Louisiana-Pacific Corp (LPX) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2017 Louisiana-Pacific Corporation's Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Sallie Bailey. Ma'am, you may begin.

Thank you very much, Stacia. Good morning, and thank you for joining our conference call to discuss LP's financial results for the second quarter of 2017. I am Sallie Bailey, LP's Chief Financial Officer. And with me today are Brad Southern, LP's Chief Executive Officer; as well as Mike Kinney and Becky Barckley, our primary Investor Relations contacts.

I will begin the discussion with a review of the financial results for the second quarter and the first 6 months of 2017. This will be followed by some comments on the performance of the individual segments and selected balance sheet items. After I finish my remarks, Brad will discuss the general market environment in which LP has been operating, provide his perspective on our operating results and give some thoughts on the outlook. As we've done in the past, we've opened up this call to the public and are doing a webcast. The webcast can be accessed at www.lpcorp.com.

Additionally, to help with the discussion, we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I will be referencing these slides in my comments this morning. We have filed our 10-Q as well as an 8-K this morning with some supplemental information.

I want to remind all the participants about the forward-looking statements comment on Slide 2 of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information included on Slide 3 of the presentation. The Appendix attached to the presentation has some of the necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning. Rather than reading these 2 statements, I incorporate them with this reference.

Today, I will begin my comments by reporting on our safety performance. On the second quarter of 2017, we experienced a total incident rate of 0.45 and a 12 months rolling average rate of 0.46. LP continues to be among the safest companies in our industry.

The second quarter of 2017 was an important quarter in LP's history. In addition to the board electing our fifth CEO, we are reporting the highest revenue quarter since the second quarter of 2005. A lot has changed at LP in the last 12 years. The second quarter of 2005, we reported sales of $692 million. OSB represented 58% of the revenue. Siding reported sales of $125 million on operating profit of $16 million, and the Siding production volume was 242 million square feet. Fast forward to the second quarter of 2017, we're reporting a similar level of sales at $694 million. However, OSB's portion of the revenue has dropped to 7 -- 47%. Siding sales are almost twice the second quarter of 2005 at $230 million of revenue, and operating profit has risen to $48.5 million. The production of Sidings increased almost 100 million square feet to 335 million square feet.

Outpaced profile has changed a lot since the second quarter of 2005. Thanks to the focus of the management team and our employees on diversifying out-of-commodity OSB into specialty product. With that, let me go into the details.

Moving to Slide 4 of the presentation for a discussion of the second quarter 2017 consolidated results. We are reporting net sales of $694 million for the second quarter of 2017, a 19% increase from the net sales of $582 million reported in the second quarter of 2016.

In the second quarter, we recorded net income of $95 million or $0.65 per diluted share compared to net income of $32 million or $0.22 per diluted share on the second quarter of 2016.

The adjusted income from continuing operations for the quarter was $84 million or $0.58 per diluted share based upon a normalized tax rate of 35%, as compared to $40 million or $0.28 per diluted share in the second quarter of 2016.

Adjusted EBITDA from continuing operations was $164 million in the quarter compared to $99 million in the second quarter of 2016.

For the first 6 months, we're reporting net sales of $1.3 billion, a 20% increase from the net sales of $1.1 billion reported in the first 6 months of 2016.

For the first 6 months, we recorded net income of $150 million or $1.02 per diluted share compared to net income of $42 million or $0.29 per diluted share in the first 6 months of 2016.

The adjusted income from continuing operations for the first 6 months was $133 million or $0.91 per diluted share based upon a normalized tax rate of 35%, as compared to $50 million or $0.34 per diluted share reported in the first 6 months of 2016.

Adjusted EBITDA from continuing operations was $276 million compared to $151 million in the same period of 2017.

Moving to Slide 5 and a review of our segment results, beginning with the Siding segment. This segment includes our SmartSide and CanExel Siding products as well as OSB produced at our Hayward, Wisconsin operation. The Siding segment reported sales of $231 million, an 11% increase from the second quarter of 2016; operating income of $49 million; and adjusted EBITDA of $56 million, an increase of $7 million or 14% from the second quarter of 2016.

For the quarter, SmartSide average sales prices were up 5% primarily due to the impact of our announced price increases. Higher demand also led to a 3% improvement in sales volumes relative to the second quarter of 2016.

We did produce about 75 million square feet of OSB in this segment during the second quarter of 2017 compared to 64 million square feet in the second quarter of 2016.

