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

Hello, and welcome to today's webcast presentation where we have Rottneros presenting the year-end report for 2023. With us presenting, we have CEO, Lennart Eberleh; and CFO, Monica Pasanen. [Operator Instructions] And with that, we welcome Monica and Lennart.

Thank you very much, and hello, everybody, to our Q4 report for 2023. And we can start off by saying that our quarterly result was impacted by low pulp prices and the annual plant maintenance shutdown in Vallvik as well as high variable costs. This was leading to a result of minus SEK 100 million in EBIT, which is not satisfactory, but it doesn't stop us from our focus on impacting and working on the things that we can control ourselves to offset cost inflation and continuously increasing our efficiency. If we look at the full year, we can see that the production of the 2 lines that we have left in the company after having closed the groundwood line, has risen with 3% and this includes a record on the CTMP line with 122,000 tons and a very good year in Vallvik, which is one of the best 3 years we've had so far. The net profit results at SEK 121 million. And on the basis of that, a positive outlook into the future and the strong balance sheet that we're having with us, the Board is proposing a dividend of SEK 0.50 per share to the AGM, which will be held on the 20th of March. If we look into Rottneros as an investment case, we are part of the green transition. We come from bio-based circular economy and business models. We have a renewable raw material, the forest that captures carbon dioxide out of the atmosphere and turns it into very long and stable fibers that we're using to provide our customers with the solutions that they need. We have demonstrated that we have a long-term profitability base, and we are undergoing a broadening of our revenue base, which is one of our long-term targets but at the same time, also increasing our volumes in the pulp molds and making sure that we are efficient. We have a robust balance sheet, and we create shareholder returns last year, around about 11%. Not the least, do we have very strong market positions in selected niches and especially in a year like 2023, when all markets has turned negative. This gave us a lot of strength and the ability to run full and supply our customers with the volumes they needed and thus maintained a good invoicing situation. If we look a little bit into the market situation, which has been a turmoil with reducing prices during the course of the year, but we've seen signs of stabilization towards the end of last year and during the quarter 4 as well as into the beginning of 2024. The pulp market is, as you know, a cyclical market. We had a peak in prices towards the end of 2022, which then has gradually decreased during the course of '23 with a low point at the beginning of the last quarter with USD 1,145 per tonne. The figures you see here are the quarterly average prices. And since then, they have started to increase. We've seen that the demand overall has been stable, thanks to those niches that we are supplying into. But we've also been agile and quick to adapt to the situation that has arose and managed to offset over into new markets. So that has helped us keeping the mills running. But if you look to the supply and demand situation, which is important for the pulp market, as everybody wants to run their mills full at all times, if the demand falls off, of course, this leads to increased stocks and those developments, you can see here, the bars or the stock situation. We had a peak back in 2019, 2020, which then has come down during the course of the pandemic. And with things having normalized, supply chains have stabilized and also falling off of demand towards the end of '22, we saw that stocks skyrocketed to levels we haven't seen before. However, that has reversed in '23, those levels have been worked off with curtailments and closures of pulp mills and thus, the ability to start increasing prices towards the end of the year, as you can see to the far right of this diagram. We also have seen that our entire value chain through to the customers and consumers has been destocked. So we are cautiously positive into looking ahead and see that activity is returning. At the same time, another black swan has come up and we see how supply chains are once again impacted by conflicts that can suddenly happen. And in this case, it's the Red Sea conflict, which once again leads to a longer transit times, a dramatic increase in container freights, longer shipping times which is locking in containers and ships and thus making deliveries a little bit more impacted by the situation, both from a cost and time perspective. If we turn on to the European paper and board market, which is our main market with more than 65%, we see that all markets had a negative development during the course of the first 3 quarters of 2023, an overall decrease of 16%, and this was even valid for packaging grades, which otherwise have seen a positive development as well as tissue. So it has been an extremely challenging year for our customers and thus for us as well. And on the normal circumstances, this might have led to production curtailments at our site. But as we have adopted quickly and see -- as we have seen what was coming, we were able to offset our volumes in other areas. Worthwhile noting also is that with the closure of the groundwood line in 2022, we have now also exited the printing and writing segment, which has seen a negative development for the latest decades as there is a structural shift from paper into digitalized media, and this is heavily impacting these segments. But we are focusing more on the growth sector, which is board and packaging. You see that here all years, of course, add up to 100%. And then the total volumes varying over the years. So the 2023 year figures will be roughly 70 million tonnes. We estimate a decrease versus '22 of maybe 14% to 15%. Remember, the 16% was just the first 9 months. But the share of Board and Packaging is gradually increasing and is becoming more and more an important segment of the Rottneros volumes that we are supplying to the European market. And this is also the basis of the ongoing investment program we have, where we will increase the capacity of our high-yield pulp, which is especially well suited for folding boxboard, which will be started in the Autumn of 2024 and will increase our capacity of currently 125,000 up to 165,000 tonnes. If we're looking at how this paper and board market is impacting the market for market pulp, we see that Europe and North America still have seen contraction while China has held up the volumes strongly and more than 40% of the world's pulps volumes are going to China. Overall, still an increase, varying a bit between the various grades. But nevertheless, this has led to -- we have been able to adopt a little bit our sales strategy. Looking into the segments that we are supplying into. You can see here, Board and Packaging, still our biggest segment, a slight decrease based on the fact that Europe had seen a contraction. But the 2 really special grades that we're having for filter and electrotechnical applications have seen strong markets. Also tissue has increased. It's one of those areas where there's often a lot of growth, not last year in Europe and in other areas of the world. And here, it is also easier to shift between qualities. So this is giving us the possibility to be flexible and agile. And with that overview of the market and our current sales, I leave the word over to Monica to guide us through the financials.

