Investor Update

Sep 2, 2019

Morning, everyone. This is Urs Claasson, CEO of SCA speaking. I'm happy to invite you all to this press conference as SSCA has earlier this morning announced that we are going to build a new paper machine for the production of kraftliner in Obbola. The annual production in Obbola will, with this investment, increase from current level of 450,000 tonnes of kraftliner up to 725,000 tonnes. This is, of course, in order to meet an increasing demand of renewable packaging materials and the investment amounts to SEK7.5 billion. So with this investment, we will continue to realize our profitable growth strategy consisting of 2 parts: First, to grow our forest asset and secondly, to increase the value from each tree. And when it comes to the growth of the forest asset, we like to continue to invest in our current forest with intense in civil culture management and this is, of course, in order to increase growth and by that also step by step increase the harvesting level. And we will also continue to acquire forest land when and if we can. When we talk about the increase in the value from each tree, we like to grow our pulp business. We also like to expand our kraftliner capacity. These two segments is segments where we can see a healthy long term growth in demand. We also like to focus on Renewable Energy as a coming new segment. And last but not least, we will also continue to reduce our exposure to publication paper. When we look at our cash flow funded growth opportunities, they, 1st and foremost, shall contribute to strong industrial return on capital employed. But at the same time, we also like to maintain a healthy balance sheet. And by that, we also like to keep our investment grade rate. Last but not least, all investments has to fit into our integrated value chain. In the staircase that you have in the slide, you can see that we now tick another strategic project when we have taken the decision to go for the kraftliner expansion in Obbola. Ostrand and also Munchsund are now up and running, and we also know that we will have more than 6.7 terawatt hours of installed wind power capacity on SA land in 2021. And by that expansion, it will oblige the natural next step for us to take. And before I hand over to Torbjorn for a financial summary of this project, I'd like to give you some investment highlights. First, we understand the favorable trends drive long term growth in this business. Here we think about renewable packaging, e commerce, growing population, growing middle class and so on. This investment will also secure our long term competitiveness. It will be, in fact, the biggest kraftliner machine in the world. And by that, we will also strengthen our market leading position. We will improve our cost position and we will, of course, use best available technology with future development potential. With our project scope, with a parallel start up of the new paper machine, we can get an EBITDA enhancement already from start. This setup will also substantially reduce our risk, both technically, but also in the market. The investment will also contribute to the transition towards a fossil free society by replacing plastics with fiber based renewable materials and we will also replace an 8 1,000 cubic meter annual consumption of oil with wood pellets from our own production. And finally, this investment will contribute to profitable growth for SCA. Capacity will increase by 275,000 tonnes and the investment is expected to generate an annual EBITDA improvement of approximately SEK800,000,000 to SEK1000,000,000 after the ramp up. So by that, I hand over to Toby. Thank you, Ulf. I will just show you here some of the key figures of the investment. And you can see here on this page on the left hand side, the total investment project encompasses SEK 7,500,000,000. Of this, you can see that SEK 2,500,000,000 replaces investments that we would have had to do within the next few years to extend the lifetime of the Obbola Mill. So if you can say that SEK 5,000,000,000 is an optional investment and the SEK 2,500,000,000 that replaces those necessary reinvestments is non optional. We then have an increase in the capacity of the Obbola Mill. You can see, as Ulf mentioned, which goes from 450,000 tonnes today to 725,000 tonnes after the investment, so an increase of 275,000 tonnes. And then the EBITDA effect is an increase from today's base level of SEK0.8 billion to SEK1 billion per year in terms of EBITDA. And this is assuming a trend price going forward of SEK600 per tonne for kraftliner. And we expect it to take a 3 year time period ramp up to full capacity. And another important aspect here is also that we expect the mill to be profitable during the 1st year of operation. So it's profitable from the start. And with that, I will hand on to Mats. Yes. Thank you. As we Ulf said here in the introduction, we are investing into a growing market, and it's a big market. The total paper and board market is 450,000,000 tonnes, out of which the containerboard market is 160,000,000 tonnes globally. If we look into the history of growth and we would