Louisiana-Pacific Corporation's (LPX) CEO Brad Southern on Q2 2017 Results - Earnings Call Transcript

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About: Louisiana-Pacific Corporation (LPX)
by: SA Transcripts

Louisiana-Pacific Corporation (NYSE:LPX) Q2 2017 Earnings Conference Call July 26, 2017 11:00 AM ET

Executives

Sallie Bailey - Chief Financial Officer

Brad Southern - Chief Executive Officer

Analysts

Ketan Mamtora - BMO Capital Markets

George Staphos - Bank of America Merrill Lynch

Gail Glazerman - Roe Equity Research

Mark Weintraub - Buckingham Research

Chip Dillon - Vertical Research

James Armstrong - Armstrong Investment

Sean Stewart - TD Securities

Paul Quinn - RBC Capital Markets

John Babcock - Bank of America Merrill Lynch

Steven Chercover - D.A. Davidson

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2017 Louisiana-Pacific Corporation's Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call may be recorded.

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

Sallie Bailey

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

I will begin the discussion with a review of our financial results for the second quarter and first six months of 2017, and this will be followed by some comments on the performance of the individual segments and selective balance sheet items. After I finish my remarks, Brad will discuss the general market environment in which LP has been operating, provide his perspective on our operating results and give some thoughts on the outlook.

As we've done in the past, we've opened up this call to the public and are doing a webcast. The webcast can be accessed at www.lpcorp.com. Additionally, to help with the discussion, we've provided a presentation with supplemental information that should be reviewed in conjunction with earnings release. I will be referencing these slides in my comments this morning. We filed our 10-Q as well as an 8-K this morning with some supplemental information.

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

Today, I will begin my comments by reporting on our safety performance. In the second quarter of 2017, we experienced the total incident rate of 0.45 and the 12 month rolling average rate of 0.46. LP continues to be among the safest companies in our industry. The second quarter of 2017 was an important quarter in LP’s history. In addition to the Board electing our fifth CEO, we’re reporting the highest revenue quarter since the second quarter of 2005. A lot has changed at LP in the last 12 years. The second quarter of 2005, we reported sales of $692 million. OSB represented 58% of the revenue, Siding reported sales of $125 million and operating profit of $16 million. And the Siding production volume was 242 million square feet.

Fast forward to the second quarter of 2017, we’re reporting the similar level of sales of $694 million. However, OSB’s portion of the revenue has dropped 47%. Signing sales are almost twice the second quarter of 2005 at $230 million of revenue and operating profit has risen to $48.5 million. The production of signings increased almost 100 million square feet to 335 million square feet. Our pace profile has changed a lot since the second quarter of 2005, thanks to the focus of the management team and our employees, our diversifying out of commodity OSB into specialty products.

With that, let me go into the details. Moving to slide four of the presentation for a discussion of the second quarter 2017 consolidated results. We are reporting net sales of $694 million for the second quarter of 2017, a 19% increase from the net sales of $582 million reported in the second quarter of 2016. In the second quarter, we recorded net income of $95 million or $0.65 per diluted share compared to net income of $32 million or $0.22 per diluted share in the second quarter of 2016.

The adjusted income from continuing operations for the quarter was $84 million or $0.58 per diluted share based upon a normalized tax rate of 35% as compared to $40 million or $0.28 per diluted share in the second quarter of 2016. Adjusted EBITDA from continuing operations was $164 million in the quarter compared to $99 million in the second quarter of 2016.

For the first six months, we’re reporting net sales of $1.3 billion, a 20% increase from the net sales of $1.1 billion reported in the first six months of 2016. The first six months we recorded net income of $150 million or $1.02 per diluted share compared to net income of $42 million or $0.29 per diluted share in the first six months of 2016.

The adjusted income from continuing operations for the first six months was $133 million or $0.91 per diluted share based upon a normalized tax rate of 35% as compared to $50 million or $0.34 per diluted share reported in the first six months of 2016. Adjusted EBITDA from continuing operations was $276 million compared to $151 million in the same period of 2017.

