October 28, To Our Shareholders,

Transcription

1 Peter Wijnbergen President & CEO October 28, To Our Shareholders, The North American OSB market remained disappointing this quarter as the ramp-up of industry capacity continues to outpace a more gradual than expected recovery in US housing starts. This was reflected in Norbord s financial performance, as we generated just $15 million of EBITDA in. However, the metrics we can control continued to show strong improvement. Our North American shipments increased 7% year-to-date and we continued to benefit from our distribution channel diversification with volumes to our Big Box and industrial customers up even further. All our mills continued to operate well and four of them La Sarre, Joanna, Inverness and Genk set new quarterly production records. In North America, our operations are producing at stated capacity and maintaining manufacturing cost reductions, despite the significant downtime we took in the quarter. In Europe, our production volume exceeded stated capacity even though the Cowie particleboard mill undertook a two-week project shutdown. Our excellent operational performance as well as paybacks from our recent capital investments are driving accelerating Margin Improvement Program (MIP) results. Yearto-date, we ve realized $12 million in MIP gains as our mills are more efficiently producing increased volumes and more higher-margin products. Despite the negative headlines coming out of Europe, our business there continued to generate a steady EBITDA contribution for the 18th quarter in a row. So far this year, our panel shipments are up 6% and we have achieved double digit sales growth in our core UK and German markets. The long-term market fundamentals remain favourable for OSB capacity expansion in Europe and we continue to develop our plans on this front. I am excited about the two major capital projects we completed this quarter. First, we invested a total of $30 million over the past 12 months in our Joanna, South Carolina mill to completely redesign, rebuild and automate the wood handling section of the plant. We tied in this new equipment in September and have already been able to run the mill at 25% above its stated capacity on a weekly basis. This was a unique opportunity to debottleneck our big continuous press and will position us well to serve the growing mid- Atlantic region. Second, we invested $8 million to rebuild and enhance the dryer and energy system in our Cowie, Scotland particleboard mill. This will allow us to improve the plant s efficiency and replace natural gas with biomass in the drying process. This project was completed in September and early results are also positive. 1

2 The US housing market the largest driver of OSB demand continues to recover, though at a more gradual pace than industry experts had originally predicted. Housing starts are expected to increase by about 8% this year to almost 1 million. Looking ahead to 2015, housing economists forecast starts will continue to improve by approximately 15% supporting increased demand for our products. In the near term, however, we will continue to manage our production schedule as needed to adjust to the typically slowerdemand winter period. We are grateful for your ongoing support of Norbord. Our strategic initiatives put us in an excellent position to take full advantage of the US housing recovery and growing demand in our core European markets. Our customer partnerships are strong and we continue to make inroads in our key markets. Our mills are running better each year. I remain confident that Norbord s financial performance will improve in the coming quarters and years. This letter includes forward-looking statements, as defined by applicable securities legislation including statements related to our strategy, projects, plans, future financial or operating performance and other statements that express management s expectations or estimates of future performance. Often, but not always, forward-looking statements can be identified by the use of words such as expect, suggest, support, believe, should, potential, likely, continue, forecast, plan, indicate, consider, future, or variations of such words and phrases or statements that certain actions may, could, must, would, might, or will be undertaken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Norbord to be materially different from any future results, performance or achievement expressed or implied by the forward-looking statements. See the cautionary language in the Forward-Looking Statements section of the Management s Discussion and Analysis dated January 29, and Management s Discussion and Analysis dated October 27,. 2

3 News Release NORBORD REPORTS THIRD QUARTER RESULTS; DECLARES QUARTERLY DIVIDEND Note: Financial references in US dollars unless otherwise indicated. HIGHLIGHTS EBITDA of $15 million Earnings of $5 million or $0.09 per diluted share North American shipments up 7% year-to-date; European shipments up 6% Quarterly production records at four OSB mills Declared quarterly dividend of CAD $0.60 per share TORONTO, ON (October 28, ) Norbord Inc. (TSX: NBD) today reported EBITDA of $15 million in the third quarter of compared to $33 million in the second quarter of and $45 million in the third quarter of. North American operations generated EBITDA of $7 million in the quarter versus $24 million in the prior quarter and $36 million in the same quarter last year. European operations generated EBITDA of $11 million in the quarter versus $12 million in both the prior quarter and the same quarter last year. In response to challenging North American OSB market conditions, we moved most of our annual maintenance shuts forward to the third quarter and curtailed additional production at several mills, said Peter Wijnbergen, President and CEO. Despite this downtime, our mills ran very well producing at stated capacity and holding onto manufacturing cost improvements achieved in the first half of the year. We generated $12 million in Margin Improvement gains so far this year and our recent capital investments are starting to pay back. In the near term, I expect North American OSB pricing to continue to move sideways with the slower demand we traditionally experience at the end of the year. However, I remain optimistic that our OSB sales will improve next year as the US housing recovery continues to unfold. Our European performance remains strong, with year-to-date shipments up 6% on demand growth in our core UK, German and Benelux markets. While OSB prices have been under pressure this year, we did not see any significant impact on our overall results in the third quarter. Our mills continue to perform well and are producing above stated capacity, a trend I expect will continue into next year. Norbord recorded earnings of $5 million or $0.09 per share (basic and diluted) in the third quarter of compared to $11 million or $0.21 per share ($0.20 per diluted share) in the prior quarter and $27 million or $0.51 per share ($0.50 per diluted share) in the third quarter of. Reported earnings in the current and comparative periods included the following one-time items: 3