Thank you, Lennart. Yes, it has been a very challenging quarter, and we will now look into what happened in the fourth quarter. As always, it is impacted by the maintenance shutdown in Vallvik mill, but now we are comparing Q4 2022 with Q4 2023. So we have the same impact in both years. Price and currency is a big minus at minus SEK 79 million. It is mostly the pulp price in currency or U.S. dollars, but we also had a stronger Swedish krone which has impacted the quarter. On the volume side, we see a minus volume and change in inventories. We actually have a positive impact of volumes, like Lennart just said, we have had increasing volumes. But what happened end of 2022 is that as all the variable costs were increasing, we were reevaluating the stock value of our pulp, which meant that we had a good positive impact of material in stock in 2022. Now this has not been the case in 2023, which means that we see a negative in this column. We have talked a lot about the high wood costs. And in this slide, you can see that the variable costs are only impacting by minus SEK 2 million. And the reason for that is the turbine failure we had in Vallvik mill at the end of 2022, that was out for more than a month, and we had to purchase electricity on the open market instead of producing that ourselves and the extra cost for electricity last year has been matched by increasing wood costs this year. So these are the main explanations for going from SEK 1 million to minus SEK 100 million for the quarter. And then looking at the full year, we are comparing a record year 2022 of SEK 550 million in EBIT and this year, we have accumulated SEK 139 million in EBIT. Positive is that our turnover for comparable units have increased by 3%, and comparable units means that we have taken away the turnover for the groundwood pulp. And the reason why we can increase turnover, although market prices are decreasing, is that we also increased the output or the production in our mills by 3%. Other than that, we see a fairly similar picture to what happened in the quarter, but we see that on an annual level, the variable costs are really the big impact of what has happened to our profit. And the majority or all of this SEK 363 million is basically the increased cost of wood. And that is a challenge for us and for other pulp producers at the moment. On the next slide, we will see the EBIT and EBITDA development over time. We see the bigger cyclicality that is following the pulp prices that we saw on previous slides, but we also have the impact each fourth quarter of the maintenance shutdown in Vallvik mill, so that is quite evident from this picture. But all in all, we ended up with a 5% EBIT margin for 2023. And with that, we move over to the balance sheet and it continues being very strong. We still have equity to assets ratio of 66%. We have available liquidity or had at the end of the year of SEK 528 million and that is -- included the credit lines that we have not utilized. And we have a net cash position of SEK 105 million. When looking at the proposal by the Board of dividend of SEK 0.50 per share, that equals SEK 76 million if accepted by the Annual General Meeting and in light of the strong balance sheet that is it can be considered justifiable. And with that, I hand back to Lennart.

