Michael Kinney - Head, IR William Southern - CEO & Director Sallie Bailey - EVP & CFO.

Mark Weintraub - The Buckingham Research Group George Staphos - Bank of America Merrill Lynch Gail Glazerman - Roe Equity Research Ketan Mamtora - BMO Capital Markets Clyde Dillon - Vertical Research Partners Reuben Garner - Seaport Global Securities Steven Chercover - D.A. Davidson & Co. Mark Connelly - Stephens Inc.

Stephen Kim - Evercore ISI Paul Quinn - RBC Capital Markets.

Good day, ladies and gentlemen, and welcome to the Q1 2018 Louisiana-Pacific Corporation Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mike Kinney, Director of Business Development and Investor Relations. You may begin..

Thank you, Gigi, and good morning, everybody. Thank you for joining our call today to discuss LP's financial results for the first quarter of 2018. I'm Mike Kinney, LP's Director of Investor Relations, and with me today are Brad Southern, LP's Chief Executive Officer; as well as Sallie Bailey, our 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.

Sallie will be referencing these slides in her comments this morning. Also, we have filed our 10-Q and 8-K this morning with some supplemental information. I do want to remind everybody about the forward-looking statements comment on Slide 2 of the presentation.

Please also be aware the discussion of our use of non-GAAP financial information included on Slide 3 of the presentation. The appendix attached to the presentation has some of the necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning.

Rather than reading these two statements, I incorporate them with this reference. Now let me turn the call over to Brad..

Thanks, Mike, and thank you all for joining us this morning. I'll begin today's call with an overview of our results for the quarter followed by highlights from each of our segments in the current market environment.

I will then provide some color on the investment we announced this morning in Entekra, which gives us access to the growing opportunity in off-site manufacturing solutions for the construction markets. I will conclude by touching on our outlook for the housing market as we move through the second quarter.

Sallie will then take you through the financial results in more detail followed by the question-and-answer session. Starting with the results. We continue to make progress in the first quarter on our goal to transform LP into a leading building solutions company.

As I outlined last quarter, what this means in practice is the execution of a strategic shift from commodity OSB into value-added OSB products like FlameBlock and Legacy flooring and specialty products like SmartSide.

Our objectives are to decouple performance from the commodity OSB cycle, to deliver consistent and sustainable results, to create opportunities for growth, to increase margins, and ultimately, to drive value for our customers and shareholders.

We are very pleased with the performance of the EWP and South America segments where we continue to see traction from the various initiatives we have put in place to drive growth and increase return on invested capital.

The fundamentals of the Siding and OSB businesses remain robust, and we are encouraged by the positive pricing dynamics in both markets. With that said, we delivered lower-than-anticipated sales volumes in Siding, driven by the timing of purchases and ongoing rail transportation system issues in Canada.

I will cover these in more detail shortly in my review of our operating segments. Starting with Siding. As noted, we're pleased to report another quarter of increased earnings, driven primarily by pricing. While pricing continued to improve, the reported results were impacted by year-over-year decrease in volume due primarily due to two factors.

First, the transportation issues in Canada, namely the ongoing shortage of railcar availability with the CN caused unplanned downtime at our operations and increased both inventory and light shipments. These issues negatively affected the reported results in both Siding and OSB.

We continue to experience car shortages throughout April in British Columbia and Manitoba. We are encouraged by the actions the CN is taking to increase rail capacity and availability and expect that this issue will mitigate in the coming months. When possible, we are converting shipments to trucks, but this is, at best, a stopgap measure.

We do currently anticipate some residual impact into the second quarter. In addition to the rail issues in Siding, we also had a difficult comparable this quarter with respect to SmartSide volumes.

As you may recall, we experienced the pull-forward of demand in the first quarter of 2017 as customers increased buying ahead of a price increase that was implemented on March 1, 2017. This year, we lowered the allowable prebuy limits associated with the price increase.

With that said, we believe this impact is temporary and that volume trend should normalize at the half-year point. We have confidence in the underlying demand for our innovative and high-quality Siding products and are on track to achieve the targeted 12% to 14% full year revenue growth for SmartSide.

We also continue to make progress on the conversion project at Dawson Creek, British Columbia. The project is proceeding on time and on budget.

Finally, as part of our continued transformation and to provide investor with greater transparency into our Siding business, we now separately report volume and pricing details for the strand and fiber units within the Siding business.

We believe that doing so will provide investors with greater context into the volume and pricing dynamics of each business as we work to drive growth in strand and increase return on invested capital in fiber. Let me now turn to our OSB results.

Overall, the fundamentals of OSB remain robust, and we delivered strongest first quarter since 2006 despite the transportation issues. We continue to see strong demand for our value-added OSB products resulting in record sales for both FlameBlock and Legacy flooring. And as noted, pricing remains robust. Moving to EWP.

We again reported very strong results as we continue to deliver on our plans to drive growth, enhance operational execution and increase return on invested capital. We delivered healthy increases in sales and adjusted EBITDA with both volumes and pricing higher on a year-over-year and sequential quarter basis.

