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

Hello, and welcome to today's webcast with Rottneros, where CEO, Lennart Eberleh; and CFO, Monica Pasanen, will present the report for the first quarter of 2025. [Operator Instructions] And with that said, I hand over the word to you guys.

Thank you very much, Ludvik, and hello, everybody, to this quarter 1 presentation of 2025. A stable production in a turbulent world is what we have achieved during the quarter. We are focusing on the things we can control ourselves: health and safety for our employees, production and cost control. But sometimes these things are not enough to create a result which we are satisfied with or being proud of. And as we saw that development emerge during the first months, we decided by the end of the quarter on 21st of March to publish a profit warning and instantly went into negotiations with our unions to see over our costume and our organization in order to be able to adjust the production capacity and our costs. And that is ongoing. And we have very constructive and positive dialogues with the unions, and we believe this can be concluded fairly soon. So that will lead to some cost adjustments that we believe over time will reduce our annual cost by some SEK 35 million to SEK 40 million. And that is, of course, in order to counteract the high raw material costs that we still see, the strengthening of the Swedish krona that has started during the first 3 months of this year and also being able to adapt to a currently new situation on the mechanical pulp market, where we see a slightly lesser demand and prices are under pressure. So if we then move over and look into the market, which is characterized, of course, by a high uncertainty. Pulp is a global product from global players in the global economy where tariffs suddenly can redraw the map that we were used to see, and we have to see how these things play out. But for the first quarter, in general, the stocks have remained low at 41 days, which is more or less seen as the normal level, a bit lower for the long fiber, which is the most important grade for Rottneros, around about 37. A decrease of 1 day and 41 days for the short fiber, which is the dominant quality in this market. And especially in our niches, we see good demand for our UKP and ECF grades out of Vallvik, but a challenging market situation for the mechanical pulp that we produce at Rottneros Mill. But overall, you can see here, we've gone now over to only displaying the net prices, no more gross prices, less a rebate, which is somewhat difficult to define. We see a level of around about $800 for our grades. And if we translate that into Swedish krona, that's the upper line here, that's around about SEK 8,000. So it's pretty stable. We've seen an uptick during the autumn of 2024 into the winter, went up to some $1,600 from $1,418, so a good uptick. But it seems that we are now moving more sideways since we come into the second quarter. As you can see on the lower graph, the prices for the mechanical pulp have constantly come under pressure over the last years. That decline has sort of stopped somewhat now during the recent months, but certainly on a level which is not healthy. And that is also why we have decided to exit certain markets where our profitability simply doesn't add up anymore. And of course, the exchange rates are playing their role in this as most of these export businesses are denominated in U.S. dollars. But looking into Europe, which is our main market, some 67% of our production is delivered to European customers. And there, we can see a slow start in 2025. '24 was characterized by a rebound from '23, which was low. And now it has sort of stalled. Especially on the graphical side, we see continuous closures and rebuilds into other areas; but also cartonboard, which used to be a good growth area and where certainly our mechanical pulp is aimed for, has stalled a little bit. So here, we are really eagerly waiting for consumer confidence coming back and the general pickup in economy which fuels consumption, the use of cartonboard and, thus, the use of our mechanical pulp with our European customers. But more interesting maybe is to see to this development over time. Here, if you take the green line, the sort of smooth line which looks like a sinus curve back to 2021 and into 2025, that's a rolling 12-month average production volume of paper and board in Europe. We peaked there around February of 2022 at 7.3 million tonnes per month, and that has now reduced to 6.3 million. So there's around about 1 million tonnes per month that has disappeared. That's 12 million tonnes on an annual basis on a market which is around about 80 million, 85 million tonnes, which is quite a considerable volume. There are various things that are impacting this development. Of course, there are still closures as part of this, but also a slight underutilization of the existing capacity that has been installed. So I think everybody in this value chain is ready to ramp up as soon as the demand is coming back. How that translates into pulp deliveries, we can see on this slide. Again, China, very volatile, a very weak market in 2024, which is now rebounding. And in 2025, they're really playing their card of being the world's biggest market for market pulp and trying to optimize their pricing. Pricing cycles have shortened considerably over the last years. It's more like 3- to 6-month cycles now where it used to be maybe 1 or 1.5 years a couple of years ago. So again, a lot of uncertainty, unpredictability and difficult to have visibility on where we are going. China is also a lot dominated by short fiber imports from Latin America. And here, we see that prices have come under pressure as that is a grade where we see a lot of capacity additions both in China, but also furthermore in Latin America. And then we can see that there is a gap between short fiber and long fiber, and that gap has increased dramatically over the recent month and price cycles. So historically, maybe some $100 to $150 is now north of $200 as a price gap. And of course, it's not everybody who can sort of support that kind of gap, and those who are more pressured on their margins downstream, of course, are looking into substitutions. Less prone to substitution are the speciality areas where we are active. Especially filter and electrotechnical are standing out here. As you see, we have a growth in the quarter 1 over 2024. Filter has gone from 23% to 26%. Electrotechnical, which is our brown pulp out of Vallvik, from 22% to 24%. Speciality is stable. Cartonboard, also stable, but cartonboard in general has come down a bit. If we look in a longer perspective, a new segment is growing, fiber cement going from 3% to 4%. And tissue that has grown again as we've seen this shortcoming in the cartonboard area. So here again, it's a sort of spot area where we can place our volumes if needed to make sure that we can utilize our capacity, especially in Vallvik. It's more difficult for the Rottneros Mill. The grade is more specialized and formed for certain areas such as cartonboard and not so easy to get into the tissue market. But some inroads have been made, and we are eagerly looking for new applications, of course, at all times to make sure that we also can come back to running the Rottneros Mill at full. We were coming back to that. And with that broad overview, I hand over the word to Monica to guide us through the results.