4 $ millions Q2 Earnings before one-time items $ - $ 11 $ 18 $ 18 $ 138 Non-recurring income tax recovery Earnings, as reported $ 5 $ 11 $ 27 $ 23 $ 147 Market Conditions In North America, year-to-date US housing starts were 10% higher than the same period in and permits were 6% higher. US single family housing starts, which are more important for the OSB industry, were 4% better versus last year. The consensus forecast from US housing economists is currently just below 1.0 million starts in, which would still be an 8% improvement over last year. The North Central benchmark OSB price continued to trade in a tight range in the third quarter, while the South East benchmark OSB price trended lower. The North Central benchmark averaged $216 per thousand square feet (Msf) (7 16-inch basis), compared to $219 per Msf in the previous quarter and $252 per Msf in the same quarter last year. In the South East region, where more than half of Norbord s North American capacity is located, benchmark prices averaged $177 per Msf, compared to $199 per Msf in the prior quarter and $207 per Msf in the same quarter last year. Norbord s core European panel markets in the UK, Germany and Benelux (where over 90% of the Company s panels are shipped) remained strong in the third quarter. Particleboard prices were up and MDF prices held firm. However, OSB prices are under pressure as eastern European supply is being redirected toward the west due to the ongoing conflict in the Ukraine. As a result of the lower OSB prices, third quarter average panel prices were 3% lower than both the prior quarter and the same quarter last year. Performance In North America, Norbord s OSB shipments were in line with both the prior quarter and the same quarter last year and increased 7% year-to-date. The North American OSB mills produced at approximately 80% of stated capacity (including the two curtailed mills in Huguley, Alabama and Val-d Or, Quebec), compared to 85% in the prior quarter and 80% in the same quarter last year. The decrease versus the prior quarter is due to the timing of annual maintenance shuts and additional production curtailments taken during the quarter. Despite this, two of the Company s North American OSB mills achieved quarterly production records. Norbord s North American OSB cash production costs per unit (before mill profit share) increased by 3% versus both the prior quarter and the same quarter last year due to the timing impact of annual maintenance shuts and higher year-over-year raw material prices. Unit costs decreased by 1% year-todate. Excluding the impact of raw material price changes and annual maintenance shuts, unit costs were flat quarter-over-quarter, decreased 3% year-over-year and decreased 4% year-to-date due to lower raw material use and improved mill productivity. Norbord continues to work on rebuilding the press line at the curtailed Huguley, Alabama mill to prepare it for restart. The Company has not set a restart date and will do so only when it is sufficiently clear that customers require more product. Norbord does not expect to restart its curtailed mill in Val-d Or, Quebec in, but will continue to monitor market conditions. 4

5 In Europe, Norbord s shipments increased 10% versus the prior quarter, 13% versus the same quarter last year and 6% year-to-date. During the quarter, Norbord completed a dryer upgrade project at the Cowie, Scotland particleboard mill. Despite the downtime associated with this project, the European mills produced at approximately 100% of stated capacity in the quarter, compared to 105% in the prior quarter and 95% in the same quarter last year. The Company s two European OSB mills achieved quarterly production records. Norbord s mills delivered Margin Improvement Program (MIP) gains of $12 million year-to-date from improved productivity, lower raw material use and a richer value-added product mix, partially offset by the timing impact of annual maintenance shuts. Capital investments totaled $24 million in the quarter and $66 million year-to-date. The full year target is now estimated at $75 million as the Company took the opportunity to complete several strategic projects during the annual maintenance shuts conducted in the third quarter. Key projects this year include the rebuild of the wood handling end at the Joanna, South Carolina mill, the dryer upgrade at the Cowie, Scotland particleboard mill and the fines screening project at the Cordele, Georgia mill. Also included is approximately $10 million for preliminary work to rebuild the press line at the mothballed Huguley, Alabama mill. Further investment to prepare this mill for restart has been deferred to Operating working capital was $76 million compared to $96 million in the prior quarter and $66 million in the prior year. Working capital decreased quarter-over-quarter, reflecting lower finished goods inventory in Europe that was built up during the prior quarter in anticipation of the dryer project shut at the Cowie, Scotland particleboard mill. The year-over-year increase was due to higher operating and maintenance supplies inventory as a result of significant capital projects and the ramping up of the Jefferson, Texas mill. At quarter-end, Norbord had unutilized liquidity of $396 million, consisting of $54 million in cash and $342 million in unused credit lines. The Company s tangible net worth was $429 million and net debt to total capitalization on a book basis was 48%. Both ratios remain well within bank covenants. Dividend The Board of Directors declared a quarterly dividend of CAD $0.60 per common share, payable on December 21, to shareholders of record on December 1,. Additional Information Norbord s letter to shareholders, news release, management s discussion and analysis, consolidated unaudited interim financial statements and notes to the financial statements have been filed on SEDAR ( and are available in the investor section of the Company s website at Shareholders are encouraged to read this material. Conference Call Norbord will hold a conference call for analysts and institutional investors on Tuesday, October 28, at 11:00 a.m. ET. The call will be broadcast live over the Internet via and A replay number will be available approximately one hour after completion of the call and will be accessible until November 28, by dialing or The passcode is Audio playback and a written transcript will be available on the Norbord website. 5

