Norske Skog ASA (NSKOG) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to a short webinar where Norske Skog's CEO, Tore Hansesaetre, will present highlights from a very good quarter. The CEO and the corporate management are present. After presentation, you will be able to raise questions to the CEO by raising the yellow hand in the Teams. Please keep your microphones on mute. The floor is yours, Tore.

Thank you and Good morning, everyone. Thanks for spending the morning with Norske Skog. I will take you through, as Carsten mentioned, briefly the parts of the presentations here. If you manage to -- there you are, yes. First page, just to remind everyone who is Norske Skog. [indiscernible] 5 quality industrial sites: 4 in Europe, 1 in Australasia. Also remind you that we have -- we are in an investment program where the main earnings are in front of us from that. So, of course, we are now entering the result to recycled containerboard market, which we are very pleased about. But the on the financials, we see that the net debt is NOK 1.7 billion. The remaining net CapEx for the expansion project of NOK 1.4 billion. The cash position of the company is NOK 2.7 billion by the end of the quarter. With undrawn financing facilities, we have liquidity up to NOK 4 billion, so we have covered for the remaining part of the expansion CapEx. If you should -- Carsten, push to the next slide. This doesn't work I think. Then the next slide shows the highlight of the second quarter where we have the strong financial position with -- however with [indiscernible] into market downturn. The EBITDA of the company ended on NOK 380 million, which are then including NOK 90 million from business interruption at the Saugbrugs for the month of May and June. The net debt of the company of NOK 1.746 billion with a leverage ratio of healthy [ 0.7x ] with the net cash position of NOK 2.673 billion. The market remains challenging with price and profitability pressure. The publication paper prices are lower due to continued demand decline, weaker market balance, but also lower raw material costs. We see also on containerboard that prices have been stabilizing after dropping in the previous quarters, both in publication paper and containerboard markets. We believe additional capacity closures are required, and we believe that also will happen. Saugbrugs PM6 is unfortunately stopped since the 27th of April due to a rockslide. We are -- the extent of the damages and the rebuild is still to be investigated, but team's we -- from the inspections so far, they then say that PM6 will likely be closed through the first half of next year. The mill is insured both for property damages and business interruption for up to 18 months. Then this quarter, we are entering the containerboard market with the startup of Bruck PM3, which is running according to plan, and we expect that machines to be in full utilization in the second half of 2025. However, we have moved the Golbey startup from the fourth quarter of this year to the second quarter of 2024. And then due to the financial situation -- solid financial position of the group, the Board has resolved to initiate share repurchasing program for up to 10% of the share capital, in line with the mandate given from the Annual General Assembly. The repurchasing program will start today and run down to the end of the year or when the max amount of NOK 472 million is reached. One page on the Saugbrugs incident, which you also see here visible on the slide. So the rockslide on 27th April damaged buildings, machinery, and equipment. We are -- and that is, by far, the most important here is that no one was physically harmed in this uncontrolled and unfortunate incident. The main focus for us in the second quarter has been to secure the site, remove rocks and building materials to get access to the paper machine. PM6 has 260,000 tonnes of capacity and we'll -- that then will be out of the market for the first half of next year as well. Saugbrugs has insurance coverage for both property damage and business interruption for up to 18 months. And we have for the May and June months and then recognized business interruption of NOK 90 million in other revenue and by that also EBITDA in the second quarter of '23. In Bruck, we are ramping up the production for containerboard, which you also see here on the picture. The deliveries in the second quarter was 10,000 tonnes of recycled containerboard, and we expect that to more than double in line with the normal ramp-up phase for the machine. And then, of course, for us now, it's both to introduce ourselves to customers and qualify and get that up and running. But, of course, from a production point of view, it's about stabilizing the production, optimize production cost, [indiscernible] and so on, which is normal for a ramp-up of these type of machines. On Golbey in France, we have -- startup of PM1, we have moved to the second quarter of next year to reflect the revised time plan for installation work. And the startup of the machine is now then aligned with the new biomass boiler from Green Valley Energie, GV. And the net investment for the project is NOK 265 million, which then is including energy-related grants and certificates, which will be paid out in the period of '23 to '27. The group financials, very short that the revenue increased by 2.5% to NOK 3,404 million. And