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Louisiana-Pacific Corp  (NYSE:LPX)
Q4 2018 Earnings Conference Call
Feb. 13, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2018 Louisiana-Pacific Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will have a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference will be recorded for replay purposes.

It is now my pleasure to turn the conference over to Mr. Mike Kinney, Director of Investor Relations. Please proceed, sir.

Mike Kinney -- Director of Investor Relations

Thank you, Haley, and good morning, everybody. Thank you for joining our conference call today to discuss LP's financial results for the fourth quarter of 2018 and the full year. I'm Mike Kinney, Director of Investor Relations and Treasurer, and I'm joined today by Brad Southern, LP's Chief Executive Officer and Alan Haughie, LP's Chief Financial Officer. As we've done in the past, we've opened up this call to the public via 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. We will be referencing these slides in our comments this morning. Also, we have filed an 8-K this morning with some supplemental information and the presentation.

I do want to remind 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 Form 8-K filing we filed this morning provides the necessary reconciliations. Rather than reading these two statements, I would incorporate them with this reference.

Now, let me turn the call over to Brad.

Brad Southern -- Chief Executive Officer

Thanks, Mike, and thank you all for joining us this morning. I'll begin today's call with a few highlights from the fourth quarter and 2018, provide a strategic update, review our top priorities and provide our view on the current market environment.

Before I go further, I would like to take a moment to acknowledge two additions to the LP team. The first is our newly appointed Chief Financial Officer, Alan Haughie, who brings more than 25 years of financial expertise and significant strategic planning leadership experience to LP. We are excited to have him on board as we continue to executing on our strategic transformation into a leading building solutions provider.

Following my remarks, Alan will take you through our financial results in more detail and our capital allocation strategy followed by the question-and-answer session. As Mike noted, we are providing an expanded earnings presentation this morning which Alan and I will be referencing throughout the call. We hope you find this to be a helpful addition to our regular earnings materials and, of course, we welcome your feedback.

The second addition to our team, as we announced this morning, is Steve Macadam. Steve has joined our Board of Directors. He is the President and CEO of EnPro Industries, a diversified manufacturer of proprietary engineered products using critical applications including sealing technologies, metal polymers, and filament wound bearings. He brings to LP more than 25 years of leadership and operational experience. He has a proven track record of profitably growing businesses in the U.S. and globally, and a deep understanding of industrial products manufacturing, product distribution, procurement and team building. I know that Steve will be a valuable addition to our Board and I look forward to benefiting from his advice and expertise. We welcome both Alan and Steve to the team.

The feedback of all our shareholders is important to our management team and the Board as we transform our business. Over the past several months, we engaged in productive discussions with the D. E. Shaw Group regarding our strategy, capital allocation priorities and Board composition. We were in the process of reviewing our capital allocation policy at the time and had a constructive dialog with D. E. Shaw about how to construct and execute a strategy that would generate the most impact for our shareholders. We appreciate the support of D. E. Shaw and look forward to their continued engagement as a shareholder.

Turning now to Slide 5. Our full year performance was strong and reflected the changes we are making at LP. We are committed to delivering 12% to 14% growth in Smart Side Strand and to increasing volumes of value-added OSB. I'm pleased to report that we've delivered on both commitments with Smart Side Strand growth of 12% for the full year and 10% in the fourth quarter, and full year value-added volume up to 38% of our overall mix in OSB. For the fourth quarter, siding performance was impacted by a number of headwinds, which Alan will discuss in further detail.

We remain confident in our long-term 12% to 14% Smart Side growth target. From a product development front in siding, we are excited to note that we have begun to take orders for our new Smart Side smooth strand product, which will be officially rolled out at the international builder show later this month.

We are encouraged by the opening order volumes we are seeing and we will begin shipping product later in the quarter. Dawson Creek conversion remains on time and on budget. This project is an important element in our strategy to increase siding manufacturing capacity to support sales growth. In OSB, our full year performance was solid. However, commodity pricing pressures impacted results for the fourth quarter. Weaker-than-expected single-family starts contributed to higher-channel inventories during the quarter. This dynamic resulted in a soft order file and more market downtime as we adjusted production planning to match demand.

OSB pricing reached to low point in December, but more recently has recovered in the South as demand has improved. Despite the volume and pricing headwinds in the fourth quarter, we are very encouraged by the continuing traction that we're seeing from our value-add OSB products. Our diverse value-add OSB portfolio drove incremental margin and outperformed housing start growth. Value-add margins, which generally show greater resilience in declining markets, performed comparably well as the market slowed. The reliability-focused operational improvements drove an increase in OEE, our operating efficiency measure for OSB, to 84%, which is a 4% increase from 2017.

Our EWP results for the quarter were impacted by slow demand driven by weakened housing starts. While not a highlight, we consider our performance in EWP to be in line with the industry. Finally, LP South America had a record year achieving $40 million of EBITDA for the year.

Moving to Slide 6. LP is transforming from a commodity producer to a more stable cash generative business by significantly improving our revenue and EBITDA mix. We remain focused on further improving our business by growing the siding segment and reducing costs across all businesses. Our cost reduction initiatives are focused on three areas: increasing the efficiency of our mills by improving productivity, run time and quality through our OEE initiative; applying best practices to our supply chain including procurement, logistics and working capital across $1.1 billion of addressable spend; and optimizing our infrastructure costs.

Another important component of our transformation strategy is our shareholder value-focused approach to capital allocation. In that regard, this morning we announced a $600 million share repurchase authorization with the first $400 million to be purchased through an accelerated share repurchase program. We also announced a 4% increase in our quarterly dividend.

Going forward over time, we anticipate returning share -- to shareholders at least 50% of operating cash flow in excess of capital spending required to sustain our core business and grow siding and value-added OSB. The long-term capital return program underscores the Board's confidence in LP strategy and long-term growth prospects and highlights our commitment to delivering increasing returns to our shareholders.

Turning now to Slide 7. We believe LP stock price does not reflect the fundamental value of our businesses and the share repurchases announced today allow us to do something about that. While our current valuation might be appropriate if we were a pure-play OSB company, it does not properly reflect the value inherent in our growing and profitable siding and other value-added businesses, nor the other value initiatives outlined on Slide 6 and 7.

