Norske Skog ASA (NSKOG) Earnings Call Transcript & Summary

Good morning, everybody. My name is Carsten Dybevig, and I'm the Vice President of Communication and Public Affairs. Welcome to our short webinar where Norske Skog's CEO, Geir Drangsland, will present highlights from the last quarter. The CEO and the corporate management are present. Present here also in the studio are also the CFO, Rune Sollie; and VP, Corporate Finance, Even Lund. After the 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 during the session. The word is yours, Geir.

Hi, everybody. Thank you for spending time with us this morning to look into the figures for the fourth quarter of Norske Skog. There's already been published a webcast of the presentation. So I will do this as a short presentation of the core and content of the presentation. Yes, this is visualizing of what's going on in Norske Skog. As you see, the dark green bar is the traditional income stream, which has been created for many years in publication paper. And what we are doing, we are investing NOK 5.5 billion to NOK 6 million into rebuild machines in German -- now in Austria and in France to create income streams on the light green bar, which is being grown now, as you see in '23-'24, the ramp-up is going on and it will in '25-'26 be finished. So that leading way transform us to have 2 big income streams. It's from publication paper, but also in addition, we will have a large income streams from packaging paper. Next. Quarter highlights. Fourth quarter 2023, earnings positively impacted by insurance settlements. Quarterly EBITDA of NOK 760 million, including extraordinary net positive impact of NOK 655 million from Saugbrugs and NOK 57 million gain from Tasman sale. Improved financial position and liquidity due to receipt of NOK 720 million in insurance proceeds in the quarter. Paper and containerboard prices stabilized. Publication paper markets remain weak and further capacity closures are required. Containerboard demand returning, but markets still experiencing excess capacity. Bruck PM3 ramp-up on plan in challenging markets. Very positive customer feedback on containerboard deliveries from Bruck, increased deliveries in January 2024. We're very pleased with that. Golbey machine progressing towards start-up in second half of 2024. Saugbrugs paper machine #5 restarted end of fourth quarter 2023. Successful start-up of paper machine #5 and expect close to normal production and on-time deliveries during first quarter 2024. Progressing with evaluation of opportunities for paper machine 6 and related infrastructure. Maintained good balance sheet following shareholders' distributions. Equity ratio of 42% and interest coverage ratio of 18.4% (sic) [ 18.4x ]. Completed NOK 415 million share repurchase program and paid dividend of NOK 0.67 per share, equivalent to NOK 57 million. Next. Here, we are visualizing some key figures from fourth quarter. As you see on the volume, we are slight up on volumes in fourth quarter compared to quarter -- third quarter '23. We're pleased with that. Also, the income stream is more relatively increased because there is booked incomes from the insurance proceeds. So that impacts a lot on the income stream. And also, of course, that is directly on the EBITDA, the income from insurance. So that's a substantial increase of the EBITDA in fourth quarter, which is NOK 760 million. Also pretax profits, very strong. We're very pleased after in 2 years investing NOK 5.5 billion in rebuilding machines in Bruck and in Golbey, still having an equity ratio of 42%. Also, interest coverage ratio is very good. Cash is very strong, still on the balance sheet, NOK 2,463 million in cash. Net debt also reduced actually fourth quarter compared to third quarter '23. Next. This is a lot of details where we can analyze the development from quarter-to-quarter. So I won't go into detail with that now. So I think we take the next one. This is a picture of the containerboard machine in Golbey. Production will start up, as I said, in second half 2024. Mechanical equipment all delivered. The remaining work, it's mainly on piping and electrical work, which will be completed during summer. Bruck paper machine 3 is very happy with the development there. On the bar, you see here the volumes, which started in April '23. And actually, for January, you see 12,800 tonnes, which is above plan and expectations. So it's very well received from our customer side, both the quality and on-time deliveries from the mill in Austria. Next. Here you see an overview picture of our mill in Halden, the Saugbrugs mill, where revenues from paper machine 4 and paper machine 5 is developing as planned. Very pleased that we have started up the machine #5 after it's been not going -- been running for 3 years. So that's well done by the management in the plant. And we are exploring opportunities for the machine #6. It's ongoing in the company, and we will come back later with news what's going to happen there. Next. This is just some monitoring of sourcing of energy and fibre prices and the union allowances, where you can see energy has come down, also recycled paper come down, but it's pressure on spruce pulp prices in Norway, which impacts the mill gate cash cost for Skogn and Saugbrugs. We are anyway challenging environments there. And also the union allowance has dropped a little late this month. Next. Yes. As you see here, the paper prices on publication market has been challenging during '23, but we see, hopefully, it's in a way more balanced price development in '24 is our expectation. So that as we also have commented several times, so this need for more reduced supply of publication paper. Next. Here we see the packaging paper market, which is also a little surprisingly for many -- after many years, as you see on the bar chart here from 2018, quite stable, increase in demand, but suddenly in '23, there is a drop, but our expectation is for '24 that it will be recovered, so more balanced demand/supply situation for '24 than in '23, which was challenging. So concluding remarks, recycled fibre energy costs stabilizing at lower levels, but pulpwood costs remain high. Publication paper prices under continued pressure from weak market balance and lower input costs. Containerboard prices stabilizing at production cost in a challenging market with excess capacity. Expect negative EBITDA from packaging paper segment in '24 due to Golbey paper machine start-up in second half of '24. Maintaining a strong liquidity position as investments near completion and debt repayment increase. Significant focus on reducing production costs and working capital to maintain competitive position. That's the concluding remarks from us.

