Louisiana-Pacific Corporation (LPX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2021 Louisiana-Pacific Corporation Earnings Release Conference call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to turn the conference over to your speaker host, Mr. Aaron Howald, Director of Investor Relations. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Thank you for joining us today to discuss LP's results for the first quarter of 2021 as well as our Q2 outlook. My name is Aaron Howald, and I'm LP's Director of Investor Relations. I'm joined this morning by Brad Southern, LP's Chief Executive Officer, and Alan Haughie, LP's Chief Financial Officer. We are hosting a simultaneous webcast in addition to this conference call, and we have uploaded a presentation to which we will refer during this morning's discussion. We also filed our 8-K this morning with some additional information. All these materials are available on LP's Investor Relations website, www.investor.lpcorp.com. Slides 2 and 3 of the accompanying presentation provide notices in detail about forward-looking statements and non-GAAP financial metrics. The appendix of the presentation also contains some necessary reconciliations that are further supplemented by this morning's 8-K filing. Rather than reading those statements, I will refer to you to those supplemental materials. And now I'll turn the call over to Brad.

Thanks, Aaron. Good morning, everyone, and thank you for joining us to discuss LP's results for the first quarter of 2021. Robust customer demand for all of LP's products has continued, driven by ongoing strength in homebuilding and remodeling, resulting in an outstanding quarter for LP. SmartSide net sales grew by nearly 50% versus Q1 of last year to $283 million and EBITDA more than doubled to $90 million. Smooth and ExpertFinish volumes more than doubled, with those innovative products reaching 8% of total SmartSide volume. OSB prices continued to climb throughout Q1, with the result that LP's OSB segment generated extraordinary cash flow. LP's South American segment also had a very strong quarter, with 50% more sales and 3x more EBITDA than the first quarter of last year. As a result, LP exceeded $1 billion in sales, generated $461 million in EBITDA and $314 million in operating cash flow and earned $3.01 per share, all of which are quarterly records. Last quarter, we announced a phased integrated capacity expansion plan that included converting our mill in Houlton, Maine from LSL and OSB to SmartSide, the restart of our Peace Valley OSB mill in Fort St. John, British Columbia, and plans to convert our OSB mill in Sagola, Michigan to siding. Let me briefly update you on those projects. The Houlton conversion is underway and on schedule despite some expected difficulties with travel and contractor access presented by COVID. We expect to begin SmartSide production at Houlton less than a year from now in late Q1 of next year. We are excited about the capacity expansion that these investments in Houlton represent, and we are gratified by the enthusiastic responses from local and regional suppliers and community stakeholders. Given the strength of SmartSide demand, we are exploring options to accelerate the conversion of Sagola. We're also evaluating and prioritizing subsequent projects to add capacity by conversion and/or expansion of existing facilities as well as growing prefinishing capacity. SmartSide has a long runway for growth ahead as we innovate, capture share, expand addressable markets and execute an aggressive capacity expansion strategy. Process to resume OSB reduction in Peace Valley is also going quite well. I want to complement the small team that has maintained the mill since we idled it in the summer of 2019. They have kept the equipment in excellent condition, and we anticipate minimal impediments to an efficient restart. We're also pleased by the number of former employees who are returning to the mill, we're glad to welcome them back, and we look forward to resuming production in early Q3. Last quarter, I spoke about the challenges presented by shortages of MDI, the resident use and manufacture of SmartSide and OSB. MDI availability has improved significantly, and we are essentially back to normal levels of supply with OSB mills once again using planned levels of MDI. This episode has highlighted the strategic value of having Siding and OSB integrated in LP's portfolio. SmartSide uses MDI exclusively, but OSB can use alternate rests. When supply has become constrained, we were able to allocate scarce MDI from OSB to Siding. Without which Siding, we have struggled to achieve another outstanding quarter of growth. While the MDI supply has improved, global shortage of vinyl acetate-based adhesives has forced decreased production of TechShield, LP's Radiant Barrier sheeting product in the second quarter. The vinyl acetate supply situation is improving, and we expect to be back to normal levels of TechShield production by the end of the quarter. However, as COVID subsides in North America and the broader economy rebounds, supply chain disruptions and tight logistics availability are likely to present challenges going forward. We recognize the difficulties this creates for LP's customers, particularly in an environment with such strong demand. We're doing everything we can to mitigate the impact of these issues through strategic sourcing and network optimization, and we are adding SmartSide and OSB capacity as safely, efficiently and quickly as possible. Finally, I'm happy to announce that LP is in the initial phases of returning to our national headquarters after more than a year of working from home. While we are relieved and gratified to be slowly getting back to normal, I want to acknowledge that for the majority of LP's mill employees as well as many customers, working from home was not feasible. And while COVID-19 vaccines are now widely available in the U.S. and Chile, vaccination rates continue to lag in Canada and Brazil. The situation is improving, but we are not out of the woods yet. Ongoing diligence in care exercised by LP's pandemic response team and mill employees are helping minimize operational impacts from COVID, enabling LP to supply our customers the products they need to build and renovate homes. I encourage all of them and all of you on the call to continue to exercise appropriate precautions and get vaccinated as soon as possible. LP had a remarkable first quarter. And while challenges remain, very strong housing in RNR markets resulting in intense demand for SmartSide and OSB, keeping our near-term outlook exceptionally positive. With that, I will turn the call over to Alan for a more detailed discussion of LP's financial results for Q1 and outlook for Q2.

