Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 Louisiana-Pacific Corporation Earnings Conference call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the call over to Aaron Howald. Please go ahead..

Thank you Michelle, and good morning everyone, and thank you for joining us today to discuss LP's financial results for the fourth quarter and full year 2019. My name is Aaron Howald, and I'm LP's Director of Investor Relations.

I'm joined today by Brad Southern, LP's Chief Executive Officer; and Alan Haughie, Chief Financial Officer.As we have done in the past, we are hosting a simultaneous webcast in addition to this conference call. The webcast can be accessed at our website www.lpcorp.com.

We've also provided a presentation with supplemental materials to which we will refer during this morning's comments. And finally, we have filed our 8-K this morning with some additional information.I want to remind all participants on the call about forward-looking statements and our use of non-GAAP financial information during the discussion.

I will refer you to Slides 2 and 3 of the accompanying presentation for more detail. The appendix attached to the presentation has some necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning. Rather than reading those statements, I incorporate them herein by reference.And now I'll turn the call over to Brad..

Thanks Aaron and thank you all for joining us this morning. I'll begin today's call with a high-level overview of our results for the fourth quarter and the year. After that I'll provide an update on our strategic transformation initiatives, then I will turn the call over to Alan for a more detailed review of our financial performance.U.S.

housing market has improved somewhat since the third quarter with December being particularly strong. Single-family starts were up 15% compared to Q4 of 2018, but only up 1% on a full year basis. Total U.S.

housing starts for the year were up only 3% compared to 2018, with the bulk of the increase in the multi-family segment.OSB prices have climbed somewhat from cycle lows, with the Q4 average north central benchmark up 3% compared to Q3, but still down 8% compared to Q4 of 2018.

Despite minimal market uplift, our Siding segment continued its growth trajectory and OSB segment was EBITDA positive.We generated $100 million in cash from operations in Q4, completed our $600 million share buyback, announced an increased dividend of $0.145 per share, and continued to meet and exceed our goals for strategic transformation.

We also ended the quarter with $0.05 of adjusted earnings per share and ended the year with $0.37 of adjusted earnings per share.Slide 5 summarizes our progress relative to our transformation goals. As you can see on the graph to the left, single-family starts grew 1% in 2019 from $876,000 to $888,000.

By contrast, we grew SmartSide Strand revenue by 11% compared to Q4 of 2018 and by 10% on a full year basis, setting quarterly and annual records.Sustained growth was -- with so little organic market size increase indicates continued market penetration and growing demand for our products in the repair and remodel sector.

This growth is consistent with our guidance, which we reaffirmed for 2020.The table on the right highlights the progress we have made since 2018 on our strategic transformation. In addition to the sales growth I mentioned, Siding also generated $13 million in efficiency gains for a total of $32 million of EBITDA impact.

I should also point out that the record safety performance of the Siding business that I mentioned in Q3 continued throughout Q4.

Safety is a core value for us at LP and I am grateful for and proud of Siding team's outstanding safety performance to close out 2019.All businesses continue to improve operating efficiency, which we measure as overall equipment effectiveness or OEE. We also continue to gain ground on sourcing savings.

Coincidentally, the OSB segment also contributed $32 million of impact towards our transformation goals in 2019, whereas Siding's impact was predominantly from growth OSB gained $23 million of the $32 million toward efficiency.OSB's growth impact of $9 million is derived from the continued increase in the percentage of high value-add Structural Solutions products, which hit 45% of OSB volume in Q4.

EWP in South America added another $4 million of EBITDA gains from efficiency for a combined 2019 transformation impact of $68 million.

The three-year combined target for growth and efficiency improvement is $165 million, with one-third of the time elapsed we are a bit over 40% of the way to the goal, so we remain ahead of pace.Alan will walk you through the financials in more detail in a few minutes, but the combined efforts of the business segments, along with the intense focus on cost, resulted in $100 million in operating cash flow in the fourth quarter.

Alan will also discuss some non-cash impairment charges we took in the quarter.

Those impairments resulted in a reported loss for the year and the quarter, but excluding those adjustments our EBITDA was $49 million for the quarter and $209 million for the year.I've talked about growth and efficiency, but I want to spend a moment discussing the innovations we are bringing to market. We are LP Building Solutions.

