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Morningstar | Norbord's Management Executes Well Amid OSB Price Declines, Challenging Operating Conditions

While Norbord managed a remarkably strong 2018, supported by frothy panel prices early in the year, 2019 will grow more difficult for the wood products company. From the third to fourth quarter, adjusted EBITDA declined by roughly two thirds to $70 million. This is partially due to lower seasonal demand for OSB but was primarily driven by the sharp decline in benchmark panel prices amid weaker U.S. homebuilding. We had already been expecting relatively low prices, based on a fairly gradual climb in homebuilding matched to high levels of OSB supply in North America. With our assumptions intact, we maintain our CAD 39 per share fair value estimate and no-moat rating for Norbord.

Results in North America were the primary source of weakness, as benchmark OSB prices fell nearly 30% versus the third quarter. This drastically reduced segment adjusted EBITDA to $50 million from $190 million. In light of recent prices, management has made a number of wise moves, in our view. First, the company avoided taking on material debt during the latest upswing in prices, which reduces cash-flow concerns. Second, management avoided committing to a timeline for restarting a pipeline of mills. Finally, management waited for share prices to fall before engaging in significant repurchase activity. For this commodity business, we think these moves are among the best response to softening prices.

In Europe, adjusted EBITDA rose slightly to $24 million from $23 million the quarter prior. With its recent mill rebuild running smoothly and additional capacity growth in the pipeline, we see opportunities for this segment to consistently grow for the foreseeable future. In contrast with the U.S., OSB is fairly new to Europe and sees much less use. Given the favorable cost of producing OSB versus plywood, we think its introduction to Europe will be well received. Even in a volatile housing market, market share growth should drive resiliency in the Europe segment's profits.