Interim Report January-September 2013

(For full report including tables, see attached file)

• Loss after net financial items amounted to SEK 23 (6) million for January to September 2013 before impairment losses and one-off costs, which amounted to SEK 92 million. Operating loss amounted to SEK -19 million for January to September.
• Loss after net financial items for the third quarter of 2013 was affected by impairment losses of SEK 80 million referable to the CTMP plant from Utansjö Mill. Loss after net financial items amounted to SEK -91 million after these impairments.
• Cash flow from operating activities amounted to SEK 47 (14) million for the third quarter of 2013. This positive cash flow is fully explained by a reduction in working capital.
• The Board of Directors has decided to carry on with the operation of the groundwood line at Rottneros Mill and has thus repealed a previous decision to close the line.
• Carl-Johan Jonsson took office as the new CEO and President on 1 July 2013.

CEO’s statement

The global pulp market is continuing to improve this autumn. NBSK deliveries to China increased further in September, and demand for NBSK from Europe/North America continued to be good. The supply of pulp for the remaining of the year will be affected by many producers having a number of maintenance shutdowns. There is expected to be a further rise in demand from, among others, tissue paper producers whose utilisation of production capacity is already high, as several of them will start-up new tissue paper machines during the autumn. There is a corresponding market situation for CTMP, with stronger demand during the autumn following a period characterised by uncertainty.

Taken overall, there appears to be a favourable outlook for the long-fibre pulp market for the rest of the autumn.

There is currently (mid-October) a clear upward price trend for NSBK in many markets. Several producers have announced price increases from 1 October, taking us to a price level of USD 900 per tonne in Europe.

The continued strength of the SEK and the lower production availability at Vallvik have had a negative impact on our result. We are pleased to announce that the groundwood line at Rottneros Mill will now return to full production during the autumn following a decision taken by the Board of Directors to resume full operation.

At Rottneros we have this autumn initiated an extensive thoroughgoing change process. Our areas of focus include improving availability of production and the utilisation of capacity at both mills, together with the optimisation of internal processes, such as logistics, purchasing, administration and use of raw materials. In addition, we are increasing our activities to further improve safety for our employees. 

All levels of the company will be involved in order to ensure a consensus of the prevailing situation, our strategic objectives and how to achieve the defined objectives. The main prerequisite for future success is in fact to establish a common understanding on all matters. Of course it will be necessary to take action. We will reshape our business culture and implement the responses required to ensure the sustainable, long-term profitability of Rottneros, in which we all can take pride together. Let us consider the challenges we face as our opportunities. 

It is from now and onward that we will proceed forward! 

Carl-Johan Jonsson

THE PULP MARKET

Markets and products 

The paper pulp market continued to have a good balance between supply and demand during the third quarter of 2013. 

Pulp producers implemented price increases of approximately USD 15 per tonne during the third quarter of the year up to approximately USD 875 per tonne at the end of September. The PIX price for bleached sulphate pulp was USD 810 per tonne at the start of the year. This price rose by over USD 65 per tonne during the first nine months of the year, while the price of bleached short-fibre sulphate pulp fell by USD 5 per tonne. Producers have announced further price increases for October. The price of bleached long-fibre sulphate pulp after the first three quarters of the year was approximately USD 110 per tonne higher than the prices for the same period of 2012.

The price variance for bleached long-fibre sulphate pulp compared with bleached short-fibre sulphate pulp increased by approximately USD 60 per tonne during the third quarter. This variance was approximately USD 35 per tonne at the beginning of 2013, approximately USD 40 per tonne after the second quarter and approximately USD 105 per tonne at the end of the third quarter of 2013. This means that the variance in the PIX price has reverted to previous historical levels. 

The PIX price for bleached short-fibre sulphate pulp fell by approximately USD 45 per tonne in the third quarter, while the price for bleached long-fibre sulphate pulp rose by approximately USD 15 per tonne.

Statistics for bleached chemical market pulp for the total global market showed that deliveries for January to August 2013 amounted to SEK 28.3 (27.6) million tonnes, which was 2.6% higher than the same period in 2012, despite an extra shipping date in 2012. Global delivery capacity utilisation for bleached chemical pulp was 91% (91%) for the period January to August 2013. Production capacity utilisation for the period has been estimated at 95% (92%). Global producer stocks of bleached chemical pulp amounted to approximately 4.3 (4.1) million tonnes at the end of August.

