Borregaard ASA

OSE:BRG

Earnings Call Transcript 2017-Q4

[Per Arthur Sørlie, President & CEO]

Good morning, and welcome to this Fourth Quarter Presentation for Borregaard. My name is Per Sorlie. I'm the CEO of the company. And I'll be joined this morning by our CFO, Per Bjarne Lyngstad, and we will take you through the following agenda this morning.I'll just briefly touch on the highlights for 2017 and the fourth quarter, the proposed dividend, the market situation for the business areas, a strategic update for the priorities in strategic -- on the strategic agenda. And then I'll talk about the outlook. And Per Bjarne will come and talk about the financial figures in more detail.In the fourth quarter, we had an EBITA of NOK 109 million compared to NOK 160 million a year ago. We're still faced with strong competition for lignin in certain construction markets, but also higher costs in Performance Chemicals due to especially logistics and startup costs related to the projects that we have in this area.We had an improved result also this quarter in Speciality Cellulose. Other Businesses had higher costs and also lower shipments due to seasonal variations in the Fine Chemicals area. And then we reported in the outlook at the third quarter that we would have some additional costs related to technical problems in the chlor-alkali plant. They came out at NOK 15 million, which is included in the NOK 109 million EBITA for the quarter.Then if you look at the full year, we had an all-time high EBITA of NOK 749 million, pretty much in line with the previous year. And the earnings per share also came out at the best ever, primarily due to lower taxation.The dividend that has been proposed by the board to the annual general meeting will be NOK 2 per share. If you look at the operational performance in the year, it was excellent in Speciality Cellulose, with both higher prices and a stronger product mix.In the lignin area, we are still also this year as in the last 3 years actually. We have stronger competition in certain sectors of the construction market, geographic regions primarily, and increased costs also related to these reallocation activities that we are performing.Increased costs in Other Businesses. And throughout the year, we saw increasing costs in caustic soda and wood costs, which are 2 important input factors for the business in Norway. And we did quite a lot on execution of our strategic priorities that I will back to later in the presentation.Then the dividend proposal for 2017. Just let me remind you of the dividend policy. We want to pay a regular, that is stable, and increasing dividends, reflecting the long-term earnings and the cash flows that we have in the group. And the target for the dividend is to be between 30% and 50% of net profit.Since we have an ambition to pay regular and stable dividends, it means that if we are performing well above our return on capital employed target, we will be in the lower end of the 30% to 50% range, and if we are performing below the 15% return target, we will pay closer to the 50%.Last year the return on capital was close to 20%, so it was well above the targeted 15%, which indicates that the dividend will be in the lower end of the range. The NOK 2 is a NOK 0.25 increase from last year, where the ordinary dividend was NOK 2 -- or NOK 1.75, and at the same time it's 35% of net earnings and this will be a cash outlay of NOK 199 million for the company.Then I'll move on to the market situation; first, Performance Chemicals. In the last 2 quarters last year, quarter 3 and quarter 4, we had increasing volumes compared to the previous year. And the increase in the fourth quarter was 7%. This increase came in the categories that we refer to as construction and miscellaneous, which are typically average or below average pricing. The sales volumes into the high-end, the Specialities, was pretty much in line with the previous quarter.So when the 7% increase comes in these other categories, technically of course than the average sales price goes down when you calculate it. So more or less nearly all of the 5% reduction is explained by this mix, the fact that the increase of 7% comes in product categories that are lowering the average sale price.Having said that, of course the price competition in certain construction markets, that is driving prices down for those categories, but the other categories that we are active in don't really have a similar market balance related problem.We also had a slight increase in liquid lignin inventories at the end of the year. However, that is quite normal because the fourth quarter is a low -- fourth and first are low quarters in terms of construction volumes.Then if we look at the full year, the total sales for the full year was 449,000 tonnes. We had an increase of 4% from 79,000 up to 82,000 for the high-end. And you can also see some of the reallocation efforts here in the sense that the construction volumes have gone down now for 3 years, 4 years in a row and we are increasing the miscellaneous portion of the sales volume, so that this is a mitigating effect for the oversupply that we see in certain regions in the construction segment.If you look at the average sales price in currency for the full year, it is just above 0.5% down, which means that in practicality the price pressure that we see in construction was fully offset by mix improvements and reallocation activities. So we feel pretty good about that performance, but we have isolated the price pressure into the construction segment and we are finding outlets in other areas for that material.Then if we look at Speciality Cellulose. In the fourth quarter, we had improved the product mix. So both -- the fourth quarter is normally not a very high volume quarter, but in the last 2 calendar years it's been pretty high sales in the fourth quarter. And this year compared to last year, we had a stronger product mix. And especially the ether grades that are driving the demand side on the highly specialized grades.However, in the quarter itself cellulose prices in sales currency were fairly similar to the same quarter last year. Also, inside this Speciality Cellulose business area we report bioethanol business and we are seeing higher sales volume and prices in that area, so that is also a contributor to a better result in this business.If you look at the full year, the sales came out at 150,000 tonnes roughly and the share of highly specialized came up to 72%, which is the highest number in the 5-year period that we are showing on the right-hand side of this slide. At the same time -- and this was