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

Hello, and welcome to today's webcast presentation with Rottneros. With us today, we have the CEO, Lennart Eberleh; and the CFO, Monica Pasanen with us. My name is Martin Westerlund, and I work for Finwire. [Operator Instructions] And with that said, I'll leave the word over to you guys.

Thank you very much, Martin, and hello, everybody, to this webcast for the full year report of 2022. It's with great pleasure that we are here today and presenting a record net profit for the company of SEK 565 million, a number that we haven't seen since the financial crisis. We have -- taking care of our balance sheet, which continues to be extremely robust, and the strong cash flow has led to a strong cash position. And on the basis of that, the Board is proposing a dividend for the year of SEK 1.40 per share. The year as such has also had its challenges based on the declining market for newsprint and graphical papers. We took the decision to discontinue the groundwood pulp line, which was weighing on the results. And during the fourth quarter, we had a turbine failure at our Vallvik mill, which had an impact on the last quarter's results. But we will go into the figures in a short while, together with Monica. And prior to that, I will give you a brief overview of the company, the reasons to invest in Rottneros continue to be the same. We are in the middle of a green transition and the forest industry as much as pulp and paper will and can contribute to that. We have a proven track record of long-term profitability and creating stable shareholder returns. We are aware of the fact that we are operating in a cyclical environment, and thus, a robust balance sheet is important. We have a target of more than 50%. And over the last time, we have been north of 65%. Last year, we came in at 66%. And given our products and product lines, we have developed strong market position in selected niches, which help us balancing out market fluctuations and price movements somewhat better than average. And that brings us over to the market. Where is the pulp market currently at? If we look at the price graphs, the dark line is the NBSK in Europe in dollars and the lighter in Swedish kronas, you see tremendous upwards movement during 2021, up until quarter 3 of 2022, when we, in dollars came in just at $1,500 at the end of the quarter. These are quarterly average prices you see here. And during the quarter, the pulp prices have started moving south. We lost some $70 down to $1,430, and that movement continued at a slower pace at the beginning of this year. And by the end of January, we were down to $1,410. So from top notations, we lost some $90. More important maybe to see it on the monthly average, which is the dark line, but also the balance in the market, which we think is, given -- is good described in the balance between supply and demand. And here, you see the stock development. And it has been stable during the last 2 years. We have notes of small increases in the stock numbers. But so far, no dramatic changes. A lot of stock has been tied up in transit over the last time. There have been continuous reports of logistics issues and containers being short and ships being out on the seas, not being able to load and unload at the harbors due to the pandemic, and these volumes are now slowly coming into the market as well and should impact the stock figures. But of course, it's also a question of demand. And if we look at the demand and compare the first 10 months of '22 with '21, we see that graphical papers once again had a very negative development during the course of the year, but also containerboard was coming in weaker than usual, whereas board, graphical board, packaging board and liquid packaging board has been just about 0. Tissue continues to be a growth market. But just looking at the annual change, maybe it doesn't say that much, and it's more important to look at how these segments in Europe develop over time. And if we look here, for the last 5 years, paper, packaging and tissue and their respective development, we can see that there is a structural decline for paper. In tonnes, it's a decline of roughly 30%, whereas board and packaging has seen an increase. And that is also one of the reasons why we are shifting our focus away from graphical papers into packaging grades. In tissue, although it is a very large segment, remains to be a growth opportunity for us rather than a strategic opportunity that we're pursuing. If we're looking at the market for chemical market pulp, first 11 months, we see that there has been growth in Europe, North America, South America, whereas China had a very slow year, but the dark lines or the dark bars are the full 11 months whereas the lighter ones are the first 8 months. And here, we see how it has changed during the last 3 months of that period where you can see Europe has a very obvious slowdown as much as North America whereas in China, still negative but less negative than for the first 8 months. So there has been a growth, and we have seen also price announcements coming in from China. China has had a weak year, much affected by the handling of the pandemic in China, but that seems to be now over and opening up. And as soon as China is coming back from the current Lunar year, which is celebrated now, we believe things will turn more positive there. For Rottneros, we look at our split of segments. We have a new segment here at the top. Fibre cement where fibres -- cellulose fibres are replacing asbestos fibres, a small but growing segment. Packaging is growing. Filter, electrical and special stable, and printing and writing has been declining and will decline further as we now have closed the groundwood line. And with that brief overview, I leave over to Monica to take us through the figures.

