Norske Skog ASA (NSKOG) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the presentation of Norske Skog first quarter figures. The participants from the company is SVP, Corporate Finance, Even Lund; it's the CFO, Tord; and it's the Head of Communication, Carsten Dybevig; and it's the Sales Director, Robert Wood; and myself, CEO of the company, Geir Drangsland. I leave it to you, Tord and Even, to introduce the participants for the figures. So, good luck.

Thank you, Geir. So, in Norske Skog, we continue to focus on our strategy of being a committed and cost-efficient supplier [Technical Difficulty] paper, growing our deliveries of packaging paper and exploring profitable growth opportunities with new fibre projects across our 4 mills in Europe. Very soon, in about 1 week, we will have 2 paper machines producing recycled containerboard, which will enable us to increase our deliveries from this segment significantly during the next couple of years. But here we also work very diligently to maintain full utilization of our 7 machines in the publication paper space by constantly focusing on reducing our mill gate cash cost and gradually gaining market share. So, these are the quarter highlights. EBITDA came in at NOK 612 million for the quarter, whereof NOK 560 million is a result of the final settlement with the insurance company over the claim relating to the rockslide at our Saugbrugs mill in April 2023. Operational EBITDA also show an improvement over prior quarter and the containerboard machine at Bruck delivered its strongest quarter to date, both in terms of production and deliveries and in terms of results. After the quarter end, we have together with the [ Mariner ] Group closed the transaction for the sale of our remaining Australasian operations, and the sale will result in a cash consideration of around NOK 150 million recognized in Q2. We are reviewing future opportunities at Saugbrugs and the BCTMP main study is now completed in terms of the plant design. The environmental permitting process is ongoing, and we are expecting the results on this during the summer months. We have also completed a study for a low CapEx restart of PM6, paper machine #6, but we stress that a potential restart of PM6 would be done in parallel with a permanent closure of PM4 and PM5. These are the key figures for the quarter. Production and deliveries developed well for containerboard and magazine paper, while newsprint dropped back in large part due to weather-related events and power losses at our Skogn mill, which interfered with the production. Operating revenue decreased slightly due to the lower volumes as prices were similar to the prior quarter. Other operating income is up due to the insurance compensation at Saugbrugs, which also you could see reflected in the EBITDA and the pre-tax profit. Briefly on the financial position. The equity ratio increased to 39% and the interest coverage ratio to 7.9x. The cash balance is maintained at NOK 1.1 billion as the insurance compensation offsets the CapEx in the quarter mainly related to BOX Golbey PM1 project and an increase in working capital. The net debt is also maintained at NOK 4.1 billion. You can expect the working capital to be reduced in Q2 as the annual CO2 compensation in Norway was received 15th of April, and we are expected to receive the CO2 compensation in France in May or June. Moving to the segments. For Publication Paper, we have lower deliveries due to the just mentioned weather-related unplanned shuts at Skogn. But the production is now back to normal. Average prices for the segment were slightly up. This is mainly due to mix effects with a higher share of magazine paper, a higher-priced product, and a lower share of newsprint. Fixed costs relating to Golbey PM1 of approximately NOK 60 million have been shifted from Publication Paper to Packaging Paper segment, which, of course, impacts the results for the Packaging Paper segment. Bruck PM 3, the machine in Austria, which has been in production for 2 years now, delivered in excess of 48,000 tonnes in the quarter, which is close to the target utilization of around 50,000 per quarter. I now hand over the word to SVP, Corporate Finance, Even Lund, for an update on our project and also markets.

