Norske Skog ASA

OSE:NSKOG

Earnings Call Transcript 2022-Q2

[Sven Ombudstvedt, executive]

Good morning, ladies and gentlemen, and welcome to this presentation of Norske Skog's Second Quarter 2022 Financial Results. I'm going to, as always, take you through some highlights. But before I go into the quarterly highlights, let me remind you of our 4 main areas. Of course, the legacy business of publication paper is still what matters mostly for the quarter and the financial results by now. But happy to say that the packaging commercial projects are progressing according to plan and budgets.

The Energy segment is also progressing nicely with the Bruck waste-to-energy boiler in its commissioning phase and the results of the Bruck mill are benefiting significantly now from the startup of the Energy boiler. Also in Golbey, we are progressing with the Green Valley Energie boiler, which will start production in April of 2024. And finally, the bio products, the CEBINA, CEBICO, Circa and Valmet are also progressing with quite a lot of commercial work that has been completed in the second quarter.

Very briefly then on the financial results, profitability for the quarter can be described as good. I think after 6 very difficult COVID quarters through 2020 and 2021, we have now for the 3 quarters running achieved results in line with what our expectations and targets have been. And I have to underline that we indeed have to improve profitability, and it's quite pleasing to see that, that has indeed happened despite the difficulties around high volatility on energy and raw material costs, particularly recovered paper for the latter part.

The net profit is NOK 935 million in the quarter. This includes a noncash impact from the valuation of our energy contracts, where the Norwegian contracts will fluctuate significantly from quarter-to-quarter if there is high volatility in the underlying markets compared to contracts. Going forward, we also see that the cost picture, particularly for energy, but also for recovered fiber will be challenging for us. It will still be volatile and price levels could be quite high. I think most people are aware of the energy situation in Europe presently, but also the global challenges around value chains and energy and raw materials in general.

I mentioned the waste-to-energy plants and the biomass plant at Golbey, which will support the general reduction of natural gas, almost 1.2 terawatt hours can be then replaced by renewable materials in various forms, which is clearly in line with what Europe is trying to do in general at the moment.

The publication paper market is also quite good. We expect that to still continue to be tight going forward, particularly as there has been announced capacity reductions in the industry also for the next coming years. Our own Bruck PM3 newsprint machine stopped its production on the 10th of July and is now ready to be converted and work will commence on the physical conversion of the machine. We do not expect a significant EBITDA impact of this stop as the PM3 has been relatively marginal with present energy and raw material costs.

On the other energy and growth projects, I mentioned that we've had a significant project of progress in the quarter. And we are on time line and on budget for the main projects, which I'm sure everyone is pleased to see. The further commercialization of CEBINA and CEBICO will also continue with unabated speed in the second half of the year. And we've had significant progress also in the first half of 2022.

Looking a little bit more into the figures themselves. You can see the revenue is increasing. Sales prices increased in the quarter and EBITDA is also increasing. In the first quarter, you will probably remember that we had a positive gain on the sale of the Nature's Flame business. So the underlying increase is even somewhat higher than what we see from the middle graph on this page.

Then the details. We had some more sales volume in the second quarter compared to the first quarter, but the main positive as mentioned, was price. The negatives is then fixed costs and other. And again, this highlights the one-off gain in the first quarter of the year from the Nature's Flame sale.

A bit more details on the operating segments. We have a significant improvement in Europe in the quarter, again, mainly sales price and little bit volume. And also, we have stabilized the operating income from Australia. Also we're now having EBITDA of just around NOK 50 million, which is definitely a needed improvement, but also shows that the Boyer mill in the stand-alone environment where the region is relatively streamlined can operate profitably on its own.

This all leads into a balance sheet, which can be described as healthy. You see the cash on the balance sheet on the left-hand side, and we also see the underlying cash earnings from the business. Again, a needed profitability improvement from the COVID period and now turning into a positive net cash environment. The debt stands just north of NOK 1 billion, which means that the net debt is now at 0.5x. It is also mentioned, although maybe not a significant amount.

We have repurchased some bonds of the EUR 150 million bond outstanding at just below par in the quarter. This means that we have a solid liquidity buffer of around EUR 460 million, including the undrawn debt facilities that we have for the projects but also including the CO2 compensation in Norway, which has been earned but not yet paid. Compared to this, the CapEx of the growth projects is in the range of EUR 260 million to EUR 280 million, which will then be spent over the next couple of years.

