Louisiana-Pacific Corporation beats earnings expectations. Reported EPS is $0.71, expectations were $0.52. Louisiana-Pacific Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to Q4 2023 Louisiana-Pacific Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Aaron Howald, Vice President, Investor Relations and Business Development. Please go ahead.
Aaron Howald: Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the fourth quarter and full year of 2023. My name is Aaron Howald and I am LP's Vice President of Investor Relations and Business Development. With me this morning are Brad Southern, LP's Chief Executive Officer; and Alan Haughie, LP's Chief Financial Officer. During this morning's call, we will refer to a presentation that has been posted to LP's IR webpage, which is investor lpcorp.com. Our 8-K filing, press release and other materials, detailing LP's strategy and sustainable business model are also available there. As usual, today's discussion will contain forward-looking statements and non-GAAP financial metrics as detailed on Slides 2 and 3 of the earnings presentation.
The appendix to the presentation also contains reconciliations that are further supplemented by this morning's 8-K filing. Rather than reading those materials, I incorporate them herein by reference. And with that, I will turn the call over to Brad.
Brad Southern: Thanks, Aaron, and thank you all for joining us to discuss LP's results for the fourth quarter and the full year of 2023. 2023 ended much better than it began for LP and the markets we serve. In the fourth quarter, Siding achieved its highest EBITDA margin of the year. I'm pleased to share that Siding is back on a growth footing, having returned to normal inventory and order flows after a destocking cycle in the first half of last year. We are well positioned to gain share in R&R and with homebuilders. Commodity OSB prices fell early in Q4, but rebounded later in the quarter. These factors, along with strong price realization and efficient operations, contributed to an EBITDA result meaningfully above our guided range.
Page 5 of the presentation summarizes some of our results for the quarter and year. LP generated $658 million in sales and $129 million in EBITDA in Q4, bringing the full-year totals to $2.6 billion and $478 million respectively. This translated into $0.71 of earnings per share in Q4 and $3.22 for the full year. The full year comparisons are negative, largely due to normalized OSB prices, but LP's businesses demonstrated exceptional management of the elements within our control. 2023 was a year of heavy investment and capacity to enable growth in Siding and Structural Solutions. LP invested $300 million in capital in 2023 for the largest projects being the conversion of our mill in Sagola, Michigan, to SmartSide from OSB and the construction of our newest ExpertFinish facility in Bath, New York.
These projects were completed safely and efficiently, and both facilities are fully up and running. LP also completed the strategic acquisition of a mill in Wawa, Ontario, which expands our portfolio of future Siding conversions. Alan will offer more details on capital allocation, but I will summarize by saying that even after another year of significant investment in SmartSide and ExpertFinish capacity, the Wawa acquisition and $69 million return to shareholders via dividends, LP ended 2023 with $222 million in cash on hand and over $770 million in liquidity. Like LP results, the new residential construction markets we serve saw a meaningful recovery in the second half of 2023 after starting the year, notably weaker. Affordability challenges persist, but interest rates have fallen over 100 basis points from their peak in Q4, contributing to improved optimism about single-family housing starts.
The Repair and Remodel sector remains softer than new construction, but lower rates and better affordability may encourage more sales of existing homes or offer homeowners the interest rate clarity needed to take on larger home improvement projects. The current consensus for total housing starts is about flat the last year at a bit below 1.4 million, but many forecasters expect a higher single-family mix. Compared to the consensus a year ago, we are cautiously optimistic that this improving outlook will translate into a stronger market for LP in 2024. Regardless of the near-term market, I am very confident LP's strategy positions us well with a strong portfolio of products and a long-run way for profitable growth. The durability, beauty and performance of LP's products solve problems for builders, contractors and homeowners.
We are investing in new capacity and new process technologies. This improves our productivity, accelerates product innovation and enhances our margins. We operate our capacity with discipline and agility whatever the market brings, and we are prudent stewards of our capital, investing strategically in growth and innovation while returning cash to shareholders. None of this happens without the dedication of LP's people. Our operations teams delivered significantly better efficiency and safety performance in 2023, ending the year with a world-class total incident rate of 0.5. The single injury is too many, but I am incredibly proud of our operations team for this performance. We will never stop working to ensure a safe work environment for everyone at LP.
