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. [Operator Instructions] And with that said, I'll hand over the word to you guys. Please go ahead.

Thank you very much, Martin, and hello, everybody. Thank you for finding the time during vacation times and a busy week with lots of reports to join us for our Q2 report. And the short summary of this is that we had a very strong production, good deliveries during the second quarter and in combination with higher pulp prices that led to a record result for Rottneros in its current form. This is with great humbleness and respect for the environment that we're currently operating in, that we are presenting this. We all know about the increasing uncertainties that are out there, the macroeconomics, the geopolitical tensions as well as the climate change that is abundantly clear, a big challenge for us going forward. But thanks to everybody's efforts in our company, we focus on the things that we need to focus on and delivered a good production and delivery with a very safe work environment. The pulp market, which I will come back to in a short while more in detail, has continued to be very strong. But despite the fact, we all know that the energy situation is worrying some. Gas, for example, is an important input for our customers in Europe, which are nonintegrated paper and board makers that do need gas to run their drying sections. And for us, in our mechanical pulp mill, Rottneros, electricity is a key input, and we have seen strong elevated prices recently. Therefore, we've also -- are in the middle of an in-depth strategic review in order to ensure that our -- all our business lines have a sustainable profitability in line with our financial targets going forward. We have no results to present on that yet, but we will hopefully come back on that very soon because we don't estimate that the environment we are will change to the better in due course. So if we go back to why we are here. Rottneros is a listed company, has been so for a very long time. And the business model of being a circular economy with renewable and sustainable raw materials has proven to be successful. We have also started a cooperation with Söderberg & Partners investment department and rise during this quarter to further enhance our circular approach both to our process, but also looking into market aspects and the durability of our products and our customers' products. The business model of being a niche supplier with a very dedicated and specific products for our customers continues to prove solid, and we're also continuously generating a very strong cash flow, not the least during the last quarter. A brief review of the market trends and challenges. As we have said, the pulp markets have turned back after a small dip at the beginning of the year. This is the average quarterly prices. And also, the strengthening of the U.S. dollar has made the lighter underlying merging with a darker one on top, which is the price in Swedish krona per tonne, which is, of course, very good and healthy sign of where the European market is currently. If we look more detailed, the curve line here is the price on a monthly average. So at the end of the second quarter, the price was USD 1,430. And we had continued price increases at the beginning of quarter 3. $1,470 is the current note in the list price. And that is, of course, a consequence of a market where things are more or less in balance. If we look at the staples, those are the stock levels. And up until 2019, a average good and solid stock situation was around 35 days. If we look during the course of this year, that has increased up to 42 at the beginning of 2021 and into 2022. But however, this does not seem to be a too large stock situation, which should -- could have put pressure on pulp prices. There is more pulp in transit. There are port congestions. There is a shortage of carrier, so rail carriers as well as containers and trucks. So we estimate that about 2 million tonnes of excess pulp are in transit and not available to the market currently. So the elevated level is not a sign of an oversupply. And on top of that, we also see structurally that there is more and more short fiber coming from Latin America due to longer transit times. There is also a structural increase in the balance here. But all in all, good and solid performance of the pulp market. This is the European paper [ and board ], its share of various applications in total for 2021. Still, graphical papers are around about 1/4 of the market, but this is over time, a decrease in share. We see a structural decline. Nevertheless, currently, the European market is enjoying a very favorable situation, which we can see here on the next slide with all except newsprint, graphical segments being on the positive side. And that is also as a consequence of imports from Asia not finding their way into Europe as freights is not available or too expensive. As a consequence of that, papermakers have been able to forward their price increases and their cost increases to their customers. And so far, that has also led to good prices on the pulp side. So we can see that both the pulp makers and paper and board makers are enjoying healthy profits for the time being. Usually, it's either one or the other who's having a good market situation. That is boiling down to the market pulp deliveries from January to May. The statistics as usually are lagging a little bit behind. Globally, there is a small minus driven by China still being relatively weak, but Europe and North America being balanced, especially during the beginning of the year. Also, during the second quarter, of course, we have seen that our deliveries have been good. North America, from a financial and economical perspective, probably even a bit better than Europe at this point. So we have to see where that goes going forward. These are our deliveries. And again, I can only reemphasize that we are more and more focusing on applications where there's a growth such as board and packaging, filter or electronical applications, whereas printing and writing is a declining segment. Tissue is a growing segment but it's very much exposed to short fiber, and this is not really the most suitable segment for our products. We do create additional volume or value for our customers, but it's a very tough economical situation in that segment for pulp suppliers. Now with that, I leave it over to Pia. Please, guide us through the financial numbers for the second quarter.

