Louisiana-Pacific Corp Q2 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to LP's Second Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Aaron Howald, Vice President of Investor Relations and Business Development. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the second quarter of 2023, and our outlook for Q3 and the remainder of the year. My name is Aaron Howald, and I am LP's Vice President of Investor Relations and Business Development. Joining me this morning are Brad Southern, LP's Chief Executive Officer; and Alan Haughie, LP's Chief Financial Officer. During this morning's call, 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 detailing LP's strategy and sustainable business model. Today's discussion will contain certain forward-looking statements and non-GAAP financial metrics, as described on Slides 2 and 3 of the earnings presentation. I will incorporate those slides by reference rather than reading them. 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, and thank you all for joining us. I'll briefly describe LP's results for the quarter before I turn my attention to the future and discuss LP's strategy of growth, innovation and efficiency, and how it positions us exceptionally well to benefit, not only from the ongoing rebound in new construction, but also from the improvement in repair and remodeling that we expect will eventually follow. The second quarter ended with encouraging signs of an improving housing market. While single-family starts are down 21% for the first half of the year compared to 2022, May and June saw stronger-than-expected building activity. As housing starts have rebounded, demand for LP's oriented strand board has followed, pushing prices meaningfully higher and improving LP's EBITDA and cash flow outlook. By contrast, the repair and remodeling market appears to be comparatively weak and softening, likely due, at least in part, to constrained home inventory and reduced home sales. Existing home sales, which in a typical year outpace single-family starts by 4 or 5 to 1, are down 23% for the first half of the year, and vacancy rates and active listing counts suggest that trend will persist. The shed market where LP has a dominant share of exterior siding panels closely follows existing home sales and has been similarly weaker so far in 2023. Against this backdrop, LP generated $611 million in net sales, $93 million in EBITDA, $88 million in operating cash flow and $0.55 in adjusted diluted earnings per share. While our EBITDA performance exceeded guidance from the prior quarter, Siding revenue was lower than expected, which shared the softest component of the Siding business in the quarter. Overall Siding volume dropped 16% versus prior year quarter, roughly equal to the drop in single-family starts for the quarter. Partially offsetting this, siding prices were 6% higher than prior year, with the result that net sales were 11% below the prior year. On Slide 6, you can see that while single-family starts dropped 22% on a trailing 12-month basis, Siding volume was flat and Siding prices were up 11%. Comparing the first half of 2023 to the first half of 2019 before the pandemic, Siding revenue has grown at a compound annual rate of 14%. Over the same four-year period, single-family starts were essentially flat. The first half of this year is certainly softer compared to the COVID year since Siding was on allocation; Siding growth consistently exceeds that of the underlying market. A bright spot for the quarter was ExpertFinish prefinished siding, which saw flat volume in Q2 compared to the prior year despite the general repair and remodeling slowdown. Our newest ExpertFinish facility located in Bath, New York will open in Q3, bringing increased automation and improved efficiency to LP's prefinished siding production. To support ongoing product innovation, in the second quarter, LP opened our new innovation center at the Natural Resource Research Institute in collaboration with the University of Minnesota Duluth. The innovation center will accelerate our development of high-performance and sustainable building solutions. We're also happy to announce the introduction of two new additions to the Siding product portfolio. The new products are brushed smooth ExpertFinish lap and pebble stucco panels. These new offerings retain SmartSide's durability, efficiency of installation and industry-leading sustainability, and will help us gain share in markets that prefer these aesthetic characteristics. For the OSB segment, the ongoing improvement in single-family new construction has led to increased demand for OSB, which has, in turn, led to higher prices. Given the two to three-week OSB order file, the price increases in the last days of Q2 will mostly be reflected in Q3, but impressive operating efficiency and a sequentially higher structural solutions mix of 54%, helped the OSB business contribute $37 million in EBITDA in Q2. Both businesses have done an impressive job so far this year operating efficiently despite lower capacity utilization as we manage our operating footprint with discipline. While the current market environment for repair and remodeling and siding may be softer than anticipated, our commitment to our strategy is unwavering. We will continue to grow through innovation, manage our capacity with discipline and efficiency, preserve the strong balance sheet that lets us invest in our future. Our strategy is working. We will continue to invest in capacity to produce and deliver the best Siding and Structural Solutions products in the industry. The acquisition of what will become our next Siding mill in Wawa, Ontario, is an example of this. We are pleased with the progress we have made integrating the Wawa team into LP Siding business. We're engaging with the local community and First Nations as we prepare to sustainably harvest the local Aspen fiber, and we have begun the engineering work necessary to prepare Wawa to become a state-of-the-art Siding mill so that we can meet growing customer demand. Our capital allocation strategy gives us the flexibility to adjust the timing of investments in growth to match customer demand, decoupled from the volatile cash flow generated from OSB price fluctuations. Before I turn the call over to Alan, I want to conclude by spending a moment talking about safety, which is a core value at LP. Our goal is zero injuries. While we will never be perfect, we work every day to continuously improve safety at LP. We were recently notified that LP won the 2022 Safest Company Award from EPA, the Engineered Wood Association. This is the 11th time in 15 years that LP has earned this award. Safety is not about winning awards; it's about building a culture where we look out for ourselves and each other so we can all go home to our families safely every single day. I'm happy to say that LP's safety performance in Q2 has continued to build on our safety legacy. In the second quarter of 2023, LP Siding business had a single recordable injury. The rest of our North American employees, including the OSB business and all corporate functions, ended the quarter without a single recordable injury. That means LP team members in North America completed almost 2 million work hours with only 1 recordable injury. One is too many, and we will learn from it and improve, but we are incredibly proud of this result, and I know that every employee shares my commitment to being the safest company in our industry. And with that, I will turn the call over to Alan for a more detailed review of the financial results before we take your questions.

