Louisiana-Pacific Corp (LPX) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 Louisiana-Pacific Corporation Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for today, Mike Kinney, Director of Investor Relations. You may begin.

Thank you for joining our conference call today to discuss LP's financial results for the fourth quarter of 2017. I'm Mike Kinney, LP's Director of Investor Relations, and with me today are Brad Southern, LP's Chief Executive Officer; as well as Sallie Bailey, our Chief Financial Officer.

As we have 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. Sallie will be referencing these slides in her comments this morning. We plan on filing our 10-K later this afternoon and have already filed the 8-K this morning with some supplemental information.

I do want to remind everybody -- all participants on the call 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 reconciliation 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.

Now let me turn the call over to Brad.

Thanks, Mike, and thank you all for joining us this morning. I'll begin today's call with an overview of significant strategic and operational progress we made in 2017, review the current market environment and touch on our outlook for the year, including our capital allocation priorities. I'll then hand the call over to Sallie to provide a more in-depth review of our financial results, followed by the question-and-answer session.

2017 was, by all accounts, a year of significant growth and development at LP, highlighted by continued progress on our goal to transform LP into a leading building solutions company. In fact, it was our strongest year since 2005, a meaningful achievement when considering the fact that there were half as many new housing starts in 2017 compared to 2005. Our performance for the year was broad based, and we ended the fourth quarter with increases in revenue, adjusted EBITDA and EBITDA margins in all 4 of our segments: OSB, Siding, EWP and South America. We're also pleased to announce that our board has reinstated a quarterly dividend of $0.13 per share, which I will discuss in more detail when I review our capital allocation strategy.

While OSB continues to be the largest revenue contributor on a consolidated basis and we benefited from a positive pricing environment as well as other factors, including increasing mix from our value-added products in OSB, it is our strategic shift in the specialty products, specifically Siding, that best characterizes the future of LP. Our focus on growing Siding and specialty products is not new. What is new is the degree to which we are aligning all aspects of our business to achieve this goal from internal target setting to how we measure our performance. As Siding and specialty products continue to increase as a percentage of revenue and as we continue to shift capacity out of commodity OSB and into Siding and other specialty products, we will be able to decouple our performance from the commodity cycle that dominates OSB. We believe that the end result of these focused and deliberate actions will be more consistent and sustainable results over time, greater growth opportunities, a stronger margin profile, and ultimately, increasing shareholder value.

I am pleased with the progress that we made on this transformation throughout 2017. Let me provide some highlights from the fourth quarter, starting with Siding. We achieved record Q4 sales volume and adjusted EBITDA in Siding, together with a year-over-year increase in pricing. These results continue to trend since 2011 of steady top and bottom line growth in Siding. In addition, our market share growth has outpaced single-family housing starts since the fourth quarter of 2016, which we believe is in part a strong testament to the high quality and value of our SmartSide offering. Recall that our sales volume growth justify the 2015 conversion of our Swan, Manitoba OSB mill to Siding. Our expectations for continued strong Siding growth justify the current conversion project proceeding in Dawson Creek, British Columbia. We will continue to evaluate multiple options for the next siding mill, including a restart of our idle mill in Val-d'Or, Québec or a brownfield project in Cook, Minnesota.

Turning to OSB. We delivered our best quarter since the second quarter of 2005, maintaining the strong momentum we reported last quarter. We continue to see strong demand for our value-added product mix in OSB, with FlameBlock and legacy flooring growth exceeding our expectations. We are pleased that our OSB strategy of focusing on value-add and specialty products is reflected in the decline of commodity volume and the increase in value-add specialty volume. Pricing remained robust and we continue to make progress on productivity and our cost improvement initiatives.

In EWP, we delivered another solid quarter following our near-record third quarter. I'm especially pleased with the progress in our EWP segment as engineering a turnaround in this business was one of my first priorities after assuming the COO role last January. As a result of our collective efforts, we are seeing sustainable increases in margin and volume, all underpinned by a strong focus on cost reduction. While the recovering housing market certainly helps this business, our focus on growing LSL and LVL sales volume, while reducing SG&A spend, has accelerated business performance.

Finally, we continue to make steady progress in South America. Our sales office in Peru is up and running. In Argentina, we have hired a sales manager. And our office in Buenos Aires is on track to open this quarter. Our new OSB mill project in Chile is on time and on budget. In Brazil, we have reorganized our sales function and our operations team delivered record production in the fourth quarter.

Our North American businesses delivered this performance against a backdrop of continued recovery in the housing market and the building supply industry. In the fourth quarter, we witnessed continued expansion on a year-over-year basis in single-family housing starts, which is driving healthy demand. The repair and remodel sector also saw improvement, driven by the overall health of the economy and housing market. These factors contributed to improved price realization across our 3 product segments. The recently passed tax reform package is likely to boost investment and consumer spending in the near term. While there are some concerns about how the tax legislation will impact the housing market, overall, the market is showing the most robust activity we've seen in over a decade. For example, in November, new single-family home sales reached the highest figure in over a decade. And in December, the NAHB index of builder confidence soared to its highest rating since 1999.