Long-fibre chemical pulp (NBSK) 

(produced at Vallvik)

There is a good balance in the market for bleached long-fibre chemical pulp, despite an increase in stock of approximately 25,000 tonnes up to the end of August. Producer stock levels of long-fibre chemical pulp are low, corresponding to 28 days' production, which is one day lower than at the beginning of the year. Deliveries of bleached long-fibre chemical pulp amounted to 15.03 (14.55) million tonnes for January to August 2013, which was 3.3% higher than the same period of 2012. Delivery capacity utilisation for the period January to August 2013 amounted to 95% (94%) and production capacity utilisation to approximately 95% (92%). 

Mechanical pulp and CTMP 

(produced at Rottneros)

The price of CTMP in the Western European market amounted to approximately USD 590-600 per tonne at the beginning of the year. The price was USD 30 higher per tonne at the end of the third quarter, with some variations depending on market and quality. Deliveries fell by two per cent for the period January to August 2013 compared with the same period of 2012. Deliveries amounted to 1.8 million tonnes for January to August 2013. Delivery capacity utilisation for the period January to August 2013 was 91% (95%) and production capacity utilisation was 90% (95%).

PRODUCTION AND DELIVERIES

The Group's pulp mills at Rottneros and Vallvik have a combined annual production capacity of almost 400,000 tonnes. Production amounted to 254,500 (244,200) tonnes for January to September 2013. Rottneros Mill's production of CTMP increased by 900 tonnes, and the mill's production of groundwood pulp is 5,200 tonnes higher this year compared with last year, when significant market-related production limitations were made. 

Deliveries amounted to 255,900 (252,100) tonnes for 2013. Vallvik Mill’s deliveries of sulphate pulp remained the same compared with the same period of the previous year. Deliveries of groundwood pulp from Rottneros Mill increased by 3,400 tonnes compared with the same period of 2012 as a consequence of a stronger market.

Maintenance shutdowns and seasonal variations 

A holiday shutdown took place at Rottneros Mill at the turn of the month for July and August, which was combined with minor annual maintenance work. A maintenance shutdown will take place at Vallvik Mill this year, which will be effected for the most part during the fourth quarter. Total cost this year is expected to be approximately 30 (25) million. Costs relating to maintenance shutdowns are recognised in the period during which a shutdown takes place. Otherwise, the Rottneros Group is not affected by seasonal variations to any appreciable extent.

SIGNIFICANT EVENTS

Impairment losses and one-off costs

The result for the third quarter has been affected by impairment losses of SEK 80 million relating to the CTMP plant from Utansjö Mill. The book value amounted to SEK 25 million at the end of September.

Work continued during the year to sell the CTMP line, or alternatively to find a new use for it, but this has still not yet led to any concrete deals. Positive discussions continued with a number of interested parties. However, the sales process has been underway for several years, for which reason the current assessment is that there is little likelihood of the plant being disposed of in its entirety in the near future. This resulted in the previously announced review of the book value of the plant being conducted during the autumn.

As a basis for the change in value, the company obtained an external assessment of the market value of the plant’s constituent parts in a second-hand market. 

In addition, the result for the second quarter was affected by one-off costs in respect of the departing CEO under applicable contracts.

INVOICING AND RESULTS

January to September 2013 compared with January to September 2012

Group net turnover amounted to SEK 1,072 (1,108) million for January to September 2013. The average price of long-fibre sulphate pulp (NBSK) in USD was USD 24 higher than the previous year, while the average price of NBSK pulp converted into SEK was 2% lower on account of a negative USD trend.

The average price of electricity on the Nord Pool electricity exchange amounted to SEK 0.34 (0.27) per kWh for January to September 2013, which is 26% higher than the same period of the previous year. 

• Group operating loss amounted to SEK 111 (5) million for January to September 2013. Besides an impairment loss of SEK 80 million, the negative result was affected by costs relating to salary, pension and payroll overheads under the contract for the departing CEO. The operating loss excluding these costs amounted to SEK -19 million for the period. Hedging activities realised in 2013 amounted to a loss of SEK -3 (-5) million. 
• Group loss after net financial items amounted to SEK -115 (6) million and includes net financial items of SEK -4 (1) million. 
• Loss after tax: SEK -115 (-3) million.
• Earnings per share after tax: SEK 0.75 (-0.02). 
• Cash flow per share: SEK 0.09 (0.04).

