Louisiana-Pacific Corp Q4 FY2024 Earnings Call

I would now like to hand the conference over to your speaker today, Aaron Howald, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us to discuss Louisiana-Pacific Corporation's results for the fourth quarter of 2024 as well as our full year results and our outlook for Q1 and 2025. Hosting the call with me this morning are Brad Southern, Louisiana-Pacific Corporation's Chief Executive Officer, and Alan Haughie, Louisiana-Pacific Corporation's Chief Financial Officer. After prepared remarks, we will take a round of questions. During this morning's call, we will refer to a presentation that has been posted to Louisiana-Pacific Corporation's IR webpage, which is investors.lpcorp.com. Our 8-K filing, earnings press release, and other materials are also available there. Today's discussion contains forward-looking statements and non-GAAP financial metrics as described on Slides two and three of the earnings presentation. The appendix also contains reconciliations that are further supplemented by this morning's 8-K file. Rather than reading those materials, I will incorporate them by reference. And with that, over to Brad.

Thanks, Aaron, and thank you again for joining us today. Q4 was a strong finish to a record year for siding, future growth, share gains, and margin expansion. In 2024, siding set records for net sales and EBITDA overall as well as multiple records for ExpertFinish. In OSB, we saw slightly higher market prices than in 2023, but more importantly, the business executed our strategy effectively, grew structural solutions, increased operating efficiency, and managed capacity with agility and discipline. Page five of the presentation shows financial highlights for the fourth quarter and full year. In Q4, we saw the expected seasonal slowdown as winter weather brought the building season to a close. Compared to the prior year, siding sales grew by 9% in the quarter. For Louisiana-Pacific Corporation as a whole, the net effect of siding growth, a decline in OSB prices, and an increase in OSB sales volumes resulted in $681 million in sales, $125 million in EBITDA, and $105 million in operating cash flow. After investing $61 million into sustaining maintenance and growth capital, Louisiana-Pacific Corporation returned $42 million to shareholders through dividends and share repurchases. For the full year, siding sales grew by 17% to $1.56 billion. Thanks to siding growth, slightly higher OSB prices, and the margin expansion driven by increased capacity utilization and operating efficiency, we achieved $2.9 billion in sales and $688 million in EBITDA. These represent increases of 14% and 44% respectively. This nearly doubled earnings per share to $5.88. Louisiana-Pacific Corporation used $605 million in operating cash flow to continue executing our capital allocation strategy by investing $183 million in CapEx and returning $286 million to shareholders via dividends and share repurchases. Most importantly, we accomplished this safely, ending the year with a 0.67 total incident rate. This is considered a world-class TIR, but it's not good enough for Louisiana-Pacific Corporation. We will never stop working to improve our safety performance to ensure no one gets injured while working at Louisiana-Pacific Corporation. As we look forward to 2025, the market is not radically different from what it was a year ago. On our call this time last year, we said that we expected 2024 to be a flat year for housing and a soft year for R&R. We expected both businesses to outperform both markets. This is exactly what happened. In 2024, total US housing starts were down 4% for the year and 6% in the fourth quarter. Louisiana-Pacific Corporation is over-indexed to single-family housing, which fared better, especially in the first half of the year. Single-family starts were up 7% for the full year but down 5% in the fourth quarter. It's hard to be precise about the repair and remodeling market, but we estimate the total US R&R expenditures were down low to mid-single digits. Against this backdrop, siding revenue grew by 9% in Q4 and 17% for the full year. We saw the resumption of normal seasonal demand patterns in siding, as well as broad-based growth in all product categories and in all geographies we serve. This growth is driven by new product innovation, our demand creation efforts, Louisiana-Pacific Corporation's superior product offerings, and by our amazing teams that make it all happen. Volume growth enabled more margin expansion for siding as we more fully utilized our new capacity at Louisiana-Pacific Corporation's Holton, Sagola, and Bath facilities. As a result of this growth, siding achieved our long-term EBITDA margin target of 25% for the full year despite a soft market. In OSB, despite housing starts below long-term average demand, the business achieved EBITDA above our long-term cycle average thanks to efficient cost control and disciplined capacity management. The consensus expectation for housing starts in 2025 is looking like another flat year, perhaps a modest rebound in R&R spending. Accordingly, in OSB, Louisiana-Pacific Corporation is planning for another year of operational excellence, cost control, and strategic execution. In siding, the focus is on share gains and volume growth. We are seeing encouraging evidence of that growth so far in 2025 with a healthy siding order file that we will detail in our guidance discussion. Accordingly, we are increasing our investments in new product innovation, demand creation, and capacity expansion to meet our customers' needs. 2024 was a relatively light year for CapEx investments. The recent conversions of our Sagola and Holton Mills and the opening of our pre-finishing facility in Bath gave us room to grow in siding. As demand continues to increase, we want to ensure that we do not outgrow our siding capacity. That means that 2025 and 2026 will see significantly increased investments in capacity expansion starting later this year. The next projects will include a second manufacturing line at Louisiana-Pacific Corporation's Holton, starting the next siding expansion project after that, and increasing capacity at our existing ExpertFinish pre-finishing facilities, with a significant portion of this work happening in parallel. At our historic volume growth rate of about 7% per year, and our much higher growth rate for ExpertFinish pre-finished siding, these projects should be completed in time to keep siding capacity utilization within an efficient balance. We would much rather be a little early than late with new capacity, and so we are starting now to preserve our ability to grow, rather than risking an extended period of allocation like we saw during COVID. As Alan will detail in a few minutes, we expect the siding business to generate over $400 million in EBITDA this year, reinforcing our confidence that siding can comfortably fund its own growth. The Louisiana-Pacific Corporation team is fully committed to executing our growth strategy. I'm confident that we will continue to innovate new products, gain market share, operate safely, and increase the scale and efficiency of our manufacturing network. With that, I will turn the call over to Alan to detail these investments, the financial results, and our 2025 outlook, after which we will take your questions.

