LP Building Solutions (LPX) Q1 2021 Earnings Call Transcript

LP Building Solutions (NYSE:LPX)
Q1 2021 Earnings Call
May 4, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2021 Louisiana-Pacific Corporation Earnings Release Conference call. [Operator Instructions]

I would now like to turn the conference over to your speaker host, Mr. Aaron Howald, Director of Investor Relations. Please go ahead, Sir.

Aaron Howald — Director of Investor Relations

Thank you, operator, and good morning, everyone. Thank you for joining us today to discuss LP’s results for the first quarter of 2021 as well as our Q2 outlook. My name is Aaron Howald, and I’m LP’s Director of Investor Relations. I’m joined this morning by Brad Southern, LP’s Chief Executive Officer, and Alan Haughie, LP’s Chief Financial Officer. We are hosting a simultaneous webcast in addition to this conference call, and we have uploaded a presentation to which we will refer during this morning’s discussion. We also filed our 8-K this morning with some additional information. All these materials are available on LP’s Investor Relations website, www.investor.lpcorp.com.

Slides two and three of the accompanying presentation provide notices in detail about forward-looking statements and non-GAAP financial metrics. The appendix of the presentation also contains some necessary reconciliations that are further supplemented by this morning’s 8-K filing. Rather than reading those statements, I will refer to you to those supplemental materials. And now I’ll turn the call over to Brad.

Brad Southern — Chairman and Chief Executive Officer

Thanks, Aaron. Good morning, everyone, and thank you for joining us to discuss LP’s results for the first quarter of 2021. Robust customer demand for all of LP’s products has continued, driven by ongoing strength in homebuilding and remodeling, resulting in an outstanding quarter for LP. SmartSide net sales grew by nearly 50% versus Q1 of last year to $283 million and EBITDA more than doubled to $90 million. Smooth and ExpertFinish volumes more than doubled, with those innovative products reaching 8% of total SmartSide volume. OSB prices continued to climb throughout Q1, with the result that LP’s OSB segment generated extraordinary cash flow. LP’s South American segment also had a very strong quarter, with 50% more sales and 3 times more EBITDA than the first quarter of last year.

As a result, LP exceeded $1 billion in sales, generated $461 million in EBITDA and $314 million in operating cash flow and earned $3.01 per share, all of which are quarterly records.

Last quarter, we announced a phased integrated capacity expansion plan that included converting our mill in Houlton, Maine from LSL and OSB to SmartSide, the restart of our Peace Valley OSB mill in Fort St. John, British Columbia, and plans to convert our OSB mill in Sagola, Michigan Society. Let me briefly update you on those projects.

Houlton conversion is under way and on schedule despite some expected difficulties with travel and contractor access presented by COVID. We expect to begin SmartSide production at Houlton less than a year from now in late Q1 of next year. We are excited about the capacity expansion of these investments in Houlton represent, and we are gratified by the enthusiastic responses from local and regional suppliers and community stakeholders.

Given the strength of SmartSide demand, we are exploring options to accelerate the conversion of Sagola. We’re also evaluating and prioritizing subsequent projects to add capacity by conversion and/or expansion of existing facilities as well as growing prefinishing capacity. SmartSide has a long runway for growth ahead as we innovate, capture share, expand addressable markets and execute an aggressive capacity expansion strategy.

Process to resume OSB reduction in Peace Valley is also going quite well. I want to complement the small containment has maintained the mill since we idled it in the summer of 2019. They have kept the equipment in excellent condition, and we anticipate minimal impediments to an efficient restart. We’re also pleased with a number of former employees who are returning to the mill, we’re glad to welcome them back, and we look forward to resuming production in early Q3.

Last quarter, I spoke about the challenges presented by shortages of MDI, the resident use and manufacture of SmartSide and OSB. MDI availability has improved significantly, and we are essentially back to normal levels of supply with OSB mills once again using planned levels of MDI. This episode has highlighted the strategic value of having Siding and OSB integrated in LP’s portfolio. SmartSide uses MDI exclusively, but OSB can use alternate rests. When supply has become constrained, we were able to allocate scarce MDI from OSB to Siding. Without which Siding, we have struggled to achieve another outstanding quarter of growth.

While the MDI supply has improved, global shortage of vital asset tape-based adhesives has forced decreased production of TechShield, LP’s Radiant Barrier sheeting product in the second quarter. The vinyl acetate supply situation is improving, and we expect to be back to normal levels of textile production by the end of the quarter.

However, as COVID subsides in North America and the broader county rebounds a tremendous supply chain disruptions and type logistics availability are likely to present challenges going forward. We recognize the difficulties this creates for LP’s customers, particularly in an environment with such strong demand. We’re doing everything we can to mitigate the impact of these issues through strategic sourcing and network optimization, and we are adding SmartSide and OSB capacity as safely, efficiently and quickly as possible.

Finally, I’m happy to announce that LP is in the initial phases of returning to our national headquarters after more than a year of working from home. While we have a relieved and gratified to be slowly getting back to normal, I want to acknowledge it for the majority of LP’s mill employees as well as many customers, working from home was not feasible. And while COVID-19 vaccines are now widely available in the U.S. and Chile, vaccination rates continue to lag in Canada and Brazil. The situation is improving, but we are not out of the woods yet.

Ongoing diligence in care exercised by LP’s pandemic response team and mill employees are helping minimize operational impacts from COVID, enabling LP to supply our customers the products they need to build and renovate homes.

