Q3 2019 Earnings Call
Good day, everyone and welcome to Norbord Inc.'s third quarter earnings Conference call. As a reminder, today's call is being recorded and the webcast Norbord website is at Www Dot Norbord Dot com.
Oh parts discussion today may include certain projections and forward looking statements regarding norbords business future actions and expected results.
These statements are subject to known and unknown risks.
And future results may differ materially.
Our future information on known risks please see the caution regarding forward looking information statement on Norbord.
January 31st 2019th annual information form and the cautionary statement contained in these forward looking statements section of Norbords management discussion and analysis dated October Thirtyth 2019.
And now I will turn the call over to Peter Wind, Bergen, President and Chief Executive Officer. Please go ahead Sir.
Well. Thank you Ryan good morning, everyone welcome to our Q3 29 todays conference call.
I'm joined today by Robin Lynparza RCM Oh.
The other culprits, our director of corporate Affairs.
Robert when slow a recent addition to the team and our Vice President Investor Relations corporate development.
This morning, I'll briefly summarize a few points about our Q3 results.
Before we take your questions.
Favorable U.S. housing markets fundamentals continue to be slow to translate into stronger or agreed amount.
Our mills run roll again in Q3.
However, our financial results were disappointing.
You are talking market softness that began last made last year.
Thank you to weigh on always be markets in the quarter.
Benchmark prices where mix in the third quarter.
North central and Western Canadian average regional prices were higher quarter over quarter, but still materially below year ago levels.
Well southeast prices weakened two multiyear lows.
For the fourth consecutive quarter, we took an extensive downtime or cross our North American Mills 70 mill days in Q3.
To ensure we only produced.
No.
However, despite the significant downtime, we were able to lower our north American unit cost, 4% quarter over quarter operating more efficiently.
As you know, we idled or under knowledge mill in British Columbia in August .
Earlier this month, we announced I'd be relied on line one our core deal, Georgia Mill starting mid November .
Together, just indefinitely curtails, 12% of our available North American capacity.
These were difficult but necessary the systems.
Reflect the economic realities administering our business.
We have experienced hardworking teams in both mills and decisions were a no way a reflection of the quality and capability era, we use.
I'd like to thank.
We use for older efforts [laughter].
We will continue to serve our customers without disruption from our older operating only be mills in North America.
Excluding our two Alberta mills on our second line up where deal.
Looking forward.
I've seen improvement India affordability concerns.
[laughter] record breaking rough weather, but not too we're building conditions and many north American regions over the past year.
The build up of U.S. I'm, So new home inventory now appears to have been absorb new home sales increase through the third quarter.
This trend has begun to translate into increased new home construction activity.
With this September seasonally adjusted annual rate.
Pace, well U.S. single family starts up 4% year over year nine has HM.
Homebuilder sentiment remains positive.
Nationalization of Homebuilders housing market index had its highest level up here.
So we are now I'm going to slower winter construction cheese.
The expectation is that these positive indicator still carry over into plenty plenty.
In Europe , our segment adjusted EBITDA was down from six quarters or two main reasons.
First.
And your maintenance shops in the quarter typically do it would coincide slower summer vacation season.
I'm encouraged the lost volume [laughter].
[laughter].
Welcome.
You highlighted last quarter.
Prices have been rolling over.
By Germany, Europe's largest always do come to me Mark.
As their export oriented economy is feeling the effects of mobile cranes more.
European panel prices typically move.
Much narrower Bob in North America.
That'd be a benefit that's well above average function in Europe Pops couple years.
Crisis are now reverting wordstar historical.
We have seen to the Pos, but lower prices helped stimulate baseball there'd be an.
For the plywood.
This will continue to drive consumption growth in Europe .
That's always been or more direct link between sell price raw material cost from Europe .
Oh, yes, but a few quarters like we are working hard to bring down cost well something else.
Further.
Do you see I know shot this quarter, we're addressing typical startup issues.
Holding back or ramp up in that business.
We are still in the early innings not sub pump up.
About a four year five well.
Now turning to capital allocation.
We remain committed to a balanced approach consistent longstanding track right.
In recognition of the impact of weaker than expected North American LNG markets on a financial results Nobody's, possibly borders we will be pulling back capital expenditure through 100 million dollar here.
