Earnings Call: Q3 2018

Oct 16, 2018

Good afternoon, everybody, and most welcome to this Third Quarter President and Analyst Conference. My name is Christoph Kaszflar, and I am Head of Communications. With me today, I have our CFO, Peter Enarson and our CFO, Susanne Le Thandre. As usual, we will spend approximately 20, 25 minutes to go through the details and then open up for Q and A session. Please, Peter. Thank you, Christophe, and good afternoon and very welcome to today's presentation of our Q3 numbers. I would like to start with sharing my key highlights of what has happened during the quarter. And after that, I will invite Sussan to go a little bit more thorough into the financial details. And as you know, this is the last time that Sussan will participate as the CFO of Bjorkosnes during this presentation. So I would like to also take this opportunity again to thank you, Sussan, for the years that you have put into the company in a very good way. So sharing my key highlights, the first most important is sales. And I'm really very, very satisfied to see the performance that we have had during the Q3 when it comes to growth. And it actually amounts to 9%, which is more than double the long term targets that we have for the company of 3% to 4%. And if you look into that number, you could say that 9% corresponds to roughly SEK 511,000,000. And of that SEK 511,000,000, SEK 4.50 of those actually corresponds to base price increases. During the quarter, we have also experienced some headwind when it comes to raw material prices, as you can see. And that has actually influenced a lot the cost of wood that we have had during the quarter. And one important thing to know is that we have a contract in 1 of our non integrated mills that where we have a fixed index when it comes to the pulp price, and which actually leads to the fact that we have an extra cost effect of 75,000,000 dollars hitting the cost of wood during this quarter. Importantly, also to state is that the strategic investments is are both progressing according to plan. We have the future platform in the future platform MG center in Greiblaca and also, of course, the big investment, KM7, in Gjoern. And both of them are progressing according to plan. And I'm also proud to say that we have been included in the Dow Jones Sustainability Index once again for the 2nd year. And last year, we were the leader in Europe when it comes to packaging and container. And this year, we are also the world leader in Dow Jones within packaging and container. And we also have the new organization in place starting effective from October 1. And last week, we announced that Helian Vstrom has been appointed to take the position as Head of Division Paper. So I look forward a lot to have Helian on board, but today's presentation will be the last time that we present according to the old structure of business areas, packaging paper, corrugated solutions and consumer board. So let's start with the strong performance of packaging paper. And as you can see, the sales has increased by 16% during the quarter And it also means that the EBITDA has increased up 20% 20%, and we reached an EBITDA of SEK472,000,000, 19% of sales. And this is very strong indeed, I would say, considering the fact that the extra cost of pulp that I mentioned in the beginning hits packaging paper by 75,000,000 during the Q3. So let's turn to consumer board. And also here, we experienced a continuing strong demand and we have a sales increase of 6%. And with EBITDA is minus 40% compared to Q3 last year. And we are reaching SEK 278,000,000 during the 3rd quarter, which corresponds to 13% of sales. We expect the market to remain stable in both packaging paper and also within consumer board. And last but not least, the performance in corrugated solutions. Net sales within corrugated solutions has increased by 12%. And if you look into the solutions part of corrugated solution managed packaging, the sales has actually been 27% during the quarter. So EBITDA is roundabout on the same level as it was during last year and we reached 266,000,000 23% in margin. And also within corrugated solutions, we expect the market to remain stable. If you look at the price increases per division, you could see that compared to last year, we have increased prices in packaging paper by 14% and within the quarter, roundabout 1% or 4%. And if you look at corrugated solutions, we have increased prices 10% compared to last year and roundabout 1% during the quarter. So all in all, I would say that I'm quite satisfied with the growth rates of the business areas. And what sticks out is the cost that we have had for pulp hitting packaging paper and the fact that we have a situation with Consumer Board where we are in negotiations to increase sales prices in so we have difficulties to cover the extra cost of wood for consumer board. And with that said, moving over to what we had said and what the message is that we conveyed during the Capital Markets Day, This is the from the overall perspective, the strategic direction of the company. And 1st and foremost, we need to secure a successful ramp up of KN7 and to make sure that we secure a competitive cost of wood. And secondly, to make sure that we have a continuous improvement program in place to stabilize the production and last but not least, to make sure that we accelerate in innovation and in solutions. And looking at KM7, this is what it looks like in more detail. Looking at where we are right now in October, we have actually 95% of the civil construction under the building is up and ready up to 95%. And the machine is assembled to 50% of what is the final state. 