Rottneros AB (publ)

Hello and welcome to this webcast with Drott News, where CEO Lennart Eberle and CFO Monica Palsson will present a report for the third quarter of 2025. After the presentation there will be a Q&A, so if you have any questions you can send them in via the form to the right. And with that said I hand over the word to you Lennart.

Thank you very much Ludvig and hello everybody to this quarter three of 2025. On the 30th of October, a rainy and autumn-like day in Sweden. And like the weather, our results are really not as summer-like as the picture on the first slide. It has been a challenging market that we've seen during the quarter. We are still struggling with very high raw material prices, although they have peaked and they're starting to come down. The pulp market has not really improved since the spring. On the contrary, it has moved sideways and with some lackluster in China. And as a result of that, we've seen a decline. result, which is really not anything we are happy with. As a consequence, we continue to focus on the things we can control ourselves. We have a very strong cost focus. The reorganization is in place. We will see the result of that program towards the end of the year with a full effect of some 35 to 40 million. We do not stop there. We will work further to see if we can achieve further savings. We have a working capital, which is too high that we've seen some reductions in that we will work with to continue further going onwards. And of course, we go also through all the variable costs we have to see if additional savings can be achieved in those areas. So this is a time where to put up our sleeves and really show that we can be a part of turning this around. If we look into the market, it's, as I've said, a very challenging climate. If we look at the prices in US dollars for the chemical grades, it has come down after a pickup at the beginning of that year. which we thought was the beginning of the cycle. It has stopped then. Stocks have increased. They have now decreased. But if we look into the various grades which are in stock, short fiber and long fiber, the short fiber has had a better run and there have been some increases in the short fiber pricing in Asia with two times $20 during the summer break. And the stocks have been coming down to a more normalized level. whereas the long fiber sulfate craft pulp has increased its stock to a slightly overbalanced level, and thus the prices have come under pressure. This is valid for the standard grades. If we look into the chemical pulp grades that we make in niches for brown and white and porous grades for filters, we still see a very good and continued good demand in those niches with increased demand from our customers. We'll come back to that in a short while. Translating prices into Swedish kronors is, of course, important. And here we see the effect of the kronor that has strengthened over the last months as well. So in addition of reduced list prices in US dollars, these prices also have come down even further if we translate them back to the Swedish kronor. And that is, of course, an effect of the weak market that we've seen where it simply has not been possible to forward the price and cost increases that we have seen lately. But if we look into how the market has developed as it is weak, as I've said, mainly in Europe, we see all across the board that all grades are struggling with a small exception of container board, which mainly is self-sufficient on recycled fibers. That's just not a big market for fresh fibers. And Europe is Rotterdam's biggest market with some 65% to 70% of our sales. 2024 for downward production was still a good year. But the first eight months of 2025, we've seen a slowdown of activity. And this slowdown has increased since May. The slowdown already shown up in the first four months. it has accelerated then and especially in the cotton board area which is important for us we've seen that the activity hasn't really come back and that is weighing on our high yield pulp production and deliveries And translating this into the chemical deliveries, we see that Europe is down as much as the U.S. as well. And the entire uptake of some 5% is from China, where we see a strong restocking as the Chinese buyers expect the current prices to be the low price. And if there's anything to be said about the current prices, We are at levels which are not sustainable for the high-cost producers. And thus, I believe that the Chinese buyers are right in assuming that this is the bottom of the cycle. It's time to start buying. And this should have some positive momentum going forward. But there are some imbalances. There is an oversupply or a lack of demand. And that has to be rectified before we will see a strong uptick in the development going forward. And on top of the imbalances as a consequence of a weak downstream market in Europe, we have also seen an emergence of pulp production in China itself. China is still the biggest market for market pulp. both from Europe, Canada and Latin America for short fiber-based products. But they have started over the last decade to make more and more of their own pulp and also integrated pulp and board, which we will see on the next slide. So you see here the availability of domestic wood that until the early 2010s has been the primary uh raw material for making pulp domestically up until some 10 million tons which is the dotted line and that availability of domestic wood has increased during the last five years year over year and that is a consequence of the building market that is weak and down so a lot of wood is going into building buildings and as the entire property market has come to hold these fibers are now finding their ways into the pulp and paper market so the increase in chinese production of pulp is fueled by availability of local fibers. And on top, of course, you see that there is also be an increased import of wood chips, which are certainly more price sensitive, but they are weighing on the market sentiment in China quite strongly. And if we translate the pulp production in China also into what this means for paper and board output from China, you see the same picture here since 1920. That has moved up to larger volumes, quite a strong increase during the first month of 2025. And this is a level of production that cannot be consumed domestically in China. So we've seen exports out of China, both from paper and board, into Asia and Europe and other markets where we historically have our customers. So our customers have been... are meeting these kind of low-cost producers from China and had to reduce their own production and thus wait on the demand for market pop. There are actions being in place. India, for example, has put duties and tariffs in place to stop this import of low-priced Chinese products. And also there are discussions in Europe to start anti-dumping actions against the import of Chinese production. So we will have to see how this is playing out going forward. This is however more for standard bulk grades of pulp, hard and soft wood, bleached grades of standard quality. and if we look into the rotten rules qualities we still see a strong and increasing demand for our ukp grades for filter and electrotechnical applications but also ecf grades for specialities or tissue printing writing an area that we have not been so active in for the last years is now coming back as we have to find new outlets for the volumes that we cannot place within carton board And also a new segment is emerging, which is fiber cement, where our fibers are substituting asbestos fibers to give some strength to cement. So we do see a good development on the sales of our chemical speciality grades, which have grown in the quarter and outpaced the production level. So we've seen for Rotterdam some reduced stocks. The challenge here is to find the market outlets for our high yield pulp. where we have a very cost-efficient mill now after all the changes we had during the last years. We are very efficient when it comes to head count per tonne of pulp produced. The energy efficiency has increased over the last years, so everything is really in place to be performing very well, and we do see good production on those days when we are running. And now with these tariffs being in place, for example, in India, we see also that some of the export markets are coming down, coming back and improving our order books. So there are some lights of hope going forward also for the high yield pulp area. And with that, I leave over to Monika to guide us through the results for the third quarter and the first nine months.

