Louisiana-Pacific Corporation (NYSE:LPX) Q1 2024 Earnings Call Transcript May 8, 2024
Louisiana-Pacific Corporation beats earnings expectations. Reported EPS is $1.5, expectations were $1.13. Louisiana-Pacific Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Q1 2024 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, LP’s Vice President of Investor Relations and Business Development.
Aaron Howald: Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP’s results for the first quarter as well as our updated outlook. 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. After prepared remarks we will take one round of questions. 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, 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 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. I will incorporate those materials by reference rather than reading them. And with that, I will turn the call over to Brad.
Brad Southern: Thanks, Aaron. Good morning and thank you for joining us to discuss LP’s results for the first quarter and our ongoing growth, innovation and efficient capital allocation. LP’s Siding and OSB businesses got off to a strong start in 2024 by launching new products, gaining share in new construction, repair and remodeling and growing strategic partnerships with our customers, all of which contributed to outstanding results in the first quarter. I’m confident that both businesses are poised to build on these gains in the second quarter and beyond. In the first quarter, LP generated $724 million in sales, a 24% increase over last year. LP earned $182 million in adjusted EBITDA, $116 million more than in Q1 of 2023.
Leverage from growth in Siding and the combined effect of higher prices and record operating efficiency in OSB drove improved margins. With the completion of capacity investments in Holton, Sagola and Bath, our strong balance sheet has allowed us to resume share repurchases consistent with our capital allocation strategy. Alan will discuss our results in greater detail in a moment. But first I’ll provide the operational and strategic highlights for the quarter across our businesses. In the OSB business, commodity prices were meaningfully higher than last year, contributing $62 million in EBITDA. This is of course outside our control. However, I am proud to say that the OSB team made the most of the strong demand environment by operating efficiently and safely, while delivering a strong mix of value-added Structural Solutions products.
For example, the OSB business achieved a record for operating efficiency in the first quarter, which helped boost sales by about 150 million square feet compared to last year. More than 75% of this incremental volume was Structural Solutions. More importantly, the OSB business delivered these results safely with a total recordable incident rate under 0.3. I also want to take the opportunity to thank the teams at our Peace Valley, British Columbia and Maniwaki Quebec mills for leading the way with outstanding safety, efficiency and cost control. Siding revenue grew by 9% in the first quarter, which was the compound effect of 5% higher net selling prices and 4% higher volume. Prices were higher due to rapid realization of our annual price increase plus mix uplift, primarily from expert finish.
Higher capacity utilization from increased sales volume helped Siding achieve a 25% EBITDA margin in the quarter. As a result, the Siding business exceeded the high end of our guidance ranges for growth and margin. The chart on the left of Page 6 shows normalized growth in Siding volume, Siding net sales and total US Housing Starts with 2010 as the common baseline. The 2024 estimate for Siding reflects the midpoint of LP’s updated full year guidance, which Alan will get to in a moment. As you can see, the Siding business is backed with historic growth trajectory after the destocking cycle that normally follows the end of a managed order file. In fact the midpoint of our full year guidance represents sales volumes above 2021’s level and net revenue above 2022’s all-time high.
By contrast, Housing Starts reached $1.6 million in 2021. And if the current consensus is accurate will have fallen by about 9% to $1.45 million in 2024. Nearly 30% cumulative Siding revenue growth over a period of which underlying market contracted clearly demonstrates pricing power and share gains in the market we serve. The chart on right shows ExpertFinish as a percentage of overall Siding volume and revenue. Starting from zero in 2019, ExpertFinish has grown to 9% of volume and nearly 14% of revenue in Q1 of this year. If you were able to join us at the International Builders’ Show in Las Vegas, you saw our newly launched Brushed Smooth, Trim and Siding, Pebbled Stucco Panels, Nickel Gap and many other new products, all of which should add to the ongoing price mix uplift of ExpertFinish and help drive growth in new residential construction and R&R.
