Good day and thank you for standing by. Welcome to the Fourth Quarter and full-year 2021, Louisiana Pacific Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advise that today's conference is being recorded. .

I would now like to hand the conference over to your host today, Aaron Howald, Vice President of Investor Relations. Please go ahead, sir..

Thank you, Michelle. And good morning, everyone. Thank you for joining LP Building Solutions today to discuss our results for the fourth quarter and full year of 2021, as well as our outlook for Q1 and the full year. My name is Aaron Howald and I'm LP's Vice President of Investor Relations and Business Development.

I'm joined this morning by Brad Southern, LP's Chief Executive Officer, and Alan Haughie, LP's Chief Financial Officer. During this morning's conference call and webcast, we will refer to an accompanying presentation available on LP's IR webpage, which is www.investor.

lpcorp.com, where you will also find our Earnings Press release 8-K, and other materials. Slides 2 and 3 of the presentation provide notices in detail regarding forward-looking statements and non-GAAP financial metrics. Rather than reading those statements, I incorporate them herein by reference.

The appendix of the presentation also contains some necessary reconciliations that are further supplemented by this morning's 8-K filing. And with that, I turn the call over to Brad..

Thanks, Aaron. Good morning, everyone. And thank you for joining us to discuss LP's financial results for the fourth quarter and full year 2021. Q4 was a strong finish to a record year for LP Building Solutions. Customer demand for Smart Side and Structural Solutions persisted throughout the quarter with no sign of typical holiday slowdown. With U.S.

housing permits in December reaching a seasonal run rate of $1.9 million, demand shows no sign of slowing. I'll therefore begin with an update on our substantial investments in capacity. For siding progress continues on the Houlton main conversion project with production expected to begin next month.

We rebuilt the press on our Swan Valley Manitoba mill in October and we're rewarded in January with an all-time monthly production record. LP also announced plans to build our fourth and to-date largest expert finish facility at a site in Bath, New York.

In OSB, production at pace Valley was 10% ahead of the ramp up plan established following its rates start in July, providing much needed structural panels to our West Coast customers. I want to thank our engineering, operations and local mill teams for the ongoing success of these projects.

In Q4 was significantly ramped up the rate of capital investment spending a total of a $121 million, for context total capex in 2021 was $254 million. Roughly half of which was for strategic growth. So almost half of the year span occurred in Q4. The right capex span for Q4 was not a one-time outlier.

2022, LP will aggressively increase our investments in capacity with plans to spend over $400 million in capex drop growth and innovation. Along with the soon to be completed Houlton conversion, later this year we will start the Sagola Michigan conversion, with siding production expected in Q1 of 2023.

In a few minutes, I will give you a preview of our long-term capacity strategy for Smart Side and export finish. This will be the first year but we have worked on two parallel Siding capacity edition projects, but it won't be the last.

We are currently narrowing the list of candidates for capacity expansion projects to follow Sagola, and we have begun the process of securing long lead time items necessary for these projects.

In the OSB segment, while we're not increasing volume, we will invest in the specialized equipment and process technologies necessary to accelerate the shift from commodity OSB to value-added structural solutions like Tec Shield, Flame Block, Weather Logic, and Legacy Flooring.

And we will continue to invest and demand-generation through sales and marketing and customer training as we gain share and expand addressable markets. Slide 5 highlights LP's financial results for the fourth quarter. In Q4, LP generated $1 billion in net sales and over $300 million in EBITDA.

This was 7% lower than prior year due to investments in growth, raw material inflation, and slightly lower OSB prices. This resulted in $200 million of operating cash flow and adjusted earnings per share of $2.24. LP returned almost $330 million to shareholders in Q4, mostly through share repurchases.

This completed the $1 billion authorization for share repurchases, leaving $500 million in remaining authorizations. Alan will provide more detail about our capital allocation strategy and execution in a few minutes.

But I should point out that the adjusted earnings per share I just mentioned is higher than last year, despite lower net income due to a much lower share count.

Before I summarize the full-year financial results, slide 6 shows more detail about Siding growth relative to the underlying housing market, as well as the growth of the highest value-added products in the Siding portfolio. On a trailing 12-month basis, single-family starts in the United States increased by 13% from 991,000 to 1.1 million.

Siding Solutions revenue grew at double this rate, increasing 27% in 2021. In November, Siding Solutions broke another record by surpassing $1 billion in annual revenue before ending the year at almost $1.2 billion.

For context, a billion dollars is close to the revenue that LP's much larger OSB business would generate at pre -COVID cycle average prices. This achievement marks a significant milestone in our strategic transformation. Siding revenue growth is a compound the result of 16% volume growth and a 9% increase in prices.

The price increase includes a positive mix effect of growth in Expert Finish, shakes, corners, and other innovative siding products. As you can see in the pie charts at the right, our total volume grew by 16%, the volume within this innovative subset of the siding portfolio nearly doubled reaching 10% of total volume in 2021.