The Siding segment reported sales of $445 million for the first 6 months of 2017, an increase of 15% from $389 million reported in the first 6 months of 2016.

For the first 6 months of 2017, the Siding segment reported operating income of $89 million compared to $69 million; and adjusted EBITDA of $105 million as compared to $84 million over the same period of 2016.

SmartSide sales volumes were up 9%, and sales prices were up 4% for the first 6 months of 2017 compared to the same period in 2016.

Turning to Slide 6. OSB recorded net sales for the second quarter of 2017 of $325 million, up 29% from $253 million in the second quarter of 2016.

OSB reported operating income of $103 million compared to operating income of $44 million in the second quarter of 2016.

Adjusted EBITDA from continuing operations was $118 million compared to $59 million in the second quarter of 2016.

Sales volumes were 2% higher. Pricing for OSB was higher by 26%, which resulted in an improved operating results by $68 million. Partially offsetting the impact of the higher sales price was an increase in raw material costs, principally resin as well as increases in manufacturing costs primarily due to downtime associated with capital projects.

For the first 6 months of 2017, OSB recorded operating income of $163 million and sales of $593 million compared to operating income of $59 million and $470 million of sales in the first 6 months of 2016.

For the first 6 months, OSB reported adjusted EBITDA of $193 million compared to $89 million in the first 6 months of 2016.

Sales volumes were higher by 1%, and sales prices were higher by 26%. The impact of the higher sales price on OSB operations was $122 million for the first 6 months of 2017 compared to the prior year.

Please turn to Slide 7 of the presentation, which shows the results from our Engineered Wood Products segment. This segment includes I-Joist, Laminated Strand Lumber, Laminated Veneer Lumber, OSB produced at our Houlton, Maine facility plus other related product. The segment also includes the sales of I-Joist and LVL products produced by an Abitibi joint venture or under sales arrangement with Murphy Plywood.

Engineered Wood Products segment recorded sales of $94 million in the second quarter of 2017, up from $78 million in the second quarter of 2016. EWP reported income of $5 million in the second quarter of 2017 as compared to $1 million in the second quarter of 2016.

For the second quarter of 2017, adjusted EBITDA from continuing operations was $9 million as compared to $4 million in the second quarter of 2016.

Volumes of I-Joist and LSL and LVL were up 11% compared to the same quarter last year. Pricing was up 4% in LVL/LSL and up 3% in I-Joist.

For the first 6 months of 2017, sales were $176 million, up from $150 million in 2016.

The segment's operating income in the first 6 months was $6 million as compared to a loss of $2 million in the first half of 2016.

Adjusted EBITDA improved to $13 million from $5 million in the first 6 months of 2016.

Moving on to Slide 8 of the presentation. For the quarter, our South American segment recorded sales of $39 million, $2 million lower than the $41 million reported in the second quarter of 2016.

Operating income was $6 million and adjusted EBITDA was $8 million for the second quarter of 2017, which is about $1 million lower than the second quarter of 2016.

Volumes in Chile were down 17%. Volumes in Brazil were up 24% compared to the same quarter last year. The sales volume decrease in Chile was due to the reduced demand in local markets. And in Brazil, sales volumes increased due to higher export sales.

Pricing was up 2% in Chile and 1% in Brazil. However, in local currency, Chile's pricing was flat, and Brazil's pricing was lower by 7%.

For the first 6 months, our South American segment recorded sales of $76 million as compared to $72 million in the first 6 months of 2016.

Operating income was $11 million compared to $12 million in the first 6 months of 2016, and adjusted EBITDA decreased by $1 million to $15 million from the same period of 2016.

Total selling, general and administrative expenses were $47 million in the second quarter of 2017, essentially flat with the same quarter in 2016.

For the first 6 months, selling, general and administrative expenses were $96 million, approximately $7 million higher than the first 6 months of 2016. The increase in the year-to-date expenses was primarily related to higher incentive compensation accruals and higher spending on sales and marketing.

Please turn to Slide 9 of the presentation. As of June 30, 2017, we had cash, cash equivalents, investments and restricted cash of $759 million, working capital of $925 million, net cash of $400 million.

Capital expenditures for the first 6 months of 2017 were $46 million. Operating cash flow for the first 6 months was $162 million as compared to $104 million in the first 6 -- in the first half of 2016. We are projecting capital expenditures for 2017 at $175 million to $200 million, of which $125 million is from growth project and $75 million is associated with maintenance projects.

With that, I'll turn the call over to Brad for his comments.

