Norbord Inc. (WFG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the West Fraser and Norbord conference call. [Operator Instructions] During this conference call, both West Fraser and Norbord's representatives will be making certain statements about potential future developments. Certain of the statements and information on this call constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of applicable Canadian provincial securities laws. All statements, other than statements of historical fact are forward-looking statements or information. Forward-looking statements or information on this call relate to, among other things, the anticipated completion of the transaction and timing for such completion; potential impact on West Fraser's and Norbord's earnings, cash flow, margin performance, shareholder returns and cost leadership; integration of Norbord management and operations, cost savings and impacts on customer relationships and growth opportunities; impact on West Fraser's and Norbord's capital markets profile; approval of the action by West Fraser and Norbord shareholders; obtaining regulatory approvals and satisfying closing conditions; the listing of West Fraser's common shares on the NYSE; and the applicability of the exemption under Section 3(a)(10) of the Securities Act to securities issuable in the transaction. These forward-looking statements and information reflect West Fraser's and Norbord's current views with respect to future events and are necessarily based upon a number of assumptions that, while considered reasonable by West Fraser and Norbord, are inherently subject to significant operational, business, economic and regulatory uncertainties and contingencies. West Fraser and Norbord caution the reader that forward-looking statements and information involve known and unknown risks, uncertainties and other factors that may cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements or information contained on this call, and West Fraser and Norbord has made assumptions and estimates based on or related to many of these factors. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking information are the following: the ability to consummate the transaction; the ability to obtain requisite regulatory and shareholder approvals; the satisfaction of other conditions; the consummation of the transaction; the ability of West Fraser to successfully integrate the operations, management and employees of Norbord and achieve cost savings; the potential impact of the announcement or consummation of the transaction on relationships, including with regulatory bodies, employees, suppliers, customers and competitors; changes in general economic, business and political conditions, including changes in the financial markets; changes in applicable laws; compliance with extensive government regulation; and the diversion of management time on the transaction. Certain of these factors are identified under the caption "Risk Factors" in the company's most recent Annual Information Form filed with Canadian provincial securities regulatory authorities. Although West Fraser and Norbord have attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause results not to be as anticipated, estimated, described or intended. Investors are cautioned against undue reliance on forward-looking statements or information. Forward-looking statements and information are designed to help readers understand management's current views of our near- and longer-term prospects and may not be appropriate for other purposes. West Fraser and Norbord do not intend, nor do they assume any obligation to update or revise forward-looking statements or information, whether as a result of new information, changes and assumptions, future events or otherwise, except to the extent required by applicable law. This call is being recorded on Thursday, November 19. I would now like to turn the conference over to Ray Ferris. Please go ahead.