Thanks, Brad. The waterfall on Page 7 of the earnings deck shows Siding's results for the second quarter compared to the prior year. The reduction in volume is the largest driver of both the year-over-year revenue decline and the revenue guidance miss. This 16% volume decline resulted in $54 million less revenue and $26 million less EBITDA given Siding's high variable margin. Price increases partly offset the volume decline. The combination of list price increases last July and this January lifted net prices by about 6%. Outside of volume and price, other factors in the quarter include continuing mill conversion costs. On our first-quarter call, we identified $16 million of such costs embedded within EBITDA. As predicted, that cost has fallen to roughly $10 million this quarter as Sagola ramps up production. $5 million of this is identified on the waterfall and the further $5 million is a repeat cost from last year. Same cost, different mill and so does not pop as a variance, but it's there nonetheless. On the plus side, input prices have stabilized and in some cases already falling. Year-over-year, freight costs fell by $4 million, partially offsetting a $6 million headwind from raw material inflation. Thankfully, a much smaller impact than in recent quarters. The resulting EBITDA of $59 million at a margin of 18% would have been 3 points higher, but for the mill conversion and ramp-up costs, which I must stress are entirely discretionary and incurred in the interest of long-term growth. The OSB waterfall on Page 8 is similar to those of previous quarters in that the price change dwarfs all other factors. And as in recent quarters, I will dispense with price and describe the remarkable performance delivered by the OSB team, managing the business safely and efficiently in a challenging market environment. Commodity volume was down 12% year-over-year, with market curtailments and the removal of Sagola, partially offset by substantial improvements in operating efficiency. Structural Solutions mix was up sequentially and year-over-year, accounting for 54% of second quarter volume. As in Siding, raw material inflation plateaued and is receding from many input categories. Perhaps most impressive, the OSB business achieved a 5% reduction in cash cost of production compared to the second quarter of last year despite volumes being nearly 20% lower. The $17 million benefit from lower cost of production, combined with $4 million in freight savings and the transfer of Sagola overhead to the Siding business, added $32 million of year-over-year EBITDA benefit in the quarter, more than offsetting all other non-price factors. This highlights the considerable value of our strategy of operating OSB efficiently while maximizing the incremental contribution from the Structural Solutions portfolio. Cash flow is shown on Slide 9. As expected, it improved sharply in the second quarter with a net outflow of $56 million compared with a $257 million outflow in the first quarter. Clearly then, absent the $80 million payment for the Wawa facility, cash flow would have been positive in the quarter, even with ongoing investments in Sagola, Bath, and other maintenance and growth capital spending. In addition to spending $74 million on CapEx and acquiring Wawa, LP paid $17 million in dividends and paid $12 million in cash taxes. We ended the quarter with $30 million drawn on our revolver, leaving us with about $600 million of liquidity. Cash flow has continued to improve in recent weeks, in large part due to increased OSB prices, with the result that the revolver has now been fully paid down. LP's capital allocation strategy is unchanged, as is our commitment to it. We'll continue to earn cash, invest in growth, and return a significant portion of the remainder to investors via dividends and share buybacks, in that order. With