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

Hello, everyone. Welcome to this webcast presentation where we have Rottneros present their Q2 report for 2024. With us presenting, we have the CEO, Lennart Eberleh; and CFO, Monica Pasanen. After the presentation, there will be a Q&A. [Operator Instructions] And with that said, please go ahead with your presentation.

Thank you, Martin, and hello, everybody, to our second quarter report of 2024. If we look at the highlighted summary here, we have focused very hard to stabilize our operations after the slightly bumpy start into this year, and we've seen good delivery figures. We've seen a new production record during the second quarter for our mechanical pulp, but also Vallvik has had solid production numbers. We've been able to capitalize on our excellent customer relations. And especially in Europe, we have seen a strong pulp market with rising prices for softwood kraft as well as in the U.S. where some volumes from us are going. So all in all, the increase in turnover has been summed up to 4%, and we ended the quarter with an EBIT of SEK 30 million. Looking a bit more into detail in the market, we can see that the pulp market, once again, is diverging on a global basis. As I've mentioned, Europe has been very strong and so has the U.S. been, especially on the softwood side, whereas China has seen some weaker months during the past. If we look at the prices, they have turned up here. These are the quarterly average prices, both in Swedish kronas as well as in U.S. dollars. The upper 2 lines are the gross prices, and the lower ones are the net prices according to GTO. And you see that the gap between the gross and the net is increasing over time as we see an annual rebate inflation for the gross prices. But the currency has been favorable as well, and we are back on price levels on a net basis, almost where we were at the forward peak towards the end of 2022. Looking at the monthly prices and also the stock development, stock levels have come up to 41 days. It's a slight increase, which is primarily driven by the hardwood kraft supplies from Latin America, whereas softwood still is at some 35 days. We have seen some disruptions during the beginning of the year, a strike in the finished pulp and paper industry and an outage of one large kraft pulp mill in the Nordics. The mill is coming back and the strike is over. So we see a more stabilized supply situation. And you see here also that net prices have peaked a little bit south. The pick has gone up. And while I'm speaking here at the beginning of July, we've now seen numbers of 16-25% for peaks in Europe. So a good market development and, of course, very good and solid deliveries from us into this pulp market. If we look more closely into the European market for pulp and paper, which is our main market, some 68% of our deliveries. We see that across the board, all grades have seen an improvement for the first 4 months of this year versus the same period of 2023, which was extremely weak and thus prices have come down. But even graphical papers are moving up as well as the packaging grades, which are more important for us nowadays. And the overall volume has increased with some 7%. We're also seeing an ounces of packaging grade price increases, which is, of course, a testimony of that the market is stabilizing and the demand is picking up, which can be related into better pricing situation for our customers. And we've seen in our niches, such as UKP, for e-grade as well as our filter grades that good continued demand and also leading forward for demand from our customers. Looking at the grades and the relation to each other, the importance of board and packaging is continuously increasing despite the fact that the overall volume is slightly decreasing between 2018 and 2024. The importance of packaging is growing. And here, our investment into the mechanical pulp plays well in hand as mechanical pulp is extremely well suited for packaging grades. So we are looking optimistically into the further development of this market. Leaving Europe and looking into the global market for pulp. Also here, we've seen an increase of close to 4% primarily driven by Europe and North America, where we've seen good demand pickup on the back of some shortages. Customers have made sure that they are restocking that has led to this very dramatic price increase that we've seen over the past month, while China has remained relatively calm and stable, and we have to see how the Chinese market is developing going forward. Bear in mind that China is some 40% of the global pulp market. So what happens there as long as the markets are linked through functioning logistic systems will sooner or later play into the other markets. But again, in our core market in Europe, we see a good situation and a positive development downstream for our grades. Looking more into detail into where we are supplying pulp into cartonboard remains to be the biggest areas with some 25%, a slight decrease versus the full year of 2023. Filter and Electrotechnical stable and together, close to some 45%, almost half of all our volumes going into these very special applications. And you can see that tissue has increased quite a bit. That was on the back of a week second half of 2023 and tissue being one of the global biggest areas for market pulp where there's constant growth is giving us the opportunity that when, for example, cartonboard a bit weaker, we have a chance to offset our volumes. And that is important in order to always be able to run our production sites full and make sure that we can deliver the pulp that we produce. So all in all, our mix is shifting more and more towards niches. We're basically out of the printing and writing, and we start to see increased volumes into fiber cement, which is quite interesting to see how a renewable product can help in the building sector to reinforce concrete construction. And with that, I hand over the word to Monica to guide us through the financials.

