Forestry firm fends off the axe

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As the new CEO of Norske Skog, Sven Ombudstvedt is charged with finding a way to lead the long-troubled forest products firm out of the woods. Paradoxes abound as he tackles falling prices, falling demand, heavy debt and bankers holding the proverbial axe.

"We have not run out of cash and we still have assets," claims Norske Skog CEO Sven Ombudsvedt, who's working to ensure the firm's survival. PHOTO: Views and News

For months, analysts and investment bankers have floated not-so-subtle hints that Norske Skog may need to head into bankruptcy reorganization. Newspaper Dagens Næringsliv (DN) reported early last month, just as the company was reporting another heavy quarterly loss, that Norske Skog’s insurance costs against bankruptcy had risen dramatically. 

Norske Skog's CEO formerly worked for firms in which the state has large ownership stakes, Norsk Hydro and Yara, but the forestry firm doesn't enjoy such direct state support. PHOTO: Views and News

Analysts told DN that Norske Skog has too much debt. Around NOK 2 billion falls due next year, another NOK 4.1 billion in 2012. Revenues fell around 15 percent during the first quarter and demand for Norske Skog’s newsprint, which makes up about two-thirds of its product line, is down. Demand for magazine paper, which makes up the other third, also fell last year in line with the economy and plunge in advertising.

There’s been some improvement since then and Norske Skog remains one of the world’s largest paper producers, but it’s a shadow of its former self. Worldwide employment has fallen from well over 10,000 to around 6,000, and only about 1,700 in Norway, following production cuts and not least a controversial plant closure in Skien. Staffing at corporate headquarters just west of Oslo is one-fourth what it was  just five years ago.

Ombudstvedt, meeting with foreign journalists in Oslo early this week, confirmed that more production cuts loom if Norske Skog’s cost and price situation doesn’t improve. “There is still a certain chance we will take down a machine,” he said.

He added, however, that “there is a limit to how many costs you can take out.” He repeated calls for consolidation in the industry and brushed off the bankruptcy rumors.

“We have not run out of cash and we still have assets,” Ombudstvedt said. He’s already guided the sale of some, and said the company is in negotiations over sale of the Skien property, which he considers ripe for redevelopment.

Some signs of improvement
After six months at the helm of Norske Skog, Ombudstvedt also has seen some improvement in demand this year and claims operations in Australia and New Zealand are providing cash flow. The pay-off date for a large loan “is still two years away.” he stressed, and “discussions with our lenders” are ongoing.

Industry restructuring and consolidation is needed, though, for long-term survival. “You probably know more about this than I do, but this has to do with people reading less (0n paper),” Ombudstvedt told the journalists. Prospects for any sustainable rise in demand for newsprint and magazine paper are slim. He predicts some “poor man mergers and acquisitions,” to reduce capacity.

The paradoxes emerge in terms of the Norwegian government’s efforts to create jobs, support industry and especially to preserve economic vitality in Norway’s outlying areas. While Prime Minister Jens Stoltenberg is forking over billions for preservation of rain forests around the globe, and investing more billions in the oil and gas sector at home, there’s been little direct support for a forestry business important for areas outside Oslo.

The state, a major investor in companies from Statoil to Ombudstvedt’s previous employers Norsk Hydro and Yara, has no direct ownership stake in the company that represents what once was Norway’s important timber industry, apart from the state pension fund’s holdings. Efforts to secure energy procurement guarantees have stalled and the state, otherwise keen on maintaining a high environmental profile, dumped tax incentives on biodiesel fuel and has not followed through on support for bioenergy, which offered Norske Skog diversification hope. Its bioenergy plans are now mostly on ice, because of the new technology needed, the costs involved and limited profit potential.

The state’s ‘dilemma’
Asked whether the state has forgotten Norske Skog, Ombudsvedt said he didn’t think so, “but they could be more active in doing what they say they’ll do, and more active in bioengery.” He feels there’s been a “slight underestimation” of the value a forest products firm like Norske Skog can have for Norway.

“It’s a dilemma for an oil- and gas-producing nation like Norway,” Ombudsvedt said, noting that the forestry industry simply isn’t as important in Norway as it still is in, for example, Sweden and Finland.

He wishes there would be more “focused resources” on the forestry sector as a whole. Norske Skog’s balance sheet no longer allows it the resources to take over other firms, apart from the predicted “poor man’s M&As, but Ombudstvedt notes that a lot can happen before the firm’s big loans are due. At least some “stabilization” at today’s levels, and prospects for restructuring, may shed some light through the trees.

Views and News from Norway/Nina Berglund
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