Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2020 Louisiana-Pacific Corporation Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session.

[Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I'd now like to hand the conference over to your host today, Mr. Aaron Howald, Director of Investor Relations. Please, go ahead, sir..

Thank you, Liz, and good morning, everyone. Thank you for joining us today to discuss Louisiana-Pacific's financial results for the second quarter of 2020, as well as our near-term outlook. 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. We have 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. The webcast, 8-K and supplemental materials can be accessed at our website, www.investor.lpcorp.com. I want to remind all participants on the call about forward-looking statements and use of non-GAAP financial metrics during this morning's discussion.

I will refer you to slides two and three 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 spent the bulk of my time on the last quarterly call discussing the steps LP was taking in the face of a worsening COVID pandemic. We were preparing to weather significant uncertainty, but we were confident in our liquidity position.

This morning, I am pleased that my update will be more positive than many of us might have expected just three months ago. The effects of the pandemic are far from over. But so far, LP has fared better than the downside scenarios we modeled and discussed on the last call. As we know, the housing sector has shown remarkable resiliency.

After bottoming out in mid-April, the markets LP serves recovered sharply and show no sign of slowing. Demand for our products rebounded quickly through May and June. OSB prices follow this pattern, falling sharply in April, but climbing in May and ending June close to their Q1 highs. This was a transformative quarter, despite the volatility.

Siding achieved the second highest quarterly revenue in the segment's history and the lowest cost of production in three years. The OSB business also demonstrated excellent efficiency and cost control, delivering its best quarterly unit production costs since 2016, with a much richer mix of value-added products.

I'll leave the details to Alan, but we finished the second quarter with $129 million operating cash flow, $97 million in EBITDA and $0.43 of adjusted earnings per share. LP announced this morning that our Board has approved a quarterly dividend of $0.145 per share.

On the last call, the three elements of our COVID response that I discussed were safety, liquidity and agility. Let me give you a brief update on each. First and most importantly, safety. I am pleased to report that very few LP employees have tested positive for COVID.

Thankfully, all of them have either fully recovered or are recovering and our operations were not significantly impacted in Q2 by cases at our facilities. We will continue to follow expert guidance and stay committed to keeping our employees, vendor partners and customers safe. We are mindful of the human toll of this pandemic.

Our hearts go out to those who have lost loved ones and we want to thank all of the first responders and frontline medical workers. As for liquidity, LP generated $129 million of operating cash flow in Q2 and ended the quarter with $259 million of cash on hand.

Given current prices and production rates and assuming no sudden reversal of market conditions, we expect even better cash generation in Q3. A significant driver of LP's result for the quarter was the discipline and agility demonstrated by our leadership team's operations, capital management and corporate functions.

In mid-March, in response to rapidly slowing demand, we curtailed roughly one-third of April's production of OSB and Siding. By the end of April, we were seeing signs of the demand recovery, as this trend accelerated, both segments added production back in May. And by June our facilities were near 100% capacity.

Our improved OEE allowed us to adjust production levels and still achieve exceptionally low production costs. Housing is clearly a bright spot in an otherwise uncertain economy. After steep drops in April housing starts in June were flat with last year. OSB demand and prices are strong and repair and remodel activity is robust.

We are also seeing shifts towards single-family homes, movement away from urban cores and increased R&R spending. LP is well positioned to capitalize on all these trends. Alan will share more specific modeling in a few minutes with details about how these trends are reflected in our current expectations for Q3 and beyond.

I want to spend a few minutes talking about strategic transformation and execution in the Siding segment. The business exited the fiber product line to focus on higher-margin SmartSide strand enhanced our retail strategy and launch ExpertFinish our Prefinish product line.

This work showed its value in Q2 helping the segment to grow in a volatile quarter. LP completed the strategic exit from fiber with the sale of the Eastern facility and the conversion of the Roaring River facility to export finished production.

This structural change positions the business focus exclusively on driving growth and innovation of the higher-margin SmartSide strand products. Over the past several quarters, our sales and marketing teams have worked to revitalize our relationships with our retail customers. As a result, LP products have more shelf space and higher brand awareness.

For example LP SmartSide is the number one searched siding brand on at least one major big-box retailer's website. As R&R spending at home centers jumped in Q2, sales of our LP SmartSide through retail channels more than doubled, implying share capture as well as volume growth. This trend shows no sign of slowing so far in our Q3 order intake.

Customer demand for recently launched Smooth SmartSide and ExpertFinish has exceeded our expectations. The addition of these two products to our portfolio has enabled us to enhance our distribution in the Northeast. The customer response to ExpertFinish has also been very encouraging.

ExpertFinish is well positioned for both new construction and R&R and it addresses labor constraints by saving the time and cost of painting after installation. This was a remarkable quarter for the Siding segment.

With the backdrop of pandemic-induced volatility, the segment delivered continued growth above underlying housing starts exited lower margin fiber products, demonstrated the value significantly improved strategic partnerships with our largest customers and drove growth with innovative new products.

While Q2 was stronger than we initially expected and the near-term outlook is positive, many risks and uncertainties remain. COVID-19 cases are increasing. Many states are slowing or reversing their reopening plans.

