Norske Skog ASA (NSKOG) Earnings Call Transcript & Summary

Good morning, everyone. My name is Carsten Dybevig, Vice President of Communications and Public Affairs at Norske Skog. Welcome to this webinar, where we will present highlights from the second quarter. Presenting today are Geir Drangsland, Chief Executive Officer; Tord Steinset Torvund, CFO; and Even Lund, Senior Vice President of Corporate Finance. Also joining us from the corporate management team are Robert Wood, SVP, Commercial. There is no prerecorded presentation for this quarter available on Norske Skog's website. This webinar is being recorded and will be made available on the website after the event. Following the presentation, there will be a Q&A session. [Operator Instructions] With that, I hand it over to you, Geir.

Thank you, Carsten. Good morning to everybody. Thank you for sharing time with us. I just think we get started, and I'll leave the words to you, Tord and Even, you just go ahead. Thank you.

Thank you, Geir. So in Norske Skog, we continue to focus on our strategy of being committed and cost-efficient supplier of publication paper in addition to growing our deliveries of packaging paper and exploring profitable growth through new projects across our 4 mills in Europe. These are the highlights for the quarter. We had record deliveries and production of recycled containerboard in the quarter as Golbey PM1 is continuing the ramp-up. The profitability of the Containerboard segment has also improved, resulting both from price increases in Q2 and efficiency gains with higher production volumes. EBITDA came in at NOK 73 million and pretax profit at negative NOK 163 million. We are maintaining profitability and increasing market share across both segments. However, the Norwegian mills are, this quarter, negatively impacted by a stronger Norwegian krone. The liquidity is expected to strengthen further in Q3 as the proceeds from the NND transaction at Saugbrugs of NOK 780 million is expected in late July or early August. We received approximately NOK 470 million in CO2 compensation in this quarter, in Norway and in France, and we expect an additional NOK 50 million in Austria in Q4. We have several initiatives to improve profitability across our mills, and we are starting to see the positive benefits of these cost-saving initiatives. And we are also maintaining a strong focus on working capital. These are the key figures for the quarter. Deliveries of publication paper is in line with prior quarters, while containerboard, as expected, is continuing to increase as the ramp-up is progressing at Golbey. At Golbey PM1, we produced 73,000 tonnes in the quarter, an increase from 56,000 tonnes in Q1. Operating revenue is up from Q1 due to both higher volumes and higher prices, but this is partly offset by currency effects with a stronger NOK. Other operating income is down due to the one-off effect from the NND agreement at Saugbrugs in Q1. EBITDA is NOK 73 million, as mentioned, and the pretax profit negative NOK 163 million. Then moving to the financial position. The equity ratio is stable above 40% and the interest coverage ratio currently stands at 2.3x. The cash balance increased to NOK 723 million end of Q2. And as mentioned, we expect proceeds from the NND transaction of NOK 780 million within the next month. The net debt decreased to less than NOK 4.4 billion. Then moving to the segments. For publication paper, deliveries are on a good level with 280,000 tonnes. As mentioned, average prices for the segment are up when looking at the transaction currency, meaning predominantly euros, British pounds and U.S. dollars. But when converting this back to Norwegian krones, this offsets the increase in these figures. Other operating income decreased due to the one-off effect from the NND transaction in Q1. Cost of materials improved, mainly due to lower prices of pulpwood, and we expect further price reductions on pulpwood in the second half of 2026. The employee benefit expenses is up due to the annual salary adjustments and also a high number of public holidays in the second quarter, resulting in more overtime. On packaging paper, Bruck PM3 delivered EBITDA of NOK 25 million in the quarter, which is an increase from NOK 15 million in prior quarter. The continued increase in deliveries and prices enabled higher operating revenue when compared to Q1. Price increases have been fully implemented by end of June, which should increase the average prices in Q3 as compared to Q2. Decrease in other operating income is mainly due to recognition of grants in the previous quarter. The lower cost of materials per tonne due to better operating efficiency and good management of volatile energy markets. Depending on the CEE price, we expect to receive cash proceeds from energy certificates at Golbey with a market value of EUR 30 million in Q2 2027, and EUR 45 million in Q1 2029. The remaining CapEx for the Bruck's -- for the PM1 project at Golbey is about EUR 5 million. Then looking at the containerboard ramp-up. We have good progress on Golbey PM1, as you see from both production and deliveries shown on this slide. And we still maintain expectation of full utilization in the first half of 2027. So with that, I hand over the word to Senior President, Corporate Finance, Even Lund, for an update on projects and paper markets.

