Rottneros AB (publ)

Hello everyone and welcome to this webcast presentation where we have Rottner Rose presenting the Q2 report for 2024. With us presenting we have the CEO Lennart Ebele and CFO Monica Pasane. After the presentation there will be a Q&A and if you'd like to ask any questions please feel free to use the form that is located to the right. And with that said please go ahead with your presentation.

Thank you, Martin. And hello everybody to our second quarter report of 2024. If we look at the highlighted summary here, we have focused very hard to stabilize our operations after the slightly bumpy start into this year, and we've seen good delivery figures. We've seen a new production record during the second quarter for our mechanical pulp, but also Valvik has had solid production numbers. We've been able to capitalize on our excellent customer relations and especially in Europe we've seen a strong pulp market with rising prices for softwood craft as well as in the US where some volumes from us are going. So all in all the increase in turnover has been summed up to 4% and we ended the quarter with a EBIT of 30 million. Looking a bit more into detail in the market, we can see that the pulp market once again is diverging on a global basis. As I've mentioned, Europe has been very strong and so has the US been, especially on the soft put side. Whereas China has seen some weaker months during the past. If we look at the prices, they have turned up here. These are the quarterly average prices, both in Swedish kronors as well as in US dollars. The upper two lines are the gross prices and the lower ones are the net prices according to TTO. And you see that the gap between the gross and the net is increasing over time as we see an annual rebate inflation for the gross prices. But the currency has been favorable as well. And we are back on price levels on a net basis almost where we were at the former peak towards the end of 2022. Looking at the monthly prices and also the stock development, stock levels have come up to 41 days. It's a slight increase, which is primarily driven by the hardwood craft supplies from Latin America, whereas softwood still is at some 35 days. We have seen some disruptions during the beginning of the year, a strike in the Finnish pulp and paper industry and an outage of one large crop pulp mill in the Nordics. The mill is coming back and the strike is over, so we see a more stabilized supply situation. And you see here also that net prices have peaked a little bit south. The PIX has gone up and while speaking here at the beginning of July we've now seen numbers of 1625 for PIX in Europe. So a good market development and of course very good and solid deliveries from us into this pulp market. If we look more closely into the European market for pulp and paper, which is our main market with some 68% of our deliveries, we see that across the board, all grades have seen an improvement for the first four months of this year versus the same period of 2023, which was extremely weak and thus prices have come down. But even graphical papers are moving up as well as the packaging rates, which are more important for us nowadays. And the overall volume has increased with some 7%. We've also seen announces of packaging great price increases, which is, of course, testimony of that the market is stabilizing and the demand is picking up, which can be related into better pricing situation for our customers. And we've seen in our niches such as UKP for E-grades as well as our filter grades that good continued demand and also leading forward for demand from our customers. Looking at the grades and the relation to each other, the importance of board and packaging is continuously increasing despite the fact that the overall volume is slightly decreasing between 2018 and 2024. The importance of packaging is growing and here our investment into the mechanical pulp placed well in hand as mechanical pulp is extremely well suited for packaging grades. So we were looking optimistically into the further development of this market. Leaving Europe and looking into the global market for pulp. Also here we've seen an increase of close to 4%, primarily driven by Europe and North America. We've seen good demand pickups on the back of some shortages. Customers have made sure that they are restocking. That has led to this very dramatic price increase that we've seen over the past month. While China has remained relatively calm and stable and we have to see how the Chinese market is developing going forward. Bear in mind that China is some 40% of the global pulp market. So what happens there, as long as the markets are linked through functioning logistic systems, will sooner or later play into the other markets. But again, in our core market, Europe, we see a good situation and positive development downstream for our grades. Looking more into detail into where we are supplying a pulp into, carton board remains to be the biggest areas with some 25%, a slight decrease versus the full year of 2023. Filter and electrotechnical stable and together close to some 45%, almost half of all our volumes going into these very special applications. And you can see that tissue has increased quite a bit. That was on the back of the second half of 2023. And tissue being one of the global biggest areas for market pulp, where there's constant growth. It is giving us the opportunity that when, for example, the carton board is a bit weaker, we have a chance to offset our volumes. And that is important in order to always be able to run our production sites full and make sure that we can deliver the pulp that we produced. So all in all, our mix is shifting more and more towards niches. We're basically out of the printing and writing, and we start to see increased volumes into fiber cement, which is quite interesting to see how a renewable product can help in the building sector to reinforce concrete constructions. And with that, I hand over the word to Monica to guide us through the financials.

