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Louisiana-Pacific Corp (NYSE:LPX)
Q3 2019 Earnings Call
Nov 5, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Third quarter 2019 Louisiana-Pacific Corporation Earnings Conference Call. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Mr. Aaron Howald, Director of Investor Relations. Please go ahead, sir.

Aaron Howald -- Director of Investor Relations

Thank you, Sidney. Good morning everyone and thank you for joining us today to discuss LP's financial results for the third quarter of 2019. My name is Aaron Howald and I'm LPs, Director of Investor Relations. I'm joined today by Brad Southern, LP's Chief Executive Officer and Alan Haughie, our Chief Financial Officer.

As we have done in the past, we are hosting a simultaneous webcast. In addition to this public conference call, the webcast can be accessed at our website www.lpcorp.com we have also provided a presentation with supplemental materials to which we will refer during this morning's comments. And finally, we have filed our 10-Q and 8-K this morning with some supplemental information.

I want to remind all participants on the call about forward-looking statements and our use of non-GAAP financial information. During our discussion, I will refer you to slides 2 and 3 of the accompanying presentation for more detail. The appendix attached to the presentation has some necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning rather than reading those statements I incorporate them here in by reference.

Now let me turn the call over to Brad.

Brad Southern -- Chief Executive Officer & Director

Thanks, Aaron. And thank you all for joining us this morning, I'll begin today's call with a few highlights from the third quarter and an update on our transformation, particularly with regard to our growth and efficiency initiatives in the context of the current market environment.

I will then turn the call over to Alan for more detailed look at our financial results. First I want to acknowledge and welcome the Nicole Daniel who recently joined LP, as our Senior Vice President, General Counsel and Corporate Secretary. Nicole earned her Juris Doctorate from the from Indiana University and has both an impressive legal background and a wealth of senior leadership experience. Welcome to LP, Nicole. We are glad to have you on the team.

I'm pleased to discuss our performance relative to a market that remains challenging. The sluggish housing starts and stagnant OSB pricing, specifically, I will talk about four highlights for the quarter. First, we are ahead of pace to achieve our long-term targets for growth and efficiency. Second, we hit our growth targets for SmartSide Strand, setting records this quarter for sales and for safe operations. Third, we significantly rationalized our OSB production at our mill in Peace Valley and curtailing OSB production in our siding mills. And finally, we generated excellent operating cash flow difficult housing and price climate I discussed during Q2's earnings call continued into the third quarter. Single Family Starts were a little over 3% compared to Q3 of last year. However, on both a year-to-date and trailing 12-month basis starts were lower than last year. Despite these headwinds, we continue to make progress toward our transformation goals, which I'll discuss in more detail shortly.

As shown on slide 5, we grew SmartSide Strand revenue 13% to $213 million, which is another quarterly record. We continue to grow SmartSide Strand revenue and volume at rates meaningfully above that of the underlying market. For OSB, ...prices were down 35% and volume was down 14%. Our business responded delivering the lowest OSB cash cost of production in more than two years while also increasing our value add Structural Solutions mix.

All businesses continue to improve operating efficiency, measured as OEE and gain ground on sourcing savings achieving $28 million and year-to-date efficiency improvements for LP, as a whole. I'll put that in context, relative to our longer-term targets in a moment. Finally, we reduced finished goods inventory by $29 million, which made a significant contribution to the $59 million of cash we generated from operations in the quarter.

Alan will walk you through the impact of this on our, on our EBITDA and the other elements of our capital allocation strategy in more detail. So I won't steal his thunder, other than to point out that we completed the accelerated share repurchased in Q3, bought back a further $42 million worth of shares on the open market and declared a quarterly dividend of $0.135 per share.

Now I'll discuss our transformation in more detail and review our progress toward our long-term goals. The chart at the left to slide 6, shows U.S. Single Family housing starts in SmartSide Strand revenue on a trailing 12 month basis compared to last year. Despite an uptick in Q3 starts are down 3% over the past 12 months from 890,000 to 863,000. Over the same timeframe. We grew SmartSide Strand revenue by 10%, demonstrating continued progress on a central theme of our transformation.

The table to the right shows the EBITDA generated by our transformation initiatives on a year-to-date basis. SmartSide growth has generated $14 million of EBITDA so far in 2019 even including a significant increase in sales and marketing expenditures, improvements in OEE and savings from strategic sourcing and logistics optimization have added a further $11 million for a total transformation EBITDA Impact and Siding of $25 million.

Alan will share more detail in a few minutes, but the net result of this is the 19% EBITDA margin for siding for quarter in which we removed OSB production from its mills and significantly reduced finished goods inventory.

In addition to sales growth the Siding business set another record by end in Q3 without a single offshore recordable entry. Safety is a core value at LP, it's about making sure every employee returns home safely to their families at the end of the workday, I want to commend the Siding business for an overall good quarter.

The OSB market did continue to deteriorate in Q3. Our average selling price for OSB in Q3 was down 35% compared to Q3 of last year. OSB sales volume was down 14% with our decision to idle Peace Valley being the largest single contributor. The OSB business responded to these market headwinds with the focused operating discipline and outstanding cost control resulting in the lowest cash cost of production, in two years and the lowest cash conversion cost in five years.