Thank you, Lennart. So we will first have a look at the second quarter of the year and compare it to last year. We go from having SEK 41 million in EBIT last year to SEK 30 million this year in the quarter. And we can see that price and currency has had a fairly big negative impact. This can be looked at in different ways. First of all, we have 3 main grades that we are producing and selling. We have NBSK, which is the bleached sulfate pulp we have UKP, which is the same pulp but before bleaching it. And then we have the CTMP pulp, the mechanical pulp. And these have different patterns when it comes to price fluctuations. So NBSK rose by 16% in this period, whereas CTMP was fairly flat. So that can have an impact on our prices or it has an impact on our prices, also the mix between these grades, how much we're selling of each will have an impact. They are pretty much 1/3 each for the different grades. And then the final impact is from the lag between our sales prices and the market prices that you saw on the previous charts, we do have a time lag and seen when we have rising prices, we are lagging behind to some extent quarter-on-quarter. On the other hand, we had a big positive impact from volume. We had 7% higher sales volume, and it was especially driven by CTMP that has had good production throughout the year and also good sales. The sales of sulfate pulp, the NBSK and UKP was only held back due to that we didn't have enough material to sell. We had good production in the second quarter, but the production problems from the first quarter held back sales to some extent. On the variable cost side, we can see that it had hardly any impact at all, which means that we know that the price of wood is high, but the mix that we are buying has not changed dramatically for us. And also, the other input costs have been fairly stable. I could have a final comment on the quarter regarding depreciation. When we're doing our investment programs, we are taking out some old equipment and related to that, we had a book value of SEK 5 million that was taken out as an additional item in depreciation in the quarter. Then we can look at the first 6 months. And we come from a very strong first half or especially the first quarter of 2023. The prices had been high up until the end of 2022 and started going down in '23. And here, we have the positive effect of the time lag. So we are enjoying high prices, especially in the first quarter, which is where we see the biggest drop in change from last year to this year. Once again, we see a good increase from volumes and once again driven especially by CTMP that has had a very stable and good production throughout the year. On this slide or for this period, we see that the variable costs have had a negative impact this year. It is partly the wood costs, but it is also partly due to production problems in the Vallvik mill during our first quarter when production problems will mean that we have to buy more electricity and fuels and have a less efficient production and thus higher cost per ton. So for the first half year, we have had SEK 35 million in EBIT. Then we can move on to the balance sheet. We still have a solid balance sheet, and we have SEK 298 million in available liquidity, and the equity to assets ratio is at 64% at the end of the period. We can see now that we have a net debt position for the first time. That is debt instead of a net cash position since 2021. And this is, of course, partly due to our ongoing investment program. In the quarter, we invested SEK 135 million. And so far this year, SEK 216 million out of the total cash flow for investments that we estimate to be around SEK 430 million. After the quarter ended in the beginning of July, in the beginning of this month, we secured long-term financing and this financing is connected to the solar panels and batteries that are being built at Rottneros mill. It is up to SEK 100 million loan that we can draw on when we have the payments for the investments. It has a tenure of 5 years. And we can take this loan with such a long tenure, thanks to a Green Credit Guarantee that is provided by the Swedish Agency, EKN, Exportkreditnämnden, so that is part of securing the financing for our ongoing investment program. With that, I hand back to Lennart.

