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

Hello, and welcome to today's webcast with Rottneros with CEO, Lennart Eberleh; and CFO, Monica Pasanen, will present the company's Q3 report. And with that said, I'll leave the word over to you guys.

Thank you very much. And hello, and welcome everybody to our today's report presentation. And with me, I have our newly appointed CFO from early September, Ms. Monica Pasanen. So welcome, everybody, and let's dive into our report straight away. If we look at the highlights, driven by a continued strong pulp market with high prices and also additionally fueled by the currency rates development. We have record high turnover for quarter. As announced earlier, at the mid of August, the decision was taken to close the ground with pulp line. This pulp is mainly used for newsprint applications, which is a market in decline. And this is also the product line, which is mostly exposed to the electricity market. It's needing a lot of electricity to free up the fibers. And in the current turmoil and also on the long-term perspective that we see, the Board has come to the conclusion that in the long view and strategic direction of the company, this will not be sufficiently profitable to continue running it. So it's with great sadness that we took that decision. We've went into union negotiations, which have been finalized now as well, and the new organization will be in place as of January 1 with a reduction of staff of some 35 people versus the 40 that we have announced earlier on. But it will be full production until the end of the year on this legacy part of our company. And we also have a very strong balance sheet that we feel is worthwhile pointing out as we are bracing for storm, we don't know where the macroeconomic is taking us. And in such a situation, having a good and solid balance sheet with a strong cash position, of course, also opens up for opportunities as they should arise in the coming months and years. Rottneros as an investment, we are part of the circular economy that is not changing anyway by the way of restructuring our operations. We are an established niche supplier. We've seen how these niches that we chose to focus on have developed very strongly during the past years and especially this year, which also is contributing to our position. And we continue to have a strong cash flow, which enables us to create shareholder value, while also developing the company. Having a quick glance at the market and how the pulp market has developed since we last talked about it. Here, you see the quarterly average prices both in dollars as the dark line and recalculate it into Swedish krona in the lighter line and you see on the very right prices in Swedish krona have gone to record high levels. Be aware that these are gross prices, so there is a net rebate to be calculated from this. But even though on net levels, these prices are unprecedented in the pulp market, so very strong market that we have been able to leverage on the back of our stable production. If we look at the monthly price development, again, the blue line is the price of the long-fiber sulphate bleached kraft pulp in Europe. You see it on the left axis, the U.S. dollar price, $1,500 just touched upon it in the last month. And now you can see also there on the monthly average prices that it's leveling out. And as we've seen early October, there is a slight setting in the market. October prices have come down with $20. But as you see, the green light tables are showing the balance between supply and demand and stock levels are stable, slightly elevated. But as you can see, that hasn't driven any prices going down as we see there is more pulp in transit, and there's also a move towards more pulp from Latin America as the eucalyptus pulp becomes a logical share of the cake and thus longer transit times are structurally inflating the stock levels. So what we see currently is more the effect of the macroeconomic situation and uncertainty in our major markets Europe for our customers and how they will be able to continuously forward electricity prices and pulp prices to their paper and board customers. So far, what we've seen in this has been done very successfully. So we have continued in a situation where both paper market and pulp market are very profitable. The European market is trending towards more and more packaging. It's now half of the market and a little bit more than that. And the graphical papers are decreasing and they now just about 26%. This is the total production during the first half year. And if you look at how these segments have developed, you see there to the left side, the graphical segments have decreased during this year versus last year, which was also a very strong year '21 versus '22 -- '20 on the rebound of the corona pandemic. But now the structural changes that we've seen for a long time are coming back. And on the basis of that, we also have been taking that decision to close down the groundwood line as it is primarily supplying into the newsprint area, which you can see here is a declining market. So paper market is down minus 2.8%. Board still up, which you will see in a second, it is of course, favorable for us as a pulp supplier. If we look at the pulp market, the global deliveries of market pulp have a positive development of 2.8% despite the fact that China, which is the largest market has been weak during this period, especially Europe and North America have pulled the markets up and we could favor from that. And if we look in a split here between the various grades, the hardwood kraft pulp from Latin America is the one that has seen the largest increase in deliveries. The long fiber chemical pulp is slightly minus, but that is more a restriction of supply due to fiber shortage in North America and logistics issues rather than a decreased demand. And the brown pulp, the UKP also has continued seeing a very strong growth with a double-digit figure during this period. And of course, at our Vallvik mill, we are one of the premier producers of unbleached pulp with the highest quality demand. So if you look at how our sales are distributed by product area, this is January to September. deliveries and turnover versus the full year 2021, tissue is declining. The board and packaging is increasing. And here, we can create substantial value for our customers. Filter stable, electrical technical applications also very stable, as well as special. But you see already here during the course of this year that printing and writing is decreasing, and we will see a much larger decrease of that segment going into 2023 when the groundwood line will be out of production. Others have increased from 1% to 5%, and that's a basket of various specialty grades that we run for some of our customers. So the niche strategy that we have and the focus we have to create customer value by making customized pulps is paying off, and we are exposing ourselves more and more to those segments where we see a long-term growth of demand. And with that, I leave over to Monica to guide us through the financial figures. Please, Monica.

