January 28, To our Shareholders,

Transcription

1 J. Barrie Shineton President & CEO January 28, 2011 To our Shareholders, I am pleased to report our first positive earnings since Norbord generated earnings of $0.39 per share on EBITDA of $105 million in 2010, a meaningful improvement on the breakeven result of the prior year. This reflects much stronger performance from our European business, better OSB prices in North America and higher capacity utilization across all of the Company s operations. After a slower start in the first quarter, 2010 turned out to be a much better year for Norbord. North American OSB prices improved, particularly in the second quarter when they peaked at almost $400. Panel demand was stronger allowing our North American mills to operate more of their capacity and our European mills to run flat out. Our European operations had an excellent year, generating more than double the cash flow of last year. And we continued to tightly manage working capital, finishing the year at our lowest-ever level. I believe the worst is behind us. Today, we have a strong balance sheet, we are cash flow positive and have successfully managed through the toughest downturn in our industry s history. Our share price has recovered significantly over the last two years, but it still values Norbord s assets well below their replacement cost. We have put in place a normal course issuer bid that allows us to buy back up to 5% of our outstanding common shares, a sound investment should our cash flow support it. Norbord s House is in Order Our balance sheet is solid. Our efforts over the past three years to stabilize our finances are largely complete. We extended our bank lines, added a seventh lender and put in place a more flexible accounts receivable securitization program. Today, we have unutilized bank lines and cash on hand totalling $348 million, which is sufficient liquidity to support our operating initiatives and fund our capital allocation priorities. Our focus as a low-cost OSB producer is sharper. We have continued to streamline our North American operations by exiting non-core businesses. We sold our Deposit MDF mill late in 2009 and we wrote down our investment in the Cochrane hardwood plywood joint venture at year-end. Today, our North American operations consist solely of highquality, well-located OSB facilities. Continuous improvement drives productivity and margin gains. In 2010, we implemented new resin technology across all of our North American OSB operations. We expect the full benefit of this margin improvement initiative to flow through to our 2011 results through faster line operating speeds, higher sales margins and a richer value- 1

2 added product mix. Initial feedback from customers suggests that these changes have been well received in the market. Diversified sales minimize exposure to cyclical new home construction. Today, almost two-thirds of Norbord s North American OSB is directed to home improvement centres and industrial customers and away from the new home construction sector. This diversification strategy has served us well through the downturn, allowing Norbord to operate 70% of its OSB capacity in 2010, compared to the industry-wide operating rate of about 60%. The time is right to re-invest. We appropriately constrained capital investments to minimal levels for the last three years. Now, our improving cash flows and more positive near-term outlook support a modest ramp up in capital spending. A significant project to upgrade our European particleboard assets will be complete by mid-2011, enabling Norbord to reposition its product offering and compete on an equal footing with the newest generation of particleboard capacity. We are closer to our goal of world-class safety performance. Last year, Norbord achieved a best-ever safety incident rate of This year, our days lost due to injury - an important injury severity measure - decreased by 80% to just 82 days across the entire company, another best-ever result. Our Guntown, Cordele and Nacogdoches mills achieved Safety Star certifications, a program based on OSHA s Voluntary Protection Program (VPP). Four more of our facilities will meet this rigorous safety standard in And both our Cordele and Nacogdoches mills completed their second calendar year without a single recordable injury, an exceptional, industry-leading achievement. Proactive succession planning further strengthens our management team. In September, we promoted Peter Wijnbergen to the newly-created position of Chief Operating Officer with responsibility for our North American operations. As well, Nigel Banks joined our team in November as a successor to Bob Kinnear who will retire from his role as Senior Vice President, Corporate Services this year. Both these appointments ensure organizational continuity as we execute on our strategic priorities. Outlook for 2011 The housing market in North America is improving, but slowly. Experts are not yet predicting a sharp rebound in housing starts and more recently have adjusted their forecasts down, closer to 2010 levels. We expect that overall OSB demand in 2011 will look very similar to last year. Good working capital practices are keeping inventories low across the supply chain. Small changes in either supply or demand are likely to result in ongoing price volatility. It s my view that the general economic news will improve and unemployment levels will fall throughout this year, leading to better new home construction activity and improving OSB demand and prices in the second half. 2