Sagola producing A-grade lap siding in Bath starting soon, the bulk of 2023's CapEx is behind us, so the rate of expenditure should be significantly lower in the back half of the year. As a reminder, LP retains $200 million in Board authorization for share repurchases, and as OSB prices and cash flows improve, so too does the probability of share buybacks. Now it was rather a busy quarter regarding the reconciliations of net income to both EBITDA and adjusted net income. So let me spend a moment to describe three items that appear on Slide 10 of the presentation covering, in this instance, the net income to EBITDA reconciliation. Reading top to bottom on the slide, the first item of note is a $21 million tax provision. We decided to repatriate $45 million of cash from LP SA in the second quarter. This means that we can obviously no longer assert that cash held in South America as permanently invested there, which triggers the obligation to book a tax entry to reflect the potential tax we would pay if and only if we choose to repatriate the remainder of LP SA's cash. That charge was about $22 million, $5 million of which relates to the $45 million actually repatriated, leaving $17 million of the $22 million charge as a noncash entry. The next item on the list is a $17 million other operating charge, of which $16 million relates to the resolution and settlement of a patent dispute within the OSB business. And finally, you'll note $34 million in business exit charges in the quarter. This refers to Entekra, the exit of which was referenced on our first-quarter earnings call and is mostly noncash, which brings us to guidance. I've already mentioned the near completion of 2023's major capital projects, so that's why I'll start. Remaining expenditures for the year should bring full year CapEx to about $300 million, implying roughly $110 million of spending in the second half of the year with a roughly 60-40 split between growth and sustaining maintenance. With reference to Siding growth, in previous quarters, the long lead times resulting from our managed order file enabled greater near-term visibility and made quarterly revenue guidance both useful and meaningful. With the combined effects of moving off of the managed order file and our increased focus on one-step distribution, this has resulted in a new normal order file of roughly two weeks. Now while this makes us much more responsive to our customers, it also makes quarterly revenue less predictable. So we'll take a longer-term focus going forward. First, recall that the third and fourth quarters of last year set records for Siding volume and revenue. And while we expect second half revenue to be roughly 5% higher than first half revenue, this will result in a year-over-year decline in the second half of 12% to 13%, and therefore, our full year Siding revenue decline of roughly 10%. With respect to OSB, the rapid increase in OSB prices also complicates our algorithmic approach to revenue guidance, in part because LP's price realization tends to lag price movements in either direction. That being said, if we assume that prices remain flat at last Friday's levels published by Random Lengths, and if we adjust for the timeline induced by our order file and other factors, we would expect the OSB revenue to be at least 50% higher sequentially compared to the second quarter of this year. And it should go without saying, and just for the avoidance of doubt, this is not a price prediction; it's an assumption for modeling purposes. Under these assumptions and including the cost of a third quarter press rebuild in siding, as well as some maintenance in the OSB business deferred from earlier in the year, we would expect total company EBITDA to be between $160 million and $180 million in the third quarter. And with that, we'll be happy to take your questions.

