Q3 2020 Norbord Inc Earnings Call

Q3, compared to 143 in Q to Q2.

Oh, it's be supply a struggle to keep up with the stronger than expected rebound and always be demand, leaving.

Leading to record high benchmark prices that have carried into the early portion of the fourth quarter.

Our adjusted EBITDA in Europe also increased from 2 million doors to Q in Q2 to $16 million in Q3 on the strength of the recovery in demand.

And improving or European or whether it be pricing.

We continue to make great progress at our Inverness mill in the third quarter were to face to commissioning is now well advanced.

The mill is now consistently producing at as phase one capacity and starting to ramp up towards its phase two capacity of 945 million square feet on a tree ads basis.

This expansion will help us continue to supply substitution driven to always be demand growth in Europe.

For the years to come.

Now to the to the discussion to discuss her decision to permanently close to 100 miles mill in British Columbia.

This closure will reduce our stated north American capacity by 440 million square feet three assets.

As you know the hundred My House Mill has been indefinitely curtailed since August 2019.

In response to a wood supply shortage and rising fiber costs, owing to the mountain pine beetle epidemic and more recent certainly significant wildfires.

These factors led to a 50% reduction in the annual allowable harvest for this region serving them though.

Earlier, this year and in reaction to the pandemic.

We adopted a more flexible operating strategy across our manufacturing platform to be more agile in responding to the changing market conditions and customer requirements well containing manufacturing costs.

Asked norbords highest cost mill and with an ongoing wood supply shortage and the region. It became clear that on <unk>. The hundreds not house mill was unlikely to have a role to play in the future.

Taken together the current unexpected ongoing wood supply shortages make the operation uneconomic and so we have decided to permanently close the mill.

We recognize this is difficult news for our team in hundred My House.

And reiterate that this decision is not a reflection on the professionalism and commitment of our employees there.

Or two to community over 100 miles.

I want to thank our team and 100 miles for their effort in the face of extremely challenging industry conditions.

And with that I'll now pass the call over to Robin.

Thanks, Peter and good morning, everyone.

As you update your models that keeping the results. There are two factors they want to draw your attention to.

Barry in light of the recent unprecedented and steep run up in North American benchmark LMP prices I'll remind you of the inherent lag in our realized prices very since these benchmarks during periods of rapidly changing prices.

Its flag, which cuts both ways of course.

Currency because of the timing impact of our order files for commodity and value added products as well as the roughly 25% of our North American volume that goes into specialty end uses were negotiated prices don't move up or down with the commodity benchmarks.

And second while we are optimistic about current market indicators. We also recognize that we are now entering the winter construction period when demand typically slows down.

Turning to our dividend you will have seen that our board increased the dividend to 60 cents Canadian per share this quarter on the back of record financial results and continued optimism about 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.

As well as being consistent with our historically balanced approach to capital allocation.

It also recognizes the need for resilience and balance sheet flexibility given the significant uncertainty hanging over our positive outlook, which people what Peter will outline in a moment.

In recognition of our strong Q3 financial results and our positive outlook. We have returns to our 2020 you ever turned out 2020 capital expenditures back to the original target of $100 million.

And looking ahead to next year, we have a preliminary 2021 capex budget of $150 million.

We will focus this higher budget on reducing manufacturing costs enhancing process safety across our mills.

Are there investments to support the Companys industrial sales growth strategy.

And continuation of the Chambord rebelled.

And with that I'll pass the call back to Peter.

Thank you Robin.

We are optimistic about the demand strikes were currently seeing.

But we also recognize there remains considerable uncertainty around to depth and duration of the economic impact of COVID-19 that's.

That's roaster uncertain U.S. election results upcoming Brexit deadline.

We further acknowledge that there is an apparent disconnect between just strong housing economy.

And a weaker macro economy that may eventually get reconciled one way or the other.

We remain vigilant and we will continue to focus on the health and safety over I'm per use firsts.

