NORSKE SKOG Q2 report. New corporate management announces major changes in Norske Skog

Transcription

1 NORSKE SKOG 2006 Q2 report New corporate management announces major changes in Norske Skog

2 Towards a new era After more than four years of poor profitability, we are now making every effort to reverse the trend. With a new organisation and a far-reaching improvement plan, I am convinced we will accomplish this. Many factors make it necessary to implement an extensive turnaround. The market position has changed. When the world economy is buoyant, we should normally have made good profits. Paper consumption is flattening out in the western world, and an excess capacity has been built up in the important Chinese growth market which we did not anticipate when we acquired the remaining 50% of PanAsia. We are burdened by high energy prices and an unfavourable exchange rate. Such conditions have generated fundamental changes in our cost picture, and represent one of the principal challenges for the future. The role of the mills will be strengthened. Each of them will be a business unit with responsibility for sales and procurement. This will ensure the best possible relationship between customers, mill and suppliers. Norske Skog s administration will be streamlined and made more efficient. A major element in this will be the Norske Skog Production System (NSPS), a global standardisation programme which will change the way we work in the company and create synergies through the development of best practice. This will have a positive impact on the whole of Norske Skog. These changes will affect many employees, and we are working closely with union officials to minimise their impact. This company has demonstrated before that we take our social responsibility seriously. We have a financial strength which allows us to take the necessary action. I believe in a future for the paper industry, and we will be able to retain a leading global position. Christian Rynning-Tønnesen Turnaround in Norske Skog: Reorganising, do improving effici Norske Skog must substantially enhance its profitability, and is implementing an extensive programme which will run for two years. Its main elements are further improvements in operational efficiency, a concentration on the most profitable products and a considerable downsizing. Christian Rynning-Tønnesen has his plan ready. Demand for newsprint in Korea has fallen by some 20% over the past four years. Norske Skog will therefore shut down the PM1 and PM4 paper machines at Norske Skog Jeonju, reducing Korean production capacity by a total of tonnes. The machines are due to cease operation at the end of this year.the company closed Norske Skog Union ( tonnes per annum) and PM1 at Norske Skog Tasman ( tonnes per annum) earlier this year. Downsizing The workforce is to be downsized as part of the profitability improvements. This could do away with more than jobs. Relatively speaking, the largest cuts will be in administrative functions. But sizeable reductions will also be made at the mills. The Norske Skog management gives weight to achieving a good process with union officials involved in the planning and implementation. Most efficient When the restructuring programme Norske Skog Q2 2006