This 10% of volume delivered 14% of the segment's revenue for the year, helping Siding grow at twice the rate of the underlying market. And as I said a few minutes ago, we intend to double down on our investments in capacity, equipment, innovation, and sales and marketing to continue to gross far side.

Slide 7 shows LP's extraordinary results for the full year. In 2021, all business segments set records for sales and EBITDA, which totaled $4.6 and $2 billion respectively.

The resulting adjusted earnings per share was almost $14 after substantial investments in capacity, innovation in sales and marketing, LP returned nearly all of the $1.5 billion and operating cash flow to investors through share buybacks and dividends.

While demand for new construction and repair and remodeling projects is projected to continue for some time, 2022 will surely bring new challenges. We have seen some hopeful signs of moderation, but inflation continues to exert upward pressure on prices for raw materials PREIT.

Global supply chain disruptions continue to threaten availability of some raw materials. But I have never been more confident in the creativity and dedication of our team in the sustainable business model we are building. I will close by stressing that our success is built by our people.

The war for talent is real and LP aspires to be recognized as safe, welcoming, and rewarding place to work for anyone and everyone who has the talent and desire to join our team. At LP, we are growing and transforming by investing in all our assets including our most important one, LP's 4800 employees.

And so, to say thank you for an unforgettable year and a job well done, LP has substantially increased retention bonuses, retirement plan matches, and discretionary profit-sharing contributions for employees.

And with that, I will turn the call over to Alan to discuss Q4 and full-year results for the Siding and OSB segments, and to update you all on LP's capital allocation strategy..

Thanks, Brad. And thank you all for joining us. As Brad said, 2021 was indeed a remarkable year. Looking forward in 2022, we plan to build on the momentum of our ongoing transformation by increasing our investments and growth, and I'll detail these plans in a moment. But first let's delve a little deeper into the fourth quarter.

The waterfall on Slide 8 shows the changes to sidings, revenue, and EBITDA compared to last year.

Revenue increased by $22 million or 9%, and this was the net result of a 2% decrease in sales volumes, more than offset by an 11% increase in average selling prices, and this increase is the combination of list price increases, reduced discounts and rebates, and the ongoing positive mix effects of Expert Finish and other high-value-added components.

The drop-in sales volume, as for shadow during our third-quarter earnings call, was unrelated to demand, but was rather the result of lower production due to the major planned outage for the press rebuild at our mill in Manitoba.

In fact, the 2% decrease in volume is rather impressive given that the month-long outage in October at one of our largest mills represents nearly 10% of sidings normal quarterly prediction. The cost of this press rebuilds accounts for the lion's share of the $12 million of maintenance expense in the waterfall.

Another subject reintroduced in our previous earnings call was our continuing investment in demand creation and production capacity totaling $25 million in the quarter. This includes $5 million of increased selling and marketing investments, $8 million for the Houlton conversion, and $12 million of maintenance costs.

The bulk of which, as I said a moment ago, was the press rebuild in October. The last and largest bar on this waterfall chart is a $29 million hit to EBITDA from inflation. Of this, $21 million reflects raw material prices with resins and associated chemical inputs being the bulk of the increase.

Higher fuel costs also drove about $4 million of increased freight costs..

The remainder of this inflation is mostly related to wages and incentives. Now we have seen some recent normalization of these input costs, but it is likely that resident freight prices will remain above 2020 levels for some time. The resulting EBITDA margin for the quarter was therefore 17%.

However, absent the $25 million of discretionary investments, Siding 's fourth quarter EBITDA margin would have been 26%, which is of course why we continue to invest in our growth. The net result of all this growth in investment as shown on slide 9, is a full-year EBITDA margin of 25% for Siding.

This actually meets its long-term margin target, which was set at this level to accommodate the ebbs and flows associated with mill conversions and the other investments that generate future growth.

Therefore, ending the year at 25% despite a mill conversion, a press rebuild, an ongoing raw material inflation is remarkable and made possible by strong customer demand, which drove the 27% revenue growth, and very efficient manufacturing operations, which in turn delivered the necessary operating leverage.

I won't belabor the full year waterfall, but if you'll forgive a slight oversimplification, the EBITDA benefit of volume growth more than offset investments in future growth, primarily manufacturing infrastructure and sales and marketing, while the EBITDA benefit of increased prices more than offset raw material, freight, and wage inflation.

And it should go without saying that we strive to retain those price and volume increases sustained as necessary by ongoing investments, whereas inflation is, with any luck, temporary. Page 10 shows the fourth quarter results for OSB compared to the prior year.

Although prices for the quarter were down sharply from the summer's record highs, the trend in the fourth quarter was one of steady increases followed by a marked acceleration late in December. Ultimately, revenue and EBITDA fell by just $19 million in the quarter due to prices.

