Louisiana-Pacific Corporation (NYSE:LPX) Q3 2020 Earnings Conference Call November 3, 2020 11:00 AM ET

Company Participants

Aaron Howald – Director of Investor Relations

Brad Southern – Chief Executive Officer

Alan Haughie – Chief Financial Officer

Conference Call Participants

John Rider – Stephens Inc.

John Babcock – Bank of America

Ketan Mamtora – BMO Capital Markets

Steve Chercover – D.A. Davidson

Sean Steuart – TD Securities

Mark Weintraub – Seaport Global

Paul Quinn – RBC Capital Markets

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Louisiana-Pacific Corporation Q3 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]

I’d now like to introduce your host for today’s conference call, Mr. Aaron Howald, Director of Investor Relations. You may begin.

Aaron Howald

Thank you, Kevin, and good morning, everyone. Thank you for joining us today to discuss LP’s results for the third quarter of 2020 as well as our Q4 outlook. My name is Aaron Howald, and I’m LP’s Director of Investor Relations. I’m joined today by Brad Southern and Alan Haughie, LP’s Chief Executive Officer and Chief Financial Officer, respectively.

As we have done in the past, we are hosting a simultaneous webcast in addition to this conference call. We have uploaded a presentation to which we will refer during this morning’s comments. We also filed our 8-K this morning with some additional information. All of these materials are available on our IR website www.investor.lpcorp.com. I want to remind everyone on the call about forward-looking statements and use of non-GAAP financial metrics during today’s discussion. The Slides 2 and 3 of the accompanying presentation provide more detail. The appendix of the presentation also has necessary reconciliations that are supplemented by this morning’s Form 8-K filing. Rather than reading those statements, I incorporate them herein by reference.

And now I’ll turn the call over to Brad.

Brad Southern

Thanks, Aaron, and thank you all for joining us this morning. We spoke with many of you a month ago at our Investor Day. This morning, I’ll focus mostly on what has changed since then, starting with the market then moving to our transformation.

Our aftermarket is showing continued strength in our transformation is ahead of pace. This was an all-time record quarter for SmartSide volume and revenue. Compared to Q3 of 2019, SmartSide revenue grew by 22%, with 19% higher volume and 3% higher prices. Cost of production was also a multi-year low. And of course, record OSB prices produced significant cash flows. As a result, and as I’m sure you saw in the 8-K we released this morning, we finished the quarter comfortably ahead of our most recent guidance for $273 million in EBITDA and a $1.56 on adjusted diluted earnings per share.

There are more housing starts in the US in Q3 than in any quarter since 2007 and the percentage of single-family starts was higher than in any other quarter since 2011, creating strong demand for our products. Mortgage rates are at historic lows, builder sentiment is at all-time highs, and the inventory of existing homes measured in months of supply is at an all-time low. All of these are strong leading indicators for continued strength in new construction, which LP is well positioned. We are also seeing continued evidence of ongoing preference shift from multi-family to single-family and away from cities to urban and rural areas. This is very positive for LP since building a single-family home concerns on average about 3 times as much more upside in OSB as multi-family home.

Since our Investor Day, OSB prices have stabilized with Random Lengths’ prices flat in intervening weeks. While OSB prices remain unusually high and they will surely normalize eventually relative price stability as a sign of supply and demand, may be approaching near term equilibrium. We are confident that our transformation strategy of growing SmartSide and managing OSB with efficiency and agility, we’ll continue to drive long-term value.

Slide 6 shows our progress toward our strategic transformation goals. Our target is $165 million of incremental EBITDA impact by 2021. We are well ahead of pace and our progress accelerated in Q3. We have achieved more EBITDA impact through three quarters of 2020 than we did in all of 2019. The SmartSide growth is the largest single contributing factor, closely followed by OEE gains in SmartSide and OSB has been strategic sourcing. As a result, with $137 million in cumulative benefits achieved, we are almost a year ahead of pace to hit our 2021 targets. These improvements are normalized for OSB prices.

Our strategic transformation is driven by sustainable growth and efficiency improvements, as a no way inflated by current OSB prices. Given our results for the last two quarters, as well as a sustainable gains produced by our strategic transformation, we’ve announced the resumption of share repurchases at Investor Day. Alan will give you a more detailed update of our capital allocation strategy in a few minutes.