That means, always pushing ourselves to solve our customers' problems in innovative way. Over the last 12 months, we added smooth and export-finished pre-finished siding to expand our offering and reach.

We are addressing labor shortages with our Structural Solutions products that save builders time like WeatherLogic and FlameBlock.Entekra helps address constraints in framed labor and productivity by utilizing the efficiency of battery automation. Our products exist on a spectrum of value.

Our strategy is to drive our products and ultimately our mills up that spectrum from commodity OSB to Structural Solutions, from OSB to Siding from prime to pre-finish.

We are innovating and executing to bring value to our customers and our shareholders.2019 was a year of challenging market dynamics including flat single-family housing and the lowest OSB prices we have seen in years. We responded with relentless execution and I'm extremely proud of the results of our efforts.

We grew SmartSide Strand revenue 10%, managed production and cost in OSB and launched innovative solutions like smooth siding, export finish and opened our new automated Entekra facility.Our transformation is making us better and more resilient, as we push our products and our mills up the value spectrum.

We have demonstrated that we are consistently growing Siding in a flat market and make the OSB segment profitable at the bottom of the OSB price cycle.

We are cautiously optimistic that the market will continue to improve in 2020 and I'm confident that our transformation is making LP more agile and better able to thrive in any market.With that, I'll turn the call over to Alan for a more detailed review of our fourth quarter and year-end results and the major themes that drove them..

first, I'll provide a summary of LP's financial performance for the fourth quarter and full year; second, I'll describe LP's ongoing transformation through the lens of our cash flow generation and the transition to phase two of our capital allocation strategy; and finally, before taking questions, I'll discuss LP's outlook for 2020 and beyond.As you can see on slide seven of the accompanying presentation, LP had net sales of $537 million for the fourth quarter and $2.3 billion for the year, down $52 million and $518 million respectively.

For the fourth quarter, OSB pricing volume declines of $38 million and $48 million respectively, were partly offset by $20 million or 11% SmartSide growth and $16 million of growth in EWP.For the full year, OSB pricing volume declines were $416 million and $183 million respectively, again, partly offset by SmartSide growth of $73 million or 10%.

We reported gross profits of $70 million for the fourth quarter and $303 million for the year.

If we normalize OSB prices, in last year's fourth quarter gross margin of 16% would have been 10%, against we improved 3 points this year to 13%, reflecting the transformation benefits, including growth in SmartSide and I'm about described in more detail.Selling, general and administrative expenses were flat for the quarter, but up $21 million for the year.

This reflects increased investments in sales and marketing to drive siding growth, much of which started late in 2018, hence the flattening of spending in the fourth quarter year-over-year comparison.We recorded $86 million of impairments in the quarter, including $47 million from non-operating assets.

Following the decision to idle Peace Valley, the removal of OSB productions from siding mills and with increased operating efficiencies at our active OSB mills, these non-operating assets have moved lower in the pecking order as candidates for future production.

Therefore, within the time frame of the remaining life of the plant and equipment, they're unlikely to generate meaningful cash flow.The remaining $39 million relates to assets used in the production of laminated strand lumber and OSB in the EWP segment.

Changes to EWP's distribution network in the year, while a significant net positive to the segment, did have the effect of reducing LSL demand expectations.I should point out that the impairments do not imply that these facilities are no longer candidates for future conversion to siding mills, some of them will remain attractive options.

It's simply that the cash flow generated from those conversions, while significant, would likely occur beyond the window of the remaining asset life.As a result of these charges, LP reported a fourth quarter net loss of $51 million and a net loss of $5 million for the full year, absent the impairments and with an average of 115 million shares outstanding, more of which in a moment when I discuss the share repurchases.

Adjusted diluted EPS was $0.05 for the quarter and $0.37 for the year.Slide eight disaggregates revenue and EBITDA to the business segment level. I'll discuss sales briefly before moving to the EBITDA waterfalls.

Siding segment sales were $230 million, a dip from the third to the fourth quarter is a familiar pattern that follows the seasonality of the building industry, but the decrease was smaller than we've seen historically.In fact, this was a record sales fourth quarter for the Siding segment, not just for SmartSide.

For the year, the Siding segment generated $963 million in sales, which is $21 million more dollars within 2018, with growth in SmartSide strand more than offsetting reductions in OSB, fiber and CanExel.The OSB segment generated $172 million in sales for the quarter and $777 million for the year, reflecting year-over-year declines of $83 million for the quarter and $528 million for the year.