Thank you very much, Monica. And then let's look ahead. We are aware that our industry is cyclical, and we also know that we have some temporary challenges such as an increased levels for our pulp wood. But there are some underlying positive global demand driving forces, which certainly will create more demand for cellulose fibers in the future. One of those is tissue that will consume more and more of the pulp that is being produced, more people on our planet with a higher disposable income at and asking for a better standard of living, thus consuming more tissue papers. Primarily, this is hardwood going into the segment, but this also means that this will not be available for other segments. We know that we are shopping more and more through the Internet and all our products have to be shipped to the consumers. And here, fiber-based packaging do have their natural advantages over other solutions. They can be recycled. They can easily be recollected and turn into new paper grades. And thus, this will continue to create opportunities for both recycled and also virgin fibers, as you cannot use the fibers as many times as you like. There is a certain physical limit to that. So at some point, virgin new fresh fibers have to enter into this market through folding boxboard or liquid packaging or some other kinds of packaging papers. We are aware of the transition that our energy system is undergoing towards more renewable energy sources, which means there has to be transmitting capacity in the form of cables across the land or through the water and especially deep sea water cables are using an isolating Shell, which is made of fibers with a high cleanliness and very low conductivity, such a grade, which we are producing, but also more and more transformers are needed to go from high voltage to low voltage also with the rise of, for example, charging points for electrical vehicles. And again, transformers have an [ inner shell ] of an insulating material, which is fiber with a very low connectivity where our pulp is of world-class and very thought after. And we see here that we already are in negotiations for next year with increased demand from our customers. Sustainability is at the top of the mind of everybody, and we are focusing more and more on creating sustainable solutions and one of these solutions are our molded fiber trays, which we do produce ourselves and within the joint venture with Arctic Paper in Poland. And also, sustainable by and large is driving the demand for cellulose fibers and renewable products from renewable sources. Talking about packaging and what we do on innovation and development, we have now completed the development of our technical standard for molded fiber line. One of those lines is on its way sooner to replace 2 old ones. So we will have 2 lines up there in the future. And we have this new factory emerging in Poland, where all the groundwork is done. The pulp system is on site. The first 2 lines are on the way to be installed there in the coming weeks and months and then later on this year to be started up. And then those 2 lines will be complemented by another 4 lines in order to reach the full capacity that we have planned for during next year, which is very exciting. The market still is very strong. There is a huge demand, which is by big numbers over exceeding the current supply situation. So there's really a sweet spot here to demonstrate that the technology that we've developed is well suited to scale this up into an industrial scale and to be cost competitive in the supply of sustainable packaging solutions, not the least for packaging that create that demand a modest-size atmosphere for food stuff in a cold chain with shelf life up to 3 weeks. We've also invested into Blue Ocean, which is a slightly different forming technology. They have secured their first customer and for a start-up that is a critical phase in the development of the company coming out with the first screw caps for supplements and many other products will follow suit on that. So that's a great development and also a good outlet for our pulps, which we are in the process of trying to see how they could fit into the Blue Ocean system. So the dry forming Blue ocean with our wet forming we feel is giving a 360 full service opportunity for this segment in the future. So summarizing it all, we have focused on stabilizing operations. We do see the results from that. We do see new production records. Our big investments are according to plan. It's the investment in increased mechanical pulp capacity in Rottneros mill. It's the solar panels and battery investment as well as the Tall Oil Plant in Vallvik. Those are the 4 big ones, summing up to a total of SEK 430 million, including maintenance investments and improvements in our factories. And we continue to have a strong balance sheet to be conservative and responsible in allocating and using our shareholders means to develop Rottneros going forward. And with that, it's the end of our presentation, and we are coming to the questions and answers, and I hand back to Martin for some questions, please.

Thank you very much, Lennart and Monica for the presentation. And like I said, now we're in the Q&A section here. And we'll start with the first question here. The result was weighed down by a negative mix effect, such as more CTMP deliveries where prices have not risen as much. How do you see the mix in the coming quarters?

The mix is very much dependent on the production capabilities in our mills. And one reason for CTMP being higher in the mix in the second quarter is, of course, because we have had good production of CTMP, but we had our production problems in the first quarter of NBSK and UKP and had very low stocks going into the quarter and could not supply to the extent that we would have liked to do to our customers. So going forward, we see that this will be more normalized with good production in both mills. And of course, even further down the road, we are looking at capacity increases in Rottneros mill, making the CTMP, but on the other hand, that is a mix, the change in the mix. But on the other hand, we will see improved profitability with higher production output of CTMP.

And the pulp prices are at an all-time high, but your earnings are far from it. What's holding you back there? And how will you capitalize fully of the increased prices?

Yes. So the prices are at an all-time high for NBSK for the gross price. And when we are looking at the sales of our NBSK, we are focusing on our main niches where we see that we have good profitability and stable customers. And that is our best way of capitalizing on the prices to be able to sell to our preferred customers and niches. And then, of course, looking forward, we see that we have a bit of a time lag with our own sales prices. So we have confidence in seeing some increase from our owned prices as well.

But the earnings are also a combination of prices and costs, and we have to realize that the current wood pulp prices are at record high, which is weighing on everybody making pulp in the Nordics.

And the pulpwood prices keeps rising. How do you see the FX quarter-on-quarter in SEK?