Norske Skog ASA

OSE:NSKOG

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Geir Drangsland, executive]

Good morning, everybody. Welcome to this presentation of third quarter financial figures for Norske Skog. Allow me introduce the participants from the company. It's Sales Director, Robert Wood. It's the CFO, Tord Torvund. It's the Vice President Corporate Finance, Even Lund; and Director for Communications, Carsten Dybevig. So thank you for sharing time with us, and I think we just go on with the presentation.

So I'll leave the word to you, Tord.

[Tord Torvund, executive]

Thank you, Geir. In Norske Skog, we continue to deliver on our strategy of being a committed and cost-efficient supplier of communication paper and also growing our new segment into Packaging Paper, and also exploring profitable fiber opportunities across all our 5 mills. Always done with a focus on sustainable business operations.

Some quarter highlights, we maintained a positive EBITDA and a solid cash position of about NOK 1.6 billion, despite challenging markets in both publication paper and containerboard. We are pleased to have signed our NOK 500 million green loan at our Skogn on good terms, which enhanced our cash position when we now move into the last stages of our investment project in Golbey.

Excess capacity is still present in all the markets we operate, and capacity closures are required to balance the supply and demand and utilization rates. Significant increases in the price of recycled paper have also put pressure on production costs and margins in our industry. However, some of this has been mitigated by price increases on our end products, particularly on containerboard and newprint.

Our containerboard deliveries increased to 42,000 tonnes in this quarter and customer feedback remains excellent. Production increased to 44,000 tonnes, and we achieved a utilization at Bruck PM3 of about 85%, which is in line with our ramp-up plan.

The start of containerboard production at Golbey PM1 was revised to the first quarter of 2025, because of more extensive piping and cabling work being required. Once in production, it will increase our total deliveries, total capacity of this company of more than 30%, contributing then greatly to our future for growth and deliveries.

The main study for our building a BCTMP line at Saugbrugs is progressing well, and we expect a final investment position in the first half of next year. And note again that investments will release further insurance proceeds of NOK 615 million.

Moving to the key figures. Production and deliveries remain on a good level on publication paper and continue to increase in line with our ramp-up plan for containerboard. Operating revenue increased in the quarter due to higher prices on containerboard and newsprint, while prices on the magazine-grade papers, SC and LWC remained more or less flat from prior quarter. Other operating income is down due to lower recognition of insurance compensation at Saugbrugs and also slightly lower CO2 prices affect this bulk.

EBITDA decreased to NOK 91 million. The difference in insurance compensation explains the majority of the decrease and lower prices on sale of excess energy. And as mentioned, lower CO2 prices are also key reasons for the reduction. Pretax profit is negative NOK 156 million, and it's impacted by the write-down of our shares in Circa Group to 0 and fair value changes on the currency hedging contracts.

Briefly on the financial position. The equity ratio remained strong at 41% and interest coverage ratio at 10.1x. As noted in the previous quarter, the cash position at the end of the second quarter was at a high level due to repayment of our previous bond, NSKOG02 being completed in July. Adjusted for this repayment, the cash position in Q2 would be approximately NOK 1.8 billion. And as you can see, it remains at a good level at NOK 1.6 billion in Q3.

The net debt at quarter end stood at around NOK 3.7 billion, an increase from previous quarter, mainly due to CapEx in excess of NOK 300 million, primarily in Golbey, a buildup of working capital and currency effects on euro-denominated debt. We did not sell any CO2 quotas in the quarter, which explains part of this working capital buildup.

Looking at the segments. EBITDA of NOK 99 million and a margin of 4% of Publication Paper Europe. It's a decrease from previous quarter. Mainly, again, due to lower insurance recognition at Saugbrugs and the negative impact from excess energy due to lower prices of this solar energy. The fiber costs have also increased, but this has been somewhat mitigated by price increases on newsprint.

EBITDA in Publication Paper Australasia remains positive, but the local markets are still a challenge. However, we do maintain our ambition of delivering a positive EBITDA from this segment going forward. Packaging Paper continues to grow in line with plan, and price increases realized in the quarter mitigate the increase in recovered paper prices. Again, production in this segment will increase significantly when we start up Golbey PM1 in Q1 next year.