the main driver there is 10% increase in deliveries, while the selling prices went down, which is also the main driver for EBITDA decreasing from NOK 675 million in the previous quarter to NOK 380 million, giving an EBITDA margin of 11%, which is more in line with of recycled EBITDA for publication paper. Operating cash flow, the cash conversion from EBITDA to operating cash flow was fairly good, ending on NOK 353 million for the quarter. This is mainly driven by working capital release through reduced inventories, but also receive payment for CO2 compensation for the previous year. Net debt increased to NOK 1,746 million with still a healthy leverage ratio of 0.7x. And the increase is driven by the planned investment program for the conversion projects made. Briefly on the segments. Norske or the publication paper in Europe, we have seen pressure on prices and profitability. We ended on NOK 429 million, which is an EBITDA margin of 15%. In the number, we have included business interruption for May and June for Saugbrugs and then we also are pleased that Austria approved CO2 compensation for 2022 to be paid out this year, but the amount of NOK 4.7 million is then recognized in the second quarter of 2023 fully in the publication paper segment. Publication paper Australia, we are improving operations, even though the result is still disappointing and negative by minus NOK 5 million. We have challenging profitability mainly due to increased raw material costs, which we have not been able to offset falling prices in the second quarter. However, they have implemented price increases for the second half of this year, which should then improve the profitability for the region. Packaging paper, we are still on the second quarter in a very first phase of a ramp-up. So result-wise, it's very equal to the first quarter where we did not have any production and other activities is slightly negative, but an improvement from previous quarter due to reduced valuation of the long-term incentive program. In the market, we see that variable costs, the main input factors are coming down from the peak levels in '22 and have been then reducing throughout '23, both energy, recycled fiber. However, the virgin fiber in the Nordics is still highly priced, among other, due to reduced import of [ Bruck ] from Russia to the Nordic area. And even though the variable costs have come down and also driving prices, one of the reasons for the selling price is also coming down. It's also important to mention that the trend -- we are still above the trend levels in terms of historical prices versus where we are now on these variable costs. Prices, selling prices have decreased from the peaks and throughout also the second quarter and then for all publication paper grades, while for recycled containerboard it has stabilized in the quarter, which is reflecting that we are meeting the cost bottom here. The European -- we'll also remind you on the CO2 allowances that Norske Skog due its low carbon footprint, we have surplus allowances to sell, and that is then positively impacted by higher CO2 prices. The publication paper market, the industry is used to handle structural demand decline. As you can see, the industry takeout capacity along with demand on the left-hand side. However, on the right-hand side, you see that from basically beginning of '22 and the deviation between supply and demand has increased and that the industry is currently on low utilization. And there is announced or capacity have been taken out now mid this year in the [Technical Difficulty] case by the end of the year, but there is still a need for more capacity takeout to balance the market. The Norske Skog Group is in a strong financial position, and the Board has therefore decided to initiate a share repurchasing program in accordance with the authority given by the general assembly with the maximum number of shares to be 10% of the share capital with the maximum consideration of NOK 472 million. The purpose of the program is to return excess capital to the shareholders. And this program will start today, and we'll report on a weekly basis the transactions made. Finalizing with the outlook, the raw material and energy costs are stabilizing. However, the development going forward remains uncertain. In general, it is higher volatility than, let's say, previous years. Paper prices are influenced by the lower variable costs, but also weak market levels. Containerboard prices, we see signs of stabilizing now in the second quarter, and we expect no further price decreases going forward, but there is still a challenging market situation also for containerboard. Further capacity closures and industry consolidation are, therefore, required in both publication paper and containerboard. The introduction of Norske Skog Bruck in the recycled containerboard market is well underway, but we still expect negative EBITDA from the packaging paper segment in '23 as we ramp up production. We are maintaining a healthy balance sheet. We have a strong liquidity position, and we have a strong cost competitiveness for our mills. And then we will also put a placeholder in your calendars for the Capital Markets Day on 16th November here in Oslo. Details will be provided, but we hope to see you there. By that, we end the short recap of the presentation. And then I guess we open for questions.