Thank you, Sallie, and good morning. I will begin by thanking Curt Stevens on behalf of our employees and Board Members for his service to LP as CEO and CFO. Curt was a great CEO and worked relentlessly to make LP a better company with a great culture. I know Curt well and believe that there's no better way of sending him into his retirement than having a great quarter. And as Sallie reported, that is what we did.

Q2's good performance was driven by strong earnings and safety results in all businesses. In Siding, we had record results, setting new records for SmartSide sales volume and revenue. In OSB, we had our best earnings quarter since Q1 of 2006. And we were EBIT positive in EWP. Our OSB and Siding businesses results were driven by improved pricing in sales volume. In EWP, we realized improved pricing and volume across all product lines and benefited from a strong focus on cost reductions. In South America, we saw a modest growth over the first quarter of 2017 in sales and earnings despite continued challenging economic environments in both Brazil and Chile.

I do want to highlight SmartSide sales growth. 2017 marks the 20th anniversary of LP's introduction of SmartSide. We have sold over 10 billion square feet of SmartSide and continued to capture growth in the quarter by expanding distribution and deal replacement, adding to our contractor base and converting several big builders. I am also very pleased with the continued expansion of our business with shed manufacturers. Overall, we are gaining market share because we manufacture quality products that are durable. And we have an excellent sales team, supported by increasing brand awareness and strong product management.

Our first half performance has us well positioned for a good year overall. While 2017 housing starts were trending slightly below the 1.28 million we expected, I am encouraged by this year's relative strength in the recovering single-family sector despite continued reports of builders having to work through land and labor-related constraints. Our sales force is reporting channel inventories below normal for OSB and at/or slightly above normal for SmartSide and EWP. So in all businesses, Q3 and Q4 demand should translate directly into sales.

I want to transition now and to give you some capital updates. Yesterday, we announced our intent to acquire International Barrier Technologies. As a reminder, we account for more than 75% of their sales and have already licensed and adopted their technology at our Clarke County, Alabama mill to manufacture FlameBlock products. We anticipate this transaction to close early in the fourth quarter at a cost of $22 million. For LP, this acquisition is primarily a technology play as we grow FlameBlock through continued marketing investment; we wanted to secure the technology.

The OSB mill expansion project at our Panguipulli, Chile location is proceeding on time and budget with a start-up planned for Q3 of 2018. We have completed the construction phase of the I-Joist line in Lautaro, Chile with the first beam being produced on July 5. And we are moving ahead with the conversion of our Dawson Creek OSB mill to SmartSide. The conversion will support SmartSide strong sales growth. The decision to convert Dawson Creek versus other alternatives is driven by the projects higher financial return, lower execution risk and shorter time line or speed to market. At this point, we expect the project to cost about $130 million. We expect the start-up for Dawson Creek's SmartSide production this Q1 2019.

We forecast that with the addition of Dawson Creek to our SmartSide production platform, we will have sufficient SmartSide capacity through 2021. Given that the project time lines for both Cook, Minnesota and Val-d'Or, Quebec will be longer than for Dawson Creek, we will continue the feasibility studies for both of these locations. We will update you on timing and progress on these and other options for SmartSide capacity growth.

In closing, I'll speak a little bit about capital allocation. The last 18 months have seen a continuing strengthening in our balance sheet, and let me remind you of what our priorities for capital usage are. SmartSide capacity expansion and manufacturing flexibility remains at the top of the list; OSB cost reduction and incremental specialty products capability in our OSB business; South American capacity expansion; and finally, opportunistic adjacency acquisitions to support our business strategies.

We will be providing our board a comprehensive strategy update at the November meeting. This update will provide a basis for evaluating all of our capital allocation options, including return of capital to shareholders for dividends and share repurchases.

With that, I'll turn the meeting back over to Sallie for -- to fill some questions.

Thank you, Brad. Stacia, we'd like to take some questions now, if we can go to the queue.

(Operator Instructions) And our first question comes from Ketan Mamtora from BMO Capital Markets.

First question, I just want to come back to the Siding expansion plans. And I know you are still doing the feasibility study on the other 2. But any kind of puts and takes you can provide on Val-d'Or and Cook? And how you think about it at this point? Because I know one is larger; the other one is smaller. So just any thoughts around that at a high level.

