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Text: My name is Aaron Howald and I'm LP's Director of Investor Relations.
I'm joined today by Brad Southern, LP's Chief Executive Officer and Alan Haughie, LP's Chief Financial Officer.
All of these materials are available on LP's Investor Relations website www.
Rather than reading these statements, I will refer you to these supplemental materials.
As you all know, the housing and repair and remodel markets that LP serves continue to show remarkable resiliency despite the ongoing COVID-19 pandemic and demand for our products has remained very strong.
Q4 was another record for SmartSide as sales increased by 30% to $259 million and Siding EBITDA nearly doubled over -- year-over-year to $77 million.
OSB prices remained exceptionally high throughout the quarter, resulting in $250 million in EBITDA for the OSB segment.
All business segments continue to demonstrate outstanding cost control.
As a result, LP ended 2020 with $2.8 billion in sales, $781 million in EBITDA, $660 million in operating cash flow and $4.31 in earnings per share.
It was a very strong ending to a uniquely challenging year that leaves LP well-positioned for continued growth.
Two years ago, we introduced a strategic transformation plan for LP.
That plan included a three-year target of $165 million in cumulative EBITDA improvements from growth, operating efficiency and strategic sourcing.
Today, I am proud to announce that we have exceeded this target a year ahead of schedule with $177 million in cumulative impact delivered in only two years.
I want to stress that we measure these results choosing normalized OSB and raw material prices.
So this achievement is not merely an artifact of unusually high OSB prices or favorable movements in the cost of logs or resins.
Rather, it is a result of the incredible dedication, creativity and grit of our sales, operations, logistics and sourcing teams.
Having to chase significantly greater efficiency, we will not only hold those gains but raise the bar as we continue to drive our growth and value-creation strategy.
Today, to build real progress and to accelerate LP's transformation, I am pleased to announce a series of interconnected strategic initiatives.
First, in order to supply growing demand, we are announcing a two-phase capacity expansion strategy for SmartSide.
Phase 1 will be the conversion of our mill in Houlton, Maine from production of Laminated Strand Lumber and OSB to SmartSide.
Houlton is ideally located for SmartSide production because of its access to an ample and sustainable Aspen wood basket and its proximity to the large and under-penetrated repair and remodel market along the East Coast of the United States.
Houlton will add roughly 220 million square feet of SmartSide capacity with production beginning early in 2022.
With LP converting to SmartSide, we will cease LSL manufacturing there sometime this year; the change that has contributed to a broader reevaluation of our product portfolio.
Due to the loss of LSL from our EWP portfolio, coupled with our inability to consistently earn the cost of capital in EWP, we have decided to evaluate strategic options for our remaining Engineered Wood Products business.
Phase 2 of the SmartSide capacity expansion strategy will be the conversion of our OSB mill in Sagola, Michigan.
Sagola is currently producing OSB and will continue to do so until it is converted to SmartSide manufacturing.
Although the precise timing is yet to be determined, if demand for SmartSide continues to grow at historic rates, we will need to begin to work on the Sagola conversion soon after Siding production begins at Houlton.
This will require OSB production at Sagola to cease sometime in mid-to-late 2023.
These two new facilities will add roughly 520 million square feet of additional SmartSide capacity and remove roughly 670 million feet of OSB capacity.
There is still a long runway for further Siding growth after these conversions with several potential expansions of existing facilities, as well as other conversion opportunities.
In addition to serving our growing customer demand, these conversions will also position the mills for years of growth and improved stability, which will benefit Houlton's and Sagola's employees, their families and the broader communities.
Finally, since we idled our Peace Valley OSB mill in Fort St. John, British Columbia, we have kept the mill ready with the intention to reopen it when we were confident that sustainable market demand would be sufficient to absorb its capacity.
The consensus for 2021 housing starts has climbed for the past several months and is now, in the year, 1.5 million.
On a seasonally adjusted basis, December starts were at 1.6 million and permits were 1.7 million suggesting continued strength in new residential construction.
At these levels of starts, with channel inventories extraordinarily has been, it is clear that our customers need additional volume.
Looking further into the future, long-term demographic data and a structural under-supply of housing suggest continued tailwinds for demand.
As a result, we have begun the process to restart production of OSB at Peace Valley.
Our goal is for Peace Valley to become a low cost leader in the industry.
Our flexible and disciplined operating strategy remains unchanged.
Restarting Peace Valley increases our ability to meet intense customer demand and will add to our strategic options for balancing OSB supply and demand with discipline, agility and efficiency.