95% of the machine has actually arrived to Guggen. So now the big job by commissioning and to assembly the machine is taking place. But everything is so far on time, and we are also at cost when it comes to KN7. Talking about the securing the competitive cost of wood, It's as you all know, we have experienced wood shortage during the year, and it has hit the result by roughly SEK 100,000,000 in the first quarter, SEK 100,000,000 in the second quarter. And we have also had an effect of roughly 40,000,000 during the Q3. And that has mainly been the consequence of high transportation costs. And if we look at the continuing part of the year, we don't see any extra costs coming in from wood shortage for that will hit the 4th quarter. So we hope that this is the end of this by looking at the 3rd quarter. The focus to finalize the Bergvik Ost has unfortunately been delayed. There are no big reason for that. There are numerous amounts of details in these negotiations. And we communicated at the Capital Markets Day that we aimed to finalize the Bervik Ost deal by year end. And unfortunately, right now, we believe that it might take a little bit longer than that. But we still have the same message as conveyed at the Capital Markets Day that we believe that it creates more value for Birkarsnes to invest in the business than to invest in own forest land. And what needs to be continuously improved is safety and to stabilize the production. And I believe that a safe company is really a well run company. And if you look at the numbers and the statistics percent of last time injuries during the last year and we have set up a target that we firmly believe in and that we are committed to achieve at 1.5% during 2023. And this is something that is very closely correlated with production stability. And I foresee that this is also this KPI will continue towards 1.5 or towards 0 as we improve stability. And looking at production stability then that is also something that we conveyed during the Capital Markets Day and that we have a program that I feel very confident with. We have targets and initiatives now set on all mills in Birkorsnes. And we have communicated that we will reach a level of improved availability in our mills of 2% units every year. And 1% units increased availability in excess volume actually corresponds to SEK 100,000,000 in EBIT. So 2% units per year is SEK 200,000,000 and roughly 1% unit in EBIT margin. And this is also something that we will be transparent with and to continue to report as we go along each quarter so that you will have a chance to follow that this is actually coming through. And finally, our commitment to accelerate in growth. It's very much about innovation and it's also very much about solutions. And looking at the statistics here, we are on new products ratio of 6.7% coming from last year to year to date 2018. And we need to get back as quickly as positive to as quickly as possible to 15% when it comes to new product ratio. And here we have stated that we will be back on 15% in 2023, But the ambition is to be back on 15% of new products much sooner than 2023. And as we also communicated at the Capital Markets Day, we see no reason to change any long term targets, and we are committed to deliver on these targets. And looking at the Q3, we have a growth of 9%, as I said, and the long term target is 3% to 4%. We did not reach EBITDA target of 17%, we reached 15%. Return on capital employed is 11% looking at the 3rd quarter, and we have a long term target on 13%. And but we do have still net debt to EBITDA on below 2.5 where we reached 2.36. So with that, as my key highlights then of the quarter, I would like to invite you to Sam to share a little bit more of the details in from a financial perspective. Thank you. Okay. As Piotr has already said, we've had a solid performance when it comes to growth, continued top line growth. Sales has grown 9% quarter on quarter, and we continue to see increase in sales prices within packaging paper primarily. They've increased their pricing with 14% to 15% compared to last year. Corrugated Solutions has increased their local pricing with 9% to 10% compared to last year. We also have a 6% positive impact from the currency. The weak krona is helping us, as we're going to see on this slide as well. Raw material is really putting a lot of pressure on us, as you know. Last year, we start if we start the waterfall here with EBITDA from last year, 10 1. The sales price has increased EUR 450,000,000 And as I said, 10% average price increases and Packaging Paper, 14% increase, 14% to 15% and the corrugated solutions, 9% to 10%. Currency has improved or increased with 200,000,000 and SEK 335,000,000 of that is actually impacting the business areas. And then we take a negative hit on the hedging line for hedging and revaluation of SEK 120,000,000. 