As you may have heard by now, MDI resin production in the US has been constrained by the impacts of hurricanes Laura and Delta, suppliers of precursor chemicals. LP is taking steps to secure alternate sources of supply and shift to different resin types where possible. Due to lack of supply, we have curtailed production of Laminated Strand Lumber at our EWP facility in Houlton, Maine for four weeks. We are working with customers to minimize the impact of this disruption. We do not currently anticipate production impacts to SmartSide or OSB. The situation is fluid and I’m proud of the agility with which our supply chain, operations and logistics teams have managed through this disruption.

The housing market continued strong recovery and OSB prices are high. But LP’s performance was not merely the result of the market out of this. Our teams overcame and adapted to many challenges in the quarter and helped our customers do the same. Multiple hurricanes threaten our mills and our employees’ communities in the quarter. Our teams also helped our customers’ work through the challenges of tightening truck and rail availability, shrinking inventories, and lead times increased by unprecedented demand. And of course, we’re all still dealing with ongoing COVID-19 pandemic. Some of our mills are located near COVID hotspots. We have seen a slight uptick in the number of employees cases. But thankfully, all impacted employees have recovered or are recovering. Our teams continue to take necessary precautions to minimize the spread of COVID-19 and safeguard themselves and each other.

We have yet to have any mill closures caused by COVID-19 outbreaks and we will maintain these precautions for as long as necessary to keep our employees, vendors and customers safe. Despite these challenges, we executed relentlessly on our strategy. Of course, high OSB prices generate lots of cash. Both, SmartSide growth 22%, ongoing growth in Structural Solutions, and an additional $10 million efficiency gains in the quarter, all of which are sustainable. Our results were driven by much more than high OSB prices. In fact, given our growth and efficiency improvements, even if OSB prices had been flat to last year, EBITDA would still be nearly double that of Q3 of last year, as a result of our growth and efficiency initiatives.

While we celebrate record results in a very challenging year, I’m inspired about the adaptability and determination of LP’s employees and grateful that by working together, we achieved outstanding results while staying safe.

And with that, I will turn the call over to Alan Haughie for more details on our results, before we take your questions.

Alan Haughie

Thanks, Brad, and good morning, everyone. As Brad said, the housing and repair and remodel markets have continued the speed recovery and LP’s strategic transformation has accelerated. The result is performance for the quarter that exceeded every aspect of the guidance we provided on Investor Day. This morning, I’ll detail those results, update you on our capital allocation strategy, and offer some insight into the fourth quarter.

Slide 7 is a total company’s third quarter roll forward of revenue and EBITDA in 2019 to 2020. It is a summarized view highlighting the elements we believe characterize the quarter. Starting with revenue, of the $192 million increase, $179 million is due to higher OSB prices alone. The remaining revenue growth of $13 million include SmartSide growth of $47 million, partly offset by a $37 million reduction in fiber and CanExel revenue. But while SmartSide growth added $23 million of EBITDA, the strategic exit from fiber reduced EBITDA by just $6 million, which brings us to EBITDA, which increased overall by $224 million. And if we back out the OSB price impact, then everything else not related to OSB prices, contributed an impressive $45 million of increased EBITDA, including the $23 million of SmartSide growth I mentioned a moment ago.

So to repeat the point and put it in perspective, if OSB prices had not risen at all, then all other things being equal, our EBITDA would have almost doubled to $94 million. And this point is easily lost in the current OSB price climate, but it rigorously demonstrates the difference between the admittedly powerful cash generation of high OSB prices and the long-term value creation of, while almost everything else in our portfolio. One last point on this slide, before I move on. Our South American business had an outstanding quarter, net of currency movements, revenue and EBITDA increased by $9 million, $4 million respectively. But absent currency fluctuations, they increased by $60 million and $5 million.

Slide 8 shows the third quarter P&L compared to 2019. As I said, although the majority of the $192 million increase in revenue was price related, the remainder is volume and mix. So the fact that cost of sales fell by 5% or $26 million, reflects outstanding performance on OEE, sourcing savings and general cost control. Additionally, SG&A expenses were reduced by 10% or $6 million. Income from operations was up $234 million, reaching $242 million, resulting in net income of $177 million and adjusted diluted earnings per share of $1.56 better than last year by $1.48.

