Rottneros AB (publ)

Hello and welcome to this webcast presentation where we have Rotne Roos presenting the Q1 report for 2024. With us presenting we have the President and CEO Lennart Ebbele and CFO Monika Pasane. If you have any questions please feel free to use the form that is located to the right and we'll take that up during the Q&A after the presentation. And with that said, please go ahead with your presentation.

Thank you very much Martin and hello everybody to our Q1 report. It is the end of April 2024 and up here in Sweden where we are today we can still see some snowflakes outside our window and it seems like the winter also had taken its toll on our first quarter. It was production related challenges at our Valvikmull, the bigger one of the two, which resulted in a disappointing first quarter earnings. We have seen a lower production due to a very strong winter and also some isolated production related issues that have been taken care of and dealt with and since then production is going according to plan again. Nevertheless, these items are affecting our result with some estimated 30 million Swedish and that in addition to the continued increase of wood costs as well as lower sales prices versus the first quarter of 2023, the result ended up at 5 million. But there already also are some signs for an upcoming spring. If we compare to the fourth quarter of last year, prices have certainly risen. It is clear that the market has strengthened both for pulp and downstream qualities and the increase in prices some 12 percent in US dollars or 9 percent in Swedish kronor and also our systematic and structured approach on how we run our operations is giving result. If we look at the Rottenroosmull, where we have had a new record high production of CETMP and this is before we are starting up the investment program that is currently ongoing, which is going according to budget both when it comes to time and cost and of course this new record builds a lot of confidence that we will see a very good effect of those estimated additional tons which will bring the Rottenroosmull to some 170 000 tons on an annual basis from currently 120. On the basis of our strong balance sheet, we have proposed, the board has proposed and the annual shareholder meeting has decided to pay out a dividend of 50 euro per share to create shareholder value going forward. So given the effects of the first quarter, we don't see any changes to our business model. We see that there is a continued demand for sustainable and climate-friendly products. We do continue working on making Rottenroos even more profitable in the long run. We are broadening our revenue base. We have achieved some 13 percent of sales which are not related to pulp during the first quarter and we will work for increased volumes and I think we demonstrate that not the least with new record in the Rottenroosmull. We continued and defend our balance sheet to give us the peace of mind and be able to come through unbalances in the market and are responsibly allocating the capital to where it makes most sense. As just mentioned, the dividend that has been paid out for the 2023 results is some 63 percent. Which is slightly above the corridor of 30 to 50 but if we combine the last two years, 22 and 23, this is well within that range. But most importantly, we do have very strong market positions for our customized and specialty pulp grades with our flexibility to do certain qualities which not everybody in this market can. And this is giving us certainly a good possibility to have stable and good deliveries. And also those have been demonstrated in the first quarter with some close to 90,000 tons of pulp being invoiced. So that is very good. If we have a deeper dive into the market where we do see positive trends, as mentioned, the prices have turned around from the throw in autumn last year. At the end of quarter one, the pixelized list price was at 1400. And now in April, we see prices in the range of 1450 to 1480. And the momentum certainly will continue. It's a very strong demand, not the least due to some unplanned supply disruptions and also a stronger demand from downstream operations within carton board and papers. Also, the currency exchange rate has continued to be favorable. And more importantly, however, is the balance between supply and demand, which can be seen in the stock levels. Those are the staples here in the graph. And they have come down from the very high levels, which we've seen in the beginning of 2023, to stable levels now around about 36 to 37 days of supply in stocks. And that is the sort of normalized level as the share of Latin American volumes are increasing and they are longer and trends than other markets. We have seen that the value chains downstream have been destocked. And we can see also that there is an increasing demand for packaging and paper grades. And there are a lot of price increases out there in the market for all various grades, giving confidence to that there is an upward demand. I talked about some disruptions. Finland had a strike which was taking out a considerable amount of softwood, long fiber pulp. And there's also some unplanned outages at some pulp mills which are disrupting this balance. Looking into the European paper and board market, which is Rotterdam's biggest market with some 67 to 70 percent. We have seen a very weak 2023, which are the lighter bars here. All grades had had a negative growth. But it has turned around and the beginning of this year has been positive for almost all grades with the exception of New Sprint, which is a grade we do not supply anymore into. And all in all, you can summarize this upswing in the downstream market with some 7 percent. The continued growth of packaging as an important sector within the European paper and board market is continuing. Total production decreased by 13 percent, but board continued to increase its share. And all of our grades we make are being utilized in the carton board segment. It's all white and brown sulfate, craft pulp, but it's also our CTMP. Especially the CTMP production increase will be focused on this increase in the board market. And here we do have some unique properties, which our customers are asking for not only in Europe, but also in Asia. So more in detail, what does this development mean for the global chemical pulp market versus the last year? Again, full year comparison of 2023 with 2022, and the first two months of 2024 compared to the first two months of 2023. And a total increase of 6.5 percent, continued driven by China, but also now accompanied by Europe and North America, where the demand has increased. And on the basis of that, prices in Europe and North America have gone up. In China, not as much, but stabilized on a relatively good level. For Rotteroos, the share of our various segments is not changing significantly. The most important changes took place during the year of 2023, when we closed down the ground wood line. Printing and writing now is an insignificant segment. And the carton board segment has grown. It has been not as strong here in the beginning of the first quarter versus the full year, but we already see that there is a picking up of the demand. Filter and electro-technical applications, which are probably the most unique applications for our pulps, are very stable. We'll talk about that a little bit later. Tissue, not a highly focused area, but an area which is an underlying good growth, is giving us the opportunity to balance out when there are weaknesses in other segments, and that we have done successfully in order to be able to supply full whatever we have available through production and in our warehouses. And with that brief overview of the market and the highlights of the first quarter, I hand over to Monika to give us a description of our results. Please, Monika.

