Arctic Paper S.A.

Hello and welcome to this webcast with Arctic Paper. If you have any questions, please use the form relocated to the right and we'll take that up during the Q&A. And with that said, please go ahead with your presentation.

Okay, good afternoon. My name is Marky Arczynski. I'm the CEO of Arctic Paper Group and together with Katarzyna Wojtkowiak, the CFO of Arctic Group, we would like to present and to comment the Q3 results of our group.

Good afternoon again. I will start with a very short summary of our results. Net sales was 819 million zlotys, which is approximately 5% less than the same period of last year. The slight decrease in the revenues was mainly caused by the general macroeconomic situation in Europe, especially in Germany, which is our biggest market. On the EBITDA side, there was a significant drop in comparison to last year, especially in the paper segment. This was mainly due to extremely high prices of pulp, especially hardwood, which is the main raw material for the paper production. And that was historically high until more or less mid of third quarter. And we will see the decrease only now in the fourth quarter. Net debt to EBITDA ratio was still negative for the entire group, and the change in comparison to last year was mainly due to new loans, which were taken for the new investments.

And I would like to make some comments regarding each of our four segments, pulp, paper, packaging and the power. Regarding paper, we have a stable low demand across Europe. Please point out that Europe is only our main market. More than 98% of our output is dedicated for domestic consumption in Europe. We have quite flat prices compared to the last quarter and even compared to the previous year. And this is one of the reasons that despite of the increase of the all available costs, which is mainly pulp costs, we see significant drop of revenues. Even the volume is quite small changes. Regarding the capacity utilization, we are on the same level like the rest of the industry, around 70%. It was a small increase compared to Q2. Our goal for the next year is to exceed over 80, even 85% of the capacity utilization for the entire 2025. Regarding the volume, 112,000 tons, which is quite similar what we had in the previous quarters. And regarding the revenues, it was dropped by 5% compared to the last year and near the same compared to the Q2 of this year. No changes regarding the product portfolio, no changes regarding the brands. We are still focusing on the well-defined niches, means the European premium book paper and the signed paper produced by Munkedals, Grexpo and Kostrin Mill. We are dependent mainly of our four big markets like Germany, Poland, UK and Central Europe. Scandinavia is only 10% of our business and is mainly due to the fact that significant movement was done during the last years, that several printing houses were relocated from Scandinavia to the low labor cost country like Baltics, Poland and Slovenia. Due to the fact that German economy is in the recession since already two years, we noticed significant drop of orders coming from Germany. Germany in the past was close to 27, even 29%. This year it's only 22% of our business. The second biggest market for Arctic is Poland, close to 17%. But please point out that significant percentage of the Printex job which is executed in Poland, are dedicated to West Europe, mainly for Germany. It means that due to this week of German economy performance, both markets, Germany and Poland, are affected, and we know the significant drop compared to last year's. Regarding the rest of Europe, like France, UK, we have quite stable situation. The sales outside of Europe is quite limited, only 1%, and consists of only high premium products, like design paper even for Asia, Africa and America. Oversize to US is quite limited. It's only 500 tons per year. It means that even the new president will implement some kind of special duties for the import goods from Europe to US. We should be not affected by this case. Regarding pulp, it is one since 20 years, the most expensive period for the pulp producers and as well for the pulp buyers. We noticed significant increase during the last month, but since mid of summer period, we noticed some kind of stabilization. And even recently, since September, we see month by month significant drop mainly of the short fiber pulp coming mainly from Latin America. Today, the spread between long fiber and short fiber is exceeding $400. For several months, it was 200 to 250. And even in the past, it was between 100 to 150. Based on the current situation, when the wood prices, especially in the north of Europe, are very expensive, it means that we shouldn't expect any significant drop of the long fiber prices. This is a totally different story regarding the short fiber, mainly eucalyptus from Latin America. There, year by year, the new plantations are in the zone, and as well, new capacity are in stream year by year of roughly 2.5, maybe even 3 million tons per year. Due to low demand on the packaging business in Europe, due to low demand on the paper business in Europe, the pulp producers see significant drop of the demand for the paper, for the book, sorry, for the pulp. And during the last three months, we noticed an increase of the pulp stock in Europe by at least 20%. Our view is that short fibre will go down by an additional $150 till the Q1 of the next year. And then in Q1 2025, the spread between the long fibre prices and short fibre prices will be around $500. From our perspective, it's quite a good situation because Rotneros is the main producer of the long fibre. It means that the stable situation should be quite positive and contribute to the Rotneros result. From the paper segment