Louisiana-Pacific Corp Q4 FY2022 Earnings Call

Thank you for standing by. Welcome to the Q4 2022 Louisiana-Pacific Corporation Earnings Conference Call. Please be advised that today’s conference call is being recorded. I would like to turn the conference over today to Aaron Howald, Vice President, Investor Relations.

Thank you, operator. Good morning, everyone and thank you for joining us to discuss LP’s results for the fourth quarter and full year of 2022 as well as our updated outlook for the first quarter of 2023. As the operator said, my name is Aaron Howald, and I am LP’s Vice President of Investor Relations and Business Development. I am 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 podcast, we will refer to an accompanying presentation that is available on LP’s IR webpage, which is investor.lpcorp.com. Our 8-K filing is also available there along with our earnings press release and other materials. Today’s discussion will contain forward-looking statements and non-GAAP financial metrics as described on Slides 2 and 3 of the earnings presentation. Rather than reading these statements, I incorporate them herein by reference. The appendix of the presentation also contains reconciliations that are further supplemented by this morning’s 8-K filing. And with that, I will turn the call over to Brad.

Thanks, Aaron. Good morning, everyone and thank you for joining LP’s conference call to discuss our fourth quarter and full year results. In 2022, LP’s 50th year, we delivered record siding volume and earned $1.4 billion in EBITDA and returned nearly $1 billion to shareholders, including repurchasing 14 million shares. We also invested in our ongoing transformation by completing the conversion of our Houlton mill, starting the conversion of Sagola from OSB to siding and growing our capacity to produce export finish and structural solutions. In Q4, we grew Siding Solutions net sales by 38% and remained EBITDA positive in OSB despite prices falling to levels not seen since 2019. Another highlight of the year was publishing our second sustainability report. LP’s inherently carbon-negative products and efficient manufacturing processes mean that LP is delivering value to customers, homeowners, and shareholders while also positively impacting communities and the environment every day. It was a truly remarkable year and I want to thank every LP employee whose contributions helped make that possible. The recent slowdown in housing starts is likely top of mind for most of the audience. So let me address that, starting with a reminder that LP’s OSB and siding businesses have very different relationships with that underlying market. Q4 saw 26% fewer single-family starts than in Q4 of 2021 and single-family starts were down 11% for the full year. LP’s OSB segment is closely correlated with new residential construction. As a result, after a remarkable year of cash generation, commodity OSB prices fell to near cash cost in Q4 as demand slowed due to reduced housing starts. We responded with disciplined management of capacity and exceptional execution by our sales team, which allowed the OSB segment to earn $13 million in EBITDA, which is above our algorithmic guidance given how far prices fell. LP’s Siding segment, on the other hand, is more specialized, has no connection to commodity prices, and has significantly more diverse channels and end users, with only about 40% of siding volume going to new residential construction, and we think SmartSide is the best siding product available. As a result, siding has consistently outperformed the underlying housing market with net sales increasing by 38% in the fourth quarter and by 26% for the full year. In the fourth quarter, our siding distribution customers continued to order, but some of their customers’ pulls slowed. This resulted in an inventory build in the channel of which we were unaware until late December due to the time lag inherent in a managed order file. By quarter-end, therefore, most SmartSide products have finally caught up to customer demand, bringing lead times and inventories back to more seasonably normal levels. Alan will talk more about that in the guidance section. Looking back, single-family starts grew by 14% from 2020 to 2021, then fell by 11% in 2022, ending essentially flat over 2 years. Over that same 2-year period, we have grown Siding Solutions revenue by more than 50%. Siding is not immune to a housing slowdown, but it has consistently outperformed the underlying market. We are confident this trend will continue as we execute our strategy to grow and take share by focusing on repair and remodel markets and driving product innovation. Let me talk a bit about LP’s view of the current market and how we are navigating it. Consensus for total U.S. housing starts for 2023 is around $1.25 million, or 20% lower than 2022, although data released last week was a bit better than this. Most observers expect the housing market will strengthen in the back half of the year implying that Q1 could see housing starts fall by more than 20% compared to 2022. There is significant uncertainty in housing and R&R markets at the moment, particularly with regard to interest rates and affordability. As a result of this near-term uncertainty, we are seeing softer demand in siding and OSB. But I want to reinforce that LP’s strategy is not simply to wait for strong housing starts or high commodity OSB prices. Our strategy is to grow SmartSide, grow ExpertFinish, grow our exposure in R&R, grow our portfolio of structural solutions and expand our reach geographically. We will continue to execute on our strategy because we have shown that it delivers value. This strategy is the reason why siding has gained share and consistently outperformed the housing market. As we have said before, we have more than enough flexibility in our production plans and capital projects to respond effectively to short-term weakness and more than sufficient liquidity to continue investing for long-term growth in siding and structural solutions. In the long run, fundamentals remain very strong with demographics and structural undersupply as tailwinds for new construction and aging housing stock supporting R&R growth. LP will bridge the short-term gap protecting against market downside while preserving our ability to benefit when the housing market regains its footing. And we will do it by executing our strategy with disciplined operations and capital allocation. And with that, I will turn it over to Alan to discuss our financial results for the quarter and an update on our capital allocation strategy.