So far no new work-from-home orders or declarations of non-essentiality have been issued that impacts LP's operations or customers, but that remains a possibility. COVID is likely to create more volatility in the remainder of 2020 and potentially beyond.

That said I'm enormously proud of the grit and resiliency that LP's employees have shown during this unprecedented time. Our teams demonstrated disciplined management of the things we can't control as well as agility in the face of what we cannot predict. LP's results this quarter are a testament to the team's creativity, flexibility and resolve.

I want to thank every LP employee for their effort as we work through these extraordinary times. With that, I will turn to Alan for more details on our financial results..

Thanks, Brad. Well the second quarter was interesting to put it mildly. It was bookended in April by one of the largest month-over-month decreases in housing starts in a decade and in June by an even larger increase.

Random Lengths' OSB prices followed a similarly erratic pattern falling by one-third from their Q1 highs in the first weeks of the quarter before recovering most of that ground by the end.

Builder sentiment home sales and demand for our products falls were suddenly and dramatically, bottomed by mid-April and then rebounded sharply and have continued to climb since.

I concluded my comments on last quarter's call with a discussion of LP's potential results based on a 20% drop in single-family housing, a 20% drop in SmartSide volumes and a 30% drop in OSB volumes with flat OSB prices. Under this scenario, we were confident that LP could achieve low double-digit EBITDA.

Although it did not constitute guidance, this seemed a very real if conservative scenario. The actual decline in single-family housing starts of 13% was a little better than our modeled number. The demand for both SmartSide and OSB proved much stronger in fact SmartSide volumes didn't decline at all.

They grew by 3% helped by a surge in demand from retailers which more than offset a decline with distributors. The OSB market turned sharply as housing starts recovered through the quarter with LP's year-over-year production down not 30% but just 16%.

Note that our Peace Valley mill which was idled in the third quarter of 2019 represented roughly 16% of LP's OSB capacity in 2019. And of course our average OSB price for the quarter increased by 22%.

Ultimately, net sales for the second quarter was 7% or $40 million lower than 2019 due not to softness in Siding or OSB but entirely due to our EWP segment and to the strategic exit from fiber. I'll explain both in a little more depth in a moment.

So, in combination with exceptionally low-cost of production and reduced SG&A, EBITDA for the quarter came in at $97 million still double-digits, but only just. Okay, so, we've established that the second quarter was volatile. Slide seven of the presentation shows that our strategic transformation proved robust to that volatility.

For the trailing 12 months ended June 30th, SmartSide strand revenue grew at 7% compared to 3% growth in single-family housing starts over the same trailing 12-month period. Furthermore, compared to the first quarter of this year, single-family housing starts were flat, but SmartSide strand revenue grew by 8% quarter-over-quarter.

Combining growth efficiency and sourcing savings, the EBITDA impact of our transformation was $15 million in the second quarter and $28 million year-to-date. For the avoidance of doubt, we exclude from this measure the favorable impacts of market-driven raw material price decreases about $6 million in the quarter.

So, at $96 million of transformation benefits over the last 18 months, we're still ahead of pace to achieve an EBITDA impact of $165 million by the end of 2021. Slide eight shows the summary of profit and loss accounts. While the second quarter sales fell year-over-year by 7% gross profit increased by 50% to $117 million.

The result in gross margin for the quarter of 21% was eight points better than the second quarter of 2019 five points due to OSB pricing and three points due to improved product mix, operational efficiency, and cost controls.

Selling, general, and administrative expenses for the quarter were $8 million lower than prior year largely due to lower support and infrastructure costs. The strategic exit from fiber to focus on SmartSide strand impacted our results in a number of ways. First, the divestiture of CanExel generated $14 million in cash and a modest gain of $2 million.

As mentioned on the first quarter call, the historic results of the Siding segment have been recast to exclude CanExel. Second, we have converted our remaining five mill in Roaring River to ExpertFinish. And third, customer acceptance of our strand-based replacements for their fiber-based equivalents has exceeded our expectations.

This has resulted in the decision to accelerate the conversion to strand cease our fiber production and fully dedicate Roaring River to ExpertFinish. As a result, we have written off $10 million of fiber inventory and paid $4 million of fiber assets, and incurred $2 million in severance costs.

After interest and taxes, net income was $33 million more than doubled year-over-year. The resulting adjusted earnings per share was $0.43. And as a result of the share buybacks in 2019, there were 11 million fewer shares outstanding than in 2019.

But even adjusting for this difference earnings per share was higher than the second quarter of 2019 by more than $0.30. Slide nine shows revenue and EBITDA by segment and slides 10 to 13 have waterfalls detailing the year-over-year changes for the second quarter and year-to-date for Siding and OSB.

Second quarter sales for Siding of $220 million were $11 million lower than prior year with $7 million of continued growth in SmartSide strand offset by lower fiber sales of $18 million driven by the accelerated strategic exit from fiber.

The resulting Siding segment EBITDA of $51 million for the second quarter was $6 million higher than the prior year and the EBITDA margin has increased from 19.5% in 2019 to 23.2% in 2020. The margin percentages were unaffected by the reclassification of CanExel.

Lastly, the revenue for Siding includes a $5 million reserve for potential ExpertFinish returns. During the quarter, we discovered a packaging issue that caused aesthetic damage to some pieces during shipping and handling. The reserve reflects our estimate of the full cost of pending returns and replacements of the impacted inventory.