In terms of pricing, we executed a price increase in the first quarter and expect to realize the benefits from that in the second quarter. We continue to improve margins by driving sustainable increases in LSL and LVL sales volume while maintaining the focus on reducing costs.

I'm proud of the progress we continue to make in turning this segment around. Finally, in LP South America, I'm pleased to report that we delivered the strongest quarter ever with adjusted EBITDA improvement on a year-over-year and sequential basis. In Chile, the Panguipulli II project is progressing well on time and on budget.

In Brazil, we delivered a record month for March in terms of mill production. The local market in Brazil is recovering, albeit at a slow pace. In an effort to drive further growth in the South America market, we've recently opened up sales offices in Peru and Argentina. Early indicators were positive.

We were also realistic about the time needed to build the sales function, make meaningful inroads and shift product to new markets. We are taking a prudent and patient approach with a focus on maximizing the opportunities for long-term growth.

In short, the investments we've made in our organizational structure, personnel and capacity across South America are beginning to bear fruit, and we are confident in LP's prospects in the region. Before handing off to Sallie, I want to take a few moments to discuss the investment we announced this morning in Entekra.

Entekra is an emerging design engineering and manufacturing company that provides fully integrated off-site solutions for the U.S. residential and commercial construction markets. To put this investment in context, it's important to consider current labor dynamics in the U.S. homebuilding market. U.S.

homebuilders report the single biggest issue facing them today is the critical shortage of skilled labor to build new homes and stressed that skilled framing labor is particularly tight. In a recent survey by the National Association of Home Builders, 88% of builders reported labor shortages as their #1 constraint to building more houses.

This labor shortage, combined with rising construction costs, underscore the need for more efficient, productive and innovative building techniques to make the required demand for new housing. We view off-site productions one of the few viable solutions to increase the productivity of the home construction process.

Off-site production offers a number of benefits, including better overall quality, fewer delays caused by weather and the reduction of on-site labor.

With critical labor constraints and an estimated housing shortage since the downturn of 2 million to 3 million new homes, the timing is right for the accelerated adoption of innovative and more productive building solution.

We view the entry into this market as a natural extension of our strategy to position LP as a leading building solutions company. Through this partnership, LP will be able to take advantage of Entekra's proven engineering and automated framing expertise.

We can combine that expertise with LP's market access to large regional and national builders and our large-scale manufacturing capabilities as well as capital deployment and engineering expertise that will help scale the business.

Furthermore, we will be able to leverage Entekra's management capabilities and experience, allowing us to maintain the focus on continued execution of our Siding, OSB and EWP value agendas. On the topic of M&A, I am pleased to report that we have successfully completed the integration of the October 2017 acquisition of Barrier Technology.

Barrier is now fully integrated and is operating as part of our OSB business segment. Barrier's technology continues to improve and expand our ability to provide fire-resistant products to our customers, and the integration gives us confidence in our ability to successfully execute transactions of this nature.

In conclusion, we expect the strength in the housing markets to continue in the second quarter and the demand for our products to remain robust. We continue to execute on our strategy to drive sustainable growth and enhance shareholder value with a focus on growing our value-add offering in the Siding business.

We are confident in the underlying strength of our businesses, we believe the housing market will continue to improve, and we remain focused on returning value to shareholders through our flexible capital deployment and investment strategy.

Before handing off to Sallie, I'd like to remind everyone that we will be hosting an Investor Day on Monday, May 14, at the New York Stock Exchange.

Members of our leadership team will be joining Sallie and me to review the opportunities across our business segments, our growth in innovation strategy and our continued transformation to a building solutions company.

We also plan to have our mobile LP House Party product display unit on-site, which will afford participants with an opportunity to see firsthand some of our specialty and value-added products. We think it will be an engaging and informative event, and we hope you'll join us. With that, let me turn the call over to Sallie..

Thanks, Brad. I'll begin with a review of the financial results for the first quarter of 2018, and this will be followed by some comments on the performance of the individual segments and selected balance sheet items. You will notice some changes in our 10-Q this quarter.

We've broken out sales by product family and sales by product type, and additionally, we've begun reporting sales volumes into the production volumes. This morning, we filed our 10-Q as well as an 8-K with some supplemental information. Turning to Slide 4 of the presentation for a discussion of the first quarter 2018 results.

We are reporting net sales of $691 million for the first quarter of 2018, a 13% increase from the net sales of $611 million reported in the first quarter of 2017. In the first quarter, we recorded net income of $91 million or $0.62 per diluted share compared to net income of $55 million or $0.38 per diluted share in the first quarter of 2017.

The adjusted income from continuing operations for the quarter was $93 million or $0.63 per diluted share based upon a normalized tax rate of 25% as compared to $48 million or $0.33 per diluted share based upon a normalized tax rate of 35% reported in the first quarter of 2017.

Adjusted EBITDA from continuing operations was $159 million in the quarter compared to $114 million in the first quarter of 2017. A couple of highlights before I move into the individual segment results. The finance segment continues to diversify our portfolio, representing 33% of the revenues this quarter and 30% of the segment adjusted EBITDA.

