Thank you for standing-by and welcome to Louisiana-Pacific's Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your host, Investor Relations, Aaron Howald..

Thank you, operator, and good morning, everyone. Thank you for joining us today to discuss LPs results for the third quarter of 2021, as well as our outlook for the fourth quarter. My name is Aaron Howald, and I'm LP's Director of Investor Relations.

I'm joined this morning by Brad Southern, LP's Chief Executive Officer; and Alan Haughie, LP's Chief Financial Officer. In addition to this morning's conference call, we are hosting a simultaneous webcast and we have uploaded a presentation to which we will refer during this morning's discussion.

We also filed our 8-K this morning with some additional information. Slides 2 and 3 of the accompanying presentation provide notices and detail regarding forward-looking statements and non-GAAP financial metrics. The appendix of the presentation also contains some necessary reconciliations that are further supplemented by this morning's 8-K filing.

Rather than reading these statements, I incorporate them herein by reference. Before I turn the call over to Brad and Alan, I'm happy to announce that we published an environmental product declaration for SmartSide last week.

We have known for years that SmartSide performs very well and looks great as the EPD demonstrates it is also classified as carbon negative, making it exceptionally sustainable, especially when compared to alternative Siding substrates. LP is also expected to publish its first ESG report later in November, including SASB disclosures.

Sustainability is a core value at LP and we're excited to share our story. The SmartSide EPD is available on LP's website and our ESG report will be published soon. And with that, I will turn the call over to Brad..

Thanks, Aaron. Good morning and thank you for joining us to discuss LP's results for the third quarter of 2021. Despite a significant OSB price correction in the quarter and ongoing inflation and supply chain challenges, LP delivered its second best quarter ever.

Siding sales grew at 19% fell through South America and EWPs at all-time quarterly records and the OSB business continued to generate impressive cash flows. Entekra, our California based offside advanced framing system business was gross profit positive in the quarter and continues to gain customer acceptance and operational momentum.

Demand for LP's products remain robust and our capacity expansion projects at Holton and Peace Valley are on schedule. We also strengthened our strategic relationships with key customers, including being named partner of the year in category by the Home Depot.

As you will see on Slide 5 of the presentation, sales for Siding Solutions increased by 19%, another record quarter made possible by strong demand and exceptional performance by the siding operations team.

Siding efficiently produced and shipped over 430 million square feet and more importantly they did so safely without a single recordable injury in the quarter. The fastest growing components of the siding portfolio are innovative products like ExpertFinish pre-finished siding, smooth siding and shapes.

We shipped more than four times the volume of those products compared to Q3 of last year. These newer products contributed significantly to the segment's price growth in the quarter. OSB sales were up over $230 million from last year, but down sequentially as OSB prices corrected early in the quarter.

Since reaching the recent low in August, Random Lengths' OSB prices have steadily increased, supported by consistently strong demand. The Engineered Wood Products segment had another record quarter with twice their sales revenue and more than four times the EBITDA of the same quarter last year.

South America also had a very strong quarter with more stable OSB prices than seen in North America. Compared to Q3 of last year sales in South America increased almost 70% and EBITDA more than tripled.

As we have seen recently LP South America is capable of significant cash flow generation and we are reinvesting that cash in South America to grow capacity and improve OEE in order to stay ahead of steadily growing demand. The siding conversion project at Holton remains on schedule with production expected to begin in the first quarter of next year.

The mill has discontinued production of Laminated Strand Lumber and OSB production will cease this week to begin the last phases of the conversion process.

Inflationary pressures have impacted the Holton project somewhat, particularly the price of steel, but the long-term nature of material and labor contracts for the project have blended these inflationary pressures somewhat. I want to thank the team there for keeping the conversion process safe and on schedule.

The Peace Sally restart has also gone exceptionally well. I'm grateful to the local mill leadership as well as the OSB operations and support functions for a safe and efficient restart. The mill is ahead of its planned ramp-up curve and produced just over 100 million square feet in Q3.

With housing starts consensus, higher now than when we announced the restart, there's no question that the market needs the mills output.