Thank you, Lennart. And I'm, of course, very proud to present the record earnings for quarter 2, and I will go through the financials by starting with going through the EBIT this quarter versus the same quarter last year. And what is driving the profitability? Well, we start off with the gray bar that is showing the EBIT for quarter 2 last year, and that was on SEK 97 million. And as you can see, as the second bar, the blue one, it's the price and currency bar, and that is adding up to SEK 156 million. And Lennart explained that the NBSK and the list price was higher. And during the quarter, we had an increase in the list price of 16%. And if we turn that into SEK, it was actually greater, 36% higher list prices in SEK versus last year's quarter 2. We also had a production record this quarter. So we see that the volume has a positive impact on the EBIT for this quarter. And then we go to the negative side, and that's the variable cost. We started off early this year by saying that we saw an increase in our input goods, the prices. And this has continued and even peaked during quarter 2. It's mostly chemicals and oil and gas besides freight cost that is increasing. On the positive hand, we see that they have come to a stop and even a decline in June, in the month of June. So that's good going forward. We also know that for the next coming quarter, we will have a rise in the prices of wood pulp. If we look at the fixed costs, they're nearly on the same level, it's minus SEK 4 million. And also, on the other hand, it's minus SEK 5 million for depreciation and other costs. And we end up with our record-high level profit of SEK 219 million. And we take a look at the electricity price development. And here, we see a graph, and that is showing the Nord Pool day-ahead prices per month. And we can see that during the end of last year, it has been skyrocketing. And even though we are in the summertime, the prices are still high. And if we look at the quarter-on-quarter, we had last year system price of SEK 0.42 per kilowatt. And now it's -- this quarter, it was SEK 1.27. And it was nearly the same ratio in SE area 3. If we look at the cost for electricity after our hedges, it was actually lower during quarter 2 this year versus last year. So you can say that we have well-functioning hedges. And also, we are -- have a good hedge up until 2025, and the hedges that we have are around SEK 0.32 per kilowatt. But still, it's a worrying development. And if we take a look at the EBIT development year-on-year up until June, we can see the same trend as in the quarter. It's the price and currency effect that is actually improving the EBIT. And if we look at the list prices in SEK, it was actually improved by 42% versus last year. And as you know, that approximately 50% of our sales is in U.S. dollars. Also here, we can see a positive effect of the volume and, of course, a negative effect on the variable cost. We have to focus and try to mitigate the higher variable cost by focus on the cost control and the efficiency in the company. Also, you can see that we have a high fixed cost that is working negatively and that is due to one-off maintenance costs mostly. But anyhow, we actually improved our profit or EBIT the half year 2021 to 2022 by SEK 256 million. So very good development. And if we look at the profit development over time, we see here a graph showing our EBIT and EBITDA over quarters. And we can see that during 2021, it started to pick up again. And here in 2022, we have really nice bars. And for the first time ever, we actually went over SEK 200 million on the EBIT level over a quarter. And the increase from the quarter 1 is actually 50%. And if we look at the increase from quarter 2, 2021, it's over 200%. So a very good development. And if we look at the EBIT per percent, it's 28% quarter 2. And we also have a record high net turnover. And if we look at the balance sheet, we can see that we have a very efficient and solid balance sheet. And if we start by looking at the cash flow, as Lennart mentioned, we had a really strong cash flow during the period. And in this graph, we can see the cash flow in the dark blue bars. And you can see here that we hit over SEK 250 million, SEK 262 million for quarter 4 in -- quarter 2 2022. Really strong cash performance. And if we look at the equity asset ratio, we have a goal of over 50%. And at the end of June, we were actually on the 67% of that. And we actually paid out the dividend during May, during quarter 2. So we are really happy to say that we have a very strong balance sheet. Also, if we look at the net debt, it's positive. We have a positive net debt of SEK 143 million. And we can see that on the light green bars, and it has been having a positive trend since quarter 4, 2021. And we have actually used our options to prolong our revolving credit and bank loan. So now, it's prolonged to July 2024. And if we look going forward this year, we can see that we have an investment rate of about SEK 105 million this year. And with that, I'll turn over the word back to Lennart and the way ahead.

