Credit Research
Norske Skog Credit report Analyst: Glenn Kringhaug +47 22 01 61 62
27 November 2019 25 November 2019
This document is for the use of the recipient only and should not be copied or distributed to any other person or entity. Please refer to important disclosures at the end of this presentation. Key Terms
Issuer Norske Skog AS Material group companies Norske Skog (Australasia) Pty Ltd, Norske Skog Bruck GmbH, Norske Skog Skogn AS, Norske Skog Saugbrugs AS, Norske Skog Golbey SAS, Guarantors Norske Skog Industries Australia Ltd., Norske Skog Tasman Ltd., Norske Skog Paper Mills (Australia) Ltd., Norske Skog Paper Mills (Albury) Pty Ltd., and Nornews A/S Issue amount EUR 125m Tenor 3 years, maturity 14 June 2022 Amortization 100% repayment at final maturity (bullet) Coupon rate 3 months EURIBOR + 6.00% p.a. (floor at zero), quarterly interest payments Status Senior secured (subject to the super-senior status of the RCF, guarantee facility and permitted hedging sharing security with the bonds) (i) Share pledges over the Guarantors, (ii) fixed and floating charge security over (a) Saugbrugs mill, (b) the Skogn mill, the (c) the Tasman mill, the (d) Albury mill and (e) the Security Boyer mill, (iii) assignment of shareholder loans and assignment of intercompany loans Call options Make-whole first 18 months, callable thereafter (all or nothing) at par plus 50%/30%/10% of the initial Coupon after 18/24/30 months, respectively Equity claw-back Up to 35% of issue amount may be repaid at first call price by primary proceeds raised through an IPO Special covenants Special covenants include restrictions on shareholder distributions, negative pledge, financial support, financial indebtedness, subsidiaries distributions Maintenance • NIBD/EBITDA shall not exceed 2.75x covenants • Liquidity (free cash) shall exceed NOK 100,000,000 Incurrence tests With respect to dividend payments, NIBD / EBITDA shall not exceed 2.00x Dividend restrictions Up to 75% of last years adjusted net profit, subject to the incurrence test being met (i) RCF of maximum EUR 31m (annual clean down provisions), (ii) permitted hedging, (iii) guarantee facility, (iv) factoring facility of maximum EUR 40m, (v) financial leasing of maximum EUR 12m, (vi) leasing in the ordinary course of business that would have been classified as an operational lease prior to the implementation of IFRS 16, (vii) Saugbrug Permitted additional project facility (NOK 94m), (viii) Golbey loans of maximum EUR 8m, (ix) Bruck boiler facility of maximum EUR 58m (which is subject to the incurrence test being met at debt commitment), (x) any credit facility provided by any governmental institution of maximum EUR 10m, (xi) intra-company loans, (xii) subordinated shareholder loans, (xiii) debt in acquired entities if refinanced within 3 months and (xiv) a general basket of EUR 5m
Permitted disposal The group may freely sell or dispose (i) the Albury mill, (ii) the forest estates in Tasmania, (iii) the Bruck hydro plant, (iv) the Saugbrugs development properties
Change of control Bondholder’s put option at 101% of par value Documentation / Norwegian law documentation (relevant jurisdictions for security documents) / Nordic Trustee Trustee
Source: ABG Sundal Collier 2 Credit summary
Weak market exposure but tight covenants and solid credit metrics
Credit strengths Credit concerns . Low leverage and solid debt service ability: On our estimates, Norske Skog will . Top of a highly cyclical industry: The paper market is highly cyclical with have NIBD/EBITDA of 0.4x YE 2019. We estimate that debt service ratio will stay at relatively volatile price movements and prices currently point down from what seem ~8-9x through the tenor. to be the top of the cycle. However, this is also true for costs. . Large liquidity buffer: Norske Skog had a cash position of NOK 909m at the end . High sensitivity: Norske Skog’s earnings are relatively sensitive to price changes, of Q3’19. currencies, etc., and 10% lower prices would shave off roughly all EBITDA, but lower costs would compensate. By comparison, EBITDA fell “only” ~50% after the . Tight bond structure: We argue that the covenants are strict from the financial crisis, when prices were down ~10-20%. We also note that Norske Skog bondholders’ perspective. The financial covenants include a maximum uses long contracts and plans to hedge, which reduce the sensitivities short-term. NIBD/EBITDA of 2.75x (maintenance) and 2.0x for dividends. The bond will also benefit from a comprehensive security package based on a full 1st lien fixed and . Publication paper market is in structural decline: Magazine and newsprint paper floating charge security interest in five of the group’s seven mills. have increasingly been substituted by digital solutions. The newsprint and magazine markets have declined by roughly 5% on average per year for several . Long track record: Norske Skog has a relatively long track record, and we note years. With no end in sight for digitalization, we expect the trend to continue. that adjusted EBITDA in the period we have data for (back to 1995) has never been below NOK 671m. . Capacity shutdowns “stopped” when prices moved up: Paper prices have been strong recently, partly due to many capacity shutdowns following price decreases, . Strong diversification across client base and geographies: Norske Skog has but we have seen few shutdowns in the last couple of years. The lack of shutdowns ~450 different customers spread across the world, with its largest clients accounting is likely leading to decreasing prices. for less than 10% of revenues. . Asset concentration: ~50% of 2018 EBITDA was from the Golbey plant. Golbey . Good asset quality: All of Norske Skog’s paper mills were profitable in 2018 and has an excellent position on the cost curve, but we note that all of Norske Skog’s have been so in recent years. Our analysis also show that it is well positioned at the mills have had positive EBITDA in the past few years. global cash cost curve due to the strong USD. . Cash leakage: The dividend restrictions are set to 75% of last year’s adjusted net . Low LTV at conservative EV/EBITDA: Even with a very conservative valuation profit (subject to incurrence test), which implies that roughly all cash flow throughout perspective, we find decent value coverage. Assuming an EV/EBITDA of 4x implies our forecast period goes to equity holders. a net LTV of 16% (on NOK 1bn in EBITDA). By comparison, peers are trading at ~9x EV/EBITDA currently and ~7x historically (but Norske Skog arguably warrants a . Leverage does not improve at the time of refinancing: Due to the relatively discount). aggressive dividends and structural decline of the market, we do not estimate any deleveraging through the tenor. . Strong market position: Norske Skog is one of the leading global suppliers of newsprint and magazine paper, with ~8% global market share in newsprint, ~5% in SC magazine paper and ~3% in LWC magazine paper (source: RISI).
