By: The Working Forest Staff
TORONTO, /CNW/ – Norbord Inc. has reported Adjusted EBITDA of $84 million for the second quarter of 2020 compared to $75 million in the first quarter of 2020 and $36 million in the second quarter of 2019. The quarter-over-quarter increase was primarily due to lower manufacturing costs, partially offset by lower shipment volumes, while the year-over-year increase was primarily due to higher realized North American oriented strand board (OSB) prices, as well as lower manufacturing costs, partially offset by lower shipment volumes. North American operations generated Adjusted EBITDA of $84 million compared to $68 million in the first quarter of 2020 and $18 million in the second quarter of 2019, and European operations delivered Adjusted EBITDA of $2 million compared to $10 million in the prior quarter and $21 million in the same quarter last year.
“The second quarter of 2020 started slowly as it overlapped with the significant pullback in economic activity that occurred during the early stages of the COVID-19 pandemic. However, we ultimately saw improving demand through the quarter that led to better than expected results. Our Adjusted EBITDA represented our best performance in seven quarters, more than doubling from year-ago levels and improving 12% from the prior quarter,” said Peter Wijnbergen, Norbord’s President & CEO. “Further, I am particularly pleased with our company’s ability to drive down costs while continuing to work safely within the strict protocols required by the pandemic.”
“Subsequent to the strong finish to the second quarter, customer demand has continued to increase well ahead of expectations, despite ongoing concern about the impact of COVID-19 on the broader economy. At Norbord, we have always been committed to producing what we can sell and what our customers need. A limited restart of Cordele Line 1 is the only option available to us to provide additional volume to our customers in the near term. Though these recent developments give us reason for optimism, it is unclear whether the worst of the pandemic is behind us, therefore we will maintain our approach of planning for the worst but being prepared for better. We will remain vigilant and will continue to focus on the health and safety of our employees as well as managing the business to be resilient and flexible.”
Norbord recorded Adjusted earnings of $31 million or $0.38 per share (basic and diluted) versus Adjusted earnings of $21 million or $0.26 per share (basic and diluted) in the first quarter of 2020 and an Adjusted loss of $8 million or $0.10 per share (basic and diluted) in the second quarter of 2019. Earnings in the current quarter include a $16 million non-cash impairment loss related to idle production assets at the Grande Prairie, Alberta mill. Adjusted earnings (loss) exclude non-recurring or other items and use a normalized income tax rate:
|$ millions||Q2 2020||Q1 2020||Q2 2019||6 mos 2020||6 mos 2019|
|Impairment of assets||16||–||–||16||–|
|Loss on disposal of assets||3||–||1||3||1|
|Stock-based compensation and related costs||2||–||1||2||2|
|Costs on early extinguishment of 2020 Notes||–||–||10||–||10|
|Costs related to 100 Mile House indefinite curtailment||–||–||2||–||2|
|Reported income tax expense (recovery)||3||8||(10)||11||(15)|
|Adjusted pre-tax earnings (loss)||42||28||(10)||70||(13)|
|Income tax (expense) recovery at statutory rate(1)||(11)||(7)||2||(18)||3|
|Adjusted earnings (loss)(2)||31||21||(8)||52||(10)|
|(1)||Represents Canadian combined federal and provincial statutory rate|
During the first quarter, in response to the significant market uncertainty from the COVID-19 pandemic, Norbord adjusted its operating configuration by employing a flexible operating strategy to match production with reduced customer demand. After initially reducing operating mill capacity by approximately 35% for the month of April, market demand improved sufficiently in the second quarter to allow Norbord to substantially resume production across its North American and European mills. (See the Performance section below for details of Norbord’s second quarter capacity utilization.)
Responding to Stronger Than Expected Rebound in North American OSB Demand
Subsequent to quarter-end, the rebound in North American OSB demand has accelerated, and in response, Norbord will resume production in August on a limited operating schedule on Line 1 of its two-line Cordele, Georgia OSB mill. The line was indefinitely curtailed in November 2019 due to poor market conditions and lower-than-anticipated OSB demand and had previously been running on a reduced operating schedule from September to November 2019.
Given the uncertainty around the depth and duration of the economic impact of COVID-19 combined with the inherent seasonality of OSB demand, going forward the Company will incorporate Cordele Line 1 into the flexible operating strategy employed since the early stages of the pandemic. The objective of this new operating strategy is to create the flexibility to adjust production up and down to better align with demand. The customer demand situation remains fluid, and the Company’s ability to continue to operate any of its mills could be influenced by factors outside Norbord’s control, therefore additional operating adjustments or curtailment may be necessary. Norbord does not intend to provide interim operational updates unless there is a significant change in the Company’s flexible operating strategy.