6 An accompanying presentation will be available in the Investors/Conference Call section of prior to the start of the call. Norbord Profile Norbord Inc. is an international producer of wood-based panels with assets of more than $1 billion, employing approximately 1,950 people at 13 plant locations in the United States, Europe and Canada. Norbord is one of the world s largest producers of oriented strand board (OSB). In addition to OSB, Norbord manufactures particleboard, medium density fibreboard (MDF) and related value-added products. Norbord is a publicly traded company listed on the Toronto Stock Exchange under the symbol NBD. Contact: Heather Colpitts Manager, Corporate Affairs Tel. (416) info@norbord.com -end- This news release contains forward-looking statements, as defined in applicable legislation, including statements related to our strategy, projects, plans, future financial or operating performance and other statements that express management s expectations or estimates of future performance. Often, but not always, words such as expect, believe, forecast, likely, support, target, consider, continue, suggest, intend, should, appear, would, will, will not, plan, can, may, and other expressions which are predictions of or indicate future events, trends or prospects and which do not relate to historical matters identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Norbord to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Although Norbord believes it has a reasonable basis for making these forward-looking statements, readers are cautioned not to place undue reliance on such forward-looking information. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties, both general and specific, which contribute to the possibility that the predictions, forecasts and other forward-looking statements will not occur. Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include: general economic conditions; risks inherent with product concentration; effects of competition and product pricing pressures; risks inherent with customer dependence; effects of variations in the price and availability of manufacturing inputs; risks inherent with a capital intensive industry; and other risks and factors described from time to time in filings with Canadian securities regulatory authorities. Except as required by applicable laws, Norbord does not undertake to update any forward-looking statements, whether as a result of new information, future events or otherwise, or to publicly update or revise the above list of factors affecting this information. See the Caution Regarding Forward-Looking Information statement in the March 3, Annual Information Form and the cautionary statement contained in the Forward-Looking Statements section of the Management s Discussion and Analysis dated January 29, and Management s Discussion and Analysis dated October 27,. Norbord defines EBITDA as earnings before finance costs, income taxes, depreciation and non-recurring items. EBITDA is a non-international Financial Reporting Standards (IFRS) financial measure, does not have any standardized meaning prescribed by IFRS and is therefore unlikely to be comparable to similar measures presented by other companies. See Non-IFRS Financial Measures in Norbord s Management Discussion and Analysis dated January 29, and Management s Discussion and Analysis dated October 27, for a quantitative reconciliation of EBITDA to earnings (the most directly comparable IFRS measure). 6

7 OCTOBER 27, Management s Discussion and Analysis INTRODUCTION The Management s Discussion and Analysis (MD&A) provides a review of the significant developments that impacted Norbord s performance during the period. The information in this section should be read in conjunction with the unaudited interim financial statements as at and for the three and nine months ended September 27,, which follow this MD&A, and the audited annual financial statements for the year ended December 31, and the annual MD&A contained in the Annual Report. Financial data provided has been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Additional information on Norbord, including documents publicly filed by the Company, is available on the Company s website at or the System for Electronic Document Analysis and Retrieval (SEDAR) at All financial references in the MD&A are stated in US dollars, unless otherwise noted. Some of the statements included or incorporated by reference in this MD&A constitute forward-looking statements within the meaning of applicable securities legislation. Forward-looking statements are based on various assumptions and are subject to various risks. See the cautionary statements contained in the Forward-Looking Statements section. Earnings before finance costs, income taxes and depreciation (EBITDA), cash provided by operating activities per share, operating working capital, total working capital, capital employed, return on capital employed (ROCE), return on equity (ROE), net debt, tangible net worth, net debt to capitalization, book basis, and net debt to capitalization, market basis, are non-ifrs financial measures described in the Non-IFRS Financial Measures section. Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Where appropriate, a quantitative reconciliation of the non-ifrs financial measure to the most directly comparable IFRS measure is also provided. BUSINESS OVERVIEW & STRATEGY Norbord is an international producer of woodbased panels with 13 plant locations in the United States, Europe and Canada. Norbord is one of the world s largest producers of oriented strand board (OSB) with an annual capacity of 5.1 billion square feet (Bsf) ( 3 8-inch basis). The core assets of Norbord s OSB business are located in the South East region of the US. The Company is also a significant producer of wood-based panels in the United Kingdom. The geographical breakdown of panel production capacity is approximately 73% in North America and 27% in Europe. Norbord s business strategy is focused entirely on the wood panels sector in particular OSB in North America and Europe. OSB Accounts for 85% of Norbord s Business Particleboard (EU), 9% OSB (EU), 12% MDF (EU), 6% Production Capacity by Product NA = North America EU = Europe OSB (NA), 73% Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks. See the cautionary statement contained in the Forward-Looking Statements section. 7