July to September 2013 compared with July to September 2012

Group net turnover amounted to SEK 349 million for the third quarter of 2013 compared with SEK 359 million for the previous year. The average price of long-fibre sulphate pulp (NBSK) in USD was 10% higher than the previous year, while the average price of NBSK pulp converted into SEK was only 6% higher as an effect of a weaker USD in 2013.

The average price of electricity on the Nord Pool electricity exchange amounted to SEK 0.46 per kWh for the third quarter of 2013 compared with SEK 0.20 per kWh for the same period of 2012, representing an increase of 130%.

• Group operating loss amounted to SEK 89 (28) million for the third quarter of 2013. The result for the period was affected by the impairment loss of SEK 80 million. The negative result for 2012 was affected by approximately SEK -25 million as a consequence of the maintenance shutdown at Vallvik, which will occur during the fourth quarter this year. Hedging activities realised for the third quarter of 2013 amounted to a loss of SEK -3 (3) million. 
• Group loss after net financial items amounted to SEK -91 (-26) million and includes net financial items of SEK -2 (2) million. 
• Loss after tax: SEK -91 (-26) million.
• Earnings per share after tax: SEK 0.59 (-0.17).
• Cash flow per share: SEK -0.04 (0.00).

July to September 2013 compared with April to June 2013

Group net turnover amounted to SEK 349 million for the third quarter of 2013 compared with SEK 369 million for the second quarter. The average price for long-fibre sulphate pulp (NBSK) in USD increased from USD 851 to USD 861 compared with the first quarter, representing an increase of 1%. Furthermore, a corresponding increase in the average prices for NBSK pulp converted into SEK was 1%, as the average USD rate remained the same during the period. However, the Swedish krona was significantly stronger in relation to the USD at the end of the period owing to uncertainties in the currency market.

The average price of electricity on the Nord Pool electricity exchange amounted to SEK 0.46 per kWh for the third quarter of 2013 compared with SEK 0.33 per kWh for the second quarter.

Group operating loss amounted to SEK -89 million for the third quarter of 2013, compared with the second quarter, when operating loss amounted to SEK 16 million. The result for the second quarter was affected by costs relating to the departing CEO’s salary, pension and payroll overheads under the contract and impairment losses of SEK 80 million during the third quarter. Hedging activities realised for the third quarter of 2013 amounted to a loss of SEK 3 (4) million. 

Group loss after net financial items amounted to SEK 91 million for the third quarter of 2013 compared with SEK -20 million for the second quarter.

INVESTMENTS AND FINANCIAL POSITION

• Group investments in fixed assets amounted to SEK 18 (44) million for January to September 2013.
• The Group had liquid funds amounting to SEK 40 million at the end of September 2013, compared with SEK 26 million at the end of December 2012. 
• The Group had total interest-bearing liabilities of SEK 49 million on 30 September 2013 (SEK 78 million on 31 December 2012). Interestbearing net liabilities amounted to SEK 9 million (SEK 52 million on 31 December 2012). 
• Total approved but unutilised credit facilities amounted to SEK 141 million on 30 September 2013 and total approved credit facilities amounted to SEK 150 million.
• The equity/assets ratio was 75% on 30 September 2013, representing a reduction of two percentage units compared with 31 December 2012. 
• Equity per share amounted to SEK 5.76 (SEK 6.51 on 31 December 2012).

CASH FLOW

Cash flow from operating activities before investments amounted to SEK 60 (49) million for January to September 2013 and included cash flow of SEK 1 (-10) million from financial hedging. The reduction in working capital during the period had a positive effect on cash flow of SEK 50 million. A corresponding reduction in working capital in the previous year had a positive effect on cash flow of SEK 10 million.

Parent company

The parent company’s loss after net financial items amounted to SEK -80 (-22) million for January to September 2013. Shares in the subsidiary have been impaired by SEK 45 million at the parent company as a consequence of the impairment loss in respect of the CTMP plant from Utansjö Mill, as described above. The result after net financial items includes hedging activities realised for the Group, which affected the result by SEK -3 (-5) million.

The parent company’s balance sheet and income statement can be found on pages 13.

SHARE INFORMATION

(For table, see attached file)

Share price

(For table, see attached file)

Treasury shares 

The number of shares in Rottneros amounts to 153,393,890. Rottneros’ holding of treasury shares amounts to 821,965 shares. 

