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Arctic Paper

Capital Group

Consolidated Annual Report

2021

‎  

Translatorʼs Explanatory Note: the following document is a free translation of the report of the above-mentioned Company. In the event of any discrepancy in interpreting the terminology in Polish version is binding.

 

Table of contents

 

 

 

Letter by the President of the Management Board of Arctic Paper S.A.

INTRODUCTION

Information on the report

Definitions and abbreviations

Forward looking statements

Forward looking statements relating to risk factors

Selected consolidated financial data

REPORT OF THE MANAGEMENT BOARD

Description of the business of the Arctic Paper S.A. Group

General information

Capital Group structure

Changes in the capital structure of the Arctic Paper Group

Modifications to the core management principles

Shareholding structure

Market environment

Development directions and strategy

Sales structure

Sales markets

Buyers 

Vendors & Suppliers

Information on the seasonal or cyclical nature of business

Research and development

Labour matters

Environment

Summary of consolidated financial results

Selected items of the consolidated statement of profit and loss

Selected items of the consolidated statement of financial position

Selected items of the consolidated cash flow statement

Relevant information and factors affecting the financial results and the assessment of the financial standing

Key factors affecting the performance results

Unusual events and factors

Impact of changes in Arctic Paper Group’s structure on the financial result

Other material information

Factors influencing the development of the Arctic Paper Group

Information on market trends

Factors influencing the financial results in the perspective of the next year

Risk factors

Supplementary information

Management Board position on the possibility to achieve the projected financial results published earlier

Dividend information

Changes to the bodies of Arctic Paper S.A.

Changes to the share capital of Arctic Paper S.A.

Remuneration paid to Members of the Management Board and the Supervisory Board

Agreements with Members of the Management Board guaranteeing financial compensation

Changes in holdings of the Issuer’s shares or rights to shares by persons managing and supervising Arctic Paper S.A.

Management of financial resources

Capital investments

Information on financial instruments

Information of sureties, guarantees and pledges

Material off-balance sheet items

Assessment of the feasibility of investment plans

Information on court and arbitration proceedings and proceedings pending before public administrative authorities

Information on transactions with related parties executed on non-market terms and conditions

Information on agreements resulting in changes to the proportions of share holdings

Information on purchase of treasury shares

Information on remuneration of the entity authorised to audit the financial statements

Headcount

Report on non-financial information

Statement on the application of the Corporate Governance Rules

Corporate Governance Rules

Information on the extent the Issuer waived the provisions of the Corporate Governance Rules

Internal control and risk management systems with reference to the development processes of financial statements

Shareholders that directly or indirectly hold significant packages of shares

Securities with special control rights

Information on major restrictions on transfer of title to the Issuer’s securities and all restrictions concerning the exercising of voting rights

Description of the principles of amending the Issuer’s Articles of Association

Description of the functioning of the General Meeting

Operation of the Issuer’s managing and supervising bodies and its committees as well as information on the composition of those bodies

Information compliant with the requirements of Swedish regulations concerning corporate governance.

General Meeting of Shareholders

Appointment of governing bodies of the company

Tasks of the bodies of the Company

Size and composition of the Company’s bodies

Chairpersons of the bodies of the Company

Procedures of the bodies of the Company

Remuneration of members of the bodies of the Company and management staff

Information on corporate governance

Information by the Management Board of Arctic Paper S.A. on selection of the audit firm

Statements of the Management Board

Accuracy and reliability of the presented reports

Consolidated Financial Statements

Consolidated statement of profit and loss

Consolidated statement of comprehensive income

Consolidated statement of financial position

Consolidated statement of cash flow

Consolidated statement of changes in equity

Accounting principles (policies) and additional explanatory notes

1. General information

2. Composition of the Group

3. Management and supervisory bodies

4. Approval of the financial statements

5. Material values based on professional judgement and estimates

6. Basis of preparation of the consolidated financial statements

7. Changes to the applied accounting principles and data comparability

8. New standards and interpretations that have been published and are not yet effective

9. Major accounting policies

10. Operational segments

11. Income and costs

12. Components of other comprehensive income

13. Income tax

14. Earnings per share

15. Dividend paid and proposed

16. Tangible fixed assets

17. Leases

18. Investment properties

19. Intangible assets and goodwill

20. Unit mergers

21. Other assets

22. Impairment test for tangible fixed assets and intangible assets

23. Inventories

24. Trade and other receivables

25. Cash and cash equivalents

26. Share capital and reserve capital/other reserves

27. Interest-bearing bank loans, bonds and borrowings and other financial liabilities

28. Employment benefits

29. Provisions

30. Trade and other payables, grants and deferred income

31. Investment plans

32. Contingent liabilities

33. Information on related entities

34. Information on the agreement and remuneration of the statutory auditor or entity authorised to audit financial statements

