Norbord Inc (
Q3 2010 Earnings Call
October 27, 2010 11:00 a.m. ET
Barrie Shineton - President & CEO
Robin Lampard - SVP & CFO
Pierre Lacroix - Desjardins Securities
Sean Steuart - TD Newcrest
Paul Quinn - RBC Capital Markets
Jonathan Lethbridge - CIBC
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.
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.
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.