Our Siding business is clearly back to our normal growth footing and LP is leveraging the power of our specialized portfolio to drive additional growth and share gains. For example, we recently announced a strategic partnership with Lennar, one of America’s leading and most respected homebuilders. Through this partnership, LP will provide Lennar with a uniquely broad array of sustainable Siding Structural Solutions and OSB products. We also expanded our partnership with the Home Depot, extending the availability of SmartSide Trim to Home Depot stores nationwide. These partnerships enhance our strategic customers’ ability to build high-quality and beautiful homes for homeowners and make SmartSide available for more R&R contractors. This in turn leads to continued growth, share gains and innovation in Siding and OSB.
I should mention that the impacts of the Lennar partnership, newly launched products in Siding and the meaningful increase in OSB prices late in the first quarter, had a relatively modest impact on our Q1 results. These factors will largely to be felt in the second quarter and beyond with continued growth driving additional leverage in Siding. Accordingly, while macroeconomic uncertainty remains, we are increasing our guidance for growth and margins in the second quarter and full year. With that, I will turn to Alan, for more detail on the quarter and our updated outlook before we take your questions.
Alan Haughie: Thank you. As Brad said, this was a strong quarter. Higher market prices for OSB drove significant cash generation, while the leverage from increased volumes in both OSB and Siding delivered healthy incremental margins. EBITDA of $182 million generated $105 million of operating cash flow. And with the capacity investments in Houlton Sagola and Bath, behind us, LP returned $32 million of this cash flow to investors in the first quarter through dividends and resumed share repurchases. The waterfall on Page 7 shows the year-over-year comparison for the Siding business. Average selling prices were 5% higher than last year adding $15 million of EBITDA. Roughly three points of the five points are the result of robust realization of the annual price increase helped by our minimization of prebuy late last year.
ExpertFinish and other recently launched products have also seen encouraging uptake with the resulting positive mix effects on price contributing the remaining two points of the five points. Sales volumes increased by 4% to 399 million square feet which I should note, is higher than any quarter of last year. The bulk of 4% volume growth came from Residential Construction and Repair and Remodel customers. BuilderSeries which is driving share gains with America’s largest homebuilders and ExpertFinish our pre-finished Siding designed through Repair and Remodel contractors both delivered record quarters for volume and revenue. This volume growth added $15 million in revenue and $4 million of EBITDA. Now this is slightly lower incremental EBITDA margin than we might expect from additional volume largely due to record ExpertFinish volumes.
As a reminder, ExpertFinish margins are lower than primed margins what they are for now. While they may be lower they are improving. The addition of the highly automated Bath pre-finishing facility to LP’s ExpertFinish network in addition to other efficiency gains in manufacturing contributed to a meaningful improvement in the margin for ExpertFinish compared to this time last year. And of course, as we grow ExpertFinish volumes further improvements in utilization rates and manufacturing efficiency should continue this positive margin trend. As discussed on prior calls, we are continuing to invest in selling and marketing, incurring an incremental $2 million year-over-year from which we believe we are already benefiting. This is more than offset by the $4 million benefit from the non-recurrence of last year’s mill conversion investments.
Freight costs and raw material prices continue to moderate from last year’s levels with MDI resin, being the largest single component of a $10 million EBITDA tailwind from improving raw material prices. And our unit costs for paint may have risen, substantial efficiency gains from more automated painting processes at Bath reduced unit paint usage more than enough to offset this. The only red bar on the waterfall is the $7 million of increased mill overhead. This is simply the addition of Sagola and Bath to the network as neither were fully staffed to operational in the first quarter of last year. Both with Sagola and Bath now fully [indiscernible] as demand grows to fill that capacity we should see those costs more than offset by the high incremental margin of additional volume.
So the $90 million of EBITDA represents a margin of 25%. We’ve often compared the Siding EBITDA margin over time to a rising sign wave with peaks at times of high capacity utilization and low investment and troughs at times of high investment and low utilization as that new capacity comes online. We believe that what we saw in the first quarter is entirely consistent with this principle with the business rebounding from last year’s trough and growing towards a new higher peak as we fill recently added capacity. Shifting to OSB on Page 8. The waterfall is once again dominated by price. Compared to last year, average selling prices were 38% higher adding $62 million of EBITDA. I should point out that the commodity price gain of 51% is higher than the 25% increase in Structural Solutions prices, mainly because commodity prices start from a lower base.
