Norske Skog to expand its CGW production as the newsprint market slumps, will convert one newsprint PM at its Boyer mill in Australia, expand the product range at its Saugbrugs mill in Norway; CGW may account for as much as 25% of company's future sales

Kendall Sinclair

NEW YORK , March 27, 2013 (Bloomberg LP) – Norske Skogindustrier ASA, the Norwegian papermaker that hasn’t made a profit in eight years, is betting on an expansion in coated paper used for catalogues and inserts to counter a slump in newsprint and magazine demand.

The company is converting one of its paper machines at the Boyer mill in Australia to coated paper and is also investing to expand the product range at its Saugbrugs mill in Norway in a move that could see coated paper account for as much as 25 percent of sales in the future, Norske Skog Chief Executive Officer Sven Ombudstvedt said in a phone interview on March 22.

Global newsprint demand is falling by between 2 percent and 3 percent annually while magazine demand slumped 6 percent last year as people increasingly read news on computers and smartphones. That has prompted papermakers to shut mills to try to restore a supply and demand balance as well as shifting their focus to other products. Norske Skog has annual newsprint capacity of 2.3 million tons and 1.3 million tons of magazine paper, a ratio that will change as it expands in coated paper.

“Today, it’s relatively small,” Ombudstvedt said, referring to the company’s capacity for producing coated paper used in catalogues and magazine and newspaper inserts. “In a few years’ time, it may be up to a quarter of the top-line.”

The company’s newsprint production is seen falling to just below 50 percent of its total output “in a few years,” said Ombudstvedt, adding that Norske Skog has kept the shift largely to itself as the transformation will “take some time.”

Magazine paper accounted for 38 percent of Norske Skog’s operating revenue last year while newsprint stood for 59 percent, according to its fourth-quarter report. While its new focus on coated paper mimics moves by its Nordic competitors, the company plans to also remain a major supplier of newsprint.

“We have now, after many years of productivity work, quite competitive assets,” Ombudstvedt, who joined the Norwegian company as its new chief executive officer in January 2010, said. “Being a full-scale supplier to the graphic industry could be an interesting space to be also in the future.”

The decision to remain a major newsprint supplier sets Norske Skog apart from its Swedish and Finnish rivals. Holmen AB, the Stockholm-based papermaker that provides the pink paper to the Financial Times, is moving away from newsprint and refocusing on specially developed papers for catalogues and potentially also magazines that are simpler and cheaper than traditional paper grades. Helsinki-based Stora Enso Oyj is betting on renewable packaging as the driver of growth.

While the new focus on coated paper is one measure taken by Norske Skog to try to restore earnings at a company that hasn’t made an annual profit since 2004, it has also implemented measures to try to improve earnings at its newsprint operations.

Among the mills Norske Skog has closed is the Follum paper mill in Norway. It also said March 20 it would temporarily idle one of the paper machines at its Skogn plant in Norway “to create a better balance between demand and supply for newsprint in Europe” and to “avoid unprofitable production at Skogn.”

The company last year also sold a mill in Chile to a group of Chilean investors and another one in Holland to investment firm H2 Equity Partners. One reason behind the decision to sell was to cut debt, accrued in the early 2000s as it financed acquisitions with bonds. Its debt has now been cut to about 6 billion kroner ($1.03 billion) from 9.5 billion kroner in 2009.

Ombudstvedt would consider also selling Norske Skog’s mills in Thailand and Brazil if the price is right as they are relatively small and offer no synergies with the rest of the group, he said. Norske Skog, based in Lysaker near Oslo, has 11 mills, mainly in Europe, Australia and New Zealand.

The mill closures announced and carried out by the paper industry so far are seen improving the balance between supply and demand by the middle of this year to the extent that prices for newsprint could be increased on July 1, Ombudstvedt said.

Still, to stay ahead of the annual decline in demand this year and next, one or two more European paper machines need to be closed and one further machine needs to be shut every year until at least 2020 to maintain the balance, he said. Closures may also be needed within magazine papers, Ombudstvedt said.

“Our main job is to regain the gross margin,” Ombudstvedt said, adding that the company needs an Ebitda margin of 15 percent “over time.” Norske Skog reported a gross margin of 8.8 percent for last year, according to its annual report.

Reaching the margin target will depend on how fast the economic situation in Europe improves and on the development of the Norwegian krone, which has strengthened 2.3 percent against the euro so far this year. A 1 percent fluctuation in the krone’s value against all major currencies affects Norske Skog’s profit by about 50 million kroner, according to the company.

--Editors: Niklas Magnusson, Andrew Noel

To contact the reporter on this story: Janina Pfalzer in Stockholm at jpfalzer@bloomberg.net

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net

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