As a result, despite the lowest OSB market prices in four years, the business essentially broke even for the quarter. It rarely feels like a win, the breakeven, but let me briefly put that in context by comparing the results for the last quarter during which we experienced similar OSB pricing. In Q3 of 2015, OSB prices were essentially identical to Q3 of this year. We made about 100 million square feet less OSB this quarter than in 2015. But remember that in 2015, we were still operating Dawson Creek as an OSB mill and we were still running Peace Valley. These two mills represent a bit over 200 million square feet less capacity available in Q3 of 2019. So our capacity was down by 200 million square feet, production only fell by about half that amount. We have said in the past that OEE improvements would be like finding a mill hidden within our existing network, we are seeing that impact in this quarter.

In terms of product mix, we produce more of our higher value add Structural Solutions products in 2019 than in 2015. You would expect this to increase both our average sales price and our cost of production. Prices were in fact higher this year but costs were actually lower. In other words compared to 2015, we produced less total volume with a richer mix that earned us a higher price. And with efficiency improvements that resulted in lower actual production cost. This comparison to 2015 demonstrates the transformation of the OSB business through growth and Structural Solutions, OEE improvements, operating discipline and relentless cost control. The OSB team is executing on our strategy and it shows in their results. So far in 2019, the OSB business has contributed $7 million of EBITDA from growth and $14 million from efficiency, for a total of $21 million toward our transformation goal. When added to the $25 million from Siding, in the $3 million from EWP and South America. We have achieved $49 million of transformation EBITDA impact year-to-date. Our target for 2021 is a cumulative $165 million. We are quarter under way through the 3-year period and we have achieved 30% of our goal. We still have work to do, but I'm proud to report that we are ahead of pace.

I've talked about our business results at a high level. Now I will talk about our products and link them to our strategic transformation. Our products provide a range of solutions t. The challenges faced by homebuilders and homeowners. Our SmartSide family the Strand Siding products are extremely durable and attractive and are available across a broad product offering including lab, panel, trim, soffit. Our Structural Solutions portfolio of products are key components to structurally sound and durable home. Tech Shield, Radiant Barrier can increase the energy efficiency of a home where the logic helps protect against water intrusion, legacy flooring provides industry-leading strengthen and stiffness. FlameBlock help slow spread of a fire should one occur.

Home builder site labor scarcity as a major impediment to housing growth. Our value-added products address this ongoing labor shortage by combining multiple stats into a single product system. For example, WeatherLogic eliminates the time, cost and mass associated with house wrap.

SmartSide is easy to work with an install, prefinished siding comes an extremely durable factory finish, saving the homebuilder or remodel the step of painting after installation. Our strategy is focused on growing these type of products organically and through M&A. Last quarter we announced the acquisition of PSPI, now known as LP Green Bay our entry into prefinished Strand siding, so it had no impact on Q3 results, last month we acquired secondary pre finishing facility now dubbed LP St. Louis.

Our investment in Entekra and off-site pre-fabricated construction solution was motivated by the labor scarcity constraints impacting housing growth. Entekra has begun operations at the new automated facility and Modesto, California. We are early in the start-up curve. But happy to report the market interest and acceptance of this product and solution is being validated as more product becomes available.

As we transform ourselves into a provider of value added and differentiated solutions. We are positioning ourselves to grow and thrive despite the ebbs and flows of the housing cycle, that is why we branded our sales LP Building Solutions. Our transformation is all about pushing ourselves and our products to solve more problems and add more value. Of course our improvements in efficiency and growth above underlying market growth does not happen in the backing [Phonetic]. We are transforming our ability to deliver top tier returns to our shareholders and value-added solutions to homebuilders and homeowners because of the commitment and dedication of all 4800 LP employees.

We have a talented and high-performing teams driving every aspect of our strategic transformation and I am immensely proud of their dedication and commitment. The current market may be sluggish our transformation is anything about.

With that, I'll turn the call over to Alan for a detailed review of our third quarter results.

Alan Haughie -- Executive Vice President & Chief Financial Officer

Thanks, Brad. In addition to reviewing the consolidated results for the quarter, I'll be providing high level revenue and EBITDA bridges between this year and last year for the Siding and OSB segments and briefly updating you on the progress of our capital allocation plan. Throughout my prepared remarks, I'll be referencing specific pages of our earnings presentation, which has been posted on our Investor Relations website.

So first let's move to slide 7 for a review of the third quarter. Starting with the consolidated income statement. Net sales fell year-over-year by $134 million. The combination of lower OSB prices, which were down on average of 35% and commodity OSB volumes, which were down 14% account for ...$164 million of the revenue decline. However, this was at least partly offset by the 13% growth of SmartSide, which added $25 million to the top line. Gross profit fell by $138 million principally due to the flow through of the OSB price decline. The benefits from productivity and efficiency improvements were partly offset by lower fixed overhead absorption. As a result of downtime and a quite significant reduction in finished goods inventory more of which in a moment.

Selling and administrative costs of $58 million increased by $7 million over the prior year. And as with the first and second quarters the principal driver of the increase is our continuing investment in sales and marketing. Consistent with our growth strategy. Other charges and credits of $9 million comprised of $5 million impairment charge and $4 million of severance charges, $2 million of which relate to the curtailment of our OSB mill in Peace Valley British Columbia and $2 million for reorganizations within our corporate offices.

Non-operating income and expense of $5 million includes net interest charges of $4 million and other sundry items and net interest expense is a higher than last year due to lower interest income as a result of significantly lower cash balances given almost $600 million of share buyback activity over the last 12 months.