Thanks Brad. I will take a few minutes to review LP’s performance for the fourth quarter and the full year, followed by a discussion on the current market environment and its implications for our near-term outlook. The siding growth relative to housing starts on a trailing 12-month basis is illustrated on Slide 7. As Brad noted, the gap was even more evident in the fourth quarter. The accompanying pie charts depict the mix of our specialized siding products, mainly ExpertFinish and Shapes. Although the total volume percentage decreased by 1 percentage point, this was influenced by the remarkable 20% growth in overall volume, which was exacerbated by a soft comparison due to a press rebuild in the fourth quarter of 2021. ExpertFinish revenue surged by 65% year-over-year. Slide 8 breaks down the quarter for siding. The main story is straightforward. List price hikes and a favorable product mix raised net prices by 15%, while volume increased by 20%. These factors contributed an additional $70 million to EBITDA. However, inflation in raw materials and freight costs, along with heightened selling and marketing expenses, posed a $32 million challenge. Thus, the EBITDA growth from increased volume significantly outweighed the negative impacts of inflation and investments aimed at future growth. As a result, the EBITDA margin elevated by 6 points to 23%, despite a 26% drop in single-family housing starts during the quarter. Slide 9 presents a parallel narrative for the full year. A 14% increase in prices and an 11% growth in volume generated an additional $212 million of EBITDA, partially countered by $31 million in discretionary investments, which did not involve conversion costs for selling and marketing. After accounting for $122 million of inflation, the full year EBITDA rose by $50 million compared to the previous year, maintaining a full year EBITDA margin of 23%. This reflects the effects of two press rebuilds, considerable inflation, and a decline in single-family starts by 11%. The OSB data on Pages 10 and 11 are largely influenced by declining OSB prices and increasing raw material costs. The reduction in volume, prompted by market curtailment late in the quarter, resulted in a $61 million dip in EBITDA during the fourth quarter of 2021, with $11 million coming from commodity OSB and $50 million from higher-priced structural solutions. An additional $14 million loss from inflation, mostly related to raw materials, and a $10 million impact from inventory devaluation were also reflected. Nonetheless, strong price realization led the OSB segment to surpass our estimated guidance, yielding $30 million in EBITDA. The waterfall chart for the full year on Page 11 again highlights the predominance of price inflation, but it is critical to note that the $65 million increase in EBITDA from Structural Solutions growth more than balanced the $41 million decline due to lower commodity volume. This illustrates the positive margin effects of our higher value-added Structural Solutions products. These four slides encapsulate LP’s transformation strategy succinctly. While OSB prices fluctuate beyond our control, we generate substantial cash during periods of high demand and pricing, managing our production capacity with a focused approach to demand. Conversely, Siding is our engine for growth and value creation, characterized by specialized products, consistent pricing, and significant growth potential well above market trends. Slide 12 provides a brief overview of revenue and EBITDA for the quarter. OSB price declines decreased revenue by $120 million. This was nearly counterbalanced by $105 million or 38% from siding growth, a commendable achievement for the Siding team. Revenue was further reduced by $37 million from market curtailment in OSB and a loss of $19 million from Sagola’s OSB capacity, slightly mitigated by a $13 million increase in commodity OSB volume largely due to the ramp-up at Peace Valley. Revenues for LPSA and others combined decreased by $22 million. The EBITDA figures presented in the right column are similar, except for the clarification that in North America, controllable factors like siding growth, Structural Solutions growth, and OSB volume contributed a positive EBITDA of $37 million. However, this was insufficient to offset the declines in OSB prices and inflationary pressures, resulting in LP achieving $100 million in EBITDA for the quarter, which is $178 million lower than the previous year's quarter. Slide 13 mirrors this analysis for the full year; revenue growth of $456 million significantly outweighed the adverse effects of falling OSB prices. In terms of EBITDA, the growth from Siding and Structural Solutions accounted for $294 million compared to 2021. Excluding OSB prices, this increase nearly