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 risk.
And future results may differ materially.
For future information on known risks. Please see the caution regarding forward looking information statement on Norbord.
January 31st 29, <unk> annual information form and the cautionary statements 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 and good morning, everyone. Welcome to our Q3 20 910 conference call.
I'm joined today by Robin Lombard or Oh.
Oh, that's our director of corporate Affairs.
Robert Winslow a recent addition to the team and our Vice President Investor Relations and corporate development.
This morning, I'll briefly summarize a few points about our Q3 results and our outlook before we take your questions.
Favorable U.S. housing market 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 late last year.
And your two way I'm always be markets from the quarter.
Benchmark prices were mixed 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 functions weekends to 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 what we could show.
However, despite the significant downtime, we were able to lower our north American unit cost, 4% quarter over quarter operating more efficiently.
That's you know, we idled or under no smell in British Columbia in August .
Earlier this month, we announced we will I don't mind, one our core deal, Georgia mill starting in November .
Together, just indefinitely curtails, 12% or available North American possibly.
These were difficult but necessary decisions.
Reflect the economic realities, finishing our business.
We have experienced hardworking teams in both mills and decisions were a nowhere a reflection of the quality and capability era, we use.
I'd like to thank our mill employees are older efforts [laughter].
We will continue to serve our customers without disruption from our older operating only females in North America.
Including our two Alberta Mills on our second line up where deal.
Looking forward, we have seen improvement India affordability concerns.
[laughter] <unk> running about love to we're building conditions and money North American regions over the past year.
The build up of U.S. I'm sure New home inventory now appears to have been absorb new.
New home sales increase through the third quarter.
This trend has begun to translate into increased new home construction activity.
At September seasonally adjusted annual rate.
Yes, well U.S. single family starts up 4% year over year nine has HM.
Homebuilder sentiment remains positive.
No no homebuilders housing market index, I guess level up here.
So we are now I'm going to slower winter construction.
The expectation is that these positive indicator schools carry over into its fun it's funny.
In Europe , our segment adjusted EBITDA was down from six quarters or two main reasons.
First.
And your maintenance shops in the corner.
We do it coincides with the slower summer vacation season.
I'm encouraged the lost volume.
[laughter].
So.
You highlighted last quarter.
Hi, since I've been rolling over.
But Germany, Europe's largest listening to me Mark.
As their export oriented economy is feeling the effects of mobile screens more.
European panel prices typically move.
Much narrower.
North America.
Benefit that's well above Everett, Washington, under Oh, well years.
Well I says are now reverting <unk> sorry.
Yep season of the boss lower prices helped stimulate baseball reduced.
An important I would.
This will continue to drive consumption growth in Europe .
That's always been a more direct link between a bunch of raw material cost in Europe .
Oh, yes, but a few quarters like we are working hard to bring us well something else.
Berger.
Do you see I know shop this quarter to address.
It appears to me that's been holding back the ramp up.
We are still in the early innings bump up.
About a four year.
Well.
Now turning to capital allocation.
We remain committed to a balanced approach consistent longstanding track correct.
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 expenditures to 100 million dollar.
Google focused as lower Capex, well jobs are you asking I priority.
Moving maintaining our mills and supporting our national sales growth rather than.
As well as our ongoing second phase investments.
No.
I should also upstream.
The board reduced level or do something.
Sure.
And then also renewing our normal course issuer early November .
Well consider opportunities I'm sure all the dog.
So far.
A lot of course, a disappointing quarter from a financial perspective, our balance sheet <unk>, our mills are running well.
I'd be remain calm not mark.
Yep significant upside potential in art gun and HM housing markets.
We are optimistic about results more.
Morning.
And with a well jump right into question, 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 signal 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 a lot of your signal to reach our equipment again press star one to ask an audio question.
We'll 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 as you can talk about how you're thinking around curtailing their 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 smelter system and so I guess, if you could verify that and then also because youve 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 of stuff has seen the most ordered to read the weakest price.