I'll go into more detail in a moment, but it is striking that the price component of the reduction in sales is larger than the corresponding EBITDA decreases in both the quarter and the year. This further demonstrates a significant progress on cost and efficiencies in the OSB segment.

Combined with the results of EWP and LPSA, fourth quarter EBITDA was $49 million and $209 million for the year.The next two is a waterfall charts compare segment revenue and EBITDA to prior periods. I'll start with the Siding segment on page 9.

I'm sure you'll share my delight that this is rather simpler and much greener than the third quarter version. Sidings fourth quarter EBITDA in 2018 was $34 million. Since then SmartSide revenue has grown 11% adding $5 million in EBITDA.Sales and marketing expenses were flat on the anniversary of our increased level of investment.

Sourcing and efficiency added another $2 million in EBITDA for a total transformation benefit of $7 million.

Absorption OSB volumes and prices CanExel and everything else netted to $1 million for a total increase in EBITDA of $8 million and the components of the $17 million of revenue increase are shown beneath the EBITDA waterfall.The full year Siding waterfall on slide 10, includes a few additional variance items, primarily because of the costs associated with the conversion of Dawson Creek and the effects of reduced OSB prices and volumes, somewhat offset the positive impact of 10% annual growth in SmartSide.As Brad mentioned, the transformation contributed $32 million in EBITDA growth efficiency and sourcing gains partly offset by increased sales and marketing.

The remaining reductions from 2018 were discussed at length on prior calls.Page 11 shows the OSB waterfall, comparing year-over-year revenue and EBITDA changes for the fourth quarter. OSB price and volume declines relative to 2018 accounted for $79 million in revenue decreases and $48 million of reduced EBITDA.

Structural Solutions mix increased seven points to 45% of OSB volume and curtailment Peace Valley added $8 million for a total transformation impact of $11 million. The absorption related to market downtime accounted for $5 million offset by the change in inventory reserves.Page 12 shows the full year waterfall for OSB.

And again, it's a story of steep declines in OSB prices and outstanding progress in operational efficiency, agile capacity management, and Structural Solutions growth. As Brad mentioned, not only did the OSB segment produced $32 million of transformation benefits in 2019, but also $15 million in operating cost reductions.

Given OSB prices in 2019, we consider the $10 million of EBITDA for the year to be an outstanding result.Before turning to cash flow, I would summarize our segment performance as follows. Siding continues to grow with stable margins and is more than capable of funding both its own expansion and LPs increased dividend.

The OSB segment ended the year with positive EBITDA and a year, which we hope saw the bottom of the OSB price drop, which brings us to cash flow detailed on page 13.Highlights are $100 million of cash flow from operations in the fourth quarter bringing us to $159 million for the year, almost sufficient to fund capital spending of $163 million, which is where the drop in LP's cash balance of $697 million is almost exactly the same amount that LP returned to shareholders in 2019.LP started 2019 with nearly $900 million in cash.

Phase I of LP's capital allocation plan was to right-size the cash balance by returning a significant amount of capital to shareholders.

Over the course of the year, we bought back 25.3 million shares at an average price of $25.2 per share, which is too close to a perfect square for me to let pass without a comment.We also paid $0.135 per share in dividend each quarter totaling another $65 million as our share count declined through the year.

When we introduced our capital allocation plan a year ago, we placed a stake in the ground, namely that we could generate much higher operating cash flows even at low OSB prices than we did a few short years ago.To frame this commitment, we stated that if a random length 7/16 OSB price for 2019 were to be $200 per 1,000 square feet then we would generate operating cash flow of $140 million, with a sensitivity of plus or minus $30 million of cash flow for every $10 difference between the OSB price and its benchmark of $200.Slide 14 charts our progress on this commitment.

The target when flexed to the actual OSB price of $184 per 1,000 square feet becomes $92 million of cash flow, but we also promised $100 million in annual cash flow improvements from growth and efficiency by 2021, an average of $33 million per year.So after adjusting for OSB prices our cash flow target for 2019 becomes $92 million plus $33 million of improvement or $125 million.

But as I reported that, we are ahead of pace in generating EBITDA from our transformation and the cash flow proves it.