Our first question comes from Susan Maklari with Goldman Sachs.

My first question is, can you talk a bit about the volumes in Siding as we think about the back half? Any color perhaps on where the channel inventories are? And then as we think about the increasingly lapping the pricing actions that were taken last year and even earlier this year. Is it fair to assume that a lot of that decline in the back half comes through volumes?

So Susan, let me start with the inventory question. Yes, we're still experiencing higher inventories than what would have been normal pre-COVID in our opinion. Those inventories worked down, really starting in March through the second quarter. But for certain parts of our distribution channel, they're still elevated higher than we would like to see, though I do think we'll work through all that in Q3. From a pricing standpoint, just to remind everyone, we did do a price increase midyear last year and at the beginning of this year. So all that price that will be lapping in your terminology that midyear last year price increase during Q3, and then we'll obviously enjoy the increase that we had this year. So the revenue guidance that we have given does incorporate those two price increases but doesn't anticipate another mid-year price increase.

Okay. And then perhaps turning to the margin in Siding. Can you give any color on how you're thinking about the cost structure in the back half? Any potential relief in terms of raw materials, transportation, that could come through in there? And as you think about that coming through, is it possible that we could see those second half margins in Siding moving closer to perhaps that 20% range even as the volumes continue to be lower?

Well, that's a tough call, Sue. Certainly, we are seeing some relief in raw material costs, which is beginning to show through. I did mention the existence of a press rebuild in Q3, specifically so that wasn't treated as being sort of incremental because we will have the fall off from Q2 to the second half of some of the ramp-up costs to be replaced by the cost of the press rebuild. So there's nothing sort of particularly unusual that we're modeling in the cost base within Siding for the second half of the year.

Okay...

There's a little bit of relief on raw materials.

Yes. Are you seeing that there's some year-over-year deflation that could come through on those raws and maybe transportation as well?

Certainly a good tailwind there.

Our next question comes from Michael Roxland with Truist Securities.

Can you provide some insights into the expected future volume growth in Siding? Clearly, demand was significantly weaker this quarter, and there was also a pull forward in demand during COVID. I’m trying to understand how you anticipate demand will develop in Siding moving forward and what kind of growth we might expect, particularly regarding channel inventory.

Yes. So we're optimistic about growth going forward in Siding. If you think about all the work and effort and product innovation that has gone into our ExpertFinish prefinished program, the facility that we're building in Bath, New York, to provide East Coast volume in an efficient way, we really feel like we're positioned well. Starting with a pretty low market share in the repair and remodel area outside of the Midwest, we aim to grow that repair and remodel through our ExpertFinish penetration across the country. Additionally, we launched BuilderSeries early last year, and that's a product that focuses on the large national builders, who, we all know, are taking market share in this current environment. We feel like that really positions us well to grow because within new construction, we are underpenetrated with large national builders. Now that we have this product in place, we feel encouraged as housing continues to improve and as the large builders continue to take share. We're in a fine position from a competitive product standpoint to take advantage of that growth. So we're super optimistic about the portfolio. And let me just add one other thing. We do have an initiative to place lap and trim at consumer retail, which is another area where we've been underpenetrated historically. All that really gives us a lot of confidence to believe that after this year, we're going to be back on that solid growth rate that we've enjoyed over the last decade in Siding. Plus, we've got 200 salespeople whose job it is and whose comp is related to growing Siding. We feel like we've got the right product, a good brand, a really good value proposition, and a sales force that is in the process of transitioning from two years of operating under a managed order file to actively selling and picking up market share. So we're super excited about continued growth in Siding over the mid-term to long-term time horizon.

Just in terms of your forecast, does your forecast in terms of Siding growth still assume that shares comprise 20% of the mix? Or is the growth predicated more on new construction in areas where you may be under-penetrating?

