Norbord swings to Q3 earnings of US$28M from US$1M loss a year earlier, on sales up 24.8% to US$302M; CEO cites sharp OSB price increases on stronger US home construction demand, with average benchmark price up 70% from last year to US$313/msf
October 25, 2012
Note: Financial references in US dollars unless otherwise indicated.
Q3 2012 HIGHLIGHTS
Norbord recorded earnings of $28 million or $0.64 per share ($0.61 per share diluted) in the third quarter of 2012. This compares to earnings of $6 million or $0.14 per share in the prior quarter and a loss of $1 million or $0.02 per share in the same quarter last year.
"This is our best sustained quarterly EBITDA result since the second quarter of 2006," said Barrie Shineton, President and CEO. "This positive trend is due entirely to stronger demand from US new home construction that pushed North American OSB prices sharply higher this quarter. While prices have declined recently, they are still at very robust levels. The housing recovery is accelerating, consumer spending is picking up and both are key to a US economic recovery. All of this suggests that OSB demand will continue to improve over the next several years."
"In Europe, our panel business delivered another positive quarterly result. The UK housing market remains stable and our construction panel business is holding up in spite of the economic challenges on the Continent. Our strong market position and ongoing currency advantage point to another solid result next year from our European operations."
September year-to-date US housing starts and permits were 27% and 32% higher, respectively, than the same period in 2011. More importantly for the OSB industry, US single family housing starts this year are up 24%. Further, the large public homebuilders are forecasting year-over-year increases of 25% to 35% in net orders and our pro-dealer customers are experiencing similar increases in their own sales activity as they scale up to meet this improving demand. The consensus forecast from US housing economists is for 760,000 starts in 2012, a significant 25% improvement over last year but well short of the underlying fundamental demand of 1.5 million.
Reflecting the increased demand from new home construction, North American OSB prices rose across all regions in the third quarter. The North Central benchmark price peaked at $360 per thousand square feet (Msf) (7⁄16-inch basis) and averaged $313 per Msf for the quarter, compared to $235 per Msf in the prior quarter and $184 per Msf in the same quarter last year. In the South East region, where approximately 55% of Norbord's North American capacity is located, benchmark prices averaged $274 per Msf in the third quarter, compared to $204 per Msf in the prior quarter and $169 per Msf in the same quarter last year. The spread between North Central and South East benchmark prices widened further during the third quarter, reflecting continuing regional differences in the pace of the US housing recovery.
In Europe, panel markets remain resilient in spite of the persistent economic uncertainty. In the third quarter, average panel prices were only marginally lower than the prior quarter. Compared to the same quarter last year, average panel prices were down 9%, reflecting OSB prices that have come off 2011 peak levels.
In North America, third quarter OSB shipment volumes increased 7% over the same quarter last year, but decreased marginally compared to the prior quarter. Norbord's North American operations produced at approximately 70% of estimated capacity (including the three indefinitely closed mills) in the third quarter compared to 75% in the prior quarter and 65% in the same quarter last year. The quarter-over-quarter decrease in both shipment volumes and capacity utilization is due to the indefinite curtailment of the Val-d'Or, Quebec mill that took effect in July and the related transition of specialty products to the La Sarre, Quebec mill.
In Europe, third quarter panel shipments were 3% and 6% higher than the prior quarter and the same quarter last year, respectively. Norbord's European mills produced at approximately 95% of estimated capacity in the second and third quarters of 2012, reflecting a 6% increase in our stated panel capacity effective December 31, 2011. This compares to 100% in the third quarter of 2011.
Norbord's Margin Improvement Program (MIP) has delivered $17 million in gains year-to-date. Contributions to the MIP included improved production efficiencies, raw material usage reduction initiatives and a richer added-value product mix.
Norbord's North American OSB cash production costs per unit decreased by 2% year-to-date (excluding profit share) compared to the prior year due to lower raw material usages resulting from continuing MIP initiatives.
Capital investments totaled $6 million in the third quarter compared to $4 million in both the prior quarter and third quarter of 2011. Norbord's 2012 capital investments are expected to total $25 million and continue to focus on productivity improvement and manufacturing cost reduction projects with quick paybacks.
Operating working capital was $77 million at quarter-end compared to $64 million in the prior quarter and $65 million in the same quarter last year. This increase is primarily due to the impact of significantly higher North American OSB prices on accounts receivable.
At quarter-end, Norbord had unutilized liquidity of $371 million, comprised of $242 million in undrawn revolving bank lines and $129 million in cash and cash equivalents. The Company's tangible net worth was $380 million and net debt to total capitalization on a book basis was 45%, down from 50% at the end of the second quarter and well within bank covenants.
In the second quarter of 2012, Norbord issued $240 million in senior notes due in 2015 with an interest rate of 6.25%. During the third quarter, the Company used the proceeds to repay the $240 million 7.25% debentures that were due July 1, 2012.
Also in July 2012, Norbord renewed its committed revolving bank lines, extending the maturity by one year and reducing the aggregate commitment by $25 million. As a result, the Company now has a total aggregate commitment of $245 million which matures in May 2015. All other material terms of the bank lines remain unchanged.
Both of these initiatives had been previously announced in the second quarter of 2012.
Norbord's Q3 2012 letter to shareholders, news release, management's discussion and analysis, consolidated unaudited financial statements and notes to the financial statements have been filed on SEDAR (www.sedar.com) and are available in the investor section of the Company's website at www.norbord.com. Shareholders are encouraged to read this material.
Norbord will hold a conference call for analysts and institutional investors on Thursday, October 25, 2012 at 11:00 a.m. ET. The call will be broadcast live over the Internet via www.norbord.com and www.newswire.ca. A replay number will be available approximately one hour after completion of the call and will be accessible until November 23, 2012 by dialing 1-888-203-1112 or 647-436-0148. The passcode is 8347182. Audio playback and a written transcript will be available on the Norbord website.
