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Norbord reports adjusted loss of $8M in Q2 2019

Norbord Inc. today reported Adjusted EBITDA of $36 million in the second quarter of 2019 compared to $42 million in the first quarter of 2019 and $273 million in the second 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 $18 million compared to $23 million in the prior quarter and $256 million in the same quarter last year. European operations delivered Adjusted EBITDA of $21 million, unchanged versus both the prior quarter and same quarter last year.

The company recorded an Adjusted loss of $8 million or $0.10 per share (basic and diluted) in the second quarter of 2019 compared to an Adjusted loss of $2 million or $0.02 per share (basic and diluted) in the first quarter of 2019 and Adjusted earnings of $167 million or $1.92 per diluted share ($1.93 per basic share) in the second quarter of 2018.

“U.S. homebuilding demand continued to be held back by affordability concerns and persistent record-breaking wet weather,” said Peter Wijnbergen, Norbord’s President and CEO. “For the third quarter in a row, we took extensive downtime across our North American mills which negatively impacted our production volumes and manufacturing costs. We also made the difficult decision to indefinitely curtail our 100 Mile House, BC mill starting in August as the mill is no longer viable due to a lack of wood supply at economic prices.”

“We are starting to see signs of improvement in the U.S. housing market. Mortgage rates are back down below 4 per cent. Homebuilders have rebalanced new home inventories and are reporting higher levels of buyer interest and net order growth for the first time since the fall. Housing economists’ forecast for unchanged 2019 starts implies 4 per cent growth in the second half of the year which would support higher levels of OSB demand than the first half.”

“In Europe, our panel business had another good quarter, delivering year-over-year shipments growth and a strong 16 per cent EBITDA margin. In Germany, the global trade war is starting to negatively impact macro export activity, putting downward pressure on OSB prices from the well above average levels we have enjoyed for the past year and a half. However, we expect this to accelerate the pace of OSB substitution and continue to drive rapid consumption growth.”

Market conditions

In North America, U.S. housing demand continued to be negatively impacted by affordability concerns and record rainfall across the U.S., which has constrained homebuilding activity in the past three quarters. Year-to-date U.S. housing starts were down 4 per cent versus the same period in 2018, with single-family starts, which use approximately three times more OSB than multifamily, decreasing by 5 per cent. The June seasonally adjusted annualized rate was 1.25 million starts, which is 6 per cent higher than the pace at this time last year, while the pace of housing permits (the more forward-looking indicator) was 1.22 million. The consensus forecast from U.S. housing economists is approximately 1.25 million starts for 2019, unchanged from last year.

North American benchmark OSB prices decreased in all regions due to the continued 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 in line with both comparative quarters with the exception of Germany, where prices decreased modestly due to a macro slowdown in industrial production.

Performance

North American OSB shipments were up 1 per cent quarter-over-quarter, despite four fewer fiscal days, due to seasonally higher demand. Shipments were down 5 per cent year-over-year reflecting the slowdown in U.S. homebuilding demand over the past three quarters. Norbord’s specialty products (including industrial and export) represented approximately 25 per cent of the company’s North American OSB sales volume in the last four quarters.

Excluding the curtailed Chambord, Que., mill, Norbord’s operating North American OSB mills produced at 88 per cent of stated capacity, compared to 85 per cent in the prior quarter and 98 per cent in the same quarter last year. Changes in capacity utilization were due to the timing of annual maintenance shuts and other downtime. In addition, a portion of the year-over-year decrease was due to the Dec. 31, 2018 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 6 per cent versus the prior quarter due to lower costs related to annual maintenance shuts and other downtime as well as improved productivity and raw material usages and lower resin prices. Unit costs were unchanged versus the same quarter last year as the negative impact of higher annual maintenance shuts and other downtime offset lower resin prices and the benefit of a weaker Canadian dollar.

On June 11, 2019, the company announced the indefinite curtailment of its 100 Mile House, B.C., mill starting in August 2019 as it is no longer economically viable to continue to operate the mill. The region where the mill operates has been under mounting pressure for the past decade as a result of the mountain pine beetle epidemic. This challenge has been further exacerbated by the significant wildfires that the province of BC experienced in the summers of 2017 and 2018. During the quarter, a net charge of
$2 million was recognized to provide for severance and related costs. The 100 Mile House mill has a stated annual production capacity of 440 MMsf (3/8-inch basis), or 6 per cent of the company’s North American stated annual capacity. Norbord will continue to supply its current customers and meet expected future customer demand with production from its 11 other operating North American OSB mills, including export products for the Japanese market from its Grande Prairie and High Level, Alta., mills.

During the quarter, the company announced that its mill in High Level, Alta., had twice temporarily suspended production due to wildfires burning nearby in the region and to comply with evacuation orders. In both cases, the mill resumed normal production after the evacuation orders had been lifted and a total of approximately 20 days of production were curtailed. The High Level mill has a stated annual production capacity of 860 MMsf (3/8-inch basis), or 11 per cent of the company’s North American stated annual capacity.

In Europe, Norbord’s shipments were down 9 per cent versus the prior quarter, due to fewer fiscal days and seasonally lower demand, and were up 7 per cent versus the same quarter last year. The European mills produced at 91 per cent of stated capacity in the quarter, up from 89 per cent in both the prior quarter and same quarter last year due to the continued ramp-up of the reinvested Inverness, Scotland mill following its start-up in the fourth quarter of 2017.

The company did not generate any Margin Improvement Program (MIP) gains year-to-date as improved productivity and lower raw material usage at the restarted Huguley, Ala., and expanded Inverness, Scotland mills were offset by the timing of annual maintenance shuts and other downtime, as well as the operating impact of adverse weather this year. MIP is measured relative to the prior year at constant prices and exchange rates.

Capital investments (including intangible assets) were $30 million in each of the second and first quarters of 2019 compared to $54 million in the second quarter of last year. The year-over-year decrease was primarily attributable to the timing of executing on various capital projects, including the Inverness project.

Included in year-to-date capital investments is $9 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.

Also included in year-to-date capital investments is $13 million ($40 million project-to-date) of the $71 million budget to rebuild the indefinitely curtailed 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.

Norbord’s 2019 capital expenditure budget is approximately $150 million for maintenance of business and projects focused on reducing manufacturing costs across the mills, as well as a portion of the Inverness, Scotland phase 2 and Chambord, Que., mill rebuild 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 $162 million at quarter-end compared to $183 million at the end of the prior quarter and $212 million at the end of the same quarter last year. The decreases were primarily due to lower North American OSB prices as well as timing of collections and payments. The quarter-over-quarter decrease was further due to the seasonal drawdown of log inventory in the northern mills in North America. The year-over-year decrease was further due to higher annual maintenance shuts and other downtime in the current quarter. Working capital continues to be managed at minimal levels across the company.