While we hope our announcements today will improve our valuation, we look forward to capitalizing on the current discounted stock price via share repurchases for the benefit of our long-term shareholders. Alan will provide some further detail on our capital allocation strategy and capital structure priorities later in the call.

Before I turn the call over to Alan, I want to take a few moments to discuss our view on housing. According to the fourth quarter Residential Economic Report published by Hanley Wood, the US housing market continues to be significantly under-supplied with high levels of pent-up demand in the lower price ranges. Demographic trends remain favorable, as millennials enter the housing market. Offsetting these positives, rising mortgage rates and inflationary pressures in construction are reducing affordability.

In summary, we are executing on a range of strategic, operational and financial initiatives to accelerate our transformation into a leading building solutions company. We are optimizing our capital structure to position LP to deliver greater returns to shareholders through the cycle. While we have more work to do, I am encouraged by the progress we made in 2018.

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

Alan Haughie -- Chief Financial Officer

Thanks, Brad. First, I want to thank both Brad and the Board for the opportunity to join LP at this time. I'm very excited to be part of the transformation that is under way here. I'll begin my discussion with a review of the financial results for the fourth quarter of 2018. I'll then discuss the performance of the individual segments, our capital allocation plans and our guidance heading into 2019. Throughout my prepared remarks, I will be referencing specific pages of our earnings presentation, which was posted on our Investor Relations website and filed in an 8-K this morning.

Moving to Slide 9 for a discussion of the fourth quarter performance and the full year 2018. We reported net sales of $589 million for the fourth quarter of 2018, a decrease of $122 million from the prior year. $95 million of the drop is directly tied to lower OSB prices and the further $16 million to lower OSB volumes, the vast majority of which are reflected in the OSB segment. A generally soft fourth quarter market reduced EWP sales by $16 million in the quarter. However, despite similar headwinds, siding sales increased by $8 million, boosted by a 10% increase in SmartSide Strand revenue. Gross profit in the fourth quarter also fell by $122 million from the prior year, with the $95 million of OSB price reduction flowing directly through. The remaining $25 million of reduced gross margin comprises lower volumes in OSB and EWP, the impact of downtime plus inventory valuations and increased raw material costs across the business.

Selling and administrative costs in the fourth quarter increased by $11 million from the prior year with the largest single driver being increased sales and marketing spend to support future growth in siding. We did record a fixed asset impairment charge of $11 million in the quarter relating to a previously idled facility. Other operating charges include $5 million of severance related to reorganizations within our corporate offices and $5 million related to property damage sustained by our Wilmington, South Carolina facility during the Hurricane Florence.

Non-operating income of $1 million in the fourth quarter is $9 million better than the prior year, due to lower pension charges and foreign currency impact. As a result, net income was $17 million or $0.12 per diluted share compared to net income of $131 million or $0.89 per diluted share in the fourth quarter of 2017. For the year, revenue increased $94 million over 2017, $79 million of which is due to the 12% growth in strand siding. OSB pricing added further $32 million, which was partly offset by lower OSB volumes of $17 million.

Gross margin for the year was impacted by increased raw material costs and downtime, some of them logistics related, especially early in the year. Selling and administrative costs increased by $18 million for the year, reflecting largely the same drivers as of fourth quarter. Non-operating expenses of $32 (ph) million for the year were $21 million better than in 2017, again as a result of the non-recurrence of pension charges, foreign currency impacts and higher interest income on a large and growing cash balance.

Moving on to Slide 10 for review of our segment performance. I will discuss siding in more detail after briefly covering the other segments. OSB reported 29% lower sales than the fourth quarter of 2017 with pricing accounting for about $92 million of the reduction, the remainder being lower volumes. In addition to market downtime in the quarter, we saw increases in raw material costs, primarily resin. Compared to the fourth quarter of 2017, our OSB production was lower by about (inaudible).

EWP sales were down $16 million from the fourth quarter of 2017. EBITDA came in at $2 million, lower by $5 million compared to the prior year. And as Brad noted, the decline in EWP sales was driven by weaker housing starts, resulting in lower volumes across all product lines although we maintained most of our price increases from earlier in the year.

Slightly lower sales and EBITDA on our South American businesses was driven by lower prices and reduced volumes due to the slowing housing market in Chile and general economic weakness across all of South America. Please note that the appendix of the earnings presentation includes individual segment results showing the price and volume variances for the various product lines.

And starting in 2019, we will be allocating a significant portion of our hitherto unallocated SG&A costs to the businesses to further drive line management accountability. We've included a view of our full year 2018 segment EBITDA both before and with the revised reporting in the appendix of the earnings presentation. We also filed quarterly detail in an 8-K filed with the SEC this morning.

Now, let's turn to Slide 11 for a more detailed discussion of the fourth quarter performance of the siding segment. Sales for the siding segment of $213 million were actually flat with the fourth quarter of last year, although was something of a mixed bag between siding and OSB. We saw an $8 million increase in overall siding sales, including 10% SmartSide Strand growth. Even with weakness in the housing market, SmartSide Strand increased volume by 5% and price by 5%. However, OSB negatively impacted siding segment revenue and EBITDA by $8 million and $6 million, respectively, $3 million of which was price.

And siding also recognized $8 million of costs due to increased downtime at our Fiber and CanExel facilities. These headwinds notwithstanding, we continued to invest in the business through additional marketing of $5 million to support both our efforts to increase penetration of the repair and remodel market and new product introductions. And finally, the Dawson conversion cost us an additional $2 million over last year.

Looking forward, we will be ramping up production at Dawson Creek during 2019 and plan to continue investing in selling and marketing as we introduce new products and penetrate new markets in siding. Therefore, as we consider the underlying performance of the segments and our ability to execute on our siding growth strategies, we remain confident in and continue to maintain our long-term strand siding growth target of 12% to 14%, and an EBITDA margin of at least 20% for the segment as a whole.

