Louisiana-Pacific's (LPX) CEO Bradley Southern on Q4 2017 Results - Earnings Call Transcript

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

Louisiana-Pacific Corporation (NYSE:LPX) Q4 2017 Earnings Conference Call February 13, 2018 11:00 AM ET

Executives

Mike Kinney - Director of Investor Relations

Bradley Southern - Chief Executive Officer

Sallie Bailey - Executive Vice President and Chief Financial Officer

Analysts

Sean Steuart - TD Securities, Inc.

Mark Connelly - Stephens Inc.

Chip Dillon - Vertical Research Partners

John Babcock - Bank of America Merrill Lynch

Mark Weintraub - The Buckingham Research Group

Gail Glazerman - ROE Equity Research

Steven Chercover - D.A. Davidson & Co.

Paul Quinn - RBC Capital Markets

Ketan Mamtora - BMO Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 Louisiana-Pacific Corporation 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 be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I'd now like to turn the conference over to your host for today Mike Kinney, Director of Investor Relations. You may begin.

Mike Kinney

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

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

I do want to remind everybody all participants on the call about the forward-looking statements comment on Slide 2 of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information included on Slide 3 of the presentation. The appendix attached to the presentation has some of the necessary 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.

Now let me turn the call over to Brad.

Bradley Southern

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

In 2017, was, by all accounts, a year of significant growth and development at LP, highlighted by continued progress on our goal to transform LP into a leading building solutions company. In fact, it was our strongest year since 2005, a meaningful achievement when considering the fact that there were half as many new housing starts in 2017 compared to 2005.

Our performance for the year was broad-based and we ended the fourth quarter with increases in revenue, adjusted EBITDA, and EBITDA margins in all four of our segments; OSB, Siding, EWP, and South America. We are also pleased to announce that our board has reinstated a quarterly dividend of $0.13 per share, which I will discuss in more detail when I review our capital allocation strategy.

While OSB continues to be the largest revenue contributor on a consolidated basis and we benefited from a positive pricing environment as well as other factors including increasing mix from our value added products in OSB. It is our strategic shift in the specialty products, specifically Siding, the best characterizes the future of LP.

Our purpose on growing Siding and specialty products is not new, what is new is the degree to which we are aligning all aspects of our business to achieve this goal from internal target setting to how we measure our performance. As Siding and specialty products continue to increase as a percentage of revenue and as we continue to shift capacity out of commodity OSB and into Siding and other specialty products, we will be able to decouple our performance from the commodity cycle that dominates OSB.

We believe that the end result of these focused and deliberate actions will be more consistent and sustainable results over time, greater growth opportunities, a stronger margin profile, and ultimately increasing shareholder value.

I am pleased with the progress that we made on this transformation throughout 2017. Let me provide some highlights from the fourth quarter starting with Siding. We achieved record Q4 sales volume and adjusted EBITDA in Siding together with a year-over-year increase in pricing. These results continue to trend since 2011 of steady top and bottom line growth in Siding.

In addition, our market share growth has outpaced single-family housing starts since the fourth quarter of 2016 which we believe is in part a strong testament to the high quality and value of our SmartSide offering. Recall that our sales volume growth justify the 2015 conversion of our Swan, Manitoba OSB mill to Siding. Our expectations for continued strong Siding growth justify the current conversion project proceeding in Dawson Creek, British Columbia. We will continue to evaluate multiple options for the next Siding mill including a restart of our ideal mill in Val-d'Or, Quebec or Brownfield project in Cook, Minnesota.

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

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

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

Our North American businesses delivered this performance against a backdrop of continued recovery in the housing market and the building supply industry. In the fourth quarter, we witnessed continued expansion on a year-over-year basis and single-family housing starts, which is driving healthy demand. The repair and remodel sector also saw improvement, driven by the overall health of the economy and housing market.

These factors contributed to improved price realization across our three product segments. The recently passed tax reform package is likely to boost investment and consumer spending in the near-term. While there are some concerns about how the tax legislation will impact the housing market.

