Louisiana-Pacific Corp Q4 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Fourth Quarter and full-year 2021, Louisiana Pacific Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Aaron Howald, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Michelle. And good morning, everyone. Thank you for joining LP Building Solutions today to discuss our results for the fourth quarter and full year of 2021, as well as our outlook for Q1 and the full year. My name is Aaron Howald and I'm LP's Vice President of Investor Relations and Business Development. I'm joined this morning by Brad Southern, LP's Chief Executive Officer, and Alan Haughie, LP's Chief Financial Officer. During this morning's conference call and webcast, we will refer to an accompanying presentation available on LP's IR webpage, which is www.investor.lpcorp.com, where you will also find our Earnings Press release 8-K and other materials. Slides 2 and 3 of the presentation provide notices in detail regarding forward-looking statements and non-GAAP financial metrics. Rather than reading those statements, I incorporate them herein by reference. The appendix of the presentation also contains some necessary reconciliations that are further supplemented by this morning's 8-K filing. And with that, I turn the call over to Brad.

Thanks, Aaron. Good morning, everyone. And thank you for joining us to discuss LP's financial results for the fourth quarter and full year 2021. Q4 was a strong finish to a record year for LP Building Solutions. Customer demand for Smart Side and Structural Solutions persisted throughout the quarter with no sign of typical holiday slowdown. With U.S. housing permits in December reaching a seasonal run rate of 1.9 million, demand shows no sign of slowing. I'll therefore begin with an update on our substantial investments in capacity. For siding, progress continues on the Houlton main conversion project with production expected to begin next month. We rebuilt the press on our Swan Valley Manitoba mill in October and we're rewarded in January with an all-time monthly production record. LP also announced plans to build our fourth and to date largest expert finish facility at a site in Bath, New York. In OSB, production at Pace Valley was 10% ahead of the ramp-up plan established following its restart in July, providing much-needed structural panels to our West Coast customers. I want to thank our engineering, operations, and local mill teams for the ongoing success of these projects. In Q4, we significantly ramped up the rate of capital investment spending, totaling $121 million; for context, total capex in 2021 was $254 million, roughly half of which was for strategic growth. Almost half of the year’s spending occurred in Q4. The capex spent for Q4 was not a one-time outlier. In 2022, LP will aggressively increase our investments in capacity with plans to spend over $400 million in capex for growth and innovation. Along with the soon-to-be-completed Houlton conversion, later this year we will start the Sagola Michigan conversion, with siding production expected in Q1 of 2023. In a few minutes, I will give you a preview of our long-term capacity strategy for Smart Side and export finish. This will be the first year in which we have worked on two parallel siding capacity expansion projects, but it won't be the last. We are currently narrowing the list of candidates for capacity expansion projects to follow Sagola, and we have begun the process of securing long lead-time items necessary for these projects. In the OSB segment, while we're not increasing volume, we will invest in the specialized equipment and process technologies necessary to accelerate the shift from commodity OSB to value-added structural solutions like Tec Shield, Flame Block, Weather Logic, and Legacy Flooring. We will continue to invest in demand generation through sales and marketing and customer training as we gain share and expand addressable markets. Slide 5 highlights LP's financial results for the fourth quarter. In Q4, LP generated $1 billion in net sales and over $300 million in EBITDA. This was 7% lower than the prior year due to investments in growth, raw material inflation, and slightly lower OSB prices. This resulted in $200 million of operating cash flow and adjusted earnings per share of $2.24. LP returned almost $330 million to shareholders in Q4, mostly through share repurchases. This completed the $1 billion authorization for share repurchases, leaving $500 million in remaining authorizations. Alan will provide more detail about our capital allocation strategy and execution in a few minutes. But I should point out that the adjusted earnings per share I just mentioned is higher than last year, despite lower net income due to a much lower share count. Before I summarize the full-year financial results, slide 6 shows more detail about siding growth relative to the underlying housing market, as well as the growth of the highest value-added products in the siding portfolio. On a trailing 12-month basis, single-family starts in the United States increased by 13% from 991,000 to 1.1 million. Siding Solutions revenue grew at double this rate, increasing 27% in 2021. In November, Siding Solutions broke another record by surpassing $1 billion in annual revenue before ending the year at almost $1.2 billion. For context, a billion dollars is close to the revenue that LP's much larger OSB business would generate at pre-COVID cycle average prices. This achievement marks a significant milestone in our strategic transformation. Siding revenue growth is a compound result of 16% volume growth and a 9% increase in prices. The price increase includes a positive mix effect of growth in Expert Finish, shakes, corners, and other innovative siding products. As you can see in the pie charts at the right, our total volume grew by 16%, while the volume within this innovative subset of the siding portfolio nearly doubled, reaching 10% of total volume in 2021. This 10% of volume delivered 14% of the segment's revenue for the year, helping siding grow at twice the rate of the underlying market. As I said a few minutes ago, we intend to double down on our investments in capacity, equipment, innovation, and sales and marketing to continue to grow our siding business. Slide 7 shows LP's extraordinary results for the full year. In 2021, all business segments set records for sales and EBITDA, which totaled $4.6 billion and $2 billion, respectively. The resulting adjusted earnings per share was almost $14 after substantial investments in capacity, innovation, and sales and marketing. LP returned nearly all of the $1.5 billion in operating cash flow to investors through share buybacks and dividends. While demand for new construction and repair and remodeling projects is projected to continue for some time, 2022 will surely bring new challenges. We have seen some hopeful signs of moderation, but inflation continues to exert upward pressure on prices for raw materials. Global supply chain disruptions continue to threaten the availability of some raw materials. But I have never been more confident in the creativity and dedication of our team in the sustainable business model we are building. I will close by stressing that our success is built by our people. The war for talent is real and LP aspires to be recognized as a safe, welcoming, and rewarding place to work for anyone and everyone who has the talent and desire to join our team. At LP, we are growing and transforming by investing in all our assets, including our most important one: LP's 4,800 employees. To say thank you for an unforgettable year and a job well done, LP has substantially increased retention bonuses, retirement plan matches, and discretionary profit-sharing contributions for employees. And with that, I will turn the call over to Alan to discuss Q4 and full-year results for the siding and OSB segments, and to update you all on LP's capital allocation strategy.