As well as our customers needs.

And we will manage the business to be resilient and flexible.

We have learned how to be significantly more agile in scaling our production down and up.

You aligned with customer demand, while managing costs.

Our new flexible operating configuration is now our standard operating approach.

So true.

Should conditions change.

We are well positioned to respond.

So certainly when I look at our.

What we're experiencing.

You know we are now back on time, but our shipments no longer well behind.

Like we were unfortunately earlier she is.

Got it that's more in the most not to not only meet two boutiques is that more typical for this time. He does is that fair.

That's a fair for her assessment, though.

Got it that's helpful. And then just switching over to Lyne one that's called deal I'm. Just curious you know how the ramp up buys a progress that I think last quarter. You said you were able to hire only 25 people. So you know as we kind of moved to winter and spring of next year I'm, just curious kind of how do you anticipate.

Ramping production there.

Well, our catering I I guess I want to point back to read or commentary I've made earlier your restart at that mill up front or on an emergency basis and temporary basis or.

We were able to attract a few of the employees that every had to part ways with.

The previous year.

Youre in and I'm very impressed by how the team in core deal has handled.

Southern situation the other points that I have made in the past is first of all that we now consider that middle part of our flexible operating strategy.

And in addition, a scrip overs repeat it but we will only produce what we can sell to our customers.

So that's.

I think you know or you know, we do not make a habit of talking about.

But you've also heard us talk about the uncertainties hanging over what is you know what appears today to be a very positive outlook and I think for us. It norberg right now and we talked about this last quarter as well corporate resilience is a big focus and having a flexible balance sheet and and now flexible operating configured.

Question. So that we can quickly adapt to whatever comes at us that that is very important to us right now and so.

Well. So we are prioritizing just being being a little more cautious I'm on that front and well continue to be balanced in how we allocate capital so you've seen the dividend.

Has been taken up to 60 cents, which is kind of consistent with the with our range. Since we established the variable dividend policy back in 2013.

And.

And the N.C. I'd be certainly remains a tool in our tool kit and under the right circumstances, we will renew it and we can do so very quickly.

Oh, Robert packs Robin I was going to do a good luck into gardening for anyone.

I cant agree with them.

Thank you if you find your question has been answered you may remove yourself from the queue by pressing star to our next question comes from Sean to watch with TD Securities. Please go ahead. Your line is open.

Thanks, Good morning, everyone.

Two questions on.

Good morning, one start with with RASM, there's seems to be a lot of short term supply curtailments.

Across the FDIC sector can you give us some context on how your positions.

And any expected cost inflation related to that three to the fourth quarter or into Q1 next year.

Yeah, I think your your your I figure I can confirm that there's been a force majeure event. That's one of the key resin suppliers, a rehab invoked or contingency plans for another sports, we don't expect any material impact on production.

Or Q4 financials, but obviously it always depends on how long do situation flaws.

Okay.

And Peter with respect to your comments on.

North American always be demand.

I'm wondering if you can provide a little more context on the the repair and remodeling channel.

And it seems to be a lot of generic discussion around the ongoing demand growth from that channel.

And I'm just trying to gauge it have you seen a pronounced slowdown it feels like there was a lot of volume pulled forward in the initial wave of the pandemic.

Are you should we qualify this is a deceleration in year over year growth.

Or.

Are you seeing an apparent peak in volumes going into that channel.

Oh yeah.

Sean or I'll try my best around sort of arbitrary.

Oh throughout this year you have seen a demand from the channel you're on you know we were shipped its first significant supplier to that channel.

Real stream demand sort of above where it was at the same time last year.

Sure Richard turned Roes are buffered rush at that time and 2018.

You know got divorced him into the big order in through to our in our segment <unk> shoes, and the Olympics Europe.

Sure, it's really important to compare it on a year over year basis.

And but on that basis, we continue to see significant strength in this segment.

