Norske Skog ASA

OSE:NSKOG

Earnings Call Transcript 2022-Q4

[Sven Ombudstvedt, executive]

Good morning, ladies and gentlemen, and welcome to this presentation of Norske Skog's financial results for the fourth quarter 2022. Before I go into the numbers, I will just do a brief reminder of what the company is all about and where we are going. We will become a leading European producer of packaging paper and independent containerboard supplier starting from the first quarter of 2023 with the first paper from the Bruck mill in Austria.

At the same time, we will continue to improve and to optimize the cash flow from our publication paper business in Australia and in Europe. While at the same time, developing new products inside of the biochemicals where and inside of energy. There is quite a lot of things happening in renewable energy, as everyone knows these days, and we are well placed to monetize these projects. And finally, we are always divesting noncore assets. Even in this quarter, we have good examples of that.

We have also had a significant focus over the last few years and maybe even for the last decades on sustainability. We are now by CDP, and we are now ranked as one of the leaders. Our report was indeed awarded an A- grade, which we think is probably the maximum what we can give, given the size of the company and given the industry that we operate in. That is not to say that we cannot go further. We will go further. We will improve, and we will do more on the Scope 3 reporting, the total footprint of the company. At the same time, we will also use more renewable energy. And whatever little we have left of fossil energy will still be reduced further in order to be able to upgrade also our score from CDP.

Now turning to the quarter itself and the financial results. We certainly believe that we have delivered a strong result in 2022 as for the total year and not least, the fourth quarter. The EBITDA became NOK 1.83 million with an operating cash flow of NOK 745 million. For the full year, we are above NOK 3 billion, NOK 3,105 million, good numbers in a very volatile environment. The energy markets, as you all know, were extremely volatile in 2022, reaching possibly the height of volatility in the summertime, which is also a bit unusual.

But it did allow us to actively manage our energy exposure. And in the fourth quarter with the closure of PM1, which is now closed for conversion, we had the possibility to optimize our energy situation and sell excess energy at interesting levels. However, input costs remain high also for other factors and energy, like fibers and wood fibers and coating chemicals and everything, which is dependent on the oil and energy markets in one way or another.

But they have come down from the absolutely highs, but this has impacted production. You will see from the utilization rate that we reported in the quarter that we have had a significant downtime in Europe. Publication paper markets remain relatively well balanced. There has been capacity reductions in 2023 as well, not least our 2 machines, which we have taken down in Austria and in France for conversion, but also other producers have reduced capacity, and we expect that to continue going forward. However, we are not immune to, let's say, economic developments in Europe and recessionary fears. So there are some softening, particularly on the magazine side.

We have in this -- in relation to this, we have taken an impairment relating to Bruck's PM4, which is the rightly quoted machine. And looking a bit forward, I don't think anyone will be surprised if I say that we are looking at also a conversion of PM4 into other grades than graphic paper grades. So this can also be seen as a preparation for that work.

I mentioned noncore assets. We are always on the lookout to optimize our portfolio in the fourth quarter. We sold together with our partner, a facility in Halden, which has been developed into a high school. And all in all, Norske Skog had a gain of NOK 200 million, which is recognized in the P&L for the fourth quarter, and the cash has been now received in January 2023. And finally, the Board is also proposing to the Annual General Meeting an authority to pay NOK 5 dividend per share. This is, however, subject to our lenders waiving certain restrictions on shareholder distribution. So they will most likely be an authority to pay if and when lenders are waiving their restrictions.

Looking at the numbers in a bit more detail. The revenue figures climbed above NOK 4 billion for the quarter, quite a few quarters since we've seen the NOK 4 billion number on revenues and obviously also a very long time since we have seen over NOK 1 billion on EBITDA. EBIT also quite high in the quarter, positively impacted by other factors like the gain in Halden, but also impacted by energy derivatives, which had a positive effect in the quarter.