Thanks, Brad. And thank you all for joining us. As Brad said, 2021 was indeed a remarkable year. Looking forward in 2022, we plan to build on the momentum of our ongoing transformation by increasing our investments in growth, and I'll detail these plans in a moment. But first, let's delve a little deeper into the fourth quarter. The waterfall on Slide 8 shows the changes to siding revenue and EBITDA compared to last year. Revenue increased by $22 million or 9%, and this was the net result of a 2% decrease in sales volumes, more than offset by an 11% increase in average selling prices. This increase is the combination of list price increases, reduced discounts and rebates, and the ongoing positive mix effects of Expert Finish and other high-value-added components. The drop in sales volume, as we discussed during our third-quarter earnings call, was unrelated to demand, but rather the result of lower production due to the major planned outage for the press rebuild at our mill in Manitoba. In fact, the 2% decrease in volume is rather impressive given that the month-long outage in October at one of our largest mills represents nearly 10% of siding's normal quarterly production. The cost of these press rebuilds accounts for the lion's share of the $12 million of maintenance expense in the waterfall. Another subject reintroduced in our previous earnings call was our continuing investment in demand creation and production capacity totaling $25 million in the quarter. This includes $5 million of increased selling and marketing investments, $8 million for the Houlton conversion, and $12 million of maintenance costs, the bulk of which was the press rebuild in October. The last and largest bar on this waterfall chart is a $29 million hit to EBITDA from inflation. Of this, $21 million reflects raw material prices, with resins and associated chemical inputs being the bulk of the increase. Higher fuel costs also drove about $4 million of increased freight costs. The remainder of this inflation is mostly related to wages and incentives. We have seen some recent normalization of these input costs, but it is likely that resin and freight prices will remain above 2020 levels for some time. The resulting EBITDA margin for the quarter was therefore 17%. However, absent the $25 million of discretionary investments, siding's fourth-quarter EBITDA margin would have been 26%, which is of course why we continue to invest in our growth. The net result of all this growth in investment, as shown on slide 9, is a full-year EBITDA margin of 25% for siding. This meets its long-term margin target, which was set at this level to accommodate the ebbs and flows associated with mill conversions and the other investments that generate future growth. Therefore, ending the year at 25% despite a mill conversion, a press rebuild, and ongoing raw material inflation is remarkable and made possible by strong customer demand, which drove the 27% revenue growth, and very efficient manufacturing operations, which in turn delivered the necessary operating leverage. I won't belabor the full-year waterfall, but if you'll forgive a slight oversimplification, the EBITDA benefit of volume growth more than offset investments in future growth, primarily manufacturing infrastructure and sales and marketing, while the EBITDA benefit of increased prices more than offset raw material, freight, and wage inflation. And it should go without saying that we strive to retain those price and volume increases sustained as necessary by ongoing investments, whereas inflation is, with any luck, temporary. Page 10 shows the fourth-quarter results for OSB compared to the prior year. Although prices for the quarter were down sharply from the summer's record highs, the trend in the fourth quarter was one of steady increases followed by a marked acceleration late in December. Ultimately, revenue and EBITDA fell by just $19 million in the quarter due to prices. Conversely, total volume for the quarter was 120 million square feet higher than last year, with 100 million square feet more commodity volume and 20 million square feet more virtual solutions. This is mostly due to the Peace Valley restart. The combined impact of this increased volume and favorable mix resulted in an additional $57 million of revenue and $43 million of EBITDA. Much like the siding segment, OSB saw increased prices for resins and other raw materials, as well as freight. Availability of logistics, particularly rail in the Northwest, also raised freight costs as we were forced to switch to truck freight in some cases, at higher costs. These challenges have continued into the first quarter of this year, particularly in British Columbia, where lack of rail cars has forced some downtime at our Peace Valley mill in order to manage finished goods inventory. For the year, OSB's performance is generally dominated by price, contributing over $1.1 billion in revenue and EBITDA, overshadowing the other elements on the chart. The full-year waterfall is easy to be dazzled by price, while the volume from Peace Valley offsets the volume losses caused by MDI shortages earlier in the year. Prices may have had record levels in 2021, but the supply chain challenges the business overcame to deliver products and therefore these results should not be underestimated. Page 12 shows the major drivers of the year-over-year change in revenue and EBITDA for the entire corporation for the fourth quarter. Focusing on the EBITDA column, OSB volume, siding growth, and improved results in South America and EWP added a combined $86 million of EBITDA, almost perfectly offsetting the impact of inflation in raw materials, freight and wages, costs