Source: ABG Sundal Collier 3 Norske Skog at a glance
Location of mills and share of capacity ~2/3 of revenue from Newsprint
Skogn, NO 19% 17% 18% Saugbrugs, NO Bruck, AT 15%
Newsprint SC 6% Tasman, NZ 18% 22% Golbey, FR LWC 10% Albury, AU 65%
11% Boyer, AU
Source: ABG Sundal Collier for graphics, Norske Skog for data Source: ABG Sundal Collier for graphics, Norske Skog for data Production capacity at the seven mills Golbey and Albury are the most profitable '000 tonnes NOKm EBITDA margin 600 350 324 20% 300 500 16% 250 15% 13% 400 172 12% 200 148 125 300 150 107 107 9% 565 7% 8% 510 265 100 6% 6% 6% 73 460 135 4% 200 50 265 100 0 0% 125 150 150 0 Skogn Saugbrugs Bruck Golbey Albury Boyer Tasman Newsprint LWC SC EBITDA Margin Source: ABG Sundal Collier for graphics, Norske Skog for data Source: ABG Sundal Collier for graphics, Norske Skog for data 4 Strong global presence
3rd biggest producer of publication paper 2nd biggest producer of newsprint
Rank Company Tonnes (000) Mkt. Share Rank Company Tonnes (000) Mkt. Share 1 UPM 6,109 13.5% 1 Resolute 1,829 8.4% 2 Stora Enso 3,170 7.0% 2 Norske Skog 1,759 8.1% 3 Norske Skog 2,625 5.8% 3 UPM 1,585 7.3% 4 Resolute 2,282 5.1% 4 Stora Enso 1,280 5.9% 5 Nippon Paper 1,817 4.0% 5 Nippon Paper 1,240 5.7% 6 Oji Paper 1,759 3.9% 6 Oji Paper 1,174 5.4% 7 SAPPI 1,350 3.0% 7 Palm 980 4.5% 8 Holmen 1,150 2.5% 8 Kondopoga 695 3.2%
Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data Newsprint market share in Australasia Magazine paper market share in Australasia
~30% Norske Skog Norske Skog #1 Other #1 Other
~80%
Source: ABG Sundal Collier for graphics, Norske Skog for data Source: ABG Sundal Collier for graphics, Norske Skog for data 5 Diversified customer base in Europe, long contracts in Australasia
Solid customer base
Customer share of sales, Europe, LTM Q1’19 Customer share of sales, Australasia, LTM Q1’19
Highly concentrated with >30% of sales attributed to two key customers secured on Top 15 customers long-term contracts to represent ~30% of sales 2022/2024
. ~450 established customers. . Fairfax Media and NewsCorp Australia are key customers.
. Mainly sold on 3-12 month fixed price contracts with some . Long-term relations with domestic newsprint printers, current opening for price re-negotiations. Contracts specify both fixed contracts in place to 2022/2024. Contracts specifying price and volumes and volumes as a percentage of customers’ total share of required paper volume to be provided by Norske required volume. Skog, but does not state fixed, minimum volumes.
. Sole domestic supplier of publication paper in Australia and New Zealand (~90% market share).
Source: ABG Sundal Collier, Company 6 Complex business model made simple: all about prices and FX
Estimated EBITDA using regression model …and estimated EBITDA margin
NOKm EBITDA margin 2,500 35%
30% 2,000 Correlation = 0.91 Correlation = 0.91 25%
1,500 20%
1,000 15% 10% 500 5%
0 0%
Q1'95 Q1'96 Q1'98 Q1'99 Q1'01 Q1'02 Q1'03 Q1'04 Q1'05 Q1'06 Q1'07 Q1'08 Q1'09 Q1'10 Q1'12 Q1'13 Q1'15 Q1'16 Q1'18 Q1'19 Q1'94 Q1'97 Q1'00 Q1'11 Q1'14 Q1'17
Q1'97 Q1'98 Q1'99 Q1'00 Q1'01 Q1'02 Q1'05 Q1'06 Q1'07 Q1'08 Q1'09 Q1'10 Q1'12 Q1'13 Q1'14 Q1'15 Q1'16 Q1'17 Q1'18 Q1'96 Q1'03 Q1'04 Q1'11 Q1'19 Reported clean EBITDA Estimated EBITDA Reported clean EBITDA margin Estimated EBITDA margin Q1'20e
. Complex business model broken down to four parameters to . Looking at EBITDA margins instead, we can reduce the estimate EBITDA. model to two parameters
. The parameters: . The parameters: . Publication paper prices . Publication paper prices . Delivery volumes . FX (USD/EUR) . Cost of fibre (pulpwood) . FX (USD/NOK)
Source: Norske Skog, Fastmarkets RISI, LUKE and Bloomberg for historical data, ABG Sundal Collier for estimates 7 Sensitivities - MTM EBITDA ~NOK 1.4bn
MTM EBITDA of NOK ~1.4bn NOK at historically weak level
Norske skog exposures Capacity Price level Price change Theoretical Price Effects 9.5 USD/NOK up ~55% since '13 10.5 '000 t EUR/t EUR/t % sensitivity change on EUR/NOK up ~30% since '13 9.0 on EBITDA yoy EBITDA 10.0 8.5 Output prices (1) Newsprint, EU 1200 492 49 10% 505 5% 227 8.0 9.5 Newsprint, Australasia - fixed price 295 542 54 10% 137 0% 0 Newsprint, Australasia - export price 25 533 53 10% 11 -33% -38 7.5 SC magazine, EU 460 574 57 10% 226 2% 45 9.0 LWC magazine, EU 265 642 64 10% 145 5% 65 7.0 LWC magazine, Australasia 135 642 64 10% 74 4% 30 6.5 8.5 Volume (2) Newsprint 10% 84 -8% -63 6.0 8.0 SC magazine 10% 24 -8% -18 5.5 LWC magazine 10% 24 -8% -18 7.5 5.0 Input prices Electricity Norway spot (3) -800 300 30 10% -24 -15% 36 4.5 7.0 Electricity ex. Norway (3) -800 300 30 10% -24 0% 0 Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Electricity gross -5,500 -48 Gas (4) -1,200 200 20 10% -24 -35% 84 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Wood (5) -2,785 320 32 10% -89 35% -312 USD/NOK (left) EUR/NOK (right) Sawmill chips (5) -1,031 320 32 10% -33 30% -99 Recycled fibre (6) -871 125 13 10% -103 -15% 155 Pulp (7) -42 792 79 10% -32 -23% 73 European newsprint price down ~5% in Q3, flat y-o-y Chemicals 10% -116 -3% 35 900 EUR/t, Germany FX exposure (8) USD/NOK 10% 179 10% 177 850 EUR/NOK 10% 76 4% 33 GBP/NOK 10% 102 0% 0 800 SEK/NOK 10% -10 -1% 1 AUD/NOK 10% -78 0% 0 750 NZD/NOK 10% -19 3% -5 700 650 NOK/EUR 9.5 407 600 (1) Assuming 90% capacity utilisation, NOK/EUR 9.0. 295 kt in Australia has fixed prices until 2022-24. (2) Assuming 10% gross margin 2018 EBITDA 1,031 (3) 2.6 TWh electricity in Norway. 1.8 TWh on 8y fixed price contract. MTM EBITDA 1,438 550 (3) 2.9 TWh electricity excl Norway. 2.1 TWh on long-term contracts MTM EPS 8.7 (4) 1.2 TWh gas bought at Bruck. Total heat use 4.2 TWh (but made internally) P/E 4.7x 500 (5) 2.8 mill m3 pulp wood consumption, 2 mill m3 in Norway. 1 mill sawmill chips. (6) 0.87 mill t RCP consumption 450 (7) 42 kt net pulp exposure (8) Net exposure. Sales in USD, EUR. Costs in NOK. 400 2003 2005 2007 2009 2011 2013 2015 2017 2019 Source: Raw data: Norske Skog, Rest: ABG Sundal Collier UF CF LWC SC News
