Norske Skog ASA

OSE:NSKOG

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Carsten Dybevig, executive]

Good morning, everybody. My name is Carsten Dybevig, and I'm the Vice President of Communication and Public Affairs. Welcome to a short webinar of our Norske Skog. CEO, Geir Drangsland; CFO, Tord Steinset Torvund; and VP, Corporate Finance, Even Lund, will present highlights from the second quarter. Also, SVP, Commercial, Robert Wood is present.

There is no pre-recorded Q2 presentation on the Norske Skog webpage this time. This webinar will be recorded and will later be available on the webpage. After the presentation, you will be able to raise questions by raising the yellow hand in the Teams webinar. Please keep your microphone on mute, and the word is yours, Geir.

[Geir Drangsland, executive]

Thank you, Carsten. Thank you, all for sharing time with us this morning in Oslo. We will now go through the figures and our performance for the second quarter, and I actually leave the presentation to CFO, Tord Torvund and the Vice President, Finance, Even Lund. So, please.

[Tord Torvund, executive]

Thank you, Geir. In Norske Skog, we continue to focus on our strategy of being a committed and cost reduction supplier of publication paper to our customers, growing our deliveries of packaging paper and exploring profitable growth through new fiber projects across all our 5 mills, always done with a focus on sustainable business practices.

Some quarter highlights. As you can see, we achieved a strong EBITDA in the quarter, positively impacted then by the insurance compensation at Norske Skog Saugbrugs of NOK 338 million. In addition, we are pleased to see EBITDA -- a positive EBITDA contribution from the Packaging Paper segment for the first time this quarter. Excess capacity is still present in all our markets and further closures are required to balance the markets. In addition, significant increases in the price of recycled paper have pressure on production costs and margins. However, some of this has been mitigated by price increases.

On the demand side, we continue to see a positive trend for containerboard and stabilized demand for publication paper. Our containerboard deliveries increased to 41,000 tonnes in the quarter and customer feedback remains excellent. We expect to reach 85% utilization at Bruck PM3 towards end of the year, in line with our start-up plan. The most exciting milestone for 2024 will be the start of Golbey PM1, which will significantly increase the size of Norske Skog. Our total production capacity will increase by more than 30% with the start-up of this machine, contributing greatly to the future growth of the company.

In the quarter, we also announced the start of a main study for BCTMP production at Norske Skog Saugbrugs, Halden. The preliminary assessment indicates that Saugbrugs will be a very cost-effective supplier of this material based on Nordic virgin fiber. We expect the final investment decision to be made during the first half of 2025. And we note that our final investment decision will release further insurance proceeds of NOK 615 million. We maintained a strong balance sheet. And during the quarter, completed a bond refinancing, which reduced the interest margin with 1 percentage points. Further, we expect to complete a new term loan at Norske Skog Skogn of NOK 500 million expected to be signed during the third quarter.

These are key figures. So, production and deliveries developed very well in the quarter with increased deliveries across all grades. Operating revenue increased as a result of the increased deliveries, but also slightly higher selling prices. The higher selling prices being mostly a result of positive mix effects. Other operating income was impacted then by insurance compensation of NOK 338 million at Norske Skog Saugbrugs and also positively impacted by higher CO2 prices in Europe. The EBITDA came in at NOK 471 million, which is an increase from prior quarter even if adjusting for the difference in insurance effects. The pretax profit shows a stronger increase compared to EBITDA. And the reason for this is that favorable developments in the fair value of long-term electricity contracts in Norway and positive currency effects on euro-denominated debt.

Briefly on the financial position. The equity ratio remained strong at 40% and interest coverage ratio up at 11.4x. During the quarter, we refinanced our bond, which resulted in cash proceeds being received prior to quarter-end, while repayment of the old bond in early July. This means that our cash position and gross debt is temporarily high at the date -- at the quarter and the date of this report. Adjusted for this, the cash position was approximately NOK 1.8 billion, in line with prior quarter. And as I mentioned, we expect to sign a new term loan of NOK 500 million at the Norske Skog Skogn during the third quarter. Net debt of NOK 3 billion shows a decrease compared to prior quarter. Some of this can be explained by CO2-related proceeds and also currency effects.

Moving to the segments. Publication Paper Europe delivered an EBITDA of NOK 464 million with a margin of 18%. These numbers, of course, being influenced by insurance compensation at Saugbrugs. We also note that deliveries of all grades of publication paper increased in the quarter. In Australasia, EBITDA turned positive this quarter, but the market remains challenging. However, we still maintain our ambition of delivering positive EBITDA from this segment going forward. Packaging Paper continues to grow in line with plan. And as a result of realized price increases in Q2, it was a positive EBITDA in the second quarter, 2024. We really look forward to presenting a positive and increasing deliveries growth for this segment going forward.

I will now hand over the word to Vice President, Corporate Finance, Even Lund to give you an update on our projects and markets.

