Norske Skog ASA

OSE:NSKOG

Earnings Call Transcript 2022-Q3

[Sven Ombudstvedt, executive]

Good morning, ladies and gentlemen, and welcome to this webcast presentation of Norske Skog's Financial Results for the Third Quarter 2022. Just to remind everyone that our business is in transition from the legacy publication paper business, which we still support and are still a large-scale supplier role.

We will then move into packaging. We are excited that our projects are moving ahead as communicated before, and that progress is being made for first paper on wheel and soluble paper in the first quarter of next year. On the energy side, we are also developing large-scale projects in Europe and elsewhere.

And finally, the bio products, which are very exciting developments inside the BioSphere if it's biocomposites, if it's bioproducts replacing petrochemical products in a lot of different applications.

However, turning to the third quarter briefly. On the highlights, we have delivered a good quarter. EBITDA of NOK 508 million is a strong result. Given the portfolio of mills we are operating today, this is the second strongest result we have ever had, and we have to move back in history to find similar figures if we look away from the second quarter of this year.

However, we realized that this is down from the second quarter, and it was impacted significantly by the Norwegian government's decision or proposal in the budget at least to reduce the CO2 compensation by introducing a threshold of NOK 200 per tonne. This in the quarter is about NOK 110 million for us, but it's also about NOK 150 million on an annual basis as we have communicated previously.

We have also reduced volumes as we shut down the PM3 at Bruck for conversion, which then leads to higher fixed cost per tonne as we still keep demanding in advent of the packaging conversions. Energy and raw material markets, as everyone realizes is impacting our operations. We have guided for this also in the past, and we certainly saw high, an extraordinary high costs for energy in the third quarter, impacted by the European energy markets in general.

Also, on raw materials like recovered paper, we saw challenges even for availability of products, but also certainly on the pricing side. So some downtime was also taken as we optimized even within the hours of the day, the production, particularly at the Golbey Mill in France.

Publication paper and capacity, as has been announced before, we are closing our PM3. We have closed PM3 in Bruck, but we also will then eventually close the PM1 in Golbey, probably towards the end of the fourth quarter. Also in the past, there has been several other announcements, which will support the market balance, and we believe that the market balance will be relatively good for this market going forward.

Norske Skog's balance sheet and liquidity position remains strong, more than NOK 2 billion of cash and cash equivalents on the balance sheet with a relatively low leverage ratio of 0.4x at the end of the quarter. We still have some CapEx to go, obviously, on the containerboard projects even if the committed capital now is there, and we have done most of the contracting.

Looking a bit more at the figures. You can see the revenue figures on the left-hand side is down. This is then impacted by the factors I mentioned, particularly the PM3 closure in July, but also the challenging raw material side, which leads to downtime, particularly in France.

EBITDA, again, suffering from higher raw material costs and the CO2 compensation reduction in Norway, which we had to take in the third quarter retroactively as it will be applicable from the 1st of January this year. So all in all, 9 months had to be booked in the third quarter, obviously, significantly impacting the third quarter's results. If you look at the bridge then, you can see that volumes are down. As we explained, prices have mitigated the volume effect as prices have moved up for the finished products in the third quarter compared to the first half of the year. While obviously, variable costs are higher. Again, we are booking the CO2 compensation in Norway as a reduction of energy costs. So that means that there is a negative variation in variable costs.

Also reflected in this bridge is the higher energy costs in Europe. However, the segments continue to perform quite well. You can see a little bit more history here with the European segments at NOK 484 EBITDA in the quarter is a strong quarter compared to 3 out of the 4 preceding quarters. In Australia, the quarter is slightly weaker than the 3 preceding quarters. This is impacted by an energy share component that we had to book in the third quarter, which is applicable for 9 months as we see now that buyers profitability in 2022 will be high enough, so an energy share component kicks in with our main supplier at Tasmania. This is also to be seen as more of a one-off event.

Again, the balance sheet is strong, supported by cash earnings, the middle graph here indicates the cash earnings and a relatively strong performance over the last 12 months, but also in the quarter, as we see that now the cash conversion is higher, which we also expect to continue into the fourth quarter.

Net debt is now below NOK 1 billion, and then the leverage, as mentioned, is relatively low. And we can also note that we are repurchasing some of our bonds as this is giving a relatively high yield compared to having cash on the balance sheet. Again, an active management on the debt side. Liquidity is available and liquidity is good on the balance sheet despite the fact that we still obviously have to invest significant amounts for the commercial projects also in the remainder of '22 and into 2023.

Our publication paper capacity, we have indicated in the past also that we aim to run this as efficiently as possible with EBITDA margins above 10% and operating rates above 90%. We did not manage that in Europe in this quarter because of volatility in the raw material side, but this is still the aim. And worthwhile to note, as I already alluded to, Golbey PM1 will be closed for conversion probably towards the end of the fourth quarter, somewhat earlier than we indicated in the past, and this is mainly dictated by the European energy markets.