Thanks, Brad. Slide 6 shows summarized results for the quarter, which, much like the fourth quarter, are clean and straightforward with ongoing SmartSide growth and higher OSB prices as the most significant drivers. Compared to the first quarter of last year, net sales increased by 74% to just over $1 billion, driven by 49% growth in SmartSide and over $330 million of significantly higher OSB prices. The resulting EBITDA of $461 million is more than 5x last year's result. We generated $314 million of operating cash flow, including increased capital investments and heavy spending on logs, common practice for LP in the first quarter. The $3.01 per share of adjusted earnings is 10x that in the first quarter last year. In terms of capital allocation, we paid $17 million in dividends in the first quarter and spent $122 million to repurchase 2.4 million shares. We've continued buying back shares through the second quarter and as of the close of business yesterday, had just $32 million remaining of our existing $300 million buyback authorization. All else equal, that remaining authorization will be exhausted by the end of this week. I'm therefore delighted to report that LP's Board of Directors has authorized a further $1 billion of share repurchases, which we plan to launch immediately. LP's Board also declared a dividend of $0.16 per share payable on June 1. Slide 7 highlights the cleanliness of the quarter from a reporting perspective. Continued SmartSide growth and OSB price appreciation resulted in $93 million and $333 million, respectively, of incremental revenue for the quarter, compared to which everything else is really just a rounding error. All $333 million of the incremental OSB pricing and 55% of the incremental SmartSide revenue translated into EBITDA, with everything else aggregating to a net negative of $6 million. Slide 8 provides an update on our transformation. On a trailing 12-month basis, SmartSide revenue grew at twice the rate of single-family housing starts. Consequently, and as the table on the right shows, SmartSide growth dominates the first quarter, accounting for $53 million of $65 million transformation in the quarter. The resident substitution, which Brad referenced earlier, accounts for the negative $4 million in efficiency. Given that SmartSide growth contributes the lion's share of our transformation dollars in the quarter, Slide 9 looks a little deep into that growth. The bar chart on the left is not repeat of Slide 8. This chart shows SmartSide revenue growth for just the quarter relative to single family starts. The pie chart on the right provides more resolution of the sources of SmartSide growth. While total volume grew by 39%, the volume of the more innovative smooth, prefinished and shake products grew to 140%. As such, their share of the total volume increased from under 5% to just over 8%. The substantially higher average selling prices of these new products also contributed 1 point to overall price growth in the fourth quarter. The waterfalls on Slides 10 and 11 show year-over-year revenue and EBITDA growth in the Siding and OSB segments for the quarter. Slide 10 covers Siding. The 49% revenue growth for SmartSide is the result of 39% volume growth compounded by 7% price growth and adds $93 million in sales and $51 million in EBITDA, for an incremental EBITDA margin of 55%. OEE and sales and marketing efficiencies offset increased costs for freight and the dwindling nonrecurrence of fiber sales reduced revenue by $20 million and EBITDA by $2 million. The resulting Siding segment EBITDA of $90 million on $285 million of revenue, yields an EBITDA margin of 32%. Slide 11 shows the quarter in more detail for OSB and is dominated by ongoing record high OSB prices. We estimate the impact of MDI scarcity and alternate resin substitution at roughly 80 million square feet or 7% of volume due to reduced operating efficiency or OEE. And as Brad said, the supply chain for that resin seems to have stabilized. We will, of course, continue to monitor that situation and other potential supply chain interruptions closely. LP's ability to substitute alternate resins for OSB production and therefore, to be able to strategically allocate all available MDI to the Siding segment was a unanticipated benefit of having these segments under the LP umbrella. OSB prices will continue to grab headlines for sure, but LP's results this quarter are in no small measure a testament to the agility of the Siding and OSB operations team and LP's strategic sourcing team as they collaboratively navigated the MDI shortage. And as you will see in the cash flow summary on Page 14 of the appendix of the accompanying presentation other than cash taxes, the only meaningful difference between EBITDA and operating cash flow is a substantial increase in working capital. And this is almost entirely the result of higher OSB prices raising accounts receivable balances and the normal seasonal accumulation of logs I mentioned earlier. The bridge from the $314 million of operating cash flow to the net change in cash is similarly uneventful. With buybacks, CapEx, dividends and payments associated with refinancing, our long-term debt as the only material items. Reconciliations of net income to both adjusted EBITDA and adjusted income are also straightforward with depreciation and a rather large but appropriately proportional provision for taxes as the only items I've not already mentioned. Slide 12 provides updated guidance for capital expenditures for the year. As Brad said, we are exploring opportunities to accelerate our siding capacity expansion. The Houlton conversion, restarting Peace Valley, other growth capital and the basis of sustaining maintenance, altogether, bring our capital expenditures for the full year in the range of $230 million to $250 million. In other words, we're raising our CapEx guidance by about $10 million. And with extremely robust housing and repair and remodel markets, fueling intense demand for SmartSide and OSB, our order files give us some visibility into the remainder of the second quarter. For the OSB segment, prices continue to climb, with the result that we believe OSB revenue will be at least 30% sequentially higher in the second quarter than in the first. We also expect another strong quarter of SmartSide growth with revenue for the second quarter, at least 30% higher than last year, which would mark the fourth consecutive quarter of growth above 20%. Assuming the Siding and OSB scenarios I just detailed and given all the usual caveats about certain demand shocks or other unforeseeable events, we expect EBITDA for the second quarter to be at least $580 million, another quarter of record results and outstanding cash flow generation. Before handing the call over for Q&A, I do want to discuss our expectations for full year revenue growth for SmartSide. Demand continues to be very strong, and we expect to continue running our mills at or near capacity for the remainder of the year. Also, ExpertFinish, Smooth and Shakes, should continue to grow as a percentage of total Smartside volume and revenue. However, given the acceleration of growth in the second half of last year, we simply cannot increase year-over-year revenue by much more than 10% in the second half of 2021. So all said, this would bring full year SmartSide growth to roughly twice our previous long-term guidance of 10% to 12% per year. And with that, we'll be happy to take your questions.

