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Edited Transcript of LPX earnings conference call or presentation 7-May-19 3:00pm GMT

Q1 2019 Louisiana-Pacific Corp Earnings Call

NASHVILLE May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Louisiana-Pacific Corp earnings conference call or presentation Tuesday, May 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan J. M. Haughie

Louisiana-Pacific Corporation - Executive VP & CFO

* Michael Emory Kinney

Louisiana-Pacific Corporation - Director of IR & Treasurer

* William Bradley Southern

Louisiana-Pacific Corporation - CEO & Director

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Conference Call Participants

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* Clyde Alvin Dillon

Vertical Research Partners, LLC - Partner

* John Charles Tumazos

John Tumazos Very Independent Research, LLC - President and CEO

* John Plimpton Babcock

BofA Merrill Lynch, Research Division - Associate

* Ketan Mamtora

BMO Capital Markets Equity Research - Analyst

* Kurt Willem Yinger

D.A. Davidson & Co., Research Division - Research Associate

* Mark Adam Weintraub

Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst

* Mark William Connelly

Stephens Inc., Research Division - MD & Senior Equity Research Analyst

* Paul C. Quinn

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Louisiana-Pacific Corporation First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Mike Kinney, Director, Investor Relations and Treasurer. Sir, you may begin.

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Michael Emory Kinney, Louisiana-Pacific Corporation - Director of IR & Treasurer [2]

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Thank you, Ashley, and good morning, everybody. Thank you for joining our conference call today to discuss LP's financial results for the first quarter of 2019. I'm Mike Kinney, Director of Investor Relations and Treasurer. And I'm joined today by Brad Southern, LP's Chief Executive Officer; and Alan Haughie, LP's Chief Financial Officer.

As we've done in the past, we've opened up this call to the public and are doing a webcast. The webcast can be accessed at www.lpcorp.com. Additionally, to help with the discussion, we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. We will be referencing these slides in our comments this morning. Also, we have filed our 10-K and 8-K this morning with some supplemental information.

With that, I will turn the call over to Brad.

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [3]

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Thanks, Mike, and thank you all for joining us this morning. I'll begin today's call with a few highlights on the first quarter, an update on our growth and efficiency initiatives, provide our current view of the market environment and then turn the call over to Alan for a more detailed look at our results.

But before I do any of that, it gives me great pleasure to acknowledge an addition to our team here at Nashville. Robin Everhart joined us in mid-April as our new Senior Vice President, Chief Human Resources and Transformation Officer. Robin is filling the vacancy created with -- when Tim Harnett accepted a role as Senior Vice President of Operations at Entekra, our joint venture that provides fully integrated off-site framing solutions. Robin is now responsible for all HR functions and will play a key role in ensuring a strong linkage between our transformational goals and our HR programs. Throughout her career, she has fostered strong business relationships, helped create significant economic value and build high-performance business cultures. I'm excited to have Robin on the team, and I'm confident she will help drive our strategic transformation into a leading building solutions provider.

Speaking of transformation, let's turn to Slide 5 for a summary of our recent accomplishments. In the first quarter, we grew SmartSide Strand revenue by 13%; expanded Siding capacity; introduced a popular new Siding product and a new weather-resistant sheathing product; improved plant efficiencies and returned cash to our investors. On the February call, we announced the imminent launch of our Smooth SmartSide Strand product scheduled for the International Builders' Show. This range of products, which combines a clean look with the rugged durability and long-lasting beauty of our LP SmartSide offering that fills a long-standing need for a solution that offers a smooth aesthetic. Before the Smooth product was launched, we were encouraged by the opening order volumes, and I can report that demand for Smooth SmartSide is currently exceeding our expectations.

In addition to launching Smooth, we brought new Siding capacity online in Q1. In February, we successfully completed the conversion of our Dawson Creek mill, which produced and shipped its first commercial Siding product in March. I am proud and appreciative to our Siding leadership team and to the -- and to each of the nearly 400 employees in Dawson Creek that made this happen.

Another milestone was the launch of LP WeatherLogic, our water-resistant barrier space solution. This engineered wood panel features an integrated water-resistant overlay in a distinctive blue color. Builders welcome a solution that eliminates the need for house wrap, can speed the construction process and promotes a clean job site. It also provides a tighter home to meet energy code requirements, improving long-term energy efficiency. Since its launch, the enthusiasm around WeatherLogic from our sales team has been contagious and has captured the attention of builders. We're excited to see blue houses popping up on construction sites.

The progress we've made in executing our strategy comes amid a challenging economic environment. We saw a second consecutive quarter of declining housing starts and our OSB price has fallen by almost 30% year-over-year. Many builders as well as suppliers to the trades have attributed the Q1 lag in activity to cold wet weather. This no doubt constrained OSB demand, along with initial caution from builders as they waited for things to pick up from a weak fourth quarter. Throughout this period of uncertainty, we continued to adjust OSB production planning to match demand, taking downtime as necessary, while promoting our more margin-resilient value-add portfolio.

Let me take a moment to point out that with our focus on providing complete building solutions, we have organized our branded value-added OSB into our family of Structural Solutions. These products were designed to solve common construction problems by improving the structural strength and integrity of a home and by providing defenses against the destructive effects of extreme climate and environmental conditions. Benefits include a more time- and cost-efficient installation process for the builder and a more resilient energy-efficient and valuable home for the homeowner.