perspective, 70% of our pulp purchase to produce paper comes from Latin America and Iberia. It's mainly short fibre. And the drop of the raw material prices should help us to make a much more offensive sales policy. And our aim is based on this, that week by week, month by month, lower production costs give us a more chance to be more aggressive on the market and to be able to increase our capacity over 80%. Quite important to emphasize the trend what was achieved during the last five years from the Rotnerus and Valvik perspective. Even five years ago, the printing and writing papers application represents close to 11, even 12% of the total sales of the pulp. Today it's only 1%, which is equal to the drop of the business. Then opposite to the filters and electronic application. Five years ago, the filters application was roughly 11-14% of the power production. Today it's close to 25%. These filters are dedicated not only for automotive business, which is quite weak recently, but as well for the building industry, ventilation, and as well for food industry, for example, for coffee filters. and then it's quite important to emphasize the significant improvement achieved during the last five years regarding the electrotechnical applications five years ago the part dedicated for the insulating paper for the electronical application mainly for the transformers was roughly 12 to 11 percent of the total output today is over 21 percent And based on the current trend, when the production of the transformer in Europe and even globally is booming, we should expect even 25% in coming years. Packaging business is quite stable, and we assume that our annual sales between 18,000 to 15,000 tons should remain for the next two to three years. Our main project regarding the packaging business is connected to Rotnero's packaging technology. We already 15 years ago started to collect experience how to use the natural materials, the fiber, to produce packaging. And then after several years, we collected enough experience. And two years ago, we have decided to create a joint venture to build a brand new molded pulp trays plant located in Poland, close to the German border. One of the main reasons for the location is the logistic cost. Such kind of products are very light and logistic is key element regarding the cost efficiency. Due to the fact this new plant, which will be in operation end of this year, beginning of next year, will be able to produce up to 80 million pieces per year, and this product will be dedicated for the food industry in Germany, Switzerland, Austria and Benelux. If the project will be successful, which I strongly believe, that by the end of 2025, beginning of 2026, we will be able to make an evaluation of the project and as well to make a decision even to make expansion of this plant to be able to produce even over 200 million pieces per year. Regarding power segment, which is quite interesting due to the energy prices fluctuation in Sweden, in Poland and also in Germany. The current setup, which is quite interesting and complicated. We have a CHP power plant based on the natural gas that runs in Poland. We have already in Poland and in Sweden the PV installation of total capacity total total power install of 18 megawatts. We have a thermal waste incineration in Sweden. We have a two hydro turbines which are able to produce over seven megawatts of green energy. And also we have a biomass boiler in Sweden. Recently, we have several ongoing projects. Mid of this year, this PV installation in Poland of 17 MW has been completed. And just after the project was completed, we made a decision to continue. And we decided to build a second phase of this project, which would be close to 10 megawatts installation. It will be ready by May next year. And it means by the spring next year, close to one third of energy which is needed to run the Polish mill will come from the green energy, mainly from PV installations. Why we invest so many money in the PV project in Poland? It's mainly due to the big difference regarding energy prices in Sweden and energy prices in Poland. For several weeks, several days and even several months, the average energy price in Poland is between 120 euros. even to 190 euros like today. In Sweden, the price is much, much lower. Of course, assuming that for different price zones. But even if we calculate the SA3, the price gap is between 60 to 80 euros. Due to the fact that capex per megawatt is near the same, it means that it's much more profitable to invest currently to install a new PV installation in Poland compared to Sweden. We are also looking actively to search some PV projects which are already in operation mainly in Poland due to this spread of the energy prices. We are also running the modernization of the biomass boiler in Grygspo. This project will be ready by September, October next year. And this project is also connected with the brand new production facility. It will be the wood pellet production line also ready by October next year. Our aim is to be able to produce up to 50,000 tons of pellets per year. And using this waste heat from the paper production process, it means that we are expecting still at least 50 million Swedish crowns saving on annual basis for the Swedish mills in Grixbo. Then we also active regarding the energy storage system in Sweden. Due to the fact that pulp and paper mills are huge energy consumers, we have a good connection to the Swedish grid. and our location are excellent to plan and to build some energy storage systems. These projects are mainly done as a joint venture because we see that there is a significant capex connected with these projects and we would like to minimize the risk connected with unpredictable revenues after 2030.