for Peace Valley, and other major maintenance spending. I should mention that these results are supported by ongoing improvements in the EWP business, particularly through our enhanced pricing strategy designed to protect margins from volatile input prices, chiefly lumber and aerospace. This strategy contributed to EWP's impressive $27 million of EBITDA for the fourth quarter, bringing its full-year EBITDA to $95 million, four times its 2020 result. The strategy continues to bear fruit with LVL and I-GOs price increases implemented as recently as last month. Furthermore, last week, LP announced the sale of its 50% stake in an I-Joist joint venture for $50 million. In 2021, that 50% equity stake generated about $11 million in EBITDA, which is about twice the cycle average. The supply and distribution agreements associated with the joint venture will continue in place with those impacts showing up in the OSB and EWP segments as before. LP South America also had a very strong finish to the year. Although OSB prices there are generally less volatile than in North America, the near tripling of our South America's EBITDA to $130 million was overwhelmingly from price. While the lion's share of the increased capital investment in 2022 will be in North America, our South American business is in the early stages of a multi-year self-funded capacity expansion. A summary of cash flows on slide 13 serves as a useful reminder of our capital allocation strategy. In 2021, we earned $2 billion of EBITDA after paying $420 million in cash taxes. Funding a modest increase in working capital. Quite frankly, we could've used more and paid $30 million in interest and other assorted expenses. We generated nearly $1.5 billion of operating cash flow. Of this, we invested over $250 million in CapEx, with the Houlton mill conversion being by far the largest single component. We then devoted $1.3 billion to the repurchase of 21 million shares at a volume-weighted average price of $61.5 and paid $66 million in dividends. Our balance sheet, therefore, remains extremely strong. We ended the year with $370 million of cash on hand and therefore zero net debt and an undrawn revolver of $550 million. Our best investment is unquestionably in our own transformation. But as long as our shares continue to trade at a discount to our intrinsic value, we believe that the next best use of cash is to return it to shareholders through share repurchases and regular dividends. Speaking of dividends, LP's board approved a 22% increase in our quarterly dividends to $0.22 per share. We are now at our investment plans for 2022 summarized on Slide 14. As Brad said earlier, we will be completing the Houlton conversion this year, as well as starting the conversion of Sagola, making 2022 the first year in which LP will work on two siding capacity additions. We are already in the planning stages for additions beyond Sagola, including spending on long lead-time items. Total spending in 2022 on all these mill conversion accounts for almost half of the $400 to $430 million slated for CapEx in 2022. Other strategic growth capital of $80 to $90 million includes among other things further expansion of our pre-finishing capability. We're currently able to finish roughly 5% of our press capacity, and we plan to nearly double that pre-finishing capacity in 2022 and then double it again over the subsequent two years. To that end, in December we announced the purchase of a site in Bath, New York where we plan to build our fourth Expert Finish facility. While we build the Bath facility, we will simultaneously expand our existing Expert Finish facilities in Green Bay, St. Louis, and Roaring River. We are also exploring options for a facility in the Northwest, strategically located to finish Smart Side produced at Dawson Creek. Our long-term target is to refinish as much as 30% of siding capacity, but remember that we're also expanding siding capacity to meet customer demand, so we are chasing a rising target. With respect to guidance for sales and EBITDA, in the first quarter, we expect siding revenue will be about 10% of the prior year, with price accounting for most of the growth as Houlton will not begin its ramp up until March. A combination of additional capacity late in the year, list price increases, and the mix effect of Expert Finish and other high value-added siding products should generate full-year revenue for 2022, which is at least 15% higher than in 2021. As I'm sure you're all aware, OSB prices have been climbing steeply for the past several weeks. Without attempting to predict future prices, I will offer an outlook predicated on the assumption that OSB prices remain flat from last Friday's published levels. Under that assumption, revenue for the OSB segment in the first quarter would be about 40% above that of the fourth quarter of 2021. The total company EBITDA implied by these levels of growth is at least $500 million. However, all businesses are encountering difficulties in transportation logistics with fuel prices pushing freight costs higher and availability remaining challenged. We have been forced to take downtime at Peace Valley due to truck and rail logistics, but we're working through that. Logistics challenges are less likely to force production curtailments in the siding segment as the product can be stored outdoors. Downside risk to our outlook is, therefore, largely attributable to logistics and to a lesser extent, raw material availability and continued inflation. However, absent a significant external economic shock, demand for siding, OSB, and EWP seems unlikely to let up anytime soon. And with that, I'd like to open the call for Q&A.