Okay. I'll make 3 points that we're studying in making the decision for the next mill. As you mentioned, Ketan, obviously, Cook would be a larger -- is a larger side, and we would put a larger press in there, so it would be a higher-capacity plant. Though right now, the site there is -- basically, has no equipment installed at all and would require pretty significant building of construction. So it would be a longer time line for Cook than it would be for Val-d'Or to get to start-up. And then thirdly, the optimal mix in the 2 plants will probably a little bit different. We'd really like the press size in Val-d'Or for trim production. So as we continue to do the evaluation, we'll be looking at our sales mix and trying to quantify projected growth across the different SKUs. And depending on how that comes out, if we were to get very much stronger trim growth in the future that would bias little bit towards Val-d'Or. Second thing that would bias as to Val-d'Or's speed, it would be a little quicker, but then, we really like the bit larger capacity that Cook would afford us. So that's the way we're evaluating the options.

Got it, and appreciate that. And then, again, I know it's still preliminary, but any thoughts around how much of a CapEx requirement there might be at Cook versus Val-d'Or?

We're still pretty preliminary on that, but it would be quite a bit more at Cook.

Any order of magnitude that you might -- just sort of at high level just for us to get a sense?

No. I'd rather wait and get all the data printed to engineering before I give guidance there.

Got it. That's helpful. And then, I just want to come back also to your housing comments. You are off to a pretty strong start in Q1. But it seems like housing has eased a little bit. Can you talk about work you are seeing right now? And are we heading into -- again, year where expectations were high. But as the year goes on, the expectations come down?

Yes. That's definitely the case with housing starts this year. But I will just reference in my comments, I do -- we are seeing relative strength in single family versus multi-family. We're -- pretty much we're on forecast for what we are expecting for growth in single family. So the downward adjustments in total housing is really related to weaknesses in multi-family. And as you know, single family is -- creates much higher demand for both our OSB and Siding, well, and EWP products. So relative to -- from a demand-creation standpoint, the housing numbers are okay for us because of the strength in single family. The reduction in multi-family really doesn't impact us too much.

Okay, that's helpful. And Sallie, will it be possible for you to provide some sense on how much the downtime cost you in the second quarter? And how much was -- were raw materials a headwind year-over-year in OSB?

Sure. Right. So in terms of the downtime, it was about 38 down days, which is about 53 million square feet. And you recall, in the first quarter, we did have -- I don't have the exact days with me, but we did say it was about a $12 million impact from the press rebuild at Jasper. In terms of the raw material costs, the majority of the raw material costs in OSB, really came -- as I mentioned, really came out of resin. And just on a price variance from the second quarter of '17 to the second quarter of '16, we think it was about $7 million in total. That's in total. That's not all going into OSB, but OSB is probably 1/3 of that, 1/3 to 1/2.

Got it. And in the second quarter of 2016, would you have the number for the down days?

So it looks like it was about 63 -- I'm sorry, 27 down days. In the second quarter of '16, it was 37 million square feet. And the second -- in the first quarter of '17, we were down for 60 days, and it was 83 million square feet.

And our next question comes from George Staphos from Bank of America Merrill Lynch.

I want to come back to Siding. Were the production volumes and shipments as you'd expected particularly in Siding, did you see any effect at all from the higher prices in terms of your demand? And was there any shift that was notable to OSB production just given the pricing that it would have affected your reported Siding volumes? And I had a couple of follow-ons.

Okay. So let me start with the OSB question. And just to be clear, we -- our first priority at all times is meeting demand for our SmartSide product line. So we never -- do not run siding to fill Siding orders in order on OSB no matter what the OSB pricing is. We've done so much investment and demand creation in Siding, so we obviously do not want to extend order files in siding in order to support OSB, even at the margins we're seeing to date. So the OSB that we run in the business is just a capacity filler across our system. And just keep in mind, with the addition of Swan, we added a good bit of capacity into our system. So even with a good volumes that we had this quarter, we were not selling out across all our machine -- machinery the capacity in Siding. Okay. And so as far as the quarter, probably a little bit light compared to what we were thinking. But just -- I'll just ask you to look at the year-to-date for our SmartSide volume, it's up 9%. We did have pull-forward as a result of the pricing that we implemented across the first quarter. And so we're -- I'm very pleased with the year-to-date growth there. And we are seeing the volumes kind of return normal in Q3 since we're past the pricing level, the(inaudible) pricing impact, yes.