Yes. And then you are welcome to raise questions to the CEO or other members of the management here. I can see that Kenneth -- no, Morten Normann, you are welcome to raise question.

You mentioned that regarding Golbey and the conversion, you said that electrical works are being completed during summer. In my world, July and August is also summer. Could you be a little bit more precise when you expect the first containerboard to be out in the market?

Well, if you want to go deeper into details on that time line, I will give actually the word to Amund Saxrud, which is in charge of that project.

Well, we are in the phase in a way to complete direction of both piping and cabling and this is ongoing. And after we have finalized that, we will also go into the commissioning phase. That is in a way normal procedure in project and then the startup. And at the moment, I think we are not more precise than saying second half at the startup. And we still believe that we will start up in second half, but at this point, we will not be any more precise than saying second half.

Do you have other questions, Morten? Okay. Thank you.

No, I think it's still, yes, confused but at the high level, so that's okay.

Do you have other questions? Okay. Next one is Sivertsen.

Yes, Kenneth from Pareto here. Just on the market side, just following up. It seems like you also mentioned that it says oversupplied publication market. So any signs of curtailments or closure do you know about? That's one.

Actually, I will leave that to the Sales Director, Rob Wood. He is closer to the players.

Yes. So far, we have no indications of any more permanent curtailments. I think everyone's watching the market development closely. Everyone is aware of the overcapacity. Everyone is trying to run obviously where they can as efficiently as possible. But as we've stated, no doubt that for the pricing to move significantly in a positive direction, we would need some capacity closures across all grades. I think you're aware of that yourselves...

Okay. I appreciate that. Moving on to the earnings, so there are some cost relief and some price pressure, but if you could give us some high-level bridge on EBITDA compared to Q4 going into Q1 or your mid of Q1, if you can give us high-level thoughts here, it would be appreciated.

The bridge from which time to what time did you actually mean now? We cannot give details for January...

No, I understand that you cannot give details, and -- but it's more on a high level thoughts at the current market, how should we think about Q1?

