Q2 2020 Norbord Inc Earnings Call
Good day, everyone and welcome to Norbord Inc.'s second quarter earnings Conference call.
As a reminder, today's call the is being recorded and webcast on Norbords website at Www Dot Norbord Dot com.
Norbords discussion today may include certain projections and forward looking statements regarding north bridge business future actions unexpected results.
These statements are subject to known and unknown risks and future results may differ materially.
Further information on known risks. Please see the caution regarding forward looking information statement and Northridge debris fourth 2020, <unk> annual information form and the cautionary statement contained in the forward looking statements section of Norbord management's discussion and analysis dated August four.
2020 [noise].
Now I'll turn the conference over to Peter White, <unk>, President and Chief Executive Officer.
Please go ahead Sir.
I catch on John Good morning, everyone welcome to work <unk> Conference call.
I'm joined today by Robin line partnership Huh.
<unk> director of corporate Affairs.
Robert Winslow, Vice President of Investor Relations and corporate development.
This morning, I want to take amendment.
[music].
Okay punch above our culture results Oh, we have been able to effectively manage our bush's directors several times.
Oh gosh, what interim data from a financial comments before we take your questions.
Our second quarter results were strong I wish we generated $4 million of attrition habitat.
That's resulted in seven quarters.
The same quarter last year.
In North America.
That's right.
Okay, well construction.
[laughter] <unk> carried over from last quarter, when I'm trying to part of <unk> second quarter.
However demand for construction subsequently I covered much quicker and stronger than we had expected.
[music] constraints in Toronto border, providing enough schatz trying to pull book.
<unk>.
[music].
Oh gosh <unk> positions.
For the kitchen options.
Great Okay.
Okay No division.
<unk> purchase.
[laughter] <unk> contracts.
[music].
That's driving demand for more affordable suburban how.
<unk> <unk> single family home building much crocheting sharp turns as much or if there's more to family.
Yes, I wish I had a motion [laughter] apart from kind of a traditional industrial customers.
Good portion furniture.
[laughter] were declared non essential.
That's what the subsequent lifting ambitions restrictions.
Industrial demand has been gradually recovering and is now approaching to record levels.
The bounced back in new housing and ongoing strengthened oren or.
That's right improvement doesn't always be demand and benchmark prices.
Had initially dipped early stages of the pandemic.
Our North American Mills produced 74% of available capacity in the second quarter, that's written considerable downtime.
Implemented a flexible operating strategy to allow us to better align our production demand.
Excluding the indefinitely curtailed hundred mile House militant who do learn one.
Maybe 243 Mildews downtime in the second quarter.
Prior to June 35 days into first quarter.
Well now I'm, especially pleased stuff, we were able to significantly reduce our poor units manufacturing cost versus book for quarters.
Demonstrating the beneficial to flexible operating strategy be adopted to manage traded pandemic and definitely will maintain going forward.
You have Shane Doug or resuming limited production line, when although kudu mill.
Which had been indefinitely curtailed since November last year.
The stronger than expected rebound and always be demand I, just love to extreme tightness in the markets.
And record high reported benchmark prices.
Well I would characterize a Z emergency restart.
Could you line.
<unk> only option available to us to provide additional volumes to our customers in the near term.
Now going forward.
Mmm corporate core do line into our new flexible operating strategy.
Allowing us to adjust our production both up and down on short notice to align with customer demand.
In Europe.
Thanks to cope with 19 or business were much more acute.
As many of our you kind of customers were forced to close operations due to government imposed to restructure restrictions.
And as a result.
Okay I know the man so markedly in the second quarter.
She knows to close all of our UK mills, so between five and eight weeks.
Demand on the continent remains resilient throughout the second quarter.
And you can't imagine has recovered in June as government restrictions use.
Our adjusted EBITDA, so from $10 million in Q1 to $2 million in Q2.
Given the extension of curtailments, we had to tick.
Despite a pandemic related constraints experience in the quarter. It continues to make great progress at our Inverness mill.
The mill is close to producing at its full phase one capacity.
And we remain on track to complete the complete the phase two expansion projects before the end of year.
This will help us continue to supply substitution driven there was good demand growth in Europe for years to come.
And with that I'll now pass it over to Robin.
Thanks, Peter and good morning, everyone.
As you Recalibrate your models for Q2 results. There are two factors I want to draw your attention too.