Products other than LP WeatherLogic included in this product family are LP FlameBlock, which helps meet today's most rigorous fire codes; LP TechShield radiant barrier, which prevents up to 97% of the sun's heat from entering the attic; and LP Legacy, which is engineered to be one of the strongest, stiffest sub-flooring solutions in the industry. Together, our Structural Solutions OSB products complement each other to deliver a whole house bag. This quarter, we moved closer to our long-term goal of having 50% of our OSB volume generated by our Structural Solutions portfolio, reaching 40%.

We also improved Overall Equipment Effectiveness, or OEE, by almost 5 points over the first quarter of 2018. OEE is our measure of manufacturing efficiency, and its improvement was the largest single contributor to the $8 million of operational efficiencies generated this quarter.

Finally, as part of our drive to create shareholder value, we spent $438 million buying back shares over the last 3 months, including $400 million via an accelerated share repurchase. We paid first quarter dividend of $17 million and now today, declared a second quarter dividend of $0.135 per share.

Another key focus area that will drive value is growth of SmartSide Strand. The chart on the left-hand side of Slide 6 shows the last 12 months of SmartSide Strand revenue up to and including March of 2019 compared to the corresponding 12-month period 1 year ago. On this basis, SmartSide Strand revenue has grown 14%, about 10 points of which is from volume growth. Over that same time period, single-family housing starts also measured on a trailing 12-month basis have remained flat. We estimate that 40% of our SmartSide Strand revenue is tied to single-family housing, so we should not expect a close correlation, but by any measure and I think this is a conservative one, our growth in SmartSide Strand is significantly outperforming the market.

On our fourth quarter call, we outlined our plans to generate an additional $100 million of cash flow by 2021 at a range of potential OSB prices. This $100 million comprises $90 million from growth, $75 million from efficiency improvements, offset by labor and benefits inflation of $30 million and all net of taxes of 25%. The table on the right-hand side of Page 6 summarizes our progress on the growth and efficiency targets. Alan will cover the details by segment in a moment. And although 1 quarter does not make a trend, we are at present ahead of our internal targets on all 3: growth, OEE improvement and sourcing sites. In the first quarter alone, we have generated $20 million through our combined growth and efficiency targets for 2021 of $165 million.

From sales to operations, our folks are embracing our high-performance culture and thinking and acting like owners, and we're focusing on value creation now more than ever before. This gives me great confidence that we can continue to grow Siding and Structural Solutions, improve efficiency and return capital to our shareholders even in a flat housing market.

Having said that, many of the large national builders are reporting that consumer traffic for housing continued to accelerate in March, with mortgage rates coming off of last year's highs. Despite high traffic, the actual housing starts data continues to disappoint in comparison to last year. The U.S. Census Bureau reported March 2019 housing starts down 13% versus March 2018, and single-family down 10% and multifamily down 19%.

Looking forward, U.S. builder confidence for new single-family homes rose 1% in March to 63% on the National Association of Home Builders/Wells Fargo Housing Index. In addition, the home mortgage index gauging current sales conditions increased 1 point to 69, with any score over 50 translating to a positive outlook.

While the housing data has been disappointing over the last 2 quarters, the near-term outlook is positive as we move into the spring season. However the year plays out in housing here at LP, we will remain focused on executing our strategy and driving shareholder value.

And on that note, I'll turn the call over to Alan for a detailed review of our first quarter results.

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Alan J. M. Haughie, Louisiana-Pacific Corporation - Executive VP & CFO [4]

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Thanks, Brad. In addition to reviewing the consolidated results for the quarter, I'll be providing high-level revenue and EBITDA bridges between this year and last year for the Siding and OSB segments and updating you on the progress of our capital allocation plan. Throughout my prepared remarks, I will be referencing specific pages of our earnings presentation, which was posted on our Investor Relations website this morning.

So moving to Slide 8 for a review of the first quarter, starting with the consolidated income statement. Net sales fell year-over-year by $109 million. $105 million of which was in the OSB segment, with realized prices for OSB almost 30% lower than the first quarter of last year. This was partly offset by a 13% year-over-year increase in SmartSide Strand revenue, comprising 8 points of volume growth and 5 points of pricing and along the way, generating $22 million of incremental revenue. This growth in SmartSide Strand was offset by softer EWP sales very much tied to overall market conditions and lower OSB revenue from our Dawson Creek mill. As a reminder, during the first quarter of 2018, Dawson, which rolls up into our Siding segment, was producing OSB; whereas for much of this year's first quarter, it was in the latter stages of being converted to produce Siding and was therefore out of commission.

Gross profit fell by $96 million. The negative impacts from lower volumes in EWP and the Dawson conversion were offset by a combination of cost-reduction actions and the improvements in product mix inherent in replacing low-margin EWP with higher-margin SmartSide Strand, thus neutralizing everything but the OSB price reduction.

