Arctic Paper S.A.

Hello and welcome to today's webcast with Arctic Paper, where CEO Michael Jarczynski and CFO Katarina Wojtkowska will present a report for the first quarter of 2025. After the presentation, there will be a Q&A, so if you have any questions to Arctic, you can send them in via the form to the right. And with that said, I hand over the word to you guys.

Hello everyone, welcome to this Friday morning presentation of Arctic Paper financial results for first quarter 2025. Together with CEO Michał Jopczyński, we will present this to you. Starting with a summary of Q1 2025 results, if we compare them to the same quarter of 2024, we can see that there was some decrease in our net sales. It had two main, it had a bit different reasons in our both segments. In the paper segment, the biggest impact was the lower volume of salt paper and also just a slightly bit lower paper price. On the side of pulp, the main reason was lower volume salt. On the EBITDA side, we also noticed significant decrease of our results and it had some influence also from the paper segment, which was mostly, as mentioned before, lower volume and a bit lower price. Whereas on the pulp segment side, the main reason was very high cost of wood. So raw materials on one hand and on the other hand also the strengthening of Swedish krona against both US dollar and also euro had some impact on the results. The group's net debt to BTA ratio is still on a safe level, even though it has increased somehow due to more use of our overdraft facilities, but it still remains on relatively low level, which indicates the good financial position of the group. Let's go to the characterization of each of our segments.

Next, please. Q1 was quite stable and unfortunately not in the favor of the pulp and paper producers. The demand in Europe and even globally demand for the pulp and paper product was weak. And also we already see this regarding the prices. During the Q1, we have flat prices, even small decrease compared to December prices and also small flat compared to the last year. Move to the next one, please. From the volume perspective, we are a bit better compared to end of last year, but significantly lower compared to Q1 2024. The demand for paper is weak and we were able to use maximum 74% of all capacity. It's a little bit better compared to December, but normally December and the Q4 is a quite weak period for the pulp and paper producers. From the volume perspective, we were able to produce and deliver 125,000 tons of fine paper to the customers. Next, please. From the operating data, the revenues is quite flat, small difference compared to Q1 2024. It's only 0.5%, but also a small decrease compared to end of last year. The evidence price is also affected by the currencies. But the currency's fluctuation and the effect of the currencies for all results will be presented in a few minutes by Katarzyna. Next, please. No changes regarding our product structure. We are still producer of fine quality paper in three paper mills, two in Sweden and one in Poland. Regarding the market share, also not big changes. Europe is still by far our key market. And unfortunately, Germany is due to the recession or weak economic performance. We were not able to maximize our size according to our plans. Still, Germany is number one. And then the next big market are Poland, UK, Central Europe and Nordic. Our sales outside of Europe is quite limited, only 2%. We already started, beginning of last year, small sales to the US. and it seems that due to the current tariff issues and turbulent in a global trading relation this market is not so promising and probably we have to revise our strategy regarding this market already this year we delivered to us close to one and five thousand tons of paper thanks please No changes regarding the client structure. Our biggest percentage of the product is delivered to the merchants, which are responsible for delivering the product for the middle and small-sized companies across Europe. The second part is the printers across Europe. Big printers are located in France, UK, Germany. And the next is the publishers, mainly in Germany and also in UK. The next, please. The pulp market is also characterized by low demand. It's affected mainly due to global recession or global turbulences regarding the trading. The demand for pulp related products like paper, packaging and tissue product is weaker compared to 2024. And it has significant impact regarding the results delivered by our pulp segment. Next, please. Still, we notice very high or even the most expensive wood prices in our history. And unfortunately, even due to this quite stable demand for the wood product, the prices of wood pulp is growing in Sweden. And the average is close to 700 Swedish kronor per cubic meter delivered. We hope that it will stabilize because the demand for the forest product, especially timber, is quite stable or even decreasing. But probably it will affect positively on our result on Q3 this year. The next piece.

Maybe some words now about the currencies. As we mentioned before, the currency situation had significant impact on the results of Q1. As in the paper segment, the strengthening of Swedish krona against both US dollar and euro had an impact on the revenue side. It was partly offset by strong prices against US dollar, because as you know, our main sales in the paper segment is in euro and our main costs, which is pulp, is in US dollars. The situation is completely different in the pulp segment, where strong Swedish krona against US dollar had significant impact on the revenue side. As you know, in that segment, Almost 100% of sales is done in US dollar, whereas most of the cost is in Swedish krona. Therefore, we could feel that significantly during Q1.