Okay.

Last question for me you need incremental Capex next year, if we exclude chambord spending from 950 million.

Can you give us a little bit more detail on that the specific types of projects for discretionary spending you're looking at and when Robin you touched on class pay back expectations any update you can give us on.

What those metrics look like for that that type of wandering I'll give you. One example, Sean you know where our for our board has just approved a renewal approach project for our gearing.

Belgium dryer.

We have a single dryer there are real intent to replace it with a larger single dryer to.

That plan was originally built into early 2007.

You know it was a it just now we're a dryer limit its show just kind of a project you know I think it's in the neighborhood of 10 million.

I don't know if that's euros or dollars dollar that's about the same anyway dollars, you know or would take about a year to implement but then how significant uptick and we expect a very good return for that project. So those are the kind of things that we're focused on for next year for two or three bottlenecking, our processes wherever need more volume.

Or focusing on cost reduction projects or a mix improvement show wherever come from further focus on our specialties specialty.

Strategy projects.

Right.

With respect to the need the de bottlenecking part of that pure <unk>.

The guidance you can give us on capacity creep.

Across the portfolio, we should think about.

Well I'm, sorry, I think I tried to make that distinction show <unk> continued demand growth in the European business based on substitution.

So that's a place where we're very much focused on de bottlenecking <unk> more.

More capacity available for our customers.

In North America, our focus over the last year or two has been primarily on cost reduction investments and.

Or efficiency or investments and.

Making more capacity available to our specialty segment.

Understood that's.

That's all I have thanks very much everyone.

Thanks, Sean.

Our next question comes from Hamir Patel from C.I.B.C. capital markets. Please go ahead. Your line is open.

Hi, good morning.

Peter What's you know what do you expect to do with the the press at a 100 mile House.

Hi, I am here well the one thing I can tell you is that vote would be used for and always be production in North America are you know it's difficult to do but got a shot.

You know what your interest Crovitz.

<unk>.

But <unk>.

In Europe for example, wherever you have had the old process to dispose off.

If earlier I'm sure if I go back about 10 15 years, we were able to sell some of that press technology, you put more recently in Inverness.

Yeah, we actually have scrapped or two old presses Edward or show real look at what the appropriate or appropriate action is through tech. Once you know to covert restrictions are little bit to yourself.

Yeah. Thanks, Peter and you know Canfora recently indicated that they had sold their long idle long I'll pull aboard a.

Hi sites and the press there do you see that starting up somewhere else in North America.

I'm not aware of any plans anywhere in North America.

I know dot a very similar.

Yes, sure sure Russia.

Have you ever taken to Russia, five or six years ago.

So, but beyond that I can't comment.

Okay fair enough, but that's all I had I'll turn it over thanks.

Thanks Omar.

Our next question comes from Jim a jump off the call from Bank of America. Please go ahead. Your line is open.

Hey, good morning, Thanks for taking my questions. Just a quick there's a flexible operating structure and you talked about this a little bit in the past, but just want a little wanting to get a little bit more color on how this impacts the overall efficiency at the plants and also from a cost perspective, whether you're able to keeping that was running at a level that's pretty comparable to.

How they would have been under your prior structural.

Yeah, I mean, obviously, but.

What we have learnt during this past six or seven months is that youre. Some mills are technically much more capable to take this fluctuation in volume than others.

And so our focus on to support US flexible strategy is on those mills, particularly.

And.

And as you have seen from us over the last little while Oh, we have been able to do so.

Without a significant impact on our costs and that's really where our focus has been.

Okay, well thanks for that and then just a quick way to send more I was just wondering if you can remind us of some of the key factors that ultimately gets you to restart that recognizing that's orchard demand focus, but I was wondering if you could provide a little bit more color on what exactly you could be looking for in the market.

Yeah, John that's a good question U.S. rehab repeat it.

Past or whatever it is eight or 10 or 12 quarters.