However, in general, OSB prices climbed significantly at the end of the first quarter and remained elevated through most of April until our recent pullback. Given the duration of our order files, higher prices at the end of the first quarter have been realized mostly in the second quarter. Sales volumes were also higher in OSB a record quarter for OEE allowed production increases to meet stronger customer demand. And as Brad said, more than 75% of the incremental OSB volumes sold was in Structural Solutions, which accounted for 52% of total OSB sales volume, up 6 points from last year. So, if you’ll indulge me let me use the data on this chart to briefly demonstrate the value of Structural Solutions in a different way. Using the price, volume, and EBITDA data on this chart to compare commodity to Structural Solutions, you’ll see that the selling prices for the incremental Structural Solutions volume, if you do the math, we’re on average about $55 per thousand square foot higher and Structural Solutions EBITDA per thousand square foot was about $25 higher than it was for commodity.
Of course this analysis is imperfect as it’s only the year-over-year incremental changes not the entire population, but it does directionally demonstrate the incremental margin uplift that Structural Solutions delivers and therefore it reinforces our strategy of ongoing specialization. As in the Siding business, deflation in raw material prices contributed $7 million of EBITDA. For OSB, the other bucket is mostly the non-recurrence of last year’s aggressive cost control efforts in the face of very weak demand and depressed prices at that time including the deferral of most non-essential maintenance and capital work. And while this may have kept the business EBITDA positive a year ago and demonstrated an impressive operational flexibility, we are now back on a more regular footing for operations.
As a result, we have resumed more normal maintenance spending. The $90 million of EBITDA generated in the quarter, coincidentally the same as the Siding business, represents an EBITDA margin of 29%. Slide 9 shows substantially improved year-over-year cash flow. The operating cash flow this year is almost equal and opposite to this time last year with an inflow of $105 million this year compared with an outflow last year of $119 million. And this boils down to two obvious factors; higher EBITDA and significantly less working capital build. And when it comes to uses of this improved operating cash flow, the completion of the Sagola and Bath investments resulted in substantially lower capital investments this year. So, consistent with our stated capital allocation strategy, and as Brad stated, we’re generating cash and have resumed share repurchases.
Speaking of which as of May 8th, we have spent $50 million in share buybacks to find 2024 including the $13 million spent in the first quarter. And LP’s Board of Directors has approved an increase of $250 million to our remaining authorization, bringing the total authorization for share repurchases to $400 million as of today. And with roughly $800 million in liquidity, LP has more than enough dry powder to support future growth and shareholder returns, which brings me to our updated guidance on Slide 10. For Siding, the strong first quarter demand has continued into the second quarter and even accelerated. As a result, we now expect revenue in the second quarter to be in the range of $380 million to $400 million, representing revenue growth of somewhere between 20% and 25%.
I’m sure you’ll remember and we can scarcely forget that the second quarter of last year represents the weakest comparable for the year and therefore magnifies the rebound somewhat. This incremental volume would sustain EBITDA margins in the order of 25%, resulting in EBITDA for the quarter of $95 million to $105 million. Accordingly we’re raising our guidance for full year revenue growth by 300 basis points to a range of 11% to 13% and increasing our full year EBITDA expectations to the $340 million to $360 million range for an EBITDA margin of around 23%. For OSB, if we assume OSB prices remain at current levels, we would expect EBITDA in the range of $125 million to $135 million in the second quarter. For the full year guidance, we’re modeling, but not predicting cycle average for the second half of the year.
As a result, our full year EBITDA guide of $315 million to $325 million is the sum of the first quarter actuals, the second quarter guidance, and then the second half cycle average as defined on Slide 10. Basically the same method we introduced last quarter, but with updated numbers obviously. Assuming for simplicity that LPSA and corporate net to zero this brings our full year EBITDA guidance to $655 million to $685 million, about $150 million higher than our previous full year outlook. So, in summary, it was a strong quarter and a strong start to the year that leaves both businesses exceptionally well-positioned to continue executing our strategy of growth, specialization, and transformation. And with that, we’ll be happy to take your questions.
Operator: Thank you. [Operator Instructions] Our first question comes from Kurt Yinger with D.A. Davidson. You may proceed.
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