Against this $125 million target, we generated $159 million.I should point out that with the indefinite curtailment of Peace Valley, the sensitivity of our future cash flow to both rising and falling OSB prices have tightened from $30 million for each $10 change in OSB price to $25 million for each $10 change.

This translates to a new 2019 normalized cash flow from operations of $347 million assuming a cycle average OSB price of $260, an increase of $27 million over our 2018 benchmark of $320 million of cash flow.

And if that isn't a convincing demonstration of LP's transformation then I don't know what is.This time last year, we promised that once the $638 million of buybacks were complete, we would over time return to shareholders at least 50% of cash flow from operations in excess of core capital investments.

So with this Phase I complete and cash balances return to a level more appropriate for LP's liquidity and investment needs, we can formally begin Phase II of LP's capital allocation strategy.The first step is a 7% increase in the quarterly dividend from $0.135 per share to $0.145.

And in addition LP's Board of Directors has approved a new $200 million share repurchase program, the initiation of which will depend on our level of excess cash flow through 2020, which brings us to LP's outlook for 2020 and beyond, which you'll see summarized on slide 15.We expect capital expenditures to be in the range of $130 million to $140 million in 2020.

And with 2019 seeing 10% growth in SmartSide Strand sales and a flat housing market this gives us the confidence to reconfirm 10% to 12% annual growth for 2020 and beyond.Longer term and having generated $68 million of additional EBITDA from growth and efficiency in 2019, we're confident that we'll meet or exceed our 2021 target of $165 million.

The conversion of Dawson Creek complete the Siding segment has ample capacity for growth and so we continue to expect long-term EBITDA margins for the segment to be at least 20%.2019 strong cash flow from operations of $159 million shows that LP's transformation is robust and sustainable.

And as I said before, we're committed to returning 50% of cash flow in excess of necessary capital and other investments.With that right now I'll be glad to answer any questions you may have..

[Operator Instructions] Our first question comes from George Staphos of Bank of America. Your line is open..

Hi, thank you and thanks for all the details. I had two or three questions and I'll turn it over. Alan first of all, you had mentioned something about the fourth quarter margin comparison when you make some adjustments being up. I think you said around 300 basis points.

If you had mentioned the details on the conference call, I had missed it in the formal remarks.

If you could just go through that again that would be helpful.Secondly, I'm guessing the answer is going to be, you're not terribly concerned but should volumes remain where they've been as opposed to hopefully improving in terms of housing and then OSB? Is there any sort of source of consternation or headwind relative to getting to the transformation goals by 2021? I know you said you're confident but if you could provide a bit more color in terms of why volume wouldn't be a factor that would be helpful.And then lastly on conversions, I'm not really in a position to comment what mill might be more likely down the road, when you ultimately get to that sort of happy problem of running out of capacity in SmartSide, but could you give us a bit more thought given the impairments where or sort of what methodology you'll use to look at the next conversion? Thank you..

Okay. I'll start with the first one. The margin conversion, if you look at the 2018 fourth quarter result we had net sales of $589 million and a gross profit of $94 million. The year-over-year price decline alone in OSB was $38 million. So if you take $589 million of 2018 revenue and back out $38 million, you get a new baseline sales figure.

You take $94 million of gross profit back out $38 million to get a new gross profit figure by one by the other and you get 10%. So that's the normalized....

Got it. Yes..

And so that takes 16% in 2018 to 10% and then our gross profit this quarter this year was 13%. Secondly, you asked about – does lower volume in any way give us any concern over achievement of our operating efficiency goals? I would say not in the slightest. The point being our Siding business is continuing to grow.

Our OEE improvements are as it were we're on target for I would say adding additional capacity across our existing mills. So the – with the volume still with such a significant volume of both OSB and Siding production, there are still ample opportunities for us to continue to improve.

And no, we're highly confident in being able to achieve these goals..

George, I'll just add to that. Part of that question may have been based on the closure of Peace Valley within this time horizon. There was a fairly significant plan for improvement at that facility. Look there was a lot of opportunity for improved OEE at Peace Valley.

That was in our original numbers but because of our success across the rest of our system with our OEE initiative, we're confident we can still hit the original numbers that we guided to even without that mill in our system..

Thank you for that..

Yes. And then on the Siding capacity conversion question, really not much changed since we've talked about it last quarter.