My answer is not significantly different we continue to evaluate oh demand.

ER from our from the market than from our customers, but refocus or particular about the sustainability of that increase in demand.

And so that's really the key for US you know right now we have a very positive outlook for next year.

We have also noted that there are some significant uncertainties right now to Chris still facing.

I'm sure we will closely monitor.

You know how sustainable do you feel.

The increase in demand is.

Okay and no then my last question, but fortunate turn it over.

It sounds like some of these investments that you plan on making the 2021 or to help growth within the specialty side of things and I was wondering if you might be able to talk about which end markets are ultimately seeing the strongest growth and which ones. You I got you expect to remain strong into that yet.

Yeah, I understood partially side this year is really quite surprising.

Well I think I have sort of talk through the Pos in very general terms us a furniture commercial construction and transportation.

Transportation is a bit of a grabel of all sorts of different answers, but that's an area, where we really were caught by surprise. This year people in particular, a recreational vehicles, a rich shoes are remarkable volume of or would it be.

That's been a big growth Mark market this year and I guess this one of these impacts Oh I don't anticipate it impacts so if the covert crisis.

Since people can no longer where it's much more difficult to go on vacations.

Oh or abroad, or maybe choose not to go on a cruise anymore a lot more in north Americans have chosen to buy a RV and.

On to our journey, the RV vacation crop so, but that's a good example of where we have seen some significant and unexpected growth.

Thank you.

Thanks, John.

Our next question comes from Paul Quinn with RBC capital markets. Please go ahead. Your line is open.

Yeah. Thanks, good morning.

Okay flocks afternoon, I guess I'm, just pulling up a question on <unk> in a yeah recognize.

Recognize how was it a difficult decision. He said suppresses era equipment that you can sell this year and their associated 10 year that you can also sell.

No there's not much there most of the there was no let us have called them good.

Good morning first of all Paul Sorry, [laughter]. There is no I think in British Columbia at school, it's a tree license.

That's a long term tenure, we did not have any that was associated with that mill.

Ah. So it was all short term trend are primarily focused on the beetle killed wood.

And in terms of equipment.

People, obviously or we will pull out for whatever equipment, we can use with our other operations if it's still in good shape.

And you know with the press I've already mentioned that earlier, but that's sort of our perspective. There are you able to the mill has to be put away very carefully when we originally close it down and we will we will obviously therefore have equipment that can be used elsewhere in our operations.

[music].

Okay. That's fair and then I guess on the <unk> collecting he said no material impact, but have you seen any splits and you got adequate India supplied to that you had.

At a number of mills that are running instead, all excited or something else.

You know we have I said, we have a invoked our contingency plan are implemented our contingency plan.

Peter we have worked very closely with our M.D.I. supplier and.

And you know there have been for extremely responsive during a difficult time.

You know I should say that our European mills oversee our supply from a different source.

And there's been no real issues, there and in North America, we have had enough flexibility to.

Were you able to sort of react to a this temporary.

<unk> or temporary challenge and obviously that may change, if it's temporary becomes a significantly longer it on.

Well the suppliers currently indicating that <unk>.

Okay, and then just lastly earlier this week when here, let's be competitor mentioned that they expect it would be great. He was in Q4 to be higher than Q3, we've got it at Europe look as though.

Well I mean, obviously just starts to the quarter has been extraordinary from a pricing perspective.

No.

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It's just superlatively. So I don't even know what works years are there more in terms of what we have seen but pricing.

You know at the same time as I mentioned earlier, you know, we are growing and tutor weaker demand pure it's seasonally periods of the year and.

So with that I would expect that you know doors kinda prices are going to sustain at these levels through the end of the year.

Yeah, I'm I'm no <unk> medication, but that's a that would be I think it's a reasonable assumption.

And so then the question is just okay, how how real things.

[laughter].

[laughter] bothersome <unk> always here.

Okay can you still hear me.

[laughter].

