Good day and thank you for standing by. Welcome to Q4 2023 Louisiana-Pacific Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Aaron Howald, Vice President, Investor Relations and Business Development. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the fourth quarter and full year of 2023. My name is Aaron Howald and I am LP's Vice President of Investor Relations and Business Development. With 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 a presentation that has been posted to LP's IR webpage, which is investor lpcorp.com. Our 8-K filing, press release and other materials, detailing LP's strategy and sustainable business model are also available there. As usual, today's discussion will contain forward-looking statements and non-GAAP financial metrics as detailed on Slides 2 and 3 of the earnings presentation. The appendix to the presentation also contains reconciliations that are further supplemented by this morning's 8-K filing. Rather than reading those materials, I incorporate them herein by reference. And with that, I will turn the call over to Brad.

Thanks, Aaron, and thank you all for joining us to discuss LP's results for the fourth quarter and the full year of 2023. 2023 ended much better than it began for LP and the markets we serve. In the fourth quarter, Siding achieved its highest EBITDA margin of the year. I'm pleased to share that Siding is back on a growth footing, having returned to normal inventory and order flows after a destocking cycle in the first half of last year. We are well positioned to gain share in R&R and with homebuilders. Commodity OSB prices fell early in Q4, but rebounded later in the quarter. These factors, along with strong price realization and efficient operations, contributed to an EBITDA result meaningfully above our guided range. Page 5 of the presentation summarizes some of our results for the quarter and year. LP generated $658 million in sales and $129 million in EBITDA in Q4, bringing the full-year totals to $2.6 billion and $478 million respectively. This translated into $0.71 of earnings per share in Q4 and $3.22 for the full year. The full year comparisons are negative, largely due to normalized OSB prices, but LP's businesses demonstrated exceptional management of the elements within our control. 2023 was a year of heavy investment and capacity to enable growth in Siding and Structural Solutions. LP invested $300 million in capital in 2023 for the largest projects being the conversion of our mill in Sagola, Michigan, to SmartSide from OSB and the construction of our newest ExpertFinish facility in Bath, New York. These projects were completed safely and efficiently, and both facilities are fully up and running. LP also completed the strategic acquisition of a mill in Wawa, Ontario, which expands our portfolio of future Siding conversions. Alan will offer more details on…

Thanks, Brad. I'll briefly review the results for the Siding and the OSB businesses for the fourth quarter and full year, and then offer guidance for EBITDA and capital expenditures. Slide 6 shows Siding's quarterly results. Jumping 12 months back in time, the fourth quarter of 2022 was the last quarter in which Siding was on a managed order file, and as such, it represents rather a difficult comp. The biggest difference in the year-over-year waterfall is therefore the 15% drop in volume, a corresponding $55 million drop in revenue and a $26 million drop in EBITDA. On the plus side, Bath and Sagola are now fully up and running, resulting in lower conversion and ramp-up costs. This, combined with continued improvements in raw material costs, produced a $13 million EBITDA tailwind. Net of $6 million in inventory, absorption and other stuff, the Siding business finished the quarter with $72 million of EBITDA. The EBITDA margin of 22% was the highest of the year, which reinforces our confidence in Siding's long-term 25% EBITDA margin target. Now, I won't belabor the full-year waterfall on Slide 7, given that we've discussed the most important elements in prior quarters. However, it is perhaps useful to recap that the transition from a managed order file made for a difficult year with respect to volume, particularly in the first six months while inventories normalized. Nonetheless, the full-year EBITDA of $269 million represents a robust EBITDA margin of 20%, particularly so in light of the carrying costs of new capacity. Capacity, which I would like to stress provides a long-run way for growth with meaningfully lower future CapEx, at least until customer demand necessitates further investments. Slide 8 covers the fourth quarter for OSB. While prices fell steeply during the shoulders of the third and fourth…

[Operator Instructions] Our first question comes from the line of Ketan Mamtora from BMO.

