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LP Building Solutions (NYSE: LPX) First Quarter 2021 Earnings Conference Call, May 4, 2021, 11:00 AM Eastern Time
Ladies and gentlemen, thank you for your support and welcome to the Louisiana Pacific Corporation earnings release conference call for the first quarter of 2021. 【Instructions】
I now want to transfer the meeting to your presenter, Mr. Aaron Howard, Director of Investor Relations. Please go on, sir.
Aaron Howald - Director of Investor Relations
Thank you operator and good morning everyone. Thank you for joining us today to discuss LP's performance in the first quarter of 2021 and our second quarter outlook. My name is Aaron Howald and I am the Director of Investor Relations of LP. This morning, LP's CEO Brad Southern and LP's CFO Alan Haughie joined me. In addition to this conference call, we will also host a webcast at the same time, and we have also uploaded a presentation, which we will refer to in this morning’s discussion. We also submitted 8-K this morning with some additional information. All these materials can be found on LP's investor relations website www.investor.lpcorp.com.
The second and third slides of the accompanying presentation provide detailed notices regarding forward-looking statements and non-GAAP financial measures. The appendix to the presentation also contains some necessary reconciliations, and this morning’s 8-K document further supplements these reconciliations. I will not read these statements, but will refer you to these supplementary materials. Now I will transfer the call to Brad.
Brad Southern-Chairman and CEO
Thanks, Aaron. Good morning everyone, and thank you for joining us to discuss LP's first quarter 2021 performance. Driven by the continued strength in residential construction and renovation, strong customer demand for all of LP's products continued, creating an outstanding quarter for LP. SmartSide net sales increased by nearly 50% compared with the first quarter of last year, reaching 283 million U.S. dollars, and EBITDA more than doubled to 90 million U.S. dollars. Sales of Smooth and ExpertFinish more than doubled, and these innovative products accounted for 8% of SmartSide's total sales. OSB prices continued to climb throughout the first quarter, so LP's OSB division generated extraordinary cash flow. LP's South American division also had a very strong quarter, with sales increasing by 50% from the first quarter of last year and EBITDA increasing by 3 times.
As a result, LP's sales exceeded US$1 billion, generated EBITDA of US$461 million and operating cash flow of US$314 million, with earnings per share of US$3.01, all of which set a quarterly record.
Last quarter, we announced a phased comprehensive capacity expansion plan, which included converting our plant in Holton, Maine from LSL and OSB to SmartSide, and restarting our Fort St. John, British Columbia facility. Peace Valley OSB factory and plans to convert our OSB factory in Sagora, Michigan. Let me briefly introduce these projects.
Although COVID has some anticipated difficulties with travel and contractor access, Holden's conversion is still proceeding as planned. We expect to start producing SmartSide in Houlton at the end of the first quarter of next year in less than a year. We are excited about the capacity expansion of these investments represented by Holden, and also pleased with the enthusiastic response from local and regional suppliers and community stakeholders.
Given the strong demand for SmartSide, we are exploring options to accelerate the conversion of Sagola. We are also evaluating and prioritizing follow-up projects to increase production capacity by converting and/or expanding existing facilities and increasing pre-processing capabilities. As we innovate, seize share, expand addressable markets, and execute aggressive capacity expansion strategies, SmartSide has a long growth track.
The process of restoring the OSB reduction in Heping Valley is also progressing smoothly. I want to add to the small containment that has been maintained since we were idle in the summer of 2019. They keep the equipment in good condition, and we expect minimal barriers to effective restart. We are also happy for some former employees who have returned to the factory. We are very happy to welcome them back. We look forward to resuming production in the beginning of the third quarter.
Last quarter, I talked about the challenges posed by the shortage of MDI, the residential use and manufacturing of SmartSide and OSB. The availability of MDI has been significantly improved, and we have once again basically restored the normal supply level of the OSB factory using the planned MDI level. This episode highlights the strategic value of integrating Siding and OSB into the LP product portfolio. SmartSide only uses MDI, but OSB can use alternate rests. When supply is restricted, we can allocate scarce MDI from OSB to Siding. Without Siding, it would be difficult for us to achieve another outstanding quarterly growth.
Although the supply of MDI has improved, the global shortage of tape-based adhesives, an important asset, forced the production of TechShield, LP's radiation barrier sheet product, to decline in the second quarter. The supply of vinyl acetate is improving, and we expect textile production to return to normal levels by the end of this quarter.
However, as the COVID subsides in North America and broader counties rebound, huge supply chain disruptions and types of logistics availability may pose challenges for the future. We recognize that this creates difficulties for LP customers, especially in an environment where demand is so strong. We are doing everything we can to mitigate the impact of these issues through strategic sourcing and network optimization, and we are increasing SmartSide and OSB capacity as safely, efficiently and quickly as possible.
Finally, I am happy to announce that after working from home for more than a year, LP is in the initial stage of returning to our national headquarters. Although we are gratified and gratified that we are slowly returning to normal, I want to admit to most of LP's factory employees and many customers that working from home is not feasible. Although the COVID-19 vaccine is now widely used in the United States and Chile, the vaccination rates in Canada and Brazil are still lagging behind. The situation is improving, but we are not out of the predicament yet.
LP's pandemic response team and factory employees have worked continuously to help minimize the impact of COVID on operations, enabling LP to provide our customers with the products they need to build and renovate their homes.