Thank you, Lennart. Yes, as we pointed out, or Lennart pointed out earlier, the result for the quarter was a disappointment, mainly related to production problems. So if we look at the comparison between the first quarter last year to this year, we see that we had a drop in prices of 96 million, and we are really comparing a first quarter prices this year with very high prices still last year. They are increasing, but we didn't really see the prices coming through in our own sales to the extent that it would have been at the same level as last year. These were known facts, but what was the biggest disappointment was really in the volume and the production related issues that we had, especially in Vanvikmil, and that impacted by approximately 30 million. Apart from the loss in margin that we have from lower volumes, it also impacts the variable costs. The production is not as efficient, and as a consequence, we end up buying more electricity and fuels, for example. So part of the increase in variable cost is due to production inefficiencies, and part is due to continued higher wood costs. The production related issues also had some impact on higher fixed costs. On the positive side is the item other, which is related to revenue from other sales than pulp. This increased to 13% of our total revenues, and it is byproducts, wood, packaging, and areas not related to pulp. So in total, we had an EBIT of 5 million Swedish crowns for the quarter. Then if we look at the balance sheet, we still have a solid balance sheet with an equity to assets ratio of 65%. We do have an available liquidity, or we had an available liquidity at the end of March of 427 million Swedish crowns. We have our big investment programs ongoing. It is the solar panels and battery park in the energy sector. It is the increased city and capacity at the plant in Valvik mill. The majority of these 82 million invested during the quarter was in these three projects. Also, which is a bit unusual for the first quarter is that we paid out the dividend of 76 million, and the unusual part is that it happened already in Q1 and not Q2, as we had our annual general meeting already in March. So we are confident with a strong balance sheet and good liquidity going forward. With that, I hand the word back to Lennart.