3 In Europe, the bull market for OSB peaked late in However, prices are holding and we expect this positive panel market dynamic to continue well into this year. A favourable exchange rate continues to support our UK-based manufacturing by limiting competing imports and providing a unique opportunity to export our panels to the Continent. We expect to run our European mills at capacity in There are some industry developments that we are watching closely. In North America, the broader economic recovery could drive higher raw material prices that may be difficult to pass on should the housing recovery lag. In Europe, government biomass energy incentive programs could put further pressure on wood fibre prices. We will continue to push the envelope on controllable costs to mitigate this potential input cost risk. Norbord is Well-Positioned The recovery phase of this housing cycle is approaching and Norbord will enter it a stronger company. We have high-quality, low-cost facilities that are running at relatively higher operating rates. We have strong customer partnerships. We have continued to grow our sales with key customers throughout the cyclical downturn. Our European operations are providing meaningful and stable earnings. The long-term fundamentals supporting housing demand are favourable. Norbord is well-positioned to generate superior returns once the recovery takes hold. On behalf of everyone at Norbord, I thank you for your continued support. I look forward to reporting on our progress throughout the year. 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 believe, should, expect, suggest, likely, would, 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 2010 Management s Discussion and Analysis dated January 28,

4 News Release NORBORD REPORTS STRONGER 2010 RESULTS; GENERATES POSITIVE EARNINGS ON IMPROVED EBITDA Note: Financial references in US dollars unless otherwise indicated HIGHLIGHTS Achieved positive EBITDA of $105 million vs. break-even in 2009 European EBITDA more than doubled from $17 million in 2009 to $36 million Ramped up North American OSB production in improved pricing environment North Central benchmark OSB price increased 34% vs. the prior year to levels not seen since 2006 Indicative European OSB price increased 25% from 2009 Employee days lost due to injury down 80%, a best-ever result TORONTO, ON (January 28, 2011) Norbord Inc. (TSX: NBD, NBD.WT) today reported positive EBITDA of $105 million versus break-even EBITDA in The year-over-year improvement is due largely to higher North American OSB and European panel prices and higher shipment volumes. North American OSB generated a year-over-year EBITDA improvement of $90 million driven by strong second quarter results, while Norbord s European panel operations generated a $19 million year-over-year EBITDA improvement. In the fourth quarter, Norbord recorded positive EBITDA of $13 million versus $12 million in the previous quarter and $6 million in the fourth quarter of Norbord recorded earnings of $17 million or $0.39 per share (basic) for the full year versus a loss of $58 million or $1.35 per share in The Company recorded a loss of $2 million or $0.05 per share in the fourth quarter, excluding the impact of a $6 million after-tax or $0.14 per share non-cash write-down of its investment in a non-core business. In the fourth quarter of 2009, the Company incurred a loss of $11 million or $0.25 per share. Our 2010 results exceeded our expectations, said Barrie Shineton, President and CEO. In North America, our customer and product strategy enabled us to run more capacity and to benefit from a stronger pricing environment throughout the year. In Europe, our EBITDA more than doubled on the back of particularly robust OSB markets. While I m pleased that Norbord generated positive annual earnings for our shareholders this year, we recognize that we still have a long way to go before our financial performance is back to acceptable levels. We expect the overall business environment in 2011 to generally mirror Norbord s experience in the past year. We are seeing the beginnings of a slow recovery for the US housing market, which should start taking hold in the second half of the year. Norbord will be well-positioned to generate stronger results once that occurs. Market Conditions US housing starts were 0.59 million in 2010, up modestly from 0.55 million in 2009, but significantly below the long-term annual average of 1.5 million. For the full year, the North Central benchmark OSB price averaged $219 per Msf (7 16-inch basis) compared to $163 per Msf in In the South East region, where approximately 55% of Norbord s 4