So after a tax provision of $3 million. We generated $2 million of net income. We're moving the impairment, and severance charges and normalizing the tax rate results in non-GAAP net income of $10 million for the quarter and non-GAAP earnings per share of $0.08.

The accelerated share repurchase initiated in the first quarter was completed early in the third, resulting in the delivery of a further 4.4 million shares. In addition to the 12 million shares delivered at inception. And this results in a diluted weighted average share count of $122 million for the third quarter earnings per share calculation.

Now the capital allocation plan established in February of this year was in part made possible due to LP, having a core business capable of generating healthy EBITDA irrespective of OSB prices for the most part, irrespective of housing growth, I am of course, referring to the Siding business and SmartSide in particular. The tables on slide 8 sharing revenue and EBITDA by segment, help illustrate this point, the first three columns show the sequential quarterly results so far in 2019 with the final column, comparing the third quarter of 2019 to the third quarter of 2018.

So, over the first three quarters of this year, Siding revenue has grown from $236 million in the first quarter to $238 million in the second and to $259 million in the third. In particular SmartSide side Strand revenue was 7% higher in the second quarter than in the first and then 7% higher again in the third quarter than in the second and admittedly this includes some benefit from the much price increase in seasonal demand patterns. The quarterly EBITDA for Siding has also risen sequentially even after a growing investment in marketing and a diminishing EBITDA contribution from the OSB produced at the siding mills.

Siding is the only segment to exhibit this trend of consistent sequential quarterly revenue and EBITDA growth this year, which is why it share of total company EBITDA has risen from 74% in the first quarter to 87% in the second and 96% in the third. In short, the siding business is the reason LP remain profitable join us down cycle in OSB prices.

But before discussing siding and OSB segment performance in more detail, I'll briefly cover EWP and South America. EWP's third quarter revenue of $105 million is $4 million lower than last year due primarily to adverse pricing which flowed directly through to EBITDA, which is consequently $5 million lower than prior year.

Revenue in our South American business was impacted by the weakening of the Chilean peso against the dollar, which dump in the benefit of local volume increases. And the economic climate also drove prices and hence EBITDA slightly lower by $1 million.

And as a reminder, we now allocate a significant portion. About 75% of our hitherto unallocated SG&A costs to the businesses to further drive line management accountability. We reconciled the quarterly detail for 2018 and in 8-K filed with the SEC in February, and it is against these recast 2018 numbers that all EBITDA comparisons are based.

Slide 9 shows the 3rd-quarter revenue and EBITDA for Siding. The bars on the waterfall represent the year-over-year EBITDA impacts were applicable the corresponding revenue changes are shown in orange text below the EBITDA bars. And we have grouped the growth in SmartSide Strand, the marketing investment and the efficiency savings together under the heading Transformation Impact in order to demonstrate our progress and it's these same numbers that were summarized on a year-to-date basis earlier on slide 6. Now there are quite a few items to cover on this waterfall but I'll start with the overwhelming highlight, which is of course SmartSide Strand year-over-year growth of 13%. I mean, Brad, has already said it, but I'm going to say it again. We had another quarterly record for SmartSide revenue. However, as disclosed in the appendices to this earnings day volume grew by 14% and gross prices by 1%, rebates of around 2% including some catch-up from the first half of the year grow at net pricing to a negative 1% compared to the third quarter of last year.

This is in stark contrast to the second quarter of this year, in which volumes of flex the prior year with prices 3% higher. Therefore, on a year-to-date basis. SmartSide revenue has grown 10% comprising 7% volume growth and 3% from pricing. This SmartSide growth generated $7 million of incremental EBITDA which was almost offset by $5 million of incremental year-over-year marketing spend and I must emphasize that our investments in marketing is a long-term enabler for growth and should not be expected to correlate with growth in the period in which it is spent.

Having said that marketing costs to at least offset by efficiency savings of $5 million generated through a combination of OEE improvements and strategic sourcing gains. As a reminder, during the third quarter of 2018 our Dawson Creek mill in British Columbia was producing OSB, whereas this year it is ramping up production as a newly converted siding mill and not producing any OSB. As a result of this conversion. We bought $3 million of unrecovered labor and overheads this quarter compared to 2018, which is an improvement on the $9 million incurred in the first quarter and the $6 million incurred in the second.

The curtailment of OSB production in siding reduced segment revenue by $12 million and EBITDA by $4 million although the EBITDA loss was mostly price. I'm now going to address the bar labeled absorption in some detail given its size and its impact on siding EBITDA for the quarter. In the third quarter of 2018. The siding segment was producing about twice as much OSB, as it was directly selling to customers while transferring the rest to the OSB segment as standard cost. With the removal of this production as part of our mill optimization the direct costs in the siding mills have of course been saved but there remains about $4 million of fixed costs that are no longer being funded by the OSB segment, and overall, this has a positive impact on LPs profitability because not only have we shifted OSB production to lower cost mills but the same $4 million shows up as a saving for the OSB segment.

The remaining $3 million of the $7 million labeled that as absorption is a natural consequence of the significant reduction in finished goods inventory. Any period during which our manufacturing operation sells more than it produces will result in the capitalization, into inventory of less fixed cost that incurs, the impact on earnings is pronounced enough to call out this quarter because of the magnitude of the inventory reduction and because in the third quarter of last year Siding sold less than it produced and so it's over absorbed cost last year. I should stress that this is a temporary phenomenon caused by the drive to reduce inventory and generate cash.

