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

Europe
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.

Australasia
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.

Key figures, second quarter of 2015 (NOK million)

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