Furthermore, the 2 specialty segments, Siding and South America, both recorded adjusted EBITDA margins above 20% in the quarter and above the first quarter of 2017 levels. All 4 business segments reported higher sales and adjusted EBITDA from the same quarter last year. Moving on to Slide 5 and a review of our segment results. Beginning with Siding.

This segment includes our SmartSide and CanExel Siding products as well as OSB produced at our Dawson Creek facility and at our Hayward, Wisconsin mill. The Siding segment reported sales of $227 million, a 6% increase from the first quarter of 2017.

Operating income of $45 million and adjusted EBITDA of $54 million, an increase of $5 million from the first quarter of 2017. For the quarter, SmartSide average sales prices were up 6% due to changes in product mix and the price increase, while sales volumes were lower by 4%.

As Brad noted, reduction in our sales volumes to our SmartSide product line reduced transportation issues for products produced in Western Canada and a margin enhancement initiative on the fiber portion of the SmartSide product. We raised prices by 9% to 16% in our SmartSide fiber products, which negatively impacted the demand for these products.

Demand for our SmartSide strand product was essentially flat with the first quarter of 2017. We produced 86 million [indiscernible] of OSB in the Siding segment during the first quarter of 2018.

The increase in OSB production is related to moving the Dawson Creek mill into the Siding segment as we prepare for the conversion of the Dawson Creek mill to a Siding mill later this year. OSB sales in the segment were $18 million and the adjusted EBITDA associated with OSB from those sales for the quarter ended March 31, 2018, was $4.2 million.

Turning to Slide 6. OSB reported net sales for the first quarter of 2018 of $313 million, up 17% from $268 million in the first quarter of 2017. OSB reported operating income of $97 million compared to operating income of $61 million from the first quarter of 2017.

Adjusted EBITDA from continuing operations was $113 million compared to $76 million in 2017. Beginning this quarter, we are reporting OSB commodity sales and value-add sales separately. Sales volumes in our commodity OSB product were 2% higher with sales volumes in our value-added products 2% lower.

The reduction in the value-added products was tied to our movement of the Dawson Creek OSB mill. As mentioned in the Siding segment results, that mill which manufactures TechShield Radiant Barrier was moved to the Siding segment. Pricing for OSB was higher by 18% for commodity products and 15% for value-added products.

The increase in OSB pricing resulted in improved operating results of $46 million. Partially offsetting the higher sales price are increases in raw material costs and increases in manufacturing costs due to downtime related to logistics issues associated with our Western Canadian operations.

Turning to Slide 7 of the presentation, which shows the results of our Engineered Wood Products segment. This segment includes I-Joist, Laminated Strand Lumber, Laminated Veneer Lumber, OSB produced at our Houlton, Maine facility, plywood plus other related products.

This segment also includes the sales of I-Joist and LVL products produced by the Abitibi joint venture or under our manufacturing agreement with Murphy Plywood. The Engineered Wood Products segment recorded sales of $101 million in the first quarter of 2018, up from $82 million in the first quarter of 2017.

EWP reported income of $3 million in the first quarter of 2018 as compared to $1 million from the first quarter of 2017. For the first quarter of 2018, adjusted EBITDA from continuing operations was $7 million as compared to $5 million in the first quarter of 2017. Volumes of LVL were up 4%.

All sales volumes were up 16%, and volumes of I-Joist were up 19% compared with the same quarter last year. Pricing was up 9% in LVL, up 10% in LSL and up 7% in I-Joist. And we did announce a price increase last Friday of up to 10% across our family of SolidStart Engineered Wood Products. Moving on to Slide 8 of the presentation.

For the quarter, our South American segment reported record sales of $42 million, about $5 million higher than the $38 million reported in the first quarter of 2017. Operating income was $9 million and adjusted EBITDA was $11 million for the first quarter of 2018, which was about $4 million higher than the first quarter of 2017.

The volume of OSB sold in South America in the first quarter of 2018 was lower than the volume sold in the first quarter of 2017, primarily due to selling less imported product and product which was in-transit to our new sales offices and customers in Peru and Argentina. Pricing was up 25% in OSB and they present in Siding.

Pricing was especially strong in Chile, thanks to robust market demand. Total selling, general and administrative costs were $51 million in the first quarter of 2018, about $2 million higher than the same quarter in 2017, primarily related to increases in headcount in our sales and marketing areas. Please refer to Slide 9 of the presentation.

As of March 31, 2018, we had cash and cash equivalents of $896 million. Capital expenditures for the first 3 months of 2018 were $43 million. As we have discussed, we approach our capital allocation strategy with a focus on deploying capital where we believe we can generate the highest returns and value for our shareholders.

We look at capital allocation across three main buckets, liquidity requirements and working capital needs, organic growth initiatives and value-enhancing M&A and return of capital to shareholders.

On a full year basis, we are projecting capital expenditures for 2018 at $200 million to $250 million, of which, $115 million is for growth projects and $130 million is associated with maintenance projects. Our $45 million investment in Entekra is an example of our ability to deploy capital where we see attractive inorganic growth opportunities.