35. Financial risk management objectives and policies

36. Financial instruments

37. Capital management

38. Employment structure

39. Certificates in cogeneration

40. Grants and operation in SEZ (Special Economic Zone)

41. Material events after the balance sheet date

 

 

‎  

Letter by the President of the Management Board of Arctic Paper S.A.

Dear Sirs,

Another successful year for the Arctic Paper Group is behind us. Although the pandemic still had a major impact on societies and the economy, the conviction that it was time to rebuild and to continue to grow created a boom, and we took full advantage of it. The economic recovery across Europe has increased demand for our products. Demand, for both pulp and paper, has increased significantly compared to 2020. Graphic paper as a medium for conveying information – has maintained its strong position. Paper sales volumes increased by more than 12%, and this, combined with capacity reductions by competitors, significantly increased our share of the overall European graphic paper market.

We recorded very good results in the packaging paper segment. Sales dynamics exceeded 200%. This shows a clear trend towards substituting plastic with packaging made from natural raw materials such as pulp. This gives us a strong conviction that this direction of pulp and packaging development is worth continuing.

The prosperity of the economy also causes negative factors. These include increases in the cost of raw materials (pulp, oil), energy, transport costs and extended delivery times for machinery, equipment and spare parts. Inflation pressures were reflected in the rapidly rising costs of manufacturing our products, but an appropriate pricing policy and rapid response to changing market conditions allowed us not only to maintain margins but to increase them.

The results achieved by our two segments, the pulp segment and the paper segment, once again confirm the validity and effectiveness of the mutual hedging policy of these two segments. The paper segment contributed 48% of total EBITDA and the pulp segment 52%.

Despite many market turbulences, very rapidly changing conditions, 2021 once again confirmed that Arctic Paper is a reliable and solid partner for its customers.

An important event was the development and adoption of our strategy 2022-2030. It sets out areas for investment and growth directions that we believe provide a strong basis for growing performance and increasing shareholder value.

I would like to thank the entire team of the Arctic Paper Group for their hard work in 2021. Thanks to your commitment and initiative, we have seized the market opportunities that have presented themselves to us. The business and operational results achieved give me confidence that 2022 will be equally successful.

 

Sincerely yours,

 

Michał Jarczyński

President of the Management Board of Arctic Paper S.A.

 

‎  

 

 

 

INTRODUCTION

 

to the annual report for 2021

Arctic Paper Capital Group

‎  

 

Information on the report

This Consolidated Annual Report for 2021 was prepared in accordance with the Regulation of the Minister of Finance of 19 February 2009 on the current and periodic information provided by securities issuers and on the conditions for recognizing information required by the law of a non‐member state as equivalent information (Journal of Laws of 2009, No. 33, item 259, as amended) and a part of the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), approved by the EU (IFRS, EU).

As at the approval date of these Consolidated Financial Statements for publication, in light of the current process of IFRS endorsement in the European Union and the nature of the Group’s activities, there is no difference between the effective IFRS standards and the IFRS standards endorsed by the European Union. IFRS cover standards and interpretations approved by the International Accounting Standards Board (IASB).

Certain selected information contained in this report comes from the Arctic Paper Group management accounting system and statistics systems.

This Consolidated Annual Report presents data in PLN, and all figures, unless otherwise specified, are disclosed in PLN ‘000.

‎  

Definitions and abbreviations

Unless the context requires otherwise, the following definitions and abbreviations are used in the whole document:

Abbreviations applied to business entities, institutions and authorities of the Company

 

 

 

Definitions of selected terms and financial indicators and abbreviations of currencies

 

 

Other definitions and abbreviations

 

 

 

 

 

‎  

 