Thank you, Lennart. So we will first have a look at the first quarter or the second quarter of the year and compare it to last year. We go from having 41 million in EBIT last year to 30 million this year in the quarter. And we can see that price and currency has had a fairly big negative impact. This can be looked at in different ways. First of all, we have three main grades that we are producing and selling. We have NBSK, which is the bleached sulfate pulp. We have UKP, which is the same pulp, but before bleaching it. And then we have the CTMP pulp, the mechanical pulp. And these have different patterns when it comes to price fluctuations. So NBSK rose by 16% in this period. Whereas CTMP was fairly flat. So that can have an impact on our prices or it has an impact on our prices. Also the mix between these grades, how much we are selling of each will have an impact. There are pretty much one third each for the different grades. And then the final impact is from the lag between our sales prices and the market prices that you saw on the previous charts, we do have a time lag and seen in when we have rising prices, we are lagging behind to some extent, quarter on quarter. On the other hand, we had a big positive impact from volume. We had 7% higher sales volume and it was especially driven by by CTMP that has had good production throughout the year and also good sales. The sales of sulfate pulp, the NBSK and UKP was only held back due to that we didn't have enough material to sell. We had good production in the second quarter, but the production problems from the first quarter held back sales to some extent. On the variable cost side, we can see that it had hardly any impact at all, which means that we know that the wood price of wood is high, but the mix that we are buying has not changed dramatically for us. And also the other input costs have been fairly stable. could have a final comment on the quarter regarding depreciation. When we're doing our investment programmes, we are taking out some old equipment and related to that, we had a book value of 5 million that was taken out as an additional item in depreciation in the quarter. Then we can look at the first six months. We come from a very strong first half or especially the first quarter of 2023. The prices had been high up until the end of 2022 and started going down in 2023 and Here we have the positive effect of the time lag, so we're enjoying high prices, especially in the first quarter, which is where we see the biggest drop in change from last year to this year. Once again, we see a good increase from volumes and once again, driven especially by CTMP that has had a very stable and good production throughout the year. On this slide, or for this period, we see that the variable costs have had a negative impact this year. It is partly the wood costs, but it is also partly due to production problems in the Valvik mill during our first quarter, when production problems will mean that we have to buy more electricity and fuels and have a less efficient production and thus higher costs per ton. So for the first half year, we have had 35 million in EBIT. Then we can move on to the balance sheet. We still have a solid balance sheet and we have 298 million Swedish crowns in available liquidity and the Equity to assets ratio is at 64% at the end of the period. We can see now that we have a net debt position for the first time. That is debt instead of a net cash position since 2021. And this is of course partly due to our ongoing investment program. In the quarter we invested 135 million Swedish crowns and so far this year 216 out of the total cash flow for investments that we estimate to be around 430 million. After the quarter ended in the beginning of July, in the beginning of this month, we secured long-term financing And this financing is connected to the solar panels and batteries that are being built at Rottnerosmil. It is an up to 100 million Swedish crown loan that we can draw on when we have the payments for the investments. It has a tenure of five years. And we can take this loan with such long tenure thanks to a green economy. credit guarantee that is provided by the Swedish agency EKN, Exportkreditnämnden. So that is part of securing the financing for our ongoing investment program. With that, I hand back to Lennart.

Thank you very much, Monica. And then let's look ahead. We are aware that our industry is cyclical and we also know that we have some temporary challenges such as an increased levels for our pulpwood. But there are some underlying positive global demand driving forces which certainly will create more demand for cellulose fibers in the future. One of those is tissue that will consume more and more of the pulp that is being produced. More people on our planet with a higher disposable income at hand asking for a better standard of living. thus consuming more tissue papers. Primarily this is hardwood going into the segment but this also means that this will not be available for other segments. We know that we are shopping more and more through the internet and all our products have to be shipped to the consumers and here fiber-based packaging do have their natural advantages over other solutions they can be recycled they can easily be recollected and turned into new paper grades and thus this will continue to create opportunities for both recycled and also virgin fibers as you cannot use the fibers as many times as you like there is a certain physical limit to that so at some point virgin new fresh fibers have to enter into this market through folding box board or liquid packaging or some other kinds of packaging papers. We are aware of the transition that our energy system is undergoing towards more renewable energy sources, which means there has to be transmitting capacity in form of cables across the land or through the water, and especially deep sea water cables are using an isolating shell, which is made of fibers with a high cleanliness and very low conductivity such a great which we are producing but also more and more transformers are needed to go from high voltage to low voltage also with the rise of for example charging points for electrical vehicles and again transformers have an inner shell of an insulating material which is fiber with a very low conductivity where our pulp is of world-class and very thought after and we see here that we already are in negotiations for next year with increased demand from our customers. Sustainability is at the top of the mind of everybody and we are focusing more and more on creating sustainable solutions and one of these solutions are our molded fiber trays, which we do produce ourselves and within the joint venture with Arctic Paper in Poland. And also sustainable by and large is driving the demand for cellulose fibers and renewable products from renewable sources. Talking about the packaging and what we do on innovation and development, we have now completed the development of our technical standard for a molded fiber line. One of those lines is on its way into Sune to replace two old ones. So we will have two lines up there in the future. And we have this new factory emerging in Poland where all the groundwork is done. The pulp system is on site. The first two lines are on the way to be installed there in the coming weeks and months and then later on this year to be started up. And then those two lines will be complemented by another four lines in order to reach the full capacity that we have planned for during next year. which is very exciting. The market still is very strong. There is a huge demand, which is by big numbers over exceeding the current supply situation. So there's a really sweet spot here to demonstrate that the technology that we've developed is well suited to scale this up into an industrial scale and to be cost competitive. in the supply of sustainable packaging solutions, not the least for packaging that create, that demand a modified atmosphere for foodstuff in a cold chain with shelf life up to three weeks. We've also invested into Blue Ocean, which is a slightly different forming technology. They have secured their first customer and for a startup that is a critical phase in the development of the company, coming out with the first screw caps for supplements, and many other products will follow suit on that. So that's a great development and also a good outlet for our pubs, which we are in the process of trying to see how they could fit into the Blue Ocean system. So the dry forming through Blue Ocean with our wet forming, we feel is giving a 360 degree full service opportunity for this segment in the future. So summarizing it all, we have focused on stabilizing operations. We do see the results from that. We do see new production records. Our big investments are according to plan. It's the investment in the increased mechanical pulp capacity in Rottenruss Mill. It's the solar panels and battery investment, as well as the tall oil plant in Valvik. Those are the four big ones. summing up to a total of 430, including maintenance investments and improvements in our factories. And we continue to have a strong balance sheet to be conservative and responsible in allocating and using our shareholders' means to develop Ratneroos going forward. And with that, it's the end of our presentation, and we are coming to the questions and answers. And I hand back to Martin for some questions, please.