Peace Valley will also contribute to our Structural Solutions strategy as a significant producer of TechShield radiant barrier as we work to transform our portfolio away from commodity OSB to hire more constructural solutions. The resulting financial performance for Q3 is summarized on Page 6 of the presentation.

LP’s businesses generated a combined $1.2 billion in sales, $522 million in EBITDA and $3.87 in earnings per share. We returned over $400 million to shareholders via dividends and share repurchases, all of it from free cash flow generated in the quarter. Our Board of Directors declared a $0.19 per share dividend.

And as Alan will detail authorized a further $500 million for share repurchases. Supply chain interruptions and inflationary pressures are presenting headwinds.

While we have benefited from higher OSB prices, some of those gains are now being offset by higher prices and tight availability for resins and freight where we have seen meaningful price increases.

We are working to minimize these impacts by partnering with our suppliers, balancing costs and risks with agile inventory management and seeking alternative sources of supply where possible. I am proud of and confident in our strategic sourcing and operations teams as they navigate these challenges.

I want to talk about how we are responding to these inflationary pressures. When faced with raw material scarcity, we have consistently allocated limited resources to the most strategic applications.

Because our OSB business has maintained the flexibility to use various resin types, we've been able to ship MDI resins to siding in order to maintain production, product quality and growth.

For freight, flatbed trucks are in tight supply, we have the ability to convert shipments from truck to rail, and we have our own small trucking fleet, both of which contributed to record siding shipments in the quarter.

We can't predict the duration of the supply chain challenges, but our teams will continue to work diligently to minimize their impact. Before I turn the call over to Alan to review our financial performance in more detail, I want to announce two changes to LP's executive leadership team.

First, Neil Sherman, who joined LP in 1994 and has served as Executive Vice President and General Manager of LP Siding business since January of 2017, will transition to lead Entekra as its President.

Neil has done a tremendous job of growing LP’s siding business, and he is exactly the kind of leader in Entekra needs to reach its potential as an innovative and disruptive building technology.

Second, Jason Ringblom, who joined LP in 2004 and has served as the Executive Vice President and General Manager of LP's OSB and EWP businesses since January 2017 will succeed Neil as EVP and General Manager of the Siding business.

Jason has been instrumental in transforming LP's OSB business, increasing its operational agility and efficiency, while shifting the focus from commodity products to value-added structural solutions. Jason is rejoining the Siding business, where he previously held a leadership position with our sales team.

So, he is very familiar with the SmartSide customer base and value proposition. Neil and Jason's leadership of Siding and OSB has been critically important to LP's ongoing strategic transformation. I am extremely grateful for their contributions, and I am confident they will continue to deliver outstanding results in their new roles.

Both of them have built world-class teams that lead and execute their business strategies. And I know neither team will skip a beat during this transition. Both Jason and Neil will remain in their current roles for a brief transition period until we appoint a new EVP and General Manager for OSB and EWP, a process that we hope to complete soon.

With that, I will turn the call over to Alan for a more detailed discussion of LP's financial results for the third quarter as well as an update on our capital allocation strategy and our outlook for Q4 and the full year..

Thanks, Brad. Before I dive into the financial results for the quarter, I'd like to add my personal thanks and congratulations to both Neil and Jason. LP's results for the past several quarters, even years are due in no small part to their leadership, and I'm confident they'll be equally impactful in their new roles.

As Brad said, the third quarter of 2021 was LP's second best quarter ever. Page 7 of today's presentation summarizes these results compared to the third quarter of last year. Revenue increased by 53% from almost $800 million last year to $1.2 billion this year. Just over half of this increase, $225 million was the result of higher OSB prices.

Siding added $49 million to which EWP, South America and Entekra collectively added a further $148 million in revenue. EBITDA increased by 90% year-over-year from $273 million to $522 million. OSB prices and Siding growth added $225 million and $31 million, respectively. South America and EWP added a further $60 million.

However, inflation in wages, raw materials and freight costs increased by $58 million compared to last year's deflationary environment and costs for the Houlton conversion and the Peace Valley restart totaled $10 million in the quarter. The waterfall on Slide 8 adds year-over-year revenue and EBITDA detail for the Siding segment.

