Norske Skog ASA

OSE:NSKOG

Earnings Call Transcript 2021-Q4

[Sven Ombudstvedt, CEO & President]

Good morning, ladies and gentlemen, and a warm welcome to Norske Skog's Fourth Quarter 2021 Financial Results. This is -- will be a short-term cost with a normal presentation. And -- to remind you all of the slide most of you have seen before, is that Norske Skog is now transforming from a publication paper company into a fiber and energy company with significant packaging capacity coming on, with the first paper on reel in the fourth quarter of 2022 in our Bruck, Austria facility. On the energy side, we have also made significant strides despite the high energy costs that we faced in the fourth quarter. We have an investment in the waste energy plant in Austria, which is now under commissioning, and we will take that over during the second quarter 2022 and other project we are very excited about. In addition, our biochemical products or bio-based products, which will replace chemicals. Circa, CEBINA and CEBICO is ongoing with significant progress being made both on the financial side in terms of Circa but also in terms of production capacity being installed and a main study for expansion in terms of CEBICO. All in all, significant and satisfactory progress also on the business development side. If we then turn to the figures and the fourth quarter in of itself, we have now normalized our earnings after 6 very difficult quarters. We have had 6 quarters significantly impacted by the pandemic mainly on the demand side. So the demand fell significantly, particularly in the second quarter of 2020. And the industry, as always, have bounced supply and demand by closing down capacity, but it does take some time. So the normalized revenue line and the EBITDA is only now surfacing in the fourth quarter. EBITDA NOK 422 million. And you can see on the right-hand side, the cash earnings from operations. This is basically cash flow minus maintenance g. You can see that we have struggled significantly over the last few quarters, and we are now only returning to a normalized level in the fourth quarter. Very briefly on the quarter itself, there were significant price increases in the fourth quarter further into 2022 as well in a tight market, but also obviously, influenced heavily by high energy costs. We also had higher recovered paper costs through 2021. That has continued, and there is no real easing of that. At the same time, energy costs both for gas and electricity, particularly in Continental Europe have been unprecedented in terms of increases. Despite that, an EBITDA of NOK 422 million is obviously a vast improvements from unsustainably low levels in the 6 preceding quarters. We have also received as always, CO2 allowances in the fourth quarter. All of those were received and sold, leading to a positive cash impact in the quarter. The CO2 compensation, we were eligible for, both in Norway and France has been booked in 2021 and will be paid during the first half of 2022, hopefully, in the first quarter. Also significantly is the fact that the credit facilities for the projects were finalized in the fourth quarter. So all in all, EUR 265 million has now been secured at very attractive levels partly because of this guaranteed by export credit agencies in Germany where the main suppliers are from. The projects have started, both in terms of the CapEx being spent but also physically with construction ongoing in France and Austria. And finally, towards the end of the quarter, just before Christmas, we negotiated with interested parties in New Zealand and -- at the end of January, we agreed with Talley’s which is a large New Zealand-based raw material and seafood group agreed to sell Nature's Flame. We have previously announced that we are a bit too small to operate a facility in New Zealand and that we have limited synergies following the closure of the Tasman mill last year. And thus, we agreed with Talley’s to sell the business. Roughly NZD 48 million and a book gain somewhere between NOK 150 million and NOK 200 million, a little bit depending on currency rates. Also to illustrate our liquidity profile, which has been somewhat in focus as of late with the sale of Nature's Flame and the CO2 compensation, which has been booked but not yet received, the cash balance is significant. And with the projects now being financed, there is a significant liquidity source for our projects going forward. All in all, the net debt is at the same level at the end of fourth quarter as it was at the end of the third quarter, reflecting that we are spending money but also generating cash finally as we come out of the pandemic. Briefly on the segments in Europe, the utilization was high at 96%, which is basically full utilization. We are producing as much as we possibly can. With higher prices, as I said, alluding to price increases to compensate for energy. And then obviously, we have higher raw material prices in the quarter and in the year in total. In Australia, we now only have the Boyer mill left. So this is reflecting the performance of the Boyer mill and look at the EBITDA line, which is a significant improvement from unsustainably low levels in the fourth quarter, showing that as the last man standing in Australasia, the only producer of publication paper, the Boyer mill should be able to generate significant cash flows also going forward. CO2 has become an important part of our business, partly because we do have world-class facilities who emit limited CO2. So we are eligible for surplus quotas to be sold and also because the CO2 compensation in Norway and France is dependent on the price of CO2. On the right-hand side, you can see the price increases in 2021, which were significant. And thus, this is becoming an important part of our business. Also with the waste to energy plant, I referenced in Austria, we will further reduce our CO2 emissions by roughly 150,000 tonnes reflected in the net sellable quarters. You can see on the left-hand side of this graph. Publication paper markets are as all markets spend on supply and demand. On the demand side, you can see on the right-hand side, we have indicated for some time that we believe that 2021 will be roughly similar in size as 2020 that is roughly correct. We saw a modest decline for some product groups and the modest increases for others. So all in all, we could say that the consumption was roughly flat. For the first time in many years, there was probably more demand than the industry could fulfill in the fourth quarter, leading them to the tightness, which is created by the, let's say, the stabilization of the market and indeed, the closures of capacity on the left-hand side. So significant capacity has been closed. Players have left the industry. And also for the first time, there is a certain transparency going forward about further closures mainly because of commercial projects like our own, where you can see Bruck GmbH is on this chart, but also other players have indicated that they will convert out of publication paper into packaging, leading to what we believe is a relatively tight market also going forward. If we then turn to raw materials for a minute. I noted already that recovered paper prices have been at a relatively historically high level in 2021 after significant increases in the start of the year. And then in the fourth quarter, we were indeed hit by higher electricity and gas prices. You can look at whatever chart you like. We have chosen