Let's move to the operating data connected to the pulp segment. Regarding the production, which was close to 86,000 tons pulp production during Q1 this year, it's a little bit higher compared to the Q4 last year, and even better higher compared to Q1 last year. Please point out that during the Q1 last year, we have... several technical problems regarding the production process in the Swedish pulp mills, and as well, due to the heavy winter, it was some turbulences regarding the deliveries. It seems that the deliveries during Q1 was achieved to 83,000 tons, which is below our expectation. We hope that in Q2 and Q3 the result will be even close to 90 or even over 90,000 tons of pulp. Next, please. And the next piece. A quite stable situation regarding the structure of the application of the pulp produced by erotonous and bivalvic meal. Fortunately, we are less impacted by the low demand for the printing and writing paper. But the 32% dedicated for the packaging is also affected by the low demand. The export to China is also limited due to low demands from Chinese producers and the Chinese pulp and paper sector is also affected by these turbulences of the trading relations between China and the US. And we don't expect any improvement for the Chinese business for the next coming months. European automotive sector is also affected by recession and it also has some influence regarding the delivers of the pulp delivered to the filters business. Means that filters for the fuel and the air is also limited. Quite stable and even promising segment is electrical technical application. The transformer business is booming. And it seems that we have to put more attention regarding the development of production pulp for the insulating paper for European and also non-European producers. Next, please. Packaging business is quite stable as a small, but quite stable, close to 16,000 tons per year. And all main clients are located in Germany, Poland and Sweden. It's quite stable business. So far, we have no plan to make any significant increase of the craft production. But just for information, recently we already started to run the production facility in Poland as a joint venture between Arctic and Rothenus. And this plant is focusing to produce molded pulp trays as a substitute to the plastic packaging. And we have expectation that already next year it will contribute to our EBITDA. Next, please. The power. We have several ongoing projects regarding the power. In a few weeks, we will complete a PV installation in Kostrzyn. This is the close to 10 megawatt installation connected directly to the Kostrzyn mill. And it will help us from one side to reduce this environment impact of the paper production, because today a significant part of the energy is produced using the natural gas from local sources. And as well, it will have impact regarding reduction of the energy cost for the paper process. The biggest project in our group is a modernization of the biomass boiler located in Grixbo in Sweden. The project runs according to plan, and the start-up is planned on November this year. The result will be to reduce the energy cost for the paper production by 30 million Swedish kronor per year. Another project which is close connected with the biomass boiler is the wood pellet production line. We have a surplus of the steam and this steam will be used to dry wood sourcing from the different locations in Sweden and by November this year we will start to produce up to 50 000 tons of pellets And this is our new business line. And the clients are located in Sweden and Germany, partly in Poland. And we have expectation to have an additional contribution to our EBITDA by 50 million Swedish kronor already in 2026. There is a fluctuation regarding energy prices. Sometimes, especially during the windy days and sunny days, there is a surplus of energy in the system, and the energy prices are quite low, even with negative prices, like today, this morning, or even yesterday during the lunchtime in Sweden. Due to the fact we have a plan to install the electric boiler located in Kostrzyn mill in Poland with power up to 20 megawatts. Then we have a plan to use the surplus of cheap or even negative price for energy to produce steam for the production process and also we have expectation to have a from one side positive impact to reduce our CO2 emission, secondly to reduce our energy costs. by mid of this year, the total capacity of all PV installation in our group will exceed 30 megawatts. The next please. This is a picture done yesterday during the lunchtime. This is the status of ongoing project of this 10 megawatts installation, 9.6, exactly 9.6 megawatt installation, located in Kostrzyn on the right side of the picture. You see already the production machine hall. And then this is a connect line, direct line, which deliver the energy produced by the solar panels to the production facility in Kostrzyn.

Coming back to some other topics of financial performance. Here you can see the BTA evolution during past years. As you can see, the contribution of both segments during this year has changed and sometimes it was better for the paper part, sometimes for the pulp part. We can see some deterioration in the results for past years, but we are introducing some cost-saving measures in both segments in paper and in pulp with support of our four PE strategy new segments, so power and packaging. The BDA for Q1 was close to 23 million slots. And please note that it was almost 16 million higher than Q4, where we had some one-off items, but it was unfortunately significantly lower than in first quarter of 2024. We believe that both segments can contribute well to the total group result. The net debt to EBITDA during past years has changed, but still, as you can see, even though sometimes it was negative, it is still on a very safe level, amounting at the moment 0.65. And we believe that this drill keeps our strong financial position, a strong balance sheet, which is also confirmed by good cooperation with our financing banks. As a result of what you could hear from our presentation, yesterday the management board of Arctic Paper decided to change our original recommendation regarding profit distribution of 2.24. We will recommend to the general meeting of shareholders not to pay the dividend and allocate the whole profit to the company reserve capital. The basis of this decision is mostly the weaker financial results, which were achieved in both our main segments, paper and pulp, in the first months of 2024. And in addition, we noticed, and what we mentioned before, that the biggest impact things that influenced the results was the high prices of wood in Scandinavia, which are still remaining on a very high level. Then the rapid strengthening of Swedish krona against both Euro and US dollars, and also the lack of predictability of the economic situation, which was intensified by the world economic situation and global tariffs, which were announced by USA.