primarily driven by growth in the ethers market, but also higher shipments to acetate cellulose, even though the acetate market is quite challenging on the demand side actually.This was also a pretty good year for the portion of our volume that we sell into textile. But the prices there of course are on a quarterly basis normally. So they were better, the pricing was better in the first half than in the second half.Also, like I mentioned before, the bioethanol contributed better in this year than it did last year and this is particularly driven by the demand into biofuel, where there are political regulations both in Norway and other countries in Europe where they require a certain inclusion of second generation bioethanol in their fuel. And this trend will continue as we go forward. I come back to it later on.Then Ingredients and Fine Chemicals. We had strong sales in Ingredients both in the third quarter and fourth quarter and we see a positive market trend for wood-based vanillin. Borregaard is the only supplier of wood-based vanillin, which has a certain preference and is well liked by a number of customers.The sales volume came up in the calendar year. But on the other hand, we continue to see overcapacity for oil-based products. So synthetic vanillin, ethyl vanillin products where the starting material is oil-based still have an overcapacity. But at the same time, there is now a positive trend for wood-based vanillin.The Fine Chemicals business is running at full capacity. However, shipments do tend to vary between quarters for other reasons. So we just had lower shipments in the fourth quarter compared to the fourth quarter last year, as was given in the outlook after the third quarter.However, that's not an indication of any market-related issue. The plant operates at full capacity and will continue to operate at full capacity because the market for intermediates to x-ray contrast media, which is the main product area out of this business, continues to be strong.So that completes the market summary. Then we will go on and remind you about the strategic priorities, because we made a lot of progress last year on the strategic side. That also shows in the accounts, because we are investing a lot in these strategic priorities at the moment. So that's bringing up the size of the balance before we are putting them in operation. And even though we had an all-time high EBITA, the return on capital employed came down because we have increased the size of the balance sheet through these efforts that we have on the strategic side.And just to remind you, the 3 areas that we are trying to move forward here, one, is Performance Chemicals. We want to do 2 things. We want to grow the business absolutely and we want to specialize the business further. So there is a combination of -- and you saw last year that we came out with a 4% higher volume in this area and we hope to continue to drive that part of the business. But more specifically, we are now investing in both increasing the specialization and increasing the growth. And I'll come back to that in the next few slides.Then we are investing in several projects at the biorefinery in Sarpsborg in order to specialize that asset further, not necessarily increase the volume, but increase the value-added that comes out from that asset.And finally, we have a project where we are -- that we are coming into the market, where we are in the market introduction phase, for Cellulose Fibrils, where we're trying to establish that as a new business area. While we are doing that, we are running with a loss. So while we are investing a lot of money in lignin and the biorefinery in Norway in order to implement the growth, we are carrying a higher balance sheet and at the same time we are running with a loss in the market introduction phase for Cellulose Fibrils, which is bringing down the EBITA at the moment.Then just to comment on the specific projects. We have come -- we are well into the construction phase of the new lignin operation in North America. It will be -- it's on time. It will be completed before the summer and it will open in the middle of 2018. So it will be available for sales into the North American market in particular in the second half of 2018. The first phase here is for 100,000 tonnes capacity and we will implement the second step later on that will bring the full capacity up to 150,000.We are excited about this project because it's a softwood raw material base for us, which is a good starting point for doing business, and it's coming in a region where there is undersupply of lignin and has been for a long time. So we are working hard to reopen markets that have been really close and have not had the offer of lignin for a long time. And we look forward to the second half of this year when we can put this plant online.In the meantime, I'll just comment that we are building up the organization. So we are carrying some extra cost in our operations at the moment because we are building up the operating organization for this business which is not being capitalized.So we expect that, for instance, in the first quarter next year we will -- this year we will carry roughly NOK 10 million more in fixed cost than we did a year ago as a result of this project being in the preparation phase for commercial startup, because we need to hire people, we need to train people and we need to have them ready for the startup.And secondly -- the other thing that will happen here of course is that when we start this plant in the middle of the year, it will start to be depreciated in the second half this year.Then we have another project where we are in the startup. This was approved in the spring or late first half in 2017. This is a project that will go for 2-1/2 years. It will be implemented stepwise, but it will be finalized before the end of 2019. And it's a project -- NOK 500 million project at the biorefinery in Sarpsborg, which has 2 objectives. One is to reduce the cost level, to streamline the operation, take out cost both in logistics and energy costs and other fixed cost. And it will also increase the capacity and our capability to make specialty products.So whereas the US project is primarily a growth project but with a raw material that can also be specialized further down the road, this is a project to prepare for more specialization in the short to medium-term. But that also at the same time comes with a lot of cost reductions. And this will be gradually implemented from the end of 2018 till the end of 2019.Then we have the other projects that we are doing to complete the strategic agenda. One