Thanks, Brad. As Brad said, the fourth quarter brought the year to a strong finish. As I'll explore in a few minutes, the first quarter of 2025 also seems to be shaping up well. Page seven shows the fourth quarter waterfall for siding. 2024 largely exhibited normal seasonal demand patterns, with a sequential drop in volumes in the fourth quarter as building activity faded. Single-family starts were down not just seasonally, but also by 5% year-over-year. Despite this, siding volumes grew by 3%, beating single-family starts by eight points. Higher selling prices added another six points of revenue growth, with roughly half coming from list price increases and half from mix. And we largely reinvested these earnings in selling and marketing and in mill staffing, with the expectation that 2025 demand will require higher production. For the full year on page eight, siding revenue grew by 17 points, outgrowing the underlying markets, as Brad said. This growth added $230 million in revenue, $79 million of it from prices, and $151 million from volume. And it added $143 million in EBITDA, being the flow-through of $79 million in price, with $64 million coming from volume. Increased investments in demand creation and mill staffing, partially offset by a $60 million benefit from raw material price deflation, brought 2024 to a close with a 25% EBITDA margin, 500 basis points higher than last year, 2023. We sold just over 1.7 billion square feet of siding in 2024, which is about 75% of our nameplate capacity. So we have a healthy runway of capacity to grow into while we execute new expansion projects. For OSB on page nine, lower prices in the fourth quarter cost the segment about $18 million in both revenue and EBITDA. However, by effectively managing what we can control, the business recovered most of the revenue impact and half of the EBITDA impact of these lower prices through the combined effects of higher volumes, improved OEE, and efficient raw material utilization. Page ten shows the full year of OSB. On average, prices were slightly higher year-over-year, but the $35 million in pricing benefit was overshadowed somewhat by the $106 million in revenue and $55 million in EBITDA from higher commodity and structural solutions volumes. Helped, of course, by a three percentage point improvement in OEE, which in essence means that when we ran, we did so more efficiently. Raw material deflation, labor inflation, and a hodgepodge of other small items left the year at just under $1.2 billion in net sales and $298 million in EBITDA. So the fourth quarter was a bit below our declared cycle average quarterly EBITDA of $60 million, but the year ended well above that level. Page eleven shows cash flows for the quarter and full year. Both are pretty straightforward, with EBITDA translating cleanly to operating cash flow, helped by a slight decrease in working capital and a normal cash tax rate. We invested to maintain and expand our manufacturing capabilities and returned most of the excess to shareholders, paying $74 million in dividends and $212 million in the year to repurchase shares at a volume-weighted average price below $90. Louisiana-Pacific Corporation ended 2024 with $340 million in cash, zero net debt, and almost $900 million in total liquidity.