Thank you. And our first question comes from the line of Susan Maklari with Goldman Sachs. Your line is open. Please go ahead.

Thank you. Good morning, everyone; I think it's still morning. Thank you for taking the questions. My first question is, can you talk a little bit about the housing backdrop and how you're seeing demand coming through as we think about the spring? And builders are really looking to ramp inventory, and especially, with the big public forecasting a lot of community count growth this year, and presumably some meaningful increase in inventory with that?

Yes, Susan. Just confirming everything that you said about the optimism with the public builders around their order files for the year and their ability to continue to grow volume and inventory throughout the year. I'm hearing the same thing on the calls that I've read and a conference that I attended recently. So, we're very optimistic about the housing forecast for the rest of this year and beginning to get optimistic about carrying it over into the following year just given all the momentum. And then as that relates to our order files, in all three of our North American businesses, order files remain very strong. We continue to manage order files in siding and have been now for almost a year-and-a-half, and from an OSB perspective, it continued very strong order intake weekly. So, we're seeing that strong housing market translate into consistent strong order patterns across our North American businesses.

Okay, that's helpful. And then you talked a little bit about the continued headwinds that you're seeing on the raw materials side. Can you give us a little bit more color on the resins, what's you're seeing there? And I know you had transitioned to some other inputs in your commoditized products to compensate for some of those headwinds that you're seeing. Can you talk a little bit about where you are with that and how you're thinking about the overall inflationary environment as we think about 2022?

Susan, we are back. The premium resin that we use is MDI, and then we can move OSB, especially the commodity skews over to phenolic. We're back to running a full allocation of our MDI resins in both siding and OSB, so availability currently is not an issue. But obviously, as you remember, if that becomes an issue as we move through the year, we do have the ability to flex back to PF resin if needed. And then as far as resin pricing, we're looking at increases between 10% and 20% year-over-year. Those prices for resin pricing for MDI are indexed to benzene and derivatives. So, we're pretty much locked into seeing that MDI pricing rise as we see oil prices rise, but we're more concerned about price inflation right now than availability.

Okay. Well, that's good to hear. Thank you. And good luck with everything.

Thank you, Susan.

Thank you. And our next question comes from the line of Ketan Mamtora with BMO Capital Markets. Your line is open. Please go ahead.

Thank you. Good morning, Brad, Alan, Aaron.

Good morning, Ketan.

First question, maybe start with the siding capacity options that you are looking at beyond Sagola. Brad, would it be possible to give us some sense of what are the options that you are considering and the timeline that you're thinking?

