Norbord reports ‘strongest quarter ever,’ closes 100 Mile House mill
Norbord Inc. reported Adjusted EBITDA of $322 million for the third quarter of 2020 compared to $84 million in the second quarter of 2020 and $33 million in the third quarter of 2019. The increases versus all comparative periods were primarily driven by significantly higher realized North American oriented strand board (OSB) prices partially offset by higher North American profit share attributed to higher earnings. North American operations generated Adjusted EBITDA of $310 million compared to $84 million in the second quarter of 2020 and $24 million in the third quarter of 2019, and European operations delivered Adjusted EBITDA of $16 million compared to $2 million in the prior quarter and $11 million in the same quarter last year.
“The third quarter of 2020 was Norbord’s strongest quarter ever,” said Peter Wijnbergen, Norbord’s president and CEO. “The recovery in economic activity that unfolded in the latter stages of Q2 carried into Q3, driving strong new housing construction and repair-and-remodelling demand that helped lift North American benchmark OSB prices to all-time highs. Our European results also benefitted from higher quarter-over-quarter panel prices and continued recovery of UK panel demand that had been significantly impacted by the pandemic in the second quarter. Adjusted EBITDA increased nearly tenfold from year-ago levels and was 18 per cent above Norbord’s previous best quarterly result in the second quarter of 2018. I remain particularly pleased with our team’s ability to remain focused on working safely within the strict protocols required by the pandemic while at the same time containing manufacturing costs.”
“Customer demand has been significantly stronger than expected during this unusual period of economic uncertainty. We are optimistic, but we also recognize that our business is cyclical and that it is not yet clear whether the worst of the pandemic is behind us. Today we announce the permanent closure of the 100 Mile House mill in British Columbia, which will reduce Norbord’s North American stated capacity, as the ongoing wood supply shortage in that region makes the reopening of that mill uneconomic. As always, we will remain vigilant, focused on the health and safety of our employees as well as our customers’ needs, and we will manage the business to be resilient and flexible.”
Norbord recorded Adjusted earnings of $204 million or $2.52 per share (basic and diluted) versus Adjusted earnings of $31 million or $0.38 per share (basic and diluted) in the second quarter of 2020 and an Adjusted loss of $9 million or $0.11 per share (basic and diluted) in the third quarter of 2019. Earnings in the current quarter include $10 million of costs related to closure of the 100 Mile House, British Columbia mill.
In North America, U.S. new home construction activity, the single largest driver of OSB demand, has recovered from the economic impact of COVID-19 seen early in the second quarter. The September seasonally adjusted annualized rate of U.S. housing starts was 1.42 million, which is an 11 per cent year-over-year improvement. The pace of single-family starts, which use approximately three times more OSB than multi-family starts, improved 22 per cent to 1.11 million. The pace of permits (the more forward-looking indicator) was 1.55 million in September, an increase of eight per cent versus the same period in 2019. The 2020 consensus forecast from U.S. housing economists is approximately 1.36 million starts, five per cent higher than 2019 despite the pullback to a seasonally-adjusted pace of 0.93 million in April. Throughout the ongoing pandemic, demand from the repair-and-remodelling sector has continued at record pace.
Reflecting the stronger than expected recovery in North American OSB demand, North American benchmark OSB prices increased significantly as the quarter progressed. Average benchmark prices were higher than all comparative periods and were, for most of the quarter, at record highs.
In Europe, UK panel demand continued to recover from the COVID 19-related pullback in April and May. Continental demand, which was not impacted by the pandemic, particularly in Germany, remained steady throughout the quarter. In local currency terms, average panel prices were up 6% quarter-over-quarter and down nine per cent year-over-year.
In North America, third quarter shipments were up nine per centquarter-over-quarter but declined eight per cent year-over-year. Excluding the Chambord, Que., mill, Norbord’s North American mills produced at 86 per cent of available capacity in the third quarter of 2020 compared to 74 per cent in the second quarter and 92 per cent in the third quarter of 2019. Norbord’s third quarter North American OSB cash production costs per unit (excluding mill profit share and freight costs) increased by four per cent compared to the prior quarter and were unchanged compared to the same quarter last year.
