Earnings call transcript: Rotternaut’s Q1 2025 results show operational challenges

Rotternaut, a company in the pulp and paper industry, reported its financial results for the first quarter of 2025. The company faced significant challenges, including a negative EBIT of -SEK 62 million, largely due to a weaker US dollar and high wood costs. Despite these hurdles, Rotternaut maintained a strong equity to assets ratio of 56%. The stock price remained unchanged at SEK 5.88, though InvestingPro data reveals a concerning 36% decline over the past six months. According to InvestingPro’s Fair Value analysis, the stock appears undervalued at current levels.

Key Takeaways

• EBIT for Q1 2025 was -SEK 62 million, impacted by currency and cost pressures.
• New investments in molded fiber machine lines and an increased stake in Blue Ocean closures.
• The Valvik mill’s production increased by 16% year-over-year.
• Initiated a cost-saving program targeting SEK 35-40 million annually.
• Strong equity to assets ratio of 56%.

Company Performance

Rotternaut’s performance in Q1 2025 was marked by operational challenges. The company’s EBIT was negatively impacted by a weaker US dollar and high wood costs, which now constitute 75% of total variable costs. Despite these issues, the company managed to increase production at its Valvik mill by 16% year-over-year and commissioned new molded fiber machine lines in Sunne and Poland.

Financial Highlights

• EBIT: -SEK 62 million
• Equity to assets ratio: 56%
• Production increase at Valvik mill: 16% year-over-year
• Investments completed in 2024-2025: SEK 460 million

Outlook & Guidance

Looking forward, Rotternaut remains cautious about new investments, focusing on optimizing its supply chain and reducing costs. The company anticipates potential improvements in the wood supply market and is exploring strategies for mechanical pulp markets. Management emphasizes a conservative approach to future capital expenditures. InvestingPro’s Financial Health Score of 2.1 (FAIR) supports this prudent approach, while analysts maintain optimistic projections for profitability in the current fiscal year. Get access to the complete Pro Research Report for comprehensive analysis of Rotternaut’s future prospects.

Executive Commentary

Leonard Ehrble, CEO, highlighted the company’s focus on internal factors, stating, "We are focusing extremely on the things we can impact ourselves: health and safety, production, and costs." CFO Monika Falseline echoed this sentiment, emphasizing a conservative investment strategy.

Risks and Challenges

• Currency fluctuations, particularly the US dollar, remain a significant risk.
• High wood costs continue to impact profitability.
• Declines in European paper and board production could affect demand.
• Market volatility in China presents ongoing challenges.
• The gap between short fiber and long fiber prices could pressure margins.

Q&A

During the earnings call, analysts questioned the weak demand attributed to 2024 production imbalances. Rotternaut is working to activate sales channels and is exploring strategies for the mechanical pulp markets. Management reiterated a conservative approach to capital expenditures, focusing on cost control and production flexibility.

Full transcript - Rottneros AB (RROS) Q1 2025:

Ludwig, Webcast Moderator: Hello, and welcome to today’s webcast with Rotternaut, where CEO Leonard Ehrble and CFO, Monika Falseline, will present the report for the first quarter of twenty twenty five. After the presentation, there will be a Q and 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 guys.

Leonard Ehrble, CEO, Rotternaut: Thank you very much, Ludwig, and hello, everybody, to this quarter one presentation of 2025. A stable production in a turbulent world is, what we have achieved during the quarter. We are focusing on the things we can control ourselves, health and safety for our employees, production and cost control. But sometimes these things are not enough to create a result which we are satisfied with or being proud of. And as we saw that development emerged during the first months, we decided by the end of the quarter on March 21 to publish a profit warning and instantly went into negotiations with our unions to see over our costume and our organization in order to be able to adjust the production capacity and and our costs.

And that is ongoing, and, we have very constructive and positive dialogues with the unions, and we believe this can be concluded fairly soon. So that will lead to some cost adjustments that we believe over time will reduce our annual cost by some SEK 35,000,000 to 40,000,000. And that is, of course, in order to counteract the high raw material cost that we still see, the, strengthening of the Swedish krona that has started during the first three months of this year and also being able to adopt to a currently new situation on the mechanical pulp market, where we see a slightly lesser demand and prices are under pressure. So if we would then move over and look into the market, which is characterized, of course, by a high uncertainty, pulp is a global product from global players in the global economy where tariffs suddenly can redraw the map that we were used to see, and we have to see how these things play out. But for the first quarter, in general, the stocks have remained low at forty one days, which is more or less seen as the normal level, a bit lower for the long fiber, which is the most important grade for Rotten Russe, around about 37, a decrease of one day and forty one days for the short fiber, which is the dominant quality in this market.

