Earnings Call: Q3 2018

Oct 30, 2018

Sincerely, welcome to this press conference where we will present the interim report for the Q3 of 2018. The report will be presented by our President and CEO, Ulf Larsson and our CFO, Toby Lawton. After the presentation, there will be the opportunity for questions on the report, both from those of you participating in this press conference live and those of you that take part over the phone. So, Wouter Florsson, please. So thank you for that, Bjorn. Good morning, everyone. Happy to give you some more details about our Q3. And here I have this one. We have had another quarter with a stable market and increasing prices in more or less all product areas. And the sales growth was rather strong, 12% and driven by currency and also by pricemix. On the other hand, we saw that volumes were down and that is related to first that we have to build up stock for Ostrand just now. Now we are up and running and we have to build up the stock so we can provide good service to our customers. And that is exactly what we're doing just now. And then if you compare with Q3 2017, at that time we had a situation where we could sell out some volumes from stock. That is not the case just now because now we can only sell what we produce. So the stock level in general is rather low all over the place. EBITDA was up 48% in comparison with Q3, but also in comparison with the Q2 this year. Again, prices and currency, we can see that we have a good and stable cost control in all areas except from wood where also we are a little bit hit by increasing wood prices. We had a very dry summer, as you remember, which was good for people, but maybe bad for harvesting operations. And due to our large forest holdings, we had the ability to move from really dry areas over to places where we had more wet climate. And by that, we could also continue to harvest. We had some extra cost, of course, related to that, but not more than maybe SEK 10,000,000 during the quarter. But the most important thing, we had a very stable and controlled wood supply during this period due to our big and large forest holding. And last but not least, Ostrand. Ostrand is progressing according to plan, and we will come back also to that with some more details later on during the presentation. If we then take a look at our KPIs for the Q3, we had an EBITDA level well above SEK1.5 billion, which is corresponding to 33 percent EBITDA margin. And if you look to the right hand side, you can see that the Q2 was rather weak, but that was due to the fact that we had our expansion stop at Ostrand at that time. Otherwise, the Q2 would have been just in between Q1 and Q3, I expect. So really strong result. Our industrial return on capital employed counted as an average for the last 12 months is 15%. And now we have the 90% of the investment in Ostrand in the balance sheet, of course. And now we have also started, of course, to see the effect from the running operation. Our net debt in relation to EBITDA was 1.4%. And as we've said before, we have been able to finance the Stant project with the running cash flow, which is, of course, very positive for us. If we then walk into our different segments starting with the forest. As mentioned, we had a stable wood supply due a large forest holding. And we have seen in the market a continued price increase. And as you can see also to the left hand side, Already mentioned that we now have to build up the inventory in order to provide our customers with good service, but that is also the case for the forest. We need to build up the inventory in order to supply the Ostrand mill with wood as we need a lot of wood, of course, in order to keep the production up and running. Sales was up 15%, increased volumes, but also higher prices. EBITDA was down 8% for the forest and one thing is that we had lower volumes from our own forest, which has a substantial impact on the EBITDA level. We had some minor costs related to the dry conditions during the summer around SEK10 1,000,000. And also we can see now that the costs for externally sourced wood is getting up. And forest is not 100% compensated for this wood increase that will come with some kind of lagging between 3 6 months. So as it is today, the industry favors a little bit from that, but that is just internal. In wood, we also have had increased prices during the quarter. We are on really low inventory levels. Sales was up 9%. Prices and currency, We have somewhat lower volumes due to our inventory levels, as mentioned before, if we compare with Q3 'seventeen, but we are more or less sold out in our sawmills it is today. EBITDA was up 48% due to higher prices. On the negative side, we can see that wood prices is now starting to come up. In pulp, I'm happy to say that the ramp up is progressing according to plan. And we have said that we will reach 900,000 tonne per year, which is corresponding to 2,500 cubic meter per day more or less. We have reached around 60% to 70% out of