We addressed the issue quickly and I'm proud of the way our Siding team is handling this. I'm even more gratified by the feedback from our customers who have shown understanding and support for our swift response. Second quarter sales for OSB of $204 million were $5 million more than prior year due to 16% lower volumes offset by 22% higher prices.

OSB EBITDA of $46 million was $49 million higher than prior year, including $37 million of price increases. The remaining $12 million of increased EBITDA is largely a result of the OSB leadership team's relentless drive for operational efficiencies and cost control. Second quarter sales for EWP of $79 million, were $28 million below prior year.

The decrease is attributable to three factors.

First, the second quarter of 2019 was a period of transition between major distributors and saw increased volumes to build inventory, hence a difficult year-over-year comp; second, a government declaration that despite OSB manufacturing in Québec remaining essential I-Joist manufacturing was deemed not to be thus hurting our joint venture in the province; and third, demand for EWP products simply did not recover through the quarter as strongly as OSB and Siding resulting in price concessions, which brings us to cash flow on page 14.

We began the quarter with $488 million in cash, including what at the time was a full draw on our $350 million revolving credit line. EBITDA of $97 million and $34 million in cash and working capital decreases less $2 million in interest payments resulted in $129 million of operating cash flow.

Predictably, the lion's share of the working capital reduction came from Siding inventory of finished goods and raw materials. Capital spending was held to $15 million in line with the reduced spending plan.

During the quarter, we also repaid the entire credit line of $350 million paid dividends of $17 million and generated $24 million through the sale of CanExel and made cash in the corporate-owned life insurance policy.

We ended the quarter with strong liquidity of over $800 million comprising cash of $259 million, and an expanded undrawn $550 million line of credit. With respect to capital allocation, our strategy remains the same.

We maintain our commitment to return to shareholders over time at least 50% of the cash generated from operations after investments necessary to sustain our assets and execute our strategy. More simply put, we'll return excess cash to shareholders once we've generated it.

On the last call, we announced that we did not plan to buy back any shares in 2020, but the better 2020's cash generation gets the closer we'll get to reversing that decision, which brings us to our outlook for the third quarter and beyond.

On our first quarter call, we attempted to provide some indication of our second quarter results and delay any potential liquidity concerns, given the market signals we were receiving at that time. As we've already said, once before on this call, we promised double-digit EBITDA and we delivered it.

In many ways, the economy is as uncertain now as it was three months ago except this time is bullish as opposed to bearish. And perhaps the question to ask is not how bad will it get, but how long will it stay is good. So we'll communicate how we're running the business and monitoring trends and impacts.

For OSB, we currently see thin inventories in the channel and no let-up in demand. All our mills are running close to flat out exceptionally idled Peace Valley. Through July, our utilization rate was above 90% with the unit cost of production comparable or better than in the second quarter.

Factoring in necessary downtime for preventative maintenance, we expect to produce and sell roughly 900 million square feet of OSB in the quarter. This will be roughly 8% less than in the third quarter of 2019, largely due to the idling of Peace Valley midway through the quarter last year.

I've already mentioned that, the order book for SmartSide strand is strong and all indications are that, we will post revenue growth in the high single digits for SmartSide in the third quarter, partly offset of course by lower fiber sales.

Please note that, manufacturing or customer disruptions caused by COVID could still materially impact our third quarter results and we feel that it would be even more premature to offer commentary on the fourth quarter. With respect to capital spending under more normal circumstances, we might resume some of the deferred projects.

But given travel restrictions and other COVID related challenges, we doubt we could spend more than $50 million in the remainder of the year compared to our current projection of $30 million.

Given the extraordinary volatility of the second quarter and especially the dire early projections for COVID, the recovery in housing demand in OSB prices is remarkable.

While we cannot control prices, I want to echo Brad and praise the agility and dedication of all LP employees, who worked so diligently to control costs as they produce and delivered our products. So before, we take your questions, I want to end on a word of caution. The market appears very strong.

But given the volatility of the past five months, we remain cautious about the future impacts of COVID. We also need to bear in mind that several of our OSB mills are in areas with rising COVID case numbers.

Though COVID is yet to cause production interruptions at our mills, and we are working diligently to prevent this we cannot preclude the possibility. That said, we'll continue to do everything in our power to manage the factors under our control with the continued safety of LP's employees customers and vendors as our highest priority.

And with that, I'll hand the call over..

Thank you. [Operator Instructions] Our first question comes from Ketan Mamtora of BMO Capital. Your line is open..

Thank you. Good morning, Brad, Alan. Congrats on a good quarter..

Good morning, Ketan..

First question maybe just starting on the Siding business, you said that business continues to remain strong. You've given, sort of, high single-digits revenue growth for Q3.

Can you talk about kind of how July is trending relative to that, sort of, outlook that you have? Is it, sort of, in line with that number? Is it a little better? Any thoughts and color there will be helpful..

Yes. It's in line with the guidance that Alan gave or it's a little stronger, but certainly no weakness at all compared to what we've been talking about this morning..

Got it.

And then if you can talk a little bit about how kind of some of the end market trends have been within that, sort of, new resi versus R&R? And if there are any regions that are kind of doing better than what you were expecting, particularly, given that we've seen a rise in cases in the south?.