Slide 9 shows the third quarter revenue and EBITDA waterfall for Siding. The cumulative transformation impact of $31 million was driven by impressive SmartSide revenue growth of 22%, that’s an incremental margin of 50%. Now, as not obvious from the waterfall, but the segment presented here today is almost entirely SmartSide. The EBITDA margin of 28% is more reflective of its earning power than at any point in the company’s past. This is what a cleaner, simpler Siding segment looks like, when we’re not in the throes of a mill conversion, when we are enjoying returns on our investments in selling and marketing and when we’re running flat out. This ability to profitably grow gives us confidence in SmartSide alone, it can support and sustain a growing dividend.

Slide 10 is a similar presentation for the OSB segment and it is not surprisingly dominated by higher OSB prices, Not only as the average Random Lengths’ price for the third quarter of 2020, a record for the price this time last year was well below the cycle average, hence the large year-over-year impact. But if we return to the theme of cash generation from higher OSB prices versus value creation, then OSB has played its part. Beyond pricing, there was a further $11 million of EBITDA improvement, all the more impressive on the back of lower volumes and a richer mix of high value-added products. So we’re continuing to transform this business through Structural Solutions growth and a relentless drive for efficiency, which is creating long-term value regardless of OSB prices.

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Which brings us to cash flow on Slide 11, operating cash flow for the quarter was $218 million, compared to $59 million in 2019. Note that in the third quarter, we paid $45 million in cash taxes, including a catch-up from the second quarter. Our capital allocation strategy, of course, remains unchanged. To return to shareholders at least 50% of cash from operations in excess of capital expenditures required to execute our strategic transformation. Accordingly, late in the third quarter, and given our significant free cash flow generation, we resumed buying back shares. We spent $29 million buying back shares in the quarter, in addition to making $16 million in dividend payments and ended the quarter with $420 million in cash. As of today, we have spent $100 million of our $200 million of Board authorization for share repurchases. And given our strong balance sheet and our cash generation expectations for the fourth quarter, we expect to complete the remaining authorization for share repurchases by the end of the year.

So let’s cover those fourth quarter expectations. Much uncertainties still surrounds, COVID, the US Election underway as we speak, the broader economy and even housing. However, our order files gives us enough visibility into the quarter to provide some limited guidance. Assuming no unforeseen events, we expect the fourth quarter in aggregate to look a lot like the third. SmartSide revenue will likely see the typical seasonal slowdown, the revenue growth is still expected to be in the neighborhood 20% year-over-year. If so, this would result in full year SmartSide growth of about 12%.

OSB prices have held steady since Investor Day, in contrast to the steady climb over the third quarter. At this point and absent of sudden and steep drop, average OSB prices in the fourth quarter should be higher than in the third. Subject to these assumptions, the resulting EBITDA for the fourth quarter should be within $10 million of third quarter levels.

We do plan to spend a little more heavily on capital projects in the fourth quarter as circumstances permit, bringing spending for the year to about $80 million, compared to the $70 million previously communicated. As Brad said, we’re almost a year ahead of pace relative to our strategic transformation goals. We targeted a cumulative EBITDA impact by the end of 2021 of $165 million and through the third quarter of this year, we have achieved cumulative impact of $137 million. So it’s a purely operational aspects of the fourth quarter pan out, as I’ve just outlined. We expect to hit the $165 million target by the end of the year.

And for the avoidance of doubt, let me reiterate that these transformation impacts in no way benefit from higher OSB prices or low raw material costs. And with OSB prices at an all-time high, it would be tempting to ascribe LP’s outstanding quarter to that fact alone, and to be sure, the OSB segment generates impressive cash flows at these prices. And we often talk about the hidden value of LP’s SmartSide business. Earlier in SmartSide growth trajectory, it’s revenue was routinely overshadowed by that of the OSB segment and its profitability was clouded by the other products in the Siding segment. But if we apply the third quarter OSB volume and price realization to historic OSB prices, that puts this situation in context, since 1995, there have been only 8 quarters where OSB prices were high enough that current volumes and realizations, the OSB segment would have been more revenues in SmartSide third quarter record of $260 million. So it’s getting harder and harder to hide this incredible growth story, and the SmartSide approaches $1 billion in revenue with high and stable margins, it’s now hiding very much in plain side.