5 North American OSB capacity is located, prices were somewhat lower than in the North Central region, averaging $198 per Msf, compared to $148 per Msf last year. In the fourth quarter, North Central benchmark OSB prices averaged $191, up $11 from the third quarter and up $19 from the fourth quarter of South East prices averaged $165 in the quarter, up $9 from the third quarter and up $11 from the fourth quarter of In 2010, the US housing market remained challenging while OSB demand and prices continued to be volatile. The first half of the year saw surging North Central benchmark OSB prices that peaked at $395 per Msf in May before retreating to more sustainable levels in the second half of the year. The first-half price run-up was largely influenced by several unique factors that resulted in overall demand outstripping the ability of both producers and distributors to respond in a timely manner. Second-half housing activity was softer as the May expiry of the US first-time home buyer tax credit pulled home buying demand forward into the first half of the year. In the UK, where the majority of Norbord s European assets are located, housing starts increased by 30% over 2009 as house builders replenished their inventories of new homes. The European OSB market was particularly robust in 2010, building on the recovery that began at the end of The 25% year-over-year increase in average indicative OSB prices was driven by firmer end-use demand, inventory re-stocking and substitution for plywood. Particleboard and MDF prices also strengthened during the year, increasing a more modest 5% and 6%, respectively, reflecting the recovery of higher input costs. MDF exports to Continental Europe increased by 46%. Although the Euro weakened somewhat during the year versus the Pound Sterling, the currency remained in a range that continued to benefit Norbord s UK-based operations. Performance Norbord s operating North American OSB mills ran at approximately 90% of their capacity in 2010 compared to 80% in Including the indefinitely closed mills, North American operations ran at 70% of capacity in 2010, compared to 60% in In Europe, mills operated at approximately 95% of capacity in 2010, up 15% from the previous year. For the full year, Norbord s North American per unit OSB cash production costs increased 8% over the prior year. The benefit of higher production volume was offset by higher resin and fibre prices, higher supplies and maintenance costs as a result of running more production in 2010, employee profit share payouts, and the foreign exchange impact of the strengthening Canadian dollar. In the fourth quarter, North American per unit OSB cash production costs decreased by 1% over the third quarter of 2010 due to higher production volume and lower key input prices and usages. OSB cash production costs increased by 3% over the fourth quarter of 2009 as improved key input usages and higher production volume were offset by higher resin and fibre prices, supplies and maintenance costs. Resin, fibre and energy, which account for approximately 65% of Norbord s cash production costs, increased sharply over the five-year period preceding Margin Improvement Program gains of $16 million in 2010 limited the impact that higher raw material prices had on earnings. At year-end, Norbord had unutilized liquidity of $348 million, comprising $235 million in undrawn revolving bank lines and $113 million in cash and cash equivalents. The Company s tangible net worth was $352 million and net debt to total capitalization on a book basis was 49%. 5

6 Capital investments were constrained to essential capital projects totaling $16 million in Norbord s 2011 capital investments are planned at $25 million, which includes an infrastructure investment at the Cowie, Scotland particleboard mill that is expected to increase production capacity and reduce manufacturing costs. Developments In January 2011, True North Hardwood Plywood Inc. announced the winding-down of its hardwood plywood operation in Cochrane, Ontario. In the fourth quarter, Norbord recorded a $6 million after-tax ($0.14 per share) non-cash provision for its 50% investment in this business. Additional Information Norbord s year-end 2010 letter to shareholders, news release, management s discussion & analysis, annual consolidated audited 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 Friday, January 28, 2011 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 February 28, 2011 by dialing or The passcode is Audio playback and a written transcript will be available on the Norbord website. Norbord Profile Norbord Inc. is an international producer of wood-based panels with assets of $1.0 billion, employing approximately 2,030 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 symbols NBD and NBD.WT. -end- Contact: Robin Lampard Senior Vice President & Chief Financial Officer Tel. (416) info@norbord.com 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, should, will, will not, forecasts, suggest, expects, may, and other expressions which are predictions of or indicate future events, trends or prospects and which do not relate to historical matters identify forwardlooking 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. 6

7 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 1, 2010 Annual Information Form and the cautionary statement contained in the Forward-Looking Statements section of the 2010 Management s Discussion and Analysis dated January 28,

8 JANUARY 28, 2011 Management s Discussion and Analysis INTRODUCTION This Management s Discussion and Analysis (MD&A) provides a review of the significant developments that impacted Norbord s performance during 2010 relative to The information in this section should be read in conjunction with the audited financial statements, which follow this MD&A. In this MD&A, Norbord means Norbord Inc. and all of its consolidated subsidiaries and affiliates, and Company means Norbord Inc. as a separate corporation, unless the context implies otherwise. Brookfield means Brookfield Asset Management Inc. or any of its consolidated subsidiaries and affiliates, a related party, by virtue of a controlling equity interest in the Company. Additional information on Norbord, including documents publicly filed by the Company, is available on the Company s web site at or the System for Electronic Document Analysis and Retrieval (SEDAR) at 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 statement contained in the Forward- Looking Statements section. To enhance shareholders understanding, certain five-year historical financial and statistical information is presented. Norbord s significant accounting policies and other financial disclosures are contained in the audited financial statements and accompanying notes, which follow this MD&A. All financial references in the MD&A are stated in US dollars unless otherwise noted. Earnings before interest, taxes, depreciation and amortization (EBITDA), EBITDA margin, operating working capital, total working capital, capital employed, return on capital employed (ROCE), return on common equity (ROE), net debt, net debt to capitalization on a book basis, and net debt to capitalization on a market basis are non-gaap financial measures described in the Non-GAAP Financial Measures section. Non-GAAP financial measures do not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP) and are therefore unlikely to be comparable to similar measures presented by other companies. Where appropriate, a quantitative reconciliation of the non-gaap financial measure to the most directly comparable GAAP measure is also provided. 8