1,000,000. Maintenance shutdowns have little impact basically on the same level as last year, slight positive SEK7 1,000,000 compared to last year. Wood shortage, we have still a pillar for wood shortage. We did not have a wood shortage affecting our volumes for the Q3, to be very clear. What we did have, though, was logistic costs for transporting the logs around in our system to make sure that we actually had wood at each site when it should be there. So we did have SEK 40,000,000 of extra cost for transportation of logs around in our system. Our fiber cost is the big hitter, as you all know. The wood cost and the pulp cost has increased substantially. The effect is SEK 530,000,000 compared to Q3 last year. And it's split fifty-fifty between wood cost and pulp that we buy into our mills in primarily Beetham, Jakobstad and Fruhve. Chemicals and Energy has also increased with NOK 130,000,000 and NOK 100,000,000 of that is chemicals. And then we have rest of others, which primarily consists of outbound logistics, transportation from our mills. That's primarily driven by currency, and we also have fixed cost increases in there. That ends us at €881,000,000 at EBITDA. Another chart on our raw materials. And here, we can clearly see the sharp increase of our wood cost. This is our wood cost index, 30% increase compared to Q2 last year. And caustic soda, which is a main chemical that we're using and it stands for a large part of the chemicals we buy, has also increased 30% compared to last year, and it's now flattening out on a very high level though. We also have an effect that Peter talked about in our mill in Jakobstad, where we have a long term agreement to supply pulp at market conditions or market prices. However, that market that agreement is with a set rebate, a fixed rebate and with the pulp prices that has increased substantially since 2012 when this agreement was agreed, has changed the situation a lot. Prices have gone up dramatically and so has also the rebates. And as we have a fixed rebate, it affects us negatively. And in the quarter, the effect was SEK 75,000,000 compared to if we had had a correct or a market level rebate. Net debt is, of course, driven by our huge investments or strategic investments that we're doing. If we adjust EBITDA for our provisions, we are land on NOK2.4 net debt to EBITDA, which is in line with the targets. We have a net debt now of SEK 8,500,000,000, SEK 3,500,000,000 more than last year at the same time. And we're expected to peak mid-twenty 19. And focus after that is to deleverage, of course. Now, Petra, I hand over to you to talk about the outlook. Thank you. So this is the outlook for the Q4 that we expect the demand to continue within all business areas. And we also see possibilities for further price increases. It's not in all segments, in all business areas, but we see selected price increases as very positive also for the Q4. And we also see a sharp increase in wood cost to be expected to continue during the Q4. And that, of course, also include the contract that we have talked about in Pietasari. So that's the 3 major parts that we would like to convey as an outlook. And then to once again then to summarize the 3rd quarter, the challenge of the 3rd quarter has definitely been the raw material costs. And that is something that we also see that it will continue. And what we are very pleased with for the Q3 is the growth rates of 9% and also the performance that we have when it comes to the strategic investments that we are still on target when it comes to the ramp up of KM7 in March, April next year and that we are very proud about the Dow Jones Sustainability Index, where we are now ranked as the world leader within container and packaging. So with that said, Christophe, I think we can open up for some Q and As. Thank you very much. This is Gustaf from Pareto. I have three questions. First of all, if you could quantify anything on the cost inflation situation and your abilities to increase prices going forward. I mean, how much of a margin pressure should we be expecting in the next coming quarters? I think from the way we can mitigate the cost increases of wood is, of course, to increase prices. And that is where we can see selective price increases in packaging paper and as well as in corrugated solutions. And unfortunately, we cannot mitigate very much when it comes to consumer board, talking about the liquid packaging board. But here we are in negotiations for next year, and that negotiation is not yet finalized. So I can't convey any numbers or targets for that. But then we can also, of course, mitigate the cost increase of wood by improving production excellence, where we have a quite substantial potential