is the Cellulose Fibrils, which has been completed as an investment. It's in the market introduction phase, continued to be very strong interest here. We have more than 800 prospects considering this product at the moment. But there are long lead times because this project -- this is a new product. It takes time to run it through piloting and the commercial phase. But very encouraging development I would say so far. But in the meantime, like I said, we are carrying costs in the EBITA from this project.Then we have the second step of this Ice Bear project in Speciality Cellulose. This will be completed in the second half this year and this will increase more capacity, but also more importantly it will enable longer campaigns of these kind of grades so that we get better economics from running these new categories or these new qualities of pulp.And finally, we have a project that will go online this quarter, more or less as we speak, and that's in the bioethanol business. We are investing to bring the capacity -- to bring all our capacity up to speed when it comes to producing bioethanol for biofuel. At the moment, roughly 1/3rd of our bioethanol can be sold into biofuel, but starting this quarter -- later this quarter, we will be able to sell 100% of our bioethanol into biofuel.It doesn't necessarily mean that we will do that, but as we see the situation right now there is a price premium in that particular application, so it should be a sensible thing to do in the short to medium-term.Then I'll complete my presentation with the outlook. When it comes to Performance Chemicals, we still think that the situation in the construction sector in certain regions will prevail for some time. If you look at the signals, you can see that the oil price has come up. That means that the alternative products in this sector is being -- becoming more expensive.However, as we see it right now, we still don't see really a movement in the balance in the market, so we still think it will prevail for some time. So in the meantime, we will continue our reallocation efforts and probably also a higher level of distribution costs.The sales volume in 2018 will increase between 5% and 10% from the volume sold in 2017. We expect growth in the high-end, but most of this added volume will go into the construction and miscellaneous categories. As a result of the increase on the overall year, we also expect a higher sales volume in the first quarter of '18.And I already touched upon the Florida project and how that will affect costs and depreciation. We will have some extra fixed cost in the first half before we turn it on. And of course when we turn it on, there will be some depreciation as well.Then on to Speciality Cellulose. We expect that the average cellulose price in sales currency will be in line with 2017. It means that in some market segments there will be price increases. In other market segments there will be price reductions. But across the portfolio it's neutral between '17 and '18.As we looked upon earlier, we saw that we had a very strong product mix in 2017. Unfortunately, the mix will become weaker in 2017. How much weaker it will become is really too early to say exactly. But it's coming as a consequence of lower sales into the acetate segment.When it comes to the first quarter, sales volume will be higher than in the first quarter last year, but like what I just said, there will be slightly lower sales into highly specialized grades.In Other Businesses, the market is strong in Fine Chemicals and we expect to run the plant at capacity also in 2018. As we said for the fourth quarter, we expect that it will continue into 2018 the positive trend that we now are starting to see in wood-based vanillin. Sales will increase for Cellulose Fibrils, but I just said also that there will be long lead times, but we expect increased sales through the year. At the same time, we expect that the costs related to the business, the fixed cost and depreciation will stay at the same level as it did in 2017.As I mentioned in the fourth quarter summary, we are seeing some commodities that have had steep increases recently and I'm sure that you might have read about this also in the press. The wood cost has come up gradually throughout 2017 and there have been increases announced for 2018. And caustic soda had a steep increase towards the end of 2017 and into 2018. Also, as a result of new regulations in Europe from 1st of January this year where it's illegal to produce chlor-alkali products based on mercury, which means that capacity has been taken out.These are of course commodities that will vary from time to time. We have benefited in recent years from lower wood cost and caustic soda pricing. Now we are -- we'll have a time where we will have to absorb higher costs from those 2 categories.We assess as we speak now. And these are commodities, so pricing could change throughout the year. But the way we see it right now at the start of 2018, we think that the wood cost will add between NOK 10 million and NOK 15 million in the quarter, in the first quarter, and the second quarter if the pricing prevails between NOK 10 million and NOK 15 million. The caustic soda will add roughly NOK 10 million in the first quarter.The caustic soda -- the wood cost of course is carried by the Speciality Cellulose business. The caustic soda cost is carried by the Speciality Cellulose business and the vanillin business. We use quite large volumes of that product in both of those.I should also say that when the caustic soda price goes up, Borregaard's competitive position improves. And the reason is that Borregaard is the only player in the markets where we are active that is captive producer of caustic soda. We source roughly 1/3rd of our caustic soda externally. So when the price comes up, it's only 1/3rd of that cost increase that is hitting Borregaard, whereas 100% of the cost increase will hit our competitors.So actually the higher the caustic soda price is, the better our position is in the longer run. In the immediate short-term of course, we have to eat the extra cost as our competitors also will have to do, but normally in the longer-term this will be passed on to the market in some way or other.Finally, just reminding you that we have the FX exposure. And as you know, the Norwegian krone has started to move a bit, especially against the US dollar. But we also have the hedging policy in place, so we have locked in fairly good rates. And Per Bjarne will come back to that in a minute.So that completes my presentation and I will hand over to Per Bjarne for the financial figures.