Let me conclude with a high-level review of our capital allocation framework as well as our view of the year -- on the year ahead. In terms of capital allocation, we have one overarching goal and that is to strategically deploy capital where we believe we can drive the greatest value for our shareholders. We will do so by actively managing our balance sheet. We will leverage existing cash on hand and excess cash flows generated throughout the year to enhance shareholder returns through organic and potential inorganic growth opportunities, while maintaining the resources necessary to support our ongoing liquidity needs.

Our priorities fall into 3 buckets and Sallie will provide a bit more color into our CapEx plans in her prepared remarks. But we ended the year with a cash balance of almost $930 million. First, we plan to retain approximately $300 million on the balance sheet to support liquidity and working capital needs. Secondly, we plan to allocate $300 million to support our organic growth initiatives and to pursue value-enhancing M&A in our core and adjacent markets, products and technologies. Finally, we will utilize approximately $300 million to sustainably return capital to shareholders through quarterly dividends and opportunistic share repurchases. As you may know, we currently have a $100 million share repurchase authorization in place, and we expect to be active and deploy that authorization as and when we see opportunity in the share price.

Furthermore, as we announced, our board has authorized a quarterly dividend of $0.13 per share or an annual outlay of approximately $75 million. We're pleased to be in a position to commence a regular dividend, which I believe underscores the confidence our board has in our robust financial profile, track record of execution on our strategic plan and our positive outlook for the future.

After my first 7 months as CEO of LP, I am excited and energized by the progress we have made in our outlook for the future. The overall macro environment remains encouraging. The real economy is as healthy as it has been since the late 1990s with low unemployment and strong GDP and income growth. U.S. housing stock is old and massively underbuilt to the tune of an estimated 3 million homes relative to demand.

Interest rates remain low, and despite strong home price growth in recent years, home prices remain relatively affordable. Home inventories are also extremely low. The last time the existing home inventory to sales ratio was near its current level, housing starts were at 2 million. And demographics are improving as millennials transition to their late 20s and enter the phase of life when many begin to think about purchasing a first home.

In terms of the markets in which we operate, we believe, based on recent data, that single-family demand will remain strong with an upward trend based on the fact that builder confidence remains high. On the multifamily front, we currently expect the market to remain relatively flat in the first quarter due to oversaturation in the market and pricing pressure.

From a forward planning perspective, we prepared our 2018 budget based on the anticipated 1.3 million housing starts.

Let me provide you with a brief overview of our current product channel inventory levels and order files. SmartSide inventories remained at normal levels. OSB channel inventories are lean. OSB order activity is strong. Logistics issues related to railcar availability have tightened supply availability in the West and the North Central markets. EWP inventory levels are normal. In terms of demand, SmartSide demand is robust across all market segments. We expect demand to remain strong in OSB, while EWP demand remains strong due to single-family growth expectations. In short, the overall market environment remains favorable and the onus is on us to execute.

We enter 2018 from a position of strength, with the opportunity to drive sustainable growth and value to our shareholders. We have an engaged and experienced management team to bring a track record of delivering on the type of transformation that we are pursuing company-wide. We are aligned on our goal to build a best-in-class operating platform with flexible low-cost assets, an increasingly optimized supply chain and enhanced sales and marketing platform and a focus on developing the talented team we need to win in our markets. While there is more work to do ahead, we are successfully executing on our strategy to become a building solutions leader with a large and growing specialty products business. All of this is supported by strong balance sheet that will provide us with the flexibility to deploy capital with the highest return opportunities.

With that, let me turn the call over to Sallie.

Thank you, Brad. I will begin the discussion with a review of the financial results for the fourth quarter and full year of 2017. This will be followed by comments on the performance of the individual segments and selected balance sheet items, and we'll then take your questions.

Moving to Slide 4 of the presentation for a discussion of the fourth quarter 2017 consolidated results. We reported net income of $711 million for the fourth quarter of 2017, a 29% increase from net sales of $550 million in the fourth quarter of 2016. Fourth quarter 2017 net income was $131 million or $0.89 per diluted share compared to net income of $42 million or 13 -- or $0.29 per diluted share in the fourth quarter of 2016. Adjusted income from continuing operations for the quarter was $107 million or $0.73 per diluted share based upon a normalized tax rate of 35%, as compared to $33 million or $0.23 per diluted share reported in the fourth quarter of 2016.

Adjusted EBITDA from continuing operations was $199 million in the quarter compared to $85 million in the fourth quarter of 2016. For the full year, we reported net sales of $2.7 billion, a 22% increase from net sales of $2.2 billion in 2016. Net income was $390 million or $2.66 per diluted share for the year compared to net income of $150 million or $1.03 per diluted share in 2016. Adjusted income from continuing operations for 2017 was $341 million or $2.33 per diluted share based upon normalized tax rate of 35% and compared to $130 million or $0.89 per diluted share reported in 2016.

Adjusted EBITDA from continuing operations for 2017 was $660 million compared to $346 million in 2016. I'd like to give a couple of highlights before I move into the individual segment results.

This is the best financial performance for LP since 2005 when U.S. housing starts were over 2 million. In 2005, OSB represented 60% of the company's total sales and 85% of the business unit operating income. In 2005, the Siding segment represented 17% of the sales and 7% of the business unit operating income. Fast forward 12 years, in 2017, with just over 1.2 million U.S. housing starts, OSB represented 49% of the net sales of the company and 65% of the business operating income. In just 12 years, in end markets with demand 42% below the 2005 demand levels, the Siding business sales have almost doubled to represent 32% of the company's total revenue. And the Siding business operating income has quadrupled and now represents 28% of the business segment operating income. We are transforming LP into a building solutions company and the financial results reflect that change.

