Business News
Norske Skog: Weak earnings after significant drop in volume
Friday 08. May 2009 - The first quarter of 2009
Norske Skog’s earnings for the first quarter of 2009 are considerably lower than the earnings in the fourth quarter of 2008, but still somewhat better than for the first quarter of 2008. The result is significantly negatively impacted by the sharp drop in global demand for newsprint and magazine paper.
“For many years, Norske Skog has implemented measures to reduce costs and capacity in line with the structural decline in global newsprint consumption. In the first quarter of 2009, the negative demand trend has been reinforced by the global financial crisis,” says CEO Christian Rynning-Tønnesen.
Reduced advertising volume entails significant reductions in pagination. This effect has led to a reduction of approximately 20 per cent in the global demand for newsprint so far in 2009, compared with the same period in 2008. In response to this demand decline, production at most of Norske Skog’s mills has been reduced during the first quarter.
The total production volume during the first quarter of 2009 was 15 per cent lower than production in the fourth quarter of 2008, and total capacity utilization was 76 per cent in the first quarter, down from 90 per cent in the fourth quarter of 2008.
“High capacity utilization is essential to keeping our costs at a competitive level. Therefore, we will be implementing measures to improve operating rates by shutting down the least profitable capacity. Both temporary and permanent measures are being considered,” says Rynning-Tønnesen.
Financial items had a positive effect on net cash flow, which means that cash flow after financial items and tax has held steady at approximately the same level as in the fourth quarter of 2008. Further improvement of Norske Skog’s financial position is one of the companys main focus areas, and net debt has been reduced by NOK 1.2 billion so far this year. The reduction in debt is mainly the result of changes in currency rates during the first quarter, as well as gains from buying back own bonds in April. Average debt maturity has increased from 5.2 years at the end of 2008 to 5.8 years after the first quarter of 2009. “We will continue to work to reduce the company’s net debt through cash flow from operations and transactions. In addition, we are constantly searching for opportunities to improve the group’s overall maturity profile,” says the CEO.
Production
The significant reduction in demand for newsprint and magazine paper has led to a need for substantial curtailments in production, with the result that capacity utilization was between 62 and 87 per cent in the first quarter. The best capacity utilization was achieved in Australia and New Zealand, while operations were weakest in Asia.
Segment results
Earnings in newsprint activities in Europe have been hit hard by lower volumes. The gross operating earnings for the region declined from NOK 369 million in the fourth quarter of 2008 to NOK 204 million in the first quarter of 2009. The gross operating earnings for our activities in Asia were negative (NOK 42 million). The main reasons for this are price erosion and continuing decline in volumes. In Australasia, gross operating earnings came to NOK 104 million, down from NOK 173 million in the fourth quarter of 2008. This region is also experiencing weaker demand. South America was the only region where activities achieved an acceptable result in the first quarter. The gross operating earnings were NOK 87 million, which is about the same level as in the previous quarter, despite reduced volumes in the first few months of 2009. The magazine paper segment was also weak this quarter, with gross operating earnings of NOK 201 million, down from NOK 331 million in the fourth quarter of 2008.
Cash situation, maturity profile and net debt
Norske Skog’s main priorities are improving profitability and reducing net debt. The net cash flow from operations was NOK 723 million in the quarter, which is about the same as the cash flow in the fourth quarter of 2008. There was a positive cash effect of NOK 460 million in the first quarter from terminating interest and currency swaps.
At the end of April 2009, pro forma net debt was NOK 12.8 billion, down from NOK 14 billion at year-end.