As of February the fourteenth, Louisiana-Pacific Corporation has paid an additional $51 million to repurchase roughly 0.5 million more shares. And this leaves 69.7 million shares outstanding and $187 million remaining under the pre-existing share repurchase authorization. Now, Louisiana-Pacific Corporation's guidance for the first quarter and full year of 2025 is on page twelve. For siding, the order file continues to be healthy. And to be clear, consistent with a typical seasonal rebound early in the year. And while there was minimal price lag in January, price realization now fully reflects the annual list price increases. Accordingly, we expect sales growth in the first quarter between 9% and 11% for revenue in the $390 million to $400 million range. EBITDA should land between $95 million and $105 million for an EBITDA margin of about 25%. For the full year, although we currently expect flat housing starts, we nonetheless anticipate revenue growth of seven to nine points, bringing revenue to between $1.65 billion and $1.7 billion. EBITDA should be between $450 million and $425 million, for an EBITDA margin, again, of around 25%. For OSB, assuming random length prices are flat to last Friday's published levels, we would expect first quarter EBITDA to land between $35 million and $45 million. And for future quarters, we offer no estimate of OSB prices and merely revert to cycle average as a reasonable approach to modeling the longer-term EBITDA potential of the OSB business. I should note that while we're using the same algorithm to estimate cycle average EBITDA, the inclusion of 2024 data does increase that cycle average EBITDA slightly from $60 to $65 per thousand square feet, as reflected in the outlook for the second through the fourth quarters. And finally, for the avoidance of doubt, we have insufficient clarity about them to incorporate any tariff impacts in our guidance. The first quarter and full year guidance therefore assumes the current state continues. Now if siding growth proceeds on this trajectory, we will need new press capacity sometime in the next two to three years. And will need additional pre-finishing capacity somewhat sooner. The chart on page thirteen shows this schedule of capacity additions that will be necessary to meet demand under these scenarios. As a result, 2025 will be a year of significant investment. We expect to spend about $200 million in growth capital largely in the second half of 2025. And 2026 will also most likely be a year of heavy investment, with two expansion projects in parallel, as Brad mentioned. We'll have more specifics on timing, total project cost, and expected returns in coming quarters. Sustaining maintenance is also increasing in 2025 with some green and modernization projects in OSB designed to improve efficiency, yield, and most importantly, safety. So in conclusion, 2024 was a strong year. We executed our growth strategies. And that execution generated over $600 million in operating cash flow, which we invested to maintain and enhance our manufacturing capabilities, generate more demand for our products, and to develop and reward our people. And we returned the rest to shareholders consistent with our capital allocation strategy. We believe we have a strategy that works, a record of solid execution, and a robust balance sheet, all of which gives us confidence that we're very well positioned to make the most of what the housing and repair remodel markets have to offer. And to invest further in more product innovation, growth, capacity expansion, and shareholder returns. And with that, I'll open the call for Q&A. Operator?

Certainly. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. Our first question will be coming from Michael Roxland of Truist Securities. Your line is open, Michael.

Yeah. Thank you, Brad, Alan, and Aaron for taking my questions. Congrats on a strong finish to the year.

Thank you.

I'm wondering if you could comment, obviously, siding demand is, as you noted, continuing to be strong. Could you comment on the Lennar pull-through and help us think about the cadence of that growth this year?

So we have ramped into full contract execution with Lennar. There was a ramp period after the deal was signed. We didn't get all the homes immediately, obviously. So we're running at full scale with them. We're in the second year of that agreement. And I would say it's at or have exceeded our expectations as far as volume pull-through.

When you say this, I mean, add or exceeded, would you say it's more of the latter than the at, meaning that it's performed?

It's performed as expected. Sorry for any confusion. They are contracted for a certain amount of homes, and we've gotten those homes. There's a little extra here and there, but materially, it's within the bounds of the agreement.

