Q4 2019 Earnings Call
[music].
Good day, everyone and welcome to Norbord Inc.'s fourth quarter and year end earnings Conference call. As a reminder, today's call is being recorded and webcast on Norbords website at Www Dot Norbord Dotcom Norbords 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.
For further information on known risks. Please see the caution regarding forward looking information statement in Norbords February 4th at 2020 annual information form and the cautionary statement contained in the forward looking statements section of Norbords management's discussion and analysis dated February 4th 2020, and now I'll turn the call over to Peter Weinberger President and.
Chief Executive Officer. Please go ahead Sir.
Thank you Brian Good morning, everyone welcome to our Q4 and you're around 29 team conference call.
I'm joined today by Robin line part our CFO.
Hi, there call approach, our director of corporate Affairs, Robert when slow our Vice President Investor Relations on corporate development.
This morning, I'll comment briefly on 2019 and the markets.
Then Robin will review the financials before reassure our outlook for 220 on take your questions.
29 tune was a challenging year for Norbord.
Our financial results were disappointing US you as housing activity like prior year levels.
Through most of the year.
Only turning positive in November.
The slowdown rust reflected in lower north American older through them on.
Further the slowing industrial sector in Germany put downward pressure on the very high panel prices for your feet I'm drawing in our European markets.
In Q4, we delivered adjusted EBITDA of $27 million I know just with loss of 30 $1.13 cents per share.
Leaving full year results.
Hmm.
37 cents loss per share respectively.
In North America read through this decisive action during the year to align our production worth of weaker housing related demand.
Indefinitely, curtailing or hundred Mars B C mill.
And lime long at our Georgia or core deal, Georgia Mill.
Well I'm attitude of maintenance work, we typically schedule across our mills during the slower winter months.
This resulted in 222 mill days of downtime in Q4.
Which represents almost 20% or far available production days.
This compares with 70 mill days of downtime in Q3.
And I'm not 31 days in Q4 2018.
Now on the cost side.
The consolidation of downtime allowed us to more efficiently allocate production volumes just from your progress.
Resulting in record I know production of two mills and lower unit manufacturing costs.
Our European business had a solid year, even us panel prices weakened.
Generating adjusted EBITDA up $64 million.
Bob 50 per child above our 15 your average representing the third best ever year for this segment of our business.
Our experience is that there is a much stronger link between crisis and costs in Europe.
With prices, having rolled over from the peak, we expect that would cross through polo shirt.
And have already seen some improvement during Q4.
We've also seen in the past that lower always be pressure in Europe drive foster substitution against imported plywood.
We are into early innings of ramping up production at our expanded there were no Scotland mill.
And have an estimated four your pipeline of growth ahead of us to meet increase customer demand.
I'll talk about our outlook at the moment put first.
Robin over to you for some financial comments.
Thanks, Peter This morning, I'll provide some quick additional color on our Q4, North American segment results.
Well, it's some guidance on a few items I know you'd be looking past so within your 2020 models.
Have you seen our results [noise].
Hello. This is sometimes that's quite a.
Peter already highlighted you could tell significant production volume in Q4.
Combined with the 60 or so Dave this is out in 17% knowing year over year shipping volumes in North America.
Since I play 19 sets so quite a reset is now behind that really long have sack what fiscal daycare on different full for the next several years.
Looking forward to plenty plenty as a reminder, we typically have significant seasonal cash out into one.
Here some of the cash outflow from our you know you know what well bells ongoing capex investments and the problem in dollar dividend. The board declared will be offset by a significant tax refund yard that came to me. So I went fighting for taxes. It seemed that number on our balance at year end.
In terms of 2020, Capex I'll confirm the guidance last quarter.
Pared back budget of $100 million.
This will be allocated cost I know, but normal maintenance work as well, it's an against manufacturing costs and then surely something can you just as far as though especially product sales.
Its budget includes become thinking I mean, it might not see on that front as well as something in that <unk> at our sound like it back now in preparation for uneventful those guys.