to increase availability in our mills. And considering the fact that we are capacity constrained in production, that has an extra leverage if we can increase availability. All right. But just to clarify from the guidance and the report, it sounds like if we just think about Q4 that cost inflation will most likely exceed your potential to increase prices? I think that would be a clear assumption. Okay. Fair enough. Secondly, on the pulp contracts that you were talking about in Jakobstad. Just wondering how long is that contract and how long will we have that negative effect? We have a possibility to renegotiate 2022. But the impact is dependent on the pulp price, of course. Yes. Yes. So it's at this level of pulp pricing we have this impact. Yes. Okay. Very clear. And then lastly, I noted in corrugated solutions, if we look at the revenue per ton in Swedish krona, there's a pretty remarkable decline quarter on quarter. I'm thinking that the currency effect should be positive quarter on quarter. So just wondering what explanation is there, why we're seeing this pretty large drop from Q2? From Corrugated Solutions? Yes. That we have to come back on. Okay. Thank you. Thank you. Mikael Jafs, Kepler Cheuvreux. You talked a little bit about Consumer Board and that you're negotiating prices. Could you say anything in terms of we know that you have fixed priced contracts that range over, in some cases, several years. But how large part or how many contracts are you renegotiating now? Or are you renegotiating your whole product portfolio for 2019? I would say that to a large extent, we are renegotiating the major part of Consumer Board for next year. And then on Bergvik, as you said, it might be a little bit delayed, but could you sort of and you gave a statement there previously saying that it's not your business to own forest land. But should we understand it in such a way that you will buy it and then sell it on and make a huge capital gain? Is that how we should understand that statement? It's to make a huge capital gain, I think that remains to be seen. The aim for us is to utilize the forest land to make sure that we have a competitive wood supply. So I think what will be sort of on our minds and on the target for us is to make sure if we can find a partner that we can actually work together for strategic securing of a competitive wood cost. That is what we most likely would like to utilize the forest land to do instead of putting it in the balance sheet. Okay. Many thanks. Oscar Lindstrom from Danske Bank. Two questions. First off, a follow-up question here on Michael's regarding the Forestland transaction. You have net debt coming pretty close to your ceiling level. And you say that we should expect this to continue to increase going into next year. Would it make sense for you? Or do you feel that the sort of Forestland transaction and you're buying this at book values, which are below or close to book values, which are below where most market prices are. Do you at all see this as an opportunity to strengthen your balance sheet? By doing what do you mean? By selling off maybe some of the prime forest land, which has a high value to smaller investors? I'm thinking anything near a lake or waterways or near major cities, etcetera, as a way of strengthening the balance sheet specifically? I think that we have the targets set to make sure that we both, of course, take care of the balance sheet situation. But I think the most and foremost to make sure that we have a competitive wood supply. But we see but I would say that those 2 goes more or less hand in hand to that we don't have the intention to keep the Bervik forest land in our own books if we can find a good partner to take that part. And my second question is around you mentioned here the stability of production or improving production stability is one of your goals, was the number 2 goal there. How far along in that are you? And then will there be some moment in time where you can say, okay, now we've sort of achieved or done what we can do to achieve production stability. So I'd like a little bit more clarity on that process. It's what we have done during this year is that we have made a quite extensive analysis by at each mill. So we have spent 2 days, two times during this year to really go through all the losses, all the opportunities. And we have also one central team and we have also teams at the mill. And what we have gathered are the initiatives in all mills. And so what we are doing now is that we go live now during 2019 with quite an extensive performance management system where we will actually follow each and every initiative. And all these initiatives actually end up to a total sum of increased EBIT or increased availability in production. So we will have very good tools to follow this in detail. So the way I see it is that I think this is a never ending story. I think that we will never say that now we have reached the end target of production stability. But we do have a quite big potential to close the gap where I think that we should be and where