Thank you, Lennart. One of the highlights is that we have a strengthened balance sheet thanks to the rights issue during the quarter, but we'll come back to that later on. And we'll start with the profit and loss for the third quarter. We see here that we go from a plus 70 million in EBITDA to minus 21. This is, of course, where we see a very disappointing development. The majority is due to price and currency of our prime product, pulp. Lennart went through the graphs, so you could all see the sloping trend, and that is also what we can see in our own pricing when we are looking at the waterfall here. We are also selling a bit less, but that's mainly on the high yield pulp side. We exited the Asian market earlier on this year when prices were at a level where we were not really covering our variable costs. And now we are getting some volumes back, but we have lost some on volume. We see some positive signs on variable costs. In the previous quarters, we have showed big negative numbers when we have been comparing quarter this year to quarter last year, but now it is evening out. Behind this zero, we have a slight negative impact from higher wood costs, but they are offset by slightly lower costs. other variable costs like chemicals and fuels. What is really positive to see is that we are improving our fixed cost position. We are working very actively, very hard with our fixed costs and we start seeing improvements. We have to admit that some of the improvements are also due to when our annual maintenance shots are and when the costs for these annual maintenance costs come into our profit and loss statement. But the majority of the positive improvement is from our cost saving program. We see a fairly large number, minus 34 million for byproducts and other things. We had lower variable costs for fuels, but at the same time, we get a lower price for our byproducts, mainly tall oil and bark that we are selling. We also sold some emission rights last year, which we didn't do in the last quarter. So those are the main reason behind the minus 34. Then if we look at the same picture, but for the first nine months, we see a very similar trend. Price and currency having the major impact. On this slide, we see that the variable costs for the first nine months this year are higher than last year. And if we break it up between wood and other variable costs, it's approximately 100 million higher costs from wood. and then we have positive impact from other variable costs. On these nine months, we are still seeing higher fixed costs, but that is what we are addressing at the moment, plus that we have some one-off items affecting the comparability. With that, we can continue looking at the wood costs a bit more. 76% of the variable costs for producing pulp is today the cost of wood. If we look five years back and would have had a similar picture, the percentage would have been approximately a third. And if we take this into million Swedish crown, in a 12 month period, use approximately 1.2 billion Swedish crowns for variable costs to produce our pulp. So 1.6 billion. The 1.2 billion is the cost for wood. And if we would have had the same wood costs as five years ago, this number would have been a bit more than 600 million. So we have a higher cost for wood of approximately 580 million for the volume we are producing now in a 12 month period. And that's of course a very big number when you're thinking of what our EBIT is normally. And if we compare it to the cost for our personnel in the last 12 months, that was a bit more than 300 million. So this is the cost increases more than double of that. On the next slide, you will see how the wood prices have evolved. So the comparison year that I talked about was 2021. And it's really from 2022 and forward, we had seen the huge increase in the cost of wood. This is from official numbers from Skogsstyrelsen for the price of spruce wood, pulp wood to our industries. We see here that the prices are starting to peak. We don't have the statistics yet for the third quarter. But when looking at our own costs, we see that they were marginally higher in the third quarter of this year compared to last year. And there have been several announcements of price decreases in the market. So it will be interesting to see what the picture looks like when we have the official statistics also for the third quarter. Then we go into the balance sheet. At the beginning of this quarter in July, we successfully concluded the rights issue of approximately 300 million Swedish crowns that we raised. That, of course, improved our equity to assets ratio. We're back at 63%, above the 60% line. We used part of the rights issue to reduce our debt, so our net debt position has improved. What is really positive to see during the last two quarters is that we have had a positive cash flow from operations before investments. We have had a negative EBITDA, but that has been more than offset with working companies on our working capital in reducing our stocks. And that is something that we are continuing to doing. And we see that we still have good potential to improve our working capital position further. With that, I hand back to Lennart.