Google focused as lower Capex bug area, so I priority.
Clothing, maintaining our mills and supporting our industrial sales growth rather than.
As well as our ongoing second phase investment bridge from attached to them.
Oh sure Olson's upstream.
The board produced a different level or do you sense.
Sure.
Oh, the bolsa renewing our normal course issuer early November .
We will consider opportunities to enhance shareholder value.
Virtually so far.
A lot of course, a disappointing quarter from a financial perspective, our balance sheet wouldn't be revenge, all our mills are running well I.
We remain confident in our markets.
We have significant upside potential in are you done HM housing market.
And are optimistic about result smoke.
I mean.
And with a well jump right into question today, So I'll turn things over to your operator, who law for it opened airlines.
Thank you.
If you like to ask an audio question. Please signaled by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask an audio question.
We will pause for a brief moment to allow everyone an opportunity it's a signal for questions.
We'll take our first question and that is from John Babcock <unk> with Bank of America. Please go ahead.
Good morning, I was the first it was weren't its couldn't talk about how you're thinking around CRE tailwind Cordele, Georgia Mill I mean at least based on some of the data that we have it seems like this would be one of the lower cost mills your system and so I guess, if you could verify that and then also could you have or provide any color on kind of potential curtailment cost associated with that.
Well at least some guidance Rhonda.
Good morning, John well, yes. It is definitely one of our lower cost mills, but the southeast region as one of the area stuff has seen the most ordered to read the weakest price.
Over the last number or quarters.
Maybe the last year it isn't enough export markets you know there's more production in the region on consumption.
You called that ultimately there was insufficient demand, but these are in the foreseeable future to support to production enough though.
And you got anything in terms Duff <unk> costs, such as you know like two line Mel I believe we of course help want them for line. So that second line continues to operate.
And are the announcement, there's about a 45.
Person reduction and the workforce and that now as a result curtailment so.
Well, that's significant amount of cost like why is it your line now going forward.
Okay, and then how much do you typically spend annually on a curtailed mill to keep it sufficiently maintained to have optionality to restart at some point.
After nine boxing areas like when it comes down to south pretty modest.
Okay, and and as far as kind of the walk Paul There. I mean are you is going to take some time to work on inventories are they pretty thin at this point.
Well I should know where you have two lines to airwatch her line through pretty I, just threw off right shoulder snow concern over the last fall.
So when they went around it sounds like.
Yeah.
John Sorry, there isn't the yeah, the seasonality to logging in the south that there was a fan VC.
So you know the and then Terry.
Fairly steady through here.
Okay, and then kind of last last question on this topic I guess I'm you know what do you know about the other you know is female shutting in South Carolina does this wind it sounds like it's going to be down for a while I'm you know any information or anything you've kind of heard out there you would be helpful.
No sorry, I don't have any more information I'm, probably you do some the newspaper article we wrapped in a couple in the local newspaper a couple of weeks ago.
Okay and then the last question before I turn it over just on Europe , I was wearing it could kinda talk about market conditions, and how they kind of trying to through the quarter and particularly how they are now I'm you know relative to how they ended the quarter.
Yeah I mean, it's the same thing on Europe is us as I pointed out you know prices are in an error brands on North America typically.
No there are adjusting or rolling over two words to long term average no volume isn't so much impact that because we still have lots of room for substitution.
So we're not challenge necessarily to sell our volume.
But we are adjusting through this lower pricing pricing environment.
Yes, it's up more towards the long term average.
Okay. Thank you.
Thanks, John .
Thank you well take our next question and that is from Sean Stuart with TD Securities. Please go ahead.
Thanks, Good morning, everyone. One follow on the the last question with respect to biggest broader north American supply trends [laughter]. So between the two mills and B C. In your move in Georgia, and G.P., It looks like 9% to 10% of the market is coming out.
Pretty quickly and I guess I want to look at the other side of that do you have you keep revitas Peter your updated thoughts on industry capacity creep.
And any perspective, you have on operating rates for the mills that restarted 2017 2018 is that fully in the market now.
Any perspective, you can provide there.
Good morning show I'm Ah well I'll do my best obviously, we have limited perspective, so our competitors or operations, but you know if you look at the A.P.A. production stats, you know where you could try to say you could sort of calculate that on average.