So let's summarize the current status of the Siding business. The Dawson Creek mill is up and running. Siding is no longer producing OSB, has ample capacity for further growth, which should in turn deliver operating leverage and as reporting its highest quarterly EBITDA this year while incurring its highest marketing spend of the year. We've directly into the pre-prefinished market with the recent acquisition of facilities in Green Bay, and St. Louis are posting another revenue record quarter for SmartSide. The Siding EBITDA margin is respectable 18% for the quarter without the benefit of OSB production so if we then exclude the cost of the Dawson ramp-up which is by definition temporary, the EBITDA margin would have been close to 20%, which is our stated long-term target for the segment after all.

Slide 10 shows the 3rd-quarter revenue and EBITDA waterfall for the OSB segment as Brad said, first a breakeven performance for OSB business is a remarkable achievement given the current OSB price environment and stagnant year-on-year housing. And this is truly a testament to the ongoing transformation under way within this business and I want to walk through the controllable elements by which we delivered this result .

After all the drop in OSB prices accounted for the entirety of last year's EBITDA. And embedded within this $122 million of adverse pricing is a drop of 33% in Structural Solutions prices which compares favorably with the 41% drop in commodity prices, testament to the power of our ongoing portfolio of value-added products. Commodity OSB, volumes were down 14% year-over-year and we took 97 downtime days in the quarter, 90 of which were market related. Compared to the second quarter of this year, we collapsed, two-thirds of our downtime into Peace Valley by idling it with the remainder taken in money market [Phonetic] . This ...approach is far more efficient and sprinkling downtime across our system and was a major contributor to our outstanding cost performance in a sluggish market. However, the combination of the lower commodity volumes and prices reduced EBITDA by $134 million, therefore in the absence of the offsetting actions I'm about to describe the OSB segment would most likely reported an EBITDA loss of $11 million so the transformation impact to call out for OSB includes $2 million of EBITDA, due to increased volumes of our value-added Structural Solutions and it also includes the EBITDA benefit resulting from closing Peace Valley which is saving the company $2 million of fixed costs per month.

Along with commodity OSB, we also reduced TechShield, Radiant Barrier Peace Valley. We are growing Structural Solutions. But we weren't claim to that volume at the expense of profit. And if there was a subset of our structural Solutions portfolio that we were willing to let go, it was the high cost TechShield manufactured at Peace Valley then shift to great expense to the U.S. West Coast. As a result we jettisoned $8 million of revenue with no loss of EBITDA and realize the $4 million of savings from the closure.

Brad, compared the benefits improving OEE to -- unearthing a hidden mill within our network. Arguably, it is the improvements in OEE and the ability to absorb volumes that our remaining mills that in part enabled the closure of Peace Valley. We are therefore including the savings, which can be thought of as accelerating or monetizing OEE as part of our transformation. And on the subject of OEE the third quarter of 2018 was something of a high point. So there was minimal year-over-year improvement this quarter. Although the benefits from the improvements over the first half of the year have been maintained.

Now I cover the absorption impact that arose from the reduction of finished goods inventory in Siding when I discuss that segment while this same phenomenon also -- impacted OSB EBITDA, although the distinction between absorption and downtime is by the blurry. Nonetheless, the combined impact of downtime and finished goods inventory reduction cost the OSB segment $7 million of EBITDA. This was of course partly offset by the $4 million of costs transferred, if you will from Siding. And as I mentioned when discussing siding this $4 million item is therefore a wash LP, as a whole, which is rather academic for OSB because unlike Siding, which we, as we know is in growth mode the OSB business remains focused on operating efficiency. The result of their effort much like in the second quarter is cost savings of $7 million net of inflation.

The result of all these efforts is a net $10 million of EBITDA recovery, resulting in an EBITDA loss of just $1 million in an extremely harsh pricing environment. EBITDA for the first 9 months, therefore, as a positive $4 million. Our third quarter and year-to-date cash flows are summarized on slide 11. Aside from EBITDA, a major driver of our $59 million of operating cash flow in the quarter was the $31 million of inventory reduction, this was almost entirely the result of a $29 million reduction in finished goods.

However, during the third quarter of last year, although not shown on this slide, we increased finished goods inventory by $8 million. I'm stressing this point because it is the divergence of finished good movements of $37 million. In other words, $29 million inflow this year compared with $8 million outflow last year, that drove the absorption hit to EBITDA of about $10 million across Siding and OSB.

From a cash flow perspective, this was unquestionably the right thing to do. Despite the negative impact on EBIT down earnings in the quarter. On a year-to-date basis, we've now generated $58 million of cash from operations . As a reminder, we generated $54 million in the second quarter, which largely offset the $55 million outflow in the first quarter.

Now when we introduced our capital allocation plan in February, we guided to a range of operating cash flows for 2019 and describe the sensitivity of our cash flow guidance to OSB prices . We also stated, our goal of generating $165 million of additional EBITDA from growth and efficiency by 2021. After adjusting for labor inflation and taxes this $165 million should produce about $100 million of incremental annual cash flow over three years. Our progress on this transformation in 2019 is and we'll continue to be reflected in improved operating cash flow.

For example, should the Random Lengths 7/16's OSB price ultimately average $180 per thousand square feet for 2019. We believe that our cash from operations will exceed the $80 million, we modeled at that price. As mentioned earlier, the accelerated share repurchase was completed in early August, after which we bought $42 million worth of shares on the open market at an average price of $24. We ended the third quarter with $318 million in cash resulting in net debt of basically zero and, when including $350 million of undrawn revolver we have over $650 million of liquidity.