Thank you, Tord. Moving to the Saugbrugs mill in Halden. As already mentioned by Tord, the project to sell part of the property to Norwegian Nuclear Decommissioning, NND, is ongoing and is expected to close in the third quarter. This transaction will result in a gain in the third quarter of NOK 330 million and a payment of NOK 780 million. The properties are expected to be handed over to NND during the second half of 2028, resulting in the close of production at PM4 and PM5. We continue to collaborate with Green Mountain following the signing of a letter of intent earlier this year with ongoing studies to evaluate the potential for a data center at the site. In parallel, we have undertaken a zoning process to allow for establishing a data center at the property. However, this activity is currently stalled at the municipality level as it is undecided whether the planning program can proceed in its current form. Simultaneously, we continue to evaluate the rebuild of paper machine 6. The studies have taken somewhat longer than expected due to the original scope, not including the high-voltage facilities required to operate PM6. This will result in an increase in the complexity and investment for the project. Thus, the Board has not been in a position to make a final decision on whether to rebuild PM6 during the second quarter. We expect to provide further update on this during the second half of 2028 -- '26. The Bruck paper project at Skogn is moving along nicely. The project was completed in April, and production started shortly thereafter. And we have had trial deliveries and also the first commercial deliveries to customers with excellent feedback so far and look forward to continue the ramp-up of this product during the second half of '26. Also, moving along nicely is the battery energy storage solution project at Bruck. We expect to make a decision on this project during the third quarter with installation and start-up in the second quarter of 2027. Moving to the markets. The publication paper market balance remains slightly weak. At the newsprint side, we see utilization of around 82% for 2026, whereas for the magazine paper grades, it is slightly lower at 74% for uncoated mechanical grades and 75% for coated mechanical grades. Norske Skog is mainly present in the newsprint market and thus currently delivering quite decent results in the challenging markets. On the cash cost side, the newsprint machines remain highly competitive in their market, thus contributing to a strong delivery ability. On the magazine paper side, we are slightly weaker position with Saugbrugs PM4 and 5 as well as Bruck PM4 being on the higher end of the cash cost curve. Moving to the packaging paper market. Demand for recycled corrugated casing materials continued to increase slightly in Western Europe, with an expected demand increase of 1% to 2% in 2026. However, utilization remains at a historically low level due to a lot of supply being introduced over the past few years. On the cash cost curve, Golbey PM1 is nicely positioned in the first quartile. Bruck PM3 would be at a similar cost position if the cash cost curve included income from gate fees that we receive by operating a waste-to-energy boiler. In the quarter, as Tord mentioned, we had a positive EBITDA and are very pleased to see things move in the right direction for our Packaging Paper segment. On the raw materials side, energy prices remain volatile. However, we have secured most of our energy consumption on contracts, lasting all the way to 2030. So we are not that much impacted by short-term energy volatility. However, we continue to work to benefit from the volatility by -- through our excess energy sales. Recycled paper prices have been slightly more stable recently, although we do see a small increase in the past few months. Pulpwood prices continue to move down. However, the downward pressure has slowed a bit, but we do expect further price reduction in the second half of '26. EUA prices or the CO2 quota price remain in the area between EUR 70 and EUR 80 per allowance. For the product prices, we have seen a slight increase in publication paper prices during the quarter, but prices have largely been stable, and we expect a more or less stable outlook going forward. On the recycled containerboard prices, we have realized the full price increase of approximately EUR 100 per tonne during the second quarter with the final increases being implemented in June, and see more or less price stability on this grade going into the third quarter. For the outlook, we continue to increase market share in an uncertain operating environment and challenging markets. We have, as Tord mentioned, ongoing initiatives to reduce production costs and working capital to maintain our competitiveness. We continue to explore profitable projects across all mills to diversify our revenue streams. And we have a significant focus on the ramp-up of Golbey PM1, which reached the utilization of just above 50% in this quarter, and we expect full utilization in the first half next year. Final decision on the future direction for Saugbrugs is planned for the second half of 2026.