I encourage all of them and everyone on the phone to continue to take appropriate precautions and get vaccinated as soon as possible. LP's performance in the first quarter was very good. Although challenges remain, the very strong housing in the RNR market has led to strong demand for SmartSide and OSB, making our near-term prospects extremely optimistic. With this, I will forward the call to Allen to discuss LP's financial performance in the first quarter and prospects for the second quarter in more detail.
Alan JM Haughie - Executive Vice President and Chief Financial Officer
Thanks, Brad. Slide 6 shows the summary results of this quarter. It is very similar to the fourth quarter. The continued growth of SmartSide and the increase in OSB prices are the most important driving factors. Compared with the first quarter of last year, driven by a 49% increase in SmartSide and a significant increase in OSB prices of more than US$330 million, net sales increased by 74%, which is slightly more than US$1 billion. The resulting EBITDA was US$461 million, more than five times the result last year. We generated $314 million in operating cash flow, including increased capital investment and large expenditures on logs, which was a common practice of LP in the first quarter. Adjusted earnings per share were $3.01, which was 10 times that of the first quarter of last year.
In terms of capital allocation, we paid $17 million in dividends in the first quarter and spent $122 million to repurchase 2.4 million shares. We have been continuing to repurchase stocks in the second quarter. As of yesterday's close, only 32 million US dollars were left in our existing US$300 million repurchase authorization. Under the same conditions, the remaining authorization will be used up this weekend. Therefore, I am happy to report that the board of directors of LP has authorized another $1 billion in stock repurchase, and we plan to start immediately. LP's board of directors also announced that it will pay a dividend of $0.16 per share on June 1.
Slide 7 highlights the cleanliness of the quarter from the perspective of the report. The continued growth of SmartSide and the increase in OSB prices led to an increase in revenue of US$93 million and US$333 million in this quarter, respectively. In contrast, everything else is just a rounding error. All of the $333 million in OSB incremental pricing and 55% of SmartSide's incremental revenue are converted into EBITDA, and everything else adds up to a net negative of $6 million. Slide 8 provides the latest progress in our transformation.
On the basis of the past 12 months, SmartSide revenue has grown at twice the rate of single-family housing starts. Therefore, as shown in the table to the right, SmartSide growth dominated the first quarter, achieving a $53 million or $65 million transformation during the quarter. The resident substitution mentioned by Brad earlier caused a negative efficiency of $4 million.
Given that SmartSide growth accounted for the largest share of our transformation funding this quarter, Slide 9 looks a bit deeper into this growth. The bar graph on the left is not a repetition of slide 8. The chart shows the quarterly SmartSide revenue growth relative to the start of a single household. The pie chart on the right provides more resolution for SmartSide growth. While total sales increased by 39%, sales of more innovative smooth pre-processing and shrinking products increased to 140%. As a result, their share of total sales increased from less than 5% to slightly more than 8%. The sharply increased average selling prices of these new products also contributed 1 percentage point to the overall price growth in the fourth quarter.
The waterfall chart on slides 10 and 11 shows the year-on-year growth in revenue and EBITDA in the Siding and OSB segments during the quarter. Slide 10 covers the siding. SmartSide's 49% revenue growth is the result of 39% sales growth plus 7% price growth, as well as $93 million in sales and $51 million in EBITDA. The EBITDA margin is 55%. OEE and sales and marketing efficiencies offset the increase in shipping costs and the non-recurring decrease in fiber sales, resulting in a reduction of US$20 million in revenue and a reduction of US$2 million in EBITDA. The resulting Siding division’s EBITDA was US$19 million, revenue was US$285 million, and the EBITDA margin was 32%.
Slide 11 shows OSB's current quarter in more detail, mainly due to the continuous record highs of OSB prices. Due to the reduced operating efficiency of OEE, we estimate that the impact of the scarcity of MDI and substitution of alternative resins is approximately 80 million square feet or 7% of the volume. As Brad said, the resin supply chain seems to have stabilized. Of course, we will continue to closely monitor this situation and other potential supply chain disruptions.
LP can replace OSB production with alternative resins, and therefore can strategically allocate all available MDI to Siding, which is an unexpected benefit of placing these market segments under the LP umbrella. OSB prices will certainly continue to make headlines, but OMP’s performance this quarter largely proves the agility of Siding and the OSB operations team and LP's strategic procurement team in working together to solve the MD1 shortage.
As you will see in the cash flow summary on page 14 of the attached presentation appendix, apart from cash taxes, the only meaningful difference between EBITDA and operating cash flow is a substantial increase in working capital. This is almost entirely due to the increase in the price of OSB and the result of the normal seasonal accumulation of logs as I mentioned earlier. The bridge from operating cash flow of US$314 million to net changes in cash is equally calm.
Due to repurchases, capital expenditures, dividends and payments related to refinancing, our long-term debt is the only important item. The reconciliation of net income with adjusted EBITDA and adjusted income is also very simple. Depreciation and a considerable but appropriate proportion of tax reserves are the only items I have not mentioned.
