Norbord's (NBRXF) CEO Peter Wijnbergen on Q4 2015 Results - Earnings Call Transcript

| About: Norbord Inc. (OSB)

Norbord Inc. (NBRXF) Q4 2015 Earnings Conference Call January 28, 2016 11:00 AM ET

Executives

Peter Wijnbergen - President and Chief Executive Officer

Robin Lampard - Senior Vice President and Chief Financial Officer

Analysts

James Armstrong - Vertical Research Partners

Sean Steuart - TD Securities

Paul Quinn - RBC Capital Markets

Andrew Kuske - Credit Suisse

Bill Hoffman - RBC Capital Markets

Ketan Mamtora - BMO Capital Markets

Roger Smith - Bank of America Merrill Lynch

Stephen Atkinson - Dundee Capital Markets

Hamir Patel - CIBC Capital Markets

John Tumazos - Very Independent Research

Operator

Good day, everyone, and welcome to Norbord Inc.’s 2015 Annual Earnings Conference Call. As a reminder, today’s call is being recorded and webcast on Norbord’s website at www.norbord.com.

Norbord’s discussion today may include certain projections and forward-looking statements regarding Norbord’s business, future actions and expected results. These statements are subject to known and 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 January 27, 2016 Annual Information Form and the cautionary statement contained in the Forward-Looking Statements section of Norbord’s Management’s Discussion and Analysis dated January 27, 2016.

And now, I will turn the call over to Peter Wijnbergen, President and Chief Executive Officer. Please go ahead, sir.

Peter Wijnbergen

Thank you, Ron, and good morning, everyone. Welcome to our fourth quarter and year-end 2015 conference call. I’m joined today by Robin Lampard, our CFO; and Heather Colpitts, our Senior Manager of Corporate Affairs. I’ll comment briefly on 2015 and the fourth quarter before I turn the call over to Robin to review our financial performance and operating numbers.

2015 was an exciting year for Norbord, even though our progress is just starting to become visible in our quarterly results. 2015 financial results are driven by disappointing North American OSB market in the first-half of the year, with recovery beginning in the third quarter and solid earnings in the fourth quarter. In fact, our fourth quarter EBITDA was almost equal to the first three quarters combined.

Inventory destocking in the supply chain along with lower export volume is due to the stronger U.S. dollar, led to lower demand in North American OSB mills in the first-half of 2015. With those headwinds behind us by mid-year, we saw continued improvement in OSB demand translate more directly onto the mills, driving prices higher towards the end of Q3 and into Q4.

I’m very pleased with the – our operational performance in 2015 and the strong margin improvement gains we delivered. These gains combined with significant resin price relief and weaker Canadian dollar allowed us to more than offset OSB price weakness and deliver a modest improvement in our full-year 2015 adjusted EBITDA. In addition to our excellent operating performance, I’m also pleased with the significant progress we have made towards realizing the benefits of our merger with Ainsworth.

Our goal was to deliver 50% of our $45 million annualized synergy targets by the end of 2015, and we have already captured $27 million, or 60% on an annualized run rate basis. Synergies to-date have come from reduced corporate overheads, optimization of sales and logistics, and the sharing of best operational practices.

I’d like to particularly highlight the progress we have made ramping up high-level in Alberta over the nine months post-merger by stabilizing the workforce, resolving a number of technical challenges, and improving the overall mill operations. Our European business once again had a solid quarter generating $10 million of adjusted EBITDA, 23rd consecutive quarter of stable EBITDA contribution.

After Robin review his financials, I’ll tell you more about the strategic investment we’re now proceeding with at Inverness to make our European business even more meaningful to Norbord’s overall results. Then as usual, we’ll take your questions. But first, Robin, it’s over to you.

Robin Lampard

Thanks, Peter. Based on your positive feedback last quarter, we will continue with our new format of brief or prepared comments to allow more time for your questions. A greater level of detail is, of course, still available in all of our public documents, the press release, MD&A and financial statements, they’re all available on our website and summarized in the accompanying earnings presentation, which I will reference in my remark.

I’ll begin with a few comments regarding market starting on Slide 4. Peter went into some detail on last quarter’s call to empathize Norbord’s exposure to the U.S. housing recovery. While Norbord has now has more production capacity in Canada since our merger with Ainsworth, about 85% of our North American production is sold in U.S. dollars to U.S. customers, warehousing demand continues to improve.

U.S. new home construction activity is single biggest end user OSB in North America, and housing starts were up a 11% in 2015 with permits 12% higher. Housing starts came in at just over 1.1 million for 2015, and housing economists are forecasting around to 1.25 million level for 2016, as this gradual recovery continues to play out.