3 wnsizing and ency has been completed, the ambition is for Norske Skog to be the most efficient paper manufacturer in the world regardless of region. Strict priority will be given to profitability in everything the company does, whether it concerns the product portfolio, the customer portfolio, investments or the operations model. Business units The regions will no longer be a separate management level, and four senior vice presidents will now each be responsible for a portfolio of mills. Every mill will become a separate business unit with responsibility for sales, procurement and logistics. Staff functions are being concentrated under the senior vice president for organisation and the chief financial officer. One senior vice president has also been given special responsibility for measures to improve profitability in Norske Skog. Standardisation Major differences in productivity and earnings currently exist between Norske Skog s 18 mills. By continuing to develop global standards and by utilising the experience and expertise of each mill, efficiency and profitability will be enhanced throughout the group. The main job of a global Norske Skog production system team is to develop an operational model for the company s business units. Work on creating a standard solution of this kind will embrace structures and processes relating to operations, management, attitudes and expertise. The intention is to develop a model which strikes a balance between the advantages of local independence and the benefits of sharing best practice. New corporate management The company is now implementing a major restructuring and simplification of its organisation. As the first step in this process, chief executive Christian Rynning-Tønnesen presented a new organisational structure in July together with changes to the corporate management. The number of people in this team has been reduced from 11 to eight people. Eric d Olce, senior vice president, comes from the post of mill manager at Norske Skog Golbey in France and will be responsible for the Norske Skog Skogn, Norske Skog Parenco, Norske Skog Golbey and Norske Skog Steti mills. He will also coordinate group sales and marketing activities. Antonio Dias, senior vice president, comes from the post of executive vice president for. He will be responsible for the Norske Skog Saugbrugs, Norske Skog Follum, Norske Skog Bruck, Norske Skog Walsum, Norske Skog Pisa and Norske Skog Bio Bio mills. Vidar Lerstad, senior vice president, comes from the post of senior vice president for strategy. He will be responsi Eric d Olce Senior vice president Axel Thuve Acting senior vice president HR & organisation Peter Chrisp Senior vice president Antonio Dias Senior vice president Christian Rynning-Tønnesen CEO and president ble for the Norske Skog Jeonju, Norske Skog Chongwon, Norske Skog Hebei and Norske Skog Shanghai mills. Ketil Lyng, senior vice president, comes from the post of senior vice president for supply and logistics. He will remain responsible for these functions at corporate level, while also assuming responsibility for the Norske Skog Albury, Norske Skog Boyer, Norske Skog Tasman and Norske Skog Singburi mills. In addition, Lyng will be responsible for the environment. Peter Chrisp, senior vice president, comes from the post of mill manager at Norske Skog Tasman. He will be responsible for the Norske Skog production system (NSPS) programme for improving profitability as well as for research and development. Andreas Enger, chief financial officer, will also be responsible for strategy, energy, communication and information technology. Axel Thuve, will be acting senior vice president for human resources and organisation. A recruitment process for this post has been initated. The new corporate management has a broad international background and solid experience from Norske Skog. Andreas Enger Chief financial officer Vidar Lerstad Senior vice president Ketil Lyng Senior vice president Norske Skog Q2 2006

4 Report for the second quarter of 2006 Gross operating earnings before special items: NOK million (Q1 06: NOK million); net operating earnings before special items: NOK 278 million (Q1 06: NOK 167 million). Demand for newsprint was good in most of the company s markets. However, the prices in China remain low because of overcapacity. Difficult market for magazine paper in Europe, with excess capacity and pressure on prices. A new chief executive has been appointed, with a consequent restructuring designed to focus greater attention on the individual operating units. A plan to improve earnings has been initiated, with an extensive de-manning as one of its main elements. The decision has been taken to close tonnes of capacity in Korea. De-manning and capacity closures will involve some NOK 1 billion in provisions and impairment in the third quarter. Key figures, group IFRS: Q2/06 Q1/06 Q2/05 YTD 2006 YTD 2005 Operating revenues NOK mill Gross op earnings NOK mill Gross operating margin % Net op earnings/(loss) NOK mill (14) Net operating margin % (0.2) Pre-tax earnings/(loss) NOK mill (213) (19) (54) Net earnings/(loss) NOK mill (180) 213 (8) 33 (50) Earnings per share NOK (0.95) 1.13 (0.06) 0.17 (0.38) Cash flow NOK mill Cash flow per share NOK Return on capital employed % (0.1) Deliveries t Production t Operating earnings before IFRS-related value changes, provisions and impairment charges: Q2/06 Q1/06 Q2/05 YTD 2006 YTD 2005 Gross operating earnings before special items Net operating earnings before special items Norske Skog Q2 2006