Siding Solutions revenue grew by 19%, with both volume and price increasing by 9% year-over-year. The Siding team shipped 432 million square feet of SmartSide in the third quarter, made possible by a remarkably efficient production and shipping in response to unrelenting demand.

And quite frankly, shipments of 432 million square feet in the quarter is more than we thought possible prior to the additional capacity of Houlton coming online next year. On the cost side, we have accelerated our investments in selling and marketing after sharply curtailing them last year during COVID.

We intend to continue investing at this rate in the fourth quarter and beyond to drive demand creation particularly for expert finish, in anticipation of the home startup. OEE improved to 89% for a net transformation impact of $33 million in EBITDA.

Inflation of raw materials, mostly resin and paper, added $18 million of costs and freight costs increased by $10 million. After running our mills at near maximum capacity for more than a year, we completed some necessary sustaining maintenance projects at a total cost of $7 million in the quarter.

One such project that began at quarter end and is now almost complete, is a press rebuild at our siding mill in Swan Valley, Manitoba, the impact of which will mostly be felt in the fourth quarter. We also incurred $3 million of conversion costs at Houlton.

The resulting EBITDA of $73 million is therefore down $3 million from 2020, bringing the quarterly EBITDA margin to 23% or 27% on a year-to-date basis.

The chart on Slide 9 show that revenue for Siding solutions continues to grow faster than single-family housing starts on a trailing 12-month basis, with Siding revenue growing by 33%, while starts increased by 23%. The pie charts show continued growth in innovative Siding products like expert finish, smooth siding, shakes and corners.

For the third quarter, these new higher value-added products made up 10% of siding volume, 15% of Siding revenue and contributed three points of the 9% price increases for the segment. Slide 10 shows the quarter in more detail for our OSB business.

OSB prices fell steeply in the first weeks of the third quarter before stabilizing in August and are down sequentially from record highs. However, compared to last year, higher prices added $225 million of revenue and EBITDA.

On our last quarterly call, we guided to OSB revenue being about 10% below the second quarter or around $700 million, provided that OSB prices remained steady at the levels published the previous Friday by Random Lengths. As we now know, of course, prices continue to fall from that point before rebounding.

By quarter-end, the actual average weekly Random Lengths price for 716th sheeting was approximately $100 lower than it would have been as prices remained flat after our last call.

And at roughly 1 billion square feet of quarterly capacity, the $100 price difference would imply a revenue difference of about $100 million, yielding an adjusted estimate of about $600 million in revenue, which it turns out is precisely the result in third quarter revenue.

Price again swamps other factors in the OSB waterfall, but I will address the other components briefly. Volume was up in the quarter due to production at Peace Valley offsetting the onetime costs associated with this restart.

OEE in the quarter was down compared to the prior year, partly due to resin substitutions and partly due to maintenance and production issues, resulting in a $4 million hit to EBITDA.

The same inflationary pressures we discussed for signing also impacted OSB with resin and freight inflation costing $15 million and $11 million in the quarter, respectively.

I wouldn’t normally point this out, but the freight variance is abnormally large this quarter, so I should note that whereas Siding is typically sold at delivered prices, freight costs in OSB are generally passed through. Therefore, the OSB freight cost increase in the quarter is offset within the price component with no net EBITDA impact.

So OSB ended the quarter with $600 million in revenue, $381 million in EBITDA and another remarkable quarter of cash generation.

And while not shown in waterfall charts, EWP and LP South America had remarkable quarters as well, with strong demand and pricing more than offsetting increases in raw material costs, which brings me to a summary of cash flows in the quarter and a capital allocation update. Operating cash flow was a little over $500 million in the third quarter.

After $68 million in capital spending, we returned $416 million to shareholders, comprising $399 million in share repurchases and $17 million in dividends, and we ended the quarter with cash balances essentially unchanged. LP repurchased 6.8 million shares during the third quarter, ending the quarter with 90.2 million shares outstanding.