8 Norbord s financial goal is to achieve top quartile ROE and ROCE among North American forest products companies. As Norbord operates in a cyclical commodity business, Norbord interprets its financial goals over the cycle. Protecting the balance sheet is an important element of Norbord s financing strategy. Management believes that its record of superior operational performance and prudent balance sheet management should enable it to access public and private capital markets, subject to financial market conditions. At period-end, Norbord had unutilized liquidity of $396 million, comprising $54 million in cash, $242 million in unutilized revolving bank lines and $100 million undrawn under its accounts receivable securitization program. SUMMARY North American OSB demand continues to improve with US housing starts up 10% and single-family starts up 4% year-to-date. However, industry supply from the six (re)started OSB mills continues to outstrip this growing demand. As a result, North Central benchmark OSB prices averaged $216 per thousand square feet (Msf) (7 16-inch basis) in the quarter, down slightly versus the second quarter, while the South East averaged $177 per Msf, down 11% versus the second quarter. The $39 regional price spread between the North Central and South East benchmark OSB prices reflects the ongoing ramp-up of recently restarted capacity and the uneven pace of the housing recovery in the South East. Year-to-date, North Central benchmark OSB prices averaged $218 per Msf, down 36% over the prior year. Against this challenging market backdrop, Norbord pulled forward the timing of some scheduled annual maintenance shuts into the third quarter and curtailed additional production. Norbord recorded EBITDA of $15 million in the third quarter, down $18 million compared to the prior quarter and down $30 million compared to the same quarter last year. Despite the negative impact of the downtime and maintenance work undertaken in the quarter, Norbord's operating mills continued to run well producing at approximately 100% of stated capacity and maintaining production cost gains achieved in the first half of the year. The Company has generated significant Margin Improvement Program (MIP) gains as the paybacks from recent capital investments ramp up. Norbord s European panel business continues to provide steady results that are in line with both comparative quarters. Norbord recorded earnings of $5 million ($0.09 per basic share and diluted share) in the third quarter of compared to $11 million ($0.21 per basic share; $0.20 per diluted share) in the prior quarter and $27 million ($0.51 per basic share; $0.50 per diluted share) in the third quarter of. Earnings decreased both year-over-year and quarter-overquarter due to lower North American OSB prices and the timing of scheduled annual maintenance shuts. Earnings in the third quarter of include a $5 million ($0.09 per basic and diluted share) non-recurring income tax recovery. Earnings in the third quarter of include a $9 million ($0.17 per basic and diluted share) non-recurring income tax recovery. Year-to-date, Norbord recorded earnings of $23 million ($0.43 per basic and diluted share) compared to earnings of $147 million ($2.93 per basic share; $2.76 per diluted share) in the prior year. The year-to-date earnings decrease is primarily driven by lower North American OSB prices. Housing market activity, particularly in the US, influences OSB demand and pricing. With over 70% of the Company s panel capacity located in North America, fluctuations in North American OSB demand and prices significantly affect Norbord s results. Year-to-date, approximately 50% of Norbord s OSB sales volume went into the new home construction sector. The remainder went into repair and remodelling, light commercial construction and industrial applications. Management believes this distribution channel diversity provides opportunities to maximize profitability while limiting the Company s relative exposure to the new home construction segment during periods of soft housing activity. As the US housing market recovery progresses, Norbord's shipment volume to the new home construction sector will continue to grow. On the cost side, fluctuations in raw material input prices significantly impact operating costs. Resin, fibre and energy account for approximately 65% of Norbord's OSB cash production costs. The prices for these global commodities are determined by economic and market conditions. In the first three quarters of, raw material input prices were higher than the same period last year. Management expects some relief on resin prices in the fourth quarter as oil prices Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks. See the cautionary statement contained in the Forward-Looking Statements section. 8