Overall, the market is showing the most robust activity we've seen in over a decade. For example, in November, new single-family home sales reached the highest figure in over a decade. And in December, the NAHB Index Builder confidence soared to its highest rating since 1999.

Let me conclude with a high level review of our capital allocation framework as well as our view on the year ahead. In terms of capital allocation, we have one overarching goal and that is to strategically deploy capital where we believe we can drive the greatest value for our shareholders.

We will do so by actively managing our balance sheet. We will leverage existing cash on hand and excess cash flows generated throughout the year to enhance shareholder returns through organic and potential in organic growth opportunities. While maintaining the resources necessary to support our ongoing liquidity needs.

Our priorities fall into three main buckets and Sallie will provide a bit more color into our CapEx plans in her prepared remarks. We ended the year with a cash balance of almost $930 million. First, we plan to retain approximately $300 million on the balance sheet to support liquidity and working capital needs.

Secondly, we plan to allocate $300 million to support our organic growth initiatives and to pursue value enhancing M&A in our core and adjacent markets products and technologies.

Finally, we will utilize approximately $300 million to sustainably return capital to shareholders, through quarterly dividends and opportunistic share repurchases. As you may know, we currently have $100 million share repurchase authorization in place and we expect to be active and deploy that authorization as and when we see opportunity in the share price.

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

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

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

In terms of the markets in which we operate, we believe based on recent data that single-family demand will remain strong with an upper trend based on the fact that builder confidence remains high. On the multi-family front, we currently expect the market to remain relatively flat in the first quarter due to over saturation in the market and pricing pressure. From a forward planning perspective, we prepared our 2018 budget based on anticipated 1.3 million housing starts.

Let me provide you with a brief overview of our current product channel inventory levels and order files. SmartSide inventories remain at normal levels. OSB channel inventories are lean. OSB order activity is strong. Logistics issues related to railcar availability have tightened supply availability in the west and the north central markets.

EWP inventory levels are normal. In terms of demand, SmartSide demand is robust across all market segments. We expect demand to remain strong in OSB, while EWP demand remain strong due to single-family growth expectations. In short, the overall market environment remains favorable and onuses on us to execute.

We entered 2018 from a position of strength with the opportunity to drive sustainable growth and value to our shareholders. We have an engage and experienced management team to bring a track record of delivering on the type of transformation that we are pursuing company-wide.

We are aligned on our goal to build a best-in-class operating platform with flexible low cost assets and increasingly optimized supply chain and enhanced sales and marketing platform and a focus on developing the talented team we need to win in our markets.

While there is more work to do ahead, we are successfully executing on our strategy to become a building solutions leader with a large and growing specialty products business. All of this is supported by a strong balance sheet that will provide us with the flexibility to deploy capital to the highest return opportunities.

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

Sallie Bailey

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

Moving to Slide 4 of the presentation for discussion of the fourth quarter 2017 consolidated results. We reported net income of $711 million for the fourth quarter of 2017, a 29% increase from net sales of $550 million in the fourth quarter of 2016. Fourth quarter 2017 net income of $131 million or $0.89 per diluted share compared to net income of $42 million or $0.29 per diluted share in the fourth quarter of 2016.

Adjusted income from continuing operations for the quarter was $107 million or $0.73 per diluted share based upon a normalized tax rate of 35% as compared to $33 million or $0.23 per diluted share reported in the fourth quarter of 2016.

Adjusted EBITDA from continuing operations was $199 million from the quarter compared to $85 million in the fourth quarter of 2016. For the full-year, we reported net sales of $2.7 billion, a 22% increase from net sales of $2.2 billion in 2016. Net income was $390 million or $2.66 per diluted share for the year compared to net income of $150 million or $1.03 per diluted share in 2016.

Adjusted income from continuing operations for 2017 was $341 million or $2.33 per diluted share based upon a normalized tax rate of 35% and compared to $130 million or $0.89 per diluted share reported in 2016. Adjusted EBITDA from continuing operations for 2017 was $660 million compared to $346 million in 2016.