In this case, a longer-term fly in the burgeoning market with new technologies. Finally, returning capital to shareholders remains one of our key priorities, and the board regularly evaluates opportunities to do so. As you know, the board reinstated the dividend last quarter, and we announced another $0.13 dividend on Friday.

While we did not repurchase any stock in the quarter, we will be actively looking for opportunities to repurchase shares depending on our stock price, market conditions and if we believe doing so represents a compelling opportunity relative to other uses of cash. Thank you. And Gigi, we'd like to go to the queue..

[Operator Instructions]. And our first question is from Mark Connelly from Stevens..

Brad, two things. When I look at LP's M&A record, it hasn't been great. So I wonder if you could help us understand how you're thinking about this panel business, given that there are so many different companies doing some variation on this..

Sure. So the things that we're interested -- interesting about this acquisition to us was, first of all, with the joint venture, we have a management team that has done this before in Europe created a very successful -- built and created a very successful business in Ireland and sold product into the U.K. as well.

And so we feel good about the capability of the organization and the leadership team to execute on this strategy and to scale it. Secondly, there are some manufacturing and conveying components to these factories that were very familiar to the back end of the Siding mill where you're moving product around.

So we believe we do bring an engineering expertise and particularly an expertise around permitting and building facilities in the U.S. And then thirdly, I would mention that we have very good relations with most of the big builder and regional builders, I should say, national builders and regional builders in the U.S.

We plan to leverage those relationships to -- at a minimum, get an entry into sales process for these panel products. So we've done a lot of due diligence. While the manufacturing is not simple, I believe it is something where we can add value and then helping Entekra provide the market access into the builder community is also advantage from us.

And so we feel very good about the opportunity. It is a startup, and so the key to the success of these businesses, the scalability and market acceptance of these panel-type products. And so we're looking forward to making that happen and growing with the Entekra company..

Okay. That's very helpful. You mentioned being long-term and patient in Latin America. LP has been extraordinarily patient with EWP and has several attempts to try to get that business to a better place, but we almost never see double-digit operating margins.

Is there is something new that you're trying to do to get those margins up?.

Okay. So there's -- the two or three things. First of all, I'll mention, and not in particular order, we are very focused on maintaining a very competitive cost position in that business. You might recall we've talked about we removed a lot of SG&A over the last 12 months from the business.

And then we need to grow the volumes, and we need to be more aggressive in pricing. And so our volume growth has been good over the past 12 months. As Sallie mentioned and I did too, the pricing that we implemented in Q1, we've announced another price increase last week.

And then finally, growing the volume in our LSL part of the business is very important to the underlying economics of that. The LSL mill, in comparison to other EWP mills, is a high-fixed-cost facility, so volume is very critical to the economics of that facility.

So we're very focused on continuing to drive double-digit growth in our LSL business so that we can get the economies of scale that we need in our Houlton LSL mill. So volume growth, a sharp eye on cost and then getting all the pricing we can out of the market as the housing market continues to improve and price demand for the products..

And I would like to add to that, Mark. You can really see the impact of the efforts that Brad was talking about. Single-family starts were up 7% in the first quarter or the first quarter 2017, and our EWP business sales were up 23%. So we're certainly pleased with the progress in that business and have expectations that we'll continue to see progress..

Our next question is from George Staphos from Bank of America Merrill Lynch..

Two questions from me to start and then I'll turn it over. First, can you give us a bit of color to what kind of investment you think you'll need to do to broaden Entekra's acceptance by the consumer and to scale it as you say? That's question #1..

So, George, you're asking beyond the $45 million that we announced this morning?.

Correct. Yes..

Okay. So let me put it in perspective. A fully automated plant that we envision would be the model for this product would run between $15 million to $25 million based on the geography. So each of the facilities would cause that to expand. We feel like the investments we've made could find, from the map I just gave you, about two facilities.

And so we're looking at basically $20 million increments as we scale the business up region by region or plant by plant. From a sales and marketing standpoint, there is some investment there.

I don't have a number, top of mind, but right now, the demand and the inquiries to Entekra about selling the system is signaling to me, we're not going to have to do a lot of marketing upfront. We need to get capacity in front of that so that we can meet the demand that already exists in the marketplace..

And George, I would add to that, that we fully expect Entekra to start generating cash at those first facilities get into operating mode and selling mode, so we're anticipating that the investment will be self-funding..

Okay.

And Brad, can you mention, when do you expect you'll actually be manufacturing using Entekra's capabilities?.

They're manufacturing today in a small, call it, pilot plant in Ripon, California. And the job one is to put some automation with the fundings, to put some automation in that plant. But probably from the fully automated plants, we're looking at late next year before we get any volume out of those or out of that first plant..

A follow-on and another one and I'll turn it over. In terms of gaining more acceptance by builders regarding this technology, what do you need at this juncture? Or is the builder community really ready for this now, given the constraints that you mentioned? And then totally shifting gears.

In Siding, I think you said, if I heard you correctly, that strand Siding prices were flat year-on-year with that mix.

Was that your expectation? Are you seeing any kind of competitive response to your -- obviously, your continued growth in the market?.