I'll now hand over the word to Vice President Corporate Finance, Even Lund, for a brief update on our markets and projects.

[Even Lund, executive]

Thank you, Tord. Moving to the raw materials and starting with energy. Energy prices increased slightly in the quarter. However, due to a large share of energy being purchased on long-term contracts, this has a smaller impact for Norske Skog.

Recycled paper prices have continued to increase, but recently also seeming to turn down. We'll have to see how that trend develops. But certainly, recycled paper still remains at a very high level and material cost factor for us. As spruce pulpwood prices have continued to increase for several years now and reaching ever higher levels, we do not see any signs of prices easing in the near term and -- but maintain fairly competitive production in our Norwegian mills even at this price level. CO2 prices have come down recently as well down to around EUR 65 per allowance at the moment. We did not sell any CO2 allowances in the quarter and maintain a position of around 200,000 to 250,000 allowances that we could sell in the markets.

Moving to the publication paper market. Prices have been flat -- fairly flat for quite some time. There was a price increase for newsprint in the third quarter to reflect the higher recovered paper prices, as mentioned, in order to mitigate some of that cost increase. However, margins still remain under pressure in the Publication Paper segment as a result of higher costs.

In addition, as already mentioned, there is excess capacity in the Publication Paper market across both newsprint and magazine. But clearly, the situation is still quite a bit better in the newsprint segment compared to the 2 magazine paper grades. Norske Skog has been able to maintain a high operating rate in the third quarter of above 90%, increasing our market share in challenging markets.

On the Packaging Paper market, containerboard prices have increased to mitigate the higher recovered paper prices also here. However, the recent small decline in recovered paper prices has immediately been translated into lower prices for recycled containerboard, showing that the market is not very tight at the moment and the price is more or less a function of the production cost for the marginal producers. However, we, as shown, we have been able to achieve a positive margin in the segment, even though we are not yet at full utilization for our containerboard machine in Bruck.

Operating rates in containerboard reached around or closing in to 90% at the end of the third quarter. However, due to more capacity coming in over the coming years and especially in 2025, we see some pressure on the supply side for containerboard going forward, and capacity will have to come out in order to balance the markets. Looking a bit more specifically on our containerboard production. We are getting closer and closer to full utilization at Bruck PM3. As mentioned already, we achieved a production to design capacity of 85% in the third quarter, and expect a gradual increase towards for utilization in the second half of next year.

In the middle, you can see a graph outlining the production costs for containerboard at Bruck PM3 indexed to 100. And the clear cost increase occurring for the past 6 months is the result of higher recovered paper prices eating into our production margins.

We are still working to start up the Golbey PM1 machine and we revised the startup date to the first quarter of 2025, and also revised the net CapEx to EUR 320 million. That machine will add an additional 550,000 tonnes to our containerboard capacity and increase the group's total production capacity with more than 30% being then a significant contributor to our revenues going forward.

Briefly on the Saugbrugs BCTMP project, we progressed with the design phase for this project. We have established a project organization and engaged technical and environmental consultants, and working with multiple machinery and equipment suppliers. We've also had several meetings with Norwegian Environment Agency in order to determine the thresholds applicable for emissions and discharges from the potential project and operations. We've also engaged at an early stage with potential customers and sales agents.

Briefly on the project highlights, we are looking at the 300,000 tonne BCTMP facility in Southern Norway aiming at final investment decision in the first half of next year and an expected net investment of around NOK 1.5 billion, perhaps a bit higher. Production start in 2027 and full utilization in '28 and net investment return of above 20%. And as already mentioned, investment projects will unlock insurance of NOK 615 million to support the investment. And yes, the project will require updating our existing environmental and building permits as well as approvals from certain lenders.

On the outlook, energy costs have normalized and stabilized a bit, although at a higher level than pre-COVID '19, but pulpwood and recovered paper prices remain at very high levels. Publication paper prices are at very low levels as we see continued pressure from fiber cost and margins are certainly under pressure. Recovered paper remains a significant cost for the production of containerboard even though there has been a minor price decrease for OCC in the recent months. We expect positive EBITDA from the packaging paper segment in 2024 as the Golbey PM1 start-up has now been revised to the first quarter of next year.