[Per Bjarne Lyngstad, Chief Financial Officer]

Thank you Per, and good morning, everyone.In the fourth quarter, Borregaard's revenues increased by 2% compared with the fourth quarter of 2016, mainly due to improved product mix in Speciality Cellulose and higher sales volume in most units with the exception of Fine Chemicals.EBITA adjusted was NOK 109 million compared with the NOK 160 million in the same quarter in 2016. Speciality Cellulose had an improved result, but both Performance Chemicals and Other Businesses had weaker results.Costs increased partly as a result of technical problems in the chlor-alkali plant, with an additional cost of NOK 15 million in the quarter. The additional cost was NOK 10 million lower than our estimate in our third quarter outlook.The net currency impact was positive with NOK 15 million in the quarter compared with 2016, the fourth quarter. The EBITA margin was 9.6% in the fourth quarter, a notable decline from the fourth quarter of 2016.In the fourth quarter, a write-off and accrual for an external storage tank for lignin in Norway were recorded as other expenses with a total of NOK 9 million. Earnings per share were NOK 0.9 compared with NOK 1.23 in the fourth quarter of 2016.For the full year of 2017, Borregaard's revenues increased by 3% compared with 2016, mainly due to higher prices and improved product mix in Speciality Cellulose. Both EBITA adjusted and the earnings per share were all-time highs for the company.EBITA did increase marginally by NOK 2 million to NOK 749 million. Also, for the full year, Speciality Cellulose's result improved, while Performance Chemicals and Other Businesses had weaker results. Both costs and depreciation increased in 2017. The net currency impact was also for the full year positive with NOK 15 million.The EBITA margin ended at 16.2%, a slight decline from 2016. Return on capital was 19.1%, down 2.6 percentage points from 2016. As Per said, the reduction was a result of increased capital employed from investments. The Florida project investment alone amounted for more than 50% of the reduction in return on capital employed.Also, the tax rate for the year came down and the tax expense came down. We ended at a tax rate of 22% and we saw in the fourth quarter an impact both of the lower tax rate that we will see from 2018 in Norway, going down from 24% to 23%, and also from the tax reform in the US, where the federal tax goes down in 2018 from 34% to 21%. This affects deferred tax. And then for the full year, earning per share increased by 2% to NOK 5.66.Revenues in Performance Chemicals increased by 2% in the fourth quarter, mainly due to 7% higher sales volume. For the full year, revenues increased by 1%.As Per said, market conditions continued to be challenging for construction products in certain regions. EBITA adjusted was NOK 76 million in the fourth quarter, down from NOK 106 million in the fourth quarter of 2016. The reduction was mainly due to lower average sales prices, higher distribution costs and increased manning in the Florida project.Sales volume for Specialities was in line with the corresponding quarter in 2016 and the net currency effect was slightly positive. For the full year, EBITA adjusted was NOK 449 million, a reduction from the NOK 517 million we achieved in 2016. Again, challenging market conditions in the construction sector and higher costs were only partly offset by improved product mix and a 4% volume increase for Specialities.The net currency impact for Performance Chemicals was close to 0 for the full year. And the EBITA margin for the full year ended at 20.6% compared with 23.9% in 2016.In Speciality Cellulose, improved product mix and higher sales volume gave a 7% revenue growth in the fourth quarter of '17 compared with the same quarter in 2016. For the full year, revenues also increased by 7%, mainly from higher prices and improved product mix.EBITA adjusted increased to NOK 65 million in the quarter, NOK 20 million above the same quarter in 2016. Improved product mix, positive currency impact and higher production were only partly offset by increased cost for wood and caustic soda, including a large share of the additional costs from the chlor-alkali plant. The average price in sales currency was in line with the same quarter in 2016. And the contribution from bioethanol increased in the quarter as a result of both higher volumes, reduced energy consumption and increased sales prices.For the full year, EBITA adjusted increased by NOK 100 million to NOK 350 million for Speciality Cellulose, an