Yes, thank you very much, Monika. And we cannot say anything but it's very tough times. And it's not only for us, Rotten Roots, but certainly for the entire industry, which is under stress currently. But we all believe that fiber do have their natural place in business, in packaging, in other convenience products. It's a renewable product. We are self-sufficient when it comes to its sourcing. We do not import anything from Outside Europe, we create a lot of energy based on the raw material that we're harvesting. There's more forest standing today in the Nordics than it used to be 100 years ago. So it's responsible, managed forests that supply us with the renewable fibers that we can turn into lots of various different products. tissue is a growing area in general currently a little bit under pressure in europe but with more people having more disposable income the demand for tissue is continues to grow more people are consuming more products and fiber-based packaging materials are the most and best packaging materials that are available. You can recycle them, so the primary fiber that we're harvesting here in the Nordic is then coming into the market and can be recycled down on the continent various times to create new products and new values. I was into renewable energy. Of course, the energy that is produced as a residue from our sulfate craft mills is renewable, based on biofuels. But also the entire investment in electrifying our society, rebuilding the grids, is asking for more cables. Cables need more paper, as paper is an insulator in the cable construction. And also in transformers, a lot of fibers is being used. And here we see one of the very strong end-users where we have an excellent position. We are one of the cleanest producers of pulp with extremely low or no conductivity, which is a key performance for these kind of end-users. And, of course, everything about sustainability, both when it comes to using fibers, but also when it comes to using fibers as a raw material for, for example, molded fiber packaging, where we are also working with. And rock and roll packaging is that area where we do put a lot of efforts into. We are now performing the customer evaluation and qualifying trials in Poland. We believe those will be... finalized by the end of the year so we can actually start moving production from Sweden to Poland and then scaling it up and of course we also see the emergence of a lot of other players in the market one of them we have invested into when it comes to dry molding opposed to the wet molding process that we are having but we see also a lot of activities with various different players and I think that is a sign of that there is a belief and need for molded fiber products in the market as a complement to all kinds of other products, and especially in light of the single-use plastic directive and the packaging and packaging waste directive, which we are soon to be implementing. And customers are asking for solutions that are more suitable than purely plastic-based packaging materials. So to summarize it, we have seen a very challenging market during this year with some imbalances that need to be leveled out before we will see a good pickup. But it seems that we're coming closer to that point. We have definitely seen an increased supply of raw material over the last month. Monika has explained to you the monetary impact of it and the Public statistics will come soon, but we know the deals that we have closed with our suppliers and we see that these prices are coming down. They will take some time to drill through the stocks, which are in the forest, along the forest roads, in the mills, before you see it in the profit and loss statements, but it is coming down. We have done our homework when it comes to stabilizing our operations, making them more efficient. working on operational efficiency and everything is in place there are no further big investments needed we can be very conservative looking forward and controlling our capex for the next period and we of course working extremely hard to both control our cost but also free up working capital in order to secure the cash that we have in the company And wrapping all that up, I think, even though it is very dark at the moment, there is some light at the end of the tunnel. And we believe we are soon entering a more positive period again. And with that, we leave the word back to Ludvig to guide us through some questions and answers.