Thank you, Lennart. Yes. We had a quarter where we see that our margins are starting to be squeezed, which we can also see in the result. So an EBIT of minus SEK 62 million for the quarter is, of course, below our expectations or where we want to be. What has impacted Q1 versus the same quarter last year is negative on price and currency. It's really the weaker U.S. dollar, which is approximately minus SEK 24 million. So the prices are higher than a year ago in currency, but offset by the exchange rate. We've had a very good production quarter, as Lennart pointed out. Very good production in Vallvik, much higher than a year ago, which was marked by some production disruptions during the very cold winter. We have good production potential in Rottneros Mill after the investments that have been made, but we are not running at full capacity. But when we are running, it is producing well. Our big headache is really the variable costs, where wood is actually more than the minus SEK 37 million that you see on the chart. We had some positive impact from other variable costs, meaning that the wood cost is our single largest item in our cost side in the profit and loss statement. On the fixed costs side, the biggest impact on the increased cost come from personnel, both in number, but also with the general inflation and wage increases. Inflation is, of course, also affecting other fixed costs. And that is why we have initiated the cost saving program, both looking at the organization, but of course, also looking at other fixed costs that we are having where we can be more efficient and where we can influence. Let's have a closer look at how the variable costs have looked like during Q1. If we go back some years, the cost of wood was at 65%, 70%. Now it's up to 75% of the total, of course, depending on how efficiently we run and cost of other items will have an impact on -- or mix of products that we produce has an impact. But definitely, wood is the single largest item that is affecting our cost side. You see here that electricity that we quite often talk about in our report is only 3% during the quarter. This is thanks to very efficient production in Vallvik Mill. When the production is good, then it's higher efficiency in the whole process with lower electricity consumption and also other inputs. And another variable is also that Rottneros Mill has had a limited production during the period, and they are the ones who are producing or consuming most of the electricity. Let's then have a look at the balance sheet. As you know, we have been going through a big investment program that was mainly in 2024, but also now the remainder in '25. In total, during 2024 plus the first quarter this year, we have invested a bit more than SEK 470 million in our assets and where we now see that we also can reap the benefits with good production. For 2025 as a whole, we expect to have cash flow from our investment program of a bit more than SEK 160 million. And on normal years, we should be around SEK 120 million to SEK 130 million. So there is some leftovers from the big investment program that we still have in this year. But looking at our profitability in Q1, we are, of course, very careful with investments -- new investments being made at the moment. We're also closely looking at our working capital. That's also something we can influence. We did have an increase in working capital in the first quarter and that we are now reversing to release more funds from that part. We did secure a financing at the end of 2024 and that we have -- that was to finance our investment program, which has been -- this is how we then have been financing the costs that we have had. Our equity to assets ratio is still at a solid 56%, which is above our target of minimum 50%. And with that, I hand it back to Lennart.

