity in front of us to grow in the repair and remodel segment. It's the reason behind the innovation. Our other focus area for us for what we believe we're currently under-penetrated is with large national builders. And we've got a product that we're launching this year to help us address that along with other sales and marketing strategies associated with that. One of the strengths of our Siding business is the diversity of channels that we sell into and the strength and diversity of our product portfolio. We're not solely dependent on growing lap siding because of our position in panel. We're not solely dependent on growing panel because of our position in Siding. As we add products like Prefinish and shakes, it expands and diversifies that product portfolio, allowing us to take advantage of opportunities when they arise in these business segments. This has historically been a long-term strength of our portfolio and I think it's going to serve us well as we expand it and look at further market penetration in this favorable market environment.

Got it. That's very helpful color. And then I guess my second one, when you talk about perhaps accelerating the goal of conversion, if we were to see OSB markets remain strong—not necessarily kind of where things stand today, but if they remain strong. How would you think about potentially backfilling what type of OSB capacity you'd lose with Sagola?

Just to remind you Kurt, that was our thinking around part of the justification for restarting Peace Valley was the integrated way we looked at capacity expansion across the two businesses. We feel like we're addressing, especially the customers in that Midwest part of the country that we can access from Peace Valley. With Peace Valley's startup plan for later this year, in the second half of this year, we want to have that facility up and running fully by the time we start bringing Sagola down. So that was really how we are addressing it is through Peace Valley's startup and then continued OEE improvement across our entire OSB network. But we're really focused on that growth in Siding. Sagola is the next great idea in front of us in that regard. We're pretty single-minded in getting that mill up and running as quickly as possible. Our expectation is that our OSB market share will be protected by the startup of Peace Valley.

Got it. Okay, makes sense. Well, good luck here in Q2.

Thank you.

Your next question is coming from the line of Mark Connelly with Stephens Inc. Your line is open.

Hey, good morning. This is John Rider on from Mark. So, first question, when you look at this period of tight supply in OSB, has it changed your thinking about how OSB inventory should be managed, whether on your side or between you and distributors? And has working capital gotten too lean here?

John, there's no— there's no question that working capital has gotten very lean and one could argue too lean. If we had been able to foresee the rebound and product demand in May, June, July of last year, obviously we would not have taken the mill downtime that we had taken. I assume our distributor partners would not have brought their inventories down as well. So, I don't know if this will change the way that the industry looks at inventory management because I think that we're all trying to rebuild inventories back to some kind of normal level. However, it is evidence that the caution that went into the cash generation mindset we all had in late spring of last year or early spring of last year has, really put us in a position to struggle to keep up with demand. Therefore, I think it’s more of an anomaly than a long-term change in philosophy around working capital.

Okay. That's really helpful. And then we are hoping you could talk a bit more about your ESG programs. We're seeing rising scrutiny of environmental claims, particularly in Europe right now. And do you clearly have a good sustainability story? We're curious, what sort of ESG targets you have set for OSB, siding, and how you think you stack up in the building material space?

Let me start by saying, I think we stack up very, very well given our footprint, the sustainability of our wood procurement mindset or strategy. We are currently working on setting other types of ESG environmental targets. We are in the data collection phase because this will be a data-driven exercise for us. We are focused on it. We've reconfigured a board committee to provide board oversight to this and are seeing and participating in setting high expectations for advanced containers. We'll be back later in the year to set out specific targets around other ESG parameters, other than just what procurement sustainability. I will mention just from a concept standpoint, I feel like we have a really good story. When you're nailing siding on the side of a house for the 50-year warranty, or you are putting up a sheet of carbon to the house. I believe we're going to have a really good story, but we want to ensure that the data we report is accurate, and that the goals we set are reasonable, and it's something that we can accomplish. But that work is underway. If you'll give us another quarter or two, we'll be back with a robust discussion on that before the end of the year.

Great. Thank you.

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

Yes, thanks very much. Good morning, guys.

Good morning, Paul.

Just wow with the quarter. But looks even more robust in Q2. Just maybe start on the SmartSide business, just wondering what your — that order file is it that strong that you would have a potential for a second price increase in 2021, or is that something you don't want to do, and you really want to gain market share?