We have not yet made a restart their names onboard and we will only be settlement. It is professional fair that customers will clarify my father.
We continued to take a balanced approach to capital allocation plane 19.
You reinvest in more than $140 million going on now I returned $130 million in cash to our shareholders through a combination of dividends and share buyback, including $5 million. During Q4 on your I really mean normal course issuer bid.
As of today, we have 3.8 million shares remaining room under the IB and we will continue to look for opportunities to buy back stock when the prices significantly below our view of unfunded value.
Our balance sheet remains solid as we head into 2020.
You'll recall that last summer, we termed out our 2020 senior secured notes at 20.7, an upsized defensible by under in the $10 million. It seems seems to have a set of it.
We finished 29 seen with 272 million of the study and a debt to cap ratio of 40% plus the name well below our revolver covenant.
We remain committed to returning excess cash to shareholders and our variable dividend policy gives us the flexibility prudently balanced capital allocation decisions with the inherent cyclicality of our business.
As you know I've seen I board maintain the variable dividend paying 20 cents per share for the quarter payable on March 23rd.
And with that back to put it.
Thank you Rob.
So looking ahead.
Underlying U.S. Holland phone market fundamentals are encouraging.
You as housing starts continue to improve with exports current forecast.
Averaging 1.33 million starts the funny funny, which represents a 3% increase over 29th Street.
Further.
The seasonally adjusted annual crucial permits.
More forward looking indicator.
Well, it's up nearly 6% year over year to one four and 14 million.
[noise] builders have she early success adapting their offerings [laughter] growing demand for lower cost entry level homes [noise].
And mortgage interest rates remain near multiyear lows.
These factors.
ARX <unk> positively impact.
Housing activity and over the three them out.
Should we answered the farms bring building season.
And I was just yesterday random lengths regional prices are up between China 18 for Sean over Q4 average level.
We have significant upside potential in an improving housing markets.
And I'm increasingly encouraged by the also.
Outside of new home construction.
She continues solar growth an older or see entry users.
Our big box volumes remain strong.
And we continue to focus on our ambitious growth targets for the products.
In Europe.
Rental Bush's 40 square for Europe above average results.
As the class costs should start to offset declining so far so feels to ramp up we'll continue to ramp up Inverness to meet growing overseas.
Combined with our solid balance sheet and liquidity.
Weve Norbords is well positioned for the year Uh huh.
With that we'll move onto a question I'm sure I'll turn things back through the operator, we'll open up their lives.
Thank you if you'd like to ask questions see 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 the retry equipment again press star one to ask a question well pause for just a much aloha, everyone and opportunity to signal for questions.
[noise] well take our first question from John Babchuk with Bank of America [laughter].
Good morning, I guess I just wanted to start out and you mentioned that there were 222 mill a down days during the quarter or you could you give us or sensors to whether that was any more weighted towards the front or back half of the core.
Oh good morning, John.
No I mean, we root for I mean, I'm, sorry, I'm here condensate <unk>. The one thing that we then it's obvious if that we closed down cardio line one halfway through the quarter. So obviously that list.
The weighted into the back half of the Florida.
And then typically our maintenance I couldn't be more weighted towards the end of the player.
Okay.
And also.
Thank you for that and then also you know what you're going to always be prices I was wondering could kind of provide you know your own commentary on what's driving prices lately. If this is kind of more demand driven or if you're also seeing.
Kinda tightness on the supply side, I mean generally want to get your views on it.
Yeah, well I mean, obviously, it's difficult for me to comments on the supply side, though that water for own operations.
But oh, we have talked pasta over about the fact that we've seen continued very low inventory levels throughout the system really for most of last year.
He thinks that's up to remains unchanged.
No I think building conditions have been very favorable because we haven't had a lot of bad weather compared to previous years at least so far this year.
[noise] or even into the fall.
And youre showing that combines with I think very strong outlook for housing Hashman. That's a much has been good.