9 BUSINESS OVERVIEW Norbord is an international producer of wood-based panels with 13 plant locations in North America and Europe. Norbord is one of the world s largest producers of oriented strand board (OSB) with an annual capacity of 5 billion square feet (Bsf) ( 3 8-inch basis). The majority of Norbord s OSB business is located in the South East region of the US. The Company is also a significant producer of wood-based panels in the UK. Norbord does not own any timberlands. Wood fibre is purchased from third parties that include private landowners and government-owned and -managed timberlands. Norbord employed approximately 2,030 people at December 31, Operations include 11 OSB mills, 2 particleboard mills, 1 medium density fibreboard (MDF) mill and 1 furniture plant. The Company reports all operations as a single operating segment wood-based panels. STRATEGY Norbord s business strategy is focused entirely on the wood panels sector in particular OSB in North America and Europe. Pricing and demand for Norbord s principal product OSB continued to be significantly affected by challenging housing markets. This environment, while not altering the long-term strategy of the business, required management to focus on certain short-term objectives starting in In this regard, Norbord accomplished the following in 2010: Short-Term Strategic Priority 2010 Performance 1. Generate cash. Achieved EBITDA of $105 million versus break-even EBITDA in Returned North American operations to positive EBITDA of $82 million versus a loss of $8 million in Generated positive EBITDA of $36 million at European operations versus $17 million in Ramped up the Company s North American and European production capacity by 10% and 15%, respectively, benefitting from higher prices during the year. Ongoing minimal investment in operating working capital, achieving lowest-ever year-end levels. 2. Strengthen the balance sheet. Added a seventh lender to revolving bank group, increasing committed bank lines to $245 million, and extended term to May Improved bank covenant headroom through generation of $130 million in operating cash flow. Replaced existing accounts receivable securitization program with new $85 million evergreen program, containing no financial covenants and subject to a minimum credit-rating requirement of single B(mid). 9

10 The actions taken by Norbord over the past three years to recapitalize, increase liquidity, reduce losses and conserve cash have stabilized the Company s balance sheet, which is an important element of Norbord s ongoing financial strategy. At the end of the year, the Company had unutilized liquidity of $348 million, net debt to capitalization on a book basis of 49%, and tangible net worth of $352 million. 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. Norbord s long-term strategic priorities remain unchanged from prior years, and the following table provides updates on the Company s 2010 achievements in each area: Long-Term Strategic Priority 1. Develop a world class safety culture Performance Maintained an industry-leading safety performance with an Occupational Safety and Health Administration (OSHA) recordable rate of 1.43 and a lowest-ever lost-time injury rate of 82 days. Completed second OSHA recordable injury-free year at the Cordele, Georgia, and Nacogdoches, Texas, mills. Achieved Norbord Safety Star certification at the Cordele, Nacogdoches and Guntown mills. 2. Pursue growth in OSB. Monitored opportunities to grow OSB business through acquisition. Improved operating efficiency at the Genk, Belgium, mill, lowering manufacturing costs and increasing production volume by almost 40%. 3. Own high-quality assets with low-cost positions. 4. Maintain a margin-focused operating culture. 5. Focus on growth customers. Implemented new resin technology across North American OSB mills. Exited joint venture investment in non-core hardwood plywood business in Cochrane, Ontario. Generated margin improvements of $16 million in spite of limited production volume increases. Appointed Chief Operating Officer with the mandate to advance the implementation of cost-reduction technologies. Increased sales volume to key North American pro-dealer customers by 30%. Increased North American value-added product sales volume by 40%. Increased UK MDF exports by over 45%. Limited exposure to new home construction segment through end-use diversity. 6. Allocate capital with discipline. Limited capital investments to essential projects totalling $16 million. Put normal course issuer bid in place, enabling Norbord to purchase up to 5% of its outstanding Common Shares. 10