And here, you can see the volatility that we have had to strive through in the, let's say, preceding 12 months and certainly in the third quarter, German energy prices, although they are coming down now from the highs of the third quarter, it's still a very volatile marketplace to be in. And it's difficult to be very precise also where this market is heading into a winter, which may or may not be called, but the only thing we know is that there will be more energy demand in winter time then in summertime.

So there is a likelihood that volatility continues and that the prices historically speaking, are -- will be relatively high. On the recovered paper prices, you see here both the inked grade that we use for our publication paper markets, but also the OCC, which will be used for containerboard. You can see both of them have significantly decreased from high levels. But again, it's a volatile marketplace, and these things will shift fast.

The Nordic log markets, the pulpwood market is higher into 2022 and further into the second half of 2022, which, again, indicates a relatively solid demand for pulpwood and particularly from Swedish and Finnish pulp producers. Energy exposure is obviously high on the Norske Skog management agenda these days with our large-scale consumption. We are both in Norway and in total, a large-scale energy producer, and we are trying to manage this as best as possible.

So you can see from the graph, the gas consumption is reducing significantly. And we have talked about also in the past the new boiler in Bruck, the waste to energy boiler, which will then take away gas procurement. We also run biomass boilers, and we have heat recovery. So the remaining electricity is then bought in the marketplace. But again, the lion's share of that is on long-term contracts, which have different pricing than the spot market. However, it does leave us with some spot purchases, and this is where we have to optimize the earnings on short, medium and longer term.

On the right-hand side, you can also see that with the conversions to container board, we will use more energy because there is more paper to be dried, which, again, we will try mostly to cover with green energy with the Golbey Green Valley Energie projects producing competitive steam from biomass.

If we look a little bit at Norske Skog in its marketplace, you can see that both in terms of geography and in terms of product mix, Norske Skog is relatively well placed. You can see compared to the average of the market, most capacity is in Continental Europe, at least 2/3 of it, while we have almost the opposite, where almost 2/3 is in the Nordics.

Also on the product side, we are heavily skewed towards newsprint and less skewed towards lightweight coated, which at least presently is the most competitive marketplace. However, I already alluded to the fact that we think that this market is going to be relatively tight going forward. This is the reason why on the left-hand side, we have listed all the capacity closures that has happened over the few -- past few years, but also the announced closures, including our own Bruck and Golbey machine conversions.

You can see that there are several machines and sites who will convert out of publication paper, leaving what we believe is a relatively tight bounce in that market. You can also see on the right-hand side that the stock levels in the industry is at a relatively low level and is even declining on a rolling basis.

This has led to significant price increases, of course, also supported by the cost increases that all producers are facing. And you can see that we have for newsprint, SC and lightweight coated delivery into Germany. We have prices now either approximating or superseding EUR 1,000 per tonne. In absolute terms, this is high levels and higher than we've seen probably as long as we can remember.

But we have to remember that this is not translating into margins. Again, the cost increases have been significant. What is underpinning this is on the right-hand side, the operating rates in phase-over still declining market, although more benignly than during the COVID period. And Norske Skog's operating rate illustrates quite well that it's possible to keep a high operating rate and thus a certain price power in this market presently.

Turning to Australia for a minute. I will spend a few minutes on our Boyer operations, and we would like to highlight with this slide that the Boyer operations is indeed well also placed for the future. It's the last remaining publication paper mill in the region, both in Australia and New Zealand and have now normalized EBITDA at around 10%, and we still will try to work through to have a somewhat higher return also from Boyer with quite long-term contracts, both on the sales side and on the raw material side.

Infrastructure is large and well invested over many, many years. And Tasmania is a little bit like Norway in a very good place when it comes to renewable energy developments, both on wind farm side, but also in terms of hydroelectrical power. And to top it off, the Tasmanian government is also supporting the Australian national renewable energy ambitions and aims to increase and even significantly increase its renewable energy production. This is also supported by links to the mainland. You can see on the map that there are 2 main links going from the north of the Ireland into Australia.

One is operational and the other is still planned, but this shows the significant ambition of Tasmania to become really a powerhouse of renewable energy. So we think Boyer is in the middle of this, and there are significant opportunities for us, together with partners to develop the Boyer site to be part of the Tasmanian renewable energy strategy going forward.

Turning to containerboard, and we also talked about this in the past that this is the market which is slightly different from the publication paper market in the sense that it's a growing market and that we can keep higher operating rates and EBITDA margins than what we've been used to. Our machines will be supported by competitive steam supply. They will be located well in the market with relatively low transportation costs compared to competitors with access to raw materials, but also with technical specifications, which are ideally for these type of products.