9 have declined more than 20% in the third quarter. Norbord will continue to pursue aggressive MIP initiatives to reduce raw material usages and improve productivity to offset potentially higher uncontrollable costs. The long-term fundamentals that support North American housing and OSB demand such as new household formations and immigration are predicted to be strong. Norbord s European operations are exposed to different market dynamics relative to the North American operations and this has provided meaningful market and geographic diversification for the Company. Combined with Norbord s strong financial liquidity and solid customer partnerships, the Company is well positioned to benefit from the continuing recovery in housing markets. RESULTS OF OPERATIONS (US $ millions, except per share information, unless otherwise noted) Q2 Return on capital employed (ROCE) 7% 15% 21% 12% 42% Return on equity (ROE) 5% 10% 21% 7% 45% Earnings Per Common Share Basic earnings Diluted earnings Dividends paid Sales ,041 EBITDA Depreciation Investment in property, plant and equipment Shipments (MMsf 3 8") North America ,616 2,452 Europe ,264 1,192 Indicative Average OSB Price North Central ($/Msf 7 16") South East ($/Msf 7 16") Europe ( /m 3 ) European indicative average OSB price represents the gross delivered price to the largest Continental market. Total sales in the third quarter of were $302 million, compared to $311 million in both the second quarter of and the third quarter of. Quarter-over-quarter, sales decreased by $9 million or 3%. In North America, sales decreased by 8% due to both lower pricing (mainly in the South) and lower shipment volumes. In Europe, sales increased by 4% due to higher panel shipment volumes. Year-over-year, sales decreased by $9 million or 3% and year-to-date, sales decreased by $125 million or 12%. In North America, sales decreased by 14% year-over-year and 25% year-to-date due to significantly lower OSB prices that were partially offset by higher shipment volumes. In Europe, sales increased by 16% year-over-year and 14% yearto-date due to higher shipment volumes and the foreign exchange translation impact of a stronger Pound Sterling relative to the US dollar. Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks. See the cautionary statement contained in the Forward-Looking Statements section. 9

10 Markets North America is the principal market destination for Norbord s products. North American OSB comprised 67% of Norbord s panel shipments by volume year-todate. Therefore, results of operations are most affected by volatility in North American OSB prices and demand. Europe comprised 33% of total shipments by volume year-to-date. European panel prices are less volatile than North American prices and therefore, affect Norbord s results to a lesser degree. Norbord Focused on North American OSB Market Panel Shipments (YTD Volume by Market) European Panels 33% North American OSB 67% In North America, year-to-date US housing starts were 10% higher than the same period in and permits were 6% higher. US single family housing starts, which are more important for the OSB industry, were only 4% better versus last year. The consensus forecast from US housing economists currently stands at just below 1.0 million starts in, which would still be an 8% improvement over last year. Despite the significant rebound in housing starts since 2009, total starts remain well below the long-term average of 1.5 million. The North Central benchmark OSB price continued to trade in a tight range in the third quarter, while the South East benchmark OSB price trended lower. The North Central benchmark OSB price averaged $216 per Msf for the quarter, compared to $219 per Msf in the previous quarter and $252 per Msf in the same quarter last year. In the South East region, where approximately 55% of Norbord s North American capacity is located, prices averaged $177 per Msf in the third quarter, compared to $199 per Msf in the prior quarter and $207 per Msf during the same quarter last year. Approximately half of Norbord s third quarter OSB sales volume went into the new home construction sector, while the other half went into repair and remodelling, light commercial construction and industrial applications. Management believes that this distribution channel diversity provides opportunities to maximize profitability while limiting the Company s relative exposure to the new home construction segment during periods of soft housing activity. Management expects the Company s sales volume to the new home construction sector will continue to grow as US housing recovers to more normal levels. Norbord s core European panel markets in the UK, Germany and Benelux (over 90% of Norbord s shipments) remained strong in the third quarter. Year-over-year, particleboard prices increased by 8% and MDF prices were unchanged. Versus the prior quarter, particleboard and MDF prices both held firm. However, OSB prices decreased by 11% year-over-year and 5% quarter-over-quarter as eastern European supply was redirected toward the west due to the ongoing conflict in the Ukraine. As a result, third quarter average panel prices were 3% lower than both the prior quarter and the same quarter last year. Historically, the UK has been a net importer of panel products. For the past several years, the Pound Sterling has traded in a range relative to the Euro that has been advantageous to Norbord s primarily UK-based operations as it has improved sales opportunities within the UK, slowed the flow of Continental European imports and supported Norbord s export program into the Continent. The Pound Sterling traded between 1.25 and 1.28 against the Euro in the third quarter, a range that continued to benefit Norbord. Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks. See the cautionary statement contained in the Forward-Looking Statements section. 10