Over the last number up or quarters or maybe the last year.
It is not export markets you know there's more production in the region on consumption.
You called that ultimately there was insufficient Amanda fees in the foreseeable future to support to production enough mill.
And going into [laughter] terms Duff <unk> costs as you know, it's too I know I believe we of course help one of the line. So that second line continues to operate.
And are the announcement, there's about a 45.
Person reduction in the workforce and not analyzer itself.
So.
Well, that's significant amount of cost Mike why don't you line now going forward.
Okay, and then how much do you typically spend annually on a crucell mill to keep it sufficiently maintained to have optionality to restart at some point.
Couple of million Bucks areas like when it comes down to south pretty modest.
Okay.
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 soon at this point.
Well I should know where you have two lines to airwatch her line through pretty I used to offer right shoulder snow concern over the long.
So when they're they're down it sounds like.
Yeah and Mark.
I'm sorry, there isn't the you know that seasonality to logging in the south that there was a fan DC.
So you know they haven't Giants.
Fairly steady coming here.
Okay, and then kind of last one 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 gonna 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, 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 last question before I turn it over just on Europe , I was where 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.
Prices are in an error brands on North America typically.
There are adjusting or rolling over two words to long term average no volume isn't so much impact that's 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 and one follow on the the last question with respect to biggest bought or North American supply trends [laughter]. So between the two mills and B C in <unk>.
You're moving 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.
Morning show I'm, well I'll do my best So 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 concern to calculate that on average.
Over the year, you know mills running at about 91% Walter Reed this capacity in that range anyways.
And I repeat we sort of summed up yeah, we would expect that these mills that started up.
Middle of last year are getting pretty close through their sort of great numbers.
I'm show.
No I think there's not there's not a lot less lot left off Oh, well volume increases from doors ramp ups.
Would be my expectation.
In terms of creep you know revolvers talked about the fact that it's our belief that.
Capacity only expense run there's a 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 war, even that's available out of an existing though.
Okay. That's helpful.
And then follow up on Europe , as well you de indication was that it 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 starting to get where you want it.
That's a good question you know.
As we talked about in the past you know we opted to.
To invest.
What about 50% of Greenfield or there is in return the not your or ramp up spread out over four years those reserves layered on new investments.
So ramp ups are never smooth, but.
You know at the moment, it looks like or back on track through our original ramp up schedule. After that's something that should third quarter.
Okay. That's all I 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 if 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 mean, that's kind of a.
Very broad question, but I I guess, the 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 there's much slower in developing done.
It's been forecast.
I think decisions have been made.
In the past number appears to start up capacity anticipating housing to recover faster to about 1.5 million level that everybody is talking about.
And that may or may not materialize.
Thank 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.
No housing starts in the one corn to the 1.3 million range is probably something we should be thinking about.
Over the longer or does the near term outlook.
And it 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 can't be stronger I should note. That's always a fair amount of by the fellows for treatment.
A lot.
That's that's helpful on me and maybe just an another difference between.
Now versus bad it's just the alternative avenues for Oh, let's be products. So you've spent a lot of time.
You know 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 Bella Pointe 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.
Ah 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 norbord skirts and Norbords carriers.
Oh, we're at about 50% new 25%.
Specialty and 25% are.
Sure, we probably slightly ahead of the is the overall average.
What others are significant change in the makeup of how long does come true.
Okay. That's very helpful. Thank you so much.
Thanks.
Thank you we'll take our next question from Mark Weintraub with Seaport Global. Please go ahead.
Thank you good morning I'm.
Hoping to get an update on any thoughts you have I see inventories in the channel.
Good morning, Mark.
I think.
Our our perspective. This your first of all it's impossible to measure this accurately.
But our perspective based on what 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.
Huh.
Let me kind of reference suffered huh.
And up you know we believe for this.
As a result.
British kidney at the moment.