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

For the quarter, SmartSide average sales prices were up 5%, primarily due to the impact of our announced price increases. Higher demand also led to 3% improvement in sales volumes relative to the second quarter of 2016. We did produce about 75 million square feet of OSB in this segment during the second quarter of 2017 compared to 64 million square feet in the second quarter of 2016. The Siding segment reported sales of $445 million for the first six months of 2017, an increase of 15% from $389 million reported in the first six months of 2016.

For the first six months of 2017, the Siding segment reported operating income of $89 million compared to $69 million, and adjusted EBITDA of $105 million as compared to $84 million in the same period of 2016. SmartSide sales volumes were up 9% and sales prices were up 4% for the first six months of 2017 compared to the same period in 2016.

Turning to slide six. OSB reported net sales for the second quarter of 2017 of $325 million, up 29% from $253 million in the second quarter of 2016. OSB reported operating income of $103 million compared to operating income of $44 million in the second quarter of 2016. Adjusted EBITDA from continuing operations was $118 million compared to $59 million in the second quarter of 2016. Sales volumes were 2% higher, pricing for OSB was higher by 26%, which resulted in improved operating results by $68 million. Partially offsetting the impact of the higher sales price was an increase in raw material cost, principally rising as well as increases in manufacturing costs, primarily due to downtime associated with capital projects.

For the first six months of 2017, OSB recorded operating income of $163 million and sales of $593 million compared to operating income of $59 million on $473 million of sales in the first six months of 2016. For the first six months, OSB reported adjusted EBITDA of $193 million compared to $89 million in the first six months of 2016. Sales volumes were higher by 1% and sales prices were higher by 26%. The impact of higher sales price on OSB operations was $122 million for the first six months of 2017 compared to the prior year.

Please turn to slide seven and the presentation, which shows results from our Engineered Wood Products segment. This segment includes I-Joist, Laminated Strand Lumber and Laminated Veneer Lumber, OSB produced at our Houlton, Maine facility plus other related products. This segment also includes the sale of I-Joist and LVL products produced by Abitibi joint venture or under a sales arrangement with Murphy Plywood. The Engineered Wood Products segment reported sales of $94 million in the second quarter of 2017, up from $78 million in the second quarter of 2016.

EWP reported income of $5 million in the second quarter of 2017 as compared to $1 million in the second quarter of 2016. For the second quarter of 2017, adjusted EBITDA from continuing operations was $9 million as compared to $4 million in the second quarter of 2016. Volumes of I-Joist and LSL and LVL were up 11% compared to the same quarter last year. Pricing was up 4% in LVL/LSL and up 3% in I-Joist. For the first six months of 2017, sales were $176 million, up from $150 million in 2016. The operating income in the first six months was $6 million as compared to a loss of $2 million in the first half of 2016. Adjusted EBITDA improved to $13 million from $5 million in the first six months of 2016.

Moving on to slide 8 of the presentation. For the quarter, our South American segment recorded sales of $39 million, $2 million lower than the $41 million reported in the second quarter of 2016. Operating income was $6 million and adjusted EBITDA was $8 million for the second quarter of 2017, which is about $1 million lower than the second quarter of 2016. Volumes in Chile were down 17%, volumes in Brazil were up 24% compared to the same quarter last year.

The sales volume decrease in Chile was due to the reduced demand in local market. And in Brazil, sales volumes increased due to higher export sales. Pricing was up 2% in Chile and 1% in Brazil. However, in local currency, Chile’s pricing was flat and Brazil’s pricing was lower by 7%. For the first six months, our South American segment recorded sales of $76 million as compared to $72 million from the first six months of 2016.

Operating income was $11 million compared to $12 million in the first six months of 2016, and adjusted EBTIDA decreased by $1 million to $15 million for the same period of 2016. Total selling, general and administrative expenses were $47 million in the second quarter of 2017, essentially flat with the same quarter in 2016. For the first six months, selling general and administrative expenses were $96 million, approximately $7 million higher than the first quarter 2016. The increase in the year-to-date expenses was primarily related to higher incentive compensation accruals and higher spending on sales and marketing.

Please turn to slide nine of the presentation. As of June 30, 2017, we had cash, cash equivalents, investments and restricted cash of $759 million, working capital of $925 million, net cash of $400 million. Capital expenditures for the first six months of 2017 were $46 million. Operating cash flow for the first six months was $162 million as compared to $104 million in the first half of 2016. We are projecting capital expenditures for 2017 at $175 million to $200 million. Of which, $125 million is for growth projects and $75 million is associated with maintenance projects.