Slide 12 provides updated guidance on annual capital expenditures. As Brad said, we are exploring opportunities to accelerate the expansion of side panel production capacity. Holden’s conversion, restart of the Peace Valley, other growth capital, and continued maintenance of the foundation have combined to make our annual capital expenditure between 230 million and 250 million US dollars. In other words, we increased our tax guidance by approximately $10 million. With the extremely strong housing and repair and renovation market, driving strong demand for SmartSide and OSB, our order documents gave us some insight into the rest of the second quarter.
For the OSB market segment, prices continue to climb, so we believe that OSB revenue in the second quarter will be at least 30% higher than the first quarter. We also expect SmartSide's second quarter revenue to grow strongly again, at least 30% higher than last year, which will mark the fourth consecutive quarter of growth of more than 20%. Suppose I just introduced the Siding and OSB scenarios in detail, and gave all the common warnings about certain demand shocks or other unforeseen events, we expect EBITDA in the second quarter to be at least $580 million, and another quarter’s record performance , Which generated excellent cash flow.
Before transferring the Q&A call, I want to discuss our expectations for SmartSide's full-year revenue growth. Demand is still very strong, and we expect that for the rest of this year, our factories will continue to operate at or close to capacity. In addition, ExpertFinish, Smooth and Shakes should continue to grow as a percentage of Smartside's total sales and revenue.
However, given the acceleration of growth in the second half of last year, our year-on-year revenue growth in the second half of 2021 simply cannot exceed 10%. So everyone says that this will make SmartSide growth for the whole year approximately double our previous long-term guidance of 10% to 12% per year. With this, we are happy to answer your questions.
[Operator Instructions] Our first question comes from the cooperation between Mark Weintraub and Seaport Global. Your line has been opened.
Mark Weintraub - Seaport Global - Analyst
thank you. Congratulations. Obviously, this is a good time for you. In terms of Siding's replacement growth and some of the things you are focusing on, can you let us know what they might represent? Perhaps if we can understand the size of the quantities they can represent and the cost of identifying these will be the first signs?
Brad Southern-Chairman and CEO
Yes, Mark, I really want to talk about three areas-the three types of investments we are considering to achieve sustained growth. There is no order of priority. The first is to add additional printing capacity to the existing facilities currently producing SmartSide. We like the idea of training the workforce in the field. So those where there is enough wood supply to accommodate the significant growth. In most cases, this means at least doubling.
From a media perspective, we see it as a so-called brownfield scene. Even after Sagola, we will have Maniwaki and Peace Valley, both of which produce OSB and Aspen baskets. So these two facilities are definitely candidates for conversion. Finally, what is more like a greenfield scene, the best example is the chef, the pace of the land we own in Minnesota-like we have been in the greenfield siding factory in the past. So honestly, in my opinion, as we continue to improve our setup capabilities, some combinations of these opportunities will come into play in the next 10 years.
From a capacity point of view, what I mean is that generally speaking, it should not be too obvious. Converting an existing OSB plant may be the most effective capital use without a doubt, because obviously, a lot of redundant resources are used. Then build a brownfield facility in an existing location, and there will be no capital efficiency associated with this. Since no land is purchased, certain components of the factory do not have to be doubled. Then, obviously, more greenfield scenes will be the most expensive.
Mark Weintraub - Seaport Global - Analyst
great. Strangely, Val-d'Or is not mentioned there. Is this no longer a consideration? or...
Brad Southern-Chairman and CEO
I'm really sorry. This is my oversight, this will be a restart of the shutdown function in Val-d'Or, yes.
Mark Weintraub - Seaport Global - Analyst
Okay, super and then—just like a quick follow-up, with a 32% profit margin. In-I know-it's just that I think this is the last quarter and you have increased your expectations that the business can be promoted in the long-term. In other words-this 32% is even much higher than your long-term updated view. Any thoughts on the potential sustainability of this profit margin?
Brad Southern-Chairman and CEO
Yes. I would say that sustainability comes from a combination of improvements, and this is why we emphasize so much on the new products we have launched in the past four years, Prefinish Shakes, Smooth, I will be more valuable than our products-in our basic main product superior. As I mentioned in the conference call, if we buy Trim's hybrid products, the price will be very favorable. So this is-so we are looking at our innovation strategy as a means to increase profits, and it does. I would say that this is a restriction as we gain market share, but obviously, the huge business base we have in LAP and panels is competitive. Therefore, if this is the correct statement, we will maintain our choice in order to be competitive in the business of large builders. Our business in the family center may be more competitive from a pricing perspective.
Mark Weintraub - Seaport Global - Analyst
Great, appreciate the color, I will turn it around. thank you.
Brad Southern-Chairman and CEO
Our next question comes from the collaboration between Ketan Mamtora and BMO Capital Markets. Your line has been opened.
Ketan Mamtora - BMO Capital Markets - Analyst
thank you. Congratulations, Brad, Allen. Obviously, the start of this year is very strong. Maybe just back to Sagola, I mean you are talking about some kind of timetable for advancement. Last quarter, you talked about the possible launch in the third quarter of 2023, but it sounds like it was earlier. I'm just curious, because you let Holden continue now. Obviously, if demand remains strong, when will you be able to retrofit the plant at the earliest?
Brad Southern-Chairman and CEO
Ketan, I want to say that the earliest we can get production from this plant may be one year after Holden started, which is the first quarter of 2023. When we continue to carry out engineering design, I will have a little freedom in this. But obviously, we are on a parallel path, focusing first on Holden, but we intend to bring this-considering the work before us, to convert the facility as soon as possible instead of deciding to convert first .