Thank you, Lennart. Yes, we've had a very eventful quarter, record high turnover, good profitability. At the same time, we see that inflation starts hitting us on input costs. We had the decision about the groundwood pulp line in Rottneros Mill happening during the quarter. And all in all, we can see that we had a net profit for the quarter of SEK 270 million. On this slide, you see the EBIT, but the net profit was SEK 270 million. And I will spend a few words on describing that. If you have read the report, you have seen that we have accounted for the electricity hedges that we will not be using for our cash flow hedging. Normally, we have electricity hedges to cover our future cash flow. And now when we are closing the groundwood line in Rottneros Mill, the group's total consumption of electricity will go from 300 gigawatt hours to approximately 220 gigawatt hours, which means that we have more electricity hedges than future cash flows, which means that this portion has to be recognized as financial derivatives and the value of this part goes into financial net, which is then seen in the net profit for the quarter, when you look at the full profit and loss. But then more interestingly, we should look at what is really happening to our operating profit, our EBIT. We go from SEK 101 million to SEK 185 million. We see that the majority comes from price and currency, and you have seen the graphs on the previous slides. Quarter-on-quarter, the list price, the gross price increased by 11%. At the same time, the dollar against the Swedish krona increased from 8.6% to approximately 10.6%. And we are selling approximately half of our products in U.S. dollars. So we're very exposed to the U.S. dollar. All in all, the gross price in Swedish krona is 35% higher this quarter compared to last quarter. So that is the biggest driver for our profitability this quarter. We also have higher volumes despite having taken some downtime in Rottneros Mill due to the electricity prices. We have higher production. And one reason is that the CTMP at the mill is doing very well. And the other reason is Vallvik Mill has had a good quarter, production quarter. And when we compare to last year, we have been running full until the last day of September when the annual maintenance started, whereas it started a week earlier in 2021. That also affects the volume. On variable costs, we can see that we have SEK 60 million higher variable costs, and this is measured per ton. So it's not affected by the volume. Surprisingly enough, it's not electricity that is giving a higher cost, and that is thanks to our high hedging policy. It is rather wood and pulp wood and chemicals that is higher than a year ago, it is more or less 50-50 in the increase in cost between pulp wood and other input materials. Fixed cost is a big number. We are SEK 82 million higher than a year ago. And the big reason here is, of course, the provisions that we have taken for the groundwood line at Rottneros Mill. In the fixed cost, SEK 52 million is recognized for personnel costs and other costs associated with discontinuing the operations. And we have another SEK 10 million increase in depreciation costs due to obsolete equipment at Rottneros Mill and also an adjustment of the -- in Rottneros packaging of the machinery we have there to adjust to current operations. So all in all, the EBIT for the quarter was SEK 185 million. If we adjust for the provisions for the groundwood line of SEK 62 million in total, that gives SEK 247 million, but a quarter with above SEK 200 million in profit if it had been a more normal quarter. If we then look at the first 9 months, it's very much the same picture. So I will not go through the various reasons because we -- it's almost identical. It's just that the numbers are a bit higher, but we go from SEK 209 million to SEK 549 million in EBIT, and that is compared to other years in recent times when we have been between SEK 260 million and SEK 295 million in full year EBIT. So of course, it is a very high number this year. Then we go forward and say just a few words about our financing in July. We exercised the option to prolong our current financing. We took a new financing in July 2021 for 2 years with an option to prolong and that is what we did now in July, which means that the current long-term financing that we have in place will expire in July 2024. And looking then at the balance sheet, the new loan facility that we now have, as I talked on the previous page, you can see that also in the equity to assets ratio. So in the third quarter last year, when we decreased the amount of long-term financing we had, our equity to assets ratio increased from the high 50s to the high 60s. So we are now at 68%. We have a very strong cash flow, which has -- means that our net cash position right now is SEK 311 million. If we look at cash and cash equivalents, we had at the end of the quarter, approximately SEK 430 million in cash. In addition, we have SEK 282 million in unused credits, which means that we have available liquidity above SEK 700 million, which was at the end of the quarter, and the situation is fairly similar right now as well. We invest approximately SEK 100 million in normal operations each year, and that is also the number we are looking at for 2022. Of this, we have already invested a bit more than SEK 60 million. And of course, with the maintenance shutdown in Vallvik mill now in the fourth quarter, there are quite a few projects ongoing that will then end up at total of a bit above SEK 100 million. With that, I hand back to Lennart.