Over the year, you know mills run out about 91% Walter Reed is capacity in that range anyways.
And I repeat we sort of summed up we would expect that these mills that started up.
Middle of last year are getting pretty close through their sort of great numbers.
And show.
No I think there's not there's not a lot less left off Oh volume increases from doors ramp ups.
I would be my expectation.
In terms of creep you know revolvers talked about the fact that it's our belief that.
Pass the only expand spenders are significant capital project.
To support it.
And if there isn't you know orders you know, there's very limited opportunity to up to make a substantial difference in the amount of avoiding that's available out of an existing though.
Okay. That's helpful and a follow up on Europe as well you. The indication was that the Inverness ramp was a little lumpy in Q3.
How fast is that get resolved is this a one quarter issue or is this is a multi quarter.
Ramp state ticked up where you want it.
That's a good question you know.
S. Three I've talked about in the past you know we opted to.
To invest.
What about 50% of Greenfield or there is in return the ninth you're already ramp up spread out over four years those reserves layer them the investments.
So ramp ups are never smooth, but oh youre at the moment it looks like we're back on track through our original ramp up schedule. After that's something that Shouldnt third quarter.
Okay. That's all they have for now thank you very much.
Thanks, So [noise].
Thank you we will take our next question and that is from Andrew Kuske with Credit Suisse. Please go ahead.
Thank you good morning, maybe I'm a big picture question just on industry outlook.
Some of the curtailments sort of happened.
Do you look at the set up of the industry is being somewhat similar to what we saw in the early two thousands where housing trends continue to increase market capacity was tight.
It was getting tighter for different reasons. This time around but then obviously, there's fewer players in the industry versus the early 2000. So I guess, how do you think about this the cycle we're seeing now.
Yeah. Good morning, after I read that's kind of for Prairie broad question, but I I guess, there right I would answer it is.
Certainly there's fewer players in the industry, but but what does bring important Florida markets has been.
Hey housing demand picture, though this much slower in developing done could've done has been forecast.
I think decisions have been made.
In the past number appears to start up capacity anticipating housing to recover faster to that 1.5 million level that everybody is talking about.
And that may or may not materialize I.
I think you know it's certainly.
You know, but this has resulted in the kinda conditions.
I was just perhaps to pause on.
And that makes decisions around two of our operations.
And Oh, you know we are now sort of shutting our perspective, so I'm.
No housing starts in the one corn to the 1.3 million range, that's probably something we should be thinking about over the longer or does the near term outlook.
It is off the shelf is obviously different dunbar lots into early two thousands.
But that doesn't mean that would always be markets can't be.
Got it be stronger I should know that's always a fair amount of by the problems for treatment about supply.
That's that's helpful and maybe and maybe just another difference between <unk>.
Now versus bad it's just the alternative avenues for Oh, let's be products. So you've spent a lot of time.
Oh on specialty product, but when you look at just other source weather's for furniture supply or industrial applications could you give us a bit of a flavor of what your mix is now into that channel and how do you think about just the broader industry.
Oh I think that's that's a very pellet plant because if you go back to that or early 2000 periods.
Well over 70, or even 80% of C industries or be production serves the new home construction markets.
Today, that's probably only about 50 or 55%.
I'm sure we have seen growth and our an hour and industrial shack month uncertainty of core Norbords case. It Norbords case, so we're at about 50%, new 25% specialty and 25% to our.
Sure, we probably slightly ahead of the overall average what others are significant change in the makeup of how overseas come true.
Okay. That's very helpful. Thank you so much.
Thanks.
Thank you we will take our next question from Mark Weintraub with Seaport Global. Please go ahead.
Thank you good morning.
Hoping to get an update on any thoughts you have I see inventories in the channel.
Good morning, Mark.
I think.
Our our perspective is your first of all it's impossible to measure this accurately.
But our perspective based on what are you understand problem most of our customers.
Is that inventory has continued to shrink or during the year and that's inventory.
For us in terms of days or sales of our customer startups.
Let me kind of reference suffered huh.
And you know we believe for this.
As a result.
British kidney at the moment.
Okay, and that's one of days if supply basis, obviously, if demand gets better that that looks even skinny or I guess that would be if I read out yeah.
That's right.
We often fight yesterday as battles that comes through [laughter].
Yeah.