The latest housing numbers for December show are off to a good start this year, which starts at a 1.15 million seasonally adjusted level, and then where forward-looking permit numbers at a 1.23 million pace. In addition, the average house size continues to grow and is now over 2,700 square feet per single family.

As you can see on Slide 5, Q4 average benchmark prices in all of our key North American regions were up for quarter-over-quarter and year-over-year. Earlier average benchmark prices were lower in 2015 for the reasons Peter already outlined.

The bellwether in North Central OSB price range from a low of $175 in April to a high of $257 in November, finishing the year at $230 and currently holding at $235. In Europe full-year 2015 average panel prices were 10% lower than the prior year, due to the impact of Eastern European OSB producers redirecting supply to take advantage of the weaker euro in the first-half of the year.

As you can see on Slide 6, Continental OSB prices continued to recover in Q4 after bottoming in the second quarter. European OSB demand has been growing at a pace well above GDP in our key markets, up 15% in the UK and up 10% in Germany based on the stats available for last year. This reflects accelerating substitution away from higher cost imported plywood, as well as improving economic fundamental.

Next to our results. On Slide 7, you’ll see our sales and adjusted EBITDA, as well as a summarized reconciliation of reported earnings to adjusted earnings. Norbord reported adjusted EBITDA of $57 million in the quarter compared to $30 million in the prior quarter and $14 million in the fourth quarter of last year.

Full-year adjusted EBITDA was $122 million in 2015, a modest improvement over $115 million in 2014. As a reminder, all of our 2014 numbers have been restated to include Ainsworth’s result to provide a more apples-to-apples comparison with our 2015 post-merger numbers.

As you can see on Slide 8, the Q4 EBITDA improvement was driven by higher OSB prices. You can also see that we had some negative uncontrollables in Q4 versus Q3. And this is driven by the 140 mill days of downtime we took in Q4 to complete annual maintenance work at many of our North American mills.

As Peter highlighted in his opening comments, the significant progress we made on controllables throughout the year, combined with lower resin prices and the cost benefit of the weaker Canadian dollar more than compensated for the lower OSB prices in our full-year 2015 results.

Turning now to our balance sheet and cash flow. As you can see on Slide 9, we were operating cash flow positive in 2015. Working capital was a bit higher at year-end 2015, as we had significant accruals at the prior year-end related to merger transaction costs.

As always, working capital remains well control across the company. Capital investments totaled $70 million in 2015, and looking ahead next year’s regular CapEx budget is $75 million. This budget does not include the strategic reinvestment in our Inverness mill, as Peter will discuss in a moment.

Regular CapEx includes maintenance investments across our 15 operating mills, continued work to rebuild the press at our mothballed Huguley mill, and further debottlenecking and cost reduction projects under our multi-year capital reinvestment strategy.

Finishing up on Slide 10, we continue to have strong liquidity, up $344 million at year end, mainly comprised of unused credit lines. We were able to pay down some of our AR securitization program drawn during Q4 and had $30 million drawn at year end.

We also continue to have significant headroom versus the financial covenants that govern access to our underarm revolvers. Our tangible net worth stood at $724 million and net debt-to-total capitalization was 51%.

I’ll close my remarks today with a few comments on capital allocation. As Peter outlined in his shareholder letter this morning, our priorities remain unchanged. Our improving cash flow and strong liquidity give us confidence that our balance sheet confront our ambitious plan through this year.

In additions to our regular CapEx budget for committing a $135 million for the Inverness reinvestment spread over the next couple of years, and prioritizing the pay down of our 2017 bonds early next year. We also remain committed to our variable dividend policy, and you will have seen that our Board declared another CAD $0.10 per share dividend for the quarter payable on March 21.

And with that, I will turn the call back over to Peter.

Peter Wijnbergen

Thank you, Robin. In my shareholder letter, I outlined two strategic opportunities for pursuing to create value for our shareholders. First, the opportunity to grow our European OSB business. With a heavy lifting of the Ainsworth integration now behind us and improving momentum in our North American business, we believe the time is right to pull the trigger on the Inverness reinvestment project we’ve been developing for the last few years.

As you all have seen in our press release this morning, our Board has approved a £95 million or $135 million investments to modernize and expand our Inverness Scotland OSB mill. As Robin highlighted, demand in our key Western European markets continues to grow rapidly. And our European mills are all running at full capacity.

Over the next two years, we will upgrade Inverness by installing modern continuous press technology on our new production line to replace of two smaller dated multi-opening presses, almost doubling the capacity to 720 million square feet, or 640,000 cubic meters.

This modernization builds upon the mill’s access to the most competitive wood fibre basket in western Europe and the existing infrastructure at the Inverness site, and we’ll significantly lower the mills manufacturing costs and further improve its competitive position. The reinvested mill will also have the flexibility to produce a broader selection of panel products to serve the European marketplace. We expect the new line to come online in the second-half of 2017, while operating as usual in the interim.