Thank you. Good morning, Brad, Alan. Thanks for all the details. Alan, perhaps to start with, when I think about the 2024 Siding EBITDA guidance, can you talk about sort of at a high level, what are the sort of the key elements, as we think from 2023 to 2024, given that in 2023, volume was a big drag, there was probably inefficiencies as you were working through the inventory destocking phase, and then you also have a price increase for this year. So can you talk about just sort of three or four key elements as we think about the bridge?

Sure. Ketan, thanks for the question. I do want to stress that this is the most comprehensive guidance, to my knowledge, that the company has ever given. And one of the objectives, particularly around the 20% EBITDA margin for Siding was to actually convey a sense of comfort. If you think about the volume sensitivities, the margin is obviously heavily impacted or can be heavily impacted by fluctuations in volume. And so we're confident that we're going to see a volume increase in '24, and hence that our EBITDA margin will benefit from that - the presence of that volume uplift. On the question of volume, though, we are expecting and anticipating increases in our expo finished production, which is itself right now, as we grow that business, not necessarily margin accretive, it's profitable, but not to the same degree as the rest of the business, a situation which I have absolutely no doubt we will improve as the years' progress. We are also investing rather heavily in selling and marketing, certainly more heavily in 2024 than we did in 2023. And that's largely offsetting the benefits that we get from removal of the ramp-up costs that you saw in 2023. And secondly - thirdly, rather, we are actually carrying still, as you will note, in essence, one extra mill in our network. Again, this is a decision that we're making in order to make sure that we have all of our mills, let's say, agile and adept at producing Siding product as we move ourselves from 2024 into 2025 and continued future growth. And there is, of course, some labor inflation and freight inflation that we're anticipating. That's no mean - by no means certain yet. So they're the factors. I've basically thrown those all in the pot in this guidance that we're giving you. And so I was tempted to say at least 20% EBITDA margin. But occasionally when I've said at least, we've literally blown the number out of the water. And I don't want to send any signal that I think blowing this number out of the water is on the card. But I think 20%, given all of these investments we're making and our confidence in the volume uplift is a very safe number.

Understood. No, that's very helpful context. And one more on Siding. Can you talk maybe, perhaps, Brad, in terms of how the sheds business is performing? I know in the middle of the year we went through this pretty big destocking phase there. What are you seeing in sheds' demand?

Yes. So, Ketan, we had a good recovery in shed demand second half of last year. So certainly Q4 was okay to good. Right now in our order file, it's probably the weakest sector that we have. I think there was a little bit of inventory built in that shed serving channel in Q4, but it's okay. But right now it's the weakest part of our order file. But we do not anticipate that carrying out throughout the year. It's just kind of what's happening right now. As you are referencing, I'm sure, we'd certainly experience kind of an overhang post-COVID of shed demand being very light first half of this year. We're seeing this year being more of a normal demand pool for that sector again. Again - but we did carry a little inventory - well, the channel carried a little inventory across the year that we're working through right now. No worries there. Just kind of the current situation in the market.

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

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Steven Ramsey from Thompson Research Group.

Hi. Good morning. Maybe to continue the Siding sales and marketing spend topic. Curious where that spend is focused by product set or customer type. And can you talk to how you're judging the success there, the ROI, the timing between spend to sales?

Yes. So the two areas of focus, first of all from a sales resource standpoint is around new construction and the sales assets that are focused on that segment, along with the technical support that goes into ensuring a smooth transition of the incumbent Siding product onto SmartSide. So we're adding sales resources in support of that push in new construction. And then on the marketing side, the focus there is primarily in Repair and Remodel. That is a different sales process where contractors are actually convincing a homeowner to reside their house and then to use our product. And that requires a good bit of personalized or more consumer-oriented marketing support. And so not all of the increases is there, but certainly the majority of the marketing spend increase is focused on our growth of Repair and Remodel.

Okay, that's perfect. And then on the Siding margin outlook, you have a consistent 20% on Slide 11 for both Q1 and the full year. But just going midpoint to midpoint, looks like about 100 bps of improvement. Just curious how you think about the cadence through the year, how seasonality plays into that and volume uptake off of the higher base of production.