George, I'd like to add one thing to that. So as we've been talking about it, we really would think that the best way to think about Siding is on the trailing 12-month average. And when we look at the sales volume at SmartSide and compare the last 4 quarters to the last 4 quarters ended Q2 of '16, we've seen about 100 -- just under 160 million square feet increase in the amount of sales volume, and that actually equates to 14%. And it doesn't -- obviously, take into consideration on the improvement we've had in sales pricing over that time. So I do think it's important for us to -- and we can share this information as well, it's all in our public documents, for you all to start thinking about what did the last 4 quarters look like because there will be some pluses and minuses in each quarter. And I think what we're mostly pleased with in this quarter is that we did see the volume growth that Brad referenced despite the fact we had a very, very strong first quarter.

Sallie, that's fair, and we'll consider that as well going forward. And maybe that's part of the answer to the next question. But if we look at margins in Siding and again, recognizing there's apples and oranges between SmartSide and Exel -- CanExel, did you convert revenue to EBITDA at the rate you would have expected when we do the calculation? And again, we can't make a precise calculation with the numbers that we get relative to what you know. It did look like costs per MSF were actually up year-on-year. So if you had any thoughts in terms of what was driving that, we appreciate the detail. And then lastly, on OSB, were -- was there any volume effect from pricing in your view? Any kind of demand impact from the higher prices? Or was it just purely housing decelerating some of that, at least in our view, led to volumes being a little bit light of where we would have expected?

Hey, George, can we just -- what are you thinking about on Siding? Because we had adjusted EBITDA margins of 24% this quarter relative to 22.7% in the first quarter and 23.7% a quarter ago. So can you help us understand what you're thinking about there?

Yes. Well, what I was doing is I was taking the revenue, backing out the EBITDA to come up with the cash cost, so I'm just doing a comparison of your numbers this quarter versus the prior year quarter, and then taking that to production recognizing that gets a little bit messy, right? It's not shipments. And then I mixing up 2 separate product lines. So that's what was driving the question, whether there was any kind of less-than-favorable production cost, specifically for SmartSide, relative to what you would have expected. And it sounds like the answer is you didn't -- you proceeded as you'd expected, but I just want to confirm that then.

Yes. I think that's a fair comment. And as to helping you think through the margins, really, just one -- just a thought about it. What Mike and I will spend some time trying to think through what information we have provided to help you get better clarity on that.

Okay. And on OSB volume, were you pleased with the volume as it played out. Was there any effect from higher pricing from what you saw? Or is it really just the pace of starts maybe decelerating somewhat in terms of demand for that product line?

We were happy with the pace of sales for the quarter and the production. And as you -- as we've mentioned before, we try to match production to sales, and we responded to it -- basically to our order intake. But we were pleased with the sales and production for the quarter.

And our next question comes from Gail Glazerman from Roe Equity Research.

I guess, can you just give a little bit of color on recent OSB pricing and how sustainable you think it is? How much of it you think is supply/demand versus the outage at a competitor? And also, maybe just give some color over the next few months how you expect incremental supply to impact the market.

So you've seen the move in Random Lengths since the end of the quarter, end of Q2, so it continues to be strong. I believe it's the underlying demand capacity balance, well, I know, is very tight in the industry right now as a result of the increased demand. So we're happy with where pricing is. We feel like it's going to be balanced for the rest of the year. As far as the new capacity, the stuff that's scheduled for this year is going to be scheduled to come on late in the year. And so we're really not expecting to see much of a capacity impact or production impact until we get to next year.

Okay. And so you referenced somewhat weak demand in Chile. Just wondering if you can give some perspective there. And is it something that's stabilizing just as you're looking to bringing on capacity next year?

Sure. Gail, I think we have to remember where Chile is in their year. So typically, in Chile, the first and the fourth quarters are the stronger quarters rather than the second and third since their seasons are exact opposite of ours. So I'd say it's weak normal -- so seasonality is a big part of it, along with just difficult economic circumstances. So when we review the Chile results, what we're really pleased with is the surprising plus or minus was maintained in local currency. And we feel pretty strongly that the demand will continue to come back. And we're, as we've talked about in the past, beginning to see through sales offices build demand in places like Peru and Argentina.

Okay. And can you talk a little bit about what you're seeing in wood costs throughout the businesses?

Sure. We feel pretty favorably in terms of how our resources group is managing our wood costs. Relative to last year, they are slightly better, and we're seeing that in all of our -- that impacts all of the businesses. And we don't see any reason that, that's going to change going forward. They've done a very good job with managing our wood costs.

And our next question comes from Mark Weintraub from Buckingham Research.