Got it. Okay. And just, you know, second question, I have this, given the weakness or what had been weakness in commodity OSB, have you shifted any more of the production to structural solutions, which are more margin accretive? And are you handicapped in any way for making a large shift to structural solutions from commodity OSB, particularly as you look to build out, you know, build a series given, you know, tie-in across opportunities?

We do have to invest to continue to grow structural solutions from a manufacturing standpoint. Those investments tend to be small, especially relative to the siding conversion, and fairly quick to execute. So there are times that we run into some constraints around product availability and structural solutions, but that's very rare. As commodity pricing flattens out or is below trend lines, we really enjoy incremental margin we get from structural solutions. Our strategy is to continue to sell PULLED SKUs through distribution and capture that margin. That's been a key part of our strategy. I'm proud of where we were in 2024, and we have plans to grow on that in 2025.

Yeah. Thanks very much.

Welcome.

And one moment for our next question. Our next question comes from Ketan Mamtora of BMO Capital Markets. Your line is open.

Good morning and thanks for taking my question. Perhaps to start with on siding, can you talk about, you know, sort of the EBITDA and the margin level in siding for 2025? Clearly, the ExpertFinish business is growing quite nicely. We know that it is, you know, there is a higher price point product should be margin enhancing. Can you talk about a couple of offsetting factors, you know, that may be keeping margins at the same level? Is it SG&A? Is it anything else?

Yeah. Thanks, Ketan, for the question. I'm sure that's a bit of a burning question. I'll try to be thoughtful and careful in my response. This is the first time that we've guided to a 25% EBITDA margin for the siding business. So I do want to answer the question in reverse. The volume leverage and the price flow-through that you're used to seeing on our waterfalls that you see in the Q4 and the 2024 full-year waterfall are expected to continue. The pure volume conversion of revenue to EBITDA is about 40% and, of course, price flows to 100%. So we get that kind of blended volume and price flow-through of about 65%. But we're not harvesting; it's way too early in Louisiana-Pacific Corporation's growth trajectory for us to even consider that. The costs included in this full-year guide include about $20 million of inflation. A third of that's labor, so that's certain. The remainder is raw materials, and that piece is largely speculative. There is about $10 to $15 million closer to the high end of additional selling and marketing expense. To generate future business and help secure this year's growth, we are continuing to invest in selling and marketing. We encourage discretionary selling and marketing investments to generate future growth. The push into repair and remodel requires a higher level of marketing dollars per foot of business gained. Further on the discretionary side, there's roughly $5 million of engineering costs and staffing associated with the capacity expansions, and some additional mill staffing in the hope that market or market share gains give us more growth than we've guided to. So there's about a one and a half to two percentage point margin impact from all of that. What's not included? We have not assumed any material price mix favorability. It's too early to know how ExpertFinish will progress in the year. We're optimistic, but it's reckless to take that as a given given that 2025 as a housing market is going to be challenging. It's a flat market in housing and probably down in R&R. So this is a market share gain year. We can't always predict where and quite how and when those market share gains will occur.

Thanks, Alan. That's very helpful and very detailed. So appreciate it. And then switching to siding capacity expansion, on Holton line two, can you share with us at this point kind of what kind of capacity expansion you are planning and what kind of total investments will be on line two?

That'll add about 300 million feet of volume. The Holton expansion would be adding a parallel manufacturing line to the existing mill, adding a forming line and then a press. I don't think we've gotten into the details precisely of how expensive that's going to be. Not yet. But the returns are consistent with previous expansion projects that we've had. As we get closer to that and have more specifics about timing, we'll be able to share that.

From a manufacturing standpoint, we would be focusing that line on the lap and trim capacity versus panel.

Got it. That's very helpful. I'll jump back in the queue. Good luck in 2025.

Thank you, Ketan.

One moment for our next question. Our next question will be coming from Susan Maklari of Goldman Sachs. Your line is open, Susan.

Thank you. Good morning. This is Charles Perron in for Susan today.

Your voice has gone down a couple of octaves, Susan.

Maybe first, I want to ask about the siding guide and the application for the volume outperformance versus the market. Where do you see the biggest opportunity for growth and outperformance across new construction, R&R, and maybe shed as we look into 2025?