We had a significant focus on reducing our production cost and working capital to maintain our competitive position and high operating rates. In addition, we monitor our capital position closely and maintain a good dialogue with all our lenders as investment projects are now close to completion.

So with that, I will hand the word over to Carsten to organize the Q&A session.

[Carsten Dybevig, executive]

Yes. Thank you, Even. There is no pre-recorded Q3 presentation on Norske Skog web page, but this webinar will be recorded and will be later available on the webpage. [Operator Instructions] Johannes Grunselius, you're welcome to raise questions. [Operator Instructions]

[Johannes Grunselius, analyst]

[Technical Difficulty]

[Carsten Dybevig, executive]

Hello, Johannes?

[Even Lund, executive]

You can unmute now.

[Carsten Dybevig, executive]

Okay. We'll try [ Sean Leonard ]. You're welcome to raise a question.

[Unknown Analyst]

Just a quick question, I guess, as we head into 2025 in terms of the containerboard markets sort of based on your commentary around -- can you hear me?

[Technical Difficulty]

[Carsten Dybevig, executive]

Yes, come over. You're welcome to raise your question.

[Unknown Analyst]

Can you hear me?

[Carsten Dybevig, executive]

Hello you can raise your question. We have some problems with the speakers here.

[Unknown Analyst]

Can you hear me?

[Unknown Executive]

[Foreign Language]

[Technical Difficulty]

[Carsten Dybevig, executive]

Sorry for this, everyone. Give us 2 minutes and we will get back with sound from this meeting room. Apologies.

[Even Lund, executive]

Sean, could you try to ask your question now?

[Unknown Analyst]

Great. Can you hear me?

[Even Lund, executive]

Yes.

[Unknown Analyst]

Great news, thanks for sorting that out. Just around your comments in terms of operating rates for containerboard as we enter 2025 sort of on the balance of facts from what you're seeing

[Technical Difficulty]

[Even Lund, executive]

Hello? You dropped out. But I think your question was around how we see the operating rate for containerboard going into 2025?

[Unknown Analyst]

I think it dropped out. No. So you obviously, I think from your comment earlier, sort of implied that operating rates are going to drop unless capacity exits the market. So at face value, do you think that capacity is going to drop out of the market? Or do you think 2025 will be a tougher year in terms of prices and margins?

[Robert Wood, executive]

Yes, that is probably the case with the new capacities coming on. But of course, like we will with Golbey, they will not be a full boilerplate capacity. Everyone will have to ramp up a little bit. So it's -- it will be dependent also on the demand side as well. So it's a little bit too soon, I think, to see how it will be. Yes.

[Unknown Analyst]

Okay. So I mean, in short, that's probably uncertain to slightly negative at this point based on what you're seeing.

[Robert Wood, executive]

Yes. I think that would be fair to say, given the new capacity that's coming on. But as I said, it's dependent on how we see the demand and that's based on numerous things, as we know, in Europe, how the economy is going to grow.

[Unknown Analyst]

Yes, I mean, I guess, where we are as of today, what type of growth rate heading into 2025, do you think is reasonable to expect?

[Robert Wood, executive]

Sorry, I didn't catch that.

[Unknown Analyst]

As we head into 2025, what type of demand growth rate do you think is reasonable to expect sort of as a base case?

[Robert Wood, executive]

Think back to the kind of level of 2.5% maybe. It's been a bit higher for the first part of this year. Some question marks on how sustainable the growth in the food deliveries are, how the industrial deliveries are. But I would think 2.5% is not unreasonable.

[Carsten Dybevig, executive]

Thank you. And Johannes Grunselius, you can raise a question.

[Johannes Grunselius, analyst]

Yes. I'll try again. Can you hear me now?

[Carsten Dybevig, executive]

Yes.

[Johannes Grunselius, analyst]

Excellent. Excellent. Yes, I was just curious about your outlook comments because you're highlighting in the report that the trend of better shipments in Publication Paper Europe is expected to continue into the fourth quarter. If you can give some color on the sort of magnitude there, please? And if you can also maybe give some color on the current pricing situation for Publication Paper, what you see in Q4, it's going to be stable or more a function of cost?