11 SUMMARY (US $ millions, except per share information, unless otherwise noted) KEY PERFORMANCE METRICS Return on capital employed (ROCE) 13% 0% (6)% 4% 25% Return on equity (ROE) 5% (19)% (37)% (11)% 20% Cash provided by (used for) operating activities 130 (35) (13) Cash provided by (used for) operating activities per share 3.00 (0.82) (0.86) NET SALES AND EARNINGS Net sales ,104 1,252 EBITDA (60) Earnings 17 (58) (115) (45) 97 PER COMMON SHARE EARNINGS Basic 0.39 (1.35) (7.62) (3.10) 6.76 Diluted 0.38 (1.35) (7.62) (3.10) 6.74 Common dividends Total assets 1,062 1,043 1,044 1,404 1,299 Long-term debt Net debt Net debt to capitalization, market basis 35% 48% 32% 30% 27% Net debt to capitalization, book basis 49% 58% 61% 60% 51% Shipments (MMsf 3 8") North America 2,989 2,780 3,624 3,947 3,932 Europe (1) 1,298 1,158 1,348 1,712 1,603 Indicative OSB pricing Average OSB price North Central ($/Msf 7 16") South East ($/Msf 7 16") Europe ( /m 3 ) (1) Excludes product consumed internally (108 MMsf, 127 MMsf, 114 MMsf, 138 MMsf, 178 MMsf for each period, respectively). Markets remained challenging as high unemployment and limited mortgage availability continued to delay a meaningful recovery in both US and UK housing demand in Notwithstanding this environment of continued low demand, prices for the Company s products were firmer in both North America and Europe, and Norbord generated significantly improved financial results this year. Fluctuation in North American structural panel demand and OSB prices are significant variables affecting Norbord s results. North American OSB prices were very volatile during the year, ranging from $160 to $395 per thousand square feet (Msf) (North Central 7 16-inch basis), averaging $219 per Msf compared to $163 per Msf in the prior year. Norbord benefited from these higher prices by running more of its capacity during the year, operating at 70% of capacity compared to 60% in Norbord achieved EBITDA of $105 million in 2010 versus break-even EBITDA in EBITDA margins for 2010 were 12%, compared to 0% for the prior year earnings were $17 million or $0.39 per share (basic) versus a loss of $58 million or $1.35 per share in Pre-tax ROCE averaged 13% compared to 0% in the prior year. ROCE is a measurement of financial performance, focusing on cash generation and the efficient use of 11

12 capital. As Norbord operates in a cyclical commodity business, it interprets ROCE over the cycle as a useful means of comparing businesses in terms of efficiency of management and viability of products. Through this five-year cyclical trough, Norbord has generated an average annual ROCE of 7%. Higher product prices and sales volume in both North America and Europe were the key drivers of the EBITDA improvement in Norbord s North American OSB operations achieved six consecutive quarters of positive EBITDA, with the second quarter posting the strongest result since Norbord s European operations generated more than double the prior year s EBITDA, which resulted from particularly robust OSB prices this year. Over the past five years, $288 million in cash has been generated from operating activities and $200 million in cash has been generated from recapitalization activities. This cash has been used to reshape the Company from its historic role as a diversified Canadian forest products company into an internationally recognized leader in the structural panel industry. During this time, Norbord invested $253 million in capital expenditures primarily focused on growing the business, and paid out approximately $232 million in cash dividends, including special dividends, to shareholders. Markets are expected to remain volatile in 2011 as global economies reposition for recovery. The past three years have seen the worst housing downturn in several generations, and the Company focused on preserving cash and stabilizing its balance sheet. This year, Norbord generated significant positive operating cash flow and strengthened its balance sheet. The Company is well positioned to benefit from recovering housing markets. Over the long term, the underlying demographics will continue to support robust demand for new homes. Further, management believes that Norbord s North American and European operations provide meaningful market and geographic diversification over the cycle, while capitalizing on Norbord s strength as a panel producer. OUTLOOK FOR 2011 Norbord operates in extremely volatile markets and expects the overall business environment in 2011 to generally mirror that of Housing markets are expected to begin showing meaningful signs of improvement in the second half of 2011 as the structural impediments to recovery are worked through. High unemployment and competition from foreclosures remain the biggest structural hurdles to a recovery in the US housing market. While the market works through these issues, significant OSB industry supply remains curtailed through indefinite mill closures. Norbord s two indefinitely closed mills, in Texas and Alabama, will not operate until signs of a sustainable recovery in housing starts are visible. Industry experts are forecasting 2011 US housing starts of around 0.68 million. On the positive side, new home inventories remain very low, and affordability is at generational highs. Norbord is of the view that, once the economy finds its footing and the foreclosure overhang subsides, new household formation trends will ultimately support a return to the long-term annual average of 1.5 million housing starts. In the UK, the government is implementing the most significant public sector spending cuts since the World War II. While the impact on European panel markets is not yet clear, Norbord believes its European business outlook remains relatively buoyant. Pent-up demand for new homes continues to grow, and Norbord expects the Pound Sterling, relative to the Euro, to remain in a range that is supportive of its UK-based manufacturing. This currency advantage limits UK imports and provides further export opportunities on the Continent. On the input cost side, global commodity prices that troughed in 2009 recovered in Unlike previous economic cycles, the overall economy appears likely to lead a housing sector recovery in this cycle. Improving demand for global commodities could put upward pressure on resin and wax prices that panel producers may not be able to pass on to customers. In addition, western European government incentives for biomass energy expansion are putting upward pressure on European fibre prices. Norbord continues to pursue Margin Improvement Program (MIP) initiatives to mitigate potentially higher uncontrollable costs. 12

