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

Hello, and welcome to today's webcast presentation with Rottneros. With us presenting today, we have the CEO, Lennart Eberleh; and CFO, Monica Pasanen. [Operator Instructions] And with that said, I'll give the floor to you guys. Please go ahead.

Thank you very much, Martin, and hello, everybody, to this report. It's a strong start into 2023 that we've seen a quarterly result of SEK 149 million, which is slightly above last year's first quarter, which we know was the beginning of the record high year of 2022. And the main reason for this at this point is that we still have very high pulp prices on historical high levels. However, we've seen them declining during the quarter as we've seen during the end of the last year, and we had a good production in our mills. This is also the first quarter where we have discontinued the groundwood line at Rottneros Mill and demolition is going on. And we see the impact of the improved product mix on our results. After the period, we also had some further events in order to mitigate the inflation and cost increases that we have seen and as a continuation of the organization, a review of the Rottneros Mill and our central staff functions. We have initiated an organizational review of the Vallvik Mill, which has been the last part to be going through in order to be efficient and modernized. We've also taken a decision, as earlier announced, when we were running the preproject to increase the CTMP capacity at the Rottneros Mill. This will add some 40,000 tonnes of mechanical pulp at a very favorable investment cost per tonne of around about SEK 4,500, which is very competitive in the pulp market. And furthermore, we're also starting to invest in renewable energy generation. It's a 3-megawatt solar park as well as a battery storage in order to participate in the frequency balancing of the Swedish grid, which provides a favorable return on the investment. And this brings us to what Rottneros presents to you, shareholders. We are not only seeing that the green transition is profiting our pulp, but we are also actively taking part in it. We see that we generate a long-term profitability in our operations, and that has led to a very robust balance sheet that enables us to take significant steps now to further develop the company. We create stable shareholder return, and we have a strong market position in our selected niches, which we're not the least, during the last quarter, see -- gives advantages to the way how we can sell our products. And with that, we come over to the market situation and the development we see here. And as you can see in this graph, the broader lines are the gross prices where we have to deduct the rebate, whereas the thinner lines are the net prices according to TTO. Left lines -- left part of the diagram is in U.S. dollars and right is in Swedish kronas. And we see that we have peaked towards the end of 2022. These are the quarterly average prices, and there has been a drop in prices during the last 6 months. However, that drop has not been as strong in Swedish kronas as in dollars. And if you look at the supply balance, in the market, we see that stock levels have increased. We are now back at levels that we've seen back in 2018. It's more on the short fiber, 52 days. A little bit less on long fiber, 47 days. But for both grades, it has been an increase during the month of February that we see here. March figures are at this point not disclosed as of yet. And also here now, we have introduced the net price list for Europe according to TTO, which is the lower line. So we see how this price develops without taking into consideration the rebate. So we know the prices go up. And since a couple of months now, we see that the oversupply that is in the market that is shown, stock increase has also weighed on the pulp prices. If we look at our main market, which is the paper and board market in Europe, 2022, it was a total of around about 85 million tonnes. You see that the part in the middle that represents board and packaging is the increasing part of the market. This is both integrated and nonintegrated producers. And on the basis of that, and especially the low part of the diagram, where we see the paper volumes decreasing, was the reason behind closing down the groundwood line. And given the very dramatic development during recent months that we can also see here for the full year, and that development has continued into quarter 1, especially newsprint and graphic paper had been very negative development on volumes. And this would have caused tremendous problems on our groundwood sales. So having taken those tough but necessary decisions during last year was well timed. However, we also see that board and packaging is currently undergoing a negative growth as the general economical situation is weighing on sales and all supply chains are pretty much full. So we will have to wait for a couple of months before balance is restored. What does this mean for the pulp market? Well, if we look around the world, Europe, January to February, has seen very slow sales of market pulp. North America, a little less so, and especially China has seen a pickup. You see here also the full year '22, the first 2 months in '22 versus the first 2 months of this year, sorry, what has been a negative growth there in China. But China is not yet back to where we thought it should be and it hasn't really fueled the market after the release of the restrictions after corona. So there is still some headroom for market development going forward. So for the time being, we see an oversupply into the market. If we look at our sales and how they have developed, we are adjusting our sales to where we find the takeoff. And you see, especially in the tissue segment, which is not a strategic segment, there, we could increase our sales on the short run, while board and packaging has decreased a little bit, but still is the major segment of our sales. Filter is stable and has increased year-over-year and so do the electrotechnical applications, transformer board and electrical papers, which is proof of the customer value that we supply. And with that brief overview, I leave over to Monica, guide you through the quarter 1 results.