Thank you, Tord. So, most of you have probably seen this slide a couple of times before. We'll not spend too much time on it. Projects at Bruck are still completed and are running quite well, as Tord just mentioned. We are just about 1 week away from starting up the production at Golbey. Pulp production started this morning actually, and we hope to have the first paper coming out of the mill in just a few days, which will be a milestone event for Norske Skog. Remaining CapEx of around EUR 35 million to EUR 40 million, most of that to be spent now in the second quarter and a small part also in the third quarter. And noting that we have remaining grants mainly in the form of energy certificates to be received in 2026 and 2027 of around EUR 50 million in total. Looking a bit at the markets. So here you see the publication paper market for the different grades. Slightly different representation or visualization than we've usually made. On the left-hand side you see the demand for newsprint, both the domestic demand in dark green and the net exports in gray as well as the capacity with the black line on top. The newsprint market is perhaps the best publication paper market when comparing to the magazine grades, but still there is a need for future closures with an operating rate [ around ] -- at the moment around the mid-80s and expected a slight demand decline through 2025 after a more stable year in '24. The magazine paper grades, first, uncoated mechanical in the middle, where we have the 3 grades, supercalendered, uncoated mechanical improved, and uncoated mechanical other grades, with a domestic demand and then net exports on top. Here, the utilization rate is quite a bit lower in the mid-70s, and we expect also a slight demand decline for this grade into '25. And then the weakest market for us at the moment, where we have 1 machine operating currently, the LWC, or coated mechanical market, where the utilization rate is also then in the mid-60s, so a bit lower and the demand decline expected in '25. In challenging markets, it's all about being cost competitive. We are very cost competitive in newsprint with both the Skogn Mill and the Golbey PM2 machine. In total, we have capacity of more than 800,000 tonnes of newsprint delivering in the U.K., Europe and also some exports. In uncoated mechanical we have some deliveries of uncoated mechanical improved from Skogn, but our main delivery into this market is through Saugbrugs where we have 2 machines operating, PM4 and PM5. And as Tord mentioned, we are looking at the project to restart the PM6, which will be significantly more competitive than the PM4 and 5 machines, and then to close those machines. But we will update on that in -- into the future. Coated mechanical, as mentioned, we have 1 machine, the Bruck PM4, 265,000 tonnes. This is a very challenging market. So although we are in the middle of the cash cost curve, it's still challenging to be very profitable in this market. Packaging paper. So we are increasing our market share in this market. Bruck delivered 48,000 tonnes of containerboard in the first quarter, and we hope to get that up to around 50,000 tonnes per quarter going forward. In addition, we will start Golbey in a few days now, and that will deliver up to around 125,000 to 130,000 tonnes per quarter when at full utilization. That's expected to be reached in the first half of 2027. The market was quite strong in '24, growing with around 4%, and we expect a slight growth of around 1% in 2025. Utilization is below the target of 95% for the industry, currently in the mid-80s, and we expect it to remain around that area for some time as there are new machines starting up in 2025, including our own Golbey PM1. On the right-hand side you see the cash cost curve for Western European containerboard capacity. Bruck is positioned in the third quartile, noting that this is a cash cost curve developed by a third-party. And when we look at the cash cost of Bruck PM3, we see it as significantly more competitive than as it's represented here. To produce publication paper and containerboard is mainly about procuring energy and fibre at the best price possible. For energy, we have most of our exposure, of at least electricity or power, through long-term contracts. So we are not as exposed to the spot markets as others may be. And for the thermal energy, we do purchase a small share of natural gas, but most of it comes from our own biomass and waste-to-energy boilers. Recycled paper prices have been volatile and are starting to increase again. We expect RCP and OCC prices to remain high and continue -- and to increase going forward, putting further pressure on margins. The same is the situation for fresh fibre. We purchase quite a bit of spruce pulpwood in Norway, and the prices are at their record high levels, and we expect them to remain in that area going forward. EUA prices or the CO2 quota price is again volatile, around mid-60s currently. We have 96,000 unsold quotas from 2024 and expect to receive a surplus of additional 200,000 quotas in 2025. In addition, we have received on 15th of April, NOK 370 million in energy support in Norway and additional EUR 11 million is expected to be received in France during 2025. Looking at the product prices. Publication paper on the left side, fairly flat for quite some time now, and we expect it to stay at that level going forward. The prices reflect more or less the breakeven cash cost for the marginal producers in each market and it's not at any high profitability levels. Recycled containerboard index increased in March, and we expect it to stay -- or in February, and we expect it to stay at that level or even perhaps increase slightly going forward as this market is also under significant pressure in terms of profitability. Tord briefly mentioned that we are reviewing future opportunities at the Saugbrugs mill. We have just completed both the study for a BCTMP pulp project and the restart of the paper machine 6, and we'll get back to that in the future once the review of the studies have been completed. On the outlook, the operating environment is expected to remain uncertain and volatile with pressure on profitability for most of our product grades. Thus, we have a significant focus on reducing our production cost and working capital to maintain competitiveness. Bruck PM3 is expected to reach full capacity utilization during the second half of 2025. As mentioned, we delivered 48,000 tonnes in the first quarter and full capacity utilization is around 50,000 tonnes. Golbey PM1 will start production in about 1 week and reach full utilization in 2027. Since it is starting quite a bit into 2025, we were not able to participate in the annual volume contracts, which will mean that we have to take a larger part of the production into export markets for the year 2025 with lower product prices. But that will, of course, improve significantly when we enter 2026 and can participate in the higher volume contracts. As mentioned, the remaining gross CapEx at Golbey is expected around EUR 35 million to EUR 40 million, and we expect to receive around EUR 50 million in energy certificates and grants during '26 and '27. And as always, we keep -- maintain or monitor our capital and liquidity position closely and have several ongoing initiatives to secure both financial performance and position going forward. So with that, I think we can open up for the Q&A.