With its production of TechShield and long lengths, Peace Valley will also help us reach our goals for Structural Solutions as a percentage of total volume.
As we have been keeping the mill ready for an eventual restart, the cost to resume production shall not exceed $12 million.
We've begun the necessary engineering, capital and rehiring planning to support the restart.
Our least expectation for first press load is sometime in Q3, full production capacity about a year later.
We will continue to monitor the housing outlook, OSB demand and channel inventories to gauge proper timing for the restarts.
As I said previously, continued Siding growth will require more frequent mill conversions.
As a result, as Peace Valley resumes full production as a low-cost leader, it enables our phased capacity expansion plans for SmartSide, while maintaining our current OSB market share.
The blue and orange line show LP's expected OSB in SmartSide capacity over time in millions of square feet.
Houlton's shutdown, its conversion to SmartSide and its ramp up to full capacity are shown as A, C and E on the graph.
Peace Valley will begin production at point B sometime after Houlton ceases making both LSL and OSB in preparation for conversion.
Sagola, Michigan will be the next Siding mill after Houlton.
Sagola's conversion will add roughly 300 million square feet to SmartSide capacity and remove roughly 420 million square feet of OSB capacity.
While the exact timing of Sagola's conversion to SmartSide is still to be determined, the graph illustrates initial SmartSide production in the second half of 2023, which is consistent with an annual demand growth rate of 11%.
Timing for all these steps is based on the assumption that OSB demand and SmartSide growth continue and that the capital projects are completed on schedule.
Should demand slow, which we do not currently anticipate, any or all of these steps can be delayed with minimal costs.
There is little room to significantly accelerate the Houlton conversion or the Peace Valley restart as both of these projects are already under way.
The Sagola conversion, on the other hand, could be brought forward somewhat, should demand growth accelerate.
The plan, once fully implemented, will increase total SmartSide capacity by roughly 520 million square feet or a little over 30%.
The net effect of Houlton and Sagola's conversion and the Peace Valley restart will increase LP's OSB capacity by less than 100 million feet.
More importantly, each of these initiatives will accelerate LP's ongoing transformation, grow our portfolio of SmartSide and Structural Solutions and improve our operational agility as we meet increasing customer demand.
2020 was a year of incredible hurdles that uniquely tested our ability to adapt and work together.
However, I'm incredibly proud of how LP employees came together to not only survive but thrive as a company.
In the face of adversity, LP delivered strong results.
As we turn our attention to a new year, we are focused on meeting customer demand for LP products.
We are excited to share our plans to execute a multiple years' SmartSide capacity expansion project and restart Peace Valley as part of our discipline and agile approach to OSB operations.
This acceleration of our growth and value-creation strategy will build on LP's growing momentum as we transform into a Building Solutions later.
Slide 8 shows summarized results for the quarter, which are very clean and straightforward.
Net sales increased by 60% to $860 million, primarily due to 30% growth of SmartSide and $246 million of higher OSB prices.
The resulting EBITDA of $328 million is 7 times last year's result and translated nearly dollar for dollar to operating cash flow of $321 million with the benefit of $45 million in tax refunds.
We further lowered our year-end share count to 106 million shares after spending $171 million in the quarter to buy back a little over 5 million shares, and with taxes as the only meaningful adjustment to net income, adjusted earnings per share was $2.01 compared to U.S. GAAP earnings per share of $2.34.
Slide 9 is the same data for the full year and is much of the same story, just with bigger numbers.
Net sales increased by 21% to $2.8 billion and EBITDA increased to $781 million, which is 4 times last year's result.
We grew SmartSide revenue by 15% and $481 million of revenue and EBITDA from higher OSB prices and generated $659 million in operating cash flow.
Capital spending of $77 million ended up being about half our original pre-COVID guidance for 2020.
The vast majority of this $77 million was spent on sustaining maintenance, which typically runs in the $80 million to $100 million range per year.
As a result, we ended the year with $535 million in cash after paying $65 million in dividends and $200 million to repurchase shares.
Slide 10 adds detail to the EBITDA impact from growth and efficiency through LP's ongoing strategic transformation.
As Brad said, we exceeded our three-year target of $165 million in cumulative EBITDA impact a year early with $107 million from growth and $71 million from efficiency.
And this is a result of truly remarkable performance by our sales, operations and sourcing teams, especially given the challenges of 2020.
But this is a race with no finish line.