Conversely, total volume for the quarter was a 120 million square feet higher than last year, with a 100 million square feet more commodity volume and 20 million square feet most virtual solutions. This is mostly due to the Peace Valley Restart.

The combined impact of this increased volume and favorable mix resulted in an additional $57 million of revenue, and $43 million of EBITDA. Much like the Siding segment, OSB saw increased prices for resins and other raw materials, as well as freight.

Availability of logistics, particularly rail in the Northwest, also raised freight costs as we were forced to switch to truck freight in some cases, at higher costs.

These challenges have continued into the first quarter of this year, particularly in British, Columbia, where lack of rail cars has forced intumescent downtime at our Peace Valley mill in order to manage finished goods inventory.

For the year DOSP waterfall on Page 11 is dominated by price, clearly not shown to scale, which added over $1.1 billion dollars of revenue and EBITDA, and rather overwhelms the other elements on the chart.

In the full year waterfall is easy to be dazzled by price, while the volume from Peace Valley over wipes out the volume losses caused by MDI shortages earlier in the year. Prices may have had record levels in 2021, but the supply chain challenges the business overcame to deliver products, and therefore these results should not be underestimated.

Page 12 shows the major drivers of the year-over-year change in revenue and EBITDA for the entire cooperation for the fourth quarter. Focusing on the EBITDA column.

OSB volume, Siding growth, and improved results in South American and EWP added a combined $86 million of EBITDA, almost perfectly offsetting the impact of inflation in raw materials, freight, and wages, costs for Peace Valley, and other major maintenance spending.

I should mention that these results are helped by ongoing improvements in the EWP business, particularly through our enhanced pricing strategy designed to protect margins from volatile input prices, chiefly lumber and aerospace.

This strategy contributed to EWP's impressive $27 million of EBITDA for the fourth quarter, bringing its full-year EBITDA to $95 million, four times its 2020 result. The strategy continues to bear fruit with LVL and IGOs price increases implemented as recently as last month.

Furthermore, last week, LP announced the sale of its 50% stake in an I-Joist joint venture for $50 million. In 2021, that 50% equity stake generated about $11 million in EBITDA, which is about twice at cycle average.

The supply and distribution agreements associated with the joint venture will continue in place with those impacts showing up in the OSB and the EWP segments as before. LP South America also had a very strong finish to the year.

Although OSB prices there are generally less volatile than in North America, the near tripling of our South America's EBITDA to $130 million was overwhelmingly from price.

And while the lion's share of the increased capital investment in 2022 will be in North America, our South American business is in the early stages of a multi-year, self-funded, capacity expansion. A summary of cash flows on slide 13 serves as a useful reminder of our capital allocation strategy.

In 2021, we earned $2 billion of EBITDA after paying $420 million in cash taxes. Funding a modest increase in working capital. Quite frankly, we could've used more and paying $30 million in interest and other assorted stuff. We generated nearly $1.5 billion of operating cash flow.

Of this, we invested over $250 million in CapEx with the Houlton mill conversion by far the largest single component. We then devoted $1.3 billion to the repurchase of 21 million shares at a volume weighted average price of $61.5 and paid $66 million in dividends. Our balance sheet therefore remains extremely strong.

We ended the year with $370 million of cash on hand and therefore zero net debt and an undrawn revolver of $550 million. Our best investment is unquestionably in our own transformation.

But as long as our shares continue to trade at a discount to our intrinsic value, we believe that the next best use of cash is to return it to shareholders, to share repurchases and regular dividends. And speaking of dividends, LP's board approved a 22% increase in our quarterly dividends to $0.22 per share.

We're up to now about our investment plans for 2022 summarized on Slide 14. As Brad said earlier, we will be completing the Houlton conversion this year, as well as starting the conversion of Sagola, making 2022 alignment years, the first year in which LP will work on two Siding capacity additions.

And we're already in the planning stages for additions beyond Sagola, including spending on long lead time items. Total spending in 2022 on all these mill conversion accounts for almost half the $400 to $430 million slated for CaPEx in 2022.

Other strategic growth capital of $80 to $90 million includes, among other things, further expansion of our pre -finishing capability. But currently able to finish roughly 5% of our press capacity. And we plan to nearly double that prefinishing capacity in 2022, then double it again over the subsequent two years.

To that end, in December we announced the purchase of assigned Bath, New York, where we plan to build our fourth Expert Finish facility. While we build the bath facility, we will simultaneously expand our existing Expert Finish facilities in Green Bay, St. Louis and Roaring River.

We're also exploring options for facility in the Northwest, strategically Located to finish Smart Side produced at Dawson Creek. Our long-term target is to refinish as much as 30% of Siding capacity, but remember that we're also expanding Siding capacity to meet customer demand, so we are chasing a rising target.

With respect to guidance for sales and EBITDA. In the first quarter, we expect Siding revenue will be about 10% of the prior year with price accounting for most of the growth as Houlton will not begin its ramp up until March.

