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Norbord earnings more than triple previous year: Report

Feb. 6, 2017 - Norbord Inc. reported Adjusted EBITDA of US $114 million for the fourth quarter of 2016 versus $114 million in the prior quarter and $57 million in the fourth quarter of 2015. For the full year 2016, Norbord recorded Adjusted EBITDA of $383 million compared to $122 million in 2015 on higher North American OSB prices and higher shipment volumes. North American operations generated Adjusted EBITDA of $352 million compared to $95 million in the prior year and European operations delivered Adjusted EBITDA of $41 million versus $38 million in the prior year.

"2016 was an excellent year for Norbord and we more than tripled our Adjusted EBITDA over the prior year," said Peter Wijnbergen, Norbord's President and CEO. "US housing starts continued their steady recovery, driving increased North American OSB demand and prices. The fourth quarter of 2016 marked our eighth consecutive quarter of improved results as the seasonal slowdown in construction-related demand was less pronounced than usual. Channel inventories remain lean and demand in all our core markets remains strong, setting us up well as we enter 2017."

"Norbord's mills in both North America and Europe continued to deliver strong operational results in 2016, with seven mills setting annual production records. We captured the full $45 million in targeted merger synergies, reflecting the extraordinary effort across our company to quickly integrate Norbord and Ainsworth and realize on the opportunities to reduce costs, optimize sales and logistics, and share best practices."

"In Europe, our panel business delivered its 27th consecutive quarter of stable Adjusted EBITDA in US dollar terms, despite the post-Brexit translation headwind of a weaker Pound Sterling. OSB is accelerating market share gains versus plywood, driving double-digit demand growth in our key UK and German markets. Our project to modernize and expand the Inverness, Scotland OSB mill to serve this rapidly growing customer demand is on-schedule and within budget for start-up in the second half of this year."

Norbord recorded Adjusted earnings of $55 million or $0.64 per share (basic and diluted) in the fourth quarter of 2016 versus $58 million or $0.68 per basic share ($0.67 per diluted share) in the third quarter of 2016 and $16 million or $0.19 per share (basic and diluted) in the fourth quarter of 2015.  For the full year 2016, the Company recorded Adjusted earnings of $175 million or $2.04 per basic ($2.03 per diluted share) compared to an Adjusted loss of $14 million or $0.17 per share (basic and diluted) in 2015 that included a number of one-time merger-related expenses.  Adjusted earnings/losses exclude non-recurring items and use a normalized income tax rate:

Market Conditions

In North America, US housing starts were approximately 1.17 million in 2016, up 5% from 1.11 million in 2015, and the December seasonally-adjusted annualized pace of permits, the more forward-looking indicator, was 1.21 million.  Single family starts, which use approximately three times more OSB than multifamily, increased by 9% in 2016.  US housing economists are forecasting 2017 starts of approximately 1.25 million, a further 7% year-over-year improvement.

According to APA–The Engineered Wood Association, North American OSB production, which represents demand on the industry's mills, increased by 7% in 2016 to approximately 21.8 Bsf (3⁄8-inch basis), or 88% of the industry's operating capacity.  This compares to an estimated operating rate of 83% in 2015.

North American benchmark OSB prices improved significantly as the year progressed as new home construction activity and OSB demand continued to increase. The North Central price ranged from a low of $213 per Msf (7/16-inch basis) in February to a high of $310 in the summer, averaging $269 for 2016, up 29% from $209 in 2015.  

In Europe, Norbord's core panel markets remained strong, with double-digit OSB demand growth in both the UK and Germany. In the UK, where three of Norbord's four European mills are located, GDP grew at 2%, unemployment dropped below 5% and housing starts activity remained firm.  In Germany, Norbord's largest Continental European market, housing starts increased by 16% representing the eighth consecutive year of growth.

Reported European panel prices in US dollar terms were impacted by the significant devaluation of the Pound Sterling following the "Brexit" referendum in June. In local currency terms, OSB prices in the UK were 5% lower on average but have firmed by about 5% since their post-Brexit lows. On the continent, OSB prices were up slightly on average, after firming in the first half and softening in the second half of 2016.  UK particleboard and medium density fibreboard (MDF) prices were 4% lower due to sales mix.