We are looking at needing capacity given our current volume growth and our current mix assumptions sometime probably late 2022, which would mean the only investment would start 2021 with the bulk of that investment probably actually being in 2022.

So backing up from there then we would be contemplating Board approval and a public announcement about the location in either Q4 of this year or Q1 of next year – or I should say this call or the call – the last call of the year in 2020 but all the options we have been considering are still under consideration as we move forward..

Okay. Thank you. I’ll turn it over..

Our next question comes from Mark Connelly of Stephens Inc. Your line is open..

Thank you. Two things.

Have you now rolled out the smooth Siding product in all the markets you intend to? And with the pre-finished business that you picked up, can you just give us an update on how you're satisfaction with how bringing that in-house has gone?.

On the smooth – the smooth offering is in all markets, but not all SKUs in all markets. There's a large initiative this year around increasing the number of SKUs that we offer in smooth and so I would say there's still plenty of upside growth available for us around our smooth offering.

On the pre-finish, we have launched that product out of our -- two of our pre-finished facilities that are up and running now. The order file for that is very strong. We are currently meeting the demand projections there. So we are in a start-up, especially for the facility that was located in St. Louis that we restarted, but for our pre-finished.

So -- but all indications from a customer interest are very strong. And right now we're kind of trying to keep up with the order file by increased production. But we're very, very happy with the launch there and the reception of that launch that will be seen at the builder show..

That's great. And just one more question. When you were in New York at the Stock Exchange Brad, you talked about having some targets for how much LSL volume you'd need to really make that business carry its weight. Now you've changed things around and reduced your overall LSL expectations.

How does that net out in terms of the profitability opportunity in that business?.

That's a great question. With the distribution change that we made last year, we have seen a move back to more of that demand being filled by LVL and that has shown up in our EWP numbers last year. We are -- LVL is a good product from us from a margin standpoint. So from -- we're not really all that upset about that transfer back.

But obviously, we have taken a step backwards and filling up the capacity at Holton because of the mix change to more LVL sales..

Okay. Thank you..

Our next question comes from Ketan Mamtora of BMO Capital Markets. Your line is open..

Thank you. Good morning, Brad, Alan..

Hi. Ketan..

Hi..

First question, can you talk a little bit about your order books in OSB and kind of inventories in the channel for this time of the year?.

Yes. Ketan, I'll discuss through all three of the businesses because we usually get questions by the end of the call on all -- at least for OSB and siding. But let me start with EWP very strong order files right now for EWP business, we're pretty much booked up about two to three weeks in EWP.

OSB is also strong again two to three week order file for OSB and distributors and data are reporting very lean inventories throughout the channel in OSB. For Siding, softer than we would like right now and I'm going to like to go into a little bit of detail around that.We did have a good Q4 ordering on Siding.

There was some, I will say some extra buying in Q4 as some of our dealers had rebate tiers, annual rebate tiers that with some extra volume they could hit. We saw a little more activity around that in December as these distributors try to hit the rebate tiers.

Also we made a change this year and we've talked about this on the call previously, but we made a change on the timing of our price increase.

The last few years we've been raising prices to most customers on March 1st.And what has happened there is we've gotten really good strong pre-buy activity in February and then we would see a softening in the first part of Q2.

This year we had -- the majority of our price increases go into effect January 1st, so that also led to some pre-buy activity. We allowed 112% of prior December's orders as a limit. And not all customers hit that, but some did.

And so we're going through -- where we are right now and the order file is really working through some of that pre-buy that occurred in December and we're not through that yet.I do want to speak to the reason for the move of the price increase date movement.

We have -- we decided this year to structure our channel incentives to more of a quarterly incentive plan than just an annual incentive plan. And we did that for -- the primary reasons trying to smooth out some of the kind of artificial buying that we see at the end of the year associated with those folks trying to hit their year-end tier rebates.

And so we're trying to kind of incentivize a more consistent order pattern quarter-to-quarter.And we felt like in order to do that -- in order to implement that this year and have it viable in Q1 we needed to get the order -- the price increase skewing of order activity out of the way in December versus carrying it over into the middle of the first quarter.

Okay. More of an answer than you asked in your question, but I just thought I would cover all three businesses while we were on it..

No that's super helpful and just one follow-up on that.

So how much price increase have you announced for this year in Siding?.

It's at normal..