Thank you very much, Pia. And by now, I think most of you have seen our estimate of what's happening in the future, and there are various trends favoring consumption of pulp and usage of pulp as it is a renewable product solving many of the challenges. We see it's well fitted to help growing segments like the tissue or the packaging segment, which is underlined by growing number of people in the world spending money. We are also helping the green transition on the power side. Transformations need pulp. Cables need cable paper, which is made out of pulp. And of course, we have a sustainability trend that is driving the usage of packaging, which is nonfossil-based, where we also have our own efforts in the packaging factory in Sunne and now also in Poland, together with our joint venture partner, Arctic Paper. So there seems to be a lot of things that are in favor of renewable products such as pulp, all in all. And as I've mentioned, the joint venture is forming up. We are finalizing the drawings for the plant. And we'll later on this year, after summer start, procuring the equipment and we are on track by starting the factory by the end of 2023. And again, so far at this point, we're also running the factory in Sunne on a commercial basis. We're the first yet modified atmosphere packaging tray as we have seen it on the market. To sum it all up, so far, the first half of this year has been very good for Rottneros. We do what we can do, and we focus on the things we can focus on. We have tools in place to mitigate risks. Electricity is, of course, something that we're working with and we have worked with for a long, long period of time, as it always has been an important input cost for us. We have, as Pia said, well-working hedges and those hedges are stretching all the way out to 2025. And the elevated energy situation is probably also a lot due to the current economical as well as the geopolitical situation. And we will have to see how long it will draw out in the future, as well as we do what we can do in order to complement our hedges with long-term power purchase agreements. Also, these things are in progress. We continue to have a strong balance sheet. We create shareholder value. We do pay out the dividend, and we have the necessary funds to develop Rottneros going forward, both our pulp mills as well as our new business ventures within packaging, which is going according to plan. In order to safeguard what we have and what we do as a company, we are reviewing our positions, both on a production and market perspective. And as a consequence of this year's somewhat weaker market on some of the products, which is groundwood pulp, we also took earlier a decision to go from 6 shifts this year down to 5 shifts, with a consequence that we will have a summer break of about 4 weeks, and that will impact quarter 3 with around about 5,000 tonnes. So we've curtailed the least paying volumes and we utilized the hedges we have in order to offset part of the fixed cost that we have anyway. So we believe that, that will be a plus/minus zero situation on that part, which is the smallest part within our portfolio. Long fiber sulfate kraft pulp is strong, prices continue to rise and we've also seen a very strong performance on the CTMP where we have increased prices with more or less 20% from second quarter of last year, and we continue to see very good demand there. So that is as we see it as of today. So with that said, I leave the word back to Martin and see if there have been any questions.

Thank you very much, Lennart and Pia, for the presentation. And now it's time for the Q&A. How has changed market situation affected Rottneros?

The market situation, so far, has not really changed. We see there's an increased uncertainty, but there still is a good and healthy demand. So I would say, we are still profiting from the good demand situation that we have. Europe is our biggest market with more than 60% of sales, followed by Asia, just under 20%, and the remaining part is in North America, which also is a very healthy market and especially our niche is e-grades, electronical pulp grades and packaging and board has gone strong as well as filters. So I think if it has changed, it has only changed very little from a very, very strong situation into still a strong and balanced situation. And as I've said, we can also see that the pulp prices at the beginning of the quarter 3 are continued increasing, and we're now at $1,470. And the increase in June in the U.S. went through as well, and there, the list price is over $1,800. So I think we are still enjoying a good situation.

We'll take the next question. Pulpwood prices are on a rapid rise and more price increases are announced by key market players. Could you please elaborate on your pulpwood sourcing and shed some light on the price increases you see in the market?

Yes. Pulpwood is generally sourced close by our mills around about 150 to 200 kilometers away. We have a sourcing company in the Baltics, in Lapland, which is taking care of parts of the import that we're having around about 15%. This year, it has been lower. Remember, back in 2018 where it was very high and dry, we actually increased the volumes through our Latvian organization. And we have long contracts with some of the bigger players in the market. All of that, of course, as we don't have any forest of our own. Part of the fiber base is coming from sawmill in the form of sawmill chips. This is part of the value creation from forest as the sawmills can only utilize certain share of the tree and the rest becomes byproducts. And one of the largest byproducts is sawmill chips. And we have, especially around Rottneros mill, but also around Baltics, lots of long-standing relations with sawmills that are supplying us with their chips. You also know that as of 2020, we have Nykvist Skogs, which is an organization that works with private forest owners. So we have actually improved our situation of sourcing the necessary raw materials. The raw material prices are not fluctuating as much as pulp prices, for example. Prices are set on a quarterly or mostly half-year basis. And yes, they are increasing. They're coming from a very low level. They have been on a very low level for a long time. And the current increase is also fueled by the fact that around the Baltic area, we have a situation where imports from Russia and Belarus are not there anymore. Finland imported some substantial volumes from Russia. And I think also Central European producers were importing from Belarus as well as Ukraine. And those volumes are currently not there. So consumers are focusing on the volumes that have been up further north historically in Finland and Sweden and the Baltics. So all of that has driven up prices, and we have to see. At the same time, we also hear that there are some uncertainties around the sawmill industry. So that could also impact the activity in the forest. We are still suffering in mid-Sweden of the bark beetle situation, which is forcing forest owners to continuously harvest trees, which are slightly affected or just on the border of being affected, and that is still creating a good flow of volume. So I don't want to give an exact figure because these are both trade secrets as well as a number of [ various list ] prices, which are out there. But yes, prices are going up, but they're coming from a very low level.

We'll take the next question. You estimate SEK 50 million and SEK 61 million direct and indirect maintenance costs for -- in Q3 and Q4. Is that on the low side given the strong pulp markets, in example, higher indirect costs from lower per production?

I leave that to Pia to explain how we calculate the costs for our stocks.