The Working Forest Newspaper

Norbord Reports 2011 Results

January 27, 2012

By: Working Forest Staff

2011 HIGHLIGHTS

• Norbord achieved positive EBITDA of $45 million
• Increased European EBITDA by $7 million to $44 million
• Margin improvement program delivered $25 million of gains
• Set annual productivity records at 7 of 9 operating OSB mills
• Cordele, GA and Nacogdoches, TX mills completed 3+ years without a recordable injury
• Cowie, Scotland mill Norbord Safety Star certified, the first in Europe

Norbord Inc. reported EBITDA of $45 million in 2011 compared to $107 million in 2010 on 15% lower North American OSB prices.  North American operations generated EBITDA of $14 million versus $83 million in the prior year and European operations generated EBITDA of $44 million versus $37 million in the prior year.  In the fourth quarter of 2011, Norbord recorded positive EBITDA of $9 million versus $12 million in the previous quarter and $14 million in the fourth quarter of 2010.

Norbord recorded earnings of negative $11 million or $0.25 per share for the full year compared to earnings of positive $13 million or $0.30 per share (basic) in 2010.  The Company recorded earnings of negative $9 million or $0.21 per share in the fourth quarters of both 2011 and 2010.

"Our 2011 financial results are disappointing in absolute terms," said Barrie Shineton, President and CEO.  "However, I am pleased that Norbord's operations in both North America and Europe performed exceptionally well this year.  We achieved $25 million of margin improvement gains, reflecting an outstanding effort across our company in reducing manufacturing costs and increasing mill productivity.  In North America, these gains allowed us to maintain positive EBITDA despite a 15% drop in OSB prices.  In Europe, our business held up surprisingly well in the face of increasing economic uncertainty.  We increased shipments by 10% and stronger product pricing offset sharply higher raw material costs."

"Early indicators suggest some upside in both demand and price in North America as we move into the first quarter of 2012.  The OSB supply chain is lean and less capacity appeared to be available at the end of last year.  And, I believe our European business will continue to perform well, in spite of the evolving sovereign debt crisis that continues to dominate media headlines."

Market Conditions

The seasonally-adjusted US housing starts number for December was 657,000, 25% ahead of last year's year-end pace.  Full year housing starts, including multifamily, were approximately 610,000 in 2011, up 3% from 590,000 in 2010. However, the single family component, which is more important to the OSB industry, declined by 9% in 2011.

North Central benchmark OSB prices dropped from a peak of $218 per thousand square feet (Msf) (7⁄16-inch basis) in early January to a low of $165 per Msf in mid-May before stabilizing in a tighter range for the second half of the year.  The North Central benchmark OSB price averaged $186 per Msf in 2011 compared to $219 per Msf in 2010, as the exceptional price spike of Q2 2010 did not repeat this year. In the South East region, where approximately 55% of Norbord's North American OSB capacity is located, prices remained at a discount to the North Central region, averaging $169 per Msf compared to $198 per Msf last year.

In the fourth quarter, North Central benchmark OSB prices averaged $190 per Msf, up $6 from the third quarter and in line with the fourth quarter of 2010. South East prices averaged $166 per Msf in the quarter, down $3 from the third quarter and in line with the fourth quarter of 2010.

In the UK, the market remained steady with flat year-over-year housing starts, stable home prices and a more positive mortgage lending environment.  In Germany, Norbord's largest Continental market, housing starts averaged 20% higher than 2010.

Norbord's European panel markets remained relatively robust throughout 2011.  All panel prices increased, reflecting industry efforts to recover substantially higher raw material input prices. OSB prices peaked mid-year and averaged 8% higher year-over-year. Particleboard and MDF prices firmed throughout the year, increasing 15% and 14%, respectively.  Norbord expects this positive dynamic to continue at least into the first half of 2012 despite declining consumer confidence across Europe and the negative impact of the European sovereign debt crisis.

In 2011, European currencies remained in a range that continued to benefit Norbord's primarily UK-based operations. Exports from the Company's UK-based manufacturing plants to Continental Europe increased again this year.

Performance

In North America, OSB shipment volumes for the full year decreased a modest 3% compared to the prior year. Norbord's operating OSB mills ran at approximately 80% of their capacity in 2011, compared to 85% in 2010, due to more curtailments taken to manage inventory levels during the year. Including the indefinitely closed mills in Huguley, Alabama and Jefferson, Texas, the North American operations ran at approximately 65% of capacity in 2011 versus 70% in the prior year.

Norbord's North American OSB cash production costs per unit decreased by 1% versus 2010.  Lower raw materials usage and improved productivity decreased unit costs by 4%, but most of these gains were offset by higher resin prices, the stronger Canadian dollar and higher maintenance curtailment costs in the fourth quarter.

In Europe, panel shipments increased by 10% over the prior year.  Norbord's European mills operated at full capacity in 2011 with the exception of a three-week shut for the Cowie, Scotland particleboard mill upgrade and planned holiday and maintenance curtailments.  Norbord intends to increase the stated capacity of the Genk, Belgium OSB mill from 260 MMsf (3⁄8-inch basis) to 350 MMsf effective year-end 2011, reflecting a step change improvement in operating efficiency.

Norbord's Margin Improvement Program (MIP) delivered $25 million in gains in 2011.  In North America, the resin technology conversion contributed more than half of these benefits through productivity and raw material usage improvements, effectively offsetting the negative impact of higher resin prices and other uncontrollable costs.

Capital investments totaled $25 million in 2011 versus $16 million in 2010. The increase is primarily due to the Cowie, Scotland particleboard mill upgrade in the second quarter.  Norbord is planning for capital investments at the same $25 million level in 2012, including a pilot installation of new fines screening technology at the Nacogdoches, Texas mill.  Capital expenditures can be constrained to $15 million if market conditions warrant.

Operating working capital increased by $18 million during the year to $28 million at year-end.  The biggest component of this increase was higher accounts receivable related to stronger European panel prices and shipments.  Norbord's accounts receivable metrics remain in line with prior periods.

At year-end, Norbord had unutilized liquidity of $350 million, consisting of $267 million in undrawn revolving bank lines and $83 million in cash and cash equivalents.  The Company's tangible net worth was $343 million and net debt to total capitalization on a book basis was 51%, well within bank covenants.

Developments

This is Norbord's first full year reporting under International Financial Reporting Standards (IFRS).  Extensive transitional disclosure was provided in the 2010 and each interim 2011 management's discussion and analysis and consolidated financial statements. There was no material impact to earnings or cash flow as a result of the Company's conversion to IFRS.

As announced last quarter, Norbord applied to the Toronto Stock Exchange (TSX) and received approval to renew its normal course issuer bid in accordance with TSX rules, beginning December 21, 2011.  Under the bid, the Company may purchase up to 2,178,705 of its common shares, which represented approximately 5% of the 43.6 million issued and outstanding common shares as of November 30, 2011.  Purchases under the bid will terminate on the earlier of December 20, 2012, the date Norbord completes its purchases pursuant to the notice of intention to make a normal course issuer bid filed with the TSX or the date of notice by Norbord of termination of the bid.  No share purchases were made under the Company's previous normal course issuer bid that expired on September 16, 2011.

Norbord