[Operator Instructions] And our first question coming from the line of Mark Weintraub with Seaport Global.

Congratulations. Obviously, fantastic times for you. In terms of the alternative growth in Siding and some of the things that you're looking at, can you give us a sense as to what they might represent? And perhaps if we can understand the magnitude of volume they could represent and the cost to get it recognizing that these would be preliminary indications?

Yes, Mark, I'll talk really 3 areas of -- 3 types of investments we're looking at making for continued growth, and this is not in any priority order. First of all would be adding additional press capacity at existing facilities that currently make SmartSide. We like the idea of having a trained workforce on the ground. So those locations that have sufficient wood supply to accommodate significant growth. In most cases, that would mean at least doubling of growth. From a press standpoint, we're looking at that as what's called a brownfield scenario. Secondly, we -- even after Sagola, we will have Maniwaki and Peace Valley, both producing OSB and Aspen wood baskets. And so those 2 facilities are certainly candidates for conversion. And then finally, what would be more of a greenfield scenario, which is the best example would be the cook, Minnesota piece of land that we own that would -- that has had, as we've planned on in the past as far as greenfielding a siding mill. So honestly, some combination of those 3 type of opportunities will play out, in my view, over the next 10 years as we continue to grow siding capacity. From a capacity standpoint, just to I mean speak generally, not to be overly obvious about things, converting an existing OSB mill is probably the most -- without doubt the most efficient use of capital because, obviously, utilizing a lot of redundant resources. And then a brownfield facility at an existing location, it wouldn't be -- there would be capital efficiency associated with that. But not buying land, there are certain components of the mill that would not have to double up on. And then, obviously, more of a greenfield scenario would be the most expensive.

Great. And curious, Val-d'Or didn't get a mention there. Is that no longer a consideration? Or...

Sorry, sorry. That's an oversight on my part, which would be a restart of a shutdown ability in Val-d'Or, yes.

Okay, super. And then -- and just as a quick follow-up, 32% margins in Siding. I know -- just I think it was last quarter, you increased your expectations on what the business can drive over the long haul. That's -- this 32% is a lot higher than even where your longer-term updated view had been. Any thoughts as to how sustainable this type of margin can potentially be?

Yes. I would say that the sustainability comes from improved mix, which is the -- why we emphasized so much the new products that we've launched over the last 3 or 4 years, which with Prefinish Shakes, Smooth, all carry a premium over what we -- over our basic prime product. As I've mentioned before too on the call, if we bias mix to Trim, and that can be very favorable to price as well. So that's -- so we're looking at our innovation strategy as a means to increase margin, and it certainly does. I will say that the constraint on that as we gain market share, there is a competitive nature, obviously, to a big base of business that we have in lap and panel. And so we are keeping our options open, if that's the right way of saying it, to be competitive when it comes to big builder business. And our business at the home centers, which can be a little more competitive from a pricing standpoint.

And our next question coming from the line of Ketan Mamtora with BMO Capital Markets.