Forward looking statements

The information contained in this report which does not relate to historical facts relates to forward looking statements. Such statements may, in particular, concern the Group’s strategy, business development, market projections, planned investment outlays, and future revenues. Such statements may be identified by the use of expressions pertaining to the future such as, e.g., “believe”, “think”, “expect”, “may”, “will”, “should”, “is expected”, “is assumed”, and any negations and grammatical forms of these expressions or similar terms. The statements contained in this report concerning matters which are not historical facts should be treated only as projections subject to risk and uncertainty. Forward-looking statements are inevitably based on certain estimates and assumptions which, although our management finds them rational, are naturally subject to known and unknown risks and uncertainties and other factors that could cause the actual results to differ materially from the historical results or the projections. For this reason, we cannot assure that any of the events provided for in the forward-looking statements will occur or, if they occur, about their impact on the Group’s operating activity or financial situation. When evaluating the information presented in this report, one should not rely on such forward-looking statements, which are stated only as at the date they are expressed. Unless legal regulations contain detailed requirements in this respect, the Group shall not be obliged to update or verify those forward-looking statements in order to provide for new developments or circumstances. Furthermore, the Group is not obliged to verify or to confirm the analysts’ expectations or estimates, except for those required by law.

Forward looking statements relating to risk factors

In this report we described the risk factors that the Management Board of our Group considers specific to the sector we operate in; however, the list may not be exhaustive. Other factors may arise that have not been identified by us and that could have material and adverse impact on the business, financial condition, results on operations or prospects of the Arctic Paper Group. In such circumstances, the price of the shares of the Company listed at the Warsaw Stock Exchange or at NASDAQ in Stockholm may decrease, investors may lose their invested funds in whole or in part and the potential dividend disbursement by the Company may be limited.

We ask you to perform a careful analysis of the information disclosed in ‘Risk factors’ of this report – the section contains a description of risk factors and uncertainties related to the business of the Arctic Paper Group.

 

 

‎  

 

 

 

Selected consolidated financial data

 

 

‎  

Selected consolidated financial data

 

* – Profit and loss and cash flow statement items have been translated at the mean arithmetic exchange rates published by the National Bank of Poland, prevailing in the period that the presented data refers to.

** – Balance sheet items and book value

per share have been converted at the average exchange rate announced by the National Bank of Poland (NBP) as at the balance sheet date.

 

‎  

 

 

 

REPORT OF THE MANAGEMENT BOARD

 

from operations of the Arctic Paper
‎ Capital Group
‎ to the report for 2021

‎  

 

Description of the business of the

‎ Arctic Paper S.A. Group

General information

The Arctic Paper Group is a producer of paper and pulp. We offer bulky book paper and a broad range of products in the segment and high-quality graphic paper. The Group produces numerous types of uncoated and coated wood-free paper as well as wood-containing uncoated paper for printing houses, paper distributors, book and magazine publishing houses and the advertising industry. In connection with acquisition of the Rottneros Group in December 2012, the Group’s assortment was expanded with the production of pulp. As at 31 December 2021, the Arctic Paper Group employs over 1,500 people in its Paper Mills, companies involved in sale of paper and in pulp producing companies, procurement office and a company producing food packaging. Our Paper Mills are located in Poland and Sweden, and have total production capacity of over 685,000 tonnes of paper per year. Our Pulp Mills located in Sweden have aggregated production capacities of over 400,000 tonnes of pulp annually. As at 31 December 2021, the Group had 13 Sales Offices ensuring access to all European markets, including Central and Eastern Europe. Our consolidated sales revenues for 12 months of 2021 amounted to PLN 3,413 million.

Arctic Paper S.A. is a holding company set up in April 2008. The Parent Entity is entered in the register of entrepreneurs of the National Court Register maintained by the District Court in Zielona Góra, 8th Commercial Division of the National Court Register, under KRS number 0000306944. The Parent Entity holds statistical number REGON 080262255. The Company has a foreign branch in Göteborg, Sweden.

Business objects

The principal business of the Arctic Paper Group is paper production and sales. The Group’s additional business, partly subordinate to paper and pulp production, covers:

—  Generation of electricity,

—  Transmission of electricity,

—  Electricity distribution,

—  Heat production,

—  Heat distribution,

—  Logistics services,

—  Distribution of paper and pulp.

Our production facilities

As on 31 December 2021, as well as on the day hereof, the Group owned the following Paper Mills:

—  the Paper Mill in Kostrzyn nad Odrą (Poland) has the production capacity of about 315,000 tonnes per year and mainly produces uncoated wood-free paper for general printing use such as printing books, brochures and forms, and for producing envelopes and other paper products;

—  the Paper Mill in Munkedal (Sweden) has the production capacity of about 160,000 tonnes and mainly produces fine uncoated wood-free paper used primarily for printing books and high-quality brochures;

—  the Paper Mill in Grycksbo (Sweden) has the production capacity of about 210,000 tonnes per year and produces coated wood-free paper used for printing maps, books, magazines, posters and printing of advertising materials.

