Now two years in as top executive—and after the worst economic quarter in those two years—the disciplined and structured Brad Southern, CEO of LP Building Solutions, continues to change the company. He did an acquisition of a Green Bay, WI, prefinished business in the second quarter in a business segment where he saw high growth prospects. LP converted one under-used oriented strand board (OSB) mill to siding production and indefinitely curtailed another. He saw his team reduce operating costs, despite the supply/demand strain from a “slow” US housing market. He did all this while pricing for OSB, which LP pioneered in the USA in the 1980s, was down almost 50 percent year-over-year, which reduced LP sales by 27 percent.
“OSB has struggled to consistently earn its cost of capital the last 10 years. To some extent, past leaders have given up on that. That’s not how we’re approaching it,” Southern says. “I want all our businesses to earn cost of capital consistently.”
Analysts credit Southern, 58, for his focus and straightforward determination. They cited this in selecting him as the 2019 RISI CEO of the Year in North America. He is the 21st winner of the annual award and the first from LP. Southern was honored at the 34th annual RISI North American Forest Products Conference in Boston in October.
“He had been in charge of the siding business as it has undergone this very successful business improvement,” said one analyst of Southern. “He comes at things in a seemingly disciplined and thoughtful fashion. He’s very reasonable and gives investors greater confidence.”
“For a business that has traditionally been a commodity business, he has really tried to push it upstream,” another analyst said. “He understands that he needs to get LP to a different level.”
Southern was appointed general manager of LP’s siding business in 2004. In the last five years, the siding business has consistently grown. For the second quarter this year, LP SmartSide strand sales were US$200 million. Overall siding EBITDA margin was 19 percent in the second quarter of 2019. LP growth in SmartSide strand reduced its exposure to the volatile OSB business. Five years ago, LP in the second quarter generated 30 percent of sales from SmartSide siding. In this year’s second quarter, even with the housing downturn, SmartSide represented 38 percent of sales. Total company sales for the first six months are US$1.2 billion, or annualized US$2.4 billion, this year.
Southern wants LP siding to keep growing in home building, retail, and repair and remodel. He envisions 10-12 percent per year growth in SmartSide siding revenue. About 40 percent of the company-made siding is for single-family homes, with 25-30 percent for retail buildings, and 25 percent for repair and remodel jobs.
LP will go national with a prefinished product offering at the International Builders’ Show in late January in Las Vegas. This enables LP to sell its own branded product nationally. The recently completed acquisition of the Green Bay prefinished business moved LP in this direction.
Southern says he has about 175 salespeople around North America who constantly meet with contractors to have them try LP siding, engineered wood products (EWP), and Structural Solutions OSB (value-added OSB). He says LP has “super dynamic product distribution” nationally and a broad product base. It’s all about getting in the door to test the product for a contractor, he says.
“LP siding is a great product with a low claims rate,” Southern adds. “First-time users are incentivized to try it. We can sell this all across North America.”
It’s also about logistics, as in almost any pulp, paper, or forest products business today. Southern says LP is using information technology for logistics decision-making and working harder on every route in terms of the cost for truck or rail.
Southern further emphasizes that the company engineers continue working to design new products, in SmartSide siding and specialty OSB. They’ve recently launched OSB products including LP WeatherLogic Air & Water Barrier, LP Legacy sub-flooring, and LP Flameblock Fire-Rated Sheathing. He says the engineers design OSB products that are a premium above commodity OSB so “you can get paid for that” premium product.
Low demand means big downtime and, as shown in the second quarter, Southern will run his OSB to orders only. The company took 105 downtime days system-wide in the second quarter, up from 34 in second-quarter 2018. Southern says he also will continue to look for conversions of OSB mills to siding mills.
Across the business, Southern reports the company is relentlessly focused on improving operating efficiency through overall equipment effectiveness (OEE) and also improvements through procurement savings, lower logistics expenses, and reducing overhead. Through the first half of this year, LP realized US$17 million in efficiency improvements over the first six months of 2018.
Further, if demand is not enough, he will take out capacity. In the third quarter, the company idled its Peace Valley, BC, mill, its largest OSB mill. During the later portion of 2018, LP converted its Dawson Creek OSB plant in British Columbia to a siding mill.
“We don’t run our OSB production to inventory. That’s another change (at LP) that has happened,” Southern says. As for the Peace Valley curtailment, he adds, “We manage differently (today) than we did in the past.” LP will continue to curtail Peace Valley until the market demands the additional capacity.
Southern’s strategy sounds similar to what is occurring in containerboard today in the US. To protect their benchmark linerboard price in the domestic market, US producers took extensive downtime, which dropped the industry operating rate swiftly from 98.8 percent in September 2018 to 89.5 percent by February, a nine percentage point decline in the five months. The downtime continued through at least the first half of this year. Veteran industry watchers claim this type of operational acumen was unheard of 20 years ago.
LP’s supply/demand strategy has nothing to do with containerboard, but the containerboard example did ring a bell for Southern. Southern was in the North American containerboard business while at MacMillan-Bloedel (M-B), where he worked for 15 years before joining LP. He even designed a sheet plant in Arkansas that still runs today, operated by International Paper.
Southern’s mill production strategy is hard-nosed because OSB margins have been on a disastrous roller coaster. In the second quarter this year, LP’s OSB margin was negative; two years ago in second quarter, it was a very high 55 percent margin; and five years ago in second quarter, it was a negative margin business again (based on sales and adjusted EBITDA).
Southern has a bachelor’s and master’s degree in forest resources from the University of Georgia. He received his graduate degree in 1984 and went to work for M-B for 15 years until 1999 when Weyerhaeuser acquired M-B. At M-B, Southern was first in the woodlands division “scheduling land for harvesting,” then strategic planning, and finally containerboard manufacturing, where he led the design and startup of a greenfield sheet feeder plant in Russellville, AR, and was general manager for three years. He also worked at the large Pine Hill, AL, containerboard mill, where he was influenced by Wyatt Shorter, the mill manager. Southern says Shorter taught him about the “moral imperative for a good safety program.” Southern left M-B in 1999 to join LP.
He was hired by Curt Stevens, who became LP’s CEO in 2012. Southern replaced Stevens two years ago as the company CEO. From Stevens, Southern says he learned about approachability and credited Stevens for helping him make a “smooth transition—without ego” to the top spot at CEO.
A city boy raised in the Atlanta suburb of Forest Park, GA, by his father, an engine mechanic for Delta Airlines, and his mother, a registered nurse, Southern stayed local for college at the University of Georgia. Growing up, Southern most remembers his summers in Hancock County, northeast Tennessee, at his grandparents’ home with his younger brother. “I learned the value of getting up in the morning and working on something every day, rain or shine,” he says. His grandparents were in the cattle farming and tobacco businesses.
At the university in Athens, GA, Southern recalls he learned under and was influenced by finance professor James Fortson, a Union Camp Professor of Forestry chair. Southern says he learned about life, finance, business logic and analysis, and shareholder value from Fortson, and that a business’s “value is based on its future cash flow and that management’s job is to improve the cash generation capability of the business.
“Fortson laid fertile ground for me on the importance of shareholder value,” he says. In the first half this year, LP paid US$438 million in share repurchases, even with the economic headwinds.
“We have a disciplined method for creating value and to fight for those opportunities. We’re looking to improve every day,” Southern says.
Greg Rudder is managing editor for PPI Pulp & Paper Week. He covers the North American containerboard and kraft paper markets. Reach him at [email protected]