Executives
Barrie Shineton - President & CEO
Robin Lampard - SVP & CFO
Analysts
Pierre Lacroix - Desjardins Securities
Sean Steuart - TD Newcrest
Paul Quinn - RBC Capital Markets
Jonathan Lethbridge - CIBC
Norbord Inc (NBDFF.PK) Q3 2010 Earnings Call October 27, 2010 11:00 AM ET
Operator
Good day everyone and welcome to Norbord Inc. 2010 Third Quarter Earnings Conference Call. As a reminder today's call is being recorded and webcast on Norbord's Web site at www.norbord.com.
Norbord's discussion today may include certain projects and forward-looking statements regarding Norbord's business future actions and expected results. These statements are subject to known to unknown risks and future results may differ materially. For further information on known risks, please see the caution regarding forward-looking information statement in Norbord's March 1, 2010 Annual Information Form and the cautionary statement contained in the forward-looking statements section of Norbord management's discussion and analysis dated October 26, 2010.
And now I would like to turn the call over Barrie Shineton, President and Chief Executive Officer. Please go ahead sir.
Barrie Shineton
Thanks very much Andrew and good morning everyone and welcome to Norbord's third quarter conference call. I have Robin Lampard our CFO with me today. I am pleased to report another positive financial quarter for Norbord. We generated positive EBITDA of 12 million. This is a modest improvement over the same quarter last year and the fifth consecutive quarter that we have delivered both positive EBITDA and operating cash flow.
At the same time I have to say I am disappointed that the robust OSP pricing environment we experienced in North America in the first half of the year did not carry over and North Central OSB benchmark prices that peaked at $395 in the second quarter averaged just $180 this quarter.
And so these prices were even lower than that, this North American market. This adjustment in North American prices corrected our impacted our EBITDA by something over $50 million in quarter three.
Before I turn the call over to Robin, I would like to comment some additional highlights for the quarter. First, with the hindsight it is now clear that the expiry of the U.S. home buyer tax credit maybe able to hurt new home construction activity in quarter three by pulling forward both buyer interest and home sales into the first half of the year. Norbord pull backed production quickly beginning in September to match softer order files.
We operated about 70% of our total capacity in the quarter, still a good result I think when compared with the overall industry operating rate. Norbord continues to be somewhat less directly exposed to the new home construction market. Today more than 65% of our North American OSB sales volume goes into repairing model and in industrial and use. This diversification is continuing to evolve and we believe that, in the current market dynamic of low demand and excess capacity, Norbord benefits by always having a home for its production capacity.
Second a few comments on our European panel business. In Europe, the jump in construction activity in the first half of the year continued into the third quarter. OSB prices in the quarter were 37% higher than the same period last year. We are watching current economic development closely. The UK government has recently announced that this was drawing stimulus support and implementing the most significant public sector job and spending cut backs since the 1930s.
While implications for our UK based business are not yet clear, I believe the current bull market for panel products will ease in the near term and prices have likely peaked in the fourth quarter of this year. However underlying demand dynamics, limited imports and a weak pound sterling suggest a reasonably positive outlook for our European business next year. We expect the results to be similar to this year.
And lastly a few comments on the cost side. Stubbornly high raw material prices, particularly with resin remained a concern for Norbord in both North America and Europe. These input costs have stabilized this quarter but at a level that are about 10% higher than the same period last year.
While the trend is for lower input prices, particularly in North America, the adjustment over the next several quarters will happen more slowly than I would like. And with those comments, I'll turn things over to Robin.
Robin Lampard
Thanks Barry. As Barry highlighted, North American OSB prices corrected in the third quarter on the back of post tax credit softer housing demand. Benchmark North Central OSB prices ranged from $207 to $160 and averaged $180 in the Q3. This compares to $295 in Q2 and is almost unchanged from Q3 last year. So these benchmark prices averaged just $156 in Q3, down from $277 in Q2 and also almost unchanged from Q3 last year.
