Earnings Call: Q1 2017

Apr 20, 2017

Perfect. Welcome to this presentation of 2017 Quarter 1 Results, Bilhor Kokosnes. I'm Palin Berg, CEO of the company. I'm accompanied by Susan Littander and Adrian, our temporary IR manager. So let's jump directly to the results of quarter 1. I'm happy with our turnover in sales. We have a growth of 5% visavislast year. And I think this is a sign of good demand. We do have strong demand basically across the board. I'm not so happy with the result. EBITDA of 16%, nine 23,000,000. As you know, we've pre announced our results previously. We've had problems with quality and we've also had start up problems with the small mill, Rokammer. And this has been unfortunately a recurrent theme when it comes to start up issues. So I think this is something that we are dealing with. We know what to do and we are definitely on the right track. We've taken measures to contain quality issues. We've strengthened our quality processes. And we know exactly what the problem has been in Rokammer. And Rokammer is now up and running. So we view these extra costs as temporary, but nevertheless, they hit us during quarter 1. You have a distribution of sales also, of course, on this slide and the bigger business areas are packaging paper and consumer board 38% 17% corrugated solutions. And if you wonder what other is, it's a combination of Scandinavian Fiber Logistics, wood sales and some other smaller subsidiaries of ours. Key highlights. Well, first of all, we're growing again. That's really a piece of good news. I think this is what we've been waiting for. We have been constrained in terms of capacity. In 2016, we did not achieve the growth that we were looking for. We're back on track again in quarter 1 and the production is also back on track. We actually have all time high production levels and also all time high sales levels. So again, that's good news. Again, back to the not so good news, the one off costs that I just mentioned of SEK 80,000,000. I think this could be viewed as temporary costs. And of course, when we start up a mill, it is we started up once after rebuild. We don't start it up twice after rebuild, just once. And now Rokkammer, as I mentioned, is back on track. And the costs associated that actually happened and that we had to take in association with what happened in Rokkammer was that the mill completely stopped because of breakdown of some key components. And the cost was that we had to supply Fruvi with external pulp because Rokkammer supplies Fruvi with CTMP pulp. And that's the background for that cost. And also when it comes to the quality, we have contained material and which has not been sold and we've taken all the cost and we've blocked all the material and that's where the cost arise for the blockage of all this material. And I should mention also that our investments in Gjovern and Graeblak is well underway. It's well on track and I see no major issues around these projects right now. And of course, given the issues that we've had with production problems over the last few quarters, one may question, can we produce at all? Well, yes, we can. And we have an annual compounded growth of 3% over the last 3 years as you can see by this slide. And we're right now at all time high levels and see no reason that this cannot continue. And so production is actually doing well in spite of the temporary issues that we've had from time one time to the other. The lessons learned, I would say, is that we need to be more cautious when it comes to pre projects and in terms of preparations for start ups. And I think over the last couple of years and the rebuilds that we've done, we may not have taken necessary measures after the fact that's obvious. So going forward, we will be more stringent when it comes to planning for and taking measures for our start ups. Financially, sales volumes up to 722,000 tons and that's record volumes. And I think this is especially good news. And again, it indicates a strong market. And it also indicates that when we are capacity constrained, we cannot sell now. Production is running well and we can sell. And especially good news is the fact that consumer board increases with 8%. And I think that's also what we have been looking for. And as you know, the production issues and the investments that we have made primarily is towards the consumer board and capacity. Now that's up and running and we can start selling as expected. So sales volume is really satisfactory. Net sales also satisfactory, 5% up. Actually the organic growth is 3% because in these numbers in the quarter one numbers is Scandinavian Fiber Logistics, which was not part of quarter 1 of 2016. So organically up 3%, but still that's within our target, 3% to 4% per annum. So I think we are reaching what we intend to reach when it comes to sales growth. If you look at the slide, you see that quarter 1 of 2015 was actually higher than quarter 1 of 'seventeen, but the reason was Latkeren that we sold during quarter 2 of 2015. EBITDA is actually down 9% and as you already know and we have announced the reasons why. If we compare to quarter 1 of last year, it's down with the 9%. Last year, we did not have a maintenance stop and we did have part of a maintenance stop during quarter 1 and part of it during quarter 2 in Gjovern. The cost is 75,000,000 euros and we did have the, as we view it, temporary costs for quality and start up of Rokkammer. If we theoretically back that out, our EBITDA margin is actually at 19%, not the 16%, and that's where I feel we should be. So I'm not happy with the one off costs. I'm not happy with the hiccups that we have. But underlying, I think we are where we