What we are seeing this on publication paper prices published by RISI, there was obviously a slight move down towards in January, mainly on the magazine grades, newsprint was flat. So there is still pressure on our product presence going into the first quarter. Wood costs in Norway, pulpwood, they are high. We expect it to remain high. It's difficult to say whether they will be flat or continue to move upwards. So we think we also have some room to navigate in terms of being more efficient in our purchasing and logistics. So net effect is difficult to say, but definitely will stay at a high level. Recycled paper is -- it's come down a lot from the peaks we saw. We think it will stay around the current leverage, but it's difficult to say. Energy has come down a lot, especially in natural gas, which is favorable in Bruck. So some tailwinds from the gas prices coming down definitely and also spot market electricity prices. Of course, we are hedged quite thoroughly. I think around 85% of our energy exposure is either internally generated or on long-term contracts, but we had some spot exposure, which is benefiting from lower spot market prices. So some tailwind also on the cost side there. So all in all, it's -- I mean, we're seeing lower costs going into Q1, but also pressure on prices. So we'll have to see where it ends up at the end.

Any other who wants to raise questions or give comments to the quarterly results. Yes, Morten, you are welcome.

Yes, I have a technical question regarding the pulpwood prices in Norway. They're quite high. I should have known this, but what is the sensitivity if they let the prices were to move down, let's say, NOK 100 per cubic meter, how -- what effect would that have on EBITDA?

Well, how is the purchase on? And how much is it, 1.2 million cubic in Skogn and 500,000 cubic in Saugbrugs, so 1.7 million times 100 means -- that's 170, yes. So NOK 100 means 170 million in increased EBITDA generation for us.

[indiscernible], you are welcome to raise questions.

And just relating to testliner prices, I think if I recall in a presentation or 2 back, you mentioned or flagged quite significant discounting to the sort of index. I can't recall. I think it was like 30%, 40%. Could you maybe provide any insights as to how that has evolved in the last couple of quarters? Are we closer to that now? Anything on that would be pretty useful.

So yes, we haven't provided there specific details in the presentation here, but obviously, looking at our segment reporting, the packaging paper segment, you can sort of see the implied development for the, call it, net testliner price that we are able to achieve in each quarter. So if you take that implied price and then, of course, translate to euros with the prevailing rate, you get around EUR 327 per tonne for the quarter.

Okay. Excellent. That's very useful. And then just continuing on the testliner front, you're obviously flagging excess capacity still. I think in the previous presentations, I think the communication was more around acquiring quite a bit of capacity to come out of the market. Do you think we've seen enough come out of the market? I mean how far from sort of [indiscernible] market do you think we need to go? Or do you still expect significant closures? Or do you think that's largely done?

There is still clearly a need for more closures in the market, utilization rates now are mid-80s and it should be at mid-90s. If you see sort of annualized run rate demand at the moment, it's maybe around 23.5 million tonnes in Western Europe for the recycled brown containerboard grades. Capacity is high 26 million tonnes and expect it to move up as we see more conversions being completed through '24 and '25. So there's definitely a need for several million tonnes of capacity to either come out or for projects to be postponed going forward in order for the market to reach balance. We expect some demand growth to pick up in '24, which will, of course, help the situation, but capacity closures should be required as well.

Okay. Thank you, [indiscernible]. Any other who wants to raise questions or give comments. I can't see any hands raised. Well, then we will finish from here, and thank you all for participating in this webinar. No, it's Morten Normann, you are welcome to raise the question.

Yes. Looking at publication paper Europe, you have about NOK 811 million in operating income and I guess, the insurance settlement of NOK 625 million is within that. What is the remaining factors in other operating income? And what is the EBITDA effect from those apart from the insurance settlement?

Yes, so you are correct. There is a large share of the other operating income in Europe coming from business interruption insurance at Saugbrugs. In addition, we booked another NOK 103 million in property damage insurance at Saugbrugs for the -- in other operating income. The remaining part mainly booked the CO2 allowances and also other bits and pieces at the mills. Does that help your calculation?

Yes.

Okay. Any other questions? Okay. Then we will thank you all for participating in this webinar, and we wish you all a nice day.