I would like to give a couple of highlights before I move into the individual segment results. This is the best financial performance for LP since 2005 when U.S. housing starts were over 2 million. In 2005, OSB represented 60% of the company's total sales and 85% of the business units operated. In 2005, the Siding segment represented 17% of the sales and 7% of the business unit operating income. Fast forward 12 years, in 2017 was just over 1.2 million U.S. housing starts, OSB represented 49% of the net sales of the company and 65% of the business operating income.

In just 12 years, in end markets with demand 42% below the 2005 demand levels. The Siding business sales have almost doubled to represent 32% of the Company's total revenue, and the Siding business operating income has quadrupled and now represents 28% of the business segment operating income. We are transforming LP into a building solutions company and the financial results reflect that change.

Moving on to Slide 5 and a review of our segment results; starting with Siding. This segment includes our SmartSide and CanExel Siding products, as well as OSB produced at our Hayward, Wisconsin operation. Looking forward to 2018, we will see an increase in OSB in this segment in preparation for the conversion of our Dawson Creek OSB mill to a Siding mill.

The Dawson Creek mill became part of the Siding segments effective January 1, 2018. Siding sales for the quarter were $213 million, 26% increase from the fourth quarter of 2016 with adjusted EBITDA of $53 million for the quarter and 81% increase from the fourth quarter of 2016. We are pleased with the continued growth in the fourth quarter in our Siding segment, reflecting our increasing strategic focus on Siding growth as a core element of our transformation as Brad outlined in his remarks.

For the quarter, SmartSide average sales prices were up 6% due to changes in product mix and the price increase. Sales volume increased 16% in the quarter due to the demand in key markets. We produced roughly 40 million square feet of OSB in the segment during the fourth quarter of 2017 which is comparable to the production levels in the fourth quarter of 2016.

The Siding segment reported sales of $884 million for 2017, an increase of 18% from $752 million in 2016. Siding segment operating income was $187 million for 2017 compared to $126 million in 2016 and adjusted EBITDA was $219 million as compared to $154 million in 2016. SmartSide volumes were up 10% for 2017 compared to 2016 with sales prices up 5% for SmartSide. Increases in OSB prices added $40 million to Siding operating results in 2017 compared to 2016.

Turning to Slide 6. OSB reported net sales for the fourth quarter of 2017 of $358 million, up 30% from $276 million in the fourth quarter of 2016. OSB reported operating income of $136 million compared to $60 million in the fourth quarter 2016. Adjusted EBITDA from continuing operations was $153 million compared to $74 million in 2016. Sales volumes were 3% lower compared to the fourth quarter 2016. Pricing for OSB was 34% higher, compared to the fourth quarter of 2016, which resulted in improving operating results by $92 million.

Increased costs in raw materials and higher manufacturing costs because of downtime partially offset the higher sales price. The OSB segment had 45 down days in the quarter which equals about 66 million square feet of loss production. OSB reported operating income of $426 million and sales of $1.3 billion for 2017 compared to $186 million and $1 billion of sales in 2016.

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

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

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

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

Moving on to Slide 8 of the presentation, we have changed our presentation for our South American business segment from a geographic perspective to a product line perspective. As we continue to expand our presence in South America through addition of sales offices in Peru and Argentina, sales by product line is a better indicator of the financial performance of the segment.

For the quarter, our South American segment recorded sales of $41 million, $7 million higher than the $34 million recorded in the fourth quarter of 2016. Operating income was $8 million and adjusted EBITDA was $10 million for the fourth quarter of 2017.

The fourth quarter of 2016, we reported $2 million of operating income and $4 million of adjusted EBITDA. OSB volumes were flat year-over-year, while Siding sales were 32% higher year-over-year. Pricing was up 19% in OSB and 6% in Siding, compared to the fourth quarter of 2016.

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

Total selling, general, and administrative expenses were $46 million in the fourth quarter of 2017 about $2 million lower than the fourth quarter of 2016. It's primarily related to timing on management compensation accruals.

For the year, selling, general, administrative expenses were $190 million, up about $7 million from 2016 driven mainly by increases in compensation expense, software maintenance agreements and expenses associated with our strategy review.

