Q2 2020 Norbord Inc Earnings Call

Earnings presentation that accompanies this call.

And we had I think was $19 million.

Right am I don't have an in front of me Robert you habit.

That's my mistake. Thank you.

[noise], if it's already a 50 50 million dollar a year to date positive from raw material prices. So that just kind of gives an order that's it that's a pretty big movement for six months.

Oh from you know primarily from from resin and energy prices, a and also from the weaker Canadian dollar as you know oil prices and and foreign exchange rates. A you know were pretty hugely dislocated in the early stages of the pandemic.

So that was that was a definite tailwind, but then the other big number you see is 19 million in that other operating costs line.

Your.

For the first six months and you know that a lot of that would be this ah this labor or the labor savings that we that we highlighted as we were able to do a lot more maintenance work where their own employees rather than contractors.

Okay.

And then I.

I guess, maybe just some news <unk> well just not panel side in Europe.

You know, obviously Q2 was difficult do we do we expect a.

Copper and reach now we're back to normal and do we expect a Q3 similar to Q1 results.

All of our mills from our full operation really starting in the second half of Mary.

To our Milner Konstantinos continue to operate throughout trusting us amount on the compound that was pretty much more resilient.

No it wasn't UK.

As I talked about earlier.

So.

It's a moment.

You know, we expect much more of a normal quarter no British not occur on sort of operating conditions.

Okay, and then maybe just back on their own Mcauslan, what are the specific things that you're doing in the flexible operating regime that the people that.

Lower their cost and and put you in.

And.

Associated with that it restart at cardio line, one limited capacity would it would is that specifically me.

All right well under cost I think Robinson tried to explain that already but.

You know nor under normal operating conditions, you know, we tried to minimize downtime.

By extensive use of contractors.

To help us with our no weekly or biweekly American on so it's Roger Smith, our annual maintenance.

Yeah, we are taking on a completely different parts for you know during the pandemic.

You know bye.

Scheduling, perhaps a little bit more time.

To allow us to Taco most of that maintenance with their own people.

Trading off.

Ooh some time for money, if you want to put it that way.

And I picked up how this works very well person.

We'll continue down that road faster you know astor's markets progressions.

You know thinking about core deal.

Line one.

There are major constraints.

Yes, we have talked about for a long time is trained labor and that remains our key constraint.

And you know.

You may recall that run rate that's true.

Her children middle of last year, we had to say.

Goodbye to 45 of our colleagues.

Are you know, we're now trying to higher up to 25 hock.

And that explains why we're on a limited operating schedule.

And in the near term dishes old we.

The lead free can manage.

Longer term, we're incorporating cardio line one into our flexible operating configuration.

Its production will remain demand dependent.

Okay. That's all I had that's like a lot going forward.

Thanks, very much Paul.

Thank you very much. Our next question will come from John Babcock Bank of America.

Hey, good morning, Thanks for taking my questions I'll just follow the topic of Cordell I was wondering if you can you talked about in part you know kind of the demand and balancing you know how good demand is right now and re acceleration that you've seen with how helpful. You'll have to lung cordell, they kind of catch up on that the NIM.

Well our ability to run their course deal no I've just described such limited.

But no there overall demand conditions for hours B. I think our press illustrate it's if you look at a run them like Brent price or some movements over the last.

Two or three weeks.

Show or you know, we're experiencing extremely tight markets conditions.

And Ah you know to there's a potential or I remember you haven't even really answered hurricane season yet.

Of course, I'm very hopeful that rebound.

But that risk is still out there on the top off the strong demand that we're experiencing across really all.

Areas of the amount what are those new home construction.

There are in our aside repair and remodeling side or industrial that our industrial answers.

Okay, and what are your waterfalls, I guess stand right now and do you have any sense as to how long it might take you catch up on you know to get those order files to a more normalized level.

Well I mean as you've heard me talk about in the past.

John Reid read typically would target having about a two week.

Order file show that we can schedule or operations as efficiently as possible.

No we are real in excess of doors.

Oh station and I think already in the in you know would last quarter, we talked about being somewhat uncomfortable.

But the length of the order files that we were experiencing in December January February.

Your watch very much the same if not worse at the moment.

And.

Yeah.

[noise] typically what would happen is when demand starts to decline seasonally.

Oh, that's one reason we can hope to.

Recover from dish.

It's conditions.

Okay have you had to you know with waterfalls, where they are now I assume you have some contract customers that you prefer to serve and so you know I mean have you had to turn away business given how tight the market us.