First a couple of points on our strong Q2 cost improvement that Peter highlighted.
We had a tailwind from both lower raw material costs and the weaker Canadian dollar and further we were able to reduce maintenance costs by substituting our own employees for contractors as we limited traffic in our mills during the pandemic.
Second in light of the recent unprecedented and steep run up in North American benchmark always be prices I'll remind you of the inherent lag in our realized prices versus the benchmarks during periods of rapidly changing prices.
Slag, which cuts both ways of course.
Courage because of the timing impact of our order files for commodity and value added products.
Well as the roughly 25% of our volume that goes into specialty end uses were negotiated prices don't move up or down with the commodity benchmarks.
Turning to our balance sheet and capital allocation, our strong Q2 results enabled us to fully repaid drawings on our liquidity line, leaving us with $278 million of liquidity at quarter end and considerable headroom versus our two financial covenants.
And did you have seen after prudently pulling back our variable dividend to five cents per share last quarter in the face of significant uncertainty in the early stages of covert 19.
Our board increase the dividend to 30 cents per share this quarter, reflecting our strong financial results and improving end market demand.
This is entirely consistent with our variable dividend policy that gives us the flexibility to adjust the payout level up and down as our operating results outlook and balance sheet permit.
And is consistent with our historically balanced approach to capital allocation.
Well, we are optimistic about the demand strength. We're currently seeing you recognize there remains considerable uncertainty around the depth and duration of the economic impact of covert 19.
And that the current disconnect between the stronger housing economy, and weaker macro economy will ultimately get reconciled one way or another.
So we remain vigilant and we'll continue to focus on the health and safety of our employees as well as managing our business to be resilience and flexible.
One of the silver linings of depend demick experience is weve quickly learned how to be more agile in scaling our production down and up to align with customer demand while at the same time managing our costs.
And we will maintain this new flexible operating configuration going forward.
With that will jump right into questions. So I will turn things over to our operator, we'll open up your line.
Thank you very much ladies and gentlemen at this time, we would like to open the floor for questions. If he would like to ask a question. Please press star one on your telephone keypad now.
Again that is star one to ask a question.
Well pause for just a moment as we wait for questioners to Q.
Our first question will come from Paul Quinn RBC capital markets.
Great Good morning robbing Peter.
Hi, good morning.
Fantastic job in the cost side and I realize that input costs are down.
But maybe you can pursue what the savings on the maintenance side what.
Oh.
Well, Paul a difficult to put back you know numbers against that but I would just I would just pointing to the variance table in our.
In our.
<unk> earnings presentation that accompanies this call and we had I think was $19 million.
Right and I I don't have an in front of me never do you have it [laughter]. That's my mistake. Thank you [laughter] [noise].
[laughter], sorry, 50, 50 million dollar a year to date, a positive from raw material prices. So that just kinda give us an order that's that's a pretty big movement for six months.
Oh from you know primarily from from resin in energy prices.
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 depend on Mike.
I'm so that was that was a definite tailwind.
But then the other big number you see is 19 million in the other operating cost line.
For its first six months and you know that a lot of that would be this at this labor and 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 piece just in apparel side in Europe.
No. Obviously Q2 is difficult do we do we expect a upper reach now we're back to normal and do we expect a Q3 similar to Q1 results.
All of our mills in our full operation really starting in the second half of Mary.
To our mill and the comps on costs continue to operate throughout trusting us amount on the continent has pretty much more resilient.
Then a question do you Craig.
As I talked about earlier.
So.
It's a moment or.
You know, we expect much more of a normal quarter, no British and our current sort of operating conditions.
Okay, and then maybe just back on their own Mcauslan, what does the specific things that you're doing a flexible operating.
Gene that the people that.
For the cops and and put you in.
[noise] associated with that if we started at cardio line one limited capacity what did what does that specifically me.
All right well under cost I think Robinson tried to explain about already but [noise].
Oh no work under normal operating conditions, you know, we tried to minimize downtime.
By extensive use of contractors.
To help us with our weekly or biweekly maintenance shuts raws with our annual maintenance.
Yeah, we are taking a completely different posture no drug Andy can dynamic.
You know part.
Scheduling, perhaps a little bit more time.
To allow us to tackle 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 cause us worked very well person.
We will continue down that road asked or you know asked as markets progressions.