balanced the combined impacts of inflation, mill conversion costs, Sagola’s outage for conversion, and the reduced EBITDA from LPSA and other factors. Page 14 of the presentation outlines cash flows for the quarter and the full year. We started the quarter with $482 million in cash. Operating cash flow was $41 million, resulting from $100 million of EBITDA, $29 million of working capital reductions, minus $78 million in taxes. The fourth quarter involved substantial CapEx expenditures totaling $133 million, primarily for the Sagola siding conversion and the Green Bay ExpertFinish expansion. After paying $16 million in dividends and other costs, our cash balance decreased by $99 million, concluding the year at $393 million. Additionally, on Page 17 of the presentation, you will find an $82 million non-operating charge for the quarter, which includes a $78 million non-cash charge related to the settlement of our defined contribution pension plan. This charge is excluded from EBITDA and adjusted earnings per share. Now, let’s discuss the current market dynamics and how LP's strategy positions us to respond before moving on to guidance. As Brad mentioned and as you are all aware, there is considerable uncertainty in the housing market. LP is focusing its investments on growth for SmartSide, ExpertFinish, and Structural Solutions to satisfy customer demand. We previously stated that we possess significant flexibility to postpone capacity expansion projects if we anticipate that the current market sluggishness will persist. Furthermore, we have ample liquidity to absorb any temporary declines in cash flow stemming from reduced customer demand. LP will continue to manage its mills judiciously to align with customer demand. In siding, we are navigating through the process of inventory reduction following our shift from a managed order system, and all signals suggest that inventory levels are now decreasing naturally. In OSB, similar to the market downtime we took at the end of the quarter, we are continually evaluating customer demand, mill inventories, and OSB prices to achieve a balance between supply and demand. I am confident that this strategy will enable us to weather this phase of decreased demand, which I hope and expect to be temporary, while allowing us the agility to adjust as the market changes. Our capital allocation strategy remains intact, although the timing is somewhat dependent on cash flow. To reiterate, our approach is to prioritize retaining cash, then investing in growth, before returning any surplus to shareholders through dividends and share repurchases. In the fourth quarter, as OSB prices and cash flow declined, we halted share repurchases, maintaining our share count at around 72 million. We still have Board authorization for $200 million in repurchases and, consistent with our belief that our shares are undervalued, we will re-enter the market as cash flow permits. Regarding liquidity, we maintain a $550 million untapped revolver and $350 million in long-term debt at 3.625% over 6 years. We intend to safeguard this strong balance sheet while leveraging it to execute our strategy. Although 2023 is shaping up to be a year of negative cash flow given the current housing forecast and OSB prices, we will manage our CapEx and balance sheet with the necessary discipline. In the first quarter, as Brad noted, we anticipate inventory digestion following our transition from a managed system in siding, leading to expected revenue for Siding Solutions that is flat to 5% lower than the first quarter of 2022, with price hikes roughly offsetting lower volumes. For OSB, if prices hold steady at current levels, we expect OSB revenue to be approximately 20% lower sequentially from fourth-quarter figures. It is important to remember that our OSB revenue guidance reflects total capacity adjustments made to correspond production with customer demand. All of these considerations suggest a first-quarter EBITDA of at least $35 million. Given the current market uncertainties regarding full-year housing and repair and remodeling demand, it’s challenging to provide precise full-year guidance for siding revenue growth. However, we are confident that the siding segment will significantly outpace the underlying market. Yet, due to the inherent unpredictability of the market, we will defer providing substantial guidance until our next earnings call, at which point we anticipate having more clarity. Similarly, for full-year CapEx guidance, we will make the necessary investments to foster growth and surpass the underlying market performance. We have substantial flexibility in our CapEx plans and sufficient liquidity to adjust in response to evolving customer demand. I would now like to pass it back to Brad for some closing comments.