Ketan, we’re looking at multiple scenarios for that next tranche of volume, in no particular order. One option is to add press capacity or add a press at an existing siding mill. The second set of scenarios is to convert one of our two remaining OSB mills over to siding. And then third would be more of a greenfield capacity expansion where we build a new facility. Each of those has different capital efficiency parameters, and each has different ramp-up parameters. I really like the idea of adding a press to existing siding capacity because we will get instant knowledge on how to manufacture the product from a quality standpoint. That decision, obviously, is based primarily on wood availability and land availability around the facility for the capability to expand. When we look at converting existing OSB mills to siding, obviously we already have the labor in place, making it a little bit more challenging as we ramp into the quality parameters, but our two remaining facilities, Maniwaki and Peace Valley, are rather large presses, larger than any mill we've yet to convert. We're trying to work through how the complexity comes from those larger mill conversions. And then, finally, from a greenfield perspective, probably the least capital-efficient means of securing new siding capacity, but we are intrigued by, for the first time, engineering a facility just to make siding versus in the past adapting existing OSB technology over to siding. So, there's pluses and minuses for each of those three scenarios, and that’s exactly what we're working through in order to get to a decision on the capacity expansion after Sagola. As far as timing, Ketan, I could see us talking publicly about that decision later this year, probably late this year, because we're looking at needing that production ramping up in 2024. We're all hands on deck working for those scenarios and expect to be able to talk a little bit more with a greater certainty about what we've chosen to do as we get into the second half of this year.

That’s insightful for Brad. Just as a follow-up to that, vendors that leave Val-d'Or are on the option list spread.

So, we have sold the Val-d'Or facility, so that is no longer an option for us. But when I speak about possible greenfield, that obviously would include the land, which would really be an ideal place for us to build a greenfield siding mill.

Got it. That's helpful. And then, just one near-term question on 2022? When you talk about siding revenue growth of 15%, considering the mix shift and the price increases, what is embedded within the guidance around volume growth for FY2022?

Hi, Ketan, this is Alan. Remember, we have roughly taken that 15%; it's 8 to 9 points of price and the balance being volume with obviously a ramp-up through the second half of the year as Houlton comes online. That's roughly how to think about it. Obviously, we have tended to overperform on both volume and price when I give steps like that, but think of it as roughly 50-50 with a slightly greater emphasis on price and volume.

And this price also includes the mix shift benefit, so this is not our list price increases, is that correct?

Correct, yeah.

Got it. That's very helpful. I'll turn it over. Good luck.

Thank you, Ketan.

Thank you. And our next question comes from the line of John Babcock with Bank of America. Your line is open. Please go ahead.

Hey, good morning. Just quickly following up on some of the discussion there on some of the projects that you are looking at for the next round of capacity additions in siding. At this point, I assume that especially given the lengthy backlogs for machinery, have you already started to make purchases or at least get into contracts around some of that or is it really too early to comment there?

No, John. We have engineering in place and have placed purchase orders for the equipment related to the next facility. Regardless of which scenario we choose, there are specific pieces of equipment we know we will need, and we have started the process of securing that equipment or the factory space for its fabrication. So, we are actively working on that.

To have flexibility regarding the equipment options you choose to pursue, you haven't completely made a decision at this point, and I'll show you.

The stuff that we're pre-buying now would be equipment that would be needed in no matter the scenario that we choose. We’re doing this so frequently now that there are a number of aspects of the projects that are the same, and so we can, in simple terms, sort of bulk buy for more than one mill's worth of those aspects.

Got you. And then just on the CapEx guidance for the year, I was wondering, could you break down how much of that $190 to $200 million on the mill conversions is going to hold in Sagola this year and then also what will be left for Sagola in 2023?

I don't think we've disclosed that. The loose, think of it as about 50-50. Think of it as three-quarters of that money will be for Sagola. And the remainder will be for the remainder of Houlton on some long lead items. About, yeah, about a little under three-quarters of it will be for Sagola.

Great. I have one last question before I hand it over. Earlier in the call, you mentioned making investments to shift some capacity from the commodity side of OSB to the specialized area. Could you share any details regarding how much volume you expect to transition into the specialized OSB with these investments? Additionally, do you already have demand for those investments? Any insights would be appreciated.

John, we're running our structural solutions mix for 2022, was just above 45% of our total production in our OSB business. We see a lot of upside to that over the next several years and have plans in place to aggressively grow that business. So, working off a base of 45%, we are certainly targeting being in the mid-50s by the end of this year. Honestly, from getting it into the market, it helps when the market is tight. We can be a little more directive on the volumes, the sale through our contracting system, and so we are using this tight market to facilitate the conversion to our value-added portfolio.

Thank you.

Thank you. And our next question comes from the line of Seaport Research Partners. Your line is open. Please go ahead.

