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. My name is Martin Westerlund, and I work for Finwire. After the presentation, there will be a Q&A session. If you have any questions for Lennart and Pia, please visit finwire.tv and click on this webcast. And with that said, I hand over the word to you, Lennart and Pia. Please go ahead.

Thank you very much, Martin, and hello to everybody and to our Q1 report for 2022. It is a fantastic quarter that we have behind us. And if it wasn't for the trouble sometimes that we live in, in Europe currently, it would have been even greater pleasure and joy to present it today. Nevertheless, we have achieved a record high profit of SEK 145 million. And this has been driven primarily by the very strong pulp market that we experience. During the quarter, the Board has decided to take the next step forward for packaging and to jointly invest in a new factory in Poland with Arctic paper. And we have also proposed for today's Annual Shareholders' Meeting to pay out a dividend for the profits for 2021. So all in all, a very strong quarter, which I think once again shows the resilience of the forest industry sector in troublesome times. And if you look at Rottneros as an investment, we are part of the circular economy. We have sustainable products, which are made from renewable raw materials and our main material, the wood is harvested around 150 kilometers from our side. So it's a local raw material. We have a lot of local raw materials on top of the wood that we consume and our main part of sales goes into Western Europe. So also this is supporting the strong resilience of our business model. We can also see that we work accordingly to our strategy to remain our establishment in niches. And over time, we generate strong cash flow from our operations. I start off by looking into the market and what has happened there recently. As I've said, the pulp market has gone through a very strong cycle. And we've seen that quarter one prices have not dropped as far as we would have feared at the end of 2021 and in local currency, they already have improved. And if we look at the monthly average, this is the quarterly average, if you look at the monthly average, then we see that the prices have turned around in March after a very shortfall of 2 months and stable prices in January. So this indicates that we are actually in a strong situation. The bars below the graph are a measure of the stock levels. You see that they are relatively leveled out, but on a slightly higher level than what we usually would think is normal. And most of that is attributable to logistic problems. Pulp is in places where it cannot be shipped from, container ships cannot be unloaded still to some restrictions in ports. And all of that means that there is more pulp in transit, but the market is longing to get its delivery. So we see a very strong market. And on the basis of that, the prices have turned up again in March, and we will have to see how that goes, going down this year. If we look at our main market, Europe, paper and board, you see that graphical paper still is a large part of it, but containerboard is continued growing now up to 40% and other packaging materials is another 19%. So all in all, 59% or almost 60% is packaging materials. This is both integrated and non-integrated. If we look to the development by the different applications in the first 2 months of this year, you see that newsprint and uncoated still has a negative trend, whereas coated paper is currently experiencing a very strong market. Nevertheless, packaging, which is also one of our main focuses is doing strongly. And on the back of that, we have seen that the pulp market in the beginning of this year also has remained stable. Europe unchanged, a good increase in North America, China, still a little bit of a sluggish demand situation, mainly due to restrictions that are still in place. Nevertheless, China is a small market and our main market is Europe with more than 60% of our sales. If we look at how our sales go into various applications, you see here our shares of 2021 and in brackets are the figures for 2020. So packaging and board, one of our bespoke niches that we want to grow and has grown from 28% to 32%. Filter, another specialty of ours, thanks to the way that we produce -- our pulp has gone from 16% to 21%. And you see that we are following the decline in printing and writing as that has gone down from 21% to 11% in our portfolio. Electrical applications, one of our most respected areas where we are one of the best suppliers to this market has gone from 11 to 13. So all in all, we are following our strategy to grow in niches where we do provide added value to our customers. And you also see tissue is more of an area where we can be flexible going in and out depending on the market situation. So we always make sure that we find sales for all the volume that we produce. Having said that, I leave over the word to Pia to guide us through the quarter 1 figures. Please, Pia, go ahead.