Also want to acknowledge and thank LP's sales and marketing teams for navigating the difficult process of transitioning off a managed order file. As a result of our highly talented teams and the great culture we've built, LP was recognized in 2023 by Newsweek nationally and in Nashville by our local paper, the Tennessean, as a great place to work. Thank you to every LP team member for your contributions in 2023. And with that, Alan will share more details about LP's financial performance in the quarter as well as our outlook for Q1 and 2024.
Alan Haughie: Thanks, Brad. I'll briefly review the results for the Siding and the OSB businesses for the fourth quarter and full year, and then offer guidance for EBITDA and capital expenditures. Slide 6 shows Siding's quarterly results. Jumping 12 months back in time, the fourth quarter of 2022 was the last quarter in which Siding was on a managed order file, and as such, it represents rather a difficult comp. The biggest difference in the year-over-year waterfall is therefore the 15% drop in volume, a corresponding $55 million drop in revenue and a $26 million drop in EBITDA. On the plus side, Bath and Sagola are now fully up and running, resulting in lower conversion and ramp-up costs. This, combined with continued improvements in raw material costs, produced a $13 million EBITDA tailwind.
A construction worker standing on a rooftop with a toolbelt in hand, looking out at a new home development in the background.
Net of $6 million in inventory, absorption and other stuff, the Siding business finished the quarter with $72 million of EBITDA. The EBITDA margin of 22% was the highest of the year, which reinforces our confidence in Siding's long-term 25% EBITDA margin target. Now, I won't belabor the full-year waterfall on Slide 7, given that we've discussed the most important elements in prior quarters. However, it is perhaps useful to recap that the transition from a managed order file made for a difficult year with respect to volume, particularly in the first six months while inventories normalized. Nonetheless, the full-year EBITDA of $269 million represents a robust EBITDA margin of 20%, particularly so in light of the carrying costs of new capacity.
Capacity, which I would like to stress provides a long-run way for growth with meaningfully lower future CapEx, at least until customer demand necessitates further investments. Slide 8 covers the fourth quarter for OSB. While prices fell steeply during the shoulders of the third and fourth quarters, they subsequently recovered and ended the year higher than the prior year, adding about $17 million to year-over-year EBITDA. Volumes were lower in part because of the Sagola conversion, but this was partially offset by a significant improvement in operating efficiency. Structural Solutions accounted for 52% of OSB volume in the quarter with value-added products producing $20 million of incremental EBITDA on $39 million of incremental revenue. Lower raw material mill and SG&A costs added a $30 million tailwind, resulting in a very respectable $59 million of EBITDA in the quarter.
OSB's full-year results on Slide 9 are dominated by price normalization, but other than that, the year can be summarized as one of lower volume partially offset by higher OEE, lower raw material costs and lower overhead costs given the transfer of Sagola to the Siding business. Taken as a whole, despite volatility, quarter-to-quarter, 2023 was slightly better than the historical cycle average for the OSB business, which shows the power of LP's OSB strategy, improved efficiency in operations, disciplined capacity management and the value generated by the consistent incremental uplift from the Structural Solutions portfolio. Other than the acquisition of Wawa, cash flows for the quarter and year were straightforward, as shown on Slide 10. For the year, LP earned $478 million of EBITDA, paid $65 million in cash taxes and built $93 million of working capital, resulting in $316 million of operating cash flow.
After investing $300 million in CapEx, paying $80 million to acquire the Wawa mill and returning $69 million to shareholders via dividends, the net outflow of $161 million left us with $222 million in cash. Now, before I transition to guidance, let me anticipate and answer one question. LP's capital allocation strategy is unchanged. We will earn cash, invest in growth and return cash to shareholders via dividends and share repurchases in that order. LP did not repurchase any shares in 2023, but our motivation to do so is undiminished and we retain a $200 million authorization from the Board. We will resume share repurchases when our cash flows and cash balances warrant. 2024 should be a year of growth and meaningfully lower CapEx in Siding.