Okay, and that's on a days if supply basis, obviously, if demand gets better that that looks even skinny or I guess, that's what 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 the fiber cost issues longer term I'm cordell somewhat different set of scenario a different scenarios different set of circumstances how is there.
The 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 have.
Nothing I simply thinking about Ah that's in the short term anyways, but.
Got a in in hundred my House see would.
Good question is a longer term challenge you know, but I should note. There's lots of sawmills an area that there are [laughter] been announced curtailments as well so how about the whole shakes out.
It probably takes some time through to develop and what that ultimately means for wood costs in the region, which was one of the principal factors I thought maybe economics, but no very difficult.
Incurred deal we don't have those kinda circumstances. These are more markets conditions, but the challenge in the quarter deal region. I said this in a lot of to United States is that unemployment is almost zero show up here or there are the biggest challenge will probably be.
No if and when conditions improve I'm getting employees back through a true through around demand to find a flat.
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 and 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.
Yeah.
What we're trying to do.
Yes.
Got to a place where the mills, we are operating kind of run more efficiently.
Oh gosh, there's a process that for going through us.
[laughter] three or I guess got that's kind of comps preferred up but no the benefits all.
Taking two of our Williston and stuff.
Yeah, it's really I.
Sorry.
But on time, we've been taking across our portfolio a in a more efficient way.
And they like you start seeing I caught.
Okay, then maybe a Peter you highlighted in the industrial growth or bureaus be component can you give us some color, which which areas are growing <unk> any kind of metrics you can share around what percentage I guess 25 would be the.
The percentage on the industrial side.
Yeah, I think you know Oh, we have talked in the past Abbas.
That's a good Olivia penetrate a significantly under in the you know where are the biggest 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 sending for sure sending lines are two of our operations.
Rich Ross I think a requirement to further penetrate into thats kind of a market.
And that there are no up and running on rip out some very positive feedback from some of our customers.
We expect.
She has no sort of [noise].
Gross indoors and those elements are over the next year.
Okay, Great and then just lastly, I guess on a in Europe on Inverness.
Do 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 did not want to Tom.
Four or five 400000 cubic meters in the markets all those watch.
All right.
That's a lower risk right to approach to market and to reduce the.
No our oldest capital but.
No there are some operational challenges that come with that.
Right.
Right, that's all that best of luck. Thanks.
Thanks, Paul.
Thank you.
We'll take our next question and that is from chip Dillon with vertical research partners. Please go ahead.
Hi, guys do some other counterfeiting for cheap how're you.
Hi, good morning Salvador.
Good morning, so personally.
Good morning, and especially the big it'll be deeper on they do need to go. So you know you did blower them through 4% now can you elaborate a little bit how much. They at least from Ah you know efficiencies that you were generating and the east coast versus survey curtailments of the meals and it how should we look going forward you know wasting the second.
Line, you know you're mentioning Georgia Sunoco slide.
So what 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 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.
Well I doubt if that now that cost, especially if it does imply that well and that will that will make it a low cost way to think a curtailment.
Me too much into that.
He.
Even it caught my question how are you got costs are down significantly.
Very little to deal with input prices you can see in a variance have all you know a fairly modest.
Benefit 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.
Finding our oh consolidating the downtime into a in anymore. He took a couple in ALS.
And running the ones that are operating more efficiently eat events that you see if that.
Hi, spanning our volume over [laughter] Scott.
And yeah easy sounds like 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.
Can't provide any anything any guidance on that but.
You know it depend and if we don't see any tank and input prices.
Consolidating downtime in Canada Cardio line, one in the fourth quarter, where she's going to happen in mid November .
Well, our there allow it to laugh.
Two.
Gain efficiency.
But there's always some some seasonality to it there is always 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 not but also we we spend money.
No when they're out you know kind of maintenance you can only do when they shut down.
So all else being equally like normally expect hotspots and pick up.
And then Lynch acquirers.
