Segezha Group lost more than 40% of revenue

Timber holding Segezha Group in the first quarter of 2023 reduced revenue by 42% compared to the same period last year to 18.7 billion rubles. The company announced this on May 24 in its IFRS financial statements. Adjusted net loss decreased by 52% to RUB 3.76 billion.

The release to the financial statements explains that revenue decreased due to “structural transformation of sales markets”, lower product prices and the strengthening of the ruble by 15% against the US dollar and by 22% against the yuan. In the context of business segments, the revenue dipped most of all from the sale of plywood and boards (-62%), in the business areas “Forest resources and woodworking” (-51%) and “House construction” (-50%). 2023 Paper & Packaging segment revenue down 11%.

The Russian logging industry in 2022 suffered from increased anti-Russian sanctions due to the NWO in Ukraine. On July 10 last year, the European Union (EU) ban on the supply of wood, plywood, boards and pellets from the Russian Federation came into force. In October, the EU imposed a ban on the import of Russian pulp and certain types of paper and board. In April 2022, the Japanese authorities also banned the import of logs, wood chips and boards from Russia into the country.

Adjusted OIBIDA (operating income before depreciation) of Segezha Group in the first quarter of 2023 decreased by 91% year-on-year to RUB 1.1 billion. In addition to the already mentioned “structural transformation of sales markets” and exchange rates, which had a negative impact on financial indicators, the company points to a fall in product prices and a “significant increase in costs”, especially in logistics. Capital investments of Segezha Group for the first three months of this year decreased by 57% compared to the same period in 2022 to 1.7 billion rubles. Of these, 0.6 billion rubles. allocated to new capacity expansion projects, mainly for the modernization of the Sokol Pulp and Paper Mill, another 0.5 billion rubles. – to maintain existing assets and the same amount – to exercise the option to buy out banks’ shares in the Segezha West project.

The company’s European assets were sold for a conditional $1, Segezha Group President Mikhail Shamolin told reporters during a conference call. “The deal was made for about $1 or 1 euro, but with a debt that Segezha Packaging left to Segezha Pulp and Paper Mill in the region of 100 million euros. Therefore, we can say that the business was sold for an amount of about 100 million euros, which corresponds to its assessment as of the state before the SVO,” he said.

Shamolin noted that the sale of assets in Europe was “virtually the only option to keep this business running.” He recalled that after the introduction of sanctions, the supply of paper from Russia to Europe “became impossible.” Segezha Packaging tried to buy paper on the local market, but it was refused, and contracting for the sale of finished products practically stopped. According to Shamolin, the preservation of European assets would cost the group “2 billion rubles. losses on OIBDA” (for what period, he did not specify). At the same time, the entire volume of paper that was previously supplied by Segezha Pakaging, the group managed to redirect to other markets, including China.

Shamolin announced the sale of European assets of the Segezha Group at the end of March 2023. Then he said that the assets were sold “at the market price”, without disclosing the amount. Segezha Packaging united seven plants in Germany, Denmark, the Netherlands, Italy, the Czech Republic, Turkey and Romania with a total capacity of 769 million paper bags per year. Also in December last year, Shamolin said that Segezha was considering the creation of a new plant for the production of paper packaging abroad. In March of this year, Nikolai Ivanov, Vice President for the Implementation of State Programs, Sustainable Development and Forest Policy of the holding, reported that the group considers the construction of such a plant in Egypt to be “the most realistic option” (Vedomosti wrote about this on March 3).

Boris Sinitsyn, head of resource sector analytics at Renaissance Capital, expects a gradual recovery in the company’s financial performance from the second half of 2023, “if lumber prices start to rise during this period against the backdrop of a recovery in the Chinese construction sector.”

Sinara investment bank analyst Irina Fomkina predicts that by the end of 2023, Segezha Group’s revenue will decrease by 19% compared to 2022 (last year it amounted to 106.8 billion rubles), and the OIBDA margin will be 14%. Aleksey Bogatyrev, General Director of Lesprom Network, agrees with the estimate of the drop in revenue. At the same time, from the second half of 2023, Boris Sinitsyn, head of the resource sectors analytics department at Renaissance Capital, expects a gradual recovery in the company’s financial performance, subject to an increase in lumber prices “against the recovery of the Chinese construction sector.”

A significant impact on the company’s results in 2023, according to Fomkina, will be the effectiveness of negotiations with potential foreign buyers of Segezha Group products, the level of activity in construction in Russia and China, as well as solving problems with shipment by rail.

There is no need to transform the company’s business towards “dramatically different products,” Fomkina believes. Bogatyrev adds that the company is “well structured and present in rapidly growing markets such as packaging and paper bags.”

The company will be able to adapt to new realities and conclude contracts with buyers from China, Fomkina believes. Now among the Russian timber companies there is a struggle for the Chinese market, agrees Bogatyrev. He adds that demand for sawnwood in China is growing, so the winner of this fight “can increase revenue significantly.”