8 Less sensitive in reality
A leading supplier of newsprint and magazine paper
Prices and costs are linked EBITDA has been relatively resilient vs prices (indexed)* The sensitivities are less in reality: the impacts of changes in 1,200 120 prices/costs/FX are likely less than indicated on the previous page. If 115 1,000 the market turned sour, management would likely be able to offset 110 some of the impact through cuts in opex. For instance, prices were 800 105 down 10-20% after the financial crisis, but clean EBITDA “only” fell by ~50% (over two years). Furthermore, prices on cost factors are 600 100 95 correlated with product prices, e.g. lower paper prices are linked to 400 lower costs. 90 200 85 862 770 787 1,066 671 1,031 0 80 2013 2014 2015 2016 2017 2018 Clean EBITDA Newsprint SC LWC
Cost split, 2018
Other Wood 12% 16%
Labour 16% RCP 11%
Pulp 2% Logistics 11% Energy Chemicals 22% 10% Source: ABG Sundal Collier, Company * There have been some structural changes in the company (e.g. paper mill shutdown) implying that historical figures are not necessarily comparable 9 Waste-to-energy facility at Bruck
Estimated EBITDA effect of EUR 19.4m* Comments EURm 30 0.2 25 4.3 6.4 . In June, Norske Skog took the investment 20 1.3 decision on the ~EUR 72m facility at Bruck 7.8 15 27.1 . Expected annual EBITDA effect of ~EUR 10 19.4 14.8 20m from 2022 due to reduced energy 5 costs, CO2 savings and gate fees for 0 delivered waste. Gate fee Energy CO2 Other Sales Opex Tax EBITDA savings savings effect
Source: ABG Sundal Collier for graphics, Norske Skog for data. *Norske Skog estimates. Capex of ~NOK 700m, mostly financed through bank loans NOKm 800 700 600 232 500 400 565 696 300 200 464 100 91 0 40 Capex, 2020e Capex, 2021e Capex Bank loans Sale of hydro Cash need plant Source: ABG Sundal Collier for graphics, Norske Skog for data 10 Overview of potential new revenue streams
Bio energy projects already initiated New products explored (+3-year horizon)
Double pellets capacity Biogas plants Waste-to-energy facility Cyrene Nanofibrils Building boards
Cyrene, a bio High-strength, Opened biogas plant at Nanofibrils used Waste-to-energy facility chemical low-weight In process to double Saugbrugs (2016) and in paper, at Bruck expected to alternative to construction wood pellet capacity to Golbey (2017) using bio- composites, give an annual effect of existing boards with no 85,000 tonnes waste from paper paint and other ~EUR 20m petrochemical glue or production chemicals solvents chemicals
Norske Skog has identified +25-30 other initiatives
Source: ABG Sundal Collier for graphics, Norske Skog for data
11 Conversion potential – 1 mill could add 35% to EBITDA
Recent projects with mill conversion from paper to packaging Conversion potential
Company Mill Date Capex (EURm) new cap (t) old cap (t) Capex/t Old grade New grade Saugbrugs Atlantic Packaging Whitby Q2'13 n.a. 300,000 180,000 n.a. Newsprint Linerboard Capacity ('000 tonnes) 460 SP Fibre Dublin Q2'13 32 396,000 317,000 81 Newsprint Linerboard Grade SC SCA Ortviken Q4'13 n.a. 75,000 n.a. n.a. LWC/newsprint Kraftliner Blue Paper Strasbourg Q1'14 n.a. 300,000 n.a. n.a. LWC Containerboard Input 100% virgin fibre PCA DeRidder Q4'14 92 355,000 n.a. 259 Newsprint Containerboard Capex/t (EUR/t) 310 SP Fibre Newberg Q1'15 18 150,000 n.a. 120 Newsprint Recycled linerboard Metsä Board Husum Q2'15 n.a. 300,000 190,000 n.a. Coated woodfree Kraftliner Capex (NOKm) 1,369 Stora Enso Varkaus Q4'15 110 390,000 280,000 282 Uncoated woodfree Kraftliner Apis Skolwin Q4'15 24 100,000 58,000 240 Newsprint Fluting/testliner Old mill (NOKm) Aviretta Ettringen Q4'15 n.a. 180,000 175,000 n.a. SC Fluting International Paper Madrid Q2'16 n.a. 380,000 470,000 n.a. Newsprint Containerboard Sales 2,168 Domtar Ashdown Q3'16 128 516,000 364,000 248 Uncoated woodfree Fluff pulp EBITDA 125 H2 Equity Partners Parenco Q3'16 100 385,000 225,000 260 Newsprint Packaging paper EBITDA margin 6% Pro-gest Italy Q3'16 150 420,000 160,000 357 Newsprint Containerboard Kruger Trois-Rivieres Q2'17 171 360,000 227,000 475 Newsprint Linerboard Heinzel Laakirchen Q3'17 n.a. 450,000 260,000 n.a. Uncoated mechanical Testliner/recycled fluting Converted mill (NOKm) PCA Wallula Q2'18 126 400,000 200,000 315 Uncoated woodfree Kraftliner Leipa Schwedt Q2'18 n.a. 450,000 280,000 n.a. Newsprint Containerboard New capacity ('000 tonnes) 460 Kotkamills Kotka Q3'18 170 400,000 180,000 425 magazine Folding boxboard Kraftliner price (EUR/t) 600 Verso Androscoggin Q3'18 19 200,000 n.a. 95 Coated woodfree Linerboard Sales 2,385 APP Indonesia Q1'19 n.a. n.a. 850,000 n.a. fine paper Recycled containerboard Copamex Anahuac Q1'19 n.a. 260,000 185,000 n.a. Uncoated woodfree Linerboard Schumacher Myszkow Q2'19 100 300,000 60,000 333 Newsprint Testliner EBITDA margin 20% Stora Enso Oulu Q2'19 350 450,000 1,100,000 778 Coated woodfree Kraftliner Hokuetsu Niigata Q2'19 16 130,000 161,000 123 Coated woodfree Corrugated base paper EBITDA 477 Fajar Paper Surabaya Q2'19 n.a. 230,000 330,000 n.a. fine paper Lluting Change in EBITDA 352 Russian L-Pak Lipetsk Q3'19 n.a. 180,000 n.a. n.a. Coated woodfree Containerboard International Paper Riverdale 1Q'20 255 450,000 235,000 567 Uncoated woodfree Linerboard/containerboard Average 116 315,074 294,864 310 ATRoCE 16%
Source: ABG Sundal Collier for graphics, Fastmarkets RISI and companies for data Source: Fastmarkets RISI and Norske Skog for historical data, ABG Sundal Collier for the rest. *Sales and EBITDA avg. 2015-Q1'19. Kraftliner price is avg. from 2007- May'19. Assuming 90% operating rate
12 ESG – Renewable and recyclable products
Pulp & paper is renewable and recyclable Climate targets and achievements
UPSTREAM DOWNSTREAM Environmental ambitions Achievements in 2018
PULP MILL / ELECTRICITY Plan in place to be carbon- Recovered 80% of waste from BIOREFINERY neutral at all paper mills production to generate energy
PAPER PRODUCT WOOD FUEL Carbon footprint reduction of Carbon footprint reduction of 20% by 2020 vs. 2006 PAPER 31% compared to 2006
