Norske Skog in better shape, proposes auditor switch

Despite falling earnings and demand in some markets, Norske Skog chief executive Sven Ombudstvedt paints an optimistic picture in the group's second-quarter report.

Factors contributing to that include strong demand for newsprint from strong demand regional newspapers in India, taking up the slack as the domestic market in Australia and New Zealand gets smaller.

Demand in Australia for the first five months of the year was about nine per cent less than in the same period of 2015, and capacity utilization fell to 91 per cent from 97 per cent in the previous quarter.

The stronger Norwegian krone meant that revenue from ANZ decreased - as did operating revenue there - but Norske Skog gained from the falling British pound after Brexit and the group reports a favourable market balance for publication paper in Europe, thanks to "benign demand development" and capacity closures.

Ombudstvedt reported net profit in the quarter of 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 so gross operating profit came out at NOK 335 million, "the best gross operating earnings since the third quarter of 2012".

With support for the board and management on assets write-downs from consulting firm BCG - providing a minor impairment in Australasia and none in Europe - the board is recommending a change of auditor to BDO, and this will be among business at an extraordinary general meeting on August 10.

Ombudstvedt says the company has however had to write down fixed assets "materially" in order to get a new auditor to accept the assignment after 2015. Second quarter accounting effects of the asset write-downs is NOK 1.4 billion - NOK 300,000 in Europe and NOK 900,000 in Australasia, as well as a NOK 200,000 write down of the minority stake in Malaysian Newsprint Industries.

Operational development

Gross operating earnings (EBITDA) in the second quarter 2016 was NOK 335 million, a "significant increase" from NOK 242 million in the first quarter and better than the 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, ahead of the NOK 500 million guidance. Net income in the second quarter was NOK 229 million compared with a negative NOK 578 million in the second quarter 2015.

Ombudstvedt says after comprehensive refinancing, 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".

Key figures, second quarter of 2016 (NOK million)

Pictured: Production of wood pellets at NZ subsidiary Nature's Flames has reached 40 000 tonnes a year, and the company plans to expand production of pellets, "given the considerable competitive export advantage"

• Norske Skog announced on Friday that Standard & Poor's had removed it from the CreditWatch list - where it has been since April 29 - and its long-term credit rating from CCC- to CCC+, with the outlook changed to "stable", reflecting improved liquidity situation and profit.