we are right now. So just to follow-up, I mean, you had a lot of production problems in 2016, again, even more so, I would say, in 2017. So far this year, would you say that production has been more stable? I mean disregarding the wood supply issue, which is a separate factor, but would you say that the machines have been run better already or? I would say that if we compare year on year, this year has been a better year compared to last year definitely from a production stability perspective. But we need to take the luck out of that because it's we still have an improvement potential to put in there, but it is definitely moving in the right direction. All right. Thank you. Thank you. It's Linus Slausen with SCB. I'd like to come back to the wood cost situation. And when you guide on the Q4, when it comes to wood costs, you used the word sharp increase in costs, for instance. I just want to be clear here. Is that on a sequential basis or is it on a year on year basis when you use that expression? And also if you in any way could maybe quantify the sequential wood cost impact? Is that smaller or larger than the sequential impact in the 3rd versus the 2nd quarter? I think maybe if you I know the answer, I think, but I think maybe you have more details exactly the quarters. I think the if you look when we say sharp increase, we mean year on year, not quarter on quarter or consecutive quarter. That's how far we can guide, I think. But how big it will be compared to this quarter? But I think you could what we conveyed last quarter, now you have to sort of kick me if I say too much here, but it's the during the first two quarters of this year compared to last year on average, the wood cost actually increased by 15 percent. That was something that we told the market after the second quarter. And if you do the same analogy looking at the 3 first quarters of this year, but you compare it to the same period last year, it is actually 30% up. I think maybe that could maybe answer. Partly. And then because now you didn't come from Q4, if I understood correctly. That's the one we hardly we cannot guide on that. We know that it will continue upwards, not in the same pace, but it will continue upwards. But in what angle? Don't want to guide on that. Okay. And then on you talk about the select price increases, but you're also talking about a slower pace of price improvement in your own products going forward. Is there should we expect something better as the next year starts? You've already mentioned the Consumer Board situation, that's one. But do you also have some lag effect in, say, packaging paper where you've had full year contract, 6 month contracts on the SAC and kraft paper, which will actually come into effect even though you've had price increase in April, July and now hopefully in October. Some of those price effects won't be seen until next year. Is that the case? Or have we seen in your numbers most of what is taking place in terms of price announcements? We don't have any contracts with the lagging effect that will sort of surface during the 1st part of 2019. But I would say that packaging paper is the business area where we have a very strong demand right now. So if we can free up capacity and if we can also look into next year at selected price increases, I would say that packaging paper still is an area where we have price increase potential in selective parts. Right. Good. And then maybe just a final question. You talked about your sales growth. It was 9% in the 3rd quarter, but it did not stem from volume growth. In fact, this was the 4th quarter of negative volume growth year on year. When do you see that change? Should we expect a neutral or even positive year on year volume growth, let's say, in the Q4? I think that is impossible to guide with the instability that we do have in production, I would say. But it's if we can have an increased volume, then of course, it influences the result in a positive way, especially if we have selected price increases. But we are only in the mid of October yet. So I think that is that remains to be seen. It's Christian Kopfer from Nordea. Just a few questions from my Firstly, you said that Berbig transaction drags on a little bit. What's the primary reason for that? There are no real primary reasons. It's more that it's a big negotiation with a lot of letter of intent participants. And it's a lot of details to be carried out. And it just takes longer than anticipated. So just a big transaction and a lot of details? Yes. Yes. Okay. On the pulp side, you have said that you expect 100,000 tons surplus pulp production this year, right? Is that pretty much tilted towards the second half of the year? Or is it evenly? Or could you say anything about this? Pulp is the area where we earlier in the year, when we had wood shortage, down prioritized, so we produced less in the first half of the year than we had planned. So that would imply that we would have a higher share in the second half of the year. Did you see that already in Q3 or? No. Okay. And the price that you get on your