It's the normal you know for that, the 4% to 6% depending on the SKU..

4% to 6%. Okay got it.

So what would be the cadence of that? Is it a typical over the next couple of quarters you expect to get back?.

Yes. Because of the move up to the January date -- for the effective date, we're seeing order shift there probably by -- certainly by mill if not a little earlier in February. So there will be some ramp-up of the pricing in Q1. But when we get to Q2 we should have it fully implemented..

Okay. That's very helpful.

And then just one on OSB, can you just remind us -- or in Q4 what was your operating rate and how many down days you all took?.

Yes I'll take the down date. We took something in the region of 125 to 127 down days 92 of those down days were Peace Valley being down. The vast majority remainder was at 1 mill on Maniwaki mill. Other than that the OSB mills are running flat out..

Got it. Okay. That's -- yes. Okay that's helpful. And then just one last question before I turn it over. When I look at 2019 Siding EBITDA margin that was about 18.5%, but obviously you had a number of transitory issues that year.

As we think about 2020 do you think you could get to that 20% kind of an EBITDA margin number?.

I think we'll certainly move towards it. I'm not going to -- I have not actually committed to a Siding margin number for 2020. But given that, the OSB production and the OSB sales are out of that segment now, so let's call it a cleaner segment.

The biggest single step up that we saw or likely to see in sales and marketing occurred in 2019, so we're writing on that higher base. We'll certainly anticipate raising margins in 2020..

And not having the Dawson startup in there, as well a bigger margin helped just from a cost standpoint, but also we'll have a little richer -- well a lot richer mix coming out of that facility because there's a some startup board sales associated with any kind of mill conversion..

Yes. So when I look at that waterfall that you'll have on Slide 10. So Dawson Creek start-up costs were about $18 million and it looks like the fixed cost absorption portion was about $12 million.

So is it fair to say that all else equal you should get about $30 million going to 2020 from 2019?.

It's fair not to expect those variances to recur yes..

Got it. Okay, that’s very helpful. I will turn it over. Good luck in 2020..

Thank you..

[Operator Instructions] Our next question comes from Steve Chercover of Davidson. Your line is open..

Thanks. Good morning everyone..

Good morning, Steve..

So a couple of guys have tried to slice at this I also wanted to get your full year operating rate in OSB and really just to drill down. What would you say your OSB capacity is, if you have the opportunity to run full? And that does not mean restarting any mothballed facilities but just run what you have..

So Steve let me speak to the differential in running ex-Peace Valley.

So when we -- for the second half of last year we -- well once Piece Valley came out and we move some volume around, we were able to run the OSB system pretty much full other than the down days Alan spoke to, except for one, we were only running three shifts at Maniwaki so we run -- and those are 4-shift operations.Moving into this year, we have acquired some export business that's allowing us to add that fourth shift -- we have added that -- or in the process of adding that fourth shift back at Maniwaki.

So we're in a position -- currently where we'll be running the system pretty much full and reporting to you all market-related down days that we take, but our current intent with our infrastructure ex-Peace Valley, ex-OSB production in the Siding mill, so I'll just remind you the only place we're running Siding right now – sorry, running OSB in our Siding business right now is in Dawson where we did hold off, we did transfer some of the West Coast retail business out at Peace into Dawson when we shut down Peace.

So there's a little bit of OSB there.But other than that we -- our intent is to try to run our OSB segment pretty much at full capacity assuming that there's demand for that product in the marketplace.

And that would -- a whole reason for rationalizing production last year at Peace Valley and out of our Siding mills out of our EWP mill in Holton was to try to run our system more full this year.But I want to reiterate, we will only do that if the demand is there for production.

And then when you ask about what does that mean for us from a capacity standpoint without Peace you should -- you could think about our system capacity to be around 3.7 billion square feet at 3/8s..

And that's what I thought. But then when we look at the cash flow transformation and you give us a leverage saying a $10 change equals $25 million annually after removing Peace I just thought would the simple answer would be $2.5 billion? I don't think that's the right capacity number..

No. I'm a little confused as to -- Steve..

So part of the confusion there is the apples and oranges comparison in 3/8s basis than in 1/16 basis. And then there's a tax component to that cash flow sensitivity as well..

Okay. Got you..

So but that explains that difference..