Oh, it's maybe on the other side, Okay anyways so.

It is possible on the averages are run everything ever just how is the fact that normally in a a downward markets regain a little bit and mill not realize they shouldn't compare it to the steep [laughter] well beyond thoughts you know I am I think that this re do not like to.

<unk>.

To give forward guidance when it comes through results or pricing.

You know and so [noise].

Stick all I can say, yeah, I would just echo that we in fact, we do not give guidance for obvious reasons.

Yeah.

[noise] already yeah, well I mean, we're not being tapped here under the table.

I got my Shin source or [laughter] shut [laughter]. Thanks, so much.

[laughter].

Thanks, Paul.

Our next question comes from Mark Weintraub with Seaport Global. Please go ahead. Your line is open.

Thank you and maybe following up on Paul's question.

And recognizing that you don't give guidance could you share with us where oh, what speed prices. Your average out west the prices in North America quarter to date have been relative to the third quarter and roughly what percentage of the volume.

Well I would be encompassed in that would would that be.

For the fourth quarter yeah.

Yeah, Hi, Mark no I I cannot share anything from the fourth quarter and for the same reason, we just we don't you don't give guidance nor do we disclose anything outside of our corner. So I just can't just can't go there.

You can see what's happened with benchmark prices, obviously and you have a sense that for you know for for how we stack <unk>, where volume goes right about 75% of our North American volume is tied to is tied in one way or another she does random lengths spaces in that 25% about volume that goes into industrial and export uses it.

De linked from knowledge no I'm not.

That's that's still applies.

Okay, and then just like I was just asking for.

What's already [laughter] as opposed to what's going to happen in terms of the pricing, but not I. If you understood that finite I can move on I I did I understand that yeah, and look I can't I still can't go there [laughter] fair enough.

Then second in.

In Europe noticeably the price was pretty flat for the third quarter versus second quarter.

Very much different than what we saw in the U.S. can you just remind us how pricing tends to work in Europe.

From a framework.

It's a good question I mean pricing in Europe in general.

It's negotiated is first of all so there is no sort of commodity benchmark.

Secondly, they tend to vary in a range of about 20%.

From top to bottom.

And pre it usually takes several years to go from one extreme to the other extreme.

You know from the numbers that we do publish which are a particular greater forward to be in the German market.

As you can see that fuel prices have come from off from their recent peaks over the last year or so and a half now flattened out.

You know demand and the particular substitution demand in Europe has really gained strength a.

During disk over a period because people have become increasingly aware of to risk associated with being at the far end of a very long supply chain.

And are increasingly focusing on buying from domestically produced or would it be.

And recognizing you don't give forward guidance, if I think about the demand getting better and the price having come and all else equal it would.

Lead me to think that there would be positive bias going forward.

Assuming no big shift in demand trajectory are there any other variables that I shouldn't be weighing heavily as I make my judgment.

No I think you know other than the the overall risk on your assessment of how important that the overall risk that VF indicated it is.

You know I think.

But the others are those are the key elements Oh.

Okay, two real quick ones to inventory in the channel into particularly in North America, where would you say.

Oh, what be inventories are relative to where they typically would be this time of year.

Oh for just time of the year. They have now should have I think as best as I can judge it based on comments that we receive from our customers.

You know, we as best as we can judge it inventory situation is now more normal to what we would see this time of the year.

And of course, a lot of it depends on how long.

Demand continues into the winter.

You know, it's always difficult to predict when a when that seasonal seasonality really kicks in.

But.

That's oh other than that.

No I would say we are probably back in line to where it would typically be.

Great and one last one on the dividend. So you increased 10 that recognizing it's a variable dividend you increased it and it seems like it did.

The dividend until things were wouldn't change is that the way to read it now and door what would be the kind of the thinking to have increased the debt.

Variable dividend as opposed to having done a special dividend given the extraordinary markets that we've been and just kind of your thought process would be helpful.