We are expecting volume growth across all product offerings this year. Compared to 2024, there is probably some recovery volume in shed. Shed was rather weak, especially in the first half of last year. That's back to normal; it's not particularly strong right now. If any one sector is leading the growth, it's shed at the moment, but we're expecting above-market growth across all sectors: retail, builder new construction, and repair and remodel. We're also seeing growth across all geographies. The visibility we have into the order file shows strength everywhere.

Gotcha. That's good color. Maybe can we talk about also the raw material and freight expectations for 2025? I think on siding you alluded to $20 million inflation. What does it imply for price cost? And how would potential tariffs impact your siding cost structure as we think about the year ahead?

I'll take the easy one first and then avoid the second. The $20 million I referenced includes about $8 million or so of labor. That's certain. The rest is raw material. We think we'll see increases in paper overlay costs mostly offset by reductions in MDI costs. There is some potential for raw material inflation, but that piece is broadly speculative. Most of our major raw materials other than wood are indexed to derivative products that go into them, so we model around benzene cost, oil cost, and similar inputs. That analysis drove the assumptions around price changes for non-wood raw materials.

Got it. Thank you, guys.

And there's no assumption in anything that we've talked about that assumes any tariffs are reimposed on raw material inflows.

And one moment for our next question. Our next question will be coming from Sean Steuart of TD Cohen. Sean, your line is open.

Thanks. Good morning, everyone. A couple of questions. Want to revisit tariff exposure. Can you give us a sense of your approach in engaging with customers on OSB and siding if and when tariffs materialize? Is the intention to try and pass it on in complete or to fully offset the tariff in terms of pricing? Brad, I'm wondering if you can speak to your perspective on demand, elasticity, intent in the market, the ability to pass those tariffs on, and how much of a supply response might be needed for both OSB and siding.

For OSB, it's a traded commodity. There's not a direct way to pass costs onto the customer other than through the trading floors. A cost structure change in the industry due to tariffs will reset the cost curve, and price will follow. It's hard to know the impact on siding with the information we have today. We do have two siding mills in Canada and can move volume around in our network. There are supply chain optimizations we can pursue if tariffs change dynamics. We have done scenario planning around potential responses, but we haven't put a number on it because of the lack of clarity. Customers are aware that the industry would be significantly impacted by Canadian tariffs, but we haven't had discussions about how that would manifest from a siding perspective.

Thanks, Brad. I wanted to revisit the 2025 siding sales growth targets you provided, the 7% to 9% sales growth. Does that reflect market share gains in a difficult housing environment? In a more normalized scenario where we potentially get a bit of an uplift in housing, is 10% annual sales growth a feasible number? And when you're thinking about longer-term growth, is that the premise for longer-term sales growth potential for that segment?

Yes. A recovery in single-family housing combined with broader R&R recovery would provide a tailwind we haven't seen since the COVID period. That would allow us to grow at a higher rate than in a flat housing year. A stronger housing market and R&R market would allow us to go above the 7% to 9% growth rate. It would help both volume and pricing, which could add another point on revenue.

And about capacity investments, our biggest fear is being late to the party. We need to ensure we have capacity ready because we are convinced recovery will happen at some point.

Understood. That's all I have for now. Thanks very much.

Welcome. Thanks, Sean.

And one moment for our next question. Our next question will be from Steven Ramsey of Thompson Research Group. Your line is open, Steven.

Hi. Good morning. Maybe to start with the order file being encouraging. If I recall, this is what you guys were seeing a year ago early in 2024. I'm curious what the makeup of the order file now is compared to a year ago, and if it's telling you anything different when you think about the portfolio between SmartSide, Builder Series, and ExpertFinish?

The only material difference in the order file strength this quarter versus a year ago is stronger shed pulls this year than we had last year in the first quarter. Otherwise, single-family, big builder, retail are consistent with what we were seeing in Q1 of last year. Geography is consistent as well.

Okay. That's helpful. Secondly, Bath margins have been on a positive trajectory over the last year or two. Is there an assumption that it stays on that trajectory in 2025, or is it less of a margin headwind in 2025 than it was last year, even as it's increasing?