Thank you so much for the presentation here. And as you mentioned, now it's time for Q&A. So if you have any questions to Lennart and Monika here, you can send them in via the form to the right. And the first question here is, how do you plan to strengthen profitability after the sharp drop in EBITDA this quarter?

Should I take that? Yeah, please go ahead. I think we are on the right track and we have seen that we saw already at the beginning of the year that The market was getting tougher with lower prices. After a while, the Swedish crown strengthened and the wood prices were increasing at that time. So that is why we have initiated the cost saving program that is now showing that we are decreasing our fixed cost. We are also looking at our variable costs other than wood to be more efficient and to to improve on the variable cost side. And not the least, it's not part of profitability, but it's part of the cash flow to be efficient with working capital. And we do have a good track record for the last two quarters. And we have clear targets to improve even further on the working capital side.

And if we fill in here also, of course, there's a huge potential in fully utilizing the capacity that we have installed in our high-yield pulp and rotten roots mill. We see some markets coming back that have been closed down for some time, but we're also working very hard in introducing new grades based on the entire raw material basket that is available. So we're talking about both the traditional softwood high-health upgrades, but there are also opportunities for us as we have the technical equipment to make blends of soft and hardwood or pure hardwood. And there are various grades of hardware as well. So there is a good demand for those. And of course, that will generate additional sales and contribution and quickly improve then once it's working out our profits.

Thank you. What will the cost reduction of 35 to 40 million SEK have on margins going forward?

They will, of course, translate directly into operating profits. So they will be part of the improvement program, as will also other actions. As I mentioned when we talked about the wood costs, the 35 to 40 million on fixed cost is limited. Very much is personnel costs and also some other fixed costs, 35 to 40 million. But if we compare that to the cost of wood, that has increased by approximately 600 million in four years or from the lower levels to the very high peaks. the big impact will come when we see that we have lower raw material prices going forward.

Thank you so much. How will the proceeds from the right issue support further growth or stability?

Those proceeds have been used to improve our cash position, balance sheet, and to pay down debt. As I've said, there are no ongoing big investments planned. We have restructured Rotten Roost Mill from a mill that had two pulp lines for newsprint grades and carton board grades. Newsprint, as we saw, has been structurally very much declining, exited that. So now it's one line with one third of the manning working only for carton board grades, which is an over time growing market area. And also Valvik has proven that it is very efficient. and all major reinvestments are completed. So this really proceeds to strengthen our balance sheet, make sure we have a good net debt to equity ratio and necessary cash funds available to finance the ongoing business.

Thank you. When do you expect lower wood prices to start improving your earnings?

As we've seen here, we're peaking now and that will happen all the coming quarters.

Thank you so much. Moving on to the last question here. What financial potential do you see in packaging project in Poland?

This is now milestone two of our project. The first one was to finalize the tactical development in Sweden. Milestone two is to make sure and prove that we can scale up to an industrial scale and make sure that all these bits and pieces are working together. and filling that line, which can produce once fully operational 100 million trays of any kind of packaging. But compared to the pulp business we have, it is still a marginal contribution to our results. So the result and impact of that will be further down the road.

Thank you so much for presenting here today, Lennart and Monika. Thank you all for tuning in. I wish you a pleasant weekend.

Thank you very much, everybody, and looking forward to talk to you after our Q4 results early on next year. All the best.