So let us-we don’t aim for the first quarter of 2023, and then we will continue to update you on the phone notification is to move forward one quarter or backward one quarter or two, given, a, we need to start from a demand Perspective, but also as we improve our engineering work on Sagola.
Ketan Mamtora - BMO Capital Markets - Analyst
understood. This is very helpful. Then maybe you talked about the still strong demand for OSB and Siding. Maybe talk about the backlog of orders between OSB and Siding at this time of year?
Brad Southern-Chairman and CEO
Yes. Through the EWP there, they are very strong in both products. -I mean-it was unprecedentedly strong, but it was always strong in the second quarter. So I mean, that is-the seasonality has already begun. But the order documents for any of our three have not weakened. Well, I will throw out South America, there is also there-any of our core business, but a very strong order got it.
Ketan Mamtora - BMO Capital Markets - Analyst
understood. Then there is the last question about capital allocation. The balance sheet is in a very favorable position. Cash in the second quarter will also be very strong. You-Allen just mentioned that after getting a $1 billion authorization, you announced your plan to launch this week. What is the correct way to think about the rhythm of stock repurchase? I'm not asking about some specific quarterly guidance. But, given a strong balance sheet, what is the correct way to consider the leverage of LP and the way you consider using cash for repurchase?
Brad Southern-Chairman and CEO
So Ketan, as you mentioned, our balance sheet is very strong. After we execute this stock repurchase authorization, our balance sheet will be very strong. So there is-in our opinion, in my opinion, in particular, from the perspective of cash generation, we will not risk this $1 billion risk at all, which of course is feasible. We will remind you that this is an authorization, not a plan to spend it. So if things slow down later this year or next year, we have some flexibility. But it is clear that our plan is to deploy the authorization quickly to begin deployment quickly.
The rationale behind stock repurchase as a capital allocation tool, even at a stock price of $70? I don't know if we were there at that moment. I didn't have it in front of me, but we were at the beginning of the call. I still think, I think Allen agrees with this, and of course our board of directors, we still think we are seriously underestimated. So we think there is a good reason.
Repurchase stocks with that note, not just because we have money. Therefore, the reason behind us and because this is still a good investment for our shareholders to adopt an active stock repurchase mentality in LP, and then I will assure our shareholders that we will be cautious about this and deploy in a reasonable manner Taking into account the economic reality at the time. But then again, I think I am very optimistic about housing, maintenance and renovation and LP in the next four quarters. So we expect to spend this money next-I don't want to set a time frame, but we plan to start using the authorization immediately, from a dollar point of view, we may repurchase the stock at our rate in the past year I've been doing this all the time around.
Ketan Mamtora - BMO Capital Markets - Analyst
understood. Very helpful. Good luck in the second half of the year, Brad.
Brad Southern-Chairman and CEO
Your next question comes from John Babcock of Bank of America. Your line has been opened.
John Babcock-Bank of America-Analyst
Hi. Good morning, thank you for asking my question. I think it's just beginning, and I want to know if you can just talk about it. I mean, obviously, as you have seen the huge growth of SmartSide. Wait, if you can talk about how it affects your brand's visibility and the ability to develop from it. I mean, it’s clear that over time, you can gain greater scale and have more market share as you grow, but I want to understand how this ultimately helps compound growth to a certain extent, if this is Current words.
Brad Southern-Chairman and CEO
John, this is interesting. When you asked this question, I wrote it as not compound, and then you said the word before me. But this must be the brand equity and brand credibility that accompanies scale, and it accompanies—perhaps call it a broad scale, that is, penetration in several different types of markets. Our retail position among brands, consumers and DIY. That is-we take this very seriously. We value our position on retail websites, where many businesses are serving large retailers.
Repairs and renovations are-for residential projects, usually projects sold in caves. Therefore, consumer brands and contractors can vividly educate and persuade consumers to use SmartSide as a way to build brand reputation on the kitchen table. Finally, as we expand with the builders, this really allows us to enter the stagnant side of the contractor base. So-then we can continue with other examples, but-as a brand with extensive exposure opportunities, I believe that it does provide a compounding effect.
The most important thing is our ability to export finished products and enter the market for pre-processed noodles. This is to some extent a re-segmentation. When I really bring aesthetic appeal to the brand, it surpasses contractors or consumers. At that time, it is only a main product.
So this is the result of our past investment in marketing and sales. We have discussed in many such calls. We will continue to really pay attention to this and make sure that we support the brand in a way that ensures future growth. I also hope that One more thing we have learned from our COVID experience is that you can do this effectively. I think our contractors are more willing to receive online education about branding and installation. Consumers certainly do.
Then again, large retailers really educate the public on how to start purchasing construction products online. So we are really paying attention there. I am very satisfied with the progress we have made so far.
John Babcock-Bank of America-Analyst
OK. thanks. Then I did notice a considerable increase in SmartSide pricing this quarter. Can you [illegible] what the price increase is-or the price increase that the product has announced?
Brad Southern-Chairman and CEO
Yes. We announced an overall increase of 4% to 6% in all regions. It varies by region and by SKU, but overall it is 4% to 6%. We have-we now realize that it could be 3% to 4% overall, and then the portfolio changes are very positive, adding about another percentage in terms of non-pricing. So I will say it is, but we may have achieved a stronger price realization on the rising back end than in previous years, but this is only the strength of demand now that can be maintained-allowing us to retain some of the increased pricing at the beginning of the year.
