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

Hello, and welcome to today's webcast presentation. We have Rottneros with CEO, Lennart Eberleh; and CFO, Monica Pasanen, who will present the Q3 report for 2024 and answer questions during the Q&A after the presentation. [Operator Instructions] And with that said, please go ahead with your presentation.

Thank you very much, Martin, and hello, everybody, to this quarter's results presentation. We -- looking into the highlights. We see that despite a little bit of a slowdown especially on the hardwood side, the softwood market has remained more stable and especially our niches for U.K. -- very stable. We have seen that some of our competitors have fallen out and we have already signed contracts for next year higher volumes and maintained good prices. Out of SEK 40 million have been impacted materially by the continuously high -- they are burdening the profit and loss statement that we're having. But on the other side, we feel very comfortable with the volumes and the inflow of raw materials into our pulp mills. 2024 is a year of high investment projects going on in our 2 pulp mills. Those are coming to an end and will lead to fruition in the coming months, year, making us more efficient, more competitive and more resilient in this current climate. [Audio Gap] seeing that the new forming machines are coming on site in both Poland and [indiscernible] with one machine. So this is very exciting, and we are happy that these big investments, which nevertheless have taken a lot of time for us and our small organization. If we're looking into the market, we see -- continued to increase, especially driven by the development in China earlier this year. And in the future to be a bigger spread between hardwood and softwood [Audio Gap] this presentation a bit more about that. But looking into our market, which is the softwood market, we've seen that prices have peaked as usually. This is the quarterly average price which is now at the top of this cycle. And as you can see on the lower graphs, which are the net prices, spot volume [Audio Gap] into these indexes and driven the prices down a little bit. Again, stable demand for [Audio Gap] softwood market. CTMP, however, is a bit [Audio Gap] by the fact that a lot of market CTMP is going into Asia and here the slow market in China has [Audio Gap] and volumes. However, still having a favorable exchange rate between the Krona and the U.S. dollars. [Audio Gap] looking into the stock development, we've seen that earlier that stocks have come up -- approaching levels which can certainly be seen as approaching 48 days. And this is, of course, always [Audio Gap] on the monthly list prices, you see that they have come down after the peak. Moreover, this is an oversupply situation for the hardwood, we make softwood, but hardwood is impacting the total market. It's the biggest share of the chemical market and a lot of projects have been started up during the course of this year. And the suppliers already have [Technical Difficulty] erosion is not continuously [Audio Gap] how that is going forward. America as 1 of the 3 regions still has a more balanced situation, but also [Technical Difficulty] 18% our volumes go into the U.S. [Technical Difficulty]. Nevertheless, looking into Europe, which is the majority of our sales. We can see here how the pulp -- the paper and board market has gone so far. We see increases over 2023. But those [Audio Gap] happened during the first half of this year. Since the summer, we've seen [Audio Gap]. But it's been a recovery so far. Hopefully, the economical activity is coming back with the lower interest rates, which is some correlation to how paper and board is going on. The global pulp market, as I've said initially [Technical Difficulty] driven by China, as you can see here in the dark blue bar and China is some 40% of the market. Again, China is not a big market for Rottneros, but it is [Technical Difficulty] in Asia and thus, we have to follow closely what is happening in China at this setting the price seen both for [Audio Gap] gap between softwood and hardwood is increasing yet decoupled these 2 grades completely, but they will pass on various paths. [Audio Gap] are still going into selected niches, which are good. More than [Audio Gap] think we supply a unique property [Audio Gap] board market has been a bit slower so far this year. You see a decline of [Audio Gap] as I've said, there are some suppliers pulling out of this market so we will [Audio Gap] and the electrotechnical applications. This is pulp for transformers, but also electrotechnical cables is still very, very stable, not the least driven by the fact that there is [Technical Difficulty] structure on the electricity side, grids [Audio Gap] Special Applications also continued strong. Tissue, as I explained regulating [indiscernible], we see some decreases in other segments we have and when those other niches are becoming strong again, we can also more easily pull out there. It's not such a long customer supplier relation within the tissue for our grades. And again, printing and writing. This is the overview of our 9-month delivery so far with the continued strong [Audio Gap] and create unique properties for [Audio Gap] over to Monica to guide us through the financial figures.