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

Brad Southern

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

Q2’s good performance was driven by strong earnings and safety results in all businesses. In Siding, we had record results, setting new records for SmartSide sales volume in revenue. In OSB, we had our best earnings quarter since Q1 of 2006, and we were EBIT positive in EWP. Our OSB and siding business results were driven by improved pricing and sales volume. In EWP, we realized improved pricing and volume across all product lines and benefited from a strong focus on cost reduction.

In South America, we saw a modest growth over the first quarter of 2017 in sales and earnings despite continued challenging economic environments in both Brazil and Chile. I do want to highlight SmartSide sales growth. 2017 marks the 20th anniversary of LP’s introduction of SmartSide. We have sold over 10 billion square feet of SmartSide, and continued to capture growth in the quarter by expanding distribution and data placement, adding to our contractor base and converting several big builders.

I am also very pleased with the continued expansion of our business with shared manufactures. Overall, we are gaining market share because we manufacture quality products that are durable. And we have an excellent sales team supported by increasing brand awareness and strong product management.

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

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

The OSB mill expansion project at our Panguipulli, Chile location is proceeding on time and budget with a startup planned for Q3 of 2018. We have completed the construction phase of the I-Joist line in Lautaro, Chile with the first being produced on July 5th. And we’re moving ahead with the conversion of our Dawson Creek OSB mill to SmartSide. The conversion will support SmartSide’s strong sales growth. The decision to convert Dawson Creek versus other alternatives is driven by the project’s higher financial return, lower execution risk and shorter timeline or speed to market.

At this point, we expect the project to cost about $130 million. The extensive start up for Dawson Creek SmartSide production is Q1 2019. We forecast that with the addition of Dawson Creek to our SmartSide production platform, we will have sufficient SmartSide capacity through 2021. Given that the project timelines for both Cook, Minnesota and Val-d'Or, Quebec, will be longer than for Dawson Creek, we will continue the feasibility studies for both these locations. We will update you on timing and progress on these and other options for SmartSide capacity growth.

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

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

With that, I will turn the meeting back over to Sallie to fill some questions.

Sallie Bailey

Thank you, Brad. Geisha, we would like to take some questions now, if we could go over queue.

Question-and-Answer Session

Operator

Sure [Operator Instructions]. And our first question comes from Ketan Mamtora from BMO Capital Markets. Your line is open.

Ketan Mamtora

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

Brad Southern

Well, I’ll make three points that we’re studying in making the decision for the next mill. As you mentioned, Ketan, obviously Cook would be a larger -- is a larger site and we would put a larger press in there, so it would be a higher capacity plant. Though, right now, the site there is basically has no equipment installed at all and would require pretty significant building construction. So it would be a longer timeline for Cook than it would be for Val-d'Or to get start up. And then thirdly the optimum mix in the two plants would probably be a little bit different. But we really like the press size in Val-d'Or for trim production.

So as we continue to do the valuation, we’ll be looking at our sales mix and trying to quantify projected growth across the different skews. And depending on how that comes out, if we were to get very much stronger trim growth in the future that would bias a little bit towards Val-d'Or; second thing biases to Val-d'Or is speed, it would be a little quicker but then we really like the larger capacity that Cook bring for us. So that’s the way we’re evaluating the options.

Ketan Mamtora

And then again I know it’s still preliminary. But any thoughts around how much of CapEx requirement there might be at the Cook versus Val-d'Or?

Brad Southern

We’re still pretty preliminary on that. But it would be quite a bit more in Cook.

Ketan Mamtora

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

Brad Southern

No, I would rather wait and get deep into the engineering before I give guidance there.

Ketan Mamtora

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

Brad Southern

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

Ketan Mamtora

And Sallie, will it be possible for you to provide some sense on how much the downtime cost you in the second quarter, and how much were raw material to headwind year-over-year?

Sallie Bailey

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

Ketan Mamtora

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

SallieBailey

So it looks like it was about 27 down days in the second quarter of ’16, it was 37 million square feet in the first quarter of ’17, we were down for 60 days and it was 83 million square feet.