5 Factors that influence the comparison with results for previous quarters Norske Skog Pan Asia has been treated as a wholly-owned region from 18 November 2005, while it was previously recognised in the accounts through 50% consolidation. The Asian business was also affected by the start-up of the new newsprint mill in Hebei during the second quarter of 2005, with depreciating commencing in September Norske Skog Union was closed down in the first quarter of The mill produced tonnes during this period, and tonnes in the whole of Gross and net operating earnings under the IFRS in the second quarter of 2006 include a cost item of NOK 186 million which related to value changes for energy hedges, a provision of NOK 63 million related to de-manning, and an impairment charge of NOK 43 million on fixed assets in Korea. The impairment charge relates to the scrapping of old equipment in connection with the conversion of PM7 at Norske Skog Jeonju. These amounts are not included in operating earnings for the regions. A specification of such non-operational items in earlier quarters is included elsewhere in the interim report. Comparison between Q2 06 and Q1 06 Comparable net operating earnings (before IFRS-related value adjustments, provisions and impairment charges) improved by NOK 111 million from the previous quarter. This improvement is derived primarily from the n region, where volumes increased following the completion of the largest restructuring projects and lower electricity prices in New Zealand. Very weak earnings for European magazine paper reflected lower production and sales volumes. Measured against Norske Skog s trade-weighted basket of currencies, the Norwegian krone during the second quarter was roughly 3% stronger on average than in the first quarter. This is calculated to have had a negative effect of NOK 50 million on operating earnings. Comparison between Q2 06 and Q2 05 Comparable net operating earnings before special items increased by NOK 56 million from the same period of last year. Earnings improved in the European newsprint, n and Asian regions. Comparable energy costs declined slightly following the closure of Norske Skog Union and the transfer of its power contracts to the other Norwegian mills. A strengthened NOK is calculated to have had a negative effect of NOK 40 million. Financial items (NOK mill) Q2/06 Q1/06 Q2/05 YTD 2006 YTD 2005 Net interest exp (244) (254) (173) (498) (355) Interest hedging (29) 41 (2) Gain/(loss) currency (100) Other financial items (19) (23) (17) (42) (29) Total financial items (209) (161) (191) (370) (486) The increase in interest expenses from 2005 primarily reflects higher debt. Currency hedging has yielded a gain so far in 2006 because of the stronger Norwegian krone. Affiliated companies Following the sale of the shares in Catalyst Paper, Forestia and Nordic Paper, Malaysian Industries is the only affiliated company recognised in the group accounts. The share of earnings from MNI totalled NOK 12 million for the second quarter. Cash flow Cash flow from operations totalled NOK 574 million in the second quarter. This was on a par with the corresponding figure for the same period of 2005 and a great improvement on the first quarter of this year, which experienced one-off effects related in part to Norske Skog Pan Asia. Balance sheet Assets totalled NOK 47.5 billion at 30 June, a reduction of NOK 4.6 billion from 31 December. This primarily reflects the disposal of the Catalyst Paper shares, the deconsolidation of Forestia, depreciation exceeding investment taken to the balance sheet and currency effects. A stronger Norwegian krone during the year has reduced the value of fixed assets outside Norway by NOK 1.8 billion. Investment taken to the balance sheet totalled NOK 468 million in the second quarter and NOK 801 million for the first half-year. The restructuring project in accounted for roughly NOK 300 million of the first-half year investments. This project will be completed during the third quarter. PM1 at Norske Skog Tasman was shut down on 1 August. The project has been executed within the approved schedule and budget, and will yield the cost savings originally forecasted. Net interest-bearing debt came to NOK 17.8 billion at 30 June, a slight increase from the previous quarter but substantially below the figure at 31 December This primarily reflects settlement for the shares in Catalyst Paper. The average maturity of long-term debt at 30 June was 5.5 years, and disposable liquidity including undrawn lines of credit amounted to NOK 6.6 billion. Gearing net interest-bearing debt divided by equity was 0.88 at 30 June. Equity (excluding minority interests) at 30 June was NOK 20.1 billion, which corresponds to NOK per share. The reduction in equity from 31 December reflects roughly NOK 900 million in currency effects from the stronger Norwegian krone, and the payment of just over NOK 1 billion in dividend. Organisation The board appointed Christian Rynning-Tønnesen to be the new president and CEO on 6 June. At the same time, Andreas Enger was appointed as the new chief financial officer. He has already begun working part-time at Norske Skog and will take office on 1 September. An extensive reorganisation was approved in early July. Its main elements involve reducing the corporate management team from 11 to 8 members, eliminating the regions as a separate level of responsibility, and putting four senior vice presidents in charge Norske Skog Q