First, I just wanted to explore [past] a little bit the degree to which the OSB shipments contributed to profitability in Siding -- Siding was a terrific quarter. But I mean, it did seem that -- if I read correctly in the Q, shipments were up by 40%, whereas production base and what you said, it seemed to be up maybe by 20%. And some I'm just trying to get a sense as to how much of the profitability in the second quarter maybe would have been attributable to OSB in the Siding division?

Mark, could you ask that question again? Because we've -- we were thinking -- we were hearing OSB, and I think you're asking us about Siding.

Yes. So I'm asking -- obviously, you produced some OSB for Hayward in the Siding division. And it seems like there was a good bit more shipments of OSB this quarter than there had been in the prior year in the -- from Hayward of OSB or in the Siding business. So I'm just trying to get a sense as to how much of the $49 million of EBIT that you reported in the Siding business would have been attributable to OSB shipments.

It's about...

Go ahead.

It's about $4 million for the quarter.

Okay. So pretty low, actually. Because I believe the revenue is about $20 million. And so the margins on that is actually relatively low compared to your other OSB operations. Is that a fair interpretation?

Well, I think the margins would be similar to the -- the margins coming out of Siding wouldn't necessarily be dissimilar to the margins coming out of OSB, other than the differences that they have in the Random Lengths, the pricing. But I would say is, Mark, just to sort of size it, even though the 40%, I agree, is a headline number, it's only 11 million more square feet. So that's why the number Brad was -- it doesn't make that large of an impact on the...

Well, I was a little confused on that, actually. Because I attribute that the 11 million, that was production. And because, obviously, that's only 11 million over 64 million is a lot less than 40%. And the 40% was in the Q. And I assume that referred to shipments as opposed to production. Maybe I got it that wrong. Maybe I'm misinterpreting.

It does refer to shipments. But I mean, fundamentally -- yes, it -- no, it does refer to shipments. But I mean, the shipments and the volume -- the production, I know we can all do the math, are going to be -- well, I think the best way to talk about it is, as we also mentioned in the Q, that the difference is $3.5 million, and I think that gives you some sense of what it is. And it's just because we sell such a small amount of OSB out of the Siding business, it's just the number's top.

Okay. And maybe if I could just kind of follow up some -- number questions on down days, et cetera, and it sounds like 38. Would you consider that to be a little bit above normal? And maybe just to fill that in, how many down days are you anticipating in the third quarter?

So I think, yes, we've had more down days than we would have anticipated. Some of it was capital-related. Some of it also is the beginning of the second quarter related to some heavy snows in Northern Québec that caused some minor transportation issues but contributed to the number of down days. And we don't -- I don't believe we have any major capital expenditures planned in our -- in the OSB business in the third quarter that would cause any downtime. But I think, as you know, we generally don't share anticipated downtime with you looking forward.

Fair enough. And then lastly, CanExel, the volumes seemed to be quite good in the first half of the year, perhaps not as close to this as they should be, but my sense is that the Canadian housing was actually slowing a little bit. Maybe that's wrong. But maybe if you could just talk a little bit, and I realized it's a smaller part of the Siding driver here. But what's the -- what are you seeing in -- from Canadian demand and implications for the CanExel business?

So just keep in mind, when you think about CanExel, 2 things. First of all, it's a prefinished product, and almost all of that is going into repair and remodel versus new housing. There's some other that ends up on new housing, but it's primarily a repair and remodel SKU. And also, we have a rather large position in Europe with that product line. So we get a pretty kind of balance between, well, France, in particular and Québec, and then most of the volume is going into repair and remodel.

And our next question comes from Chip Dillon with Vertical Research.

First question is just, I probably completely misheard this. But I know, Brad, you were going through the projects, and you mentioned the start-up of the third line in Chile in the third quarter next year. Did you say something about I-Joist in the third quarter in Chile? Did I get that right?

Well, so we actually started our I-Joist line in Lautaro with first production July of this year, July 5 of this year. So that project is complete and commercialized.

How much -- how many -- what sort of volumes do we expect out of that facility in I-Joist?

It's a single line. We're running at 1 shift. So it's small volumes, basically, replacing volumes that we were shipping down there from the U.S. So we built the market by shipping product down there, and now we're translating that volume into local production to save the freight.

Okay. And then, when you look at the Chilean third line, I think I remember somewhere seeing a $15 million number, which looks small for a project of that scope. I didn't know if that was the value of maybe some repurposed equipment from North America that you sent down there. [Wonder] if you can just talk a little bit about the scope of that project in terms of its cost. And are you, in fact, able to use equipment that you've had in service up here in the past?

