Rottneros AB (publ) (RBG.F) Earnings Call Transcript & Summary

Hi, and welcome to today's webcast with Rottneros. Today, we have the CEO, Lennart Eberleh; and the CFO, Pia Ohlson, with us. [Operator Instructions] And with that said, I'll give you guys the stage. Please go ahead.

Thank you very much, Martin, and hello, everybody, to our quarter 4 report and full year report for 2021. It's a great pleasure for me to be here today and present this very strong year-end performance. And we are standing live from Bollnäs in Hälsingland and Karlstad in Värmland, and this is one of the good things that we will take with us from this pandemic, which officially is over in Sweden as of next week, February 9. I hope you're all well, and let's dive into the figures. If we look into the fourth quarter, we can see that we had a continued strong market that has supported our profits. We had an increase of SEK 153 million versus last quarter of 2020. We have experienced, and that has been in the papers across Europe and probably all around the world, an energy crisis which has brought us very high electricity prices. Our measures we have in place have worked as planned and have safeguarded us from any results of those electricity prices that would have been negative. On the contrary, we had a very positive impact of our insurances. We have also taken the next step for our packaging arm where we are now, since autumn, have worked a lot with getting the technical development into place and signing the necessary agreements. So once the decisions have been taken, we will start exploring a new factory in Poland, which we are very excited for. Final decisions have to be taken, but they will be coming within the first half of this year. On the basis of our strong balance sheet and the strong cash position, the Board also has proposed a dividend of SEK 0.60 per share for the Annual Shareholders' Meeting, which will be held in April. Why should you invest in Rottneros and buy our share? Well, Rottneros is part of the circular economy. We do have a renewable and sustainable raw material, a growing forest, which, despite that it is feeding the forest industry, is growing and accumulating carbon dioxide out of the atmosphere into the wood stock. We have proven that we have well-established niches and qualities that we supply to our customers who appreciate our qualities where we create also additional value for them. And that has safeguarded us during the last years and made us exploring new fields of applications and growing in fields where there is a growth. And of course, we have been working very strong with safeguarding our balance sheet, generating a strong cash flow, make it possible to invest and upgrade our facilities, start building new businesses as well as pay dividends to our shareholders. Looking into the market and what has happened on the pulp market since we talked last time, we see that the strong upwards trend that we had in 2021 for the long fiber sulfate kraft pulp in Europe has come to stop in October at $1,340 per tonne. And then in November and December, we saw 2 consecutive months of declines of around $40. So beginning of January, we're at $1,260. If we would be looking back in history, we would have expected this trend to continue, but that has not been the case. Supply chain issues and the good underlying demand in certain areas has made that this development came to stop in January. January prices were unchanged versus December. And we are now in February already experiencing a new increase to $1,300, and there are increases out in the market pushing the prices to $1,350. The green line is the list price in Swedish krona. So there, you see the effect of the currency differences between the dollar and the Swedish krona. These are the average prices on a quarterly basis. And if we look on the next slide, which you, by now, are probably familiar with, we see the monthly prices, and there is a little bit of a steeper drop down to $1,260 at the end of December. And the bars you see here, also indicating the stock levels of pulp ports. And you see that they have come down since the peak in 2019 that has driven up the prices during last year, and they are now back on a level which is within normal variation to a normal balance between output and demand. Now if we allow some comments on why the situation is rather unusual, as I've mentioned, we have experienced logistics issues, supply chain issues around the world, which have made that pulp has ended up in the wrong places where it's not really needed and cannot come to where it is needed with the papermakers. Supply chain issues also have made it very difficult for Chinese paper and board producers to export their goods. There had been a steady historical flow from China into Europe of paper and board, and that has dried up during last year. So our customers in Europe, and Europe is our major market, around 70% of our sales are in Europe, have experienced a very strong market and still experiencing a strong market. And on the back of that, we have seen pulp prices coming up and probably stabilizing at a relatively high level. So let's see how things go forward. But I mentioned Europe to be our major market. And just a brief overview here, these are the various paper and board qualities that are adding up to some 85 million tonnes in the market. And you see that the graphical paper and newsprint segment is now accounting for some 26%. That is a continued decline, and we have heard about machine closures during the course of the last years, and that is an effect and the result of a shift from printed media into digital media. On the other hand, packaging is growing, and the containerboard and paper now is more than half of all the fiber consumption. This is both integrated pulp and paper mills as well as nonintegrated ones, those who are buying their pulp from us and our competitors. Tissue is still a relatively small market, but in tissue is the largest growth over time. If you look at these various segments and their development during last year, there had been a rebound for printing and writing papers. There had been a strong press at the beginning of the pandemic in 2020. We saw declines of up to 20%. That has been rebounded and had some strong demand and that we have -- has been reflected in our customers' demands as well. But I think underlying, we will see a continued decline of these paper grades. Containerboard, on the other hand, continued to be strong, driven by e-commerce and continued good demand for products that need to be packed. How is that then translated into the pulp market? On a global basis, we see that January through November last year, Europe had been a good market. We've seen our prices coming up during 2021. On the other hand, China had a very weak market. So globally, demand for pulp was negative. An exception to this is the UKP, the unbleached kraft pulp, a speciality which we, amongst others, are producing. And there, we had seen a growth of more than 20% during the course of the year. It's a small segment, but it's a very important segment for us. And if we look at how our supplies have been during the course of the year, you see that our board and packaging applications have grown. This is our customers consuming our pulp for their board-making. And then filters, where porosity is an important property of our pulp, is the second largest. Printing and writing has decreased now to under 20%, and I think that will be a continued trend going forward, also looking in how the various applications have developed on the previous slides. So it's a very well balanced development and also a balanced market and customer portfolio that is leveling out the different variations that can be experienced over time. With that, we have a look into the quarter 4 results, and I'll leave it over to Pia. Please, Pia.

