Norbord earnings see dramatic increase
April 29, 2016 - Norbord Inc. reported Adjusted EBITDA of $61 million for the first quarter of 2016 versus $16 million in the first quarter of 2015 and $57 million in the fourth quarter of 2015. The year-over-year improvement is primarily due to higher North American oriented strand board (OSB) prices and shipment volumes as well as lower resin prices and the weaker Canadian dollar.
By Andrew Macklin
North American operations generated Adjusted EBITDA of $53 million in the quarter compared to $11 million in the same quarter last year and $51 million in the prior quarter. European operations delivered Adjusted EBITDA of $10 million, $3 million higher than the same quarter last year and in line with the prior quarter.
“Our first quarter Adjusted EBITDA result is almost a four-fold increase from a year ago. I’m also encouraged by the sequential improvement despite the seasonally lower North American benchmark OSB prices,” said Peter Wijnbergen, Norbord’s president and CEO. “Our mills in both North America and Europe continued to deliver strong operational results, generating $9 million in Margin Improvement Program gains. In the 12 months since our merger with Ainsworth, we have captured $32 million in annualized synergies and remain on track to deliver our full $45 million target by the end of 2016.”
“The pace of U.S. housing starts is 14 per cent higher than this time last year and single-family building activity is up even more. North American OSB demand continues to grow, sales to all our key customer segments are improving and our order files are strong. Benchmark OSB prices are currently up 16 per cent since their February low as the seasonal pick-up in demand begins to materialize.”
“In Europe, our panel business delivered another solid quarter with $10 million of Adjusted EBITDA, reflecting sales growth and record utilization at our mills. OSB prices continued to rise on the continent and are now starting to turn up in the UK. Work is underway on our $135 million capital investment to modernize and expand our Inverness, Scotland OSB mill, with construction commencing this quarter.”
In North America, the seasonally-adjusted annual pace of U.S. housing starts in March was 14% higher than the same month last year. The pace of single-family starts, which use approximately three times more OSB than multi-family, increased by 23%. The consensus forecast from US housing economists is for approximately 1.23 million starts in 2016, which suggests an 11% year-over-year improvement.
First quarter North American benchmark OSB prices were below the levels seen in the fourth quarter of 2015, but were significantly higher than a year ago as new home construction activity and OSB demand continued to improve. OSB prices moderated somewhat in February before recovering in March as the spring building season ramped up, and the North Central benchmark price finished the quarter at $225 per thousand square feet (Msf) (7/16-inch basis). The North Central benchmark price averaged $226 per Msf for the quarter, compared to $242 per Msf in the previous quarter and $193 per Msf in the same quarter last year. In the South East region, where approximately 35% of Norbord’s North American OSB capacity is located, prices averaged $215 per Msf in the quarter, compared to $221 in the prior quarter and $175 in the same quarter last year. In the Western Canada region, where approximately 30% of Norbord’s North American capacity is located, prices averaged $191 per Msf in the quarter, compared to $204 in the previous quarter and $159 in the same quarter last year.
In Europe, Norbord’s core panel markets in the U.K. and Germany experienced strong demand growth in the quarter. First quarter average panel prices were 4% lower than the same quarter last year and in line with the previous quarter. OSB prices bottomed in the UK and continued to rise on the continent, resulting in average prices that were three per cent lower year-over-year but 5% higher than the prior quarter. Medium density fibreboard (MDF) and particleboard prices, however, were still under pressure in the quarter on increased import competition, and were 5% lower year-over-year and 3% lower quarter-over-quarter.
North American OSB shipments increased seven per cent year-over-year due to fewer maintenance shuts and improved mill productivity. Shipments were 8% lower quarter-over-quarter as there were 12 fewer fiscal days than the prior quarter.
Norbord’s operating North American OSB mills produced at 92 per cent of stated capacity (excluding the two curtailed mills in Huguley, Alabama and Val-d’Or, Quebec), up from 86 per cent in the same quarter last year and 84 per cent in the prior quarter. Capacity utilization increased versus both comparative periods due to fewer maintenance shutdown days, with improved productivity having additional impact year-over-year.
Norbord’s North American OSB cash production costs per unit (before mill profit share) decreased eight per cent compared to the same quarter last year due to the weaker Canadian dollar, lower resin prices, improved raw material use and increased productivity. Unit costs decreased by four per cent versus the prior quarter due to fewer maintenance shuts, lower labour and benefits costs and the weaker Canadian dollar, which were partially offset by the lower volume impact of fewer fiscal days in the current quarter.
In Europe, Norbord’s shipments were three per cent higher than the same quarter last year and two per cent higher versus the prior quarter. The European mills produced at 100 per cent of stated capacity in the quarter compared to 94% in the same quarter last year and 95 per cent in the prior quarter. Capacity utilization increased due to improved productivity year-over-year and fewer maintenance shutdown days versus the prior quarter.
Norbord’s mills delivered Margin Improvement Program (MIP) gains of $9 million in the quarter 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.
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. Key supplier negotiations and site preparation activities commenced during the quarter with construction work to start in the second quarter. The Company has decided to move the unused second press from its Grande Prairie, Alberta mill for use in the Inverness project, which is expected to shorten the project timeline by up to six months. 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 spending for the Inverness project is expected to be $45 million in 2016.
Capital investments were $11 million in the first quarter, in line with the same quarter last year, but $16 million lower than the prior quarter due to the larger scope of capital projects undertaken in the prior quarter. Norbord’s 2016 capital expenditure budget is $75 million (excluding the Inverness project) and includes further process debottlenecking and manufacturing cost reduction projects under the Company’s multi-year capital reinvestment strategy.
Operating working capital was $172 million at quarter-end compared to $146 million at the end of the same quarter last year and $125 million at year-end 2015. Working capital increased year-over-year due to higher North American sales volume, higher OSB prices, better weather this year for building seasonal log inventory at the northern mills and the continued ramp-up of production at the High Level, Alberta mill. The quarter-over-quarter increase was due to higher North American sales volume and the usual seasonal reasons, including log inventory builds in the northern mills.
At quarter-end, Norbord had unutilized liquidity of $321 million, consisting of $14 million in cash and $307 million in unused credit lines. At quarter-end, $55 million was drawn under the accounts receivable securitization program. The Company’s tangible net worth was $740 million and net debt to total capitalization on a book basis was 50 per cent. Both ratios remain well within bank covenants.