So, we intend to hold these gains and add to them in 2021 and beyond.
Slide 11 shows an ultra-high level roll forward of revenue and EBITDA for the fourth quarter compared with 2019.
The main takeaway here is that higher OSB prices and 30% SmartSide growth tell us all we need to know about the quarter.
Everything else basically nets to zero.
Having said that, and while not shown here, our South America segment had a record quarter with $50 million of sales and $13 million of EBITDA, representing increases of 32% and 62%, respectively even after adverse currency movements.
The waterfalls on Slides 12 and 13 detail the year-over-year revenue and EBITDA growth in the Siding and OSB segments for the quarter.
Slide 12 covers Siding.
In broad strokes, the 30% revenue growth for the quarter reflects a 95% increase in retail revenue and a 20% increase in distribution revenue.
And with an incremental margin of $0.51 on each additional dollar of revenue, this $59 million of SmartSide growth produced $30 million of additional EBITDA.
With low SG&A and higher OEE more than offsetting the discontinuation of Fiber, the Siding segment EBITDA margin increased by 12 percentage points to 30%.
I should mention here that 2021 will be a year of increased investment in both selling and marketing and preventative maintenance to support future growth.
So this margin is probably something of a high watermark.
However, given the operating leverage and pricing power inherent in the business, we are raising our long-term target for the Siding EBITDA margin by 5 percentage points to 25%.
On Slide 13, very high market demand for OSB pushed prices to record levels adding $246 million of revenue and EBITDA in the quarter which rather overshadows both the continued excellence of our cost control and the growth of Structural Solutions, which rose to 49% of total OSB volume.
We are, therefore, raising our long-term target of Structural Solutions volume as a percentage of total OSB volume by 5 percentage points to 55%.
However, during the fourth quarter, we experienced interruptions in the supply chain for MDI, the primary resin used in the manufacture of SmartSide, OSB and LSL.
These issues were triggered by the impact of severe weather on MDI manufacturers in the U.S. Gulf Coast area.
While MDI supply remains constrained, we are prioritizing MDI to SmartSide, substituting alternate phenolic resins for OSB and curtailing LSL production until availability improves.
The use of phenolic resins in OSB lowers line speeds which we estimate lost us $8 million of potential revenue and $3 million of potential EBITDA in the fourth quarter.
Turning to Slide 14 and some commentary on 2021.
As you might expect, given our capacity and growth plans, this will be a year of investments.
The Houlton conversion will cost about the same as the Dawson conversion in 2018, that is about $130 million.
Roughly $80 million to $85 million of that $130 million will be spent in 2021, with the remainder in 2022.
We have other strategic growth projects totaling $30 million to $35 million that will enable us to accelerate our rollout of new products and we have our typical base level of about $100 million in sustaining maintenance.
And as Brad mentioned, the capital required for Peace Valley restart should be around $10 million at most.
As a result, we expect capital expenditures for the year to be in the range $220 million to $230 million.
A word now about capital allocation.
Our strategy remains unchanged.
We will continue to return to shareholders, which is 50% of cash from operations in excess of capital expenditures required to execute our strategy once that cash has been generated.
So, given that we ended the year with $535 million in cash with a $300 million share buyback authorization from our Board, we will be reentering the market to continue buying back shares in a matter of days.
Now I concluded my comments last quarter by saying that absent unexpected reversals in demand or the general housing outlook, the fourth quarter would look a lot like the third.
Given accelerating SmartSide growth and rebounding OSB prices, that turned out to be a bit conservative.
But we have similar visibility into our order file today, so I can share the following.
Halfway through this first quarter of 2021, OSB prices are at least 15% higher than the fourth quarter of 2020 on similar volumes.
SmartSide revenue is trending seasonally higher than the fourth quarter, on pace for at least 35% growth compared to the first quarter of 2020.
Should these trends continue and absent COVID outbreaks or sudden reversals in logistics, raw material availability or OSB prices, we expect EBITDA for the first quarter of 2021 to be at least $380 million.

user
louisiana-pacific q4 earnings per share $2.34.
q4 adjusted earnings per share $2.01.
q4 sales $860 million versus refinitiv ibes estimate of $784.9 million.
q4 earnings per share $2.34.
sees smartside sales in q1 of 2021 to be more than 35% higher than q1 of 2020.
sees osb sales in q1 to be sequentially higher than q4 by more than 15% on similar volumes.
sees adjusted ebitda for q1 of 2021 to be greater than $380 million.

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