With that, we’ll be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line Mark Connelly of Stephens Inc. Your line is open.

John Rider

Good morning. This is John Rider on for Mark. So in the — more recently, you’ve said that prefinished siding is a strategic priority, and if we remember it correctly, you said that it could be almost one-third of your sales? And to acquire your way to that sort of market shares clearly and to take a while and you are probably going to end up with a hodgepodge of assets. How do you balance the pros and cons of acquisition against building your own purpose-built standardized network of prefinishers? What does that ultimately cost? And on a related note, what is a prefinishing operation like that mean for working capital?

Brad Southern

Okay. John, I’ll try to — correct me, if I miss some of those sub-questions in there. But I do want to cover them all. So let me just provide an update on where we are now. We have three prefinished facilities in operations, two of which were acquired, one of which was on homegrown at our facility in the Roaring River, North Carolina. From a capital standpoint as far as equipment, these are a relatively small investment, single-digit, millions of dollars to be able to convert. They’re also expandable kind of in a modular way. So as we grow the business, you need — basically add a pipeline, which again is very low capital and placed in the scheme of things when it relates to OSB and Siding businesses. We do see — what we will need continued growth, the geographies that we’re in today with prefinishing as Green Bay, Wisconsin, St Louis, Missouri and Roaring River, North Carolina. And so as we build out the eastern capability, there is possibility that we were acquire or build another facility or two. But we certainly have the capacity in place or the partnerships in place in orders, so that production is not a constraint on ability to grow our prefinished business over the next couple of years.

Now as it relates to working capital, It’s a great question. And in prefinished, prefinishing is a significant departure from our efficient working capital arrangements we currently have or have had, as it relates to SmartSide. Just think about this, if you offer 12 colors, your 18-ish lab skew that used to be only in prime, now it is offered in prime in those 12 real colors. And servicing the market is important, so there it needs to be sufficient inventory both at our locations and in the channel in order to accommodate good customer service. Now we do rely on our distributor partners to carry the load on ad, but it does require a working capital build internally for us to be able to serve our distributor base.

Okay. And then, there was another part of that question, that I didn’t answer.

John Rider

No, no. I think — no actually started, just one last one. How do you balance the pros and cons of acquisition versus building your own homegrown prefinishing business?

Brad Southern

Yes, great question. So the — look, the one that we did not acquire, the one is homegrown was a North Carolina, where we had a hardboard mill that had a history of doing prefinishing. So it was rather logical for us to incorporate SmartSide prefinishing there. I would say, in most other areas it’s not necessarily optimal for us to bid on mill location. We rather be more end market. So I would — I’m biased to future growth being are acquisition than homegrown, both for each scenario, we’ll look at both the cases and make the best decisions. But as far as forecasting the future, I would say, there’s a probably more leaning toward acquisition strategy than a homegrown, saying of an acquisition, you’re buying the competency to hide the one versus having to build out internally. So we have benefited from the two acquisitions that we did to get us into the business.

John Rider

Okay. And I’ll turn it over. Thank you.

Brad Southern

Thank you, John.

Operator

Thank you. Our next question comes from John Babcock of Bank of America. Your question, please?

John Babcock

Good morning and thanks for taking my questions. I guess, just starting out, I was wondering if you can talk about whether you’re seeing much in the way of substitution of plywood from OSB, particularly with the price cap staying where it is now?

Brad Southern

No. I have heard some anecdotal — I don’t know, if it’s is actually evidence or speculation of that could be happening. But we have not seen that at any meaningful way, and certainly and no way this impact our order file.

John Babcock

Okay. And then next, you talked earlier about the impact and how that’s limit I guess or going to limit production of Golden facility. Has there been any impact to your costs, purchase you had at the mills in the US out, is there any OSB mills there? And then also, and if you can just talk very briefly about if you have any sort of anecdotal evidence about that impacting any OSB production region?

Brad Southern

Yes. So first on the cost side, what we’re doing is substituting phenolic resin for MDI. So from a cost standpoint, it’s immaterial, the difference between the two — immaterial our results, no impact there. And, we really, I think the industry overall handle this India situation pretty well. So we’ve not heard of any significant restrictions and production anywhere as it relates to MDI limits. I’ll just speak for ourselves we retain and most of our facilities, we’ve retained the capability to switch back between MDI and phenolic resin. So that’s what we’ve done and I assume that’s what some of our competitors have done as well.