13 After constraining capital expenditures at minimal levels for the past three years, Norbord expects to modestly increase capital investments to $25 million in Projects that improve Norbord s product offerings and cost position will be prioritized. Norbord has strong financial liquidity, and no debt maturities in Combined with the Company s solid customer partnerships and favourable European market dynamics, Norbord is well positioned for the recovery in housing markets and will benefit from stronger OSB demand in the years ahead. RESULTS OF OPERATIONS (US $ millions) Net sales $892 $718 $943 $1,104 $1,252 EBITDA (60) EBITDA margin 12% 0% (6)% 4% 20% Depreciation Investment in property, plant and equipment Shipments (MMsf 3 8") (1) 4,287 3,938 4,972 5,659 5,535 Indicative OSB pricing Average OSB price North Central ($/Msf 7 16") South East ($/Msf 7 16") Europe ( /m 3 ) (1) Excludes product consumed internally (108 MMsf, 127 MMsf, 114 MMsf, 138 MMsf, 178 MMsf for each period, respectively). Markets North America is the principal market destination for Norbord s products. North American OSB comprises 70% of Norbord s panel shipments by volume. Therefore, results of operations are most affected by volatility in North American OSB prices. European panel prices are less volatile than North American prices, and Europe comprises just 30% of Norbord s shipments by volume, affecting Norbord s results to a lesser degree. Shipments (MMsf 3 8") North America 2,989 2,780 3,624 3,947 3,932 Europe (1) 1,298 1,158 1,348 1,712 1,603 Total 4,287 3,938 4,972 5,659 5,535 (1) Excludes product consumed internally (108 MMsf, 127 MMsf, 114 MMsf, 138 MMsf, 178 MMsf for each period, respectively). North America The US housing market remained challenging, with periods of price volatility during The first half of the year saw surging North Central benchmark OSB prices that peaked at $395 per Msf ( 7 16-inch basis) in May before retreating to more sustainable levels in the second half of the year. The first-half price run-up was largely influenced by several unique factors that resulted in overall demand outstripping the ability of both producers and distributors to increase supply. Second-half housing markets were softer as the expiry of the US first-time home buyer tax credit in May pulled home buying demand forward into the early part of the year. The North Central benchmark OSB price averaged $219 per Msf ( 7 16-inch basis) in 2010 compared to $163 per Msf in In the South East region, where approximately 55% of Norbord s North American OSB capacity is located, prices were somewhat lower than in the North Central region, averaging $198 per Msf, compared to $148 per Msf last year. 13

14 New home construction is still the primary end use for OSB in North America, accounting for approximately 50% of OSB demand in US housing starts were 0.59 million in 2010, up modestly from 0.55 million in 2009, but still significantly below the long-term annual average of 1.5 million. To put the decline into context, 100,000 housing starts represent approximately 1 Bsf (⅜-inch basis) of OSB demand. It is important to note that approximately 40% of Norbord s OSB sales volume goes directly into the new home construction sector, while the other 60% goes into repair and remodelling, light commercial construction and industrial applications. Management believes that this limits the Company s relative exposure to the new home construction segment and provides meaningful distribution channel benefits. According to APA The Engineered Wood Association, North American OSB demand was modestly higher in 2010, at approximately 15.3 Bsf (⅜-inch basis) versus 14.1 Bsf in 2009, representing almost 60% of total North American structural panel demand and 57% of industry OSB production capacity. Against this backdrop of modestly improved demand, Norbord s North American OSB mills operated at approximately 70% of capacity in 2010, compared to 60% in Europe European panel markets showed increasing strength throughout 2010 as housing construction activity picked up and repair and remodelling demand remained robust. In the UK, where the majority of Norbord s European assets are located, housing starts increased by 30% over 2009 despite eroding consumer confidence throughout the year. In Germany, Norbord s largest Continental market, housing starts were up a more modest 8% over 2009, while consumer confidence rose to its highest level in a decade. In this firmer-demand environment, Norbord s European mills operated at 95% of capacity throughout the year, compared to 80% in 2009, with the two OSB mills running at full capacity. The European OSB market was particularly robust in 2010, building on the recovery started at the end of 2009 and supporting a 25% year-over-year increase in indicative OSB prices (denominated in Euros). OSB market strength was driven by firmer end-use demand, inventory re-stocking and substitution for plywood. Particleboard and MDF prices also recovered during the year, increasing a more modest 5% and 6%, respectively, reflecting the recovery of higher input costs. Although the Euro weakened somewhat during the year versus the Pound Sterling, the currency remained in a range that continued to benefit Norbord s primarily UK-based operations. Particularly noteworthy was a 46% increase in MDF exports to the Continent. Net Sales (US $ millions) North America $541 $406 $538 $593 $823 Europe Total $892 $718 $943 $1,104 $1,252 Consolidated net sales rose by $174 million or 24% in 2010 compared to North American sales increased by 33%, and European panel sales increased by 13%. In North America, the sales increase was driven by higher OSB prices in the first and second quarters of 2010 combined with a 12% increase in OSB shipment volume. Average North Central and South East OSB benchmark prices per Msf ( 7 16-inch basis) increased by $56 and $50, respectively, in 2010, which is an increase of 34% compared to In Europe, the sales increase was driven by higher panel prices and shipment volumes across all products. European panel shipment volumes increased by 13% for OSB, 7% for particleboard and 8% for MDF. 14