PACKAGING 100% certified wood from 26% of energy from PULPWOOD sustainably managed forests renewable sources HYGIENE Target reduced energy use Recycled 0.9m tonnes of WOOD-CHIPS and change in energy sources 2.6m tonnes paper produced SAWLOGS RCP Source: ABG Sundal Collier for graphics, Norske Skog for data SAWMILL Saugbrugs: carbon emissions WOOD CO2 equivalents/tonne PRODUCT 60
50 47
40
30
20
10 0.4 0 2004 2017 Source: ABG Sundal Collier for graphics, Norske Skog for data 13 History lesson – “everything went wrong by the numbers”
Net debt vs EBITDA Sales and EBITDA margins NOKbn Net debt/EBITDA NOKbn 25 20x 35 30% 20 30 25% 15x 25 15 20% 20 10x 15% 10 15 10% 5x 10 5 5 5%
0 0x 0 0%
2000 2001 2002 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
1994 2007 1989 1990 1991 1992 1993 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 2010 2011 2012 2013 2014 2015 2016 EBITDA Net debt Net debt/EBITDA Sales (left) EBITDA margin (right) Source: ABG Sundal Collier for graphics, Norske Skog for data Source: ABG Sundal Collier for graphics, Norske Skog for data The problem was too much debt - not cash flow NOKm 10,000 . The reason for the bankruptcy was not weak cash flow, but rather the unsustainably high debt level. 8,000 . The Company has actually generated accumulated EBITDA of 6,000 Min. EBITDA of NOK 671m NOK ~50bn since 2000. 4,000
2,000
0 1994 1997 2000 2003 2006 2009 2012 2015 2018 EBITDA Minimum EBITDA Source: ABG Sundal Collier for graphics, Norske Skog for data
14 Competitive landscape
The 10th biggest graphic paper producer globally
Top 10 global newsprint producers Top 10 global SC magazine producers 2,500 50.0% 2,000 1,829 1,759 50.0% 1,800 1,585 45.0% 1,955 45.0% 1,600 40.0%2,000 40.0% 1,280 1,605 1,400 1,240 1,174 35.0% 35.0% 1,200 980 30.0%1,500 30.0% 1,000 25.0% 25.0% 695 673 875 800 642 20.0%1,000 681 20.0% 16.6% 575 15.0% 600 15.0% 13.6% 448 405 391 400 10.0%500 360 350 10.0% 8.4% 8.1% 7.4% 200 7.3% 5.9% 5.7% 5.4% 5.0% 5.8% 5.0% 4.5% 3.2% 3.1% 3.0% 4.9% 3.8% 3.4% 3.3% 3.1% 3.0% 0 0.0% 0 0.0%
Tonnes (000) Mkt. Share Tonnes (000) Mkt. Share
The number 10 player globally in graphic paper Top 10 global LWC magazine producers 3,000 50.0% 2,569 45.0% 2,500 40.0% 2,000 35.0% . Norske Skog is one of the global market leaders in all the 30.0% 1,500 1,175 25.0% 22.0% paper grades it produces. Its market position is especially 870 20.0% 1,000 15.0% strong in newsprint, where it is the second biggest player, just 520 510 501 495 476 465 10.1% 400 10.0% 500 7.5% behind Resolute. 4.5% 4.4% 4.3% 4.2% 4.1% 4.0% 3.4% 5.0% 0 0.0%
Tonnes (000) Mkt. Share
Source: ABG Sundal Collier, RISI 15 Well-positioned on the global cost curve due to a strong USD
Global newsprint cash cost curve by region – FX sensitivity analysis USD vs. EUR
Global cash curve by region - USD/EUR 1.4 Global cash curve by region - USD/EUR 0.8 USD/EUR 1.6 EUR/t EUR/t Marginal cost producer is Asian 800 800 1.4 700 700
600 Marginal cost producer is European 600 1.2 500 500 1.0 400 400 300 300 0.8 USD/EUR has been below 1.35 in 200 200 83% of monthly observations 100 100 0.6
0 0
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1994
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017 2019 Other Oceania North America Asia Europe USD/EUR USD/EUR 1.3 Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data Source: ABG Sundal Collier for graphics, Factset for data
. Flat cash cost curve for publication paper
. Location is key for fibre, energy and labour costs, and we would therefore argue that ~60% of the cash costs are really incurred in local currency
. This means that FX changes are key to determining where the different regions sit on the cost curve
. A strong USD, as we have now, pushes North American and Asian producers to the high end
. A weak EUR and NOK means that the Europeans and Norske Skog are better off than in the last 15 years. Since 2011, the USD has strengthened by 20-25% vs. the EUR and 50-60% vs. the NOK.
16 Well-positioned on the global cost curve due to a strong USD
Norske Skog’s mills on the global newsprint cash cost curve USD vs. EUR and NOK
USD/t USD/EUR USD/NOK 900 1.8 0.22 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile 800 Tasman 1.6 0.20 Skogn PM1 Bruck Skogn PM3 0.18 700 Albury 1.4 Skogn PM2 0.16 Golbey PM1 Boyer 600 Golbey PM2 1.2 0.14 500 1.0 0.12 0.10 400 0.8 ~55% stronger USD vs NOK 0.08 300 0.6 since 2013 Correlation = 0.78 0.06
200 0.4 0.04
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1994
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015 2017 100 2019 USD/EUR USD/NOK 0 0 1 3 4 5 6 7 9 10 11 12 13 15 16 17 18 19 21 22 Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data Source: ABG Sundal Collier for graphics, Factset for data European publication paper: total capacity per mill (including the Australasian mills) '000 tonnes Golbey 1,000 Skogn 900 Saugbrugs 800 Bruck Boyer 700 565 Albury 600 510 460 Tasman 500 390 400 285 265 300 150 200 100
0
IP
SCA
UPM UPM UPM UPM UPM UPM UPM UPM UPM UPM UPM UPM UPM IPZS
Palm Palm Palm
Leipa
Kabel
Burgo Burgo Burgo
Perlen
SAPPI SAPPI
*K&NK
Heinzel
Holmen Holmen
Bellesb.
Papresa
Steinbeis Hellefoss
Schleipen
Hainsberg
Stora Enso Stora Stora Enso Stora Enso Stora Enso Stora Enso Stora Enso Stora Enso Stora
Arjowiggins
Schönfelder
Arctic Paper Arctic
Vipap Videm Vipap
Norske Skog Norske Norske Skog Norske Skog Norske Skog Norske Skog Norske Skog Norske Skog Norske Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data Kappa Smurfit
17 EBITDA margins in line with the best peers (large European mills)
Capacity per European newsprint mill Mill EBITDA margin vs. peers’ paper business margins '000 tonnes Clean EBITDA margin 700 565 25% 600 510 500 20% 400 300 15% 200 125 100 10% 0
5%
Hylte
Hürth
Krško Bruck Aalen Skogn
Perlen 0%
Shklov
Golbey
Kaipola
Shotton
Eltmann
Ortviken
Kwidzyn
Rentería
Braviken Sachsen
Ettringen Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19
Schongau
Chap. Dar. Chap. King's Lynn King's
Steyrermühl Skogn Saugbrugs Golbey Bruck Annab.-Buch.