Well, there's pricing strength in the product offering right now. Pricing is something that's always on our mind, and we would be clear about that. There are various ways of getting that. One of them is hinted to earlier on the question about price realization is working on the backend rebate part of it. We are taking advantage of the strength with the demand to manage prices, I think, appropriately. But we have to be competitive. While there can be short-term opportunities for pricing, at the end of the day, in most cases, we're essentially going to get bid against a competitive substrate. Therefore, we are maintaining a competitive position, even in times of tight demand is something that we're mindful of. Especially with a builder, these agreements are at least multi-quarter if not multi-year. So, we are focused on maintaining a competitive price situation because we are focused on gaining market share. I don't know, I'm being a little bit too faced on that answer, because we also take advantage of whenever we can get price; we can get it, but we don't do that foolishly. We want to make sure that we maintain a competitive position and that our distributors and dealer partners can be competitive as well. It's a balancing act, I guess is the right way to answer it. And it's something that we're managing daily.

Okay, that's fair. And then just on the margin uplift in SmartSide was pretty impressive. Is that solely due to a higher percentage of Prefinish, or is there cost reductions in the segment as well?

It's both. We've had — we run into the facilities full out now. The operating leverage for the OSB and Siding both is very strong. The margin for that last million feet of product, the production that we sell out of Siding has a very high margin. It's really amazing what the mill profitability can be when you're sold out and running at full production. So, the price increase certainly helped, but that overall operating efficiency is key to that.

And then just over on OSB, you've got Peace Valley stirring up in the second half of the year. Maybe you could give us an idea of what kind of volume you expect to be able to ship to the market in 2021? Is that going to be a slow start or a faster start? And then lastly, if you could give us an update on Entekra.

Yes, we're looking at about $150 million today in Q3 out of Peace Valley. So for the second half of the year, $150 million. Then Entekra, we continue to be very pleased with the order file at Entekra. We are in the process of validating the models to get that ever-increasing order file through the facility. I think the challenge for us there, I will say that's been one part of our business where labor availability at the facility has been a little bit more, a lot more of a challenge than in our more mature facilities. Maintaining a workforce is what I mean. From a profit standpoint, that business has been challenged by rising lumber prices. The agreements with the builders have a lag on lumber pricing pass through, and that's obviously hurt us. Market validation pulp is solid for Entekra. We're still figuring out how to meet the order demand as it continues to rise aggressively. We're also trying to figure out how to price products in these highly volatile times for lumber pricing. I'm encouraged by what we're doing strategically there. But it's still a startup business, that's for sure.

And no more immediate capital required?

No, we do some minor working capital provisions for them, but yes, no immediate capital required.

Thanks a lot, Brad.

You're welcome.

The next question is coming from the line of Mark Wilde with Bank of Montreal. Your line is open.

Good morning, Brad. Good morning, Alan.

Hey Mark.

Good morning.

Brad, I'm just curious if you think about the OSB market overall right now, if we were to see housing starts, continue to move up and let's say we moved up to two million starts, is it the capacity then there to serve two million starts?

No. The capacity after the startup of Peace and Sagola would be 1.6, 1.7, probably. Looking at that — so yes, when you think about it this way, Mark, in 2007, 2006, the industry was serving the 2.2 million start housing market. And we shut down and didn't start back up two or three facilities and converted three or so to Siding. Since then, looking at all the permanently shut plants, there hasn't been an offset in Rain Fields to get us back to that level. Therefore, the industry is more of a 1.5, 1.6, 1.7 with creep taking advantage— creep in there. So, it could be tight for a while.

Okay. And just remind me like a hundred thousand starts is what, like a billion and a half square feet.

Mark, this is Alan Haughie. The two rules of thumb to keep in mind are about 100,000 starts consume about a billion feet of OSB. You have to adjust that for the single-family mix. A single-family start consumes about three times as much OSB and Siding as a multifamily start. The market we're in right now is single-family mixed north of 70%. You want to adjust that billion feet per 100,000 starts upwards a little bit to account for that.