We are very excited about this project and I’m pleased with the strong show of support from the Scottish government in the form of a £12 million development grant through to Highlands & Islands Enterprise.

As we have outlined before, our European business is a source of diversifications that is unique to Norbord amongst OSB producers, contributing stability to our earnings throughout the business cycle? This reinvestment will make our already strong European business even bigger contributor to our financial results.

Now the second strategic opportunity we see is to further grow our North American specialty products to complement our strong commodity products business. Since everyone uses different terminology, I’ll just take a moment to clarify what this means to us at Norbord.

For us, commodity products are anything we sell that’s tied to volatile weekly benchmark pricing. This includes 7/16 x 4 x 8 Sheathing, which represents almost half of OSB sold in North America, and so-called value-added products like our Windstorm and Solarbord and Tallwall, which obtain a premium price over standard 4×8, but that price moves up and down with the Standard Grade. This is the foundation of our North American business and we add value by being low cost to market, working with our customers to make sure our value-added products help reduce their overall business cost and differentiating our sell-through service execution.

Specialty products on the other hands, our engineers has an OSB replacement for other higher cost products like solar grid or plywood. A good example is upholstered furniture. We add value in this segment by engineering a customized solution for a particular customer and providing a high quality reliable supply.

Specialty products are not tied to cyclical U.S. housing construction. And as a result, volumes and margins are more stable. Today, about 20% of our North American sales volume is specialty products, and we’re taking steps now to increase this volume to further complement our strong, but volatile commodity products business. One major step was the merger with Ainsworth, which provided us excess to product development expertise in areas such as engineered wood products.

In summary, 2015 was a very productive year for Norbord. We successfully integrated the Ainsworth mills into our company, captured significant synergies, and laid the groundwork for new opportunities that will generate attractive returns for our shareholders in the future.

And with that, I’ll turn things over to the operator, who will open your lines for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question will come from the line of James Armstrong with Vertical Research Partners. Please go ahead.

James Armstrong

Good morning, and congrats on a great quarter.

Peter Wijnbergen

Thank you, James.

James Armstrong

Again, my first question is the usual on inventories of a system. You mentioned that there was debottlenecking last year. What do inventories through the system look like from your point of view? And did they remain tied through the December into the January period?

Peter Wijnbergen

Yes, I think I’ve been referring to the inventorying or whatever the right term as that we saw happening in the first-half of last year, or really starting at the end of 2014. And it was sort of our sense, I think, I indicated on the previous conference call that by the middle of the year, most of that the inventorying had happened and that we felt that the inventory throughout the system as far as we could judge it was as lien as, I think, it could grow.

We have seen no change to that since and through the end of the year. It’s our sense that the drivers from our customers perspective behind a desire to lower the inventory are still in place. And we’re not aware of anybody having built or having a desire to build any significant inventory position.

James Armstrong

Perfect, that helps. Switching gears a little, with oil prices down, are you seeing any translation into your cost of goods sold, especially in resin and transportation?

Robin Lampard

I’ll speak to the resin question. James, good morning. You’ll see in the variance table for our EBITDA that sequentially Q4 versus Q3, we had a $4 million benefit from lower key input prices. So and that’s the resin story we talked about last quarter where we’ve seen a slight impact in Q3, we got that back in Q4, and for the full-year, it was obviously much more significant. We got a $39 million benefit and that’s mostly been driven by the lower resin prices that were down just a little bit over 20%, if I look at the full-year versus the prior year.

So we may yet see more with oil prices plumbing new depths almost everyday it seems. So there could be some more to go there. But we’ve certainly seen – we’ve certainly seen the big move already in our resin prices and we’ll see what happens in Q1.

James Armstrong

And then lastly how much of your current production is currently based in Canada and what effect if any are you seeing from the Canadian dollar? And can you help us quantify that?

Robin Lampard

I can, yes, something like 40% of our production capacity in North America is in Canada now post the Ainsworth merger. And we’ve seen a huge benefit from the weaker Canadian dollar, because of course prices in North America are U.S. dollar based. And something like 70% spot of the cost basis of a Canadian located mill would be Canadian dollars nominated.

And so that weak Canadian dollars had a very material impact on the competitiveness of those Canadian mills. And you can see it in the EBITDA variance table. There’s that $41 million number in the other operating costs in foreign exchange line. That is largely driven by the weaker Canadian dollars, that’s been very material. And the sensitivity we provide is every $0.01 move is around $3 million of adjusted EBITDA for us.

James Armstron

Perfect. That helps a lot. Thank you very much.

Robin Lampard

You’re welcome.

Peter Wijnbergen

Thanks, James.