Yes. And the webinar will be recorded and later available on the web page. And you may now raise questions. And first we have Sean Ungerer. You're welcome to raise your question. [Audio Gap]

I think you have to unmute your microphone, Sean. That should be [ possible ].

I think... Marcus Gavelli. Perhaps you could try to unmute your microphone.

Yes, I would just appreciate if you could give some color on... The publication paper EBITDA of almost NOK 90 million was a pretty significant jump from the NOK 40 million or so in Q4, obviously, due to the fixed cost. But just to try to understand, is this -- given the change in -- at Skogn with the volumes and the product mix, is this -- again, considering the prices stay firm, is this a decent run rate going forward, would you say? Is there anything that speaks against this being a level that you should be able to sustain also, considering the energy prices and so on?

Yes. I think it's correct as you point out that underlying -- adjusting for the insurance compensation in the first quarter, it is a significant improvement versus the fourth quarter. That is mainly relating to the fixed cost being allocated away from Publication Paper and to the Packaging Paper segment, as Tord mentioned, an effect of around NOK 60 million to NOK 65 million. And yes, we do expect the operating environment to be at around the current levels going forward, meaning that, that profitability level should be possible to maintain, noting that we see some pressure on the RCP, recovered paper prices, that may influence that, of course. So always -- as always, stressing that the operating environment is quite volatile and uncertain, so.

Okay. Sean Ungerer, you can try again.

Just around the comment earlier, I think the growth rate was mentioned about 4% year-to-date. Was that for the European testliner market?

The 4% growth rate was the European testliner market in 2024. So in 2025, we expect -- in '25 we expect around 1%.

Okay. Great. And then just going to Golbey. So you mentioned full ramp-up in 2027. So I assume that's hitting around 95%, similar to other machine currently. Is that correct?

So for Bruck PM3, we expect around 95% towards the end of '25, whereas for Golbey PM1 we do expect full utilization in the early part of 2027, if that answers the question.

Yes, it sort of does. I mean how do you think about 2026? Is that going to be -- is the ramp-up going to be driven by the market or more about your own decisions to rather ramp up as much as possible?

Yes. I think it's both. I mean, the -- as Even said, this year, because we're delayed, we don't get a chance to participate in the annual volume contract negotiations. So when it comes to '26, we -- having established ourselves well through H2 this year, we'll be in a position to take part in the annual volume negotiations with the larger customers. And we would expect that to significantly ramp up in 2026, as we saw last year with the Bruck ramp-up as well. So I can't exactly remember what the plan is. I think...

