Note: Financial references in U.S. dollars unless otherwise indicated.
Norbord Inc., a wholly-owned subsidiary of West Fraser Timber Co. Ltd. effective Feb. 1, 2021, today reported Adjusted EBITDA of $865 million for the full-year 2020 compared to $138 million in 2019. The improvement was due to significantly higher realized North American oriented strand board (OSB) prices, productivity improvements and lower raw material prices, partially offset by higher mill profit share costs attributed to higher earnings, lower shipment volumes and higher raw material usages. North American operations generated Adjusted EBITDA of $832 million compared to $85 million in the prior year and European operations delivered Adjusted EBITDA of $48 million compared to $64 million in the prior year.
For the fourth quarter of 2020, Norbord reported Adjusted EBITDA of $384 million compared to $322 million in the third quarter of 2020 and $27 million in the fourth quarter of 2019. The quarter-over-quarter increase was primarily driven by higher realized North American OSB prices, partially offset by lower shipment volumes, while the year-over-year increase was due to significantly higher North American OSB prices and higher shipment volumes. North American operations generated Adjusted EBITDA of $370 million in the fourth quarter compared to $310 million in the third quarter of 2020 and $20 million in the fourth quarter of 2019, and European operations delivered Adjusted EBITDA of $20 million compared to $16 million in the prior quarter and $11 million in the same quarter last year.
“The past year was truly remarkable in many respects for Norbord,” said Peter Wijnbergen, president and CEO of Norbord and now president, engineered wood of West Fraser. “After adjusting our production strategy in response to the demand challenges brought about by the COVID-19 pandemic in the first half of the year, OSB demand from new home construction and repair and remodelling recovered beyond expectations and forecasts in the second half, lifting North American benchmark prices to all-time highs. In fact, the recovery of demand was so robust that we reported back-to-back record quarterly results in the third and fourth quarters. In Europe, our results were more adversely impacted by the pandemic though we saw steady improvement in the back half of the year with panel prices recovering and production ramping up at the recently commissioned Inverness, Scotland Phase 2 expansion.”
“Given all that has transpired this year, I am extremely pleased with our team’s ability to remain focused within the strict protocols required by the pandemic and significantly improve our safety performance. I am also proud that we quickly learned how to scale our production to demand while containing manufacturing costs and achieving record annual production at three of our mills during these extraordinary times. Further, we were able to release our inaugural ESG report as planned before the end of the year.
“With customer demand exceeding our ability to supply it, we announced the intended spring 2021 resumption of OSB production at our Chambord, Que., mill as part of our flexible operating strategy. We remain optimistic that the worst of the pandemic has passed but we also recognize that economic uncertainty remains elevated and our business is inherently cyclical, therefore we remain vigilant. We will continue to focus on the health and safety of our employees as well as our customers’ needs, and on managing the business to be resilient, flexible and sustainable.
“As we move forward with West Fraser as one organization, I want to acknowledge my Norbord colleagues for all their commitment and hard work, especially this past year. I look forward to continuing to work together as president of engineered wood at West Fraser as we embark on a new and exciting next chapter in our company’s story.”
Acquisition by West Fraser
On Nov. 19, 2020, the company and West Fraser announced that they had entered into an arrangement agreement pursuant to which West Fraser would acquire all of the outstanding common shares of the company in an all-share transaction in which Norbord shareholders would receive 0.675 of a West Fraser share for each Norbord share. The transaction was completed on Feb. 1, 2021, Norbord became a wholly-owned subsidiary of West Fraser, and Norbord’s shares were delisted from the TSX on Feb. 2, 2021 and from the NYSE on Feb. 1, 2021.
For the full-year 2020, Norbord recorded Adjusted earnings of $517 million or $6.39 per basic share ($6.38 per diluted share) versus an Adjusted loss of $30 million or $0.37 per share (basic and diluted) in 2019. Norbord recorded Adjusted earnings of $261 million or $3.23 per share (basic and diluted) in the fourth quarter of 2020 versus Adjusted earnings of $204 million or $2.52 per share (basic and diluted) in the prior quarter and an Adjusted loss of $11 million or $0.13 per share (basic and diluted) in the same quarter last year. Adjusted earnings (loss) exclude non-recurring or other items and use a normalized income tax rate.
Market conditions
According to the APA – The Engineered Wood Association (APA), new home construction is the largest end use for the OSB industry in North America, accounting for approximately 58 per cent of OSB consumption in 2020. 2020 U.S. housing starts were up seven per cent year-over-year to 1.38 million, and the seasonally adjusted annualized pace of permits, the more forward-looking indicator, was 1.67 million in December, a five per cent increase over December 2019. Single-family starts (which use approximately three times more OSB than multifamily) increased by 12 per cent, and represented 72 per cent of total starts, up from 69 per cent in 2019. New home construction has rebounded significantly since the low of 0.55 million in 2009, with the seasonally-adjusted pace of U.S. housing starts above the long-term annual average of 1.5 million for the past three months.
According to the APA, 2020 North American OSB production was in line with 2019 at approximately 23.0 Bsf (3/8-inch basis), representing 69 per cent of total North American structural panel production and 96 per cent of the OSB industry’s operating production capacity (85 per cent of industry installed capacity). This compares to an estimated operating rate of 83 per cent in 2019.
