Norske Skog's Gross Operating Results in Weaker Market

Oslo, Norway, 02 November 2007 -- Norske Skog's gross operating result before special items was NOK 850 million in the third quarter of 2007, down from NOK 1129 million in the second quarter. The lower result is related to weaker price development in Asia, Australia, and South America; increased prices on recovered paper; and a substantial negative effect from the strong Norwegian currency.

"With yet another disappointing quarter behind us, the need for a comprehensive restructuring becomes even more evident," said CEO Christian Rynning-Tønnesen.

The board of directors of Norske Skog expresses its concern over the development in the newsprint and magazine paper market. The director's report states that the industry has to adapt to the falling demand in North America and parts of Europe to achieve satisfactory return.

The development in the demand for magazine paper globally is positive, while newsprint demand is down. The European market balance for newsprint is also affected by increased imports from Canada. This has led to lower deliveries and substantial newsprint stocks being established in Europe. Norske Skog is reacting to this development by reducing production for the rest of 2007.

Norske Skog has already decided to implement a temporary reduction of 200,000 metric tons in European newsprint production in 2008. Under the current market conditions, it is likely that this will have to be followed by more permanent measures. Norske Skog has therefore decided to initiate a process to fully review all its paper machines.

"Norske Skog must be at the forefront of the market development and adapt production to the expected demand. Both the conversion of some paper machines to production of other paper grades and permanent closures will be considered," says Rynning-Tønnesen.

The profitability improvement program, which started one year ago, continues to yield results. The continuous improvement achieved up to the third quarter of 2007 equals annual improvements of NOK 1.6 billion, but these improvements are offset by cost increases.

The cash flow from operations, after financial costs paid and taxes paid, was NOK 772 million in Q3, an increase of about NOK 500 million compared with the preceding quarter. The reduction in operating capital and the cash effect of currency hedging has offset the weak operating result.

Net interest-bearing debt was reduced by NOK 1.3 billion through the third quarter, to a large degree due to a stronger Norwegian krone. The gearing was 0.98 at the end of the quarter compared with 1.04 in July. There are no major debt repayments before 2010 and 2011.

The Q3 result from the European activities is adversely affected by a stronger Norwegian currency and increased recovered paper costs. The demand for newsprint was 1% lower in the period January-September 2007 compared with the same period in 2006. The demand for magazine paper increased by 3.9% in the same period.

The result in Asia is significantly weaker than the preceding quarter. This is primarily due to lower prices in several markets, except China and Korea, and a strong increase in recovered paper prices. Newsprint demand in Asia increased by 2% in the period January-August 2007 compared with the same period in 2006. In China, the corresponding increase was 8%.

In Australasia, the quarterly result is weakened by a price reduction of 7% in Australia. The result so far in 2007 is still significantly better than for the same period last year, mostly due to the restructuring of the machine portfolio, yielding lower production costs. The demand for newsprint increased by 4% during January-August 2007, compared with the same period in 2006.

In South America, the result is affected by 5% lower prices, measured in local currencies. The demand for newsprint has increased compared with 2006. Newsprint consumption in Brazil, which is the most important market in the region, has increased by more than 10% so far in 2007.

Health and safety

The H value (injuries with absence per million working hours) was 1.6 from 01 October 2006 to the end of September 2007.

"The health and safety of our employees has first priority. Our health and safety statistics remain very good, but it is important to maintain a continuous focus on this area," says the CEO.

New member of corporate management

Rune Gjessing becomes part of the corporate management team in the role of senior vice president for strategy. This is currently handled by the finance organization. Gjessing will be responsible for the process to review all of the company's paper machines in the first half of 2008.

"Norske Skog will focus even more on strategy and business development in the time to come," says Rynning-Tønnesen. "I want this important work to be included in the corporate management team."