Please refer to Slide 9 of the presentation. Capital expenditures for the year were $149 million as we continue to reinvest in growing the Siding and South American businesses, as well as improvements to increase our productivity, especially in our OSB mills.

Brad covered our capital allocation priorities. So let me just recap the key items before we move on to questions. Of the approximately $930 million in cash on the balance sheet at the end of the year, we plan to retain approximately $300 million to support liquidity and working capital need.

Secondly, we are allocating approximately $300 million to support our organic growth initiative and to pursue value enhancing acquisition in our core and adjacent markets, products and technology. And finally, we will utilize approximately $300 million to return capital to shareholders to the newly reinstated quarterly dividend and opportunistic share repurchases.

As Brad noted, we currently have $100 million share repurchase authorization in place and we will repurchase shares as and when we see value in the share price relative to our expectations and relative to other higher returning cash deployment opportunities.

We are planning to use between $200 million and $250 million of cash for capital expenditures in 2018, of which approximately $115 million is for growth projects like the Dawson mill conversion and the third mill in Chile. And the remaining approximately $130 million is associated with maintenance and smaller capital return project.

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

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Sean Steuart of TD Securities. Your line is now open.

Sean Steuart

Thanks. Good morning.

Sallie Bailey

Good morning.

Sean Steuart

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

Sallie Bailey

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

Bradley Southern

And I'll speak to the pricing, Sean. So we have two kind of value add products in our portfolio. There are a couple FlameBlock and legacy flooring are the best examples where we have the couple those from Random Lengths and price that those products offer price sheet, but for the rest of our value add mix, they're all priced as a adder to Random Lengths and the adder can be adjusted not weekly sometimes, we'll have contracts, but from the information you'll see through the years. They are still tied someway at a random.

Sean Steuart

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

Bradley Southern

So the capacity is 300 million square feet. You're right, we're looking at a start up in Q3, the middle of Q3. I would expect to be run in kind of by maybe half of that, after six months half of that capacity and then pushing full capacity by the end of 2019.

Sean Steuart

Okay. Thanks for that. I'll get back in the queue.

Bradley Southern

Okay. Thank you.

Operator

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

Mark Connelly

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

Bradley Southern

The OSB pricing swings flows through EWP is that your question?

Mark Connelly

Yes, exactly.

Bradley Southern

Okay.

Mark Connelly

How well you'll be - are you going to seeing the prices around on I-Joists?

Bradley Southern

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

Mark Connelly

That means that your supply and demand balances across your EWP businesses are a lot better than they were a year ago?

Sallie Bailey

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

Mark Connelly

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

Bradley Southern

Mark. I understood. Yes. So look definitely the pricing we got last year and we're getting this year as a result of tighter markets for our EWP product line. The increase in lumber pricing last year really helped our ability to recover pricing in LVL and EWP, I'm sorry in I-Joists.

So the market dynamics around pricing are favorable and then also we have been increasing shifting in our LVL plants, we have - both LVL plants are now running for shifting and we've been able to increase volume through it, our LSL plant in Houlton, Maine. So the market dynamics of that industry has improved with the recovering - with the increase in lumber prices kind of covering single-family housing starts.

Mark Connelly

Okay. That's super helpful, especially the higher lumber thing, I hadn't thought about that. I'm done. Thank you.

Sallie Bailey

Thanks Mark.

Operator

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

Chip Dillon

Yes. So thanks so much for the details. I just missed one number, Sallie would you again reiterate what the CapEx for this year is? I know you mentioned maintenance was around $130 million. What was the other growth part?

Sallie Bailey

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

Chip Dillon

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

Sallie Bailey

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

Chip Dillon

Okay. That's helpful. And then when you do put Dawson in there starting in January. I know Brad was mentioning the ramp face starting I guess in the mid-third quarter. As you ramp it, will that line still make commodity OSB when it's not making SmartSide or is it 100% dedicated, and therefore, we will see some drop off in OSB at some point as a result of the startup.