Operator

Your next question will come from the line of Sean Steuart with TD Securities. Please go ahead.

Sean Steuart

Thanks. Good morning, everyone. Few questions.

Peter Wijnbergen

Good morning.

Sean Steuart

First on Inverness, Robin or Peter, can you give us a senses as how that CapEx will be staged, I guess, I’m just trying to weight it this year versus next. And any context on project returns you’re expecting from that investment?

Peter Wijnbergen

Good morning, Sean, thanks. The – obviously, we have not yet concluded final negotiations with our equipment suppliers. That will be sort of the first order of business now that we have final approval from our Board of Directors. But I would say that your spending will be spread over this year and the next two with the heaviest part of the spending next year and the smallest part of the spending in the final year.

In terms of return you know that our long-term targets of return for the company is 21% return on capital employed. And this is a strategic project and it’s in line with no returns. We expect are in line with our long-term objectives.

Sean Steuart

Okay, thanks for that. And the question on Huguley. I think you had about $40 million less to spend on that mill to get it up. Is that still the number – that was last quarter. Is that still the right number to think about? And how much of that, if any is embedded in the $75 million you’re talking about for your 2016 budget?

Peter Wijnbergen

Yes, Sean, I think at the last meeting I sort of mentioned sort of roughly a quarter. In fact, as you – or as we – I think you are aware that our Board has approved $45 million spent on that mill and so far we have spent just under $15 million. The bulk of the spending will come once we have made a decision to – with regards to restart timing.

Robin Lampard

So, Sean, there isn’t very much in there for 2016 on Huguley.

Sean Steuart

Okay. And then the last question from me Peter just on the specialty focus in North America you’re 20% now. What is the objective there and over what timeframe in terms of raising that percentage. And do you have to spend much capital from your perspective to grow that business?

Peter Wijnbergen

Well, we’re still in, let’s say, we’re still in the process of laying out a more detailed plan on how we’re going to implement a move. Our objective is to grow that business beyond, let’s say the normal growth we would see in the recovering U.S. OSB market. But sort of detail, I’ll probably be in a better position to talk to you about in the – one of the next quarterly meetings or quarterly calls.

We anticipate that we will be growing that volume this year and for us that includes, for example, recovering – including that volume, for example, our export business overseas, which has very much the same kind of characteristics that I’ve described. That business retreated a bit this year and we expect that will or last year I should say and we expect it will recover in 2016. So, obviously, we continued also a bit focus on our commodity business, because it’s where we see a lot of recovery in the near-term.

Sean Steuart

Okay. That’s all I had. Thanks very much, guys.

Peter Wijnbergen

Thanks, Sean.

Operator

Your next question will come from Paul Quinn with RBC Capital Markets. Please go ahead.

Paul Quinn

Yes, thanks very much and good morning. Just a couple of questions. One on the just following up on Inverness here. You are spending $135 million to get the $720 million square feet of production. It seems quite low in terms of CapEx versus what we’ve seen in North America. How you are able to do that? Is that a new mill, or is that or you moving a mill to that site?

Peter Wijnbergen

Good morning, Paul. Well, we are very frugal spenders of capital. But, yes, that’s a good observation. It is a very low capital cost by units of capacity. And I would say that the most significant reason why we are able to pull this off that’s relatively low, it still costs on a per unit basis, because we will be able to use a significant chunk of the existing infrastructure in Inverness.

Paul Quinn

Okay. So that implies that you’re not moving GP2 to Scotland?

Peter Wijnbergen

Well, as we have talked about in the past, on the face of it, it makes a lot of sense to move to GP2 press, because we don’t anticipate the need for Greenfield capacity in North America in the near-term. However, we haven’t determined yet, if it makes sense for this project.

Paul Quinn

Okay. So it’s still up in the air. In terms of – you said at a high – that you’re particularly pleased with high level and the performance there. What is that mill running at now, or what’s the run rate versus the 860 capacity?

Peter Wijnbergen

Well, I think, overall for the year the mill run at about 50%. And so what I’m pleased about is that the mill is starting to make a process contribution to our EBITDA performance. And as we have helped them – as we have helped the mill overcome some significant technical challenges that they were facing during the startup. We think this mail is now poised to actually grow with our ability to sell in this intuitive recovering North American markets over this next – over this current year.

Paul Quinn

Okay. So I did note that mills had problems through like decades now and never sort of initially when Ainsworth built it, I think at a 925 stated capacity. And I don’t think the Ainsworth family were able to run it anywhere above 500 million or 600 million. Do you think you’ll actually get to the 860 and are you able to sell roofing products either there?

Peter Wijnbergen

Yes, so that’s a good question Paul. And our – we have now been able to prove to our own satisfaction that each individual portion of the mill can run at a kind of capacity that is required to reach the 860 million square feet. The big challenge for us right now is to sort of balance that with our ability to solve that kind of volume into the market. And I’m sure we’re keeping pace ramp – we’re wrapping up in pace with our ability to sell the product.