On the show were shooting up sort of six through to supply chain.
Thank you and then with regards to a Europe here quickly yeah, I mean, it looks like shipments were down a fair bit during the quarter.
You know maybe that maybe I missed as from your commentary, but you know was that primarily demand driven or were there any issues that and Inverness, which I know you had talked a little bit about last quarter.
You know what can you kind of add to that.
Farmington in Europe for you have a little bit the same thing that you know we do here you know we tried to sort of load in some downtime.
You around there's typically all show you know a lot of our.
European customers tick that should appear to around Christmas new years off.
That's what I'm much more.
Baked in I think in Europe, Dennis is typically in North America show, there's always sort of a slow periods for about a couple of weeks Terawatt view around.
Beyond that I wouldn't read too much at all since it was wrong. If I would also here well not so about the fiscal day count their friends. So I'm sick fewer days in Q4 hundred 19 basis seems like 20 theme.
So that that's about 6% right now.
Okay and are you seeing any signs of a pricing turning the corner in Europe.
Well.
It's early going.
And that sort of the price adjustments, you know that really sort of start us, but I think we started mentioning that in Q3 as louche boss here.
Yeah. So far we're we're pleased with this shows the demand up ticks up for machine.
You know over true typically which is sort of express or you know after Christmas break.
Hmm, Kurt Gallup look at the moment.
Okay. That's all.
[noise] sounds like who.
I can't press Star one to ask a question did you find your question has been answered you may remove yourself from the Q by pressing star too.
Well take our next question from Paul Quinn with RBC capital markets. Please go ahead.
Yeah, Thanks, very much good morning, guys.
Right right, Paul Hey done it started in Europe. Your Ah Peter you mentioned that the ramp in Inverness is going to be four years, which specific markets are you targeting what that extra volume.
And then the lumber guys are all talking about the European a restart beetle in the impacts there just wondering if that.
Lowered cost for some of your European competitors in the in that might be a little bit of a headwind for us for a dead extra billing from Inverness.
Hi, Good question, Yeah. So first of all I think you know Weve actually had mentioned in the past you know more than 70% of our European shales are focused on the UK.
No. That's it's also the case sport AFFO across the additional volumes up we expect to produce from are able to Nashville.
It's a shame time, that's mill is now capable of supporting or are you know growing demands on the continent in our in our typical continental markets.
I I would say that.
You know, there's definitely been pressure in the middle.
But the adult of this cross a there's pine beetle thing I don't know if and you still Harris.
Yep.
Okay sure its members electronics nurse.
And that you know what we've seen so far is you know harvest levels in central Europe that are more than doubled what they're typically jarosz people trying to cut that.
Cut September before this destroyed.
And see you know what I've touched had an impact on cost I'll start with found availability.
Plenty of availability.
That's probably has led to some downward price price movements in industry, that's probably contributed to the downward price movement drip feed on the continent.
For our products.
Here over the last six months.
You know to flip side I know you know Germany.
We're not in the middle of Oh sub markets, but we.
We are your old we are sort of under fringe with our with our Belgium, Milford affluent drunk I'm sure.
She or would cost a you know trending down there as well.
You know to flip side is that Oh, that's got harvest volumes others for those shows significant so clearly decline within probably about a year.
So over the long term.
Or longer term I would say that there will be a significant constrained on books will fly in central Europe.
That'll have to the opposite effect.
So it sounds like a minor headwind in the short term, but a very favorable in the medium and long term.
That's a yeah, that's certainly I'm thinking about as right now.
Okay, and then or on your Capex plans, you mentioned a investments to support production of specialty products in export just wondering if he can help us understand what some of those investments would include.
Yeah, I mean, we have talked recently or the last year, we've talked about investments in our finishing anj.
No. We're showing particular, one thing I mentioned, so I suppose this last quarter, the long before where say status. The arts sounding lined up we just completed isn't or Alabama mill. It showed dose kind of investments up they will continue to focus on stem cell Sri a growing through that.
