Pellet profits as Norske Skog looks to diversify

Jul 19, 2015 at 05:40 pm by Staff


Norske Skog will follow its papermaking peers into related industry sectors including bioenergy and tissue production, the Norwegian giant has announced.

And with the acquisition of New Zealand wood pellet maker Nature's Flame, production at the Tasman newsprint site is being considered.

The announcement accompanies reporting of lower profits in the second quarter of 2015 - at NOK 138 million, down from 192 million in the previous period - blamed on weak publication paper demand and a focus in the industry on market share.

President and chief executive Sven Ombudstvedt says the "challenging" market for publication paper is affected by cash driven commercial policy and continued efforts to cut costs and improve productivity. "In addition, we have stopped group support to operations at Walsum," he says. "Given that mill's high costs relative to competitors, it was very difficult to see a return to profitability."

The company will continue with "active capacity management" to support cash generation and improved market balance.

The move into two new growth areas will see bioenergy production at various European facilities and tissue production at Bruck in Austria, in a joint venture with Italian firm Roto-cart.

Bio-waste is also to be commercialised from raw material into gas at Norske Skog mills, with the new main business named Nature's Flame after the New Zealand 70 per cent market leader for wood pellets, which Norske Skog has acquired. Ombudstvedt says the biogas facility will contribute to earnings in 2016 and be at full contribution in 2017.

Apart from then new revenue stream, paper production costs will be reduced as biogas is a renewable alternative to fossil fuels.

Norske Skog plans to lift wood pellet production from 20,000 tons to 80,000 tons by year-end 2016. "The initial investment is small, with new production assets acquired at a fraction of construction costs," Ombudstvedt says.

"There are large environmental benefits to be harvested in replacing fossil fuels for heating with renewable wood pellets. If a proven standalone concept is established, Norske Skog will consider expanding the pellets production to the Tasman newsprint site, leveraging waste fibre for renewable pellets revenue.

"The export potential to Asia is large given the site's favourable New Zealand location," he says.

Investment for the tissue conversion project is around 80 million Euros, with project financing of 75 per cent debt and 25 per cent equity.

Norske Skog reported a net loss of NOK 571 million in the second quarter "significantly impacted by negative other gains and losses amounting to NOK 276 million".

"Net interest-bearing debt increased by NOK 0.4 billion from the end of first quarter 2015, from NOK 7.1 billion to NOK 7.5 billion, due to seasonally high interest payments and somewhat unfavourable foreign exchange effects. Cash flow from operating activities before net financial items was NOK 89 million (NOK -387 million in Q1 2015) and working capital was practically flat throughout the second quarter."

In Australasia, operating revenue declined slightly with Australian dollar depreciation and challenging export markets for newsprint to Asia. Variable costs per tonne decreased in Q2 2015 with seasonally lower energy costs. Fixed costs were flat.

Gross operating earnings improved year-over-year with the completion of the Boyer conversion.

Demand for newsprint in Australia decreased by around ten per cent in the first five 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 89 per cent compared to 88 per cent in Q1 2015.

Group annual production capacity is 2.8 million tonnes - 700,000 tonnes of that in Australasia.

Key figures, second quarter of 2015 (NOK million)

Q2
2015

Q1
2015

Q2
2014

2014

Operating revenue

2 786

2 886

3 018

12 150

Gross operating earnings (EBITDA)

138

192

251

801

Gross operating margin (%)

5.0

6.6

8.3

6.6

Gross operating earnings after depreciation

-53

-1

71

66

Restructuring expenses

-15

-3

0

-4

Other gains and losses

-276

121

5

39

Operating earnings

-343

116

76

102

Share of profit in associated companies

-9

-7

-3

1

Financial items

-244

600

-284

-1 357

Income taxes

25

-46

63

-223

Profit/loss for the period

-571

663

-148

-1 477

Cash flow from operations before net financial items

89

-387

206

948

Sections: Print business

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