Paul Quinn

Okay. And then just lastly, just on the specialty side, you gave that decent metric at 20% as you defined specialty, which seems to be a completely different definition for every OSB company out there. But if we could have sort of what were you in specialty five years ago, if you are 20% now?

Peter Wijnbergen

Okay. I haven’t done that math, so I don’t know. In the past year heard just talk about value-added products and that’s why I actually went through some exercise to try to define how we sort of see these differently. So we – our focus will continue to be on selling value-added products. But value-added products move up and down with the commodity market. They are sold at a premium to commodity…

Paul Quinn

Right.

Peter Wijnbergen

Because they provide a premium value to our commodity and to its customers. But specialty products, so that would include things like Engineered Wood products, furniture and export, and obviously the percentages have changed a bit after the merger with Ainsworth. So I can’t – off the top of my head calculate backwards what it would have been five years ago.

Paul Quinn

Okay. We’ll just monitor your progress going forward. Thanks very much.

Peter Wijnbergen

You’ll be hearing from us as we move forward indeed. That’s the plan.

Paul Quinn

Cheers. Thanks, Peter.

Peter Wijnbergen

Thanks, Paul.

Operator

Your next question will come from Andrew Kuske with Credit Suisse. Please go ahead.

Andrew Kuske

Thank you. Good morning. Maybe just continuing on that specialty commodity to divide, but with a bit of a European event. As you expand Inverness with a brand new line and some of the MD&A commentary in your comments today have been related to increasing specialty products out of the new mill and then obviously your cost structure is going to drop with a new mill. So how do you think about this from return dynamic, which is going to be the greater benefit, is it going to be premium pricing coming out of Inverness and product off of Inverness? Is that going to be the bulk of it, or is it really going to be just the cost reductions on a more…?

Peter Wijnbergen

Well, the biggest chunk of the return benefit, good morning by the way, Andrew. The biggest chunk of the return benefit will come from lower operating costs really just doing the simple math dividing the – double the volume over the same kind of overhead costs. But the European markets as opposed to the North American market has largely made the move to continuous press technology. And that’s largely due to the fact that the size requirements are so variable across the geography over there.

We tend to from a North American perspective refer to the European market. But the reality, there is probably 32 or more different markets over there, all of which required different sizes and all of which have required different quality, and sort of degree of commoditization has never existed. And so with the multi-opening press technology that we have in Inverness today, we obviously restricted to what markets we can sell into, and by the continuous press technology takes that restriction away.

Andrew Kuske

Okay, that’s great. And then maybe turning back to North America, and I know you gave some commentary about your views on just inventory is being fairly lean through the channel. Maybe if you could just give us some insight as to what your customers are saying? And in particular we had a really mild winter in most of North America that maybe aided part of the construction season? But how do you look into the Q1 and the order books that we’re starting to see coming from the U.S. homebuilders? And maybe if you could breakdown your customer categories by the U.S. homebuilders, the pro-dealer conversations and then big box and maybe also touch on specialty?

Peter Wijnbergen

Okay. Well, I mean in North America we sell about 50% of our volume to the – to what I would called a new home construction channel, of course, our customers aren’t the builders, but are the pro-dealers who service the builders. And then about roughly a quarter goes to a big box segment and remaining quarter is a combination of industrial and export sales. So that’s most of our specialty volume.

What we we’re hearing and reading from the builders is that their backlog is significantly higher so far this year. And I think I’ve just been reading about some growing traffic that would suggest that this mild winter is indeed translating in greater demand. Since the supply channel continues to be very lean, we expect that we will continue to see any demand growth translate in direct demand growth on our mills from that segment.

If I look at our big box volume, big box volume are up significantly year-over-year, again, the trend continues so far this year. And again with the very mild weather this winter so far, so I guess much easier for people to continue to do the kind of projects that have some go to Home Depot or Lowe’s.

So overall, I think I might be encouraged, but what I see by the demand side of things and certainly if you compare this winter to the last two, we don’t – we’ve had a much milder year. And I think that supports ongoing housing demands – demand growth, that’s what we are seeing in the numbers.

When you look at the last December starts that were available to us. But I want to remind everyone that the winter is always the slowest demand periods in the year. And as we were reminded by that big storm that hit Charlotte and Washington and not the really whole east coast last week, we’re not out of the winter yet.

Andrew Kuske

Okay. That’s very helpful. Thank you.

Operator

Your next question will come from Bill Hoffman with RBC Capital Markets. Please go ahead.

Bill Hoffman

Yes, thanks. Good morning.

Peter Wijnbergen

Good morning, Bill.