I'll do the SmartSide pricing first. We were up 6% quarter-over-quarter -- quarter-over-prior-quarter, so we have gotten good pricing in SmartSide. Sorry if I caused some confusion there.

And then as far as market acceptance for the Entekra system, change is -- we have an experience of change being tough in this business to change building practices in particular. So we have realistic expectations for how quickly we could get market acceptance.

But I do believe, I understand completely that the underlying economics of this system would be very beneficial to builders, especially builders whose sales are constrained by their inability to get labor. Moving this in factory, installing this as a system on a job site provides a lot of productivity and reduces cycle times.

So we believe builders, be them small, medium or large, that are interested in increasing the productive capacity today will be looking at Entekra and systems like Entekra as a means to get that done. So I feel like market acceptance will -- I believe the demand is there. There is a process change.

It has to happen for this system to be utilized on the job site. So we are and will be -- continue to working with builders to make sure they understand the economics of this, which we think is very compelling..

Our next question is from Gail Glazerman from Roe Equity Research..

Sticking on Entekra for a moment. A couple of questions there.

How would you foresee this changing the types of materials used to frame the house, either in terms of just the volume of material or the type of material? And are there other competing options that would use different materials that have been established in markets like Europe that they compete against?.

So Gail, the material used today by Entekra is always paved studs, flooring, I-Joist, Solid Sawn for some of their flooring systems, TechShield on the roof. So there's not a lot of difference in the building products used in this system, and we don't anticipate that being dramatically different.

I mean, there are some difference in fastening and setting the wall systems in place, but that's just really minimal. So no big change in the sourcing of the product compared -- or a home built on-site versus built-in factory. Gail, I can't remember if your question has a second part to it..

I guess, are there other alternatives that seem to be gaining ground either here or in international market that would also aim -- take labor out of that system, that may be more or less reliant on OSB raw materials?.

Got you. None that I'm aware of..

Okay. And just a couple of quick questions for me, OSB market.

Can you, I guess, give a sense of magnitude between how much production you might have lost in the first quarter versus the magnitude of the inventory buildup in related to that? Any sense of how much double ordering there might have been from customers that were caught because of the logistics issues?.

I'm not aware of any double ordering, Gail, of any significance.

From a volume standpoint, Sallie, are you going to answer that?.

Yes. So from a volume standpoint, we lost about 20 million square feet in our OSB business and probably just under 40 million square feet in our Siding business. So interestingly, the Canadian rail issues actually impacted the Siding business a bit more than it did the OSB business.

And then as for the inventory, most of the build in the inventory, about $30 million of that related to logs and the remainder related to in-transit issues..

Let me add on to that. On the Siding side, about 27 million of the impacted volume was from OSB that would have been shipped out of Dawson. And the other 10 million would -- is strand volume that would have been shipped out of Swan. So there was an OSB and Siding mixed into the volume shortfalls due to rail and the Siding business..

Our next question is from Ketan Mamtora from BMO Capital Markets..

Thanks for the increased disclosures. It's very helpful. So first question, again, I want to come back to Entekra one more time. So sorry if I missed this, but can you just clarify, is this kind of an outright purchase? Or I heard Brad say at one point, JV.

So what is the structure?.

So it's an investment. It's fundamentally 50-50 investment between us and the management team..

I see.

So the $45 million is your 50% share?.

Correct..

And then, so Brad mentioned that maybe by the end of next year, you all could see some volumes out of that.

When do you expect this business to be kind of EBITDA-positive? Is it kind of first year of the shoot? Or does it take a little bit of time to kind of seed the market and SG&A and those kind of things?.

Well, the way I think you should think about it, Ketan, is that it will be a couple of years before it actually has a material impact on our financial statements. So I mean, right now, it's completely in startup mode..

Understood. And then you mentioned kind of the lost production from the issues at Canadian rail.

Can you quantify, if at all, kind of the dollar impact on Q1 results?.

Sure. So, yes, mostly in terms of production costs. In OSB, it was really a loss of volume. The production cost was just under a million dollars. Actually, negatively impacted our EWP business just over $1 million. And then on the Siding business, the absorption costs was about $2.5 million..

Just to reiterate, Sallie is speaking of loss absorption, not the potential margin of the sold product..

Right..

Got it. That's helpful.

And then, can you just remind us on the 2 projects that you have going on right now, one in Chile and the Dawson Creek in terms of amount of timing?.

Sure, so we're looking at a Q3 startup for the Chile mill. It's on time and on budget. We're saying August will be the startup time.

And then for Dawson Creek, we are looking at, this will be repetitive to the last call, we're looking at taking the mill down right now in November and then December of this year to -- and we'll run OSB up through October, take the mill down in November and December to do the tie-ins, and then come up in the first quarter on SmartSide..

Our next question is from Chip Dillon from Vertical Research..

A couple of questions on Entekra.

First of all, where will we report this? Will it be in engineered wood or were you making new segment or some other arrangement? And secondly, when I think about what the business involves, how much of their production would likely be stock sizes versus how much have to be special order to fit a particular size of either a remodeled or a new house?.