Combination of additional capacity relies in the year, list price increases, and the mix effect of expert finish another high value-added Siding products should generate full-year revenue for 2022, which is at least 15% higher than in 2021, as I'm sure you're all aware, OSB prices have been climbing steeply for the past several weeks.

Without attempting to predict future prices, I will offer outlook predicated on the assumption that OSB prices remained flat last Friday's published levels. Under that assumption, revenue for the OSB segment in the first quarter would be about 40% above that of the fourth quarter of 2021.

The total company EBITDA implied by these levels of growth is at least $500 million. However, all businesses are encountering difficulties in transportation logistics with fuel prices pushing freight costs higher and availability remaining challenged.

We have been forced to take intimate and downtime at Peace Valley due to truck and rail logistics, but we're working through that. Logistics challenges are less likely to force production curtailments in the Siding segment as the product can be stored outdoors.

Downside risk to our outlook is therefore largely attributable to logistics and to a lesser extent, raw material availability and continued inflation. However, absent a significant external economic shock, demand for Siding OSB and EWP seems unlikely to let up anytime soon. And with that, I'd like to open the call for Q&A..

Thank you. . And our first question comes from the line of Susan Maklari with Goldman Sachs. Your line is open. Please go ahead..

Thank you. Good morning, everyone; I think its still morning. Thank you for taking the questions.

My first question is, can you talk a little bit about the housing backdrop and how you're seeing demand coming through as we think about the spring? And builders really looking to ramp inventory, and especially, with the big public forecasting a lot of community count growth this year, and presumably some meaningful increase in inventory with that?.

Yes, Susan. Just confirming everything that you said about the optimism with the public builders around their order files for the year and their ability to continue to grow volume and inventory throughout the year. I'm hearing the same thing on the calls that I've or scripts that I've read and a conference that I attended recently.

So, we're very optimistic about the housing forecast for the rest of this year and beginning to get optimistic about carrying over into the following year. Just given all the momentum. And then as that relates to our order files in all three of our North American businesses order files remain very strong.

We continue to be on the managed order files in Siding and have been now for almost a year-and-a-half and from an OSB perspective, it continued very strong order intake weekly. So, the -- and then same for EWP. So, we're seeing that strong housing market translate into consistent strong order patterns across our North American businesses..

Okay that's helpful. And then you talked a little bit about the continued headwinds that you're seeing on the raw materials side.

Can you give us a little bit more color on the resins, what's you're seeing there, and I know you'd had transition to some other inputs in your commoditized, or more commoditized products, to compensate for some of those headwinds that you're seeing.

Can you talk a little bit about where you are with that and how you're thinking about the overall inflationary environment as we think about 2022?.

Susan, we are back -- the premium resin that we use is MDI, and then we can move OSB, especially the commodity skews over to phenolic. We're back to running a full allocation of our MDI resins in both Siding and OSB, so availability currently is not an issue.

But obviously, as you remember, if that becomes an issue as we move through the year, we do have the ability to flex back to PF resin if needed. And then as far as resin pricing, we're looking at increases between 10% and 20% year-over-year, those prices are resin pricing for MDI is indexed to benzene and derivatives.

And so, we're pretty much locked in to seeing that MDI pricing rise as we see oil prices rise, but not too -- we're more concerned about price inflation right now than availability..

Okay. Okay. Well, that's good to hear. Thank you. And good luck with everything..

Thank you, Susan..

Thank you. And our next question comes from the line of Ketan Mamtora with BMO Capital Markets. Your line is open. Please go ahead..

Thank you. Good morning, Brad, Alan, Aaron..

Good morning, Ketan..

First question, maybe start with the Siding capacity options that you are looking at beyond Sagola.

Brad, would it be possible to give us some sense of what are the options that you are considering and the timeline that that you are thinking?.

Ketan. So, we're looking at multiple scenarios for that next tranche of volume, in no particular order. One option is to add press capacity or add a press at an existing siding mill. The second set of scenarios is to convert one of our two remaining has been using OSB mills over to Siding.

And then third would be more of a greenfield capacity expansion where we build a new facility. And each of those have different capital efficiency parameters. And then each of them has ramp up -- different ramp-up parameters.

I really like the idea of adding a press to existing Siding capacity or Siding mills because we get instant knowledge on how to manufacture the product from a quality standpoint. That decision obviously is based on what -- primarily on wood availability and then land availability around the facility just the capability to expand.

When we look at converting existing OSB mills to Siding, obviously we already had the labor in place, little bit more challenging as we ramp into the quality parameters and as you know, ketan, our two remaining facilities, Maniwaki and Peace are rather large presses, larger than any mill we've yet to convert.

We're trying to work through how -- the complexity comes from those larger mill conversions. And then, finally from a greenfield, probably the least capital efficient means of securing new Siding capacity.

