Louisiana-Pacific (LPX) just blew away earnings expectations, sending its stock price soaring. Siding sales are booming, ExpertFinish pre-finished siding is gaining serious traction, and even the volatile OSB market is delivering healthy returns. But buried within the celebratory earnings call, there's a fascinating detail that seems to have slipped past most analysts: a potential strategic link between the Siding and OSB businesses that could be boosting LP's bottom line.

The company casually revealed that they're producing OSB within their Siding network, transferring this production to the OSB segment at standard cost. This practice, initially explained as a cost optimization strategy for the Siding business, warrants a closer look.

Could LP be cleverly leveraging idle Siding capacity and a trained, specialized Siding workforce to generate additional OSB volume, essentially turning potential Siding scraps into OSB gold? If this is the case, the implications for LP's profitability and competitive edge are significant.

Let's delve into the numbers. In Q4 2023, LP's OSB segment generated $59 million in EBITDA. Structural Solutions, their value-added OSB product line, accounted for 52% of volume and contributed $20 million in incremental EBITDA on $39 million in incremental revenue.

Now, the company stated that the OSB production within the Siding network was "minimal" and represented between one-fourth and one-third of the year-over-year increase in OSB volume. Assuming the higher end of that range (one-third), this means that roughly 50 million square feet of OSB were produced within the Siding network in Q4 2023.

Here's where it gets interesting. If this 50 million square feet of OSB were sold at the average price of Structural Solutions ($407 per thousand square feet in Q4 2023), this would translate into roughly $20.35 million in additional revenue for the OSB segment.

Remember, the Siding segment transfers this OSB to the OSB segment at standard cost. This means that the OSB segment captures the full upside on any margin gain above that standard cost. While the exact standard cost isn't disclosed, it's likely significantly lower than the selling price of Structural Solutions.

So, even if we conservatively assume a $100 per thousand square feet margin gain for the OSB segment on this 50 million square feet of "Siding-sourced" OSB, this would result in an additional $5 million in EBITDA for the OSB segment, representing an 8.5% increase over the reported $59 million in Q4 2023.

This analysis is, of course, based on several assumptions and lacks complete transparency regarding LP's internal cost structure. However, it paints a compelling picture of a potential under-the-radar growth strategy that could be driving significant value for LP, particularly in the OSB segment.

Here's why this is so compelling. LP is essentially utilizing a workforce already trained for high-quality Siding production to create additional volume in the OSB segment. This leverages their investment in Siding specialization and capacity expansion to generate returns in a different, more volatile market.

Furthermore, LP benefits from selling this Siding-sourced OSB into a region (North Central) where they wouldn't normally have OSB capacity. This strategic placement likely maximizes price realization and avoids cannibalizing existing OSB sales.

Is this a deliberate and sustainable strategy? The company insists that this OSB production is primarily a cost optimization strategy for Siding, not a deliberate move to chase higher OSB prices. However, their practice of contracting this Siding-sourced OSB volume suggests a level of strategic planning and an intent to continue this practice.

LP has long emphasized a "whole is greater than the sum of the parts" philosophy, highlighting synergies between their different business segments. This practice of turning potential Siding scraps into OSB gold could be a prime example of this synergy, demonstrating a clever and potentially lucrative strategy that leverages their specialized expertise and assets to maximize returns across different market conditions.

This hypothesis warrants close attention going forward. As LP continues to expand Siding capacity, will we see a corresponding increase in OSB volume, particularly in the North Central region? Will the company shed more light on the financial implications of this practice, revealing its true impact on profitability and incremental margins?

OSB Segment Performance: Commodity vs. Structural Solutions

The following chart compares the average selling price and EBITDA per thousand square feet for commodity OSB and Structural Solutions based on Q1 2024 incremental performance data.

The answers to these questions could be key to unlocking the full potential of LP's strategic advantage, potentially revealing a hidden engine of growth that’s just getting started.

"Fun Fact: Oriented strand board (OSB) is often called "flakeboard" due to the large flakes of wood used in its production. This engineered wood product is known for its strength, affordability, and versatility, making it a popular choice in construction."