Norske Skog ASA

OSE:NSKOG

Earnings Call Transcript 2023-Q2

[Tore Hansesaetre, executive]

Welcome to the Norske Skog Group Second Quarter Presentation for 2023. My name is Tore Hansesaetre. I'm the CEO of this great company. And I will now like to go through the second quarter results with you.Before going to the figures and highlights, just a reminder of what Norske Skog is? So, we have 5 high-quality industrial assets, 4 in Europe, one in Australasia, where we are the sole domestic producer of publication paper. We are in a transformation route from a focused publication paper company into also becoming a large independent supplier of recycled containerboard, which you will see illustrated on the left-hand side of the -- on the slide here. And we are still in the investment cycle. So the earnings of these investments are still in front of us mainly, but we have a strong financial position. The net debt is NOK1.7 billion. We have a remaining net CapEx expansion of NOK1.4 billion with a strong cash position of NOK2.7 billion. And then including undrawn financing facilities, total liquidity up to NOK4 billion.The second quarter in brief, the strong -- we have a strong financial position, as mentioned, however, with reduced earnings into market downturn. The EBITDA in the quarter ended on NOK380 million, including then business interruption compensation at Saugbrugs of NOK90 million, covering the month of May and June. Net debt of the company is NOK1,746 million with a low leverage ratio of 0.7x, and with a strong cash position of NOK2,673 million.The market remains challenging with price and profitability pressure. The publication paper prices are lower due to the continuing demand decline and also lower raw material costs. And it's no secret that further closures are required to balance the market. Containerboard prices are stabilizing in the second quarter, but also here, additional capacity closures are required to bring utilization up -- utilization rates up.Saugbrugs PM6 is unfortunately a temporary stop since the 27th of April due to rockslide. The extent of damages and rebuild are still to be fully investigated, but PM6 is likely to remain closed through the first half of 2024. The mill is insured both with property damage and business interruption for up to 18 months. Bruck PM3 is ramping up according to plan, and we are very satisfied with the product quality and the production ramp-up and the start-up of PM3. And we expect full utilization rate for the machine in the second half of 2025, which is normal for these type of projects.Golbey PM1, we, however, needed to move the start-up to the second quarter of 2024. Given the strong position of the company, the Board has resolved to initiate a share repurchasing program. And this will commence today, 14th of July, and end the earliest, 31st of December or when repurchasing amounts of NOK472 million is reached. And this is fully in line with the authorization given by the General Assembly in April of repurchasing up to 10% of the share capital of the company.One slide on the Saugbrugs incident. Because on the 27th April, we had a rockslide, which you can see the results on this picture, which damaged buildings, machinery and equipment. We are very glad that no one was physically harmed in this uncontrolled and dramatic event. However, the main work in the second quarter has been to secure the site, remove rocks and building materials to get access to the paper machine.PM6 has an annual capacity of around 260,000 tonnes of SC paper and this will -- this machine will likely remain down through the first half of next year. Saugbrugs has insurance, as mentioned, both for property damages and business interruption for up to 18 months. For May and June, Norske Skog has, therefore, recognized business interruption of NOK90 million in other revenue and therefore, also in the EBITDA figures.Going to the conversion projects, Norske Skog, has in the second quarter, entered a recycled containerboard market in Europe and the ramp-up of the containerboard production at Bruck PM3 is according to plan. We delivered around 10,000 tonnes in the second quarter of recycled containerboard, and we expect that to more than double in the coming period. Improving production costs and utilization is, of course, the main focus now when we are ramping up this new machine.Golbey PM1, we have a start-up moved from Q4 of this year to second quarter 2024 to reflect a revised time plan, which is reflecting more installation work needed than originally scheduled. Startup is aligned then with commissioning of the new biomass boiler from Green Valley Energie, which is currently constructed at the site. The new investment -- the net investment will be EUR265 million for Golbey, including the energy-related grants and certificates, which will be paid out in the period '23 to '27, which is fairly standard for these type of energy-related growths.Then going to the financials and starting with the group financials. The revenue ended up on NOK3,404 million, which is 2.5% up from the previous quarter, which is mainly driven by an increase of deliveries of 10%. The EBITDA, however, decreased from NOK675 million in Q1 to NOK380 million in the second quarter, which is then representing more a normalized EBITDA margin of around 11% for the second quarter. The cash conversion is, however, fairly good with NOK353 million for operating cash flow in the second quarter, which is reflecting reduced finished goods inventories and also payment or received payment for CO2 compensation for last