all-time high result for this area. The improvement was driven mainly by higher prices and improved product mix.Energy, caustic soda and wood costs increased in 2017. And the contribution from bioethanol increased also for the full year, mainly from higher sales prices. And the EBITA margin in this area increased to 20.6%, close to 5 percentage points increase in the margin.For Other Businesses, revenues were 5% below the fourth quarter of 2016. Higher sales in Ingredients were more than offset by lower shipments in Fine Chemicals. For the full year, revenues increased by 1%. Again, higher sales volume in Ingredients was offset by lower shipments in Fine Chemicals.EBITA adjusted was minus NOK 34 million in the fourth quarter compared with plus NOK 6 million in the fourth quarter of 2016. For the full year, EBITA adjusted was minus NOK 50 million compared with minus NOK 20 million in 2016.Ingredients result in the fourth quarter was in line with the same quarter in 2016. Higher sales volume and positive market trend for wood-based vanillin were offset by increased price for caustic soda, including the share of the additional cost from the chlor-alkali plant.For the full year, Ingredients had a higher sales volume, which was more than offset by higher raw material and caustic soda costs and the result was slightly weaker for the full year.Fine Chemicals had a notable weak result in the fourth quarter due to lower shipments. For the full year, the result in Fine Chemicals was slightly weaker also due to lower shipments.Cellulose Fibrils had higher net costs both in the fourth quarter and for the full year as a result of optimization activities in production and strengthening of the marketing organization.Also, in the fourth quarter, the net corporate costs were higher than in the same quarter last year, but were in line for the full year. Currency effects were negligible both in the fourth quarter and for the full year in Other Businesses.The net currency impact on EBITA adjusted was approximately positive by NOK 15 million in the fourth quarter. Hedging losses were reduced by NOK 14 million, which means that the currency rates itself had almost no impact in this quarter. For the full year, the net currency impact on EBITA also was positive by NOK 15 million. Hedging losses for the full year were reduced by NOK 43 million to a loss of NOK 72 million.If we use yesterday's currency rates, the impact from currency on 2018 for the full year is estimated to be positive by NOK 30 million. For the first quarter of '18, the currency impact is estimated to be plus NOK 5 million.Borregaard's cash flow from operation was slower than in the fourth quarter of '16 due to a lower EBITDA and a less favorable development in net working capital. Investments were high in the fourth quarter, however lower than we expected in our previous investment forecast as a result of lower payout in the larger projects. The larger projects are on schedule both for time and cost, but with a carryover of payments from 2017 to 2018.In the fourth quarter, expansion investments were mainly related to the Florida project and the lignin operation upgrade in Norway. High investments and high tax payment were the main factors contributing to an increase of close to NOK 200 million in net interest-bearing debt in the fourth quarter. At the end of 2017, Borregaard is well capitalized with an equity ratio of 56% and a leverage ratio, which is net interest-bearing debt over EBITDA, of 0.8.Based on the outcome for 2017, we have updated our investment forecast for 2018. In addition, we now present our forecast also for 2019. The new forecast for 2018 reflects the carryover amounts from 2017, meaning that the total for those 2 years, '17 and '18, still is expected to be in the range of NOK 1.9 billion, but with a more even spending between 2017 and 2018 than we previously expected.Replacement investments are still expected or targeted at depreciation level, but will be above that level in 2017 and '18 due to the new wood seasoning silos which was covered by insurance and affected 2017 and a part of the lignin operation upgrade, which will mainly affect 2018 and also into '19.Expansion projects in 2018 and 2019 will mainly be the Florida plant, the lignin operation upgrade in Norway and the Ice Bear project in Norway. Potential new projects which so far are unknown or have not been communicated may lead to additional investments in the forecast period.And that concludes today's presentation and Per Sørlie and I will now be ready to answer questions.