In Europe, third quarter shipments were up 23 per cent quarter-over quarter, reflecting a strong recovery after the significant curtailments across the company’s UK mills in the second quarter in response to reduced customer demand due to government-imposed pandemic restrictions. Year-over-year, shipments were up 12 per cent, reflecting the continued ramp-up of the Inverness, Scotland mill. Norbord’s European mills produced at 97 per cent of stated capacity in the third quarter of 2020, compared to 70 per cent in the second quarter and 84 per cent in the third quarter of 2019.
The company generated net Margin Improvement Program (MIP) gains of $43 million year-to-date due to improved mill productivity and lower controllable manufacturing and overhead costs.
Investment in property, plant and equipment and intangible assets was $28 million in the third quarter ($67 million year-to-date), including $5 million ($44 million project-to-date) in the Inverness Phase 2 project and $1 million ($54 million project-to-date of the $71 million budget) in the Chambord mill rebuild project. At Inverness, the installation of the second wood room, heat energy and drying line is now complete and commissioning is well advanced, and the state-of-the-art continuous press is continuing to ramp up towards its targeted Phase 2 capacity of 945 million square feet (MMsf) (3/8-inch basis).
As part of Norbord’s initial COVID-19 Response Plan, Norbord’s budgeted 2020 investment in property, plant and equipment had been reduced from $100 million to $75 million. Based on the strong third quarter results and in line with Norbord’s capital allocation priorities, 2020 investment in property, plant and equipment is now forecast to return to its original budget of $100 million. Looking ahead to next year, while the company is still in the process of finalizing its capital plans, 2021 capital expenditures are targeted at approximately $150 million. This will include maintenance of business projects, projects focused on reducing manufacturing costs and enhancing process safety across the mills. It also includes further investments to support the company’s strategy to increase the production of specialty products for industrial applications and exports, as well as a portion of the Chambord mill rebuild. The company has not yet made a restart decision for the Chambord mill, and will only do so when it is sufficiently clear that customers require the production from this mill.
At quarter-end, the Company had un-utilized liquidity of $654 million, comprising $240 million in cash and cash equivalents and $414 million in unused credit lines. Operating working capital was $191 million compared to $139 million at the same quarter-end last year, owing primarily to higher accounts receivable, which were attributed to significantly higher North American OSB prices. The company’s tangible net worth was $1,183 million and net debt to capitalization on a book basis was 27 per cent, with both values well within bank covenants.
Well positioned to respond to changing conditions
During the third quarter, North American demand for OSB remained extremely strong, resulting in significantly higher benchmark OSB prices. 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, provide a positive outlook for OSB demand. Similarly, repair-and-remodelling demand has been robust and demand from industrial customers has normalized following pandemic-imposed restrictions. Excluding the curtailed 100 Mile House and Chambord mills, Norbord’s operating North American mills ran as close as possible to full operating rates in the third quarter, producing at 92 per cent of capacity. In August, the company restarted Cordele Line 1 on a limited operating schedule to meet customer orders that Norbord would not have otherwise been able to satisfy. Notwithstanding these positive trends, there remains considerable uncertainty in the broader economic environment as a predicted second wave of the COVID-19 global pandemic appears to be underway. As the typical seasonally slower period for OSB demand approaches, it is not yet clear what impact this seasonality and the pandemic will have on the company’s core markets. Should conditions change, Norbord is well positioned to respond.
100 Mile House permanent closure
Earlier this year and in reaction to the pandemic, Norbord recognized the need to implement a more flexible operating strategy across its manufacturing platform. The objective was to be more agile in responding to changing market conditions and customer requirements while containing manufacturing costs through more efficient maintenance planning and execution. This strategy has proven to have significant merit and has been adopted as the company’s standard operating approach. At the same time, it became clear that the 100 Mile House OSB mill was unlikely to have a role to play in the future. As the company’s highest cost operation, this mill had been indefinitely curtailed since August 2019 in response to a wood supply shortage and rising fibre costs. The Cariboo region in which the mill is located has been under wood supply pressure for the past decade as a result of the mountain pine beetle epidemic and more recently significant wildfires, leading to a 50 per cent reduction in the region’s annual allowable harvest. Taken together, the current and expected ongoing wood supply shortage makes operation of the mill uneconomic and Norbord has decided to permanently close 100 Mile House.