that now. The Q1, we produced 150,000 cubic meter, which tons, sorry, tons, which is far better than we expected. And what is also very positive to say is that the quality is really good. We have a better quality today than we had in the old mill. Of course, the somewhat higher volatility, but still really strong and good quality. So that must go hand by hand with increasing volumes, of course. We have said that we will reach more or less the same volume 2,008 as we had 2017, and we stick to that. And the 1st year with full production will be 2020. So the ramp up period for a mill like this is around 12 to 18 months and that is also what we will reach. If we look at stable price for more or less 4 months in a row, dollars 12.30 per tonne as pigs price. Sales was up 15% during the quarter due to prices and also currency. And also as already mentioned many times now, we have to build up the stock while deliveries are slightly less than the production, which is absolutely normal. EBITDA was up 73% due to higher prices. And on the negative side, we can see that we still consume a little bit more chemicals in the new mill. We also consume somewhat more wood, which is also absolutely normal because now we have to adjust the process in a good way and that is progressing also really well. We also are hit by somewhat higher raw material costs, but still for the Q1 in production, we are close to 37% EBITDA margin, which is, of course, a really positive level. If we then turn over to paper and start maybe with kraftliner, we can see that we've had increasing prices for kraftliner during the quarter. You can see that to the left hand side. In publication papers, we did announce a price increase from 1st July and that one came through between 6% to 8%. We have also just recently announced another price increase that will come through from 1st January as the balance is good in publication papers. Sales was up 15% due to prices and currency and EBITDA was up 66%, again, prices currency. But we've also seen an improved market and product mix. We have moved volumes from far oversea over to Europe, which is has a good contribution, and we have also changed somewhat in the product portfolio. But also here we are hit by increasing raw material costs. So by that, I'll hand over to you, Toby. Thank you, Ulf, and good morning, everybody. First start here with income statement. And you can see in the quarter, we had a net sales of just over SEK4.7 billion and EBITDA SEK15.49 billion, which meant an EBITDA margin of 32.5 percent, which is 7.7 percentage points higher than we had for the Q3 last year, driven a lot by higher prices, as Ulf has mentioned, and the start up in Ostrand. Then we had an EBIT of, yes, SEK 1,200,000,000 and a net profit of SEK 991,000,000, which then leads to an earnings per share in the quarter of SEK1.41 per share. If we look per segment, and first, here you see the Forest segment, and you can see the net sales in the Forest segment were higher this quarter, and that's really driven by supplying wood now to Ostrand now that Ostrand is up and running. On the bottom line, you can see the margin has dipped in forest, which is really 3 effects. As Ulf mentioned, firstly, it's a seasonal effect that we harvest less of our own forest normally in the Q3, which is which you can see. We had some slightly higher costs due to the dry summer during the Q3. And the third effect is also that we have had higher prices for wood in the Q3, which forest pay for, and they've not been fully compensated yet by income from the industries because of this that we use an average pricing model when we price between forest and the industries, which means there's this 3 to 6 months time lag that Olf mentioned. Then we have the Wood division where we have a strong development price increases again in this quarter and now an EBITDA margin 16% in the Wood segment. And then in Pulp, you can see the effect from the start up of Ostrand that now in the Q1, we've had an EBITDA margin close to 40% in Ostrand even with quite a lot of impact from the start up and direct costs related to the start up. So you can see a big swing. And obviously, in the Q2, we had the negative effect from the expansion stop. So that's made a big impact on the group as well. And in paper, a continued growth in top line and in bottom line. Now we've had price increases in kraftliner previously, which we talked a lot about and now impact as well from prices in publication paper, which are have been positive. And we've also had an effect of during the holiday period, we have some effect that we have a lower personnel cost during the holiday period, which has the biggest impact on the group is then for paper. It's about a €50,000,000 impact on the group as a whole in the 3rd quarter. Most about, yes, 70% of that is in paper. If we take the variances, first here on the net sales variance, you can see 14% from price and mix. Then we have the negative variance due to volume and the