11 Operating Results EBITDA (US $ millions) Q2 North America $ 7 $ 24 $ 36 $ 48 $ 234 Europe Unallocated (3) (3) (3) (9) (10) Total $ 15 $ 33 $ 45 $ 75 $ 258 Norbord generated EBITDA of $15 million in the third quarter of compared to $33 million in the second quarter of and $45 million in the third quarter of. Year-to-date, the Company generated EBITDA of $75 million compared to $258 million in the prior year. Lower North American OSB prices were the primary driver of the lower EBITDA versus all comparative periods. In addition, the Company pulled forward the timing of some scheduled annual maintenance shuts into the third quarter of which drove higher maintenance costs. Major components of the change in EBITDA versus comparative periods are summarized in the variance table below: (US $ millions) vs. vs. vs. Q2 EBITDA current period $ 15 $ 15 $ 75 EBITDA comparative period Variance $ (18) $ (30) $ (183) Mill nets 1 (16) (29) (200) Volume 2 (2) 1 15 Key input prices 3 2 (1) (8) Key input usage Mill profit share and bonus Maintenance and other 4 (6) (7) (6) Total $ (18) $ (30) $ (183) 1 The mill nets variance represents the change in realized pricing across all products. Mill nets are calculated as sales (net of outbound freight costs) divided by shipment volume. 2 The volume variance represents the impact of shipment volume changes across all products. 3 The key inputs include fibre, resin, wax and energy. 4 The maintenance and other category covers all remaining variances including labour and benefits, and the impact of foreign exchange. North America North American operations generated EBITDA of $7 million in the third quarter of versus $24 million in the second quarter of and $36 million in the third quarter of. Quarter-over-quarter, EBITDA decreased by $17 million which was primarily driven by lower OSB prices and the timing of scheduled annual maintenance shuts, partially offset by higher shipment volume and lower resin usages and prices. Average North Central OSB benchmark prices remained stable, while average South East OSB benchmark prices were down 11% or $22 per Msf versus the prior quarter. Year-over-year, EBITDA decreased by $29 million and year-to-date EBITDA decreased by $186 million. The decrease versus both comparative periods was primarily due to significantly lower OSB prices, as well as higher fibre and resin prices and higher maintenance shut costs. The benefit of higher shipment volumes, lower resin and wax usages and lower mill profit share attributed to the lower results provided a partial offset. Year-over-year, average North Central OSB benchmark prices decreased by 14% or $36 per Msf versus the same quarter last year while average South East OSB benchmark prices were down 14% or $30 per Msf. Year-to-date, average North Central OSB Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks. See the cautionary statement contained in the Forward-Looking Statements section. 11

12 benchmark prices decreased by 36% or $121 per Msf while average South East OSB benchmark prices were down 38% or $116 per Msf. Quarter-over-quarter and year-over-year, Norbord s North American OSB cash production costs per unit (excluding mill profit share) increased by 3% driven by the timing of scheduled annual maintenance shuts. Year-over-year, raw material prices were higher, while they decreased quarter-over-quarter as Benzene prices (which is a key resin feedstock) trended down from record highs. Year-to-date, unit costs decreased by 1% driven by lower raw material usages and higher production volume which more than offset higher raw material prices and the timing of scheduled annual maintenance shuts. Excluding the impact of raw material price changes and maintenance shuts, unit costs were flat quarter-over-quarter, decreased 3% year-over-year and decreased 4% year-to-date due to improved productivity and lower raw material usages. Norbord s North American OSB mills produced at approximately 80% of stated capacity in the third quarter of compared to approximately 85% in the second quarter of and 80% in the third quarter of. The decrease versus prior quarter is due to the timing of scheduled annual maintenance shuts and additional production curtailments. Despite this, two of the Company s OSB mills achieved quarterly production records. Excluding the indefinitely curtailed mills (Huguley, Alabama and Val-d Or, Quebec), Norbord's operating mills produced at approximately 100% of stated capacity in the third quarter of compared to 100% in both the second quarter of and the third quarter of. Year-over-year, operating mill capacity utilization remained flat as the impact of maintenance shuts during the quarter was offset by the inclusion of the Jefferson, Texas mill's capacity which was still ramping up in the third quarter of. Production has remained indefinitely suspended at the Huguley, Alabama mill since the first quarter of 2009, and at the Val-d'Or, Quebec mill since the third quarter of Norbord does not currently expect to restart its curtailed mill in Val-d'Or, Quebec in, but will continue to monitor market conditions. As previously announced, Norbord has begun rebuilding the press line at the curtailed Huguley, Alabama mill to prepare it for restart. The Company has not set a restart date and will only do so when it is sufficiently clear that customers require more product. These two mills represent 19% of Norbord's capacity in North America. Europe European operations generated EBITDA of $11 million in the third quarter of versus $12 million in both the second quarter of and third quarter of. Year-to-date, European operations generated EBITDA of $36 million in versus $34 million in. Quarter-over-quarter, the slight decrease in EBITDA was due to lower average panel prices, partially offset by lower raw material prices and usages. Year-over-year and year-to-date, higher average MDF and particleboard prices, higher shipment volumes, and the foreign exchange translation impact of a stronger Pound Sterling offset the impact of lower OSB prices, and higher labour and supplies and maintenance costs associated with additional down days taken relative to the comparative periods. In the quarter, Norbord completed a dryer upgrade at the Cowie, Scotland particleboard mill. Notwithstanding the downtime associated with this project, Norbord s European mills produced at approximately 100% of stated capacity in the third quarter of compared to approximately 105% in the second quarter of and approximately 95% in the third quarter of. The Company's two OSB mills achieved quarterly production records. Margin Improvement Program (MIP) Margin improvement represents the Company s single most important operating focus. The prices of resin, fibre and energy, which account for approximately 65% of Norbord s OSB cash production costs, are determined by economic and market conditions and are, to a large degree, uncontrollable. These costs have risen through most of the past decade, particularly in as the broader economic recovery gained traction. The Company realized MIP gains of $12 million year-to-date. These gains, measured relative to at constant prices and exchange rates, limited the impact that higher raw material prices had on year-to-date earnings. Contributions to MIP included improved Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks. See the cautionary statement contained in the Forward-Looking Statements section. 12