Selling and administrative costs increased by $6 million from the prior year with the largest single driver being investments in sales and marketing, consistent with our growth strategy. Nonoperating income of $12 million includes a gain of $14 million on the consolidation of Entekra into our results. Entekra was treated as an equity investment when acquired in 2018, meaning that our accounts reflected our share of the profits largely as a 1-line entry. However, at the beginning of this year, we gained the right to control this business and are obliged to fully consolidate it in all line items of the accounts. As a result, we're now recognizing, among other things, Entekra's intellectual properties as asset on our balance sheet, the flip side is that we recognized a corresponding gain of $14 million. The effective tax rate for the quarter was 21%, resulting in a tax provision of $7 million and net income of $27 million.

Now we executed the $400 million accelerated share repurchase program on February 21, at which point our bankers delivered to us 80% of the number of shares that this $400 million would have bought us at the previous Friday's closing price. That's about 12 million shares. The remaining shares will be delivered subject to an adjustment for the final number actually purchased no later than the end of the third quarter. So the 132 million diluted shares applicable for calculating the first quarter EPS is therefore the time-weighted average of 137 million diluted shares outstanding at the end of 2018 and the 125 million diluted shares outstanding at March 31, 2019. Therefore, we're reporting $0.20 per diluted share on net income of $27 million compared to net income of $91 million or $0.62 per diluted share in the first quarter of 2018. Adjusted earnings per share, which excludes the $14 million gain on Entekra post tax, was $0.13 per diluted share.

Before we discuss these sales and EBITDA waterfalls for the Siding and OSB segments, it is worth looking at the segments in the summary table on Slide 9. Much of the change in year-over-year performance has either been covered in my discussion of the income statement or will be covered in further depth in a moment. But jumping to EWP, the $15 million of revenue decline reflects $3 million of favorable pricing more than offset by $18 million of lower volume. The volume reduction had minimal impact on EBITDA given the EWP's low margins, whereas the price increase flowed directly through thereby resulting in an EBITDA increase of $2 million. In South America, increased volumes were insufficient to offset a challenging pricing environment, with $2 million of increased revenue translating into a $1 million reduction in EBITDA. And starting this quarter, we have allocated a significant portion of our hitherto unallocated SG&A costs to the businesses to further drive line management accountability. We reconciled the quarterly detail for 2018 in an 8-K filed with the SEC in February, and have provided high-level reconciliations to the segment EBITDA numbers reported in last year's 10-Q in a footnote on Slide 9.

Now let's turn to Slide 10 for a more detailed discussion of the first quarter performance of Siding. The bars on the waterfall represent the year-over-year EBITDA impacts and where relevant, the corresponding revenue changes are shown in orange text below the EBITDA bars. I'll discuss each key driver in turn. As Brad has already mentioned, the declining housing market had no discernible impact on the trajectory of SmartSide Strand revenue, which grew $22 million or 13%, comprising $13 million of volume and $9 million of pricing. From an EBITDA perspective, the $9 million of increased pricing fell entirely to the bottom line, while we earned $5 million of incremental EBITDA on the $13 million of incremental volume, a healthy conversion of 38%. As mentioned on the fourth quarter call, we are continuing to invest in selling and marketing to drive SmartSide Strand growth with a principal focus on the repair and remodel market. Consistent with that objective, we spent $2 million more than the same period last year. And this marketing investment was offset by $2 million of efficiencies through a combination of OEE improvement and sourcing savings. And we've grouped the SmartSide strand growth, the marketing investments that supports future growth and the efficiency savings together under heading Transformation, in order to monitor our progress in this and future quarters.

And while we're delighted to report that Dawson Creek is up and running as a Siding mill, it was, to all intents and purposes, out of commission for the entirety of the quarter and generating no revenue. The $9 million highlighted on this slide reflects both the one-off costs of the conversion and the unrecovered labor and overhead costs in the period. So of the $15 million lost OSB revenue, about 2/3 relates specifically to Dawson being down, and $3 million was due to lower OSB prices. Arguably, we may have elected to take downtime anyway under the current OSB climate had we not already been in the throes of the conversion. Added to which, Dawson was one of the mills negatively impacted by the transportation problems in the first quarter of 2018.

So in summary, EBITDA fell by $3 million to $42 million and the EBITDA margin fell from 20% to 18%. Now while this is below our long-term target of 20%, if we adjust for the $9 million of Dawson conversion costs, which by definition we expect to be temporary, the normalized first quarter 2019 EBITDA margin for Siding will be around 21%, even at current OSB prices. Looking forward, we will be ramping up production at Dawson Creek during 2019 and plan to continue investing in selling and marketing as we are doing to introduce new products and penetrate new markets in Siding. So we remain confident in our long-term SmartSide Strand's growth rate of 12% to 14% and an EBITDA margin of at least 20% for the segment as a whole.

Slide 11 shows the first quarter revenue and EBITDA waterfall for the OSB segment. Revenue for OSB fell by $105 million year-over-year, $93 million of which was strictly price. And although regional benchmark OSB prices were down 40% to 50%, our average realized price on commodity OSB for the quarter fell by 35%. Commodity OSB volumes fell by 7%, including the impact of about 70 downtime days, roughly half of which were due to the press we built at our Carthage mill, which was down 35 days as a result. And we're happy to say, the project was executed on time and on budget, and the mill is running great. We estimate this cost was about $4 million in the quarter though.