As of yesterday, we have spent a further $156 million since quarter end to repurchase 2.5 million more shares. This brings the remaining balance of our $1 billion authorization to $157 million. And our current number of shares outstanding as of right now to slightly under $88 million.

Our Board of Directors has declared a quarterly cash dividend of $0.18 per share and authorized a further $500 million for ongoing share repurchases, bringing our total repurchase authorization as of today to a little over $650 million.

Slide 11 shows updated guidance for full year capital investment as well as revenue and EBITDA guidance for the fourth quarter. We are lowering our full year CapEx guidance slightly to account for longer lead times and contractor availability issues.

While Houghton remains on schedule, the completion of some of the smaller projects may unfortunately be pushed into early 2022. Raw materials and logistics, particularly flatbed freight, continue to exhibit tight supply and elevated prices.

While we are currently able to procure all the resin and other raw materials that we need, inflationary pressures may dampen margins somewhat in the near-term for all segments. With respect to signing. On the last call, we guided to revenue growth of 10% for the second half of the year and a full year EBITDA margin of about 25%.

Despite the business growing in the third quarter twice the rate necessary to hit that guidance, I’m reiterating both aspects of that guidance today.

And here’s why, while the price growth experienced in the third quarter is certainly sustainable, similar volume growth in the fourth quarter is unlikely simply because the much-needed maintenance projects, especially the press rebuild at Swan Valley have temporarily lowered production.

The EBITDA margin in the fourth quarter would probably have been similar to that of the third quarter, with price increases once again offsetting raw material inflation, if not for two factors. The first is the lower production capacity. The lost volume has a high variable margin of around 50%.

And the second is the cost of other investments we’re making for future growth, increased selling and marketing, the Holton conversion, the Swan press rebuild and other critical maintenance and growth projects designed to de-risk and debottleneck operations will add roughly $25 million of discretionary costs in the fourth quarter.

Although, these actions will result in an EBITDA lower than both the third quarter of this year and the fourth quarter of last year, the resulting full year EBITDA margin still meets our long-term target of 25%, which was set at that level precisely because of the need to make periodic investments such as these.

Now we’re confident that these actions position the business very well for additional growth in 2022, particularly when Holton comes online. OSB is somewhat simpler with volume increases from Peace Valley, partially offsetting sequentially lower OSB prices.

Provided the quarter-to-date average OSB price hold throughout the fourth quarter, the resulting OSB revenue will be down about 30% sequentially from the third quarter.

So in conclusion, given the usual caveats about sudden changes in demand, unexpected changes in raw material price or availability or other unforeseeable factors, the resulting EBITDA for the fourth quarter should be somewhat above $200 million. And with that, we’ll be happy to take your questions..

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

Thank you and good morning. I want to come back to Siding to start here. Can you talk a little bit about kind of what you’re seeing on the underlying demand side? It sounds like what you said was the volume drop is driven more because of the press rebuild and the capacity curtailment that you guys are having right now.

So can you address that a little bit and I had a follow-on..

Yes, Ketan, and good morning. The demand for SmartSide is strong still. We’re still in a managed order file situation, which means really all of this year, and probably extending at least into Q1 or Q2 of next year, we’re on a managed order file. So we’re selling to production.

As evidenced in Q3, where we’re able to produce more than expected and sell – and move all that volume in Q4 with the downtime that we outlined happening in Q4, we’ll have less production and we’re selling to that production. So demand remains strong. We are selling all incremental production. We could sell more than we produced if we had it.

And so from a demand standpoint, we’re in really good shape and will be, I believe, in a very tight situation until the second half of next year when Holton is up and running confidently..

Got it. That’s very helpful. And then turning to EWP, Brad, can you provide an update there in terms of the sale process.

Any rethink in strategy, given how strong that business has been recently?.

It’s a great question, Ketan. We’re very proud of the performance of that business this year, particularly last quarter.

We have worked hard over the last three or four years to increase margins in the business and throughput, which has driven some of the margin improvement, but we still are involved in the process around strategic options for the EWP business, and we’re still active in that process.