Yes, well, the second and third quarters are obviously going to see if this plays out higher volumes year-over-year than first and fourth quarters, most likely. So my anticipation is that they - if the margin peaks, it'll - well, I'm not sure, but certainly I think third and - second and third quarters will be healthy EBITDA margins.

That's great. Thank you.

Given the extra volume.

Thank you. One moment for our next question. Our next question comes from the line of George Staphos from Bank of America Securities, Inc.

Thanks very much. Hi, everyone. Good morning. Aaron, Alan, Brad, thanks for the details. I had a question on Siding margin as well and sort of the investment that you're making this year on marketing and selling. Is there much of a lag between when you ultimately expect to get the volume and the investment that you need to support the volume growth that you're expecting? Said differently, should we expect the selling general administration, the marketing to move more or less in tandem with the incremental volume and the incremental margin? That's question number one. Question number two, and I'll jump back in queue. Can you talk to us - recognizing it's very difficult to project anything in OSB, what would you be looking to in terms of Structural Solutions as a percentage of the overall mix when we're all said and done with '24? Thank you.

George, let me - on these additional sales and marketing spend, the impact of that spend is not instantaneous. It's always an investment. In support of our CapEx - the CapEx investment we've made over the last three years or four years, we did consciously cut back on sales and marketing spend as we were in a managed order file. Obviously there wasn't immediate need for demand creation and any demand that would have been created, we would have had trouble satisfying. And so we're seeing this year really is a return to the - more in line with our prior COVID rate, plus added emphasis around the two segments that I mentioned before, where we have historically been underpenetrated and not had to have either the sales assets or the level of marketing spend that we anticipate to support a Repair and Remodel. But I would - from a marketing standpoint, you create - I mean, just at a high level, you create impressions, you create some brand equity in anticipation of that, creating demand that you feel later on. And then on the sales side, yes, some of these technical support staff that we add can have an immediate impact, but really that's more or less helping us with volume we've already converted. The more strategic sales investments, it takes a few months to hire them, a few months to train them, and then a few months for them to start being effective out in the field. So I would say most of this incremental sales and marketing spend, maybe other than the technical sales support, is going into demand creation that will fill, at the best case, late this year, probably more into next year.

Okay. But bottom line, there'll be a bias in terms of incremental and overall EBITDA margin. Attention to the upside as the year progresses would be my takeaway, both because of the seasonal pickup in volume and then even as we get into fourth quarter, some of that investment you've already made. And so you should be getting the benefit of that later in the year. Not trying to be too precise, but just conceptually, is that right, or would you disagree with any of that?

No, I agree with that conceptually, yes. And then on the…

Thank you, Brad. I'm sorry.

The question on - I'll move to the OSB question. If you want to come back to the Siding question, we certainly can. But on the Structural Solutions, mid-55 - I mean between 50% and 60%, I think, is a realistic goal for this year. I'd love to see 55%. We do manage that for margin, more so than for volume, but certainly our strategy is to get volume growth as well. And so - the - our ability to push that volume is somewhat dependent on the current price level and our enthusiasm about margin management. But a realistic goal will probably be 53%, 54% and then our upside goal maybe 55%, 56%.

Okay, thank you, Brad. I'll turn it over.

Thank you. One moment for our next question. Our next question comes from the line of Susan Maklari from Goldman Sachs.

Thank you. Good morning, everyone. My first question is on Siding. You had mentioned on the last quarter call that you were limiting the amount of pre-buy ahead of the January price increase. I guess, one, was that a success? And two, given that, how are you thinking about the order files as we are coming into this year and the channel inventories and what that could suggest for the volumes in that segment as we think about the next couple of quarters?

Susan, we did limit the pre-buy volume to basically the average purchases over the prior nine months for our customers. So we had essentially no into minimal pre-buy or pre-buy into December volume for January. So I feel really good about how we carried that across year. And I feel good about the first six weeks activity in our order file. And I feel - there always is some seasonal inventory build this time of year in Siding as people come back from the holidays in anticipation of the spring build, especially now that we're also in the pre-finished business. But I would call the seasonal build right now in the channel normal, pre-COVID normal. And so we feel good about pace of our order file and we feel good about where inventories level, inventory levels are now in the channel and our own inventories at the mill level.