To complete the review of 2018 performance, Slide 12 summarizes our sources and uses of cash for the year. We began 2018 with $928 million of cash and generated $511 million of cash flow from operations. We invested $215 million in capital projects, an increase of $66 million over 2017, largely due to the Dawson Creek mill conversion. And this left us with over $1.2 billion of funds for other uses. We put some of these toward furthering our strategic objectives by investing $45 million in Entekra, an off-site framing manufacturer. But the most substantial use of funds in 2018 was the return of almost $300 million to shareholders. A decade had passed since we last paid dividends or repurchased shares, but in 2018, we did both, reflecting the Board's belief in the Company's sustainable and growing base of non-commodity building solutions and consequently its ability to fund the regular dividend.

As of December 31st, over $38 million of the $150 million authority granted by the Board for share repurchases in 2018 remained unspent, and as of this morning, only $3 million remains. So, in a highly cash positive year and after returning substantial funds to shareholders, we ended 2018 still with $878 million of cash. And of course, we still have access to a $200 million revolving credit line.

Now, in his prepared comments, Brad described LP's ongoing transformation into a building solutions provider with a profitable and growing siding business and lower reliance on commodity OSB. Turning to Slide 14, we're already seeing the results of our transformation strategy, especially as they relate to the shift in mix from commodity OSB to siding and value-added products. To demonstrate this change, we have compared sales and EBITDA in 2018 to sales and EBITDA in 2015 on an apples-to-apples basis by resetting both years to an OSB price of $260, our estimates in the cycle average price.

This normalization has the effect of significantly raising sales and EBITDA for 2015, while significantly lowering them for 2018. And please note this rebasing is for illustrative purposes only, is not precise and reflects our best attempts at comparing performance between two very different years at a normalized OSB price. And while we continue to expect variability on a quarter-to-quarter basis such as we experienced in the fourth quarter, the long-term trends of increasing SmartSide Strand sales and the value-add OSB are clear. We're confident that as we continue the shift, we will begin to drive more consistent and sustainable results, greater growth opportunities and a stronger margin profile.

And this strategic transformation is also evident in improved cash flow from operations since 2015 as shown on Slide 15. For example, we estimate that rebasing the 2018 cash flow from operations to an OSB price of $260 would have the effect of reducing after-tax cash flow by roughly $180 million, assuming a 25% tax rate. Further adjustments for taxes, pensions, and interest income as detailed in the footnote reduced 2018 cash flow by a further $11 million to produce a normalized 2018 cash from operations of $320 million.

We estimate that the apples-to-apples normalized cash flow in 2015 would have been a $120 -- sorry, $112 million lower than in 2018 at the same OSB price. Furthermore, we estimate that each $1 change in the average annual OSB price is worth $3.8 million of EBITDA, all other things being equal. And assuming a 25% cash tax rate on incremental EBITDA, every $10 change in OSB price would therefore change after-tax cash from operations by almost $30 million. So if we ratchet our cash from operations along a range of OSB prices, (inaudible) increments of $60, then the cash generative ability of the Company in 2018 at an OSB price of, say, $200 is an estimated $140 million per year compared with an estimated $28 million in 2015. This acutely demonstrates that we now have a base business capable of generating significant operating cash flow even at lower commodity OSB prices.

And finally, given that these cash flow scenarios are all anchored around our 2018 performance, they do not include over $100 million of opportunities for increased cash flow that we are anticipating from growth and efficiency improvements over the next three years. And included within this $100 million cash flow opportunity are $75 million of EBITDA efficiency improvements we are specifically targeting by 2021, as outlined on Page 16.

We continue to focus on improving our OEE. As Brad noticed, we made significant progress in 2018 and are optimistic about our potential going forward. By 2021, we are targeting sustainable OEE of 90% or more. The steady state annual EBITDA improvement from reaching this goal is $40 million, assuming the improvement manifested and increased throughput. We believe there are many opportunities to optimize our supply chain by applying best practices to our logistics and procurement areas and by targeting an additional $8 million of EBITDA per year for the next three years at least, accumulating to roughly $25 million of annual improvement for 2021.

And the process of transferring HR, payroll and accounting services from our satellite offices to Nashville is well under way. The next phase of our infrastructure alignment should enable our business to focus only on value-added activities that drive profitability. As a result, infrastructure support functions have been optimized with the aim of delivering improved service at a lower cost. And this infrastructure optimization is due to be completed by 2021 by which time we anticipate the steady savings to be $10 million. However, as we build the teams in Nashville in 2019, there will be some temporary duplication of costs.

And so as a result of LP's improved business mix and more stable cash flow profile, we are transitioning to a more efficient capital plan with an increased focus on returning cash to shareholders. Slide 17 outlines this point. As previously mentioned, we ended 2018 with $878 million of cash on the balance sheet. After a comprehensive review of the liquidity needs in the business, we believe our maximum liquidity requirement is roughly $400 million, comprising $200 million of cash and $200 million of revolver capacity.

We further believe that our permanent debt load could be increased to twice our current average trailing five-year EBITDA, which would add $300 million of liquidity. And given the transformation of the business over the last three years, we expect that trailing average to increase through 2019 and 2020, setting aside the $200 million buffer, at least $678 million of excess cash and adding $300 million of potential additional debt, brings expected excess liquidity to $1.028 billion.

As Brad mentioned, this morning we announced that our Board of Directors has authorized a 4% increase in our quarterly dividend and an additional stock repurchase authorization of up to $600 million. When combined with the $38 million already spent in 2019, the new repurchase authorization is expected to result in LP repurchasing $638 million of stock during 2019. When completed, this will bring the total amount returned to shareholders since the second quarter of 2018 to $1 billion.

Going forward, we are committed to returning cash to shareholders while continuing to execute our growth strategy. Therefore, over time, we anticipate returning at least 50% of cash from operations in excess of capital incurred to sustain our core business and grow siding and value-added OSB. As a guide, we anticipate spending roughly $80 million per year on capital projects to sustain the business in its present form and maintain its profitability. We also typically identify on average between $40 million and $50 million of growth projects per year with returns in excess of 30% compared to a hurdle rate of 16%. The third category of spending revolves around our ongoing efforts to increase efficiency and reduce the unit cost of production. To that end, we anticipate spending between $30 million and $50 million per year on return projects.