[Even Lund, executive]

Thank you, Tord. Continuing with the Packaging Paper and Containerboard. As Tord mentioned, we continue to grow our production of packaging paper from Bruck PM3. And as mentioned before, expect full utilization of 95% in the second half of 2025. The cost -- the production cost has decreased since start-up, but increased significantly at the end of the second quarter, largely driven by higher recovered paper prices. This is also what has been driving price increases for containerboard across the region. We expect to start-up production at Golbey PM1 in the second half of 2024 and the remaining net CapEx for that project of approximately NOK 300 million. That machine will increase the production capacity of Norske Skog with approximately 30%, significantly contributing to our earnings potential for years ahead.

Moving to Saugbrugs. As Tord mentioned, we announced our intention to look into BCTMP production at Saugbrugs, following the rock slide in April of 2023. We envision a production line of 300,000 tonne capacity and a net investment of between NOK 1.5 billion and NOK 2 billion. This is based on early and indicative supplier discussions and we will have to get back with more exact and detailed figures once the pre-study or main study has been concluded. As also mentioned by Tord, the project will release additional insurance proceeds of approximately NOK 600 million, contributing greatly to covering an investment cost at the site. Saugbrugs also continues to produce SC magazine paper from 2 paper machines, PM4 and PM5 and delivering good quality paper to our customers.

Very briefly on why we have decided to look further into BCTMP at Norske Skog Saugbrugs. BCTMP is a commodity product, which, in some sense, can be compared to the larger and more common grade Northern Bleached Softwood Kraft pulp. It is a product that is used to produce everything from hygiene papers to packaging papers and reimagine Saugbrugs could be a very competitive supplier of this product. On the right-hand side of this slide, we show some of the reasons why we believe Saugbrugs to be a very competitive producer of BCTMP. I will not go into all of those here on this call, but I would like to highlight that significant investments made into the TMP lines at Saugbrugs in 2020 and 2021 are among the reasons for why we believe this production can be very efficient at Saugbrugs.

Moving to the raw materials. Paper is produced mainly using fiber and energy. So, those are very important input factors for us to follow. Energy prices have continued to normalize following the extreme situation towards the end of 2021 and through '22 and into '23, and is now at more normalized, but still quite volatile level. Recycled paper prices have increased dramatically over the past couple of months and both quality and availability has become challenging, impacting both our recycled-based publication paper production and our containerboard production.

Spruce pulpwood prices in Norway remain at a high level and continue to increase. We do not see any signs yet of the pressure alleviating on this raw material. At the end, CO2 prices have been rather volatile over the past few months. They dropped significantly coming into 2024, but have since stabilized at a somewhat higher level. We sold approximately 225,000 allowances during the quarter at prices around close to EUR 75 per allowance, which is somewhat above the prices you see in the market today.

Moving to the publication paper market in Europe. Here, you see the prices for the 2 magazine paper grades and the newsprint grade. Recently it has stabilized following the price decline we saw at the beginning of 2023, but pressures still remain due to excess capacity in all of the grades. However, due to the mentioned increase in recovered paper prices, we also see cost pressure driving necessary price increases, especially for newsprint and expect to see some further pressure on this grade going forward. On the demand side, demand has stabilized following a decline at the end of 2022 and has been fairly stable for this market being since then. But as you can see from the light green line, capacity is still above the demand and further machines will have to close for this market to become balanced.

Moving to Packaging Paper. Here, you can see that price increases have already started to be implemented and further price increases may be implemented going forward as we continue to see cost pressure from recovered paper. Although, price increases have been alleviating the situation to some extent, there is still significant margin pressure on this product. On the supply-demand side, you can see the operating rate being at what for this industry is a lower rate of 85%. Ideally, we would like to see operating rates at around 95%, which indicates excess capacity also for this market. On the positive side, we have started to see an increase in demand following the decline after the COVID-19 period, which is positive in alleviating the supply-demand balance.

Briefly on the outlook. We've been through most of these points, but to summarize, energy costs are normalizing, but we do see pressure on both pulpwood and especially in our recovered paper costs. Publication paper prices remain at low and unsustainable levels, especially then given the backdrop of higher fiber cost. Further price increases for containerboard has been implemented as recovered paper costs continue to increase, but we still see significant margin pressure on this product. As mentioned before, we expect a negative EBITDA from the Packaging Paper segment in 2024, as a whole due to the Golbey PM1 start-up in the second half. We have a significant focus on reducing production costs and working capital to maintain our competitive position. And this is an ongoing and continuous effort across all of our mills. Lastly, we maintained a strong liquidity position as our investment near completion and debt repayments increase. We have, as mentioned, refinanced our outstanding bond and are expecting to sign a NOK 500 million loan at Skogn during the third quarter.

So with that, I think we can open up for some Q&A. You can both raise your hand to ask a question over the microphone or you can enter your question into the Q&A chat function in Teams.

[Carsten Dybevig, executive]

So far, there is no chat on our Q&A, asked and nobody has raised their hand so far. I'm just waiting so many seconds for -- to see if anybody wants to raise questions.

[Even Lund, executive]

Crystal clear.

[Carsten Dybevig, executive]

Okay. Nobody is asking questions. I think we may say this is -- conclude this webinar. And I thank you all for participating in this webinar. And I wish you all a good summer and have a nice day. Bye-bye.