Thanks, Alan. As Alan detailed, we are working through the effects of catching up the siding order file and we are managing OSB capacity to match current market demand. I don’t want to minimize the near-term challenges these factors present as we enter a period of softer housing starts. The market is still quite uncertain in housing starts and R&R activity have never been easy to predict. However, there are a few things we are very confident about. First, there is structural undersupply of homes in the U.S. This undersupply must eventually be resolved. Second, the age of the average house in the U.S. suggests a very long runway for growth in R&R. And third, we know that we have the best products and team in the industry. The LP Siding segment has a long history of outperforming the underlying market and gaining share and that will continue. And we will manage our OSB capacity, our CapEx plans, and our balance sheet with discipline so that we can continue to outperform the market and deliver results for our shareholders. 2022 was an incredible year. 2023 has started with market conditions different than what we have experienced the past 2.5 years. However, we are not resting on our laurels as we bring our first 50 years to a close, I have never been more confident that LP will build on our record of growth, innovation, and sustainability to deliver shareholder value in our next 50 years. And with that, we will be happy to take your questions.

Thank you. Our first question today will be coming from George Staphos of Bank of America. Your line is open.

Hi everyone. Good morning. Thanks for taking my questions and thanks for the details. Brad, Alan, I know it’s difficult, but is there a way to assess for us what your production stance is right now in siding relative to takeaway? Are you still – I’m assuming producing at a lower rate relative to demand just to clear inventories? Or are you now – have you largely gone through that and you’re producing as far as you can tell, pretty much in line with takeaway? And in terms of first quarter, thank you for the guidance points, recognizing it’s very difficult given all the moving parts and the volatility related to pricing with OSB. Is there a way for you to give us a bit more color in terms of how you see OSB and siding stacking up in that more than $35 million guidance? Thank you.

So George, let me start with the production question around siding. So just keep in mind that Houlton has been ramping up all through last year and is right at or close to production – have the capability to produce at full production. We had to govern that volume back a little bit in Houlton as we went into Q4 and the beginning of Q1, well more so actually in Q1. And so we are – the answer to the question is we’re running our siding plants at full production other than Houlton, where we are going to have decided to take some capacity out there just to try to match the order pull-through a little bit better.

And then the second question, George, was could we give color around the $35 million. Yes, I actually agree with you on that. Bear in mind, please, that the number I am about to quote for OSB is based predicated on OSB prices of last Friday holding flat. So the $35 million roughly breaks as follows: about $50 million from siding, about negative $10 million from OSB. And then everything else, including a bit of conservatism, perhaps, LPSA offsetting corporate of minus $5 million, so plus $50 for siding, minus $10 million for OSB, minus $5 million for everything else for a total of $35 million.

Thanks Alan. And the last one, I’ll turn it over. You mentioned you have the flexibility to push ahead or delay as needed in terms of your capacity ramp in siding. What will be the key mile markers for you relative to how quickly you go ahead or decide to pull back? One of your peer companies talked about some weakness that we’re seeing in repair remodel activity, is that going to be – whether it’s dollars of revenue or commentary out of the big box retailers? What will you be looking to? And what should we be looking at as analysts engaging that? Thank you. I will turn it over.

