Norske Skog ASA

OSE:NSKOG

Earnings Call Transcript 2022-Q1

[Sven Ombudstvedt, executive]

Good morning, ladies and gentlemen, and welcome to Norske Skog's First Quarter 2022 presentation.

As always, we would like to start with reminding you of our strategy. This is a strategy in 4 bullet points. So of course, we still do our publication paper as we will still continue to serve our customers as long as there is a healthy and meaningful demand in these segments.

However, the focus has also shifted into recyclable packaging as our conversion projects in both Austria and France is going ahead according to plan.

Also, quite exciting now at this stage, we are in the start-up and the commissioning phase of the waste energy plant in Bruck Austria. Again, a very important project in these times of green deal.

And finally, on the right-hand side of this slide, our demo plant for CEBICO in Halden at the Saugbrugs mill, as an example, are developments of more advanced bio-based products, which will replace petrochemical alternatives.

Since we have the grand opening of the waste energy border in Bruck, we thought it was appropriate to talk a little bit about the Bruck industrial site now following the strategic shift that we have implemented. Bruck will still run a lightweight coated magazine paper in addition to the converted machine, which will then do 210,000 tonnes of recycled container board. Quite a big shift for Bruck, supported also by the refuse derived-based boiler, which will then consume about 160,000 tonnes of refuse or waste from local municipalities and other actors who will deliver in against a gate fee.

We also have other activities on the site. We do construction additives. We do give capacity to the grid to stabilize it, and we also will provide district heating to the neighboring city of Kapfenberg and Bruck in itself.

Now turning briefly to the first quarter. And we said after the fourth quarter that energy and raw material prices were quite volatile in the fourth quarter. That has certainly continued into the first quarter and is still obviously ongoing. This was exacerbated by Russia's invasion of the Ukraine. And clearly, we saw both volatility and high prices, particularly on energy and particularly in Continental Europe.

Despite that, the EBITDA reported for the quarter is NOK 610 million, which is quite a strong improvement on the face of it, and it is impacted by the gain on the Nature's Flames pellets business of NOK 175 million. If you correct for that, the improvement is also there compared to the fourth quarter, and it's now in a more normalized area of around 10% plus margins compared to the more difficult COVID years that we have left behind us.

The market for publication paper remains tight now in the first quarter. We had significant closures over the last 2 years. There has been also further announcements of new closures, and the strike at UPM's Finnish mills also contributed to the tightness of the market. Obviously, our conversion in Bruck will also help to keep the market relatively healthy as we will then stop in the third quarter to allow for the conversion.

I mentioned the waste energy facility is in commissioning. We have started it up for Valmet. The main contractor has started it up and is now running at about 75% operating rate, which, over time, clearly should increase to approach full operating rates. However, this improved significantly the energy sourcing situation to Bruck where we, today, buy quite a lot of natural gas, and it will reduce the CO2 footprint by about 150,000 tonnes once fully operational.

Looking briefly at the EBITDA. We can see on the right-hand side, the bridge from the fourth to the first quarter that they rarely did price increases. But you can also see on the cost side, that is where absolutely necessary to maintain the EBITDA margin, particularly on energy, as mentioned. So higher cost for electricity and gas in Europe, in particular, but also in Norway.

We have fixed cost increases, which is partly impacted by an accounting adjustment for the long-term incentive program, which is linked to the share price. So since the share price are the relatively strong performance in the first quarter, we had to book an allowance for that in the books, which impacts the fixed costs negatively.

And then on the other hand, in the other items, the gain from sales of Nature's Flame is the main positive element there of about NOK 175 million.

Raw materials, indeed, challenging. If you look at the electricity price, and we have here used the German price, both for gas and electricity. You see that it is on a very high level, both historically and even in the short run. But also the volatility has been a big challenge. We had to take a short-term temporary stop in March in the Bruck mill simply because it was impossible to source gas at any meaningful price at the time. Fortunately, we were able to restart and we can once again deliver product to our customers.

Also on the recycled fiber situation, we have again used the German reference price. High pricing, quite a bit of volatility. We thought it stabilized around the EUR 160 at the end of last year. It has now moved up a bit again. And probably you have to pay around EUR 200 today to have access to recycled fiber.

On the other hand, the Nordic prices [ grid ] are more stable, as you can see from the Norwegian reference price there. Across Scandinavia and the Nordics, you can see that food prices have been relatively stable helped by quite a lot of logging, particularly for construction in the building industry.

Liquidity remains quite strong. We have now received the proceeds from Nature's Flame in New Zealand. So the cash balance at the end of the first quarter is almost NOK 1.7 billion. But more importantly, maybe that the cash earnings have returned to profitability in the fourth quarter and the first quarter. So still positive cash flow despite the normal working capital buildup, which we also saw in first quarter of this year.

So net debt to EBITDA is after reported 0.8% at this stage, which sits within what we think is a healthy band. And importantly, the total liquidity availability is about EUR 470 million. Our remaining CapEx for the commercial projects is in the range of EUR 300 million to EUR 320 million. And we are now allowed for certain increases in the civil engineering costs, which is inevitable these days.

For our publication paper, we will still obviously have a high focus on cash flow. And to improve the operations today, we operate at full capacity. So we have no problems to reach our operating rate targets of 90-plus percent. And we're also above 10% margin, which we need to be after 2 very, very difficult years.

Four sites in Europe, one in Australia with 11 machines producing. And then as I've already alluded to, there will be 1 machine stopping in the third quarter of this year and then further 1 machine stopping next year as we will convert to containerboard.

And then light-weight coated in SC and magazine paper. So our total capacity still matches the market demand quite well.