surplus production, is that hedged on lower prices than we have on the screens or We're talking about pulp now. Right, sorry. We have 100,000 tonnes of net exposure, as you know. We have hedged 40,000 tonnes of that on 900. We did that in last year. And that runs out by the end of this year? Yes. Okay. And then finally, on the maintenance cost, I think you had a slightly higher maintenance cost than expected in this quarter. Was that still in within the ARR margin or something went wrong from your perspective or It was higher maintenance cost, and that is not acceptable, I think. But if you look at the number, it was all in all SEK 13,000,000. And it was a start up process after the shutdown in Gjavle, where we needed to do some more cleaning of 1 of the Boilers. Yes, 1 of the boilers, yes. So it was marginal, I think, compared to other quarters. Right. Thank you very much. Any more questions from the audience? Okay. And we're ready for the telephone conference questions. Thank you. Well, ladies and gentlemen, we do have a question here already from Robin Santoverta of Carnegie. So Robin, over to you. Your line is now open. All right. Thank you. Now first of all, on this Jakob style situation. So do I understand correctly that you simply buy pulp with a very low discount. And if that discount would be market based, then that would that difference would be SEK 75,000,000 in Q3? Yes, that's correct. But I assume that this sort of SEK 75,000,000 has been quite close to SEK 75,000,000 in Q2 as well pulp prices didn't go. They were roughly stable quarter on quarter. Is that correct as well? No, it's that is not correct. It was at a lower effect in the second quarter and also lower in the Q1. We can tell those numbers. Okay. Okay. I understand. But assuming that pulp prices would remain at these levels, then the best estimate is that this NOK75 1,000,000 continues now every quarter until 2022 where you renegotiate the discount. Yes, correct. Okay. Good. Now in terms of the underlying inflation of pulpwood in Sweden. Am I correct when I assume that the prices increased during the quarter, not in at the end or in June or July, but during the quarter? And therefore, it's quite likely that or natural that your Q4 pulpwood cost in Sweden are higher than the average of Q3. And is that what you're guiding? Or is it further increases from the level we saw in September? No, it was what you said first. Okay, exactly. So the price went up during Q3. We're now at the higher level obviously than we were as an average in Q3, and that is sort of what you're seeing now. Yes. Good. That's all for me. Thanks. Thank you. We now go to the line of Kevin Hellegard at Goldman Sachs. Kevin, can you take your phone off mute? It should be off mute. Can you hear me? Yes, we can now. Okay, excellent. Good afternoon. So two questions left from me. So one is, Susana, you mentioned that the wood shortage didn't impact your volumes this quarter. So what was the key reason for the relatively low volumes in the corrugated division? Basically, we've had some timing issues on our outbound logistics. So we had a couple of boats that left after the quarter ended in the beginning of October. Okay. So should that mean that you would have even stronger 4Q than normal because of that? Yes. Or like so production was normal during the quarter, there's more timing? Yes. Okay. Then just to understand your 4Q guidance and sort of the drivers here. So you're obviously talking about a 4Q margin squeeze. Is this something that you see lasting into 2019? Or when do you expect sort of you talked about higher availability of your products, etcetera, to be some of the things that can offset this margin squeeze. But when do you see the positive inflection towards the 17% you're guiding for? When should we expect that turnaround? I think that is not it's not possible to give a straight answer on I think it's of course, we need to do everything we can to mitigate the increased cost of wood. And we have parts in the company where we can actually do that. So but exactly when that will happen and when we will reach 17% EBITDA is something that I cannot give an answer to. Okay. It's just to try and understand because obviously the pulp contract you talk about is a 2022 thing. But like when do you really expect the other drivers to start kicking in if you don't see much possibility of price increases? I expect other drivers to kick in already now. But what we have committed to is to increase the availability of the production from to next year 2019 2020 by 2% units per year, which is equivalent to SEK 200,000,000 per year. And that is something that I feel confident in. But you can't I can't really promise that this will kick in and I cannot say any number exactly for the Q4. We will launch this program starting next year where we will follow all the initiatives. And we will also have a transparent communication regarding that during next year. There are no further questions currently on the phones. Are there any further questions in the room? Thank you all for coming. Thank you.