[Robert Wood, executive]

I think we certainly see from the order books that we have, that is the demand is okay. As Even said, it's better on the newsprint side than the magazine side, but we're still trying to run as soon as we can across Bruck and Saugbrugs as well. I think that Even also mentioned that we see the pricing to be relatively flat in Q4. The cost pressures are not easing. And I think that the need for further price increases to pass some of the cost pressures on to the customers will be there as we head into negotiations for H1 or Q1 2025, but we'll have to wait and see what happens.

[Even Lund, executive]

In addition, it's worth also noting that the fourth quarter tends to have higher deliveries volume due to seasonality for us. So that's an additional effect specifically for the fourth quarter.

[Johannes Grunselius, analyst]

Okay. That's helpful. But we're talking about, I suppose, about a few percent sequentially improvement?

[Tord Torvund, executive]

Yes.

[Johannes Grunselius, analyst]

Yes, yes. Then my second question is on your comments about selling of CO2 allowances. If you can just remind us about how much you sell it for a typical quarter? And what's the reason why you didn't sell in the third quarter? And any reason for that? And if we should expect excess sales of allowances in the fourth quarter or early next year?

[Even Lund, executive]

Yes. So you are correct. We did not sell any allowances in the third quarter, but we sold a fairly large share in the second quarter. We do not sell sort of monthly or quarterly on the schedule, but sell to some extent at the time when we receive allowances and when the market is favorable for sale of allowances.

So at the moment, we have around 190,000 allowances sort of in our account, and we expect to receive the final number of CO2 allowances for 2024, approximately 50,000 to 60,000 allowances towards the end of the year, meaning that we have available to us close to 250,000 allowances that are unsold for this period. And then, of course, we will get a new set of allowances in 2025. But there's no fixed schedule for when we will sell allowances.

[Johannes Grunselius, analyst]

Okay. Got you. But when you get a new set of allowances for '25, what do you expect in terms of volumes there?

[Even Lund, executive]

We expect a net surplus. So we receive a gross amount, but we need to use some of them to offset our emissions, but net surplus should be around 200,000 allowances for 2025.

[Carsten Dybevig, executive]

Thank you. Then Marcus Gavelli, the word is yours.

[Marcus Gavelli, analyst]

So it would be nice if you could just give us some color on how you think about the financing of the new BCTMP project because, obviously, with the leverage coming up now. And as you say, not the most upbeat outlook on the market, it will be interesting to hear about how you think about that. And if so, if the market doesn't improves, is it a possibility that you will further extend the potential FID?

[Even Lund, executive]

Yes. Thank you. Good question. So obviously, it's still early days with regards to the BCTMP project. So it's too soon to say exactly how that will land in terms of both FID and the financing. But looking a bit into it still, I mean this is equipment supplied by big vendors outside of Norway, meaning that export credit guarantees will likely be available for such equipment. In addition, most of the sales will be to customers outside of Norway, meaning that Norwegian export credit financing might also be available. So we expect to have the opportunity to secure a favorable financing based on those guarantees.

In addition, as we mentioned, we have to look at this as part of the group, and we have already some debt across the group, and this would add further to the debt load. But still, we think this is a very good and profitable project and good projects should always be possible to finance. We just need to think about the structure. We have not yet started discussions with the banks on exactly how this could be structured but we believe there should be a way to do this without putting undue pressure on the group and still having a sustainable financing in the project itself.

It's also important to mention that as we said in the presentation, an investment project from Saugbrugs will release NOK 615 million in insurance proceeds that will also go a lot of way to fund the investments. So hopefully, that answers some of your questions. And of course, we will get back with more details once we get further into the process, but it's still quite early days on that.

[Carsten Dybevig, executive]

Okay. Thank you to you, Marcus. Any other questions?

[Unknown Analyst]

[indiscernible] Sorry guys. No, there's no further questions from me. Apologies for that.

[Carsten Dybevig, executive]

Any further questions? It seems like there's no further questions. Okay, then thank you all for participating in this webinar, and have a nice day, everybody.