Our operating North American mills ran at approximately 90% of capacity in the third quarter, compared to 100% in the prior quarter and 85% in the same quarter last year. Our OSB mills in Huguley, Alabama and Jefferson, Texas remain indefinitely shut and represent approximately 20% of Norbord's annual North American OSB production capacity. Considering both the operating and OSB mills, Norbord's North American OSB mills operated at approximately 70% of capacity in Q3 compared to 80% in Q2, and 65% in Q3 of last year.
Turning to Europe, OSB markets continue to show their strength again this quarter in response to a short term recovery in new housing construction, resilient repair and remodeled demand, substitution of our scarce plywood and inventory restocking. In addition OSB supply was constrained by producer curtailments.
Particle board and MDF markets also remained resilient. As Barry highlighted, European OSB prices rose 37% versus last year, while particle board and MDF prices rose a more modest 14%. Compared to the prior quarter, European panel prices rose 9% for OSB and 3% rose 9% for OSB and 3% for particle board and MDF.
Our European mills ran at 100% of capacity in both the second and third quarters of this year versus 75% in the same quarter last year. We generated positive EBITDA of $12 million this quarter, $59 million lower than the prior quarter and $2 million better than the same quarter last year. Lower quarter-over-quarter results were attributed to the decline in North American OSB prices and shipment volume.
Modestly improved year-over-year results were the result of higher OSB prices which were partially offset by higher resin and fiber prices, labor cost, supplies maintenance and the foreign exchange impact of the stronger Canadian dollar.
A full EBITDA variance analysis for the quarter and year-to-date can be found in our MD&A. North American OSB operations generated EBITDA of $4 million in Q3. This is $60 million lower compared to Q2 and $6 million lower than Q3 of last year.
Quarter-over-quarter, the decrease is attributed to the significant drop in OSB prices and lower shipment volume as Barry highlighted at the start of the call. Year-over-year, the benefit of higher OSB prices and shipment volumes was partially offset by higher resin and fiber prices, higher employee profit share costs and foreign exchange impact of the stronger Canadian dollar.
Our North American OSB cash cost per unit decreased by 1% from the prior quarter primarily due to the benefit of lower employee profit share cost and lower resin and fiber prices partially offset by the negative impact of higher supplies and maintenance cost and lower production volume.
As Barrie noted our costs are running higher than last year with per unit cost up by 13% versus the same quarter last year and 9% year-to-date. The negative impacts of higher resin and fiber prices which were up cycle bottom lows in 2009. Higher supplies and maintenance cost as a result of running more production in 2010 and higher employee profit share cost was only partially offset by the benefit of higher production volume.
European operations generated EBITDA of $10 million in the third quarter consistent with the prior quarter. Results were flat quarter-over-quarter as the benefit of higher panel prices was offset by slightly lower shipment volumes and higher energy prices.
European EBITDA was double the price million generated in the same last year as significantly higher panel prices and shipment volumes more than offset the negative impact of higher fiber and resin prices.
Turning now to working capital decreased by $2 million during the third quarter. This quarter-over-quarter decrease is due to two offsetting factors. First lower inventory levels which are attributed the seasonal draw down in North American and European log inventories and the timing of production curtailment.
Second, this is partially offset by a decrease in accounts receivable, securitization proceeds due to lower North American OSB prices and shipment volume.
Accounts payable remained essentially flat as bond, coupon payments made in the third quarter were offset by higher trade payable.
I will note again this quarter that our accounts receivable metrics remain in line with prior periods and our credit performance through the downturn has been exceptionally clean.
Operating activities generated $3 million of cash or $0.07 per share in the third quarter due to the strong EBITDA results. Our capital investment was $3 million in the quarter and $9 million year to date. Our 2010 capital investment program will be limited to essential capital projects as it is expected to total $15 million.
Our liquidity position remained strong with 313 million at quarter end consisting of 76 million in cash and 237 million in un drawn bank lines. Our net debt to capitalization ended the quarter at 51% versus the 65% covenant and tangible network was 362 million versus the 250 million covenants. So, we are feeling comfortable with our balance sheet.
Just before a wrap up I wanted to highlight that we have provided extensive disposure in our MD&A on the impact of Norbord's upcoming version to international financial reporting standards.
