02 Nov 2007

Weaker market development and a strong Norwegian currency influence the quarterly result

Norske Skog's gross operating result before special items was NOK 850 million in the third quarter of 2007, down from NOK 1,129 million in the second quarter. The lower result is related to weaker price development in the regions Asia, Australia and South America, increased prices on recovered paper as well as a substantial negative effect from the strong Norwegian currency.

 
 "With yet another disappointing quarter behind us, the need for a comprehensive restructuring becomes even more evident," says CEO Christian Rynning-Tønnesen.

 
The board of directors of Norske Skog expresses its concern over the development in the newsprint and magazine paper market, and the director's report states that the industry has to adapt to the falling demand in North America and parts of Europe to achieve satisfactory return.

 
The development in the demand for magazine paper globally is positive, while newsprint demand is down. The European market balance for newsprint is also affected by increased imports from Canada. This has led to lower deliveries and substantial newsprint stocks being established in Europe. Norske Skog reacts to this development by reducing production for the rest of 2007.

 
Norske Skog has already decided to implement a temporary reduction of 200,000 tonnes in European newsprint production in 2008. Under the current market conditions, it is likely that this will have to be followed by more permanent measures. Norske Skog has therefore decided to initiate a process to fully review all its paper machines.

 
"Norske Skog must be at the forefront of the market development and adapt production to the expected demand. Both the conversion of some paper machines to production of other paper grades and permanent closures will be considered," says Rynning-Tønnesen.

 
The profitability improvement program, which started one year ago, continues to yield results. The continuous improvement achieved up to the third quarter of 2007 equals annual improvements of NOK 1.6 billion, but these improvements are offset by cost increases.

 
The cash flow from operations, after financial costs paid and taxes paid, was NOK 772 million in Q3, an increase of about NOK 500 million compared with the preceding quarter. The reduction in operating capital as well as the cash effect of currency hedging has offset the weak operating result.

 
Net interest-bearing debt was reduced by NOK 1.3 billion through the third quarter, to a large degree due to a stronger Norwegian krone. The gearing was 0.98 at the end of the quarter compared with 1.04 in July. There are no major debt repayments before 2010 and 2011.
 
The Q3 result from the European activities is adversely affected by a stronger Norwegian currency and increased recovered paper costs. The demand for newsprint was one per cent lower in the period January-September 2007 compared with the same period in 2006. The demand for magazine paper increased by 3.9 per cent in the same period.

 
The result in Asia is significantly weaker than the preceding quarter. This is primarily due to lower prices in several markets except China and Korea, and a strong increase in recovered paper prices. Newsprint demand in Asia increased by two per cent in the period January-August 2007 compared with the same period in 2006. In China, the corresponding increase was eight per cent.

 
In Australasia, the quarterly result is weakened by a price reduction of seven per cent in Australia. The result so far in 2007 is still significantly better than for the same period last year, mostly due to the restructuring of the machine portfolio yielding lower production costs. The demand for newsprint increased by four per cent in the period January-August 2007 compared with the same period in 2006.

 
In South America, the result is affected by five per cent lower prices, measured in local currencies. The demand for newsprint has increased compared with 2006. Newsprint consumption in Brazil, which is the most important market in the region, has increased by more than 10 per cent so far in 2007.

 
Health and safety
The H value (injuries with absence per million working hours) was 1.6 from 1 October 2006 to the end of September 2007.

 
"The health and safety of our employees has first priority. Our health and safety statistics remain very good, but it is important to maintain a continuous focus on this area," says the CEO.

 
New member of corporate management
Rune Gjessing becomes part of the corporate management team in the role of senior vice president for strategy. This is currently handled by the finance organisation. Gjessing will be responsible for the process to review all of the company's paper machines in the first half of 2008.

 
"Norske Skog will focus even more on strategy and business development in the time to come, and I want this important work to be included in the corporate management team," says Rynning-Tønnesen.

 
Rune Gjessing is 44 years old. He has worked in Norske Skog since 2002 and is presently vice president strategic business analysis. Gjessing holds a Bachelor of wood science and has an MBA in finance and marketing from Canada. He holds the chartered financial analyst designation and worked as an equity analyst in National Bank Financial in Vancouver prior to joining Norske Skog.
 

Oxenøen, 2 November 2007
Norske Skog
Corporate communications
 
For further information:
 
Media:
Vice president corporate communications
Tom Bratlie
Tel.: +47 67 59 93 34
Mob: +47 905 21 904 

 
Financial market:
Vice president investor relations
Jarle Langfjæran
Tel.: +47 67 59 93 08
Mob: +47 909 78 434
 

Q3-2007 BOD report and accounts