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Oh gosh focus drawn on on our key customer base, PEO and resell direct only directly to our key customer retail or to a retail strategy or retail customer base.

I should've include some large or repair and remodeling customers as relish the large pro dealers on a number of industrial customers. Yeah, we're committing committed to keep them supplies as best as Rick can.

We will continue to focus on that.

Okay is there I'm just last question is there any way you could give US you know senses to how much of the mix those contracts or this contract customers. They got.

Sure I can you repeat your question.

I was just wondering how much of your total sales will probably come from those contract customers.

Well, we shall those customers both on contracts and a in the open market word oh, you're going to catch up markets our cash markets.

And show really are the majority of our focus is on supplying our customer base.

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Okay. Thanks for the helping like that's all I can not ticket.

Thank you John.

Thank you I next question will come from Ketan, Mamtora BMO capital markets.

Good morning, not Peter Robin and good morning, taking my question.

You don't want to come back into this the flexible operating approach.

[laughter] not just Karti Bhatt.

I'm a system standpoint, do you have you've always talked often must be met its kind of you know you're running pretty much flat out or not running.

Okay.

Yes.

Oh, sorry, you approach off operating in a more flexible fashion.

Can you just talk about I know you know walked you you know walked you blondo bauxite.

On that you can.

You can have this approach and yet you know sort of keep the unit costs.

Not at manageable levels.

Well I came from I mean, I've read of already talked a fair bit about it but.

Maybe maybe to sort of explain us in a different way.

There's a strict via phone, but there's a significant difference between when we have to react at the last moment on schedule and downtime.

You know in the last moments as opposed to being able to plan well ahead.

And you're used to downtime effectively.

Along the lines of what Robert and I explained earlier at your sort of minimize our maintenance cost.

And reduce the need for outside contractors to help us.

And that's I think there through the thing that we ended up learning a during just.

During just ER covert related.

You know beginning of this period.

You know and obviously, there's more lessons to be learnt there, but others would reverse we focus on expanding on.

Okay.

I was curious if there's any be who you know they fight lot P.S., you'll be able to run the mid August had you know you all have he hired about 25.

All right.

So I'm just curious as it stands today.

What he's talking gotten if you all had that demand for <unk> for that.

Well I think you know as I told you we're planning to higher up to 25 people. We think that's the maximum re would be able to find a in that basket in terms of trained to operators were not there yet.

Peter will compare to the 45 people that we had a in the middle of under the bus running flat out.

Got that'll give you are fairly good perspective on what we might be capable off the other thing you have to remember is oh.

We started if there's no I put on an emergency basis very quickly a show or normally we would take our time to deal with all the issues before hand, and you're obviously.

Well, it's much more limited at this time around it.

Okay. That's helpful. And then just switching to Chambord feature I just terrific.

Tom Zaffino happened that people out that the managed to do that he based or are those restrictions lifted at this point.

Yeah, you're correct Saqueton under her second quarter or construction projects were not deemed to central in the province have come back and as a result, you know we have to put our capital spend there on hold.

Those restrictions have now been lifted.

So rear resuming our work very much in line with what we ever would have told you over the last year.

Well, we want to make sure it at that mill is.

That all of these sort of longer lead time items are complete.

What I thought mill can be started up you know on sort of six months' notice launch once we make a decision does this required.

Okay. That's very helpful. I haven't done it's all good luck in the back half of.

Thanks, Kate on.

Thank you I next question will come down Mark Weintraub Seaport global.

Thank you so on on pricing I.

I understand you eat the comment some lag effect setter and that the specialty mix it as well could you give a sense. If we were just a whole pricing where it is today and random lengths. So taking away the forecasting element of that order of magnitude how much higher Wood York.

Q3 pricing be.

Dan Your Q2 pricing.

[laughter] I don't know that sounds like a lot of mental math.

Don't know if I can make here on the spot for sure you've done it already Peter [laughter] will you share that's the class [laughter], Oh I would say.

First of all at least based on historical precedence you know.

Prices are unlikely to stay at let US now a record all time record high.

But you know typically you know we are two to three weeks or maybe even a little bit more showed in advance.

I'm sure you can kind of a bit of her perspective, how big the like could be.

Your Brent prices have gone up about 200 doors in the last three or four weeks.

Show you know the average.

For the quarter real like significantly to where we're at today [noise].

No, but every will stay at wherever out today I don't know yet huh.

