Rottneros AB (publ)

Hello and welcome to today's webcast presentation where we have Rottneros with CEO Lennart Eberle and CFO Monica Pastanen who will present the Q4 report for 2024. If you have any questions please feel free to use the form 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, Martin. And hello, everybody, to this report call. Happy to have you with us. And we'll start off with the highlights for the fourth quarter. And the underlying EBIT has improved, eliminating one of items to minus 28%. Please bear in mind that we had two maintenance stops in the fourth quarter. Usually, we only have the bigger mill, Valvik, in the fourth quarter and Rottenruths Mill in the third. Last year, both were the same quarter. We had a one-off impact of sales of emissions rights of 76 in the quarter and also refinanced our long-term loans prior to year-end. For the full year, we had an EBIT of 47 million, primarily impacted by the high raw material cost, where we've seen a continued increase for the cost of pulpwood and thermal chips. We have, as you know, been undergoing a big investment program, a new tall oil plant involving an increased TTMP capacity in Rotten-Roos Mill, a solar park and battery storage, as well as some one-off improvements on the maintenance side, totaling to 450 million. And that was also one of the reasons why we had refinanced our long-term loans in the fourth quarter. On the basis of this weak result and also the very unsecure macro environment we are currently in, the board has decided to put forward not to pay a dividend to the AGM, which will be held later on in the springtime. Looking a bit more into the market and what is happening in the pulp market for the last month, we can see that the prices for pulp peaked towards the late summer-autumn and then have come down. especially visible on the list prices on the gross levels. While if we look more on the net levels, they peaked a bit earlier and then have flattened out. All in all, the prices had been higher year over year, despite the fact that the market slowed down in the fourth quarter. We have also a favorable US dollar to the Swedish kronor currency exchange rate that is of course impacting our prices when recalculating into Swedish kronors. Looking a bit more granular we see that the monthly prices and especially here now the net price on the lower level has been flattened out and we can see that the prices have remained flat through December and January and looking forward we see that there is a number of price increases that has been announced both for the hardwood as well as the softwood based pulp. Stocks have peaked towards the autumn and since then have come down which also obviously is a good sign especially on the hardwood side there had been production curtailments While on the softwood, it's primarily a question of a good demand. We see good demand in our niches, UKP for E-grades as well as filters. A bit more challenging, especially on the CTMP. So looking more in detail in the delivery figures that you can find in the report, you see that there is a bit of a difference. But all in all, it seems that the prices are bottoming out. The stock levels have come down. and we're now in a phase where we've also seen the first signs of a recovery, especially in China, which has been a challenging market for the last year. Price increases have been put into place prior to the China Lunar New Year, which is currently undergoing. If we look into the European market for paper and board, we see that compared to the last year and for the first 11 months, Things have improved. All in all, there has been a recovery of extremely weak market for all grades except newsprint. And this is our main market with more than 67% of our sales, especially for the softwood chemical pulp. The CTMP is more globally spread with half of the volume into Asia and half into Europe. Looking then what this means for the pulp market, we see that Europe has performed better than 2023. And as I've just initially said, China had been weak during the majority of the year. And we first now see that while prices are buttoning out, the activity is slowly coming back. We're still waiting for a big demand surge, primarily on the carton board, listening here downstream on the supply chains. It seems that There is not really the kind of demand that we have been used to. And this is more impacting our mechanical pulp, which is primarily used for cotton bud. However, China still is and continues to be the major market for market pulp with some 40%. So it's extremely important to follow what's happening here. Nevertheless, our sales into China are very limited. Our sales all in all for the last year are successfully following the niche strategy that we have been working on for a long time now. It gives us a good exposure to a couple of segments which are stable also in more demanding and challenging times. We have the flexibility to grow in areas which are a little bit more bulk-oriented, such as tissue. You see here we have gone from 9% of sales into tissue in 2023 to 11% in 2024, as a countermeasure of the carton board that has gone down from 29% to 22%. Filter remains stable and electrotechnical is growing as are specialities. Very nice to see also that the new segment of fiber cement is slowly growing step by step. So it's a good spread of end-use segments where we can really deliver good value for our customers. And with that broad overview of our main items and the market, I leave the word over to Monika to guide us through the results.