year. The net debt is increasing to NOK1,746 million. And however, with low leverage of 0.7%, which is in line with the investment program going on for mainly the conversion projects in Continental Europe.Going somewhat more into the segments. In publication paper Europe, the EBITDA ended on NOK429 million with an EBITDA percentage -- margin of 15%. Here, we see pressure on prices and profitability. We have, in the quarter, included business interruption for the May and June months, in all NOK90 million, which is done in other revenues and the EBITDA. We have -- we are also pleased that Austria has approved CO2 compensation for the year of 2022 to be paid out in '23, but this amount of EUR4.7 million has then been recognized in the second quarter of '23.In moving to Australasia, with EBITDA of minus 5%, it's still a disappointing profitability level. However, we are improving operations, even though the profitability is challenging due to higher raw material costs. Then for the second half, we are increasing the selling -- domestic selling prices, which should give a profit improvement for this segment going forward.On the packaging paper side, no big change from the first quarter to the second quarter, which is mainly reflecting the fixed costs in this segment, but we are, of course, now ramping up production quarter-by-quarter. Then in other activities, minus 2% in EBITDA, which is an improvement from the first quarter, which is reflecting a reduced valuation of the long-term incentive program.Looking at the variable costs, we see that energy prices and recycled fiber prices in Europe is coming down from the peak levels in 2022. However, on the virgin fiber side in the Nordic region, pulpwood prices are still on a high level, which is caused by, among other, less import into the Nordic and European region from Russia. Even though the cost levels are coming down in the second -- in the second quarter of '23, it's still clear that the cost level in general is higher than the historical trend levels. This is, of course, with lower costs, also the selling prices for publication paper are coming down, together with also impacted by the weaker market balance for publication paper.On the left-hand side, you see publication paper prices, reference prices in Germany, decreasing by double digits from first to the second quarter. And this is, of course, impacting the main driver for the lower EBITDA results of the group in the second quarter. On the recycled fiber -- recycled containerboard prices represented by the blue line in the graph to the left, you see that these have stabilized more now in the second quarter, which is representing, we believe, more that we are approaching the fundamental cost base for producers.We also would like to remind you that Norske Skog has a low carbon footprint, giving us excess CO2 allowance, which we can sell in the market. And on the right-hand side, you see CO2 prices, which has come somewhat up during 2023, which is benefiting, in general, Norske Skog. The publication paper market is in structural decline. And on this graph, you see that the industry is used to deal with these type of challenges.We're taking out capacity gradually with the demand decline. However, we see that from -- on the right-hand side of this graph that from 2022 and into '23, the demand has decreased more than the supply, which is now -- the demand is now around NOK8 million to NOK9 million on an annual basis for publication paper in Western Europe, while the supply is NOK12 million. Capacity is coming out now by mid-'23. Around 600,000 tonnes is yet to be closed by the end of the year according to announcements. But it's clear that also more capacity is needed to be taken out to regain more normal utilization rate and market balance.As mentioned, the financial position of the Norske Skog Group is strong and then following up in the authorization granted by the AGM in 20th of April and also from the consent given by the main lenders to Norske Skog, the Board has then decided to initiate a share repurchasing program and it's up to 10% of the share capital, which is then -- the maximum consideration is NOK472 million. The program will start today, 14th of July. And it will be done through a third-party in accordance with standard market practice, and we will report weekly on the transactions made. And the purpose of this program is to return excess capital to shareholders and then give money back.Then ending up on the outlook. Raw material and energy costs are stabilizing, but development remains still uncertain. Paper prices influenced -- are influenced by the lower input costs and also the weaker market balance. Containerboard prices, we see signs of stabilizing, but still it's a challenging market. And we believe further capacity closures and industry consolidation is required, both in the publication paper market and the recycled containerboard market.The introduction of Norske Skog Bruck in the recycled containerboard market is well underway, but we still expect negative EBITDA from the packaging segment in 2023 as we ramp up production. We maintain a healthy balance sheet, strong liquidity position and low production costs for our sites. And then in the end, we will also like you to have a placeholder in your calendars for our Capital Markets Day on 16th November here in Oslo. And details will be provided, but we very much like to see you there.And by that, I would like to thank you so much for watching the webcast for the second quarter results and look forward to see you again soon. Thank you.