And especially in our niches, we see good demand for our UKP and ECF grades out of Valvik, but a challenging market situation for the mechanical pulp that we produce at Rotten Roose Mill. But overall, you can see here, we’ve gone now over to only displaying the net prices, no more gross prices, less a rebate, which is somewhat difficult to define. We see a level of roundabout $800 for our grades. And if we translate that into Swedish kronas, that’s the upper line here, that’s around about SEK 8,000. So it’s pretty stable.

We’ve seen an uptick during the autumn of twenty twenty four into the winter, went up to some $1,600 from $14.18 dollars so a good uptick. But it seems that we are now moving more sideways since we come into the second quarter. As you can see on the lower graph, the prices for the mechanical pulp have constantly come under pressure over the last years. That decline has sort of stopped somewhat now during the recent months, but certainly on a level which is not healthy. And and that is also why we have, decided to exit certain markets where, our profitability simply doesn’t add up anymore.

And of course, the exchange rates are playing their role in this as most of these export businesses are denominated in U. S. Dollars. But looking into Europe, which is our main market, some 67% production is delivered to European customers. And there, we can see a slow start in 2025.

’20 ’20 ’4 was characterized by a rebound from 2023, which was low. And now it has sort of stalled. Especially on the graphical side, we see continuous closures and rebuilds into other areas, but also cotton board, which used to be a good growth area and where certainly our mechanical pulp is aimed for has stalled a little bit. So here, we are really eagerly waiting for consumer confidence coming back and the general pickup in economy, which fuels consumption, the use of carton board and thus the use of our mechanical pulp with our European customers. But more interesting maybe is to see to this development over time.

Here, if you take the green line and the sort of smooth line, which looks like a sinus curve, back to 2021 and to 2025, that’s a rolling 12 average production volume of paper inboard in Europe. We peaked there around February of twenty twenty two at 7,300,000 tonnes per month, and that has now reduced to 6,300,000. So there’s roundabout 1,000,000 tonnes per month that has disappeared. That’s 12,000,000 tonnes on an annual basis on a market, which is roundabout 80,000,000, 80 five million tonnes, which is quite a considerable volume. There are various things that are impacting this development.

Of course, there are still closures as part of this, but also slight underutilization of the existing capacity that has been installed. So I think everybody in this value chain is ready to ramp up as soon as the demand is coming back. How that translates into pulp deliveries, we can see on this slide. Again, China, very volatile, a very weak market in 2024, which is now rebounding. And then in 2025, they’re really playing their card of being the world’s biggest market for market pulp and trying to optimize their pricing.

Pricing cycles have shortened considerably over the last years. It’s more like three to six month cycles now where it used to be maybe one or one and a half years, a couple of years ago. So again, a lot of uncertainty, unpredictability and difficult to have visibility on where we are going. China is also a lot dominated by short fiber imports from Latin America. And here, we see that prices have come under pressure as that is a great where we see a lot of capacity additions, both in China, but also furthermore in Latin America.

And then we can see that there is a gap between short fiber and long fiber, that gap has increased dramatically over the recent month and price cycles. So historically, maybe some $100 to $150 is now north of $200 as a price gap. And of course, it’s not everybody who can sort of support that kind of gap. And those who are more pressured on their margins downstream, of course, are looking into substitutions. Less prone to substitution are the specialty areas where we are active, especially Filter and Electrotechnical are standing out here.

As you see, we have a growth in the quarter one over 2024. Filter has gone from 23% to 26%. Electrotechnical, which is our brown pulp out of you out of Valvik from 22% to 24%. Specialities, stable. Cartonboard, also stable.