So I will-from a modeling perspective, I will say that if you continue our current state and give us a little room for mixing, it will be a good way to look at our growth for the rest of the year In terms of price realization.
John Babcock-Bank of America-Analyst
This is very useful. Then in terms of the overall demand for Siding and OSP, can you remind me when it is trending towards a seasonal peak? I think it's sometime in the summer, but what is the typical seasonal pattern here?
Brad Southern-Chairman and CEO
Yes, John, really-based on my experience here, for most of my time, I have been in it, there is a little bit in the OSB, really, September, October, historically, Siding has been very good. I think the same is true for OSB because people go into winter and try to find some jobs and get siding or [unrecognizable]. So we usually see very good seasonal demand now. If the demand is stable, the construction speed in summer is constant. Then we usually see a slight increase in demand in September and October because people try to mention trying-I think people are trying to get some work done before the winter weather arrives.
So we are definitely in a very good time and season in history, and we expect to see very strong order documents before at least October. However, in view of the insufficient inventory of OSB, Siding and EWP in the current channels, I expect that even in winter, we will see quite good order documents, because distributors and distributors will take this opportunity to rebuild some of the inventory, they are studying what we expect Next year will also be a strong construction season.
John Babcock-Bank of America-Analyst
This is very helpful. Then there is the last question before I turn over. The results in South America are clearly quite strong. At this point, I would like to know if you can talk about the sustainability of this EBITDA level.
Brad Southern-Chairman and CEO
Yes. From a quantitative point of view, I feel very good about sustainability. We are doing something - in terms of scale, this is not a big sum of money, but we are making some major factory improvements there, just from all the additional capital expenditures we allocate there in the next few years. So I see that the capacity of South America will increase significantly in the next 18 months or so. We have seen very good market growth-market size growth there. Some of this is due to a good economy, especially in Chile, but our expansion into Argentina, Peru, and Colombia did help. Therefore, the market is slightly diversified.
Look, there is also a pricing part. I mean, it is. There is no direct contact with North America. However, when the situation in North America is as tense as it is now, the pressure on imports from South America will weaken, and this environment will provide us with more pricing advantages. So-we also see an improvement in prices there.
Historically, we have been able to retain this. But it is difficult for me to predict that this will be true in the future. But we have seen good price appreciation and very good sales.
John Babcock-Bank of America-Analyst
Our next question comes from Sean Steuart of TD Securities. Your line has been opened.
Sean Steuart-TD Securities-Analyst
thank you. Good morning. several questions. Ellen, I want to know if you can talk to SG&A. Given the strength of the top line, it is controlled to a surprising degree relative to our expectations. Can you tell us about the SG&A trends this quarter and the background of future sustainability at these levels?
Alan JM Haughie - Executive Vice President and Chief Financial Officer
Yes, of course. One thing to remember is that at this time last year, we significantly reduced SG&A when we entered the COVID environment. If you want, this will bring us new strength. So-of course, because we have increased unnecessary expenditures in sales and marketing. We don't necessarily replicate costs in exactly the same way. So we have some unexpected and implicit efficiencies that you might call.
As we continue to move forward for the rest of the year, we hope to increase our sales and marketing expenses, especially within Siding. And-but to put it in context, this has been incorporated into the second quarter guidance we gave you. Therefore, as we continue to invest in the Siding business in the future, SG&A will increase. But this is indeed the only fundamental change you will see. so...
Sean Steuart-TD Securities-Analyst
OK. Understood. On EWP, you indicated last quarter that you are conducting a strategic review of your business. Can you provide us with the latest information (if any) on how this process has evolved in the last quarter?
Brad Southern-Chairman and CEO
It has developed and I am satisfied with the progress and response. We have developed a considerable interest in this business. There is nothing to share today. We are only in the exploratory stage, as far as our process is concerned-we have already started and have some very interesting discussions about the future of the business. We focus on business continuity, because normally, we think what will happen as the acquirer will inherit our distribution base. It is the distribution base of our Siding, to a large extent, it is the distribution base of Structural Solutions.
Therefore, continuity is very important to us. This is part-one of the components of exiting the business, which of course is a factor that we are discussing with related parties. Good progress this quarter, we will continue to report if possible.
Sean Steuart-TD Securities-Analyst
Understood. This is all I have. The rest of my questions have been answered. Thank you so much.
Our next question comes from Kurt Yinger and DA Davidson. Your line has been opened.
Kurt Inge - DA Davidson - Analyst
Yes. Good morning everybody. Thank you for answering my question. I just want to start with Saidin's competitive dynamics. I mean, in terms of your ability to get shares here last year, what do you think are the most influential things? When we look to the next few years, I mean, are these factors different? Or what do you think is on the priority list?
Brad Southern-Chairman and CEO
OK. So looking back at the market share growth in the past 12 months or so, as we mentioned before, our position in the retail industry is very beneficial to us. We have seen incredible growth there and warehouse lows in the north. Well, the North did not report the low points and warehouse growth they saw. So our position there is really good. In addition, our shed business, another large panel consumer, rebounded very strongly. Then, I want to say that overall, the strength of real estate is also very beneficial to us, and I believe that we have also gained some market share growth there. But greater market share growth comes from our position in retail and sheds.