Thank you. First maybe a bigger picture type question. Congratulations. Fantastic year. Congrats to everybody at LP on that. Housing obviously is doing really well. We're permit data, etc. is now above normalized height levels. You are now accelerating your growth in your spend. Can you contextualize how important is what happens to housing from here versus the innovation in the product mix opportunities and repair remodel, and how you're conceptualizing, what are the key drivers to the success of your strategy going forward? I'm really just trying to get how important is it that housing stays at very elevated levels versus some of the other factors that you think are going to be bedrock to the future of Louisiana Pacific?

Mark, that's a great question. Currently, we estimate that 40% of our siding business volume is directed toward new construction, primarily in single-family homes, with only a small portion in multi-family that isn't significant. This means that 60% of our portfolio is focused on repair, renovation, and retail. We're investing heavily in pre-finished assets, and the conversion of the Houlton Maine mill is mainly aimed at the repair and remodel segment due to its location and the capabilities we're developing there. Our goal is to increase our market share in repair and remodel, which we believe can be somewhat correlated to home construction, although not for siding projects in general. The strength in housing construction does provide some support for our siding business, and we have been selling into construction for 50 years. However, our strategy for siding is primarily focused on capitalizing on opportunities in repair and remodel.

That requires both elevated SG&A, which we've discussed, and improved innovation. I believe we are demonstrating our ability to align our innovation expertise with market needs. We are committed to growing the siding business and do not see any long-term negativity in housing forecasts as a reason to lessen that commitment. However, a downturn in the housing market would indeed be reflected in our siding results due to our significant presence in new home construction. Our strategy is geared towards reducing our dependency on that market.

Great. Thank you. And then just one follow-up. When we think of IRRs for the various paths you're taking, the mill conversion versus the other strategic growth capital and sort of the bands of confidence, is there much variation or is it fairly similar? In particular, is pre-finished? Is that like a very high-probability, very high return type of expenditure, any color you can give us on those?

That's a great question. Let me talk high level, Mark, and then we can follow up with questions if you want to get to the detail that you're looking for. You think about, given our company's capital intensity, when you do anything with a press, rebuilding it or creating one in a greenfield scenario compared to the investment required for pre-finish. The capital intensity of the pre-finish incremental investment is very low in LP's world. Yet the price and margin enhancement are relatively large and so we see high returns for our investment in refinish. The risk being to our ability to sell out that production. But given the low capital intensity, there's kind of room for error there, and a lot of the cost ends up being virialized in those refinish facilities, so we could match the ramp-up curve to the spin there. Those pre-finished products projects are higher return. When we look at other ancillary projects, like the shape line that we installed at our mill in Swan, overall, we tend to be investing right now in some rather high-valued, high-priced, higher-margin skews that can generate a lot of return compared to just a basic press type of mill conversion IRRs. So, the gamut on these innovation returns goes from average to high depending on the specialization of the new product and our ability to garner price. Now, let me just speak a little bit about the scenarios around mill conversion or capacity adds. If we do a greenfield mill for siding, that's going to generate the lowest returns compared to the other two options. Next would be adding a press line since we would be buying a new press if we add a press to an existing facility. Higher returns in greenfield, but lower returns than a pure mill conversion like we've done historically since we're utilizing a press that's in place if we do a mill conversion. That's how you should think about the mill conversion returns rating down. And then you should think about these repair and remodel focused incremental investments around innovation to be relatively high returns compared to mill conversion.

I guess, Brad, just it would strike me that the opportunity costs, though, if you're converting an existing OSB press might be pretty high, so that adding at an existing mill a new capacity might, in fact, be the highest return. Did I misunderstand what you were saying?

That's a great point, Mark. It’s a topic we discuss internally. Currently, the return from converting OSB mills would be quite low due to the current margins in our OSB business. Historically, we’ve found that converting those mills in light of the sustainable margins in our siding business, even with opportunity costs considered, has been a wise investment. I’ve been satisfied with the decisions we've made regarding mill conversions in the past, but the situation is different now. The conversion of larger OSB presses to siding use is proving more complicated, leading us to explore opportunities where siding volume can be additional rather than a replacement for OSB production.

Great. Appreciate the details. Thank you.

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

Yes, thanks very much. Morning, gentlemen. I guess the first question I got is Val-d'Or. I think, Brad, you said you sold the mill. I haven't seen a press release. I'm just wondering, I mean, that was a mill that you swapped back in 2016, with the idea to bring it up. What changed that strategy, and what did you sell it for and to who?