John Babcock

Okay, thanks for that. And then just last question before I turn it over. Just on the Siding side of things, obviously demand is very strong. It sounds like you’re expecting pretty strong demand in the 4Q as well, if this demand were to continue into 2021, I mean, how will that impact your thinking around pricing and kind of your typical schedule around how you do that?

Brad Southern

John, was that question related to OSB or Siding.

John Babcock

Siding.

Brad Southern

Siding, yes. So yes, but we are working on a price increase that we implemented Q1 nail. And so I don’t — we haven’t made a decision on that. There is some works to do there. But obviously, we’re in a good position relative to underlying demand for the product, which puts us in a good position on pricing. But I do want to stress that we’re really focused on volume growth given the expansion of our SKU offering with prefinish and smooth and the ongoing streams as far as our ability to get even prime product in the marketplace. Our focus is on one off-market share increases and you have to be competitive on price side in order to maintain that. So we balance those two kind of competing needs within the business, and the given the current margins that we have in SmartSide, our focus is on growing the volume.

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John Babcock

Yes. Thank you.

Operator

Thank you. Our next question comes from the line of Ketan Mamtora of BMO Capital Markets. Your question, please?

Ketan Mamtora

Thank you. First question on Siding, I was just curious, if you can give us some sense of how your volumes have trended in Siding thus far in Q4?

Brad Southern

We have strong volumes in Q4, thus far. I think, Alan…

Alan Haughie

I think I said — I just, as I said, we are looking at 20% revenue growth year-over-year. Obviously, the vast majority of that from volume and our order book, it gives us the confidence to say that right now.

Ketan Mamtora

Got it, okay. And then so with volumes being really strong through 2020, are you pulling forward kind of timing on the next Siding project at the end of September, you all are talked about a decision sometime in early 2021. I’m just curious, if there is any rethink given how strong volumes have been?

Brad Southern

I wouldn’t call it a rethink, this only describe where we’re at right now. We are full steam ahead on the next Siding conversion. We have begun to place, do planning and place some orders for long lead time items that can be — that our site agnostic. So in other words, equipment that we know we’re going to need regardless of site. And so that is underway now. We’re still looking at early next year announcement and Board approval for the project. I think you can understand that the other is — that the impacts of community in the employee-base where we choose, and so we’re — and we haven’t chosen yet. But we want to be careful about kind of tipping our hand there until we make sure we cover all the bases locally where we end up with the facility. But we are in the process, if you want — if acquiring capital equipment and planning to do that as part of the process where it’s well underway at LP.

I just want to remind folks on the caller we just converted Dawson Creek last year, this time last year we were still talking about the start-up cost associated with that. So we’re in a good position for this year and next. I mean, obviously, the inventory situation that us and our distributor by just got into COVID related — it’s been catch-up for the last couple of quarters, but I feel good about our ability to supply the market next year. Especially, if we can build a little inventory and the distributor base over the winter and then we’ll be in a good position for another mill start-up in 2022 and should be able to continue in the kind of growth that we’ve seen over the last eight quarters or so.

Ketan Mamtora

Got it. That’s very helpful. And then Brad, any rough sense on kind of the capital that may be required. I’m not looking at a precise number, just sort of a rough ballpark on the conversion?

Brad Southern

Yes. This is — it is site dependent, Ketan, I know you understand. But I would say based on what we’ve done in Swan and Dawson Creek, we think an $80 million to $120 million. I know that’s a wide range. We will get a little more — we will narrow that range over the next couple of quarters as we talk about it some more. But if you plan around that, that would be a good number to start out.

Ketan Mamtora

No, that’s very helpful. I’ll turn it over. Good luck as we move into 2021.

Brad Southern

Thank you, Ketan.

Operator

Thank you. Our next question comes from the line of Steve Chercover of D.A. Davidson. Your line is open.

Steve Chercover

Thanks. Good morning, everyone. So first of all, your operating rates in Siding and OSB are both in the upper 80. So can you get to the mid-90s next year assuming demand is there without really any additional expenditure beyond manpower and raw materials?