Congrats, Brad, Alan. Obviously, a very strong start to the year. Maybe just coming back to Sagola, I mean you are talking about kind of pulling forward the timeline of that. Last quarter, you were talking about potentially 2023 Q3 start-up, but sounds like sooner. I'm just curious, given that you've got Houlton going on right now. When is the earliest you could you could convert that mill, obviously, if demand remains strong?

Ketan, I would say, the earliest we could get production from that mill would be probably a year after the Houlton start-up, which should be Q1 of 2023, give me a little latitude on that as we continue to work on the engineering. But we are on a parallel path, obviously, with a huge focus on Houlton first, but we intend to bring that -- to convert that facility over to siding as quickly as we can, given the work that's ahead of us to do the Houlton conversion first. So let's -- why don't we target Q1 of 2023, and then we'll continue to update you on the calls as that either moves forward a quarter or back a quarter or 2, given, a, what we need to do from a demand standpoint, but also as we refine our engineering work on Sagola.

Got it. That's helpful. And then maybe you talked about kind of demand has remained strong in both OSB and Siding. Maybe talk about kind of what do the order backlogs look like for this time of the year in both OSB and Siding?

Yes. They're extremely strong in both products, throw EWP in there as well. The -- I mean just -- it's unprecedentedly strong, but it's always strong in Q2. So I mean, that's -- the seasonality has kicked in. But there has been no weakening in the order file in any of our 3. Well, I'll throw South America and there too -- any of our core businesses, very strong order files.

And then just final question around capital allocation. Balance sheet is in a very strong position. Q2 cash will be kind of really robust as well, and you -- Alan just mentioned that with the $1 billion authorization announced your plan to launch this week. What is the right way of sort of thinking about the cadence around share repurchases? I'm not asking about sort of specific quarterly guidance. But given the strong balance sheet, sort of what is the right way to think about kind of leverage for LP and the way you think about deploying cash for repurchases?

So Ketan, the -- our balance sheet, as you mentioned, is very strong. Our balance sheet will be strong after we execute this share repurchase authorization. So there's -- in our view, in my view, specifically, we're not risking the company at all by this $1 billion, certainly doable from a cash generation standpoint. We'll remind you this is an authorization not a plan to spend it. So we've got some flexibility if things were to slow down later in the year or next year. But obviously, our plan is to deploy that authorization promptly to begin the deployment promptly. The rationale behind the share repurchase as a capital allocation tool, is it even at $70 share price? Which I don't know if we're there at that moment. I don't have it in front of me, but we were at the beginning of the call. I still think, and Alan, I think, shares this and certainly our Board, we still believe we're significantly undervalued. And so we feel that there's a good justification. Just on that note to buy back shares, not only just because we have the money. So our rationale behind that is that it remains a good investment for our shareholders to be in an aggressive share repurchase mindset at LP, and then I will reassure our shareholders that we will be prudent about that and deploy it in a way that makes sense given the economic reality at the time. But then again, I'm very -- I feel I'm very bullish about the next 4 quarters for the housing, repair and remodel and LP. So we anticipate spending that money over the next -- I don't want to set a time frame, but we plan to begin using that authorization immediately, and we'll probably buy back shares from a dollar standpoint about on the pace that we've been doing it over the past year or so.

Got it. Very helpful. Good luck in the back half of the year, Brad.

Thank you, Ketan.

Your next question coming from the line of John Babcock with Bank of America.

I guess just starting out, I was wondering if you might be able to just talk a little bit about -- I mean, obviously, like you've seen tremendous growth in SmartSide. And so on that point, if you could kind of talk about how that's maybe influencing the visibility of your brand and ability to kind of grow off of that. I mean, obviously, over time, you can get more scale as you grow and have more market share, but I want to get a sense for how this is ultimately helping to maybe compound growth to some extent, if that's [ pertinent ].

John, it's funny. As you were asking the question, I wrote down as a note "compounding" and then you said the word before I did. But that is certainly brand equity and credibility of the brand comes with scale, and it comes with a -- maybe call it broad scale, which is penetration in several different kinds of markets. Our position in retail makes it a brand that the consumer, the DIYer sees. And that's -- we value that a lot. We value our position on the retail websites where a lot of business is moving for the big box retailers. Repair and remodel is -- for a reside project, is typically a project that's sold in the home. And so a consumer brand and a contractor can educate and convince a consumer kind of figuratively at their kitchen table about using SmartSide as a way to build brand credibility. And then finally, as we expand with the builder, that really allows us to access a contractor base on the installing side. So -- and then we could go on with other examples, but the -- being a brand that has that kind of wide opportunity to be exposed and then taking advantage of that is, I believe -- does provide a compounding effect. And then on top of that, our launch of ExpertFinish and the ability to access the Prefinished side of that market, which is somewhat the same as when I was talking about repair and remodel, really also brings an aesthetic appeal to the brand that moves it beyond the contractor or consumer thinking of it as just a prime product. So this has been the fruit of past investments in marketing and sales that we've made and talked about on a lot of these calls. We continue to really focus on that and make sure that we support the brand in a way that ensures future growth. And I'll just make one more point on that, is one of the things that we've learned through the COVID experience is you can effectively do that online. I think our contractors, contract customers have moved to getting educated about -- or got more comfortable being educated about brand and installation etcetera online. The consumer certainly has. And then once again, the big box retailer is really educating the public on how to source building products by starting online. And so we do have a strong focus there. And I'm really pleased with the progress we've made so far.