I encourage all of them and all of you on the call to continue to exercise appropriate precautions and get vaccinated as soon as possible. LP had a remarkable first quarter. And while challenges remain, very strong housing in RNR markets resulting in intense demand for SmartSide and OSB, keeping our near-term outlook exceptionally positive. With that, I will turn the call over to Alan for more detailed discussion of LP’s financial results for Q1 and outlook for Q2.

Alan J. M. Haughie — Executive Vice President and Chief Financial Officer

Thanks, Brad. Slide six shows summarized results for the quarter, which, much like the fourth quarter, are clean and straightforward with ongoing SmartSide growth and higher OSB prices as the most significant drivers. Compared to the first quarter of last year, net sales increased by 74% to just over $1 billion, driven by 49% growth in SmartSide and over $330 million of significantly higher OSB prices. The resulting EBITDA of $461 million is more than 5 times last year’s result. We generated $314 million of operating cash flow, including increased capital investments and heavy spending on logs, common practice for LP in the first quarter. The $3.01 per share of adjusted earnings is 10 times that in the first quarter last year.

In terms of capital allocation, we paid $17 million in dividends in the first quarter and spent $122 million to repurchase 2.4 million shares. We’ve continued buying back shares through the second quarter and as of the close of
business yesterday, had just $32 million remaining of our existing $300 million buyback authorization. All else equal, that remaining authorization will be exhausted by the end of this week. I’m therefore, delighted to report that LP’s Board of Directors has authorized a further $1 billion of share repurchases, which we plan to launch immediately. LP’s Board also declared a dividend of $0.16 per share payable on June 1.

Slide seven highlights the cleanliness of the quarter from a reporting perspective. Continued SmartSide growth and OSB price appreciation resulted in $93 million and $333 million, respectively, of incremental revenue for the quarter, compared to which everything else is really just a rounding error. All $333 million of the incremental OSB pricing and 55% of the incremental SmartSide revenue translated into EBITDA, with everything else aggregating to a net negative of $6 million. Slide eight provides an update on our transformation.

On a trailing 12-month basis, SmartSide revenue grew at twice the rate of single-family housing starts. Consequently, and as the table on the right shows, SmartSide growth dominates the first quarter, accounting for $53 million or $65 million transformation in the quarter. The resident substitution, which Brad referenced earlier, accounts for the negative $4 million in efficiency.

Given that SmartSide growth contributes the lion’s share of our transformation dollars in the quarter, Slide nine looks a little deep into that growth. The bar chart on the left is not repeat of Slide 8. This chart shows SmartSide revenue growth for just the quarter relative to single family starts. The pie chart on the right provides more resolution of the also SmartSide growth. While total volume grew by 39%, the volume of the more innovative smooth prefinished and shrink products grew to 140%. As such, their share of the total volume increased under 5% to just over 8%. The substantially higher average selling prices of these new products also contributed one point to overall price growth in the fourth quarter.

The waterfalls on Slides 10 and 11 show year-over-year revenue and EBITDA growth in the Siding and OSB segments for the quarter. Slide 10 covers Siding. The 49% revenue growth for SmartSide is the result of 39% volume growth compounded by 7% price growth and at $93 million in sales and $51 million in EBITDA, for an incremental EBITDA margin of 55%. OEE and sales and marketing efficiencies offset increased costs for freight and the dwindling nonrecurrence of fiber sales reduced revenue by $20 million and EBITDA by $2 million. The resulting Siding segment EBITDA of $19 million on $285 million of revenue, yields an EBITDA margin of 32%.

Slide 11 shows the quarter in more detail for OSB and is dominated by ongoing record high OSB prices. We estimate the impact of MDI scarcity and alternate resin substitution at roughly 80 million square feet or 7% of volume due to reduced operating efficiency for OEE. And as Brad said, the supply chain for that resin seems to have stabilized. We will, of course, continue to monitor that situation and other potential supply chain interruptions closely.

LP’s ability to substitute alternate resins for OSB production and therefore, to be able to strategically allocate all available MDI to the Siding was a unanticipated benefit of having these segments under the LP umbrella. OSB prices will continue to grab headlines for sure, but OMP’s results this quarter are no small measure of testament to the agility of the Siding and OSB operations team and LP’s strategic sourcing team as they collaboratively navigated the MDl shortage.

And as you will see in the cash flow summary on Page 14 of the appendix of the accompanying presentation other than cash taxes, the only meaningful difference between EBITDA and operating cash flow is a substantial increase in working capital. And this is almost entirely the result of OSB prices raising accounts receivable balances and the normal seasonal accumulation of logs I mentioned earlier. The bridge from the $314 million of operating cash flow to the net change in cash is similarly uneventful.

With buybacks, capex, dividends and payments associated with refinancing, our long-term debt as the only material items. Reconciliations of net income to both adjusted EBITDA and adjusted income are also straightforward with depreciation and a rather large but appropriately proportional provision for taxes as the only items I’ve not already mentioned.

Slide 12 provides updated guidance for capital expenditures for the year. As Brad said, we are exploring opportunities to accelerate our siding capacity expansion. The Houlton conversion, restarting Peace Valley, other growth capital and the basis of sustaining maintenance, altogether, bring our capital expenditures for the full year in the range of $230 million to $250 million. In other words, we’re raising our tax guidance by about $10 million. And with extremely robust housing and repair and remodel markets, fueling intense demand for SmartSide and OSB, our order files give us some visibility into the remainder of the second quarter.

For the OSB segment, prices continue to climb, with the result that we believe OSB revenue will be at least 30% sequentially higher in the second quarter than in the first. We also expect another strong quarter of SmartSide growth with revenue for the second quarter, at least 30% higher than last year, which would mark the fourth consecutive quarter of growth above 20%. Assuming the Siding and OSB scenarios I just detailed and given all the usual caveats about certain demand shocks or other unforeseeable events, we expect EBITDA for the second quarter to be at least $580 million, another quarter of record results and outstanding cash flow generation.