Okay, but it doesn't make sense I don't think did you can provide some more details from the budget for the Capex budget for next year 100 million easy, it's safe to assume a and making I saw something you're a report that's essentially chambord. He 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 to 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 deal with the long lead time item. So that we would be in a position.
In about six months nowadays.
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 that that capital spending other than kind of long lead time right now, though it was only down in out of the way and then you know with six months now and we can invest their capital kind of workforce back in place and reestablish locking infrastructure when blend and at that time.
Okay and Ah you know when you start investing this project Dolby Shannon, we felt that at some point b minus better do pull the trigger and now you have to curtailed meals kinda give us it'll be just kind of sofa you from market to the market improves a weather just wanted to 20 or 2021.
What's kind of then you know that 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 nine why my Georgia, we talked before about because if it's an old unit goes.
So obviously I saw the turvy have been a preoccupied with are making it difficult decisions to shut these two lines down about screen, but our focus has been oh 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 that bill.
It's obviously, that's also going to depend on where we see system what region not the country, where are we will see sustainable improvement into bad stuff, which supports there's no production.
The only on her point I wouldn't make those that are you know our expectation is that.
Once up and running Chambord would be a very low cost 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 to start up capacity went up to us or when it makes sense just try to professional.
Okay, and just one last thing I'm sorry, yeah.
Anytime you're 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 tenant Jason do 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 the quarters. When do you know you shouldn't you were actually.
Very confident maintaining that for the Canadian dollars are well point for Canadian dollar level and you know we actually saw that you pushed back a you know last quarter that Youre I'm not sure Dave and after a little more flexibility. If you decide to know the 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 one of the route or are there other considerations, there as well including potential buybacks [noise].
Well I would tell you heard Peter outline and not the start of the call.
I'd be have started to see the housing market recently, improving in the U.S., but it's been slower than we anticipated that no one an overhang abundance all new home inventory and so it's been taking longer than we and I think most others had expected to translate into its founder really see market.
And this has pressured our financial results in the past me corridor.
In addition to that we're entering the seasonally so our 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 intensely introduce it in early 2013. The board has adopted the level of the dividend up and down several time as our operating cash flow and outlet kinda 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 in normal course issuer effect. So.
Yeah. This is just a continuation of the track record being felt that since we introduced that are not policy it kinda half years ago.
Thanks very much.
Thanks I'll ever.
Thank you well take our next question from Keaton 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.
If there are no if you're seeing more opportunities.
Well 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.
The fight the impact off shut downs on or some downtime in Europe in Q3.
Well not precisely but I mean.
Not really when we take an annual maintenance that as I highlighted.
North America, we do you know we can't send money to do the kinda maintenance you can't do you want to know is running.
And it's usually ends up being significant sell.
A couple million dollars probably related to know shot.
Got it definitely have somebody 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 You know 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 that big box channel to be down next year.
[noise] thoughts and that's one question I'm here, I don't know or but so clearly that this is driven by lowering the prices.
We understand from the big box, a big box and stuff so.
Yes, they have gained share not just to know what would be but another products as well.
So there's more work than does Ah Ah you know lower always be process.
But as we can tell show.
No I I would ask certainly expect the higher prices that piece of growth might slow down.
But no more in line with what we've seen the Pos but I'm just looked like there are some market share again there.
Thanks, Thanks, Peter that's helpful and just one of the churn 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 rather supply workers and Russia on on the 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 .
So let's call it the Czech Republic in Southern Germany is about area.
And I think the their question will be a if we got a if we've got a more typical winter this year.
Children's colder weather or just maybe 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 till may be longer.
So it has had the impact of reducing woods cross 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.
I'm not sure what was the impact that we have seen so spreading throughout so for US for example in our mill in Belgium, where you've got sort of a indirect impact you know I stopped.
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. That's all I had all I'll turn it over.
Thanks very much.
Thank you. This concludes the question and answer session I will now turn the conference back over to Peter Weinberg and [noise].
Thank you very much Ryan as always Robin other 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.
I would like US today show a fund dressing up.
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