Pricing in our Structural Solutions fell by 25%, testament to the resilience of this portfolio to downward pressure. And included as part of our transformation call-out for OSB is the EBITDA impact of a $2 million increase in the volume of Structural Solutions as well as improvements in OEE and sourcing of a combined $5 million. Now although these might seem like modest gains to highlight, they demonstrate both the operating discipline with which we [round] the quarter and the importance of the Structural Solutions portfolio to our growth.

Now before walking through our cash flow for the quarter, summarized on Slide 12, I'll take a moment to revisit the capital allocation plan we outlined on our fourth quarter call in February. On that call, we described the impact our ongoing transformation was expected to have on our ability to produce healthy cash from operations across a range of OSB pricing scenarios together with at least $100 million of sustainable incremental annual cash flow by 2021. The first quarter is traditionally one of heavy cash usage with the buildup of working capital and the payment of accrued bonuses. And this year, a first quarter cash tax payment of $21 million. Now although we are experiencing OSB prices toward the low end of the range of sensitivities we presented, our cash flow for this quarter is entirely consistent with and even a little ahead of both our modeling and the long-term improvements we outlined. For example, should the Random Lengths 7/16's OSB price ultimately average 200,000 square feet for 2019, we believe that our cash from operations will comfortably exceed the $140 million we modeled at that price.

With regard to share repurchases, we began 2019 by utilizing the last $38 million of the previous $150 million repurchase authority and funded a $400 million accelerated share repurchase program. The first stage of our planned $600 million of share repurchases in 2019. The accelerated share repurchase will be completed no later than the end of the third quarter, during which time, LP will not be concurrently buying shares.

I should add that with the consolidation of Entekra into our results, $40 million of the $45 million we invested in 2018 has landed back on our balance sheet. As a result, Entekra's future capital spending will be reflected as part of LP's capital spending. Although technically, it will be drawn from the fund of $40 million. So including this, we ended the quarter with $375 million of cash.

Before I turn the call over for Q&A, Slide 13 provides some limited guidance for 2019 and beyond. This is exactly the same guidance we provided on the fourth quarter call. So even though we will be counting Entekra's CapEx as part of LP's, we still expect to spend in total between $150 million and $180 million this year. And of course, as already stated, we expect to grow SmartSide Strand revenue at 12% to 14% long term but continue to guide to the low end of that range in 2019.

And with that, I'll open up the call for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of George Staphos with Bank of America.

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John Plimpton Babcock, BofA Merrill Lynch, Research Division - Associate [2]

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This is actually John Babcock on the line for George. Just want to start out, if we take on the Sidings side of things and average price realizations were up around 4% to 6% across different product lines and wanted to get a sense for how you're thinking about that going forward? And then also just want to get an update from you on how the Siding market as a whole is looking to you right now?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [3]

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So first on the pricing, you're right about the number, frankly, 4% to 6%. George, we went out this year with a similar pricing -- price increase strategy as we implemented last year, same timing, March 1. And we're looking into this year as having similar results around the price improvement that we saw last year. So I would just kind of guide to last year's improvement carrying over into this year as well as far as percentages go. And then second part of your question was about the market outlook for Siding. So as you know, we mentioned on the last call, we did allow customers to pre-buy before the March 1 price increase. That was pretty successful that we allowed them to buy 110% of last year's volume that they pretty much did that across the board. We also had some early ordering around the Smooth product launch that would have built a little bit of inventory. I think we carried some inventory into Q2 a little higher than normal in Siding as we -- because of the price increase we implemented in Q1. And so -- but with any kind of good pull-through the second half of the quarter, we should be back to reasonable inventory levels or normal inventory levels at about the end of the quarter in the channel and certainly at our mills.

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John Plimpton Babcock, BofA Merrill Lynch, Research Division - Associate [4]

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Okay. And then just one quick follow-up just on OSB. You talked about the downtime. Just want to clarify I guess, so that 35 days was included in that 70 downtime -- total downtime days? And then I was also wondering if you could talk about the cost of that downtime. I think you might have provided some color, but just wanted some clarification there.

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Alan J. M. Haughie, Louisiana-Pacific Corporation - Executive VP & CFO [5]

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Yes. The -- you're right. The 35 days of Carthage downtime was included in the 70. And in essence, the cost of that downtime, if you look at the OSB waterfall, it's largely embedded in the volume base. You see there $14 million of revenue down and $9 million of EBITDA impact, essentially includes the impact of that downtime.