Yes. Great question, Keith. Let me do segment first and then I'll do geography. So from a segment standpoint, as we've mentioned, we had a really, really strong retail pools all through Q2. Those retail pools have continued into Q3.

If you -- speaking of Q2, the geographic strength you could overlay a map of where there were the most restrictive measures around construction put in place. We obviously suffered in those places.

In the areas where building was deemed essential and distribution was not limited from the fact that they had to shut down because of local restrictions, we were able to maintain a good product flow particularly, I would say after April. Everything kind of paused in late March and April as people are trying to figure things out.

But geographically speaking, we were strong where building was deemed essential and was able to continue to progress. Right now with most of the U.S. opening -- opened back up we are seeing strengths really across all regions. And with -- Ketan as far as I'm aware no -- other than micro areas no states or large regions being affected directly by COVID.

You asked about repair and remodel versus single family, we've seen strength in both. And I would say that the -- actually probably R&R stayed a little bit stronger early in the quarter. So I think that R&R contractors continue to try to solicit and execute jobs where they can do that.

I think that's also somewhat attributable why the retail pools have been so strong for us. I think there are some R&R contractors sourcing product there.

And then the final segment related comment I'll make, I do want to clarify this because there was a question I don't know if it was you Ketan or someone else that asked me last quarter about the Shed segment. And I had said that that was surprisingly soft for us. And literally like the next week after the earnings call have really gotten strong again.

We had those customers come back into our order file with pretty strong. So again, after whatever the date of our call last quarter until now we've seen good -- two very good pulls in the Shed segment..

Got it. That's very helpful, Brad. And then one question from my side before I turn it over. On the capital allocation side, net leverage is down to sort of, only 0.3 times. We've seen a pretty big surge in OSB prices. Just talk about kind of how you are thinking about particularly on the share repurchase side, Alan talked about a little earlier.

But sort of how do you think about kind of having – sort of preserving liquidity and kind of looking at share repurchases?.

Yes certainly. It’s Alan.

Ketan looking at the trends that we're seeing in the markets right now with overall market performance OSB prices, it would look likely wouldn't it? If we assume the continuing of the current trends through the end of the year that we will build sufficient cash or significant cash through the third and fourth quarters should these trends continue.

Therefore on that assumption and I think first quarter share buybacks would seem a reasonable assumption. So think of it as the sort of shoulders of the year depending on the rate of cash generation through the second half of the year. With basically on – I use this sort of simplistic formula to describe that.

For the first six months of the year we're sort of say plus $10 million. So that calculation would imply a $10 million excess right now. So it really depends on the cash flow generation we see in the second half of the year. And as Brad said all indications are the third quarter cash flows will be bigger than second quarter cash flows.

So we're optimistic that the return to the market is on the horizon..

Got it. That’s very helpful. I’ll turn it over. Good luck in the back half of the year..

Thank you..

Thank you, Ketan..

Thank you. Our next question comes from John Babcock of Bank of America. Your line is open..

Good morning and thanks for taking my questions. Starting out, obviously we've seen the dislocations play in demand for OSB. And given that, I'd like to get a sense for how well you've been able to match production with demand in Siding.

And then also if you could share how much of your Siding sales are currently coming from the Smooth products that would be helpful as well..

Okay.

Well matching – the first question just to clarify John was the supply/demand balance – supply – demand production balance for Siding is that correct?.

That's right. Yes. Essentially just because I mean we've seen that production has had a hard time keeping up with demand in OSB. And I want to get a sense for how well you've been able to keep that production matched with the demand in Siding..

Got it. Yes I understand. We've been stretched to keep up with the order file in Siding. When we came off of the downtime that we took in April, the order file strengthened quicker than we thought fortunately. We had some finished goods inventory that we had built in Q1 that we're able to pull upon.

You'll probably see that – I guess you'll see that in the numbers. But we are running all our Siding mills at full production only on Siding running no OSB and our intent to keep it with order file. But it's – the order file is stretching out a little bit beyond our ability to produce right now so we've had to lengthened delivery schedules in Siding..

Okay.

And might you be able to provide any color on how much your sales are coming from the Smooth products at this point?.

Yes. I don't have that in front of me but it's going to be single-digit percentages still John. It's still – we're still getting placement for that product into its second year..

Okay. Thanks a lot. And then also I noticed that OSB value-added volumes were down a bit and maybe that's just because of end market exposure.

But could you talk about the drivers there and also how volumes for the value-added products have trended more recently?.

Yes. So part of the drop is because Peace Valley did manufacture some TechShield. So we well increased a little bit of that when we made the decision to close Peace Valley or idle Peace Valley this time last year.

But the very – the high commodity prices right now do put a little bit of downward pressure on some of the commodity products that essentially where builders are basically making a trade-off. You could – as by way of example if OSB's $250, 1000-square foot and TechShield's $300 then they'll happily buy TechShield.

But when that price rises for commodity to $350, they're a little less willing to pay that very high premium. So it does cause a little bit of a mix shift just modest. But that is the factor that puts a little bit of a drag on..

But John, I just want to follow that by saying it's not – we – it is no way of de-emphasis on our part of our strategy. We still are supporting those products from a marketing standpoint.