Bill Hoffman

Peter, can you talk a – thanks, Peter. Can you talk a little bit about the Asian markets? You guys mentioned a little bit that volumes were down in 2015 versus 2014. I just wonder, if you can give us an update on sort of what’s happening in those markets right now?

Peter Wijnbergen

Thanks. I should know that or I should may know that bulk of our Asian sales so far have been to Japan, where we have a approximately 75% market share for the portion of the market in Japan that has always been related. But our biggest competition for – in the structural panel market in Japan is from domestically produced plywood. And the domestic producers have dominated that market over the last year. And at the same time, there was a fair bit of housing that was pulled forward into 2014 to be the change in the value added sales tax regime in Japan that was implemented in the beginning of 2015.

So overall, demands have slowed down a little bit. We had more competition currency-based from the domestic producers. And that’s why we have seen year-over-year we have seen a slowdown in our sales to Japan. We expect to be able to regain some of that market share this year. I think our plan right now is to have volumes returning to what they were in 2014.

Robin Lampard

And I just add a little bit of numerical color to that though if you look at the APA exports that on OSB, there was a big difference in the first-half of last year versus the second-half. Exports were down about 40% in the first-half of the year, and that speaks to this export – this consumption tax in Japan that Peter just outlined. In the second-half, they’re up almost 10%. So things had to start to turnaround in the second-half.

Bill Hoffman

Okay, thanks. And then just regards to high level, I guess production, can you just help us, where you are in the mix there? I think is most of that product going offshore and/or how much of it’s coming down into the U.S. markets is just sort of commodity OSB?

Peter Wijnbergen

Yes, so in high level, we do not produce any, let’s call it pure 4X8 type commodity product. And so off the product they are producing today, I would say, and I’m getting trapped by our own – our previous discussions around value-added products and specialty and commodity. But I would say it’s a mixture of export sales overseas. So in our specialty category and value-added products in terms of premium flooring and Tallwall and those kind of things, which certain mill is very suited to produce.

Bill Hoffman

Okay. So I guess the expectation is that value-added was worried probably pick up incremental volumes?

Peter Wijnbergen

Absolutely that’s what that mill is really good at and that’s what we are focusing as production on.

Bill Hoffman

Okay, thanks. And then just last question, Rob and you mentioned 40 days of meltdown time in Q4. Any thoughts on the first quarter demand trend is pretty steady to where they were in Q4, I mean it’s seasonally weaker obviously, but just want to get a sense of operations?

Robin_Lampard

Yes, we don’t ever give guidance on that number Bill for obvious reasons. But Q4 is typically the quarter where you will see us take the heaviest number of mill days out to perform manual shuts. So, of course, we continue to stick to our protocol. We only produce what we can sell, and so we’ll have to see how the market plays out.

Peter Wijnbergen

And then, because it’s a way we calculate quarters the fourth quarter, we’re on this 445 schedules for the fourth, but except for December 31, or still year round. So the fourth quarter is always longer in terms of actual days in the first quarter.

Bill Hoffman

Great, okay. Thank you.

Operator

Your next question will come from Ketan Mamtora with BMO Capital Markets. Please go ahead.

Ketan Mamtora

Good morning, Peter or Robin.

Peter Wijnbergen

Good morning.

Robin_Lampard

Good morning.

Ketan Mamtora

First question on Europe. I know earlier in the year you all had talked about pressure from Eastern European producers. Can you talk about what are you seeing in the market right now? Has that pressure still continued, or is it largely behind you?

Peter Wijnbergen

Yes, I think there’s two interesting bids that I can comment there on for you. Our continental market, so that’s Germany and the Benelux. We have started – we started to see prices stabilize in the end of the second quarter beginning of the third quarter of last year. And we have started to see prices rise in the fourth quarter and into the first quarter of this year.

So from that perspective we have always predicted that the lower price environment would lead to increased substitution, that’s indeed what we have seen or the growth has been well ahead of GDP growth in both or in our Western European markets. And so we expect pricing to continue to strengthen as now there’s more balance between supply and demand.

The other interesting thing is now it’s very difficult to get statistics around it. But it looks like the Russian OSB market has continued to grow despite whatever reports we read about the economic instability there. And Russia has started to import always be again from outside of its own production. So I think there was a sort of encouraging signs that we’re seeing right now.

Ketan Mamtora

And that’s very helpful. Thank you. And then second question, can you update us on how you’re thinking about your private mill now?

Peter Wijnbergen

Well, I think if you’re probably referring to the fact that Minister has pulled our forest license – wood license for the Val-d’Or mill.

Ketan Mamtora

Yes, that’s…

Peter Wijnbergen

Yes. In our view it doesn’t change anything for us. The market isn’t there yet for additional OSB capacity today. But our mill continues to be maintained and the ministry has confirmed that we can reapply for wood license when we’re ready to start the mill up in the future.