biggest impact here is in Ostrand, where we are building up inventory due to the high operating level of Ostrand. We need to hold a higher level of inventory than we did before. And also when we had the expansion stop, we were selling out of inventory, so we came into this quarter at a low level. So that's the biggest effect, although it does have an impact also partly in publication paper and in wood. And then we've had a 7% positive impact from currency. Looking at the same bridge for EBITDA. You can see we have a good impact from price mix, some SEK 6 52,000,000 from higher prices and better mix. We then have a negative effect from volume, which I mentioned on the previous slide. And we do see an impact of higher wood costs, which impact us with SEK241,000,000, most of which is wood cost. And within there, we do also have an impact from higher direct costs in Ostrand during the start up, which is mentioned later, which is some €50,000,000 impact on direct costs in Ostrand. But otherwise, we have an increasing wood costs, but limited on other items. So it's nearly all driven by wood cost. Energy, we have fairly flat. We do have higher electricity prices now in the Q3, but that's been offset in the Q3 by also some increased income from selling electricity certificates, green certificates. Then currency, we have a positive impact, again, due to the weaker SEG. And then in other, we have a positive variance. We sold a wind power project, which had an EBIT impact of around CHF 50,000,000 which was shared between the 2nd and the 3rd quarter, which is the biggest impact and some impacts also from timing of maintenance stops versus the Q3 last year. So that led to a 40 from a 48% increase in EBITDA to €15,000,000 to €49,000,000 this year. Now take the cash flow. We have an operating cash flow year to date of just over SEK 2,000,000,000, and that means we're financing the investment in Ostrand from our own operating cash flow because the investment in Ostrand, you can see on the bottom line, the strategic capital expenditure is SEK 1,700,000,000 this year year to date. We are also financing an increase in working capital. So we have a CHF626,000,000 increase in working capital, which is driven by higher prices and by the growth in Ostrand. Relative to sales, working capital is stable or actually slightly down, but we obviously the higher prices impact on working capital and the growth in Ostrand. Yes. And then that results in a, yes, operating cash flow of €2,000,000,000 for the year to date and €742,000,000 for the quarter. This slide you've seen before, but just to reiterate a bit, we production began in Ostrand in June according to plan. We expect the ramp up period, as Ulf mentioned, 12 to 18 months. We expect volumes this year production volumes this year to be in line with last year and 2020 then to be the 1st year at full capacity. We had production in the Q3, as Ove presented, of 147,000 tonnes as well. We expect to double the NBSK's capacity in the mill up to 900,000 tonnes, and the biggest impact is on fixed cost reduction. And there we expect a SEK 350 per tonne reduction in fixed cost per tonne after the project, and that's the biggest impact. But we also expect a better energy balance. And from previously being a net consumer of electricity of 0.1 terawatt hours. We expect to be a net producer of 0.5 terawatt hours when we're up and stable at full capacity. And then finally, we do expect a potentially higher wood cost due to wood being sourced further away. If we look at the project costs, the one off costs, here is a slight update. The project related costs are slightly updated from what you've seen before, but very small. So we have about €75,000,000 this year, of which €20,000,000 is depreciation. So €55,000,000 impact on EBITDA due to purely project related costs. Then we have the big costs due to the expansion stop, which was in the Q2. And we've had now in the Q4 a small stop, which we also according to plan, which you can see the guidance is around €20,000,000 for the impact from that small stop in the Q4. And then the ramp up effects are the direct costs that are related to the start up, which are really related to energy, chemicals and also wood usage during the ramp up, a significant part. So now we've got through onefour of the ramp up. We have much narrower guidance on where we expect these direct costs to end up, and we have a guidance of GBP 150,000,000 to SEK 175,000,000 for the whole year. And as you can see, we've had so far this year year to date, we have SEK 125,000,000. So this effect is now coming to an end. And from next year, we'll have normal direct costs. So it's a much narrower range than we were showing previously. And then working capital, we expect and as I've showed on the cash flow, we expect working capital to increase due to the growth in production volumes, and that's what we're also seeing. When it comes to the balance sheet, we now have a total capital employed of SEK 45 1,000,000,000 