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Edited Transcript of NSG.OL earnings conference call or presentation 26-Apr-17 10:59am GMT

Thomson Reuters StreetEvents

Q1 2017 Norske Skogindustrier ASA Earnings Call

Lysaker Jun 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Norske Skogindustrier ASA earnings conference call or presentation Wednesday, April 26, 2017 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Sven Ombudstvedt

Norske Skogindustrier ASA - Former CEO and President

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Presentation

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Sven Ombudstvedt, Norske Skogindustrier ASA - Former CEO and President [1]

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Good morning, ladies and gentlemen, and welcome to this webcast of Norske Skog's First Quarter 2017 Results Presentation. As always, we start with a few words about our product and our customers. Publication Paper is still an important source for revenue on most our customers. And we reiterate this time, and we've said it many times before, that 90% of revenues come from newspapers, from the print edition. And we now we see, even here in Norway and in Europe at large, that some papers are reinstalling several of their additions and increasing publication rather than decreasing as a reversal of the trend.

Also here, we point out that the U.K. magazine Private Eye has seen its highest print circulation ever in 2016, and most of this content is only available on paper, which is something more and more specialized magazines are actually doing. And also, I think it's important to state that while print is still read widely, websites are scanned. There's quite an astonishing statistic saying that newspapers are read and used for 40 minutes, while online visitors spend, on average, half a minute on a newspaper, if you like.

Now turning to the figures themselves. And the main highlight in the first quarter is the rather stable operating earnings in Europe, while Australasia had a very weak first quarter. The group's total gross operating earnings ended at just under NOK 160 million, down from about NOK 220 million in the fourth quarter.

Europe, quite stable with cost reductions offsetting the lower seasonal sales. We had quite high capacity utilization in the quarter, but sales were seasonally lower as expected.

In Australia, there's 2 points affecting comparison with the fourth quarter. One is the fact that we had temporary production problems. After a total mill shut, we struggled to come back to regular production again. And we did lose a few million Norwegian crowns due to this fact. Also for comparison, the second -- sorry, the fourth quarter of 2016 did have a CO2 compensation in New Zealand, which was not insignificant.

The debt is slightly up because of currency, mainly, unrealized currency effects at NOK 6.4 billion. One important thing in this quarter was that cash flow from operations before financial items was NOK 175 million, which is quite a good figure considering the fact that we had the working capital release, which is unseasonal, if you like. Normally, we will have capital build in the first quarter. The net loss is NOK 274 million, which mainly is because of currency effects and interest expenses.

And finally, what we have said also in the past, as we have tried to refinance the company earlier this year, the debt level and interest payments are too high and that jeopardizes our diversification strategy, the so-called 25 in '20 strategy.

Turning briefly to the waterfall, from fourth quarter to the first quarter, volumes, not a big difference, but the sales mix is the main negative factor. Partly, there is more exports out of Australia into Asia with lower margins, which is due to the still secular decline in domestic demand in Australia. And we also had some other mix effects, too, and particularly, too, in the United States, the sale of supercalendered paper, which contributes negatively in this NOK 80 million.

Cost side is a positive and regains some of the GOE, while there are, as mentioned, comparative issues around the CO2 compensation in New Zealand, which compares negatively to the fourth quarter, here with NOK 24 million.

A few words about the debt. The changes were relatively small for currency, and the euro has the biggest and the dollar is the second-biggest on this matter, but largely unchanged up to NOK 6.4 billion. However, the maturity profile, as can be seen on this slide, shows that we have a huge maturity in 2019, the so-called SSN maturity, and some maturities falling onto that. And it seems to the company and its management and board that a holistic solution to the debt would be in all stakeholders' interests rather than trying to piecemeal and find partial solutions to the issues.

The other side of that coin is the fact that the interest payments are too large. They consume too much cash. This is the cash usage and sources in the quarter. Obviously, the gross operating earnings and the mentioned working capital release contribute around NOK 200 million, which is then spent, to a large extent, on financial items, which the bulk part is interest payments. Also a little bit restructuring expense in the quarter, which are a part of our demanning efforts, which are continuing.

The diversification strategy, new projects, new product lines generating 25% of gross operating earnings by 2020 is more difficult without a holistic refinancing. We have identified the projects. We have talked about them several times. And now from the beginning of the second quarter, there is also a project contributing to gross operating earnings, namely the biogas facility at the Saugbrugs mill in Halden, which was opened early April, which will contribute with an annual run rate of about NOK 25 million.