Bradley Southern

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

Chip Dillon

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

Bradley Southern

Well, so a great question. So think about it, we're not rebuilding the green end of the plant and doing a whole lot of work on the press. So we're essentially running strand panels like we are today with OSB through it. So most of the engineering and design work goes into the back end of the plant around conversion.

So usually what limits us is more of getting the quality parameters right on Siding. Now our plan is to load that plant as much as possible early. We like the fact that it's on the West Coast, so there will be some immediate logistics savings by moving production volume out there.

And then our plan would be to move OSB volume back into Hayward, which is in north central region of the country and it's an exciting mill. So we will try to run Dawson as much as possible in Siding throughout 2019 in order to get all the quality parameters lined out in the cruise trained, and we would like to have any incremental OSB that we run due to Dawson move back into the north central region.

Chip Dillon

Makes total sense. Thanks very much.

Operator

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

John Babcock

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

Bradley Southern

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

John Babcock

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

Bradley Southern

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

John Babcock

Okay, so how much of the volume - does that increase account for?

Bradley Southern

So well $200 million feet of fiber product, it was a 9% and then close to 1 billion feet of strand at 5%. We will realize 5% in strand. We negotiate that that can get somewhat negotiate away as it hits the market. So I would think 2% to 3% realization for this year would be what we're really shooting for is brand

John Babcock

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

Bradley Southern

Let me start there and then Sallie can follow-up. The way I'm thinking about the dividend, obviously we have a very healthy balance sheet right now. But we really - my thinking is, this is based on the strength of our Siding business. We see that stable earnings and stable cash flow generation as it means to reliably fund the dividend in the future.

So primarily I would hook it into - I'm thinking about it as evidence of our confidence and ability to sustain and grow our Siding business. But obviously the improvement we've seen in EWP this year and the continued growth we're getting are specially products in OSB gives us even more confidence that the dividend is sustainable and a realistic thing for our investors to expect from us as we transition into more of a building products type company.

Sallie Bailey

And then John, as we reflected on the level of the dividend, we really look to say what the S&P 500 companies were doing and what other building products company deals were and those appeared to be around the 2% yield and so we looked at last year's average share price and copulate when 2% yield would be and came up with the $0.13 a quarter.

John Babcock

Yes. Thank you. That's all I have.

Sallie Bailey

Thank you.

Operator

Thank you. Our next question comes from Mark Weintraub of Buckingham Research. Your line is the open.

Mark Weintraub

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

Bradley Southern

So there was no impact on Hurricane that we that - we saw. I do think the confidence in the building sector for home single-family homes was strong in Q4, activity around construction continued into the November, December timeframe, I should mention that we do have some rebates with distributor partners that are annually based with stair steps up as I hit certain sales figures.

So there was some last minute ordering and order for some of those higher rebates, it would be effective for some of our distributor partners. So which would have been a little bit a pull forward obviously but we didn't really see a lot of that in perspective to the whole quarter. Sales revenue and we're not seeing kind of any lag lagging of that as we move through Q1.

Sallie Bailey

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

Mark Weintraub

Yes, 110%...?

Bradley Southern

Yes, 110%.

Mark Weintraub

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

Bradley Southern

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

Mark Weintraub

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

Bradley Southern

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

Mark Weintraub

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

Bradley Southern

Well we speak to revenue versus volume and we're sticking with our 12% to 14% revenue growth for 2018.

Mark Weintraub

Okay.

Bradley Southern

The target.

Mark Weintraub

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

Bradley Southern

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

Mark Weintraub

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

Sallie Bailey

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

Mark Weintraub

Great. Thank you very much.

Operator

Thank you. Our next question comes from Gail Glazerman of ROE Equity Research. Your line is now open.

Gail Glazerman

Hi. Good morning.

Bradley Southern

Good morning.

Gail Glazerman

Just quickly on OSB pricing, it seem that it was a bit stronger then maybe the random print, would have suggested you kind of imply that your mix with value added was pretty flat quarter-on-quarter. So I'm just wondering I assume that was timing and I'm just wondering if you can give some perspective on I guess where current pricing might be verses the 4Q average and if that wasn't timing what else would have explain the performance?