And.
Another question I guess is the 100 mile House, you took down that entire facility you referenced among other things also cut some of that fiber cost issues longer term I'm core doubt I somewhat different set of scenario different scenarios different set of circumstances.
How is there a difference in terms of up to speed with which you could bring back. These operations. If in fact, a demand surprises to the upside again, recognizing that's an area, but if if it weren't too what type of.
Hey capability do you have to to bring back the operations at the appropriate time if need be.
Yeah, I you know I mean this is set up.
Theoretical I guess at this point, because we're really not been actively thinking about Ah that's in the short term anyways, but.
But in in hundred My House see wood.
The question is a longer term challenge.
You know, but I should note there's lots of sawmills an area that are or have been announced curtailments as well. So how does all shakes out we'll probably take some time through to develop and what that then ultimately means for wood costs in the region, which was one of the principal factors.
I thought maybe the economics, it's up no very difficult.
In per deal, we don't have those kind of circumstances. These are more markets conditions, but the challenge in the quarter deal region. I said this in a lot of to United States as that unemployment is almost zero. So a good old their their biggest challenge will probably be Oh, yes.
And when conditions improve I'm getting employees back through through through around demand to find a flat.
[laughter].
Okay. Thank you.
Alright, Thanks Mark.
Thank you we'll take our next question from Paul Quinn with RBC capital markets. Please go ahead.
Yeah, Thanks, very much a good morning.
Wonderful and maybe I'll just start on on costs and taking a look at your slide here. It looks like you got some key input prices were up but your usage was down and they sort of balanced off and I'm. Just wondering you know how do you get the costs down 4% quarter over quarter, 3% year over year.
Well I mean morning, or I guess, that's that's all that's right [laughter].
You know art.
What we're trying to do.
Yes.
Got to a place where the mills, we are operating income to run more efficiently.
Oh gosh, there's a process that were going through pass up [laughter] three I guess got that's kind of shops prefer to but there are the benefits off.
Taking two of our goes down into topic, yeah, It's really I'm.
[noise] Sally downtime, we've been taking across our portfolio.
And have more efficiently.
And they like Im sorry, you not caught.
Okay, then maybe I'm a Peter you highlighted in the industrial growth or bureaus be component can you give us some color, which which areas are growing and any kind of metrics you can share around what percentage I guess 25 would be the their percentage on the industrial side.
Yeah, I think you know Oh, we have talked in the past Abbas.
Fact that Oh, we have penetrated significantly in the in the you know where are the biggest under most obvious amount plus for over three to penetrate which was set up the upholstered furniture sector and we've talked about you know the next area of relevance being what I would broadly called a transportation sector.
And Oh, that's wherever you have started to make progress, but a number of different products regret for re referenced precisions, sending a in our quarterly documentation. We now have Tuesday 50 yard spending for sure are sending lines of two of our operations.
Rich Ross I think a requirement to further penetrate into it that's kind of a market.
And that there are no up and running on your pets are very positive feedback from some of our customers.
We expect.
After she is no sort of.
Good growth indoors and those elements are over the next year.
Okay, Great and then just lastly, I guess on a in Europe on Inverness or you. Peter you mentioned four years growth is that the way, we should think but the volume expansion just that would be done over the next four years.
That's right I think it was designed that way both from a capital efficiency or low low upfront capital cost perspective, but also because we're just not want to.
Tom.
Four or five 400000 cubic meters in the markets all those watch.
Well rewrite it.
It's supposed to lower risk right to approach to market on to produce but.
Sure oldest capital but.
No there are some operational challenges that come with that.
Right.
Right. That's all I had best of luck. Thanks.
Thanks, Paul.
Thank you.
We will take our next question and that is from chip Dillon with vertical research partners. Please go ahead.
Hi, guys. They sell other counterfeiting for cheap how're you.
Hi, good morning, sorry.
Good morning, so unfortunately.
Good morning, and especially if the big it'll be deeper on they do need to close a you know you did lower than three 4% now can you elaborate a little bit how much. They sees from Ah you know efficiencies that you were generating and they into schools versus survey curtailments have the meals and it how should we look going forward you know wasting the second.
On line you know you mentioned in Georgia Sunoco slide.
So does this mean there could be some headwinds to close going forward to you when it goes going forward. So they could the equally slightly or be slots or despite the closure.