We believe that in 2017, we will reach about 4% in comparison to the 25% target. So I think, in 2017, we will be on the trajectory. But it's more and more difficult, then, to finance the further projects, which you see here, which is the tissue project in Bruck, it's the pilot project in New Zealand, additional biogas projects and also projects like fiberboard and a whole host of others we have identified.

If you look at the market for a minute, the West European industry has a relatively high utilization rate presently. Newsprint is leading the pack here, with about 20 -- sorry, 92%, SC at around 90% and lightweight coated is below. And light weight coated is the segment we're struggling with, with no capacity announcement and also no recent closures in this segment. And we can read this off to price pressure, which is apparent in this segment, while SC and newsprint fares better with higher utilization rates.

Which leads us on to the price picture for Europe. You can see from the slide that newsprint and SC is supported by these utilization rates, while there has been pressure on light weight coated. And in the first quarter, we suffered somewhat from that. Although, this is our smallest segment, where we only have one machine producing, and we have a relatively low market share in that segment.

If we look internationally, with the U.S. pricing and the Asian prices, here illustrated by India, you can see that there is now an important gap between the U.S. prices and Indian prices. Historically, they have been highly correlated. We believe that some of the Indian weakness, which was a resultant of the demonetization in India, which happened now in the first quarter, that is behind us and there is room now to increase prices from the 1st of April, which we have done, by between 5% and 10% depending on destination, depending on the customer and this is also underpinned and helped by the high recovered paper prices that our Asian competitors are paying presently.

Looking at the European segment a little bit more in detail. Utilization rate is pleasingly high at 94%, and the cost reductions in Europe has offset some of the lower seasonal sales volumes. So all in all, a relatively stable quarter as mentioned. However, both the fourth quarter and the first quarter have been hampered by relatively high spot energy prices in North Europe, particularly affecting the Norwegian mills and also higher recorded paper prices, which I mentioned for Asia, which is also relevant for our newsprint production in Europe.

Looking at Australasia, and again, this is clearly lower than both the fourth quarter but also the first quarter of last year. Last year, we had more stability in the figures, not a lot of seasonal effects. This year, there is a seasonal effect in the first quarter. But again, the mentioned production problems and the lower-priced exports into Asia means that the first quarter is weak and at a level which is below what we consider acceptable.

If we take a moment to look forward, the outlook is for a relatively stable paper business. As far as we can see into the future. However, the diversification must be said to be limited by lack of financial options and refinancing. However, if we look at the market, the market is still supported by capacity closures and conversions in the segment.

Newsprint and SC looks relatively good with high operating earnings, light weight coated is somewhat more challenged. And this, we expect to continue with some stability into the second quarter and maybe with price improvements on some selected segments into the second half. Asia should be better with the announced export price improvements and also seasonal effects should help from the second quarter throughout 2017. As a conclusion, the group sales volumes will be probably on level with 2016 in 2017.

Given the operating environment that we are in, we are also launching now a comprehensive cost reduction and efficiency program, which would improve the annual performance by NOK 500 million. We are reporting margins in this business now which is clearly below double digit, below 10%, has been for a while. And we believe that we need to move above that into somewhere between 12% and 15%.

In order to that, we need to put our costs down. And altogether, across the 7 operating units that we have, this will entail a cost reduction program of about NOK 500 million. This will be both fixed costs. We have already fixed cost programs in place, which will be accelerated. And it will entail variable costs, logistic optimization, et cetera. We will provide more details with the release of the second quarter in July on how this will be achieved and more timing when results can be expected.

On the diversification, the Saugbrugs biogas facility is now producing, will contribute. As said before, right about 4% of GOE will come from new businesses in 2017. After our king, King Harald V, opened this facility on the 3 of April, 2017, in a very nice ceremony at our Saugbrugs' Halden mill.

As most people who follow us know that Norske Skog has no bond maturities before December 2019. However, our Board of Directors and management, obviously, is working continuously with refinancing alternatives. This has high priority given the debt levels and the corresponding interest payments are too high, but also the fact that our book equity is nearing, once again, levels which requires the board to take action. And any solution that we have contemplated will involve the equitization of unsecured bonds. We have not seen any solution which does not require a more holistic refinancing, which means equitization of unsecured bonds.

On that note, I would like to thank you very much for your attention. Thank you very much.