Thank you very much, Monica. And let us look ahead what we believe can happen in our industry and for our markets despite the very turbulent times we are in. And we don't see any major changes in the general trends, which are favoring pulp. We believe there will be an increased need for tissue that absorbs already now a major share of the market pulp that will continue to do that going forward. E-commerce is driving the use of packaging, which is mostly fiber-based and continues to do that as well. And of course, the green transition, which is taking place in Europe and in the U.S. and other places of the world, where windmills and solar farms are being built, which means the need for cables, where our e-grade pulps are very well used as much as transformers. So the order books, we understand from our customers here are stretching quite a long time into the future. So we will foresee a stable demand for our most specialized grades. And of course, sustainability is an underlying fact. It might be a little bit less so now when we are in a period of strong inflation and price increases, people have to cope with energy price increases, more gauge just or becoming more expensive. So maybe you tend to use the cheaper solution and maybe not the most environmentally eco-friendly one. But it is there, and it is one of the large questions and challenges we have to face to fight climate change. And I think there the pulp industry and the paper industry as such as much as the forest industries, we're very well positioned to help do that transition away from fossil-based. Rottneros Packaging is part of that transition, helping to substitute fossil-based packs with fiber-based packs. We have the first fiber-based modified atmosphere packaging trade in the market, a couple of millions of packs that have been filled with single meals ready to warm up in the microwave. And our project in Poland is according to plan, and we believe and see no reason why that shouldn't be the case that we will start it up by the end of 2023 to scale up the technology that we have developed. And we also see that on the latest packaging fairs that a, there's a large interest. There are many players; and b, we still have a quality, which is currently second to none. But we do not rest there. We know that the competition is out there, and everybody tries to reach the very high-quality fiber-based packaging in order to be part of this massive market that we see going forward. So summarizing, quarter 3, a record high turnover for the quarter and for the first 9 months, from a position of strength, we have taken the necessary changes and decisions to further strengthen the company's structure going forward. It is not without sadness that we will close down the groundwood pulp line, which has been an integral part of our production, and we have to depart from loyal and dear colleagues, which have devoted their working life to this mill. But unfortunately, this is the situation we are facing. And at the same time, we're also running a feasibility study to increase the production of CTMP at the Rottneros Mill. We do have a strong balance sheet to support the changes we will do going forward to support the investments we've seen and deem necessary at the same time being able to fight a situation, where prices might come under pressure and we already see increases in costs. And the packaging project is according to plan, which is, of course, very nice to see. And with that, I leave the word back to our host to take some questions and answers.

Thank you for the presentation. [Operator Instructions] Net sales increased by 41%, which is a quarterly record for you. Which are the main drivers behind this?

I'll leave that to Monica to answer.

Yes. Thank you. And it is, of course, the pricing in the market. We see higher prices on the pulp that we are selling in currency. And then when we translate it into Swedish krona, we get an additional benefit. One thing that I didn't touch upon when I talked about the result is that we -- even though the pulp prices are increasing to such an extent and we have a record high turnover, we still see that 9% of our turnover comes from other products than the sales of pulp, which means that we are also increasing the volume and prices in the other segments being by products and goods mainly and of course, also packaging.

Do you believe that the prices of pulp will continue to rise in the future?

That is always one of the big questions this industry is working on and trying to understand. It's a cyclical market. If we try to learn from history, we see the pulp prices go up and down. We might have seen a temporary peak at this time. We've already seen that prices have come down. But I think the underlying development is such that there is a need for more sustainable renewable products made from renewable sources and raw materials, and this will drive the demand. And I think on the basis of that, pulp prices will continue on a sort of trend basis going forward.

How does the more uncertain global situation affects Rottneros?