Brad Southern

I think mid-90s would be pretty high for us given where we are right now in our OEE journey. But I certainly believe we can be high-80s to low-90s consistently and now that’s not including scheduled maintenance downtime that we may have to do. But while we’re running, we have across to our system in both OSB and Siding approached and the time sustained to 88% to 92% OEE. So I feel good about that, at 95% would be a stretch for us right now. I mean, essentially, we’re talking about that over the entire year.

Steve Chercover

Is it conceivable that if the demand grows, the way housing looks poised to propel it, both from starts and perhaps size as we move more to the burbs that you could almost be on allocation in both Siding and OSB?

Brad Southern

Well. So we — yes, I don’t think we’ll be in allocation in Siding and after we get through this winter in the — we’re doing some allocation now because of the price increase that we were implementing in Q1. I believe inventories will be built in Q4 and allow more open order files we go into the spring. It is growth dependent. So it’s possible, but I don’t, I mean my opinion is, we won’t be on allocation through next year in Siding. And then, we really don’t do allocation in OSB, because of our open market wood situation, it’s really, you kind of on the market or off the market depending on availability. And so I don’t see OSB allocation next year in any meaningful way. It doesn’t mean that there is not times when you have to ration your open market order file across a good customer base. But not forward and extended period of time in OSB I don’t foresee that. And it’s really not how we operate in OSB anyway.

Steve Chercover

Okay. And because you gave us such sufficient and upbeat guidance on Siding and OSB, I’m taking my questions elsewhere. But on EWP, which is not something you really talked about — the results were pretty good and I’m assuming it was also absorbing some pretty high OSB pricing as an input. So was that operations or price, is there a price increase spending in EWP?

Brad Southern

So that the primary driver for the results that you saw this past quarter was our efficiency gains or OEE improvements in EWP. I’m glad. I just want to take a minute, we’re all really proud of the way our EWP group over the last three years is really got to after on the issue. We don’t talk about that a lot on the calls, but it has been meaningful. We are in the process of implementing price increases in our EWP business. And look EWP is going to be impacted by this rising OSB and lumber, we’re — Q3 results are little more behind that, I guess is the right way to put it. It’s caught us nail, which is the reason we’ve had to go out with a price increase, along with other industry participants on EWP. And so I think we’ll be a little bit margin stressed in Q4, the more focus on the efficiency side and I will real say that the order file — our order files in EWP are really strong as well. So we have the volume, it will be fighting some raw material price pressure as we work through the price increase for our finished products on EWP in Q4.

Steve Chercover

Well, maybe to paraphrase James Bond earned the right to Die Another Day. Okay, last question. Similarly, in South America, they’re making a decent contribution to and there only at a 75% operating rate. So is it fair to say that they have significant upside assuming that the demand materializes?

Brad Southern

They have some significant upside. We do have a mill expansion down there last year and we’re still working through some constraints around thermal oil that will be — a unit will be installed in the next quarter or so. And which we’re really open up that press line we put in there at full capacity. So, we’re expecting to see good growth in our South American business next year. Because of the continued startup of that new press line that has been in operation for about a year.

Steve Chercover

Great. Thanks for taking my questions.

Brad Southern

Welcome.

Operator

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

Sean Steuart

Thank you. Good morning. Couple of questions, CapEx for next year and appreciate you’re still in the planning stages. But if we’re at $80 million this year and at the midpoint spending maybe $100 million for the next siding conversion is, $180 million to $200 million is safe bet for CapEx next year? Are there any other nuances to the projects you’re thinking both for 2021?

Alan Haughie

All right, it’s Alan here. So you’re about the right ballpark. As divided into a sort of base spend of maybe $120 million plus, whatever we end up spending in year on the next Siding mill. So reasonable estimate which we’ll update when we announce Q4 results would be $120 million based, plus, let’s say that’s from our $80 million as 2021 spend on the exciting though. So maybe $200 million, yes, is a reasonable number for next year, divided into us two populations.

Sean Steuart

Understood. And is any other context, you can provide on the Peace Valley restart? We’ve had some positive single-family housing data since your Investor Day in late September, any details you can provide on the thinking for that to restart?

Brad Southern

Not a lot has changed since Investor Day, other than as you pointed out, continued good numbers on housing, which we are following closely. Our strategy — our plan is to continue to monitor outlook for housing and what were confident. We’ve got at least a two-year window in front of us. So a good and strengthening housing, that’s when we feel like we can justify internally the restart of that facility. So we’re watching it closely. But we — nothing is changed since we talked about on Investor Day.