Moving on to Slide 5 and a review of our segment results, starting with Siding. This segment includes our SmartSide and CanExel siding products as well as OSB produced at our Hayward, Wisconsin operation. Looking forward to 2018, we will see an increase in OSB in this segment in preparation for the conversion of our Dawson Creek OSB mill to a siding mill. The Dawson Creek mill became part of the Siding segment effective January 1, 2018. Siding sales for the quarter were $213 million, 26% increase from the fourth quarter of 2016, with adjusted EBITDA of $53 million for the quarter, an 81% increase from the fourth quarter of 2016. We are pleased with the continued growth in the fourth quarter in our Siding segment, reflecting our increasing strategic focus on Siding growth as a core element of our transformation, as Brad outlined in his remarks.

For the quarter, SmartSide average sales prices were up 6% due to changes in product mix and price -- and the price increase. Sales volume increased 16% in the quarter due to demand in key markets. We produced roughly 40 million square feet of OSB in this segment during the fourth quarter of 2017, which is comparable to the production levels in the fourth quarter of 2016. The Siding segment reported sales of $884 million for 2017, an increase of 18% from $752 million in 2016. Siding segment operating income was $187 million for 2017 compared to $126 million in 2016. And adjusted EBITDA was $219 million as compared to $154 million in 2016.

SmartSide volumes were up 10% for 2017 compared to 2016 with sales prices up 5% for SmartSide. Increases in OSB prices added $40 million to Siding operating results in 2017 compared to 2016.

Turning to Slide 6. OSB reported net sales for the fourth quarter of 2017 of $358 million, up 30% from $276 million in the fourth quarter of 2016. OSB reported operating income of $136 million compared to $60 million in the fourth quarter 2016. Adjusted EBITDA from continuing operations was $153 million compared to $74 million in 2016. Sales volumes were 3% lower compared to the fourth quarter of 2016. Pricing for OSB was 34% higher compared to the fourth quarter of 2016, which resulted in improving operating results by $92 million. Increased cost in raw materials and higher manufacturing costs because of downtime partially offset the higher sales price. The OSB segment had 45 down days in the quarter, which equaled about 66 million square feet of lost production.

OSB reported operating income of $426 million on sales of $1.3 billion for 2017 compared to $186 million on $1 billion of sales in 2016. For 2017, we reported adjusted EBITDA of $488 million compared to $246 million in 2016. Sales volumes were lower by 1% and sales prices were higher by 29% on a year-over-year basis. The impact of the higher sales price on OSB operations was $293 million for 2017 compared to the prior year.

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

The Engineered Wood Products segment recorded sales of $92 million in the fourth quarter of 2017, up from $66 million in the fourth quarter of 2016. EWP reported income of $3 million in the fourth quarter of 2017 as compared to a loss of $4 million in the fourth quarter of 2016. Adjusted EBITDA from continuing operations was $7 million for the fourth quarter of 2017 as compared to negative $1 million in the fourth quarter of 2016.

On a year-over-year basis, LVL volumes were up 20%. LSL volumes were up 42%, and I-Joist volumes were up 17%. Compared to the fourth quarter of 2016, pricing for LVL was up 8%, pricing for LSL was up 10% and I-Joist pricing was up 7%. For 2017, EWP sales were $366 million, up from $297 million in 2016. The segment's operating income was $50 million -- $15 million for 2017 compared to a loss of $6 million in 2016. Adjusted EBITDA improved to $31 million from $8 million in 2016.

Moving on to Slide 8 of the presentation. We have changed our presentation for our South American business segment from a geographic perspective to a product line perspective. As we continue to expand our presence in South America through the addition of sales offices in Peru and Argentina, sales by product line is a better indicator of the financial performance of this segment. For the quarter, our South American segment recorded sales of $41 million, about $7 million higher than the $34 million we reported in the fourth quarter of 2016. Operating income was $8 million and adjusted EBITDA was $10 million for the fourth quarter of 2017. In the fourth quarter of 2016, we reported $2 million of operating income and $4 million of adjusted EBITDA. OSB volumes were flat year-over-year, while Siding sales were 32% higher year-over-year. Pricing was up 19% in OSB and 6% in Siding compared to the fourth quarter 2016.

For 2017, our South American segment recorded sales of $155 million as compared to $137 million in 2016. Operating income was $24 million compared to $17 million in 2016, and adjusted EBITDA increased to $33 million from $26 million in 2016.

Total selling, general and administrative expenses were $46 million in the fourth quarter of 2017, about $2 million lower than the fourth quarter of 2016. This is primarily related to timing on management compensation accruals. For the year, selling, general and administrative expenses were $190 million, up about $7 million from 2016, driven mainly by increases in compensation expense, software maintenance agreements and expenses associated with our strategy review.

Please refer to Slide 9 of the presentation. Capital expenditures for the year were $149 million as we continue to reinvest in growing the Siding and South American businesses as well as improvements to increase our productivity, especially in our OSB mills. Brad covered our capital allocation priorities, so let me just recap the key items before I move on to questions.