15 Production (MMsf 3 8") North America 2,993 2,785 3,645 4,268 3,987 Europe 1,437 1,266 1,332 1,704 1,738 Total 4,430 4,051 4,977 5,972 5,725 Norbord continued to curtail production in 2010 to maximize earnings and manage inventory levels. Notwithstanding, total production volume increased by 9% or 379 MMsf (⅜-inch basis). North America North American production volume increased by 7% or 208 MMsf (⅜-inch basis) in 2010, driven by an 11% increase in OSB production volume compared to Norbord s newest OSB line in Cordele, constructed in 2006, established a company-wide production record in the year, with volume exceeding design expectations. In 2009, OSB production volume decreased by approximately 25% in North America compared to In January 2009, Norbord announced that indefinite shutdowns would take place at its OSB mills in Huguley, Alabama, and Jefferson, Texas. These two mills represent approximately 20% of Norbord s annual OSB production capacity in North America. Subject to market conditions, Norbord does not expect to restart these two mills in the near term. In June 2009, Norbord reduced production schedules at the original line in Cordele and at Guntown. In total, approximately 270 employees were affected by these decisions. In March 2010, Norbord returned the Guntown mill to a full production schedule. From March to August 2010, Norbord returned the Cordele line to a full production schedule and then ran the mill at a reduced work week for the rest of the year. Weak market conditions and reduced demand were the primary drivers for these decisions, which were made out of a necessity to contain costs and manage operating working capital. Norbord s operating North American OSB mills ran at approximately 90% of their capacity in 2010, compared to 80% in Including the indefinitely closed mills, Norbord s North American OSB mills operated at approximately 70% of capacity in 2010, compared to 60% in In 2010, production at the hardwood plywood joint-venture operation in Cochrane ceased, and in 2009, the Company sold its MDF mill in Deposit, New York (see Investments and Divestitures). Together, these two noncore North American operations represented, on average, less than 5% of Norbord s North American production volume in each respective year prior. In 2007, North American OSB production included the ramp-up of the new OSB line in Cordele. Europe European panel production volume increased by 14% or 171 MMsf (⅜-inch basis) in Production volume increased by 24% for OSB, 13% for MDF and 1% for particleboard. Norbord s OSB mill in Genk ran on a full production schedule in 2010, which, when combined with significantly improved production efficiency, increased production volume by approximately 40% year-over-year. In 2009, European panel production volume decreased by 5% or 66 MMsf (⅜-inch basis) compared to Production volume decreased by 3% for OSB, 12% for MDF and 5% for particleboard. In March 2008, a particleboard line at Genk was closed permanently. The particleboard line was considered non-core as the Genk site was acquired to expand Norbord s OSB presence in Europe. In Europe, mills operated at approximately 95% of capacity in 2010, compared to 80% in