In 2020, North American benchmark OSB prices were significantly higher than in 2019. Prices commenced their ascent at the start of the year, pausing in the second quarter due to the impact of the COVID-19 pandemic on demand, then climbing dramatically to record highs in the second half of the year. The North Central benchmark OSB price ranged from a low of $220 per Msf (7⁄16-inch basis) in January to a high of $710 per Msf in December and averaged $443 per Msf for the year.
In Europe, panel prices continued the decline started in 2019, particularly in the UK where the impact of the pandemic on customer demand was more acute than on the continent. In the UK, where three of Norbord’s four European mills are located, GDP shrank 10 per cent, unemployment rose and housing starts declined largely due to the impact of the pandemic. In Germany, Europe’s largest continental OSB market, GDP growth declined seven per cent with a slight decline in housing starts from the previous year. In local currency terms, average panel prices for the full year declined nine per cent from 2019, but prices started rebounding in the back half of the year when demand improved as pandemic restrictions eased.
Historically, the UK has been a net importer of panel products and Norbord is the largest domestic producer. A weaker Pound Sterling relative to the Euro is advantageous to Norbord’s primarily UK-based operations as it improves sales opportunities within the UK and supports Norbord’s export program into the continent. In 2020, the Pound Sterling ranged from 1.07 to 1.20 versus the Euro and averaged 1.13 compared to 1.14 in 2019.
Performance
Norbord’s Occupational Safety and Health Administration (OSHA) recordable injury rate was 0.87 in 2020, 30 per cent lower than 2019, and five mills completed recordable injury-free years.
In North America, full-year shipment volumes decreased six per cent driven by the production curtailments taken in the second quarter to align with reduced demand due to the COVID-19 pandemic. Fourth quarter shipments were down eight per cent from the prior quarter but increased five per cent year-over-year. The lower shipments quarter-over-quarter reflect fewer fiscal days and maintenance downtime taken during the typical seasonal demand slowdown in the fourth quarter. An annual production record was achieved at the High Level, Alta., OSB mill.
For the full year, Norbord’s North American operating OSB mills produced at 80 per cent of available capacity compared to 85 per cent in 2019 (excluding the curtailed Chambord, Que., mill). The decrease in capacity utilization was due to the indefinite curtailments taken in the prior year and by the impact of the pandemic on customer demand in the second quarter. Despite this, Norbord’s 2020 North American OSB cash production costs per unit (excluding mill profit share) decreased two per cent versus the prior year due to lower raw material prices and improved productivity, partially offset by higher raw material usages.
European shipment volume was three per cent higher in 2020 driven by strong OSB demand growth that more than offset the second quarter pandemic impact on customer demand. Annual production records were achieved at the OSB mills in Genk, Belgium and Inverness, Scotland. Norbord’s panel mills produced at 87 per cent of stated capacity in 2020 versus 88 per cent in 2019. The decrease in capacity utilization was driven by the 225 million square feet (MMsf) (3/8-inch basis) restatement of capacity from the completion of Phase 2 of the Inverness mill expansion project.
The company generated net Margin Improvement Program (MIP) gains of $55 million in 2020 due to improved productivity, notably from the Inverness mill, and product mix. This is in line with the company’s best-ever MIP result in 2004.
Based on the strong free cash flow in the second half of 2020 and in line with Norbord’s capital allocation priorities, a number of projects were pulled forward into fiscal 2020. As a result, investment in property, plant and equipment for the full year was $124 million ($128 million including intangible assets). During 2020, $19 million ($47 million in total) of the $46 million (£35 million) budgeted was invested in the Inverness Phase 2 expansion project. This project is now complete and the state-of-the-art continuous press continues to ramp up towards its restated Phase 2 capacity of 945 MMsf (3/8-inch basis). At Chambord, $7 million was invested during 2020 ($58 million project-to-date of the $71 million budgeted) to rebuild the Chambord mill for restart, which is planned for spring 2021.
Looking ahead to 2021, capital expenditures are targeted at approximately $185 million. This will include maintenance of business projects, projects focused on de-bottlenecking capacity, reducing manufacturing costs, and enhancing process safety across the mills, as well as the remaining portion to complete the rebuild of the Chambord mill. It will also include investments to support the company’s strategy to increase the production of specialty products for industrial applications and exports.
At year-end, the company had un-utilized liquidity of $985 million, comprising $568 million in cash and cash equivalents and $417 million in unused credit lines. Operating working capital was $121 million compared to $120 million at the same quarter-end last year. The company’s tangible net worth was $1,403 million and net debt to capitalization on a book basis was seven per cent.
Outlook
Industry experts are forecasting U.S. housing starts ranging from 1.35 million to 1.55 million in 2021. The key indicators for the U.S. housing market, including strong new home sales, housing permits and single family starts, minimal new home inventories, and low mortgage rates, continue to provide a positive outlook for OSB demand. Similarly, repair-and-remodelling demand has remained robust and demand from industrial customers has normalized following significant pandemic-imposed restrictions earlier in the year. Notwithstanding these positive trends, there remains considerable uncertainty in the broader economic environment as the second wave of COVID-19 plays out. Should conditions change, Norbord is well positioned to respond with its flexible operating strategy.
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