Thank you very much, Monika. And let us look ahead of what will be impacting our business and business model in the future. We do see some global trends on the basis of an increasing population and more disposable income at hands, which is increasing the life quality and lifestyle of people, having a positive impact on the demand for tissue, as well as e-commerce, which is driving packaging qualities. The tissue is one of the largest applications for market pulp, primarily short fiber, also to some certain degrees long fiber. So the more short fiber ends up in tissue, the lesser available it is than in those areas where the long fiber grades that we make do have an impact for our customers. E-commerce certainly is here to stay. We've seen that during the last years and more and more packaging can be made and is substituted by fiber-based packaging, which is, of course, positive. We see a big shift, not the least in the US and then Europe, for renewable energy to come away from fossil-based energies, installations of wind power and solar panels. And this is demanding transformation, transformator stations to transfer the energy that is being produced, but also cables. And in both of these areas, we see the demand of our uniquely pure, unleashed craft pod with no conductivity. But with a change in the grid on the basis of more unplanned energy sources, this also gives new business opportunities. And here our 8 megawatt hours battery comes into play as solar and wind is largely unpredictable and volatile. This is creating a situation where the grid is not totally stable. And there is a need for batteries or consumers to be switched off quickly and shortly. So this means that there is money to be earned if you can hold effect available. And that has been proven to be highly profitable in the past. And the forecast is this will be so in the future as well. There will be some revenue here on helping the Swedish Kraftnet to balance the grid with our battery. Sustainability is here to stay. Consumers are more and more aware of how important it is to live a more climate-friendly life. And our technology for formed fiber is creating a huge opportunity here to give distributors and consumers a more sustainable and more fossil-based into more climate-friendly packaging. And this is an area where we've put a lot of resources and many years of development into. Rottenloos Packaging is ready to scale up. The quality is there. The product is out in the market. The demand from the market is huge. We do get a lot of calls and inquiries from various kinds of producers of packaging and to be able to supply them with fiber-based solutions. That this has led us to invest in our joint venture with Arctic Paper in Poland, which is now underway. And we'll start up later on during this year to significantly increase the capacity and hopefully come to a threshold where then major users of fossil-based products are feeling the comfort to be able to shift. We do have a wet molding process which gives some advantages for the products, but that's not the only answer to these challenges. And they're also dry forming producers. And we've invested this small share in one of these dry molding developers, which is called Blue Ocean Closures, which can produce bottle caps with fiber instead of plastic, which is of course a great leap forward. So rounding up the first quarter, we continue to have a strong balance sheet. We share that with our shareholders. We've shifted out some 63% of the net proceeds from last year. We've seen that the market has come into balance. It has strengthened since the autumn of last year and certainly gained momentum during the first quarter of this year, with list prices moving up and a strong demand for all grades of pulp, which has enabled us to deliver very high volumes. And of course, we do not rest until we have really utilized the effect and the capacity which we do have in hand on our sites. We've demonstrated that with a continued focus and increase in production on CTMP. Looking over the years, we have moved up the lowest level of a full year production and Valvik, and we will do whatever we can also to come back to a normal and good production level this year. And combination with a good market situation, this should be carrying for a good path forward. And with that, I hand over the word back to Martin to see if there are any questions which we would like to answer.

Thank you very much, Lennart and Monika for that presentation. And like I said, now we'll jump into the Q&A section here. And we'll start with the first question here. In which quarter should we start to see the positive effects of the increased production capacity in Rotnerosbruk? And what does the startup curve look like?

A very good question. And that certainly shows that the person who's asking this knows that it's not just like switching on the light and then the full capacity is there. So the final pieces of the investment will be put into place at the autumn stop, somewhere around the end of Q3 and the beginning of Q4, a little bit depending on delivery times. And then already during Q4, towards the end of this year, November, December, we will see that the production will increase. And there is a positive curve during 2025 on a quarterly basis and towards the end of 2025, I believe we will see the full effect.

And what specific measures are being taken to address the production disruptions experienced in Vallvikbruk? And what results have been achieved thus far?

Very specifically, we've isolated the pieces of equipment that have created these problems and in close cooperation with supplier and our own team, which has demonstrated a huge and strong engagement and motivation and competence to solve these problems. Maintenance measures have been taken, pieces have been changed and rectified. And we've also worked closely with our raw material suppliers. Parts of these problems are related to the sawmill chips. 20% of raw material in Vallvik is coming from sawmills. The 80% we chip ourselves, especially in a very strong winter like this, when logs are completely frozen and going into sawmill, trying to make sawn goods out of this. Thereby, product, the sawmill chips becomes of a different quality. And there are very fine materials we call fines, which are diverging from the usual chip quality. And this is creating issues in the digester. So what we've done is going back to those sawmills and put some quality control measures in place. And I think we've seen the effects of that already towards the end of the winter. So production has gone very stable since then.

And what steps are being taken to capitalize on the growing interest in the environmentally friendly packaging solutions, particularly within rottenrose packaging? And how does rottenrosebruk play a role in this?