So George, on the production side, we’re full steam ahead on bringing Sagola up the full year by the end of the year. We see no reason to back off at all, and the path forward for Sagola start-up, which added a significant amount of press capacity. Similarly, in Bath, New York, we’re full steam ahead on that production for ExpertFinish. As we get to the next tier of volume from a press capacity standpoint, that would be Houlton line two and then various options on ExpertFinish, we will just be looking at the market as we go through the year, looking at ultimately what we feel like growth will be for this year and apply that well and also look over what we expect for housing the next couple of years. Those factors will inform our decision on whether to or what kind of pace to continue that capacity expansion. We’re still actively involved in engineering and design for ExpertFinish capacity beyond that. And as we’ve talked about on the call previously, we have begun procurement for different capital components for Houlton Line 2. But we haven’t delayed anything. We haven’t had many decisions on beginning to actually put steel on the ground or for foundations. As we get to the spring and summer, we will have a better feel for what the market is looking like in the near term, and then we will govern our capacity spend around the reality of what we’re seeing in the order file.

Thank you.

Thank you. Our next question will be coming from Ketan Mamtora of BMO. Your line is open.

Thank you. Good morning, Brad, Alan, Aaron. First question, coming back to siding, Alan, in your prepared remarks, you talked about meaningfully outperforming the broad market. Is there a way to think about either in terms of sensitivity or if there is a better way to think about sort of the degree of outperformance or sort of volume growth at different housing starts level? I’m just trying to understand what is the best way to think about volume in the siding business, recognizing that there is still a lot of uncertainty.

Yes, it’s a great question, and it’s a very hard question to answer, particularly given our experience over the last couple of years with the managed order file. But very high level degrees of sensitivity for periods of time, we believe that we outperform on a revenue basis the underlying market by let’s say 8 to 10 percentage points of growth. A simple way of articulating that. The underlying market, we’ve only really got one clear marker of the market, and that’s single-family housing. So, if single-family housing will, let’s say, be down 10%, I would argue that we should be able to grow our revenue above that. That model suggests you might expect flat revenue year-over-year. Of course, it depends on what and to what extent that’s impacted by the housing single-family starts. I would argue that in a 10% housing decline, we might actually see some strength in repair and remodel, and maybe that will be better. So, it’s flexible; the housing doesn’t necessarily move in tandem, but we use it as a simple working model of 8 to 10 points better than the market. However, whatever that market ends up being, we believe we have a long history of being able to do that through market share gains, partly driven by our innovations.

Got it. No, that’s helpful perspective. And Alan, perhaps I missed it. Did you talk about sort of 2023 CapEx guidance?

No, I didn’t quite specifically. And it’s very hard to give guidance in without being able to discuss it in an open form like this. So last, I think last couple of quarters, I’ve guided to – I said the 2023 will be a figure closer to $500 million. I’m obviously going to lower that guidance a bit. But let me tell you what our working model is as of today. I’m happy to do that because it indicates that the range. I would say our working model for CapEx. This is not a projection. This is basically describing what we see and the level of flexibility we think would be wise. Our working model is in the range of $350 million to $450 million of CapEx in 2023. It’s hard to say, as Brad said, where that will land because we will use the flexibility that we have. Q1 CapEx will be pretty heavy. I’m willing to quote a number of something like $120 million to $125 million of Q1 CapEx but that will be fairly heavy. And we have a number of commitments for long lead time items that we intend to play ahead with. And of course, we’re creating spillage. So there is no – absolutely no slowdown there.

Understood. No, that’s very helpful. I’ll jump back in the queue. Good luck.

Thank you. Our next question is coming from Susan Maklari of Goldman Sachs. Your line is open.

Thank you. Good morning, everyone. My first question is talking a bit about the pricing environment for siding. First of all, I guess, can you give us any update on the success that you’ve seen with that increase that you announced in I believe it was late last year, effective in early January? And then in this environment, with volumes moving lower, how do you think about price versus volume? What’s the ability to continue to hold the pricing that you’ve realized? And would you be willing to think about the volume versus price a little differently given where we are from a macro and housing perspective?