Thank you, Lennart. Yes, we are seeing in the quarter, in the year, squeezed margins and that we can also see in our results, where we are looking at the difference between the third quarter last year and the third quarter this year, what has happened. We go from 49 to 40, which is fairly stable. But here, we see that price and currency has increased a lot. We have talked a lot about our prices -- our sales prices lagging the market [Technical Difficulty] a quarter or longer lag between the price movements. And here, we are benefiting from the higher prices that's seen in the second quarter of this year. What is really worrying is the variable costs that are increased [Audio Gap] also affecting the third quarter are the volumes slightly lower production, but especially on the sales volume side, we are comparing against a quarter last year where we had very high sales, and that -- on the fixed cost side, it is related to maintenance activities and more of a timing issue than a significantly higher cost. And then we will look at the full year. [Audio Gap] 2023, we started very strongly. So that is why we go from a very high result of SEK 239 million to [ SEK 74 million ] for the first 9 months. Price and currency, we actually see a slightly increasing sales prices versus last year, but we also have a slightly stronger Swedish Krona, which is affecting negatively. So production volumes and sales volumes were slightly down. We had production problems, especially in the winter months in the beginning of the year that is affecting these 9 months and also affecting our ability to [Audio Gap] impact is from the variable cost, SEK 75 [Audio Gap] cost is from wood. And I think we can look at the next slide, where we see that 5% of our variable costs are from wood. [Audio Gap] cost that we are having, and we have seen a very dramatic change in the wood prices. [Audio Gap] timber and wood prices and -- should look at that is mostly affecting us is the orange one called [indiscernible] or pulpwood. If we compare against the bottom, which was at the beginning of [Technical Difficulty]. And our current prices or, let's say, the prices that we had almost half a year ago. It has basically doubled, and we still see increases in prices [Audio Gap] of course, affecting the whole market. And this is really squeezing the margins on all companies active in this. Then we can have a look at the balance sheet. Lennart mentioned the big investments, and that is what we see on this page. The light green bar is the net debt or net cash. We had many years [Audio Gap] cash situation. Now with the big investments, SEK 319 million so far, and we forecast that we will have SEK 460 million in 2024 when we end the year, we will [Audio Gap] accumulated cash from previous years to pay for these investments. So that's why we now see a [Audio Gap]. We can anyhow still [Audio Gap] balance sheet. We have 60% in equity to assets ratio, and we have good available liquidity. And with that, I hand back to Lennart.

