Norske Skog reports strong 3Q/16 results; company to seek higher newsprint prices
(Norway, Oct. 19, 2016) “The improved market balance should allow for a substantial increase in sales prices going forward, especially after significant capacity closures in Europe and North America combined with a flattening of the demand curve.” – Sven Ombudstvedt, President and CEO, Norske Skog.
Strong demand for Norske Skog’s products in all regions resulted in high capacity utilization and net profit in the third quarter of NOK 190 million. This demonstrate the long-term trend of good performance. So far this year, the net profit is NOK 430 million.
Gross operating earnings (EBITDA) in the third quarter 2016 was NOK 251 million, which was a decrease from NOK 335 million in the second quarter, mainly due to somewhat higher energy and recovered paper cost and weaken pound. Net profit in the third quarter was NOK 190 million compared with a negative NOK 874 million in the third quarter 2015.
“Despite a comprehensive refinancing of the group this year, the business units have completed major cost reductions and seen significant progress on new growth projects. The green shift transformation of Norske Skog into new segments will be more prominent in the years to come. The improved market balance should allow for a substantial increase in sales prices going forward, especially after significant capacity closures in Europe and North America combined with a flattening of the demand curve,” says Sven Ombudstvedt, CEO of Norske Skog.
Cash flow from operating activities before net financial items was NOK 115 million compared with NOK 321 million in Q2 2016. The cash balance at the end of the quarter was NOK 570 million. Net interest bearing debt was reduced by NOK 0.2 billion from the end of the second quarter, from NOK 6.4 billion to NOK 6.2 billion, as a result of a stronger Norwegian krone against all major currencies and bond buybacks. The equity was NOK 269 million at end of the third quarter compared to NOK 190 million at the end of the second quarter.
The market balance for publication paper in Europe is favorable with modest demand declines and reduced supply due to capacity closures. The newsprint market will tighten further in 2017 with significant additional European capacity closures already announced, which should lead to price increases.
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.
Ongoing growth initiatives will begin to contribute meaningfully to gross operating earnings from next year and reach full run-rate within a timeframe of 3-4 years. Fixed costs initiatives continue at all mills towards a group level run-rate of NOK 600 million per quarter.
Recent foreign exchange developments, particularly from GBP depreciation, but also from NOK appreciation to EUR is a headwind for the group. Combined with somewhat higher energy and recovered paper costs, this will diminish the positive seasonal effect from higher sales volumes in the fourth quarter.
Company to seek higher newsprint prices
In the Q3 2016 results webcast, Sven Ombudstsvedt, Norske Skog President and CEO, announced that Norske Skog was aiming for at least 30 €/t price increase for newsprint from 2016 into 2017 and that the company would also seek price improvements for other products in Continental Europe. Prices in the UK would see even higher mark-ups due to the weakness of the pound sterling, he added.
Markets & Segments
Total annual production capacity for the group is 2.7 million. 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 third quarter was 93% compared with 92% in the second quarter.
Operating revenue decreased from the previous quarter with somewhat lower sales volumes and a negative Brexit impact from GBP depreciation. European publication paper prices remained stable outside the UK, where import inflation drove UK newsprint prices higher.
Variable costs increased per tonne due to higher energy and recovered paper costs. Fixed costs remained unchanged from the second quarter. Gross operating earnings decreased quarter-over-quarter with lower revenue, cost inflation, and reduced contribution from Golbey in France due to its annual maintenance stop.
Demand for newsprint and magazine paper in Europe decreased by 3% and 2% respectively through August compared to the same period the year before. Capacity utilization remained high at 92% in the period (92% in Q2 2016).
Operating revenue increased from the previous quarter with higher sales volumes at Boyer. Publication paper prices in Australasia remained relatively stable as long term contracts are an important constituent of the business.
Variable costs increased per tonne with a relatively higher share of magazine paper production to newsprint production. Fixed costs were broadly flat. Gross operating earnings decreased somewhat quarter-over-quarter with increased costs offsetting the higher sales volumes.
Demand for newsprint in Australasia decreased by 6% through August compared to the same period the year before. Demand for magazine paper was relatively stable. Capacity utilization was close to full at 97% in the period (91% in Q2 2016).
Update On New Growth Opportunities
Growth project at Saugbrugs
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. Saugbrugs has, in addition, initiated growth projects related to the development of microfibrillated cellulose (MFC) and fibreboard.
Growth projects at Golbey
The Golbey biogas plant is under construction, and is expected to be completed during 2017. The project 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. At the same time, Golbey is implementing new projects, which will combine synergies from the existing mill and nearby industrial clusters.
Tissue project at Bruck
Norske Skog is in partner discussions for a brownfield conversion of the newsprint line at Bruck in Austria to tissue. The 125,000 tonnes newsprint machine will be closed at the end of 2017, while the 265,000 tonnes LWC machine will continue production.
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. Wood pellets are a renewable alternative to fossil fuels in the large economies of South-East Asia.
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)