Before I turn the call over for Q&A, Slide 18 provides some limited guidance for 2019 and beyond. Combining the three categories of capital investment described in our capital allocation plan, we expect to spend between $150 million and $180 million in 2019 in capital. Although not anticipated in 2019, we would likely exceed this range any year with a significant mill conversion. We remain committed to growing strand siding revenue 12% to 14%, although we are guiding to the low end of that range in 2019 given the current view of flat housing start. And we continue to target an EBITDA margin of at least 20% for the overall siding business. In support of this growth, we intend to continue our investment in selling and marketing in the siding business in 2019.

Overall equipment effectiveness is a primary focus in OSB and we're targeting a further increase of 1.7 points from 83.7% in 2018 to 85.4% in 2019. Depending on whether this improvement results in additional throughput or cost reduction, it is expected to generate between $5 million and $10 million of incremental EBITDA. And given the progress made increasing value-added OSB revenue in 2018, longer term we are targeting over 50% of OSB segment sales to be from value-added product offerings.

In conclusion, we're confident in our ability to generate positive cash flow from operations even at the low OSB prices discussed. And this, in turn, gives us the confidence to return significant cash to shareholders along the lines discussed without, in any way, compromising our ability to invest in and grow the business.

With that, I will open the call for Q&A. Operator?

Mike Kinney -- Director of Investor Relations

Haley will you take the questions, please?

Questions and Answers:

Operator

Yes. Thank you. (Operator Instructions) Our first question comes from George Staphos of Bank of America Merrill Lynch. Your line is now open.

John Babcock -- Bank of America Merrill Lynch. -- Analyst

Good morning. This is actually John Babcock on the line for George.

Brad Southern -- Chief Executive Officer

Good morning John.

John Babcock -- Bank of America Merrill Lynch. -- Analyst

Good morning. Just want to quickly follow up sort of the $75 million in EBITDA opportunity, which I think was generally pretty clear. But I think you mentioned another $25 million and I just wanted to get a sense or get a little bit more clarity on that, I think I might have missed a couple of numbers there. Thanks.

Alan Haughie -- Chief Financial Officer

Hi, this is Alan speaking. Hello. Yeah, the $75 million comprises $40 million from the OEE improvement, $25 million from sourcing savings and $10 million from the infrastructure optimization. However, on the previous slide, we mentioned that there will obviously be about $10 million per year of inevitable labor and benefits inflation. So that would deduct $30 million from the $75 million, because it's pretty much certain to get $45 million of net EBITDA improvement. Then, of course, the $100 million of cash flow number comes from taking that $45 million adding, let's say, roughly $90 million of EBITDA from growth over the next three years should we achieve it to give $135 million of EBITDA, maybe tax effect that at 25% and get to about $100 million. That's the math.

John Babcock -- Bank of America Merrill Lynch. -- Analyst

Gotcha. Okay. That's actually very helpful. Then the next question, I mean, just with this capital allocation plan, I mean, I think you talked a little bit about the impact of price and ultimately how you're kind of thinking about the cycle. Just want to get a sense for the operations right now and how close you are to breakeven and say a 2009 type downturn, particularly in OSB, and then also how you're kind of thinking about your margins during that sort of downturn in siding?

Brad Southern -- Chief Executive Officer

So, John, I'm not exactly sure how to approach the question, but are you asking how we're thinking about performance in a hard OSB downturn, is that the --

John Babcock -- Bank of America Merrill Lynch. -- Analyst

Yeah, that's right. And then also siding as well, if you could.

Brad Southern -- Chief Executive Officer

Sure. Yeah, well, as we've mentioned before on the call, hard OSB downturn would mostly -- most likely be related to a single-family housing decline or flattening, about 35% to 40% of our siding goes into new construction. So, we have 60% of that in other channels. So, we feel like we have -- we are buffered from a significant volume decline or in fact we still believe there's market share opportunity for us even in a down market, and as you know, that product is also priced off a list versus commodity pricing. So we feel like siding segment would hold up very well in a down housing market.

As far as OSB, we've worked really hard on improving our OSB performance, and in fact one of the slides Alan showed we feel like we're at least $100 million better as a company on overall performance given our cost structure today and the growth in siding that we've seen since the last downturn. So, we very much believe that in a hard OSB downturn, the Company as a whole could still remain profitable.

John Babcock -- Bank of America Merrill Lynch. -- Analyst

Okay. Thanks for the color there. Then, the last question before I turn it over. I just want to get a sense for how the OSB markets are feeling at this juncture? Obviously, we get to read the Random Lengths and some of the commentary there, but wanted to get your color as well. And then also any color you could provide on the inventories and the channel would be great.

Brad Southern -- Chief Executive Officer

Yes. So, there definitely was inventory build in December, early January. We -- John, you've seen a Random over the last three or four weeks start putting up kind of single digits every week, which we were pleased to see. We have seen demand respond back in the South, as the weather has been a little bit better than in the North and that's where we've seen the price increases that reported in Random.

We are still seeing -- not impressive for us in the Northern part of the country as they continue to battle with the winter weather. But overall inventories are adjusting back to normal after the build in late Q4. Our commodity order files out into March. So, we're moving with now pretty readily even with the slight increases in pricing. So, I would say the market is moving back into bound from an inventory standpoint after the weak Q4 and the associated weather delays to housing recovery and just feel good as the weather improves across the country that we're going to continue to see those inventories move back to normal and order files strengthen as we have begun to see in our OSB business.

John Babcock -- Bank of America Merrill Lynch. -- Analyst

I'm sorry, just one quick one. Just on -- you talked a little bit about some market downtime during the quarter, could you provide some sense as to how much you're talking, particularly how that compares to 4Q17?

Brad Southern -- Chief Executive Officer

John, I'll have to get the number of days to you. I don't have those right in front of me.

John Babcock -- Bank of America Merrill Lynch. -- Analyst

Okay. No worries. Thanks, guys.

