Jul 29, 2011 | Posted in Corporate News, News
J. Barrie Shineton
President & CEO
July 29, 2011
To our Shareholders,
Norbord’s second quarter EBITDA result of $10 million reflects both the continuing strong performance of our European operations and ongoing benefits from our expanded Margin Improvement Program (MIP). While I am pleased the EBITDA result was positive, persistent weaker-than-expected OSB pricing in North America created a challenging operating quarter for the Company.
In North America, disappointing housing starts and supply chain inventory reductions impacted demand and resulted in softer OSB prices in what usually is a seasonally strong quarter. North Central benchmark OSB prices averaged $173/Msf in the second quarter, a significant drop from the exceptional pricing environment of the same period last year when prices averaged $295. Fortunately, our diversified customer base continues to provide options for Norbord as orders from our home improvement, industrial and export customers all grew once again this quarter.
Europe is a much more positive story. Our European panels business performed well again this quarter, generating a first half EBITDA result that is almost double last year’s. Shipments were 10% higher this quarter and prices for all pane products were 12-15% stronger year-over-year. Our UK-based mills continue to benefit from the weak Pound Sterling versus the Euro that both limits competing panel imports and allows us to expand exports to the Continent. This opportunity has been particularly timely and has effectively offset a slowdown in non-construction panel sales in the UK.
US housing continues to bounce along at cyclical lows without any immediate sign of improvement. Housing starts have decreased 5% year-over-year and economists are now predicting 2011 numbers to be in the 550,000 to 600,000 range. Persistent high unemployment, declining housing prices, foreclosures and tighter mortgage lending continue to be a drag on the market. Until these structural impediments are worked through, any turnaround in new home construction will be limited.
However, good things are happening at Norbord. Our MIP initiatives are expected to generate more than $30 million in improvements this year. Almost one-half of this ambitious target will come from the successful conversion to a new resin technology that we started implementing in mid-2010. We are already seeing improved quarter-overquarter manufacturing costs and a step change in daily production rates across all our North American OSB mills. We also continue to find opportunities to direct sales away from new home construction and to new customers in the home repair and re-modelling and industrial market segments.
Our European mills continue to run at full capacity and panel shipments are up 20% yearto-date compared to last year. A significant upgrade to our European particleboard facility inScotlandwas completed on time and on budget in June. We’ve had an excellent start-up and although it is still early days, the line is delivering material usage reductions and line speed improvements beyond our expectations. These early results suggest that this project will easily exceed the justification criteria set out when it was approved.
Looking ahead to the third quarter, I have a couple of concerns. First, I am becoming increasingly cautious about any potential for improved North American OSB prices in the near term. Although we have strong order files heading into Q3, the OSB market is likely to remain challenging in the face of unbalanced supply and the lagging pace of single family home construction. Second, discretionary consumer spending in the UK has dropped sharply and is now affecting our do-it-ourself kitchen sales. In response, we are moving quickly to reconfigure our South Molton manufacturing site to reduce overhead costs and balance production in light of what I believe is a structural change in demand for this product.
While we face obvious short-term headwinds, I am still positive about the long-term outlook for our business. New and innovative margin improvement initiatives are delivering gains that will continue to offset increases in raw material prices. Inventory levels remain low and operating working capital will remain tightly managed, as always.
We have over $300 million in liquidity and debt markets continue to be open for business. Things will get better, the long-term fundamentals supporting a more robust housing market are favourable and Norbord will perform well alongside any meaningful housing recovery.
I look forward to reporting on our progress next quarter. This letter includes forward-looking statements, as defined by applicable securities legislation including statements related to our strategy, projects, plans, margin improvements, 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 “believe,” “should,” “expect,” “suggest,” “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 2010 Management’s Discussion and Analysis dated January 28, 2011 and Q2 2011 Management’s Discussion and Analysis dated July 29, 2011.
NORBORD REPORTS SECOND QUARTER 2011 RESULTS
Note: Financial references in US dollars unless otherwise indicated. All prior period comparative figures have been restated for IFRS.
Q2 2011 HIGHLIGHTS
- Achieved positive EBITDA of $10 million
- European operations generated positive EBITDA for 10th consecutive quarter
- North American OSB production costs declined 4% vs. the prior quarter due to improved productivity and raw material usages
- Cordele,Georgiarecognized by APA as the industry’s safest large mill for 2nd consecutive year
- Cowie, Scotland first European mill to achieve Norbord Safety Star certification
TORONTO, ON (July 29, 2011) – Norbord Inc. (TSX: NBD, NBD.WT) today reported positive EBITDA of $10 million in the second quarter of 2011 compared to $14 million in the first quarter of 2011 and $72 million in the second quarter of 2010. North American operations generated break-even EBITDA this quarter versus $7 million in the prior quarter and $64 million in the same quarter last year. European operations generated EBITDA of $13 million this quarter versus $11 million in the prior quarter and $10 million in the same quarter last year.
