Norske Skog ASA (NSKOG) Earnings Call Transcript & Summary

Sorry for the delay this morning. We had an incident Sven will be explaining shortly. Welcome to this quarterly presentation webcast at Norske Skog, where Norske Skog's CEO, Sven Ombudstvedt, will present highlights from a very good quarter. And the CEO and also members of the corporate management are present. We have Tore Hansesaetre present. We have Rune Sollie, Robert Wood, Lars Sperre, Amund Saxrud and also Investor Relations Even Lund present. [Operator Instructions] And the word is yours, Sven.

Thank you, Carsten, and good morning, ladies and gentlemen, and welcome to this short call on the quarter. I will commence the comment on the quarter in a little while, but we will start this morning's session by giving a few words about what happened during the night at our Saugbrugs mill in Halden. As you can see on the screen, there has been a landslide in the early hours of the morning behind the walls of the PM6 building, where the paper machine #6 is located. And that has caused severe damage to the building infrastructure. But actually, there was no personnel harm, so there's no physical damage. But there were indeed people at work during the night inside the machine hall, which means that we have people inside. And clearly, they have had traumatic experiences, so our thoughts and well-wishes are, of course, with the people mostly affected, the people who were at work. So our sympathies go out to those. When it comes to the damage to the building and the impact to our business, it's a bit too early to be too precise. But obviously, there has been material damage to frames, to machine and other equipment related to PM6. And thus far, it's impossible to be too precise on the lasting impacts to our, for instance, production. But it's clear that production of PM6 is stopped with 260,000 tonnes of annual capacity, and it will be a longer production stop. We will obviously give more information when we have a better picture. But thus far, we can only guide you along this stop. What that means is clearly more than a few days, but how long and what is the eventual impact will be, we cannot say at present. Look, PM4 will continue. We have confirmation for the main mill, it is operational, and therefore, we are able to produce at PM4, which has now capacity of 100,000 tonnes. So there will still be paper coming to service to the markets. Again, impact is uncertain both in terms of production and absolute financial impact. And we will provide that. Obviously, the Saugbrugs mill is insured, as the rest of Norske Skog critical infrastructure. But again, it's far too early to say anything precise about that for the moment. So that's what I was going to say about last night's incident. So I will then turn briefly to the quarter. If most of you have already seen our presentation and the material, and there is also webcast, so I will be relatively brief now this morning. Just note that we had reported an EBITDA of NOK 675 million, which we think is a strong quarter. Even looking backwards, we have an LTM of NOK 3.2 billion now. And also, the operational cash flow in the quarter was satisfactory at NOK 430 million. Paper prices declined in local euro terms and dollar terms, the fourth quarter to the first quarter, mainly driven by lower input costs but also driven by soft demand. I think most segments in the paper and pulp industry see this. Probably most segments and most industries in Europe see that there is soft demand, which has continued since basically summer of last year. This also affects containerboard. And we are, for both containerboard and publication paper, a bit uncertain what is actually demand driven and what is the stock variations. There were some buildup of stock last year in both segments, but we will have maybe a better view, and most of the destocking should be done at least during the second quarter. However, we are also proud and pleased to talk about the containerboard production at Bruck, which is now -- has started operations. It's a successful start-up. We reached first paper on rail just before March and into April, so really at the end of the first quarter. And now the first deliveries are scheduled to go to customers during the second quarter. So we all wish the best for the Bruck team, which has done a fantastic job, and the project team and management to deliver this on time and on budget. And there you can see the team. There is still the first product on the rail, which was then produced between the 31st of March and the 1st of April. On the right-hand side also the waste-to-energy facility, which was opened and commissioned commenced in April of last year and which is now running at its designed capacity after the long stop in January this year with some modification work being done. Briefly on the financials. We can say that the numbers are impacted by lower volumes. We can clearly see that on the revenue line and also the sales numbers. We have sold 301,000 tonnes in the first quarter, which was clearly lower than the 4 preceding quarters, also impacted, of course, by the rebuild costs in Australia and France. However, the -- if you look at the last 4 quarters and if you average them out, it's -- I think also you can say that the first quarter this year is a satisfactory quarter with the margin above 20% on an EBITDA level. Cash flow I briefly comment on. Still in the first quarter is normally when we build the inventory, this year as well, which normally makes us to have related cash flow. And the last quarter to this quarter is still relatively healthy cash flow. On the net debt, that has increased from year-end by about NOK 200 million. And most of that increase is attributable to currency where the euro has strengthened to NOK. Or maybe more correctly, the NOK has weakened, which explains most of that impact. And this will also note that the CO2 compensation in Norway was received in April, so it's not included in all the figures we reported. I'm not going to spend too much time on the segments at this stage. Just comment on Australia briefly, which is negative in the quarter, disappointing, clearly, but also impacted heavily by a full mill stop which happened in March, with the problems both coming into the stock and restarting after the stoppage led to higher costs and, let's say, unfortunate downtime. This is not something we will repeat and partly we should never repeat exactly that stop. But also, this is a onetime, once-a-year affect which hits the first quarter, so we still expect the year to be materially better than the first quarter also in Australia. Finally, on the other segment, the negative NOK 27 million was the new EBITDA which is a onetime effect by the LTI program which we exercised in early February. Input costs, again, most people are familiar with this. I just note that while energy and the pulp and paper prices are significantly down from the top levels of 2022, they are still at historical relatively high levels. Also, likewise for pulpwood prices in Norway, so there is still cost pressure, so we cannot see when we look at paper prices, so you cannot expect to see historical levels. We still need and we will still see higher prices -- since they are down from the peaks also, we will still see higher prices. And we can see now that there is reaction on the supply side, both on the containerboard, which we expect that they will be, as they always is, when the market is turning. And also on publication paper, we're seeing significant capacity announcements from competitors in the last few years. Also noting that the CO2 quota price we see and the European Union analysis remain at a reasonable, not really at historically high level, which is clearly important for us as we got our focus the same, and it impacts the CO2 compensation scheme. Again, softening demand impacts utilization, but we have seen significant closures. And as I said, we expect that there's more reaction particularly on containerboard, which always happens when the demand is turning and price again approaches the marginal producers' cash cost, which is what we see today. And then on the outlook. Again, the raw material and energy costs are lower but are still relatively at the high levels compared to the history. And we will still expect some volatility here going forward. Pricing in nominal terms is lower than they were last year but still at higher levels than what we've seen in the past. But we are uncertain on the demand development. Again, we don't know exactly what is destocking, what is the weaker economic trends, but it's clear that the European economic trends are impacting our industry and most industries such as this. The conversion projects. As mentioned, with Bruck, we have started production of that machine. The Golbey machine is expected to be started in the fourth quarter. We still can indeed reiterate that we are on time and on budget, what we have communicated around this project, which in itself is an important thing. Just a very brief comment on the new segment, the Packaging Paper segment. We have allocated costs to that. And there is not a lot of volumes in the first quarter, no paper to be sold, so we still see a negative EBITDA from that until production ramps up. So we have previously guided, in normalized market circumstances, we'll see volumes EUR 70 million to EUR 80 million EBITDA from this segment while carving guidance we announced. Then I'm happy to announce that we have a new CEO in of Norske Skog from the 1st of June. Tore Hansesaetre will take on from 1st of June. So Tore, I invite you to say a few words about what I'm sure is your favorite subject.