So all else equal, share repurchases are very much back on the table, which brings us to guidance on Slide 11. With the inventory destocking behind us and Siding back on a growth footing, as well as more historically normal OSB prices. We have improved visibility to offer a full-year outlook for both businesses if you'll forgive some very obvious caveats. In Siding, we expect a year of resumed growth and a more normal seasonal order pattern, consistent with what we saw in the fourth quarter and have seen so far in 2024. Revenue growth is expected to outpace both the current flat consensus for total U.S. housing starts and the forecast for single-digit declines in Repair and Remodel. We therefore expect revenue growth of about 8% to 10% for the full year from a combination of volume and price, and this would result in Siding revenue of, let's say, $1.45 billion approaching 2022's record level.
An EBITDA margin of around 20% would result in full-year EBITDA for Siding of between $280 million and $300 million, with reduced investments in capacity partially offset by discretionary increases in selling and marketing. So what does this mean for the first quarter? Well, the expected return to more normal seasonal demand patterns means somewhat higher demand in the second and third quarters compared to the first and the fourth. Accordingly, first quarter sales for Siding are expected to be in the range of $340 million to $350 million, with EBITDA between $65 million and $70 million, assuming an EBITDA margin of about 20%. For OSB, full year revenue guidance is impossible without a price prediction, which we won't even pretend to offer. Instead, we're going to introduce the concept of cycle average EBITDA spread.
This is the EBITDA that the OSB business earns per thousand square feet of volume on average over the cycle. This spread accounts for variations in both selling prices and the cost of production. As demand, and therefore commodity prices, fluctuate, in response, we adjust our capacity utilization, our product mix, our maintenance costs and other factors. And to illustrate how this distinction can be useful, recall that in the third quarter of 2019, the OSB business achieved breakeven EBITDA. And in the first quarter of 2023, we reported a small positive EBITDA. These were very similar outcomes but at very different nominal selling prices and cost of manufacture. Now, historically, LP's cycle average OSB spreads have been around $60 per thousand square feet of sales volume.
This is actually the trailing 10-year average for LP's OSB business, excluding the outlier years of 2021 and 2022, when the spread was actually much higher. Actual commodity price fluctuations result in an EBITDA range with a flaw that we've demonstrated can be held above zero when prices are low, such as in the two examples I just cited, and actually with a very high ceiling when prices rise. So if we take this concept and apply it to current conditions, I would estimate that LP's 4 billion square feet of capacity running at about 85% average utilization at $60 per thousand square feet should generate about $200 million in EBITDA on a cycle average basis. And this is actually very close to the EBITDA we just generated in 2023. To use this concept to construct the outlook for OSB, we'll start with the first quarter and build from there.
For the first quarter, we expect shipment volumes to be similar to fourth quarter levels at around 770 million square feet to 790 million square feet. So far, Random Lengths prices have averaged about $25 higher than the fourth quarter we've just reported. So under that volume assumption, if the OSB price holds, EBITDA in the first quarter should be around $65 million to $75 million. We're making no attempt to predict future OSB prices. So our full year outlook for OSB is the sum of the first quarter outlook I just gave, followed by three quarters of cycle average EBITDA. Adding the two businesses together and assuming for simplicity that LP South America's EBITDA covers corporate costs, we expect full-year EBITDA of about $495 million to $525 million with the first quarter in the $130 million to $145 million range.
A quick word on sensitivities. As we are already realizing the January price increase in Siding, the most significant sensitivity in that business is volume. Each increase or decrease in volume of 10 million square feet from this baseline would add or subtract about $4 million in EBITDA at typical incremental EBITDA margins. For OSB, sensitivities for incremental volume and price shown in the table are based on the same utilization and EBITDA assumptions used to construct our outlook and would of course compound. With respect to capital spending, LP invested heavily in SmartSide and ExpertFinish capacity in 2022 and 2023. As a result, we have a healthy runway of capacity ahead of us. We will continue to invest in growth this year, albeit on a smaller and more targeted scale compared to recent years.
Accordingly, 2024 should see capital investments roughly $100 million lower than 2023, with sustaining maintenance comprising roughly 75% of the total. So in many ways, 2024 is a return to normal. Siding is growing again after something of a destocking hangover. OSB prices are currently in a historically normal range, albeit on the high side of that range, and LP's capital investment in 2024 will be nearly $100 million lower than last year because the Sagola, Holton and Bath projects are complete. And with that, we'll be happy to take your questions.