Oh, just that that they get the second part of your question first our entire [noise].
I mentioned in response to an earlier question Yeah, we have taken 45.
I'm pleased that if that now that cost that's actually doesn't play so that well and that will.
We'll make it a low cost way to think a curtailment hi, when 22 nice into that.
He did the unit costs no question, how how are you got costs are down.
Secondly.
Very little to do it and that prices you can see in a variance have all you know a fairly modest.
Benefit at year over here $2 million across the entire company from lower raw material prices and a $2 million headwind quarter over quarter. So that's not really the driver of it it is operating efficiency and the benefit of.
Spreading our oh consolidating the downtime into in anymore. He took a couple in ALS.
And running the ones that are operating more efficiently. It depends how do you see if that.
Spanning our volume over over the next caught.
And yeah easy Sinclair failed and how should we think about doesn't the future you know the next few quarters versus the kind of level.
Well I mean.
Right any anything any guidance on that but.
Depending if if we don't see any change in input prices.
Salivating downtime into the cardio line line in the fourth quarter, where she's going to happen in mid November that will further I like to laugh.
To gain efficiencies.
But there's always some some seasonality to it there is only seasonality and and as a reminder, you know the fourth quarter around the holiday periods of time, when we concentrate our annual maintenance shuts I don't know.
And so not only is their volume impact from that but also means we spend money and maintenance I didn't know when they're out you know that kind of maintenance you can only do I know shutdown.
All else being equally in the Cadillac Sac costs, It said tick up.
And then Lynch acquirers.
Okay that makes sense.
I don't think did you can provide some more details on the budget for the Capex budget for next year 100 million easy it's safe to assume a anything I. So something you're a report that's essentially chambord is on track to be ready you know I I've at some point to be you know what do you can make a quick decision for a restart.
Soon or even be something about you, perhaps sleep well you know further into 20 to 21, perhaps.
Well, we've always said our goal it sounds boring must deal with a long lead time items. So that we would be in a position within about six months nowadays.
And to start production.
To be clear and we have not made that decision.
But you may not be then obviously felt right back on the page so that capital spending other than kind of long lead time, I'm still though it was only down in out of the way and then you know with six months now as we can it that's the rest of capital kind of workforce back in place and reestablish locking infrastructure when planning at that time.
Okay and Ah you know when you started investing this project will we see we felt that at some point b minus better to pull the trigger.
Now you have to curtailed Middle school, you could give us a little bit the Santa Sofa, you from market to the market improves a weather just wanted to 20 or 2021, what's kind of then you know the pecking order for it potentially new capacity would that be chambord, because it's a you know you've made more recent investments or could you know that 919, Georgia restart before.
For that because of its little unit goes.
So obviously I saw the turvy have been a preoccupied with are making it difficult decisions to shut these two lines down that screen, but our focus has been.
No it should we be and circumstances, where market demand is such that a additional capacity is required you haven't really thought around probably would prioritize up because obviously that also will depend on where we see system what region not the country, where are we will see sustainable improvement into bonds have lots of poor.
There's no production.
You only on her point I wouldn't make is that a you know our expectation is that.
Once up and running Chambord would be a very low class mill, yeah. So doing another kind of things that we would have to take into consideration that should we think our way through.
Whether it makes sense for startup capacity when it does or when it makes sense just try to professionally.
Okay, and then just one last thing it I'm sorry, Yeah, I Shouldnt say in the meantime, you know obviously, we will make sure that our mills are maintained in the state of readiness.
Okay, probably just one last one of them kind of 10 locations you reduce the variable dividend and I Wonder obviously, you know they don't have a downturn to mark has probably sit for a few quarters, but Ah you know what have you seen on your rent change in the past wanted to quarters. When do you know you mentioned you were actually.
Very confident maintaining that for the Canadian dollars are well point for Canadian dollar level and you know now we actually saw that you pushed back a you know last quarter that Youre I'm not sure Dave and after you go more flexibility if you decide to know what a dividend. So easy just to be goes you keep on your note that keeps on increasing.
And your Cashewmilk Thompson loans on what's your expected to be wandering around or are there other considerations, there as well including potential buybacks [noise].