Thank you very much, Lennart and Monika, for that presentation. And like I said, now we're in the Q&A section here. And we'll start with the first question here. The result was weighed down by negative mixed effects, such as more CTMP deliveries where prices have not risen as much. How do you see the mix in the coming quarters?

The mix is very much dependent on the production capabilities in our mills and one reason for CTMP being higher in the mix in the second quarter is of course because we We have had good production of CTMP, but we had our production problems in the first quarter of NBSK and UKP and had very low stocks going into the quarter and could not supply to the extent that we would have liked to do to our customers. So going forward, we see that this will be more normalized with good production in both mills. And of course, even further down the road, we are looking at capacity increases in Rottnerås mill making the CTMP. But on the other hand, that is a mix, the change in the mix. But on the other hand, we will see improved profitability with the higher production output of CTMP.

And the pull prices are at an all-time high, but your earnings are far from it. What's holding you back there and how will you capitalize fully over the increased prices?

Yes, the prices are at an all-time high for NBSK for the gross price. And when we are looking at the sales of our NBSK, we are focusing on our main niches where we see that we have good profitability and stable customers. And that is our best way of capitalizing on the prices to be able to sell to our preferred customers and niches. And then, of course, looking forward, we see that we have a bit of a time lag with our own sales prices, so we have confidence in seeing some increase from our own prices as well.

But the earnings are also a combination of prices and costs, and we have to realize that the current wood pulp prices are at record high, which is weighing on everybody making pulp in the Nordics.

And the pulpwood prices keep rising. How do you see the effects quarter on quarter in SEC?

As you saw in the waterfall, when we looked at Q2 this year compared to last year, we were on a similar level. We have seen increases to some extent. quarter on quarter from q1 to q2 as well but they are at a much lower pace than what they were last year when the prices really were uh rising sharply um there has there have been announcement uh announcements in the market of still increases increases in the pulpwood prices um But so far we have had a good development and also part of it is thanks to how we can choose to buy from a good mixture so we can minimize the cost increases for our own part.

And we'll take the next question here. If I recall correctly, CapEx 424 was initially expected at 350 to 400 million SEC. Now you're saying 430 million. What is the result of the increase? Is it a CapEx overrun or have you just moved future CapEx to 24 instead?

No, it is not an overrun on the current projects that we're running. On the contrary, they are performing very well according both to time and cost. And those are the majority. It's the capacity increase on mechanical pulp, it's the energy investment and battery and solar panels, and it's the tall oil investment. But as we've had a rocky start into this year, we have also seen the necessity to make sure that our plants are well maintained and in good shape, so we have moved forward some of the maintenance capex to make sure that we have good utilization, good production, quality and environmental footprint in our milts.

And can you elaborate on why the NBSK has so much lower realized prices than the list price?

Again, what we see is the total mix of our sales. And as Monika explained, there are a couple of various product and qualities that are playing into this. And there are various ways of pricing. So some of our customers have a pricing, which is sort of the average of the picks the month previously, which then will be moved forward. Some have a longer time for their pricing agreements. So it's a combination of various pricing settlements that we are running and the PIX is only a very small share of our total volume.

Okay, and we take one final question here. How do you plan to leverage the continued growth in the pulp market to further enhance profitability and also market share?

We will continue to focus on those areas where our products clearly deliver unique properties to our customers to make sure that we can maintain our very long lasting relationships with the key customers that we've already had over decades which are very happy with the service and the quality we supply and in those areas we also see that The rebate that we have to supply at is lower than the gross rebate that many of the very big pulp buyers are getting when it comes to more commodity grades. So that's our way going forward, focusing on niches where special and unique properties are demanded that we can supply and thus making sure that we always maintain a good margin between the selling price and the input cost, which we have to see how that will develop going forward.

Okay, and that's a wrap of the Q&A section here. Thank you very much, Lennart and Monika, for presenting, but also answering all our questions. And thank everyone who followed this conference call with Rotneros presenting their Q2 report for 2024. And I wish you all a great rest of the summer and until next time. Thank you very much and goodbye.

Thank you. Bye bye.