Thank you, Lennart. And of course, I'm very proud to present our strongest quarter ever to you. So let's start with taking a look at the EBIT quarter 1, '22 versus quarter 1 '21 and what is driving the profitability. The last year's quarter 1 was actually coming out with SEK 11 million. And as you see here on the great blue bar, we have a big improvement in the price and the currency. And as Lennart showed you earlier, we actually had an improvement in the NBSK in U.S. dollar of 35% versus last year. And actually, NBSK in SEK was improved by 50%. So that's the greatest part of the good result. And another positive is our volume that actually made up SEK 2 million on the improved profit, but we also had some negatives, and we had our variable cost that has actually decreased versus last year, and that is due to the input goods rising prices. And as you all know, we have a beginning inflation. So that's the biggest drop. And even though we have effective hedges, that we will take a look at the next slide, we have seen increases in gas, wood and freight and chemicals. Also, we had some negative SEK 11 million in our fixed cost, and that is due to lots of different parts, but mostly it's price increases in our internal cost of freight and also in maintenance. So that was a drop by SEK 11 million. But all this adds up to our best quarter ever and EBIT of SEK 145 million. Next slide, please. Thank you. And here we see a graph of the electricity price development, and this is a graph from North pole with the day-ahead prices. And we can see that the blue line here is describing the system price and the light green bar is the line is describing the SE3 area price, where we have most of our consumption -- and if we take a look at our hedges, they are really well functioning. We can see that the electricity prices have been increasing a lot since the quarter 3, 2021 in September, and they have even increased more during the end of 2021 and are still on a very high level. But the cost -- real cost is actually decreasing. We had a cost of our electricity on 22 per kilowatt. And last year at the same quarter, it was actually nearly doubled. So it's really effective hedges that we have. And as you know, we are well hedged forward, and we have hedges until 2025, and 47% of those are in SE3 area. So that's something that we are really happy about right now. And if we take a look at our EBIT development, we can see that in 2019, we had a really strong market, and we had a really good EBIT. Then we had a drop and a weakened market in 2020, and we can see that 2020 was actually not a good year for us. But then the market was picking up, and it was an upgoing trend and we had an upgoing trend during 2021, and we can see that here in the quarter 1, 2022, we actually landed on a record high EBIT and it's the best performance ever in our history. If we take a look at the balance sheet, we have a really strong and efficient balance sheet. The good equity asset ratio is actually improving. We are -- at quarter 1, we landed on 67%. And we usually have a very strong cash flow. But during the end of the quarter 1, we had a lot of invoices and we had a lot of current receivables during the 31 of March, and that is actually giving us a little bit less cash flow from operations than usually, and it's also affecting the net debt. But of course, the result is good with a lot of invoicing. And the investments that we have made during the quarter 1 was SEK 18 million, so a strong balance sheet. And with that, I will turn the word over to Lennart and the way ahead. Thank you.