So I think strategically, there really hasn’t been a change in the way we evaluate that business being part of our portfolio, though we are very proud of the way that the business team has performed, improving margin.

And obviously, if we get – if we do get to a sale, that’s going to help on the valuations a lot, but no change in strategic prioritization with the EWP business, even given the good performance in Q3..

Got it. That’s very helpful. I jump back in the queue..

Thanks..

Thank you. Our next question comes from Mark Weintraub of Seaport Research. Your question please..

Congrats first on a very strong third quarter. And just following up a little bit more on the Siding business.

Have you gone through the process of negotiating pricing for next year with customers yet? And can you give us a sense of how that is playing out? And relatedly, I know, you’ve got Holton starting up and et cetera, and that there can be a life cycle to the EBITDA margin curve.

But are you relatively confident that we can see the 25% type EBITDA margins in Siding in 2022 as well?.

So on the pricing question first, Mark, we have not gone to market yet with our price increase strategy for next year. I’ll just remind the audience that we typically and are planning this year to time our price increase for January 1. And so we’ll be communicating that later in November and December to the market.

So we haven’t gotten feedback on that. But we feel confident about our ability to get some pricing next year given the demand situation for the product. And then as we look into next year and the margin profile, we’re still guiding to 25%, and I think that’s a good margin to – for us to focus on next year.

And we have a lot going on next year on the cost side with the completion and start-up of the Houlton mill and then we’ll begin the Sagola process later in the years, and we’ve got some raw material headwinds, especially compared to where we were at the beginning of this year.

But I think given our pricing strategy, given our consistently improving mix around pricing, I feel good about that 25% margin guidance for next year..

Great. Thank you. And then also just a quick follow-up. EWP, obviously, very strong performance also in South America and trying to get a sense as to how much of that you think is step change and reflective of the growth and changes in that business versus cyclical? And then somewhat relatedly, because this is sort of not the siding and not the OSB.

So Neil is taking over Entekra, which is interesting, obviously, around the Siding business. And what does that potentially say, if anything, about what you think Entekra potentially can become in time? And maybe if you can give us some help on that..

Sure. let me start with South America. Really proud of the business improvement, really over the last three years, particularly this year. Mark, there’s no question, some of that margin is aided by the pricing, the world wide price OSB, the price the lowest being North America.

You can imagine that imports to South America diminish from North America when we had the kind of pricing environment we had up here this year, which allows us to push price down there.

I do think there is a ratchet up in performance in South America, but they will – I do believe there will be some pricing moderation as we see the decline in pricing or experienced the decline in pricing in North America.

But the magnitude of price increase and the magnitude of price decrease in South America historically has been a lot less volatile than what we’ve seen in North America. But I do think we should expect some moderation of margin down there.

Now there is a component of that margin improvement, though, that is sustainable and that’s operational OEE aspect of the business. That – historically, that has been our poorest OEE division crude siding in North American divisions or segments. They’ve made really good movement over the past year, and there’s a lot of room for future improvement.

And then we also have a pretty aggressive for the scale of that business, capital reinvestment strategy down there. We’re primarily focused on improved machine reliability. And so there’s room for us to continue to improve South America from a cost standpoint.

And then I guess there’s a little bit of latency on how pricing kind of gets into equilibrium. And I don’t think we’ll know that for a quarter or two in South America, but we’ll obviously continue to report out on that. On Entekra. Entekra is very strategic to us. I’m really pleased with the progress we’ve made in that business over this past year.

But I think that they’re speaking a step change, Mark, there’s a step change needed. I believe we have validated market acceptance. I’ve said that on this call before, but we really have to bring a level of confidence in to just the overall operations of that business and the delivery of the value proposition.

So we made a couple of moves in the quarter. One that we mentioned on the call, we did one of our very experienced plant managers into the Badesto facility is now the plant manager. And then as we talked about, we’re moving Neil over there to be President. So we see this as a very significant strategic opportunity for us.

We think the timing is right to really put some concentrated resources on it. Obviously, Neil has a great track record over his tenure in siding of growing that business and building a really strong team that was capable of doing that. And we want to kind of lift and place him over in Entekra to see the same kind of rapid business improvement.