But we are intrigued by -- for the first time, engineering a facility just to make Siding versus in the past, adapting and existing OSB technology over to Siding. So, there's pluses and minuses for each of those three scenarios, and that's exactly what we're working through in order to get to a decision on the capacity expansion after Sagola.

As far as timing, Ketan I could see us talking publicly about that decision later this year, probably late this year, because we are looking at needing that production ramping up in 2024.

So, we're -- in all hands-on deck working for those scenarios and we expect to be able to talk a little bit more with a little more certainty about what we've chosen to do as we get, in the second half of this year..

That saying for Brad and then so, just as a follow-up to that, vendors that leave Val-d'Or and the Cook among of the option list spread..

So , we have sold the Val-d'Or facility. So that is no longer an option for us. But when I speak about possible greenfield, that obviously would include the. The land is really -- would be a really ideal place for us to build a greenfield siding mill..

Got it. That's helpful.

And then, so just one near-term question on 2022? When you talk about Siding revenue growth of 15% considering the mix shift and the price increases, what is embedded within the guidance around volume growth for FY2022?.

Hi, Ketan, this is Alan. Remember, we have roughly taken that 15, it's 8 to 9 points of price and the balance being volume with obviously a ramp-up through the second half of the year as Houlton comes online. That's roughly how to think about it.

Obviously, we tend to -- we have tended to over-perform on both volume and price when I give steps like that. But think of it as roughly 50-50 with a slightly greater emphasis on price and volume..

And then this price also includes the mix shift benefit, so this is not our list price increases, is that correct?.

Correct, yeah..

Got it. That's very helpful. I'll turn it over. Good luck..

Thank you, Ketan..

Thank you. And our next question comes from the line of John Babcock with Bank of America. Your line is open. Please go ahead..

Hey, good morning. Actually, just quickly following up on some of the discussion thereon, some of the projects that you are looking at for the next round of capacity additions in Siding.

At this point, I assume that especially given the lengthy backlogs for machinery, have you already started to make purchases or at least get into contracts around some of that or is it really too early to comment there?.

No, John, we have -- we're doing engineering and have purchase orders in place for equipment associated with that next facility. So, we are where there will be no matter which scenario or certain equipment, we know that we will need and we have begun the process of securing that equipment.

The equipment or the factory space for the equipment to be fabricated. So that's -- we're active there..

Okay. to have flexibility though in terms of that equipment of which of those different options you decide to pursue, it's not like you fully made up the decision at this point and you'll -- and I'll tell you to show..

The stuff that we're say pre -buying now would be equipment that would be needed in no matter the scenario that we choose or that what we getting -- again, we're doing this so frequently now that there are number of aspects of the projects that are the same, and so we can, in simple terms, sort of bulk buy for more than one mills worth of those aspects..

Got you.

And then just on the Capex guidance for the year, I was wondering, could you break down how much of that $190 to $200 million on the mill conversions is going to hold in Sagola this year and then also what will be left for Sagola in 2023?.

I don't think we've disclosed that. The loose, think of it as about 50-50. No, that think of it as three quarters of that money will be for Sagola. And the other remainder will be for the remainder of Houlton on some long lead items. About yeah, about a little under three quarters of it will be for Sagola..

Great. And then just a last question before I turn it over.

Earlier on the call, you talked about moving -- never rather making investments to move some capacity from the commodity side of OSB into the specialized area, could you provide us any color in terms of how much volume you might be able to move into the specialized OSB with those investments? And then also, if you already have demand for those investments? Any commentary run that would be useful..

John, we're running our structural solutions mix for 2022 was just above 45% of our total production in our OSB business. We see a lot of upside to that over the next several years and have plans in place to aggressively grow that business. And so, working off a base of 45%, we certainly are targeting being in the mid-50s by the end of this year.

And honestly, from getting it into the market, it helps when the market is tight. We can be a little more directive on the volumes, the sale through our contracting system, and so we are using this tight market to facilitate the conversion to our value-added portfolio..

Thank you..

Thank you. And our next question comes from the line of Seaport Research Partners. Your line is open. Please go ahead..

Thank you. First maybe a bigger picture type question. Congratulations. Fantastic year. Congrats to everybody at LP on that. Housing obviously is doing really well. We're permit data, etc. is now above normalized height levels. You are now accelerating your growth in you spend.

Can you contextualize how important is what happens to housing from here versus the innovation in the product mix, opportunities and repair remodel, and how you're conceptualizing, what are the key drivers to the success of your strategy going forward? And really, I'm just trying to get, how important is it that housing stays at very elevated levels versus some of the other factors that you think are going to be bedrock to the future of Louisiana Pacific?.

Mark that's a great question, and as we've reported before, right now, we estimate that 40% of the volume in our Siding business goes into new construction, almost all of that single-family, we have a little bit of multi-family, but it's not really material.

And so, 60% of the portfolio right now is -- and for a while has been focused on repair and remodel retail in the shared business. As you know, we are -- and as we reported on this call, we're investing heavily and pre -finished assets.