Thank you very much, Monica. And let's see if we can try and look around the corner what lies ahead. As we've mentioned, we are, of course, focusing extremely on the things we can impact ourselves: health and safety, production and costs. We're taking the necessary steps to bring those costs down and do our part of being able to offset these very high prices we see on the raw materials side. We are engaged in very intense discussions with our suppliers as well as with our customers to make sure that we optimize the entire supply chain. We are part of a very important supply chain. There are a set of different products that are using fibers where our customers and the ultimate consumer loves fibers. Tissue, of course, continues to be a very important area where there is growth, where there is profitability, but it's mainly supplied from the short fiber. But on the other side, that means that the short fiber capacity that is coming onstream is fine in its own in the tissue area. Packaging grades continue usually to grow. We haven't seen that now in the first 2 months in Europe. But by and large, that's where everybody is looking at and focusing on, to redirect graphical and newsprint capacity into the packaging area. Packaging area is a product where a lot of recycled fiber is used, but you can only recycle fiber a certain number of times, 5 to 7 time at most, then it sort of gets worn out and used and doesn't contribute with any strength anymore. So there has to be an inflow of fresh fibers. You can either have that in its form of fresh fiber-based products, which are made in Scandinavia or in Canada, or you can actually use fresh fiber pulp in the furnish of a recycled paper mill, which you will find on the continent. And as this market is growing, there is less recycled fibers available as the office market is -- we call about office waste, all the copy papers have become less and less. So one way or the other, you have to reinforce the fibers in this recycling loop. And this recycling loop, of course, is very important for the entire sustainable performance of the forest pulp and paper industry. We have the transition in the energy sector, which is, a, driven by new solar and wind farms coming onstream. Electrification is important to offset climate change. But we also have a grid both in the U.S. and in Europe which needs renewal. And that means more cables. Cables need fibers in form of insulation paper. Means also more transformers, and also transformers consume a lot of fibers as there is an insulation inside the transformer. And of course, sustainability. And overall, I think in a world where we are maybe now looking more on what we can do ourselves in Sweden, in Europe, the forest industry is self-sufficient when it comes to raw materials supply. It's all local. We are using a local, sustainable and renewable resource, which is grown here in Sweden as the Swedish forest industry are an important part of the Swedish industry cluster. We provide also energy and, of course, tax and workplaces. And the products we use are used in everyday life. So it's quite important to maintain these value chains that are in place. And I'm sure we will all see that, that will be the case going forward. We not only focus on pulp production even if that's our main core, but we are in the move of getting into the packaging area with our molded fiber. And we have now finally have commissioned our new machine lines, 3 in total: 1 in Sunne and 2 in Poland, which are now being finally trimmed and then meaning that we move up. Our share in Blue Ocean Closures where we produce fiber-based caps is also developing nicely. New investors have joined the group. Market products are out in the market, and there is, again, a big surge for plastic alternatives, fossil-free alternatives. So if we summarize quarter 1 of 2025, of course, the overall achieving aim was to stabilize our production and operations. That has been the case. We've seen a 16% growth in the Vallvik volumes. Of course, the reference wasn't too good, but it was necessary to get back and demonstrate what we are able to do. We've had a big set of investments during 2024. All in all, some SEK 460 million have been invested. They all are closed and commissioned and are ready to run. We've seen that the performance targets have been met, which is great. So we know what we have sort of as an engine under the hood. And as we are now in a more turmoil situation, of course, we do all we can to get our costs under control. They have been under control. They have to be reduced. We have to be flexible when it comes to the production of mechanical pulp, utilizing the volatility. There's a big volatility when it comes to energy prices, but also being agile and adapt to a quickly-changing market environment, and again, together with our suppliers and customers, long-standing relations make the best out of the situation. Vallvik, again, running very well and our Polish and packaging efforts now coming to fruition. And with that, I will leave the word back to Ludvik and see if any questions have come in. Please, Ludvik.

Thank you so much for the presentation here. And as you mentioned, we will now carry on with the Q&A here. And the first question is here. Despite higher NBSK prices, net turnover fell due to lower sales volumes. What are the key reasons behind the weaker demand? And how do you plan to recover volumes going forward?

The weaker demand is maybe more offset by an imbalance that we had during 2024 as we had a weak production in the beginning. Our stocks came down and we felt we have to restock, entered into 2025 with coming out of this imbalance. We are now focusing on activating all the channels, we are having to make sure that we're getting back in pace and really ramping up our sales in line with the production that has now proven to be very stable on a good level, knock on wood, never mention the good things too early. But also into quarter 2, as we are quite far advanced in that, it looks good. So we see that there is a good demand from our customers. We can activate additional channels that we used to have. And I'm positive that, that will turn out in reducing our stocks and freeing up some of the working capital that Monica has talked about.

EBIT dropped to minus SEK 62 million, largely due to exchange rate losses, rising wood costs and higher fixed costs. Which of these factors do you see as temporary versus structural? And what is your time line for margin recovery here?

Yes. The -- some of the factors are, of course, difficult to influence and maybe the exchange rate is, I don't know if it's structural or temporary. Someone else need to judge that. But on the wood side, where we have one of our biggest costs, that is really squeezing our margins in the first quarter. We do, however, see that the balance in the wood supply market is shifting somewhat in favor of buyers. It's a bit early to say when we can see a big impact in our profit and loss statement, but at least we see some signs of possibilities to source wood at more favorable prices. Other things like inflation is, of course, something that everyone is hit by. And the inflation is coming down, but here is where we need to look at our costs, our organization, and that is what we are doing. And as mentioned earlier, we see a potential of reducing our fixed costs by approximately SEK 35 million to SEK 40 million per year starting from this autumn. Back to you, Ludvik.

Working capital have been increasing the last 4 quarters, an increase of SEK 222 million. Why? And what can you do to decrease working capital?