And then we’re very blessed to have a strong bench. Jason spent portions of his career associated with – particularly, with the sales side of our siding business. So I feel really good about Jason’s ability to continue the good performance in siding as well. But it does – I guess the nature of your question, what does this say about Entekra.

It says that we see it as a huge opportunity, and we’re really getting serious about getting a manufacturing competency so that we can continue to grow that business. We’ll probably – we’ll have revenue in the business of around $100 million this year of Entekra. We’re close to breakeven EBITDA, particularly in the second half of the year.

So, I mean, $100 million from zero, 18 months ago, does show that the revenue generation capacity of this business. And so we’re excited about turning that into a growth engine that is creating value. And that’s Neil’s job is to get that done as quickly as possible..

Thank you..

Thank you. Our next question comes from Paul Quinn of RBC Capital Markets. Please go ahead..

Yes. Thanks guys. Good morning. And I really appreciate all the extra detail on the guidance.

So just maybe to start with siding, if I’m working on my numbers to try to get to what your guidance is that suggests revenues of around $270 million in Q4 as well as EBITDA around $50 million, which keeping price flat, costs up a bit, volumes have got to come down about 4%.

Is that in the realm of possibility?.

Yes. You kind of nailed it that, yes..

Okay.

And then does that volume drop in Q4, does that bounce back in Q1 and Q2?.

Yes, very much so. The easiest way to think about Q1, the highest level is that Q1 next year ought to be sort of a fact similarly of the quarter we’ve just reported in Q3.

Given that with Holton won’t be online, so the capacity will go back to what it was in Q3 with a number of the maintenance projects, including Swan Valley project we build behind this. So yes..

Okay. And then one of the big programs that you’ve got is really on the prefinished side. Maybe if you could give us some details of the growth of pre-finishing in Q3..

Yes. We’re seeing really good growth at pre-finish, Paul, and we’re really supporting that with a capital investment strategy behind it. I would say we’re also constrained on paint capacity right now in SmartSide because of the good growth we’ve had there.

And so we’re aggressively pursuing both in plant capacity increases on facilities that we currently operate, but also, as we’ve mentioned on the last call, a greenfield location in the Northeast to support the start-up of Holton. We actually, Paul, we also saw – are seeing good growth in the west. We’re very pleased by that.

I’m a little bit surprised by the market acceptance out there. So, we’re also pursuing some capacity expansion plans for the west. So, I would say hitting on all cylinders as far as our export finished market acceptance and like the rest of the business trying to catch up a little bit on the capacity side.

So, we feel really good about the progress we made there over the last two years..

Okay. Great. And then just switching over to South America, pretty strong results there. And Brad, you mentioned further investment in that.

Is the investment just all around the operations to get that OEE up? Or is there some kind of plan to add further capacity down in South America?.

It’s both, Paul. We are doing the OEE related maintenance capital, let’s call it. We do have the ability, especially with the second line that we put in and just getting to a level of detail, but I’ll go ahead with the train of all. We started that press up, and – but not at full capacity.

There were some other constraining elements in the mill that we wanted to validate that we could sell the volume before we made that incremental investment, and we’re doing that now. So there is a component of the capital investment down there that is increasing capacity..

Great. Thanks very much. That’s all I had. Best of luck..

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

Thank you. Good morning. Just one question for me on the CapEx plan. You touched on equipment lead times, contractor shortages. And you trimmed the budget for this year. And I guess two-part question.

The inflation that you’re seeing, how does it affect the overall returns for siding conversions from your perspective? And any initial thoughts on 2022 CapEx guidance as you move ahead with the heart of the Sagola conversion project?.

All right. Thanks for the questions. I would say our raw material inflation is a drop in the ocean when it comes to the returns of – on siding conversions. So it means that I'm occasionally a little bit off on my forecasts, but it's just noise. No impact on the returns really.

For 2022, logistics and any other sort of practical constraints aside, 2022 is going to be a high investment year. We're still working on our plans, but with any luck, we will be spending significantly more than $250 million next year, provided we can get the economy and the logistics network in the U.S. to assist in that.