Sallie Bailey

Yes. Gail, as you were coming our conference call last quarter, we spend a lot of time talking about what happened over quarter and then the fact that we price off of random one to two week behind when the random is actually printed and we foreshadowed that that was a negative to the third quarter and are positive to the fourth quarter and that's in fact what happened.

Gail Glazerman

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

Sallie Bailey

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

Gail Glazerman

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

Bradley Southern

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

Gail Glazerman

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

Bradley Southern

That's a great question. So let me do timing first. I'd see us being able to talk more about where and when next year as we get the Dawson conversion behind us and get another look at our growth rates in 2018 as well as, as I mentioned before the mix differences because that is very important to the decision where to put the next mill. So from an operating standpoint, I mentioned this before, but if we see growth that is more lap and trim related, that will bias us to a Val-d'Or start up earlier because that mill has a 16-foot press. If we see the growth in more panel like products that would go against the Val-d'Or decision, that kind of pushes into Cook.

Secondly, Cook will most certainly be a larger plant as far as capacity goes then Val-d'Or and require a longer engineering and construction phase. So we would want to get started on that a little bit earlier and it would be more costly to do it there. As far as the tax change, we do look at these investments on an after tax basis, so by definition the lower tax rate in the U.S. have made investment options in the U.S. more competitive than they were in the past. So that will play into the decision as far as calculating the financial - the differences in financial return between those two options.

Gail Glazerman

Okay. And if could just squeeze in one last one. Just as I look at housing, it's a bit more aggressive than I think you've seen in the past. I am just wondering how confident you are in that and how worried you are about labor constraints and the potential impact of rising interest rates?

Bradley Southern

Gail, it's another good question. And I don't think we have successfully predicted housing starts in our budget cycle for the last three or four years. We've consistently overshot it and so I would say the current consensus is probably a little bit below what establishes our budget number back in October. So I would say there is a little downside to that. I don't think it will materially impact our expectations around Siding and OSB, and because I think the weakness will be bias to multi-family if we don't hit the 1.3 million, and obviously we are much more dependent on a single-family across all our different product segments.

I do agree with you that the primary constraint right now is what I hear when talking to builders as labor. I have begun to hear some success stories in addressing that, but I don't think it will be in anyway resolved in 2018. And so I think as an industry, we don't hit 1.3 million starts, it won't be a demand issue for housing, but it could just be the ability of the homebuilders to actually build that many homes given the labor constraints they're facing.

Gail Glazerman

Okay. Thank you.

Sallie Bailey

Thanks Gail.

Operator

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

Steven Chercover

Thanks. Good morning, everyone.

Bradley Southern

Good morning, Steve.

Steven Chercover

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

Sallie Bailey

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

Steven Chercover

And do you expect that to persist this year?

Sallie Bailey

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

Steven Chercover

So that's over and above 2017 levels?

Sallie Bailey

That is correct.

Steven Chercover

And how about wood?

Sallie Bailey

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

Steven Chercover

Okay and it's late in the session, so this is kind of big picture. But in your effort to be “ a building solutions company”. Are there any products that are currently in your portfolio that you'd like to enter into or maybe grow?

Bradley Southern

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

Steven Chercover

Great. Okay, thank you.

Sallie Bailey

Thank you, Steve.

Bradley Southern

You're welcome.

Operator

Thank you. Our next question comes from Paul Quinn of Louisiana-Pacific Corporation. Your line is now open.

Paul Quinn

Actually I've got a new job.

Bradley Southern

Welcome aboard Paul.

Sallie Bailey

Yes, exactly.

Paul Quinn

Yes, send the checks up to Canada here. I got a couple questions I want to add. Just investors seem to be very sensitive to any kind of OSB capacity additions or withdraws, maybe if I try to figure out the downtime associated with the conversion to Dawson Creek, if I take that mills capacity at 380 and assume it's 70% operating rate and take it for three months, I get about 65 million square feet is that about close to what you think you'll lose?

Bradley Southern

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

Paul Quinn

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

Bradley Southern

We are obviously not saying either one of those mills producing any product into the market that we're aware of, and so there is some type of delay against expectations for both of those mills. But I don't really have much more information probably all the new deal on what's happening there.

