Louisiana-Pacific Corporation (LPX) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. All financial amounts are in millions of dollars, except per-share data. LP manufactures building products, principally Siding and OSB, and reports Siding, OSB, and South America segments. Prior-year EWP results are classified as discontinued operations.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $611 | $1,130 | $1,195 | $2,297 |
| Gross profit / margin | $119 / 19.5% | $518 / 45.8% | $220 / 18.4% | $1,139 / 49.6% |
| Income (loss) from continuing operations | $(21) | $348 | $1 | $769 |
| Net income (loss) attributed to LP | $(20) | $384 | $1 | $868 |
| Diluted EPS, continuing operations | $(0.28) | $4.28 | $0.02 | $9.19 |
| Adjusted EBITDA (non-GAAP) | $93 | $491 | $159 | $1,089 |
| Adjusted diluted EPS (non-GAAP) | $0.55 | $4.19 | $0.89 | $8.96 |
Q2 operating income was $8, versus $462 a year earlier. Q2 GAAP operating margin was approximately 1.3%, compared with 40.9%. Adjusted EBITDA margin was approximately 15.2%, compared with 43.5%. Adjusted measures exclude specified items and are not U.S. GAAP measures.
- Segments, Q2: Siding sales were $320 (down 10%) and Adjusted EBITDA $59 (down 24%); OSB sales were $229 (down 66%) and Adjusted EBITDA $37 (down 91%); South America sales were $53 (down 25%) and Adjusted EBITDA $13 (down 52%).
- Siding’s average selling price rose 6%, but shipments fell 16%. OSB prices and shipments fell sharply: structural solutions price and volume declined 59% and 20%; commodity OSB declined 55% and 23%. South America OSB structural solutions price and volume fell 17% and 15%.
- For the six months, operating cash flow was negative $30, versus positive $908 in 2022. Investing cash outflow was $271, including $188 of capital expenditures and the $80 Wawa facility acquisition. Financing cash outflow was $14. Cash, cash equivalents and restricted cash ended at $71, down from $383 at year-end 2022.
- At June 30, total long-term debt was $377, including $347 of 3.625% senior notes due 2029 and $30 drawn on the revolving facility. The $550 revolving facility matures in November 2028; LP reported covenant compliance. Stockholders’ equity was $1,419. Current assets were $671 and current liabilities $267.
Material changes and unusual items
- The sales and earnings decline primarily reflected lower OSB prices and volumes amid reduced market demand, production curtailments, and conversion of the Sagola mill to siding production. Q2 OSB price declines reduced sales by approximately $368; volume effects from curtailments and the Sagola conversion reduced sales by approximately $33 and $28, respectively.
- U.S. single-family housing starts were down 14% in Q2 and 21% for the first half year over year; multi-family starts were down 6% and 2%, respectively. Management said repair and remodeling activity appeared resilient, while noting uncertainty around inflation, interest rates, employment, consumer confidence, and financial markets.
- LP ceased Entekra manufacturing operations in Q2 and recorded $34 of business-exit charges, including $24 of long-lived-asset impairment, $6 of inventory write-downs, and $3 of other costs. The filing also cites approximately $30 of non-cash impairment charges associated with the shutdown.
- LP recorded $16 of costs to resolve patent-related claims and obtain patent rights. Other operating charges also included $5 of reorganization charges. Q2 foreign-currency losses were $8.
- A $22 discrete tax expense arose after management changed its indefinite-reinvestment assertion for undistributed Chilean and Brazilian earnings. The six-month effective tax rate on continuing operations was 95%; the filing attributes the elevated rate principally to this discrete item. Q2 reported a tax provision despite a pretax loss.
- LP acquired the Wawa, Ontario facility for $80, with plans to evaluate conversion to a SmartSide Trim & Siding mill. The facility remains shut down pending construction planning and market-demand assessment. The company also paid $35 in cash dividends during the first half.
Outlook, risks and contingencies
The filing provides no specific earnings, sales, or margin guidance. Management expects to fund capital expenditures over at least the next 12 months with cash on hand, operating cash flow, and, as needed, available revolving-credit borrowings. It says long-term demand and performance remain uncertain. Key exposures include housing and repair/remodel cyclicality, OSB commodity pricing and supply-demand conditions, raw-material and energy costs, labor and supply disruptions, foreign-currency movements, and manufacturing interruptions.
LP reported $43 of total contingency reserves, including $27 for environmental matters and $16 for other matters; estimates are uncertain and ultimate payments could materially exceed accrued amounts. Warranty reserves totaled $8, and management considered them adequate while noting future changes may be required. The company reported $13.5 of standby letters of credit outstanding. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether OSB prices and demand stabilize, and how commodity pricing and production curtailments affect margins and cash generation.
- Whether Siding shipment trends recover and whether planned mill conversions, including the Wawa facility, deliver expected growth and returns.
- The pace of cash use, working-capital needs, capital spending, and use of the revolving facility while cash balances are lower.
- The nature and potential additional cost of Entekra exit, patent-related, environmental, and other contingency matters.
- The ongoing tax effects of repatriating Chilean and Brazilian earnings, and the impact of foreign exchange and interest-rate exposure.