here to look at electricity and gas prices in Continental Europe. And you could say that prices have increased by factors rather than percentages, factors of 3 to 5x. This you can also see is reflected in paper prices, which has then also increased similarly in the fourth quarter as we and others announced price increases, which basically reflects energy cost increases, and we also termed them energy surcharges. Now turning to our projects for a minute. We are now in the commissioning phase of the waste-to-energy facility in Bruck. Valmet is the main contractor, and they have now fed the boiler both with heat and also with what is going to be burned, namely shredded waste or RDF. We are happy to say that this is a project which is on time and on budget, and we aim to take this over from Valmet in the second quarter of the year. The total investment, as we have announced several times, is EUR 72 million. We have invested thus far, EUR 59 million. And we've also drawn upon the loan facility, EUR 45 million out of a total EUR 54 million. Everything is going in accordance to plan. And we are very excited about this, which is significant project for us, but also a green and very environmentally friendly as it reduces CO2 and takes care of waste issue. Also, green investments into containerboard, totally recyclable containerboard. We have announced before that this is 760,000 tonnes of capacity when all is up and running. We expect that this will cost about EUR 350 million all in all, EUR 265 million, as I mentioned, is secured on highly competitive rates in terms of debt financing. What has happened in 2021 is that this market is even stronger than we thought. So the price increases are over and above the raw material increases. On the chart here, you can see the development of the main raw material, which is old container -- corrugated container boards. But also here, there is an influence of gas cost and energy in Europe. However, the margin has expanded. So these projects based on 2021 figures, look better than what we have expected. We are not discounting that, and we are talking about EUR 70 million to EUR 80 million on a normalized basis when all is up and running. What is important is that we will still have a high competitiveness in the market which is growing. On the right-hand side, you can see that the growth in 2021 is estimated to be almost 7% with a high utilization rate. So this is indeed the growth market. It is growing over and above GDP. We do not think that 7% is what it's going to be for the next years, but we do believe that the growth rate in this market has been lifted from between 2.5% and 3.5% to maybe closer to the upper range of that, so maybe 1 percentage point higher than what we estimated when these projects were announced at the first instance. Always important to be competitive. This is an illustrative cost curve where external consultants believe that our converted machines will be. And given the scale, the location and the competitive energy supply, both to Golbey and Bruck, we believe also that we will be very competitive in this market. So that is always the fundamental all we do is to remain and stay competitive and then any market upsides will then be an added benefit. Nature's Flame, we have talked about also our investment into Talley's in New Zealand, which was a relatively modest investment of around NZD 15 million, including the CapEx we have spent to bring this up to a world-class 90,000 tonne facility. There is also further expansion possibilities, and we are happy to say that the new owners, Talley’s will, in all likelihood, carry on with that work, and has agreed that this is a good idea. We -- as I mentioned earlier, we are now too small. We have too limited synergies with other operations in the area. So we think it's a better idea to let Talley’s carry the mantle forward. All in all, a cash consideration of around 48 million, gives a significant return on investments. So we are -- I think we're happy that Nature's Flame has gotten a solid local owner, and we're also happy with the transaction in of itself. Also on the development side, our ownership in Circa continues to be an important stake for Norske Skog. We have more than 1/4 of Circa and we are following this continuously. We have mentioned before that we are not supporting any capital increases in Circa for the time being. We still think there's enough other options to cover any possible overruns of the ReSolute project. One of these options were indeed now secured and announced this week under the France Relance program, which is a government subsidy for new industries to indeed encourage projects like the Circa ReSolute project. So we're also happy with the progress being made by Circa and we are indeed looking forward to be a majority or -- a large owner but not in the majority position in Circa. If you look on the CO2 footprint, we mentioned the Bruck waste-to-energy project as an important investment into reducing CO2 with removing about 150 tonnes of CO2 from the second quarter of this year, which means that we are already well underway to reach our target of minus 55% by 2030. As you can see from the left-hand side, the history shows that we have been able to reduce this. And we are now also working further on other initiatives outside of our own boundaries, including transportation, where we have moved significant amounts, particularly of timber from Norwegian roads to Norwegian railways. To wrap it up, looking forward into 2022, we see high operating rates in our industry, which means that there has been particularly in the fourth quarter, but also into 2022, there has been a possibility to increase prices. That has been absolutely necessary to cover for the higher energy and fiber costs. And now we also see inflation in other input factors. So while we have, in the fourth quarter, been able to come back to a more normalized earnings levels, we believe that the first half of 2022 will be reasonable in terms of cash flows and earnings. And it's also important to say that we are in this market. We have been in this market. And I think we have shown through the autumn with a lot of volatility in markets in delays in transportation problems, et cetera, that we are indeed a reliable supplier of all publication paper grades and our customers can indeed rely on us also going forward. The strategic shift is indeed ongoing. We are working heavily on the commercialization of both the biocomposite CEBINA and the CEBICO projects. And we expect during the first half that there will be further news here and also a possible decision to increase the CEBICO production capacity. Bruck waste to energy takeover will happen in the second quarter. It will be a significant project for us. It we also have a significant impact on our energy balance, which means that 2022 will be sort of a transition year for the Bruck mill, but indeed, a transition into a better world, both in terms of the environment and in terms of profitability. And finally, the containerboard production will start in Austria in the fourth quarter of this year and in France in the fourth quarter of 2023. I'm we're excited to follow the physical progress that is currently being made on the ground in these 2 countries. Very good projects, even better than when we announced them. So we are encouraged, and we are indeed looking forward to the rest of 2022. On that note, I thank you for your attention this morning, and have a good day.