Next, please. Just a summary. We have a tough market for pulp and tough market for paper business. It seems that during 2025, we have to change our position. We have to focus regarding optimization and improvement of efficiency. This is the reason that we decided to make some cost-saving plan on both sector pulp and packaging. and also we would like to keep during this turbulent time stable financial situation. This is the position, this is the reason why we would like to recommend to the EGM not to pay the dividend 2025. We will back to the normal payment dividend according to policy when the situation will be much, much stable. And it seems that also this year we will reduce our capex. Last year it was over 400 million zlotys. This year will be 250 million zlotys. And the same level around 220 should be the reduced capex for the next two, three years just to stabilize the situation. We hope that by second part of this year, the output from our new packaging facility in Poland is molded fiber trays. We have a full capacity and we have expectation even to develop the business in next coming years. The power business is mainly focusing regarding on-site location to increase production and utilization of the green energy on site and as well to reduce the cost. Thank you very much. Looking for your questions.

Thank you so much for the presentation here. As you mentioned, I will now carry on with the Q&A here. Given the sharp decline in EBITDA and net income year over year, what specific cost optimization and efficiency measures are currently yielding the most impact? And when do you expect this action to be reflected in improved margins?

As I mentioned, we already announced a few weeks ago significant changes regarding the pulp sector, a reduction of over 40 people in Swedish pulp mills. We also decided to put on hold several other projects, and this year we focus only on ongoing investment projects. We have no plan to start any new ones, just to stabilize our financial situation.

thank you and a follow-up question there on on the pulp how exposed is the pulp segment to continued foreign exchange fluctuations and high scandinavian wood prices and you mentioned a few steps as you have taken but what steps have been taken to mitigate this structure structural vulnerability

I assume that over 80% of the costs are connected to Swedish krona and 100% of revenues is connected with US dollar. It means that it's from one side, it will be quite difficult to change, let's say, behavior of their clients because this traditional pulp market since decades It's stabilized in the dollars, but we have already started some discussion maybe to change into the euros. Of course, another solution is to have financial hedging. But of course, today on the current exchange rates, this makes no sense. But maybe in the future, we will reconsider to use FX hedging for the future transactions.

Thank you. You postpone new investment projects to reduce expected capex for 2025. How do you balance these deferrals with long-term competitiveness and innovation needs for the group?

First of all, we reduce our expectation to increase capacity. It means that due to this weak market and probably as well the weak demand for coming months, it does make no sense to put extra money for capacity increasing. But we would like to continue this year and even on most of the ongoing projects are connected to cost saving, improving efficiency or additional business lines like the molded packaging trace plant in Poland, also this biomass boiler in Grexpo and as well this pellet production line. It also gives us additional revenues and additional contribution.

Thank you. The energy segment is expanding with new solar and bioenergy initiatives. What return on investment do you foresee for these products and how soon could they become meaningful contributors to earnings?

If you just calculate what is the difference between the production cost on the PV versus the production cost of one megawatt hours on the natural gas, it's at least 50% lower. It means that normally in our energy project, the expected return on investment is between five to seven years maximum.

Thank you. And moving on to the last question here. With net debt turning positive again after a period of negative net debt, how would you describe the company's current financial flexibility and ability to weather continued market turbulence or seize acquisition opportunities?

I would say we are not looking into any acquisition opportunities at the moment. We can realize that the net debt to EBITDA has increased slightly. We are still in contact with and in good discussions with our financing banks so we can maintain a good, stable financing situation for the entire group, both in paper and pulp segments too.

I would like to emphasize that we have a strong balance sheet and our debt to equity is only 0.6. Normally, the level which is set in the loan contract is around 3 or even 3.5. It seems that we still get. But due to this turbulent time, our view is that we have to maintain strong balance and we have to maintain strong liquidity position of Arctic. And this is the reason that Today, we have no plans to acquisition. During this turbulent time, we already are receiving on the near monthly basis several offers for acquisition in different segments. But our aim is to maximize the efficiency of the existing asset in our portfolio.

Thank you so much for the presentation here today and answering all our questions. And thank you all watching at home. I wish you a pleasant day. Thank you very much. Bye-bye.

Thank you very much. Bye.