Norske Skog: Good performance, material write-downs in Q2

Net profit in the second quarter was NOK 229 million. A gain after the exchange offer exceeding NOK one billion in April was offset by material impairments of the asset portfolio of NOK 1.4 billion at the end of the quarter. Gross operating profit for the second quarter was NOK 335 million, which is the best gross operating earnings since the third quarter of 2012. Norske Skog's equity at the end of the quarter was NOK 190 million.

New auditor

The former auditor EY suggested in its audit report for 2015 that the company's asset portfolio should be written-down by at least NOK 2 billion, where particularly the values in Europe were considered to be overvalued. The consulting firm BCG has in the process of auditor change, prepared an independent market analysis that largely coincides with the views of Norske Skog's board and management. The final BCG-report concluded with a minor impairment in Australasia and no impairment in Europe.

The company however has to write down its fixed assets materially due to a more backward-looking perspective on margins than previously assumed. This has been necessary in order to get a new auditor to accept the assignment after 2015. The second quarter accounting effects of the asset write-downs was NOK 1.4 billion, respectively NOK 0.3 billion in Europe and NOK 0.9 billion in Australasia. In addition, the minority stake in Malaysian Newsprint Industries (MNI) was written-down by NOK 0,2 billion.

The election of new auditor will take place at an extraordinary general meeting on 10 August, which is the deadline set by the Register of Business Enterprises (Foretaksregisteret) to register new auditor. The company's board proposes that the EGM elect BDO as new auditor.

Operational development and gross operating earnings

Gross operating earnings (EBITDA) in the second quarter 2016 was NOK 335 million, which was a significant increase from NOK 242 million in the first quarter and a significant improvement from NOK 138 million in the second quarter last year. The improvement was mainly due to lower energy costs. Gross operating earnings (EBITDA) for the first six months totalled NOK 577 million. Norske Skog had guided for gross operating earnings in the first half above NOK 500 million. Net income in the second quarter was NOK 229 million compared with a negative NOK 578 million in the second quarter 2015.

- After a comprehensive refinancing of the group, major cost reductions and significant progression on new growth projects, the Group is better equipped to meet the future than earlier. The improvement in the market balance, after significant capacity closures in Europe and North America in recent years, should maintain margins in the second half at the same level as in the first half, while seasonally the sales volumes are higher in the second half, says Sven Ombudstvedt, CEO of Norske Skog.

Cash flow from operating activities before net financial items was NOK 321 million compared with NOK 285 million in Q1 2016. The cash balance at the end of the quarter was NOK 725 million.

In the second quarter, Norske Skog completed a comprehensive refinancing of the debt, which increased the average maturity of existing bonds to 6 years and significantly reduced the debt. Net interest bearing debt was reduced by almost NOK 1.7 billion from the end of the first quarter, from NOK 8.1 billion to NOK 6.4 billion, as a result of debt restructuring in connection with the exchange offer, the repair equity offering and unrealized (without cash effects) currency effects. After these transactions, the equity was NOK 190 million at end of the second quarter compared to negative NOK 154 million at the end of the first quarter.

Key figures, second quarter of 2016 (NOK million)

Market outlook

The market balance for publication paper in Europe is favourable due to a benign demand development and capacity closures. Newsprint prices in the UK increased into 2H16 reflecting British pound depreciation following Brexit. The European SC market is benefiting from a strong Dollar and capacity closures in the US. The Asian export market for newsprint, of increasing importance to Norske Skog due to a smaller domestic market in Australasia, is encouraging with price improvements. There continues to be strong demand from regional Indian newspapers.

Favourable energy costs for our European mills and efficiency measures at all mills are expected to reduce variable costs by 2-3% per tonne in 2016. Fixed costs initiatives continue at all mills towards a run-rate group level of NOK 600 million per quarter by year-end 2016. Sales volumes will be seasonally higher in the second half, while margins should be on level with the first half. Ongoing growth initiatives are expected to contribute marginally to gross operating earnings this year, but reach full run-rate potential within a timeframe of 3-4 years.

Markets and segments

Total annual production capacity for the group is 2.7 million tonnes after the Boyer conversion. In Europe, the group capacity is 2.0 million tonnes, while in Australasia the capacity is 0.7 million tonnes. Capacity utilization for the group in the second quarter was 92% compared with 95% in the first quarter.

Europe
Operating revenue decreased from the previous quarter due to a stronger Norwegian krone. Sales volume and prices remained stable from the first to the second quarter. Variable costs declined per tonne with lower energy costs and efficiency measures. Fixed costs remained unchanged from the first quarter. Gross operating earnings increased to NOK 260 million in the quarter, from NOK 182 million in the first quarter of 2016 due to lower costs.

Demand for newsprint and magazine paper in Europe decreased by 3% in the five first months of 2016 compared to the same period last year. Our capacity utilization was 92% (94% in Q1 2016) in the quarter.

Australasia
Compared to the previous quarter, operating revenue decreased due to a stronger Norwegian krone and somewhat lower sales volume. Sales prices remained stable. Variable cost per tonne in Q2 2016 was lower compared to the previous quarter due to lower energy prices and efficiency measures. Fixed costs were unchanged from the first quarter. Gross operating earnings increased slightly quarter-over-quarter from NOK 75 million in the first quarter to NOK 78 million in the second quarter.

Demand for newsprint in Australia decreased by around 9% in the first five months of the year compared to the same period last year, while demand for magazine paper was relatively stable. The capacity utilization was 91% in the quarter (97% in Q1 2016).

Update on new growth opportunities

Biogas
The NOK 150 million biogas project at Saugbrugs is on schedule for completion by year-end 2016. The biogas facility will be at full run-rate contribution to gross operating earnings in 2017.

Wood pellets in New Zealand
Nature's Flames pellets production has reached an annual capacity of 40 000 tonnes. Norske Skog considers to expand the production of pellets, given the considerable competitive export advantage. Pellets brings significant environmental benefits replacing fossil fuels in the large economies of South-East Asia.

Tissue project at Bruck
The tissue project, a conversion of the newsprint site, has progressed well with all permits in place and ground work completed. Norske Skog is currently in discussions with partners for the project. The timeline is extended from spring 2017 to year-end 2017. Upon completion, the 125 000 tonnes newsprint machine will be closed, while the 265 000 tonnes LWC machine will continue production.

Growth projects at Golbey
The sodding ceremony for the construction of the Golbey biogas plant was done on July 13 with representatives from the press, investors and French politicians present. The project at Golbey will be financed locally. The plant will be connected to the biological-chemical treatment plant and be dimensioned to absorb all organic waste from the paper production. The plant is expected to be at full operation during 2017. At the same time, Golbey implements new projects, which will combine synergies from the existing mill and the nearby industrial cluster.
 
Presentation and quarterly material
A recorded webcast of the CEO presentation, the quarterly financial statements and the presentation package will be available on www.norskeskog.com.

Norske Skog
Communications and Public Affairs

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