Yes, you may raise questions by pushing the yellow hand on your screen. There is nobody so far. Yes, Kristian Spetalen, you're welcome to raise your question.

I just had a question on the paid taxes here, which was NOK 0.5 billion. Just trying to understand that with regards to the tax assets you have in Norway.

Yes, this is linked to where we are in tax position, which is in Austria and in France, so this is linked to tax for the year of 2022, mainly in France.

You have another question. No? Okay, Johannes Grunselius, you're welcome to raise your question.

Yes. Could you maybe elaborate a little bit on how you see the third quarter in terms of, let's say, building blocks for earnings because you indicate that you will continue to have negative earnings for the new containerboard business that's pretty clear. But should these be less negative Q3 versus Q2 because of absorption of fixed cost? So if you can talk a little bit about that? And secondly, if you could talk a little bit if there would be heavier price pressure in the third quarter on publication paper versus the Q2 since it appears that the big price weakness came at the end of Q2?

Yes. To start with the first part of your question, Johannes, on the packaging paper segment, we expect to ramp up and more than double both the production and the deliveries, at least the deliveries in this second -- or the next quarter, the third quarter. But it is clear that we will have it -- profitability-wise, we don't expect significant improvement quarter over quarter. They are still running 50% to 60% to 70% on utilization. So I think you should not expect significant improvement in that segment into the third quarter. On the publication paper part, the main building blocks there, we do see paper prices coming down in Europe from second now into the third quarter. I will not guide on percentages there. But we also see that the variable cost in general should for us go also somewhat down from second to the third quarter.

Okay.

Do you have any more questions, Johannes?

Maybe I can also ask you about how you foresee 2024-2025 on your new packaging business given that it appears that market are really weak at the moment for containerboard. We have seen competitors walking out from projects and some closures, et cetera. But if you can talk about your -- I think your our guidance has always been 20% plus EBITDA margin on these new business. If this is still valid given what you see at the moment in the market?

I would say, the numbers you refer to are then linked to that when we are fully up and running with both machines, which will happen in 2026, in a way. So I think that needs to be taken into the context of that 20% margin and which shape the industry will be in at that point in time. I think from our side, of course, it's positive for us that some of the [indiscernible] projects are put on hold or not gone through from the other suppliers. But it's I think reflecting that the industry as of now have a very challenging times and that further I think capacity will be taken out, permanent or temporarily, to balance the market to improve margins.

Okay, thank you, Johannes. The next one on the list is Martin Melbye. You're welcome to raise your questions.

2 questions. You highlight that your markets need capacity cuts. Will you participate or who do you think should do it? And the second question, where do you foresee net debt at the end of the CapEx period?

On the capacity cuts, of course, we have taken out capacity with the conversion projects so both in Bruck and Golbey. Right now, Saugbrugs is temporarily down with PM6. We will, of course, adjust capacity to the market as well as you can see from utilization rates in the first half of this year as well. But as of now, we don't believe that we are the one to make permanent closures due to cost competitiveness, at least right now. And I cannot speculate on who others that should take out, but more saying that the overcapacity is there and the industry historically has always addressed this, and we believe this will happen this time as well. Yes, the net debt question, I don't have any specific number on that, other than saying that we have approximately remaining undrawn facilities for the conversion projects that were around EUR90 million.

Any other questions, Martin?

I'm good.

The next on the list is Morten Normann. You're welcome to raise your questions.

Yes, I came in a little bit too late now, so maybe that has been discussed before, but within the publication paper Europe, there is a large portion of so-called other operating income. I understand that NOK 90 million of that is the insurance, but could you please give me some more details on the remaining?

It is the CO2 compensation of Bruck for 2023 of EUR4.7 million. That is included in the second quarter together with the insurance compensation for Saugbrugs of NOK 90 million as you alluded to. And then the rest is more normalized with the sale of CO2 allowances and other normal smaller things.

Okay. And the next one on the list is [indiscernible]. You're welcome to raise your question.