However, looking forward to the future, our launch is smooth, and the pre-completion is of course focused on increasing market share as well as repairs and renovations. Although there is-we do have a geographical advantage there, but we do not have broad national strength in terms of standards and transformations. So there are many opportunities in front of us to grow in the field of maintenance and renovation, which is the reason behind the innovation. Then there is another key area of ours, or we think we currently have insufficient penetration of large national builders. We launched a product this year to help us solve this problem and other related sales and marketing strategies followed, and then.
So I thought-let me back up from that specific answer. Just to say, I think one of the advantages of our Siding business is the diversity of our sales channels and the strength and diversity of our product portfolio. We just-because of our position in the panel, we don't just rely on the growing laboratory siding. We don't just rely on a panel because of our position in Trim.
Then, as we add products such as Prefinish and Shakes, which expand and diversify the product portfolio, we can take advantage of the opportunities that arise in these different market segments. This is indeed of historical significance-the long-term historical strength of the portfolio, and I think it will serve us as we expand it and further expand market penetration in this good market environment.
Kurt Inge - DA Davidson - Analyst
understood. This is a very useful color. Then I thought, my second, when you talk about the possibility of accelerating the conversion of Sagola, if we see that the OSB market remains strong, it is not necessarily what it is today, but they are still strong. How do you consider the type of OSB capacity that Sagola might lose from backfilling?
Brad Southern-Chairman and CEO
Well, Kurt just reminds you that we believe that part of the reason for restarting Peace Valley is our comprehensive approach to the capacity expansion of these two businesses. So we feel that we are solving this problem, especially for customers in the central and western regions of the country that we can visit from Peace Valley, so according to Pace Valley’s launch plan later this year or the second half of this year, we hope that when we start to close Sagola To get the facility fully up and running. So this is our real way to solve it by launching through Peace Valley, and then continuously improving OEE throughout our entire OSB network.
But we are really focused on the growth of Saidin. In terms of doing so, Sagola is the next great idea before us. Therefore, we are very focused on getting the plant up and running as soon as possible, and our expectation is that our OSB market share will be protected by Pace Valley's start-up.
Kurt Inge - DA Davidson - Analyst
understood. OK. make sense. Well, I wish you good luck in the second quarter.
Brad Southern-Chairman and CEO
Our next question comes from the line between Mark Connelly and Stephens Inc. Your line has been opened.
John Rider - Stephens Inc. - Analyst
Hi. Good morning. This is Mark's John Ryder. So the first question is, when you see this period of tight supply of OSB, has it changed your idea of how OSB inventory should be managed, whether it is on your side or between you and the distributor? Has the working capital here become too poor?
Brad Southern-Chairman and CEO
There is no upper limit-there is no doubt that working capital has become very scarce, and people may argue that it is too scarce. If we—if we, as our channel partners, can foresee a rebound in product demand in May, June and July last year, obviously, we will not take the factory downtime we have already taken. And I don’t think our dealer partners will reduce inventory.
So I don’t know whether we will consider-whether this will change the way the industry looks at inventory management, because I think we are all working hard to rebuild inventory to a certain normal level. But there is evidence that our cautious attitude towards cash generation at the end of last spring or early spring of last year did make it difficult for us to keep up with demand. So I think this is more of an anomaly than a long-term change and philosophy surrounding working capital.
John Rider - Stephens Inc. - Analyst
Okay, okay. This is really helpful. Then we hope you can talk more about your ESG plan. We are seeing more and more stringent reviews of environmental claims, especially now in Europe, do you clearly have a good sustainability story? We are curious what ESG goals you set for Siding's OSB? What do you think of your performance in the field of construction materials?
Brad Southern-Chairman and CEO
Well, let me first say that considering the sustainability of our footprint, our timber procurement thinking or strategy, I think our combination is very good. We are now working hard to set some other types of ESG and environmental goals. We are now in data collection mode because it is clear that this will be a data-driven exercise for us. We focus on it. We have reconfigured a board committee for board oversight on this, and are looking at and participating, and then set high expectations for advanced comparisons. Therefore, we will set specific targets around other ESG parameters later this year, not just wood procurement sustainability.
I will mention that from a conceptual point of view, I think we have a very good story. When you nailed nails on the side of the house to get the 50-year warranty, or when you were laying the base of the house, you nailed a carbon plate to the house. So we-I believe we will have a very good story, and-but we want to make sure that the data we report is accurate, the goals we say are reasonable, we can do something and deliver, but the work is in progress. If you give us another quarter or two, we will have a heated discussion on this before the end of the year.
John Rider - Stephens Inc. - Analyst
Our next question comes from the collaboration between Paul Quinn and RBC Capital Markets.
Paul Quinn-Royal Bank of Canada Capital Markets-Analyst
Yes. Thank you so much. Good morning, guys.
Brad Southern-Chairman and CEO
Paul Quinn-Royal Bank of Canada Capital Markets-Analyst
Hi. Wow, it was a quarter, but it looked stronger in the second quarter. Maybe just start the SmartSide business. Just want to know if your order documents are so strong that you might raise prices for the second time in 21 years? Or is this something you don't want to do, and you really want to gain market share?