Okay, that's helpful. And then perhaps a higher-level question, and as we think about the potential that rates will come down as we move through the year, and that could drive some pickup in existing home sales, how are you thinking about what that could mean for the business and any thoughts on the timing around that increase in the turnover in housing relative to when it could come through to the actual results?

Susan, I think interest rate reduction this year would have a - I think it would have a significant impact on housing. I think that kind of the short term would be more emotional perhaps than economic. Just the movement downward, I think, would provide some homebuyers the confidence to move into the market. I do think that over a period of time, it could free up some existing homes to go on the market. For homeowners that have been kind of hesitant in this interest rate environment to make that move, that won't necessarily translate into new home construction. I mean, wasn't at all, but it's certainly housing that would be on the market. So I think for this year, on new construction, the impact would be maybe a little more emotional or feel good than it is really the economics changing. But I think over - for 2025, it could be a very powerful driver of demand. And then secondly, on the Repair and Remodel, a reSiding project is a high-dollar project that is highly likely to be financed instead of paid out of savings. So I do think that interest rate reduction would have a more immediate impact on Repair and Remodel by just making those projects more affordable for a homeowner. So if we get that reduction, I think it would provide new constructions on tailwind, then, maybe it would be more impactful to '25. I think for Repair and Remodel that impact could be immediate for us.

Okay. Thank you for the color. It's helpful and good luck with everything.

Thanks, Susan.

Thank you. One moment for our next question. Our next question comes from the line of Matthew McKellar from RBC Capital Markets.

Hi, good morning. Thanks for taking my questions. Maybe first, just setting aside the price increases, are you able to talk to how you would expect mix shift from what I assume would be more ExpertFinish and potentially more BuilderSeries product year-over-year to affect average selling price in Siding in 2024?

Yes, so I think it's - certainly our focus this year is around growing our BuilderSeries and our ExpertFinish brands. One for ExpertFinish Repair and Remodel, BuilderSeries for new construction. The BuilderSeries depends on the SKU, but typically that is a price point item to a certain extent. So that would be a damper on average price as that volume increases not necessarily on margin but on price. And then for ExpertFinish, that sells for a much higher pricing and so that would be weighting our revenue up if we get more ExpertFinish. So, I'm not - I think there's probably more opportunity from a net-net for the ExpertFinish to have a bigger impact positively than BuilderSeries would have negatively. But we'll have to see how that plays out as we go through the year. So maybe mix would be a slight positive upside to the year compared to '23.

Okay, that's helpful. Thanks for that. And then next, in new home construction, can you talk about what the tone is like from your customers in that segment? And with that, do you have a view at this point on whether housing starts by regional builders should trend much differently than housing starts across the industry?

Yes. So I would say, just giving the exposure that we have to conferences and one-on-one conversations, I think the - maybe in the middle of fall last year I felt like there was some - I felt more pessimistic about this year from a builder standpoint. I think the mood there has strengthened through Q4, and certainly the tone right now is pretty solid. Obviously the conversations around rate reduction has a positive impact on sentiment there or on the mood. But the large national builders that we partner with are certainly optimistic about this year. They've put infrastructure in place to sell through this year and are anticipating growth. I do - I was surprised to hear in a conference I was in, in Q4, or maybe it was in January, anticipating some strengthening from the regional builders just because there's such a need for new home construction because the existing homes are on the market. And there - I mean, at the end of the day, there is only so much the national builders can do in the moment as they continue to grow. And also, post-COVID, there has been some capability for the regional builders to get the permitting, get the infrastructure in place where they're maybe not as efficient at that as the big builder, but they have been working on it. So overall, I think we could see some recovery or some growth at the regional level. Honestly, that placed our existing sweet spot inside and we've always had a really good presence there. You couple that with continued growth at the national builder level, we could really play out for a good year for us in new construction.