Well, thanks. Good morning and thank you, operator. Well, that's certainly a healthy cautionary note I would add. So listen, good morning, everyone, and thank you for joining our Joint West Fraser-Norbord conference call today. Joining me on the call is Chris Virostek, our Chief Financial Officer of West Fraser; Peter Wijnbergen, the Chief Executive Officer of Norbord; and Robin Lampard, the Chief Financial Officer for Norbord. Before we go into the presentation and discussion, I want to acknowledge and recognize the tremendous efforts that a number of people have dedicated into making this combination of West Fraser and Norbord come together. Both Chris Virostek and Robin Lampard collectively with our combined legal and finance teams have worked tirelessly over the last number of weeks to make this compelling transaction happen. Particularly in the last -- in the past week, their teams have worked almost around the clock. On behalf of Peter and I and our respective Boards, we thank them each for their skill and their perseverance in making this transaction happen. I think it is important to note that it is in our West Fraser DNA to always be looking for the best opportunity to improve and grow the company. It's hard to imagine that 65 years ago, that 3 Ketcham brothers, Bill, Pete and Sam, purchased a small planer on 2 Mile Flat in Quesnel, British Columbia with just 12 employees that would grow into the company that we have today. Norbord also has a rich, long, proud history of success. The success of West Fraser has always been by recognizing those past successes. The Norbord history of success underscores the significance of our announcement today. Over the past few years, we have greatly admired and respected the Norbord team and their performance. We are very pleased and truly honored to welcome the Norbord employees into the West Fraser family. Peter, Robin and the rest of the Norbord team have built a great company and we feel fortunate that we are able to execute on this transaction. We're very excited to be here today, again with Peter, Robin and Chris, to share our views on the strategic combination of West Fraser and Norbord. By adding the leading global OSB producer to the West Fraser diverse wood products portfolio, this combined company truly positions West Fraser into a leading global diversified wood products company. Norbord's industry-leading OSB capacity of close to 9 billion square feet when combined with more than 6 billion board feet of West Fraser lumber and our mix of panels, engineered wood, pulp and renewable energy truly creates a strong platform of balanced, high quality capacity, able to supply a wide range of home building, construction and industrial needs. With a clearly demonstrated skilled employee base of now more than 10,000 employees, and an asset scale and asset quality and both product and geographic diversity will result in increased financial resilience through the cycle. This proven best-in-class platform will position us well for future growth and value enhancement. At the close of this transaction, West Fraser will be a top global producer of both lumber and OSB. So now 63 plus operations of the combined company will operate now in 2 continents, with facility spread between Canada, the U.S., the U.K. and Europe. Strong operating footprints in Western Canada and the U.S. South, and OSB and panel capacity in Europe and in eastern Canada provides a solid and diverse portfolio. The advancement into new regions for West Fraser in Eastern Canada, particularly Europe, provide potential additional opportunities for growth with the proven leadership in both these regions. How are we aligned on strategy? We are a lot alike. It's a strong match. Simply put, the 2 companies share complementary strategies. That is a priority on safety, while achieving operational excellence that results in industry-leading cost control and margin improvement. A balanced and disciplined capital allocation strategy and proven execution has led to a strong track record of shareholder returns. The 2 companies also share a common view and focus on how to get better. We will be building and sharing on each other's strength. I believe our asset quality and geographic and product diversity is unparalleled. However, what I am most excited about is the combination of 2 highly skilled and recognized high performance teams. It's always about the people. The combination of these 2 teams will allow us to continue to build on the key critical mass required to achieve industry-leading technical and people development programs that support long-term employee growth and retention. I talked about the improved resilience throughout the cycle, which we expect to improve further as we capitalize what we believe are very reasonable and achievable synergy targets of roughly CAD 80 million annually. We also strongly believe that our combined product portfolio will make us a more meaningful, efficient and relevant supplier to our customers that will ultimately lead to a stronger and more stable relationships. And frankly, our footprint and financial capacity will position West Fraser for continued lumber and OSB growth in both North America and Europe. Our expectations around synergies are relatively modest and are in the areas that we believe we understand and can achieve in the first 2 years. We see opportunities for improved efficiency, primarily based in 2 areas: the proximity of our operations in several regions; and two, the combined company scale in areas of transportation, logistics and the elimination of duplication in certain areas. Stability of leadership is critical to a smooth, effective and efficient transition while maintaining high performance and the ability to execute on available synergies. Norbord has built a world-class company of people and systems under the leadership of Peter Wijnbergen. And I am thrilled that at closing, Peter has agreed to continue to provide his leadership as President of Engineered Wood for West Fraser. I would also like to note that Robin Lampard will continue with West Fraser as part of our executive team and provide his skilled leadership in positioning and integrating our 2 companies in the best manner possible. I would also like to announce Sean McLaren, currently our V.P. of U.S. Lumber that upon closing will be promoted to President, Solid Wood, and will be primarily responsible for our lumber operations in both Canada and the U.S. I believe that Peter, Sean, Robin, along with the rest of the executive team will play a large role in driving the company forward in making West Fraser an even higher performing company and a better place for all of us employees to call home. Peter, I am looking forward to working closely with you and the rest of your Norbord team for many years to come. I'll now turn the conference over to Peter Wijnbergen.