Chip, in terms of financial results, those show up in other. We have the others segment. But again, as I said to Ketan, I don't expect them to be material and we'll keep you all informed as the business grows..

And Chip, on your second question, so the Entekra system is -- they're manufacturing wall systems in plan if you didn't already understand that. Not just -- it's not like a seat plan or just 4 x 8 panels. And so they are running links of wall system in the plant. Right now, they're pretty much using standard products for everything.

They do like longer-length OSB. Obviously, it's easier to -- or more efficient to handle in the factory, but that's also being used on on-site construction. So if you walk through their front-end inventory, it would be products you're used to seeing delivered on to a homesite..

I understand that.

I just meant on the other end when a builder buys the Entekra premade wall, will it be a special order for certain size of a wall or an exterior? I'm sorry, of a frame? Or will it be standard sizes? In other words, are you going to be making a lot of special orders? Or is this some business where it's standard products?.

Chip, I'm sorry. Yes. No, the way the process works is the builder sends the plans over for the house. Those plans are converted into in-factory framing units and we -- basically, every job is custom, unless there's a repeat design for the house.

So we are essentially framing whatever the specifications are that's just getting framed in a factory versus on-the-job site. There's no standard product coming out of the Entekra plants..

That's very good to hear. I mean, that certainly fits in your gradual strategy to become a building products company, so it is all custom made for the most part or custom products that you're selling into the market. That's good to know. And then on the engineered wood slide, for the quarter, I found it -- I just was curious.

Your -- it looks like you know your revenues increased $18 million. The EBITDA conversion was decent, up -- or the EBIT conversion was about 10% of that.

But I was just wondering, is there any extra leverage we might see? And the -- I guess a corresponding question is, it looks like, just looking at these percentages, that it's still dominated by LVL and that LSL and I-Joist are smaller, just looking at these percentages. So you might confirm that.

But I guess what I'm looking at is, as the market grows, is there any operating leverage in this business?.

Chip, one thing I didn't talk about, the conversation about the CN, with CN also impacted the engineered wood business. So probably close to $1 million of production costs and there's also some lost volume there. So take that into consideration this year, evaluating the numbers..

Got you. That's helpful. And one last quick one. People always kind of roll their eyes when you blame weather, but I'm looking at your inventory build just overall in the quarter. It was up well in the double digits. And I know, seasonally, it typically goes up.

But when you factor in that March had most of the Easter weekend in it, and you have these 4 Northeasters in the East Coast region, maybe I'm admiring you for not citing weather, but certainly did not that have any impact, especially on any part of your business in terms of actually getting product out the door or having sales?.

Well, we never like to blame weather for anything, Chip, as you know. So I would tell you that $30 million of that is associated with log and that's actually getting more logs at a better cost. And the way we thought about the inventory is that most of it really is related to just one I'm going to call indigestion associated with the rail issues.

So even as I have conversations with our general managers, I've not heard them discuss weather as really being the culprit. And I think as we think about inventories, meaning in the system not just at LP, our view is that OSB inventory channel -- channel inventory is pretty lean; SmartSide, likewise as maybe just normal and EWP as well.

So yes, I'm not hearing weather as a reason..

Okay. And again, to be clear, the inventory increase, you mentioned 30s logs.

You're not in a position to ship more than you make in the second quarter as opposed to being in a position to ship more than you make?.

Oh, no. I think some of that is things that will ship more, it's very likely we could ship more than we make. But I think Brad want to add some insight into the weather comment..

Well, just keep in mind weather was a factor in the rail issues. So with the colder winter, the harsher winter in Canada, that slowed rail speeds down and shortened up the length of the number of cars that could put on a line. So the rail issue and weather definitely link when you speak to the production coming out of Canada..

And then, I guess, one thing I'd like to add, as we're getting the next question on the -- in order for us to continue to hit that 12% to 14% revenue growth, we are going to have to be shipping Siding in the second quarter..

Our next question is from Reuben Garner from Seaport Global Securities..

So I think you mentioned that last year in the Siding segment, you had some pull-forward from a price increase and you lowered the allowable limit this year.

Can you quantify what that impact is? And then maybe as a part of it, just talk about your volume price outlook for Siding for the next few quarters? I know the comp gets a little bit easier there..

Okay. So last year, we had a price increase on March 1, and we allowed our customers to purchase 120% of their prior year January and February volume prior to price increase. So this year, we had a price increase scheduled the same time, but we only allowed 110%.

So that means that for January and February, most customers ordered 10% less volume than they had the year before. So that's the quantification. So for the quarter, it would have had about a 10% impact on volume..

So Reuben, last year when we talked about the first half of the year, we had a very strong first quarter and we knew that we had pulled some sales from the second quarter and the first quarter. So we're really focusing the evaluation of the business on the first six months. We believe this quarter, we have the reverse.

So we have had a bit of a weaker first quarter that we should see some more strength in the second quarter. And that's part of what gets us back to that on track this year for the full year, the 12% to 14% revenue growth. But I will note that if you look at a trailing 12-month basis, we are about 12% revenue growth that we referred to in the past..

