16 Jul 2015

Norske Skog: Lower margins in a challenging market

Norske Skog's gross operating earnings (EBITDA) in the second quarter of 2015 were NOK 138 million, down from 192 million in the first quarter. EBITDA were down due to weak publication paper demand in 2015 and industry focus on market share. Today, Norske Skog announces entry into two new growth areas alongside the publication paper business: bioenergy at our facilities and tissue production at Bruck.

The net loss of NOK 571 million in the second quarter of 2015 was significantly impacted by negative other gains and losses amounting to NOK 276 million. Net interest-bearing debt increased by NOK 0.4 billion from the end of first quarter 2015, from NOK 7.1 billion to NOK 7.5 billion, due to seasonally high interest payments and somewhat unfavourable foreign exchange effects. Cash flow from operating activities before net financial items was NOK 89 million (NOK -387 million in Q1 2015) and working capital was practically flat throughout the second quarter.

- We cope with a challenging market for publication paper by a cash driven commercial policy, and continued efforts to cut costs and improve productivity. In addition, we have stopped group support to operations at Walsum. Given that mill's high costs relative to competitors, it was very difficult to see a return to profitability. We will continue to pursue an active capacity management policy to support cash generation and improved market balance, says Sven Ombudstvedt, President and CEO of Norske Skog.

Market and segments

Lower LWC sales volume due to discontinuation of Walsum and appreciation of the Norwegian krone caused lower operating revenues in the quarter. Cost of materials were lower compared to last quarter reflecting the discontinuation of high cost production at Walsum. Fixed costs in the quarter declined to below NOK 500 million. The low sales volume, a less favorable sales mix and continued losses at Walsum through May contributed to reduced gross operating earnings both year-over-year and quarter-over-quarter.

Demand for newsprint and magazine paper in Europe decreased by 10% and 4% respectively in the five first month of 2015 compared to the same period last year. The mills reduced their capacity utilization to 80% (82% in Q1 2015) in the quarter to avoid low margin sales and to support the company's commercial policy.

Operating revenue declined slightly with Australian dollar depreciation and challenging export markets for newsprint to Asia. Variable costs per tonne decreased in Q2 2015 with seasonally lower energy costs. Fixed costs were flat. Gross operating earnings improved year-over-year with the completion of the Boyer conversion.

Demand for newsprint in Australia decreased by around 10% in the first five months of the year compared to the same period last year, while demand for magazine paper was relatively stable. The mills increased their capacity utilization to 89% compared to 88% in Q1 2015.

Active capacity management
Total annual production capacity for the group is 2.8 million tonnes. In Europe the group capacity is 2.1 million tonnes, while in Australasia the capacity is 0.7 million tonnes. Capacity utilization for the group in the second quarter was 82% compared with 83% in the first quarter.
- The market remains challenging. We have performed active portfolio management of our machine capacity in the second quarter, and we will continue this policy in the next quarters. Already announced permanent capacity cuts of more than 2.5 million tonnes in Europe and North-America in 2014 and 2015 in our product segments should be favourable to the market balance, and thus future price levels, says Sven Ombudstvedt, President and CEO of Norske Skog.

Key figures, second quarter of 2015 (NOK million)

Operating revenue 2 786 2 886 3 018 12 150
Gross operating earnings (EBITDA) 138 192 251  801
Gross operating margin (%) 5.0 6.6 8.3 6.6
Gross operating earnings after depreciation -53 -1 71 66
Restructuring expenses -15 -3 0 -4
Other gains and losses -276 121 5 39
Operating earnings -343 116 76 102
Share of profit in associated companies -9 -7 -3 1
Financial items -244 600 -284 -1 357
Income taxes 25 -46 63 -223
Profit/loss for the period -571 663 -148 -1 477
Cash flow from operations before net financial items 89 -387 206 948