We assumed in our guide that Bath makes slow progress in 2025—still improving. But we're adding capacity at a rate that will drag on improvement a little, so it's improving, but not quite by the same amount as in 2024. That's our modeling assumption.

Great. Thank you.

One moment for our next question. Our next question will be coming from Mark Weintraub of Seaport Research Partners. Your line is open, Mark.

Thank you. First, Alan, just one point of clarification. When you were talking on the siding margin bridge, you mentioned price mix flattish. Was that just mix? Are you still building at, like, 3% on price from list price adjustments?

Yes. What I meant was that this year we enjoyed something closer to six points. I don't model that additional mixed benefit. So the underlying price increase is as stated.

Gotcha. So we do get that, let's say, $45 million or something from price?

Yep. Good. Yep.

And then second, you've been driving market share gains through innovation and demand creation. Last year we had Lennar and Home Depot and the smooth side introduction. Can you talk more specifically about items that will help drive growth this year that are new and different?

We invite anybody to visit our booth in Las Vegas next week to see new products we've launched and other items we have. There's progress on coloring for prefinished products and product expansion there. Having the full portfolio of smooth in-market for the full year, including January, is an add versus last year. Innovation has been key to our growth, particularly after coming off allocation. Builder Series and ExpertFinish growth has been strong. Innovation increases our addressable market with customers we already have. We're continuing to make inroads with large, medium, and small builders. On the R&R side, it's a contractor play: how many loyal contractors are pushing and installing our product is important. That's a big part of the increase in marketing spending Alan mentioned—supporting contractor adoption. That's a steady, local execution play that yields strong returns. We're still selling to a relatively small percentage of North American contractors, so the opportunity is huge. We're encouraged by progress and the expertise we're building. For repair and remodel, we continue to strengthen distribution, create a recognizable brand, and offer products that contractors want to install.

Thank you, Brad. Lastly, efforts to get a better sense of customer inventories: where are you in that process? Do you have a much better sense of where customer inventories are, and where are they currently?

We will never have perfect visibility, but we have much better visibility than we've ever had. We're in a normal position for mid-February, a little on the high side coming into the year. Distributors tend to build inventory in anticipation of the spring selling season, so there is more in the channel now than thirty days ago. But inventories are normal relative to the home building and R&R busy seasons. We're pleased with where inventories are and with how we managed that with our distribution base through the price increase.

Thanks so much.

Yep.

One moment for our next question. Our next question will be coming from Matthew McKellar of RBC Capital Markets. Your line is open, Matthew.

Good morning. Thanks for taking my questions. Looking at your siding capacity slide, am I correct in thinking this implies you'll start investing in another siding line essentially as you complete the expansion at Holton? How would you think about what the trough for siding margins looks like as you work through this next capacity cycle?

I'll talk about execution and then Alan can speculate on margin. I've been part of siding for twenty to twenty-five years. If we do it, we'll be running two parallel expansion projects—not completely overlapped. We'll start Holton first, then move into the second one shortly after. It's going to be intense. We are staffing up our engineering group in anticipation. A lot of the work will be executed by contract engineers, but we are increasing in-house capability. It's exciting to be in a position where consistent growth leads to continual expansion, giving continuity with vendors and expertise. We'll start Holton and shortly after have a decision on the next capacity expansion. We have many options and are narrowing them. Tariff situations will impact that decision because we have options in both Canada and the U.S.

The risk of being late is what drives this. When we're in the throes of parallel expansion, the conversation about margins may feel different; it might be closer to why margins are rising rather than falling. I would like to believe our scale has reached a point where the trough in the margin cycle will be higher than before.

Thanks for that color. Next, taking to the investment in Green Bay: aside from incremental capacity, should we think about other improvements you hope to drive through your investments, in particular potential automation opportunities and cost savings?

Prefinished technology is advancing fast. We started pre-finish work as a skunkworks and have invested to increase throughput and automation; there's more to come as we scale ExpertFinish. The press side has less opportunity, though we have active projects around automation of finishing operations, particularly in packaging, which is labor-intensive and can benefit from automation for safety and efficiency. Each capacity addition in ExpertFinish has been significantly more efficient. The second line after Holton gives us an opportunity to design almost an entire mill footprint specifically for siding production rather than converting an OSB line. That could be more capital intensive but offers an opportunity for a step change in margin at that facility when it reaches full production. More to come as we learn and refine plans.