[Unknown Analyst]

Just a very small one. [indiscernible] from Carnegie. Could you be a bit more specific on the manning costs due to the Florida expansion both in the quarter and also for the full year '17?

[Per Arthur Sørlie, President & CEO]

We expect to have about 50 employees at that plan when we start up mid '18 and we are gradually increasing that manning. And the additional cost for the full year of 2017 was closer to NOK 20 million and we will probably see another NOK 10 million increase for each quarter towards summer, which means that it will be in the range of NOK 40 million, maybe a little bit above NOK 40 million when we start up the plant there.

[Per Bjarne Lyngstad, Chief Financial Officer]

Yes, annual run rate.

[Per Arthur Sørlie, President & CEO]

Annual run rates, yes.

[Eivind Sars Veddeng, Analyst]

Eivind from DNB. Can you maybe elaborate a bit on your pricing outlook for 2018 in Specialty Cellulose? What's driving there the flat year-on-year? What's going on in ether acetates and textile grades, please?

[Per Bjarne Lyngstad, Chief Financial Officer]

Like I said, there are -- that's a mix of increases and decreases in pricing. And I don't think there are any surprises there compared to the situation we have seen in 2017. It's a strong market for ethers. It's a weak market for acetate. And also it is -- like I said, in the second half of '17 and into '18 there is a weaker market for textile cellulose as well.

[Jo Erlend Korsvold, Research Analyst]

Jo Korsvold, SEB. A question regarding the Florida JV. Any indication of the utilization rate in the ramp-up phase?