I might have got ahead of myself there, Paul, but we do have a purchase agreement and we're selling it to a company that cannot make OSB. It's a facility or land sale primarily, and that's a work in progress right now.

Okay. Well, that's good news. Maybe back on Swan, just when you did that conversion, I think it was back in 2015, did you rebuild the press at the time or I guess maybe the press rebuild that you've done now, does that give you more production than the 350 or does that lower your costs or does it do both?

Hey Paul, we did not rebuild the press when we converted it, but we did identify the need for that conversion, but we have been so tied on siding, we kept pushing the conversion price down until we just couldn't any longer. This is, in fact, the first rebuild of that press in that plant since the plant started up almost a decade ago.

When we do those press rebuilds, they're not primarily done for incremental production. But we do have been able to find the opportunities for increased volume out of those presses. That comes from reduced press-time and improved reliability. One of the bigger advantages, as we see a real improvement in quality in control. When you take better control technology into account, you get those single-digit improvements in capacity as a result of that. The biggest improvement is less downtime and less maintenance time in the press, which leads to higher production. We used to think of these converted projects as zero return projects. They probably don't consistently hit our cost of capital, but they approach it given the improved technology that's available on these new presses.

That's really helpful. Maybe just on the EWP sales process, just wondering if the sale of your JV I-Joist helps out and where you're sitting in that process.

Yes, Paul, this is Aaron. It should help that process. It certainly adds clarity in terms of the transaction parameter. Just to be clear, what we sold as part of the joint venture was our 50% equity stake in the EBITDA of the joint venture. It was a fairly complicated transaction involving an OSB supply agreement and an I-Joist distribution agreement, both of which continue. But yes, all else equal, it should simplify and clarify the ongoing EWP process.

There’s an added benefit, Paul, to the complexity of that JV, which has been a great investment for us. It muddied the waters when we tried to explain how the business operated to potential buyers. So, having that clarity going forward, we think is going to expedite our strategic evaluation of that business.

Okay, sounds good. Last one for me, just you mentioned South America capacity expansions, maybe you could give us some details of what the plan is there?

Primarily what we're doing there is improving press reliability at those facilities overall. We did put a second press in two or three years ago but did not add drying capacity to utilize all the press because we didn't need that volume. There are deep bottlenecking, lower capital intensity debottlenecking projects that we can implement to get that second press up to full capacity. That's what we're speaking to. We are evaluating other geographic locations for expansion in South America and those are primarily dependent on our ability to develop markets around those facilities. Overall economics shelf of the economies down there. I'm very optimistic about our ability to grow in South America through either what I'll call organic growth, which is the bottlenecking our existing operations and then eventually, as we've done over the years, finding new geographies where stick frame construction is becoming more predominant and we can be a supplier there. For example, Argentina is a great wood basket, slowly transitioning to more stick frame construction. Colombia is another good place, obviously, rife with a lot of political issues right now that would prohibit us from building a facility there. But as those economies and those housing markets mature, we like that environment and have done well down there as we know how to operate in South America. We're cautious about expansion, but when we see an opportunity, we want to lean into that.

Great. Thanks for the detail.

Thank you. And our next question comes from the line of Kurt Yinger with DA Davidson. Your line is open, please go ahead.

Great. Thanks, and good morning, everyone. I just wanted to start off on siding margins. It sounded last quarter like despite some of the cost pressures with conversions and discretionary investments, maybe that 25% margin target was a reasonable expectation for '22. I'm curious if your thoughts around some of those items have changed at all and whether that's still an achievable hurdle?

Yes, I would say it is. It will be dependent obviously on the unknown factor of raw material price inflation and whether or not, and I'm not saying there would be, but whether or not we have a reaction from us in terms of price. That power will always exist, as well as the pace of the expense of a mill conversions. So those known factors, known controllable factors in terms of the rate at which we choose to invest in growth, as well as that slight unknown in terms of raw material inflation. Fundamentally, I would argue that the performance we've demonstrated so far puts us on track to our long-term EBITDA margin target of 25%. That's beginning to look a little conservative in the long run.

Got it. That's helpful. And Brad, you touched on still being on a managed order file in siding. As we get into the second half of 2022 and Houlton moves towards full production capabilities, do you see the potential at all to start rebuilding channel inventories? And as you speak to customers and consider where channel inventories are today versus where they could be if production was a constraint or what you would consider normal, is there any way to size that gap?