But as Alan's mentioning in these very volatile these repricing markets, sometimes the easiest things for a builder to our contractors is just make sure they have enough commodity volume and inventory. I mean that becomes a priority for them. So their order pattern can change a little bit and because of the volatility.

But we -- but from a long-term perspective, we're still laser-focused on increasing our value-add percentages..

Okay. Thank you. And then also on OSB, I was wondering if -- I just really want to get your thoughts on what it would take to get capacity outed back, in the industry obviously like a decent bit was curtailed earlier this year. And the market is still very uncertain.

And so, I want to get your thoughts on what ultimately might cause that capacity, to kind of come back?.

So let me -- we have one mill idled in our system. I won't speak to, how we'll make the decision around that. As we've mentioned before, we see it as a demand-driven decision, not a price-driven decision. If you look at where housing starts, we believe housing starts will end up this year.

It's going to be pretty much level to last year, when this production was taken out. Because at that time demand capacity imbalances. And so we don't see us -- we do not plan to bring Peace Valley up until we see, 1.35% or 1.45% housing starts, on the horizon and believe that that's sustainable.

So it's a -- we are focused on evidence of underlying demand, needing the capacity for Peace Valley restart. And we're not basing it on a price outlook..

Understood. Thank you..

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

This is actually Marcus on for Paul..

Hi, Marcus..

On OSB markets, they've been on quite of a bit of a run here. And I know you don't have a crystal ball.

But what kind of sustainability did you see to the current rally?.

Well, it's August. Building is strong across the U.S. We're running full out. I would imagine the industry is pretty close to that. And as I think, as long as demand for the product is flowing into construction, there's no really reason for there to be a softening in it. I think obviously where pricing is today is kind of record highs.

So I think the direction is downward over time, just given where we're at. But we're not seeing any weakness in our order file to lead us to expect softening of demand anytime soon and anytime soon being in the next few months.

But typically when we get to Thanksgiving to New Year's, we see it softening and typically some price abatement during that season. But it's not something that's on the immediate horizon, at least in our order file..

All right. That's helpful. And then maybe on the Siding business, it's had a nice rebound versus your expectations, in May. And you did take a bit of downtime there in Q2.

Have your customers been able to secure all the products they need? Or maybe put another way is the supply chain, adequately stocked right now?.

The supply chain -- as we were taking downtime in April, the supply chain also pulled inventories down, in anticipation of the softening of demand. And so it has been tight with our customers on Sidings, from their inventory standpoint.

And then as we ramp the mills back up, our ability to meet demand and provide enough products for them to also be able to rebuild their inventories to a more normal level has been a challenge. And that's why I spoke I think it was to Ketan's question, about lengthening in our order and our delivery schedule as a result..

All right. That makes sense. And then, the EWP business has faced a few headwinds here.

What are you seeing in the market today? And what are some of the opportunities for the business over the next 12 to 18 months?.

Actually our order file, in EWP is really, really strong too. So we're seeing a nice pickup of demand there. And just as a reminder, though we use OSB and lumber, in the making of I-Joist. So the raw material cost into I-Joist manufacturing, is really by the way the near-cost is up too for LVL.

And so I see a good outlook from a demand scenario for that business in the near-term but there's going to be margin squeezes as a result of the raw material price increases that we've been seeing and enjoying on the OSB side..

All right. That’s all I had. Best of luck in the quarter..

All right. Thanks..

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

Hey, good morning. This is John Rider on for Mark. First question for you. We have been hearing a lot about labor issues before COVID started, and certainly is now probably a bit more of an issue for builders.

Have you seen more interest coming through for Entekra?.

Yes. As you noticed Northern California Bay Area play from a market standpoint. And while that was -- that really hurt us in Q2 as order file pretty much evaporated as those districts did close down. We've seen -- we are seeing good inquiries and from a start-up perspective a good order file volumes for the next couple of quarters that didn't accrue..

Okay. Thank you. That's good color. And then second one here.

Has the rollout of SmartSide in more geographies gone as well as you had hoped? And has COVID changed the way you're thinking about distribution at all?.

The -- our audio was garbled a little bit.

Would you repeat the question again?.

Yeah. Sorry about that.

Has the rollout of SmartSide to more geographies gone as well as you had hoped? And has COVID changed the way you've thought about distribution at all?.

COVID has not changed our thinking about distribution. Obviously the emphasis can change quarter-to-quarter over a six-month period as for instance retail demand, the bank really gets strong. So we have to be able to flex to where there's pull for our product.

But I really like -- I will speak to an exception here in a second, but I really like our distribution structure in retail our access to the R&R market, which was really, really facilitated and continues to be facilitated by our ExpertFinish rollout.

And then we've had good two-step distribution into new construction for a while, though we did upgrade it last year. And then -- but what has been a key to a region we have been waking in, which is the Northeast is getting the Smooth and Prefinished product line launch.

So those two launches Smooth last year and ExpertFinish this year has made us a much more attractive supplier into Northeast distribution, so we've been able to bring on some higher quality distribution in the Northeast that we're really glad to say and I think it's going to be key to us growing in that region we've been historically weak..

Great. Thank you very much..

Thank you. Our next question comes from Sean Steuart of TD Securities. Your line is open..