Yes. The press line that we moved -- that we are moving down there is from Silsbee, our mill that's permanently closed in Texas. And then, the capital approved for that project is $60 million. I think the $15 million that you're referencing may have been -- could have been the spend we did in -- as preliminary to doing the engineering and everything. But the total project approval with our board is $60 million.

Okay. And then, last question just on the CapEx. I know that, obviously, a lot of the heavy lifting for Dawson, I would imagine, is going to happen next year. Would a good guess of CapEx next year be in the same general range as it is this year? I know there can be a little flip-flopping. Or would it be an order of magnitude or higher or lower as it looks right now?

So Chip, as we've discussed in the past, we'll probably give guidance as we typically do on our third or fourth quarter call. That being said, there's no reason based upon Brad's enumeration of how we're thinking about capital to think that we're going to increase the capital above -- going forward above what we've -- the $175 million to $200 million we've talked about for this year.

Okay. I got you. And last quick question is, I know you're taking sort of a fresh look at capital allocation. And I sensed in the past that you all have preferred, I think, maybe sort of a relatively small dividend, let's say. And then maybe buy back for -- as it really builds up and there are no other opportunities. What are your thoughts towards some kind of a variable dividend as we move forward? Is that still kind of a low priority in terms of how you think of things?

I'll just answer the question this way. As we update our strategy and review it with our board in November, we'll be looking at all options. And right now, everything's on the table.

And our next question comes from James Armstrong with Armstrong Investment.

First question is back on Siding. As we go forward, is there any reason that -- the last few years you've seen a seasonal dip in Siding. Is there any reason that won't continue as you go forward? Or just is demand strong enough that likely in the third quarter could be just as good as the second?

I do not expect to see a dip in the third quarter.

Okay. Fair enough. And then, other than market tightness, are you seeing any impact from the British Columbia fires?

We have minimal impact, and really, the only impact we've seen is around the [sea] input boxcar availability on allocation. I guess, due to their inability to move some cars around in that area. So we had a little bit of shipping delays at our 2 British Columbian mills, but nothing that we can't work around throughout the quarter. But there's been no direct impact on either of our operations up there.

Okay. And then just lastly, on the Dawson Creek ramp-up, you said it was going to come online in first quarter of 2019. However, is that the like when the first square foot will be made? And what's the normal ramp-up of that mill?

Well, yes, that's a good question. So I think you could reference back to our Swan start-up as a good barometer. That was a pretty good start-up for us, and we would expect to see the same at Dawson. So if you use those volumes, it'd be pretty similar. But it's going to be -- there won't be a ton of production out of there in the first quarter. But by the time we get to second quarter of 2019, we would expect the mill to be running well above 50% of capacity for Siding.

Okay, that helps a lot. And it will -- are you planning to make pure Siding there? Or should start up with OSB first and then slowly switch to Siding as we go into 2020?

Well, that mill is currently running OSB. And so we have the quality systems in place for OSB. So right out of the shoots in the Q1, we will transfer Siding volume up there.

And our next question comes from Sean Steuart with TD Securities.

Just one question on your EWP results. You had good progress there, and you referenced volume and pricing gains. But you also mentioned cost-reduction efforts. And I'm wondering if you can go into a bit more detail there, specifically, I guess, how concentrated that might be at an any specific asset and sustainability of those gains.

Yes. So primarily, we did some restructuring in the business and removed over 30 positions this year that will be permanently out of the business. So the primary -- other than good cost control at the plant level, the sustainable restructuring that we did around the business is helping our own SG&A side. Though some of -- I would say, some of those positions were at the mills, too, so that's spread across operations and SG&A.

And our next question comes from Paul Quinn with RBC Capital Markets.

Just maybe a high-level question. Since your well-attended Investor Day, we've seen Norbord's OSB plant up in BC, separate 2 weeks, that's had a market impact. And also, on their call, they announced the restart of Huguley. You mentioned that the capacity research coming in, in 2017 in the OSB side are really at the end of the year, but you expect the market impact in 2018. Just based off what you expect to start, and especially single-family starts for '18, how much of an impact do you think the additional capacity have in the market? Is it going to be tighter? Is it going to be looser, just directionally?

Well, the capacity will be coming online this year, starting up next year, all those mills that are announced will be in a ramp-up curve situation. I would think if we get the 8% to 10% growth in housing, and that translated into single-family housing, there should -- the demand will help absorb that capacity. So we're still looking at it being fairly balanced next year. I guess, the -- with the 2 variables being real housing continued recovery pace that it's on and then how quickly will some of those mills get up and running as we move through the year. But we've said before, Curtis said it before that the OSB industry is going to need capacity as housing continues to recover. So I think next year could still be in balance but obviously, won't be as tight as it was this year with all the mills coming on, though.