Of the approximately $930 million of cash on the balance sheet at the end of the year, we plan to retain approximately $300 million to support liquidity and working capital needs. Secondly, we are allocating approximately $300 million to support our organic growth initiative and to pursue value-enhancing acquisitions in our core and adjacent markets, products and technology. And finally, we will utilize approximately $300 million to return capital to shareholders to the newly reinstated quarterly dividend and opportunistic share repurchases.

As Brad noted, we currently have $100 million share repurchase authorization in place, and we will repurchase shares as and when we see value in the share price relative to our expectations and relative to other higher returning cash deployment opportunity. We are planning to use between $200 million and $250 million of cash for capital expenditures in 2018, of which approximately $115 million is for growth projects like the Dawson mill conversion and the third mill in Chile and the remaining approximately $130 million is associated with maintenance and smaller capital return projects.

Finally, as a result of the new tax legislation, our normalized tax rate has declined from 35% to 25%. We use the 25% normalized tax rate for our 2018 budget. We believe that our cash tax rate going forward will remain around 20% as a result of our Canadian net operating losses. However, our cash tax rate will fluctuate depending upon the amount of capital investment in the U.S. in 2018.

This concludes our prepared remarks. Sonia, we'd like to go to the queue for questions.

(Operator Instructions) Our first question comes from Sean Steuart of TD Securities.

A few questions. Let's start within the OSB segment. You touched on the progress you've made around the specialty product transition and a couple of questions on that front. I'm wondering if you can put some numbers on it in terms of percentage of volume. And then comment on your ability to decouple the pricing for that type of product from the Random Lengths print?

Sure. Sean, I think the best way to think about the specialty sales, we tend to call it value added. So it's about -- it was about 37% of our sales in the fourth quarter. It was about that same percentage in the third quarter of 2017, and that's up from about 33% in the fourth quarter of 2016.

And I'll speak to the pricing, Sean. So we have 2 kinds of value-added products in our portfolio. There are a couple, FlameBlock and legacy flooring are the best examples where we have decoupled those from Random Lengths and price that -- those products off a price sheet. But for the rest of our value-add mix, they're all priced as an add or 2 to Random Lengths and the adder can be adjusted not weekly sometimes, we'll have month-long contracts. But from the information you will see through the year, is they are still tied at some way to Random.

Okay. Question on South America. The Chilean expansion project, I think previous guidance called for Q3 2018 start-up. Can you remind us of the incremental capacity there and the expected ramp-up period for that project?

So the capacity is 300 million square feet. You're right, we're looking at a start-up in Q3, the middle of Q3. I would expect to be running kind of maybe half of that after 6 months, half of that capacity, and they'll be pushing full capacity by the end of '19.

Our next question comes from Mark Connelly of Stephens.

You've obviously been bringing a lot more of your Engineered Wood Products revenue to the bottom line. Can you talk a little bit more about the market balance that you have in LSL and the other products and also how OSB pricing swings are going to flow-through for Q1 maybe?

In the OSB pricing swings post through EWP, is that your question?

Yes, exactly, exactly. Just how well you'll be -- are we going to be seeing the prices whip around on I-Joist?

Okay. So finished product pricing in our EWP business is off a price sheet, and we are pricing that pretty much, especially in a short term, independent of swings and OSB pricing or lumber pricing. So there is margin impacts as we see lumber and OSB pricing move for our I-Joist businesses. But beginning last year, we have been able to keep pace with those increases through improved pricing for the finished products in our EWP business.

So does that mean that your supply and demand balances across your EWP businesses are a lot better than they were a year ago?

I'm not sure I get the question, Mark. Are you trying to figure out why there's such a great improvement in the business and whether it relates to the market?

Well, I mean, you're clearly passing things through more consistently and so I'm just trying to understand what -- is your supply and demand balance fixed or are you selling differently? I mean, something has changed a lot.

Mark, I -- yes. So look, definitely, our -- the pricing we got last year and we're getting this year is a result of tighter markets for our EWP product line. The increase in lumber pricing last year really helped our ability to recover pricing in LVL and EWP -- no, I'm sorry, I-Joist. So the market dynamics around pricing are favorable. And then also, we have been increasing shifting in our LVL plants. We have all -- both LVL plants are now running in full shifting, and we've been able to increase volume through our LSL plant in Houlton, Maine. So yes, the market dynamics of that industry has improved with the recovering -- with their increase in lumber prices and the recovery in single-family housing starts.

Okay, that's super helpful, especially the higher lumber thing. I hadn't thought about that.

Our next question comes from Chip Dillon of Vertical Research.

I just -- I missed one number, Sallie. Would you again reiterate what the CapEx for this year is? I know you mentioned maintenance was around $130 million. What was the growth part?

Well, in total, Chip, we're looking at $200 million to $250 million, and about $115 million is for growth projects, primarily Dawson and the third mill in Chile, and most of that actually is Dawson.

Okay. All right. That's helpful. And then you mentioned you sold 40 million board feet of OSB in the Siding segment, both -- or I'm sorry, produced that both this fourth quarter and the 2016 fourth quarter. Could you tell us what the sales volume, I guess, base wise? I know you said it went up, yet you gave us a percentage change on that. But I just didn't know if you could give us an idea of were the sales more than $40 million less because I know the volumes were up 12% over the same period.