Thanks. Good morning. A couple of questions. On Peace Valley, it sounds like the decision there is exclusively related to your demand outlook or housing start out like with regards to a potential restart.

Is there any issue with fiber availability in BC that could affect that decision as well?.

There is -- sure. I mean, the fiber availability in BC is an issue. And for us at Peace it's never been a supply constraint, but it has been a pricing constraint. So when we look at the competitive positioning of that mill, I mean this would be relative to a restart analysis that we would do.

We have to make sure that we can get the margins we need to justify starting that up and getting a return on capital. So that's been something that we've dealt when all the mills are operating and it is a factor in the restart decision.

But right now I would not say fiber cost per loan would be a significant obstacle to a restart nor would supply of fiber be a significant obstacle to restart. But it is a factor that we would consider as we contemplate the potential margins of that mill during a startup..

Okay. Thanks for that. The second question is on SG&A. There was a positive trend relative to your sales base this quarter with decline in SG&A percentage. You touched on a few of the factors in the prepared comments.

I guess I'm just trying to gauge the sustainability of that progress and how much of it might have been related to spending cuts around initial pandemic concerns that we could see a recurrence of that spend coming back? Any guidance you can give on the SG&A side?.

Sean, that's a good question. And let me talk about it in three buckets. We did some staff reduction relative to COVID and the expectations around demand and order velocity. But also some rational things we did here at the national office, where we're still predominantly working from home.

And so, some of the support positions we had here are just being underutilized at this point. We also had some open positions and these -- the some new open positions. We also had some existing open positions that would have been in prior quarters.

And we put a hiring freeze in place, which is still in place and will be in place for a while, probably at least in the next budget season. So, we've had some functional staff reduction as a result. Obviously our travel expense is way down all kind of that supporting. People cost is way down given COVID.

Second bucket is we did do a reduction enforced in our sales area. Again, we were looking at a time where salespeople couldn't be in front of customers. We do a lot of product knowledge type sales support, which is very hands-on, training at dealer and distributor locations.

That's been very problematic having 40 -- 20 or 40 contractors come in for a hands-on training session We've moved a lot of that to online, which was more efficient from a manning situation.

I could see us -- that SG&A will come back as things continue to get open and especially given our sales volume and the fact that we're going to support our customers with training and other things they need from our sales force. The third area has been marketing.

And once again, we took a pretty serious look at that spend, especially in Siding, where we've had large increases over the past two or three years. And I would say it did a little bit of a reset understanding that the environment has changed there and where we've emphasized online support of our marketing and product knowledge type of literature.

I mean obviously we're not printing us out pieces to hand out to folks. So it was an adjustment in our marketing spend to fit to the time that I think will carry through the rest of this year, but that spend will come back and it will come back enthusiastically as we see and believe there's a return to it.

But, I just think -- we just felt like given the environment we were working in and the restrictions we had on face-to-face contact with customers, we needed to emphasize our online presence and that was just a much more efficient way to access customers with some of the stuff we have been working on previously.

I want to say one more, but I know that's probably a lot longer answer you were looking for. So let me make one more point there. All that excludes the support we put around our ExpertFinish launch. Anything else – pre-finished launch, it requires a lot of samples. People want to see the product.

You want to touch the product, experience the product up close. So there has -- we have supported that launch robustly and we'll continue to do so, just because we see such an opportunity there.

And then the reality of that sales process is typically a contractor is in a home, trying to convince a person to put a hard siding on their house, and we want that hard siding to be ours and that requires a higher level of marketing support than in most of our other sale activities..

That’s a tremendous detail. Thanks very much. Appreciate it..

Probably, too much. Sorry about that..

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

Thank you. With pricing in OSB moving just in an unprecedented manner here, I was hoping we maybe could get a little bit of help in understanding impacts from mix and/or potentially lags? Because if you look at the random length pricing for instance it's right now more than $200 per 1000 square feet higher than the second quarter average.

And even if we average in July it's like $180 North Central higher in some of the other regions.

I'm sure there are reasons that one shouldn't just -- if we're going to assume prices stayed here you shouldn't just pencil in $180 and times it by the volume? But maybe if you could just walk us through what are some of the biggest factors that would cause the price change to deviate from what we see in random length?.

Let me speak to two things that are top of mind for me. And then Alan please – correct me. We do talk about this a lot. So first of all when we're talking about a rising OSB market, just keep in mind that our contract volume which is depending on the situations 60% to 70% of our volume is in some type of contract situation.

But those contracts are priced prior a week or two ago, Random Lengths. So we're going to get a lag on our contract volume as prices increase.

And then the other noticeable thing from our mix standpoint is sometimes Random will have adders especially on flooring -- or the flooring pricing reported oil prices aren't rising as quickly as the commodity prices. I think that's primarily a reporting issue.

I know for our open world market order file that we try to obviously keep those things and sync. For some reason Random sometimes will have -- we'll see lags there in the flooring pricing relative to the commodity pricing which shows back up to our contract volume.

So there's these nuances relative to the way Random I guess gathers their data and reports. It can impact us negatively in a rising market. So it's -- it could cause -- it will definitely cause a lag in realization in a rising market. And Mark we've reported that in almost every rising market.

I've been a part of it since I've been on these calls as we don't -- we just don't get it all as quickly as work as with Random..