and we have a net debt of just under CHF 7,000,000,000 so very low leverage considering especially our forest asset, and 1.4x EBITDA and equity €38,000,000,000 which means a net debt to equity of some 18%. Okay. So to summarize, we have had a stable quarter, stable prices and good underlying demand in all areas more or less, strong sales growth and EBITDA was up 48% in comparison with Q3 last year, but also in comparison with Q2 this year. And as you remember, Q2 was heavily impacted by the start up in Ostrand, but now we are up and running. We've had a stable wood supply to our industries very much due to the fact that we have large forest holdings that we can rely on and the Ostrand startup is progressing according to plan, both volume wise, but also quality wise, which is equally important. So by that, I think we open up for questions from the audience. Gustafsson from Pareto Securities. I have two questions. First of all, if you could comment a little bit on what you're seeing in terms of cost inflation going forward. Secondly, how should we think about pulp deliveries in Q4? Are you going to continue building inventory? Or should we expect those to come up? Also, can you please remind me of what you said in Q2? If I remember correctly, I think you said that the production levels from Ostrand in Q2 were very limited. Yes. So on I mean on cost inflation, we see the impact of wood, and you saw the SEK240 1,000,000 variance we had there versus the Q3 last year in wood cost, and that is nearly all essentially nearly all wood. So on other items, we see pretty limited impact if you talk about chemicals and so on. So it's really wood driven, but we do see an increasing wood cost. So then maybe on pulp deliveries, we expect to still build inventory in the Q4. Probably the effect will be a bit smaller than the Q3, but still we'll be ramping up production faster than we're ramping up deliveries because we're having to build inventory as well. So we don't we're not giving any figure on it, but we do expect that effect also in the Q4. And then it will level out once we get up to a higher stable production level. But we have no limitation in the market, so to say, in the pulp market. It's really the underlying demand is really strong. Linus? It's Linus Lancer with SEB. Maybe if you could expand a bit on what you see in the round wood market on both sawlogs and pulpwood if you look into the Q4 and the beginning of next year? Yes. I mean, we have seen during this year a price increase as an average, I would say, between SEK 60 SEK 80 SEK 80 SEK somewhat like that. And I think that is even it will be more flat now. I think we have, at least for the time being being reached the peak, so to say. So I think we will remain on this level now. We have a good supply. It was somewhat stressed in the summer for many players due to the dry summer. And also before that, as you remember, we had a harsh winter with lots of snow and also some problems with the harvesting operations during the wintertime. But now I think that inventory levels are stabilized now and so rather flat development from now on, I think. And when it comes to your sourcing for your new capacity at Ostrand, how have you been able to find those new volumes? Have you had to rely on increased imports to any degree? Or how has your mix shifted in terms of sourcing? I think it is more or less to what we've said before. We have increased the purchase from private forest owners in the region and that has went well. Of course, We have also done some long term contracts with as earlier announced with Sverdskog and some of the forest owners associations, and they are also delivering to plan. And we don't import too much. We have some operations in the Baltics, and we continue with them. But I mean, we are more or less on the same level. So rather stable wood supply, I would say. And when it comes to wood, the wood business area, you had a very strong market for quite some quarters, both in terms of demand and pricing. And now some competitors of yours, they are talking about stabilizing prices or even declining prices? How do you see if you can talk about Europe to start with, how do you see the price outlook for sawn wood products in the next several months? We don't do too much with an outlook. But I mean we have had increase in prices I think for 14 quarter in a row. And still we feel that underlying demand is strong. Our inventory level is low, as mentioned. And yes, now as you normally have, you have a seasonal effect in Q3 and Q4. Normally, they are a little bit weak in terms of demand in comparison with Q2 and Q3. And this year, we feel that last year, we didn't feel it at all, which is more an exception. So but I mean, we feel that the market is stable. Thank you. Nikkeljos, a couple of questions. The first one around another stable market nowadays, the pulp market. Could you sort of elaborate a little bit on that? I mean, we all know that there's very little new capacity