But cotton board as in general has come down a bit. If we look in a longer perspective, a new segment is growing, fiber cement going from 3% to 4%, and tissue that has grown again as we’ve seen this shortcoming in the cotton board area. So, here again, it’s it’s a sort of spot area where we can place, our volumes if needed to make sure that we can utilize our capacity, especially in Valvik. It’s more difficult for the Rottenbus mill. The grade is more specialized and formed for certain areas such as cord and board and not so easy to to get into the tissue market.

But, some inroads have been made, and we are eagerly looking for new applications, of course, at at all times to make sure that we also can come back to running the Rotten Russe mill at full. We were coming back to that. And with that broad overview, I hand over the word to Monika to guide us through the results.

Monika Falseline, CFO, Rotternaut: Thank you, Lennart. Yes, we had a quarter where we see that our margins are starting to be squeezed, which we can also see in the result. So EBIT of minus 62 for the quarter is, of course, below our expectations or where we want to be. What has impacted q one versus the same quarter last year is negative on price and currency. It’s really the the weaker US dollar, which is approximately minus 24.

So the prices are higher than a year ago, but in in currency, but offset by the exchange rate. We’ve had a very good production quarter. As Leonard pointed out, very good production in Valvik, much higher than a year ago, which was marked by some production disruptions during the very cold winter. We have good production potential in Rotneros mill after the investments that have been made, but we are not running at full capacity. But when we are running, it is producing well.

Our big headache is is really the variable costs where wood is actually more than the the minus 37 that you see on the chart. We had some positive impact from other variable costs, meaning that the the wood cost is our single largest item in our cost side in the profit and loss statement. On the fixed cost side, the biggest impact on the increased cost come from personnel, both in number, but also with the general inflation and wage increases. Inflation is, of course, also affecting other fixed costs, and that is why we have initiated the cost saving program, both looking at the organization, but, of course, also looking at other fixed costs that we’re having where we can where we can be more efficient and where we can influence. Let’s have a closer look at how the variable costs have looked like during q one.

If we go back some years, the the the cost of wood was at 65, 70 percent. Now it’s up to 75% of the total. Of course, depending on how how efficiently we run and cost of other items will have an impact on or or mix of products that we produce has any impact, but definitely wood is the single largest item that is affecting our cost side. You see here that electricity that we quite often talk about in our report is only 3% during the quarter. This is thanks to very efficient production in Valvik Mill.

When the production is good, then it’s higher efficiency in the whole process with lower electricity consumption and also other inputs. And another variable is also that Rotneros Mill has had a limited production during the period, and they are the ones who are producing or consuming most of the electricity. Let’s then have a look at the balance sheet. We have as you know, we have been going through a big investment program that was mainly in 2024, but also now the reminder in ’25. In total, during 2024 plus the first quarter this year, we have invested a bit more than $470,000,000 in our assets and where we now see that we also can reap the benefits with good production.

For 2025 as a whole, we expect to have cash flow from our investment program of a bit more than hundred and 60,000,000. And on normal years, we should be around hundred and 20 to hundred and 30. So there are some leftovers from the big investment program that that we still have in in this year. But looking at our at our profitability in q one, we are, of course, very careful with investments new investments being made at the moment. We’re also closely looking at our working capital.

That’s also something we can influence. We did have an increase in in working capital in the first quarter and that we are now reversing to release more funds from that part. We did secure financing at the end of twenty twenty four, and that we have that that was to finance our investment program, which has been this is how we then have been financing the costs that we have had. Our equity to assets ratio is is still at a solid 56%, which is above our target of minimum 50%. And with that, I hand it back to Leonard.

Leonard Ehrble, CEO, Rotternaut: Thank you very much, Monika. And let’s see if we can try and look around the corner what lies ahead. As we’ve mentioned, we are, of course, focusing extremely on the things we can impact ourselves, health and safety, production, and costs. We’re taking the necessary steps to bring those costs down and do our part of being able to offset these very high prices we see on the raw material side. We are engaged in very intense discussions with our suppliers as well as with our customers to make sure that we optimize the entire supply chain.

We are a part of a very important supply chain. There are a set of different products that are using fibers where our customers and the ultimate consumer loves fibers. Tissue, of course, continues to be a very important area where there is growth, where there is profitability, but it’s mainly supplied from the short fiber. But on the other side, that means that the short fiber capacity that is coming on stream is finding its own in the tissue area. Packaging grades continue usually to grow.