Thank you, Lennart. Yes, we are happy to say that we see an underlying improvement in result, but a lot of things has happened during the quarter. In the fourth quarter, we normally have the maintenance shutdown in Vallvikmil, which we also had this year, which is always greatly affecting our result. But this year, we also had the maintenance stoppies in Rottnerosmil in the fourth quarter. which is normally in the third quarter. So this will affect the comparability between the years. But we see here that the higher sales prices really come through here in the fourth quarter. But we see that the variable costs continue to increase compared to last year. Another big thing happening in the quarter was that we sold emission rights in the total of 76 million Swedish crowns and that helped to boost the profitability and we ended up with an EBIT of minus 28 million for the fourth quarter. Then if we look at the full year, it is a bit a similar picture. We see that price and currency is especially the sales price is higher, but year on year it doesn't have the same impact as on the fourth quarter. We can see that volumes have a negative impact and this is mainly for the poor production we had in the first quarter of the year that we didn't manage to catch up with during the rest of the year. And for the full year, we really see the impact of the wood costs in the variable cost increasing. And also for the full year, we have a positive impact from the sales of emission rights, which is to the right of the slide. All in all, we ended up with an EBIT of 47 million for the full year. Looking a bit closer at our variable costs, this is a split of the variable costs for our production of pulp. The wood is 70% of the total cost last year. The share was 65. So here we see the impact on our costs and also how that will affect our margins when we are selling our goods. Then going to the balance sheet, we have had a heavy investment program, like Lennart talked about. This year, we invested 450 million. Last year, we started the investments and invested a total of 205 million. To support these investments, we renegotiated our long-term financing at the end of the year. So now we have a loan, so 400 million and available revolving credit facility of 150 million. All in all, we had an available liquidity at the end of the year of 385 million. And we continue having a strong balance sheet with an equity to assets ratio of 59% at the end of the year. With that, I hand back to Lennart.

Thank you very much, Monika, for the high-level economical figures. And looking ahead, what do we believe is happening going forward? Obviously, it's difficult to have a good and fact-based foundation of future outcomes in the turmoil world we're living in currently. But nevertheless, there are a couple of things we do sincerely believe are impacting the global economy. fiber market in a positive way. Of course, we are continuously growing the number of people living on this planet, and most of them are having a higher disposable income. The standard of living is increasing, which is fueling the demand for tissue. Primarily, tissue is based on hardwood, short fiber from Latin America, but there are certain applications, kitchen towels and other more absorbing grades that there are opportunities for a mechanical pulp as well as for the white long fiber softwood pulp. But also on and off a trend towards more sustainable tissue applications where customers are demanding brown fibers in the tissue. So here it is really an opportunity. And as we've seen earlier in the split for the segments, an opportunity to grow as tissue continues to grow and becoming more and more the most important sector for fibers. We know that fiber is a great raw material for sustainable packaging and more and more goods which are consumed and shipped are needing more and more packaging. And this segment has been a bit slower for the last year, but we believe that as economical Activity is returning. Consumer confidence will be returning. There will be an easening of the disposable income as interest rates are coming down. We will also see that consumption will increase and thus increase the demand for packaging. Energy, as such, of course, is always very important and it's a key element. matter for the green transition and as we are rebuilding and reinvesting in the grids both in North America as well as in Europe, we demand more cables, we demand more transformers and these are applications where our pulp really makes a difference and we see that These projects are driving the demand for our E-grade pumps, which is really, really nice to see, as well as it's this more renewable energy coming into the system. And here, of course, although we talk about the trends favoring pulp, we've also done our little bit of investing in a solar farm, which produces two gigawatt hours of green energy, as well as a battery storage for energy, which is now up and running and being developed. ready for a couple of months. All in all, sustainability is at the heart of our activities. All we do, we do in order to become more sustainable to supply sustainable solutions to our customers. And the forest industry, by and large, is part of the green transition and trying to help fighting climate change and coming away from the fossil-based products into more renewable-based products. And the forests continue to grow Fibers store carbon dioxide. And this is one part of the solutions which we believe and are convinced will drive the demand for our products going forward. So if we wrap up what has happened during the fourth quarter and full year of 2024, as we've mentioned, the start of 2024 was impacted by a very cold winter. We had a couple of production issues. issues which we have solved. We have stabilized our operations through the course of the year and see that it is on a stable and good level. We have had a very heavy investment program that we've run through. Those of you who've been following us for a couple of years, you might remember the Agenda 500. And that were a couple of years with an investment around about 200 million. I think it was some three years where we had that investment level. Now we had one year with 450. I'm very happy to say that all the projects have been completed in time. We see the full effect of them. All the targets have been met, which is fantastic. And it's a great effort that has been done by our own people and our suppliers and the hard work. So that's really nice that we have a foundation to be ready when the economy is coming back and the demand is picking up. And we already can see in the fourth quarter that we have improved underlying results based on the improvement on prices quarter over quarter 23 to 24. Despite the fact the results are impacted by continued high fiber costs and we just do our best and focus on the things we can improve and impact ourselves so that the results continue to be as good as possible going forward. And with that, we open up for some questions and answers. And I'll leave the word back to Martin.