Well I would tell you heard Peter outlined and not sort of the call. Yeah that'd be have started to see the housing market recently, improving in the U.S., but it's been slower than we anticipated do that.
<unk>, an overhang of once all new home inventory and so it's been taking longer than we and I think most others had expected to translate into a stronger really see market.
And this has pressured our financial results in the past me quite or in addition to that we're entering the seasonally slower winter construction season for the next two quarters and so the board felt it was prudent to reduce the dividend level for now.
Just to put them out and put some perspective on that's you know you know we haven't variable dividend policy in sensing introduce it in early 2013.
The board has adjusted the level of the dividend up and down several times as our operating cash flow and how what kind of have changed.
So if you look back over that six and a half year period, we've returned $1 billion to our shareholder it's mostly through dividends and more recently through buying back our stock normal course issuer effect. So.
Yeah. This is just a continuation of the track record we felt that since we introduced that Ah that policy it kinda half years ago.
Thank you very much.
Thanks I'll ever.
Thank you well take our next question from Ketan Mamtora with BMO capital markets. Please go ahead.
Thank you I'm, just curious you know but.
19.
Shaping up would be a much difficulty or.
Seeing any M&A opportunities in North America for that matter, even in Europe , I know that are more kind of family I'm teasing yara, but I'm just curious.
It did our you know if you're seeing more opportunities.
Oh, Wow, I mean, we haven't seen anything yet.
We're keeping our you're close to the telephone anymore.
Got it and then just.
Execution question Robin you sit anyway.
Defy the impact off shut downs or sort of downtime in Europe in Q3.
Well not precisely but I mean.
I don't really when we take an annual maintenance shut as I highlighted in the context of North America. We do you know we can't send money to do the kinda maintenance you can't do you want to know was running.
And it's it's usually ends up being significant fell.
A couple million dollars probably related to know shot.
Got it definitely has sometimes doesn't know what a good luck in 2020.
Thanks Shane.
Thank you well take our next question from Hamir Patel with C.I.B.C. capital markets. Please go ahead.
Hi, good morning.
Peter.
Do you strong aren't our growth you guys are seeing it sort of over 20%. This year, you know clearly driven by low always be prices. So if we see a much stronger pricing environment for always be next year would you expect your volumes into a big box channel to be down next year.
So that's one question I'm here, I don't know or but so clearly benefits driven by lowering the prices.
You know, we understand from the big box or make boxes.
Sales they have game sure not just to know what would be but another products as well.
So there's more work than just Ah Ah you know a lower always be prices.
Especially if we can tell so.
No I I would actually be expected higher prices at the pace of growth might slow down.
But no more in line with what we've seen in the past, but I'm just looked like there are some market share again there.
Thanks, Thanks, Peter that's helpful and I, just wanted to turn to it to Europe and right any comments you might have on how that European spruce beetle might be affecting the cost curve for the European panel industry and does that maybe saver plywood a more there always be.
Oh water Oh plywood production on the continent, I think the only place where there's quite a word is in Russia and under Baltics.
That's more focus on Bert.
So Pete Doherty the impact of this beautiful too so far has been felt strongest in central Europe .
Ah so let's call it the Czech Republic in southern Germany is that that area.
And I think the their crush shouldn't really be a if we got a if we've got a more typical winter this year.
I'm sure was colder wetter this may be a sort of up to your.
To your habit to your retail so if the weather continues to be warmer.
The unusual in that part of the world.
No doubt tail maybe longer.
So it has had the impact of reducing would cost and that's part of the world. So that would is consumed.
Primarily by sawmills, but also by one or one or two hours females in the area.
And so that's sort of the impact up rehab Shane spreading throughout so for US for example in our mill in Belgium, where you've got sort of a indirect impact you know last that long.
Lower cost with from the from the centers for the flow of people flux outwards.
That makes sounds great. Thanks, Peter that yeah, no that makes it makes a lot of sunsets, a that's all I had I'll I'll turn it over next.
Thanks very much.
Thank you. This concludes the question and answer session I will now turn the conference back over to Peter Weinberg and.
Thank you very much Ryan as always Robin Heather No. Robert are all available to respond to any further questions you may have.
Thank you all for your participation today and I look forward to reporting on our progress next quarter.
I have a good thing whatever Halloween Oh, there's like US today, so have fun dressing up.
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