Ketan Mamtora

Okay. That’s very helpful. Thank you and good luck in the first quarter.

Peter Wijnbergen

Thank you.

Operator

Your next question will come from the line of Roger Smith with Bank of America Merrill Lynch. Please go ahead.

Roger Smith

Thank you. Good morning. Could you please review again what was driving the European pricing down? And how could we think it might return to prior levels?

Peter Wijnbergen

Yes. Well, I think I just should have in the previous discussion, I think I just sort of talked about that we have seen OSB pricing under pressure over the last year, as production from Eastern Europe that used to be going into Russia has been displaced to Western Europe to chase higher margin opportunities after the ruble devalued by 40%. We – that had a price impact. And we expected that lower pricing environment would mean speed up in the substitution rate for imported plywood, that’s indeed occurring. And so we’re seeing prices starting to recover sort of the middle of last year.

Roger Smith

Okay. And you said first part. Can you provide any further insight into how the CapEx to $135 million in Inverness CapEx might spread? I mean should we think $10 million, $15 million and $16 million and maybe 75% of the $135 million and $17 million and resin $18 million, how should we think about that?

Robin Lampard

Roger, yes, we’re not in a position to give you any guidance on that yet. We will already. But as Peter said earlier in the call, we – the next critical step for us is to finalize negotiations with key equipment suppliers. And until we have a better sense for that, we just can’t – we can’t give you anything more specific than what Peter already was. There will be quite a bit this year. The bulk of it will be next year and there will be still some in 2018.

Roger Smith

Okay. And the 6.45’s notes, you said they come do, I guess, in February of 17. But we – how you plan to address that refinance as you get close to that, or with new bonds, or can you talk about that at all?

Robin Lampard

Well, one of our priorities is to actually permanently pay it down. And so our cash flow – our operating cash flow is starting to improve. But that said, we do have significant capital commitments that we’re making on the Inverness side in regular CapEx. So we do have significant liquidity that financial liquidity that’s available to us that we could use to help that pay those down when the time comes. So that is our intention. And as we get closer to it, you will figure out exactly how it gets funded. But we’re confident that the balance sheet can do all of these things in the coming couple of years.

Roger Smith

Perfect. Thank you very much.

Robin Lampard

Okay.

Operator

Your next question will come from Stephen Atkinson with Dundee Capital Markets. Please go ahead.

Stephen Atkinson

Good morning. In terms of 140 mill days downtime, I’m trying to quantify that. Should I take the average production of all your mills and then multiply it, and that would give me a number?

Robin Lampard

The math is as simple as taking the number of mills that we have running, which is 13. Actually in North America, I guess, it would be just to nine, and multiplying that by the number of fiscal dates in our quarter which was I think 97.

Stephen Atkinson

Okay.

Robin Lampard

And that gives you a sense, I think it was something like 12%.

Stephen Atkinson

Okay.

Robin Lampard

12% is what [ph] your supporting mill days represents.

Stephen Atkinson

Okay.

Robin Lampard

So a significant part of production…

Stephen Atkinson

Absolutely.

Robin Lampard

That’s taken out.

Stephen Atkinson

Yeah. No, thank you. Second thing is in terms of Inverness, where you mentioned about the excellent fibre base. Can you tell me what species it is, and how far you have to go for it?

Peter Wijnbergen

Yes, Stephen, it’s mainly Scots pine. It’s primarily plantation for us that have been planted after Second World War. And Inverness is very well located right in the middle of the bulk of the forest in Scotland and the Scottish forest is growing fairly rapidly. So on a sustainable basis, there is a significant growth expected over the next 20 years.

Stephen Atkinson

Well, I know, I’m sure they get a lot of raid. Sorry, so that in terms of the market, the way I gather it is that a lot of it will be just displacing plywood as apposed to OSB? Am I reading it right?

Peter Wijnbergen

Well, I think it’s two things. We expect the market to continue to grow. The order is Western Europe and the U.S. seem to be the two bright spots relatively speaking in the world today. But in addition, yes, there will be ongoing substitution for imported plywood in particular, yes.

Stephen Atkinson

Okay. It sounds like a great project. Thank you.

Peter Wijnbergen

Thank you, Stephen.

Operator

Your next question will come from Hamir Patel with CIBC Capital Markets. Please go ahead.

Hamir Patel

Hi, good morning.

Peter Wijnbergen

Good morning.

Hamir Patel

Peter, I actually have one question on Val-d’Or. When you announced the loss of the wood license in your press release at the time you referenced that you’re considering other options for the mill. Just given the fibre in that region is citing an option for that mill and what do you think of the citing market?