Well, thank you, Ray, and thank you for all those kind words. Good morning, everyone. I'd like to speak briefly now about the benefits that this exciting strategic combination holds for Norbord shareholders. First, I'll start by saying that this union will give Norbord shareholders, with 44% of the combined company stock, meaningful participation in a global wood products leader with greater growth potential and resilience throughout the cycle. Joining with West Fraser will unlock significant growth opportunities in our core North American market, while providing the scale that is increasingly important to serve customers in our sector. With expanded operational and financial capability of the new West Fraser, will provide greater resilience and cash flow stability through down cycles, which we all know happen from time to time and can challenge even the best management teams. Further, greater access to capital will open the door to new opportunities, both in North America and in Europe, supporting growth across our portfolio of facilities. Finally and perhaps most importantly, reflecting on the comments that Ray made earlier, joining with West Fraser will give shareholders a compelling value enhancement opportunity that comes with a larger platform and more productive diversity, all while remaining committed to safety, sustainability and operating world-class, low-cost facilities. I believe this next slide of the investor deck provides an excellent visual representation of the expanded product offerings that the West Fraser and Norbord combination will be able to provide to our customers. The new West Fraser can be more of a one-stop shop with expanded higher value customer relationships. Together, we will become the go-to wood product supplier for a wide range of home and building construction needs. Quite simply, the new company will be more relevant, more efficient and more valuable for its principal homebuilder, building construction and pro-dealer customer segments. So not only are our products complementary, as we've come to know the West Fraser and its team better these past few months, we have seen that our teams and our operating strategies are complementary as well. So we very much look forward to joining your team, Ray, and we look forward to work together to make the new West Fraser to even greater success. And with that, I'll turn the call over to Chris Virostek.

Thank you, Peter, and good morning, everyone, and thank you for joining us. As Peter has outlined -- Peter and Ray have outlined, this transaction brings together 2 leaders in wood product manufacturing with similar end markets and complementary products. The scale of the combined company provides that greater diversity in products, geography and end use creating that platform for further growth and a greater ability to weather volatility in wood product markets. New home construction and repair and renovation spending continue to exhibit positive fundamentals and the outlook for growth is positive. The presence in industrial products in European markets also adds an additional layer of diversity. Over the past 3 full years and last 12-month period ending September 30, the pro forma combined company would have generated, on average, approximately USD 1.3 billion of adjusted EBITDA with margins in excess of 20%, except for the 2019 period, which was impacted by low commodity prices. The increased scale of the company, potential for synergies and diversity in products and markets should position the company well to weather difficult market conditions when they arise and produce attractive results when the market conditions are supportive. Both companies have a history of returning capital to shareholders against the backdrop of maintaining a strong financial profile. Reinvesting in the business and improving cost position is a core strategy of both companies and will continue to be a focus for the combined company. The increased financial scale also paves the way for improved access to capital markets. Returns to shareholders will continue to be a focus of the combined company and our board will be evaluating the best manner in which to do that going forward. Based on yesterday's closing price and the proposed exchange ratio, the combined market capitalization would be approximately USD 6.9 billion or CAD 9.1 billion. Combined debt as of September 30 on a pro forma basis would be USD 1.2 billion and represent a net debt to total capitalization at market basis of 9% and the last 12 months net debt-to-EBITDA ratio of 0.6x. Pro forma liquidity after giving effect to the new credit facilities to be available at close would be USD 1.5 billion, consisting of cash and undrawn revolvers. There are no near-term maturities for the combined company. West Fraser will be a clear leader among historical peers and well positioned among a larger comparable peer universe. With a strong balance sheet and leverage position, West Fraser expects the transaction will reduce -- will lead to a reduced cost of capital. To facilitate the further participation of investors in West Fraser security, West Fraser will apply to list its common shares on the New York Stock Exchange on or prior to closing and intends to begin reporting its financials in U.S. dollars following closing. The companies also share a number of common shareholders with overlap of approximately 30% and would have a diversified global shareholder base across North America, Europe and Asia. Environmental stewardship, sustainability and social responsibility are at the heart of everything we do, and we are energized by the opportunities we will have in the areas like safety and fiber utilization. With a larger platform, an expanded team and greater reach, we can continue our contributions to carbon storage in our products and a focus on reducing emissions and promoting diversity in our workforce. This transaction adds significant scope and scale to West Fraser. It improves diversity in all the ways that have been talked about today. We intend to maintain our disciplined approach to capital allocation, a strong balance sheet for all markets, and reinvest and return capital to provide attractive shareholder returns. In terms of next steps for the transaction, we anticipate to file for regulatory approvals later this month, mail materials in December for a January meeting of shareholders. Thank you. And with that, we'll open it up for questions.

