The year 2013 was one of commotion for the book and fine paper producer Arctic Paper. It started with an attempt to take over the Swedish pulp producer Rottneros, a long process ending with less success than expected. Since then, the firm has continued working on cutting costs and developing new products, all while seeing several managers or board members jump ship.
In a conversation with PPI Europe in late 2013, then acting CEO Wolfgang Lübbert discussed the firm’s financial footing, looming issues on the energy front, opportunities on the packaging market and other plans for the future.
Like many other graphic paper producers, Arctic Paper has seen its financial results dwindle. For the first half of 2013, the firm’s sales decreased by 4.9% year on year to Polish zloty (PLN) 1.26 billion ($410 million), excluding the revenues generated by the acquisition of a majority stake in Rottneros. When those are included, however, the firm’s sales rose by 19.3% to PLN 1.59 billion. Arctic Paper posted a net loss of PLN 43.9 million compared with a net profit of PLN 17.7 million during the same period in 2012.
Lübbert explained that there were three main reasons behind the weaker results: currency, volume and delayed political decisions.
Of these three, the Swedish krona is the biggest problem, according to Lübbert. “Of course we are able to hedge for a certain time but the Swedish krona has been at a very high level for two years now. The currency exchange rate doesn’t always hit you straight away, sometimes it comes later,” he said.
Secondly, Arctic Paper’s sales volumes shrank by 1.6% in H1, compared with the same period in 2012. This decline is small, however, compared with the 7.7% drop in European demand for fine paper in general during the same period.
Finally, the company is awaiting political decisions regarding energy issues in Poland and Germany. In Poland, the value of so-called yellow certificates is up for discussion. The certificates form part of a support scheme for entities that generate electricity in highly efficient cogeneration units using gaseous fuels. Arctic Paper is eligible to take part in this scheme for producing energy with the gas turbine at its 280,000-tonne/yr Kostrzyn uncoated woodfree (UWF) paper mill. Lübbert estimated that the yellow certificates account for about one quarter of the profit of Kostrzyn, and this income had yet to be added to the firm’s accounting in 2013. It is unclear when the situation will be resolved.
In Germany, large electricity consumers have been exempt from network charges since 2001. In March 2013, the European Commission opened an in-depth inquiry into the matter in order to determine if this constitutes state-aid, and if so, if it distorts competition in the European Union. This means that the discounts for all companies concerned have been put on hold.
In Arctic Paper’s case, the firm is missing revenues of almost euro 1 million ($1.4 million).
In Germany, Arctic Paper operates the almost 100,000-tonne/yr Mochenwangen mill, producing book paper and wood-containing offset paper.
PACKAGING TO THE RESCUE?
In order to improve its results, Arctic Paper is cutting costs and launching new products aimed at boosting the firm’s revenues.
In October 2013, at its 265,000-tonne/ yr Grycksbo coated woodfree (CWF) paper mill in Sweden, the company launched a new range of high-whiteness products for packaging applications, the AP-Tec portfolio. This range includes the coated, fully bleached AP-Tec Liner, suited for preprint and lamination on corrugated board, the double-sided, coated solid board AP-Tec Pack, aimed at smaller packaging, and the coated packaging paper AP-Tec Flex, suited for extrusion, lamination and flexible packaging.
The Grycksbo mill already caters to a non-graphic clientele by supplying paper for bags, for example, but this marks a bigger move into the packaging market. Arctic Paper expects to produce some 10,000-15,000 tonnes of AP-Tec papers on the mill’s PM 10 in 2014, Lübbert said.
In the first half of 2014, Arctic Paper plans to launch a new brand of high-speed inkjet paper, manufactured on PM 2 at its Kostrzyn mill in Poland. The firm plans to make 10,000-15,000 tonnes/yr of this paper, although Lübbert did not expect to produce more than 3,000-5,000 tonnes of it this year.
Arctic Paper plans to launch further products connected to high-speed inkjet at its 160,000-tonne/yr Munkedals uncoated woodfree and mechanical paper mill in Sweden later in 2014, Lübbert said.
NO PLANS FOR FURTHER CLOSURES
Moreover, Arctic Paper is examining its costs. “We are looking for synergies and efficiencies in all units and we have also increased the speed of our reduction of manpower,” Lübbert said.
In Sweden, Arctic Paper is in the process of cutting 33 jobs at its Grycksbo mill and 20 positions at its Munkedals mill.
In Germany, Arctic Paper closed the 18,000-tonne/yr PM 1, which produced book paper and technical papers, at its Mochenwangen mill in June, reducing the headcount by 14. Going forward, the company has no plans for further capacity reductions.
“We are currently thinking about the direction of Mochenwangen. In principle, the idea for the mill is to go much deeper into very special niche papers and therefore we will not dismantle PM 1. It might be the case that for certain products, which it is much too early to talk about, we will need this machine specifically, so it will stay there. But we have to develop some products which are more suitable for this kind of machine with other partners outside of our group,” Lübbert said.f
ROTTNEROS STRATEGY UNDER REVIEW
In November 2012, Arctic Paper launched an offer to buy at least 90% of the shares in pulp manufacturer Rottneros. This was the start of a long sales process, heavily criticized in Swedish media by some Rottneros shareholders. After prolonging the acceptance period three times, Arctic Paper gained control over 54.2% of the shares in the company in February - far from the 90% it had hoped to reach, which would have enabled it to call for compulsory acquisition of the outstanding shares and warrants. However, in December, the company sold almost 4.5 million shares of Rottneros, equivalent to 2.9% of the company, bringing its holding down to 51.3%.”
According to Lübbert, one of the greatest challenges in taking over Rottneros was its shareholder structure, which involved almost 16,500 small owners.
When the takeover was first announced Arctic Paper said it expected the deal to generate synergies mainly from purchasing, logistics and overhead costs of some seK 80 million ($13 million) within 12-18 months. Today, however, the firm has achieved very little of these synergies, Lübbert said.
He described the current connection between Arctic Paper and Rottneros as a “normal supplier-customer relationship.” At the moment, the company has no firm plans about what to do with its stake in Rottneros.
Rottneros operates two pulp mills in Sweden with a combined capacity of some 240,000 tonnes/yr of kraft pulp, 85,000 tonnes/yr of stone groundwood pulp and 85,000 tonnes/yr of chemi-thermomechanical pulp.
GRYCKSBO LOAN AGREEMENT RESOLVED
When defining risk factors in connection to its H1 financial results, Arctic Paper said it had not been able to live up to its loan agreement commitments with a consortium of three Polish banks - Bank Pekao, Bank Zachodni wBK and BRE Bank - and the Swedish Svenska Handelsbanken. “The breach of financial ratios concerned the net debt-to-EBITDA ratio for the whole group as well as the solidity ratio and interest coverage ratio for one of the paper mills,” Arctic Paper said.
In early October, the firm’s subsidiary Arctic Paper Grycksbo - the paper mill in question - reached an agreement with Svenska Handelsbanken. as a result, the bank has set March 30, 2014, as the overdraft repayment date for the company and released the firm from the obligation to maintain financial ratios, namely a solidity ratio and interest coverage, by that date.
“With the Polish banks we are in good, friendly and open discussions,” Lübbert said, adding: “Of course we got a list of things that we have to work on and we are in the middle of that process, but I must say the cooperation with all banks involved has been very positive so far.”