Thank you. I'm very happy to present a very strong year-end performance for you, and I will start off with doing a comparison on EBIT on quarter 4 2021 versus quarter 4 2020 and what is driving profitability. Firstly, as Lennart commented, we had an increase in the EBIT of SEK 153 million. And as you can see on the dark-blue bar, we have the price and currency that is the major part of that. And during the quarter, we had an increase of the NBSK in U.S. dollars of 53%. And actually, the dollar had a bit of a currency upwards of 3% that also contributed to the EBIT. And if we look at the volume, we also had a positive contribution. Even though we made less tonne, we had a favorable mix that actually improved the EBIT. If we take a look at the light-green bar, the variable cost, it is actually so that Lennart told us that the electricity hedging was actually impacting positively on the electricity prices in the quarter 4 versus 2020. And we actually made -- we had SEK 20 million less electricity cost, but we saw an increase in the variable cost on fuel, on chemicals and on wood, so that total impact was a minus versus 2020. Also on the fixed cost, we had higher personnel cost and planned maintenance cost that actually contributed negative. And if we take a closer look into the volatility in the electricity price market, we here see a graph that shows us the development from January 2016 up until December 2021. And the light-green line is describing the price area SE3 where we have most of our consumption, nearly 90% is consumed by the mill in Rottneros. And the dark-blue line is the system price. And we can see that those lines are actually deviating during the end of the year, and that actually made us stop the mill in Rottneros for, and we lost about 7,000 tonnes in quarter 4 due to high electricity prices, though we had well-functioning hedges and we actually had lower electricity cost during quarter 4. And also during 2021, we had a positive effect on the hedges of SEK 113 million, and we had lower electricity prices year-on-year on SEK 35 million. So let's take a look at the EBIT for the whole year. And here, we can see that we have a major change is SEK 309 million, an increase in EBIT versus 2020. And likewise, as in quarter 4, we actually have the price and currency that is driving the EBIT. We had a change in the NBSK of 42% 2021 versus 2020, but we had a weaker U.S. dollar that affected the EBIT negative, and that was minus 7%. If we take a look at the volume, you see here that we have a negative trend on the volume, and we have identified the problems. We have taken actions to drive our continuous improvement, and we are improving our capacity utilization. If you look at the variable cost, the first 3 quarters of 2021 was actually good ones in terms of EBIT. And then in quarter 4, something happened and the costs were actually higher, as I described, on the quarter comparison. And here, we see the same negative effect on the fixed cost as in the quarter comparison. So I will talk a little bit more about the profit development year-on-year. Here, we see that compared to quarter 4 2020, we have positive quarters for the whole of 2021. And that is taking us to the financing side. What has happened there? Well, we have been doing some new financing. We had the early redemption of our bond loan of SEK 400 million in quarter 3, and we took up a new loan facility of SEK 100 million, plus a revolving credit of SEK 150 million. And that will give us lower financing cost in the future. And if we see the effect on our balance sheet by just this new financing, we can see here in the light-green bar in quarter 4 for 2021, we actually have a positive net debt, and we haven't had that since 2016. So a strong development on the net debt. And also, we can see the cash flow, and the cash flow is strong. And even though that we have paid a dividend in September and we have been investing SEK 125 million, we ended the year of equity ratio of 64%, and our target is over 50%. So efficient and solid balance sheet. And with that, I will give the word back to Lennart.