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Operator [6]

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

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [7]

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When I look at products like WeatherLogic and think about the success you've had with Radiant Barriers, that looks like a good market for you. And I'm just curious how you think about what percent of your U.S. panel business might be receptive to that kind of value-added product versus the overall market?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [8]

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So Mark, I would talk about it this way. First of all, it's a sheathing product, so it's used vertically on the home. And we see a very good possibility over time for the industry to convert almost 100% to that value-add product because of the cleanliness on the job site and the characteristics of the overlay. So that will be a long pull. That's not going to happen immediately, and a lot of that has to do with just product availability right now. But we are very excited about a deep penetration and significant market share being gained against commodity products that go on to the side of the home. We're just getting started in it, but we have great distribution in place. We have distribution, obviously, that knows how to sell into that market. We could see that being as successful as our Radiant Barrier product is today and we move into the future.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [9]

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So there's no geographic place -- the Radiant Barrier obviously was a lot more geographically limited. So that's why I was asking the question way I did. So you think this product can work nationally as configured?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [10]

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Yes. Sorry, Mark, I didn't understand. Absolutely, there's no common top climate restrictions on selling the product for the sheathing.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [11]

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Fantastic. And just one more question, we're starting to see builders make changes to the size of the homes, something they really didn't do that much in the 2009 to 2011 area. Are those changes big enough? Or do you think they're going to be big enough that they would actually start to change the assumptions you make when you're doing your own forecasting?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [12]

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Great question, Mark. You know the -- we have been hearing that as a trend, and there are some data out there currently that is showing that is maybe beginning to happen. And that's all in the context of affordability in making a home or constructing a home that millennials can afford to occupy as their first or second home. But I do think smaller homes and more cost-efficient homes are on the horizon for the industry, but we really have not seen that playing out in the ratio of housing starts to OSB demand. So we are not baking any of that into our long-term demand projections for OSB, though I think it's something we need to keep an eye on.

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Operator [13]

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

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [14]

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First question, can you talk a little more about sort of competitive dynamics in the Siding business? I mean, from a demand standpoint, housing starts are pretty much flat. There's also supply that's getting added in the industry. So kind of what you are seeing in the market? And your volumes kind of grew pretty nicely in Q1. So just talk about kind of where you are seeing growth as well whether it's in particular geographies or in end markets? If you can comment on that.

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [15]

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Yes. So Ketan, from a percentage standpoint, the growth that we're seeing is national. Now we work off a larger or smaller basis, depending on our current market penetration by geography, but we're seeing growth really across all geographic areas that -- we're national. So it's everywhere, but -- so we're seeing good percentage growth across nationally and into Canada. We do benefit from the breadth of product that we offer. So our growth is not just coming from our lap portfolio, which we compete against -- can be one-on-one against fiber cement. We're seeing good growth in our panel offering that goes through retail. And then our trim product has really grown well for us. So it's -- the percentage growth is across the board geographically and really across all product categories. Now with that said, our opportunity and our focus area right now is around the opportunity to repair and remodel. We are not as penetrated nationally as we would like to be in that segment. We have good market share in the North Central region and not as good market share the rest of the country. So our focus and the reason we talk about incremental marketing spend in our Siding business is really the opportunity we see to accelerate our growth in repair and remodel across all regions other than the North Central, and that's only because we're already pretty well penetrated in the North Central region.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [16]

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Got it. That's helpful. Just on that R&R, how big is sort of your penetration right now in that end market?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [17]

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Yes. We're middle single-digit percentages on market share penetration of R&R. So a lot of room, Ketan, for growth there.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [18]

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Got it. That's very helpful. And then just turning to kind of Dawson Creek for a minute. So there was about $9 million of expenses, Alan. So as we think about going from Q1 to Q2, and then the back half of the year, so any rough estimate on how those costs kind of wind down? Any ramp-up production there?

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Alan J. M. Haughie, Louisiana-Pacific Corporation - Executive VP & CFO [19]

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A little. We will see -- as Dawson Creek ramps up, we will see a -- let's say, a hedging on this, at least through Q2 and Q3 simply because as it ramps up, it will be smaller with each progressive quarter, all things considered. But we will see this impact for a couple of quarters as it ramps up.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [20]

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Got it. And then can you also touch on kind of any debottlenecking that you maybe doing either at your OSB mills or Siding mills?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [21]

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Yes. So Ketan, when we talk about our improvements in OEE, that is our focus on we can call it debottlenecking, we can call it speeding up, we can call it getting improved A grade yield, but it's a combination of all the parameters that go into proof of production at our mills on per unit of time. And so we are -- and that usually is a unique issue in each mill where the current constraint or the current opportunity lies for productivity improvement can be unique to each mill. So we have teams that are focused on mill-specific opportunities to improve throughput in both the Siding and the OSB business. We do tend to have a -- we're a little bit further ahead on that project in our OSB business because that's been a key focus area while on Siding we've been more focused on growth. We had -- we did start our OEE initiative in Siding last year and are also seeing really good improvement there. So debottlenecking and speeding up our equipment, improving our A grade yield are focus areas across the entire business. And I'm really proud of the improvement that we've seen in OEE. As Alan talked about in his remarks, that single-digit EBIT improvement can be overshadowed by the huge movements in OSB pricing, but one of the reasons we were able to be EBITDA-positive in that segment in the quarter is because of what we did around the productivity improvements while we were running.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [22]

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Got it. And then so is there any way to kind of quantify even if it is on a percentage basis what could kind of the impact be, maybe capacity at the mills from those initiatives?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [23]

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Well, Ketan, I said, we sort of -- we have that and the -- because as I mentioned last quarter, we're targeting 90% across our system as our first key benchmark we work toward. I don't have exactly the volume in front of me, but I said I think 2 calls ago that, that would equate to a mill's worth of production in our system. So what -- when we kicked off this initiative really aggressively at the beginning of last year, what we told our operations group is let's go find that hidden mill that we had in our system that will require very little capital in order to unleash. And so it's significant, the volume that we could pick up there, and that's really efficient capacity to go and harvest since it's basically only your variable cost associated with producing that extra volume. So as we've converted mills like Swan and Dawson over to Siding, the way that we get productivity improvement in or I should say production improvement in our OSB business is through our OEE initiative and then some modest capital projects that we implement that can also give us incremental capacity. And I know you maybe wanted a more specific answer to that, but I'll just say we've got a lot of headroom. And as we look at it across our whole system compared to where we started the year last year, we're talking about a mill's worth of production.