The utilization rate will probably start the year around 70%...

Yes.

And around 85%.

Yes.

That makes sense. And then the last push into '27 up to -- yes, similar 95%-ish level for Golbey, if not a little better.

Okay. Excellent. I appreciate it. And then just last one. So it just sounds like the European testliner market is still quite precarious with demand and it's sort of maybe hitting 1% this year, waste paper costs going up. I mean, essentially, I mean, a large part of the cost curve must be under significant pressure again. So that most probably means more price increases coming? Or do you sort of finally see some more market closures happening?

Yes. Of course, I think there is some push for perhaps further price increases based on the raw material costs. At the same time we are coming with the new machine, Laakirchen is coming with a new machine, possibly the Duino machine in Italy as well. So that's probably going to balance that. But still the raw material costs is the main driver. I think we'll have to see how it goes.

Okay. Thank you, [ Sam ], and thank you to Robert Wood, our Commercial Director. [indiscernible], you are welcome to raise a question.

You are referring to export markets on your slides. Can you define is that out of EU or out of manufacturing plant? So -- and then following to that, if you could elaborate a little bit on how tariffs may impact short-term and longer term, please?

Yes. Basically -- I can say basically, exports for us is overseas volumes. So it would include for us Turkey, Middle East, India, China. For us, we don't consider U.S. as export. Although it's an export market, that's considered part of our core business. I hope that helps. In relation to tariffs, it's, of course, volatile because they come on and then they're taken away almost the day after. So we have some exposure to deliveries to the U.S., but with the existing small levels, we're able to deal with that. We had one of the biggest customers here visiting us from America 2 weeks ago just before Easter. So we just have to see how that develops. We are prepared for it. We have good positions, and we'll have to see ultimately what the Trump administration does.

Okay. And if I may follow up a little bit. You're showing -- charts showing global oversupply in all your markets. And this is not sustainable, of course. What's your expectations of closures from other parties that could bring market balance?

Well, we've seen, as you know, one closure coming probably in Germany, if that's ratified by [ UPN ] and the SCB market. We do see the need for others. If we can be competitive on our mill gate cash costs, we expect our machines to survive longer than others. And that's what we're seeing. We have, as we said, also gained some market shares in all the areas. So I think others will look to take capacities out before us.

How do you win market share? Is that on price or other factors?

I think it's commodities we're dealing with. So it's very, very little you can do on price. It's all the quality issues, the delivery, reliability and our local service. We have our own sales offices in our key markets, and that's very, very appreciated by the customer. So I think that's our strength there. Closeness to the market, speaking the local languages. That helps us.

And then [indiscernible], you are welcome to raise your question.

Could you elaborate a bit more on the Saugbrugs project? I guess you have 3 options: one, pulp; two, SC magazine paper; and three, [ do nothing ]. Which is the best project and which can you afford?

Good question. I mean we do indicate at least some preliminary CapEx figures in the presentation, net investment of around NOK 1.5 billion to NOK 2 billion for the BCTMP project and for the PM6 restart around NOK 300 million to NOK 350 million. We have to dig a bit deeper into that. But, at the moment, of course, to do the BCTMP project would require a bit more financing than what we have in place, whereas the PM6 project might be realizable with our own balance sheet as it is. And also in terms of time line, the project -- the BCTMP project is quite a bit longer in terms of construction work than the restart of the PM6. So -- and also for the market, the PM6 is much lower risk as we do transition the existing customers away from PM4 and 5 and to the PM6. But what the best alternative is, is not yet decided. It's under review as stated, and we'll have to come back to that.

Any more questions, Martin?

That's good.

And then, Cole Hathorn, you're welcome to raise your questions.