Langerbrugge Holmen Stora Enso UPM Source: ABG Sundal Collier for graphics, Norske Skog and Fastmarkets RISI for data Source: ABG Sundal Collier for graphics, Norske Skog and peers for data Capacity per European SC mill EBITDA margins in line with the best peers '000 tonnes EBITDA margin 600 20% 485 500 15% 400 300 10% 200 5% 100 0 0%
-5%
Maxau
Rauma
Plattling Renkum
Ettringen Q1'06 Q1'08 Q1'10 Q1'12 Q1'14 Q1'16 Q1'18
Schongau Saugbrugs
Laakirchen Norske Skog Holmen UPM
Jämsänkoski Kvarnsveden
Langerbrugge Stora Enso Resolute Perlen Source: ABG Sundal Collier for graphics, Norske Skog and Fastmarkets RISI for data Source: ABG Sundal Collier for graphics, Norske Skog and peers for data 18 Relative position in Europe hurt by high local costs in Q4’18
European publication paper cash cost curve in Q4’18 Comments EUR/t . Important to note that the position on the global cash cost 1000 curve is more important than on the European one. 900 800 . As long as European producers remain competitive in a global 700 Saugbrugs Bruck context they will continue to have a large export market share. 600 Bruck Golbey Skogn 500 Skogn . Norwegian mills were affected by significant increases in local 400 electricity and pulpwood costs in Q4’18. 300 200 100 0 0.4 1.7 2.8 4.4 6.0 7.6 8.6 9.4 11.4 12.6 13.9 15.0 17.2 18.7 19.7 Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data European newsprint cash cost curve European SC cash cost curve European LWC cash cost curve EUR/t EUR/t EUR/t 500 Bruck 500 Saugbrugs 700 450 Golbey 450 Bruck Skogn 600 400 400 500 350 350 300 300 400 250 250 300 200 200 200 150 150 100 100 100 50 50 0 0 0 0.5 1.5 2.2 2.4 2.7 3.4 4.5 5.0 5.8 6.3 6.9 0.4 0.5 1.3 1.7 2.3 2.8 3.6 4.3 4.6 5.5 5.8 5.9 0.27 0.69 0.85 1.06 1.31 1.59 2.12 2.47 2.96 3.31 3.69 Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data 19 Mills with low delivery costs to important end-markets
Golbey is located in the heart of Europe Skogn well-positioned to export to the UK
Frankfurt Skogn
Golbey Paris
No domestic London italian producers
Source: ABG Sundal Collier for graphics, Norske Skog for data Source: ABG Sundal Collier for graphics, Norske Skog for data Newsprint: Delivery cost to Frankfurt per mill Newsprint: Delivery cost to London per mill EUR/t EUR/t 90 100 80 90 Average delivery 80 70 Average delivery cost of EUR 56/t 60 cost of EUR 39/t 70 60 50 50 40 38 40 30 23 30 20 20 10 10
0 0
Skogn
Mill #1 Mill #2 Mill #4 Mill #5 Mill #6 Mill #7 Mill #9 Mill #3 Mill #8
Mill #1 Mill #2 Mill #3 Mill #4 Mill #5 Mill #6 Mill #7 Mill #8 Mill #9
Golbey
Mill #10 Mill #12 Mill #13 Mill #14 Mill #15 Mill #17 Mill #18 Mill #19 Mill #20 Mill #22 Mill #23 Mill #11 Mill #16 Mill #21
Mill #13 Mill #14 Mill #15 Mill #16 Mill #17 Mill #18 Mill #19 Mill #20 Mill #21 Mill #22 Mill #23 Mill #10 Mill #11 Mill #12 Source: ABG Sundal Collier for graphics, Norske Skog and Fastmarkets RISI for data Source: ABG Sundal Collier for graphics, Norske Skog and peers for data 20 Normalised cash cost indicates a better position than in Q4’18, which was affected by unusual factors in Norway
Skogn normalised cash cost 17% lower than in Q4’18 Adjusted European newsprint cash cost curve EUR/t EUR/t 450 500 386 400 450 39 350 322 400 47 350 300 39 32 300 250 47 250 32 200 125 200 150 82 150 100 100 143 50 122 50 0 0 0.48 0.98 1.30 2.11 2.53 2.96 4.09 4.29 4.93 5.62 5.83 6.05 RISI Q4 estimate Normalised cash cost Fiber Energy Chemicals Labor Other Skogn normalised Skogn Q4'18 Competitors Source: Fastmarkets RISI for data, ABG Sundal Collier for estimates Source: Fastmarkets RISI for data, ABG Sundal Collier for estimates Saugbrugs normalised cash cost 17% lower than in Q4’18 Adjusted European SC cash cost curve EUR/t EUR/t 500 500 436 450 450 400 44 364 400 62 350 44 350 300 70 62 300 250 250 70 200 131 200 150 84 150 100 100 50 130 105 50 0 0 RISI Q4 estimate Normalised cash cost 0.5 0.8 1.2 1.3 1.5 1.8 2.1 2.6 3.0 3.3 3.7 Fiber Energy Chemicals Labor Other Saugbrugs normalised Saugbrugs Q4'18 Competitors Source: Fastmarkets RISI for data, ABG Sundal Collier for estimates Source: Fastmarkets RISI for data, ABG Sundal Collier for estimates 21 Publication paper demand is in structural decline
Global consumption of newsprint Global consumption of printing & writing paper Million tonnes Million tonnes 45 140 40 120 35 100 30 25 80 20 60 15 40 10 5 20
0 0
2013 2014 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2015 2016 2017
2000 2001 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: ABG Sundal Collier for graphics, Norske Skog for data Source: ABG Sundal Collier for graphics, Norske Skog for data Decline in newsprint demand from peak by regions % demand decline since peak demand in the respective regions 0% -10% -20% -18% -30% -29% -40% -40% -50% -48% -47% -60% -55% -60% -70% -62% -80% -77% -90% North America Oceania Middle East Latin america Europe China Africa Japan Other Asia Source: ABG Sundal Collier for graphics, Norske Skog for data 22 Australasian publication paper demand is declining by 7% p.a.