So just to remind you again that the main point of policy for the publication paper in Europe is indeed to operate as sustainably as possible to generate high free cash flow and generate at least an EBITDA margin plus 10%. For the next couple of years, as mentioned, this looks reasonably well as we expect these markets to be tight given the capacity closures.

Obviously, there is some uncertainty on the actual consumption because today, the market is basically consuming everything that is produced and delivered to customers. We do not see any major signs that consumption is impacted materially from the historically relatively high prices that we see nominal in the market now, but this is an uncertainty going forward.

I cannot fail to say something about energy and raw material markets, obviously. And you can see on the left-hand side, the German energy price. This is now becoming sort of mainstream news in Europe as we are heading towards the winter, which looks to be difficult given the situation of imports from Russia, but also the European bottlenecks. We see France do a lot of downtime on nuclear plants for maintenance. We also see the effects of shutdown of other energy sources inside the EU. So today, we can describe the situation of high uncertainty for the industry in total for all industries for consumers and also for ourselves.

So we will face a situation, particularly in the fourth quarter of this year and the first quarter of next year, where we cannot necessarily ensure full operations, but at the same time, as always, we will do whatever we need to do to satisfy our customers and the main business. And I think we have a good track record of doing just that.

Recovered paper prices have also increased, and particularly on the spot market. Now we see levels which are unsustainably high, and there is a lot of trade in recovered paper crossing borders, which we haven't really seen since the Chinese were more active. This means that clearly, the cost is increasing and probably are now approaching levels which is unsustainable, given even the high paper prices today.

On a bit more calmer note is the wood markets in the Nordics here illustrated by the spruce pulpwood prices in Norway, which are reasonably stable if you look at the reported figures. However, we have some increase in our own prices from the 1st of July, but not material in this context, which means that operating in the Nordics is indeed favorable for Finland, for Sweden, for Norway.

And here, you can see that we have a relatively high share of our capacity in the Nordics. So today, having more than 50% of the publication paper capacity in the Nordics is indeed a favorable situation, not only for energy, but also for fiber. So -- and particularly in general, since the German market is important, both from a production and from a market point of view. We believe that for our 2 Norwegian mills that this means a relatively competitive position going forward and that, that should support earnings in our Norwegian operations.

If we then look at the market, we see on the left-hand side, the closures I already alluded to the fact that we have for the first time, at least in my memory, we have a certain visibility on the supply side as people preannounce closures because of conversions into mainly packaging grades. A significant amount has been closed over the last 2 years. We are closing, as I mentioned, around Bruck PM3, which is on this chart, and then there are both our Golbey PM1 and other machines and mills we'll close going forward, leading to the belief in a tight market.

On the right-hand side, you can see the stock volumes, which is also reported here where we had sort of a normalization again in this quarter as the strike with -- at UPM's Finnish mills ended. So we're now more into somewhat more normal delivery situation again. Paper prices have clearly increased and had to increase given the energy prices, but also given high operating rates in the industry and high demand.

So you can look at our own utilization. This is clearly a fact coming out of COVID and into 2022. We are operating in principal as much as we technically and practically can. And there is no reason to believe that other players have a very different operating rates.

So a tight publication paper market is still there for some time. And then at the same time, we are entering the recycled containerboard market. As mentioned, the projects are going well, and we have done a lot of work both at Bruck and Golbey already to prepare for the actual conversion, which is now upcoming in the next few quarters. This is a totally different market where both margins and the demand have a completely different picture than what we are used to higher EBITDA margins and the growing market, which has, over the last few years, been very attractive. And we still expect this to be an attractive place to be going forward.

Despite that, you always have to be competitive in commodity industries. And here is a picture of Golbey, including an illustration of the new biogas model -- boiler, the so-called Green Valley Energie boiler where you can see towards the lower right-hand corner of this picture, and this is a joint venture with Pearl and Veolia together with us. We will sell steam at a competitive level into Golbey for the packaging project, and we'll sell electricity to the grid. This will be the largest French plant of this size and at the top will reach almost 100 meters in height. It's a truly impressive project in and of itself and will underpin the competitiveness of Golbey also going forward.

Similarly, in Bruck, where we have done this on our own close to 100% built a waste-to-energy facility, as you can see on the picture on the left-hand side here. And also, we've tried to illustrate the actual reduction of gas and electricity from the grid. So indeed, we are then purchasing less energy from outside. It is still in commissioning this plant, and we expect in the relatively near future to also take it over when the plant is fulfilling all the standards according to the purchase contract from Valmet.

Altogether, it should reduce gas consumption by some 0.7 terawatt hours, which is a significant amount, no matter how you look upon it. And obviously, we are there to be competitive also in the market, which this facility will ensure.