I'm hoping that if there's a footnote on the bottom of that slide in minuscule font, we can always on post-calls elaborate and we'll elaborate on that..

That would – that’s a big factor….

…which explains….

I have to put on my bifocals and go through that..

Specifically designed so they have to do that..

Thank you. And just one other quick one on EWP.

So the mill where you're taking the charge and I recognize it's still functional is that Holton? And have you seen much impact from the new very large facility in South Carolina?.

That is Holton to confirm -- and currently no we haven't but we're going to. So -- but as of today, we haven't really been impacted by that..

Okay. Thank you. Best wishes for this year..

Our next question comes from Mark Weintraub of Seaport. Your line is open..

Thank you. I just wanted to clarify as we think about the bridge in Siding from 2019 to 2020. So totally understood, presumably we don't have the $18 million in conversion and ramp costs at Peace Valley. So that hopefully is incremental to 2020 versus 2019.

I'm not sure that the absorption -- that's not necessarily something we add though to our 2020 is it?.

No. We simply don't go backwards from that point. Yes you're quite right Mark..

Right.

So that's more than half?.

…initially earlier. Yeah..

Okay. Just wanted to clarify on that. And then additionally, so you talked about stable margins. So while we do have the price increase, so hopefully there's a chance that actually there could be -- this is I guess at the Siding price versus cost type level, but maybe we can get a little help there.

But -- and the other thing, it looks like volume growth every 10% of volume increase we saw 11% was $5 million, so if you get 10% for a year on SmartSide that probably translates to about $20 million. Is that a reasonable way to think about? And are there….

Sorry go ahead..

Are there any other significant components likely to move the bridge substantially as we think about 2020 versus 2019 in Siding?.

Okay. So, there are a couple. When you included the comment on stable margins, stable was just a conservative way of saying consistent and growing. I'm not trying to argue that Mark that we don't foresee a margin increase in Siding when I used the word stable.

So your question is valid.Yes the pricing and volume should both contribute to an increased margin. Your math around the volume conversion was pretty good. We may as we go through the year invest more in sales and marketing efforts. So again we may -- you may see some of that margin contribution dampened by that.

But at the same time, we are continuing to chase our efficiency improvements.

And if you -- even though the two are not related if you look at the waterfall for the full year on Siding then you see that efficiency savings basically offset the marketing dollars.So I don't see why we shouldn't see the same -- or everything aligns and we continue be as successful as we have been that we would see ourselves being able to offset increased sales and marketing with efficiency gains letting the price and volume impacts of SmartSide growth flow through to the bottom line all of the things being equal.

So we are optimistic about the profit conversion in 2020 for Siding..

Super. That's very helpful. And then lastly Entekra, I think the first commercial facility was going to ramp in the latter part of last year. Can you give us any sense as to how that's going? We're certainly seeing interest in the homebuilder community to focus on some of these off-site builders so an update would be appreciated..

Yes. So Mark we did start-up the facility in late Q4. We are still in a start-up mode I would say – well, I know that we're about 80% of where we want to be from just a number of machines that are running. They're all -- each of the machines are also into their own ramp up curve.

This is kind of a little bit of discrete manufacturing there versus continuous.

We do -- we are targeting to have -- to be essentially fully functional by March and there will be some ramp-up after that but we'll put -- this isn't a wet process hardboard mill, the learning curve should be pretty quick.The order file is very strong for the business compared to our capacity today.

So, we're encouraged by the market acceptance in Northern California and really when we get to the Q2 timeframe, we'll be in a position to really evaluate what the more longer term potential of the plant as far as our return on capital and profitability goes.

But so far everything is going well around the start-up, around the order file and us hitting the interim start-up metrics that we had in place to gauge how where we're coming up the learning curve..

Super. Thank you..

Our next question comes from Paul Quinn of RBC Capital Markets. Your line is open..

Yes, thanks very much. Good morning guys..

Hey Paul..

Good morning Paul..

Hey just a couple of easy questions.

One on the export side to move Maniwaki from three shifts to four shifts where are you selling those additional sheets?.

Office of export..

Is that a South American export to support the market? Or is it a--.

To Vietnam..

Vietnam.

And then just at a high level I mean you've got a major siding competitor that's growing about the same level that you're growing which is pretty significant and just wondering if we've seen any changes in the overall siding market? Any other uses between brick vinyl and continue to take market share? And where do you expect your market share percentage to be at the end of 2019?.