Thank you, Lennart. Yes, we are living in very turbulent times, marketwise. And what has happened then to our profitability, it looks very stable. We go from SEK 145 million to SEK 149 million quarter-on-quarter, but there is a lot of things happening in between. The most positive item affecting is the price and currency, and you saw the price curves. We were still on an upward trend a year ago and have now peaked, but we are higher -- have higher prices in U.S. dollars in the first quarter than a year ago. And also, the currency is more favorable with a weakening Swedish crown. We also get a positive effect from mix. Part of the mix is that we now have more sulphate pulp in the total volume as the groundwood is closed. But we can also see here positive from sales of byproducts when we are producing our pulp. All prices have been going up with inflation, and so has also the prices for our byproducts which, in turn, shows us the variable costs where we have a very high cost increase. The majority comes from wood where prices have been increasing continuously since a year ago. A fairly big portion, about 1/3, comes from chemical costs. And we know that a lot of the chemical costs are linked to energy prices, which have been high. So having said that, we can see that some of the chemicals pricing have peaked or flattening out or even decreasing. So we'll see what happens going forward. There is inflation also on the fixed cost side, but we do have a smaller overall costume with the closure of the groundwood pulp line, meaning that we have basically like a plus/minus 0 on the fixed cost side. So if we look a bit on what it has on history, this is EBIT and EBITDA per quarter since 2019. So first quarter this year shows a strong profit also from a historical point of view. And we have an EBIT margin of 20% in the quarter. And for the rolling or moving 12 months, it is 16.5%. Then tomorrow, we will have our Annual General Meeting. The proposed dividend is SEK 1.40, which is a significant increase from last year. And would mean if it is approved, that we would have SEK 214 million payout to our shareholders in about a week's time. Then looking at the balance sheet. We continue having a very strong balance sheet. On the right-hand side, you see the green bar, which is net cash. SEK 578 million is the actual cash we have in our books, and this is then minus the -- our debts. We have some credit lines that are unutilized. Our available liquidity is SEK 860 million or -- at the quarter end. We have one thing happening from our electricity price hedges from last year, where we now, for 2023 and '24, have excess electricity price hedges due to -- that we are not producing the groundwood pulp. And we secured the main part of these hedges, selling the hedges and meaning that we will have a positive cash flow for these financial derivatives in 2023 of SEK 156 million for the full year or SEK 38 million per quarter. Then what are we going to use our cash for? We have the dividend proposal of SEK 214 million. And then we have investments that were approved in addition to normal maintenance investments, which will give approximately SEK 300 million outflow of cash during this year in 2023, which is higher than previous years. Apart from having a strong balance sheet, we are -- or apart from financing it ourselves, we are discussing new financing lines to support our investment program. Thank you.

Thank you, Monica, and that leads us into how we think things will develop going forward. And as shown before, we do see some opportunities that are behind a continued positive development of pulp and paper usage overall. There is a growing number of people on the planet with increasing disposable income, which leads to better life standard, which is driving demand for tissue. We have seen how e-commerce has emerged during the pandemic, and our habits have changed, and this will remain and continue to grow. There is the need for renewable energy to mitigate energy, which was based on fossil fuels, and this will lead to the need for transformers as well as cables and transmission. And there is a good demand there for our clean UKP, the unbleached kraft pulp. And of course, overall, sustainability is here to stay, and we are adopting our habits. And this is where we have seen a potential for us to develop a new line of business, Rottneros Packaging, where we have, during the quarter, formalized the joint venture company in Poland, together with Arctic Paper. We are now sourcing and contractually negotiating the equipment into this factory, which will significantly increase the capacity of molded fiber trays. And the mill or the factory is developing according to plan. And we are still one of the first producers of a very high-quality fiber-based packaging that can replace fossil-based packaging. And the demand and the interest we see from the market still is very strong. And we will be one of Europe's largest packaging [ fares ] made and believe that this will further fuel the demand and see where things are going. So if we wrap this up, we have stable results at the beginning of 2023 on the back of remaining high pulp prices, although in a declining mode. Production is stable. We have now a new production structure in place where we are not making any groundwood pulp for the printing and graphical market anymore. We have a significant financial buffer that enables us to take investment decisions to further develop the company forward. From a couple of years ago, when Rottneros was two pulp mills, we have now acquired a wood sourcing organization that has strengthened our raw material purchases in Nykvist Skogs 3 years ago. We are also investing in more CTMP capacity, which will profit the group by moving volumes from a less profitable groundwood into the more profitable CTMP. And we have packaging that is emerging here now during the year as to become something more significant and substantial. And with that, I think we see how Rottneros is transforming itself into a continued interesting investment within the paper and pulp sector. And with that, I'll leave the word back to Martin to see if there are any questions.

Thank you very much for that presentation, and I'll jump into the Q&A section. [Operator Instructions] And we'll start off with the first question here. We are 1 month into Q2. How has the demand for Rottneros pulp developed in April?

That is a good question, of course. But unfortunately, we cannot comment the market development after the first quarter.

Understood. We'll take the next question here. Have the pulpwood prices peaked? Or are they still on the rise?

We see that there are recently some new announcement for pulpwood. So I think there will be certainly one more step, but I think we also see that everybody is seeing the crunch between increased raw materials and decreasing product prices. So I think there is a limit to how far these products can -- prices can continue. So let's see what happens, but I'm cautiously optimistic that we will not see too much more of increases on pulpwood.

Okay. I'll take the next question here. Could you elaborate on the economics for the solar park investments, and in particular, the additional revenues from the battery storage?

Yes. The solar park is a more long-term investment in terms of that we want to secure electricity and green electricity for Rottneros Mill at long-term good prices. So I think everyone who is investing in solar panels knows that it's not a quick payback. On the other hand, with the battery storage, there is an opportunity to be part of the infrastructure to help the electricity situation in, what it is called, [Foreign Language], frequency regulating market. And we want to be part of that. And we can see that, that is a profitable investment.

The next question here. Could you also elaborate on the tall oil plant investment in Vallvik? And why now?

That is a replacement investment. The tall oil plant is an integral part of a sulphate kraft pulp mill, which enables you to take the soap that you separate and transform it into tall oil, which then can be the basis for biofuels or other bio-based products. It generates additional income, and it is very difficult to get rid of the soap, I would call it now, not really chemist. So you have to use it in your plant. So it's basically up for life -- end of lifetime.

And do you expect any market-related disruptions to production now in Q2?

I cannot comment upon that.

I'll take the next question here. Congratulations with a strong result. What have you seen for tissue demand in Q1?

We've seen a continued good demand for tissue during quarter 1, and that enabled us to shift some volumes from other segments into the tissue segment to keep up with our deliveries.