Thanks very much. I'll turn it back.

One moment for our next question. Our next question will be coming from Kurt Yinger of DA Davidson. Your line is open.

Great. Thanks, and good morning, everyone. Just wanted to circle back on Lennar. As that business has ramped and you've executed against the agreement, have there been any surprises or big learnings that you can take and leverage as you pursue other larger builders in the space?

Not really any surprises. Execution has gone as planned. The learning, which wasn't a surprise, is that technical training of the contractor base to install our siding correctly is a key part of the conversion. The technical support we've provided was significant. Winning procurement is important, but execution around educating installers and ensuring local distribution to serve developments is critical. There were cases where local distribution wasn't fully in place, and that was a learning. The learnings translate well into how we approach future builder opportunities.

Is it fair to think that as you grow in scale and convert bigger builders, the next conversions are a bit easier because the contractor base becomes more aware of installation?

No doubt. The wider we cast our net in R&R and new construction, every contractor we train becomes an advocate for our product. That creates stickiness. As we open distribution and build scale with contractors, it becomes more valuable than scale on the operations side. Distribution and contractor adoption strengthen our overall effort beyond a single deal.

Okay. Appreciate the color. Thank you.

Welcome.

One moment for our next question. Our next question will be coming from George Staphos of Bank of America Securities. Your line is open, George.

Thanks very much, everyone. Good morning. Given the success with SmartSide, it doesn't sound like you need to make any major marketing changes. But does there come a time in the horizon where marketing and advertising need to change because of scale and acceptance of the product? Right now it's much more of a technical sale you're working on, and that's been working fine. Does national advertising ever come into play in the next two to three years?

I wouldn't say in the next two to three years. What's working and what we're increasing investment in is boots on the ground with our Salesforce, having people selling every day and supporting technical selling. On R&R, success has come from focused local consumer advertising and local media where we have distribution and contractor support. We follow that with focused local marketing and it yields great results. I believe local selling and local brand awareness deliver better ROI than national programs currently. If evidence supports a national program, we could consider accelerating growth through national branding, but I like what we're doing locally and have seen results.

It's working, and you have to stage it with your ability to produce and meet demand. Makes sense.

Exactly.

And on the next line, what are the lead times such that if you're going to be producing in the future, you need to start ordering equipment now? What kind of inflation are you seeing in press capacity versus the past per thousand square feet?

We've started securing pieces and parts for Holton and for equipment that are location-agnostic. Preliminary approvals are in place and we've begun pre-buy activities, securing factory time, fabrication time, and some steel. Inflation has been significant over recent conversions, but we're not seeing unusual increases beyond more normal cost changes. Aaron can provide specifics on timing and what we're observing.

Inflation is a factor, but the nature of the projects is also changing. Sagola and Holton were conversions of existing plants; Holton line two is an expansion where we're adding a press rather than converting one. So the nature of the projects changes total cost. Fortunately, siding price has also been increasing, so project cost increases are offset by strong returns because we have pricing power for specialized products. Some items are long lead time and site agnostic, so it makes sense to secure that capacity now. We're confident that if we continue to grow at our historical volume CAGR, we'll have capacity ready in time and minimize the risk of another extended managed order file period.

Understood. Two last questions: with shed growing a little more quickly this year, is that any impact on the margin trend? Would it take a few basis points off margin because of mix? And in terms of maintenance, remind me if there are cadence factors we should consider in modeling quarters?

Shed tends to be lower price but not lower margin, so it is not a margin hit, though it is a pricing hit.

Q4 will be the heaviest quarter for maintenance project spending, as always.

Thanks very much. Good luck on the quarter.

Thank you. Our size helps. Yeah.

Thank you. And I'm showing no further questions. I would now like to turn the conference back to Aaron for closing remarks.

Okay. Thank you, everyone, for joining us. With no further questions, we'll end the call there. Stay safe, and come and see us next week in Vegas and see some of the new products that we were talking about driving our growth in 2025.

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