Operator

Thank you. Our next question comes from Mark Connelly of Stephens. Your line is now open.

Mark Connelly -- Stephens -- Analyst

Thank you. Brad, if we could just stay on this pricing issue. We've heard a lot about better discipline in the last several quarters. Are you seeing the channels operating differently or product moving through the channels more? Because certainly, we're not seeing a big difference in the way OSB prices respond to market weakness. Is that just because new capacity is swamping producer's ability to keep thing in balance? Or is it because there is just not enough visibility to respond quickly?

Alan Haughie -- Chief Financial Officer

Yeah. So, I think there is two drivers to the decline in OSB pricing in second half of the year. I mean, obviously, the new mill capacity that came on line over the last 18 months is now -- is in the market. And then I think as moved into Q4, there were -- as has been reported, there was a slowing in housing and new home construction, so we did see a decline in demand. We did see our channel partners backing off orders for OSB. I think that was extremely negative sentiment around housing as far as just the emotion in the market in late Q4 and early Q1.

I think that was not directly related, I don't think the government shutdown helped that sentiment at all. And so I just think that the -- and then we had the normal winter weather cycle. So, I think the demand -- the capacity to enter the market in '18 associated with a real decline in housing, which resulted in decline in OSB demand just set the market up to see the severe declines that we've seen. So, as we see demand increase and housing get its feet back up underneath at the beginning of the spring, I believe we'll continue to see pricing recovery early in the year, but that's my view and we'll have to see how it plays out.

Mike Kinney -- Director of Investor Relations

And Mark, one other point, just and answering John's question as well. In Q4, we took almost 100 days of downtime. Q4 of '18 and then compared to Q4 of '17, that was almost double.

Mark Connelly -- Stephens -- Analyst

Okay. That is helpful. And just one more question. In the past, you've described the M&A prospects as tuck-ins and complementary to the siding distribution channel, is that unchanged in this new strategic review?

Brad Southern -- Chief Executive Officer

Yes, I would want to use the word adjacent and so -- and I would apply that to our -- both our OSB business -- our value-added OSB business and siding, and then obviously we have this joint ventures bringing a very small relative to our size investment in Entekra, but adjacent acquisitions -- adjacent M&A that makes sense as far as our current core strategy is how we would prioritize our M&A.

Mark Connelly -- Stephens -- Analyst

That's super helpful. Thank you.

Alan Haughie -- Chief Financial Officer

You're welcome.

Operator

Thank you. Our next question comes from Ketan Mamtora of BMO Capital Markets. Your line is now open.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Good morning. Thanks for taking my question. First question on siding's long-term growth target of 12% to 14% and this is a two-part question. One, Brad, what do you think is a reasonable volume assumption for growth here? In 2018, volumes are up about 5% and I'm not just looking at 2019, but as you look out over the next two, three, four years, what do you think is a reasonable volume assumption? And second, do you think you can raise pricing every year? 2018 was kind of 5%, which is well in excess of inflation. So how do you think about this over the medium term?

Brad Southern -- Chief Executive Officer

Okay, they are up. I wanted to stick with the guidance on revenue growth versus breaking that out by volume and price changes. As you know, when we report that changes year-to-year, sometimes we get a little more volumes, sometimes we get a little more price. Pretty much consistently we've been able to guide in a 12% to 14% range, but I'll -- let me expand on that for the nature of your question. I feel like -- well -- let me -- I do want to not discount the fact that our siding business does benefit from strong housing growth.

Obviously, as I mentioned earlier, it's 40% of our mix and we like it in siding when housing starts are strong, we do see the impact in our order file and then it allows us to really -- guide to the higher end of that 12% to 14% growth when we see housing strong. But for the rest of the segment, the other 60%, our market share in those segments other than shared and retail is relatively low. And so our strategy for the remaining 60% and for single-family is to grow market share. And so a big part of our success will be driven by our ability to continue to have market share gains across all the segments that we play in and we still see opportunities to do that within the segments we've discussed. We see opportunities to do that for under-penetrated geographically, and then per this launch of our smooth product, we see opportunities to grow in areas where, in the past we haven't had the product offering that we're looking for.

And I'll just say that other thing that gives us confidence around that is, Ketan, as you know, we do have a very broad product offering in siding, lap, panel, trim, soffit, fascia, and multiple types of panels. And so we are able to take advantage of that portfolio by segment, by geography in ways that -- where we can find growth opportunities and not necessarily always having to win with lap siding. So, I'm confident in the 12% to 14% because of our under-penetration in most segments, our ability to garner market share and the strength of our product offering.

So that's why we continue to guide there, and as I've mentioned before on this call, at some point 12% to 14% gets to be a big number as our absolute revenue continues to grow. And so I don't think that for -- at some point we may have to come back and guide to a smaller percentage, but that's certainly not where we're at today.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Got it. That's very helpful color. And then just turning to the Board addition, Steve Macadam. We actually know Steve, and just for perspective, I think he had helped (inaudible) rethink in the containerboard industry in late 1990s in terms of how producers thought about supply and running the mills. I'm curious, Brad, if you've had the chance to talk with Steve about this and if this has any implications at all for the OSB industry?

Brad Southern -- Chief Executive Officer

Steve and I've had numerous discussions as we've on-boarded him to on the Board. I want to ask, Ketan, one other thing that is not mentioned in our -- at least in my prepared comments. Steve also is CEO for BlueLinx, a major distributor in our channel and a big customer of ours. So, he also brings to us really in-depth channel knowledge and experience is beneficial too.

But just let me answer the question this way up. I have also spent half of my career in the containerboard business. You might not know that. So, while I wasn't CEO like Steve was I did -- I do understand that business pretty well and I have studied it intensively. And I think there's lessons to be learned by studying industries that -- or companies that improve within the industry and how they go about doing that, and we have studied that as far as how it impacts, what we think about operations here at LP and I'm sure Steve will use that experience and others that he has to help us continue to execute our strategy.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Got it. That's very helpful color. I'll turn it over. Good luck in 2019 and ahead.

Brad Southern -- Chief Executive Officer

Thanks.