Thank you very much, Lennart and Monika, for that presentation. Let's dive into the Q&A section here. We'll start with the first one. How does your cost structure compare to your competitors?

Yes, first of all, we have to define who our competitors are. And we are selling softwood pulp. So we are looking at the softwood segment. And as you saw on previous slides, this is a big part or the major part of our variable costs. And this is not a global market, but a North European market for the wood cost affecting all of us in a similar way. Having said that also the costs of softwood in North America is high so we see that we have a similar situation all of us producing softwood.

When will the factory in Poland be fully operational?

We are currently in the last steps of the Checking out the first machine, electricity is put on, water is put on, the pulping system is in place, packaging lines are ready. So it's a question of a couple of more weeks, then we will start validating quality and start producing products. And towards the end of the first quarter, we will have sellable products coming out of the first machine. The second machine is on its way. And then we will gradually increase the capacity by a couple of more machines later on this year.

What impact can be expected on the pulp market in general and Rottnero specifically regarding the possible US trade tariffs against Europe?

That is a very good question that a lot of people have of course dived into deeply. If we go back to what happened back in 2017 when Trump administration one put similar tariffs in place, all of you might remember that there has been a long ongoing battle between Canada and the US on thorn timber products that impacted mostly the Canadian timber and pulp market and opened up for opportunities for European suppliers. If these tariffs will be put in place, we do believe that this might be a similar impact this time, i.e. there will be less softwood pulp coming out of Canada, opening up for Europeans to supply more into North America. We have a couple of very specific grades which are not made locally in the US, so we are cautiously positive that we can find a way with our customers to solve any potential tariffs might they be put in place for Europe as well. But by and large, I think it's something about the thorn products market, which has been a long ongoing dispute. And if there will be less thorn products coming out of Canada, there will be less wood chips available for the Canadian pulp molds that will further decrease the capacity of softwood pulp which opens up and brings more balance into the global software market. Then by detail, what this will mean, we will have to wait and see, but all in all, this would be a supportive move to further increase the gap between hardwood and softwood pop. So I'm cautiously positive about this. Nevertheless, I don't think nobody wants more tariffs. So what we all want is a, peace and a functioning global economy.

Thank you for that answer, Lennart. There has been weak deliveries in Q4. Has it been more difficult to sell?

There are two different things happening here. We have the softwood side and the sulphate pulp. We had, as you know, we had slower or not so good production in the beginning of the year and had good demand so we continued to have low stock levels of of sulfate pulp and that combined with the maintenance shutdown meant that we we didn't have that much volume to sell of the sulfate or we we had um it held back the sales to some extent. Then we have the CTMP market, which we have commented on in our report, which is slower. It doesn't have the same demand and it's impacted very much by what is happening in China with much integrated pulp coming online that is affecting demand. With maintenance shutdown in a quarter, even if we try to build up stocks ahead of a shutdown, which lasts for about a week, it does affect also the invoicing. So that is the background behind the lower volumes for the quarter.

Thank you, Monica, for clarifying that. How do you see the working capital needs going ahead versus historical levels?

Yeah, of course, with cost of wood increasing, it will mean that we will tie more capital in the wood that we are purchasing. And similarly, if the sales prices are increasing, we will see a a similar trend, but all in all, we don't see any other trend affecting working capital need.

And how do you plan to mitigate the impact of rising raw material costs? And what strategies are in place to improve profitability despite these pressures?

It is our Historic and the continued future focus on being in niches where we supply additional value to our customers, where we are not so linked to these list prices, but can have more individual pricing, which gives us a little bit of an edge. It is, of course, also very important to supply the right quality, which we're always working with. and improving our productivity and efficiency. So the move that we made in Rottenboos from two pipelines to one pipeline, reducing our overhead costs, reducing our fixed costs, making more tons with a lower fixed cost number, of course, is one of these efficiency gains that we see. So it is a continued focus on all the areas where we can become better day by day through our daily operations. A continued focus on the right segments will create more value for our customers and making sure we do the things we do continuously well over time.