16 Operating Results EBITDA (US $ millions) North America $82 $(8) Europe Unallocated (13) (9) Total $105 $0 Norbord achieved EBITDA of $105 million in 2010, compared to break-even EBITDA in North American OSB generated EBITDA of $84 million, compared to negative $6 million in the prior year, marking a year-overyear improvement of $90 million. Other North American products generated EBITDA of negative $2 million in 2010 and Norbord s European panel operations generated EBITDA of $36 million, which is a year-overyear improvement of $19 million. Unallocated costs were $13 million in 2010 compared to $9 million in 2009, an increase of $4 million primarily due to the foreign exchange impact of the strengthening Canadian dollar. North America Norbord s North American OSB operations delivered positive EBITDA results in each quarter of The EBITDA improvement of $90 million in 2010 was driven by strong second quarter results. EBITDA generated in the second quarter of 2010 was $64 million compared to negative $6 million in the second quarter of 2009, which represents a year-over-year improvement of $70 million that can be attributed primarily to higher prices. North Central OSB benchmark prices peaked at $395 per Msf ( 7 16-inch basis) in the second quarter, a price level not experienced since The upward momentum commenced in the first quarter of Prices rose against the backdrop of cold and wet weather conditions in the Southern US, which affected log availability and impacted operating schedules. Demand was seasonally firmer in the second quarter, and the expiry of the US first-time home buyer tax credit in May generated a pull-forward effect on demand earlier in During the year, OSB price volatility was extreme as prices climbed quickly in the second quarter and then declined dramatically during the remainder of On the cost side, higher raw material prices impacted operating costs. Resin and fibre prices, which were at cycle-bottom levels in 2009, climbed in the first half of 2010 and then leveled off for the remainder of the year. Europe Norbord s European operations experienced stronger results in each quarter of 2010 compared to EBITDA results more than doubled from $17 million in 2009 to $36 million in Higher European panel prices and higher shipment volumes contributed to the improved year-over-year results, despite the continuing input cost pressures, particularly related to fibre. In Europe, the average indicative OSB price (denominated in Euros) increased by 25%, and particleboard and MDF prices increased by 5% and 6%, respectively. European panel shipment volumes increased by 13% for OSB, 7% for particleboard and 8% for MDF. European OSB markets continued to show increasing strength throughout the year in response to some short-term recovery in new home construction, resilient repair and remodelling demand, substitution for scarce plywood and inventory re-stocking. In addition, OSB supply was constrained by curtailments early in the year as a result of weather-related wood shortages, particularly in Continental Europe. The weak Pound Sterling relative to the Euro continued to be advantageous for Norbord, as it improved sales opportunities within the UK and slowed the flow of Continental European imports. This currency trend also supported Norbord s export program to the Continent. 16

17 The components of the EBITDA change are summarized in the variance table below. EBITDA Variance (US $ millions) 2010 vs EBITDA current period $105 EBITDA comparative period 0 Variance $105 Mill nets (1) $151 Volume (2) 19 Key input prices (3) (34) Key input usage (3) (2) Other (4) (35) Production curtailment, net (5) 6 Total $105 (1) The mill nets variance represents the change in realized pricing across all products. Mill nets are calculated as net sales 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 and energy. (4) The other category covers all remaining variances including labour and benefits, supplies and maintenance, and the impact of foreign exchange. (5) The production curtailment, net, represents the net EBITDA variance impact related to the indefinite curtailment of North American OSB mills in Jefferson and Huguley. Higher North American OSB and European panel prices improved Norbord s results by $151 million in In addition, higher shipment volumes in both North America and Europe added $19 million to EBITDA in Housing market activity, particularly in the US, influences OSB demand and pricing. Fluctuation in North American OSB demand and prices significantly affects Norbord s results. US housing starts modestly improved by 7% year-over-year, from 0.55 million starts in 2009 to 0.59 million in Higher mill nets in 2010 reflected the benefits of diversified distribution channels, low inventories in the supply chain, slightly firmer demand as a result of the US stimulus tax incentive which ended in May, and extremely wet weather conditions in the Southern US at the beginning of the year. In the UK, government stimulus programs generated an improvement in construction activity that supported stronger panel pricing, particularly for OSB. Overall, Norbord s European operations benefited from underlying robust demand dynamics resulting from the weak Pound Sterling and limited imports. On the cost side, the benefit of lower global commodity prices was experienced for most of 2009, resulting in cycle-bottom prices. Resin and energy prices increased in the first half of 2010 and then leveled off for the remainder of the year. The direct impact on operating costs of rising energy prices continues to be limited since all of Norbord s heat energy for OSB operations is generated from biomass. Norbord s reduced reliance on fossil fuels has generated significant energy-cost savings in both North America and Europe. Further, the ability of Norbord s European mills to comply with Kyoto Protocol energy-efficiency targets has resulted in a surplus of carbon credits, which have been monetized on environmental exchanges. Fibre prices in both North America and Europe increased in 2010 compared to In the first quarter of 2010, extremely cold and wet weather conditions affected fibre availability and prices. North American fibre prices moderated slowly throughout the rest of the year. European fibre prices remained under pressure due to the impact of government biomass energy incentives. Norbord does not own any timberlands; therefore, it purchases timber, wood chips and fibre as well as other wood recycled materials on the open market, in competition with other users of such resources, where prices are influenced by factors beyond Norbord s control. Resin, fibre and energy, which account for approximately 65% of Norbord s cash production costs, increased sharply over the five-year period preceding MIP gains of $16 million in 2010, measured relative to 2009 at 17