You know thinking about core deal.
Line one.
You are our major constraints.
Yes, we have talked about for a long time is trained labor.
Got it remains our key constraint.
And you know.
You may recall that run rate.
True for her to build up until last year, we had to say a good bard to 45 of our colleagues.
No we're not trying to higher up to 25 [laughter] that explains why we're all my limited operating schedule.
And in the near term decision will be.
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 that that's what good looks going forward.
Thanks, very much Paul.
Thank you very much I next question will come from John Babcock Bank of America.
Hi, Good morning, Thanks for taking my questions. All you know just following the topic of Cordell I was wondering if you can you talked about impart kinda demand and balance in you know how good demand is right now and re acceleration than you've seen what how helpful. You'll have to lung cordell to kind of catch up on that and then.
Well, our ability to run or the record you'll know I've just described such limited.
But no there overall demand conditions for always be.
I think our press illustrate it's if you look at a run them like Brent prices a move much over the last.
Ah two or three weeks.
I'm sure you know, we're experiencing extremely tight markets conditions.
And Ah.
You know to there's a potential for every we haven't even really entered hurricane season, yet and of course, I'm very hopeful that rebound.
But that risk is still out there on top off the strong demand, but we're experiencing across really all.
Areas of the amount to one of those new home construction.
Are there are in archard repair and remodeling side or industrial.
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 to catch up on you know to get those older falls to a more normalized level.
Well I mean as you've heard me talk about in the past.
John Reid re typically which.
Targets, 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.
Doors decision and I think already in the in you know would last quarter, you talked about being somewhat uncomfortable.
But the length of the order files that we were experiencing in December January February.
George very much the same if not worse at the moment.
And.
Yeah.
[noise] typically what would happen is one demand starts to decline seasonally.
Oh, that's one reason.
You can hope to.
Recover from dish or types 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 markets.
<unk>.
Over his focus drawn on on our key customer base, Oh, and resell direct only directly to our key customer retail or to a retail stride or retail customer base.
I should've includes some large or.
Repair and remodeling customers in his role as the large pro dealers on a number of industrial customers.
Sure, we're committing committed to keep them supplied as best we can.
We will continue to focus on though.
Okay is there just last question is there any way you could give US you know senses to how much of the mix that its contract with this contract customers make up.
Sure I can you repeat your question.
Just wondering how much of your total sales up 20, calling from those contract customers.
Well these cell dose customers both on contracts I'm into in the open market word or what we call the cash off market or cash markets.
Intro really are the majority of our focus is on supplying our customer base.
Okay. Thanks for the helping but that's why I cannot treat you.
Thank you.
Thank you Ma'am I next question will come from Ketan, Mamtora BMO capital markets.
Good morning, Dr. Peter Robyn.
Good morning, taking my question you don't want to come back into this the flexible operating approach.
[laughter] conscious party, but from a system standpoint, do you have you've always talked all four seem as kind of you know when you're running pretty much locked out or not running.
Okay.
Oh, you approach all operating in a more flexible fashion.
Just talk about I know you know walked you know what you've learned data works really well.
I do.
You can have this approach and yet.
You know sort of keep.
<unk> costs.
Not a manageable level.
[noise] well characterized I mean, I've read of already talked a fair bit about it but.
Maybe maybe to sort of explain it's in a different way.
There's a strict via phone so theres a significant difference between when we have to react at the last moment on schedule and downtime.
You know and a loss moments as opposed to being able to plan well ahead.
And you're used to downtime effectively.
Along the lines of what Robin and I explained earlier or to your sort of minimize our maintenance cost.
And reduce the need for outside contractors to help us.
Dutch pick up through the thing that we ended up learning.
During this.
During just Ur cobot related.
You know beginning hostess periods.
You know one obviously, there's more lessons to be learnt there, but others would revert focus on next problem at all.
[laughter].
I was curious if there's any be who you know so if I want to he is going to be able to run the mud logs had you know you all have you hired about 25.
Sorry.
So I'm just curious as it stands today.
Bought fees. So I was getting gotten if you all had the demand for for that.
Well I think you know as I told you we're planning to higher up to 25 people, we think touched a maximum breed would be able to find.
And that basket in terms of trained operators were not there yet.
You know compared to the 45 people duck rehab into middle of under the bus running flat out I.