Australasian demand for publication paper Exports of newsprint from Australasia to Asia '000 tonnes '000 tonnes 1,400 350 1,200 300 265 1,061 1,023 961 250 233 1,000 860 209 788 753 800 200 182 600 150 131 101 400 100 200 50 0 0 2013 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2019 Source: ABG Sundal Collier for graphics, PPPC for data Source: ABG Sundal Collier for graphics, PPPC for data Newsprint demand in Asia and Oceania Newsprint operating rate in Asia and Oceania Consumption ('000 t) Consumption ('000 t) Operating rate 16,000 1,000 100% 14,000 800 12,000 95% 10,000 600 8,000 90% 6,000 400 4,000 200 85% 2,000 0 0 80%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ASIA Oceania Oceania ASIA Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data 23 Significant capacity cuts have helped utilisation rates
European publication paper demand is dropping 5% p.a. European production capacity per grade '000 tonnes '000 tonnes 3,000 12,000
2,500 10,000
2,000 8,000
1,500 6,000
1,000 4,000
500 2,000 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 Shipments incl export European demand News LWC SC Source: ABG Sundal Collier for graphics, Euro-graph for data Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data European capacity cuts in 2014-2017 European operating rate per grade Grade Tonnes W-E cap % of eur cap Operating rate Newsprint 1,305,000 7,781,000 16.8% 100% SC 640,000 7,291,000 8.8% LWC 930,000 8,258,000 11.3% 95% Publication total 2,875,000 23,330,000 12.3% 90%
UCF 400,000 7,393,500 5.4% 85% CF 120,000 8,218,000 1.5% Fine paper 520,000 15,611,500 3.3% 80%
75% Total graphic paper 3,395,000 38,941,500 8.7% 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 News LWC SC Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data Source: ABG Sundal Collier for graphics, Fastmarkets RISI and Euro-graph for data
24 New round of capacity cuts started – more needed
Europe leading the way with new capacity cuts European capacity cuts announced
Europe Share of European capacity
Country Company Mill Grade Capacity (kt) When 25% 23% Germany Feldmuehle Uetersen Coated fine 80 2019 France Lecta Condat le Lardin Coated fine 230 2019 20% France Arjowiggins Bessé-sur-Braye mill Coated fine 195 2019 France Arjowiggins Bessé-sur-Braye mill Uncoated fine 80 2019 15% Germany UPM Plattling LWC 155 2019 Italy Burgo Group Verzuolo LWC 400 2019 Sweden Arctic Paper Grycksbo Coated fine 45 2019 10% 8% Germany Palm Aalen Newsprint 90 2019 Finland UPM Rauma SC 265 2020 5% 4% 4% France UPM Chapelle Newsprint 240 2020 1% Finland Stora Enso Oulu mill Coated fine 1,080 2020 0% Source: ABG Sundal Collier for graphics, Fastmarkets RISI and companies for data Coated fine LWC Newsprint SC Uncoated fine Outside Europe Global capacity cuts announced Country Company Mill Grade Capacity (kt) When United States Georgia-Pacific Port Hudson, LA Uncoated woodfree 630 2019 Share of Global capacity United States International Paper Selma, AL Uncoated woodfree 235 2019 10% United States White Birch Paper Ashland, VA Newsprint 195 2019 9% 9% Japan Daio Paper Mishima Coated woodfree 150 2019 8% Japan Hokuetsu Niigata Coated woodfree 161 2020 7% Japan Oji Paper Tomakomai Newsprint 200 2020 Japan Oji Paper Tomioka Coated woodfree 130 2020 6% 5% Japan Oji Paper Ebetsu Uncoated woodfree 45 2020 5% 5% Japan Nippon Paper Akita Coated woodfree 175 2019 4% Japan Nippon Paper Ishinomaki Coated woodfree 52 2019 3% 2% Japan Nippon Paper Fuji Uncoated woodfree 69 2019 2% 2% Japan Nippon Paper Fuji LWC magazine paper 49 2019 1% Japan Nippon Paper Fuji LWC magazine paper 17 2019 Japan Nippon Paper Kushiro Newsprint 143 2019 0% Coated fine LWC Newsprint SC Uncoated fine Japan Nippon Paper Yufutsu Newsprint 116 2020 Japan Nippon Paper Yufutsu Uncoated woodfree 88 2020 Source: ABG Sundal Collier for graphics, Fastmarkets RISI and Japan Nippon Paper Yufutsu Uncoated woodfree 49 2020 companies for data Source: ABG Sundal Collier for graphics, Fastmarkets RISI and companies for data
25 Paper prices have risen 15% since the beginning of 2018
European paper prices up ~8% y-o-y, flat in Q2 US prices up ~7% y-o-y, flat in Q2
900 EUR/mt, Germany 1250 USD/st (newsprint in USD/mt) 850 1150 800 1050 750
700 950
650 850 600 750 550 650 500
450 550
400 450 2003 2005 2007 2009 2011 2013 2015 2017 2019 2003 2005 2007 2009 2011 2013 2015 2017 2019 UF CF LWC SC News UF CF LWC SC News
Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data
. Since the beginning of 2018, average paper prices have risen 15% to peak, driven by strong macroeconomic fundamentals, all-time- high pulp prices and a stronger USD versus EUR.
. Newsprint rose the most and was up 24%, while SC and LWC were up 18% and 13%, respectively.
. Now, however, it seems that prices have peaked and publication paper prices have declined 3-5%.
26 Our paper price model points down 10% from peak
ABGSC paper price model vs actual price ABGSC paper price model per grade Estimated price change y-o-y Estimated price change y-o-y % 30% 20% 25% 15% 20% Corr 0.93 10% 15% 10% 5% 5% 0% 0% -5% -5% -10% -10%
-15% -15%
1998 2002 1982 1984 1986 1988 1990 1992 1994 1996 2000 2004 2006 2008 2010 2012 2014 2016 2018 2020
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 Estimated price change Actual price change Newsprint SC LWC Source: Fastmarkets RISI for historical data, ABG Sundal Collier for estimates Source: Fastmarkets RISI for historical data, ABG Sundal Collier for estimates Capacity utilisation rate is pointing down in 2019 Capacity utilisation rate per grade Capacity utilisation rate Capacity utilisation rate 98% 100% 96% 94% 95% 92% 90% 90% 88% 85% 86% 84% 80% 82%
80% 75%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
1984 1992 2000 2008 2016 1980 1982 1986 1988 1990 1994 1996 1998 2002 2004 2006 2010 2012 2014 2018 2020 Capacity utilisation Newsprint SC LWC Source: Fastmarkets RISI for historical data, ABG Sundal Collier for estimates Source: Fastmarkets RISI for historical data, ABG Sundal Collier for estimates
27 Variable costs are moving down
Pulp prices are down 30-40% from peak Norwegian pulpwood prices could drop ~10-20% next year
1,300 Price, USD/t Spread, USD/t 500 EUR/m3 1,200 60 1,100 400 50 1,000 300 900 40 800 200 700 30 600 100 500 0 20 400
300 -100 10
1998 2003 2008 2013 2018 1999 2000 2001 2002 2004 2005 2006 2007 2009 2010 2011 2012 2014 2015 2016 2017 2019
2012 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 2014 2015 2016 2017 2018 2019 Spread NBSK BHKP Finland Sweden Lithuania Estonia Norway Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data Source: ABG Sundal Collier for graphics, Luke and SSB for data RCP prices moving down again (Chinese RCP ban) Energy costs are also pointing down USD/t 60 Energy cost index, EUR 250 50 200 40 150 30 100
50 20
- 10
0
2001 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Mixed waste paper OCC 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data Source: ABG Sundal Collier for graphics, Bloomberg for data
28 Key credit forecasts
Revenue and EBITDA forecast (NOKm) Leverage multiples
14,000 12,641 12,647 20% 2.2x 11,852 11,527 18% 12,000 11,130 10,767 10,504 10,581 16% 10,000 14% 13% 8,000 12% 10% 9% 9% 9% 9% 6,000 8% 8% 7% 4,000 6% 6% 0.4x 0.4x 1,681 4% 0.4x 2,000 1,066 1,031 962 923 939 0.2x 787 671 2% 0 0% 2015 2016 2017 2018 2019e 2020e 2021e 2022e 2018 2019e 2020e 2021e 2022e Revenues Clean EBITDA Clean EBITDA margin NIBD/adj. EBITDA
Interest coverage ratio Cash conversion 73% 11.8x 65%65% 61%61% 60% 54% 56%56% 8.0x 7.8x 47%47% 7.7x 42%42% 44% 34% 24%
2019e 2020e 2021e 2022e 2015 2016 2017 2018 2019e 2020e 2021e 2022e Clean EBITDA/financial expenses Based on CFO Based on CFO, excluding development capex
Source: ABG Sundal Collier, Company 29 Key credit forecasts at bond issue vs. now
EBITDA (NOKm) Leverage multiples 1,681 1.7x
1.5x
1,220 1.2x 1,061 962 991 923 939 0.9x 859
0.4x 0.4x 0.4x
0.2x
2019e 2020e 2021e 2022e 2019e 2020e 2021e 2022e At bond issue Now At bond issue Now
Norske Skog has delivered significantly better results than we expected at the bond issue, partly explained by one-offs but also better underlying results. It has sold a hydropower plant (NOK 89m sales gain) and has been granted full CO2 compensation for the years 2018, 2019 and 2020, corresponding to ~NOK 120m for 2018 and 2019 (in total), while 2020 compensation is dependent on future CO2 quota prices. It also announced the sale of the Albury mill in Australia, giving net cash proceeds of ~NOK 700m in Q1’20 and a positive annual EBITDA effect of ~NOK 80m.