Okay. And then I did notice that you had a pretty sizable increase in SmartSide pricing this quarter. Can you just remind us what the price increase was -- or price increases that have been announced for that product?

Yes. We announced a 4% to 6% across the board in that with a variety of regions. It varies by region, it varies by SKU, but 4% to 6% overall. And we've been -- what we're realizing now is maybe 3% to 4% overall, and then the mix change has been very positive, added about another percent on that pricing. So I would say it's -- but we've probably gotten a little bit stronger price realization on the back end of the increase than we've gotten in prior years, but it's just the strength of the demand right now is available to hold on -- allowed us to hold on some of that list pricing that we increased at the beginning of the year. So I would -- from a modeling standpoint, I would say, if you carry over where we are right now and give us a little bit of leeway on mix, it would be a pretty good way of looking at the rest of the year as far as our price increase realization.

That's useful. And then as far as overall demand for both Siding and OSB, can you just remind me when that tends to peak seasonally? I think it's sometime during the summer, but what is kind of the typical seasonal pattern here?

Yes, John, really for -- in my experience here, and most of my time, I was in Siding and a little bit in OSB, really, September, October, historically in Siding has been really good. I think that's also true for OSB as people move into the winter and try to button up some jobs and get the houses siding or sheathed. So we've typically seen really good seasonal demand now, had that demand plateau in the summer as it kind of hit a constant rate of construction. And then we would generally see a little surge in demand September, October as people were trying, as I was mentioning, trying to -- what I think was people trying to complete some jobs before the winter weather hit. So we're certainly in a -- historically in a really good time and season right now, and we're expecting to see continued very strong order files at least until October. But given the lack of inventory in the channel right now for both OSB, Siding and throw EWP in there as well, I anticipate that even in the winter, we'll see pretty good order files as distributors and dealers take that opportunity to rebuild some inventory, they're looking into what we expect to be a strong building season next year as well.

That's very helpful. And then just last question before I turn it over. The South America results were clearly quite strong. And I was wondering on that point if you might be able to talk about the sustainability of this level of EBITDA.

Yes. From a volume standpoint, I feel really good about the sustainability. And we're doing some -- in the scale of things, it's not big dollars, but we're doing some major mill improvements down there just from the little extra capital spend that we've allocated down there for the next couple of years. So I see the capacity of South America growing significantly over the next 18 months or so. And we're seeing really good market growth -- market size growth down there. And some of that is attributed to good economies, especially in Chile, but also our expansion into Argentina, Peru and Colombia has really helped as well. So diversified the markets a little bit. Look, there is a pricing component of that as well. I mean, it is in no way directly tied to North America. But when things were as tight as they are right now in North America, the pressure from imports in South America diminishes and gives us a little more pricing strength in that kind of environment. And so that -- we have seen price improvement down there as well. Historically, we've been able to retain that. But it's hard for me to predict that, that will be true in the future. But we've seen good price appreciation and really good volumes down there.

And our next question coming from the line of Sean Steuart with TD Securities.

A couple of questions. Alan, wondering if you can speak to SG&A. It was kept in check to a surprising extent, relative to our expectation, given the top line strength. Can you give context on SG&A trend this quarter and sustainability of these levels going forward?

Yes, sure. One thing to bear in mind is that this time last year, we significantly cut SG&A as we entered the COVID environment. And that had the benefit, if you like, of giving us a new muscle. So as -- certainly, as we sort of step back up unnecessary spending on things like selling and marketing, we don't necessarily replicate the cost in exactly the same manner. So we've got some what you might call, unexpected and implicit efficiencies. We are looking to increase our selling and marketing expenditure with -- particularly within -- for Siding as we go forward through the remainder of the year. And -- but to put it in context, that's already sort of baked into the Q2 guidance that we gave you. So there will be an increase in SG&A as we continue to invest in the future of the Siding business. But that's really the only fundamental change that you'll see. So...

Okay. Understood. On EWP, you had indicated last quarter that you were undertaking a strategic review for the business. Can you give us any update on how that process has evolved, if at all, over the last quarter?