Better understanding of what's industrial customers require.
And no I'd say, it's opens up a new revenue of ER.
Potential shales.
For people, who are looking at very tightly controlled sickness variance.
As well as much better surface calls it.
I mean, they just lastly, just on or repair remodel shipments were up 19% year over year, just what's driving that strength.
Well, that's an interesting question right because you know I think overall home depot and lows are not showing dramatic.
Yes.
A dramatic.
Total sales increases so certainly not 19%.
Hey, you know we are always aware that there is some price sensitivity at the retail level.
Show always be pressure, that's you know last year, where particularly low.
And as a result, you know there's probably some extra volume they've got sold because she to always be is probably less problem <unk> low price panels in the store.
But even if I compare our sales last year at a 27 team.
We're still seeing significant growth.
They're probably not quite 19%, but more like a pen or slightly over 10%.
And that's comparison.
I think your old particular home depot has been very focused on.
Growing.
Growing there, they're a total volume shales in our or something or.
What's the latest or building materials related products.
Just to try to penetrate more strongly.
Yeah with the larger renovating retailer.
Mm.
Alright, thanks for that help.
Yeah sure apartments.
Renovating.
Contractor enough retail.
Right Okay.
<unk>.
Oh.
Well take our next question from Sean Stewart with TD Securities. Please go ahead.
Thanks, Good morning, everyone.
Uh huh.
Couple of questions.
It feels like North American or U.S. demand in particular is [noise].
It's picking up a more quickly now.
In question with respect to capacity management decisions in the past you you've referenced capacity additions and you're thinking around that are more closely tied to I guess underlying demand trends and then it must be prices any updated context on on what type of demand backdrop you.
Would need to see to restart.
Sean bore and I guess potentially line one at core deal as well and and thoughts on sequencing of of those potential restarts.
Yeah. Thank you a show I'm I'm glad that we're actually able to talk about.
This challenge now rather than the other way around but.
Hi, we've typically talked about needing youre six months lead time to start in their curtailed mill and that's the remains the case for both Chambord on hundred My House.
So it's really did 2021 demand outlook that we're looking at to make that decision.
Yeah, we could be more nimble with the Georgia line, one operation because you know like Jewish to fully operational and the management team as a result is still in place.
Sure I appreciated man sustained above expectations this year.
The others are.
More short term option.
However.
Late the labor markets in the U.S. shop remains very tight.
Every node at all or at least most off the 50 plus I'm for usually out there layoff have found daughter employment.
Okay.
Thanks for that detail.
Question on input prices you you gave some context in Europe, but in the quarter. It looks like input prices were a a modest headwind both year over year end quarter over quarter any detail you can give us that with respect to cost trends in North America early in 2020.
Yeah, I mean, certainly the next week, so far Sean but.
It seems.
Last year in bearing sales in the Mdna from fee then there's something it's not on the input price fun.
I I thought that consolidated so we really haven't seen a lot of movement, one way or another hmm.
And then in the recent Sinclair so.
I guess, you've got some they design going forward Thats, a really hasn't been much faster.
But I would add you know in North America, you know, where you really really on wood costs are most importantly input price no real tough for years now about the fact that those prices on the fund India I agree with aggregate have remained fairly even.
You know, though we will continue to see you know fluctuations here and there I I don't really want at the moment on Irish for a significant change there.
Resin prices.
It should have our second most important cost input.
You will have been fairly flat.
And your dared indirectly driven by.
By as oil prices through.
Then gene I think in particular.
[laughter] benzene prices have been fairly.
We are relatively weak show you, where there's no forecast somebody significant move their go to the warm.
The one thing to look for is longer term the in fact off Oh, what happens as a result Ah Ah.
This shows the quarantining for lack of about a description of what's happening in China.
You know as a result of this virus.
You know obviously, none of our suppliers come from there, but you know it or is it better service has traditionally being a significant shores was a man.