[Operator Instructions] Your first question comes from John Babcock of Bank of America.

Starting, I was just wondering if you can talk about first of all the synergies that you see between kind of the saw mills and the OSB mills that the combined company will have. And also if you can talk about any sort of benefits on the input cost side that may result from the merger or acquisition [ merger ].

Sure. I'll start there, and Ray or Peter can add some color. The exciting thing about this is when we look at the co-location and the complementary nature of these businesses, we have mills, particularly in the U.S. South, that are very close together. And we think that provides opportunities on fiber procurement efficiencies in the supply chain, giving the right log to the right mill, taking the full basket of fiber, reliability initiatives, sharing of engineering and best practices, ramp-ups of capital, all those sorts of things. I think those exist in western Canada as well. Ray, anything you want to add to that?

Well, I think one of the ones that were -- when you look at the combined companies, the scale of our transportation and logistics platform in rail and trucking, and it's -- we think there's lots of opportunities to gain efficiencies within that as we undertake a combined strategy. And so that's a pretty significant area for us as well.

Okay. And next question, you talked about this a little bit earlier, but I wanted to get a little bit more detail. Just overall, the relationship with the homebuilders and the distributors that you currently deal with. I was wondering how that relationship might be enhanced with this deal.

Well, I mean, that's certainly -- John, I mean, I think that's a very important aspect. It's certainly one of the key things that we see is that's quite exciting. We think our kind of go-to-market strategy is just further enhanced. I think it just gives us that breadth of product mix, our SPF lumber, our southern yellow pine lumber, plywood and now OSB. And of course, we do produce MDF. And so we just think it's an opportunity to continue to find ways to better support our customers. And if we can become more valuable to our customers, we think that's an opportunity for both. So I think we're very excited about that. We think it's an area that was well, that Norbord does very well. And we're looking forward to kind of putting this product mix together.

Okay. And just last question before I turn it over. You did talk about opportunities for growth here. I was wondering how much of that is really driven by the increased access to capital that you have, while also maybe any sort of change in strategy that may come with this?

So I would say, even prior to this transaction, I think our view is always to position the company to be prepared to execute on growth throughout the cycle. So to me, this combination just further enhances that. I don't think it changes us from our strategy. But I think it puts us in a very enviable position that obviously, an expanded ability from a, I would say, a more robust cash generation and more runway in order to grow that. So I would just say that I think we have a strong platform on -- and I think the key part is that platform is built with an increased capacity on the people side. So I think our -- I just think we're well positioned that once we integrate this and then move on to the next stage, the company is going to be well positioned. It's not like -- let's be clear. What -- the Norbord companies are running extremely well, low cost, high margin. Our companies are doing the same. There's not a lot of fix-it work to do here. We're going to be in a position as opportunities come along to take a look at those as they come forward.

The next question comes from Paul Quinn at RBC Capital.

Just to, I guess, start on capital allocation. You both have returned cash to shareholders through share buyback and dividend. On the Norbord side, they got that variable dividend. You or West Fraser has got a low base. What's the plan going forward?