The Cordele, Georgia mill has two production lines and a total stated annual production capacity of 1,040 million square feet (MMsf) (3/8-inch basis), of which 440 MMsf (3/8-inch basis) is attributed to Line 1. Cordele Line 2 has continued to operate during the indefinite curtailment of Line 1. Norbord is hiring approximately 25 employees at the mill in connection with the limited restart of Line 1.
Liquidity and Capital Allocation
The robust cash flow generated during the quarter allowed Norbord to fully pay down its credit facility drawings, ending the quarter with strong liquidity of $378 million, which includes the previously announced $55 million increase in the revolving bank lines aggregate commitment. The Company believes its available liquidity is sufficient to fund expected short-term cash requirements and has comfortable headroom against the financial covenants governing access to its committed credit facilities. Core long-term bond debt totals $665 million, with no maturities until 2023.
Norbord continues to defer a number of non-critical capital projects in response to COVID-19 uncertainty and previously reduced its 2020 capital expenditures budget from $100 million to $75 million. The minimum annual investment required to maintain the Company’s existing assets is approximately $35 million.
To prioritize preserving financial flexibility, Norbord did not repurchase any shares under its Normal Course Issuer Bid (NCIB) during the second quarter. To-date, Norbord has repurchased a total of 1.2 million shares under its current NCIB at a cost of $27 million.
In North America, US new home construction activity, the single largest driver of OSB demand, pulled back in the month of April in response to the economic impact of COVID-19. The seasonally adjusted annualized rate of US housing starts was 934,000 units in April, but improved to 1.19 million in June, only slightly behind the 1.24 million pace in June 2019. The pace of single-family starts, which use approximately three times more OSB than multifamily starts, improved similarly. The pace of permits (the more forward-looking indicator) was 1.07 million units in April, but improved to 1.24 million in June, almost in line with the 1.27 million pace in June 2019. The 2020 consensus forecast from US housing economists is approximately 1.21 million starts, or about 6% below 2019 levels, but forecasts have been increasing in response to the stronger than expected rebound in homebuilding activity following the initial COVID-19 impact. Throughout the ongoing pandemic, demand from the repair-and-remodeling sector has strengthened and has provided a partial offset to the lower homebuilding activity in April.
Reflecting the uneven pace of demand throughout the quarter, North American benchmark OSB prices decreased in April before increasing in May and June. Average benchmark prices were largely in line with the prior quarter and reflected regional differences in the impact of COVID-19 but were significantly higher than the same quarter last year. The table below summarizes average benchmark prices ($ per Msf, 7/16-inch basis) by region for the relevant periods:
|North American region||% of Norbord’s
|Q2 2020||Q1 2020||Q2 2019|
In Europe, UK panel demand pulled back significantly in the first half of the quarter as government directives required many of the Company’s UK customers to close operations in late March. As restrictions in the UK eased and many of the Company’s UK customers restarted operations, panel demand gradually recovered in the back half of the quarter. Continental demand, particularly in Germany, remained resilient throughout the quarter. In local currency terms, average panel prices were down 3% quarter-over-quarter and 16% year-over-year.
In North America, second quarter shipments were down 4% quarter-over-quarter and 12% year-over-year. Excluding the Chambord, Quebec mill, Norbord’s North American mills produced at 74% of available capacity in the second quarter of 2020 compared to 79% in the first quarter and 88% in the second quarter of 2019. Norbord’s second quarter North American OSB cash production costs per unit (excluding mill profit share and freight costs) decreased by 9% compared to the prior quarter and 7% compared to the same quarter last year.
In Europe, second quarter shipments were down 19% quarter-over quarter and 15% year-over-year, reflecting significant curtailments across the Company’s UK mills in response to reduced customer demand. Norbord’s European mills produced at 70% of stated capacity in the second quarter of 2020, compared to 93% in the first quarter and 91% in the second quarter of 2019.
The Company generated net Margin Improvement Program (MIP) gains of $34 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 $14 million in the second quarter ($39 million year-to-date), including $2 million ($39 million project-to-date) in the Inverness phase 2 project. There was no investment ($53 million project-to-date) in the Chambord mill rebuild project during the quarter as Quebec construction sites were declared non-essential during COVID-19. 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 $378 million, comprising $20 million in cash and cash equivalents, $291 million in revolving bank lines and $67 million in available drawings under its accounts receivable securitization program. Operating working capital was $152 million, seasonally lower compared to $197 million at the prior quarter-end and modestly lower than $162 million at the same quarter-end last year. The Company’s tangible net worth was $1,001 million and net debt to capitalization on a book basis was 40%, with both values well within bank covenants.
The Board of Directors declared a quarterly variable dividend of C $0.30 per common share, payable on September 21, 2020 to shareholders of record on September 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 $0.05 per common share to reflect the Company’s strong financial results and improving end-market demand. The Company continues to focus on balance sheet flexibility given the economic uncertainty from the ongoing COVID-19 pandemic. Any dividends reinvested on September 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.