Operator

Thank you. And our next question comes from George Staphos from Bank of America Merrill Lynch. Your line is open.

George Staphos

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

Brad Southern

So let me start with the OSB question. And just to be clear, our first priority, at all times, is meeting demand for our SmartSide product line. So we’ve never -- do not run Siding to Siding orders and order on OSB no matter what the OSB pricing is. And we’ve done so much investment in demand creation in Siding that we obviously do not want to extend order files in Siding in order to support OSB even at the margin we’re seeing today. So the LSP that we run in the business is just capacity filler across our system. And just keep in the mind with the addition of Swan we added a good bit of capacity into our system. So even with the good volumes that we had this quarter we we’re not selling out across our all machinery to capacity in Siding.

And so as far as good quarter, probably a little bit light compared to what we were thinking. But I’ll just ask you to look at year-to-date for our SmartSide, volume is of 9%. We did have pull forward as a result of the pricing that we implemented across the first quarter. And so I’m very pleased with the year-to-date growth there and we are seeing the volumes return normal in Q3 since we’re passed the pricing level, so pricing impact.

Sallie Bailey

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

George Staphos

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

Sallie Bailey

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

George Staphos

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

Sallie Bailey

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

George Staphos

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

Brad Southern

We were happy with the pace of sales for the quarter and the production. As we’ve mentioned before, we’ve tried to match production to sales and we responded nicely to our order intake. But we were pleased with the sales and production for the quarter.

Operator

And our next question comes from Gail Glazerman from Roe Equity Research. Your line is open.

Gail Glazerman

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

Brad Southern

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

Gail Glazerman

And so you referenced somewhat weak demand in Chile. I am just wondering if you can give some perspective there, and is it something that’s stabilizing just as you’re looking to bringing on capacity next year.

Sallie Bailey

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

Gail Glazerman

And could you talk a little bit about what you’re seeing in wood cost throughout the businesses?

Sallie Bailey

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

Operator

Thank you. And our next question comes from Mark Weintraub from Buckingham Research. Your line is open.

Mark Weintraub

First, I just wanted to explore probably a little bit the degree to which the OSB shipments contributed to profitability inside -- was it terrific quarter. But it did seem that if I read correctly in the queue, shipments were up by 40% whereas production based on what you said seemed to have been up maybe up by 20%. And so just I’m trying to get a sense as to how much of the profitability in the second quarter maybe would have been attributable to OSB in the Siding division?

Sallie Bailey

Mark, could you ask that question again, because we were thinking -- we were hearing OSB and I think you were asking about Siding.

Mark Weintraub

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

Brad Southern

It’s about $4 million for the quarter.

Mark Weintraub

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

Sallie Bailey

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

Mark Weintraub

I was a little confused on that actually, because I interpreted that the 11 million, that was production because that’s only 11 over 64 is a lot less than 40%. And the 40% was in the queue. And I assume that refer to shipments as opposed to production. And maybe I got it wrong, maybe I’m misinterpreting.

Sallie Bailey

That’s referred to shipments. But I mean, fundamentally, it does refer to shipments. But I mean the shipments on the volume production, I know we can all do the math, are going to be -- I think, the best way to talk about it is as we also mentioned in the queue that the difference is $3.5 million and I think that gives you some sense of what it is. And it's just -- because we sale such a small amount of OSB out of the Siding business, the number’s top.

Mark Weintraub

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

Sallie Bailey

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

Mark Weintraub

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

Brad Southern

So just keep in mind when we think out CanExel, two things; first of all, it’s a pre-finished product; and almost all of that’s going into repair and remodel versus new housing. There’s some of it ends up on new housing, but it's primarily repair and remodel SKU. And also we have a rather large position in Europe with that product line. So we get a pretty kind of balance between France, in particular, and Quebec and then most of the volume is going into repair and remodel.

Operator

And our next question comes from Chip Dillon with Vertical Research. Your line is open.

Chip Dillon

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

Brad Southern

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

Chip Dillon

And how much -- what volumes we except out of that facility in I-Joist?

Brad Southern

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

Chip Dillon

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

Brad Southern

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

Chip Dillon

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

Sallie Bailey

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

Chip Dillon

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

Brad Southern

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

Operator

Thank you. And our next question comes from James Armstrong with Armstrong Investment. Your line is open.