From a share buyback perspective, we have $158 million remaining of the $600 million authority outlined in our capital allocation plan for 2019 and I fully expect that when we report our full-year numbers, I will be announcing the completion of that plant.

So before I turn the call over for Q&A. slide 12 provides some limited guidance for 2019 and beyond. We are reaffirming our guidance but further improving our capital spending guidance. On the second quarter call we indicated a range of $160 million to $170 million for the year, we now believe our capital spending will not exceed $160 million.

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

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from George Staphos with Bank of America. Please proceed with your question.

George Staphos -- Bank of America -- Analyst

Thanks everyone. Good morning, thanks for the details, and congratulations on the progress. Brad, Alan, if you could talk a little bit quickly on Siding pricing and realizations and you had mentioned that there was a swing and rebates from 2Q to 3Q, which explains a lot of the change in price realizations. Could you comment at all as to whether there was any change within mix whether you responding to any competitive activity wouldn't appear to be at least from your formal remarks on volume, but for what it's worth realization, a little bit lower than we were modeling, I just want to see if there's anything else beyond rebates in that and then had a quick follow on.

Brad Southern -- Chief Executive Officer & Director

Yes, George, mix was an issue in the quarter. We did have a higher proportion of our sales go into our reach out retail channel, which tends to be more skewed to our Panel product, which is a little lower pricing than or Lap and Trim. So there is definitely a mix component. Alan talked about the rebate catch-up and then I would say from a other discounting and sales incentives, they were pretty normal for what we were doing. At this time of year. But mix definitely played a component in it along with the rebates.

George Staphos -- Bank of America -- Analyst

So it would be fair to say that on the one hand, you had a little bit more in the way of retail because this was happening in terms of starts versus I guess DIY and repair remodel activity would that be what was driving that. And it sounds like you weren't -- you didn't need to respond a significantly, if at all measurably to any increase in competitor capacity in the Siding market which obviously has been an ongoing question this year for your business.

Alan Haughie -- Executive Vice President & Chief Financial Officer

George. I would say, as far as competitive situations as it relates to Lap and Trim those usually isn't something that is priced at point of sale. So it's not like you -- we feel that in a quarter it's more reflective of what we have to do on the rebate side. So we address the competitive situation you rebating incentives that they show up kind of -- now they show up in our net pricing that we report, but more of a some subtract from our gross price then immediate type of responses to a commit competitive situations . And just the original part of your comments -- it's true that, well, first of all, we've had really good growth in retail this year, and relative to what we're seeing an overall housing growth. There's a little bit of a skew toward selling more into retail relative to what we've done in the past from a growth standpoint .

George Staphos -- Bank of America -- Analyst

Alright. Thank you, Brad, I'll turn it over.

Operator

Thank you. And our next question comes from Chip Dillon with Vertical Research. Please proceed with your question.

Chip Dillon -- Vertical Research Partners, LLC -- Analyst

Yes, thank you very much. And then, I appreciate all the details. This could be, I guess for either Brad or Alan. You mentioned, I think if I heard you right that if we assumed a 190 North Central price that cash from operations might actually exceed the $80 million you originally modeled which obviously a test to the efficiencies you've gained, The question I have though is, we've seen in recent months, a pretty big divergence between Southeast and Western Canadian OSB prices from that benchmark. So I didn't know if you could add some color to how maybe that might make it more of a challenge or maybe won't and ...as the case, might be.

Brad Southern -- Chief Executive Officer & Director

Well, I would say from a guidance standpoint, we haven't got -- we're sticking with what Alan has said, we haven't got to the point where we're differentiating between the regions, but no question, Chip, there has been that divergence especially prior to this -- the last couple of weeks of price movement, and if you think about the capacity especially that we took out of our siding mills that will -- usually selling into that North Central region, there has been, it has been less competitive than in the regions that we had lower pricing and on -- so I think some of these recent moves around capacity coming out of the market is, it's going to have pricing across the regions even out a little bit more than what we've seen in the prior 3 or 4 months, but from us being refined enough to make that distinction on the guidance based on regional differences -- were OK sticking what we said before.

Chip Dillon -- Vertical Research Partners, LLC -- Analyst

Okay, that's super helpful and then just one quick follow-up, I guess, are not making or at least in the 3rd quarter, OSB in the Siding segment, which I assume is reflective largely of Dawson making it up, it's learning curve. But if you could talk a little bit about how we could see the OSB production in that segment evolve as you do your next conversion, obviously I would imagine that you would continue to make OSB at your siding mills as you until you fill that mill up with siding demand.

Brad Southern -- Chief Executive Officer & Director

Yes. First of all, we back up and just to get us all grounded on our capabilities for OSB production in Siding, so we can currently make OSB at three locations Hayward, Swan and Dawson, I think that's where we can make OSB competitive, I guess technically we could make it at all the other mills, but in reality, those are the three places that we put OSB capacity. But with that said, especially on a delivered basis when you look at our current network OSB mills in our OSB business those would be the three highest cost places to make OSB in our current system overall.