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Operator [24]

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And our next question comes from the line of John Tumazos with John Tumazos Independent Research.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [25]

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This is John, I'm sorry. So in terms of the OSB industry, other companies have not been quick to cut production. But in the containerboard industry, for example, the operating rate fell to 86.4% in the March month, where they had lots of reasons to be optimistic hearing that volume growth for containerboard are peak June and September seasonal quarters. Why do the OSB companies do you think not cut production as much as, say, the containerboard sector? Is there structural reasons why the plants are harder to phase down or take-or-pay contracts or chips or other factors that might cause companies to produce too much?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [26]

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So John, let me -- I'll just speak to how we approach taking market-related downtime and -- so I can only speak to our experience. We run to meet our customer demand, so we want to sell volume into active orders versus pushing volume into the market where our customers aren't really looking for the volume. So we're very focused on gauging the underlying demand in our customer base and supplying that demand but that would not put any incremental volume beyond what's needed in the marketplace. As far as the cost part of it, as I would say going into the big downturn in 2007, 2008, we did have a view that it was extremely inefficient to run OSB mill to anything other than 24/7. We learned how to do that pretty effectively during the downturn, and we've carried that learning into our system today. So while it's not optimal, we feel confident that we can run mills other than on 24/7 operations and that's what the market need is. So our personal experience is we can be relatively efficient. We did see some cost escalation associated with the downtime, as Alan pointed out and that's going to happen when you can't cover all your costs and volume. But we've learned to do it pretty efficiently, and we want to remain disciplined around making sure our customers have adequate supply, but not overreaching as far as building a lot of inventory at our mills or in the channel.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [27]

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In your OSB segment, what fraction of the volume are flooring, furniture, other specialized uses where the products don't fluctuate with Random Lengths or to the degree the Random Lengths' prices fluctuate?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [28]

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So John, we -- as I mentioned -- or as Alan and I both mentioned, 40% of our volume is in our Structural Solutions, but only a small subset of that is not tied to Random. So we do have some products like LP FlameBlock that is not tied to Random really at all. And then we have products like our Legacy flooring that is tied to Random kind of remotely. So it's less than 10% of our portfolio is not in some way tied to Random over a quarter period.

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Operator [29]

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And our next question comes from the line of Chip Dillon with Vertical Research.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [30]

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First question I had is just to make sure I understand the share count. You mentioned the ending count was, I think, 125 million diluted. But again, you've already paid for about -- and we don't know the exact numbers, 3 million more shares. You just don't reflect that until you settle up with Goldman. Is that right? So it really is somewhere around 122 million. And I guess just as you clarify that, I think you said you would be out of the market until that is settled, which would be sometime between now and September 30. If that's true, would you expect to be back in the market before year-end?

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Alan J. M. Haughie, Louisiana-Pacific Corporation - Executive VP & CFO [31]

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I think the answer to all of that is, yes. You're correct that the remainder -- the remaining, let's say, 20% of the number of shares of that $400 million, in theory, has brought us -- will be part of the true-up that occurs when the arrangement -- the ASR arrangement ends. It could end before the end of the third quarter, but it has to end by the end of the third quarter. Subsequent to which and all other things being equal, we'll be back in the market in some way, shape or form. We haven't decided yet whether we'd do another ASR or whether we, as it were, just buy on the open market ourselves.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [32]

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Okay. And then I think Brad was talking about WeatherLogic before. And you drive around and you see houses build or being repaired, and you see the tie back in these other branded wrappings. If you could just tell us why? I believe you said WeatherLogic would replace that. Although I think it's a -- well, it would replace that and what advantages does it have? Is it a price issue? Or are there other properties that make WeatherLogic? And I'm not asking you to compare with the brand I mentioned, but just with other brands in general that are more established.

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [33]

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Yes. So you're right, it replaces the need for a secondary weather wrap. The wrap is integrated into the overlay that's on our product. And then, Chip, I'm sure you've seen the green product installed in places. It brings a really clean look to the site, a lot less waste, a lot more resiliency as between the application of the wrap and the Siding that goes on the house. So there is minimal chance of any kind of wind damage blowing the house wrap off. And also because of the tape seams, it provides for a much more integrated and clothed system. That's how we talk about the energy efficiency aspects of it. So the advantages are clean -- very clean work site, much more confidence that the builder can have about the installation and the seal that goes into the home. And then the cost -- well, and then it's a one-step operation. So typically, when you're doing a house wrap, you sheath the home with your OSB first and come back and do the house wrap. And with WeatherLogic, you're -- we're installing it all at one time. So there's a labor efficiency and a timing -- a time efficiency that comes along with that. The cost can be -- it's really geographically dependent, so it's -- the cost advantage is based on the labor rate in the marketplace along with the cost of the secondary house wrap. So it's not necessarily providing a huge cost advantage. The value prop is more on the aesthetics, the quality of the job on the home and the confidence that the builder can have that they got a nice pipe seal on the sheathing part of their home.