Norbord Inc. is an international producer of wood-based panels with assets of $1 billion, employing approximately 2,000 people at 13 plant locations in the United States, Europe and Canada. Norbord is one of the world's largest producers of oriented strand board (OSB). In addition to OSB, Norbord manufactures particleboard, medium density fibreboard (MDF) and related value-added products. Norbord is a publicly traded company listed on the Toronto Stock Exchange under the symbols NBD and NBD.WT.
This news release contains forward-looking statements, as defined in applicable legislation, including statements related to our strategy, projects, plans, future financial or operating performance and other statements that express management's expectations or estimates of future performance. Often, but not always, words such as "should," "believe," "forecast," "expect," "appear," "suggest," "will," "will not," "intend," "plan," "can," "may," and other expressions which are predictions of or indicate future events, trends or prospects and which do not relate to historical matters identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Norbord to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
Although Norbord believes it has a reasonable basis for making these forward-looking statements, readers are cautioned not to place undue reliance on such forward-looking information. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties, both general and specific, which contribute to the possibility that the predictions, forecasts and other forward-looking statements will not occur. Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include: general economic conditions; risks inherent with product concentration; effects of competition and product pricing pressures; risks inherent with customer dependence; effects of variations in the price and availability of manufacturing inputs; risks inherent with a capital intensive industry; and other risks and factors described from time to time in filings with Canadian securities regulatory authorities.
Except as required by applicable laws, Norbord does not undertake to update any forward-looking statements, whether as a result of new information, future events or otherwise, or to publicly update or revise the above list of factors affecting this information. See the "Caution Regarding Forward-Looking Information" statement in the March 1, 2012 Annual Information Form and the cautionary statement contained in the "Forward-Looking Statements" section of the 2011 Management's Discussion and Analysis dated January 26, 2012 and Q3 2012 Management's Discussion and Analysis dated October 24, 2012.
October 25, 2012
To Our Shareholders,
The third quarter was our strongest sustained financial performance since US housing first turned down in 2006. Norbord generated earnings of $0.64 per share on EBITDA of $66 million - more than double our second quarter result and a more than five-fold increase over the same quarter last year. This turnaround is entirely due to an accelerating recovery in US housing and a sharp rebound in demand for our OSB products.
Our North American operations performed exceptionally well, generating EBITDA of $58 million on the back of strong OSB pricing across all regions. Escalating demand from the new home construction sector temporarily outstripped supply and pushed the North Central benchmark price to a high of $360 per Msf. While we transacted little volume at this peak pricing, Norbord did benefit from a higher average selling price throughout the quarter. Additionally, our shipments are up year-over-year and our sales to home building and home improvement customers continue to grow in this positive market environment.
Our European panel business delivered another consistent quarterly result, generating $10 million in EBITDA. Norbord's panel markets in the UK and northern Europe remain surprisingly resilient in spite of the daily barrage of negative headlines coming out of the Eurozone. While OSB prices have softened as we anticipated, higher panel shipments and flat raw material costs have offset any impact on our margins.
It is now clear that a US housing recovery is well underway. Home prices are rising and mortgage availability is improving. Inventories of resale homes are falling and the so-called "shadow inventory" of distressed homes is less of an issue as foreclosures are being processed in an orderly manner. In addition, pent-up demand for housing is building - the consequence of suppressed household formations over the last half-decade. All of this is now being reflected in housing numbers. Year-to-date starts are up 27% and should this pace continue through the fourth quarter, starts will come in at 770,000 this year. And the experts' forecasts for next year are even more bullish, ranging from 900,000 to one million, suggesting a further increase in the order of 25%.
Looking forward, our quality customer base and continuing UK currency advantage should generate another solid performance from our European business. And while North American OSB prices have recently declined from their third quarter peak, they are currently holding at very robust levels. Against this backdrop, I am optimistic about our fourth quarter and next year.
Some in the analyst community view the existing North American OSB industry capacity overhang as a risk. In my opinion this concern is premature. In the short term, improving housing demand is likely to outpace any capacity additions, given the complexity and long lead times to restart mothballed mills. At Norbord, with most housing indicators now pointing to a better market dynamic, we are developing plans to restart our idled capacity. But we'll act on these plans only when it is sufficiently clear to us that our customers require more product and a restart is economically sustainable.
Demand from US new home construction is accelerating and this momentum is having a positive impact on our bottom line. Our European operations have proven they can deliver solid numbers in spite of a negative economic environment. Our stock price continues to set new 52-week highs, reflecting a renewed optimism around US housing. I am encouraged by these trends and look forward to reporting much improved full year results in January.
J. Barrie Shineton
President & CEO
This letter includes forward-looking statements, as defined by applicable securities legislation including statements related to our strategy, projects, plans, future financial or operating performance and other statements that express management's expectations or estimates of future performance. Often, but not always, forward-looking statements can be identified by the use of words such as "expect," "suggest," "support," "believe," "should," "potential," "likely," "would," or variations of such words and phrases or statements that certain actions "may," "could," "must," "would," "might," or "will" be undertaken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Norbord to be materially different from any future results, performance or achievement expressed or implied by the forward-looking statements. See the cautionary language in the Forward-Looking Statements section of the 2011 Management's Discussion and Analysis dated January 26, 2012 and Q3 2012 Management's Discussion and Analysis dated October 24, 2012.
Industry Intelligence Editor's note: In an omitted table, Norbord reported sales of US$302 million in Q3, 2012 and sales of US$242 million in Q3, 2011.
Note: Financial references in US dollars unless otherwise indicated.