Alan Haughie -- Chief Financial Officer

Thanks, Ketan.

Operator

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

Steve Chercover -- D. A. Davidson -- Analyst

Thanks. Previous callers really drilled into some of the things I wanted to talk about, but you didn't (ph) mention Entekra whatsoever and I'm just wondering how that's coming along and whether that is still a growth area given the new strategic priorities?

Brad Southern -- Chief Executive Officer

It is a potential growth -- possible growth area for us that's obviously why we've made the investment. We are in the process of constructing the fully automated facility in California, the first one. We are continuing to run the pilot plant there. And for this year, we're really in the -- more or less in the prove-out phase to understand how to build and construct one of those facilities and -- but I will say from a market acceptance standpoint, there's a lot of curiosity from customers about the possibilities there.

And as we line up the operations and get product in market, we will be able to talk more robustly about what we're seeing there, but we're still in the early phases of really constructing that first big automated facility in Northern California.

Steve Chercover -- D. A. Davidson -- Analyst

Okay, thank you. And then on the previous line of questioning, 60% of your siding is dedicated to (inaudible) new home construction, but very little is to repair and remodel, could you size the market opportunity in repair and remodel discreetly?

Brad Southern -- Chief Executive Officer

There is -- sorry about that. There is a -- the repair and remodel side of the siding market is this big or bigger than the single-family new construction market and obviously it's much more resilient in the downturn, because when people aren't building homes, they're generally having to reside homes. And then from a market share standpoint, we're in the single-digit market share. So, we see a substantial opportunity and upside in repair and remodel and that's why we're focused on it. By the way, we also felt like our product is really a good -- a very, very good alternative there and we feel like the move into the smooth product line will help us grow there.

So, we see it as a big part of our future growth strategy and a real opportunity. Just for your knowledge, we're pretty -- we've got pretty good market share in the middle part of the country, the Midwest. So, we've been successful there. We've got some really good channel partners that work with us to grow market share and we've seen nice growth there. So really this is our plans on our investment that we're making this year is to take that model and move to broader geographic penetration outside of the Midwest. So, we -- there's still opportunity in the Midwest, where we're very low penetrated is on the Eastern Shore in the Southern part and Southwest part of the U.S., and that's where our focus is.

Steve Chercover -- D. A. Davidson -- Analyst

Thank you, Brad.

Brad Southern -- Chief Executive Officer

Welcome.

Operator

Thank you. Our next question comes from Chip Dillon of Vertical Research. Your line is now open.

Chip Dillon -- Vertical Research -- Analyst

Yes, good morning, Brad and Alan, welcome to the call and to this industry. First of all, I think it's crazy not to acknowledge what you guys are doing this morning. This is fantastic to hear and what I believe you did in the fourth quarter is it looks like you bought 3% of your stock when people are literally throwing in the trash can. So, I think that's very impressive. Along those lines, just so we can kind of keep up, while we have a share count on average for the quarter, we don't really know where we stand either as of this morning or year-end, if you could just tell us what the starting -- so we can get a gauge of a starting point and I believe the dilution addition is somewhere around a couple of million shares. But I'm guessing you guys are somewhere down in the 138 million share range right now, on a basic basis?

Brad Southern -- Chief Executive Officer

So, that's a very accurate guess on your part, yes.

Alan Haughie -- Chief Financial Officer

Good job, Chip.

Chip Dillon -- Vertical Research -- Analyst

Okay. I just wanted to make sure I got that right and that would be -- well -- so that's what it before the little $3 million stub plus the $600 million that you're doing including the $400 million accelerated?

Brad Southern -- Chief Executive Officer

Yeah. Right. That's right.

Chip Dillon -- Vertical Research -- Analyst

Okay. Okay, that's very helpful. And then if you could just share with us a little bit -- maybe update us on where we stand with the conversion process. I know, Brad, you've been very good about giving us that roadmap, especially with the two other facilities that could possibly be involved in the conversions of both Val-d'Or and Cook, I believe, and just sort of give us a roadmap of where your latest thinking is in terms of that timing, especially given that housing has been a little slower than what we would have thought in the last year or so?

Brad Southern -- Chief Executive Officer

Yeah. Chip, so, first of all, let me just repeat that we're making good progress with our conversion in Dawson Creek and should be producing siding there late Q1. So that conversion is going well. And as I mentioned last quarter, that's where our engineering focus is focused right now to use the word twice. So, made sure we have a good start-up there. I just remind the audience here that that's a really strategic conversion for us, because it's our first mill in the West Coast, where we have been able to grow our market share there pretty aggressively over the last decade.

So, we're really excited about what that mill's going to do for us and the logistics sidings that will come from having that presence on the West Coast. As far as the next mill conversion, we are -- we will get very end of that once we free up some of the engineering resources that we have focused on the Dawson start-up. We are continuing to -- it really is a matter of replicating our growth models, looking at how or what SKUs are growing and the relative growth rates between the different SKUs. There is some -- there is also a geographic component to that, of course, just like we had in Dawson. And so I think we'll be in a position, I would say, Chip, probably no earlier than Q4 of this year, we'll be talking about it probably no later than Q -- So, Q1, Q -- late this year or first part of next year. I believe we will be in a position where we have enough information to make the decision of where we want to go and what that means as far as scale and CapEx expectations. So, again, we're nine months away from making that decision.

Chip Dillon -- Vertical Research -- Analyst

Okay. That's very helpful. Thank you.

Brad Southern -- Chief Executive Officer

Thanks, Chip.

Alan Haughie -- Chief Financial Officer

Thanks Chip.

Operator

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

Mark Weintraub -- Seaport Global -- Analyst

Thank you. First on the siding business a couple. The pricing for this year is that now -- have those negotiations largely concluded at this point for SmartSide?

Brad Southern -- Chief Executive Officer

Yes, we have a price increase announced in the market for March 1st and we are allowing a pre-buy of about the 10% of last year's volume, which is currently under way and then we'll be rolling out that price in March 1st, and it's a more -- very similar to the pricing we put on the market last year.