Before handing the call over for Q&A, I do want to discuss our expectations for full year revenue growth for SmartSide. Demand continues to be very strong, and we expect to continue running our mills at or near capacity at for the remainder of the year. Also, ExpertFinish, Smooth and Shakes, should continue to grow as a percentage of total Smartside volume and revenue.

However, given the acceleration of growth in the second half of last year, we simply cannot increase year-over-year revenue by much more than 10% in the second half of 2021. So all said, this would bring full year SmartSide growth to roughly twice our previous long-term guidance of 10% to 12% per year. And with that, we’ll be happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question coming from the line of Mark Weintraub with Seaport Global. Your line is open.

Mark Weintraub — Seaport Global — Analyst

Thank you. Congratulations. Obviously, fantastic times for you. In terms of the alternative growth in Siding and some of the things that you’re looking at, can you give us a sense as to what they might represent? And perhaps if we can understand the magnitude of volume they could represent and the cost to get it recognizing that these would be preliminary indications?

Brad Southern — Chairman and Chief Executive Officer

Yes, Mark, I’ll talk really three areas of — three types of investments we’re looking at making to put continued growth, and this is not in any priority order. First of all would be adding additional press capacity at existing facilities that currently make SmartSide. We like the idea of having trained workforce on the ground. So those locations that have sufficient wood supply to accommodate significant growth. In most cases, that would mean at least doubling of growth.

From a press standpoint, we’re looking at that as what’s called a brownfield scenario secondly, we — even after Sagola, we will have Maniwaki and Peace Valley, both producing OSB and Aspen baskets. And so those two facilities are certainly candidates for conversion. And then finally, what would be more of a greenfield scenario, which is the best ex
ample would be the cook, Minnesota pace of land that we own that would — that has had as we’ve been on in the past as far as greenfielding a siding mill. So honestly, some combination of those are type of opportunities will play out, in my view, over the next 10 years as we continue to grow setting capacity.

From a capacity standpoint, just to I mean speak generally not to be overly obvious to things, converting an existing OSB mill is probably the most without doubt the most efficient use of capital because, obviously, utilizing a lot of redundant resources. And then a brownfield facility at an existing location, it wouldn’t be there would be capital efficiency associated with that. And with not buying land, there are certain components of the mill that would not have to double up on. And then, obviously, more of a greenfield scenario would be the most expensive.

Mark Weintraub — Seaport Global — Analyst

Great. And curious, Val-d’Or didn’t get a mention there. Is that no longer a consideration? Or…

Brad Southern — Chairman and Chief Executive Officer

Sorry, sorry. That’s an oversight on my part, which would be a restart of a shutdown ability in Val-d’Or, yes.

Mark Weintraub — Seaport Global — Analyst

Okay, super. And then — and just as a quick follow-up, 32% margins. And in — I know — just I think it was last quarter, you increased your expectations on what the business can drive over the long haul. That’s — this 32% is a lot higher than even where your longer-term updated view had been. Any thoughts as to how sustainable this type of margin can potentially be?

Brad Southern — Chairman and Chief Executive Officer

Yes. I would say that the sustainability comes from improved mix, which is the — why we emphasized so much the new products that we’ve launched over the last four years, which Prefinish Shakes, Smooth, I’ll carry a premium over what we — over our basic prime product. As I’ve mentioned before to on the call, if we buy as mix to Trim, and that can be very favorable to price as well. So that’s — so we’re looking at our innovation strategy as a means to increase margin, and it certainly does. I will say that the constraint on that as we gain market share, but there is a competitive nature, obviously, to a big base of business that we have in LAP and panel. And so we are keeping our options open, if that’s the right way of saying it, to be competitive when it comes to big builder business. And our business at the home centers, which can be a little more competitive from a pricing standpoint.

Mark Weintraub — Seaport Global — Analyst

Great, appreciate the color, I’ll turn it over. Thank you.

Brad Southern — Chairman and Chief Executive Officer

Thanks, Mark.

Operator

And our next question coming from the line of Ketan Mamtora with BMO Capital Markets. Your line is open.

Ketan Mamtora — BMO Capital Markets — Analyst

Thank you. Congrats, Brad, Alan. Obviously, a very strong start to the year. Maybe just coming back to Sagola, I mean you are talking about kind of pulling forward the timeline of that. Last quarter, you were talking about potentially 2023 Q3 start-up, but sounds like sooner. I’m just curious, given that you’ve got Houlton going on right now. When is the earliest you could you could convert that mill, obviously, if demand remains strong?

Brad Southern — Chairman and Chief Executive Officer

Ketan, I would say, the earliest we could get production from that mill would be probably a year after the Houlton start-up, which should be Q1 of 2023, will give me a little latitude on that as we continue to work on the engineering. But we are on a parallel path, obviously, with a huge focus on Houlton first, but we intend to bring that — to convert that facility over deciding as quickly as we can, given the work that’s ahead of us to do the hold in conversion first.

So let’s — what don’t we target Q1 of 2023, and then we’ll continue to update you on the calls is that either moves forward a quarter or back a quarter or 2, given, a, what we need to do from a demand standpoint, but also as we refine our engineering work on Sagola.

Ketan Mamtora — BMO Capital Markets — Analyst

Got it. That’s helpful. And then maybe you talked about kind of demand has remained strong in both OSB and Siding. Maybe talk about kind of what do the order backlogs look like for this time of the year in both OSB and Siding?