[Per Arthur Sørlie, President & CEO]

Two comments on that. First, the -- what we have said, communicated several times, is that this is a 150,000 capacity plant that will be built in 2 steps. And we have said that for internal rate of return calculation purposes, we have assumed a 5-year ramp-up. So it's a linear 5-year ramp-up, which means that first year of operation 30 and 2nd year 60 and so forth. But that's a conservative assumption. I mean, when you have a 100,000 tonnes capacity available, you want to fill it as soon as you can. So the efforts that are put into this from the sales force is that we have a dedicated team that is working on opening this market and starting the middle of this year 100,000 tons capacity is available. So we will definitely try to fill it faster than the assumption in the decision document. But that will all be down to the market development.

[Mikkel Nyholt]

Mikkel Nyholt, Carnegie. Could you also comment on the development in Spain and the higher costs that you saw there obviously this quarter as well in terms of how we can think of that going forward and eventually will that cooperation with Sniace terminate completely once the terms release?

[Per Arthur Sørlie, President & CEO]

The facility in Spain is a hardwood raw material facility, so it's primarily sold into the construction sector in Europe and the Mediterranean area, going all the way east into Turkey and so forth. So in essence that adds to the problem that we are discussing of oversupply in certain regions of the construction segment. And of course the way lignin arrangements work is that when our sourcing partners operate, we have to take the raw material. So when Sniace started up, there was an increased supply of lignin into the construction segment in areas where there is a slight oversupply in the first place. So you have to look upon that as 1 element in the whole picture around the construction market. And the products going out of Spain is neither more problematic or less problematic to place in the marketplace than other things. It's the market balance in total that is an issue. And as you know, we have announced that we have given termination on our agreement at that facility, which means that we have an option to terminate that cooperation in a couple of years. However, what will happen will be down to -- I expect that -- the market balance in lignin, from historic experience, it usually balances out eventually. But I think that they want -- we don't have an agreement where we can exit that business right now. So we have given termination, but in the meantime we are operating that business as normal. And on top of that, there is -- we've also announced that Sniace is in the process of ramping up their production because they have a cellulose mill and a viscose textile mill, and they are restarting the textile mill, which will increase their production of cellulose at the same time.

[Mikkel Nyholt]

So in terms of figures, in Q3 you had about a NOK 30 million pull back on EBITDA in Performance Chemicals and the pull back this quarter was approximately the same. Back then you said that slightly above 1/2 of that, so in the range of NOK 15 million to probably NOK 18 million, came from higher distribution costs, of which the majority came from Spain. Is it fair to assume that it's the same levels this quarter? And then when Sniace will ramp-up their production, is it fair to assume that their capacity will double, that means that your distribution costs, say then NOK 10 million to NOK 15 million, also will double in the next couple of quarters and then run out for the next couple of years?

[Per Bjarne Lyngstad, Chief Financial Officer]

In the fourth quarter, the distribution cost actually was a bit lower than in the third quarter. It was below 15% -- NOK 15 million. To predict about the future here -- of course the volume increase in Spain, we don't know how much it will be and it will be very difficult to -- it will also depend on how successful we are on the sales side with that volume.

[Per Arthur Sørlie, President & CEO]

Yes. Like I said -- I mean, old experience shows that market will fall back into balance at a certain stage. It's just impossible for us to predict exactly when that will happen. And there are micro factors at the moment like the oil price that is working in our favor in terms of rebalancing the market, but it's not an imminent sign that that will happen. So I mean, in theory, your analysis could be correct, but normally there are so many other factors moving at the same time.

[Unknown Analyst]

How much was the production in 2017?

[Per Arthur Sørlie, President & CEO]

In Spain?

[Unknown Analyst]

Yes.

[Per Arthur Sørlie, President & CEO]

The question was the production rate in Spain in 2017. And that was roughly 35,000 tonnes.

[Unknown Analyst]

Do you then have any possibility for raising your production more than 60,000 tonnes?

[Per Arthur Sørlie, President & CEO]

No. I mean, the capacity at that mill as far as we know is in the range of 60,000 to 70,000 in terms of nameplate, but for practical purposes I assume that 60,000 is fairly a max.

[Per Arthur Sørlie, President & CEO]

Okay. So thank you very much.

[Per Bjarne Lyngstad, Chief Financial Officer]

Thank you.