6 of a mill portfolio each. Another senior vice president will be responsible for monitoring the implementation of an extensive programme to enhance earnings and efficiency. Key principles for managing the company will be simplification and a greater focus on direct supervision of the individual mill. This will be achieved through the new organisational model, with responsibility for mills assigned to dedicated members of the corporate management team. Each of the mill managers will have the responsibility for the result of their operations. Mills with weak earnings will be kept under continuous assessment. Plan to improve earnings Norske Skog must improve its profitability significantly. An extensive programme to improve earnings will therefore be implemented in order to reach the group s required rate of return on capital employed of 11% by the end of 2008 with the present market and cost conditions. The actual return has been in the region of 3-4%. A series of improvement initiatives are being planned. These include simplification of work processes, increased production efficiency, cost reduction within supply and logistics and a substantial de-manning. The de-manning is targeted at shedding of some jobs. The largest cuts in relative terms will affect administrative functions, but the mills will also see considerable reductions. Weight is being given to achieving a good process, with union officials involved in planning and executing all parts of the programme. Shut-down of Korean capacity Korean demand for newsprint has declined by roughly 20% over the past four years, and sufficient profitability cannot be achieved on all exports from Korea. It has accordingly been resolved to close down two machines at Norske Skog Jeonju. Production capacity accordingly needs to be reduced, and PM1 and PM4 at Norske Skog Jeonju will be shut down at the end of These two paper machines have a combined capacity of tonnes. Impairments and provisions In connection with impairment of the paper machines in Korea and costs associated with de-manning across the group, a provision expected to be in the order of NOK 1 billion will be made in the accounts for the third quarter of As usual an impairment testing of all assets will be undertaken during the second half year. Share developments The foreign shareholding at 30 June was 61%, an increase of four percentage points from 31 December. A total of million Norske Skog shares were traded in the first half, representing a turnover rate of 1.47 on an annual basis. A long-term incentive scheme in the form of synthetic options has been adopted by the board for Norske Skog s corporate management team. This scheme replaces an earlier programme in the period Under the new arrangement, the chief executive can award up to options to each member of the corporate management in 2006, 2007 and The chair can award up to options to the chief executive in the same years. These options run for the year they are awarded plus three years, and can be exercised wholly or in part during the final six months of this term. In accordance with his contract of employment, chief executive Rynning-Tønnesen was awarded synthetic options in early July with a strike price of NOK This corresponds to the average price of Norske Skog s shares in the period June. Under the new option programme, six other members of the corporate management have been awarded options each at the same strike price. If the options are exercised, an amount will be paid which corresponds to the difference between the market price of Norske Skog s share and the option price. This sum is treated as salary, and the net amount after tax will be used to buy Norske Skog shares at market price. These shares must be held for three years. Health and safety A fatal accident was tragically suffered at Norske Skog Golbey in early July, and a full internal investigation has been launched. The lost-time injury frequency per million working hours was 1.1 for the 12 months from 1 July 2005 to 30 June Operations and market Total production at and deliveries from Norske Skog s mills in the second quarter were marginally higher than in the first quarter. Production and deliveries during the first half totalled about three million tonnes, up by 12% and 16% respectively from the same period of last year. To achieve comparability, corrections must be made for factors relating to Asia and Norske Skog Union. Taking these into account, overall volumes are roughly on a par with Europe newsprint Key figures: Q2/06 Q1/06 Q2/05 YTD 2006 YTD 2005 Op revenues NOK mill Gross op earn NOK mill Net op earn NOK mill Gross op margin % Deliveries t Production t Production/capacity % Earnings improved marginally from the previous quarter. The negative effect of a stronger Norwegian krone was offset by lower costs following the closure of Norske Skog Union. Price increases implemented at 1 January have resulted in improved earnings compared to last year. Demand for standard and upgraded newsprint in Europe dur 6 Norske Skog Q2 2006