Source: ABG Sundal Collier, Company 30 Net LTV at 16% at trough sector multiple
Decent value coverage even in a very conservative valuation perspective
Peer valuation Historical EV/EBITDA, sector*
EV/EBITDA 12x
Peers 2019e 2020e 2021e 10x Stora Enso 7.6 7.6 7.1 UPM Kymmene 8.0 8.0 7.6 8x Metsä Board 7.0 7.1 7.3 6x
Huhtamaki 10.9 9.7 9.0 4x Holmen 13.5 12.9 12.1 SCA 13.4 12.1 11.0 2x BillerudKorsnäs 9.2 6.8 5.8 0x
Average 9.9 9.2 8.6
Q4'96 Q3'15 Q1'96 Q3'97 Q2'98 Q1'99 Q4'99 Q3'00 Q2'01 Q1'02 Q4'02 Q3'03 Q2'04 Q1'05 Q4'05 Q3'06 Q2'07 Q1'08 Q4'08 Q3'09 Q2'10 Q1'11 Q4'11 Q3'12 Q2'13 Q1'14 Q4'14 Q2'16 Q1'17 Q4'17 Q3'18 Median Historical min Historical max Historical average * Norske Skog, Stora Enso, UPM, Holmen, SCA, BillerudKorsnäs Steep discount to peers and previous transactions 16% net LTV at NOK 1bn in EBITDA Net LTV EBITDA, NOKm To be conservative, we apply relatively strict EV/EBITDA multiples for 27% 700 800 900 1,000 1,100 1,200 1,300 Norske Skog for the credit story. Arguments for low multiples are that 3.0x 31% 27% 24% 22% 20% 18% 17% the market is close to a cyclical peak and it has weaker exposure (pure 3.5x 27% 23% 21% 19% 17% 16% 14% paper) than its peers. If we assume a terminal decline, with a 10-year EV/EBITDA 4.0x 23% 20% 18% 16% 15% 14% 13% life declining by 5% per year, one can argue for a DCF value ~40% 4.5x 21% 18% 16% 14% 13% 12% 11% 5.0x 19% 16% 14% 13% 12% 11% 10% below the perpetuity case and multiples ~40% below peers. A 40% discount to the cheapest peers (Stora, UPM and Metsä) implies an LTV EBITDA, NOKm EV/EBITDA of ~4x. Even with such a low multiple for Norske Skog, we 70% 700 800 900 1,000 1,100 1,200 1,300 find the LTV to be low. We note that the Oceanwood acquisition priced 3.0x 80% 70% 63% 56% 51% 47% 43% Norske Skog at EV 3.7bn (EV/EBITDA of 5.3x). 3.5x 69% 60% 54% 48% 44% 40% 37% EV/EBITDA 4.0x 60% 53% 47% 42% 38% 35% 32% The current market cap implies a net LTV of ~16%. 4.5x 54% 47% 42% 38% 34% 31% 29% 5.0x 48% 42% 38% 34% 31% 28% 26% Source: ABG Sundal Collier, Company . Credit estimates. 31 Valuation support from EV/t in paper transactions LTV of 29-35%, net LTV of 11-14% EV of ~NOK 4.7bn based on the Albury mill transaction EUR EV/tonne of paper transactions . There have been several paper mill transactions (conversion to EUR EV/tonne 850 packaging) that can be used as pricing benchmarks, using EV per tonne of capacity. 750 650 . To estimate EV/tonne for Norske Skog, it is most relevant to 550 focus on recent transactions containing newsprint mills and 450 similar assets (see table below). 350 . The Albury mill was sold for ~EUR 200/t, which using the same 250 EV/t would imply NOK 4.7bn in EV at the new capacity of 2.4 150 mill t (excluding Albury) or NOK 57/share in equity value. 50 2004 2006 2008 2010 2012 2014 2016 2018 2020 . EV/tonne equal to the average of similar transactions (EUR 200- Source: ABG Sundal Collier for graphics, Fastmarkets RISI and FactSet for data 250/t), it would represent an EV of NOK 4.7-5.9bn or a LTV of 29-35% YE 2019, or net LTV of 11-14%. Norske Skog valuation by EV/t
Norske Skog Capacity (t) 2,360,000 2,360,000 Newsprint transactions relevant for Norske Skog EV/tonne (EUR/t) Implied EV (NOKm) Value per share (NOK) Company Date EV (EURm) Capacity (t) EV/tonne (EUR/t) 125 2,950 35 150 3,540 42 Parenco Q3'12 30 265,000 113 175 4,130 50 Albury mill Norske Skog (Pisa, Brazil) Q1'14 55 180,000 306 transactionAlbury mill 200 4,720 57 transaction price Shree Rama Newsprint Q2'15 53 144,000 368 225 5,310 64 price Holmen (Madrid) Q2'16 150 470,000 319 250 5,900 71 UPM (Swhwedt) Q2'16 70 280,000 250 275 6,490 78 Norske Skog Q2'18 387 2,625,000 147 300 7,080 85 White Birch (Bear Island) Q3'18 29 234,000 126 325 7,670 93 Norske Skog (Albury) Q4'19 52 265,000 196
Source: ABG Sundal Collier for graphics, Fastmarkets RISI and FactSet for data Source: Historical earnings: Norske Skog, Rest: ABG Sundal Collier
32 M&A: synergy potential from historical paper mergers
Synergies value Norske’s European operations at NOK 3bn Historical cost savings in P&P mergers, % of sales
16.0 . We have 30 years of data for mergers in the pulp & paper Promised cost synergies in % of sales 14.0 industry. 12.0 . Historically, paper mergers have on average promised 7% cost 10.0 synergies as a percentage of sales for the target company. 8.0
6.0
. Norske could be very interesting for UPM, Stora, Holmen, SCA 4.0 in a future deal: 2.0 . i) synergies could be substantial for a European player . ii) it gives potential to manage utilisation rates/prices 0.0
better for a player with a higher market share
Average
IP/Union
LP/Forex
Jefferson…
Nexfor/IP
UPM/Myll
Graphic/PI
Stora/Enso
Upm/Repap
Sappi/M-real
IP/Champion
Norske/Haindl
Canfor/Slocan
WY/MacMillan
WY/Willamette
Abitibi/Bowater
Abitibi/Bowater
GP/Fort James GP/Fort
Donohue/Quno
Norske/Pacifica
Norske/Fletcher
Abitibi/Donahue
Bowater/Avenor
Mead/Westvaco
Domtar/EBEddy
NewPage/Verso Bowater/Alliance
. Norske’s European synergies could be NOK 600-700m based Wausau/Mosinee
Cascades/Domtar
Smurfit/St.Laurent
Abitibi price/Stone Abitibi
WestFraser/Weldw…
Stora/Consolidated CanFor/NorthWood
on the historical 7% synergies promised. Source: ABG Sundal Collier for graphics, companies for data Point St.Laurent/West Norske as target: synergies and value . If we apply an EV/EBITDA of 4.5x, we arrive at NOK 3bn of potential deal value for Norske’s European operations. Norske as target Paper Europe Norske capacity Sales 7% synergies EV/EBITDA 4.5x Grade mill t m'share NOKm NOKm NOKm
SC Magazine 460 9% 2,438 171 768 LWC Magazine 265 4% 1,559 109 491 Total Magazine 725 6%
Newsprint 1,200 14% 5,540 388 1,745 Total Publication Paper 1,925 9% 9,538 668 3,004
Australasia 460 3,400 238 1,071 Source: Norske Skog for historical data, Rest: ABG Sundal Collier 33 Key covenants vs. our estimates
Strict proposed covenants from bondholders’ perspective
Overview Net leverage (NIBD/EBITDA) vs. covenants
The proposed bond terms include the following financial covenants: 1,800 1,681 3.0x 1,600 2.5x Maintenance covenants: 1,400 • NIBD/EBITDA below 2.75x 1,200 2.0x 962 • Minimum liquidity of NOK 100m 1,000 923 1.7x939 1.5x 1.5x Dividend restrictions 800 1.2x • 75% of last year’s adjusted net profit* subject to NIBD/EBITDA not 600 1.0x 0.9x exceeding 2.0x. 400 Subordination 0.5x 200 0.4x 0.4x 0.4x • The bond is structurally subordinated by pension liabilities of NOK 261m, 0.2x 0 0.0x and factoring (on and off balance sheet), leases and other debt of NOK 2019e 2020e 2021e 2022e 622m. In addition, we note that it will enter into a bank loan of up to EUR EBITDA NIBD/EBITDA Maintenance (2.75x) 58m for the Bruck boiler investment (maturity later than the bond). All Incurrence (2.0x) At bond issue numbers are from the time of the bond issue. Shareholder loans • Shareholder loans are fully subordinated to the secured obligations and no repayment of principal or payment of cash interest under any shareholder loans (other than as permitted distribution, e.g. a dividend) is carried out before the secured obligations have been discharged in full.