Sean Steuart

Okay, thanks very much. I appreciate the time.

Brad Southern

Welcome.

Operator

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

Mark Weintraub

Thank you. First question was on the Siding business, if you could give us some more color perhaps that there strong growth both in the third quarter and what you’ve been expecting to what you’ve seen and expect to see in the fourth quarter. As we think of it through new residential repair remodel Sheds and or geography, if you could give us some color on what the big drivers are?

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Brad Southern

We get all over. But I will go through it item-by-item. So I mean the home centers or retail — retail home centers are just phenomenal growth as they report their earnings releases, where we’re certainly at or above average even given their good numbers on the pull throughs. It’s really been phenomenal and driven by just better volume through there. But we’ve also introduced several new SKUs over the last year, then we just really hit the timing on that really well, have lap and trim and get many other stores now along with our panel offering. And so I mean, certainly the biggest growth area and as far as the segments goes been in retail, Shed has been extremely strong as well. Although, I remember on the Q2 call, I got a question from somebody about Shed and I said, we’re not seeing a lot of activity there. I’d like the next day of change and that’s been a real phenomenal growth as well. We hear anecdotally — not anecdotal we hear from our customers and Shed that the need for more space and even using Sheds as home offices for — or either clear out an office by buying a Shed and putting your junking in. So you can have an office inside your house. That’s all of that’s for real. And it’s been — we’ve been — as you know, we’ve been well positioned in that segment for a while.

So we’ve seeing really good growth there. Single-family is going well as well across, especially in the smile you ask about the regions. So in the Southeast, the Mid-Atlantic, Texas has been a great market for us from single-family perspective, very strong. And then repair and remodel, that has been for us more establishing of distribution around our prefinish offering, or I should say, maybe a reestablishing in distribution. So we’ve seen good pulls there. I don’t have quite the visibility to be able to say exactly, of course, that’s ending up because it’s been more of a distributor play this year for us. But — and we’re certainly building the network that we need to continue to drive good growth in repair and remodel as we look into the future, which is all a part of our plan that we outlined on Investor Day. And this just quickly on geography, you did ask that, the Midwest is very strong for us that South Central region is extremely strong for us, as well as the Southeast and Mid-Atlantic and we have a good position on the West Coast and in California.

So obviously, there has been some — there’s been a weaker housing market from a start standpoint, I think just due to the COVID and the fire situation out there, it’s been a kind of a tough summer for homebuilding, but where we are positioned in the West, we’ve done well. Well there, we’ve done at least as good as the market out West.

Mark Weintraub

Thanks. And I guess, as I was trying to get to instance you did really well everywhere it’s sort of hard to get to what I was trying to get a sense of which is, how much is this the overall market improving versus where you may be seeing gains from you product initiatives, etcetera. If you can provide more color there. That’d be helpful.

Alan Haughie

While single-family is improving and there is no question about that, so that improving overall and then we are proving in our market share gains there but that single-family market is very strong. The Shed market strong, but I will say, I think there is, I don’t expect it to sustain the especially from a growth percentage anything near what we’ve seen this year. I think there is some temporariness to that and then retail is really to me the question mark recalled, it’s been very strong and I think there might be some stickiness to that because as people as a small contractors the order aligned for retail, realigned our credit around the retail environment, but that of positioning that could be sticking from a market share growth and that’s coming from somewhere, no, that’s not new demand. But I do think that there has been some competitive movement into retail from a distribution standpoint. As part of this pandemic and the offerings, they have in the way you can order online, etcetera. And so it’s fortunate that we’ve got a good position there that we can take advantage of that. But without question, Mark, what’s driving the strength, if you want one answer, it’s single-family and all that comes from somebody buying a new home I think is a key driver from a market tailwind standpoint right now for us.

Mark Weintraub

Great. And just one more, if I could on kind of CapEx — on the capital allocation. I mean you talked about 50% beyond the CapEx needs. And if we look at the third quarter order of magnitude. It was — you had a $100 million in the fourth quarter if it’s going to look similar, big picture, another $100 million, your dividends for those two quarters would be $30 million, $35 million. So that would suggest that you’ve arguably got round numbers $160 million, $170 million, which could go to share repurchase based on those two quarters. Is a, is that a way to think about it or is it, I’m not that discrete and then how does the timing work because it sounds like you’ve spent $30 million in the third quarter and $40 million since with the expectation of completing the $100 million, which I think would be another $30 million, if I’m getting my math, right. But then there would be needed extra earnings, you’ve had that don’t seem to be covered by the — what you’ve got authorized today?