[Audio Gap] and with a brief overview of our current situation, let's look at how we think things will develop in the future. [Audio Gap] which still are [Technical Difficulty], both hardwood, softwood, chemical and mechanical tissue as an indicator of world standard of living, people with more available income are spending more on the well-being and this is driving demand for tissue and tissue is one of the big [Audio Gap] few integrated pulp and tissue producers, and there is a good [Audio Gap] volumes that are built in [indiscernible]. Packaging, not the least driven through e-commerce and are ways of consuming products. So the majority of packaging is based on recycled [Technical Difficulty] that you can only recycle a fiber a certain number of times. And then you have to add the fresh fiber, either as a part of the fiber furnish in the paper machine or as a 100% primary fiber-based quality, for example, within the food sector. So this will continue to drive the demand, and there has been a big increase [Audio Gap] qualities for corrugated and board packaging based on recycled fiber. So there is an underlying demand here also for primary fibers in the future, which we can serve to. I briefly also talked about the renewable energy sector. [Audio Gap] in North America and Europe are becoming old. They have to be rebuilt. They have to also be adopted to the new way of making energy based on wind and solar, which needs a lot of transmitting capacity, a lot of cables that have to be put in place and also [Audio Gap] technical items are needing [Audio Gap] to make the best quality [Audio Gap] we see that here, our customers are continuously asking for [Audio Gap] order books into the future, which also will be seen in the split between ECF, which is the white grade and the UKP, which is the brown grade and it's over time becoming more and more brown in our Baltic Mill. And not the least, the drive for climate change, finding fossil-free solutions for everything we do, and forest-based products are [Technical Difficulty] this is, a, driving the demand for fibers, but b, it is also driving the possibility for us to find new business opportunities. And here, we are serving this kind of market with our own packaging arm, where we have 4 fibers and [indiscernible] fiber solutions for especially food [Audio Gap] about the access to fiber and what is happening here on a global basis. [Audio Gap] there is a limited growth potential for softwood while there is a continued demand. This market will continue to be more and more in balance going forward. It's a [indiscernible] from the northern hemisphere, primarily Canada and the Nordics. While in Canada, there has been a couple of factors which are negatively impacting the output of softwood pulp, which has led to [Audio Gap] continues good production in the Nordic, but we have a lack of raw material. There has been a substantial export from Russia into Finland and Ukraine that export has ceased and that has brought a tightening balance with price increases. And you see the curve that Monica showed just a couple of slides before [Audio Gap] in Sweden is coinciding really with the exit of those exports. So that [Audio Gap] In the Southern Hemisphere, you see predominantly the production of hardwood or [Audio Gap]. Brazil is one of the major exporting countries, and there are more pulp plants [Audio Gap] in the planning to be made. But also here, we see an increase in cost for land and money as well as logistics. The good sites are taking. They've been on the coast. And now the more you go inland, the [Technical Difficulty] still cheaper than the softwood, but it will become more [Audio Gap] and China has built a tremendous amount of capacity both in [Audio Gap] pulp production. But here, the pulp production is based on imported chips from Indonesia, Vietnam, Australia, South Africa. And as that capacity increase has been so dramatic, the demand part is increasing, which is also driving up the prices here. So it's going to be interesting to see how that will play out in the future, but it's certain sort of cash costs limitations to how low those prices can become. So [indiscernible] in the future, less softwood, but as there are unique properties in the softwood, we are supplying, we believe and see that our customers are very keen on securing the supply of those kind of qualities. So softwood will become more and more of a specialty. And within this specialty, we are one of the foremost -- of very distinct specialties. So summarizing the third quarter of [Audio Gap] continued to stabilize our operations, the CTMP plant and Rottneros mill is going very well. We have stabilized the operations involving [indiscernible] 2024 in the winter months. We are finalizing major investments to be more resilient and more efficient going forward. The SEK 93 million [indiscernible] so we can extract more of each cubic meter of wood that we take into Vallvik to make products which are sellable coming out. It's a reinvestment. It's not a new investment, but it will make us more efficient. And [Audio Gap] going forward. We're investing in the capacity increase in Rottneros mill going from 130,000 to 170,000 tonnes for SEK 220 million, still a very cost-efficient investment, if you calculated by the investment amount per tonne. And we have started some investment to solutions such as a solar farm of 2 gigawatt hours on an annual basis [Audio Gap] our batteries, which will participate in the stabilization of the Swedish grid, which is generating new income. And as we've seen, we have a continued strong balance sheet to be able to manage these investments [Audio Gap] normal investment levels in the coming years going forward. And with that, I thank you for your time and leave the word back to Martin to see if we have any questions that we can answer.

[Operator Instructions] And we'll start with the first question. You sold SEK 11 million of emission rights. Do you expect to sell in Q4 as well?

We have looked at our emission rights and what we have in our books so to say. And we saw that this was a good time to sell some of the emission rights, and we also look at the possibility to sell more. So that is the short answer to that question.

Thank you. And given that the molded fiber trace production start was postponed to Q4, when do you first expect to see revenues?

We have had already revenues during the last years when we were validating the technology. So there has been a very small stream of that. And now going from 1 machines to 3, 1 [indiscernible] and 2 more in Poland, we will start seeing a little bit more of substantial volumes within that frame in the beginning of next year will be still marginal compared to the turnover size of Rottneros as a group, but it is now starting to ramp up and will over the coming year become more and more, but still on a very low level, but starting to be seen.

CapEx for 2024 is expected at SEK 460 million. What about 2025 and 2026?

Yes, that is correct. And as Lennart pointed out, we have had several larger investment programs, and all of them are [Technical Difficulty] during the fourth quarter. So we will have some cash flow still in 2025 from the bigger investments. And looking forward, we see that we will go back to the levels that we had before or let's say, we will go back to having investments that are approximately equal to our depreciation, which is approximately SEK 120 million in that region. So that is what we can see in front of us now going forward.