If I could start with waste paper raw material costs. I'd just like your view on where you see OCC costs going here? Because we've seen a rally from the lows of EUR 100 up to kind of almost EUR 150 a tonne in Germany now. I'd just like your views on what's driven the increase and where you see things going considering export markets are probably going to be a little bit softer and there's a little bit of demand uncertainty? So first one, views on OCC? The second one is on your contract negotiations for containerboard and ramping up Golbey. And please correct me if I'm wrong, but I view it now with Golbey starting -- you're probably perceived as a more reliable supplier considering you've got 2 production facilities as they start. So even though you're not part of the annual negotiations, can you give us an update of how your initial contact with players like the DS Smiths and maybe [indiscernible] of this world are progressing to place some offtake volumes within Europe are going? And then the third one is just anything that you can call out on what you're seeing in the debt markets and maybe just some color on your liquidity position from here?

I can start with the first one on OCC, and I'll leave it to Robert for the coal-based start-up. OCC, we agree with your comments that there is pressure in this market and that the prices are going up quite rapidly, also present in all the statistics provided by various industry analysts. Where will it stop? Difficult to say. I mean, we did have a peak in the summer last year where we paid up towards EUR 200 per tonne. Will it get back to those levels? Hard to say, but certainly not impossible, but we do see price increases are demanded and requested across all the markets and expect the trend to continue beyond what we currently see today, but do not want to make any promises of where it will end.

Yes. Maybe I can take on the points regarding the start-up of Golbey. I think I agree with you that it strengthens our position now to have eventually the second larger machine coming online. So we will be seen as a significant independent supplier of containerboard. In terms of the contract negotiations, of course, those are commercially sensitive. But we are and have been talking to most, if not all, of the key corrugators in Europe. And given the quality that we've already delivered into the market from Bruck, they now know us, they know our organization and our capabilities. So I think we are confident that we will be able to place the necessary orders in this first phase, including, as we said, some export volumes with our key trading partners that we've already used for Bruck and we'll continue to use in our publication paper areas as well. So I think quietly confident on our ability to [ place ] the volumes.

On your third question on the liquidity position, we did reach the final settlement with the insurance company in the first quarter, which provided us with NOK 560 million -- NOK 540 million additionally to our capital position. In addition, as mentioned, we have received quite a bit of energy support in Norway now in April and expect to receive more in France throughout '25. And we have significant surplus of CO2 allowances and we'll also get the proceeds from the sale of the Boyer mill recognized in the second quarter. In addition, we have the energy certificates to be received in '26 and '27 in Golbey. So we feel fairly confident at our liquidity and capital position as it is currently and -- but still monitoring it very closely and working across all axes to improve our capital -- competitive position and liquidity position as always, and maintaining very close dialogue with banks and also bondholders. But we feel very comfortable where we are now.

Perfect. And then maybe this is a bit of a leading question, but that's -- when I think about the European paper and packaging market, there are quite a few private players that have got quite levered balance sheets at the moment. But private equity has played in the space. It is more challenging to get kind of more high-yield financing. Do you have any refis that are coming up that we should be aware of or any thoughts there? And do you have any views on the challenges that maybe some of your smaller competitors might face to get either bank financing or levered financing? If you don't, I understand, but just like your views there.

On our part, we have sort of regular debt installments of between NOK 500 million and NOK 600 million per year going forward. We do have a larger maturity in 2027 relating to the Skogn green term loan, but with the option to extend that to 2029. In addition, we have the outstanding high-yield bond of NOK 1.4 billion which matures in 2029. So as we see it, we are fairly comfortable on the installment schedule and no big refinancings in the coming years. For our competitors, I think it's quite difficult to say, also because a lot of them -- I mean, the larger ones are very solid. The smaller ones are regularly not public. So it's difficult to know their financial and financing position in detail and how their dialogues are going.

There is no others on -- wanted to comment or ask questions? So thank you all for participating in this webinar, and have a nice day.

Thank you.

Thank you.

Thank you. Bye bye.