Looking at the segments. Europe, clearly, a very big improvement from the third quarter and also from the average of the last 4 quarters, while Australasia is more or less stable. It's a bit lower now in the third and the fourth quarter as we have a gain share on energy with our energy supplier, which was booked in the third and the fourth quarter. But Australia should also be able to improve somewhat. And again, we should be able to normalize EBITDA about 10% also in Australia.

From the first quarter 2023, we will introduce packaging as a separate segment. It will not be an enormous amount of business in that segment from the first quarter as we are only starting up the Bruck machine in the first quarter. And obviously, Golbey is only coming in the fourth quarter. So for 2023, there will be tonnes inside this segment, but it will not be an enormous amount of business going through the packaging segment. But we think it's important to illustrate what the segment can bring. And of course, over time, this will become a very interesting segment for us.

Here, you can also see the fixed cost and how it will be at least an illustrative split of the cost between the operating segment to give an idea on what the packaging paper segment should absorb our fixed costs per quarter. The cash balance at year-end is approximately NOK 2.7 billion with a net debt of about NOK 1.1 billion, which means that we have had in the second half of 2022, a very high operating cash flow around NOK 600 million per quarter, which means that our leverage ratio is now quite low, and we also have proceeds coming in from CO2 related income, which will also support 2023, which belongs Bruck and waste to 2022, which also means that we have in 2022 and 2023, we have had a view on the cash management, and we have also been able to deposit some cash up more interesting rates indicated here at 3% to 3.5% and also buying back some bonds.

Just to indicate that we together with working to release the distribution restrictions in our loan documents. We are having a very active view on cash management as we now have the opportunity to have more flexibility and have a lower debt after a strong 2022. Two words on the high school facility that we sold to the weaken count for a total proceeds of about NOK 730 million. Again, this is also a 50-50 company, Norske Skog and Ringstad in Halden had and which was an old building which we didn't really use much, which we have refurbished and made available rented out for as a school.

And then we decided that it was time for us to sell as we are not really into the business of running real estate. What is interesting is that there are quite a few other opportunities adjacent to the school in Halden and also a bit further from the middle. We have several other opportunities to develop real estate at interesting also financial levels.

One aspect which I'm proud to announce today is that we are investing in Norway in a significant way. So we can announce a TMP capacity expansion at Skogn, basically replacing the need to import recovered paper from -- mainly from Continental Europe and the U.K. and on a ship to Norway and instead utilize Norwegian energy and Norwegian wood fibers.

All in all, we will reduce imports of recycled fiber by some 70 to 80 kilotonnes and we will increase the TMP production by about 100,000 dry tonnes. So it's a relatively interesting investment. We are investing in existing infrastructure, and we are receiving support from the NOx fund, which a is governmental firm, who is incentivizing businesses to reduce harmful emissions. In this case, NOx, we will also reduce waste, we will reduce other emissions by this investment. And clearly, it's an interesting payback time and an IRR for Norske Skog.

Very low risk around the project as we will use known technology, known suppliers. It will be inside one of our buildings, and we will also reuse all the equipment from other paper mills. Quite interesting, showing that we believe that we have a very competitive position in Skogn also for the next years.

Turning to raw material markets. I have already indicated the volatility, and you could also say high levels of some of them. Energy prices continue to be a bit of a challenge to manage for an industrial company like ourselves despite the fact that the relatively mild winter in Europe has eased some of the worst pressures on energy. However, we have to say that it still remains certain historically high level compared to even to 2020 and 2021.

Recycled paper is in also volatility coming down from the highs of 2022 and with particularly OCC significantly down, recycled fibers for paper for graphic paper production a bit less and maybe more on sort of a long-term average level than the absolutely highest that we've seen. Against this, there is an increase in pulpwood prices. This is on the slide, we see the Norwegian price. This is a fact across most of the European space as there is no wood imports from Russia impacting negatively the supply of wood into Europe.

Product pricing. This is on the left-hand side, you can see here both recycled containerboard and publication paper prices in the same graph. And we see that as has tracked raw material prices over 2021, '22 and into 2023, some weakness in certain grades as we see less economic activity in Europe. And we also see raw materials coming down, particularly on the recycled fiber side.