coming on stream. But how should we think around that market? Just a couple of words on that. Yes. I don't know really how you should think, but we feel that the market is strong and you also know the history. We have had increasing prices for many quarters in roles in this field. Now it has been stable for, I think, 4 months in a row, which is also an exception more or less. But the demand is strong. And as you say, no new capacities on stream. So and so we feel that the market is stable, still stable. And then could you please remind us about your dividend policy? We have a no, I mean, it's a stable and increasing dividend. So that's the policy. Well, if we don't have any further questions from the audience, maybe we have some from participants through the phone. So please, operator? We do have questions from the phone lines. The first question comes from the line of Robin Santavirta. Your line is now open. Please ask your question. All right. Thank you. So can I ask about the pulp volumes? And I've asked this before, but perhaps a bit more specify now when you're producing more in Ostrand. So what market are you planning to sell the additional volumes? Is that now clear? And have you already sold to some new markets? Or is it mostly Europe still? Well, I think we've said that before also. I mean, as it is just now, we have to sell everything that we can produce in Europe. We have had some customers that they have been suffering during this period when we have been working with the new mill. But now we're up and running and now we can supply them with pulp and they are happy for that and we are happy for that. Long term, I think that some volumes, of course, will go to U. S. And also some minor volumes will go to Asia. But our main and head market will continue to be Europe. And as it is just now, we can sell whatever we produce in Europe. But long term, we will open up for overseas sales. All right. And would you mind just to specify a bit to say you would the target is to produce as much as last year, but you're producing a bit into inventories. So what kind of delivery volumes are you expecting for the full year 2018? Could you provide a little bit of guidance on that? I think our guidance we've provided before is that we expect volumes in 2018 to be in line with 2017. What we talk about there is production volumes. So we do expect delivery volumes to be slightly down if you take it on 2018 versus 2017, but a small difference. Yes, the effect will continue a little bit in the 4th quarter, but it won't be as big. And obviously, it depends on the ramp up. So we won't speculate on the volume in the Q4, but you've seen the curve, and we expect the ramp up to continue upwards. Right. And then you state that the quality you produce is good, but does that mean that now in Q3 you already everything that you sold is, so to say, A quality? Everything is A quality. We had some minor volumes at the early at the really early stage, which we sold as B quality, but that was 1,000 to 1,000 tons, not more than that. So the quality has been really stable already from the very start, which is really positive. Okay. Just a final one on pulp. Now the EBITDA margin, as you said, was high at 36 percent already at this stage. And the cost per delivered tonne is to me quite low at this stage. How should we look at that cost per delivered ton now going forward into Q4. Is it fair to assume that it could remain at this level or even then decline when you get a little bit more deliveries out? I mean, as I think we don't give outlooks, but what you can see, we've had the extra direct costs and project related costs due to the start up, which we've given guidance on. So that's one effect. And then we have to leave it to you to predict what you think will happen with prices and wood costs, of course. But those effects, you can see in our guidance. All right. And the final question from me just on pulp markets. Do I understand you correctly that the current outlook is what you're seeing now is basically stable and for flat pricing? We know that we have done prices now for November on twelvethirty again. So I mean that is flat. If we have we've had flat prices now for 4 months in a row. So that is what we know. All right. Thank you very much. Thank you very much. And the next question I have four questions from my side. The first one is regarding the Wood Products division and why volumes were down almost 9% year over year? Can we take them 1 by 1, stock with us? Yes. Yes. As I said during the presentation, I mean, the reason for that is that during last year, we had some volumes in stock, but that is not the case this year. So that is only related to the fact that we now can just sell what we produce. Last year was slightly different. But this year, we can just sell what we produce and we have due to low stock level. Is that a situation that should also be true of the Q4 this year that you last year had deliveries beyond production? I mean, just now