Okay, very helpful. And then on Entekra, can you help me understand the distribution strategy you mentioned potentially marketing investments.

Would your plan B to go through your distribution partners? And do any of them already have similar offerings to this? Or is this something that is pretty new to your distribution platform?.

And that's a great question. So yes, today, Entekra is purchasing for normal distribution for the foreseeable future. We see that continuing. There are certain pro-dealers that offer a variety of services. Nothing exactly like what Entekra is doing, I would characterize even close to what Entekra is doing.

But panelization, some implant, well, trusses, roof trusses would be a great example. I guess, there would be some significant overlap or potential for significant overlap. But we see this as incremental, from a demand standpoint, to what's already happening as far as helping builders build more efficient homes.

And we look forward to working with our distributors, these companies in California today, looking -- working with our distributors and dealers in California to continue to supply Entekra..

Our next question is from Steve Chercover from Davidson..

A couple of follow-up questions, this is late in the session. First of all, with respect to the Canadian rail situation, I mean, obviously, it had been quite negative not just for you, but for the group.

And I'm wondering, does that potentially influence where you might situate future Siding operations?.

Yes, it's definitely a factor in future decisions around Siding. As Sallie has said, it's very painful for us to delay orders in Siding. Unlike OSB, our customers have nowhere else to go if they're using engineered wood Siding than us.

And while we -- while the other competitive advantages from being in Canada, particularly wood cost, the inability of -- to get consistent rail service every year will be something we put in our consideration for future Siding conversions..

So I don't want to put words into your mouth, but I mean, this actually might move the needle towards Cook as opposed to Québec..

It will be one of the factors we consider when we compare the two..

Okay.

And forgive me if I missed it, but did you say it costs about $40 million a copy to replicate the Entekra facilities? Is that about right?.

No, that would be for two facilities. Two fully automated facilities and that's an approximation. Obviously, it can range depending on the specifications of the factory and where you put it, but this side, we'll say $15 million to $25 million per plant..

Our next question is from Mark Weintraub from Buckingham Research..

So with Entekra, you obviously make OSB. You certainly make flooring and most of the products that seem to be included. You obviously mix lumber studs, et cetera.

How much of what they are delivering in their package do you make versus you don't make? And what is initially the thought process on integrating product you make into it and how might that evolve?.

Okay. So in all my visits to the Entekra facility in California, I'm only seeing them use an OSB for the sheathing, roof and in fact, I've only seen them use TechShield in the roof and then OSB for sheathing and OSB for flooring. They do engineer the flooring solution pretty much on the builders' specification.

So while they are using I-Joist, they also use open web and Solid Sawn for the flooring. And then as you've mentioned, they use studs just like us on on-site primer wood. So we were definitely would play into sheathing, roofing, flooring and for some percentage of the I-Joist or the studs for the flooring..

And so order of magnitude, if you were to go into integrated model over time, what percentage of the product they deliver can you -- could you potentially deliver at this juncture?.

Well, it would be everything but the studs and the roof trusses. But off top of the mind, I don't know what percent that would be..

Okay.

So initially, it's fair to say you don't have an integrated model though? Or is it they're just buying from kind of a third party making their own decisions where they buy it?.

Let me be clear, we did not do this from a vertical integration strategy or as part of that. Now, obviously, if it makes sense for us, that would be a logical thing to do.

But -- and especially when it comes to OSB, in the commodity OSB which they use a lot of, it's so logistically dependent on -- depending on the region, on what's the right OSB to be buying that right now, we're going to give the business, the opportunity to purchase whatever makes sense and to make their business model successful.

And if I may repeat, if there's ultra-logical reason for us to ship direct or to provide product through distribution for specifying LP, we will. But right now, the issue as far as volume growth and especially in OSB, we don't need this incremental volume to balance out our mills..

Mark, just to be clear. This is an investment versus, let's just say, versus the joint venture, say, we have with our -- with Abitibi on I-Joist. But We feel that -- and we'll operate it as an investment. We'll have an independent Board of Directors.

And as Brad mentioned in his comments, we're really relying and believe appropriately so on the management team that was successful converting from masonry to stick frame in Ireland and parts of the U.K. their ability with our help to have a similar conversion here..

And by the way, when they were doing that, was that also under this name, Entekra, in Ireland?.

No..

Century what?.

Century homes..

Yes..

Okay, great. And then just, if I could, shifting gears. So on the SmartSide, you obviously have that conversion now. So presumably, you have the capability to be producing more Siding than you had been previously.

And I guess, I wasn't quite sure whether you have been producing more and it was the logistical issues, et cetera, so that caused you maybe to build some inventory. And/or whether or not it was more on the demand-side being -- because I've seen that on the fiber, it was on the demand side, but on the strand, it was just the logistics.

Is that the way I understand it?.

Yes, Mark. That's the way to think about it. So I just want to be clear. You must be -- because Dawson still has not converted. It's producing 100% of OSB. It's just part of the Siding segment results. Okay. And so the -- our ability to produce SmartSide strand hasn't really changed.

It's about market demand and so more strand Siding being sold out of those facilities, either out of Swan or out of Hayward..