Okay and on the specialty business.

How should we think about.

How that price can move under certain circumstances or not is that I assume there.

Annual Reopeners for different types of Reopeners and and what has been the history in very strong markets and recognizing there's still uncertainty and who knows where we are three six months from now but.

If we do have sustained strong markets, what history tell us what tends to happen in those businesses.

Well first of all I want to sort of shade us.

We have learned over the last 10 years US we continue to focus on.

Growing our industrial customer base, and our volume with those customers that we need to remain consistent than their supply even during periods when commodity prices are significantly higher.

Secondly.

No.

There are the prices are negotiated although there might be some limited movement up and down related to markets in general a depression or negotiate it and we tend to get a premium over the long term average commodity pricing indoors products because of all the extra services on quality would.

Firemen stuff, but our or specific quality requirements for a different customers.

Sure that's sort of I think how are you need to think of us.

Under.

Under normal market conditions.

There is.

There's no orders already.

Alternative right, whether its imported plywood or something that stuff that customers could revert to.

And therefore, you know there's a need for you know during our and or negotiations to keep pricing or to keep that kind of competition in mind to us reprice our product.

Preorder conditions today are extraordinary.

And but what I would expect that.

Sri Renegotiating contracts for next year, we will still sort of come from that same perspective.

With those customers.

Okay. Thank you and then lastly.

With the third quarter at a minimum looking like it's gonna be I'm exceptionally.

Profitable exceptionally strong from a cash generating perspective.

Any any.

Help in framing when it's a relatively short period like that's how you think about.

The capital allocation question and in particular.

How much might you tend to.

Put towards special dividends or any way to help us understand.

How you process you know again, the the exceptional state of affairs that we're in right now.

Well.

Thanks, Mark on obviously.

Dividends is a poor decision on capital allocation very much as a board decision.

Our next board meeting as an early November.

But you know our first of all I'll point to our track record, we haven't variable variable dividend strike.

Strategy in place.

We have very track record of addressing the variable dividend up and down according to market conditions and youre, including Bakken 2018, when we had an extraordinary court every other special increase to the special dividends.

I don't Wanna Foreshadow watch what may or May not happen at the end of this quarter, but you only other things that I would put him.

Or that we are certainly I couldn't be thinking about it there's still a lot of uncertainty here in a market you know this covert.

Pandemic is far from run its course.

There is a big disconnect between the overall economic performance and the housing let's call it the broader housing market.

And brought it up disconnect come continued or just for a long term time youre, we've never seen up before so there's still a lot of uncertainty and we'll certainly and you know and I think our board, we'll certainly keep that in mind.

As they continue to think their way through capital allocation decisions.

Okay. Thank you appreciate help.

Thanks Mark.

Thank you our next question, but come family, Andrew Clatskanie Credit Suisse.

Thank you good morning.

Yes, it really relates to the operating model that you've now adopting a bit more dynamic in nature and just any other color you can provide on the efficiencies are setting a rotating which are the metals, whether it's just from a straight out operating basis.

Shifting to delivered a certain customers in a more more reliable fashion and then very fundamental I just met employee standpoint.

You are clearly a fairly large employer and something that communities, where you operate and is this really reinforcing and your norbord as an employer of choice in those communities.

Yeah, we certainly like to think of it that way and you're right. You know most of our mills are relatively small communities and it's not just a direct employment and youre to fairly good pay and benefits that we provide our costs are our employees and their families.

But there's a lot of indirect employment of comes from our operations as well. So do you economic footprint, a new smaller towns are significant.

And up and we're very cognizant of that you know you know real if there's long term strategy of.

Oh the lining.

Our our employees interests with those off the Corp. The deal for our shareholders. So we're just prefer chair model and and show US The company does well show do our employees and I think that those are very fundamental unimportant element of how how we think.

Off of that particular part of Oh or or how we think of our employees.

You know in terms of the flexibility in the operating schedule a pure about also plays an important role you know and show. Our first focus is on keeping our employees employed and keeping them, but benefits and that's for sure but of course are very important consideration.

We thought around how we would react to a two just covert crisis there really in March when we started to think about [laughter] think about that.

Okay. That's helpful. I guess would that kinda backdrop.

That 25, you're targeting at Cornell.

Do you think you could exceed that number and get closer to the 45.

Well at the moment doing like the one when we had two part ways where their employees last fall.

You know, we really did show knowing that all of them would likely find daughter jobs in very quick order and that I think has been the case.