Brad Southern — Chairman and Chief Executive Officer

Yes. They’re extremely strong in both products through EWP in there as well. The — I mean just — it’s unprecedentedly strong, but it’s always strong in Q2. So I mean, that’s — the seasonality has kicked in. But there has been no weakening in the order file in any of our three. Well, I’ll throw South America and there are too — any of our core businesses, but a very strong order post got it.

Ketan Mamtora — BMO Capital Markets — Analyst

Got it. And then just final question around capital allocation. Balance sheet is in a very strong position. Q2 cash will be kind of really robust as well, and you — Alan just mentioned that with the $1 billion authorization announced your plan to launch this week. What is the right way of sort of thinking about the cadence around share repurchases? I’m not asking about sort of specific quarterly guidance. But given the strong balance sheet, sort of what is the right way to think about kind of leverage for LP and the way you think about deploying cash for repurchases?

Brad Southern — Chairman and Chief Executive Officer

So Ketan, the — our balance sheet, as you mentioned, is very strong our balance sheet will be strong after we execute this share repurchase authorization. So there’s — in our view, in my view, specifically, we’re not risking the company at all about this $1 billion certainly doable from a cash generation standpoint. We’ll remind you this is an authorization not a plan to spend it. So we’ve got some flexibility if things were to slow down later in the year or next year. But obviously, our plan is to deploy that authorization promptly to begin the deployment promptly.

The rationale behind the share repurchase as a capital allocation tool, is it even at $70 share price? Which I don’t know if we’re there at that moment. I don’t have it in front of me, but we were at the beginning of the call. I still think, and Alan, I think, shares this and certainly our Board, we still believe we’re significantly undervalued. And so we feel that there’s a good justification.

Just on that note to buy back shares, not only just because we have the money. And so, our rationale behind and as that remains a good investment for our shareholders to be in an aggressive share repurchase mindset at LP, and then I will reassure our shareholders that we will be prudent about that and deploy it in a way that makes sense given the economic reality at the time. But then again, I’m very I feel I’m very bullish about the next four quarters for the housing, repair and remodel and LP. So we anticipate spending that money over the next — I don’t want to set a time frame, but we plan to begin using that authorization immediately, and we’ll probably buy back shares from a dollar standpoint about on the pace that we’ve been doing it over the past year or so.

Ketan Mamtora — BMO Capital Markets — Analyst

Got it. Very helpful. Good luck in the back half of the year, Brad.

Brad Southern — Chairman and Chief Executive Officer

Thank you, Ketan.

Operator

Your next question coming from the line of John Babcock with Bank of America. Your line is open.

John Babcock — Bank of America — Analyst

Hi. Good morning, and thanks for taking my questions. I guess just starting out, I was wondering if you might be able to just talk a little bit about it. I mean, obviously, like you’ve seen tremendous growth in SmartSide. And so on that point, if you could kind of talk about how maybe influencing the visibility of your brand and ability to kind of grow off of that. I mean, obviously, over time, you can get more scale as you grow and have more market share, but I want to get a sense for how this is ultimately helping to maybe compound growth to some extent, if that’s current.

Brad Southern — Chairman and Chief Executive Officer

John, it’s funny. As you were asking the question, I wrote down as a not compounding, and then you said the word before I did. But that is certainly brand equity and credibility of the brand comes with scale, and it comes with a — maybe call it broad scale, which is penetration in several different kinds of markets. Our position in retail at a brand, the consumer, the DIY receives. And that’s — we value that a lot. We value our position on the retail website where a lot of business is moving for the big box retailers.

Repair and remodel is — for a reside project, is typically a project that’s sold in the hole. And so a consumer brand and a contractor can educate and convince a consumer kind of figuratively at her kitchen table about using SmartSide as a way to build brand credibility. And then finally, as we expand with the builder, that really allows us to access the contractor base stalling side. So — and then we could go on with other examples, but the — being a brand that has that kind of wide opportunity to be exposed and then taking is, I believe, does provide a compounding effect.

And then on top of that, our launch export finish and the ability to access the Prefinished side of the market, which is somewhat re segments when I really also brings an aesthetic appeal to the brand that moves it beyond the contractor or consumer that kind of it as just a prime product.

So this has been the fruit of past investments in marketing and sales that we’ve made and talked about on a lot of these calls, we continue to really focus on that and make sure that we support the brand in a way that ensures future growth. And I’ll expect one more point on that is one of the things that we’ve learned through the COVID experience is you can effectively do that. I think our contractors got more comfortable being educated about brand and installation cetera online. The consumer certainly has.

And then once again, the big box retailer is really educating the public on how to source building products by starting online. And so we do have a strong focus there. And I’m really pleased with the progress we’ve made so far.

John Babcock — Bank of America — Analyst

Okay. Thanks. And then I did notice that you had a pretty sizable increase in SmartSide pricing this quarter. Can you just [Indecipherable] what the price increase was — or price increases that have been announced for that product?

Brad Southern — Chairman and Chief Executive Officer

Yes. We announced a 4% to 6% across the board in that with a variety of regions. It varies by region, it varies by SKU, but 4% to 6% overall. And we’ve — what we’re realizing now is maybe 3% to 4% overall, and then the mix change has been very positive, added about another percent on not pricing. So I would say it’s but we’ve probably gotten a little bit stronger price realization on the back end of the increase than we’ve gotten in prior years, but it’s just a the strength of the demand right now is able to hold on — allowed us to hold on some of that list pricing that we increased at the beginning of the year.

So I would — from a modeling standpoint, I would say, if you carry over where we are right now and give us a little bit of leeway on mix, it would be a pretty good way of looking at the rest of the year as far as our price increase realization.