look back 15 years, we have seen a very steady growth of 3%. And back in the crisis 2,009, there was a dip. But what was interesting there was to see how the growth path climbed back directly after. So we have been on a continuous growth trend, very stable growth trend over the last 15 years. And we see no reason why this trend would change for the coming foreseeable future. So we are investing in a growing market and there are many megatrends supporting this growth. But out of the 160,000,000 tonnes, the kraftliner, the virgin fiber based containerboard market, kraftliner is 35,000,000 tonnes approximately, out of which Europe is standing for 5,000,000 tonnes. And this is our core market And it has been important for us in the project to make sure that we have a very competitive cost, quality and offering position in Europe where we assume and we are believing that we have the best possible position, a leading position in our core markets with this project. Kraftliner, as it is kind of a niche, but it's still 35,000,000 tonnes globally, is focusing very much in segments. We are calling it industrial and fresh food segments where you need the virgin fiber, you need the strong fiber and you need the clean fiber in the fresh segment. If you compare that to the total containerboard market where those segments are 25% of the total consumption, You understand that with this those segments, our strong fiber from Northern Sweden is excellent to match the demands of the segments. So we have a good fit from our fiber base and we have a good know how to meet the needs of those segments. We also believe the underlying growth is very stable and it's driven mainly by industrial production and consumer spending. So that is forming the underlying growth. And we see are seeing no reason why these underlying growth would change going forward. But we have all we are also seeing that there are structural changes that gives opportunities going forward. There are favorable trends supporting kraftliner and containerboard going forward. We're seeing changes in the retail sectors. E commerce is taking a larger share of the market and there is a demand for sustainable and renewable packaging materials. So I think this is giving support to a favorable growth trend going forward. If we then look into the project, we 1st and foremost, we are in SCA have been providing us with a good cash flow, good profit over the last 30, 40 years. So we have a great history here and we are investing into a good business. And the paper machine here is from 1975 and is fully depreciated. Our total containerboard business, we have a sales of around SEK 5.4 billion last 12 months, and we had an EBITDA margin last 12 months of around 35%. So we're investing into a good business where we have a good position and we are renewing our asset base in order to serve it for the next and being competitive for the next 40 years to come. And by doing so, when we are renewing the our asset base, we are also able to increase our capacity, as we have heard. And I think it's important here to remember that we are not adding a paper machine, we are replacing a paper machine. So we have one paper machine today being the biggest kraftliner machine in Europe doing 450,000 tons, replacing that with 1 new doing 725 1,000 tonnes. And I will show you later on how that what that means from a relative competitiveness structure. Here you see a slide more or less explaining the main parts of the investment. We are building in line a new paper machine, a new paper machine building, in line with the old paper machine. This is also setting the time line for the project, but this means that we can run the old paper machine all the way up till the start of the new paper machine. And that secures our uninterrupted supply of goods. We will not have a big gap in between stopping the old paper machine and starting up the new paper machine. But of course, with this investment, we have to build a new huge paper machine hall to fit the new one. We are building a new line kiln. That's where we are going to replace 8,000 cubic meters of oil with wood pellets. We are improving the water treatment from the mill and then debottlenecking several parts of the pulp mill, which we sequentially will start up and secure a good project start up here. And all of these start ups doesn't require long stops either. This is a slide where you, from a model point of view, can see how we are strengthening our market leading position, improving our cost position and how we're going to use best available technology, but also with future development potential. If you look on the model or the picture to the right there, we have plotted the new kraftliner machines globally since year 2000. They are not many and most of them have been already. They are existing, but it has also been some announced coming machines. And the machine that we are announcing today is coming on the top there. And I would say our investment today is setting a new benchmark in our industry. And this is very important because basically it's the same fixed cost that we are using independent