Yes. I would say that is still around that. I want to make one little caveat. We do have to estimate that somewhat because some of the shared stock-keeping units are accessed by the shed manufacturers through regular two-step distribution. But certainly, we can kind of tail from our panel sales. During COVID, as we talked about, there was a very strong part of our portfolio. And while, when you look at panel sales this year versus 2019, it's still going to be way up, it is off of what we experienced during COVID. I would say we are holding our own everywhere else, but the shed market is down in the first half, and that actually caught us by surprise in the second quarter. I don't think there are any long-term issues with the shed. Historically, we've been able to grow market share in the shed during downward trend periods. Our panel market share is dominant there, so we're going to ride through the ups and downs because of our ability to gain market share in panels. But right now, it is pretty low.

Got it. Appreciate all the color. Then one final question before turning it over. Just in terms of pricing on the side, you mentioned, obviously, it's up year-over-year, but sequentially pricing was down. Can you just provide some color on what drove the decline on a sequential basis? Is it a mix factor? Is it concessions? Just trying to get a sense of why you would pricing would decline sequentially?

Yes, it was entirely due to the mix of products within the portfolio that caused the decline. It wasn't related to any increases in list prices; it was solely a matter of product mix.

And our next question comes from the line of George Staphos with Bank of America Securities.

A couple of sort of micro questions to start, and then I had some other questions on Siding. So you called down capital spending a bit. And comparing the slides 1Q versus 2Q, there's both some trimming on the conversion and also strategic growth capital, obviously, maybe with the year proceeding a little bit less quickly than you would have expected. But if there's any other color you could share in terms of why those numbers moved? And then on the $16 million of OSB patent-related claims, if you could remind us what's behind that, recognizing it's now in the past, but what was in those figures and drove the settlement claim?

Let me start with the capital expenditures. There has been some modest reduction, but primarily this reflects our cautious approach regarding the initial payments for Wawa and the commitments we made for Houlton 2 before prioritizing Wawa, which led to delaying Houlton 2. The team has successfully negotiated some of the payments we would have otherwise been required to make for Houlton 2. The conservatism related to Wawa and the negotiation outcomes for certain Houlton 2 payments are the main reasons for the reduction in capital. Good news...

Got it. And on the patent claim?

Yes, I'm unable to share much information. Thank you for understanding. I can't disclose the specifics, but the issue is resolved and behind us. Just to clarify, it pertains to something within the OSB business.

Okay. Now we'll leave it there. Can you talk to us a bit about how the distribution strategy has evolved for Siding over the last couple of years? Are there any reasons, again, in answering some of the earlier questions, a lot of the weakness in Q2 is with sheds, we get it. But are you finding your distribution strategy is allowing you to grow at the pace you'd want? How does your distribution strategy compare with some of the other siding companies? Any changes, any needs to change tactics at all, how does it compare versus peers?

Yes. Great question, George. So going into COVID in 2019, I want to take a macro view and then move to our strategy. Pro retailer, well, there's consolidation going on in the channel, and pro retailers and other one-step market access vehicles through consolidation have grown in importance. Traditionally, we have been a two-step distribution as our primary means of accessing the builder and contractors historically. Two-step distribution is still really important to us. But our ability to access the large national builders through the pro retail channel speaks to a need to have a more direct relationship and more direct sales into pro retail. Not that this is ever not controversial, but similarly for the one-steppers that access repair and remodel. We had an initiative going into 2019 of placing reloads in strategic urban populations and having a more direct access for certain parts of our portfolio to access national builders and contractors. Obviously, during COVID, due to demand for the product, we put that initiative on hold and we did everything we could do just to keep up with the orders. But as product became available this year and we had inventory internally, we have stepped up the pace of this kind of reload strategy in the marketplace to have more direct access. While there can be some pain associated with that, I'm confident that this will pay off in the long term as we continue to execute our big builder strategy and our repair and remodel strategy. As you implied in your question, that is consistent with what other large specialty manufacturers have done over the years to make sure the market access is keeping up with the times. And as Alan said, I don't want to imply this year's volume is somehow constrained by lack of distribution quality; we have really good distribution in place. We are in this transitional period where we're going more direct with the pro retailer and one-stepper for repair and remodel. We have the inventory available to open these reloads. It is a bit of a transitionary period for us, but in the long run, I believe it's going to pay off.

