By: The Working Forest Staff
TORONTO, CNW — Norbord Inc. has 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 & 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-remodeling 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% 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 $10 million of costs related to closure of the 100 Mile House, British Columbia mill. Adjusted earnings (loss) exclude non-recurring or other items and use a normalized income tax rate:
|$ millions||Q3 2020||Q2 2020||Q3 2019||9 mos 2020||9 mos 2019|
|Costs related to 100 Mile House closure||10||–||–||10||–|
|Impairment of assets||–||16||10||16||10|
|Loss on disposal of assets||–||3||–||3||1|
|Stock-based compensation and related costs||2||2||–||4||2|
|Costs on early extinguishment of 2020 Notes||–||–||–||–||10|
|Costs related to 100 Mile House indefinite curtailment||–||–||–||–||2|
|Reported income tax expense (recovery)||61||3||(6)||72||(21)|
|Adjusted pre-tax earnings (loss)||276||42||(13)||346||(26)|
|Income tax (expense) recovery at statutory rate(1)||(72)||(11)||4||(90)||7|
|Adjusted earnings (loss)(2)||204||31||(9)||256||(19)|
|(1)||Represents Canadian combined federal and provincial statutory rate.|
In North America, US 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 US housing starts was 1.42 million, which is an 11% year-over-year improvement. The pace of single-family starts, which use approximately three times more OSB than multi-family starts, improved 22% to 1.11 million. The pace of permits (the more forward-looking indicator) was 1.55 million in September, an increase of 8% versus the same period in 2019. The 2020 consensus forecast from US housing economists is approximately 1.36 million starts, 5% 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-remodeling sector has continued at a record pace.
Reflecting on 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. The table below summarizes average benchmark OSB prices by region for the relevant quarters:
|North American region||% of Norbord’s
|Q3 2020||Q2 2020||Q3 2019|
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 9% year-over-year.
In North America, third-quarter shipments were up 9% quarter-over-quarter but declined 8% year-over-year. Excluding the Chambord, Quebec mill, Norbord’s North American mills produced at 86% of available capacity in the third quarter of 2020 compared to 74% in the second quarter and 92% 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 4% compared to the prior quarter and were unchanged compared to the same quarter last year.
In Europe, third-quarter shipments were up 23% 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%, reflecting the continued ramp-up of the Inverness, Scotland mill. Norbord’s European mills produced at 97% of stated capacity in the third quarter of 2020, compared to 70% in the second quarter and 84% 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 unutilized 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%, 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 US 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% 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% 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.
The Board of Directors declared a quarterly variable dividend of C $0.60 per common share, payable on December 21, 2020 to shareholders of record on December 1, 2020. Consistent with Norbord’s variable dividend policy and historically balanced approach to capital allocation, the dividend is being increased from the prior quarter’s level of C $0.30 per common share to reflect the Company’s record financial results and improving end-market demand. At the same time, the Company continues to focus on balance sheet flexibility given the economic uncertainty from the ongoing COVID-19 pandemic, the US election and the upcoming Brexit deadline. Any dividends reinvested on December 22, 2020 under the Company’s Dividend Reinvestment Plan will be used by the transfer agent to purchase common shares on the open market.
Norbord’s dividends are declared in Canadian dollars; however, shareholders may opt to receive their dividends in the US dollar equivalent. Details regarding this option are available on Norbord’s website at https://www.norbord.com/investors/shareholder-information/dividends.
Norbord’s variable dividend policy targets the payment to shareholders of a portion of free cash flow based upon the Company’s financial position, results of operations, cash flow, capital requirements and restrictions under the Company’s revolving bank lines, as well as the market outlook for the Company’s principal products and broader market and economic conditions, among other factors. The Board retains the discretion to amend the Company’s dividend policy in any manner and at any time as it may deem necessary or appropriate in the future. For these reasons, as well as others, the Board in its sole discretion can decide to increase, maintain, decrease, suspend or discontinue the payment of cash dividends in the future.