Some words of summary about the financial performance. As you can see, the EBITDA for 2024, even despite of the tough market situation, is still quite good. We are quite happy about this. And as usual, you are using the chance to do some effective hedging of both segments, paper and pulp. As for cash flow breakdown this year, so 2024, here you can see what we've been spending most. And please note that there is a huge CAPEX spending in 2024, as we mentioned before. And Michal mentioned the investments for each segment. Most of that is energy capex for the projects that were mentioned on the previous slides. Our net debt to EBITDA, as mentioned in the very beginning of our presentation, is still negative. The difference is due to the loans that we have for the financing of our new investment, but still our situation balance sheet is very strong. Cash situation is still good. So in general, we can say that the financial situation is satisfactory.

2024 is difficult from the market condition perspective but it's also quite promising from the future or future looking forward this year our total capex will exceed 7 million hundred euros for power power packaging and and paper together but it was a decision base of two facts first of all we have a very strong balance sheet we are the healthy company with very very limited debt And based on our four-piece strategy, we've decided that this current, let's say, even some recession on German and other markets is a good time to make a decision to start several projects. From one perspective, we were able to negotiate a very good financial condition for the new equipment. And as well, the lead time for this equipment is quite shorter compared it was even two or four years ago. I think that the project which will be ready by, some of them will be ready by end of this year, some of them will be ready by the mid of next year, it will contribute a lot regarding the revenues and EBITDA for the future. Based on the current situation, as I mentioned, the CAPEX for this year will exceed 700 million Swedish kronor, but for 2025 and 2026, And the capex will be significantly lower. It will be like we had already in 2020, 2021 or 2023. And I also I'm quite convinced that the project will be quite successful, that we'll be able to deliver our expectation for this 4P strategy to grow in our new segment like power and packaging. And already since today, I would like to invite you for our annual presentation, which is scheduled by the second part of February to make a presentation for the entire 2024 and as well for the outlook for 2025. Thank you very much.

Thank you for that presentation. And now we'll jump into the Q&A section here and we'll start with the first question.

you elaborate on how you are balancing capacity utilization and margins going forward for several years arctic was the company which were able to exceed even 90 percent of the capacity realization during the last two years when we noticed significant drop of the demand in europe by 20 even 30 percent on some segment then we decided we have to be more focused regarding the margin compares to the volume Now, when we see a positive trend regarding the decrease of our production costs due to lower of our main raw material pulp, we are more aggressive to gain our market share and as well to increase our capacity across all countries in Europe.

Thank you. Why will the management not use the strong liquidity to buy back shares in this situation?

I think that from the investor's perspective, we should not only looking for this year, but as well for the looking forward. And this quite offensive investment program this year, when we will spend more than 700 million Swedish kronor, makes some limitation regarding extra dividend for this year. Of course, we have a clear dividend policy and we would like to stick to this policy. And already during our February meeting, we would like to present our proposal for the dividend.

that from this perspective i think for this year and next year probably we will focus more regarding the capex investment and the normal dividend maybe in the future we should consider to pay back shares thank you for clarifying that ebitda for the paper segment dropped significantly this quarter how do you expect this will impact your competitiveness and also cost structure in the short and also long term

In fact, this drop of the pulp prices give us a lot of benefits. Arctic is a non-integrated paper producers. We are not sourcing the pulp internally for two reasons. First of all, Rotneros and Valvic Meal are the producer of the specialty premium grades, which are able to be sold on the better price that we are buying the pulp for our paper production. And second reason is that due to the fact that there is a significant drop of the short fibre prices, we as an independent and not integrated paper producer, we are able to play the game towards the pulp suppliers. And I think that this year, next year, in event 2026, the non-integrated paper producer would be much more flexible to adapt to the market condition versus to the integrated pulp and paper mills, which have to be related to the local wood sourcing.

Your net debt has improved significantly compared to previous quarters. How does this strong financial position impact your capacity for future investments or acquisitions, particularly in growth areas like packaging and also sustainable energy?