* Reported net profit + depreciation – maintenance capex Source: ABG Sundal Collier, Company 34 Profit and loss
P&L (NOKm) 2015 2016 2017 2018 2019e 2020e 2021e 2022e
Revenues 11,130 11,852 11,527 12,641 12,647 10,767 10,504 10,581
Clean EBITDA 787 1,066 671 1,031 1,681 962 923 939 EBITDA 774 907 604 1,372 2,948 962 923 939
Clean EBIT 32 392 63 585 1,219 490 451 447 EBIT 19 -947 -1,702 926 2,486 490 451 447
PTP -844 -1,498 -3,317 1,603 2,325 370 331 327
Net profit -1,318 -972 -3,551 1,525 2,194 315 282 261 Adjusted net profit -747 -471 -3,130 1,336 686 537 504 504
Financial covenants (NOKm) 2015 2016 2017 2018 2019e 2020e 2021e 2022e
Maintenance NIBD/adj. EBITDA, < 2.75x 5.8x 4.7x 8.5x 2.2x 0.4x 0.2x 0.4x 0.4x Minimum liquidity, > NOK 100m* 102 202 264 743 869 1,782 1,659 1,648 * Excluding restricted cash, assumed by ABGSC
Incurrence NIBD/adj. EBITDA, < 2.0x 5.8x 4.7x 8.5x 2.2x 0.4x 0.2x 0.4x 0.4x
Source: ABG Sundal Collier, Company 35 Balance sheet
Balance sheet (NOKm) 2015 2016 2017 2018 2019e 2020e 2021e 2022e
Property, plant and equipment 8,570 6,548 4,698 4,483 4,092 3,466 3,508 3,297 Intangible assets 17 279 87 94 87 87 87 87 Other non-current assets 1,033 357 154 212 1,936 1,936 1,936 1,936 Sum non-current assets 9,620 7,184 4,939 4,789 6,115 5,489 5,531 5,320
Trade and receivables 1,894 1,732 1,497 1,403 1,441 1,259 1,260 1,301 Inventories 1,253 1,161 1,148 1,304 1,343 1,175 1,178 1,219 Cash and cash equivalents 271 371 433 912 1,038 1,951 1,828 1,817 Other current assets 94 49 92 157 447 447 447 447 Sum current assets 3,512 3,313 3,170 3,776 4,269 4,833 4,713 4,784
Total assets 13,133 10,497 8,109 8,565 10,383 10,321 10,244 10,104
Sum equity 4,729 2,090 -1,427 2,365 5,590 5,391 5,269 5,153
Non-interest bearing 1,482 1,053 1,211 952 936 936 936 936 Interest bearing 4,263 4,979 1,348 2,318 1,431 1,846 1,928 1,893 Sum long-term liabilities 5,745 6,033 2,560 3,270 2,367 2,782 2,864 2,829
Trade and payables 1,885 1,807 2,056 1,951 2,007 1,729 1,691 1,702 Other 238 137 119 118 161 161 161 161 Interest bearing 536 430 4,802 862 259 259 259 259 Sum short-term liabilities 2,659 2,374 6,976 2,931 2,427 2,149 2,111 2,122
Total liabilities 8,404 8,407 9,535 6,200 4,793 4,931 4,974 4,951
Total equity and liabilities 13,133 10,497 8,109 8,565 10,383 10,321 10,244 10,104
Source: ABG Sundal Collier, Company Tax assets do not include significant unrecognised off-balance sheet positions 36 Cash flow
Cash flow (NOKm) 2015 2016 2017 2018 2019e 2020e 2021e 2022e
Clean EBITDA 787 1,066 671 1,031 1,681 962 923 939 Interest paid, net -432 -471 -184 -70 -121 -120 -120 -120 Taxes paid -9 -4 -19 -20 -123 -56 -50 -65 Other -101 -96 -37 -55 -501 -32 -32 -32 Funds from operations (FFO) 244 495 431 886 936 755 722 722
Change in net working capital -129 -12 -58 -5 32 72 -42 -70 Cash flow from operations (CFO) 115 483 373 881 967 827 679 652
Capex -179 -299 -276 -279 -341 -714 -482 -250 Sale proceeds 2 194 5 1 93 900 0 0 Other 3 0 -8 90 -37 0 0 0 Free cash flow (FCF) -59 377 94 692 683 1,013 197 402
Debt repayment -305 -553 -401 -548 -1,825 -35 -35 -35 Debt drawdown 2,614 1,446 424 332 1,291 450 117 0 Equity issue 0 0 0 0 0 0 0 0 Dividends paid 0 0 0 0 0 -514 -403 -378 Other 0 0 0 0 0 0 0 0 Net cash flow (NCF) 2,250 1,269 117 477 149 913 -123 -11
Cash BoP 710 271 371 433 912 1,038 1,951 1,828 Cash EoP 271 371 433 912 1,038 1,951 1,828 1,817
Source: ABG Sundal Collier, Company 37 Disclaimer Disclaimer Norway Sweden United Kingdom ABG Sundal Collier ASA ABG Sundal Collier AB ABG Sundal Collier Partners LLP Pb. 1444 Vika Box 7269 St Martins Court, 5th floor Munkedamsveien 45E, 7th floor Regeringsgatan 65, 5th floor 10 Paternoster Row NO-0115 Oslo SE-103 89 Stockholm London EC4M 7EJ Tel +47 22 01 60 00 Tel +46 8 566 28 600 Tel +44 207 905 56 00 Fax +47 22 01 60 60 Fax +46 8 566 28 601 Fax +44 207 905 56 01
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