Here is one of the supporting factors of what I just mentioned, the Green Valley Energie plant, which will support Golbey with it steam. This will produce steam for our packaging, about 0.7 terawatt hours and then also around 0.2 terawatt hours of electricity, which will be sold to the grid on a fixed price. This is a joint venture. We have partners Veolia and PEARL into this project.

So this is in a sense on of investment for us, but it's a key cornerstone to the competitiveness of the Golbey mill and its conversion projects. We are now in the construction phase here, and you can see physically at the site that there is a lot of activity. Completion is expected during the first or second quarter of 2024.

At Bruck, we have also in the past talked about the waste-to-energy boiler, which will reduce our gas consumption with quite an impressive 0.7 terawatt hours. And this will also, similarly, as the Golbey boiler will enable a very competitive steam supply for the large trying operations of paper and containerboard. This is still under commissioning. We have not formally taken over the plant, but it has been operational since April, and this is now running, supporting the operations at Bruck on a day-to-day basis.

There has been some concerns about the containerboard market after a very, very strong 2020 and 2021. And indeed, 2022, as with a lot of other markets in Europe are slower. But at the same time, we have seen price increases. This, of course, also is related to the higher energy prices. And you can see that operating rates in the industry is still high 24% now to September, and it has been relatively flat for the past 2 years. So we still believe that this is a good place to enter, and we still believe that our projects are facing a very promising future with a good market of containerboard for many years in Europe.

A little bit differently, we will also this time we wrote a page to the upper secondary school that Porsnes Utvikling, a joint venture between Ringstad, Norske Skog has developed. So you can see the picture here. The school is now used from the school here onwards in August, it was open for students. And we have then transformed the former paper storage, which wasn't really used for a lot of things into a very, very sophisticated a nice environment for learning with the lease, with the municipalities of the surrounding areas for weekend and with a long-term lease on the projects.

Quite an exciting thing to be able to use old industry infrastructure to also develop new opportunities for learning. And we also believe that we can benefit from apprentices from the vocational education at this fantastic facility. We cannot have a quarterly presentation without talking about CO2 and most of you will be familiar with our reduction targets that we do want to reduce our CO2 emissions by 55% within 2030 and a further 0 emissions by 2050. And indeed, we are working towards becoming carbon negative, climate positive by actually capturing CO2 with joint ventures, both at Skogn and the Saugbrugs mill.

Also important for us is the economic effects of the European Union's allowance prices. You can see the curve on the right-hand side as we are net recipients of quotas and that we have CO2 compensation schemes active in several countries that we do operate. So indeed, we think that Norske Skog and also the paper and pulp industry at large is indeed an enabler of the circular economy.

We -- our material paper is the most widely recycled material in the world, vastly more recycled than other materials like glass and plastic. We also utilize and practice all the waste we generate, and we are indeed greening further an already very green energy platform. So in this time frame that we're discussing here, we are indeed going to use only green energy. And in the end, we will be a net positive contributor to the green economy by actually abating more CO2 than we are emitting.

Towards the end, I would like to finalize with a few words, as always, about the outlook. And as you gather by now, we believe that the publication paper market is expected to remain tight, mainly due to the closures. The market is still declining, although much more benignly than it did during the COVID period. Also, you have to remember when you see the market decline this year that a lot of that has been impacted by supply issues partly because of energy costs, but also partly because of the European strike in Finland in the first half.

Volatile energy and raw material markets will continue to cause those challenges. We are preparing for a winter where we will probably need to stop production occasionally because of this, and we will probably also optimize more in the fourth and the first quarter than we have done so far in order to release energy into the National Grid scores in Norway and in Australia and in France.

Publication paper prices have increased further into the fourth quarter, clearly, to address the cost increases we've already seen, and these price increases have largely been sticking in the market. In the fourth and the first quarter, as I mentioned, we are prepared to manage the energy exposures a little bit more aggressively than what we have done thus far. And that is clearly, particularly if we have a cold winter and these markets will turn even more volatile, we will support any regimes that is needed from national governments, obviously, but we will also probably release some energy and sell it into the markets if that is more profitable.

Containerboard production is in the making. So we are looking forward to that. And the commercial introduction has gone very well thus far. And I think the customers are waiting for a company like Norske Skog to enter this market. And finally, of course, we are still developing projects. There is a lot of progress. We have partnerships on the CEBINA and CEBICO side in Norway for development of replacement products, which can replace plastics and other petrochemical-based products.

And finally, just a word on the fourth quarter, we are relatively optimistic on the outlook for the fourth quarter since we've had a couple of one-off energy elements playing into the third quarter, which will not be repeated in the fourth quarter. I think as opposed to our habitual nonguiding we will this time indicate that the fourth quarter is likely to be stronger and maybe even significantly stronger than the third quarter.

On that note, I thank everyone for their attention and wish you all a very good day.