Our financial situation currently is very good and we are a stable and more or less debt-free company. This enables us to plan for the CAPEX very carefully and we are able to expand. And as it was mentioned during our presentation, when we will have finished our current projects and current investments, we will also consider some new parts and some new investments, for example, like the molded fiber tray company, which will be operating by the end of this year. And when we will do an assessment after, for example, a couple of months or a year, then we'll consider the new investments, whether to expand this with the new lines and to expand the capacity of the paper trays. In the meantime, of course, we are also looking into some energy segments,

in investment for example pv plants i would like to emphasize that arctic is a very strong company from the balance perspective we are have one of the most solid balance in our balance sheet in europe and it also from one side it give us a lot of opportunities to make decision and to borrow the money or to finance partly by our own cash some project And as well, we are, let's say, much more silent regarding the fluctuation of the demand. If Arctic will be not adapt-free company like it was five, six, seven years ago, this current situation that we are running only on the 70% capacity could create a lot of problems. Now, even with this low capacitation, we are delivering the result even better compared to four years ago.

Thank you for that answer. And with a projected slow recovery in key markets like Germany, what actions are you taking to reduce reliance on these markets and adapt the business to the current economic conditions?

First of all, we have no plan to spend money for capacity increase. We think that what we have today in our group, roughly 450,000 tons of pulp and 600,000 tons of paper is optimal from the business perspective. Secondly, we would like to spend and the money which we are already spending in a paper segment is mainly dedicated to create a long term competitive benefits for us compared to our competitors, like lower production costs, like lower energy consumption per ton, like less labor costs, some kind of automatization. And I think that this trend just to create a long term, stronger competitive position for Arctic meals from the pub and from the paper perspective, it's much more stronger and long term view compared to be opportunistic, even to look for some kind of acquisition today. Today, in fact, there are plenty of opportunities to acquire meals on several segments. But after investigation of several cases, we see that, in fact, why we should acquire unhealthy business. That's the reason that we would like to focus mainly to maintain or even to improve our long term competitive position.

Thank you for that. The expansion of the solar power plant in Kostyn and improvements to the biofuel boiler in Grygsbo are impressive. What additional investments in sustainable energy are planned and how do you expect these to impact your future costs and also margins?

Energy is quite important element of the pulp and paper production. We have some projects in Sweden, but as I already mentioned, due to the big difference regarding the energy prices in Poland and in Sweden, it means that it makes more sense from our perspective to invest to the more green energy on the Polish side versus in Sweden. Already, the Swedish energy is close to 99% green. On the Polish side is only 40 or 30% green. It means that due to this decarbonization process and the carbonization goal, which is to be carbon neutral by 2035, We have a lot to do already. We have in Polish side the gas turbines and we have a plan to replace biogas with the next four to five years. We're also looking for some kind of pyrolysis process installation in Kostrzyn and some other project will be also interesting. The big benefits for us is that Kostrzyn mill, the Polish mill, is that also the energy distributor we have our energy grid and it's much easier to have access and to connect to the grid compared to be totally greenfield project this is the reason why we decided just after finishing this 17 megawatt installation pv installation to start a new one which close to 10 megawatts I'm pretty convinced that when we close this new project by May of next year, probably we have to be more of looking for the location close to the mill. And our aim is to be able to achieve close to 100 megawatt of the green energy by 2030. During our Q1 presentation next year, May 2025, we would like to make some kind of update of our strategy and as well update of our financial goals, update regarding our investment expenditures and revenues.

Thank you. And we'll take one final question here. The 4P strategy emphasizes higher margins and a reduced environmental footprint. Could you specify which aspects of the 4P strategy are prioritized and how these influence your decisions on future investments in the core segment versus new areas?

I think that already on the slide which was presented by Katarzyna regarding the cash flow, there's a clear message that definitely this energy is a key element. From one side, it's the next step to be a green, to be a carbon neutral target, but as well to reduce the costs. Please point out that pulp production process and paper production process is quite energy intensive. And if we are able to reduce the energy consumption per ton of paper or ton of pulp, and if we are able to produce as much energy on site, definitely we are able to from one side to be more green as a green producer. And from another side, we are able to reduce our costs and to improve our long term competitive position towards our competitors.

okay that's a wrap of the q a section here thank you very much both for presenting and are seeing all our questions and thank everyone who followed this presentation with arctic paper and i wish you all a great rest of the day and thank you very much until next time thank you very much thank you