So as we looked at rationalizing production this year as a, as a absolute need for what we needed to do and we ran network optimization and that's what led us to the decision to remove the OSB from those operations so that we could put the volume there into lower cost OSB assets like to go with. So that is the removal of OSB volume from our Siding is a response to our current market conditions and obviously we would rather be run in OSB in those facilities when OSB pricing allows us to do so. When we convert the next mill. It's a little bit depending on what that mill is, but we would certainly aspire to having OSB flexibility at the converted mill and if not retaining in the rest of the SmartSide system, so that we could balance production across the whole system.

Operator

Thank you. And our next question comes from Mark Connelly with Stephens. Please proceed with your question.

Mark Connelly -- Stephens Inc. -- Analyst

Thank you, Brad. Brad recent stories are blaming old people for not moving out of their houses and it seems to me that if that's the new trend and it simply means that the market needs more low-priced homes and high-priced homes and not enough is getting built. So if that is the new trend. How does that affect your profitability in OSB and Siding, I assume you take a modest hit on square footage, but would there also be a material shift in your siding demand if houses got smaller?

Brad Southern -- Chief Executive Officer & Director

Well, certainly if the house smaller. It's going to use less OSB and siding number -- but by definition...

Mark Connelly -- Stephens Inc. -- Analyst

Is your average house materially bigger it right now. I mean is it going to be a material hit to you if the average house in America gets bigger, where do you sit on that curve now?

Brad Southern -- Chief Executive Officer & Director

Well, maybe just to clarify the question a little bit.

Mark Connelly -- Stephens Inc. -- Analyst

Well, I'm just trying to get a sense of how big your average siding start is now? Is it materially bigger than then the starter home or I'm just trying to get a sense of, is this going to be a big issue?

Brad Southern -- Chief Executive Officer & Director

Got you. Okay. So I would say our, the average home if SmartSide goes on the day is bigger than the starter home typically start -- I mean are making a real generalization but typically starter homes are vital and so as you move up the value equation on home size that's where we tend to play more competitively from a hard siding standpoint. So yes, I agree that I mean this is just my experience, but I would agree that the average SmartSide home is larger than what maybe not above average, but it's certainly not starter home typically a starter home so as if the market was to sway into a heavy -- a lot bigger proportion of smart -- of starter homes then the size of the home would be smaller and we would need to be more competitive, they gets final -- and the way you get competitive against final not necessarily is always by price but by offering a product offering that can be, beneficial to a homeowner in a starter home and thus the move into prefinished and some of the other specialty SKUs that we're working on in our SmartSide business.

Mark Connelly -- Stephens Inc. -- Analyst

That makes sense. Just a related question. In general, are the siding margins that you experience in repair and remodel significantly different? You talked about rebating. I'm just wondering do you spend materially more marketing in the R&R channel than you do in the new home channel?

Brad Southern -- Chief Executive Officer & Director

We definitely spend more in the R&R channel. Then in the new construction channel or the retail channel, without a doubt, that's a, it's a more of a consumer sale than what we've seen in new home construction, but I will say also there's probably a little richer mix because there is going to be much more lap and trim compared to panel. We do benefit on the margin and pricing standpoint because of mix. And as we move into prefinished and get to retain the incremental margin associated with a prefinished solution, which is going to play really well in repair and remodel but the opportunity -- we look at repair remodel as a higher cost to serve but also higher margin at the end of the day because of the, the prefinished opportunities that exist there.

Operator

Thank you. And our next question comes from Ketan Mamtora with BMO Capital Markets. Please proceed with your question.

Ketan Mamtora -- BMO Capital Markets Equity Research -- Analyst

Thank you. First question. Brad or Alan, can you talk a little bit about sort of your OSB order books and what you see in terms of inventory in the channel for this time of the year?

Brad Southern -- Chief Executive Officer & Director

Yeah, sure, where we're out of 2 to 3 weeks, which is normal for us Ketan right now as everybody on this call notice we had a really nice rally the last couple of weeks and OSB pricing. The reason, one of the, from a demand standpoint and the reason for that rally was inventories were very low 2 or 3 weeks ago , and I think there was a scramble to rebuild those as some of the production came offline. And so there has been some returned to normalcy in an inventory in the channel, but I would say it's currently still below normal for this time of year, but because the distributors and dealers are just playing it and so close to the best up to the 2 or 3 weeks ago that there has been a little bit of scrambling in an attempt to rebuild inventory levels.

Ketan Mamtora -- BMO Capital Markets Equity Research -- Analyst

Got it. That's very helpful and then just one other question on the Engineered Wood business, can you talk about how you are thinking of the business long term, I mean, year-over-year EBITDA through the first 9 months is still down? There is new capacity that's coming into the market in the U.S. South. Just talk about kind of is this business really core to LP?

Brad Southern -- Chief Executive Officer & Director

Well, it's core to LP, as I've mentioned before the distributor base that we sell our EWP into are the same distributors, the same customers for Structural Solutions and for our Siding business. And so, and it does make the portfolio offering that we have to the channel more relevant by being in EWP business but as I've also said in the past, that's no excuse for not earning the cost of capital and so we continue to work on that within the business, you know Ketan we've done a lot around SG&A reduction. We've done a lot around pricing in that business and we continue to work within our mills with our OEE initiatives to drive efficiency, so we do, definitely have a target of that business getting to where it's returning the cost of capital ...and we've made good progress against that goal but there's still work to do.

Operator

Thank you. And our next question comes from Mark Weintraub with Seaport Global. Please proceed with your question.