So rather than on the old shows of other products something that may be will slow down in dire temporarily anyways here in the short term.
That's a that's useful context, thanks very much.
Uh huh.
[noise], we'll take our next question from Mark Weintraub with Seaport. Please go ahead.
Thank you and I apologize I missed the first couple of minutes, but the you mentioned the fewer fiscal base. So I just trying to incentive shipments were down.
17% is kicking me attribute 6% of that you. Just you were school days in fill in a more apples to apples basis. It would be down 11 or is that not outside the right way Yep no. That's exactly the right I think like Mike.
Okay. Okay. Good income presumably production also on an apples to apples basis was down some more on the order up 11% for you.
Yeah, that's I on the number absolutely anything yet they always know almost exactly in lock step.
Okay and you referenced in your in your commentary.
That 88.
Pointing to an 83% operating rate for let's be during 2019 do you happen to know if though if the capacity number use there is adjusted for the closures that [laughter] place towards the ended the year.
Yeah, So that would have taken all knows that started out with the year running.
As the denominator.
And taken their needs in the foot action volume over that denominator.
Okay very good so you can get bigger capacity number effectively yeah, that's right basically everything except chambord.
Either way to think about that.
Okay, Great and then its been notable in the last couple of weeks that western delivered prices in particular have really been moving and I think that there have also been some changes in in that they go to market strategies in western markets delivered Mark.
It's good can you maybe help us a little bit Oh I understand whats.
What might be happening.
In those markets specifically.
Yeah, that's a good technical question.
Mark or show you know Ria show mentioned I think in the past in past conversations stuff.
We have been concerned.
The relationship between these western deliberate French numbers, so random lengths reported numbers.
Versus the either.
Shouts questar Western Canadian.
Mill levels, including frame.
We are bullish you know weve re should we sort of being concerned around you know the there should there there seems to be a very significant difference at least away.
What we experienced in terms afraid grades plus our flush or.
You know are supplying mill.
You know.
No one notch.
And show you know we.
Indicated through our customers Oh.
This is not sustainable re don't shoot other sustainable.
On the you know we need to find different ways.
To come through supply arrangement.
For that part of the markets.
And I I don't know of course, how others interpreted or how random lengths. Unfortunately, that's that's kinda stuff.
But it would.
Certainly the movement at least on a short term basis would suggest.
Yeah, you know maybe to the market is more closely than what we see us the reality.
For our shipments introductory.
And in order of magnitude what percentage of your product would fall under the kind of bit delivered western market.
Oh, I don't know for sure.
So I I tests are going back through on that but let's say you know in principle that market re supply out of our Alberta mills, and a little bit out of our southwest Mills.
Right, Great that's exactly how much of the total I don't know fan.
And then lastly, just trying to understand a little bit more on the European spruce.
The my understanding is that that the you know what's <unk> take share during these.
These types of environments and presumably from plywood tickets first question is whether or not is that European spruce usable for the manufacture of plywood.
You have to bought her mother ship, there's not a significant the if any.
Plywood industry domestic plywood industry at least on the continent.
Using software.
Oh, I think the answer there I can shape fairly shape, we say terrorist nom.
So and the Big Challenge is you know about food.
Needs to become shoots in a reasonably fast time frame <unk>, there's the ability to stores some of it in.
Lakes and no behind hydro dams.
But that is very limited that show.
So you know the expectation is so our expectation is.
Oh operations stuff can consume this word are running as hard as they sound right now to come through as much as possible.
Some volumes on the same store, but there will probably also be a significant for them, but we will never be euticals from a commercial success.
And I'm like that gets right to the Hardy corrections. So basically the we all these mills already running full out that that could be using the Europeans Bruce you.
Your knowledge and LSB.
Well, the always beside especially as we can tell which you know like we have even less information and Europe every half over here in terms of what our competitors through with or operations, but as best we can tell from somebody available shipment information snowmelt mills are running flat out.
But there's other places where bruce can be <unk>, which is being consumed a lot of those folks mills are those are.