Yes. Chip, we ran on this a couple of quarters ago, that the volumes of OSB historically that's sold in the Siding business have been so small, that the percentage increases look really large. You raised a really good point. Going forward, we will start being more explicit about the OSB in the segment, particularly because of Dawson Creek. But on a quarter-to-quarter basis, it really -- the sales and the production tend to be pretty similar.

Okay, okay. That's helpful. And then when you do put Dawson in there, starting in January, I know Brad was mentioning the ramp phase starting, I guess, in the mid-third quarter. Will -- as you ramp it, will that line still make a commodity OSB when it's not making SmartSide? Or is it 100% dedicated, and therefore, we'll see some dropoff in OSB at some point as a result of the start-up?

Chip, just let me kind of go through the time line and then answer your question directly. So we are planning to run OSB at that plant through Q3 of this year, though it is now in our SmartSide segment for reporting purposes. We will take the plant down in Q4 for 2 to 3 months to do all the conversions and bring it up early Q1 on Siding. Our plan is to run it as full as possible on Siding, but we are retaining the capability to make commodity OSB in that plant.

I was getting it mixed up with another one, I'm sorry. So it should -- there's not a long start-up curve is what you're saying. It could be, if the market is good enough, you could pretty much run it all the time on Siding, which I know that's not realistic day 1, but that's physically possible, right?

Well, yes, great question. So think about it, we're not rebuilding the green end of the plant and doing a whole lot of work on the press. So we're essentially running strand panels like we are today with OSB through it. So most of the engineering and design work goes into the back-end of the plant around conversion. So usually what limits us is more of getting the quality parameters right on Siding. Now our plan is to load that plant as much as possible early. We like the fact that it's on the West Coast so there'll be some immediate logistics savings by moving production volume out there. And then our plan would be to move OSB volume back into Hayward, which is in the North Central region of the country and it's a Siding mill. So we will try to run Dawson as much as possible in Siding throughout 2019 in order to get all the quality parameters lined out and the crews trained. And we would like to have any incremental OSB that we run due to Dawson move back into the North Central region.

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

This is actually John Babcock on the line for George. Just want to start out on OSB here. I was wondering if you -- clearly, we've heard a lot about transportation issues on the West Coast. I think you referenced that a little bit earlier. Just want to get a sense whether you're trying to see signs of improvement there or if this is something that could persist for some time?

We are seeing signs of improvement there, and we don't believe, at the end of the day, there'll be any significant impact on our Q1. We've had to build a little inventory of sold product in our warehouses as we've had issues with rail. But we're beginning to see that clean out over the last week or so.

Okay. And then also as we kind of look ahead to the year and realize you don't really provide guidance, but just want to get a sense, have you guys announced any increase in EWP or Siding pricing for the year?

I can speak to that since we are public on that. So we have announced the 6% to 8% price increase in EWP effective February 1. And then we're out with a 5% price increase announced for strand siding in March, and then a more robust price increase for our fiber product, which is less volume than we have in strand.

Okay. So how much of the volume does that increase account for?

So well, 200 million feet of fiber product at let's say, 9% and then close to 1 billion feet of strand at 5%. We won't realize 5% in strand. We negotiate that. That can get somewhat negotiated [ways] it hits the market. So I would think 2% to 3% realization for this year would be what we're really shooting for in strand.

Okay. And then the last question I just had was on the dividend and want to get a sense for what factors you're considering in setting the level of the dividend and also how you think about the sustainability, particularly should the market soften.

Let me start there and then Sallie can follow up. We -- the way I'm thinking about the dividend, obviously, we have a very healthy balance sheet right now. But we really -- my thinking is this is based on the strength of our Siding business. We see that stable earnings and stable cash flow generation as a means to reliably fund the dividend in the future. So primarily, I would hook it into -- or I'm thinking about it as evidence of our confidence and ability to sustain and grow our Siding business. But obviously, the improvement we've seen in EWP this year and the continued growth we're getting in our specialty products and OSB gives us even more confidence that the dividend is sustainable and a realistic thing for our investors to expect from us as we transition into more of a building products type company.

And then, John, as we reflected on the level of the dividend, we really look to see what the S&P 500 companies were doing and what other building product companies' yields were. And those appear to be around that 2% yield. And so we looked at last year's average share price and calculated what a 2% yield would be and came up with the $0.13 a quarter.

Our next question comes from Mark Weintraub of Buckingham Research.

First, on the Siding business, you had a very good 16% volume growth in the fourth quarter. Nice step-up from what we'd seen in the second and third quarters. And also that was against a very strong 18% prior year comp. Maybe provide a little bit more color. Was there any additional activity post the hurricanes and/or -- I mean, it sounds like a March price increase. I'm not quite sure why there would have been prebuy. But what else might have been going on in that quarter that the volumes for SmartSide had that nice pickup?

So there was no impact on hurricane that we saw. I do think the confidence in the building sector for single-family homes was strong in Q4. Activity around construction continued into the -- into December -- November-December time frame. I should mention that we do have some rebates with distributor partners that are annually based with stair steps up as they hit certain sales figures. So there was some last-minute ordering in order for some of those higher tier rebates could be effective for some of our distributor partners. So -- which would have been a little bit of pull forward, obviously. But we didn't really see a lot of that in perspective to the whole quarter sales revenue, and we're not seeing kind of any lagging of that as we move through Q1.