I think that that'll give your further good perspective on luxury might be capable off the other thing you have to remember south.
We started this mill up in an emergency basis very quickly a show your or normally we would take her time to deal with all the issues before around you obviously.
Plus much more limited at this time around.
Okay. That's helpful. And then just switching to Chambord feature.
That's correct.
Okay and stuff you know people out that the amazing do does he based or are those restrictions lifted at this point.
Oh, you correct Saqueton under second quarter or construction projects were not deemed to central into problems have come back and as a result, you know we had to put.
Our capital spend there on hold.
Those restrictions have now being lifted I'm sure. We're resuming our work very much in line with what we would have told you over the last year you know we want to make sure. It I thought mill is.
All of these sort of longer lead time items are complete showed us up mill can be started up.
Well I'm sort of six months' notice launch a once we make a decision does is required.
Okay, that's what I've done a good luck in the back office here.
Thanks, good at home.
Thank you I next question will come from Mark Weintraub Seaport Global.
Thank you so on on pricing I.
I understand you eat the comments on lags et cetera, and that the specialty mix. It as well could you give us a sense. If we were just till he pricing where it is today in random lengths. So taking away the forecasting element of it order of magnitude how much higher Wood York.
Q3 pricing be.
And your Q2 pricing.
[laughter] I don't know that sounds like a lot of mental math.
No if I can make here on the spot I'm sure you've done it already Peter [laughter] will your share it that's the cloud [laughter], Oh I would say.
First of all at least based on historical precedent.
[noise] prices are unlikely to stay at some others 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 sold in advance.
I'm sure you can kind of a bit different perspective, how big the like could be.
Your Brent prices have come 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 with wherever out today I don't know about 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 what has been the history in very strong markets and recognizing you know, there's still uncertainty and who knows where we are three six months from now but.
If we do have sustained strong markets, what would history tell us what tends to happen in those businesses.
Well first of all I want to sort of Schrader.
We have learned over the last 10 years US we continue to focus on.
Growing our industrial customer base on our volume, but those customers that we need to remain consistent than their supply even during periods when commodity prices are significantly higher.
Secondly, you know are there the prices are negotiated.
Although there might be some.
Limited movement up and down related to markets in general.
Sure negotiated and return to got a premium over the long term average commodity pricing endos products because of all the extra services on quality requirements that a that our or specific quality requirements for a different customers.
Sure that's sort of I think how you need to think of it.
Under.
Under normal markets conditions.
A there is.
There's no there's always an alternative or whether its imported plywood or something about stuff that customers could revert to.
And therefore, you know there's a need for during our and or negotiations to keep pricing or to keep that's kind of competition in mind to us reprice our product.
Ah preorder conditions today are extraordinary.
And but what I would expect about.
Sri Renegotiating contracts for next year, we will still sort of come from about shame perspective.
With those customers.
Okay. Thank you and then lastly.
With the third quarter at a minimum looking like it's going to be.
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 no I got in the exceptional state of affairs that we're in right now.
Oh, Thanks, Mark I'm obviously.
<unk> 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 point to our track record, we haven't variable variable dividend schreiner.
Strategy in place.
We are pretty track record over dressing to variable dividend up and down according to market conditions and youre, including Bakken 2018, when we had an extraordinary quarter every other special increase to the special dividends.
I don't want to foreshadow watch what may or may not happen at the end of this quarter, but you only on or things that I would put him.
Right.
We are certainly I couldn't be thinking about it there's still a lot of uncertainty here in a market no just covert pandemic is far from run its course.
There is a big disconnect between the overall economic performance the housing let's call it a broader housing market.
And brought it up disconnect can continue to exist for a long term time, there we've never seen that before so there's still a lot of uncertainty and real shirt me and you know and I think our board, we'll certainly keep in mind.
As they continue to think their way through capital allocation decisions.
Great. Thank you appreciate help.
Thanks Mark.
Thank you. Our next question will come found Andrew Klatsky Credit Suisse.
Thank you good morning.
I don't really relates to the operating model that you've now adopting that more dynamic in nature and just any other color. You can provide on you know the efficiencies are searing of rotating through the metals, whether it's just from a straight on operating basis.
Shifting to delivered a certain customers are more more reliable fashion than done very fundamental just minimum floor you standpoint.
