Norske Skog ASA

OSE:NSKOG

Earnings Call Analysis

Earnings Call Transcript 2023-Q4

[Geir Drangsland, executive]

Good morning, and welcome to Norske Skog's fourth quarter presentation.

Here is a snapshot of Norske Skog. During 2024, Norske Skog will complete the last leg of its strategic transition by completing the conversion of Golbey machine 1 to containerboard in the second half of 2024. Following the conversion of ramp-up, Norske Skog will have 760,000 tonnes of containerboard capacity and almost 1.6 million tonnes of publication paper capacity.

Norske Skog maintains a strong financial position with 1.5 leverage ratio and available liquidity of NOK 2.9 billion and around NOK 600 million of remaining net investment.

Highlights in the quarter. EBITDA was NOK 760 million in the quarter, which included an extraordinary net positive impact of NOK 655 million from sold books, mainly relating to insurance, and NOK 57 million gain from Tasman sale. The financial position improved due to receipt of NOK 720 million in insurance proceeds in the quarter.

Publication paper markets remain weak, and further capacity closures are required during 2024. We have seen containerboard demand returning, but the market is still experiencing excess capacity. Bruck machine #3 is ramping up on plan in a challenging market, but we received positive customer feedback on our deliveries and see higher deliveries entering in 2024.

Golbey machine #1, progressing towards start-up in the second half of 2024. Successful start-up of Saugbrugs paper machine #5 at the end of 2023 and expect close to normal production and on-time deliveries during the first quarter of 2024. We are still progressing with our evaluation of opportunities for Saugbrugs paper machine #6 and its related infrastructure, but it's too soon to comment further at this stage.

We maintain a good balance sheet following shareholder distributions during the second half of 2023 of NOK 472 million with an equity ratio of 42% and interest coverage ratio of 18.4x.

Deliveries increased for all grades in the quarter. Total operating income increased mainly because of recognized insurance compensation, with operating revenue increasing slightly due to a weaker NOK and higher deliveries as well as sale of excess energy.

EBITDA of NOK 76 million and a margin of 20% in the quarter mainly because of insurance. Pretax profit, NOK 586 million, significantly up from the previous quarter, mainly driven by recognized insurance proceeds.

We maintain a strong financial position with equity ratio of 42%, interest coverage ration of 18.4x, cash position of almost NOK 2.5 billion, leverage ratio of 1.5x as defined by our loan agreements.

Looking at segment during the fourth quarter. Publication paper Europe delivered a strong EBITDA and margin positively impacted by recognized insurance at Saugbrugs and higher deliveries for all grades. Prices are stabilizing, although pressured from continued lower energy prices. This is offset by a weak NOK for our Norwegian mills. We see continued margin pressure from high pulp wood cost and the situation to continue.

Publication paper Australia delivered a strong EBITDA positively impacted from gain on sale of assets from Tasman of NOK 57 million. There was a slight improvement in deliveries and improved market share in domestic markets as well as improved price terms in new contracts. Production ramp-up continues for the Packaging Paper segment in challenging markets. Deliveries were slightly low in the quarter, but Bruck is participating in annual contract for 2024, which has resulted in improved deliveries volumes already in January this year.

The containerboard market remains at depressed levels. Containerboard production start-up in second half of 2024, still the plan for Golbey machine #1, close to all deliveries completed, with main exception being piping and electrical work.

As mentioned, Bruck machine #3 is participating in annually delivery contracts starting from January '24, improving delivery volumes to almost 13,000 tonnes in January. Technical ramp-up performing in line with plan, excellent product quality and customer feedback.

We started production at Saugbrugs machine #5 towards the end of 2023 and expect close to normal deliveries in the first quarter of 2024. We continue to explore future alternatives for Saugbrugs machine #6 and will update further when appropriate.

I will not cover all insurance details impacting the quarter and future results here that highlight again that we are very pleased with the settlement and process with our insurer.

Briefly costs, energy prices have come down and stabilized at more normal levels, with cycle paper has come down from previous highs. Pulp wood costs continue to pressure margin for virgin fiber producers, and we expect the situation to continue going forward. The CO2 quota price has come down significantly from the peak, and we will expect the price to fluctuate around current levels for 2024. Publication paper prices have stabilized at cost support levels, but if input cost move lower, we expect prices to follow.

The market is experiencing excess capacity for all grades, with coated magazine grades being the weakest. More capacity will have to come out during 2024.

Containerboard prices have stabilized as well, again supported by production cost levels. The market is seeing excess capacity, with operating rates being at around 85% versus the preferred 95% level. Significant capacity will have to come out for the market to become balanced, especially considering new capacity set to enter the market over the coming 12 to 24 months.

To conclude, recycled fiber and energy costs are stabilizing at lower levels, but pulpwood cost remaining high. Publication paper prices, under continued pressure from weak market balance and lower input costs. Containerboard prices stabilizing, and production costs in a challenging market with excess capacity. Expect negative EBITDA from Packaging Paper segment in 2024 due to Golbey machine #1 start-up in second half of 2024, maintaining a strong liquidity position as investments near completion and debt repayments increase, significant focus on reducing production cost and working capital to maintain competitive position.

That concludes this presentation. Thank you.