We haven’t seen that now in the first two months in Europe. But by and large, that’s where everybody is, looking at and then focusing on to redirect graphical and newsprint capacity into the packaging area. Packaging area is a product where a lot of recycled fiber is used, but you can only recycle a fiber a certain number of times, five to seven times at most, then it sort of gets worn out and used and doesn’t contribute with any strength anymore, so there has to be an inflow of fresh fibers. You can either have that in the form of fresh fiber based products, which are made in Scandinavia or in Canada, or you can actually use fresh fiber pulp in the furnish of a recycled paper mill, which you would find on the continent. And as this market is growing, there is less recycled fibers available as the office market is, we call about office waste, all the copy papers have become less and less.

So one way or the other, you have to reinforce the fibers in this recycling loop. And this recycling loop, of course, is very important for the entire sustainable performance of the forest pulp and paper industry. We have the transition in the energy sector, which is, a, driven by new solar and wind farms coming on stream. Electrification is important to offset climate change. But we also have a grid both in The U.

S. And in Europe, which needs renewal. And that means more cables. Cables need fibers in form of insulation paper, means also more transformers. And also transformers consume a lot of fibers as there is an insulation inside the transformer, and of course, sustainability.

And overall, I think in a world where we are maybe now looking more on what we can do ourselves in Sweden, in Europe, the forest industry is self sufficient when it comes to raw material supply. It’s all local. We are using a local, sustainable and renewable resource, which is grown here in Sweden. We as the Swedish forest industry are an important part of the Swedish industry cluster, We provide also energy and, of course, tax and workplaces. And the products we use are used in everyday life.

So it’s quite important to maintain these value chains that are in place, And I’m sure we will all see that, that will be the case going forward. We only not only focus on pulp production, even if that’s our main core, but we are in the move of getting into the packaging area with our molded fiber. And, we’ve now finally have commissioned our new machine lines, three in total, one in Sunne and two in Poland, which are now being, finally trimmed and then meaning that we move up. Our share in Blue Ocean closures, where we produce fiber based caps, is also developing nicely. New investors have joined the group.

Market products are out in the market. And there’s, again, a big search for plastic alternatives, fossil free alternatives. So if we summarize quarter one of twenty twenty five, of course, the overall achieving aim was to stabilize our production and operations. That has been the case. We’ve seen a 16% growth in the Valvik volumes.

Of course, the reference wasn’t too good, but it was necessary to get back and demonstrate what we are able to do. We’ve had a big set of investments during 2024. All in all, some SEK $460,000,000 have been invested. They all are closed and commissioned and, are ready to run. We’ve seen that the performance targets have been met, which is great.

So we know what we have sort of as as an engine under the the HUD. And as we are now in a more turmoil situation, of course, we do all we can to get our costs under control. They have been under control. They have to be reduced. We have to be flexible when it comes to the production of mechanical pulp, utilizing the volatility.

There’s a big volatility when it comes to energy prices, but also being agile and adapt to to a quickly changing market environment. And again, together with our suppliers and customers, long standing relations make the best out of the situation. Baltic, again, running very well, and our Polish and packaging efforts now coming to fruition. And with that, I will leave the word back to Ludwig and see if any questions have come in. Please, Ludwig.

Ludwig, Webcast Moderator: Thank you so much for the presentation here. And as you mentioned, we will now carry on with the Q and A here. And the first question is here, despite higher NBSK prices, net turnover fell due to lower sales volumes. What are the key reasons behind the weaker demand? And how do you plan to recover volumes going forward?

Leonard Ehrble, CEO, Rotternaut: The weaker demand is maybe more offset by an imbalance that we had during 2024. As we had a weak production in the beginning, our stocks came down, then we felt we have to restock entered into 2025 with coming out of this imbalance. We are now focusing on activating all the channels we are having to make sure that, we’re getting back in phase and really ramping up our sales in line with the production that has now proven to be very on a good level, knock on wood, never mentioned the good things too early. But, also into quarter two, as we’re quite far advanced on that, it looks good. So we see that there is a good demand from our customers.

We can activate additional channels that we used to have, and I’m positive that, that will return out in reducing our stocks and freeing up some of the working capital that Monika has talked about.