John Babcock — Bank of America — Analyst

That’s useful. And then as far as overall demand for both Siding and OSP, can you just remind me when that tends to peak seasonally? I think it’s sometime during the summer, but what is kind of the typical seasonal pattern here?

Brad Southern — Chairman and Chief Executive Officer

Yes, John, really for — in my experience here, and most of my time, I was inside and a little bit in OSB, really, September, October, historically in Siding has been really good. I think that’s also true for OSB as people move into the winter and try to button up some jobs and get the house siding or [Indecipherable]. So we’ve typically seen really good seasonal demand now, have that demand plateau and the summer is kind of at a constant rate of construction. And then we would generally see a little surge in demand September, October as people were trying mentioned trying to — what I think was people trying to complete some jobs before the winter weather hit.

So we’re certainly in a historically in a really good time and season right now, and we’re expecting to see continued very strong order files at least until October. But given the lack of inventory in the channel right now for both OSB, Siding and for EWP in there as well, I anticipate that even in the winter, we’ll see pretty good order files as distributors and dealers take that opportunity to rebuild some inventory, they’re looking into what we expect to be a strong building season next year as well.

John Babcock — Bank of America — Analyst

That’s very helpful. And then just last question before I turn it over. The South America results were clearly quite strong. And I was wondering on that point if you might be able to talk about the sustainability of this level of EBITDA.

Brad Southern — Chairman and Chief Executive Officer

Yes. From a volume standpoint, I feel really good about the sustainability. And we’re doing some — in the scale of things, it’s not big dollars, but we’re doing some major mill improvements down there just from all extra capital spend that we’ve allocated down there for the next couple of years. So I see the capacity of South America growing significantly over the next 18 months or so. And we’re seeing really good market growth — market size growth down there. And some of that is attributed to good economies, especially in Chile, but also our expansion into Argentina, Peru and Colombia has really helped as well. So diversified the markets a little bit.

Look, there is a pricing component of that as well. I mean, it is. In no way directly tied to North America. But when things were as tight as they are right now in North America, the pressure from imports in South America diminishes and gives us a little more pricing strength in that kind of environment. And so that — we have seen price improvement down there as well.

Historically, we’ve been able to retain that. But it’s hard for me to predict that, that will be true in the future. But we’ve seen good price appreciation and really good volumes down there.

John Babcock — Bank of America — Analyst

Yes. Thanks, Brad.

Operator

And our next question coming from the line of Sean Steuart with TD Securities. Your line is open.

Sean Steuart — TD Securities — Analyst

Thank you. Good morning. A couple of questions. Alan, wondering if you can speak to SG&A. It was kept in check to a surprising extent, relative to our expectation, given the top line strength. Can you give context on SG&A trend this quarter and sustainability of these levels going forward?

Alan J. M. Haughie — Executive Vice President and Chief Financial Officer

Yes, sure. One thing to be
ar in mind is that this time last year, we significantly cut SG&A as we enter the COVID environment. And that had the benefit, if you like, of giving us a new muscle. So as — certainly, as we sort of step back up unnecessary spending on things like selling and marketing. We don’t necessarily replicate the cost in exactly the same manner. So we’ve got some what you might call, unexpected and implicit efficiencies.

We are looking to increase our selling and marketing expenditure with — particularly within — for Siding as we go forward through the remainder of the year. And — but to put it in context, that’s already sort of baked into the Q2 guidance that we gave you. So there will be an increase in SG&A as we continue to invest in the future of the Siding business. But that’s really the only fundamental change that you’ll see. So…

Sean Steuart — TD Securities — Analyst

Okay. Understood. On EWP, you had indicated last quarter that you were undertaking a strategic review for the business. Can you give us any update on how that process has evolved, if at all, over the last quarter?

Brad Southern — Chairman and Chief Executive Officer

It has evolved, I’m pleased with the progress and the response. We’ve had quite a bit of interest in the business. There’s nothing to share today. We’re just in some discovery phase and as far as the process that we’re — that we’ve launched and having some very interesting discussions about the future of that business. We are focused on continuity of the business because typically, what we think is going to happen as the acquirer will inherit our distribution base. It is of our distribution base for Siding and to a large extent, Structural Solutions.

So continuity is important to us. It’s part — one of the components for getting out of that business, and that’s certainly a factor that we’re talking to the interested parties about. Good progress within the quarter, and we’ll continue to report out when we can.

Sean Steuart — TD Securities — Analyst

Understood. That’s all I have. The rest of my questions have been answered. Thanks very much.

Operator

And our next question coming from the line of Kurt Yinger with D.A. Davidson. Your line is open.

Kurt Yinger — D.A. Davidson — Analyst

Yes. Good morning, everyone. And thanks for taking my questions. I just wanted to start off on the competitive dynamics in Siding. I mean what would you kind of consider the one or two things that have been most impactful in terms of your ability to gain share here in the last year? And as we look ahead to the next couple of years, I mean, are those factors any different? Or what do you think is kind of is on the priority list there?

Brad Southern — Chairman and Chief Executive Officer

Okay. So looking back the last 12 months or so with the good market share gains, as we’ve mentioned before, our position at retail has been very beneficial to us. We’ve seen incredible growth there along with the depot lows in the north. Well, where north don’t report the lows and depot’s growth that they have seen. So our position there was really good. Also, the rebound in the Shed business, which is another big panel consumer for us, has been extremely strong. And then, I would say, overall, just the strength in housing has also been very positive for us, and I believe we’ve picked up some market share gain there as well. But the bigger market share gains have come through our position in retail and in shed.