Also important for us is the CO2 allowances. You can see that in 2022, we had a surplus of 240,000 tonnes in Europe. Also, the CO2 price is important for the CO2 compensation, which is now in Norway and France and also be introduced in Austria. So pricing here is important. And we can say that also historically, the CO2 allowances on a high level. However, most people, most observers expect this to continue going forward.

The market is reasonably bounced despite the fact that as most of the markets, we saw a bit less economic activity across the main markets in the second half of last year. But we have to say that with the closures, you can see on the right-hand side, we expect the markets to be in good balance also going forward. And we have to remind you that Nordic producers are in a particularly good place competitive-wise with access to differently priced energy and to a certain extent, a differently priced fiber.

Norske Skog holds then about 60% of our European public paper capacity in Norway. So we feel and we will even emphasize this with the TMP investment as Skogn just mentioned, that this is and will remain a competitive capacity going forward. However, 2023 will be a big milestone for us with the introduction into the market of recyclable containerboard, packaging paper. Both projects are still on time and on budget as we have announced. So there will be a start-up in Bruck for sellable paper in the first quarter. There will be start-up of sellable paper from Golbey in the fourth quarter.

And we expect over time that these machines will then ramp up to full capacity utilization over maybe 18 to 24 months and reaching an EBITDA over the cycle of about 20%, underpinned by competitive steam supply from either from own production or from joint venture productions, good locations, low transport costs, good access to raw materials and of course, ideal scale, trim and speed since these machines are now in practice newly built.

Very exciting. We're looking forward to the rest of 2023. And here, we have introduced a picture to show you the activity that is ongoing, Norske Skog, Golbey in France, in May 2022 and in January of 2023. Quite an impressive amount of work that has been done in terms of erection of the biomass boiler, which is on the lower right-hand corner of the right-hand picture. And you can see a lot of activities ongoing, both on the paper machines, on the wastewater treatment plant, on the raw material storage, practically speaking, across the whole site. Hundreds of people working, contractors on site and at the same time, we are producing paper. It's an impressive achievement by the Golbey team for sure.

Circular economy. Just to remind you, towards the end of the presentation that Norske Skog is a very circular company in the circular economy. Our end products are recycled more than other products, paper and paper products are recycled more than any other material in the world. We are almost using all our waste. And despite that, we can still improve this by the new TMP plant investment in Skogn. And of course, the green energy that we are using is going to be even greener. We will also start in our new boiler in Australia to replace the final coal supply that we are still using there. That's the only place where we still have any meaningful fossil consumption.

Towards the end, a few words about the outlook. We expect the newsprint market to remain fairly balanced because of industry closures. We have a return to norm with a 5% demand reduction in 2022. So we're back to the trend line, which we have guided to also before. And we expect that to continue, but we also expect the market to be reasonably well balanced. There will be operational challenges. Our operating rates, as mentioned in the fourth quarter was low. We will still see that partly because we are still in commercial projects, but partly also because of volatile raw material prices, we will probably have to optimize and run our mills on a short-term basis, which could lead to downtime.

Energy exposure as for 2022, we will continue to do that. Whenever there is an opportunity, we will try to take it. TMP production is very versatile and can be used to optimize even short-term energy positions inside hours of the day. Pricing for newsprint is reasonably stable from 2022 to '23, but we have seen softer price developments for magazine grades, particularly on the light weight coated side. Containerboard production, as mentioned, will start up first with Bruck in the first quarter and Golbey in the fourth quarter.

So we are looking forward to that, but 2023 will then also be a area of transition. And finally, of course, still the renewable energy and bio-based product development is ongoing. We don't have news to report every quarter. Some of these projects will take quite some time. Some of them are more near term. But we do have high focus, not only in Continental Europe but also in Norway and Australia to develop new projects, and there will be a news flow coming out over 2023 also related to these fiber projects.

On that note, I thank you very much for your attention, and I wish you all a very, very pleasant day. Thank you.