Susan, for the first question, we were able to implement our price increase January 1. I would say just as consistent with the way we’ve done it in the past, there could be a little lingering effect through Q1 of realization, but predominantly all of it was accepted in the marketplace. So we have minimal concerns there. And then for the price volume trade-off, generally, siding doesn’t work that way. I mean, there is – we’re pricing in the distribution. I don’t think most siding jobs are a cost play to start with. And so we feel like we’re pricing the product equivalent to the value-add warrants in the market and our distribution partners have done a good job of getting that price through the channel. Now, I do want to say there is an exception to that, and that is around large national builder deals, which typically do require some back-end rebates. We’re part of that game and we are active in continuing to process those kinds of opportunities now. And that can result in a rebate pattern that chips away at that list price increase for specific customers and for large volume type of deals. But I’ve got – I would just say, for the year, we should expect to see by the time we get to the second quarter that January price increase has worked its way into our P&L.

Okay. That’s very helpful. And then turning to the OSB segment, you talked a bit about some production curtailments there. Can you give us more color on some of those locations and how you’re thinking about holding production as we think about where pricing may move for OSB through the year?

Yes, Susan, I’m not going to go through mill by mill and talk about what we did. I would say — I would describe it this way: Q4 was pretty general across our entire system with downtime that is somewhat easier to do during the holiday season. It was widespread distribution of downtime late in Q4 to try to match demand. As we come into Q1 and everybody comes back from the holidays, it is more targeted around mill cost including transportation. In Q1, the downtime will be a little more concentrated, but we will be taking as needed in order to match demand.

Okay, thank you and good luck.

Thank you, Susan.

Thank you. Our next question is coming from Mike Roxland of Truist. Your line is open.

Thank you. Good morning, Brad, Alan, and Aaron. Thank you for taking my questions. Just on siding, realizing that consumers tend to focus on more small ticket items during economic slowdowns, I’m just trying to get a sense of what gives you the confidence that siding will continue to grow as the economy softens, home equity value declines, and unemployment increases? I’m just trying to get a sense of how you’re framing siding in the current environment.

Yes. So Michael, the risk you've described surrounding macro R&R spend is real. As we talked about in our prepared remarks, the outlook for new construction is uncertain to say the least right now, kind of all over the board depending on the analysts that you look at. The underlying market certainly will impact the results for siding volume growth as we go through this year. No question about it. But where I disagree with you is the point about the business not being stress tested during other periods of downtime of a housing slowing or housing going down. We’ve consistently outpaced the market on volume growth and certainly on revenue growth. The reason we’ve been able to do that is, first of all, our portfolio is pretty highly diversified given the exposure to non-housing and even non-repair and remodel segments like sheds and positions in retail. Over the past 5 to 7 years, we’ve done a good job around product innovation that has opened up new opportunities for us, and that’s why we show that slide about the percentage of revenue that is new products. So, the fact that we have an ExpertFinish kind of just coming into any kind of significant market position now. R&R could be down, but because of our market share being pretty low in R&R and the fact that we’re essentially in the last phases of introducing ExpertFinish to the market, we see a lot of upside to that from a market share standpoint. Again, we can’t overcome R&R's down 10%. This year, we’re going to feel that. But we are confident that we’re going to grow.

Got it. Thank you. Just one quick follow-up on that, you mentioned lower penetration rates in certain parts of the country and segments. Can you provide a little bit more color about what parts of the country and what segments have lower penetration rates that you’re trying to increase your share?

Yes. In general, in the center of the country, north to south, from Texas up to Minnesota, we’ve got good market share there. Once you go east of Texas and south of the Atlantic Seaboard, there’s a lot of opportunity there for both new construction and repair remodel. The reason is we’ve converted Houlton in Maine and three more buildings for ExpertFinish capacity in New York and expanding the capacity that we have in North Carolina for ExpertFinish. There is an opportunity there. And then I would say that there have been pockets of the Pacific Northwest; there are some good markets for us historically, but there is still opportunity for growth, particularly with ExpertFinish.

Got it. And then just one last question before turning it over. Obviously, you have a large shareholder which slightly increased its stake last quarter to slightly under 10%. Do you see more shareholder value being created through the involvement of the shareholder?