As you know this account change will impact all Canadian public companies next year. In addition to the usual status update on our transition plan. We have also provided an overview of our transitional policy elections and a reconciliation of our shareholders equity from paying gap to IFRS as of January 1st, 2010 which will form the basis for our comparative numbers next year.
The key take away is we don't expect any significant impact on future EBITDA from the 2010 change over to IFRS.
And of course cash flow is not impacted by the new accounting rule. And with that we will jump right in to questions today and I will turn the call back over to Andrew who will open up the lines for your question.
Question-and-Answer Session
Operator
Thank you. (Operator Instructions). The first question comes from Pierre Lacroix with Desjardins Securities. Please go ahead.
Pierre Lacroix - Desjardins Securities
Thank you. Good morning. Just a question on the logging fees and going into the next winter, given the fact that we had last winter and last spring with weather conditions that you had showed and with your improved balance sheet, with your outlook; do you see the logging season and your expected in entry level for logs to be different from what it was when you entered the winter season in 2010.
Barrie Shineton
Good morning Pierre. I think we entered the winter season last year exactly where we wanted to be on try entry levels but we didn't count on the wet weather both in the northern part of North America and in the South East. You're asking me to be a weather forecaster I guess and I'm having a tough time forecasting OSB prices these days. So we run tight log inventories and we will enter this winter season with tight log inventories and we're expecting normal weather conditions. If the weather is like last year, we will be having to move quickly to make some adjustments.
Pierre Lacroix - Desjardins Securities
Okay, no change for your strategy there?
Barrie Shineton
No change for our strategy there. We're running -- we run very low inventories, both on finished products and log side.
Pierre Lacroix - Desjardins Securities
Okay. Good. You were talking about 60%, 65% of our sales volume going to prepare remodeling and industry implications. Can you give us a sense of what kind of price you're getting on these end markets? Are you getting premiums heading into these end markets or it's pretty much the same commodity type of business?
Barrie Shineton
716s four by eight kind of commodity OSB is generally in these arrangements priced at random like prices. So it's pretty predictable and you have good visibility on that. We get premiums on our specialty products of course and that represents some 35% of our production these days.
Pierre Lacroix - Desjardins Securities
35%?
Barrie Shineton
Yeah.
Pierre Lacroix - Desjardins Securities
All right. Okay. Thank you very much
Barrie Shineton
Thanks Pierre.
Operator
The next question comes from Sean Steuart with TD Newcrest. Please go ahead.
Sean Steuart - TD Newcrest
Thanks, good morning everyone. Just a couple of questions Barrie. Following up on Pierre's question, just the heavier weighting you've had to the repair and remodeling industrial market versus home construction, can you give us some context of how that ratio might have changed for you over the last year and was it more of a conscious decision to reposition your product there or is that really just where the market pulled you?
Barrie Shineton
We've been doing what I suppose many of our competitors are doing. We've been moving volumes away from new home construction to places where demand has been a bit more stable. A big box business in North America is well over half of our volume today and that's been a long term strategy direction that are worth taking.
Sean Steuart - TD Newcrest
Okay. And then maybe a question for Robin. Obviously, very constrained CapEx this year and are we safe to assume 2011 numbers will be in the same ball park or do you get to a stage where you need to start to throw a little bit more capital at the mills to keep them running smoothly?
Robin Lampard
Sean, I don't think we're at the point where it's a question of need. We would like to put a bit more into the mills next year assuming that the market plays out the way we think it will. So I think we're planning for a slightly higher number this year, nothing too materially higher. But we will have the flexibility to pull it back if we need to. We could certainly hold it up to $15 million again next year if we had to.
Sean Steuart - TD Newcrest
Okay and then Barrie just one last question on Barrie just one last question on Europe. Good price realizations continuing and I guess just anecdotally your impression of how much of that is the pound versus euro exchange rate and how much of it was just solid fundamental demand.
Barrie Shineton
Well the answer is both, but because our manufacturing primarily biased towards the UK. The weak pound has been very beneficial to us as a company located there. I mean we are exporting it to Europe that our imports are naturally restricted into the UK because of the weak currency and so that creates a market dynamic that is pretty positive for us.