Next question comes from the line of Ketan Mamtora with BMO.

Could you provide some details about the decline in Siding volume in Q2? You've mentioned that the shared business was weak; can you quantify the volume drop in the shed business during that period? Additionally, has there been any change in that trend so far in Q3?

Yes. Fortunately, there has been a little shift where some of those shed manufacturers are back in our order file, which is where very little of that activity was in the first half, particularly in Q2. We have seen a bit of a strengthening there. In terms of quantifying the amount down, we were down about 20% over prior year first half volumes in shed. We're estimating our shed business to be around 30% of our volume. It's hard to pinpoint it because some of it goes through distribution. The weakness in the direct shed and direct shed distributor volumes we saw in the second half means significantly that segment is down.

Got it. That's helpful. And then as my follow-on, can you give us some sense in terms of the inventory destocking that you saw in Siding, how much that impacted your volumes in Q2? Or to put it differently, can you give us some sense of sell-through trends, the underlying customer demand in Siding in Q2, and what you're seeing there?

Yes. The sell-through demand at our distribution, given the best information we have, which isn't 100%, has been obviously stronger than our sales into distribution because we do know the inventories have been worked down since March. The sell-through is going to be healthier than what we're experiencing right now. Once we get to a stable inventory situation in distribution, then all that volume will show up in our order file. We're just not doing that today. I will add a little color to it. It is complex right now. Distribution is still trying to figure out what the new normal inventory level should be given the COVID experience, the introduction of ExpertFinish, which requires a lot more inventory to carry a color palette. Our distribution and LP have been trying to figure out what is the right amount of inventory needed to service the market. Some of that uncertainty is playing into the order strategy of our distributors, but once we get to a point where everyone is comfortable with the inventory level, we will see that sell-through showing up in our order file. But it certainly has been a contributing factor in the first half to our overall volume, simply due to the inventory level we had to work through.

Our next question comes from the line of Sean Steuart with TD Securities.

I won't ask any Siding questions. I think those have been covered there. On CapEx, Alan, you touched on some of the nuance with the Houlton payments being deferred. Can you give us a sense as you look at 2024, the spending on siding conversions next year, how that would stack up versus $120 million to $130 million this year?

It is actually genuinely too early for me to make a good call on that. Good call though, right now, as we're developing our plans, probably similar to my go call right now. No significant change. It's a weak answer, but that's closer to the truth, thankfully.

That's good enough for me. Another question on OSB. Brad, I'd be interested in your thoughts on the run we've seen year-to-date, but especially of late. It feels like new home construction has surprised versus muted expectations. What’s your perspective on what's driven the recent run and at what point do you consider industry supply growth as a mitigating factor that could undermine the momentum we've seen of late?

What we've experienced this year has been manufacturers and LP coming into the year predicting a soft housing market and gearing production plans accordingly. We've had stronger-than-expected housing forecasts pretty much every month. Unlike Siding, OSB inventories were low coming into the year as distributors worked down those inventories. When the building season hit and was stronger than anticipated, there was scrambling for volume. Even as big as the OSB business is, if distribution gets behind on inventory, but sales are strong, it's difficult to catch up, which translates into pricing. I’ve predicted OSB pricing to our Board of Directors and got it wrong every time the last six years. I can no longer pretend to know what’s happening tomorrow with OSB pricing. I would just say it's August, and we've got three more months of good housing building and construction weather ahead of us. September and October are typically strong demand months in this industry for both OSB and Siding. We feel good about the outlook for the near term. Once we reach Thanksgiving, we will have to reassess. We’re already doing that analysis to match our capacity with demand in our order file, so we'll talk about that on the next call, but I feel optimistic about the near-term outlook for OSB.

And next question comes from the line of Kurt Yinger with D.A. Davidson.

I just want to stick with OSB here for a minute. I think you referenced some kind of deferred maintenance and some market curtailments. Maybe that was primarily a Q1 comment, but can you just help us frame what the upside could be in terms of OSB volumes in the second half of the year? And then just on Peace Valley specifically, how is production going at that mill? Any recent impacts from wildfires or anything like that?