7 ing the first half was up by 3.8% from the same period of last year. This increase was largest for the standard grade, and in the former Eastern Bloc countries. Europe magazine paper Key figures: Q2/06 Q1/06 Q2/05 YTD 2006 YTD 2005 Op revenues NOK mill Gross op earn NOK mill Net op earn NOK mill Gross op margin % Deliveries t Production t Production/capacity % Earnings were very weak. The European market is characterised by excess capacity and strong pressure on prices, particularly for the grades of coated magazine paper which Norske Skog mainly produces. The restarting of machines in North America has contributed to the imbalance in the market by reducing scope for exporting tonnage. In these circumstances, Norske Skog has reduced production and deliveries. Overall European demand for magazine paper rose by 4.8% in the first half compared with the same period of last year. When comparing with 2005, account must be taken of a long-running labour dispute in the Finnish paper industry last year. Key figures: Q2/06 Q1/06 Q2/05 YTD 2006 YTD 2005 Op revenues NOK mill Gross op earn NOK mill Net op earn NOK mill Gross op margin % Deliveries t* Production t Production/capacity % * Only from mills in the region. As in earlier periods, has the highest margins of any Norske Skog region. This largely reflects lower costs. Demand for newsprint continued to make good progress in the region, with increases of 10% during the first half and 8% in the second quarter compared with the respective periods of last year. Earnings for the region remained unsatisfactory, but represented a considerable improvement from the previous quarter when Norske Skog Albury had their rebuild shut and power prices in New Zealand was exceptionally high. A further improvement in earnings is expected in the second half year because of price increases in Australia from 1 July and because the restructuring of the business will reduce distribution costs and fixed cost. Demand for newsprint was about 4% lower in the first half year of 2006, compared with the same period of last year. Asia (Norske Skog PanAsia) Key figures: Q2/06 Q1/06 Q2/05 YTD 2006 YTD 2005 Op revenues NOK mill Gross op earn NOK mill Net op earn NOK mill Gross op margin % Deliveries t Production t When making comparisons with 2005, account must be taken of the fact that PanAsia was consolidated on a 50% basis until mid- November The new mill in China s Hebei province also came on line in July and has been depreciated since September. Earnings for the region were weak in the second quarter, but represented a slight improvement on the previous quarter owing to higher volumes. The level of prices in China has been low after additional production capacity came on line. Demand for newsprint in Asia was 1% higher during the first half compared to the same period of This figure is based to some extent on estimates. After an extensive stock correction at clients in early 2006, demand in China has increased sharply since March. The rise has been around 9% so far this year in India, and 1% in both Korea and Japan. Lysaker, 10 August 2006 The board of directors of Norske Skogindustrier ASA Key figures: Q2/06 Q1/06 Q2/05 YTD 2006 YTD 2005 Op revenues NOK mill Gross op earn NOK mill Net op earn NOK mill 12 (105) 22 (93) 70 Gross op margin % Deliveries t Production t Production/capacity % Norske Skog Q2 2006