Sean Steuart - TD Newcrest
Okay got it. That's all I had. Thank you.
Barrie Shineton
Thanks Sean.
Operator
(Operator Instructions). And the next question comes from Paul Quinn with RBC Capital Markets. Please go ahead.
Paul Quinn - RBC Capital Markets
Yeah. Thanks and good morning. Just question on European operations it's what I seem to struggle with. Just going forward it sounds like you expect to us the prices to peak in Q4 but volumes will off. So, can we expect EBITDA contribution to be a slight less than Q3?
Barrie Shineton
In quarter four Paul, was that your question?
Paul Quinn - RBC Capital Markets
Yeah.
Barrie Shineton
I think we go through a soft patch in terms of opting our pricing in the UK as the customers and economy in general kind of shift their mind around the initiatives by that current UK government but the fundamental demand dynamics will stay strong and I think in my shareholder letter I said we expect to soft patch in quarter four and quarter one but we expect this our own pricing dynamic all through next year and we expect to deliver about the same kind of EBITDA results out of the UK next year as we have this year.
Paul Quinn - RBC Capital Markets
Okay so that delivery and the same results in 2011 versus 2010. Is that saying that even though the UK government is really pulling the back their hands on spending that it really isn't going to have an affect in your business?
Barrie Shineton
We believe that sort of market dynamic in the UK is supports manufacturing in the UK and we expect same result.
Paul Quinn - RBC Capital Markets
Okay. Thanks very much. That's all I had.
Barrie Shineton
You're welcome, Paul.
Operator
The next question comes from Jonathan Lethbridge with CIBC. Please go ahead.
Jonathan Lethbridge - CIBC
Thanks. Good morning. I just had a question on Europe as well I was wondering in terms of market share do you have a sense for how the market share between OSB and plywood in Europe?
Barrie Shineton
Well in terms of construction end use plywood in Europe is typically especially plywood it's high grade plywood it doesn't really compete with OSB as it does still in North America and so in the timber frame housing industry particularly in Western Europe and the UK the power product is uses all OSB.
Robin Lampard
I would just add Jonathan it's Robin speaking, it's really more particle war than it's a competitive product in construction uses in the UK and as you know we make that product as well and we specifically target the construction sector. So we kind of got both end is covered
Jonathan Lethbridge - CIBC
Right. I guess my comment was following on a note that was in your disclosure about plywood and was there any trend happening that would change demand dynamics for your products.
Robin Lampard
No I think the comment was more directed at imports. So no, nothing fundamentally changing.
Jonathan Lethbridge - CIBC
Okay. And just on North America, are you guys comfortable continuing to operate at 90% given current OSB prices and current profit levels?
Barrie Shineton
Well we aren't Jonathan -- we aren't running at 90% of capacity. We have what 80% of our capacity curtailed permanently?
Robin Lampard
20%
Barrie Shineton
20% curtailed permanently and so that volume is out and we've been running close to 80% in quarter two and we sort of cut it back 70% in quarter three. So we're not running at 90% capacity henceforth.
Robin Lampard
And Jonathan I think Barrie has said this before, we watch our EBITDA and working capital levels weekly and we're certainly ready to pull back on capacity if we don't like the numbers that we're seeing and we've certainly done that in the past and we'll do that again.
Jonathan Lethbridge - CIBC
Okay. No I did recognize that you had taken the 20% out. I was just wondering in terms of going from point A to point B so as the market is adjusting if you feel a need to adjust further.
Robin Lampard
Yeah and I think we also said that we're expecting a softer patch heading into the end of the year. So I certainly wouldn't expect us to be running more in Q4.
Jonathan Lethbridge - CIBC
Okay, thank you.
Operator
There are no further questions at this time. Please continue.
Barrie Shineton
Well that was easy. Thanks Andrew and to everybody who has been on the call. Robin and I are always available to respond to further questions and I would encourage you to give either one of us a call if you think of something else you want to know and thank you very much.
Operator
Ladies and gentlemen, this now concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.
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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
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