Honestly, the Houlton Maine mill conversion is primarily a repair and remodel play given where that mill is geographically and some of the capability that we're engineering in that facility.

And so, we're really focused on growing our market share and repair remodel that we believe -- it can be a little bit correlated to home construction, but not for reciting projects, generally speaking. So yes, I mean, the house --strength of the housing -- the construction certainly provides a tailwind to our Siding business.

And that selling into the construction as a competency that our company has for the last 50 years. But our whole strategy around Siding is really focused on leveraging the opportunity and repair and remodel,.

and that bring -- that requires both elevated SG&A, which we've talked about, but also improved innovation, and I think we're demonstrating our ability to match our innovation expertise to the needs of the market. And so, we will not -- we are focused on growing the Siding business and we do not view the housing.

The long-term or any negativity around someone forecast on housing to back off for that commitment. Now, in reality will the down housing year be reflected in our results for Siding? Certainly, it would because we do have good, pretty good penetration into new home construction. But our strategy is focused on diversifying away from that dependency..

Great. Thank you. And then just one follow-up.

When we think of IRRs for the various paths you're taking, the mill conversion versus the other strategic growth capital and sort of the bands of confidence, is there much variation or is it fairly similar? In particular is -- for instance, are there pre -finished? Is that like a very high-probability, very high return type of expenditure, any color you can give us on those?.

That's a great question.

Let me talk high level Mark and then we can follow-up questions if you -- to get to the detail that you're looking for, but you think about -- given our company's capital intensity, when you do anything with a press, rebuild it or create one in a greenfield scenario, and compare that to the investment required for pre -finish.

The capital intensity of the pre -finish incremental investment is very low in LP's world. Yet the price and margin enhancement are relatively large and so we see high returns for our investment in refinish, and with the risk being to our ability to sell out that production.

But it is -- but given the low capital intensity, there's kind of room for error there, and a lot of the cost ends up being virialized in those refinish facilities. So, we could match the ramp-up curve to the spin there. Those prefinished products projects are higher return.

When we look at other ancillary, like the shape line that we installed at our mill in Swan, Those -- again, those -- we tend to be investing right now in some rather high-valued, high priced, higher-margin skews that can generate a lot of return compared to just a base press type of -- or a mill, mill conversion IRRs.

So, the gamut on these innovation returns go from average to high depending on the specialization of the new product and our ability to garner price.

Now, let me just speak a little bit about the scenarios around mill conversion or capacity adds, and in Siding, if we do a greenfield mill for Siding, that's going to be a lower of the three returns on our options, next would be adding a press line, because we would be buying a new press if we add a press on an existing facility.

So higher returns in greenfield, but lower returns than a pure mill conversion like we've done historically, because basically, we're utilizing a press that's in place if we do a mill conversion. That's how you should think about the mill conversion returns rating down.

And then you should think about these repair and remodel focused incremental investments around innovation to be relatively high returns compared to mill conversion..

I guess Brad, just -- it would strike me that the opportunity costs though if you're converting an existing OSB press might be pretty high, so that adding at an existing mill a new craft might in fact be the highest return.

Did I misunderstand what you were saying?.

That's a great point, Mark. It depends on, and it's something that we certainly debate internally. Right now, the return on conversion and OSB bill would be pretty low given the margin right now in our OSB business. But when we have -- so that's a really good point.

But historically when we've looked at those mill conversions in light of the sustainable, consistent margin related to our Siding business even with the opportunity costs, we have felt that those are good investments, really good investments.

And then, historically Mark that spend in the context of us ramping up Clark County or Peace Valley in our OSB business we've been able to offset those conversions with more efficient OSB mills coming online.

So historically, I've been very pleased with those decisions we've made around the mill conversion, but it's a different -- we are different place now looking forward for the point you made, but also a little more problematic of converting these larger OSB presses over to Siding usage has us looking at opportunities where the Siding volume becomes more incremental to us rather than a substitute for our replacement for OSB production..

Great. Appreciate the details. Thank you..

Our next question comes from the line of Paul Quinn with RBC Capital Markets. Your line is open. Please go ahead..

Yes, thanks very much. Morning, gentlemen. I guess the first question I got is Val - d'Or. I think, Brad, you said you sold the mill. I haven't seen a press release. I'm just wondering, I mean, that was a mill that you swapped with back in 2016, with the idea to bring it up.

What changed that strategy, and what did you sell it for and to who?.

I might have got ahead of myself there, Paul, but we do have a purchase agreement, and the -- and we're selling it to a company that cannot make OSB. It's a facility or land sale primarily, and that's -- it's a work in progress right now..

Okay. Well, that's good news.

Maybe back on Swan, just when you did that conversion, I think it was back in 2015, did you rebuild the press at the time or I guess maybe the press rebuild that you've done now, does that give you more production than the 350 or does that lower your costs or does it do both?.