should be when it comes to EBITDA. Cash flow during the quarter is negative and the reason is pretty straightforward. It's due to our investments. Working capital is at 11% where it was also during the last quarter, so no significant change. Return on capital employed. As adjusted, which and adjustment means that we back out the provisions that we made during 2016 and this is a rolling 12 months measure. And the provisions mailed during these 12 months was 230,000,000 NOK205,000,000 in quarter 4 and NOK25,000,000 during quarter 2. You're whispering. Yes, it was actually over $300,000,000 Over $300,000,000 EBIT, not EBITDA. EBIT, sorry, over $300,000,000 Thank you. So we are adjusted at our target, which is also good news and of course where we should be. Leverage is safely below 2.5 and not too much to say and the reason it goes up of course is the negative cash flow in our investments. So summary, I think, again, I'm not so happy with the result due to the hiccups, and we're taking measures. We're fully aware that hiccups are not long term acceptable. And I think but underlying, I think we are where we should be when it comes to our financial performance. Looking at business areas, and this is just an introductory slide for those of you that are not so familiar with our business areas. 1st of all, packaging paper, we have strong positions in packaging paper. We have a strategy which basically says we're going to be selective. And the reason is that parts of this business is doing really well. Part of it is less good on the market, more commodity type markets. And of course, we intend to shift from commodity and more into specialties. And structurally, it also means that the investments that we make in Havelaka and Gruvon has the intention of strengthening our position in specialties and of course taking some capacity out in some of the more commodity like markets. We're also keen on expanding packaging paper outside of Europe. We're right now above 40% of sales outside of Europe and that is progressing well. And we see actually very strong demand for our type of products in Southeast Asia and China. And I think that is something that is really exciting. And it's on the back of an increased awareness about sustainable packaging and not the least replacement of plastic packaging towards more sustainable paper packaging. I think we've seen strong performance. We'd actually closed Tervasari during the fall in September, but that's not visible a lot in our numbers. We did build inventory during the latter part of 2016. So sales for packaging paper has partly been done from inventory from Tervasari. It's up 3% visavislast year. It's up 4% visavisquarter4. So sales wise doing fine. EBITDA up 9% versus quarter 1 of last year is right now at 18%, slightly actually below where we normally are. And the reason is basically that 20 8 out of the 75,000,000 from the maintenance stop in hits packaging paper. If we adjust for that, we are at EBITDA 20% and that's where we should be for the business area. The market for kraft and seg paper is currently very strong. It's actually surprisingly strong. And the reason is not easy to actually disseminate and pinpoint, But definitely a very strong market at the moment. I should say also that seasonally this part of the year is typically strong, especially when it comes to sack papers and construction industry typically picks up in the beginning of spring and it's strong throughout April, May, June and then falls off a little bit. So seasonally, we have a strong typically strong period right now in packaging paper. But it seems like there's additional demand on the market. So underlying the market is also very strong. We expect that to continue throughout quarter 2. And there are potentials to raise prices on the back of this strong demand. And I say potential. I'm not saying that this is going to happen, but there are potentials to raise prices. So packaging paper, I think, is demonstrates solid performance during quarter 1. Consumer Board then, well, this is a slightly different area and very different market. It's a lot more stable typically and a lot higher visibility, not at all as fragmented. And we have where we have in packaging paper about 800 customers, the customer base is far more concentrated in consumer board with higher visibility, higher stability and also higher typically higher growth. And this is why our strategy is directed toward volume growth. And of course, that's the reason why we also invest in a board machine in Grouwer. Performance wise, it's I think we're doing reasonably well even though, of course, we're hit by the temporary costs. Typically, quarter 1 is seasonally strong, not necessarily that people drink more milk or juice or anything like this, but there tends to be somewhat of a year end effect where demand is slightly lower at the end of the year and slightly stronger at the beginning of the year. And we also see this in Q1 of this year, slightly stronger than average demand. But we also see strong demand from basically from all markets. So it's not certainly not only seasonal. There is a strong underlying demand for consumer board products. And I also think that especially when it comes to carton board, which was slightly sluggish during parts of 2016, we see a pickup of demand as well, which is also good news. Net sales is up 5%. As mentioned, that's something that we have been looking for. We have been capacity constrained. And it's also up 7% vis a vis quarter 4. So I think from a sales perspective, satisfactory. EBITDA is down and that's due to the $80,000,000 If we theoretically back that out, which is SEK 80,000,000, we have an EBITDA