James Armstrong

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

Brad Southern

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

James Armstrong

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

Brad Southern

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

James Armstrong

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

Brad Southern

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

James Armstrong

And are you planning to make pure Siding there or should start up with OSB first and then slowly switch to Siding as we go into 2020?

Brad Southern

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

Operator

Thank you. And our next question comes from Sean Stewart with TD Securities. Your line is open.

Sean Stewart

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

Brad Southern

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

Operator

Thank you. And our next question comes from Paul Quinn with RBC Capital Markets. Your line is open.

Paul Quinn

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

Brad Southern

Well, the capacity to be coming on late this year, starting up next year. All those mills that are announced will be in a ramp up curve situation. I would think if we get the 8% to10% growth in housing and that translate into single family housing,, the demand will help absorb that capacity. So we’re still looking at it being fairly balanced next year. I guess with the two variables being will housing continue recovery pace that it's on and then how quickly would some of those mills get up and running as they move through the year. But we’ve said before, Curtis said it before that with the OSB industry is going to need capacity as housing continues to recover. So I think next year could still be in balance obviously won’t be as tight as it was this year with all the mills coming on though.

Operator

Thank you. And we do have a follow-up from George Staphos with Bank of America Merrill Lynch. Your line is open.

Unidentified Analyst

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

Brad Southern

Well, I would say the biggest trend right now as lumbar pricing recovers it makes our and the industries’ EWP products much more competitive from just from a share call standpoint. And I think that has driven some of the good demand growth we’ve seen this year. Now, we have benefited too from a strategy, we started executing last year, increasing our dealer placement. So we’ve got a wider breath of selling points for our product than the higher lumbar pricing and any tightening in availability of lumbar really translates into good volumes for EWP, along with recovered housing market.

Unidentified Analyst

And then also just with regards to OSB. Just want to get a sense for me just with regards to OSB consumption and how that’s changing on per single family start basis? So it's like reworded. I mean what trends have you seen in OSB consumption for single family housing start.

Brad Southern

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

Unidentified Analyst

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

Brad Southern

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

Operator

Thank you. And our final question comes from Steven Chercover with D.A. Davidson. Your line is open.

Steven Chercover

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

Brad Southern

So let me -- this is a little bit in my prepared comments, but I don’t mind repeating it. So we had license agreement with Barrier Technologies and we -- basically, that licensing payment is about 75% of the revenue. They do have a couple of other larger customers then after that it gets really small. So with that licensing arrangement and the transfer of that technology to our facility in Alabama and the success we’re having growing the market share, we really felt it was important strategically to secure that technology if we’re going to make the marketing investment we’re making there. So it was primarily an acquisition that secures the technology, eliminates the licensing payment and then also provides some further volume with the volume that they already were selling.

There is a manufacturing plant that comes along with this and Watkins, Minnesota, a relatively smaller plant compared to what we’ve built in Alabama. It has been running our FlameBlock product for several years as we built the market for starting up Alabama. So that facility will become part of our asset base, obviously. And we will continue to manufacture to FlameBlock up there so that we can continue with logistics optimization. So as we get a plant, we get the technology, we get all the patents and intellectual property. We pick up a couple of smaller customers. And then most importantly, we’re very confident now that as we continue to grow the demand for the product, we have the ultimate exclusive on the technology. So that was the strategic rationale.

Steven Chercover

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

Brad Southern

Yes, 90 plus percent OSB. So we are commercializing Web site, FlameBlock Web site for I-Joist and selling that product now.

Steven Chercover

And I have follow-on that’s adjacent. Will you guys get any near term benefits from Weyerhaeuser’s misfortunes in Colorado, or are you simply too far from that market?

Brad Southern

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

Sallie Bailey

Thanks Steve. And Geisha I think that's all the time we have for questions. So if you could please provide the replay number, we’d appreciate it. I'd like to thank everybody for participating in the call. And as always, Mike and Becky are here to answer any follow-up questions, and thank you. And we hope you have a really good day.

Operator

Thank you. That does conclude the program for today. The replay number is 1800-585-8367 or 855-859-2056, or the local number is 404-537-3406. Ladies and gentlemen, please enjoy the rest of your day. Thank you.