Yeah, Mark I mean, ultimately obviously dividends are a board decision, but the.

He is 60% level is consistent with our with our range and the track record that we've established and you know obviously, we it's a it's a decision in a discussion that happens every quarter. So.

I again can you I can't tell you it'll stay there next quarter it may or may not.

So you heard us say our outlook is positive, but there are you know there's a much more significant level of uncertainty hanging over that outlook and then we would typically see in a cycle.

And for that reason, we're focused on both corporate and balance sheet flexibility and also operating flexibility and that will continue to be yeah that will continue to guide us going forward.

All right good thank you.

Thanks Mark.

Our next question comes from and Smokeless Cook with credit Suisse.

Please go ahead your line is open.

Thank you good morning, I think the first question is for Robyn and that's just on the MIT and the 43 million of savings year to date, which is an impressive number given all that's happened this year.

And I guess, when we look ahead in Europe.

You're no longer in a flexible operating strategy as you've been running and some of the plants.

Did you see the cost structure that you've managed to have this year and really benefit so I'm not going to be sustainable as you're really ramp up productions and check what the margins even become better.

Yeah. That's a good question Andrew Yes, our view is that you know that the bulk of that is sustainable you know it's been one of our big learnings silver linings, if you will coming out of Cove. It is it.

<unk> is quickly learning how to [laughter], how to be more flexible with their operating configuration in a way that still contains our manufacturing cost.

So I think you heard us talk last quarter about your trading off downtime for lower maintenance cost, where you know where that trade off make sense in that and that's a big part of it. So I think the majority of it is sustainable.

But if they're there has certain nip only includes controllables typically our am IP and include just the controllable elements of our cost structure and we have had a tailwind on the uncontrollable side from lower resin prices. So far this year.

But I'd say, if you look at Controllables I would I would expect you know that part of it to be sustainable based on what we can see in how we've learned to be a to be flexible and container costs.

Okay. Thank you that's very positive and then I think on the last call you talked a little bit about.

Some hiring its just you had I think as a cordell.

I guess, what the profit share that you've got with your employees just retaining.

Employees, especially environment, when she's got difficult drawing new employees and I guess that the challenge is really on the skilled side, but with the profit share that it looks like your post this year I would think you wouldn't really have any hiring issues can you talk a little bit about just hiring of attention.

Yeah sure Andrew I think what you're referring to is a to challenge a re re mention Toronto or <unk>.

Taking to people back.

In in our Kirker do a line one startup or emergency startup that we had in early August.

You mentioned stepped up you know I think in 2019, we had to part ways with about 47 of our employees one we shut up lying down.

Most of those I'm for use at font auto jobs nearby.

Nearby or because of the late.

2019 to how their employment market, we're still extremely tight.

Sure when we.

Needed to make the decision to startups line backup on a very quick racist or in early August Oh, we anticipated some difficulty getting all of those people back and that's indeed be indication or their fraud or a jobs and.

And we're a reluctance to give doors up to come back to work for us.

Show, having shut up you're right [noise].

I would say that the mill has responded extremely well and was able to do quite well even without a limited number of employees.

During the during that period.

Overall, you're absolutely right you know our retention.

Retention of employees has been extremely good react fairly limited turnover in most of our operations.

And preferred shares are long term part of touch strategy and I think that this year or two everybody's surprise will be a a very good year or for every now and then I'm sorry, there's no surprise anymore, but it certainly would have been in April.

Oh prefer churn numbers will be very attractive.

Okay. That's great. Thank you very much.

Thanks, Andrew.

Okay.

Thank you.

Everyone as always Robin Heather and Robert and I are available to respond to any further questions you may have.

Thank you for your participation today I hope you all stay safe and we look forward to reporting on our progress next quarter with.

With that Sandro handed back to you.

Thank you very much. This concludes todays call. Thank you for your participation you may now disconnect.

[music].