It has evolved, I'm pleased with the progress and the response. We've had quite a bit of interest in the business. There's nothing to share today. We're just in some discovery phase and as far as the process that we're -- that we've launched and having some very interesting discussions about the future of that business. We are focused on continuity of the business because typically, what we think is going to happen is the acquirer will inherit our distribution base. It is also our distribution base for Siding and to a large extent, Structural Solutions. So continuity is important to us. It's part -- one of the components for getting out of that business, and that's certainly a factor that we're talking to the interested parties about. But good progress within the quarter, and we'll continue to report out when we can.

The rest of my questions have been answered.

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

I just wanted to start off on the competitive dynamics in Siding. I mean what would you kind of consider the one or two things that have been most impactful in terms of your ability to gain share here in the last year? And as we look ahead to the next couple of years, I mean, are those factors any different? Or what do you think is kind of highest on the priority list there?

Okay. So looking back the last 12 months or so with the good market share gains, as we've mentioned before, our position at retail has been very beneficial to us. We've seen incredible growth there along with the Depot lows and Menards -- well, Menards doesn't report but lows in Depot's growth that they have seen. So our position there was really good. Also, the rebound in the Shed business, which is another big panel consumer for us, has been extremely strong. And then, I would say, overall, just the strength in housing has also been very positive for us, and I believe we've picked up some market share gain there as well. But the bigger market share gains have come through our position in retail and in shed. Looking forward, however, our launch is smooth and prefinish is certainly focused on a market share gain in repair and remodel. And while there is -- we do have geographic strength there, we do not have broad national strength in repair and remodel. So there's a lot of opportunity in front of us to grow in the repair and remodel segment, which is the reason behind the innovation. And then our other focus area for us for where we believe we're currently underpenetrated is with a large national builder, and we've got a product that we're launching this year to help us address that along with other sales and marketing strategies associated with that. So I think -- and let me just back up from that specific answer. And just to say, I think one of the strengths of our Siding business is the diversity of channels that we sell into and the strength and diversity of our product portfolio. We're just -- we're not solely dependent on growing lap siding because of our position in panel. We're not solely depending on an panel because our position in trim. And then as we add products like Prefinished and Shakes, it expands and diversifies that product portfolio where we can take advantage of opportunities when they arise in these different segments. And that really has been historic -- long-term historic strength of the portfolio, and I think it's going to serve us well as we expand it and look at further market penetration in this good market environment.

Got it. That's very helpful color. And then I guess, my second one, when you talk about perhaps accelerating the Sagola conversion, if we were to see OSB markets remain strong, not necessarily where things stand today, but if they remain strong, how would you think about potentially backfilling what type of OSB capacity you'd lose with Sagola?

Well, just to remind you, Kurt, that was our thinking around part of the justification for restarting Peace Valley was the integrated way we looked at capacity expansion across the 2 businesses. And so we feel like we're addressing, especially the customers in that midwest part of the country that we can access from Peace Valley, so with Peace Valley start-up plan for later this year or second half of this year, we want to have that facility up and running fully by the time we start bringing Sagola down. So that was really how we are addressing it is through Peace Valley start-up and then continued OEE improvement across our entire OSB network. But we're really focused on growth in Siding. And Sagola is the next great idea in front of us as far as doing that. So we're pretty single-minded in getting that mill up and running as quickly as possible and our expectation is that our OSB market share, though, will be protected by the start-up of Peace Valley.

Got it. Okay. Makes sense. Well, good luck here in Q2.

Thank you.

And our next question coming from the line of Mark Connelly with Stephens Inc.

This is John Rider on for Mark. So first question, when you look at this period of tight supply in OSB, has it changed your thinking on how OSB inventory should be managed whether on your side or between you and distributors? And has working capital gotten too lean here?

There's no question that working capital has gotten very lean, and one could argue too lean. If we -- if we, being us and our channel partners, had been able to foresee the rebound in product demand in May and June, July of last year, obviously, we would not have taken the mill downtime that we've taken. And I would assume our distributor partners would not have brought their inventories down as well. So I don't know if this will change the way the industry looks at inventory management because I think that we're all trying to rebuild inventories back to some kind of normal level. But it is evidenced that the caution that went into the cash generation mindset that we all had in late spring of last year -- or early spring of last year has really put us in a position to struggle to keep up with demand. So I think it's more of an anomaly than a long-term change and philosophy around working capital.

Okay, okay. That's really helpful. And then we were hoping you could talk a bit more about your ESG programs. We're seeing rising scrutiny of environmental claims, particularly in Europe right now, and do you clearly have a good sustainability story? We're curious what sort of ESG targets you have set for OSB and Siding? And how you think you stack up in the building materials space?

