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Morningstar | Norbord Posts Surprisingly Strong EBITDA Margins Despite Plunging Panel Prices

Wood panel prices have fallen precipitously in recent months as supply bottlenecks eased and demand began to soften. Versus the prior quarter, the Random Lengths OSB Composite index fell 20% to average $379 per thousand square feet. A similar story played out in lumber prices over the same period. This led Norbord's sales to decline from an all-time-high of $707 million last quarter, to just $640 million in the third quarter. Consolidated adjusted EBITDA margins also contracted to 33%. On balance though, given the near-$100 drop in North American prices, Norbord's profits held up better than we expected. Following a slight increase to our production forecasts in Europe, we've increased our fair value slightly to CAD 39 per share from CAD 38. Our no-moat rating is unchanged.

The company's performance in North America remained solid during the quarter despite weaker pricing, with segment-adjusted EBITDA margins still a solid 37%. The restart of Norbord's Huguley, Alabama mill has progressed nicely, facilitating the 10% expansion in shipments. A testament to Norbord's fairly low-cost footprint was a solid 99% capacity utilization rate on its running mills, which we largely expect to be the case even if pricing weakens a bit further still. Pricing could prove weaker in the near term as supply and demand rebalance. However, we expect stronger U.S. homebuilding to support steady demand growth through 2022, before fading toward the long-term norm of 1.5 million dwellings.

Results out of Europe were also strong. While shipments remain down versus the prior year, it's partly due to ongoing efforts to further build out capacity at the newly renovated Inverness facility. In 2019, we expect a return to growth. The installation of a continuous press has also allowed significant profit gains, with EBITDA margins nearly doubling versus the prevailing levels up through last year. We've slightly lifted our production outlook for the segment going forward.