I think we're going to take the time as this transaction gets completed to be thoughtful about that and take input and evaluate the best way to return capital there. Certainly, I think there is going to be a strong opportunity to return capital after the businesses come together. And our Board is evaluating all those options. We're going to consider all those alternatives as to the most efficient way to return that capital to shareholder. And we frequently seek that feedback from our investors as well directly as to what resonates with them. So I think what I would say is we're going to look at all those options about the best way to be effective with it.

Okay. And the combination gives you now a operating presence in Europe and Eastern Canada, areas that West Fraser currently doesn't have any lumber capacity. Are those areas of interest to you for growth going forward?

Well, I think absolutely. I think that's the only way that I can answer that. I mean, I think the exciting part of it is, is that, that operating platform aids good quality assets of both and great leadership teams in both areas. I mean, those are the things that you want in place as you look to potentially grow in those areas. So I think short answer, Paul, is absolutely.

Okay. And then just lastly, any kind of anticipation of problems on the concentration side and specifically looking at the combination and there might be something that either Canada or the U.S. has on panel concentration between plywood and OSB? Is that something of a concern?

So I mean, we'll obviously be going through competition filings. And -- but our analysis and view would be that we don't see that as a significant issue.

Your next question comes from Sean Steuart at TD Securities.

Congratulations on the proposed transaction. I guess, Ray, first question is going back to the motivation for the deal. Why now? And when you look at the potential benefits, whether it's scale and the growth platform, the lower cost of capital, diversification of the product offering, which one of those facets was the primary motivation for pursuing this deal?

Well, I'll go to the line now. And I'm going to -- I would say West Fraser has been interested in growing in OSB for as long as I've been around. And quite frankly, we've never had seen the right opportunity at the right -- and the right time to do that. And let's be clear, we don't always control the time of when these opportunities come to us. But the opportunity to acquire Norbord in -- the leading low cost, high quality, strong management team to me, the why now was easy. It's -- we're always motivated and the timing -- it just happened to be today. So to me, it's -- I'm glad that, quite frankly, we weren't successful maybe in the past so that this opportunity has arrived at this time the way it has. I think it's perfect timing for West Fraser. And motivation, look, our -- we want to be the leading premier forest products company in North America and quite frankly, beyond that. And we expect to continue to grow in lumber. But we see our panels, our plywood, and we believe the OSB business to be very strong and it fits very well into how we want to go-to-market and serve those housing and wood products consumption markets. We think the growth runway and opportunity is out in front of us. And we're fortunate to have been able to take advantage of that.

And maybe a question for Peter. A big push for Norbord in North America has been expanding the specialty offering platform and hopefully, smoothing out price realizations, peak to trough. The West Fraser approach historically has been focused on commodity product and driving costs down as low as possible and maybe not as focused on a specialty platform. Do you anticipate any change in that strategy going forward? How does this change your thoughts towards growing the OSB platform, if at all?

I would say, I'd start off by saying that what we do share in common very much is a focus on being a low-cost producer and being an efficient producer of our products. Our strategy remains intact. We have been looking to reposition the company to apply most of our growth focus in that industrial area and we continue to do so. And it's our belief that, like some of their steps in the future will be fairly significant. And this combination puts us in a better position to be able to manage that growth going forward.

Your next question comes from Hamir Patel of RBC.

It's Hamir Patel from CIBC. The way -- I wanted to ask you about -- in terms of the R&R exposure, Norbord is, I'd say, had a stronger presence there and West Fraser maybe traditionally has had a smaller presence in the R&R channel than some of its larger lumber peers. Do you see that changing given some of the existing relationships and what you've learned about the Norbord business?

Well, Hamir, and I'm glad to hear you're still at CIBC. And listen, I don't have Chris McIver with me. I'm not sure -- I think our view would be is that we participate in the R&R market and want to be the same. So I don't think there is a material difference in how we kind of go to that market. We make the same products and sell under the same area. So just -- I mean, our focus is to supply what the market dictates and that's going to remain our focus. And so I'm not sure I'm going to do a great job answering your question. I think this broad -- this broader portfolio that we're going to have to supply our customers means we want to sell everybody every day. So we're going to focus on the R&R and industrial markets. And because we can't pick and choose, we're going to need to be in all of them, and we want to be very good in all those markets.