Hey Paul, that was -- we did not -- we did not rebuild the press when we converted it, but we did identify the need for that conversion, but we have been so tied on Siding, we kept pushing the conversion price down until we just couldn't any longer.

And so, this is -- in fact this was the first rebuild of that press in that plant since the plant started up as almost being mill, however long ago.

When we do those press rebuild, they're not primarily done for, or not done at all for incremental of production. But we do -- have been able to find the opportunities for increased volume out of those presses. And basically, that comes from reduced pressed press time and so improved reliability.

And then one of the bigger advantages to as we see, a real mark improvement in quality. And that's around fitness control. So, when you take a little better control technology, and obviously very much improved ability to control the press and opening and closing space and that kind of stuff.

We do tend to get single-digit improvements in capacity as a result of that. And -- but the biggest thing is less downtime, less maintenance time in the press that leads to the higher production. We used to think of these converged -- these presses rebuild is like zero return projects.

They probably don't consistently hit our cost of capital, but they approached it given the improved technology that's available on these new presses..

Okay. That's really helpful. Maybe just on the EWP sales process, just wondering if the sale of your JV I-Joist helps out and where you are -- where you're sitting in that process..

Yes, Paul, this is Aaron. It should help that process. It certainly adds clarity in terms of the transaction parameter. And just to be clear, what we sold as part of the joint venture was the -- our 50% equity stake in the EBITDA of the joint venture.

It was a fairly complicated involving an OSB supply agreement and an I-Joist distribution agreement, both of which continue. But yes. All else equal, it should simplify and clarify the ongoing EWP process..

Is there an adventure Paul to the complexity of that JV, which has been a great investment for us? Did the waters when we tried to explain how the business operated to potential buyers. So, having that clarity going forward, we think is going to expedite our strategic evaluation of that business..

Okay, sounds good.

Last one for me, just you mentioned South America capacity expansions, maybe you could give us some details of what the plan is there?.

Primarily what we're doing there is improving press reliability at those facilities as well and overall reliability. We did put a second press in two or three years ago, but did not put drying capacity as an example to utilize all the press because we didn't need that volume.

And so, there's deep bottle necking, lower capital intensity debottlenecking projects that we can implement to get that second press up to full capacity. That's what we're speaking to.

We are evaluating other geographic locations for expansion in South America, and those are primarily dependent on our ability to develop markets around those facilities. And then obviously overall economics shelf of the economies down there.

But I'm very optimistic about our ability to grow in South America through either what I'll call organic growth, which is the bottle-necking our existing operations, and then eventually, as we have done over the years, finding new geographies where stick frame construction is becoming more predominant and we can be a supplier end of that.

For example, Argentina, great wood basket, slowly transitioning to more stick frame construction. Columbia is another good place, obviously, rife with a lot of political issues right now that would prohibit us building a facility there.

But as those economies and those housing markets mature, we like that environment and have done well down there as you know -- know how to operate in South America. We're cautious about expansion, but when we see an opportunity, we want to lean into that..

Great. Thanks for the detail..

Thanks, Paul..

Thank you. And our next question comes from the line of Kurt Yinger with DA Davidson. Your line is open, please go ahead..

Great. Thanks, and good morning, everyone. I just wanted to start off on Siding margins. It sounded last quarter like despite some of the cost pressures with conversions and discretionary investments, maybe that 25% margin target was a reasonable expectation for '22.

I'm curious if your thoughts around some of those items have changed at all and whether that's still an achievable hurdle?.

Yes, I would say it is. It will be dependent obviously on the unknown factor of raw material, price inflation, and whether or not, and I'm not saying there would be, but whether or not we -- there was a reaction from us in terms of price, that power always exists as well as the pace of the -- and the expense of a mill conversions.

So those known factors, known controllable factors in terms of the rate at which we choose to invest in growth, as well as that slight unknown in terms of raw material inflation. But fundamentally, I would argue that the performance we've demonstrated so far puts on sign off draft to our long-term EBITDA margin target of 25%.

That's beginning to look a little conservative in the long run..

Got it. Okay. That's helpful and Brad, you touched on still being on a managed order file in Siding, as we get into the second half of 22 and Houlton moves towards full production capabilities.

Do you see the potential at all to start rebuilding channel inventories, and as you speak to customers and consider where channel inventories are today versus where they could be if production was a constrain or what you would consider normal, is there any way to size that gap?.

Kurt, I would say given what I know today about the Houlton startup curve and our current order situation. In the fact it's February and things were really tight right now. I don't see us getting our channel partners inventories back to a normal level until this time next year.

I think it's going to take -- I think we're going to be tied all year as we ramp into Houlton, and I really believe it's going to be the Sagola production that put us over-the-top or catches us back up. Now, we'll continue to update you-all on that every quarter..