And how far out are your order files? I guess in conversations I've had with some other folks, I've gotten a sense that they are so far out that maybe the lags would be longer than normal which I'm not sure is a negative here by the way because it started just the way it's been going up.

That means you're still going to get all of the pricing we see now just -- it'll show up maybe in middle of August instead of right now.

But how long are your order files currently?.

Mark we really work hard and stay disciplined to a 2- to 3-week order file. We try -- it's tempting sometimes especially in pricing like this to go longer. But we just -- we want to have a -- we want to be selling volume into the market every week. And so we have stuck to a 2 to 3-week order file all through this and plan to continue to do that..

Okay. Great. And last thing I'm maybe putting you on the spot if I can a little bit.

Given what we've seen and given your comments that you don't see any reason for softening in the relatively near term next couple of months of significance, is there any reason that one would see that your EBITDA in the quarter given higher volumes in Siding given what we've seen in pricing plus the more volume in OSB wouldn't be comfortably double what we saw in the second quarter?.

Comfortably double I like that. I can accept that. The range that you're mentally trying to push us to is reasonable Mark here, given all the caveats that you introduced in your own question..

Okay. Thank you..

Thank you. Our next question comes from Steve Chercover of D.A. Davidson..

Thanks. Good morning. Sean Steuart kind of scooped my question on Peace Valley, but I did have a question on the wood pricing.

I mean has any of the competing buyers of wood left the market? Or in order to get the pricing down to a level that you're comfortable, do you have to negotiate with the crown or the province in order to permanently reduce fiber cost?.

Yes. The Peace Valley wood cost is the good question, Steve? Picking up....

Yes..

Yes so picking up on, so look it's a little -- your comments are factual. It's a crown license is where we harvest. But just keep in mind that really from a crown perspective, the emphasis is on sawtimber. And that's where the value of those four stars.

Us being a user of pulpwood, we can sometimes get I mean it's kind of lost in rounding from that standpoint. So there's not as much. So while there's not as much pressure to increase those prices from a providential standpoint there's also not a lot of opportunity to go in and negotiate it down. But you're right.

The only way to get relief there is through modified agreements with the crown or to work at it on your delivery cost or draw in and make sure you're sourcing wood closer to the mill all of which have been strategy we've employed in Peace Valley. But the stumpage price is controlled by the provincial governments in Canada where we operate..

Well I should think that without wanting to provide you with wood below fair market, they have a vested interest in for the community to have that mill running and the taxes associated with it. So well hopefully you get the market conditions that allow it to reopen. I also had a quick question....

And I just want to make sure, let me be clear. I don't want to leave the call without just saying it again. This really -- the issue with restarting Peace Valley is not an operating cost issue just to be clear. It is not the reason -- well nor the reason for shutting it down, but obviously you look at where's your best margin.

The margin issues for that plant for us it's so remote from the markets that it served in the western U.S. So that really the issue that makes that plant uncompetitive or the least competitive in our system which is why we shut it down was because of just the cost of delivery to the West Coast. So just to clarify that..

Yes. And I doubt there's anything you're going to be able to do to change that in our lifetime..

Exactly yes..

Plate tectonics is slow. So quick question on sawtimber markets. So they're doing better year-over-year and that's despite Brazil to the best of my knowledge being a real COVID hotspot and I recognize that it's -- the operations aren't necessarily there but it's a big market.

So is that simply price? Or are there operating improvements you're also enjoying there? Are you accessing export markets? What's going on down there?.

So a little of all three. So we did have a mill start-up down there last year that we're far along on. So we've got some -- from a cost standpoint, some prior year comps that are favorable to us when you're looking at the comparative numbers.

Secondly, we have a really good export business down there that has been resilient and has been very helpful as both the Chilean economy and the Brazilian economy has been I would say constrained not to stand still but there has been headwinds in both economies. We've been able to continue to operate the mills because of our good export position.

And then finally and I would say later in the quarter, we did start seeing our ability to at pricing on export volume as the price in the U.S. arose. So we've got some margin improvement is price-related on export volume as a result of -- I'm assuming on a result of those markets being less attractive to U.S. manufacturers as the U.S. price recover..

Terrific. Okay. Thanks for taking my call and stay safe..

Thank you..

Thank you. Our next question comes from Mark Wilde of Bank of Montreal. Your line is open..

Hi, Brad. Just a couple of follow-ons. One on that Brazilian business. Is that Brazilian mill primarily domestic? Or is that still export? I think that the Brazilian adoption of OSB has been a little slower from a building code standpoint than you guys would hope for..

Yes. Mark, I don't have those numbers in front of me, but I'm going to say it's 40% to 60% export depending on -- but it's high as a high export mill for steel. Yes..

Okay.

And then how is just - how is domestic demand in both Brazil and Chile just with -- both countries have been hit pretty hard by COVID?.

Pretty good over in the second quarter. Domestic the demand was actually up in Chile. It was up like 11% in Chile rather surprising under the circumstances that it was. Then LPSA is actually selling and producing more Siding product as well and that significantly helped the volume year-over-year..

Okay. And then just one other one. Is it possible to get a little bit of an update just on the Siding extension initiatives in terms of like how volume is rolling? And I'm not only thinking of like the expert finish, but also some of the other like structural products or current products that you had that you talked about rolling out..