8 Profit and loss account NOK million Operating revenue Distribution costs Other operating expenses Other gains and losses Provision for restructuring costs Gross operating earnings Depreciation and amortisation Impairments Operating earnings Earnings/(loss) from affiliated companies 1 Financial items Earnings/(loss) before taxation Taxation Net earnings/(loss) The minority s share of net earnings/(loss) The majority s share of net earnings/(loss) Earnings per share Earnings per share fully diluted apr-jun 06 Apr-Jun 05 Jan-Jun 06 Jan-Jun (603) (594) (1 251) (1 133) (2 349) (5 088) (4 869) (10 550) (9 051) (19 432) (186) 92 (181) (63) - (63) - (270) (803) (748) (1 670) (1 504) (3 072) (43) (58) (43) (69) (248) (14) (34) 193 (73) (751) (209) (191) (370) (486) (883) (213) 31 (19) (54) (1 004) 22 (36) (191) (5) 15 (43) (848) (11) 3 (18) 7 6 (180) (8) 33 (50) (854) (0.95) (0.06) 0.17 (0.38) (5.98) (0.95) (0.06) 0.17 (0.38) (5.98) 1 Earnings/(loss) from affiliated companies are included after taxation. Cash flow statement NOK million Cash flow from operating activities Cash generated from operations Cash used in operations Cash from net financial items Taxes paid Net cash flow from operating activities Cash flow from investing activities Investments in operational fixed assets Sales of operational fixed assets Net cash from sold shares in other companies Net cash used on acquisitions of shares in other companies Taxes paid Net cash flow from investing activities Cash flow from financing activities Net change in long-term liabilities Net change in current liabilities Dividend paid 1 New equity 2 Net cash flow from financing activities Translation difference Total change in liquid assets apr-jun 06 Apr-Jun 05 Jan-Jun 06 Jan-Jun (5 936) (5 182) (12 511) (10 451) (21 906) (316) (301) (547) (433) (845) (9) 72 (48) 49 (65) (468) (569) (801) (1 019) (2 230) (3 905) (461) (563) 419 (1 013) (6 014) (485) (130) (348) (956) (797) (956) (797) (807) (345) (52) (1 281) (189) (11) 4 (7) (243) (24) (44) (74) 13 1 The amounts include dividend paid to minority shareholders in PanAsia. 2 The amount in 2005 is related to the acquisition of the remaining 50% of the shares in PanAsia Paper Company. Norske Skog Q2 2006

9 Balance sheet NOK million ASSETS Intangible fixed assets Biological assets Operational fixed assets Investments in affiliated companies Deferred tax asset Other long-term receivables Derivatives Total non-current assets Inventory Receivables Financial assets at fair value through profit or loss Cash and cash equivalents Derivatives Total current assets Total assets EQUITY Equity Minority interests Total equity LIABILITIES Deferred tax Interest-bearing long-term debt Non interest-bearing long-term liabilities Derivatives Total non-current liabilities Interest-bearing current debt Tax liabilities Trade and other payables Derivatives Total current liabilities Total liabilities Total liabilities and shareholders equity Financial key figures Net operating margin Gross operating margin Return on capital employed Equity ratio % Equity ratio excl minority interests % Net interest-bearing debt Net interest-bearing debt/equity Net interest-bearing debt/equity excl minority interests Earnings per share after taxes Earning per share - fully diluted Cash flow per share after taxes Cash flow per share - fully diluted Definitions Jan-Jun 06 Jan-Jun (0.38) (5.98) 0.17 (0.38) (5.98) Definitions: 1 : Net operating margin = operating earnings / operating revenue 2 : Gross operating margin = gross operating earnings / operating revenue 3 : Equity ratio = shareholders equity / total assets 4 : Equity ratio excl. minority interests = (shareholders equity - minority interests) / total assets 5 : Net interest bearing debt = Interest bearing debt - cash and cash equivalents - current investments - interest rate swaps fair value hedge 6 : Earnings per share after taxes = net earnings / average number of shares 7 : Cash flow per share after taxes = net cash flow from operating activities / average number of shares Norske Skog Q2 2006

10 Revenue and profit by area Operating Revenue NOK million Apr-Jun 06 Apr-Jun 05 Jan-Jun 06 Jan-Jun Europe Magazine paper Total Europe Asia Other activities Other industry in Norway Other revenues Total other activities Staff/eliminations (132) (80) (237) (216) (392) Total group gross Operating Earnings NOK million apr-jun 06 Apr-Jun 05 Jan-Jun 06 Jan-Jun Europe Magazine paper Total Europe Asia Other activities Other industry in Norway Other revenues Total other activities Staff/eliminations (12) (23) (61) (43) (114) Gain on power trading and energy hedging (186) 92 (181) Restructuring costs (63) - (63) - (270) Total group Operating earnings NOK million Apr-Jun 06 Apr-Jun 05 Jan-Jun 06 Jan-Jun Europe Magazine paper Total Europe (93) Asia Other activities Other industry in Norway Other revenues Total other activities Staff/eliminations (28) (34) (88) (63) (167) Gain on power trading and energy hedging (186) 92 (181) Impairments (43) (58) (43) (69) (248) Restructuring costs (63) - (63) - (270) Total group (14) Norske Skog Q2 2006