Mark Weintraub -- Seaport Global Securities LLC -- Analyst

Thank you. A couple of real quick ones. First, if you could just let us know, since you're not making OSB in Siding segment anymore, at least for now. In the fourth quarter and the first half of this year, what would the transfer to OSB segment have been in those periods, it was 4 million in the period just ended.

Brad Southern -- Chief Executive Officer & Director

If it as being working backwards through time, a $1 million less each quarter. So about $3 million in the second of $2 million in the first, something like that.

Mark Weintraub -- Seaport Global Securities LLC -- Analyst

Okay. And the fourth quarter of last year.

Brad Southern -- Chief Executive Officer & Director

I will have to get back to you on that one.

Mark Weintraub -- Seaport Global Securities LLC -- Analyst

Okay. Sure. And then second, our debt finished goods inventory now at levels where you want them to be in the siding business?

Brad Southern -- Chief Executive Officer & Director

Yeah.

Mark Weintraub -- Seaport Global Securities LLC -- Analyst

Great. Third, can you update us on the rebates, are are we still seeing, is it a fair place to expect? We're still it like those 2% type rebates or how the market dynamics changed at all since the in the last few weeks, months?

Brad Southern -- Chief Executive Officer & Director

Well, I mean market dynamics haven't significantly changed. I mean the rebate. The majority of the rebate in the third quarter was actually sort of a catch up the year-to-date basis, so the pricing and the rebate impact if you take Q3 as a discrete quarter was a little better than it looks.

Operator

Thank you. And our next question comes from Sean Steuart with TD Securities. Please proceed with your question.

Sean Steuart -- TD Securities -- Analyst

Thanks. Couple of questions. Are you at a point where you can provide any guidance on 2020 capex plans and maybe some detail on specific discretionary initiatives?

Brad Southern -- Chief Executive Officer & Director

Yeah, I mean, it will be lower than the projected maximum of $160 million in 2019. At the moment. I would say a very safe number to work on. For 2020 is about $140 million.

Sean Steuart -- TD Securities -- Analyst

And would there be any -- an exciting conversion capital in that number?

Brad Southern -- Chief Executive Officer & Director

That's nothing significant in there, no.

Sean Steuart -- TD Securities -- Analyst

Okay. Second question, there was a reference in the notes to a $5 million impairment to a Canadian facility that you expect to sell within the next year, any context, you can provide there?

Brad Southern -- Chief Executive Officer & Director

Not, not yet for confidentiality reasons. So it's, it's a small facility that we're looking at. We're most likely going disposal.

Analyst

Okay, thank you very much.

Operator

Thank you. And our next question comes from Steve Chercover with DA Davidson. Please proceed with your question.

Steven Chercover -- D.A. Davidson & Co -- Analyst

Yeah, thanks, good morning everyone. So I think maybe Ketan touched on why prices are down and engineered wood, but on a percentage basis, profits are down more than revenues, which I think is surprising since presumably the cost for OSB used for web stock is down a lot. Can you help us reconcile that?

Brad Southern -- Chief Executive Officer & Director

I think I would say that the component of total raw material costs in EWP represented by web stock is small enough that impact is not surprising to us. There is a significant amount of raw materials. Other than that net web stock and so that while the cost reduction of the OSB is helpful to our I-Joists manufacturer, it has less of an impact on the other components of the EWP business.

Steven Chercover -- D.A. Davidson & Co -- Analyst

Okay. So is it fair to say that it really didn't run that well in the quarter?

Brad Southern -- Chief Executive Officer & Director

I'm sorry, I didn't catch that? Can you repeat the question?

Mark Weintraub -- Seaport Global Securities LLC -- Analyst

I'm just -- I just Operationally, I mean clearly, you've made some good progress in OSB with the lowest production costs in 2 years. But you couldn't say the same thing for EWP is that accurate, did it ran well?

Alan Haughie -- Executive Vice President & Chief Financial Officer

It is accurate, that we cannot say we've made as much progress and EWP as we have in OSB, I will say just to kind of dive another level of detail. We still -- the LSL production in EWP is a very volume-sensitive mill. It's a big mill has a lot of fixed costs. And so as we, the mix component of that product into our EWP business can have a have a pretty big impact on overall profitability for the quarter, our EWP. Our I-Joists and our LVL business remains, OK. But we do have quarter-to-quarter swings in LSL production that can really impact earnings. So, I mean -- I'm saying when it looks funky, Steve, it's usually a mix change that's associated with LSL.

Steven Chercover -- D.A. Davidson & Co -- Analyst

Okay and then just one on the transformation in OSB, I mean you basically found as paraphrased you but a mill where the capacity thus far and we still got another two years to go do you think there's another mill to be found?

Alan Haughie -- Executive Vice President & Chief Financial Officer

There is a lot of opportunity, there is a lot of opportunity in there, Steve. And we, and you know as we've talked about in the past. There's minimal capital associated with finding that mill. I mean there's some capital associated with it. This is primarily just running really well, and so how you really doing is adding variable costs. So we are really focused on in our growth in OSB being a result of OEE, and then there still a lot of room to answer your question.

Operator

Thank you. And our next question comes from Paul Quinn with RBC Capital Markets. Please proceed with your question.

Paul Quinn -- RBC Capital Markets, LLC -- Analyst

Yeah, thanks very much. Good morning, guys. [Speech Overlap] Just a high-level question on SmartSide if you could break down that end-use demand between home and I guess outside the home and then within the home what portion is in new home and what portion is R&R?