We still think that the containerboard market is an attractive place to be here. We have illustrations both of the growth of the market, the margins compared to what we are used to see and also the capacities that we are converting. So we do think that this is good projects. They look significantly better now than when we announced these projects. And despite the uncertainty in the world going forward, we think that the competitiveness of these projects is insured. And in principle, a high energy price in the market in general will allow for also good margins for competitive players like ourselves in this market going forward.

Here, we can see the prices over the last few years in Germany, the reference price here. And clearly, this is impacted by higher raw material costs, but certainly also a tight market and a high growth rate. We've seen over-the-cycle growth rates in 2020, '21 and also into 2022, this market has performed well. The utilization rates, as you can see, is in the mid- to high 90s, and it's difficult probably to reach much more than this. So probably an industry which operates at [ full ] steam.

So going from a well-performing packaging market into more newer areas for us in the bio products space and the CEBINA, CEBICO and the Circa [ C-suites ] of products is then getting even closer to commercialization and real markets for us and meaningful impacts.

On the left-hand side is CEBINA. We have done a test inside Salmon farming tanks on the northwest corner or Northwest Coast of Norway, and this has been very successful in the same study to reduce just the amount of time to perform a job, which clearly underpins also the competitiveness when you use CEBINA inside of paints, for instance.

Also CEBICO, in the second quarter, we opened the pilot plants. You can see that on the picture here. And we've also now entered into a partnership with BEWI and BE Form. We are quite excited about the possibilities there, and it seems like also the government is as Innovation Norway is supporting this project. This will help to reduce plastics in various formats and has a wide variety of possible applications, which have been tested for the time being.

And finally, a couple of words on our Circa investment. As you know, we hold 26% of Circa, which is listed in its own right. And the big news here in the second quarter was the Valmet industrial partnership for the development of ReSolute and the plant in France. So also here, we are supportive, the biggest shareholder, a supportive shareholder, and we will ensure that Circa also is successful even if Circa clearly is capable of running their own show.

A little bit on CO2, and the green shift. CO2 reductions, we have talked about this for a number of years that we are indeed coming towards a zero emission environment in 2050, which means significant reductions both now and towards 2030, and we have committed to 55% reduction in 2030, which we are going to achieve. This is important for us partly because the support for the green shift in and of itself, but also because CO2 has a value.

And you can see the price of CO2 allowances on the right-hand side, which is now priced between EUR 80 and EUR 100 after some volatility just after the Ukraine invasion earlier in the year. Significant support to earnings and something that we are indeed working hard towards achieving.

You can also see in terms of other green elements that we are indeed focused on recyclability. The paper industry has been early -- an early mover in recycling. And indeed, our end products are recycled to almost 3 quarters extent. So no material is more recycled than paper and our products is, in general, recycled to a higher degree. There's very little waste from our production and almost all of it is usefully utilized in one way or another.

And finally, the energy, with the new Bruck boiler, we have moved very, very close towards the full green energy in terms of energy sources we use. Then on the other hand, we're also participating in 2 initiatives to capture CO2 or even to utilize CO2 and eventually becoming a net positive contributor by taking CO2 out of the air. Borg CO2 is in the south of Norway, Ocean GeoLoop is in -- at [ Skogn ] mill in the center of Norway. Exciting opportunities and things that will become even more in focus as we move forward.

To round off this short presentation, we will give a few statements on the outlook, and we do expect the publication paper markets to remain tight mainly because of the closures but also on the demand side, we do see a relatively healthy demand picture going forward. Energy markets and in general, particularly the recovered paper raw material markets for us will cause operational challenges. And we have those in the second quarter. We will continue to have them in the quarters going forward. While they seem manageable just now, we have to alert the general world that this is going to be probably even more challenging in the fourth quarter and the first quarter of next year.

Containerboard projects are going well now, and we have full focus, full speed and with the stop of PM3 in Bruck, it is moving closer to start-up around the turn of the year. Waste-to-energy has indeed improved. The Bruck investment has indeed improved both the earnings and our general footprint and the energy mix.

And as mentioned, the significant news in the second quarter of the financing of Green Valley Energie in France will also enable further reduction of gas and energy purchase from the grid and improve competitiveness and the green profile of the company.

And finally, on the bio products, we will continue this development, again, significant progress in the first half of this year. We expect even more of a news flow in the second quarter for our CEBINA, CEBICO products.

So on that note, I will thank you all for your attention this morning, and wish you a good day.