of the paper machine size here. So you could almost make an index of fixed costs to the capacity. But capacity is also indicating the technology and the use of best available technology here. So we are quite proud of our ambition level here. We are very confident that we can build that and we will use some very interesting engineering concepts to achieve our targets here. So and the project approach that we have taken that is parallels construction of the new paper machine to ensure full production and no gap in cash generation or service to our customers. The fiber lines, they will be switched to new machines or we will be running it on the old machine before we switch over to the new machine. And with that, we also get a very short stop. And we have a very proven project approach that we are feeling confident with. We have done very expensive pre project now to plan for this investment. The project organization is in place, and it's ready to go ahead immediately as of today. We have had good know how and I would say recent experience from the Ostrand investment, how to run successful projects. And we have gone through several bigger projects in Obbola as well. They have been executed with success as well. So we are feeling that we have a good project approach to deliver on this investment. As we have announced, we are expecting our start up in Q1 2023. And start up here for us means sellable production. And as you can see on this slide, also the volumes that we expect to produce and supply in 2023 is just above the current volume. That's why we can say that we can achieve profitability during the 1st year of operation. But it takes 3 years to ramp up to full production, going from production just above current level till 725,000 tonne. And also with this, we have a good plan to how to achieve this. Ulf? So I think by that, we can open up for questions. So please operator, do we have any questions from the audience? Your first question comes from the line of Linus Larsen. Your line is open. You may ask your question. Good morning and thank you very much for taking my questions. Maybe if I may start with your thinking around returns on this very significant investment and what hurdle rate you set and on what time horizon you expect to meet that hurdle rate, please? Yes. I can say, Linus, that you can see we've given an EBITDA effect, so SEK 0.8 billion to SEK 1,000,000,000 of EBITDA effect once we've finished the ramp up. So that's and that's assuming we've taken a basically a trend price. We've looked at the trend price over history of kraftliner, and we believe the trend price is €600 per tonne for kraftliner as a trend price. And so using that trend price, this is the EBITDA effect that we expect. And then when it comes to return, I mean, you can see the figures here. But basically, we expect this to contribute to our return on industrial our industrial return on capital employed, so contribute positively. But we don't have a specific hurdle rate. And we I mean, I think this is the most relevant information of the profit effect and so you can see for yourself. But I take it, when you say it will contribute to your return in your industry, I mean, it won't it will quite obviously lower your capital employed in your downstream operations, right? No, no. We don't think so. On what time horizon? After the ramp up. After the ramp up, yes. Okay. And on what how many years are you depreciating this? Yes. So by far, the majority of the investment is 20 years. Okay. Yes. So you can assume over if you like, over the reinvestments that we would have had to have done, it's SEK 5,000,000,000. So that would be an additional SEK 250,000,000 in depreciation. Okay. Okay. So you're counting the hurdle rate on the SEK 5,000,000,000. The you're excluding the reinvestment portion of the investment in that calculation you just made? We're not excluding it, but I think you have to understand that if we weren't to do this investment, we would have had to do the SEK 2,500,000,000 to extend the lifetime of the mill. Otherwise, the lifetime of the mill would not be extended. Right, right. And also, could you please break down the CapEx? First, maybe on a per year, is it pretty linear and then time wise? And then secondly, if you could also break it down, how much is actually the paper machine and how much is in the pulp and so forth? Yes. We don't have a more detailed breakdown. We expect it to be spread over some 4, 5 years, so over the time of the investment. So that's so the cash flow will not come all day 1. It will be spread over 5 years. And you've seen I think you've seen the kind of spread of the Ostrand investment as well. It's spread over time and a significant portion also comes after we start up because there's commissioning and so on. So that's the main part. Then when it comes to the breakdown, the paper machine and associated building is the largest part of the investment. But there are a number of other parts, as Mats mentioned here, with debottlenecking the pulp and the lime kiln and so on. And how when you make this investment, can you say something around