13 productivity, lower raw material usages, and a richer value-added product mix offset partially by the timing of scheduled annual maintenance shuts. FINANCE COSTS, DEPRECIATION AND INCOME TAX (US $ millions) Q2 Finance costs $ 8 $ 7 $ 9 $ 23 $ 27 Depreciation Income tax (recovery) expense (13) - (5) (14) 42 Depreciation The Company uses the units-of-production depreciation method for its production equipment. The fluctuation in quarterly depreciation expense reflects relative changes in production levels by mill. Income Tax An income tax recovery of $13 was recorded on the pre-tax loss of $8 million in the third quarter of. Year-to-date, an income tax recovery of $14 million was recorded on pre-tax income of $9 million. The effective tax rate differs from the statutory rate principally due to rate differences on foreign activities and fluctuations in relative currency values. Included in the third quarter of is a $5 million ($0.09 per basic and diluted share) non-recurring income tax recovery which is comprised of: (i) the recognition and utilization of certain tax attributes that offset taxes previously expensed; and (ii) the recognition of a previously unrecognized deferred tax asset. LIQUIDITY AND CAPITAL RESOURCES (US $ millions, except per share information, unless otherwise noted) Q2 Cash provided by operating activities $ 22 $ 20 $ 63 $ 16 $ 209 Cash provided by operating activities per share Operating working capital Total working capital Investment in property, plant and equipment Net debt to capitalization, market basis 22% 19% 12% Net debt to capitalization, book basis 48% 44% 28% At period-end, Norbord had unutilized liquidity of $396 million, comprising $54 million in cash, $242 million in unutilized revolving bank lines and $100 million undrawn under the accounts receivable securitization program. Senior Secured Notes Due 2017 The Company s senior secured notes due 2017 bear an interest rate that varies with the Company s credit ratings, which are currently Ba2, and, accordingly, the interest rate on the notes is 7.70%. At October 27,, Norbord s long-term debt and issuer ratings were: DBRS Standard & Poor s Ratings Services Moody s Investors Service Secured Notes BB BB- Ba2 Issuer BB BB- Ba2 Outlook Stable Positive Stable Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks. See the cautionary statement contained in the Forward-Looking Statements section. 13