So we'll be aiming for higher. We've got the completion of the Houlton Mill and the significant investment in the Sagola Mill. So almost continuous investment in siding capacity is the theme for the next couple of years..

Understood. Thanks Alan, that's all I had..

Thank you. Our next question comes from John Babcock of Bank of America. Please go ahead..

Hey. Good morning. I guess just back to siding again, so apologies for kind of nailing it down.

But, just as far as like selling and marketing, can you kind of talk about why invest now in that, especially when you're short production and why not wait a quarter or two?.

Good question. There's two components to the growth in sales and marketing expense in siding and one of them is that we cut it pretty severely Q2 of last year. So some of that is just a recovery back to somewhat of a normal run rate that we had been on.

We obviously cut at Q2 of last year thinking that would not be experiencing the reality of what the COVID impact on housing. But also just to calibrate us all, the prefinished strategy, the export finished strategy is one, is very different from selling into new home construction.

Ultimately, the decision is made on siding choice in the home with a home homeowner deeply involved in that. So it's a bit more of a consumer sale.

And so our marketing expense is primarily focused about building brand identity around prefinished, our export finished brand, supporting, repair and remodel, contractor base around making that sale and just getting that exposure and placement that we need to be a national presence as far as pre-finish siding.

So it is at a step historically with what we've done from a marketing percentage or marketing dollar standpoint, but very consistent with what is required in order to have an effective repair and remodel present in siding.

Now what part of your question was, well, I think the nature of that question, John, was that we're oversold now, so is now the time to be spending it, we think so.

It does take a little while to build the kind of brand credibility and with the investments we're making around capacity expansion, we do want to be ahead of that a little bit on the marketing side so that when Holton comes up, particularly on the East Coast, a big repair and remodel market.

And then Sagola, following that, we've got some momentum on the sales and marketing side, the marketing side, in particular, to support that extra capacity. It's a judgment game, honestly, around how and when the magnitude of that marketing spend.

But I feel like we do have a credible – a very credible team that knows how to spend those dollars wisely. So I'm confident of that, but any mistake would be maybe we get ahead of it a little bit.

But I do feel like it's a minimal investment compared to the size of the capacity expansion capital and makes a lot of sense, given our recent history of sales growth and our ability to support that kind of level of spend in support of the brand..

Got it. Thanks for that. And then just my last question.

On EWP, how much more pricing will have to be realized from the announcements that you've made so far?.

You're asking like prices that are end market that have flow through the....

Yes. I mean, obviously, you had – you had like pretty decent price realization as last quarter.

Just kind of wondering like how much is left for the fourth quarter and potentially into 1Q next year?.

Yes. There's nothing left on the upside, given the decline, especially for I-Joist and lumber and OSB pricing, the competitive pressure is downward, not upward any longer, John..

Okay. Thank you. That’s all I have..

Thank you. Our next question comes from Kurt Yinger of D.A. Davidson. Your question please..

Great. Thanks and good morning, everyone. Just want to start off on siding production capacity looking into 2022. Holton will start contributing maybe a bit of volume in Q1, but realizing there's a ramp-up curve there.

Can you just help us frame what's realistic in terms of volume growth over next year? Is getting another 160 million square feet out of the system to grow double digits possible?.

Yes. I would say – I mean, we haven't seen the budget for next year in for our siding business. But if you take 150 million maybe additional square feet and then allow some improvement with OEE in our existing footprint. We could see that kind of growth going into the next year. We'll have a little better feel for that on the next call.

But I mean, we are expecting for productive capacity to be improved next year for no other reason than Hilton. I would say, just expect minimal contribution in Q1. I think we'll begin to see some in Q2 and then credible production in manufacturing in Q3 and Q4 of next year.

So the second half, we should have some incremental volumes, some meaningful incremental volume to sell..

Got it. Okay. That makes sense. And then switching to the OSB side. It sounds like maybe you're kind of ahead of plan on Peace Valley production.

Is it fair to think as that mill ramps you can get another couple of 100 million square feet of OSB volume in 2022 as well? Or is there anything from a maintenance or downtime perspective, maybe playing some catch up there that could be an offset to keep in mind?.