Brad Southern-Chairman and CEO
Well, the pricing advantage of products nowadays is great. So I mean, price increases are something we have been considering. We will be clear. There are multiple ways to do this, one of which hinted earlier that the issue of price realization is dealing with its back-end rebate portion.
So we-I would say we are using strength-now demand strength to manage prices, I think, appropriate. But we must be competitive. Although there may be short-term pricing opportunities at the end of the day, in most cases, we end up bidding with competitive substrates. So we maintain a competitive position, even when demand is tight, it is something we pay attention to, especially with builders. These agreements are at least multiple quarters, if not years. Therefore, we focus on maintaining a competitive price position because we focus on gaining market share.
I know I am a bit two-sided in this answer, because we will also take advantage of the opportunity where we can get the price, we can get it, but we will not do it stupidly, we want to ensure that we maintain a competitive position in our distribution Merchants and distributor partners can also be competitive. So this is a balancing act, I think, is the correct way to answer it, this is what we really manage every day.
Paul Quinn-Royal Bank of Canada Capital Markets-Analyst
OK. This is fair. Then the marginal improvement of SmartSide is impressive. Is this only related to the higher percentage of Prefinish? Or is this also the cost reduction of this market segment?
Brad Southern-Chairman and CEO
Yes. Both are. We have-we run-now the facility is full, and the operating leverage of OSB from Siding is very strong. So Paul, in terms of profit, for the last one million feet of product, we sold Saidin's product with a very high profit. Therefore, when you are sold out and operating at full capacity, the profitability of the factory is indeed surprising. So it-price increases certainly help, but overall operational efficiency is the key.
Paul Quinn-Royal Bank of Canada Capital Markets-Analyst
Then on OSB, Peace Valley was launched in the second half of this year. Maybe you can tell us what quantity you hope to be able to ship to the market in 21 years? Will this be a slow start or a faster start? Finally, if you can provide us with the latest information about Entekra.
Brad Southern-Chairman and CEO
Yes. So we saw about 150 million feet in the third quarter-oh, I'm sorry, because-all the time of 21 years in Perth Valley. Therefore, in the second half of this year, 150 million feet. Then there is Entekra. We continue to be very satisfied with Entekra's order documents. We are validating the model until the ever-increasing order documents are obtained through the facility. I think the challenge we face is there. I would say that this is part of our business, and when we launched the facility, labor availability increased-facing more challenges in our more mature facilities, maintaining labor is what I mean.
Then from a profit point of view, the business is challenged by rising timber prices. The agreement with the builders has a lag in the delivery of timber pricing, which has already-this obviously hurts us. But market verification, Paul, is very reliable for Entekra. We are still studying how to meet the order documents because it has been rising and the way it is so positive, and then we are also trying to figure out how to properly price the product as wood pricing in this highly volatile period. But I am encouraged by what we are doing strategically there. But we still-it's still a start-up. Definitely.
Paul Quinn-Royal Bank of Canada Capital Markets-Analyst
And no more direct capital requirements?
Brad Southern-Chairman and CEO
No. We have made some small working capital preparations for them, but yes, no direct capital has any meaning.
Paul Quinn-Royal Bank of Canada Capital Markets-Analyst
Brad Southern-Chairman and CEO
Paul Quinn-Royal Bank of Canada Capital Markets-Analyst
Thank you very much, Brad. Thank you so much.
Brad Southern-Chairman and CEO
Our next question comes from the collaboration between Mark Wilde and Bank of Montreal. Your line has been opened.
Mark Wilde - Bank of Montreal - Analyst
Good morning, Brad. Good morning, Allen.
Brad Southern-Chairman and CEO
Mark Wilde - Bank of Montreal - Analyst
Brad, I’m curious, if you consider the overall OSB market now, if we see that housing starts continue to rise, let’s say our starts reached 2 million. So is it capable of providing services for two million startups?
Brad Southern-Chairman and CEO
no. After the opening of Peace and Chambord, the production capacity is about 1.6 million, 1.7 million. So we are considering-yes. Well, think of it this way, Mark, in 2007 and 2006, this industry served the housing market with 2 million start-ups. We closed, and did not start backing up two or three facilities, and converted three or so facilities to Siding. Then, if you look at all the plans that have been permanently closed since then, there is no offset in the green space to get us back to that level. Therefore, the industry has more of 1.5 million, 1.6 million, and 1.7 million, of which Peristalsis takes advantage of Peristalsis. So it may be nervous for a while.
Mark Wilde - Bank of Montreal - Analyst
OK. Remind me, what is 100,000 starts, such as 1.5 billion square feet?
Aaron Howald - Director of Investor Relations
Yes, Mark, this is Aaron Howard. The two rules of thumb to remember are about 100,000 starts, which consumes about 1 billion feet of OSB. And you must adjust for single-family family combinations. Therefore, the OSB and siding consumption of single-family startup is 3 times that of multi-family startup. So the market we are now in is more than 70% of single-family houses. You want to adjust slightly upwards by 1 billion feet per 100,000 starting points to solve this problem.
Mark Wilde - Bank of Montreal - Analyst
OK. Then, Brad, I'm just curious, I mean, we are far beyond anything we've seen in terms of lumber and OSB pricing. Do you feel that in any area of the market, do you think that some demand construction or demand delays are happening now?