As on 31 December 2021, as well as on the day hereof, the Group owned the following Pulp Mills:

—  The pulp mill in Rottneros (Sweden) has production capacity of about 160,000 tonnes annually and produces mainly two types of mechanical pulp: groundwood and chemo thermo mechanical pulp (CTMP);

—  the Pulp Mill in Vallvik (Sweden) has the annual production capacity of about 240,000 tonnes and produces two types of long-fibre sulphate pulp: fully bleached sulphate pulp and unbleached sulphate pulp. The most of Vallvik Pulp Mill production is known as NBSK pulp. The unbleached sulphate pulp produced by the Pulp Mill is characterised by very high purity and is primarily used to produce transformers and in cable industry.

Our products

The product assortment of the Arctic Paper Group covers:

—  Uncoated wood-free paper, in particular:

›  white offset paper that we produce and distribute primarily under the Amber brand which is one of the most versatile types of paper destined for various applications;

›  woodfree bulky book paper that we produce under the Munken brand, used primarily for book printing;

›  high quality graphic paper with a particularly smooth or rough surface, used for printing various advertising and marketing materials, which we produce under the Munken Design brand;

—  Coated wood-free paper, in particular:

›  coated woodfree paper, manufactured under the G and Arctic brands, used primarily for printing of books, magazines, catalogues, maps, personalised direct mail correspondence.

—  Uncoated wood-containing paper, in particular:

›  premium wood containing bulky book paper that we produce and distributed under the Munken brand, was developed specially for multi-colour and B/W printing of books;

—  Packaging papers

›  kraft paper, which is manufactured under the brand name Munken Kraft

›  one side coated packaging papers produced under the brand name G-Flexmatt

Both grades are ideal for a wide range of packaging applications, such as shopping bags, bags for loose food, packaging or laminates used in the food or non-food industry.

 

—  Unbleached sulphate pulp;

›  fully bleached sulphate pulp and unbleached sulphate pulp used primarily to produce printing and writing paper, cardboard, toilet paper and white packaging paper.

—  Mechanical fibre pulp:

›  chemi-thermo mechanical pulp (CTMP) and groundwood which are used mainly for production of printing and writing papers;

 

‎ Capital Group structure

The Arctic Paper Capital Group comprises Arctic Paper S.A., as the Parent Entity, and its subsidiaries, as well as joint ventures. Since 23 October 2009, Arctic Paper S.A. has been listed on the primary market of the Warsaw Stock Exchange and since 20 December 2012 in the NASDAQ stock exchange in Stockholm. The Group operates through its Paper Mills and Pulp Mills and its subsidiary producing packaging as well as its sales Offices and Procurement Offices.

Detailed information on the organisation of the Arctic Paper Capital Group with identification of the consolidated entities is provided in the section ‘Accounting principles (policies)’ and in note to the consolidated financial statements (note 1 and 2).

Changes in the capital structure of the Arctic Paper Group

In 2021, no material changes in the capital structure of the Arctic Paper Group occurred.

Modifications to the core management principles

In 2021, there were no material modifications to the core management principles.

Shareholding structure

Nemus Holding AB, a company under Swedish law (a company owned indirectly by Mr Thomas Onstad), is the majority shareholder of Arctic Paper S.A., holding (as at 31 December 2021) 40,381,449 shares of our Company, which constitutes 58.28% of its share capital and corresponds to 58.28% of the total number of votes at General Meetings. Thus Nemus Holding AB is the Parent Entity of the Issuer.

Additionally, Mr Thomas Onstad, an indirect shareholder of Nemus Holding AB, holds directly 6,223,658 shares representing 8.98% of the total number of shares in the Company, and via another entity – 600,000 shares accounting for 0.87% of the total number of shares of the Issuer. Mr Thomas Onstad’s total direct and indirect holding in the capital of Arctic Paper S.A. as at 31 December 2021 was 68.13% and has not changed until the date hereof.

 

 

 

 

 

 

The data in the above tables are shown as at the date of approval of this report, which has not changed as compared to 31 December 2021 and the date of publication of the quarterly report for Q3 2021.