Kurt, based on what I understand about the Houlton startup curve and our current order status, things are quite tight right now in February. I don’t anticipate that we will return our channel partners' inventories to normal levels until this time next year. I believe we will face constraints throughout the year as we ramp up with Houlton, and I truly think that the Sagola production will be what helps us get back on track. We will keep you updated on this every quarter.

But we are very tight, and we're just getting into the spring building and remodeling season. Houlton is starting up next month. It will be minimal grade A production in Q2; I mean, obviously some. So, the really big Q3 and Q4 until we start seeing a significant impact of that incremental production. From where I'm coming from is then, maybe in December or January, we build some channel inventory, as we prepare for the spring season next year. But my belief is we're going to be tight all year in siding.

Got it. Okay. And maybe just a follow-up. I mean, when it's not a unique phenomenon to you or siding specifically, but when you speak to your customers and channel partners, what is the feedback you get on just those production constraints and do you see any kind of competitive implications that have come from it?

Yes, certainly, in times of tight supply, a contractor has to make a decision on finishing a product. A lot of that depends on availability. We’re trying to be very strategic about where we supply production. It's to strategic customers, and throughout the channel, not just our distribution partners, so they are vital. We are getting into areas where we see opportunities for future growth. Those channels are being rewarded with the volume that they need. We’re having to be very strategic about that. It does give us an opportunity from a SKU optimization standpoint, to focus on the SKUs that we see have a long-term future in our portfolio. It’s a weekly, monthly grind to make sure that we’re supplying materials we can into the strategic customer partners that will set us up for future growth. I personally don't think there’s been any long-term damage done; we’re still putting a lot of volume into the market based on the growth rates that we've seen. But when you’re oversold, you never know, could I have sold one more truckload this week or a thousand more truckloads this week? You just oversold. And that’s not a position that we want to be in, and that’s why we’re making the capital investment to get ahead of that. It bothers me to be in managed order files because we never know what your market share gains could be if you were unconstrained, but that’s the reality of where we are today.

Okay. All right. Well, I appreciate all the colour guys, and good luck here in Q1.

Thank you. And our next question comes from the line of John Tumazos, with Very Independent Research. Your line is open. Please go ahead.

Thank you for taking my question. The European prices that we can derive from West Fraser's disclosures seem to increase in the December quarter after having risen sharply in September and June. Your realizations in Latin America appear to decline slightly in the fourth quarter and are lower than those in North America based on your statements. Could you describe the competition in South America for OSB? Who are the major players? In Europe, there’s Kronospan and other panel producers, some of whom sell finished products with lacquer on the counters. Could you characterize the competition outside of North America? It’s interesting that European prices continue to rise, for example. I'm trying to understand the market and the global landscape.

The current competition in South America largely consists of import volumes from Europe, the U.S., and sometimes Asia. The market includes a significant amount of non-API panels. The quality parameters are strong, similar to those in North America. The competitiveness of import volumes in terms of pricing can vary based on international economic conditions surrounding OSB. Generally, our pricing in South America tends to be more stable when prices are high in the U.S., as U.S. imports to South America decrease, and European imports generally favor the U.S. market. This trend shows that there is a built-in insulation factor regarding OSB pricing in South America, largely due to the costs involved in transporting the product to the continent. Over the last 20 years, we have observed relatively stable prices in South America, although these prices are certainly influenced by North American pricing trends.

Thank you.

You're welcome.

Thank you. And our last question will come from the line of Sean Stuart with TD Securities. Your line is open. Please go ahead.

Thanks. Good morning, everyone. Just one quick one from me. Brad, you touched on the strides the company's making with the Structural Solutions value-added product within the OSB segment. Any update you can give us on your ability to decouple the pricing for those products from the weekly random prices? I'm just trying to gauge the relative stability in those products versus the commodity OSB.

Sean, in all honesty, there's still pretty tied to each other for most of the skews in our Structural Solutions portfolio, there is some direct link back to random prices as it's sold as a premium to that price. Now, for some of those skews we do get monthly adjustments or multiple week adjustments, not those annual week-to-week adjustments to those which actually can hurt us in a rising OSB market. However, we’ve got this built-in margin stability that comes from the Structural Solutions portfolio.

Understood. Thanks for all the detailed answers. I appreciate it.

Welcome.

Thank you. This concludes today's question-and-answer session. I would like to turn the conference back over to Aaron Howard for any further remarks.

Thanks, Michelle. Like we're out of time. one minute long, so we'll call it there and conclude the fourth-quarter and full-year earnings call for LP Building Solutions. Thanks, everybody. We will look forward to talking again soon. Have a great day and be safe.

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