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Operator [34]

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

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Mark Adam Weintraub, Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst [35]

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Can you give us an update on -- or have you received an update from Goldman in terms of how much of the accelerated share repurchase program has been completed by a certain date?

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Alan J. M. Haughie, Louisiana-Pacific Corporation - Executive VP & CFO [36]

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A great question, Mark, but I'm not in position to answer that.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [37]

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Okay. And then second, on the Siding business, obviously, it looked to me like a very good start to the year. What I guess I wasn't quite sure about is given that we had the price increase and that we had buying in front, are you able to get good visibility on what the actual consumption of the product is as opposed to just any inventory build given that the price increase was in place? And basically, how much of visibility do you have on that 12% to 14% revenue growth expectation for this year at this point?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [38]

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Mark, it is a good question. And our visibility isn't perfect because obviously that inventory is sitting at our distributors and ultimately, into hundreds of dealers around the country. But we do have a large sales force that are actively working with our distribution partners. So we get a feel for how the product's moving through both by customer and by region. So we have some feel of it, but it's not perfectly transparent to us.

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Mark Adam Weintraub, Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst [39]

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Okay. And historically, have there -- have you generally been -- have things played out pretty much as you had anticipated or have there been times when there have been pretty big surprises?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [40]

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So let me say -- let me just speak to that, one way we've addressed the issue of potentially moving our sales volume around Q1 and Q2 and not translating into pull-throughs at the distributor base at the same time. So we used to have -- we used to allow builders to -- sorry, distributors to buy 120% of their prior-year orders and that would even load up the channel more early before the price increase. So we lowered that to 110%. I know we did it last year. It might have actually been the year before, a couple of years ago.

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Alan J. M. Haughie, Louisiana-Pacific Corporation - Executive VP & CFO [41]

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2 years ago [Watkins] is saying.

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [42]

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And so that's our -- that was an intent to smooth out the Q1 and Q2 inventory build that could happen before the price increase. I would say, this year, the thing that I'm concerned about really as we go into the beginning of Q2 has been just the weather across all of the country, the cold or down here in the south, very, very wet. So we need good weather to install Siding on homes both for repair and remodel and in new construction. So I'm a little concerned coming into the quarter, but we still have a month to go or more -- well, more than a month ago to go. And if the weather gets better, which is doing down here in the South anyway, we could see some really good pull-throughs as we get in the second half of the quarter. But -- so I would say probably at the end of April, we're a little bit of concerned about inventory in the channel, but we'll just have to see how that plays out as we move through the May and June building season.

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Mark Adam Weintraub, Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst [43]

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Okay. And then lastly, if I could, just on Entekra. Can you give us an update in terms of when the commercial facility is going to start up and what we could potentially be seeing from Entekra?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [44]

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Yes. So we're -- we have -- the laws are up for the new facility that we're building in Modesto. We have all the equipment on order and are expecting to get first delivery about a month -- 4 to 6 weeks from now, which should put us into late June. And then we will start -- do the start-up for the automated facility late July and August. This will be a first for us, Mark, as you know, not a first for the management team there, but I'm a little bit hesitant. I'm not as confident to give a projection about start-up as I am on a press rebuild in Carthage, but -- so it probably maybe be best for me to provide an update on start-up curve maybe on the next call. But we're full bore ahead on the construction project right now and are targeting some kind of production in August.

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Operator [45]

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

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [46]

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I just wanted to start off on the OSB flowing through the Siding segment. I think it was about 18 million square feet this quarter. As Dawson comes up, would you expect that to kind of rise throughout the year? Or I mean is that kind of a good run rate to think about?

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Alan J. M. Haughie, Louisiana-Pacific Corporation - Executive VP & CFO [47]

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Well, bear in mind that Dawson was manufacturing OSB this time last year. And it's now ramping up with Siding output. And that -- and so, yes, there will be a ramp up, but I'm not really disclosing any further guidance around our projection by quarter for how that's going to -- on that expected rate of improvement.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [48]

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Okay.

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [49]

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Kurt, let me just -- your thesis is right, though. As we start-up Dawson and move Siding orders into that along with our growth rate, there will be OSB run somewhere either Swan or Hayward or Dawson as we move some orders around. But I think that should be a rather gradual start-up, and I don't see any big movements at our OSB order file going around plant to plant because of what's been going on in Dawson, at least in the near term.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [50]

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Okay. That's helpful. And on the $400 million liquidity target, could you remind us what, I guess, excess borrowing capacity you have now? And on that $400 million number, is that something you've kind of layered on to a leverage framework from a debt-to-EBITDA basis? Or how should we be thinking about that?