11 Production by Product/Area tonnes Apr-Jun 06 Apr-Jun 05 Jan-Jun 06 Jan-Jun Europe Magazine paper Asia Norske Skog total Total newsprint Total magazine paper Total publication paper deliveries by Product/Area tonnes Apr-Jun 06 Apr-Jun 05 Jan-Jun 06 Jan-Jun Europe Magazine paper Asia Norske Skog total Total newsprint Total magazine paper Total publication paper EBITDA / EBIT These tables show gross and net operating earnings under IFRS, adjusted for impairments, changes in the value of power contracts, and restructuring costs (- equals gain, + equals loss). NOK million /06 1/06 2/05 YTD 06 YTD 05 Gross op earnings, IFRS Reversals: Value changes power contracts Restructuring costs Gross op earnings, adjusted Gross op margin, adjusted % NOK million /06 1/06 2/05 YTD 06 YTD 05 Net op earnings, IFRS Reversals: Value changes power contracts Restructuring costs Impairments Net op earnings, adjusted Net op margins, adjusted % Norske Skog Q

12 Quarterly comparisons NOK million Operating revenue Restructuring costs Gross operating earnings Depreciation and amortisation Impairments Operating earnings Earnings/(loss) before taxation Majority s share of net earn/(loss) Q06 1Q06 4Q05 3Q05 2Q05 1Q05 4Q04 3Q04 2Q (63) - (270) (63) (803) (867) (828) (740) (748) (756) (726) (785) (779) (43) - (179) - (58) (11) 57 - (167) (14) 172 (194) (213) 194 (1 127) (85) (212) (180) 213 (997) 193 (8) (42) (91) Quarterly comparisons NOK million Operating revenue Europe Asia Other activities Staff/eliminations Total operating revenue Gross operating earnings Europe Asia Other activities Gain on power trading and energy hedging Restructuring costs Staff/eliminations Total gross operating earn Operating earnings Europe Asia Other activities Impairments Gain on power trading and energy hedging Restructuring costs Staff/eliminations Total operating earnings Q06 1Q06 4Q05 3Q05 2Q05 1Q05 4Q04 3Q04 2Q (132) (105) (100) (76) (80) (136) (113) (119) (136) (186) (12) 92 (24) (63) - (270) (63) (12) (49) (56) (15) (23) (20) (62) (29) (20) (5) (105) (39) (1) (1) (43) - (179) - (58) (11) 57 - (167) (186) (12) 92 (24) (63) - (270) (63) (28) (60) (79) (25) (34) (29) (73) (35) (22) (14) 172 (194) Norske Skog Q2 2006