Paul Quinn

Okay, and then just turning you to, I guess OSB - you made OSB in Q4, just a contribution on EBITDA basis in the quarter?

Sallie Bailey

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

Paul Quinn

So OSB contribution is not going to be on par with what we're seeing from Hayward on the Siding side, right?

Sallie Bailey

No, that's correct.

Paul Quinn

Okay, and then last question I just run South America and I like the split between OSB and Siding but if you could give us some kind of metric to follow on the size of those two respective businesses. I suspect OSB towards Siding?

Sallie Bailey

I don't know that off the top of my head. I would have guess that it is primarily OSB, because all of Brazil is OSB.

Paul Quinn

Okay. That's all I have. Best of luck. Thanks.

Sallie Bailey

Great. Thank you.

Operator

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

Ketan Mamtora

Hi, thank you. Congrats on a very strong year Brad and Sallie.

Bradley Southern

Thank you.

Sallie Bailey

Thank you.

Ketan Mamtora

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

Bradley Southern

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

Ketan Mamtora

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

Bradley Southern

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

Ketan Mamtora

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

Bradley Southern

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

Ketan Mamtora

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

Bradley Southern

We think about the CapEx that we need for Dawson for the Chilean mill that we're building now as well as possible Cook or Val-d'Or restart being part of that 300 million. We try to separate that from the maintenance capital guidance that Sallie has given in the past.

Ketan Mamtora

So Dawson Creek CapEx was also in that number?

Bradley Southern

Correct.

Ketan Mamtora

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

Bradley Southern

Okay. So two things, you're right about one. We would be interested in OSB mills and Aspen Wood basis that we believe we could in the future convert or deciding that would be a key priority for us. And I was using the example Ketan of the barrier acquisition, which with small compared to our balance sheet, but was a really key investment to secure our leadership in the play resistant OSB category. So acquisitions that would complement businesses that we know and customers that we know and markets that we understand in either structural panels Siding or Engineered Wood would be something that we're interested in pursuing.

Ketan Mamtora

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

Bradley Southern

No impact yet.

Ketan Mamtora

Okay. Very helpful. Sorry go ahead Sallie.

Sallie Bailey

I think most of those factories are not intended to start up until 2019.

Ketan Mamtora

Gotcha. Okay. That's very helpful. I'll turn it over. Good luck in 2018.

Sallie Bailey

Thank you.

Bradley Southern

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Mark Weintraub of Buckingham Research.

Mark Weintraub

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

Bradley Southern

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

Mark Weintraub

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

Bradley Southern

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

Mark Weintraub

Okay, thank you.

Operator

Thank you. And we do have a follow-up question from Chip Dillon of Vertical Research. Your line is now open.

Chip Dillon

Yes and thanks for your patience. This is the along cause. I just had one more clarification Brad you mentioned Dawson Creek would probably bridge you to if I heard you right to a Cook. If the market grows as you expect of course to where you would need to capacity of Cook. But I thought Val-d'Or was tucked in there in between. Did I misunderstand that and I know they more might make different types of product, but could you explain that 20/20 project?

Bradley Southern

Yes. So what I was attempting to explain there was just sort of thinking on when we need capacity in any form next and so given our current growth, given the conversion at Dawson we would look - would be running that new system essentially for around 2021. Okay, so now I'm not making a statement on the sequence of Val-d'Or versus Cook, because that's back to I want to take a look at mix as we get through this year before we start by saying or thinking to one mill or the other.

Maybe the point that was confusing was, in Cook that's essentially a Brownfield start up. So that the construction time for that facility would be about a year longer than, always thought of Val-d'Or, so if we did into next year and we decide Cook is the best option. We're going to have to get working on it earlier then we would have to with Val-d'Or.

Chip Dillon

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

Bradley Southern

Correct, Chip, exactly…

Chip Dillon

Okay. Sorry about the confusion. Thank you.

Bradley Southern

My apologies if I caused it.

Sallie Bailey

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

Operator

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