Performance

North American OSB shipments for the fourth quarter were up 9% versus the third quarter and 10% versus the same quarter last year. Shipments for the full year increased 7% compared to the prior year. For the full year, Norbord's operating OSB mills produced at 94% of capacity (excluding the two curtailed mills in Huguley, Alabama and Chambord, Quebec), up from 88% in 2015 and in line with the increase in shipments. Annual production records were achieved at five of the Company's North American OSB mills.

Norbord's full year North American OSB cash production costs per unit decreased 3% versus 2015 due to increased production volume, lower raw material use, lower resin and energy prices, and the weaker Canadian dollar. Although full year average resin prices were lower than the prior year, they trended up modestly in the second half of 2016.

In Europe, shipments increased 2% over the prior year. All European panel mills ran on full operating schedules during the year, excluding maintenance and holiday shutdowns, producing at 99% of capacity in 2016, up from 97% in 2015 and in line with the increase in shipments. Annual production records were achieved at both OSB mills.

Norbord's mills delivered Margin Improvement Program (MIP) gains of $15 million in 2016, primarily from improved productivity and lower raw material use and despite an offset from higher maintenance-related costs. MIP gains are measured relative to the prior year at constant prices and exchange rates.

By the third quarter of 2016, Norbord had captured the full target of $45 million in cumulative (annual run rate) synergies from the merger, within 18 months of closing. One-time costs of $15 million were incurred to achieve these synergies.  In addition to these synergies, the merger is enabling the Company to avoid significant cash outlays it would otherwise incur for capital projects. Norbord estimates this capital cost avoidance at $35 million, which includes utilizing formerly idle assets throughout the Company. As the merger synergies target has been fully realized, Norbord will continue to report progress on continuous improvement initiatives through MIP.

In January 2016, the Board of Directors approved a $135 million investment over the subsequent two years to modernize and expand the Company's Inverness, Scotland OSB mill.  On-site work commenced during the second quarter and the unused second press from the Grande Prairie, Alberta mill was moved to Inverness during the third quarter. Norbord expects the new line to start up in the second half of 2017, with no disruption to existing production capacity in the interim.

Capital investments totaled $101 million in 2016, including $33 million related to the Inverness project, several debottlenecking and cost reduction projects across the Company's mills, and additional work to rebuild the press line at the curtailed Huguley, Alabama mill.  Norbord's 2017 regular capital expenditure budget is $90 million. In addition, the Company expects to invest most of the remaining $102 million budgeted to complete the Inverness project.  A further $30 million will be required to complete the necessary refurbishment work at Huguley, once a decision is made to restart the mill.

Operating working capital decreased by $7 million during the year to $118 million at year-end, primarily due to higher mill profit share attributed to the higher earnings and higher capital expenditure accruals which were partially offset by the impact of higher North American OSB prices and sales volumes on accounts receivable. Working capital continues to be managed at minimal levels across the Company.

At year-end, Norbord had unutilized liquidity of $506 million, consisting of $161 million in cash and $345 million in unused credit lines. The Company's tangible net worth was $905 million and net debt to total capitalization on a book basis was 41%, with both ratios well within bank covenants. The Company intends to permanently repay its $200 million 7.70% senior secured notes at maturity in February 2017.

Quebec Mill Exchange

On November 3, 2016, the Company closed a transaction with Louisiana-Pacific Corporation (LP) involving the exchange of OSB mills in the province of Quebec.  Norbord swapped ownership of its mill in Val-d'Or for LP's mill in Chambord. Production at both mills has been curtailed for a number of years. The Chambord mill has a stated production capacity of 470 million square feet (3⁄8-inch basis) and the Val-d'Or mill has a stated production capacity of 340 million square feet (3/8-inch basis). An accounting gain of $12 million (net of tax) was recorded on closing of the transaction.



Norbord Inc. is a leading global manufacturer of wood-based panels and the world's largest producer of oriented strand board (OSB).  In addition to OSB, Norbord manufactures particleboard, medium density fibreboard and related value-added products.  Norbord has assets of approximately $1.8 billion and employs approximately 2,600 people at 17 plant locations in the United States, Canada and Europe.  Norbord is a publicly traded company listed on the Toronto Stock Exchange and New York Stock Exchange under the symbol "OSB".