But we are very tight and we're just getting into the spring building and remodeling season. And Houlton is starting up next month. It will be minimal grade A production in Q2; I mean, obviously, some. So the really big Q3 and Q4 until we start seeing a significant impact of that incremental production.

And from where I'm coming from is then maybe in December or January, we build some channel inventory, some much-needed channel inventory, as we prepare for the spring season next year. But my belief is we're going to be tight all year in Siding..

Got it. Okay. And maybe just a follow-up.

I mean, when -- it's not a unique phenomenon to you or Siding specifically, but when you speak to your customers and channel partners, what is the feedback you get on just those production constraints and do you see any kind of competitive implications that have come from it?.

Yeah, certainly in times of tight supply, a contractor has to make a decision on finishing a product and a lot of that depends on availability.

So what we're trying to do with our managed order file is to be very strategic about where we supply production, it's to strategic customers, and I mean all the way down the channel, not just our distribution partners, so they are very important, so that we are -- we were getting in the areas where we see opportunities for future growth, those channels were being rewarded with the volume that they need.

So we're having to be very strategic about that. It does give us an opportunity from a SKU optimization standpoint, to focus on the SKUs that we see have a long-term future in our portfolio.

And so it's a weekly, monthly grind to make sure that we're supplying all the material we can into the strategic customer partners that will set us up for future growth. I personally don't think there's been any long-term damage done, we're still putting a lot of volume into the market based on the growth rates that we've seen.

But when you're oversold, you never know, could I have sold one more truckload this week or a thousand more truckloads this week.

You just oversold And that's not a position that we want to be in, and that's why we're making the capital investment to get ahead of that, but it bothers me to be in managed order files from -- because you never know what your market share gains could be if you were on unconstrained, but that's reality of where we are today.

And we're just trying to manage it in a very thoughtful way and aligning with the customers that we see being there for us in the future..

Okay. Alright. Well, appreciate all the color guys and good luck here in Q1..

Thank you. And our next question comes from the line of John Tumazos, with Very Independent Research. Your line is open. Please go ahead..

Thank you for taking my question. The European prices that we can derive from the West Fraser 's disclosures appear to rise in the December quarter after rising sharply in September and June.

Your European -- your Latin American realizations appear to fall slightly in the fourth quarter and are lower than your North American realizations as we can derive from your statements. Could you describe competition in South America for OSB? Who's as big as you? Who's notable? In Europe, there's Kronospan and other panel producers.

Some of them put the lacquer on the counters and sell finished products. But could you just characterize the competition outside North America? It's curious that the European prices are still rising, for example.

Just trying to understand the market and the world?.

John, the competition right now in South America is primarily and dominantly import volume from either Europe, the U.S. at times, and Asia. And that depends on the skew in, it's getting a little bit of detail, but the South American market as non-API panels are pretty big part of the volume.

So the quality parameters on is robust as for all the portfolio, as they are in North America. And so depending on the internationally economics around OSB, that import volume can be a competitive to pricing or not. So generally speaking, our South America pricing is more stable when pricing is stronger in the U.S. because the U.S.

imports into South America go away, and -- or any European volume maybe coming in, is more biased to come in, in the U.S. and South America.

So generally speaking, that's how we see the trend, though somewhat like Europe, there's an insulation factor there built into OSB pricing in South America, primarily due to the fright associated, we get the product into the continent.

So we see more stable prices in South America over our 20-year history there, but there's no -- but it certainly is influenced by the relative pricing in North America at the time. That's what dominates the market for -- as far as imports..

Thank you..

You're welcome..

Thank you. And our last question will come from the line of Sean Stuart with TD Securities. Your line is open. Please go ahead..

Thanks. Good morning, everyone. Just one quick one from me. Brad, you touched on the strides the company's making with the Structural Solutions value-added product within the DOSP segment.

Any update you can give us on your ability to decouple the pricing for those products from the weekly random likes PREIT, I'm just trying to gauge the relative stability in those products versus the commodity OSB..

Sean, in all honestly there's still pretty tied to each other for most of the skews in our Structural Solutions portfolio, there is some direct link back to random links and as it's sold as a premium to that price.

Now, for some of those skews we do get, monthly adjustments or multiple week adjustments, not that annual week-to-week adjustments to those which actually can hurt us in a rising OSB market. But we are -- other than our Flame Block, skews, it's -- most of our portfolio is some way tied to random.

So what you'll see over time is the price for our OSB is going to vary and somewhat proportional to random. But we've got this built-in margin stability that comes from the Structural Solutions portfolio..

Understood. Thanks for all the detailed answers. I appreciate it..

Welcome..

Thank you and this does conclude today's question-and-answer session. And I would like to turn the conference back over to Aaron Howard for any further remarks..

Thanks, Michelle, like we're out of time. one minute long, so we'll call it there and concluded fourth-quarter and full-year earnings call for LP Building Solutions. Thanks, everybody and we will look forward to talking again soon. Have a great day and be safe..

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