Aaron Howald

Yes. So let me clarify my comments from earlier, we spent $30 million in the third quarter. As of today, since the end of September, we’ve spent another $70 million and we’re also going to spend another $100 million between today as it was at the end of the year, which means fourth quarter share buybacks will be $170 million.

Mark Weintraub

Perfect. I missed that. That’s great. It fits nicely. Thank you.

Brad Southern

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Paul Quinn of RBC Capital Markets. Your line is open.

Paul Quinn

Yes, thanks. Good morning, guys. Just a question on the building to leases transformation, great to see, you’re year ahead, when do you think you actually have this done, i.e. the $165 million, is that the end of the program? Is that when the market will give you sort of a hardy like multiple?

Brad Southern

Okay. Let me just talk about Structural Solutions for talk about the party like multiple. So our near-term target 50% and we will not stop there. We believe we are — have the ability to generate new products, we believe we’ve got ton growth opportunities, particularly with legacy flooring and our WRB offering FlameBlock, for our FlameBlock in there as well. And so we are, Paul, I would rather — I hope one day we’re 100% Structural Solutions that may not happen in much of the OSB, but that’s certainly going to be a target for us, the cost of the value-add opportunities.

Our key, I mean, just to kind of talk about the multiple questions and I think the key for us is continuing to grow growth Siding, which is our Siding business is better than authorities. So arguably could have a bit higher multiple is my personal view of that. And then if we can continue to grow that Structural Solutions, especially on the higher value add items like I mentioned legacy WRB and FlameBlock that takes part of that OSB commodity production to move into more stable and certainly higher margin panels. And so that’s the key for us to — that’s what we’re focused on, Paul. As you know, that’s what we come to work every day, focused on doing and executing, had plans around and budgets around and spend marketing dollars on and I think we’ve been — I think we’ve done a good job over the last three years, getting to where we are. But on work — and then in another way of looking at as we’re just getting smarter.

Look, I had only on WRB really in the market for about a year, legacy for two years, prefinish for six months, smooth for 12 months. So we’ve got a cadre contract of really valuable this differentiated products that we have a lot of room for growth and market share gains. And so I think we’re positioned well. And on — but the conversion story for OSB, including as it relates to converting mills to Siding is not over at LP.

Paul Quinn

Okay, thanks for that.

Brad Southern

And not even in the middle to book yet.

Paul Quinn

Okay. Would you ever consider monetizing selling Peace Valley to accelerate the transformation and maybe you could give us a quick update on the Entekra over the last month?

Brad Southern

Yes. So consider selling, yes. I like that mill from the standpoint of now that converted Dawson, it’s our only Western Canadian mill which can access the Western market in the US. So our plan is to retain to be and to be candid with you, Paul, but I wouldn’t say, I’m kind of the mindset despite everything you have is for sale for the right price. But that’s not our near-term plans to just at the right time restart that facility and use it to reestablish some better pipelines in the West Coast. That’s part of the market right now where since we converted Dawson we’re serving out of Texas. So there would be some freight advantages to having that facility in our system.

The update on Entekra is, I mean, we’ve seen continued growth in the order file, even said in Investor Day, I’m really encouraged by market acceptance of that technology. I’m really happy about the quality of the order file from a customer standpoint, names if you would recognize are in our order file, and we’re working through the start-up of that. But the big facility of Modesto. So there were still from an operation standpoint, very much in start-up mode. But from a reliability standpoint of delivering shifts all the time for our customer base, we’re doing a good job with that. And we’re trying to build our credibility in the marketplace that were it could be a reliable alternative to stick build framing and I mean, so far so good. There is a lot that we are not even in chapter one in that story.

But from a market standpoint, from an order file quality, it is very encouraging, what’s going on with the Entekra right now.

PaulQuinn

Excellent. Best of luck.

Brad Southern

Thanks, Paul.

Operator

Thank you, ladies and gentlemen. That does conclude the Q&A portion and our conference for today. Thank you for participating. You may now disconnect.



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