Well, let me start by saying, I think we stack up very well, given our footprint, the sustainability of our wood procurement mindset or strategy. And we are working on right now, setting some other type of ESG, environmental targets. And we're in the data collection mode right now because obviously, this will be a data-driven exercise for us. We are focused on it. We have reconfigured a board committee to provide board oversight to this and are seeing and participating and then setting high expectations for advancement there. And so we'll be coming back later in the year to set out specific targets around other ESG parameters other than just wood procurement sustainability. I will mention just as from a concept standpoint, I feel like we have a really good story. When you're nailing siding on the side of a house for the 50-year warranty or you are sheathing a house, you're nailing a sheet of carbon to the house. So we're -- I believe we're going to have a really good story, and -- but we want to make sure that the data that we report is accurate and that the goals we set are reasonable and something that we can do and deliver on but that work is underway. And if you'll give us another quarter or 2, we'll be back with a robust discussion on that before the end of the year.

Our next question coming from the line of Paul Quinn with RBC Capital Markets.

Just wow, what a quarter, but looks even more robust in Q2. Just maybe start on the SmartSide business. Just wondering what your -- that order file, is it that strong that you would have a potential for a second price increase in '21? Or is that something you don't want to do and you really want to gain market share?

Well, there's pricing strength in the product offering right now. And so I mean, the price increase is something that's always on our mind. We'll be clear about that. There's various ways of getting that, and one of them was kind of hinted to earlier on the question about the price realization is working on the back end rebate part of it. And so we're -- I'm going to say we're taking advantage of the strength -- the demand strength right now to manage prices, I think, appropriately. But we have to be competitive. And while there can be short-term opportunities for pricing at the end of the day, in most all cases, we're eventually going to get bid against a competitive substrate. And so we're maintaining a competitive position, even in the time of tight demand is something that we're mindful of, especially with the builder, these agreements are at least multiquarter, if not multiyear. And so we are focused on maintaining a competitive price situation because we are focused on gaining market share. I know I'm being a little bit two-faced on that answer because we also take advantage of whenever we can get price, we can get it, but we don't do that foolishly, and we want to make sure that we maintain a competitive position and that our distributors and dealer partners could be competitive as well. So it's a balancing act, I guess, is the right way to answer it, and it's something that we're really managing daily.

Okay. That's fair. And then just on the margin uplift in SmartSide was pretty impressive. Is that solely to do with a higher percentage of Prefinish? Or is that cost reductions in the segment as well?

Yes. It's both. We've had a -- we run the facilities full out now, and the operating leverage for the -- from OSB and Siding both is very strong. So Paul, on the margin, last 1 million feet of product, the production that we sell out of Siding is at a very high margin. So it is really amazing what the mill profitability can be when you're sold out and running at full production. And so it's -- the price increase certainly helped, but that overall operating efficiency is a key to that.

And then just over on OSB, you've got Peace Valley starting up in the second half of the year. Maybe you could give us an idea of what kind of volume you expect to be able to ship to the market in '21? Is that going to be a slow start or a faster start? And then lastly, if you could give us an update on Entekra.

Yes. So we're looking at about 150 million feet in Q3 -- oh, I'm sorry, for -- in all of '21 out of Peace Valley. So for the second half of the year, 150 million feet. And then Entekra, we continue to be very pleased with the order file at Entekra. We are in the process of validating the model as far as getting that ever-increasing order file through the facility. I see a challenge for us there. I will say that's been the one part of our business where labor availability as we start-up that facility has been a little bit more -- a lot more of a challenge than our more mature facilities, maintaining the workforce is what I mean. And then from a profit standpoint, that business has been challenged by the rising lumber prices. The agreements with the builders have a lag on lumber pricing pass-through, and that's been -- that's obviously hurt us. But market validation, Paul, is very solid for Entekra. We're still figuring out how to meet the order file as it continues to rise, the way it has so aggressively, and then we're also trying to figure out how to properly priced the product on these kind of highly volatile times as far as lumber pricing. But I'm encouraged by what we're doing strategically there. But we're still -- it's still a start-up business. That's for sure.

And no more immediate capital requirement?

No. We do some minor working capital provisions for them, but yes, no immediate capital that's in any way meaningful.

And our next question coming from the line of Mark Wilde with Bank of Montreal.

Brad, I'm just curious, if you just think about the OSB market overall right now, if we were to see housing starts continue to move up, and let's say, we moved up to 2 million starts. Is it the capacity then there to serve 2 million starts?

No. The capacity after the start-up of Peace and Chambord be 1.6 million, 1.7 million, probably. So we're looking at the -- so yes. Well, you think about it this way, Mark, in 2007, 2006, the industry was serving the 2 million start housing market. And we shut down and didn't start back up 2 or 3 facilities to -- and converted 3 or so to Siding. And then if you look at all the permanently shuttered plants since then, there hasn't been an offset in greenfields to get us back to that level. So the industry is more of a 1.5 million, 1.6 million, 1.7 million, with creep taking advantage, creep in there. So it could be tight for a while.

Okay. And just remind me, like 100,000 starts is what, like 1.5 billion square feet?