So, Paul let me take the question about the competitive substrates there.

I think both us and our competitor are really focused on the vinyl -- the opportunity against vinyl particularly in the repair and remodel sector which is why we moved smooth, why we move to pre,-finish why they have done the same as far as having a pre-finish offering.So, I think the opportunity at least for us that we see as far as continued growth is around further penetration against vinyl.

I personally don't see on a macro stance that's being directly competitive against brick and other substances except when you get to the conversations around affordability, so while I can't -- don't have direct evidence of this, I do know that our lab signing offering would be more economically advantageous siding than brick.

And so as we look at affordability continuing to be an issue with builders, we -- perhaps there's an opportunity for growth there. But clearly what we're focused on is repair and remodel as an engine for growth and targeting that against vinyl is what we're focused on..

Okay. So, the vinyl focus continues.

And what do you think your runway is against vinyl? Do you think that's five years or do you think that's 10 years plus?.

I think it's a 10-year runway. Some of that does depend on oil pricing we're more competitive when their raw material pricing goes up. And so there's -- we used to be in the vinyl business I'm pretty familiar with that. So, they can change at least from an economics change the mindset.

But we're focused on the aesthetic sale as we've talked about before.And I mean I really feel like us having -- being able to control a branded and self-manufactured national pre-finish line is really could be an accelerated our penetration in repair and remodel..

Okay. And then last question I had just on the future conversion. I mean you guys are taking a look at a couple of options and part of that depends on the growth and whether it's for sheets, lot products, or trim.

Where do you see most of that growth in 2019? Like what is the stronger market and can you help us out with that?.

Yes. Look the pre-finish and smooth initiatives that we have -- taken the pre-finish is a lab play as you know. And so the -- I mean there's some trend that goes along with that.

There's honestly very little panel that's pre-finished.So, we're expecting to see dramatic growth in our -- like pre-finish that's for -- you can get big percentages when you're starting it from zero.

But as we really figure out pre-finish and see the penetration that we get, there's a real opportunity for us to see growth in lab and have some trim pulled along with that and I'm just saying that relative to what we've seen in the past with panel..

Fair enough. Thanks very much guys. Best of luck..

[Operator Instructions] Our next question comes from Sean Steuart of TD Securities. Your line is open..

Thanks. Good morning. One question on the OSB segment. You've seen steady progress in your Structural Solutions specialty volumes.

And I'm just wondering if you can give us an update on how the pricing dynamic for those products decouples from the random length prints? And any context you can give on price premiums you're getting for those types of products?.

This is expected Sean and generally it's a wide spectrum of value-enhancing opportunities. And so let me bound it and then I'll talk about the products in between. TechShield, which is our largest Structural Solutions SKU is – try to directly off adder to random. And so we – so the total margin on that product varies with changes in random.

The margin that we get from the adder is much, much more stable. But clearly, there's still consistent variation between the selling price of TechShield in the selling price of commodity.On the other extreme, we have our FlameBlock offering which we sell-off of list price.

You're really not competing against OSB – all I can say OSB and that we're able to price against market and those prices are stable is what we see in Siding.

And then in between, perhaps the best example is to use there is our legacy flooring, which is a high premium flooring and that price tends to be more stable and that it's adjusted typically quarterly, but big quarterly swings in random does impact the pricing on legacy, because ultimately it's competing against perhaps more mid-range OSB flooring.

And if that gap gets to be too large then, there is the likelihood that the contractor builder will fall back to that mid-range flooring product because of the value gap there.So there's – it's a range and just to be transparent still with TechShield is our largest volume structural solutions SKU, so we still have a fairly large part of that 45% more biased to being in some way correlated with random.

The effort and focus that we're putting into our innovation pipeline though is to launch products like Legacy, like WeatherLogic, like FlameBlock that can separate us over time from this dependency that we have on random variation – random lengths variation..

That's very useful. Thanks for the context. That's all I have..

Yeah..

There are no further questions. I'll turn the call back over to Aaron Howald for any closing remarks..

Okay. Thank you everyone. With no more questions, this concludes our earnings call for Q4. We look forward to speaking with you all again sometime in May to discuss our results for the first quarter of 2020. And with that back over to you Michelle. Thank you..

You're welcome. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day..