PaperAge Magazine

Norske Skog Reports Improved First Quarter 2016, Mills Running at Full Capacity

Sven Ombudstvedt "The market looks brighter. We are currently running at full capacity at our mills, but will continue to perform active portfolio management of our machine capacity when necessary." – Sven Ombudstvedt, President and CEO, Norske Skog.

April 21, 2016 - Norske Skog's gross operating earnings (EBITDA) in the first quarter 2016 were NOK 242 million, a slight seasonal decrease from 260 million in the fourth quarter 2015 but a substantial improvement from NOK 192 million the first quarter of last year. The liquidity was greatly enhanced in the first quarter 2016 following a new securitization facility and an equity offering.

European sales prices increased in the quarter, whereas the cost of energy decreased. It was somewhat offset by more low-margin Asian newsprint export from Australasia.

“The market looks brighter. We are currently running at full capacity at our mills, but will continue to perform active portfolio management of our machine capacity when necessary. The announcements of large permanent capacity cuts and machine conversions in Europe and North-America in the last years in our product segments have been supportive to the market balance, and thus future price levels,” says Sven Ombudstvedt, President and CEO of Norske Skog.

The net profit of NOK 11 million in the first quarter of 2016 compared to a loss of NOK 828 million in the previous quarter, which was heavily impacted by a write-off of tax-assets amounting to about NOK 500 million and unrealized, non-cash, currency loss of about NOK 100 million. Net interest-bearing debt decreased by NOK 0.5 billion from year-end 2015, from NOK 8.5 billion to NOK 8.0 billion, reflecting proceeds from the equity issue, a positive unrealized currency effect of about NOK 200 million and positive cash flow from operations.

Cash flow from operating activities before net financial items was NOK 285 million compared to NOK 363 million in Q4 2015. Norske Skog returned to the accounting principle of embedded derivatives in energy contracts in Norway used in 2014 and earlier with effect from 1 January 2015.

MARKETS AND SEGMENTS

Total annual production capacity for the group is 2.7 million tonnes. 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 first quarter was 95% compared with 89% in the fourth quarter, as a result of active capacity management.

Europe

Operating revenue decreased from the previous quarter with seasonally lower sales volumes. European publication paper prices increased from the fourth quarter, but were partly offset in NOK by GBP depreciation. Variable costs declined per tonne with lower energy costs and efficiency measures. Fixed costs decreased slightly. Gross operating earnings increased to NOK 182 million in the quarter, from NOK 146 million in the fourth quarter of 2015.

Demand for newsprint and magazine paper in Europe decreased by 4% in the two first month of 2016 compared to the same period last year. Our capacity utilization was 94% (86% in Q4 2015) in the quarter.

Australasia

Compared to the previous quarter, operating revenue decreased due to seasonally lower sales volumes. Sales prices remained stable. Variable cost per tonne in Q1 2016 was lower compared to the previous quarter due to lower energy prices and efficiency measures. Fixed costs increased, as the fourth quarter figures benefitted from a reversal of an environmental provision. Gross operating earnings declined quarter-over-quarter with higher total costs and relatively more, lower margin, exports of newsprint to Asia.

Demand for newsprint in Australia decreased by around 3% in the first two 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 97% (96% in Q4 2015).

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. Norske Skog will replicate the project at Golbey.

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. The partnership with Roto-cart has however not developed as intended and has been terminated. Norske Skog is currently in discussions with alternative partners. The Bruck mill is ideally located close to key markets and has synergies with large-scale paper production. 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.

SUCCESSFUL EXCHANGE OFFER COMPLETED

The exchange offer to 2017 bondholders, as announced in the first quarter, was completed on April 12. As a result of this transaction, the group net debt decreased by more than NOK 1 billion and the book equity also increased by more than NOK 1 billion. Annual cash interest payments will be reduced by more than NOK 100 million. The effect of this transaction will be accounted for in the financial statements of the second quarter.

Norske Skog executed a new EUR 100 million securitization facility (NSF) with GSO and Cyrus, replacing the Sparebank1 NOK 250 million accounts receivables facility. The NSF is secured by receivables and inventory of Norske Skog Saugbrugs AS and Norske Skog Skogn AS, in addition to the inventory of the mill of Norske Skog Golbey AS. Norske Skog has also received EUR 15 million in proceeds from a private placement of of 63,460,714 new shares to GSO and Cyrus at a subscription price of NOK 2.24.

Norske Skog is preparing a repair offering directed towards shareholders, whom did not participate in the private placement. Shareholders in Norske Skog on April 20 are entitled to subscribe to new shares of about 20% of their shareholdings. The subscription price is NOK 2.24 per share, and the subscription period will be in late May after the prospectus has been finalized and approved by the FSA (The Financial Supervisory Authority of Norway), see separate announcement today.

“After these transactions, we have strengthened and secured our long-term capital structure by enhancing our liquidity position, realizing immediate de-leveraging and extended debt maturities,” said Mr. Sven Ombudstvedt, President and CEO of Norske Skog.

OUTLOOK

The market balance for newsprint and magazine paper in Europe is continuing to improve with recent announcements of capacity closures and conversions adding to the benefits experienced from closures last year. Reflecting closures and planned conversion projects out of publication paper, European operating rates for newsprint and LWC are expected to remain above 90% in both 2016 and 2017, after taking into account an expected secular decline in demand. This gives momentum to the positive pricing environment.

The European SC market is gaining support from US closures and US import duties on Canadian paper. The Asian export market for newsprint, of increasing importance to Norske Skog due to the smaller domestic market in Australasia, is encouraging with prices improving. Demand for regional newspapers in India are strong.

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.

Gross operating earnings for the first half of 2016 are expected to be above NOK 500 million. The growth initiatives announced last year are expected to start to contribute to gross operating earnings this year and to reach full run-rate potential within a timeframe of 3-4 years.

The Board will decide on the group's ability to complete the redemption of the 2016 bond in June based on cash balances, various liquidity initiatives and improved cash flow from operations in 1H16. The new securitization facility will not be used to debt repayments. The present amount outstanding on the 2016 bond is EUR 74 million following buy-backs in April.

With headquarters in Oslo, Norway, Norske Skog is one of the world's largest producer of publication paper. The company has an annual production capacity of 2.8 million tonnes — 2.1 million in Europe and 0.7 million in Australasia. To learn more, please visit: www.norskeskog.com

SOURCE: Norske Skog