Looking forward, however, our launch is smooth and pre finish is certainly focused on a market share gain and repair and remodel. And while there is — we do have geographic strength there, we do not have broad national strength in our par and remodel. So there’s a lot of opportunity in front of us to grow in the repair and remodel segment, which is the reason behind the innovation. And then our other focus area for us for or we believe we’re currently underpenetrated with the large national builder, and we’ve got a product that we’re launching this year to help us address that along with other sales and marketing strategies associated with that.

So I think — and let me just back up from that specific answer. And just to say, I think one of the strengths of our Siding business is the diversity of channels that we sell into and the strength and diversity of our product portfolio. We’re just — we’re not solely dependent on growing lab siding because of our position in panel. We’re not solely depending on an panel because our position in Trim.

And then as we add products like Prefinish and Shakes, it expands and diversifies that product portfolio where we can take advantage of opportunities when they arise in these different segments. And that really has been historic — long-term historic strength of the of the portfolio, and I think it’s going to serve us well as we expand it and look at further market penetration in this good market environment.

Kurt Yinger — D.A. Davidson — Analyst

Got it. That’s very helpful color. And then I guess, my second one, when you talk about perhaps accelerating the Sagola conversion, if we were to see OSB markets remain strong, not necessarily where things stand today, but they remain strong. How would you think about potentially backfilling what type of OSB capacity you’d lose with Sagola?

Brad Southern — Chairman and Chief Executive Officer

Well, just to remind you, Kurt, that was our thinking around part of the justification for restarting Peace Valley was the integrated way we looked at capacity expansion across the two businesses. And so we feel like we’re addressing, especially the customers in that midwest part of the country that we can access from Peace Valley, so with Pace Valley start-up plan for later this year or second half of this year, we want to have that facility up and running fully by the time we start bringing Sagola down. So that was really how we are addressing it is through Peace Valley start-up and then continued OEE improvement across our entire OSB network.

But we’re really focused on growth in Siding. And Sagola is the next great idea in front of us as far as doing that. So we’re pretty single-minded in getting that mill up and running as quickly as possible and our expectation is that our OSB market share, though, will be protected by the start-up of Pace Valley.

Kurt Yinger — D.A. Davidson — Analyst

Got it. Okay. Makes sense. Well, good luck here in Q2.

Brad Southern — Chairman and Chief Executive Officer

Thank you.

Operator

And our next question coming from the line of Mark Connelly with Stephens Inc. Your line is open.

John Rider — Stephens Inc. — Analyst

Hi. Good morning. This is John Rider on for Mark. So first question, when you look at this period of tight supply in OSB, has it changed your thinking on how OSB inventory should be managed whether on your side or between you and distributors? And has working capital gotten too lean here?

Brad Southern — Chairman and Chief Executive Officer

That there’s no cap — there’s no question that working capital has gotten very lean, and one could argue too lean. If we — if we, being us and our channel partners, had been able to foresee the rebound in product demand in May and June, July of last year, obviously, we would not have taken the mill downtime that we’ve taken. And I would assume our distributor partners would not have brought their inventories down as well.

So I don’t I don’t know if we’ll look — if this will change the way the industry looks at inventory management because I think that we’re all trying to rebuild inventories back to some kind of normal level. But it is evidence that the c
aution that went into the cash generation mindset that we all had in late spring of last year — or early spring of last year has really put us in a position to struggle to keep up with demand. So I think it’s more of an anomaly than a long-term change and philosophy around working capital.

John Rider — Stephens Inc. — Analyst

Okay, OK. That’s really helpful. And then we were hoping you could talk a bit more about your ESG programs. We’re seeing rising scrutiny of environmental claims, particularly in Europe right now, and do you clearly have a good sustainability story. We’re curious what sort of ESG targets you have set for OSB in Siding? And how you think you stack up in the building materials space?

Brad Southern — Chairman and Chief Executive Officer

Well, let me start by saying, I think we stack up very well, given our footprint, the sustainability of our wood procurement mindset or strategy. And we are working on right now, setting some other type of ESG, environmental targets. And we’re in the data collection mode right now because obviously, this will be a data-driven exercise for us. We are focused on it. We have reconfigured a board committee to provide board oversight to this and are seeing and participating and then setting high expectations for advanced compares. And so we’ll be coming by later in the year to set out specific targets around other ESG parameters other than just wood procurement sustainability.

I will mention just as from a concept standpoint, I feel like we have a really good story. When you’re nailing siding on the side of a house for the 50-year warranty or you are sheading a house, you’re nailing a sheet of carbon to the house. So we’re — I believe we’re going to have a really good story, and — but we want to make sure that the data that we report is accurate and that the goals we said are reasonable and something that we can do and deliver on but that work is under way. And if you’ll give us another quarter or 2, we’ll be back with a robust discussion on that before the end of the year.

John Rider — Stephens Inc. — Analyst

Okay. Thank you.

Operator

Our next question coming from the line of Paul Quinn with RBC Capital Markets.

Paul Quinn — RBC Capital Markets — Analyst

Yes. Thanks very much. Morning, guys.

Brad Southern — Chairman and Chief Executive Officer

Hi, Paul.

Paul Quinn — RBC Capital Markets — Analyst

Hi. Just wow, what a quarter, but looks even more robust in Q2. Just maybe start on the SmartSide business. Just wondering what your — that order file, is it that strong that you would have a potential for a second price increase in ’21? Or is that something you don’t want to do and you really want to gain market share?

Brad Southern — Chairman and Chief Executive Officer

Well, there’s pricing strength in the product offering right now. And so I mean, the price increase is something that’s always on our mind. We’ll be clear about that. There’s various ways of getting that, and one of them has kind of hinted to earlier on the question about the price realization is working on the back end rebate part of it.