Thank you, Sven. And hello, everybody, and yes, my name is Tore Hansesaetre. I think for those following Norske Skog, it's not a complete new face. But anyway, I have been -- I'm 38 years old, married with my 2 kids. I have been in Norske Skog a little bit more than 1/3 of my life and in various positions, educated with master's degree from NTNU in Trondheim in Norway. Started in 2009 in the strategy department before switching to operations in 2011. And then from 2019, where we intensified the work towards the study for conversions of our machines here in containerboard, I have been heading that. And then, of course, looking very much forward to the position that I will take on from 1st of June with taking the bat from a long lap from -- well ran from Sven. So that's me in a nutshell.

If you have questions, then I guess we can go to the Q&A.

Yes. Thank you Tore and Sven. [Operator Instructions] And we have Kenneth Sivertsen from -- he wants to raise questions. The word is yours.

Okay. Sorry to hear about the -- that you'll leave the company, Sven, but congratulations to Tore. I guess it will be business as always there for you guys. First, a few questions on Australia. I jumped into the call a bit late, but if you could just give some comments on the quarter and what to expect in the next quarter, that will be nice. And secondly, you had sent out a press release. As I mentioned, I came in late to the call, but any impact -- financial impact will be appreciated, if you can give any guesstimate there as early as -- and yes. And finally, on the remaining CapEx, I didn't find it. I probably will find if I look, but the remaining CapEx on the conversion project will be appreciated as well. And last and final, some general comment on the market into Q2, how to expect overall for the company will also be appreciated.