Okay. And then, Brad, I'm just curious. I mean, we're so far beyond anything that we have ever seen in terms of both lumber and OSB pricing. Are you guys sensing any areas in the market where you think there's some demand destruction taking place or demand deferral taking place right now?

Well, yes, demand referral, yes, I think there is, I know a guy who wants to build a deck; he's not going to build a deck until lumber prices come down. So yes, there's one person who is doing a job that I specifically know, but I do think there is an issue around that from an affordability standpoint for projects. There may even be some housing starts deferred just from the availability standpoint. I currently don't believe there's demand destruction happening online. Yes, that export panel has a little bit more coming in than in the past, but most other local markets are pretty strong. We're starting to see that in South America. I believe it's similar in Europe. What we haven't hit yet is any kind of substitution for it. We have to be realistic and think there probably is some deferral happening either due to affordability or lack of availability of immediate supply.

Okay. All right. Then the last one from me, just, I think a quarter or two ago, you mentioned that you were trying to do some of the downstream products, like I think, Siding products down in the Latin American business. Just any update on the uptake of those kinds of products from the Latin American market? I know changing building preferences, changing building codes is not always an easy thing to do.

Yes. We are actively working on that in Brazil, where it is harder, and in Chile, the building codes have adapted. So that's not a constraint in Chile and not in Argentina either. But in Brazil, it certainly is. Just quickly to explain, it is highly local in Brazil. You can't do a macro change in building codes. It's harder to do a macro change. You end up having to kind of almost project by project basis. What we would consider changing code is what's required down there. We've got a team working on that and it's successful but slow. In Chile, building codes are not an issue regarding that conversion, but our focus down there is really growing our slumping side business. Because we've been capacity constrained in the past, and the margins for OSB have been really good down there historically, we haven't had the EBITDA incentive to grow in Chile. But as we've increased press capacity, it's opened up some opportunities for us to look at expanding the portfolio. We've sold Siding down there since the startup of kind of who — 20 years ago. It hasn't been as much of the focus areas as we want to be in the future. As we've grown our market share for sheathing, we are pushing up against some constraints there. We see Siding as the next really good growth platform for us down in South America, where perhaps the sheathing has been more of a growth market versus growth market share.

Okay. That's helpful.

I'm encouraged by our opportunity there, especially considering the other — to kind of put a period on that. We're very under-penetrated in Argentina, Peru, and Columbia, which do use wood construction. So, there is also a geographic growth element to our strategy down there.

Okay, very good. Thanks.

Yes.

Next question is coming from the line of Mark Weintraub with Seaport Global. Your line is open.

Thank you. One quick follow-up. We've got a pretty incredible variation geographically in OSB pricing right now, with the random month, at least Western Canada, $1600, a couple of regions, more than the $1200, some regions in the $1000 type area. Any thoughts on why there are these enormous spreads, and any implications?

Yes, Mark, this is Alan. As you know in more typical times, when you see regional spreads start to open up, OSB gets shipped around the continent to address those arbitrage opportunities. That happens when there is available wood. However, demand is so strong in just about every market that's consuming OSB now that there really isn't as much — there isn't enough available wood to address that. In more normal times if we saw prices different region to region, you'd see a wave of OSB heading west to satisfy those marks. The only way that's possible now is by starving the building in the southeast. Therefore, it's just less possible now.

So, why wouldn't prices in the southeast, etc., why wouldn't they just quickly go towards that $1,600 price in Western Canada?

Well, they typically would in an environment where wood was leaving the southeast to satisfy the west coast demand, that would create scarcity in the southeast. Those prices would tend towards equilibrium. However, that phenomenon is less likely to happen in an environment where there is so little available product that there isn't extra to ship.

That just all contracted out.

Exactly. Now part of the other issue, Mark, is that the product is so scarce that open market transactions themselves are less common, which means there is less data to be reported, which means that — which further reduces the opportunity for that arbitrage to be recognized and reflected in prices.

Got it. Thank you.

Yes.

Well, with no further questions that will end our conference. Thank you for joining us to discuss our results for the first quarter of 2021. We'll look forward to talking to you soon. Have a great day and stay safe everyone.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation. You may now disconnect.