Great. Thanks very much. That's all for me. I'll turn it back.

Thank you. One moment for our next question. Our next question comes from the line of Mark Weintraub from Seaport Research Partners.

Thank you. Alan, I appreciate the qualitative drivers behind the Siding margin changes. I was hoping maybe that we could get a little bit more color on how that translates into the quantitative 20%, which I guess is a little bit lower than my back of the envelope would come out. But obviously there's lots of stuff you guys know I don't. And so - maybe if you - maybe open-ended, what you can add to the conversation at this point. Otherwise, I have kind of more pointed questions too.

I'm not sure which one I prefer. Let me give you a couple of big numbers that are in this, and I'm going to give you ranges. So high level, the selling and marketing investment is $15 million to $20 million year-over-year, and the mill reversal - the mill investment reversal is $15 million to $20 million reversing. We are adding other elements of SG&A around development of new products and the rest of the sort of infrastructure and the Siding business over in the region of, say, $10 million. And we're anticipating inflation, which can change, of course, except for the labor part of maybe $20 million or so. So there's some big ticket items that are sort of more discreet. They are, in some instances, manageable, such as the selling and marketing investment. And that - and that's probably about as much detail as I'm willing to give.

That's super helpful. Maybe two, is it that one shouldn't use like the 50% on incremental margins, which is sort of what you pence out on anything new above and beyond on the sensitivities chart you provide for the increase in volumes that you've embedded in the guide or is it..

Given those big ticket items, I'd call that, if you use the incremental margins, it should all work. The risk of going further and giving you a way forward. Okay? Based on, and something we're not going to be particularly forthcoming yet on, because there is a relationship between the two on how volume and price breakdown within that revenue guide. It's simply too early in the year for us to give a reasonable call on that. But if you make volume and price assumptions and use the sensitives accordingly, you should get something in there.

Yes, so I guess that was the last question which I had, and maybe you sort of embedded it in your answer. So the first one was - and then pricing, would that be discrete? And if we're getting 2% additional pricing that should be incremental to the EBITDA? Or did you just say that's sort of embedded in the incremental margin analysis?

No, that was - it's not embedded in the incremental margin. That's - the incremental margin discussion is always purely volume at pre-existing mix. So yes, the pricing is incremental, revenue and EBITDA.

All right, super. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Sean Steuart from TD Securities.

Thanks. Good morning. Question on the OSB cycle average you're giving, which seems to make sense, but you're talking about an 85% operating rate assumption that underlies that, which isn't great. And I guess what I'm wondering is if you can speak to the shape of the cost curve in your OSB portfolio and thoughts on potential asset closures above and beyond Siding conversions over the long run, the possibility on that front for the company?

Well, I'll do the shape of the cost curve. It's pretty flat, Sean. Obviously, we have some mills that are our cost and lower cost. But it - and that's how we rationalize capacity when we do take the downtime. But it's probably unmeasurable at the $4 billion level. We had a shift back at Maniwaki or something like that from a cost standpoint. So pretty flat cost curve. And then obviously we've learned how to move the capacity or the production up and down pretty efficiently so that the cost of downtime isn't great either. So, yes, flat cost curve for us and relatively flat for the industry, at least when we do the analysis. Earlier in my career, I was in the paper business where the cost curves could be pretty steep, and that's certainly not the case in OSB.

But you would - sorry, go ahead.

For utilization, the 85% is the trailing 10-year actual average utilization. So it's very consistent with historical.

Okay. Thanks for that second question on the growth CapEx of $50 million to $60 million in 2024. Can you give us an idea of where that's being focused? Is it a few specific projects, a broad array of projects across several assets? Any detail on that front?

It's everything and everywhere. We are - the biggest single item is the investment in Structural Solutions enhancements for the value-added OSB. But it's a bunch of small projects. There's no major project that I can really call out.

Okay. Thank you.

But - and again, 90% of - sorry, 80% of that - the strategic projects are basically inside it.

Got it. Understood. Okay, thanks very much. That's all I have.

Thank you. One moment for our next question. Our next question comes from the line of Kurt Yinger from D.A. Davidson.