And Mark, one other thing to add to that about the first quarter. Last year, we allowed people to buy up to 20% of their prior year's purchases. And this year, we've decreased that number to 10%.

Yes, 110%.

Or sorry, 110%, yes.

So previously, it was 120% and now this year, it's 110%?

Right.

And you're right, Mark, with the March price increase, we've seen very little of that in December. It's really January and February where that is impactful.

Right. And I think you sort of indicated, order of magnitude, there was about 1 billion of strand siding in 2017. And it sounds like Dawson Creek really doesn't kick in mostly until 2019. How much capacity -- or assuming demand holds nice and strong, how much production potentially could you get out of your strand siding business relative to 2017 and 2018?

Plenty. We have the OSB that we're running a Hayward that could all be converted into Siding. And then our Swan Valley plant that we converted in 2015, it did not run at full capacity in 2017. So there will be no limit on our ability to sell SmartSide this year in 2018 based on capacity.

And so based on the type of housing markets that you describe, 1.3 million type starts, is it viable to anticipate 10% to 15% type of volume increases again for 2018?

Well, we speak to revenue versus volume, and we are sticking with our 12% to 14% revenue growth for 2018, the target.

Okay. Great. And I guess, just lastly, so on Dawson Creek, if I understood correctly, that's pretty much going to be making OSB this year, but it's going to be reported in your Siding business?

That is correct. We've moved it over to the segment January 1. And the reason we did that was that there are some operating cost expense that goes early into the project, and we wanted to make sure we were capturing that expense in our Siding segment rather than OSB was one of the reasons we did it. Sallie may have other things she should mention. But that was the reason for the move over, though it will be running all OSB this year while it's running.

Right. And I guess, while I certainly appreciate that, that is going to be a Siding plant and so we're sort of maybe get a sense of the type of earnings power it can generate in Siding. Will you be providing us with some sense as to the magnitude of contribution from Dawson as a lot of us kind of look at the segments differently and think about multiples for the different businesses. And I guess, it gets a little bit confused when we have a facility that's pretty much exclusively going to be making OSB this year in the Siding segment.

Yes, Mark. That's why we've added -- in the presentation, we've added the volume and the price for OSB. And we will also include information in our Qs as we go forward about that so the -- to facilitate the understanding of the impact of the Dawson Mill on the Siding segment's results. And as we did with Swan, we'll talk about the impact of the conversion costs that are expensed on the segment.

Our next question comes from Gail Glazerman of Roe Equity Research.

Just quickly on OSB pricing. It seemed that it was a bit stronger than maybe the Random print would have suggested. You kind of implied that your mix with value added was pretty flat quarter-on-quarter. So I'm just wondering, I assume that was timing. And I'm just wondering if you can give some perspective on, I guess, where current pricing might be versus the 4Q average? And if that wasn't timing, what else would have explained the performance?

Yes. Gail, as you'll recall in our conference call last quarter, we spent a lot of time talking about what happens over quarter and then the fact that we price off of Random 1 to 2 weeks behind when the random is actually printed. And we foreshadowed that, that was a negative to the third quarter and a positive to the fourth quarter and that's, in fact, what happened.

Okay. But would there be an impact in the first quarter from that perspective, I mean, based on where we are?

I don't think there was a dramatic change between the fourth quarter to the first quarter, as there was between the third quarter and the fourth quarter.

Okay. And just another kind of quick bookkeeping note. There was a fire at Peace Valley, I think, in the fourth quarter. Was there any material financial impact? And would there be any legacy impact in the first quarter?

No. We lost about 11 days of downtime due to the fire, about 20 million feet. We made up 4 million of that by running over the Christmas break in December, and then we moved some maintenance downtime that we had scheduled in January into that outage. So we'll pick up some volume in Peace Valley in January that we weren't expecting. So across the 2 quarters, the Q4 and Q1 will be minimal impact to us.

Okay. And Brad, can you give some further perspective as you think about the next Siding conversion project? Just in terms of timing, is that decision you expect to make this year? And does the tax changes impact your thought process when you think about doing something in Québec or Minnesota?

That's a great question. So let me do timing first. I see us being more -- being able to talk more about where and when next year as we get the Dawson conversion behind us and get another look at our growth rates in 2018 as well as, as I mentioned before, the mix differences because that is very important to the decision on where to put the next mill. So from an operating standpoint, I mentioned this before, but if we see growth that is more lap and trim related, that will bias us to a Val-d'Or start-up earlier because that mill has a 16-foot press. If we see the growth in more panel-like products, that would go against the Val-d'Or decision and kind of pushes into Cook. Secondly, Cook will certainly be a larger plant, as far as capacity goes, than Val-d'Or and require a longer engineering and construction phase. So we will only get started on that a little bit earlier. It would be more costly to do it there. As far as the tax change, we do look at these investments on an after-tax basis. So by definition, the lower tax rate in the U.S. have made investment options in the U.S. more competitive than they were in the past. So that will play into the decision as far as calculating the financial -- the differences in financial return between those 2 options.

Okay. If I could just squeeze in one last one. Just your outlook for housing, it's a bit more aggressive than I think you've seen in the past. I'm just wondering how confident you are in that and how worried you are about labor constraints and the potential impact of rising interest rates.