of SEK 520,000,000 and we're up to 24% EBITDA margin and that's exactly where we should be. So underlying performance is actually where I think we should be for this business area. Corrugated Solutions, finally, this is a business area which is we operate on a huge market. The world market is 140,000,000 tonnes. We are a very small player in this big pond and with our 500,000 tonne capacity. So we're a niche player by definition. And our products are niche products and that's how we operate. And we are our target is to maximize the value, to extract maximum value out of our high performance materials because our materials are high performance when we compare to the commodity products on most commodity products on the market. So that's of course why we address value growth as a theme for our strategy. And on the back of that, we continue to expand managed packaging, which is part of corrugated solutions. And the managed packaging continues to demonstrate the strong sales, sales growth of 30% versus last year. Managed Packaging is now 16%, 17% of the business area, a run rate of $60,000,000 and a growth of 30% Q1. I don't think we're going to maintain that growth for the rest of 2017, but certainly above 20%. That's my expectation. We've had some issues around the harbor strike in Gothenburg and we've seen some effect, especially for corrugated solutions. We've actually managed to redirect about 100,000 tons from Gothenburg to other ports, especially in Norrkoping. But we also see some delays in terms of deliveries for volumes for corrugated solutions. So we at the end of the quarter, we had volume sitting in Gothenburg waiting for deliveries. And not huge, but still it does has had some effect in terms of sales volumes for the business area. And EBITDA is down 12% versus last year and it's very straightforward. It's the maintenance stop in Uefem. Most of the cost for the maintenance stop is for corrugated solutions. It's about SEK 40,000,000. And again, if we do the theoretical exercise of backing that out, EBITDA is underlying EBITDA is at $230,000,000 and the margin is at 25%. And that's typically where we should be for the business area. We saw during 2016 some periods of sluggish demand for our products within corrugated solutions. We're now back on track when it comes to demand with strong order books. And we expect that to continue into quarter 2. And again, in this business area, the demand is such that we see potentials for price increases. I wouldn't necessarily bank on it, but there are potentials for price increases for the business area. And as I mentioned already, we expect Managed Packaging to continue to grow with significant numbers also into quarter 4 and quarter 2. Outlook. This is, of course, derivative of what I've already said. Demand is strong at the moment and we expect that to continue. Some potentials for price increases for packaging paper and corrugated solutions. Wood costs and wood prices, we don't expect to change. We did basically mentioned or announced that we expect the 3% increase of wood cost for 2017. We've seen part of that materialize for in quarter 1. We don't think that there is a reason to change the guidance. But again, it's not the prices, it's the wood cost and the reason is transportation, somewhat longer distances and that's the reason for the increase of overall wood cost. As mentioned, we expect Rokkama to be on track volume wise, production wise, but we will have some additional costs for the temporary measures that we've taken to secure production. And more specifically, what happened in Rokkama was that we installed 2 brand new steam compressors. And when we took them into operation, they both broke down due to a design error from the supplier. This is now being redesigned. We'll get the components back in June. Meanwhile, we operate a temporary steam compressor, which will add some additional costs in Lokama. Only NOK 5,000,000 to NOK 10,000,000 but we know that's going to happen, so we mention it. And also we do have maintenance the maintenance stop in Gjovern is now over and we do have a maintenance stop in Graublakka in undergoing. So overall cost, we expect to be NOK205,000,000 for quarter 2. A few words about the investments in Graublak and Gruvon. As mentioned, it's on track. And the investment in Graublakka is basically we are moving the Tervasari machine from Tervasari to Graublakka. It's not going to become 10 in Hebraca. It's going to be integrated and have a completely different cost base, of course, being integrated. And we also upgrade capacity or upgrade quality with surface treatment for PM7 in Graalaka, again, to be more selective in terms of the segments that we target for business area packaging paper. On track. New board machine in Gjovern and that has a major impact on the entire production structure in Sweden. And so it's actually two reasons. One of us basically to capture growth on the market. The other one is to streamline operations internally. And that is also on track. And we will describe more about these investments and about our strategy at our Capital Markets Day in November, 15th November. So if you can, please make a note and you're more than welcome to attend this Capital Markets Day. And that's it for the presentation. I open it up for questions. Thanks. It's Linus Vassen with SP. You talked a bit about the strength that you're seeing in various markets and you touched upon potential price hikes. Could you talk a bit more about that? What kind of initiatives you've launched? What kind of magnitude and timing that we could potentially foresee in the various product areas? Well, as I said, there are potentials for price