Yes. Kenneth, thank you for that. I think this is a relatively comprehensive question list. I'm not sure if I got the first question, if it is also about Australia. I think if also, I will answer based on that basis. So Australia was, of course, weak in the quarter with a negative EBITDA impacted significantly by the stop we had in March. So there's always -- or every year, there's a full mill shut. This time, we had problems both going into the shut, not so much with the shut itself, but we had problems with the start-up again. So this led to additional costs and also additional downtime. We could have sold more volumes, but we did not have those because of the stop issues. So we still think that because of also how we have to put maintenance costs, we will not repeat that, of course, in the next quarters. And in general, we also expect a positive margin for the Boyer mill. So all in all, of course, the remaining 9 months would be clearly significantly better than the number we reported. But also at margins, somewhere between 5% and 10% plus as the minimum guidance so far for Boyer. Then when it comes to the general market situations, we have done some -- let's say, in the outlook and the report itself, we've talked a little bit about the weakness which we see in Europe as it's clearly impacting us in the various segments. However, we do see clearly supply responses to that, both from announcements from our competitors on publication paper. And we also expect based on history that the same will happen to the containerboard market. And we also note that the cost levels are still higher than what they historically have been. So it was a 0 cash margin for marginal producers are approaching. So you see signs on containerboard but probably also in the publication paper markets. So it's a bit -- we cannot be too precise on, let's say, the demand guidance because it has been weak in the quarter. But it's also influenced by inventory shifts, and people are careful, and we will probably work through inventories. Most of that may have happened, so it may also still be ongoing now in April, but we cannot be too precise. I'm not sure, Tore, if you wanted to say something about the CapEx or the remaining CapEx for the projects, how specific you want to be in it.

I think we have guided around next EUR 370 million, I guess, on the cash to make for these conversion projects. And I would say around EUR 130 million to EUR 140 million is still to come on that.

Yes. So obviously, Bruck is now mostly spent.

Yes.

So this relates to Golbey.

Yes, mainly Golbey's.

Yes. I think maybe we should give the opportunity to another person.

Yes. Any other questions? And we have Johannes Grunselius on the list. You are welcome to raise your questions.

Yes, I have a few questions on your packaging -- new packaging business and if you can remind us about how you're seeing the economics of the new Bruck volumes. Because there are obviously a lot of moving parts, if you can just sort of maybe indicate what kind of margins you are foreseeing when that is up and running fully. And also, if you can give us an indication when you are expecting to reach EBITDA breakeven on that operation.

Yes, I think what we have guided in general for these 2 projects and in the total volume will be probably on actual productions, somewhere in the range of 750,000 to 760,000 tonnes. We have said EUR 70 million to EUR 80 million EBITDA total. We have not given individual guidance on the mills, and I don't think we will do that either. Clearly, this year there will be a negative EBITDA for the segment. I think next year, we should definitely expect a positive one. And then from 2025 onwards, we will reach the guidance we've given of EUR 70 million to EUR 80 million on a normalized level. The moving parts as such, I mean, if prices are higher due to energy costs and other factors, then perhaps estimate is probably a bit on the low side. But in sort of historical normalized margins, it should be around EUR 70 million to EUR 80 million level.

All right. That's helpful. Can I also ask you about the near-term outlook because you are saying in the outlook comments that you will take response and make curtailments. I mean, you also did that in Q1.

Yes.

But how should we think about the delta Q2 versus Q1? I mean, you obviously have the incident in Halden now, but should we sort of -- are you planning for similar volumes Q2 versus Q1 in Europe?

I think the -- let's say, the second quarter will probably not be too dissimilar to the first quarter. However, as you correctly pointed out, the impact of the Halden stop will influence that final number. And we cannot, unfortunately, give too much precise guidance. So before that happened, as I've said, we should look similarly to the volumes in the first and the second quarter in terms of what downtime we really will take. But again, that's a bit up in the air now with the PM6 stop. We don't -- simply don't know how long we have to be stumbling on PM6.

Next on the list is Martin Melbye.

I was wondering about the cash flow. In this report, how much of the school sale and the CO2 compensation was booked in this quarter? And how much is yet to come in the second quarter?

So on the CO2, let's say, to make it simple, the Norwegian CO2 compensation was received in April, which is about NOK 270 million, which comes into FOB. Dividend from the sale of the school is about NOK 200 million.

And the school is yet to come or did it?

The school has been -- the school was booked in EBITDA in the fourth quarter, and the cash flow was received as a dividend in the first quarter.

Okay. And you said EUR 140 million was outstanding of the CapEx.

That's certainly what we see.

That's the net cash we expect out, yes.

Okay. And I think that you built inventories in this quarter. That could be good news for the segments, but was that normal? Or was that...

First of all, it is normal that we build the inventories in the first quarter. That probably has happened every year. We probably have to admit that we have built maybe slightly more inventory than we planned because of the somewhat weaker demand side. But as you correctly indicate, that is probably not necessarily such a bad idea with the incidents today. But in general, I would say that we have also taken downtime in the first quarter as we see, so we will always try to match this in a reasonable way with supply and demand. And I think we've also done that despite the inventory build.

Then I have no others on the list who wants to raise questions. And if that's true, I would like to thank everybody for participating in this webinar. And I will wish you all a happy and nice day.