Thank you very much, Monica. And let's look to the future and see what lies ahead for a producer like Rottneros, who is active in the bioeconomy and circular economy. There are certain megatrends that we see, which are a consequence of a growing population on our globe. We see there is an increased need for tissue, which is consuming pulp, primarily short fiber pulp from Latin America, where there's more capacity coming online. We've seen different and new consumer patterns and buying patterns, which are increasing the demand for packaging as we're ordering more online. We see the need for renewable energy and getting away from fossil energies as the basis of everything we do. And that leads to the need of cables and transformers to produce this energy and bring it to the consumers. And here, our e-grades are extremely useful for the making of cable papers, which is used in these deepwater sea cables or other transmitting cables as well as in the transformers. And we have an overall trend towards a more sustainable way of living, where we try to subsidize and substitute fossil-based products within packaging, for example, with fiber-based products such as molded pulp for food packaging. And this is where we are focusing our efforts when it comes to innovation and development. We have been working with molded pulp for a long time now, more than 15 years. And we have finalized the technical development and started the joint venture in Poland that we were thinking to start up towards the end of '23, but as there still has been problems with parts of the equipment that was purchased, we see a small delay in this and believe this will be then completed towards the shift of the half year. In the summer, everything should be in Poland to be erected and started up to produce the same kind of high-quality trade that we are making in already for our customers in the market. So these trades are out in the market with a good barrier against oxygen so that the food that is in them is preserved for a long time without the need of freezing them down. Our process is a wet process. It's very much like a paper making. So you dilute the pulp at the beginning of the process with a lot of water. It's 1% pulp and 99% water. You form the tray, you press it, you dry it and then you apply a barrier at the end of the process. But there are also other technologies to form a pulp into packaging without the step of making paper or board first, and you could call that dry pressing or dry forming. And here, Blue Ocean Closures, which is a Swedish start-up is one of the forefront companies who have developed technology, which we believe is very complementary to our wet forming process. And we have invested into a minority shareholder in that company at the end of last year and see great benefits with combining the 2 technologies in a future factory and also combining products out of these 2 processes into solutions for our customers. So if we summarize the fourth quarter and the full year, a continued strong balance sheet that gives us the ease to focus on the things we need to focus on our internal processes, how to become more efficient, how to make more pulp. It gives us a full year result which is positive, and we can maintain the ordinary dividend as a proposal to the AGM later on in the spring. Unfortunately, the impact of the stop in the fourth quarter as well as the decreased pulp prices had a major impact on that result for the fourth quarter. But we've seen that pulp prices have turned around. We saw the low point of $1,145 at the beginning of the fourth quarter. And now as we are entering into February, we already have seen a list price in Europe of USD 1,300 again. So we're up with $150 or 10% from just 3 months ago. Our investments are going according to plan. As I've mentioned earlier, we're investing in an increased capacity of CTMP at the Rottneros Mill to be focusing on packaging grades. We are investing in solar cells and battery capacity in order to stabilize the electricity grid as this becomes more volatile with more renewable energies into the grid. And we're having a tall oil investment at the Vallvik mill, which will be started up at the autumn of this year in 2024, which is an investment of some SEK 93 million. So also that is going according to plan. So we are cautiously optimistic. We are focusing very hard on the things that we have started up. We will bring them to fruition and we will continue developing Rottneros to make this an investment that you are happy with as an investor and shareholder. And with that, I open up for some questions, and hopefully, we can answer them.

So thank you for that, both Lennart and Monica for that presentation. So we will turn on the question and answering segment. And the first question we have is, how do you think you can mitigate the negative impact of increased variable costs as I understand these are mostly increased wood prices.

That is correct. Of course, the most important fact here is to have sufficient volumes of fibers coming in into our mills as that is the basis of making pulp. And thanks to the investment in Nykvist Skogs, which is a forest owners service provider. We have enabled ourselves to source more forest from private forest owners, and that has strengthened our relation both with suppliers of groundwood into our Vallvik Mill, but also especially with the sawmills that are supplying the saw mill chips into the Rottneros Mill. So having secured the volume, we are, of course, following the market price level, and this is nothing which is unique for Rottneros. I would still say we have a very competitive sourcing situation and pricing situation given where we are located. And that then leads us to -- we also have to work on the income side and having our niche strategy we are able to achieve a premium that gives us the possibility to mitigate some of these things. But again, we are part of the global pulp market and all our competitors are facing the same situation or even a more severe situation when it comes to raw material prices. And we can see that, especially in Northern America, U.S. and Canada, where there have been a couple of long fiber pulp mills that had to shut down indefinitely due to either a lack of raw material or very high prices. So I think we're in a good spot. And we will, of course, continue to do whatever we can to defend our margins.

Okay. So the next question in the same vein, I would say. How does your competitive position change on the international markets given the fact that apart from increased wood costs, which you are now facing, you will also increase -- electricity costs increased beginning from the -- from 2025 as one can read from your hedges. Will you be able to compete with Chinese NBSK producers?

Yes, it's very much a similar question. The big NBSK producers, softwood pulp producers are in the Nordics or North Europe and the U.S. So we -- that is our main competitors, and we face the same competitive landscape and with the higher wood costs, and we are also seeing increased electricity prices. The electricity prices are mainly affecting the CTMP production that we have at Rottneros Mill. And we are actively looking at hedging prices and the prices have in general increased, but we're also looking at what we can do to increase energy efficiency. We are investing in solar panels, which is a small contribution, but anyhow a contribution to our self sufficiency.

Okay. So the next question, South America, Indonesia and other places with very efficient plantations, and therefore, very competitive BHKP pulp prices could lead to a substitution of NBSK pulp in some cases. What is your plan to mitigate those risks? Will there be a place for European-made NBSK pulp in the long run?