Norbord recorded earnings of $1 million or $0.03 per share in the second quarter of 2011 compared to a loss of $2 million or $0.05 per share in the first quarter of 2011 and earnings of $33 million or $0.76 per share in the second quarter of 2010. Earnings in the second quarter of 2011 include a $7 million or $0.16 per share income tax recovery due to the recognition of a non-recurring income tax benefit. “I am pleased with our positive EBITDA result in the second quarter, despite declining new home construction activity in the US and fragile North American OSB prices,” said Barrie Shineton, President and CEO. “Our European mills ran exceptionally well this quarter and generated positive EBITDA for the tenth consecutive quarter. European panel markets remain strong and our UK-based business continues to benefit from a currency advantage that supports both domestic and export sales volume. In North America, OSB cash production costs are declining due to improved productivity and lower raw material usages, all the direct result of our Margin Improvement Program initiatives.”
“I expect our European business to continue to deliver solid results for the remainder of the year. And while I am cautious about North American OSB prices in the face of declining US housing numbers in the second quarter, I am confident that Norbord’s diversified customer base and limited exposure to new home construction will minimize the impact of this uncertain pricing environment.”
In North America, new home construction activity has continued to decline with housing starts 5% lower year-to-date compared to last year. More importantly for the OSB industry, single family housing starts are down 17% versus last year. North American OSB prices in the second quarter were significantly lower than the same quarter last year as the exceptional pricing environment of last year did not repeat itself. Benchmark OSB prices were also lower than the prior quarter as the typical seasonal price increase did not materialize. North Central benchmark OSB prices averaged $173 per thousand square feet (Msf) (7⁄16-inch basis) this quarter compared to $198 per Msf in the prior quarter and $295 per Msf in the same quarter last year. Expert forecasts for US housing starts in 2011 are being revised down and now range from 0.55 and 0.60 million, even lower than last year and well below the 25-year historical average of 1.5 million.
In Europe, panel markets continued to show strength and producers continued to increase prices to recover rising input costs. Quarter-over-quarter, average particleboard, MDF and OSB prices increased by approximately 12%, 8% and 6%, respectively. Year-over-year and year-to-date, average OSB, particleboard and MDF prices increased by an average of 15%.
In North America, year-to-date OSB shipment volumes were consistent with the prior year despite curtailing 10% more capacity this year. Norbord’s operating OSB mills continued to run at approximately 85% of their capacity this quarter. Including the two indefinitely closed mills, the North American operations ran at approximately 65% of estimated capacity in the first and second quarters of 2011 compared to 75% in the second quarter of 2010.
Norbord’s North American OSB cash production costs per unit decreased by 4% versus the prior quarter and 1% versus the same quarter last year. Higher productivity and lower raw material usages more than offset higher resin prices.
In Europe, panel shipment volume remained consistent with the prior quarter, but is up approximately 20% year-to-date compared to last year. Norbord’s European mills ran full out except for three weeks of downtime related to the Cowie,Scotlandparticleboard mill upgrade. The European mills produced at approximately 105% of estimated capacity in the first and second quarters of 2011, or 115% excluding the Cowie project downtime. This compares to 100% in the second quarter of 2010. The European EBITDA improvement year-to-date was driven by higher panel prices and shipment volumes and lower raw material usages, which outpaced higher raw material prices.
Norbord’s Margin Improvement Program (MIP) has realized $12 million in net gains year-to-date. MIP contributions include improved production efficiencies and raw material usages as well as a richer sales mix and reduced overhead costs. These savings have helped offset the negative impact of higher raw material input prices, higher maintenance costs and weaker North American OSB prices.
Capital investments totaled $4 million in the second quarter of 2011 compared to $8 million in the prior quarter and $5 million in the second quarter of 2010. Norbord’s total 2011 capital investment is expected to be $25 million, which is modestly higher than last year. This includes the Cowie particleboard mill upgrade that was completed on time and on budget during the second quarter, and will provide improved operating flexibility and reduced manufacturing costs. The line restarted successfully and is already exceeding project expectations.
The Company’s operating working capital was consistent with the prior year. Finished goods inventory remains at minimal levels and accounts receivable performance is in line with prior periods. The Company’s tangible net worth for financial covenant purposes was $352 million and net debt to total capitalization on a book basis was 51%.
Norbord’s Q2 2011 letter to shareholders, news release, management’s discussion & 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 Friday, July 29, 2011 at 1:00 p.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 August 29, 2011 by dialing 1-888-203-1112 or 647-436-0148. The passcode is 2274397. 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 2,030 people at 13 plant locations in theUnited States, Europe andCanada. 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.