We've had no wildfire-related downtime at any of the Canadian mills. We have had some fire in the area, but nothing affected wood flow or our ability to produce. We're running three shifts in Peace Valley, three in Milwaukee and forecast no changes throughout the rest of this year. We shift downtime in our production planning to match demand, so we'll continue that balancing act as we go through the year. If demand is higher in the second half, we'll run more production. But keep in mind, November and December can vary widely from a demand standpoint. We typically take downtime around the Christmas holiday season to handle maintenance work. We'll plan for that as mentioned earlier and ensure the right balance as we proceed into early next year.

Got it. Okay. On a higher level, can you talk about what you think kind of annualized Siding volumes? Or maybe from an operating rate perspective, what that would need to look like kind of excluding some of the short-term factors to get back to that long-term goal of 25% EBITDA margins?

The simple answer is that the EBITDA margin is volume-dependent. If you take that Q2 waterfall and add back the volume at that high variable margins, you're very close to that. But for the volume decline this year, we'd be at that rate. This is a business on a growth trajectory, and therefore, that growth will deliver the margins we've committed to.

Our next question will come from the line of Mark Weintraub with Seaport Research Partners.

Maybe following up a little bit on your answer, Alan, to the last question. One difference, obviously, is you now have Sagola as well, and your EBITDA margins for a number of different reasons were not 25% last year either. I'm trying to sort through all these different moving parts. If I look at where, including Sagola, your capacity would be in kind of the indicated volumes for this year, I think you're kind of 70%, recognizing against the goal is not really able to run full this year, but can you walk us through the thinking there?

If we look at our business right now, we are ramping up Sagola so that we can benefit from the volume of the upside in the growing market. We're carrying some costs of that future growth. When we do bring on Sagola, you're right. That will add a fixed cost base in advance of the volume, but it will be a smaller proportion of the whole. The larger we get, it's hard to run faster than one extra mill being ramped up per year. As we grow, that extra mill will be a small proportion, meaning our business will continue to harvest these high margins. We mustn't forget the pricing power and that mix shift towards ExpertFinish that will continue to enhance margins. As we’re demonstrating right now, we're managing our mills efficiently.

All good points. That embedded cost is impacting the margin quite a bit this year as you ramp Sagola. The heart of the question was how much of it is a function you think stocks and the shed market under normal conditions. Also, how long, in a stable growth environment if flat housing, does it take to get your system fully utilized? I realize that it's probably unfair to ask that on the fly, but I tried.

Our long-term growth algorithm is to grow something like 8 points to 10 points better than the market. We still believe that’s the case, and while the definition of the market may be hazy, over the long run, as we've done over the last decade, we're highly confident in this growth trajectory and pricing power.

And our next question comes from the line of Paul Quinn with RBC Capital Markets.

Maybe just following up on this thesis of growing 8% to 10% better than the market. The guidance for '23 is down 10% on revenues. If we flip that thesis around, do you feel you are shrinking less fast than the rest of the competition? How are you performing relative to the competition in siding?

I'll take that in three parts. In the shed market, we're no worse off than anybody else because that market is down. We have dominant market share for the panel component of shed. In repair and remodel or ExpertFinish, I feel good about taking share this year in that product, holding our own from a revenue standpoint. For new construction, I feel good about our position, and we're actually gaining share from smaller or regional builders. We launched BuilderSeries to cater to large national builders taking market share right now. This positions us well for growth as we ride through the ups and downs in the shed market; we are where we need to be for the upcoming upswing in housing. Our team down in South America feels the second half could be a little stronger than the first half. But I think, for modeling purposes, just replicate it, and you'll be pretty accurate. Hopefully, there's a little upside to that.

Okay. Thanks, everyone, for joining us this morning. With no more questions, we'll bring the second quarter call for LP Building Solutions to a close. Have a great day. Stay safe, and we look forward to talking to you soon.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Have a wonderful day.