That's helpful. And, Chris Virostek, I wanted to ask you about the synergies, the CAD 80 million within 2 years. How much of that should we expect in the kind of first year post closing?

Yes. I think these will probably unfold on a reasonably ratable basis over that time period. There's -- once we get through and get the transaction approved, we'll have an integration process. I think that'll be fairly reasonably spread such that we hit the run rate towards the end of the second year.

Great. That's helpful. I just got maybe a final question for Ray and Peter. I'm just curious from the discussions. Any sense yet as to some of the best practices that can be shared across the organizations? I would -- I've always thought that it's pretty similar culture across both companies, but curious your thoughts there.

Well, I'll let -- I'll jump in and let Peter comment after I -- listen, I think as we've got to know the Norbord team, I think that's one of the things that, quite frankly, our operating team very excited about. We think and act very similar and think about solving problems very similar. So I think to us, it's quite exciting. And one of those areas, quite frankly, that we both share strong [ cash and end users ] around safety. We think the stronger together platform that Norbord uses in their safety program is something that we're going to learn in West Fraser. And I'm sure that we're going to share our best practices. I think we both see ourselves as doing very well in that area, but when we take those best practices, we think we're going to be able to position our company as, quite frankly, the safest in the industry. So to me, that's one that I think Peter and I are quite excited about on getting at right away.

Yes, absolutely, Ray. And maybe just add one further comment there, Hamir. We are both working to see how we can best take advantage of the digitization of our manufacturing process and of our sales process. And those things are complex and sometimes difficult to realize. And having a much broader manufacturing base with a much broader team of dedicated people, I think we will have an advantage with the implementation of those kind of projects to further help us not only make our processes safer, but also continuing to make our -- keep our cost position at sort of the forefront of the industry across both lumber and OSB. So there's -- I'm pretty excited as well about the opportunities that we have uncovered when it comes to utilizing technology across these 2 manufacturing processes.

Your next question comes from Mark Wilde of BMO.

Congratulations to both of you. This is 2 companies that I have a lot of regard for over time. I wondered, just starting off, if we could get some thoughts on just managing kind of cyclicality. I mean, you've talked about this kind of potentially reducing cyclicality. It seems to me that it makes West Fraser even more of a exposed to the housing cycle than it's been historically. If we look historically, usually lumber and pulp and paper prices are kind of at offsetting cycles. Now you're going to have most of your business that's going to be just tied to the North American housing cycle. So just thoughts on how you manage that? And what the balance sheet strategy will be for managing in the downturn?

And we'll tag team on this one for sure. So I -- first of all, I would say one of the things that attracted us to Norbord was their focus on industrial and specialized panel to, quite frankly, reduce the exposure somewhat to housing. But let's be clear. We're focused on housing. Housing drives wood price consumption. And so I don't think -- we don't believe it's really a material change in the volatility of our business. But we're going to have that cyclicality. And so our view is that what better way to expose yourself to something that we think is going to be robust and strong in the next few years to come, than quite frankly doubling down in a cost and margin leader to take advantage of what we think are strong markets going forward. So on the balance sheet side, I think it's game as usual. I think we're always looking to make sure that we're positioned in any part of the cycle to execute our plan. And whether that's reinvesting in our operations or growing M&A and/or returning cash or returning value to our shareholders, I don't think it's -- I think it just enhances that quite frankly. I think we -- it gives us stronger, more resilient cash flows through any part of the cycle. Chris, do you want to add anything?

No, I think that's a great summary.

Okay. And Chris, a second one for me. On capital allocation, will there be any limitations on you in terms of returning capital to shareholders, particularly through things like share repurchases coming out of the deal?

You mean after the close of the deal?