You're clearly a fairly large employer and some of the communities where you operate and is this really reinforcing 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 that'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 that comes from our operations as well. So do you economic footprint, a new smaller towns are significant.
And Oh I'd be very cognizant of that you know you know real if this long term strategy of.
Oh for lining.
Our our employees interested but there was off the corporate girls far shareholders through just prefer chair model and.
I'm sure Westar company does well show drew our employees and I think that those are very fundamental an important element of how we think.
Off of that particular part of.
Oh sure or how we think of our employees.
You know in terms of the flexibility in the operating schedule.
Also plays an important role you know one I'm show our first focus is on keeping our employees I'm toward.
Keeping them, but benefits and that's for sure but of course are very important consideration a scary thought around how we would react to a true just covert crisis.
Really in March remember, we started to pick about thinking about that.
That's helpful. I, I guess would that kinda backdrop.
Doug 25, you're targeting at Cornell.
Do you think you could exceed that number get closer to the 45.
[noise] well at the moment, there will not be run run rehab to part ways, where their employees last fall.
You know, we really did show knowing that all of them would likely find daughter jobs and very quick order and that I think has been the case.
No I'm proud of the team to be able to attract.
You know a number outdoors employees back to Norbord.
And.
So what are we will be able to got two to 25 number 25 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.
Looks like it was the mill productivity and just lower costs.
Then overhead was there anything else and yet my feet. It was really notable.
Yeah, I mean, that's really that ties right into what you've been seeing or in our unit cost.
It's just it's it's measured on a you know I'm not trying to price basis. So.
But otherwise it's it's exactly consistent it's it's productivity, it's a lower raw material usage and pushing down you know costs across the board.
Controllable cost.
Okay, great. Thank you.
Thanks, Andrew.
Thank you I next question will come from Sean Stewart TD Securities.
Thanks, Good morning, everyone.
Two questions.
Chambord <unk> 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 him and Alabama mill and before that our Texas Jefferson Mill.
We need to see sustained demand.
For the capacity that's up no could produce before we'll make a decision.
No.
You know in that particular mill, we would have to higher.
<unk> hundred 20, or more employees and we don't want to do so if the prospect or somebody would have to lay them off again.
In a short term.
So that's not changed.
And we'll continue to evaluate what others are brought it up sustained demand isn't it.
Sure.
To allow us to make a decision to start up no up.
We have not just dropping to about place.
Okay.
And Peter just broader thoughts on I guess west to the sustainability of this.
It's self cycle Q3 will be looking at North American EBITDA margins potentially that's north of 50% historically that short lived for this industry.
And more broadly speaking when you're thinking about and what could.
It's rough 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 of that's up cycle.
If anything.
No let me I'm sure in two parts.
First of all.
No we have seen and be are seeing strong.
Demand.
You know with.
Good day and night system were always be supply kinda only react so far.
You know dot started off the quarter or do you ended the quarter at the beginning of the after third quarter over its very healthy and strong <unk> ER markets.
No the last two or three weeks, we've seen prices go almost straight up.
You know one I have nothing to go on but.
History, and historically you have.
No. These kind of price levels, 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 depressive input to become point during the past.
But that doesn't mean that we're not in a healthy market.
No.
The Sky high price numbers, maybe not sustained very long I don't know, but we don't need these kinda prices through another very strong result.
Okay. Thanks for that context I appreciate it.
Thanks, Sean.
Thank you I next question will come from John Tumazos, then John teams does 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 two days on your current output or.
I know you're.
By what margin might you be turning away orders.
Yeah. So I think two if I look at the last but first no rear.
Producing as hard as free cash.
Yeah, that's all of our operations that are currently running.
Including having to make this decision to sort of start up.
Yeah decor deal line one mill in line on a on an emergency patients.
So even if we would want to sell more severe physically not capable of doing so.
In terms of T.
First part of your question.
Her order file is.
Lengthy at the moment.
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 that's relevant being able to plan our operations today or you know we're significantly beyond that.
No doubt.
Has the advantage of course enough tying into strong markets, but at the same time. It has to disadvantage that we can no longer you no longer have for any ability to react if everything goes wrong.
Thank you.
Thank you.
Thank you very much at this time, we have no further questions in queue. 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.
Thank you all very much for your participation today stay safe.
I mean 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 have a great rest of the week. Thank you.
[music].