Comments by the CEO

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LENNART EBERLEH, PRESIDENT AND CEO

Rottneros has a stable second quarter with production record for a single quarter, strong cash flow and continued good profitability.

INTERIM REPORT JANUARY-JUNE 2019

POSITIVE PRODUCTION DEVELOPMENT, STABLE RESULTS

During the second quarter, we continued increasing production in our mills.

We reached record levels for both the quarter and the first half of the year. The volume increase together with diminishing impact from pulp price hedges meant that EBIT in Q2 increased by 10 per cent compared to last year’s Q2 and 42 per cent in the first half of 2019. At the same time, cash flow grew sharply.

Our solid balance sheet and strong cash flow mean that we are well equipped for a more challenging market. Our focus on continuous improvements in both production and sustainability will continue.

With a production of 108 thousand tonnes in Q2, we significantly exceeded the previous record for a single quarter, 103 thousand tonnes. It is extremely gratifying that the effort among all employees to increase capacity utilization in the mills continues to produce results. At the same time, there is still room to improve availability and production levels going Forward.

The increased volumes together with diminishing impact from pulp price hedges meant that the strong earnings trend continued during the second quarter. EBIT increased by 10 per cent to SEK 103m compared with last year’s Q2, despite higher wood prices and fixed costs. Cash flow during the first half of the year increased by 188 per cent and amounted to SEK 239m , of which we distributed SEK 107m to our shareholders during the quarter. Pulp wood supply improved significantly during the quarter and the balance between local wood supply and imports is back to a more favorable and long-term sustainable level.

CONTINUED PRICE PRESSURE ON THE MARKET

Pulp prices continue to be pressured by a short-term deterioration in the market balance, resulting in increased producer inventories. Consumption growth is hampered by the slowdown in the world economy, where China is mainly affected by increased trade barriers. At the same time, the supply on the market has increased through new production volumes from several Nordic players in the past six months.

The gross price of NBSK declined gradually during the second quarter from USD 1,100 in the beginning to below USD 1,000 at the end. At the same time, the long-term trend of an annual consumption increase of 1-2 per cent is expected to Continue. The market balance and the prices thus have good prospects of improving when the short-term inventory adjustment is over. It is also positive that no new major capacity additions have been announced.

A NEW LOGO REINFORCES THE MESSAGE OF A PROACTIVE ROTTNEROS

In conjunction with the Annual General Meeting in Sunne on the second of May, we presented the Group’s new logo. It is an important step on the way to communicate our focus on climate-smart products and gender equality. It is also linked to the project ”One Rottneros”, which creates a common value base, a committed leadership and reinforces our brand. We focus on safety, training and the availability of highly competent labour. The AGM was well attended and arranging the meeting in one of our mills is an excellent way to deepen our shareholders’ knowledge of our operations.

WE CONTINUE TO INVEST FOR A FOSSIL-FREE PRODUCTION PROCESS

During the quarter, we decided on a new methane gas burner in Rottneros Mill. By utilizing the methane gas generated in the bio effluent treatment plant and using it internally, we will replace the equivalent of 1,000 cubic meters of fossil fuel in the form of oil. Together with other investments in recent years the total decrease is about 7,000 cubic meters. Thus, we largely achieve the goal of a fossil-free production process at Rottneros Mill.

After an in-depth analysis, the board decided in June to end the Lignol project, which we ran together with Preem and RenFuel. The reason was the significant risks we see, in relation to the sustainability gains and the potential revenues. Sustainability and business always go hand in hand when we make strategic decisions.

FULL SPEED AHEAD IN ROTTNEROS PACKAGING

The growth initiative within Rottneros Packaging continues according to plan. There is a significant and strongly growing interest in climate-smart packaging products and fiber trays. An additional machine was purchased at the end of March and will be put into operation by the end of the year.

In summary, we have established a higher utilization level and production volume in our mills creating continued growth opportunities, not least within our selected niches. Our focus is to constantly optimize the factors we ourselves can influence regardless of external factors. With a strong momentum in the organization and solid finances, we are well prepared for both potential challenges and opportunities going forward. I would like to conclude by expressing my gratitude to the entire organization customers and suppliers for the excellent quarter and first half results of 2019.

Lennart Eberleh, President and CEO