Thank you very much, Pia. And let's have a little bit of a look ahead and what's driving demand for pulp and especially our own qualities. Tissue is a strong segment based on larger disposable incomes, better living standards and the growing population. This is mainly driving consumption of eucalyptus. And in eucalyptus, it is that short fiber mainly from Latin America where new capacity is added, and that mainly finds its way into tissue. But for higher qualities and kitchen towels, there is a good demand for long fiber, which we produce, as well as when it comes to absorption where our mechanical pulps play a vital role. E-commerce is driving the demand for paper-based and fiber-based packaging materials. We've seen that not the least during the last 2 years, but overall, in general, there was a strong trend towards more ordering through the Internet and having things shipped home. And as there is a squeeze on fibers, there's less recycled fibers available. This is also driving the demand for better and more well-functioning primary fibers, which you can easily blend into the furnish on your otherwise secondary fiber-based paper machine. So here, we see, not the least for UKP, a good market going ahead. And recycled fibers and recycled-based board prices have seen a strong uptake during the last half year. We're also aware of that there is a lot going on in the electricity sector, the EU taxonomy and also the need to replace fossil-based energy sources with renewable-based energy sources, which leads to more transfer cable -- or transferring cables, more cables, more [ transformers ]. And both cables and [ transformers ] actually have a need for very pure brown fibers with a very low or no conductivity. And here, Rottneros is one of the most suited suppliers into the segment. And we have seen a strong pickup during the last year and believe also going forward, that will be a strong demand as this transition is by far not over at all. Sustainability is a segment that is driving the entire forest industry forward, and not the least we ourselves here are trying to lock into this trend with our molded fiber packaging that we have been working on for the last 15 years. And here, I can have just some more words when we are standing. In the autumn of last year, we signed a letter of intent. As I've said initially, we have been working on that, bringing that forward and preparing the necessary decisions to be taken. That will establish a factory in Poland of a capacity of around 80 million trays of very high-quality. We're not talking about the usual salad bowl or single-use tableware. These are, as you can see in the picture, high-quality trays, which enable a modified atmosphere inside the pack. So you can have a ready-made prepared meal to be stored in a cool chain, not a frozen chain, but a cool chain for up to 3 weeks. And as far as we know, and we have done intensive and extensive market research, we haven't seen anybody else who is doing this at this point. We do have an existing market and customer. So we have served more than 3 million lunches together with our customer of this kind of packaging. So this gives us a strong confidence that the technology we have developed and that we are also safeguarding through patents will be a very good basis for taking the next step for packaging and start ramping up capacity in cooperation with Arctic Paper, where we see a very good fit as it is an existing paper mill with pulp and capacity infrastructure such as wastewater treatment and energy supply. So if we summarize the quarter 4 and the full year of 2021, we have seen a very strong pulp market. And it has come to a slight stop at the end of the year, but it's picking up again beginning this year. That has led to a strong result development. We have maintained a strong cash flow. We already paid the dividend during the end of 2021, and the Board is now preparing -- proposing a new dividend for the shareholder meeting later on the spring. And we are close of taking the next step for packaging. With that, I thank you for your patience, and we are now opening up for questions. So back to you, Martin.

Thank you very much, Lennart and Pia, for that presentation. And like you said, now it's time for the Q&A.

Moving on to the first question. How would you anticipate pulp prices to behave in 2022?

I will take that. It's always difficult. We always try to rely on the future prognose makers who are around and supporting this industry. It's not always they are taking the right approach or finding the right figures, and it's difficult to look far ahead. But what we've seen is that the pulp markets have diverged. Instead of one global market, we've seen that China, Europe and the U.S. or North America have behaved differently. They're more isolated. And the strong market in Europe we've seen during the last year and the weak Chinese market have been sort of decoupled. Thus, this is a result of supply chain interruptions, and they are ongoing. And I think it will take some time before those things are back in harmony and very well and fully functioning. So at least for the first half of this year, 2022, I am optimistic on where the balance is, that is there is a good balance. What that means exactly in prices, I don't dare to have a guess on.

Perfect. Thank you for that answer. And moving on to the next question. Looking ahead into 2022, is there something that you are excited about or looking forward to?

In 2022, I'm definitely very exciting about the hopefully -- hopeful decisions that we'll be taking around packaging. We've been working with that very long time for the last 15 years. And during the last 4 years, we have taken a very strong step forward. We have built up an organization which is highly motivated and competent. We have found a good partner and perfect fit. So that is probably one of the most exciting things looking forward into 2022. I'm also very confident that although we have a global energy crisis, we are very well situated with our electricity hedges. I mean they are stretching out up until 2025. This year, we have 91% of our needs hedged; next year, 100%; the year after that in '24, 87%. And when the prices are right and the long forward curve always is not that incredible high as the short-term prices, we will continue to build onto those hedges. And we are looking also into other means of complementing our financial instruments with more physical instruments such as long-term agreements and PPAs, power purchase agreements, where we will support the start-up of renewable energy projects such as wind power and solar power. And there is a strong development in that market. And I think 2021 and 2022 are a tipping point here where we'll see a lot of those things happening, and we are well positioned to participate in that. And we do have the time frame to allow us to do that in a professional manner as we have those hedges in place.

Perfect. Thank you for that answer. We'll take the next question. The balance sheet is strong. Do you have some plans for new projects in addition to the packaging project with Arctic Paper or acquisitions going forward?