By: The Working Forest Staff
TORONTO, CNW — Norbord Inc. a wholly-owned subsidiary of West Fraser Timber Co. Ltd. effective February 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 an Adjusted EBITDA of $832 million compared to $85 million in the prior year and European operations delivered an 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 & 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 & remodeling 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, Quebec 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 November 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 February 1, 2021, Norbord became a wholly-owned subsidiary of West Fraser, and Norbord’s shares were delisted from the TSX on February 2, 2021 and from the NYSE on February 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:
|(Reversal) impairment of assets, net||(3)||–||–||13||10|
|Loss on disposal of assets||1||–||2||4||3|
|Stock-based compensation and related costs||4||2||1||8||3|
|Costs related to 100 Mile House closure||–||10||–||10||2|
|West Fraser transaction costs||4||–||–||4||–|
|Costs on early extinguishment of 2020 Notes||–||–||–||–||10|
|Reported income tax expense (recovery)||78||61||(6)||150||(27)|
|Adjusted pre-tax earnings (loss)||343||276||(15)||689||(41)|
|Income tax (expense) recovery at statutory rate(1)||(82)||(72)||4||(172)||11|
|Adjusted earnings (loss)(2)||261||204||(11)||517||(30)|
|(1)||Represents Canadian combined federal and provincial statutory rate (2020 – 25%; 2019 – 26%). Q1 to Q3 of 2020 was based on the 26% rate and a true-up for the full-year rate of 25% was reflected in Q4.|
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% of OSB consumption in 2020. 2020 US housing starts were up 7% 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 5% increase over December 2019. Single-family starts (which use approximately three times more OSB than multifamily) increased by 12%, and represented 72% of total starts, up from 69% in 2019. New home construction has rebounded significantly since the low of 0.55 million in 2009, with the seasonally-adjusted pace of US 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% of total North American structural panel production and 96% of the OSB industry’s operating production capacity (85% of industry installed capacity). This compares to an estimated operating rate of 83% 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. The table below summarizes average benchmark OSB prices by region for the relevant years:
|% of Norbord’s
|Q4 2020||Q3 2020||Q4 2019||2020||2019|
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%, 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 7% with a slight decline in housing starts from the previous year. In local currency terms, average panel prices for the full year declined 9% 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.
Norbord’s Occupational Safety and Health Administration (OSHA) recordable injury rate was 0.87 in 2020, 30% lower than 2019, and five mills completed recordable injury-free years.
In North America, full-year shipment volumes decreased 6% 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 8% from the prior quarter but increased 5% 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, Alberta OSB mill.
For the full year, Norbord’s North American operating OSB mills produced at 80% of available capacity compared to 85% in 2019 (excluding the curtailed Chambord, Quebec 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 2% versus the prior year due to lower raw material prices and improved productivity, partially offset by higher raw material usages.
European shipment volume was 3% 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% of stated capacity in 2020 versus 88% 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). In 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 debottlenecking 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 unutilized 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 7%.
Capital Returns to Shareholders
Norbord returned $100 million in cash to shareholders through dividends and share repurchases in 2020. A total of $72 million was paid in dividends and 1.1 million common shares were repurchased for $28 million in 2020. Under its Normal Course Issuer Bid (NCIB) that commenced on November 5, 2019, and expired November 4, 2020, Norbord repurchased 1.4 million common shares at a weighted average price of C$33.17 per common share, representing a total cost of $33 million. Norbord did not renew the NCIB when it expired on November 4, 2020 and did not repurchase any shares in the fourth quarter of 2020.
Update for Bondholders
Following the repayment and termination of the Company’s revolving bank lines on completion of the acquisition by West Fraser, the collateral platform providing for security over assets of Norbord in favour of the revolving banks was terminated. As a consequence, the collateral platform providing for security over assets of Norbord in favour of the holders of the 2023 and 2027 senior notes was terminated. The termination of the collateral platforms resulted in the discharge of the liens that supported both collateral platforms. The 2023 and 2027 senior notes are now, as a consequence of such termination, unsecured obligations of Norbord.
Pursuant to the indentures governing the 2023 and 2027 senior notes, following Norbord’s acquisition by West Fraser, the Company is required to make a change of control offer to all holders of the notes, at a purchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest. Any notes that are not tendered to such offer will continue to remain outstanding obligations of Norbord subject to the terms and conditions of their indentures. Details will be provided in a notice of the offer to be mailed to the holders of the Norbord notes.
Industry experts are forecasting US housing starts ranging from 1.35 million to 1.55 million in 2021. The key indicators for the US 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-remodeling 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.
Note: Financial references in US dollars unless otherwise indicated. This news release reviews Norbord’s standalone performance during the 2020 fiscal year as Norbord and West Fraser operated as separate companies during the 2020 fiscal year (see Acquisition by West Fraser section below).