Yes, we are capitalizing on it by investing in our joint venture. So if we have one machine making this new quality with a modified atmosphere packaging now in Sunde in Sweden, we will at the end of the ramp up of the joint venture have six lines available. And then the idea is after that to consecutively, of course, grow further. We are probably the only, if not one of very few, makers or formed fiber trays, which are utilizing 100% of CTMP. And like in Quarton Board, CTMP here gives very strong technical properties when it comes to bending stiffness. So you could say our products are lighter and stronger and also have a different feel and touch compared to what the incumbents are offering today. But you have to be careful making 170,000 tons of CTMP in the future would make a huge number of converting facilities if you would like to fully integrate our pulp. So this is not the way forward. We will not be 100% integrated, but the CTMP pulp that we make plays a vital role in offering these very high quality molded fiber packagings that we make.

Okay, thank you. And can you provide an update on the progress of major investment projects such as the expanded CTMP capacity and the installations of solar panels within battery storage?

Monica, would you like to take that?

Yes, I can do that. I think we will not answer very well on the increased CTMP capacity. But as you saw from the previous slides, investments are ongoing. There is a lot of work happening at Rottneros Mill with installation of equipment. And most of it will be in place at the end of the third quarter. When it comes to the solar panels and batteries, that investment is also happening on the Rottneros Mill site. It is ongoing. And the plan is to have both the solar panels and the battery park started during August.

Okay, thank you. And on top of that, we do have the, yes, sorry. We also have the tall oil investment in Valvik for some 93 million, which will give us the possibility to extract more tall oil and other byproducts from the raw material in our thrive to be more efficient and make the most of each cubic meter of raw material that we take in to improve our margins. And that will be started up during the autumn stop in Valvik in October this year.

And what is the difference between the NBSK list price and the net price?

The difference is the rebate that customers are achieving based on their size and relation to their customers. And this rebate is negotiated on an annual basis and consecutively increasing. So we are now at around about 42 to 45% of rebate. The US has approached 50%. Whereas China is basically have not any rebates at all there. It's a pure net price. And that's one way of handling bulk markets like the pulp market.

And what trends have been observed in the market for chemical long fiber pulp, including changes in price and demand dynamics?

It becomes apparent that the long fiber is strong and gives unique properties to the board and papers you make. Not all long fiber can be substituted by short fiber. Although we have seen a lot of substitution going on in tissue and graphical papers. But if you want to have performing grades like a liquid packaging board or something like that, where you need technical performance, long fiber is needed. Long fiber growth in the Nordic hemisphere predominantly. And we've seen a lot of mills, especially in Canada, which are maybe coming to the end of lifetime and having some availability issues. Whereas the Nordics like Sweden and Finland, we have a very strong cluster. And these are the dominant suppliers of this grade for the global chemical pulp market.

Could you provide more details on the anticipated production start of the investment project in Poland in partnership with Arctic Paper and how it aligns with your strategic objectives?

A very good question. We had one strategic objective and that was to have 10% of our turnover should be coming from non pulp sales by the end of 2023. We have succeeded that quarter one was 13% and we will come back with an updated figure of that in the future. So the sales of this joint venture will contribute to this strategic objective in order to be less dependent on the cyclicality of our pulp sales. The project is ongoing. We have experienced some delays in the supply chains from suppliers. This is heavy machinery equipment. Parts of the equipment are already there and will soon be assembled. But the most important parts are still seeing some delays due to the fact that our suppliers in their turn had problems with getting the right technical equipment in time. But we believe that things will be completely assembled by the end of quarter three if we do not see any further delays in the supply and then we will start ramping it up.

And finally, could you elaborate on the decision making process behind the dividend distribution at the recent shareholders meeting and how it reflects Rottenroh's commitment to shareholder value?

Again, we do have a financial target of distributing 30 to 50% of our net proceeds to our shareholders. We've done so over the last decade and given that we do have a strong balance sheet and that to equity of net assets to equity of some 65% available liquidity and also our cash generation. The board felt strongly and confident in proposing this to the AGM and the shareholders agreed to the board's assessment and thus decided on deciding on the 50 euro per share.

Okay, that's a wrap of the Q&A section here and thank you very much for tuning in to this webcast presentation with Rottenrohs and thank you very much Lennart and Monika for presenting and answering all of our questions and until next time. So thank you very much and have a good day.