Brad Southern-Chairman and CEO
Well, yes, request an extension, yes, I think there is-I mean I know someone who wants to build a deck. He will not build decks until the vote price of timber drops. Again, I especially know that one person has postponed this work. But I do think that from an affordability point of view, there are problems with our projects and even some housing starts. I think that from an availability point of view, some housing starts may be delayed.
I currently don't believe in online demand destruction. Yes. You know the export panel export, which is a bit more than in the past. But most other local markets are very strong. Of course we have seen this in South America, and I believe the same is true in Europe. So I didn't-what we haven't hit is any kind of alternative threat. But I think we must be realistic. I think there may be some delays due to affordability or lack of immediate supply.
Mark Wilde - Bank of Montreal - Analyst
OK. OK. It is the last one for me. I just-I think a quarter or two ago, you mentioned that you were trying to make some downstream products, like I think Siding products in the Latin American business. Just any update regarding the adoption of such products in the Latin American market. I know that changing architectural preferences and changing building codes is not an easy task.
Brad Southern-Chairman and CEO
Yes. So let me-we are actively working on this in Brazil, where it is more difficult, and Chilean building codes have adapted. So we think this is not a limiting factor in Chile and Argentina. But in Brazil, of course it can be explained very quickly that it is highly localized in Brazil. So you can't like to make a macro change in architecture. Making macro changes is more difficult. Therefore, you end up having to work on an almost project-by-project basis. What we will consider changing the code is what is needed there. So we have a team doing this, and it succeeded, but it was very slow.
In Chile, as far as conversion is concerned, building codes are not a problem. So-but our focus there is to really grow our SmartSide business. Since we have been subject to capacity constraints in the past, and OSB’s profit margins have been very good throughout history, we really don’t have an EBITDA incentive for growth, but as we increase our printing capacity there, this provides us with some opportunities. Expand investment portfolio. Although we have been-since the launch of [Indecipherable] 20 years ago, we have been selling side panels there.
It is really not a focus area. This will be in the future, because as our market share in the sheet metal market grows, we are overcoming some of the limitations there. We believe that siding is the next truly good growth platform for South American cars, where the growth achieved may be more with market growth than market share growth.
Mark Wilde - Bank of Montreal - Analyst
OK. That [unrecognizable] Thanks, Brad.
Brad Southern-Chairman and CEO
Yes. I am encouraged by our chances there, especially the other one — just put aside at that time, our penetration rates in Argentina, Peru and Colombia are very low, and these places — indeed have — do use wooden structures. Therefore, our strategy also has geographical growth factors there.
Mark Wilde - Bank of Montreal - Analyst
Our next question comes from the collaboration between Mark Weintraub and Seaport Global. Your line has been opened.
Mark Weintraub - Seaport Global - Analyst
thank you. One is just a quick follow-up. Our current OSB pricing has a very incredible geographic change [Indecipherable], at least a few areas in Western Canada are $1,600, $1,200 and more, and some areas are in the $1,000 type area. Any ideas on why there are these huge spreads and any impact?
Aaron Howald - Director of Investor Relations
Yes. Mark, this is Aaron. As you know in a more typical period, when you see regional spreads start to widen, OSB is shipped across the African continent to deal with these arbitrage opportunities, and this happens when there is wood available. The demand in almost every market that consumes OSB is so strong that there is not so much in fact—there is not enough wood available to solve this problem.
So in a more normal time, if we see the price, the price in each region is different, you will see a wave of oriented strand board moving westward to meet these markets. The only possible way now is to starve in the southeast. So it's just-unlikely now.
Mark Weintraub - Seaport Global - Analyst
So why-then why won't prices in areas such as the Southeast not rise, and why won't they quickly reach the price of $1,600 in Western Canada?
Aaron Howald - Director of Investor Relations
Well, they will usually be in an environment where the timber leaves the southeast to meet the west-west coast demand, which will create scarcity in the southeast, and these prices will tend to balance. However, this phenomenon is unlikely to occur in an environment where there are too few available products for no additional shipments.
Mark Weintraub - Seaport Global - Analyst
This is all outsourced.
Aaron Howald - Director of Investor Relations
Brad Southern-Chairman and CEO
Aaron Howald - Director of Investor Relations
Now another part of the problem, Mark, is that-there are-products are so scarce that they-open market transactions themselves are less common, which means less data to report, which means that which further reduces arbitrage is identified and Opportunities reflected in the price.
Mark Weintraub - Seaport Global - Analyst
Aaron Howald - Director of Investor Relations
Yes. Okay, there are no more questions, our meeting is over here. Yes. There are no further questions, we stop here. Thank you for joining us to discuss the results of the first quarter of 2021. We look forward to talking with you soon. I wish everyone a good day and stay safe.
Aaron Howald - Director of Investor Relations
Brad Southern-Chairman and CEO
Alan JM Haughie - Executive Vice President and Chief Financial Officer
Mark Weintraub - Seaport Global - Analyst
Ketan Mamtora - BMO Capital Markets - Analyst
John Babcock-Bank of America-Analyst
Sean Steuart-TD Securities-Analyst
Kurt Inge - DA Davidson - Analyst
John Rider - Stephens Inc. - Analyst
Paul Quinn-Royal Bank of Canada Capital Markets-Analyst
Mark Wilde - Bank of Montreal - Analyst
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