Market environment

Segments of the graphic paper market

The graphic paper market is split into three core segments:

—  coated and uncoated fine paper,

—  newsprint paper,

—  magazine paper.

The Group operates solely in the segment of high quality graphic papers. We are not present in the newsprint and photocopy paper segments.

 

 

 

 

 

 

Below is a description of segments in the graphic market:

—  fine paper is wood-free paper where minimum 90% of fibre mass is pulp fibres obtained with chemical methods:

›  uncoated wood-free paper made of pulp. It may be subject to additional processing like surface sizing, calendering, surface or mass dyeing.

›  Two core categories of the paper include graphic paper (used e.g. to print books, handbooks and catalogues) and office copying paper.

›  coated wood-free paper made of pulp is subject to coating with pigment and glue mixtures (kaolin, calcium carbonate). The coating may be performed on paper machines (online) or outside paper machines (offline). Coating of paper improves its smoothness and transparency of the background, improves the quality of colour reproduction.

—  Wood-containing paper is most often manufactured of mechanical pulp or recycled-paper pulp, without or with small quantities of filler. It contains lignin which increases the opacity of the paper but accelerates ageing.

›  uncoated wood-containing paper is manufactured of mechanical pulp, used to print magazines with rotogravure and offset techniques (newsprint) and to print single-colour publications. Products of the Group in that segment are usually used to print paperbacks.

›  coated wood-containing paper is manufactured of mechanical pulp, it is double coated. It is used to print multi-colour magazines and catalogues.

In that product group there is e.g.: SC (Super Calandered), MFC (Machine Finished Coated), LWC (Light Weight Coated), ULWC (Ultra-Light Weight Coated) MWC (Medium Weight Coated). The paper in the form of rolls is used for heat-set printing.

Additional information on the market environment is provided further in this report in the section: Information on market trends.

 

Packaging paper market segments in which Arctic Paper operates:

 

The packaging paper market, where Arctic Paper operates, is divided into two basic segments:

—  Kraft paper, which is divided into bleached, unbleached and recycled fibre papers

—  packaging papers coated on one side

The Group operates exclusively in the segment of machine-whitened kraft paper and single-side coated matt surface packaging. We are not present in the other segments. 

 

 

 

Segments of the pulp market

 

Since December 2012, along with the acquisition of Rottneros AB, our assortment has been expanded by:

—  fully bleached sulphate pulp and unbleached sulphate pulp used primarily to produce printing and writing paper, cardboard, toilet paper and white packaging paper.

—  chemi-thermo mechanical pulp (CTMP) and groundwood which are used mainly for production of printing and writing papers.

Development directions and strategy

On 4 October 2021, the Company’s Supervisory Board approved the “Arctic Paper Group Strategy for 2022-2030” presented by the Issuer’s Management Board. With the Group’s new strategy to 2030, Arctic Paper will accelerate its transformation into a more comprehensive company, leveraging the synergies and competencies of its existing businesses. The Company’s strategic directions are reflected in its 4 pillars: packaging, energy, graphic paper and pulp.

With its strong position as a premium paper producer and owner of the recognisable Graphic Paper and Pulp brands, as part of its Four Pillars (4P) strategy, the Group will invest in two new business areas where sustainability and renewable resources – packaging and energy – play a key role.

The Group’s main strategic objectives in the 2030 perspective are:

  revenue growth by 25 per cent,

  an increase in EBITDA of around 70 per cent,

  an increase in EBITDA margin to 15 per cent.

 

The total investment between 2022 and 2030 in all four pillars is planned at over PLN 1.5 billion, of which around 40 per cent of this amount will be allocated to new business areas. The Group assumes that it will achieve carbon neutrality by 2035 at the latest.

 

Sales structure

In 2021 and in 2020, the sales structure by main product lines was as follows:

 

 

 

In 2021 there were no material changes to the sales structure of paper and pulp by the Group or in the revenue structure from sales of paper and pulp by the Group by its products. In 2021 there was a volume and value increase in paper sales and a value increase in pulp sales with a slight decrease in volumes.

Sales markets

In 2021 the share of Group sales outside Poland was 89% compared to 2020 (88%). This year, similarly to previous years, sales were focused on European markets. The share of those markets in the overall value of sales was 88% in 2021 (2020: 89%).

The geographical structure of sales revenues by the main markets in 2021 and in 2020 is presented in note 10.1 to the consolidated financial statements.