Hi, thanks, and good morning, everyone. I was just curious how important is BuilderSeries itself to your objectives to grow in the new residential construction segment. And I guess along those lines, what has been kind of the primary feedback from production builders with that product to date and what do you think is most important in terms of really hitting a tipping point and penetrating that specific customer set going forward?

Yes, so, the BuilderSeries is very important to our growth objectives as a - for our segment and for the company. It is a - it provides a competitive alternative for the big builder in new construction, of course. The reception upon use has been very good. It is a very workable product and certainly easier to install and the competitive product that we're going up against. So the reception has been good. The key is trial and getting the product - there's an incumbent product that we're having to compete against and so the - that - and that is a long sales process. These aren't something that tracking - the decision is not made weekly on which Siding a builder is going to use. And so it's a long sales process. It - I'll tell you, we have a great value proposition with BuilderSeries standalone. But as we couple that with Structural Solutions and even our commodity OSB, which is also a valuable part of the home builders package, we bring a heft to the sales process around these big builders that incorporates all of the products we make in North America and we're finding traction with that as we couple Siding with Structural Solutions portfolio, and as I mentioned, even with commodity OSB. We are a meaningful supplier - have been a meaningful supplier to the big builder for a long time in our OSB business. And so bringing a Siding Solution to that relationship, we're finding to be very helpful. The relationship that we built through our OSB business is helpful in the sales process for Siding. So, we're getting started. I feel good about the progress we've made since we launched BuilderSeries. I have a tremendous amount of confidence in the product. I have a lot of confidence that once we get the trial, once we get some usage and conversion, the product is going to be sticky because the installers are going to love the product, as we've experienced across our portfolio for 25 years. And we were very underpenetrated at the national builder level. So all that volume is incremental to us and as those builders continue to grow and gain market share, this provides us a real - a large opportunity to continue this growth story that we've been working on for the past 15 years in Siding.

Understood. Appreciate the color there, Brad. And then just for my second one, I mean, bigger picture on Siding margins, it sounds like the increase in investment in sales and marketing and SG&A this year is kind of getting back to normal as opposed to kind of a one-off step up. There's a pretty large gap still between 20% and, call it, the mid-20s target for the segment. I'm just kind of curious if you could talk about the timeline for getting back to those targeted Siding EBITDA margins and whether that's possible prior to another conversion coming up to the extent that demand warrants it.

Yes, good question. Yes, it's eminently possible before another mill comes up because the fundamental drag on the EBITDA margin right now is the fact that we're running with one extra mill in the network which - and so the margins will become healthier as that - as we successfully fill that mill with new high priced product. So, yes, I am - it is possible that we could enjoy certain good movement towards 25% as we fill them, the capacity we have. As we've said, a significant amount of our capacity additions are behind us and now in operation. So we are carrying that fixed costs, and we're carrying it because we're very confident that the volume needed by those mills to run profitably is very much in our future.

Got it. And just one quick follow up. I mean, sequentially Siding EBITDA margins look kind of down in Q1 versus Q4. It looks like volume could be flat, maybe a little bit better. You'll have the price increase. I mean, is that all just kind of the increase in selling and marketing that's weighing it down Q1 versus Q4, or anything else to call out there?

No, that's it.

Okay.

Labor inflation with January, the first - pricing - wage increases and so on, things like that. Nothing other than what you might call normal economics.

Got it. Thanks, Alan.

Thank you. At this time, I would now like to turn the conference back over to Aaron Howald for closing remarks.

Okay, thank you, operator. If there's no more questions, we'll end there. But before I do, let me briefly remind everyone that LP will be hosting an Investor Day in Las Vegas at the International Builder Show, two weeks from today on the 28 of February, starting at 10 o'clock in the morning, local time. The event will be in-person only, with no simultaneous webcast, but we will record it and post the recording to the IR web page pretty soon thereafter. So if you're interested in attending, check the IR web page for details or reach out and contact me. And with that, we'll close the call. Thank you, everyone, and we hope to see you in Vegas.

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