13 Change in equity retained NOK million share capital Other equity earnings Total Total equity excluding minority interests at 1 Jan Currency translation adjustments and other - - (909) (909) Share issues Change in holding of own shares Dividend paid - - (1 041) (1 041) Net profit for the period Total equity excluding minority interests at 30 June Accounting principles The interim financial statements for the second quarter of 2006 are presented in accordance with IAS 34. The interim financial statements, including comparative figures, are based on today s IFRS standards and interpretations. The accounting principles applied in these interim financial statements are the same as those applied in the financial statements at 31 December 2005 and for the year ending at that date. Accounting estimates, judgements and assumptions The group prepares estimates and makes judgements and assumptions about the future. Accounting estimates derived from these will by definition seldom accord fully with the final outcome. Estimates and the underlying assumptions are reviewed on an ongoing basis. The effects of changes in accounting estimates are recognised in the period in which the estimates are revised. If the change in estimates also has an effect on future periods, these effects are recognised in the period in which the estimates are revised and in the future periods in which the changes in estimates have an effect. The same judgements and assumptions have been made when applying accounting policies and preparing estimates in preparing these interim financial statements as when preparing the financial statements at 31 December 2005 and for the year ending at that date. Divestments Norske Skog s investment in Catalyst Paper was sold in mid-february This investment has been classified as an investment in affiliates. The book value of the investment was written down to the estimated sales price in the annual accounts for This implies that no gain or loss from the sale will be recognised in the profit and loss account in the interim financial statements for the first quarter of The line item Earnings from affiliates includes a recognition of cumulative exchange rate differences related to the investment in Catalyst Paper which have been recognised directly in equity during the ownership of this investment. According to IAS 21, these cumulative exchange rate differences should be presented in the profit and loss account at the time of the disposal of the investment. These cumulative exchange rate differences amount to NOK 148 million. Forestia AS was sold in March A letter of intent was signed with the buyer of Forestia at the time when the annual accounts for 2005 were being prepared. The value of the assets in Forestia was written down to the agreed sales price in the annual accounts for A loss of NOK 9 million on the sale of Forestia is recognised in the Q1 interim financial statements. The total loss related to the sale of Forestia, including the writedown in the annual accounts for 2005, amounts to NOK 33 million. Norske Skog s investment in Nordic Paper AS was sold in February. This was classified as an investment in affiliates. Norske Skog has recognised a gain of NOK 30 million in the profit and loss account for the first quarter of 2006 related to this divestment. Norske Skog Q

14 Pro forma figures The acquisition of the remaining 50 % of PanAsia was closed in November PanAsia is consolidated 100 % into the Norske Skog Group accounts from the acquisition date. The below numbers show the consolidated profit and loss accounts for Norske Skog as if PanAsia was consolidated 100% into the Norske Skog Group accounts from 1 January NOK million Operating revenue Distribution costs Other operating expenses Provision for restructuring costs Gross operating earnings Depreciation and amortisation Impairments Operating earnings Earnings/(loss) from affiliated companies Financial items Earnings/(loss) before taxation Taxation Net earnings/(loss) The minority s share of net earnings/(loss) The majority s share of net earnings/(loss) apr-jun 05 Jan-Jun (641) (1 215) (2 536) (5 390) (10 107) (21 655) - - (270) (836) (1 680) (3 181) (58) (69) (248) (35) (74) (751) (208) (515) (963) 59 (25) (733) (52) (11) 64 7 (36) (669) (49) (681) Special items The table below shows special items which have influenced net earnings over the past five quarters. NOK million 2/06 1/06 4/05 3/05 2/05 Restructuring provision (op earnings) (63) - (270) - - Impairments (op earnings) (43) (58) Translation effects on accounts receivable and payable (op earnings) (33) (21) Change in market value of interest rate derivatives (financial items) (29) Currency hedging gain/(loss) (financial items) (15) 8 28 The Norske Skog share Key figures January-June 2006 At High Low Earnings per share Booked equity per share Share price Market value NOK mill NOK 106, Norske Skog Q2 2006

15 1000 Euro price development newsprint, sc, lwc - germany /94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 2/06 45g SC roto 56g LWC offset 60g NOK 200 share price development Week 1/00 Week 1/01 Week 1/02 Week 1/03 Week 1/04 Week 1/05 Week 1/06 Week 30/06 Oslo Stock Exchange index Norske Skog Norske Skog Q

16 Return: Norske Skogindustrier ASA Oksenøyveien 80 P O Box 329, NO-1326 Lysaker, Norway Phone: Fax: BEconomique Design and print: Vestfjorden Grafisk AS Photo: Håvard Solerød 16 Norske Skog Q2 2006