we balanced deliveries with the production. So that will be the case also in the Q4. But again, in the Q4, you have Christmas, you have New Year and some other disturbances in the deliveries. I mean, that you have to take into account. But otherwise, it is just now we can sell what we produce. Okay. And in the my second question is the paper division. Did you mention what the size of the January price increase is going to be? And then what has been the sort of acceptance? What share of your portfolio is impacted? The announcement is between 6% 8%, exactly the same level as we announced in 1st July and that one came through. I mean and that goes for the whole portfolio both for uncoated and coated papers. But just publication paper, of course. Yes, publication papers. Yes. And I mean these are I mean this has been a division which is or a market segment which has been difficult for many, many, many years. Do you feel that this new sort of market balance and hence the prices resulting from that is a stable situation? Or I mean, do you sort of see signs that there's new old capacity coming back or being ramped up? Or how sustainable is this new market and pricing environment in publication papers? Nothing new has happened. I mean, structurally, publication paper is going down more or or less at the same speed as it's done in the past. And what we see now is a healthy balance between supply and demand. And how long will that remain? Well, don't know, a couple of quarters depending on how much capacity that will be closed during next year and so on. You have some closures announced and we will see if they come through. I believe so. But structurally, we are in the same position, I would say, as we've been now for many, many years. All right. And also in the sort of paper division, anything any news on the Obbola project or potential Obbola project? It is a project it's a pre project. So but I mean, as we've said before, we will that will we will deliver on the pre project the Q1 next year. And by then, we are also ready to take a decision. Okay. And my final question is on the pulp division. We saw, I think it was $30,000,000 in depreciation increases quarter on quarter. How much more should we expect for the Q4? Yes. We started the full depreciation from September. So that's 1 month of increase. And so it will be around 3 times that. So around yes, we expect an annual effect of around SEK 300,000,000 on depreciation. So that's about €75,000,000 per quarter. All right. All right. Super. Thank you. Thank you. Thank you very much. The next question comes from the line of Martin Melfi. Your line is now open. Please ask your question. Yes, hello. Just to understand this guidance for pulp production, is it linked to pulp deliveries so far this year or pulp production so far this year? And does that mean then, say, 173,000 tonnes or 200,000 tonnes produced in Q4, 215,000,000 I think. Maybe what I said was we expect volumes in 2018 to be in line with 2017. And when we talk about that, we expect production volumes in 2018 to be in line with volumes in 2017, where there wasn't much variance between productions and deliveries. So that's the guidance we've given. And deliveries will be a little bit behind production volume during 2018 due to the fact that we're building up this inventory. Okay. So then it's, let's say, 173,000 tonnes then produced in Q4. And say this inventory build in Q3, so if you haven't had any inventory build, what would have your been your EBITDA? Would that have been the same as shown or different? No. If we didn't have inventory build, we would have sold more. So I won't say what the EBITDA would be, but you can see the production volume we had was 147,000 and the delivery volume, yes, you can see in the report, if you just give me The store 100. Yes, yes. So that's the difference. You would have had the effect of those additional sales. Yes, the delivery volume is 106, 105. And then for next year, you have this graph where you show full production either mid year or end of the year. Do you have a good guidance for production next year? No, not yet. That will be somewhere in between. We expect 2020 to be, like we said, the 1st year with full volumes and next year will be somewhere in between. So we don't have any guidance on that yet. And the way you report this, you include the CTMP volumes. So once it's up and running, it should be 1,000,000 tonnes? Or should it be 900,000 tonnes, the way you show the numbers on pulp? No. It's the capacity is 1,000,000 tonnes. So it's 100,000 CTMP and 900,000 NBSK. Yes. That's good. When everything is fully up and running in that capacity. Thank you very much. There are currently no further questions on the phone lines. Okay. That will conclude the press conference on the report for the 3rd quarter. Thank you very much. We look forward to seeing or at least hearing you all on the 30th January when we will be presenting the report for the full year of 2018. Thank you. Thank you.