Peter Wijnbergen

Well, citing is obviously an interesting opportunity and we’re investigating whether it makes sense for us for that mill in particular.

Hamir Patel

Okay. And I mean it’s part of Inverness, would you be able to also may be use some of the equipment at Val-d’Or in Europe, or that’s not an option either?

Peter Wijnbergen

No, that’s not an option we’re considering, no.

Hamir Patel

Okay, thanks. That’s all I had.

Operator

Your next question will come from the line of John Tumazos with Very Independent Research. Please go ahead.

John Tumazos

Thank you. Some of us might not know as much about Scotland, as we wish we did. Could you run through the $135 million CapEx for the Inverness project versus the incremental capital to restart Huguley, Alabama mill. And what perspective pricing or costs might be? I sense from your decision that the cash flow from the Scottish project must be 2, 4, 6, 8 times as much per dollar invested?

Robin Lampard

Hi, good morning, John. Yes, I guess, we haven’t probably haven’t looked at it quite that way. But as we prioritize where to allocate capital, we do the nearest – the best near-term opportunity we see is to support OSB growth in Europe. And this investment as Peter already outlined in response to a previous call meets the kind of return hurdles that we need to see on a strategic project like this. And for the Huguley mill, it’s all about timing, and we just don’t – we don’t see the need for that capacity today.

Peter Wijnbergen

Just to remember the always be production for the whole industry in last year has reported by the APA was 20.4 billion square feet. And installed capacity of the mills that are running today is 24.6 billion square feet. So that’s why we’re still thinking that it’s too early to start additional capacity in North America right now.

John Tumazos

How much higher would the selling prices be from Scotland and the Southeast. And how much higher or lower would the unit cost be per square foot and Scotland versus Alabama?

Peter Wijnbergen

Well I’d say that these two markets are completely separate, so there’s very little or there’s no relationship whatsoever really between them. Cost – manufacturing costs in Europe in general are higher than they are in North America, because wood costs in Europe even though we are in a very good wood basket in Scotland, but on average, wood costs in Europe are higher than they are in North America.

However, the transportation costs from one to the other more than offsets that difference and that’s why you see very little or very few occasions where that makes any sense to exports always be from North America to Europe or vice versa.

John Tumazos

So presumably the prices are significantly higher than they’d be in the Southeast to justify the fiber cost?

Peter Wijnbergen

Exactly. Yes.

John Tumazos

Thank you.

Peter Wijnbergen

Thank you.

Operator

Your next question will come from Paul Quinn with RBC Capital Markets. Please go ahead.

Paul Quinn

Yes. Thanks the follow-up. Just a question on Val-d’Or noting that you’ve lost your wood license, what’s the risk that the Québec government allocates that to somebody else in the area. Is there a number of processing facilities that would use at fiber that would cause you concern, if you wanted to started that mill backup?

Peter Wijnbergen

Well, there are none today. There are always rumors of projects. And so that’s always a risk. But we continue to believe that Val-d’Or is the best alternative for the Aspen pulpwood in the region. And so I think when we’re ready to start up mill up in whatever format we want to start is up and in the future, we will reapply for wood allocation.

Paul Quinn

Okay. Then just switching over to Inverness, the percentage of exports now and then what do you expect once that mill is up, is that going to be a big area growth given the different press technology there?

Peter Wijnbergen

Yes. So it’s not quite 50-50 between domestic and let’s call it domestic sales and exports it’s a little bit heavier to the UK than that. And we should expect that growth over time to be more or less so that the proportion stays more or less the same.

John Tumazos

Okay. And just lastly on Japan you’ve referenced the slowdown in 2015 due to the consumption tax increase. We have another well let’s say the potential consumption tax increase, coming in Japan in 2017. So the idea would be 2016 would be a pickup for pulling demand in front of that, but 2017 would be again down is that the way I read that?

Peter Wijnbergen

It could well be, yes. I haven’t sort of spent much time thinking about 2017 Japanese sales yet. But we’re also working to take advantage of some legislative changes with regards to seismic requirements that will favor always be and that might help us negate some of that 2017 slowdown.

John Tumazos

All right that’s all I have.

Peter Wijnbergen

Potential slowdown sorry.

Robin Lampard

Thanks Paul.

Peter Wijnbergen

Thank you Paul.

Operator

That does conclude today’s question-and-answer session Mr. Weinberg at this time I’d like to turn the conference back to you for any additional or closing remarks.

A - Peter Wijnbergen

Well. Thank you Ron and as always Robin, Heather and I are available to respond to further questions. I want to thank you all for your participation. And I look forward to reporting on our next during, the next quarter call on our continued progress.

Operator

Ladies and gentlemen, this does conclude the conference call for today. Thank you for your participation. You may now disconnect your lines.

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