New growth opportunities
Norske Skog is entering into two new growth areas alongside the publication paper business. Firstly, Norske Skog will enter into bio energy. Secondly, Norske Skog will start tissue production at Bruck in a joint venture with the Italian firm Roto-cart.
Biogas in Europe
Norske Skog is in a position to build biogas facilities at our mills, leveraging bio-waste from the paper production to renewable energy. The construction of such a biogas facility, at Saugbrugs in Norway, will amount to around NOK 150 million. Enova has granted NOK 52 million in support to the project, while Sparebank 1 Gruppen and Halden Municipality's pension fund has provided around NOK 100 million in debt financing.
- We are planning to commercialize bio-waste from raw material into gas at our mills. Despite challenging markets, we believe that our mill sites are sustainable, and will strengthen their competitiveness by constructing biogas facilities. Our new growth area will be a new main business leg named Nature's Flame, says Sven Ombudstvedt, President and CEO of Norske Skog.
The biogas facility will contribute to gross operating earnings in 2016 and be at full run-rate contribution in 2017. Norske Skog is currently considering replicating the project at its other mills.
- An onsite biogas facility brings twofold economic benefits; a new biogas revenue stream and reduced paper production costs. Biogas is further a renewable alternative to fossil fuels, which forms part of the carbon solution. Moreover, biogas has large potentials in improving urban air-quality, says Sven Ombudstvedt, President and CEO of Norske Skog.
Wood pellets in New Zealand
Norske Skog has acquired Nature's Flame, the market leader for wood pellets in New Zealand. The company has a domestic market share of around 70%.
The initial investment is small, with new production assets acquired at a fraction of construction costs. Initially, Norske Skog will lift the annual production at the company from currently 20 000 tons to 80 000 tons by year-end 2016.

- There are large environmental benefits to be harvested in replacing fossil fuels for heating with renewable wood pellets. If a proven stand-alone concept is established, Norske Skog will consider expanding the pellets production to the Tasman newsprint site, leveraging waste fibre for renewable pellets revenue. The export potential to Asia is large given the site's favorable New Zealand location, says Sven Ombudstvedt, President and CEO of Norske Skog.

Entering the tissue market
Norske Skog is to convert the newsprint site at Bruck in Austria to tissue production through a joint venture structure with the Italian producer and tissue distributor Roto-cart. The total investment for the tissue conversion project is around EUR 80 million, with project financing of 75% debt and 25% equity.
- We are entering the tissue market through a joint venture structure with an experienced partner, which limits the market risk and the capital spend for Norske Skog. The joint venture will replace newsprint production at Bruck with tissue. Thus, supporting the market balance for newsprint and exposing Norske Skog towards the growing market for tissue, says Sven Ombudstvedt, President and CEO.


The market balance for newsprint and magazine paper in Europe has improved following capacity closures in the industry. This has led to higher LWC prices into second half of 2015. SC and newsprint prices are expected to follow into fourth quarter with a seasonal uptick in demand. The loss making activities at Walsum, which was fully deconsolidated in June 2015, will no longer weigh on group results.

The group has a significant competitive advantage in Australia and New Zealand, being the sole domestic producer of newsprint and magazine paper. However, the export markets for newsprint to Asia pose a challenge with historically low prices. A challenge that becomes larger as the domestic market declines.

Consumption of input factors are set to decrease with ongoing efficiency projects at all mills. Quarterly fixed costs should reach a year-end run-rate of NOK 650 million. The growth investments beyond paper will contribute to gross operating earnings from 2016. The full run-rate potential is expected to be realized within a timeframe of 3-4 years.

Presentation and quarterly material

A recorded CEO presentation, the quarterly financial statements and the presentation package are available on www.norskeskog.com. As announced earlier, it is a press and investor briefing at Norske Skog Saugbrugs today. It includes a mill tour along with the corporate and local mill management.

Oslo, 16 July 2015
Norske Skog
Communications and Public Affairs

For further information:

Norske Skog media:
Vice President Corporate Communication
Carsten Dybevig
Mob: +47 917 63 117

Norske Skog financial markets:
Vice President Investor Relations
Tom Rogn
Mob: +47 948 55 659

Q2 2015 Norske Skog press release
Q2 2015 Norske Skog quarterly report
Q2 2015 Norske Skog presentation