Gail, it's another good question. And I don't think we have successfully predicted housing starts in our budget cycle. For the last 3 or 4 years, we've consistently overshot it. And so I would say the current consensus is probably a little bit below what we establishes our budget number back in October, so I'd say there's a little downside to that. I don't think it will materially impact our expectations around Siding and OSB. And because I think that the weakness will be biased to multifamily if we don't hit the 1.3 million, and obviously, we're much more dependent on single family across all our different product segments. I do agree with you that the primary constraint right now is what I hear when talking to builders is labor. I do have begun to hear some success stories and addressing that, but I don't think it will be in any way resolved in 2018. And so I think if we -- as an industry, we don't hit 1.3 million starts, it won't be a demand issue for housing, but it could just be the ability of the homebuilders to actually build out many homes given the labor constraints they're facing.

Our next question comes from Steve Chercover of D.A. Davidson.

So I wanted to talk a little bit about input costs and manufacturing costs in OSB, and I think you've alluded to it by discussing the number of down days in Q4 because it was a great year. But absent price, it looks like EBITDA would have actually been down. So was it maintenance or downtime that caused it? Or are there other inflationary pressures we should be aware of?

Steve, we did have some pretty significant cost increases in 2017. We pretty much gave up everything we got back in 2016, so somewhere around $30 million. Most of that showed up in MDI, resin and waxes. So you're right, we did have some significant headwind from raw materials.

And do you think that persists this year?

Yes, we do. We do expect, in general, that we'll see raw material cost increases that are pretty similar to the same level, maybe a little -- maybe around $20 million or $25 million. We do see that in MDI being the biggest piece of that, but also PF solids and wax.

So that's over and above 2017 levels?

That is correct.

And how about wood?

Well, interestingly enough, wood actually was a net positive to us in 2017, most of that in the OSB business. But in 2018, we think OSB will be similar to where we were in 2017, maybe a little bit better. But we do expect to see some increased cost in our Siding business and also in our EWP business.

Okay. And it's late in session, so this is kind of a big picture. But in your effort to be "a building solutions company," are there any products that aren't currently in your portfolio that you'd like to enter into or maybe grow?

Yes. So the key focus for us right now is smooth siding for our Siding product. For our strand siding portfolio, that would be a major opportunity for us to put incremental volume into that business. We are in the testing phase of that product now. And so with that, we have all hands on deck on developing that product and products like that in both OSB and in Siding.

Our next question comes from Paul Quinn of Louisiana-Pacific Corporation (sic) [RBC Capital Markets].

I guess, a couple of questions. One, just investors seem to be very sensitive to any kind of OSB capacity additions or withdraws. Maybe if I try to figure out the downtime associated with the conversion of Dawson Creek, if I take that mill's capacity at 380 million and assume a 70% operating rate and take it over 3 months, I get about 65 million square feet. Is that about close to what you think you'll lose?

Yes. I would do the math 2 out of the 12 -- it will be down 2 out of the 12 months.

Okay. So maybe a little bit less. And then just on the addition side, if you could give us some color on what you're hearing. We've obviously got the Norbord mill up in Alabama and the Tolko mill up in Alberta. What are you hearing on Martco in Texas and Forex in Québec?

We are not, obviously, not seeing either one of those mills producing any product into the market that we are aware of. And so there is some type of delay against expectations for both of those mills. But I don't really have much more information probably, Paul, than you do on what's happening there.

Okay. And then just turning to, I guess, Houlton's OSB -- it made OSB in Q4. Just the contribution on an EBITDA basis in the quarter?

Well, Paul, I don't have that. I would say that a lot of the contribution probably came from the overall capacity utilization within the mill rather than something meaningfully to the bottom line. I mean, really, what caused the improvement in EWP in the quarter was the impact of the price increases sticking.

Okay. So Houlton's OSB contribution is not going to be on par with what we're seeing from Hayward on the Siding for that rate?

No, that's correct.

Okay. And the last question I had, just on South America and I like to split between OSB and Siding. But if you could give us some kind of metric to follow on the size of those 2 respective businesses, I suspect OSB [towards] Siding.

I don't know that off the top of my head. I would have guessed it is primarily OSB because all of South America -- all of Brazil is OSB.

Our next question comes from Ketan Mamtora of BMO Capital Markets.

First question, I want to come back to the next project on Siding, whatever that may be, either Cook or Val-d'Or. Can you just remind us, if you were to, let's say, decide just hypothetically that at the start of next year, you start working on it, so if it were to be Cook, can you just help us understand when that mill might start producing and then the same for Val-d'Or?

Yes. So Cook, if we get board approval next year, if we were to, then I would say Cook would be a 20 -- early 2021 start-up and Val-d'Or would be an early 2020 start-up, to be about a year's difference, plus or minus quarter.

Got it. And then -- so when the mills come up, is it fair to say that they will produce OSB for a period of time? And can you remind us, because Cook will be almost like a new mill, how much time you will have to produce OSB initially?