No, that's a reasonable assumption for next year, so to speak capacity, just make sure you're factoring in Holton won't be there at all, and then we will probably take Sagola down in Q4. So that there'll be a little bit of a minus on the Sagola, well, more than a little bit of minus in Q4 as we work on that conversion..

Right. Okay. That's a good reminder. And then just lastly, with the Allendale announcement recently, I was hoping you can maybe just refresh us on how you think about OSB M&A for you guys. In the past, I think you've talked about only being of interest if there was future siding opportunity that came with the mill.

But any change there with your view on OSB industry fundamentals or the flexibility of the balance sheet where it stands now?.

Not a lot of change there, Kurt. We – I mean, obviously, we're interested in – I mean, we would look at almost any opportunity, but the primary screener would be, do we believe it would enable us to convert that mill eventually to siding, which would mean it would need to be an Aspen mill.

So we're very interested in adding Aspen capacity to our network. We're a lot less interested in Southern Yellow Pine commodity OSB manufacturing..

Okay. Makes sense. All right. Well, appreciate all the color, Brad, and good luck hearing Q4, guys..

Thank you..

Thank you..

Thank you. Our next question comes from Susan Maklari of Goldman Sachs. Your question, please..

Thank you. Good morning everyone and congrats on a good quarter.

My first question is, can you talk a little bit to the availability of resins and veneers? And how you're thinking about that as we look to 2022?.

Yes. Resins are critical to both of our businesses in North America, and we've been doing a lot of work on trying to secure supply for the next week and for next year, the next quarter.

It has been pretty volatile, but I really – I'm really proud of the flexibility we've shown within our system and the way we've reallocated MDI resin, in particular, to optimize our specialty production, particularly as it pertains to Siding. So Susan, I think next year is going to continue to be challenging.

So far, we've had minimal downtime other than at Holton with our LVL line as a result of resin shortages. But I think we're going to have to continue to stay very agile as we work through next year.

And we'll just have to see, what the winter weather brings to the Gulf Coast, which has caused the problem last year with the freezers in Texas, but I would say right now, we're – we feel good about where we're at, but we do know that any disruption in the supply chain could cause us to have to be very flexible.

We're – it's fortunate for us, and I think this is true, most OSB manufacturers, but we can convert from MDI to phenolic for our commodity production and we have not had any issues related to securing phenolic resin.

So we've got a good backup plan, though we would rather be running those mills with the MDI resins particularly in support of our Structural Solutions growth..

Yes. Okay. That's very helpful color. And then can you just talk a little bit to inventory levels, especially as we think about OSB and EWP as we think about some of the activity on the ground from the housing perspective into the end of this year and then the builders kind of gearing up for the spring selling season, where things stand..

Good question. I would say, obviously, given the pricing moderation, the last three months or so, there's been some return to quasi-normal inventory levels. I would still characterize them as lean, if you look historically, but certainly not as long as it was six months ago.

And so as we go into the winter, there's typically or historically a low between Thanksgiving and say, January – the New Year around building – building new construction, multifamily construction stays strong. I could see the supply chain remaining on the lean side of normal.

If we get a slowdown in construction over that period of time, which would typically be weather-related, if it happens, we could see more of a return to a normal inventory situation by the time we get to the New Year. I don't see any scenario where the channel gets heavy with inventory, though.

I think – I just think there's too much catch-up to do given how we started this year for that to happen. And I think housing demand is too strong as well. But certainly, more – there's more inventory available in the channel than there was six months ago, but I would just still call it on the lean side..

Okay, that’s very helpful color. Thank you and good luck..

Thank you..

Thank you. At this time, I'd like to turn the call back over to Aaron Howald for remarks.

Sir?.

Okay. Thank you, Lucie and thank you, everyone for joining us this morning for LP's third quarter earnings call. There are no more questions in queue, and so we will conclude the call there. Please stay safe, and we'll look forward to speaking with you again soon..

This concludes today's conference call. Thank you for participating. You may now disconnect..