06 Nov 2008

Q3 2008: Continued positive result development

Norske Skog's gross operating earnings before special items was NOK 712 million in the third quarter of 2008, up from NOK 601 million in the second quarter.
"I am pleased that we have managed to improve the operating result even after selling two of our mills in Korea. The positive effects on the result are mainly due to higher magazine paper prices, continued reduction of our costs and a weaker Norwegian currency. I will, however, emphasize that the profitability is far lower than what we aim for," says CEO Christian Rynning-Tønnesen.
Norske Skog's activities in Korea were sold in third quarter. The result from Korea has not been included in the gross operating earnings for the quarter. The gross operating earnings from Korea were NOK 104 million in the second quarter. Adjusted for Korea, the gross operating earnings in the third quarter are thus NOK 215 million better than the result in the second quarter.
Norske Skog's main priority is to improve profitability in the operations and reduce the company's net debt. The debt has been reduced by NOK 3.8 billions through the sale of the activities in Korea as well as some properties. The strengthening of the USD and EUR has, however, resulted in an increase in the debt recognised in the balance sheet of NOK 800 million. The group's total net interest-bearing debt has been reduced from NOK 15.7 billion at the end of the second quarter of 2008 to NOK 12.7 billion at the end of the third quarter.
"We will continue the work to reduce net debt by focusing on improved cash flow from operations and transactions," says Rynning-Tønnesen.
Norske Skog's improvement program, which started in 2006, continues to yield results. The annualized effects of the cost savings were NOK 2.75 billion as of the third quarter of 2008. The program's goal is for the annualized effects of the total improvements to reach NOK 3 billion at the end of 2008.
The shut-down of Norske Skog Steti in the Czech Republic and one of the three paper machines at Norske Skog Follum were implemented in the second quarter of 2008. The result of the shut-downs is that the least profitable deliveries have been stopped, while the more profitable deliveries have been taken over by other Norske Skog mills in Europe. This has filled up free capacity while reducing the fixed costs of the group. The financial effect for Norske Skog from the shut-downs has been estimated to more than NOK 30 million in the third quarter of 2008 alone.
"The tighter market balance is the main reason for our expectance of higher newsprint prices to reflect the major cost increases we have seen in recent years", says Rynning-Tønnesen.
The result in South America has been positively influenced by a NOK 37 million VAT refund. The underlying operations in South America also show a positive development as a result of higher newsprint prices.
The result in Australasia is somewhat lower in the third quarter than in the second quarter. As a result of the price formula in the agreement between Norske Skog and local customers, the newsprint price was reduced by seven per cent from 1 July 2008. The effect of the price reduction has been partially offset by cost improvements and lower energy prices in the region.
Following the sale of the Korean activities, the activities in Asia consist of the two mills Hebei and Shanghai in China and Singburi in Thailand. The result in Asia is somewhat better in the third quarter compared with the second quarter. High recovered paper and energy costs contribute to a result which is lower than our aims and expectations for the region.
The magazine paper activities improve the result from the second to the third quarter by NOK 71 million, mostly due to higher magazine paper prices and a more favorable currency situation.
The global credit crisis is expected to affect paper demand. Norske Skog will meet this with continued cost reductions and strong capital discipline.
"If demand should drop further, we are prepared to implement additional capacity reductions," says Rynning-Tønnesen.
The net loss for the quarter is NOK 1.2 billion. This includes about NOK 800 million in negative translation differences following the sale of the two mills in Korea, as an effect of the Norwegian currency having strengthened itself against the Korean won in the period from Norske Skog purchased the activities in Korea and until the time of the sale. The change in value has been recognized continuously against equity, but for accounting purposes the same changes in value must be recognized in the income statement when the activities are sold. The translation differences have no cash impact, and neither on the group's equity.
The other items which influence net earnings adversely are for all practical purposes related to currency hedging losses as a result of a weaker Norwegian currency. A weak Norwegian currency is essentially positive for Norske Skog's activities.
A presentation/webcast will be held at Norske Skog's head office at Lysaker today at 13.00 hrs. More information about this event will be published on Norske Skog's website www.norskeskog.com.
Oxenøen, 6 November 2008
Norske Skog
Corporate affairs

Q308 Norske Skog BOD report
Q308 Norske Skog financial details