Brad Southern -- Chief Executive Officer & Director

So what we said for a long time about 40%. We estimate about 40% of SmartSide volume goes into new home construction and that leaves 60% obviously 100% minus 40%, 60% about, we've got 20% to 30% of the remainder going into a retail into the shared segment and then 22% into Repair and Remodel in some form or other and those are -- we don't have direct visibility into that because it goes in the distribution, but that's our estimate on where the product ends up.

Paul Quinn -- RBC Capital Markets, LLC -- Analyst

Okay, thanks. And then as Dawson's in start-up, maybe you can you give us an idea of timing for the next mill conversion does that take us, at least through 2021?

Brad Southern -- Chief Executive Officer & Director

Yeah. Paul, I think we'll be talking probably more specifically, be in a position late next year to talk specifically about location. And then, as Alan mentioned, in the capex guidance and we would currently think will begin spending capital on the conversion in 2021 for a late 2021, early 2022 production.

Operator

Thank you. And we have a follow-up question from Mark Weintraub with Seaport Global. Please proceed with your question.

Mark Weintraub -- Seaport Global Securities LLC -- Analyst

Thank you. One quick one on marketing expense. I think you mentioned that you're kind of at the high point seasonally. What type of expectations in terms of the trajectory for marketing, should we be thinking about in Siding?

Brad Southern -- Chief Executive Officer & Director

In general continued increases. I mean the marketing is supporting our drive into Repair and Remodel and prefinishing. So as we've said we are continuing to grow Siding and continuing to invest in that growth. We have some -- sufficient confidence in it, but we believe the returns on these marketing dollars will be excellent.

Mark Weintraub -- Seaport Global Securities LLC -- Analyst

Okay and then lastly in the this slide at the end you talk about returning about 50% of cash above and beyond what's needed to sustain the core business in growth Siding. Can you give us. Is there any sense you can give us as to how to think about what that number to sustain the business and grow Siding is?

Brad Southern -- Chief Executive Officer & Director

Yeah certainly and I'm -- it's somewhere -- it's about $120 million to $130 million a year, was our rough estimate that included necessary maintenance and the relevant elements of growth capital.

Mark Weintraub -- Seaport Global Securities LLC -- Analyst

Super. Thanks so much.

Brad Southern -- Chief Executive Officer & Director

Thanks.

Operator

Thank you. And we have a follow-up question from Chip Dillon with Vertical Research. Please proceed with your question.

Chip Dillon -- Vertical Research Partners, LLC -- Analyst

Yes, just an update on your plans for buybacks. You had mentioned I think a year or so ago when you first started talking about your new capital allocation that you would eventually incur a meaningful amount of net debt. But as long as you had a revolver in place you are good to do that. So I just was curious if you're continuing to what kind of some guidance in terms of how much you might be looking to buy back in the next quarter to next year?

Brad Southern -- Chief Executive Officer & Director

Well, that's a pushing me to say that the more that I'm willing to say at the moment, Chip. So we will be completing the $600 million buyback obviously and...

Chip Dillon -- Vertical Research Partners, LLC -- Analyst

By year end?

Brad Southern -- Chief Executive Officer & Director

Yeah, yeah.

Chip Dillon -- Vertical Research Partners, LLC -- Analyst

Okay.

Brad Southern -- Chief Executive Officer & Director

So and thereafter we have -- so when we release our fourth quarter results. That's the point at which I'll give further clarity on how we see -- what we see on next tranche or development being. So I think it's a little early for me to come out with that right now.

Chip Dillon -- Vertical Research Partners, LLC -- Analyst

Alright, that's super helpful. And just quick follow-up, of that means you basically have $120 million left for the fourth quarter, was there any reason you couldn't have been buying back stock up till now, I'm not sure what you're like lockups or require periods or...

Brad Southern -- Chief Executive Officer & Director

No, not really, other than proposed to last earnings call, but I will say this, and two days ago the share price was $29 change in $30 or so. I don't consider the difference between $30 yesterday in $24 that we bought our shares back when we over the life of the 3rd quarter is being a meaningful difference. I still consider the stock to be significantly undervalued and the our buyback activity is not in any way related to an assessment of the share price, I don't consider the share price to be high.

Chip Dillon -- Vertical Research Partners, LLC -- Analyst

Understood. And you're modest. Congratulations.

Operator

Thank you. And I'm not showing any further questions at this time, I will now turn the call over to Aaron Howald, Director of Investor Relations for any further remarks.

Aaron Howald -- Director of Investor Relations

Okay, thank you everyone, this concludes our earnings call for Q3, we will look forward to speaking with you again sometime in February to discuss our 4th quarter results, back over to you, Sidney.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Aaron Howald -- Director of Investor Relations

Brad Southern -- Chief Executive Officer & Director

Alan Haughie -- Executive Vice President & Chief Financial Officer

George Staphos -- Bank of America -- Analyst

Chip Dillon -- Vertical Research Partners, LLC -- Analyst

Mark Connelly -- Stephens Inc. -- Analyst

Ketan Mamtora -- BMO Capital Markets Equity Research -- Analyst

Mark Weintraub -- Seaport Global Securities LLC -- Analyst

Sean Steuart -- TD Securities -- Analyst

Analyst

Steven Chercover -- D.A. Davidson & Co -- Analyst

Paul Quinn -- RBC Capital Markets, LLC -- Analyst

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