how important it is to reinforce the value of the forest land? How important is that in this investment decision? And also what you expect wood how you expect wood consumption to increase on the back of this? I mean, as we've said, I think we will increase the wood consumption by 500,000 cubic meters. And as we've also said, when it comes to the Ostrand investment, we have been a little bit positively surprised about the support that we've got from local forest owners in the region. And I think it's well appreciated that we continue to invest in the industry that we have in the northern part of Sweden. And by that, we can also buy the absolutely main part of the wood from the local market. But in the calculation here, I mean, we have calculated to import the wood. That's fair to say. But as I said, as we already see today in Ostrand, we are able to buy the absolute main part from the region. So and I can also say that we will side by side with this project, we will start to man up what we have in terms of procurement of wood from small private forest on Investeboten. So that process or project has already started. Great. Thank you very much. Your next question comes from the line of Oscar Lindstrom. Your line is open. You may ask your question. Good morning, gentlemen. I want to ask some more questions on the profitability of the investment, just so that I get all this right. Now when you say EUR 800,000,000 to EUR 1,000,000,000 in EBITDA improvement, Is that on top of what you're earning already? Or is it for the machine as such? No, that's on top of what we're earning already. Right. And so if I'm comparing the profitability or trying to get a feel for the profitability on the investment, I should be comparing this €800,000,000 to €1,000,000,000 versus the EUR 5,000,000,000, which is sort of the incremental investment to get a much larger machine than what you have already. Yes. I think that's the fair way to look at it, yes. Right. And if you had gone I mean, was it a realistic option to just maintain the old machine for $2,500,000,000 And would that have maintained current sort of earnings capability? Yes. That's the alternative to extend the lifetime of the current machine but have no changes in terms of both capacity or cost position. And that would have been SEK 2,500,000,000, yes. All right. Thank you. We interrupted EBITDA during the stop. Yes. Yes. Right, right. And if I may ask about the CapEx level in absolute terms. I mean, are you prepared to give any kind of guidance for what it would look like, let's say, in the coming 2 years? To what extent will you be able to put some of this €7,500,000,000 replace other projects? So I mean, what will be the total CapEx level sort of per year? What's important to state that we will report this as strategic CapEx like we did the Ostrand project. So it will come as strategic CapEx. And then we will have our nonstrategic CapEx, which we expect to continue for maintaining the current operations, which is around SEK 1,200,000,000 per year, and that's the level we still expect kind of long term. It goes up and down year to year, but at a normal level of SEK 1,200,000,000. And this will come as strategic CapEx, and it will be spread out over 5 years. So we haven't got a detailed breakdown, and that's yes, we don't have that today, but you can assume it will be spread out over 5 years. Okay. So it's we shouldn't expect that you would be able to push down your maintenance CapEx level or current CapEx level to something below 1.2, but you'll need those 1,200,000? That's needed to maintain the current operations. So that will remain. Thank you. And just a final question. I mean, one of your peers or competitors recently announced that they would be buying back shares because they felt they didn't have, I guess, equally good opportunities in their industrial operations. Do you I mean, do you compare this investment to buying back your own shares? I think we look to do what creates the most shareholder value, quite simply, and we think this is the best way to create value for our shareholders. And is an attractive investment giving an attractive return. So that's but of course, yes, we don't exclude we look at all options. Your next question comes from the line of Justin Jordan. Your line is open. Thank you and good morning everyone. Clearly, you've had a very successful ramp up so far of the Austrian pulp mill and that gives quite a lot of confidence regarding SA and the team's ability to handle major infrastructure projects such as this. I'm just wondering just in terms of environmental planning or other sort of planning requirements for this expansion, are there any major outstanding requirements before you can actually commence construction work on-site? No, we have all permissions in place. Okay. And then just with that in mind then, should we think in terms of CapEx for this project actually starting in 2019? Or when do we actually sort of start thinking about this impacting operating cash flow of the business? Right. And again, it will be strategic CapEx. Which we report outside operating cash flow, but it