Well, maybe reputationally, it helps a little bit, but I don’t think there is any direct and we haven’t noticed any direct improvement in shareholder value as a result of that. But I mean, we’re proud to have it. But I think so not directly. However, I would assume that the credibility that brings to our strategy cannot hurt.

Got it. Good luck in 2023.

Thank you. Our next question is coming from Mark Weintraub of Seaport. Your line is open.

Thanks guys. So, for the first quarter, if I am doing my math right, you seem to be pointing to order of magnitude 16% EBITDA margins for the siding business. I was hoping to get a little bit of color on some of the variables at play, obviously below the types of ranges you have been achieving beforehand. In particular, how much in the way of start-up or conversion costs related to Sagola might be included in there? How much of this is kind of just fixed absorption higher cost and what other variables might we want to contemplate?

Yes. Good question, Mark. Let me articulate this in the context of a year-over-year for Q1. Year-over-year, we basically said that we think more or less pricing and volume will offset and that would fundamentally leave zero EBITDA impact. What you are left with is last year’s EBITDA of $83 million dropping to close to $50 million. About $20 million of that is unchanged raw material costs, carrier, and raw material inflation. Normally that would be offset with pricing. Technically, it is, except for the fact that in Q1 volumes are down. One of the problems of having profitable products is that when your volumes are down, you make less money. High variable margin on the outstanding products means that when volumes are down year-over-year, there is a heavy EBITDA impact. Pricing and volume net off; we are left with $20 million and change of raw material, then $5 million to $10 million of continuing investments. That’s really how it compares year-over-year.

Great. Thank you. And I realize this is tough and has lots of moving pieces. But did you have any assessment as to how much of the volume weakness is either you sold a little bit ahead of time or destock? What I am really trying to get a sense of is kind of ranges for volume expectations, recognizing you don’t want to give a full-year estimate given all these uncertainties, perhaps some sensitivity analysis under different macro situations of where you might think volume and siding might come out, that would be super helpful.

So, Mark, let me start there; Alan can add some color to this. In the context of gauging where we are today, I am talking about Q1 relative to the market condition. We guided 30% growth in Q4 and got 38%. We had a price increase January 1. We were all managed order file, which means customers are ordering six weeks to eight weeks or longer out in our managed order cost situation. I do believe that there was some order pull forward into Q4 that drove outstanding Q4 growth. We’ve got to kind of look at the two quarters combined to understand what’s happened there. Looking into Q2, there is a bit of that gauging what are really on pull-throughs which have been hard to understand because there was an inventory build at the end of the quarter. I think we’re beginning to see where we are servicing true demand. As I think Alan mentioned in his prepared remarks, when we get to the next call, we will have a really good feel for that.

Great. And just squeezing in real quickly because you did note another big inflation year-over-year impact; it seems some folks are seeing lower wood costs in other different businesses. When might we start – are we not seeing that yet in siding and when might that start showing up?

So, on the resin side and basically, just to say all materials other than wood, those major material streams are contracted and there is a contract price based on some derivative of oil, but it is a lag. But if we continue to see oil prices fall and even some that we have – some of that have fallen as already happened, it could be helpful for margin this year. We are certainly not seeing any more increases in that area. On the wood side, same thing, a big driver for us, we buy pulp wood. So, a big driver for us is based on executing deals now that some of the shutdowns in Canada and so you may not surprised us were from an OSB perspective looking at some downtime. Relief with diesel pricing would be certainly helpful there.

Much appreciate. Thanks guys.

Thank you. Our next question is coming from Kurt Yinger of D.A. Davidson. Your line is open.

Great. Thank you and good morning everyone. Just starting off on the OSB segment, any thoughts on the relative weakness in Structural Solutions versus commodity volumes in Q4? Do you think that reflects timing differences in terms of prices declining or kind of a larger trend we should be aware of in terms of those products perhaps being less in demand, weaker commodity pricing environment?