And so we’re — I’m going to say we’re taking advantage of the strength — the demand strength right now to manage prices, I think, appropriately. But we have to be competitive. And while there can be short-term opportunities for pricing at the end of the day, in most all cases, we’re eventually going to bid against a competitive substrate. And so we’re maintaining a competitive position, even in the time of tight demand is something that we’re mindful of, especially with the builder, these agreements are at least multiquarter, if not multiyear. And so we’re we are focused on maintaining a competitive price situation because we are focused on gaining market share.

I know I’m being a little bit two-faced on that answer because we also take advantage of whenever we can get price, we can get it, but we don’t do that foolishly, and we want to make sure that we maintain a competitive position and that our distributors and dealer partners could be competitive as well. So it’s a balancing act, I guess, is the right way to answer it, and it’s something that we’re really managing daily.

Paul Quinn — RBC Capital Markets — Analyst

Okay. That’s fair. And then just on the margin uplift in SmartSide was pretty impressive. Is that solely to do with a higher percentage of Prefinish? Or is that cost reductions in the segment as well?

Brad Southern — Chairman and Chief Executive Officer

Yes. It’s both. We’ve had a — we run — the facilities full out now, and the operating leverage for the — from OSB in Siding both is very strong. So Paul, on the margin, last one million feet product, the production that we sell-out of Siding at a very high margin. So it is really amazing what the mill profitability can be when you’re sold out and running at full production. And so it’s — the price increase certainly helped, but that overall operating efficiency is a key to that.

Paul Quinn — RBC Capital Markets — Analyst

And then just over on OSB, you’ve got Peace Valley starting up in the second half of the year. Maybe you could give us an idea of what kind of volume you expect to be able to ship to the market in ’21? Is that going to be a slow start or a faster start? And then lastly, if you could give us an update on Entekra.

Brad Southern — Chairman and Chief Executive Officer

Yes. So we’re looking at about 150 million feet in Q3 — oh, I’m sorry, for — in all of ’21 out of Pace Valley. So for the second half of the year, 150 million feet. And then Entekra, we continue to be very pleased with the order file at Entekra. We are in the process of validating the model as far as getting that ever-increasing order file through the facility. I think the challenge for us there. I will say that’s been the one part of our business where labor availability as we start-up that facility has been a little bit more — a lot more of a challenge in our more mature facilities, maintaining the workforce is what I mean.

And then from a profit standpoint, that business has been challenged by the rising lumber prices. The agreements with the builders have a lag on lumber pricing pass-through, and that’s been — that’s obviously hurt us. But market validation, Paul, is very solid for Entekra. We’re still figuring out how to meet the order file as it continues to rise, the way it has so aggressively, and then we’re also trying to figure out how the properly priced the product on these kind of highly volatile times as far as lumber pricing. But I’m encouraged by what we’re doing strategically there. But we’re still — it’s still a start up business. That’s for sure.

Paul Quinn — RBC Capital Markets — Analyst

And no more immediate capital requirement?

Brad Southern — Chairman and Chief Executive Officer

No. We do some minor working capital provisions for them, but yes, no immediate capital there’s any way meaning.

Paul Quinn — RBC Capital Markets — Analyst

Okay.

Brad Southern — Chairman and Chief Executive Officer

Yes.

Paul Quinn — RBC Capital Markets — Analyst

Thanks a lot, Brad. Thanks a lot.

Brad Southern — Chairman and Chief Executive Officer

You’re welcome.

Operator

And our next question coming from the line of Mark Wilde with Bank of Montreal. Your line is open.

Mark Wilde — Bank of Montreal — Analyst

Good morning, Brad. Good morning, Alan.

Brad
Southern — Chairman and Chief Executive Officer

Hi, Mark.

Mark Wilde — Bank of Montreal — Analyst

Brad, I’m just curious, if you just think about the OSB market overall right now, if we were to see housing starts continue to move up, and let’s say, we moved up to two million starts. Is it the capacity then there to serve two million starts?

Brad Southern — Chairman and Chief Executive Officer

No. The capacity after the start-up of Peace and Chambord be 1.6 million, 1.7 million, probably. So we’re looking at the — so yes. Well, you think about it this way, Mark, in 2007, 2006, the industry was serving the two million start housing market. And we shut down and didn’t start back up two or three facilities to — and converted three or so to Siding. And then if you look at all the permanently shuttered plans since then, there hasn’t been an offset in greenfields to get us back to that level. So the industry is more of a 1.5 million, 1.6 million, 1.7 million, with creep taking advantage creep in there. So it could be tight for a while.

Mark Wilde — Bank of Montreal — Analyst

Okay. And just remind me, like 100,000 starts is what, like 1.5 billion square feet?

Aaron Howald — Director of Investor Relations

Yes, Mark, this is Aaron Howald. The two rules of thumb to keep in mind are about 100,000 starts, consumes about one billion feet of OSB. And you have to adjust that for the single-family mix. So a single-family start consumes about 3 times as much OSB and Siding as a multifamily start. So the market we’re in right now is single-family mix north of 70%. You want to adjust that one billion feet per 100,000 starts upwards a little bit to account for that.

Mark Wilde — Bank of Montreal — Analyst

Okay. And then, Brad, I’m just curious, I mean, we’re so far beyond anything that we have ever seen in terms of both lumber and OSB pricing. Are you guys sensing any areas in the market where you think there’s some demand construction taking place or demand deferral taking place right now?