What's the expected financial and operational impact of the newly commissioned major investments, particularly the expanded CTMP capacity, solar panels and the tall oil plants?

Yes, they're a bit different, these investments. With the tall oil plant, we can see that we will have a more stable and secure production and we also have a higher capacity. And that, of course, has a positive impact. The TMP expansion means that we can produce more tons in more volumes in the middle compared to previous, which is always beneficial for the cost structure. And then with the solar panels and battery storage, that means that we can produce own electricity and that we can also utilize the batteries to decrease our electricity costs.

How significant would you say is the long-term growth potential of the molded fiber tray production in Poland and what revenue contribution is expected from this initiative?

We haven't singled out the economical and financial impact of the packaging initiative and we'll have to wait until it's up and running which is coming very close so I'm as much expecting it as everybody else. And we have been drawn with delays due to global supply chain issues for a long time. But now we are finally getting clear. I think when we look at the market perspective and the potential, it is enormous. Of course, there are properties with fossil-based products which gives them an edge, but there's also a huge share of the market where people would like to have a more sustainable solution, not a fossil-based, a plastic-based solution. It gives a different feel and touch. It gives something else that consumers all around the world are appreciating, especially if you can make it free of PFAS, floor chains, which are certainly not very healthy. So here we do have an edge. We have a great quality. It's now about really proving that this quality is coming out of our machines in a good and productive way going forward. But I would say the limitation is not the market. It is really creating the right capacity so customers dare to take the step because there's a very limited amount available as of today.

What measures are being taken to further strengthen relationships with wood suppliers and ensure a stable raw material supply at competitive prices?

We've touched upon that earlier during the financial part of the presentation. Looking at the prices, we do know as the wood market is transparent, there are list prices available for all the major regions in Sweden. that we are sourcing at a competitive price. We are sourcing very close by to our mills, up to 150, 200 kilometers away, which is securing a low transportation cost. We have seen that we've broadened the base of supplies, especially for the Rottenroos mill, as we had an increase of soil mill chips that are needed for the new capacity. That has worked out very well. So I would say over the years, decades, Rottenruth has a good reputation and a good long-lasting relation with our suppliers. So I think we can see as we have not had any problems sourcing the right amount, we do get the volumes we need. And as it is a transparent pricing in the market, we know that we're also sourcing at competitive prices. I'm very happy about the situation we encounter and I'm quite proud about the organization that we're having taking care of our fiber suppliers.

And with no dividend proposed for 2024, how do you plan to balance investments in growth with shareholder returns in the future?

That is on top of what we do and also on top of the board's agenda. We will be balancing this over an economical cycle. We have proven that we are able to both create shareholder value as well as maintaining our milts. Some years there's more dividends than 50%, some years there's less, but on average over time, This has been played out very well, and we're in this for the long run, and I hope our shareholders appreciate that. So this is what we will continue to do, and we will certainly come back with that in the future.

Okay, and we take one final question here. How do you assess the competitive landscape of the pulp industry, and what differentiates Rottnerus from its peers in terms of market position and also innovation?

We talked about that in one of the previous reports, and I think if we took up the global competitive situation, we are in the softwood, long fiber wood basket, which primarily is Scandinavian Finland, as well as Canada. Canada has its drawbacks. We've seen that the capacity of softwood pulp out of Canada has been decreased over the last years, and I might believe that we will see further decreases going forward. In Sweden and Finland, this is a backbone of the forest industry. We've got very healthy growing forests. We have good mills. So the part of the softwood need in the world will be supplied in the future more and more from Scandinavia and less so from Canada, which today still is the number one supplier in the world, but on a decreasing slope. Within this big segment, I mean, we're still talking about some 17 to 80 million tons on a global basis of softwood chemical pulp. We are in a very small niche with some added value, of course, for our customers. And this is what we continue to play. We will find those customers who appreciate our service and our quality. We see that in our regular customer service, that this is very highly appreciative of what we deliver. as well as the quality. And we are finding customers where we can meet eye on eye, where they are sort of the same size. If we go down into the tissue segment, there are a couple of blue chip global companies that certainly are so much bigger. So the relation would be more difficult. So we're trying to find the right segment with the right customers. where the relation is long-term, and it's always a question of a win-win, and this is what we'll continue to do.

Thank you very much, Lennart and Monika, for your presentation, and also all of your questions. And thank everyone who followed this presentation with Rotten Roos, and I hope you have a great rest of the day, and until next time, thank you very much, and goodbye.

Thank you, everybody.

Bye-bye. Thank you. Bye.