Yes. We certainly saw an overall volume standpoint in those go down. I think primarily the market got so competitive in Q4 as folks were rationalizing inventory and production. I’m totally optimistic on the long-term about our ability to grow Structural Solutions. I do think in both directions in a strong market, it’s easier to push structural solutions into the market; in a hard down market, those SKUs can become disadvantaged against more commodity products. We have to be careful about gauging and where we are, both on the upside and downside of Structural Solutions because of that value proposition gets out of kilter when the market is moving. It’s something we are keeping an eye on, but I do believe the strategy is sound. We did grow it and, obviously, from an annual standpoint.

Got it. Okay. That makes sense. And then just for my second, there was a question earlier around pricing. One of your competitors had some interesting comments regarding kind of the pricing dynamic there and perhaps just getting more aggressive. I mean, do you have any thoughts around that dynamic as it relates to SmartSide? Also, can you touch on the success you have seen with the Builder Series introduction?

Yes. We are excited about the progress we made last year with the Builder Series. We are excited about some wins that we have had recently and some ongoing negotiations happening. But it is competitive. There is no question about it. That’s the reason we engineered a product specifically for that channel or that end use. As the market slows, there’s certainly that competition where big builders have negotiating leverage given the volume that they will consume and the market share that they have gained during COVID. But we have a product that is very competitive there, very esthetically pleasing. Once it is trialed, it tends to be accepted and has stickiness. We are going to continue to grow that. But you pointed out correctly that it’s a competitive landscape, unlike probably any other we operate in, where price can be a dominant driver sometimes even not necessarily what we view as the entire value proposition. I feel good about how we are positioned to win there, but we won’t win them all.

Right. Okay. Well, appreciate the details. I will turn it over. Thank you.

Thank you.

Thank you. Our next question will come from Paul Quinn of RBC. Your line is open.

Yes. Thanks very much. Good morning guys. Just one of your siding competitors signed contracts with 24 to 25 top U.S. builders to supply hard siding. Just wondering how you expect that to affect your Builder Series. Also, they have also reintroduced their low price Cemplank product. Just wondering if that’s going to have a material headwind on sort of the growth of Builder Series?

Yes. As I just mentioned, it’s a very competitive field around big builder lap siding. I really feel like the product we introduced, the Builder Series is a superior product to everything that’s out there for that application. We are able to price it competitively to win our share of the opportunities. It’s a negotiated deal. There is a lot of volume involved. We will kind of have to see how it plays out this year, but the market share we gained last year is sticky. I mean, I think I am confident we can battle head-to-head with anybody around that type of business now.

I think we are confident that once a builder tries the product they are going to really like it because it’s superior to their alternative hard sidings. But I don’t circle back around; it’s a competitive landscape and sometimes you can win off a price – and sometimes the price gets too and fro, we don’t want the business anymore. Then we have to walk away or we lose it because we bid too high for it.

Got it. Thanks for that.

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

Thank you. Good morning and thanks for all the thoughtful answers to the questions. I just have one, and it’s with respect to the share buyback program. And Alan, I think your wording was you could remain – you could finish off that program subject to cash flow supporting it and with potentially a tempered CapEx outlook. Is there an implication there that you forgo the share buyback activity for the foreseeable future? And presuming your thoughts on intrinsic value haven’t really changed, I guess your intent to stay active on that program in light of share price weakness we have seen of late?

I want to reiterate something. It’s a great question. Thank you. We don’t buy opportunistically. Yes, like this, one might imagine I wish we'd take the opportunity to buy back shares. But we put investments in the business first, as I will repeat my mantra, and we don’t buy opportunistically. We do maintain that discipline that we have to have the cash already generated to engage in buybacks. I am sure that point will come; I just can’t predict well.

Understood. And the rest of my questions have been answered. Thanks very much.

Thank you. This concludes today’s Q&A session. I would like to turn the call back over to Aaron Howald for closing remarks. Please go ahead.

Okay. Thank you, operator, and thank you everyone for joining us. We are at the hour and there are no further questions. So, we will bring the fourth quarter earnings call for LP Building Solutions to a close. Thank you very much for joining us, and we look forward to speaking with you again soon.

This concludes today’s conference call. Thank you all for joining, and please enjoy the rest of your day.