Our next question is from Stephen Kim from Evercore ISI..

Its' Steve Kim at Evercore. I want to talk about Entekra a little bit more. You discussed the factory investments there, but my understanding is that the real value add that Entekra brings is actually perhaps more on the engineering and the design work that they do before any wood is cut.

So I was wondering if you could talk about what attracted you most to Entekra? Was it their factory design? Or rather, is there something about their front-end process that you found most attractive?.

Steven, you're right. It's the -- the engineering -- and sorry, I meant to mention this on the prior question and we kind of moved on.

But one of the distinctive advantages between Entekra and the competition that's out there is this ability that I described a moment ago with taking an existing framing plan that a builder already has for a home design and converting that -- and engineering that into a design that can be made in the factory and then also optimizing that design, so that you make proper trade off between cost and strength.

And so the -- it is if you look at the Entekra website, they call themselves an engineering company because that is a significant value that can provide to builders.

And over time, the expectation is a lot of that design work actually would move from wherever it's done currently with a builder into the Entekra businesses as they demonstrate the competency around this implant design and engineering.

From a factory standpoint, the equipment that the company will be buying is kind of off-the-shelf equipment, so there is nothing unique or proprietary there. It is all about the ability to understand how to take an existing plan and convert it into an efficient implant engineered design that is efficiently manufactured in this environment.

And from the back end of that is your controlling cost or cutting cost per builder and you ultimately even providing a higher-quality structure for the homeowner. And that's what's really intriguing to us..

Yes, that's very helpful. And now it gets to the question I suppose of the ability to scale the business with a design work possibly being able to be centralized perhaps more easily than factories could be. And so in that regard, Entekra is primarily a California -- has had a California focus.

So even in terms of these additional plans, which they have all envisioned they would need, but are you -- as you think about expanding Entekra perhaps, expanding this investment into space beyond just, let's say, California.

Are you intending to be exclusively in Entekra in doing that? Or are you open to exploring additional investments, but let's say, in other players and other geographies?.

So as I mentioned, we like the business model that Entekra has developed. We like the management team there. I think our first priority will be to scale the business through our investment in Entekra and our joint venture with them.

I do think this announcement and us investing in this segment of the industry and learning about it could provide additional acquisition opportunities that would either pull into LP or put into the Entekra business, depending on what was logical.

So we are excited not only about the scalability of the Entekra, let's call it, the Entekra model nationally, but also other add-on -- potential add-on acquisitions that could complement what we learned to do as far as providing this kind of value to a builder..

Great. That's super helpful. And then last one for me is you talked about I'm getting a sense of management of Entekra's going to maintain the way it is. I think they're all staying with the business. I was curious as to whether you think your investment changes the growth trajectory that they had originally envisioned for themselves.

I think there's some press out there basically saying how they hope to eventually get to about $166 million in sales just assuming that. My sense was that, that was kind of late in 2020.

I don't know if that's actually in line with the way you were thinking about it, but can you just talk about whether you think your $45 million injection here is going to be able to accelerate the growth trajectory that they had been envisioning? Or are you pretty much buying into that vision?.

I would say it's more that we're buying into that vision. Obviously, them having the funding available provides builders more confidence to make bigger bets with them, if that's what you want to call it as far as trial and also commitments around subdivisions or multiunit orders.

And so I think the investment does help the business as far as scalability, but we have to be realistic that you can't scale it until you have a factory built. And just that process of engineering and building the factory will somewhat inhibit growth until we can those up and running.

So this circle back around and say it's pretty much in line with what they've been saying publicly around our growth aspirations. I think we will accelerate a little bit but probably not materially..

Our next question is from Paul Quinn from RBC Capital Markets..

Just on the OSB market you described, Brad, is a robust market. And those your price realizations lagged, which is kind of similar to what we saw with Norbord.

How do you look at Q2 here, given the, I guess, steadying pricing and moving up late last week? And then any impact as far as you can see on new production coming into the market yet?.

So yes, we've been heartened by the stability in the OSB market over the last 6 weeks-or-so. And then as you mentioned, Paul, the blip last week, inventories were lean. The weather is getting better across the country. And so I think Q2, I've always hesitate to predict OSB pricing for past about a week or two.

But I think the underlying dynamics for it is for a good second quarter. We'll see how that plays out. As far as the production coming out of the 5 starting up machines being started up, the Norbord and total volumes out there or we see a little of that in the market or see some of it.

But for the other three, it's just minimal volume right now that we're seeing in the market. So I don't think the new capacity will have a significant or even a marginal impact on pricing in Q2. Now in Q3, if Huguley and [indiscernible] running a little bit better, we could see a little bit more volume out of them.

But hopefully, we'll also see a good Q3 demand as well as housing continues to recover. So I think the industry is in really good balance for the rest of this year even into the first half of next year as long as we continue to see the recovery in housing..

I'd like to thank everybody for participating on our call today, and we do hope that you will join us at our Investor Meeting and LP house party on May 14 at the New York Stock Exchange. And Gigi, with that, I'd like you to provide the replay number. I thank everyone and hope everyone has a good day..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect..