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

Hi, and welcome to today's presentation with Rottneros. Today, the CEO, Lennart Eberleh, will be presenting. [Operator Instructions] And with that, please go ahead, Lennart.

Thank you, Martin, and good morning, everybody. Thank you for joining us on such a short notice. We have decided after a thorough and extensive strategic analysis to close down one of the 2 pulp lines at our Rottneros Mill in Värmland. It's what we call the groundwood pulp line. This is the pulp primarily for the printing and writing sector. While at the same time, we are also starting up and have come quite far in a pre-project to further investigate increase in CTMP production, which is primarily pulp for packaging, where we have seen some good growth over the recent years. It is with great sadness that we are announcing that today, but it is necessary, given the background and the business environment that we are operating in. Pulp for printing and writing, as we call it, groundwood, is a segment which is structurally on the decline. We have seen this over many years, and we can follow our players in this market are consecutively announcing closure of mills or reorganizing of mills from printing and writing into the packaging segment. However, the groundwood line is the smallest line within the Rottneros group, and this will have only a marginal impact on our group sales and net result. Groundwood is around about 16% of our [ volumes ], but just about 10% of net sales, and it contributes marginally to the net result despite the effect of our electricity futures. We believe we will have one-off costs of about SEK 60 million. This is primarily coming from redundancy payments and some write-offs of old assets. But at the same time, this will be partly offset by our electricity futures. We are now entering union discussions, so what the final cost and final date of the discontinue will be is not clear, but our aim is to do this by the end of '22 also in order to honor relations with our raw material suppliers as well as very long-standing customers in this segment. Ultimately, this means that we also have notified today 40 people of being made redundant at the mill. We have to note this is the starting of a union negotiation, and a notification of redundancy doesn't necessarily mean that this will be the final number of people made leave. I'm talking about the cost, and one of the largest costs for mechanical pulp, which we are making at Rottneros is electricity. It is at the Rottneros mill where we consume the majority of our electricity from the grid, around about 300 gigawatt hours on an annual basis. This can correspond roughly to 20,000 households. And given the recent cost increase for electricity, it becomes abundantly clear how much this is a constraint on our profitability while operating in a segment where customers cannot fully compensate us for the cost increase that we have incurred. And just to give you a brief overview on how the Rottneros Mill looks like today. Last year, we made some 173,000 tonnes, 64 comes from the groundwood line and 110 from the CTMP. Over the years, we have made more than SEK 600 million in investments, both in the CTMP line. This line has increased from about 80,000 tonnes at the beginning of 2015 to what we believe will be some 120,000 tonnes in capacity in 2022. We have also made investments in the Energy Systems. Apart from electricity, there is steam and heat that is needed to run a pulp operation. We have invested in a fossil-free energy system for drying the pulp. And we also have a state-of-the-art affluent treatment system, which will generate 2-megawatt hours of biogas once finally trimmed in. So this means that we will have a very good and resilient energy supply to the CTMP line, which we are looking forward to improve over the time. We are a specialty producer. We are proud of making very -- many different products, which many of them also tailor-made to our customers. And this is part of the legacy, which really dates back to the 1887, when we started making pulp as one of the first market pulp producers. Industrial production has been on the site since 1630. Looking at the market segments. I talked about that we're having 2 lines at the mill. CTMP is a more modern way of making mechanical pulp, and that is primarily useful and adds customer value in the Board and Packaging segment, but also within the filter tissue as well as special applications. Very few volumes are going into the printing and writing. Groundwood, on the other line, is predominantly sold into the printing and writing segment, thus the problems that we have occurred and that have accelerated over the last month. And we don't really see how the situation will improve back to a level where we see that groundwood will have a financial situation and contribution to the company where it makes sense to continue the production. The groundwood line is old. It's difficult to find spare parts. Stones which are used to grind the wood are basically made from 2 suppliers. One had been a Russian, which is now off limits and cannot be sourced from anymore. The other one is a Canadian, and their market also is shrinking. So there is a limited time for groundwood stones in the future. And also giving the specifics of this line, it is difficult to increase production, improve productivity and keep up with cost increases by consecutively increased volumes going out. And again, it's a product that has outdated itself. Turning over to the project we are running for increasing our pulp for packaging. The aim is to increase production from today's 120,000 to 150,000 tonnes by 2025. We are in the midst of a pre-project, and we believe this will be put forward to the Board later this year during quarter 4. This will mean an investment of SEK 160 million to SEK 200 million. And we see that CTMP pulp is contributing with a much better profitability, also in a very challenging environment as well as is exposed to a growing market, and we foresee the packaging market to grow going forward. Nonetheless, we believe ourselves so strong that we are investing in molded packaging, for example, both in Sweden as well as in a project in Poland to substantially increase our capacity for packaging. What impact does this have on Rottneros as a group? While the fundamentals still are there, we are part of the circular economy. We have a sustainable business model and a renewable resource that we're using. We are and continue to be an established niche supplier with customers that are following us in good and bad times, I would say. And if anything, this would even further enhance and improve our strong cash flow as we're exiting the least profitable product line within the group. To summarize it, the groundwood line will be discontinued. We are aiming to do this by the year-end once the union negotiations have been concluded. This will lead to one-off costs of SEK 60 million, which will be partly offset by electricity futures once we know our need for electricity going forward and the final date of the groundwood line, we have electricity futures, which today have a high level in our balance sheet, and we will realize those which are not needed at market price, which would contribute strongly to mitigate the effect of this discontinuation. It will have a marginal impact on group sales and net results, and we strongly believe both in Rottneros Mill as a producer of high-class CTMP pulp for the packaging industry. With this, I leave over the word back to Martin and open up for Q&A.

Thank you very much, Lennart, for that presentation. And I will jump into the Q&A here, and we'll start with the first question. Why is it a good time to close the mills today or now?

We are in a position where we are financially strong enough to both offer the good package for those who will be made redundant as well as we can continue to develop our mill for making pulp for packaging. We have made investments of SEK 600 million. We see with a minor investment of SEK 160 million to SEK 200 million, now going forward, we can further enhance the mill, and this is made in a situation while the group is financially strong and has the ability to do this.

Okay. We'll take the next question. You're planning to increase the CTMP production. Could you comment on how much that would increase?

The increase will be, as I said, from today's 120,000 tonnes to 150,000 tonnes. So this will be an additional 30,000 tonnes or 25%. This will be done in -- we expect to be doing this over the course of the next 3 years once we have concluded the pre-project and can put an investment proposal to the Board later on this year.

Okay. You have more than 25 different products as of today. Could we possibly see an increase of that number in the future?