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Alan J. M. Haughie, Louisiana-Pacific Corporation - Executive VP & CFO [51]

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Yes. Thank you. The best way to view the $400 million is it comprises about $200 million of cash and $200 million of undrawn revolver. So quite separate from that, we do have, I believe, the capability to incur some more, I'll call, permanent debt, which we sort of outlined on our fourth quarter call. And we're currently on a trailing EBITDA basis about 1x levered in the -- with respect to high-yield or fixed debt. And I believe with relative ease, we could increase our leverage to 2x. Therefore, incur high yield maybe another $350 million. So there's no pressing need for that presently, so that hasn't been executed. So the $400 million is cash and undrawn revolver, Kurt.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [52]

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Okay. And then just lastly, on the Siding front. I'm wondering how you guys think about stocking positions or shelf space there? And kind of how you view your current position relative to kind of the growth targets you've set out and the different channels you're targeting between repair and remodel?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [53]

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Yes. That's a great question. Let me say -- I'm going to start with normal distribution or 2-step distribution. We've really upgraded our distribution base over the last year or so, and we feel really good about our national distribution network for Swan side, especially in the traditional channel distribution for building products. From a repair and remodel standpoint, much of that goes through our normal distribution channel, but there is a play with once -- what's called 1-step distribution. We are building -- that network is being built underway. We have some really good partners in parts of the country, but there's opportunities for us to improve distribution at the 1-step level and when we decided the Smooth product offering that we launched was a big part of having a credible presence in repair and remodel, so that we could improve our distribution network for 1-step. And then finally, I'll speak to retail. We have a really good position to SmartSide with both -- with all 3 major retailers on the Home Depot, Lowe's and Menards. They all have a little different take on the skews that they like to carry and how they measure success as far as our product line. But we do work actively with all 3 of those partners getting our product in front of more of the consumer environment there. And that's primarily today a panel play, but we are running test and have opportunities to expose through that retail, both our lap and trim products as well. So I feel good -- just to kind of back up from my answer for a second, I feel really good about our access to market in SmartSide. I really like our 2-step distribution partners that are carrying the product line right now nationally. A little bit of work to do yet to shore up that the kind of distribution we'll need to be successful in the future in repair and remodel, but we certainly have plans to get that done and continue to this growth rate that we're on.

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Operator [54]

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And our next question comes from the line of Paul Quinn with RBC Capital Markets.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [55]

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I really like that Slide #6, the LP's transformation, the breakdown. And I'm just wondering if you could give us 2021 EBITDA target breakdowns by segment and by growth in efficiency?

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Alan J. M. Haughie, Louisiana-Pacific Corporation - Executive VP & CFO [56]

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No. I'm sorry, we haven't gone public with those yet, and this wouldn't be the time to disclose that. However, the majority of the growth is coming from Siding. It's SmartSide Strand, without question. The majority of the OEE improvement is coming from OSB, and that was 40% of the 75%. The sourcing savings are spread across the whole of the company. So in loose color, growth primarily is coming from SmartSide Strand with some from value-added, OEE improvement almost totally from OSB sourcing everywhere.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [57]

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Okay. And I look forward to that detail coming forward. And then just on Siding, you guys are going strong. You've got a couple of other competitors there that are also going strong. Maybe you could just give us -- trying to get information on the overall Siding market seems to be very difficult. Maybe you guys are in it, so you've got a lot more feelers out there. Just maybe if you could give us on an overall idea that market size and how that's growing? And really how you feel about the sustainability of your 12% to 14% revenue growth going forward?

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William Bradley Southern, Louisiana-Pacific Corporation - CEO & Director [58]

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So Paul, the -- I think from a market size standpoint, single family's growing with starts. Obviously, that's an easy one. It's hard even for us to get good numbers on expected growth for Siding, repair and remodel. There's all kinds of forecasts around the general repair and remodel market. But getting that granular just on cladding or exterior is not that easy. The numbers that we kind of write-off of is -- are the number is looking at a long-term trend of 5% growth there. Some forecasters have it 7%, some forecasters have it 3%, some forecasters have it ranging year to year between those 2. So -- but it feels like 5% is a pretty solid number to use as far as repair and remodel. What we have done this year is do a really good job of understanding size of market in repair and remodel and growth by region. So that obviously the older housing stock in the Northeast, North Central makes for more repair and remodel. And there's more single-family starts in the southern tier of the country. So now where is the growth coming from? Where we see the biggest opportunity right now is really against continued penetration against vinyl. Hard sidings are an upsell to vinyl. We believe it's a lot higher-quality Siding to have on your home at the end of the day. And contractors and homeowners are looking for an opportunity to upsell and get the anesthetic they want to on the exterior of their home. And we want to be a solid alternative to that homeowner who wants to upgrade off a vinyl siding or wood or whatever else is on there right there today. So the market share opportunity clearly is mostly from -- what is probably houses that are currently or thought to be converted over to vinyl siding, but there's some wood out there still. There's some hardboard out there still that SmartSide would be a perfect replacement siding for. So there's a little bit of a myriad of opportunities, but the big one is the continued market share gains against vinyl.

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Operator [59]

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Thank you.

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Michael Emory Kinney, Louisiana-Pacific Corporation - Director of IR & Treasurer [60]

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Ashley, thanks. I think that was our last question. And thank you, everybody, for the call today. And Becky and I will be available if there are any questions. Thank you.

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Operator [61]

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Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.