Mark Weintraub -- Seaport Global -- Analyst

Okay. So I mean last year, I know the price was up 5% or so on average. Is that type of indicator I should take from that last comment or not necessarily?

Brad Southern -- Chief Executive Officer

We're up 5% to 7% depending on the SKU and the region and -- which is exactly how we went up last year.

Mark Weintraub -- Seaport Global -- Analyst

Okay, super. Thank you. And then if you could, you noted that the Roaring River and the East River, those were likely temporary headwinds. Can you kind of explain a little bit what happened there and is that behind us, or are we still working through at this juncture?

Brad Southern -- Chief Executive Officer

The Roaring River, the mistake that -- both occurred in Q4, two separate -- those are two separate mills and really almost two separate businesses. So for Roaring River, if you recall, Mark, we talked about earlier where we've put some pretty aggressive pricing in the market related to the SKUs that come out of that facility earlier in the year as we -- along our strategy of economic profit generation for our mills and volume was impacted by those prices -- price increase. So, our overall profitability for the mill improved as a result of the moves we've made there and we just -- but we did see that mill get disproportionately hit with weak orders in Q4. And so that resulted in the incremental market downtime that we saw in Q4.

Q1 for that business is a little bit better, but we're going to continue to take downtime in that facility as we see -- as we continue to work through this increased pricing that we put in the market. As far as CanExel; CanExel had a relatively tough year from a volume standpoint. That's a very small business and inventory swings matter in that business. So we feel like we had pulled some orders into 2017 that they had to be worked out of inventory in 2018. We feel like that mill is much better balanced going into 2019. So, I don't expect to see that kind of negative production carryover into 2019 like it did in Q4 of 2018, where we just had to take some downtime to get inventories where we need them to be.

Mark Weintraub -- Seaport Global -- Analyst

Okay, great. Understood. And on the -- you indicated that 2019 would be another year with selling and marketing spend elevated levels as you -- introducing the new products, etcetera. Can you bracket roughly -- we had the $5 million -- I think you had highlighted a $5 million hit in 4Q year-over-year, how should we think about 2019 versus 2018 or what's the best way to think about the financial impact from the marketing spend in 2019?

Alan Haughie -- Chief Financial Officer

Hi, this is Alan here. We will be spending further. I don't want to go out and quote a figure for the marketing spend, but it should -- we should be generating sufficient growth in the siding business to offset the increased marketing, so that the -- we do still expect the growth to fund the marketing when we take those two pieces together.

Mike Kinney -- Director of Investor Relations

Yeah, I think, Mark, the way to think about it is that, that is inherent in the guidance around the EBITDA margin in Siding.

Mark Weintraub -- Seaport Global -- Analyst

Understood. And then obviously the 20% plus is on the restated platform of the way you talked about the business?

Brad Southern -- Chief Executive Officer

With the allocated SG&A, yes.

Mike Kinney -- Director of Investor Relations

Yes, which -- I mean and thank you for bringing that up. Because we had been 20% plus and that was before the allocation as well. And if you look at the allocation in the businesses with siding and OSB, in particular, it's about a 3% difference. So that -- if you think about it that to be at 20% after the allocation is really before would have been about 23%.

Mark Weintraub -- Seaport Global -- Analyst

Got it.

Brad Southern -- Chief Executive Officer

But that's a good point.

Mark Weintraub -- Seaport Global -- Analyst

And then just very -- so how does the accelerated share repurchase work, if you could?

Alan Haughie -- Chief Financial Officer

Well, in essence, what basically happens is, we will deliver relatively soon $400 million of cash to our bank in essence. And they manage -- they basically manage over a period of time and they start repurchase and execute it. So we basically are committed at the point that we execute the agreement and deliver the funds.

Mark Weintraub -- Seaport Global -- Analyst

Okay, great. And then limitations based on the amount of trading. And so it's going to be a typical accelerated share repurchase program where it's going to be a function of you being able to buy certain amount of stock each day?

Mike Kinney -- Director of Investor Relations

Well, it would be. I mean, we're not doing that (Multiple Speakers), it is not in our hands, it's their right.

Alan Haughie -- Chief Financial Officer

It's totally -- once it's in the bank's hands, they will do it.

Mike Kinney -- Director of Investor Relations

They will do it, yes.

Mark Weintraub -- Seaport Global -- Analyst

Okay. All right. Thanks.

Operator

Thank you. Our next question comes from Kasia Kopytek of TD Securities. Your line is now open.

Kasia Kopytek -- TD Securities -- Analyst

Hi, good morning everyone. It's Kasia from TD.

Brad Southern -- Chief Executive Officer

Good morning, Kasia.

Kasia Kopytek -- TD Securities -- Analyst

Mike, Hey, morning. Mike, I think you referenced about 100 days of downtime in OSB in Q4? Have you guys...

Mike Kinney -- Director of Investor Relations

Yes.

Kasia Kopytek -- TD Securities -- Analyst

...continued to take downtime in the new year?

Brad Southern -- Chief Executive Officer

Well, you know, Kaisa, that's a good question. We continue to make sure that the -- our supply is matching our demand that we see and it obviously -- Q1 has been a little bit slower as Brad said. And I think that over the last few weeks, you've seen things pick up a bit. And so we have been responsive to the demand that we've seen in the market.

Kasia Kopytek -- TD Securities -- Analyst

Okay, thanks. And Brad or Alan, on Slide 15 where you referenced $100 million plus of after-tax cash flows by 2021. Appreciating you said that that includes a $75 million in incremental EBITDA. So for the growth in siding in South America of approximately $25 million are you assuming anything beyond the Dawson conversion in that number?

Alan Haughie -- Chief Financial Officer

No, specifically, no. where we -- no one else.

Brad Southern -- Chief Executive Officer

Now, Dawson --

Mike Kinney -- Director of Investor Relations

That next mill was what Brad talked about. So in reality that will take us two to three years to fill out Dawson. And then we will have the next conversion ready wherever that might be.

Kasia Kopytek -- TD Securities -- Analyst

Right. Okay, fair enough. And then if you could just maybe give a bit of context on what happened EWP this quarter or last quarter rather and then just an outlook if you could.