Thank you, Lennart. Yes, we had a record high profit in the year, very satisfying to see. But we start with the fourth quarter, which came in on SEK 1 million plus in EBIT. We, of course, had a very big help of the market with price and currency, but we also had some negative effects in the quarter. And the main thing is really the steam turbine in Vallvik Mill that was out of operation due to a failure that has led to increased variable costs and in terms of purchased electricity. We, of course, have had maintenance costs on the turbine and also slightly lower production, meaning lost revenue. When talking about the variable costs, we are also affected by inflation. Price for pulpwood is higher than last year, but the big change is really in chemicals and fuels that have increased dramatically year-over-year. On the fixed cost side, we had maintenance stopped in Vallvik in the fourth quarter, whereas the previous year, it started already in September. So that has an impact. We also have planned maintenance work that was more than the previous year. And we have also had unplanned maintenance like, for example, the turbine. And on top of that, we see that the inflation is affecting our fixed costs. We can look at the full year, which is on the price and cost side. It looks very similar, but we increased our EBIT from SEK 267 million to SEK 550 million, which is a record level for us. The 2 main items affecting the full year on the cost side is the steam turbine, but also the closure of the groundwood line at Rottneros Mill, where we have taken all the costs mainly during the third quarter, but also to some extent in the fourth quarter. Yes, we ended up with a record year, SEK 550 million. On top of that, we have a financial net of plus SEK 164 million, which comes from the electricity hedges that we had in excess of what we will be using this year and next year. And due to that, it's no longer cash flow hedging, but a financial instrument. And that meant that the net profit for the year is SEK 565 million. And based on this, the Board has also looked at a dividend proposal. The earnings per share is SEK 3.70 and the proposal is SEK 1.4, and that would mean a payout of SEK 214 million, if approved. And we can look at the next slide and look at our balance sheet. We have very strong cash generation during last year 2022. The cash generation from operations was a bit more than SEK 540 million. In total, we have had a cash generation for the last 5 years, so SEK 1.6 billion. During this period, we have invested in our operations, SEK 727 million and also paid dividend to shareholders of SEK 430 million, and this excludes the proposed dividend that I mentioned earlier. So we have a very strong balance sheet, solid good cash position which also is the reason for the dividend proposal by the Board. And then I hand back to Lennart.

Thank you very much, Monica. And let us look ahead what we believe can drive our business going forward. And there are some macro trends that we sincerely believe will favor the consumption of cellulose pulp. One is a growing disposable income for the world's population, which leads to better living standards, driving the demand for tissue. We have also seen a strong shift over to e-commerce and ordering on the Internet, which is driving the consumption of packaging, especially paper-based packaging and corrugated, but also primary packaging as folding boxboard. We have a green transition and especially interesting for us is, of course, the development of solar and wind farms which are not traditionally where the big power generating units are. So this needs investments in transmitting cables as well as transformators. And here, this very pure pulp from Rottneros with low connectivity comes in at play, and we see a strong and stable demand from customers who are using this. And of course, the overall drive to be more sustainable and use less fossil-based products and going over to fibre-based products. And there, we ourselves are active with developing Rottneros packaging as a premier supplier of high-quality molded fibre packaging. And we have our technology center in Sunne, where we have developed the technology, and we are in the middle of developing a much larger facility in Poland, together with Arctic Paper in a 50-50 joint venture. We're in the process of negotiating supplies of machinery. The whole is under renovation. It's a brownfield installation, which makes it much more efficient than a greenfield. It's on the Polish German border, 80 kilometers east of Berlin. So right at the center of Europe. And with the quality that we have developed, we have an oxygen tight modified atmosphere fibre-based tray, which is certainly one of its kind, and we see that the demand for that is simply just growing. So if we summarize quarter 4 and 2022, we see that we have record high earnings. As Monica mentioned, the net result is higher than the operating profit, thanks for the financial items. We have taken necessary precautions to make Rottneros even more resilient for future changes in demand. We're decreasing our exposure to the graphical paper sector by closing down the groundwood pulp line, which also has been the product that had the most energy consumption per tonne. We are maintaining and focusing on keeping a very strong balance sheet in order to be able to fight periods of less economical favorable situation, and our packaging project is going on according to plan. So we see the emerging of Rottneros, which will change its being and color going forward. So with that, I thank you very much for your attention, and I'll leave the word back to Martin for questions.

Thank you very much for that presentation. And like you said, now it's time for the questions. I'll take the first one here. Are the rising costs for the fourth quarter something that you see continuing into Q1?

Yes. Thank you for the question. We had some one-off items and especially the steam turbine was such an item in the fourth quarter. But with the higher inflation, that, of course, will continue, but we will not see the same amount of maintenance costs in normal quarters. The fourth quarter is the heavy one on our maintenance side due to how we schedule our maintenance stops.

Okay. Thank you for that answer. Take the next one. How do you see the electricity crisis that we have in Sweden, both in short and long term?

If we look at the development of electricity futures, we see that they have come down now for the coming years back to a more reasonable level around 50 öres to 60 öres. We have actually also taken new futures there. So given all of that, I would hopefully believe that we've seen the worst. But of course, we will continue to see volatile electricity markets as the emergence of sustainable energy continues. There's more wind power. There's more solar power. We are more and more connected with the continent. So yes, the inflation on energy prices is dampening. There has been a transition from Russian oil and gas in the European energy mix. But we see that the storages are full as well. So I'm carefully optimistic, but I believe that there will be a continued volatile electricity market.

And are you seeing an increase or a decrease in demand going into Q1?