The wood pellets for you know for it for either energy or these are all industries shifts and also come true this crucial to short term.
On the I would assume that all of them are during their very best to try to.
Tried through a to deal with this with this crisis.
Okay Super Thanks, very much.
Thanks Mark.
Once again, if you'd like to ask your question. Please signal by pressing star one well take our next question from Andrew Kuske <unk> with Credit Suisse. Please go ahead.
Thank you good morning, I'd, maybe just continuing on the European trend and the fiber pricing pressure that's happening there.
You know clearly that has been a number of knock on effects.
But do you see this effectively being a positive where maybe for the next year or two it effectively stimulates.
Greater use of it must be and it becomes more of a permanent staple in the ecosystem and then longer term that you see that is being much more beneficial for you.
Yeah, I'm wondering on her Dutch at least historically the other screen that trend.
So frito as we are for whatever reason and period.
Ah Ah price relative price weakness, we see assist rushing substitution accelerate.
And I'm, mostly it remains there is or isn't but we have seen at least for food or managed care. Afterwards. So once people are converting over to really see and the shorter domestic supply chain rather than having to rely on import of stuff from Asia, or South America and North America.
You know they don't come for at best.
Good thinking and sticking with with Europe, I guess from or Brexit standpoint.
For the next I guess, it's 10 or 11 months is really status quo.
And then.
Are you exposed to a new agreements at that point, it and maybe just some color and background or backdrop, but you face.
To go forward basis for years for your mills in the UK.
Yeah, that's a good freshman thank you show.
There's obviously many fashion stirred up question on but let's just focusing on our own operations.
First 70% of our shales remain in the UK.
And most of our known UK shows are supplied by our mill in Belgium, which is <unk> rituals remain in the European Union at least for sure.
So Dan Yoder Shaw English envoy amount of Inverness, that's a moves overseas.
We don't expect that to be significantly hinder it's going forward.
You know done there's to secondary and so what happens you know to UK is a significant net importer of food products, including panels.
From primarily the European Union.
And and show what happens to those competitive pressure, we've got those products go so far the impact of Brexit has been.
You know.
10% to 20% lower pound versus the euro which is probably the important factor in that's competitive position, we have not seen that sort of change significantly now that Brexit is official.
No time will tell what are you know over time that's great.
Relationship you will find their new revenue, whether that will change, but that's probably for us.
Are you on the near term, we don't see a significant change there.
Okay. That's very helpful. And then one final question for me and is really to Robyn and it's just on the share buyback.
How do you think about intrinsic value of the shares when you're making the buyback decisions versus say that the levels that variable dividend.
Okay, well I mean, it so in terms of thinking about me attacking that will share buybacks I mean, we're obviously looking at our expectations and the cash so that the business and generate having a long time line and that's kinda basis, but I guess, it's simple things anyway appointments and yes, I mean, we've done on your answer.
Let's see I mean.
So far.
And I know, we were buying back at arrangements call. It you know in Canadian dollar terms during Threed s. anything $7 a staff.
So that I would just.
Attack.
And.
In terms of your variable dividend versus buying back stock and we know that those stations to find so what we gating financing play 19.
You know me.
We can't be need significant cash see that variable dividend in 2018, when our stock price is trading at its infancy high.
You know I didn't make sense, that's the buyback stock then.
But when the stock correctly in response to the thought adding I tell melting and that's when we became a much more aggressive on any in Seattle.
I think <unk> facing that that was that I like that.
The allocation of capital between those two options for returning cash to Saudi.
Okay very good thank you.
Thanks Center.
I.
Is there no further questions Mr. Weinberg and I'd like to turn the conference back to you for any additional or closing remarks.
Thanks Bryce.
Bush rather than Heather.
Robert and I are available to respond to further questions.
Thank you all for participating today and I look forward to reporting on our continued progress next quarter.
Have a good bit.
This concludes today's call. Thank you for your participation you may now disconnect.
[music].