And we do have a follow-up from George Staphos with Bank of America Merrill Lynch.

This is actually John Babcock. I just want to step on for a question for George. Just with regards to EWP from a broader perspective, I was wondering if you could talk about trends you're seeing in EWP as a product category, getting market share in home construction?

Well, I'd say the biggest trend right now, as lumber pricing recovers, it makes our and industry's EWP products much more competitive from -- just from a [share] call standpoint. And I think that has driven some of the good demand growth we've seen this year. Now we have benefited, too, from a strategy. We started executing last year, increasing our deal replacements. So they've got a wider breadth of selling points for a product in the higher lumber pricing. And any tightening in availability of lumber really translates into good volumes for EWP, along with the recovered housing market.

Okay. And then also, just with regards to OSB, I just want to kind of get a sense for -- from you just with regards to like OSB consumption and how that's changing on a per kind of single-family start basis? Sorry, so just to reword it, I mean, what trends are you seeing in OSB consumption for single-family housing start?

Well, we're seeing the kind of consumption we normally see. The impact of bigger or smaller houses can influence that, but it's pretty direct correlation between single-family starts and OSB for that part of our business. But what we're focused on too is diversification. Our FlameBlock product line is a multi-family commercial product line. We do have some exposure into the furniture market with our super [strong] products. So we're trying to diversify, as much as we can, away from single family, but that is still a core and central part of demand creation for OSB.

Okay. And last question before I turn it over. Just if you could talk about -- obviously, the OSB prices that we've seen have continued to trend higher in July. And I was wondering if plywood is becoming more of a factor here with that trend.

We have not seen it impacting our demand for our product or order file. I know that the pricing there is converging. But so far, that hasn't translated to any market share loss that we could see.

And our final question comes from Steve Chercover with D.A. Davidson.

Forgive me, I got on late, so perhaps you addressed this. But can you discuss the Barrier Tech deal a wee bit more? Is it safe to say this is more of a long-term strategic transaction than near-term accretive?

Well, so let me -- this is a little bit in my prepared comments, but I don't mind repeating it. So we had a license agreement with Barrier Technologies, and we -- basically, that licensing payment was about 75% of their revenue. They do have a couple other larger customers. Then after that, it gets really small. So with that licensing arrangement and the transfer of that technology to our facility in Alabama and the success we're having, growing the market share, we really felt it was important strategically to secure that technology as if we were going to continue to make the kind of marketing investment we're making there. So it was primarily an acquisition that secures the technology, eliminates the licensing payment, and then also provide some further volume in the -- with the volumes they already were selling. There is a manufacturing plant that comes along with this in Watkins, Minnesota, a relatively smaller plant compared to what we've built in Alabama. It has been running our FlameBlock product for several years as we built the market before starting up Alabama. So that facility will become part of our asset base, obviously. And we will continue to manufacture FlameBlock up there, so that we can continue with some logistics optimization. So we get a plant, we get the technology, we get all the patents and intellectual property, we pick up a couple of smaller customers and then most importantly, we're very confident now that as we continue to grow the demand for the product, we have the ultimate exclusive on the technology. So that was the strategic rationale.

And this is geared towards OSB as opposed to EWP, right?

Yes. 90-plus percent OSB, but we are commercializing a web stock, FlameBlock web stock for I-Joist and selling that product now.

Okay. And I had a follow-on that's kind of adjacent. Will you guys get any near-term benefits from Weyerhaeuser's misfortunes in Colorado? Or are you simply too far from that market?

Well, no, it's not a distance issue. Just keep in mind that right now, FlameBlock I-Joist is less than 1% of our volume. So it's very small -- it would be an insignificant boost if we were to pick up some volume as a result of their quality issues. So it's still -- still, it's a growing sector of our I-Joist business, but it's still very, very small.

Great. Thanks, Steve. And Stacia, I think that's all the time we have questions. So if you could please provide the replay number, we'd appreciate it.

I'd like to thank everybody for participating in the call. And as always, Mike and Becky are here to answer any follow-up questions, and thank you, and we hope you have a really good day.

That does conclude the program for today. The replay number is 1 (800) 585-8367 or (855) 859-2056 or the local number is (404) 537-3406. Ladies and gentlemen, please enjoy the rest of your day. Thank you.