Norbord Inc. today reported Adjusted EBITDA of $42 million in the first quarter of 2019 compared to $70 million in the fourth quarter of 2018 and $170 million in the first quarter of 2018. The decrease versus both comparative periods was primarily due to lower North American oriented strand board (OSB) prices. North American operations generated Adjusted EBITDA of $23 million compared to $50 million in the prior quarter and $156 million in the same quarter last year. European operations delivered Adjusted EBITDA of $21 million compared to $24 million in the prior quarter and $18 million in the same quarter last year.
“The pace of U.S. housing construction began to decelerate in the second half of last year and this trend carried over into the first quarter,” said Peter Wijnbergen, Norbord’s President and CEO. “Further, the seasonally slowest time of year was exacerbated by unusually wet weather in many of our North American operating regions. Combined, these factors led to very disappointing market conditions and prompted us to take extensive downtime across our North American mills. This negatively impacted our production volumes and manufacturing costs.”
“U.S. housing demand has clearly pulled back in the last nine months and the market has yet to recover in terms of volume. We remain of the view that this is a pause rather than a directional shift. U.S. housing fundamentals remain supportive and we have already seen some of the negative trends that caused the housing pullback reverse. Mortgage rates have improved, home builders are starting to offer more entry-level homes to help first-time buyers, and home builder sentiment is improving. Although the pick-up in demand that typically coincides with the spring building season has been late in coming, housing demand is setting up for a stronger second half.”
“In Europe, our panel business had another good quarter, delivering 17 per cent more Adjusted EBITDA year-over-year due to continued strong OSB demand in our key markets and the ramp-up of our modernized and expanded Inverness, Scotland mill. The second-phase of investment at Inverness is now underway and will help us serve growing customer demand for several years to come.”
Market conditions
In North America, U.S. housing demand was negatively impacted by higher mortgage rates and new home prices as well as record rainfall across the U.S. which constrained homebuilding activity. Year-to-date U.S. housing starts were down 10 per cent versus the same period in 2018, with single-family starts, which use approximately three times more OSB than multifamily, decreasing by five per cent. The seasonally adjusted annualized rate was 1.14 million in March, which is 14 per cent lower than the pace at this time last year, while the pace of housing permits (the more forward-looking indicator) was 1.27 million. The consensus forecast from U.S. housing economists is approximately 1.26 million starts for 2019, in line with last year.
North American benchmark OSB prices in all regions weakened due to the pullback in demand from homebuilding. As a result, average benchmark prices were lower than both the prior quarter and the same quarter last year.
In Europe, panel markets remained strong, driven by continued OSB demand growth in Norbord’s core geographies. In local currency terms, average panel prices were down a modest three per cent from the prior quarter due to seasonality and sales mix, but up five per cent versus the same quarter last year.
Performance
North American OSB shipments increased three per cent year-over-year due to six additional fiscal days in the current quarter, and were two per cent lower quarter-over-quarter due to the timing of annual maintenance and other downtime. Norbord’s specialty sales volume (including industrial and export markets) represents approximately 25 per cent of the company’s North American OSB sales volume.
Excluding the curtailed Chambord, Que., mill, Norbord’s operating North American OSB mills produced at 85 per cent of stated capacity, compared to 89 per cent in the prior quarter and 94 per cent in the same quarter last year. Capacity utilization decreased versus both comparative periods as a result of the year-end restatement of annual production capacities at a number of mills.
Norbord’s North American OSB cash production costs per unit (before mill profit share) decreased one per cent versus the prior quarter but increased three per cent compared to the same quarter last year due to the timing of annual maintenance and other downtime. In addition, lower resin prices had some impact quarter-over-quarter while year-over-year, higher fibre and energy prices were a factor.
In Europe, Norbord’s shipments were 15 per cent higher than the prior quarter and 13 per cent higher than the same quarter last year. The European mills produced at 89 per cent of stated capacity in the quarter, unchanged from the prior quarter and compared to 86 per cent in the same quarter last year. Capacity utilization was unchanged quarter-over-quarter as the new finishing line at the Inverness, Scotland OSB mill was being commissioned during the first quarter of 2019. Capacity utilization increased year-over-year due to the continued ramp-up of the reinvested Inverness mill following its start-up in the fourth quarter of 2017.
Capital investments (including intangible assets) were $30 million in the first quarter compared to $60 million in the prior quarter and $50 million in the same quarter last year. The decreases versus both comparative quarters are primarily attributable to the timing of executing on various capital projects, including the Inverness project.
Included in capital investments is $2 million of the $46 million (£35 million) budget for the second phase investment to further expand capacity at the Inverness, Scotland mill by 225 MMsf (3/8-inch basis) (200,000 cubic metres) through the addition of a second wood room and dryer. This project is expected to take approximately two years to complete and is consistent with the company’s strategy of growing its European OSB capacity to serve rapid consumption growth in its key markets.
At the Chambord, Que., mill rebuild project, $9 million of the $71 million budget was invested in the quarter ($36 million project-to-date). Norbord believes North American OSB demand will continue to grow. In order to support this anticipated growth and enhance the competitive position of the company’s overall manufacturing operations, Norbord is rebuilding and preparing the Chambord, Que., mill for an eventual restart. The company has not yet made a restart decision, however, and will only do so when it is sufficiently clear that customers require more product. This project involves replacing the dryers and investing in the wood-handling and finishing areas to streamline the mill’s manufacturing process and reduce costs, as well as upgrades to process and personal safety systems, electrical systems and environmental equipment that will bring the mill up to current standards after a decade of curtailment.
Norbord’s 2019 capital expenditure budget is approximately $150 million for projects focused on reducing manufacturing costs across the mills, as well as a portion of the Chambord, Que., mill rebuild and Inverness, Scotland phase two projects. It also includes investments to support the Company’s strategy to increase the production of specialty products for industrial applications and exports.
Operating working capital was $183 million at quarter-end compared to $218 million at the end of the same quarter last year and $88 million at year-end 2018. The year-over-year decrease is primarily due to lower North American OSB prices as well as timing of payments and new lease liabilities recognized upon transition to the new lease accounting standard. The quarter-over-quarter increase is primarily due to the annual seasonal build of log inventory in the northern mills in North America, the payment of annual incentive payouts, as well as the timing of payments. Working capital continues to be managed at minimal levels across the Company.
At quarter-end, Norbord had unutilized available liquidity of $239 million, consisting of $2 million in cash and $237 million in revolving bank lines. The company’s tangible net worth was $1,107 million and net debt to total capitalization on a book basis was 34 per cent, both well within bank covenants.
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