Ludwig, Webcast Moderator: Thank you. EBIT dropped to minus SEK 62,000,000 largely due to exchange rate losses, rising wood costs and higher fixed costs. Which of these factors do you see as temporary versus structural? And what is your time line for margin recovery here?

Monika Falseline, CFO, Rotternaut: Yes. The some of the factors are, of course, difficult to to influence, and maybe the exchange rate is I don’t know if it’s structural or or temporary. Someone else need to judge that. But on the wood side where we have our one of our biggest costs that is really squeezing our margins in the first quarter, We do, however, see that the balance in in the wood supply market is shifting somewhat in the favor in favor of of buyers. It’s a bit early to say when when we can see a big impact in our profit and loss statement, but at least we see some signs of possibilities to to source wood at more favorable prices.

Other things like inflation is, of course, something that everyone is hit by, and the inflation is coming down. But here is where we need to look at our costs, our organization, and that is what we’re doing. And as mentioned earlier, we see a potential of reducing our our fixed costs by approximately 35,000,000 to 40,000,000 per year starting from this autumn. Back to you, Ludwig.

Ludwig, Webcast Moderator: Thank you so much. Working capital have been increasing last four quarters, an increase of €222,000,000 Why and what can you do to decrease working capital?

Monika Falseline, CFO, Rotternaut: Maybe I take that one as well. I think we have asked it to some extent already. There are two parts in this. One is how much we have in stock of the cubic meters of wood and tons of pulp. And here, we are looking actively at program or or a program to to make sure that we have what we need in stock, to have good customer service, and to supply our mills with the raw material needed.

So that is one part of it. Another part of it is, of course, the price of wood. If it if wood costs have increased by approximate they have doubled in in the last three years, meaning that what we have in stock is twice as costly. And this also has an impact on the how we are valuing our finished goods, which are also valued at a higher price. So that is, of course, more difficult to impact, but we can impact how much we have in in in cubic meter and in tons on the in working capital.

Ludwig, Webcast Moderator: Thank you. Tax payment of 45,000,000 siek in q one. In in Rottenhaus Elder report showed short term tax liabilities for only 1,000,000 siek end of 20 20 4. Could you please explain this?

Monika Falseline, CFO, Rotternaut: I don’t think I can do that in in without looking closer into the numbers. I will I will have to pass on that one.

Ludwig, Webcast Moderator: Yes. We’re going to the next question here. You mentioned that CTMP prices are now below variable costs in some markets. What are your short and long term strategies for CTMP? And what, and at what price levels would production become profitable again?

Leonard Ehrble, CEO, Rotternaut: We do believe that, the mechanical pulp, especially for the Cottonwood area, has its place in the market. Export markets are currently heavily impacted by subsidized capacity out of China, which is sort of flooding markets where we used to have our customers. So it’s a question of the exchange rate, our customers’ ability to pay as much as our suppliers’ willingness to set the right price on the wood chips, which is a side product. So, these three factors we are constantly evaluating and and trying to find the best way forward. But, there is a place you have a very efficient board construction.

If you have mechanical pulp in the middle, your overall use of fibers is going down at the same time as you improve your technical abilities. So we can’t give exact figures, of course, that would disclose too many things to both our customers and competitors. But by and large, I think that there will be a rebound in the mechanical pulp market that will enable us to utilize the capacity increase that we have installed.

Ludwig, Webcast Moderator: Thank you. Moving on to the last question here. Given the current earnings pressure, how are you prioritizing investments such as the solar park and the packaging project in Poland? Will future CapEx be scaled back to protect cash flow?

Monika Falseline, CFO, Rotternaut: Jan, I think we have, to a large extent, already addressed these questions. We have already commissioned and finalized the big investments. And now looking forward, we are really conservative on the investment side. We’re making sure that the investments we have made will pay off, and they are already paying off. But to capitalize on on the good benefits that we get from the investments made.

So looking forward, we will, at least for the for the short term, limit our investments to to be able to protect our balance sheet and and and cash flow. I hope that answers your the question.

Ludwig, Webcast Moderator: Yes. Thank you very much for presenting here today and answering all our questions. I thank you all for tuning in. I wish you a pleasant day.

Leonard Ehrble, CEO, Rotternaut: Thank you, everybody, and see you soon again.

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