Yes, Mark, this is Aaron Howald. The 2 rules of thumb to keep in mind are about 100,000 starts consumes about 1 billion feet of OSB. And you have to adjust that for the single-family mix. So a single-family start consumes about 3x as much OSB and Siding as a multifamily start. So the market we're in right now is single-family mix north of 70%. You want to adjust that 1 billion feet per 100,000 starts upwards a little bit to account for that.

Okay. And then, Brad, I'm just curious, I mean, we're so far beyond anything that we have ever seen in terms of both lumber and OSB pricing. Are you guys sensing any areas in the market where you think there's some demand destruction taking place or demand deferral taking place right now?

Well, yes, demand deferral, yes, I think there's -- I mean I know a guy who wants to build a deck. He's not going to build a deck until lumber prices come down. So again, there's 1 person who's delaying a job that I specifically know. But I do think that there is an issue around that from an affordability standpoint, of our projects for and maybe even some housing starts, and I think there could be some housing starts deferred just from an availability standpoint. I don't currently believe there's demand destruction going on, yet. You know that export, panel exports, there's a little bit more coming in than in the past. But most other local markets are pretty strong. We're certainly seeing that in South America, I believe it's similar in Europe. And so I don't -- what we haven't hit yet is any kind of substitution threat. But I think we have to be realistic and think there probably is some deferral happening either due to affordability or lack of availability of immediate supply.

Okay. All right. And the last one for me. I just -- I think a quarter or 2 ago, you mentioned that you were trying to do some of the downstream products, like I think Siding products down in the Latin American business. Just any update on the uptake of those kinds of products in the Latin American market. I know kind of changing building preferences, changing building codes is not an easy thing to do.

Yes. So let me -- we are actively working that in Brazil, where it is harder, and Chile's building codes have adapted. So we're -- that's not a constraint in Chile and not in Argentina either. But in Brazil, it certainly is. Just quickly to explain it is highly local in Brazil. So you can't like do a macro change in building. It's harder to do a macro change. So you end up having to kind of almost project-by-project basis. What we would consider changing code is what's required down there. So we've got a team working on that, and it's successful, but it's slow. In Chile, building codes are not an issue as far as that conversion. So -- but our focus down there is really growing our SmartSide business. Because of the fact that we've been capacity constrained in the past and the margins for OSB have been really good down there historically, we really haven't had EBITDA incentive to grow Siding but as we've increased press capacity down there, it's opened up some opportunities for us to look at expanding the portfolio. And while we we've always -- we've sold siding down there since the start-up of the Panguipulli, 20 years ago. It really hasn't been as much of a focus area as it's going to be in the future because as we've grown our market share for sheathing, we are pushing up against some constraints there. And we see a Siding as the next really good growth platform for us down in South America where perhaps sheathing will be more of a growth with the market versus growth in market share. Yes. I'm encouraged by our opportunity there, especially the other -- just kind of put a period on that, and we're very underpenetrated in Argentina, Peru and Colombia, which are -- which do have -- do use wood construction. So there also is a geographic growth element to our strategy down there.

And our next question coming from the line of Mark Weintraub with Seaport Global.

One just quick follow-up. We've got a pretty incredible variation geographically in OSB pricing right now with the Random Lengths, at least Western Canada at $1,600, a couple of regions more in the $1,200, some regions in the $1,000-type area. Any thoughts on why there's these enormous spreads and any implications?

Yes. Mark, this is Aaron. As you know in more typical times, when you see regional spreads start to open up, OSB gets shipped around the continent to address those arbitrage opportunities and that happens when there's available wood. The demand is so strong in just about every market that's consuming OSB now that there really isn't as much -- there isn't enough available wood to address that. And so in more normal times, if we saw prices, it's different region-to-region, you'd see a wave of OSB heading West to satisfy those markets. The only way that's possible now is by starving building in the Southeast. And so it's just -- it's less possible now.

So why -- and so why wouldn't prices in Southeast, et cetera, why wouldn't they just quickly go towards that $1,600 price in Western Canada?

Well, they typically would in an environment where wood was leaving the southeast to satisfy the western -- West Coast demand, that would create scarcity in the Southeast, and those prices would tend towards equilibrium. But that phenomenon is less likely to happen in an environment where there is so little available product that there isn't extra to ship.

That is all contracted out.

Exactly.

Dead on.

Now part of the other issue, Mark, is that the -- there's -- the product is so scarce that they -- that the open market transactions themselves are less common, which means that there's less data to be reported, which means that -- which further reduces the opportunity for that arbitrage to be recognized and reflected in price. Well, with no further questions, that will end our conference. Yes. With no further questions, we'll end there. Thank you for joining us to discuss our results for the first quarter of 2021. We'll look forward to talking to you soon. Have a great day, and a stay safe, everyone.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.