Brad Southern -- Chief Executive Officer

Yeah. So, the EWP is 90% to 95% -- maybe could 95% correlated with single-family construction or new construction there, some of that does go into multi-family. And the softening in the overall housing market was a direct hit on that business as far as demand. So, this is primarily sales-driven decline in Q4.

Mike Kinney -- Director of Investor Relations

Well, Kasia, remember that mill, we have two LVL mills in that segment. And the Wilmington mill was down pretty much all of the quarter as a result of the hurricane. So that had an impact which we recorded in the other operating charges. And that obviously impacted the business as well as the customer churn.

Kasia Kopytek -- TD Securities -- Analyst

Okay. So that charge, so that's not included in adjusted EBITDA, correct?

Brad Southern -- Chief Executive Officer

Correct.

Mike Kinney -- Director of Investor Relations

Correct.

Kasia Kopytek -- TD Securities -- Analyst

Okay. And then so given you're assuming sort of flat housing starts for 2019, so the performance in that business roughly similar to last year more or less? I mean absent hurricanes and things of that nature.

Alan Haughie -- Chief Financial Officer

I would agree with that, yes.

Kasia Kopytek -- TD Securities -- Analyst

Okay. All right. Thank you very much.

Mike Kinney -- Director of Investor Relations

Remember, Kasia, the raw material -- from a raw material standpoint to the degree raw materials are down and to the degree you can hold the price that should be a benefit.

Kasia Kopytek -- TD Securities -- Analyst

Right. Fair enough. Okay. Thanks very much.

Operator

Thank you. Our next question comes from Paul Quinn of RBC Capital Markets. Your line is now open.

Paul Quinn -- RBC Capital Markets -- Analyst

Yes, thanks very much. Just questions around OEE, maybe you could help me just understand the parameters around what -- it sounds like you said 84% in 2018 and it was up almost 4%, what's best in class? And then how do you reconcile this one percentage point in OEE equals $6 million of profit or $3 million in less cost?

Brad Southern -- Chief Executive Officer

Well, it's a great question on best-in-class. And I'll just tell you, I don't know. We've -- there's not a lot of information about manufacturing in general or big industry segments. What we're doing right now is we are benchmarking against, I guess, internal best. And so our target for our system is 90% OEE. And then when we hit that in 2021, we'll be rising the bar. So -- but I honestly don't know where that would stack up. And I think that would stack us up very well, but I can't be comparative to how that would compare to other players within the industry. So what we're doing -- we're really based on internal benchmarking by area where our plants perform the best and build a composite view of what that should be like and our near-term target is 90% range.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. so it sounds like a 6% increase in the OEEs, going to get you to that 90% over the next three years, why isn't '19 guidance only 1.7 points?

Brad Southern -- Chief Executive Officer

Yeah, because it's an ongoing -- you mean why are we guiding to 90% of 2019, it's a difficult process in improving OEE. This Company has made astounding progress in my opinion from what I've seen. But it is a journey in improving OEE, it's certainly not something that can be achieved overnight.

Paul Quinn -- RBC Capital Markets -- Analyst

It just ends...

Alan Haughie -- Chief Financial Officer

(inaudible) question fairly.

Paul Quinn -- RBC Capital Markets -- Analyst

Yeah, it just sounds like you did the 3.8 points -- 3.9 points in '18 and it sounds like you're setting yourself up for almost half of that in '19?

Mike Kinney -- Director of Investor Relations

What I would say, Paul, is that, you know that -- the low hanging fruit is going to be easier to get. So, that's going to -- that additional increment is going to get tougher and tougher as you continue to get to that 9%.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay, that's fair. And then maybe just moving onto the introduction of the smooth-sided siding product. What do you think that overall opportunity is in the marketplace? Like what you're missing, is that like 20% or 25% of the market?

Brad Southern -- Chief Executive Officer

Well, for lap siding, I would say, yeah, probably...

Mike Kinney -- Director of Investor Relations

Yeah, for the lap (multiple speakers)

Brad Southern -- Chief Executive Officer

...range. You know there's a not a lot of split during their assumption. Let me just say for lap siding, yeah, 20% to 25%. And it's geographically as you know, Paul, geographically concentrated, more Northeast, Mid-Atlantic, at least in the eastern part of the country. And so it should open up geographies that we'd struggle to penetrate aggressively as a result of having it. But it's gone primarily player out in the lap market and a little bit on the trim side.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. And then just last question I had was just on the lower liquidity requirement that you know figure you need that $400 million? Does that suggest that you do the Val-d'Or project over cooked just because of the lower CapEx required?

Brad Southern -- Chief Executive Officer

That would not be -- I mean it would -- if that return for that project was higher for whatever reason, obviously it would point us that way, but this isn't -- we don't believe we're anyway constrained from a liquidity standpoint to continue to make the investments we need to make whatever is optimal as far as converting mills to siding.

Paul Quinn -- RBC Capital Markets -- Analyst

Thanks very much. I like that answer.

Brad Southern -- Chief Executive Officer

Okay, Paul. Thanks.

Paul Quinn -- RBC Capital Markets -- Analyst

All right.

Mike Kinney -- Director of Investor Relations

Thanks, Paul. And thank you, Haley. I think that's -- that was the last question. And so thank you everybody for the call, and as Becky and I will be available for calls over the next few days, so if you -- please call if you have any questions. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a wonderful day.

Duration: 63 minutes

Call participants:

Mike Kinney -- Director of Investor Relations

Brad Southern -- Chief Executive Officer

Alan Haughie -- Chief Financial Officer

John Babcock -- Bank of America Merrill Lynch. -- Analyst

Mark Connelly -- Stephens -- Analyst

Ketan Mamtora -- BMO Capital Markets -- Analyst

Steve Chercover -- D. A. Davidson -- Analyst

Chip Dillon -- Vertical Research -- Analyst

Mark Weintraub -- Seaport Global -- Analyst

Kasia Kopytek -- TD Securities -- Analyst

Paul Quinn -- RBC Capital Markets -- Analyst

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