Norbord benefits from high OSB prices
Oct. 31, 2016 - High demand and prices for OSB have allowed Norbord to post its seventh consecutive quarter of improvement. The company reports Adjusted EBITDA of $114 million for the third quarter of 2016 versus $30 million in the third quarter of 2015 and $94 million in the second quarter of 2016.
The improvement versus both comparative periods is primarily due to higher North American oriented strand board (OSB) prices. North American operations generated Adjusted EBITDA of $106 million in the quarter compared to $22 million in the same quarter last year and $85 million in the prior quarter. European operations delivered Adjusted EBITDA of $10 million compared to $11 million in both comparative quarters.
“Our financial performance continued to improve in the third quarter as North American benchmark OSB prices strengthened further,” said Peter Wijnbergen, Norbord’s President and CEO. “Norbord generated Adjusted EBITDA of $114 million, marking the seventh consecutive quarter of improvement. As we enter the seasonally slower winter building period, North American benchmark OSB prices remain well above where they were this time last year as US housing starts, particularly single-family, continue to recover and drive increasing OSB demand.”
“In Europe, our panel business delivered another $10 million of Adjusted EBITDA despite the political uncertainty following the Brexit referendum in the UK. While the devaluation of the Pound Sterling following the referendum will remain a currency translation headwind in the near term, the underlying fundamentals of our European business remain favourable. In fact, our year-to-date European EBITDA is 11% ahead of last year, and 22% ahead in Pound Sterling terms.”
“Finally, I’m pleased that we have delivered the full $45 million of annualized synergies from our merger with Ainsworth ahead of schedule. These synergies have resulted from reduced corporate overhead costs, optimization of sales and logistics, procurement savings and the sharing of operational best practices. In addition to these synergies, the merger is enabling us to avoid an estimated $35 million in capital cash outlays.”
Norbord recorded Adjusted earnings of $58 million or $0.67 per diluted share ($0.68 per basic share) in the current quarter compared to an Adjusted loss of $4 million or $0.05 per share in the same quarter last year and Adjusted earnings of $42 million or $0.49 per share in the prior quarter.
In North America, year-to-date US housing starts were up 4% versus the same period last year. Single-family starts, which use approximately three times more OSB than multi-family, increased by 9% and single-family permits were 8% higher. The seasonally-adjusted annualized rate was 1.05 million in September with permits at 1.23 million. The consensus forecast from US housing economists is for approximately 1.20 million starts in 2016, an 8% year-over-year improvement.
North American benchmark OSB prices increased significantly in the third quarter versus both the same quarter last year and the previous quarter as new home construction activity and OSB demand continued to improve. OSB prices continued to rise through July before leveling out in August and September. The North Central benchmark price averaged $301 per thousand square feet (Msf) (7/16-inch basis) for the quarter. The spread between the North Central and the South East and Western Canada regions (where 65% of Norbord’s operating capacity is located) increased to approximately $40 from approximately $20 in the previous quarter on the seasonal demand variations between regions.
In Europe, panel demand remains strong in the Company’s core UK and German markets but prices in US dollar terms were impacted by the significant devaluation of the Pound Sterling following the “Brexit” referendum. In local currency terms, quarter-over-quarter, average prices for OSB, particleboard and medium density fibreboard (MDF) were modestly higher in the UK while continental OSB prices were modestly lower. Year-over-year was the opposite, with average panel prices lower in the UK and OSB prices higher on the continent.
Norbord’s North American OSB shipments increased 4% year-over-year but were 2% lower quarter-over-quarter due to lower productivity. Norbord’s operating North American OSB mills produced at 95% of stated capacity (excluding the two curtailed mills in Huguley, Alabama and Val-d’Or, Quebec) compared to 92% in the same quarter last year and 96% in the prior quarter. Both shipments and capacity utilization increased year-over-year primarily due to fewer maintenance shuts and production curtailments. One of Norbord’s North American mills achieved a quarterly production record.
Norbord’s North American OSB cash production costs per unit (before mill profit share) decreased 3% year-to-date due to higher volume, lower resin and energy prices, improved raw material usages and the weaker Canadian dollar. Cash production costs increased 2% versus the prior quarter and 1% versus the same quarter last year primarily due to higher supplies and maintenance costs, with lower volume and higher resin and energy prices also having some impact quarter-over-quarter.
In Europe, Norbord’s shipments were 3% lower than the same quarter last year and 5% lower than the prior quarter. The European mills produced at 99% of stated capacity in the quarter, unchanged from the same quarter last year and compared to 104% in the prior quarter. Both shipments and capacity utilization decreased quarter-over-quarter due to lost production days following a fatality at the Cowie, Scotland mill. Two of Norbord’s European mills achieved a quarterly production record.
Norbord’s mills delivered Margin Improvement Program (MIP) gains of $10 million year-to-date from improved productivity and lower raw material use as well as merger synergies and returns on recent capital investments. MIP gains are measured relative to the prior year at constant prices and exchange rates.
As of the third quarter of 2016, Norbord has captured $45 million in cumulative (annual run rate) synergies from the merger, within 18 months of closing. Of this amount, $36 million has been realized and the remaining $9 million is expected to be realized in future quarters from synergy initiatives already executed. In addition to these synergies, the merger is enabling the Company to avoid significant capital cash outlays it would otherwise have to incur. Norbord estimates this capital cost avoidance at $35 million, which includes utilizing formerly idle assets throughout the Company. As the merger synergies target has now been fully realized, Norbord will continue to report progress on continuous improvement initiatives through MIP.
In January 2016, the Board of Directors approved a $135 million investment over the next two years to modernize and expand the Company’s Inverness, Scotland OSB mill. During the quarter, the unused second press from the Grande Prairie, Alberta mill was moved to Inverness. Norbord expects the new line to start up in the second half of 2017, with no disruption to existing production capacity in the interim.
Capital investments year-to-date were $63 million (including $19 million related to the Inverness project) compared to $43 million in the first nine months of last year. Norbord’s 2016 regular capital expenditure budget is $75 million. In addition, the Company expects to spend $45 million on the Inverness project in 2016.
Operating working capital was $156 million at quarter-end compared to $145 million at the end of the same quarter last year and $163 million at the end of the prior quarter. Working capital increased year-over-year primarily due to the impact of higher North American OSB prices on accounts receivable and the insurance receivable related to the High Level, Alberta fire. Working capital decreased quarter-over-quarter primarily due to the timing of payments and accruals as well as partial collections on the insurance receivable related to the High Level fire.
Due to improved Adjusted EBITDA this year, cash generated from operations for the first nine months of 2016 was $183 million compared with $32 million of cash consumed in the same period of 2015.
At quarter-end, Norbord had unutilized liquidity of $420 million, consisting of $74 million in cash and $346 million in unused credit lines. The Company’s tangible net worth was $848 million and net debt to total capitalization on a book basis was 45%. Both ratios remain well within bank covenants.
Norbord has $200 million senior secured notes that are due in February 2017, which the Company intends to permanently repay at maturity using cash on hand, cash generated from operations and if necessary, by drawing upon the accounts receivable securitization program.
Quebec Mill Exchange
Norbord also announced that is has reached an agreement with Louisiana-Pacific Corporation to exchange OSB mills in Quebec. Norbord will swap ownership of its mill in Val-d’Or, Quebec for LP’s OSB mill in Chambord, Quebec. Both mills have been curtailed for a number of years.