No I'm proud of the team to be able to attract.

So a number outdoors employees back to Norbord.

And you know where we'll be able to got two to 25 number 25 or that we are targeting at this moment, we don't know yes.

One final question, if I may and it's just on the MIT.

It looks like it was the mill productivity and just lower costs.

And then overhead was there anything else in the I might be it it was really notable.

Yeah, I mean, that's really it ties right into that you've been seeing in our in our unit cost. Its just did it it's measured on a you know on I'm trying to price basis. So.

Ah, but otherwise it's it's exactly consistent it's it's productivity, it's a lower raw material usage and I'm pushing down you know cost across the board.

Controllable cost.

Okay, great. Thank you.

Thanks, Andrew.

Thank you.

Next question will come from Sean Stewart TD Securities.

Thanks, Good morning, everyone couple of questions.

Sean bore you can you give us an update on your thinking of what's needed in terms is.

I think it starts or regional demand.

Indicators to make the decision to go ahead with that eventually start.

Morning, Sean Thanks, well consistent with what we've been saying in the past about Chambord and very similar to the message we gave.

Prior to where it started to show you know not Alabama mill and before that our Texas Jefferson Mill.

We need to see sustained demand <unk>.

Quota capacity, there's no could produce before we'll make a decision.

No you know in that particular mill, we would have to higher.

Hundred on 20 or more employees and we don't want to do so if the prospect is that we would have to lay them off again, a in a short term.

So that's not changed.

And we'll continue to evaluate.

What about this.

But are not sustained demand isn't it there to allow us to make a decision to start up no up.

We have not yet got into that place.

Okay.

And Peter just broader thoughts on I guess, which he will sustainability of this.

This upcycle late Q3 will be looking at North American EBITDA margins potentially that's north of 50% historically, that's short lived for this industry.

And more broadly speaking when you're thinking about and what could.

Disrupt this up cycle are you more concerned with a slowdown in demand growth.

Or.

Water capacity additions coming into the next like what gives you some concern with respect to sustainability and that's up cycle.

If anything.

Yeah.

Let me answer in two parts.

First of all.

No we have seen and we are seeing strong.

Demand.

You know with.

Good day and night shift them, we're always be supply can only react so far.

And you know that started off the quarter or do you ended the quarter at the beginning of the of the third quarter over its very healthy and strong <unk> markets.

No the last two or three weeks, we have seen prices go almost straight up.

Ah you know one I have nothing to go on but.

History and.

Historically, we have.

No. These kind of price level should we have not seen number stay there for very long period of time now that doesn't mean it won't happen. This time, but oh, that's at least a the precedent that we can point during the past.

But that doesn't mean that we're not in a healthy market right now.

No you Sky high price numbers may not sustain very long I don't know, but we don't need these kind of crisis to have a very strong result.

Okay. Thanks for that context I appreciate it.

Thanks, Sean.

Thank you I next question will come from John Tumazos them, John Tumazos very independent research.

Thank you for taking my question and congratulations on the good business environment.

Thank you John.

Could you just explain maybe to someone less familiar like me.

The business rationale for only taking orders two three weeks out.

And.

How much more do you think you could sell today than your current output or.

I know you're.

Well my what margin might you be turning away orders.

Yeah. So I think there if I look at the last but first you know rear.

Producing as hardest recount.

[laughter] all of our operations that are currently running.

Including having just made this decision to sort of start up.

Yeah, the cardio line, one mill lying on the on an emergency basis.

So even if we would want to sell more rear physically not capable of doing so.

In terms of T.

First part of your question.

Our Florida fall is.

Lengthy.

At the moment.

We typically would like to have about a two week order file because that's the right sort of mixture between being able to react true demand surprises as well as being able to plan our operations today or you know we're significantly beyond that.

And no doubt.

Has the advantage of course off tying into strong markets, but at the same time. It has to disadvantage that become <unk> really no longer have for any ability to react if anything goes wrong.

Thank you.

Thank you.

Thank you very much at this time, we have no further questions in there too so I would like to turn the conference back over to our speaker.

Well. Thank you Shanteau I was always Robin Heather Robert and I are available to respond to further questions.

Oh, Thank you very much for your participation today stay safe.

And we look forward to reporting on our progress next quarter.

I have a good or have a good afternoon.

Thank you very much ladies and gentlemen. This now concludes today's conference you may disconnect your phone lines and had a great rested the week. Thank you Jim.

[noise].