will be very little in 2019. Okay. So it's really from 2020 onwards. And clearly, you okay. And I guess the bulk of the CapEx probably would be in 2020 2, maybe some in 2023 post commissioning? Yes. There will be some of course, there's a chunk which is post commissioning as well. So we'll yes, at this stage, we can't give a detail per year, but it will be spread out. And there will be some post start up when the commissioning is complete. And we've seen that in Ostrand as well where we still have some outstanding to some yes, less than 5%, but still to following commissioning in Ostrand. So that's quite normal. Yes. Okay. Thank you. Your next question comes from the line of Martin Malbaj. Your line is open. Yes, good morning. Could you expand on the topic of kraftliner versus testliner? I see that prices tend to move in tandem. But is the case for kraftliner that you get rid of the product regardless? Or is there better margins? Or please expand on that topic. I didn't get the question. Can you repeat the question, please? So Yes. You make you argue that kraftliner is better than testliner, yet prices tend to move in tandem if kraftliner moves down, kraftliner moves down. So can you expand a bit on the greatness of kraftliner versus kraftliner, please? We are not claiming that Kraftliner is better than Testliner. What we are claiming is that Kraftliner is different than Testliner, and they are partly addressing somewhat different end user segments. And it's correct that the kraftliner testliner pricing over the last, let's say, 15 years where we have been studying it more carefully, have been following each other, sometimes with a time lag, sometimes very simultaneously. What we have seen during the last years is that the price liner, test liner, price gap has been expanding and it has been kept on a historically quite high level. So that is correct. They are not totally independent of each other when it comes to pricing. And if you were to expand about the market balance of the 2, the next couple of years, kraftliner versus testliner? Yes. The market balance of kraftliner and that is means that we are looking to the operating rates of the mills are on a more healthy and a better level compared to testliner. That would that argument would be positive if you believe that the price gap current price gap would be kept on a high level, whilst the testliner operating rate is on a little bit worse level with a little bit more capacity coming on stream. So if I would look into that, there are more arguments saying that the kraftliner testliner pricing would be kept stable, the price gap as it is today. We have falling in the kraftliner sector when we look into the inventory position. We have seen this year that the inventories has gone down 100,000 tonnes so far, which is a little bit different picture if you look into the testliner market. Fundamentally, Mats, it's fair to say that we believe in a strong growth in the market for both kraftliner and testliners. So I mean and that was growth. We see no reason why this underlying growth of 3% globally would change going forward. And is that 3% different for kraftliner than for testliner? The kraftliner growth globally has been limited with capacity expansion. So when capacity has been coming on the market, it the growth has been increased quite significantly. So the kraftliner market has been limited with capacity. Okay. And one last question while I have you here. The kraftliner prices, they've dropped like 15%, 17% from the peak. Has that stopped now? I see that there's been some commentary about that. Yes. We are following the index prices, who is a good reflection of our actual prices as well from a trend point of view. And the index prices that we follow and the most important one has been stable for the last 3 months. Thank you. Your next question comes from the line of Barry Dixon. Your line is open. You may ask your question. Yes. Good morning. It's Barry Dixon from Davy. Two questions, please. Firstly, when you look at the incremental EBITDA on the investment, it would suggest if I take the midpoint of, say, SEK900 1,000,000,000, it suggests an EBITDA margin of an incremental EBITDA margin of 50% versus your reported kraftliner margin of 35%. Is it your opinion that this investment will structurally improve the EBITDA margin of your overall kraftliner business closer to 40% from that 35% over time? And then the second question, and I suppose more theoretical than anything, if you were to build that machine, the new 725,000 machine greenfield as opposed to using some of the existing infrastructure, how much do you think that would cost you in today's money? Thank you. Yes. I can take I'll take the first part of the question. I think maybe Mats takes the second part on the greenfield. But basically, the investment does 2 things. We both get the extra volume. So we get the extra 275,000 tonnes, which adds margin. But the other effect, which Mats mentioned in the earlier presentation, was around the fixed cost. We have yes, broadly speaking, you could say you have the same level of fixed cost, but you