Great question, Ketan. So we would want to run OSB initially at either mill on a start-up to get our quality systems all lined out and get the manufacturing systems lined out. And I would like to run OSB as long as possible once we start up because I think that would take some time from a quality perspective. So playing into our decision on starting those plants up will be, what we believe, will be a sufficient time to turn OSB. I would say we would want a minimum of 6 months, we would not need a year. So somewhere between 2 to 4 quarters of running OSB would be ideal.

Got it. And then is it fair to say that the incremental supply from Dawson Creek, you will be able to -- you'll basically be maxed out by the end of 2020 or mid-2021? Is that the right way to think about it?

Well, when I say that if we go to Cook, we'll need the plant operating in 20 -- I mean, operating competently in 2022. And that's where we would look at without a mill expansion, our current system being at full capacity. I mean, obviously, Ketan, that depends on the growth rate and the product mix. But at '21, with the Dawson conversion in 2019, we feel like we'll have sufficient capacity to get us to 2021 or 2022.

Got it. And then just one other clarification. On the $300 million organic growth number that you all talked about, so is the Dawson Creek CapEx included in that or is it separate from that?

No. We think about the CapEx that we need for Dawson, for the Chilean mill that we're building now as well as possible a Cook or Val-d'Or restart being part of that $300 million. We try to separate that from the maintenance capital guidance that Sallie has given in the past.

So Dawson Creek CapEx is also in that number?

Correct.

Got it. And then just one last question. When I think about sort of M&A, from your standpoint, can you just talk, just in general terms, what is most interesting to you? You talked about from an existing product, the smooth siding but kind of OSB mills in the aspen wood basket or something, which will give you more of a presence in kind of multifamily construction, something like cross-laminated timber. Just give us some sense of what is most interesting to you.

Okay. So 2 things, you're right about one. We are -- we would be interested in OSB mills in aspen wood bases that we believe we could, in the future, convert over to Siding. That would be a key priority for us. And I'll just use an example, Ketan, of the barrier acquisition, which was small compared to our balance sheet but was a really key investment to secure our leadership in the flame-resistant OSB category. So acquisitions that would complement businesses that we know and customers that we know and markets that we understand in either structural panels, Siding or Engineered Wood would be something that we're interested in pursuing.

Got it. That's helpful. And just last question and I'll turn it over. One of your competitors in Siding is adding quite a bit of supply. Are you seeing any impact of it at all in the marketplace at the moment?

No, no impact yet.

And I think -- I was just going to say, I think most of those factories are not intended to start up until 2019.

(Operator Instructions) Our next question comes from Mark Weintraub of Buckingham Research.

I wanted to just quickly revisit the math on the capital allocation, and in particular, I think you mentioned $300 million for return of capital, of which the dividend now would presumably, at least in 1 year, represent about $75 million. And so then that would seem to suggest we've got well over $200 million, which -- would that primarily -- should we think of that as the share repurchase bucket? Because I know you mentioned -- I wasn't quite sure if you had $100 million or $150 million on the share repurchase program.

So our current authorization is $100 million, and then I would think of -- so that's $175 million that we've discussed today. And then for the remaining $125 million, we would say that's for future dividends because we plan to pay dividends forever now. And then if we -- once we execute the share repurchase, if we do, then we would go back to our board if we thought that was a wise thing to do to get further authorization.

And presumably, you will be generating free cash, particularly in the types of markets that we're seeing right now, which would lead to even meeting the various capital goals or capital investments you have. How might we think about where that free cash, which buckets they're most likely to be directed to, if that's a fair question?

Well, free cash above the $600 million, the liquidity capital and the growth capital, would be -- we would think of that as cash that should be returned to our shareholders in some form. Now in M&A, can change that, but that's more of an opportunistic opportunity for us. But as we continue to grow Siding and make the investments in the mills and we look at M&A opportunities, it's -- would be a dynamic situation that we'll talk about every quarter as we go through this. But we do -- are stating today that above the $600 million, we are looking at returning that capital back to shareholders in an effective way.

And we do have a follow-up question from Chip Dillon of Vertical Research.

I just had one more clarification. Brad, you mentioned Dawson Creek would probably bridge you to, if I heard you right, to a Cook if the market grows as you expect, of course, to where you would need capacity at Cook. But I thought Val-d'Or was tucked in there in between. Did I misunderstand that? And I know they [might] make different types of product, but could you explain that 2020 project?

Yes. So what I was attempting to explain there was just our thinking on when will we need capacity at any form next. And so -- and given our current growth, given the conversion at Dawson, we would look -- we would look at be running that new system essentially for around 2021, okay? So now I'm not making a statement on the sequence of Val-d'Or versus Cook because that's back to I want to take a look at mix as we get through this year before we start biasing our thinking to one mill or the other. Maybe the point that was confusing was at Cook, that's essentially a brownfield start-up. So the construction time for that facility would be about a year longer than a restart at Val-d'Or. So if we get into next year and we decide Cook is the best option, we're going to have to get working on it earlier than we would have to with Val-d'Or.

Makes perfect sense. And the way to really think about it is that you would pick 1 of those 2 and then as the market grows maybe mid-decade next decade, then the other or some other option might make sense. But that's left for a day long away.

Correct, Chip, exactly. It's sequential but... My apologies if I caused it.

Okay. Sonia, I think that's all the time we have for questions, so if you could please provide the replay number. Like to thank everybody for participating in our call. We're always here with any follow-up questions you may have. Thank you, and I hope you have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.