Okay. Thank you, Tord and Even. And now we are open for questions from the participants. So you're able to raise your hand and ask questions.

So far, nobody has raised their hand. Yes. I wonder. Estenson, you are not allowing -- you have to demute your microphone and you are ready to ask your questions. And we have Martin Melbye. You have to unmute your mic to ask a question?

Could you expand upon this delay at the Saugbrugs site regarding the data center?

So regarding the data center process, and then I assume you're referring to the zoning process at the municipality level. We started the zoning process about 1 year ago to allow for data center activity at the site, and that follows the standard regulation process at the municipality level. Earlier this year, we submitted to the municipality on a public hearing, the planning program, which, in simple terms, lays out the studies to be undertaken to answer any questions or concerns that the municipality or any stakeholders in the municipality might have to establishing a data center. However, this planning program was neither approved nor disapproved by the municipality. The municipality was undecided on whether to move ahead with this planning program and allow for the studies to be started. We have received feedback that the municipality would like to see more clarity on the direction for Saugbrugs before they make a final decision on this planning program.

Is there any further questions from you, Martin? It doesn't seem so.

So what is the next data point on that process, please?

And the next step will be for the Board of Norske Skog to be in a position to make a decision on whether to proceed with paper machine 6 rebuild. And depending on the decision made by the Board, it will allow us to further specify the planning program before submitting it for another review by the municipality. So that's likely to take place during the second half of '26 following a decision by the Board.

Thank you, Martin. And then we give the word to [ Krzysztof Marek ]. You have to unmute to ask the question.

My question is about Golbey PM1 utilization. At full utilization in first half of 2027, should we expect similar per tonne economics as in Bruck? Or does the Golbey cost structure differ materially? And is the 20% packaging margin from the 2023 CMD still mid-cycle target?

Thank you. So as we showed on the previous slide, the Golbey machine is more competitive than Bruck in terms of cash cost. However, Bruck also has the benefit of waste-to-energy gate fees, meaning that overall, their competitiveness should be fairly similar. However, as we continue to ramp-up Golbey PM1, as you correctly mentioned, it was at 53% utilization in the quarter. As this utilization increases, we do expect production to be further optimized, meaning more efficient consumption of both energy and fiber, which should improve the profitability of the machine. In terms of the 20% EBITDA margin, we have not revised that target, but state that it is assuming a mid-cycle or over-the-cycle market, which is not the market we are currently in. So in the current market, that would not be realistic. But as the markets are expected to improve by the end of this decade, we do think such margins should be attainable.

Okay. Thank you, Mr. Marek, Then I give the word to [ Cole Hawthorne ].

I'd just like to follow up on the containerboard market. We've seen from some of your peers, just commentary around better order books. Maybe some of that was just restocking ahead of price increases. I was just wondering, was it easier to place volumes from Golbey as you were ramping up in the second quarter? Is there any commentary you can make on just industry demand or restocking is the first question? And then the second question is on the publication paper side. What do you think is needed near term considering that the UPM and Sappi merger is going to take a bit of time. Is there something that you're seeing in the market to better help balance supply and demand? Any commentary on the graphic paper outlook for supply demand would be helpful.

Well, I'll take it, Even.