increase the capacity significantly on the machine. So the fixed cost per tonne improves, which improves then not just for the new tonnes, but also the existing tonnes. So thereby, if you like, the EBITDA margin on the investment, yes, is higher, as you mentioned and as you saw, which is affecting it, basically, obviously drives up the EBITDA margin of the kraftliner business as a whole. So and then for the second part, Mats? Well, you can we have not done a pre project on that alternative building at Greenfield. But it's I think it's very safe to say that it's at least double the amount. That's one way. And then you're on the low end. Another way of looking upon it would be to say it's the Ostrand investment plus this investment, then you would come a little bit north of this. Greenfield and paper machines and you would greenfield and paper machines and you would deduct 1 paper machine out of that and you would come to something that. So I would say roughly in between SEK 16,000,000,000 to SEK 18,000,000,000 would be my best guess if you would do it greenfield. But if I want to do it safe, say double. Yes. That includes pulping and Captive Power? Yes. Yes. Your next question comes from the line of Robin Santavirta. Your line is open. All right. Thank you very much. Now you highlight the fact that the current machine and mill is outdated. Now still it's 5 years until the new mill and machine will be up and running. Is there a risk now that we will see some production related problem? Or is it basically increased risks? And do you need some kind of higher investment, there's a CapEx for the current machine to sort of hold up for the next 5 years? To answer that question, there are always risks in operations like this. But we have a I would say, we have a strategy of keeping our equipment in good shape. So our starting point before we take this investment decision is that we are starting with a machine that is well maintained. And so we are not expecting increased risks on top of the risks that we have today. So I think that's the simple question or simple answer to that one. But there is always a risk in operating this one. Okay. Thanks. And if I just may ask about the fiber blend, will it only be fresh fiber in the kraftliner you will produce in Obbola or any recycled banded in? No. We have a mixed fiber base today, and we will continue with that strategy going forward. So that means more recycled fiber base going forward in Obbola. We see that as a strategic flexibility that we have a flexibility in between the fiber bases this year. Okay. And how much is that now? Is it 20% going up to 1 third or could you roughly sort of beat that up for us? If you're looking to the fiber mix in terms of percent, it's also dependent on the product mix. And we have not the same fiber mix in percentage in all products. So it's dependent on the product mix. But going forward, when the new machine is fully ramped up, the percentage point of OCC in the same product will go slightly up. Is that Okay. Okay. I see. And then given just with QuickMath, it's quite easy to see that this seems to be quite profitable in terms of EBITDA margin as you both sort of commented or answered the previous questions. Now is that only volume and fixed costs? Or is it so that you calculate in something with this mix, something with the new machine, some new end products end markets or something else? Or is it only more volume, less fixed cost per tonne? Robin, it's like you say, it's basically is the volume and the fixed cost per tonne. And maybe just to give a little bit more color on that, I think of the EBITDA improvement, you can say roughly, yes, twothree to 3four comes from the increased volume and maybe 25% or so comes from improved fixed cost per tonne. And that's yes, that's what generates the improvement. But it's those two factors which drive the improvement. All right. And then finally, just 3 years of ramp up of brown kraftliner mill to full production since it's a long time. Again, is this sort of a little bit of a cautious sort of estimate or is it market related that you expect 3 years? It seems like a long time. It is market related. We have, of course, followed the start up curves of all types of new paper machines. And so we have based this on a market related startup curve. We, of course, hope and plan for better, but this is our basis for the planning and calculation. Yes. And one important point to add, which we mentioned earlier, but the because of the design of the project with the new paper mill parallel to the old paper mill, we expect it to be profitable from the 1st year. So we don't expect there's not a big stop between the old machine stopping and the new machine starting, which is a good thing in the project design. Definitely. Thank you very much. There are no further questions at this time. Please continue, sir. So, and by that, it's time for us to thank you all for calling into this press conference. And we are, of course, looking forward to meet and discuss this exciting project further with you coming months. But for now, I think we say thank you and goodbye.