Brad Southern — Chairman and Chief Executive Officer

Well, yes, demand deferral, yes, I think there’s — I mean I know a guy who wants to build a deck. He’s not going to build a deck until lumber vote prices come down. So again, there’s one person who’s delaying the job that I specifically know. But I do think that there is an issue around that from an affordability standpoint, of our projects for and maybe even some housing starts, and I think there could be some housing starts deferred just from an availability standpoint.

I don’t currently believe there’s demand destruction going online. Yes. You know that export panel exports, that’s a little bit more coming in than in the past. But most other local markets are pretty strong. We’re certainly seeing that in South America, I believe it’s similar in Europe. And so I don’t — what we haven’t hit yet is any kind of substitution threat. But I think we have to be realistic. I think there probably is some deferral happening either due to affordability or lack of availability of immediate supply.

Mark Wilde — Bank of Montreal — Analyst

Okay. All right. And the last one for me. I just — I think a quarter or two ago, you mentioned that you were trying to do some of the downstream products, like I think Siding products down in the Latin American business. Just any update on the uptake of those kinds of products in the Latin American market. I know kind of changing building preferences, changing building codes is not an easy thing to do.

Brad Southern — Chairman and Chief Executive Officer

Yes. So let me — we are actively working that in Brazil, where it is harder, and Chile’s building codes have adapted. So we’re that’s not a constraint in Chile and not in Argentina either. But in Brazil, it certainly is just quickly to explain it is highly local in Brazil. So you can’t like do a macro change in building. It’s harder to do a macro change. So you end up having to kind of almost project-by-project basis. What we would consider changing code is what’s required down there. So we’ve got a team working on that, and it’s successful, but it’s slow.

In Chile, building codes are not an issue as far as that conversion. So — but our focus down there is really growing our SmartSide business. Because of the fact that we’ve been capacity constrained in the past and the margins for OSB have been really good down there historically, we really haven’t had EBITDA incentive to growth siding but as we’ve increased press capacity down there, it’s opened up some opportunities for us to look at expanding the portfolio. And while we we’ve always — we’ve sold siding down there since the start-up of the [Indecipherable], 20 years ago.

It really hasn’t been as much of a focus area. It’s going to be in the future because as we’ve grown our market share for sheeting, we are pushing up against some constraints there. And we see a siding as the next really good growth platform for sedan in South America where perhaps achieving will be more of a growth with the market versus growth in market share.

Mark Wilde — Bank of Montreal — Analyst

Okay. That [Indecipherable] Thanks, Brad.

Brad Southern — Chairman and Chief Executive Officer

Yes. I’m encouraged by our opportunity there, especially the other — just kind of put a period on that, and we’re very underpenetrated in Argentina, Peru and Colombia, which are — which do have — do use wood construction. So there also is a geographic growth element to our strategy down there.

Mark Wilde — Bank of Montreal — Analyst

Okay. Very good. Thanks.

Operator

And our next question coming from the line of Mark Weintraub with Seaport Global. Your line is open.

Mark Weintraub — Seaport Global — Analyst

Thank you. One just quick follow-up. We’ve got a pretty incredible variation geographically in OSB pricing right now with the [Indecipherable], at least Western Canada at $1,600 a couple of regions, more in the $1,200, some regions in the $1,000-type area. Any thoughts on why there’s these enormous spreads and any implications?

Aaron Howald — Director of Investor Relations

Yes. Mark, this is Aaron. As you know in more typical times, when you see regional spreads start to open up, OSB gets shipped around the continent to address those arbitrage opportunities and that happens when there’s available wood. The demand is so strong in just about every market that’s consuming OSB now that there really isn’t as much — there isn’t enough available wood to address that.

And so in more normal times, if we saw prices, it’s different region-to-region, you’d see a wave of OSB heading West to satisfy those markets. The only way that’s possible now is by starving building in the Southeast. And so it’s just — it’s less possible now.

Mark Weintraub — Seaport Global — Analyst

So why — and so why wouldn’t prices in Southeast, etc, why wouldn’t they just quickly go toward that $1,600 price in Western Canada?

Aaron Howald — Director of Investor Relations

Well, they typically would in an environment where wood was leaving the southeast to satisfy the western — West Coast demand, that would create scarcity in the southeast, and those prices would tend toward equilibrium. But that phenomenon is less likely to happen in an environment where there is so little available product that there isn’t extra to ship.

Mark Weintraub — Seaport Global — Analyst

That is all contracted out.

Aaron Howald — Director of Investor Relatio
ns

Exactly.

Brad Southern — Chairman and Chief Executive Officer

Dead on.

Aaron Howald — Director of Investor Relations

Now part of the other issue, Mark, is that the — there’s — the product is so scarce that they — that the open market transactions themselves are less common, which means that there’s less data to be reported, which means that which further reduces the opportunity for that arbitrage to be recognized and reflected in price.

Mark Weintraub — Seaport Global — Analyst

Got it? Thank you.

Aaron Howald — Director of Investor Relations

Yes. Well, with no further questions, that will end our conference. Yes. With no further questions, we’ll end there. Thank you for joining us to discuss our result for the first quarter of 2021. We’ll look forward to talking to you soon. Have a great day, and a stay safe, everyone.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Aaron Howald — Director of Investor Relations

Brad Southern — Chairman and Chief Executive Officer

Alan J. M. Haughie — Executive Vice President and Chief Financial Officer

Mark Weintraub — Seaport Global — Analyst

Ketan Mamtora — BMO Capital Markets — Analyst

John Babcock — Bank of America — Analyst

Sean Steuart — TD Securities — Analyst

Kurt Yinger — D.A. Davidson — Analyst

John Rider — Stephens Inc. — Analyst

Paul Quinn — RBC Capital Markets — Analyst

Mark Wilde — Bank of Montreal — Analyst

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