Thank you, Pia. And let us just look at some of the trends that are favoring pulp and our sustainable products going forward. And as you are well aware, there is an increasing number of people on the planet. And also we see that the disposable income is increasing, which leads to more consumption, and this is driving tissue. Tissue is mainly served by short fiber pulp out of Latin America and all the increase that is coming out of there in the coming years will certainly find its home within tissue. E-commerce has driven, and as I've explained in the beginning, we see that containerboard, corrugated packaging is growing, driven by the demand for e-commerce, a lot of behaviors that we have picked up during the last 2 years of pandemic certainly staying with us will continue to drive demand for packaging. We have a green transition now more than probably ever where we have to invest in renewable energy to sort of minimize our dependency on fossil fuels in the energy mix, and that leads to investments in transformations, cables and distance, long distance cables to transport the power from one place where it's produced to word is consumed. So that is driving the demand for UKP, our brown pulp in E-grades. And of course, sustainability, which is an ongoing drive to decrease the amount of plastic in packaging in general. And here, not only is it favoring demand for pulp, but we also see our business opportunity for formed fiber packaging. And to say something more about Rottneros packaging that is now in the phase of creating a new factory in Poland, together with Arctic Paper, it will be a 50-50 joint venture. And the capacity of that factory will be around 80 million trays of a very high quality of formed fibers. We're actually the first fiber-based modified atmosphere packaging trade on the market, which means that you or our customers can place their product, the processed food in such a product that you see there on the shelf on the right side of this picture and store it for up to 3 weeks and simply warm it up in the microwave of at home. So convenience fruit product, which we see is increasing in demand quite a lot in the coming times. So we see a great demand here from the market. We are really looking into -- of getting this factory off the ground. And the plan is to having it up and running by the end of 2023, and that will quadruple our capacity of trays. Meanwhile, we are developing the technology in Sunne, where we have our technology center, and we also already are supplying into the market to create a thorough pipeline of projects and customers into the new factories. So we have a quick ramp-up of it once it's up and running. So to summarize this quarter, driven by the strong pulp market, we've seen invoicing and profits going up to a record of SEK 145 million, which is very good to see. We have strong earnings and low investments during the first quarter. Usually, they come in line with the maintenance stops that are towards the end of the year. As Pia has explained, the cash flow has been dampened or slowed down a bit by an increase in our working capital, and we are taking the next step for packaging. The pulp market as such remains strong for the time being, and we see an increased demand from our customers in Europe there where we have a good and long-lasting relation. So we are happy to see how this will unfold in the coming months. And with that, I leave the word over to Martin to see if there are any questions. Please, Martin, go ahead.

Thank you very much, Lennart and Pia, for the presentation, and I will jump right into the Q&A. I'll start with the first question. Can you elaborate on the investment in Poland?

Yes, I can do that. So what we've seen is the demand that we see in the market based on the technology that we have developed in Sunne, Sweden, we simply cannot satisfy what the market is asking for. So we had to start scaling up our technology and to mitigate the risk, we were looking for a partner to do that together with and Arctic Paper, who has a big pulp mill -- paper mill, sorry, with no pulp production in Poland, just 80 kilometers East of Berlin is very well situated and located to be close to the great market. All the consumers are, and logistic cost is a key parameter to be cost efficient in this kind of product. When you ship empty packaging of this kind of product, there is a lot of air to be shipped. So the shorter the shipping distance, the better your competitive position. So we are doing this together. The joint venture will rent housing from the mill. They will also get infrastructure such as electricity. We can link into the mills' wastewater system. So those are actually investments that we don't have to take opposed to if we would have had a greenfield installation. So we are sharing the risk, and we're taking a couple of short cuts by getting into an existing paper mill structure and that is giving us quite some advantages. So this will actually speed up our way to industrial-sized production very rapidly.

Thank you, Lennart and we'll take the next question. Regarding the factory in Poland, how much revenue and EBIT can we expect from SEK 60 million to SEK 80 million of trace.

We don't elaborate on the financials of our packaging arm at this point. It is still something which is under development. We are in turbulent times, and we have to see how all these things work out. But what we know is that we are competitive compared to the existing fossil based solutions when we get this kind of scale. So we'll have to come back to those numbers more in detail once things are up and running.

Perfect. Thank you very much. Do you have any additional investments in your pipeline that you can share with us today perhaps?

No, unfortunately, not what we're looking at is the usual debottlenecking, quality investments and environmental investments in our sites. We are guiding roughly around SEK 100 million to SEK 110 million on an annual basis, and that is what we're planning for 2022 as well. And with that, we should be able to increase our production and capacity utilization rate to where it should be. We have a long-term target of increasing our pulp production with 3% per annum, and that is something we work very hard with this both operational excellence and it means to make the right investments in our pulp mills to make sure that they are up to the level where we can achieve that.

We'll take the next question. How does the outlook differ between pulpwood prices and fleece coming from strong sawmills volumes? Are there any price differences.