Well, I would say, ExpertFinish is at or above expectations for a few months in, but it's very well received by our customer base. Our Smooth product is pretty much where we have -- where we expected it to be. At the end of year one we are adding SKUs to that. So we have a panel offering now in Smooth and other SKU additions that we've done there.

On the OSB side, the FlameBlock product had really good continues to grow. We are on the WeatherLogic the weather app -- the weather wrap OSB. We've ramped up production at our facility in Clark County, Alabama, which is built as a mill that we can make long lengths 10 foot, which is a hands down portfolio immensely.

We are working on a roof product that will really shape out that portfolio offering for weather resistant OSB. And it's critical from a distribution standpoint to have that product in our portfolio. So that WeatherLogic is still kind of in launch mode as we round out the portfolio.

And then finally, if you're at the show the last two years you saw our fencing product and parts from a very small base. We are getting good on distributor acceptance of that product as well. And we're seeing growth rates like from a percentage basis that are really, really high.

But as we all know a percentage growth off of a base of zero can be -- is Infinity and so we're seeing some of that right now. But I really am proud of the way we have found distribution for that kind of non-traditional product in our portfolio. It's taken us a little bit longer than we would have liked, but it's beginning to pay off.

So I would say market's a little bit all over the board depending on where we are on the launch phase of these products. Some get accepted quicker like ExpertFinish some take longer like Fencing. Okay. So let me summarize about this. Smooth ExpertFinish is a highlight. FlameBlock is a highlight. Smooth is where we want it to be.

Work to do on Fencing and work to do on the WeatherLogic logic product..

Okay.

And would you think Brad what we had three or four years if we just think about things like ExpertFinish, should we be able to see a discernible margin lift in the entire Siding segment as that becomes a bigger and bigger piece of the pie?.

Yes. Weather -- ExpertFinish is a very high market product..

Okay. All right. I’ll turn it over. Good luck for second half..

Thanks..

Thank you..

Thank you. [Operator Instructions] Our next question comes from Ketan Mamtora of BMO Capital. Your line is open..

Thank you. Just one other question on sort of the OSB capacity.

I was just curious Brad, how much additional room do you have at your existing OSB mills to increase kind of production or capacity? I mean, what kind of capital investment that could take? I'm just trying to sort of understand sort of investment of the existing mills to increase modest capacity versus kind of bringing on Peace Valley? Kind of how do you think about those two?.

Yes. Well we did add -- we did go to full shifting this latter -- at Q2 at Maniwaki. That was the only mill that wasn't running full shifting. So that's now -- that was an increase of capacity there. And then the rest of the -- well the two other opportunities.

One is OEE which we talked about a bunch over the last couple of years and there's still room to go there though we've made really, really good progress it's showing up in our numbers. But we still have two to four percentage points of opportunity in the near-term on OEE.

And then after that it comes back to our capital program where we have done extensive press upgrades during this two or three years of good ops good runs in OSB. And now we're moving our upgrade opportunities into the dryer refurbishing in our mills.

So there always going to be capital projects that are available that -- well when I was working in the paper side of the business early micro we called it creak. And I think OSB certainly the OSB industry and LP in particular has an opportunity for creak to the use of capital.

And also I'm not going to call it creak because it's hard work management to get that OEE number up. But we should be seeing single-digit increases in capacity on our capital program is robust as it has been over the last few years and we have these opportunities in OEE to increase throughput.

And that's what we're -- keeping the cheapest capacity we have is the capacity that exists today. And so getting more out of those assets is a key part of our plan of improving our margins around OSB..

Got it. That's helpful.

And then on the Siding side Brad, when do you have to decide on kind of the next project that you may have whether it's the Val-d'Or one or the brownfield in Cook? And if there is any updated thought process around that?.

Yes. So based on our current view of Siding growth and as I mentioned also mix is very critical input to the timing. For instance, we have a lot of panel capacity right now in the business because of the way we configure Dawson and Swan. So -- but we want to make sure we have plenty lap and trim for ExpertFinish.

But depending on the mix that can influence the needed -- the necessary timing.

But given where we are today and mix stay similar to where it is today, we would be looking -- we'd be willing to have new capacity operating by mid- to late 2022 which means we would be seeking Board approval around the middle of next year and identifying the location making that file decision which again will be somewhat mix based and then getting approval and announcing that publicly middle next year I could say probably this Board meeting or the next one that kind of timing?.

Got it.

And then Brad which mill is better suited to producing more lap?.

Between those two options that you mentioned Val-d'Or would be the better light mill..

Got it. That's very helpful. I'll turn it over. Good luck for the half of the year. Sorry go ahead..

Well it's just -- the reason is it has a 16-foot press which is kind of dialed in for siding and for lap and trim. That's the reason Val-d'Or would be optimal there..

Got it. That’s very helpful. Thank you very much..

Thanks..

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Haughie for any closing remarks..

Okay. Thank you everyone. This concludes the second quarter earnings call for Louisiana-Pacific. Stay safe and we'll look forward to speaking with you again sometime in November to discuss our Q3 results. Thanks everyone..

Ladies and gentlemen, this does conclude today's conference. Thank you for participating. And have a great day..