Looking very briefly at the 2 segments. Europe is clearly the largest, but I think it's also important to note that Australasia has now after years and particularly difficult COVID situation has now come back to more normalized profitability. Now the Boyer mill is the only operating assets in the region, and you can see that it's now running at a reasonable both operating rate and EBITDA. Clearly, we would still work to optimize this as we think that we also -- in Australia, there is no reason why we shouldn't be above 10% margin also here. But it's now at least come back to a profitability level, which is within reason.

Price improvements have been reported into the first quarter and also into the second quarter of this year, and we cannot exclude that we will see further price increases also going forward for our products. The reference pricing in Germany, you can see is on a high level, historically speaking, clearly needed because of the unprecedented raw material and energy price increases.

Operating rates now for the European industries in 2021 is at 90%. Probably in the first quarter, if you exclude the effect of the Finnish strike, it's probably even higher in practice running through.

The recycled containerboard market is indeed very exciting and has benefited from COVID as opposed to our publication paper market, which were more difficult during the COVID time. And we see even more healthy supply/demand picture than maybe we thought when we announced these projects. Altogether, 760,000 tonnes of capacity will reach the market. We will enter the market in the early parts of next year in reality. And then gradually, there will be more and more capacity ramping up until we reach full capacity a couple of years later.

Here, it should be possible to operate at even higher rates at 95-plus percent, and EBITDA margin is clearly higher than what we have been used to for some years in the publication paper space. So well above 20% should be an ambition, and we are obviously converting efficient machines in efficient locations. They will be supported by very competitive steam supply, and they have both the technology and the size of the machines to have good chamber weights and speed, which will support the competitiveness of these projects.

The capacity then is higher per unit as this is a heavier product. So we will have more sellable tonnes. We will have higher margins, and we will enter a growing market. So altogether, we think this is a very interesting place to be, and the future for our European mills will be recycled containerboard.

The main driving forces behind this, no surprises e-commerce and sustainability. So there is definitely more product being shipped over longer distances now than it used to be, and it's also a focus on replacing plastics, particularly in Europe. You can see the prices for the product on the left-hand side, which has moved up significantly on the base of a very good demand. And the resulting operating rates shows that the market has been able to absorb new capacity. And the area we are now entering into is not seeing the same new capacity that came on stream in 2020 and 2021.

Underpinning both these projects and the total Norske Skog strategy and the Bruck local strategy is a new energy mix. We have been using gas to the tune of about 0.7 terawatt hours with our power plant in Bruck. This power plant will still be there, but will be a backup facility mainly going forward.

The new waste energy, as you can see here on this picture, will then give us the steam, and it will also contribute with the gate fees to a tune of about NOK 100 million EBITDA per annum. The savings on gas obviously depends on where the gas market is going. But today, it is significantly higher than what we indicated, another NOK 100 million when we announced this project. It is in the commissioning phase. Valmet as the main supplier, is hard at work in commissioning phase, and it is presently running about 75%. We are convinced that this will reach 100% relatively soon.

One of the underpinnings of that project is savings on CO2. You can see that we already have, for many years, had reductions in our footprint of CO2. And we've also put new targets in line with the green deal in Europe to reduce emissions by about 55% or more in 2030 and net zero in 2050. We are quite convinced that we will reach this because of the investments that I just mentioned and other operating improvements.

Importantly, also, on the right-hand side, you can see the price development for allowances in Europe, which has now -- after some volatility earlier in the year, is back up to levels where it is meaningful to support green investments.

Green investments is also probably the key word when we talk about the scale-up and the commercialization for CEBINA and CEBICO, our 2 bio-based products being developed at the Saugbrugs mill in Halden, Norway. CEBINA on the left-hand side, where you can see CEBINA is used in a spray paint. And then the CEBICO test facility, you can see on the right-hand side of the picture.

So we have now capacities to produce this on a sort of semi-industrial basis ourselves, and we will then work even harder on the commercial side in order to develop this into industrial operations in of themselves. We have gotten support from the Norwegian government, both the Grønn Plattform, NOK 60 million support for CEBINA and also grants from Innovasjon Norge for the tests or the part of plant for CEBICO. So we are very happy with the relationship to the government, which indeed means that they are also seriously supporting us in our endeavors.

So indeed, if you have not gotten the message by now, we are indeed an enabler for the circular economy, both in terms of recyclability, in terms of waste or either reusing or not generating waste and also using green energy. In order to further sustain this, we have 2 main initiatives in Norway to -- either to store and capture CO2, which is Borg CO2, which is in the southeast of Norway, where the Saugbrugs mill is participating.

And we also have a technology to see if we can utilize both capture, but also to utilize CO2 as a valuable raw material in production, for instance, of algae in the Central Norwegian areas. Ocean GeoLoop has just installed a new facility at the Skogn mill. So we are quite excited about that partnership as well where we think that there will be a value of biogenic CO2, and we do think that this will be a business for us.

And finally, a few words about the outlook now. At the start of the second quarter, the market remains tight. Demand is reasonably healthy, and capacity has closed and will still closed as mills and machines are converted into packaging. Waste to energy will then improve our energy mix at Bruck, but also importantly, improve the earnings of Bruck, which is for the Bruck site sorely needed after a very difficult energy and recovered paper situation that we've seen over the last 9 months. And clearly, when we have also our Golbey project, we will become a major player in the European recycled containerboard markets.

Existing projects for energy and bio products will continue in Australia, in Norway, in Continental Europe. And we have -- we think we have a very exciting platform, and that this will become more and more visible over the next couple of years where the bio product innovation will be commercialized, and we will see this as their own businesses in their own sense.

On that note, ladies and gentlemen, I thank you for your attention this morning.