Transactions with related parties

Rottneros sold pulp to the related group Arctic Paper S.A., which amounted to SEK 93 (80) million. This was undertaken on normal market terms but with a lower level of credit insurance owing to the group relationship between Arctic Paper and Rottneros.

Dividend

The AGM held on 22 March 2013 resolved that a dividend would not be declared. 

RISK MANAGEMENT 

The company’s operational work involves a number of measures and strategies – for example, focusing on niches and various specific customer segments – aimed at reducing the Group's dependence on market pulp list prices and moderating fluctuations in profitability over a business cycle. The factors that have the greatest impact on the Group’s results are linked to exchange rates and the prices of pulp, timber and electricity. 

Currency exposure, USD and EUR

Although Rottneros issues invoices in different currencies, the main underlying currency for the pulp price is predominantly USD. About 10% of invoicing is contracted in SEK, with EUR as the invoicing currency. The underlying exposure to USD is thus very high, and the direct inflow of USD (the real flow) corresponds to approximately 45%. However, the impact of exchange rate fluctuations on indirect exposure is delayed, as the normal duration of a contract is between one and three months. 

The average USD exchange rate was 5% lower for January to September 2013 compared with the same period of the previous year, amounting to an average of SEK 6.51/USD for the period, compared with SEK 6.82/USD for January to September 2012.

The lower average exchange rate for USD in relation to SEK compared with the third quarter of 2012 had a negative impact on revenue of SEK 11 million. At the end of September 2013, currencies were hedged in the form of forward contracts concluded for USD 9 million, at an average rate of SEK 6.72/USD, for deliveries in 2013. In addition to this, currencies were hedged in the form of forward contracts concluded for EUR 11 million, at an average rate of SEK 9.17/EUR, for electricity purchases for the period 2013 to 2016.

Pulp price

The price of pulp (NBSK) is set in USD, while production costs are largely incurred in SEK. Contracts for 2013 were concluded at the beginning of the year for 2,000 tonnes per month at a price of SEK 5,700 per tonne for the period January to September. The profit realised by this hedging amounted to SEK 3 million for the first nine months of 2013. No new contracts have been concluded during the year.

Electricity

All physical electricity for the Swedish mills is purchased directly via the Nord Pool electricity exchange. Electricity prices are listed in EUR. At the end of September 2013, electricity was hedged corresponding to the specified percentage of forecast consumption shown in the table. Average prices in EUR/MWh are provided in the table together with average prices in SEK/kWh (based on EUR forward exchange rates as of 30 September 2013). 

Hedging contracts for EUR were concluded in respect of electricity costs for the period 2013 to 2016 amounting in total to EUR 11 million at an average rate of SEK 9.17/EUR.

The average price level for electricity on Nord Pool amounted to SEK 0.34 per kWh for January to September 2013.

See pages 27 to 31 of the Annual Report for 2012 for further information on risk.

The table above shows the market values of all hedging. The valuation refers to the liquidation value, i.e. a valuation is made in accordance with the forward contracts on 30 September 2013. The reference value refers to the spot rate on 30 September and is provided as supplementary information. As a result of the application of IFRS/IAS, these market values are reflected in the balance sheet and in some cases in the income statement, but are also shown here as supplementary information.

ACCOUNTING POLICIES

This interim report has been prepared in accordance with IAS 34 ‘Interim Financial Reporting’, which complies with Swedish law through the application of the Swedish Financial Reporting Board’s Recommendation RFR 1 ‘Supplementary Accounting Rules for Groups’ together with RFR 2 ‘Accounting for Legal Entities’, in respect of the parent company. 

The accounting policies, definitions of key ratios and calculation methods are the same as those used in the last annual report.

FORECAST FOR 2013

The company is not providing an earnings forecast for 2013. 

FORTHCOMING FINANCIAL INFORMATION

The Annual General Meeting for Rottneros AB will be held in Stockholm on Friday 25 April 2014. 

The information in this interim report is such that Rottneros is required to disclose under Sweden’s Securities Market Act.

The report was released for publication on 22 October 2013 at 08.00 CT.

This interim report and additional information is available on www.rottneros.com

This report is a translation of the original report in Swedish. In case of discrepancies the Swedish version prevails.

(For full report, see attached file)