14 Senior Secured Notes Due 2020 In November, the Company issued $240 million in senior secured notes due 2020 with an interest rate of 5.375%. The notes rank pari passu with the Company s existing senior secured notes due in 2017 and committed revolving bank lines. The Company used the proceeds to early redeem the existing $165 million 6.25% senior secured notes due 2015 and $75 million 6.25% senior unsecured notes due Revolving Bank Lines In December, the Company renewed its committed revolving bank lines, extending the maturity by one year. All other material terms of the bank lines remain unchanged. The Company has a total aggregate commitment of $245 million which matures in May 2016 and bears interest at money market rates plus a margin that varies with the Company s credit rating. The bank lines are secured by a first lien on the Company s North American OSB inventory and property, plant and equipment. This lien is shared pari passu with holders of the 2017 and 2020 senior secured notes. The bank lines contain two quarterly financial covenants: minimum tangible net worth of $250 million and maximum net debt to total capitalization, book basis, of 65%. The IFRS transitional adjustments to shareholders equity of $21 million at January 1, 2011 are added back for the purposes of the tangible net worth calculation. In addition, other comprehensive income movement subsequent to January 1, 2011 is excluded from the tangible net worth calculation. Net debt includes total debt, principal value, less cash and cash equivalents plus letters of credit issued. At period-end, the Company s tangible net worth was $429 million for financial covenant purposes. Net debt to total capitalization, book basis, was 48%. Accounts Receivable Securitization The Company has a $100 million accounts receivable securitization program with a third-party trust sponsored by a highly rated Canadian financial institution. The program is revolving and has an evergreen commitment subject to termination on 12 months notice. Under the program, Norbord has transferred substantially all of its present and future trade accounts receivable to the trust, on a fully serviced basis, for proceeds consisting of cash and deferred purchase price. However, the asset derecognition criteria under IFRS have not been met and the transferred accounts receivable remain recorded as an asset. At period-end, Norbord had transferred but continued to recognize $121 million in accounts receivable but did not have any drawings relating to this financing program. The level of accounts receivable transferred under the program fluctuates with the level of shipment volumes, product prices and foreign exchange rates. The amount of drawings under the program at any point in time depends on the level of accounts receivable transferred, timing of cash settlements and fluctuates with the Company s cash requirements. Any drawings are presented as other long-term debt on the balance sheet and are excluded from the net debt to capitalization calculation for financial covenant purposes. The securitization program contains no financial covenants. However, the program is subject to minimum credit-rating requirements. The Company must maintain a long-term issuer credit rating of at least single B(mid) or the equivalent. Other Liquidity and Capital Resources Operating working capital, consisting of accounts receivable and inventory less accounts payable and accrued liabilities, was $76 million at period-end, compared to $96 million in the prior quarter and $66 million in the prior year. The Company aims to continuously minimize the amount of capital held as operating working capital and takes actions to manage it at minimal levels. Quarter-over-quarter, operating working capital decreased by $20 million primarily due to lower finished goods inventory in Europe that was built up in the prior quarter in anticipation of the shutdown taken to complete the dryer project at the Cowie, Scotland particleboard mill and higher accrued capital expenditures from the completed project. Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks. See the cautionary statement contained in the Forward-Looking Statements section. 14

15 Year-over-year, operating working capital increased by $10 million primarily due to higher operating and maintenance supplies inventory as a result of significant capital projects and the ramping up of the Jefferson, Texas mill, and lower accounts payable driven by reduced incentive accruals in North America. These were partially offset by higher accrued capital expenditures from the completed dryer project at the Cowie, Scotland particleboard mill. Total working capital, which includes operating working capital plus cash and cash equivalents and tax receivable, was $138 million at period-end compared to $191 million in the prior quarter and $314 million in the prior year. Quarterover-quarter, the decrease is attributed to lower cash and cash equivalents and the decrease in operating working capital. Year-over-year, the decrease is primarily attributed to lower cash and cash equivalents at the end of the third quarter of. Operating activities generated $22 million in cash ($0.41 per share) in the third quarter of compared to $20 million ($0.37 per share) in the prior quarter and $63 million ($1.18 per share) in the third quarter of. Yearto-date, operating activities generated $16 million ($0.30 per share) compared to $209 million ($4.16 per share) in the prior year. Operating cash generation was in line quarter-over-quarter as the decline in operating working capital and collection of taxes receivable were mostly offset by lower EBITDA. The lower operating cash generation versus the prior year is primarily the result of lower EBITDA in the current year and the increase in operating working capital. INVESTMENTS Investment in Property, Plant and Equipment Investment in property, plant and equipment was $24 million (which includes $1 million of capitalized interest costs) in the third quarter of. This compares to $27 million in the second quarter of and $15 million in the third quarter of. Year-to-date, investment in property, plant and equipment was $66 million (which includes $1 million of capitalized interest costs), compared to $45 million in. Norbord s investment in property, plant and equipment is estimated to be approximately $75 million as the Company took the opportunity to complete several strategic projects during the scheduled annual maintenance shuts pulled forward into the third quarter. Key projects include the rebuild of the wood handling end at the Joanna, South Carolina mill, the dryer upgrade at the Cowie, Scotland particleboard mill and the fines screening project at the Cordele, Georgia mill. Also included is approximately $10 million for preliminary work to rebuild the press line at the mothballed Huguley, Alabama mill. Further spending to prepare this mill for restart has been deferred to CAPITALIZATION At October 27,, there were 53.4 million common shares outstanding. In addition, 1.6 million stock options were outstanding, of which approximately 48% were vested. In March, Norbord renewed its normal course issuer bid in accordance with Toronto Stock Exchange (TSX) rules. Under the bid, the Company may purchase up to 2,670,496 of its common shares, representing 5% of the Company's issued and outstanding common shares of 53,409,926 as of February 24,. Purchases under the bid will terminate on the earlier of March 5, 2015, 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 Norbord provides notice of termination of the bid. No share purchases were made under this bid or the Company s previous bid that expired on February 4,. Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks. See the cautionary statement contained in the Forward-Looking Statements section. 15