Buyers

The base of our customers covers both direct and indirect buyers. Direct buyers purchase the Group’s products at our Paper Mills. Indirect buyers do not buy the Group’s products on their own and they resort to the services of advertising companies or paper wholesalers, nevertheless, they constitute an important target group of marketing activities of Arctic Paper since it is indirect buyers that recommend the use of the Group’s papers to direct buyers. The groups of direct and indirect buyers of products include:

  printing houses – they are direct buyers straight from the Group’s Paper Mills,

  wholesalers – they are direct buyers of paper manufactured by the Group for further re-sale,

  publishers – they are direct and indirect buyers of paper manufactured by the Group straight from the Group for their publishing business and instruct or recommend the use of our paper to printing houses to which they commission the printing of books and other publications,

  advertising agencies – they are mainly indirect buyers that do not buy our products directly; however, they play an important role in commissioning and recommending our products to printing houses, in particular high quality paper to print annual reports of companies, brochures, leaflets and packaging,

  final buyers – those are direct and indirect buyers that buy our products directly; they also play an important role in commissioning and recommending our products to printing houses to which they commission printing services.

Pulp Mill products are mainly bought by customers that produce paper for printing, paper hygienic products and cardboard as well as electrical devices and filters. Pulp is supplied to entities that do not have the capacity to produce pulp by themselves and to buyers that produce certain types of pulp and look for suppliers of other types of pulp.

In our opinion, we are not materially dependent on any single specific buyer. The Group’s consolidated revenues for 2021 show that the share of the largest buyer did not exceed 12% of total sales revenues.

Vendors & Suppliers

In its business, the Group relies on the following goods and services:

  Pulp for Paper Mills,

  Wood for Pulp Mills,

  Chemicals,

  Electricity,

  Transport services.

Pulp

Pulp is the core material used by the Group to produce paper. The Group acquires pulp on the basis of revolving annual contracts concluded under framework agreements or one-off transactions.

Wood

Wood is the core material used by the Pulp Mills to produce pulp. The Rottneros Group has a procurement department placing orders with sawmills in Sweden as well as its subsidiary company – SIA Rottneros Baltic, purchasing wood for the Pulp Mill in Vallvik in Eastern Europe, primarily in Latvia and Russia.

Chemicals

The core chemicals used to produce papers are fillers (mainly calcium carbonate), starch (of maize, potatoes, tapioca), optical bleaching agents and other chemicals. Chemicals are also used to produce cellulose.

Electricity

In its production processes, the Group uses electricity and heat energy. The entire demand for electricity and heat energy for the Paper Mill in Kostrzyn is covered with its own heat and power plant using natural gas. The gas is supplied pursuant to a contract with a Polish supplier (PGNiG) at annual indexed prices in line with changes to the sectoral indicators published by GUS [Central Statistical Office of Poland] subject to negotiations of the indexation formula when the contractual change levels are exceeded. Gas is acquired from deposits located close to Kostrzyn nad Odrą and delivered to the Paper Mill with a local pipeline.

In the analysed period, electricity for the Paper Mill in Munkedal was purchased from external suppliers. The company also uses its own hydroelectric power plant. We were also buying heating oil to cover our needs for heat energy.

Energy for the Paper Mill Arctic Paper Grycksbo AB is obtained from biomass and electricity is partly acquired from external suppliers.

The Rottneros Pulp Mill covers its entire demand for electricity with purchases from external suppliers.

The Vallvik Pulp Mill provides for about 75% of its demand for electricity with its own resources. The remaining demand for electricity is covered with purchases from external suppliers.

Transport services

The Group does not operate its own means of transportation and resorts to specialised external entities for distribution of its products from Paper Mills and warehouses to buyers.

Entities in the Group are not dependent on those providers. The Group’s consolidated revenues for 2021 show that the share of the largest service provider did not exceed 10% of total sales revenues.

Information on the seasonal or cyclical nature of business

The demand for the Group’s products is subject to slight variations throughout the year. Reduced demand for paper occurs each year during summer holidays and around Christmas when some printing houses, in particular in Western Europe are closed. Global graphic paper markets are also subject to structural decline due to digitalisation in society, but thanks to its efficient sales process and strong brands, Arctic Paper manages its market shares and overall paper decline better than its competitors. 

Research and development

The Arctic Paper Group conducts primarily development works aimed at enhancing and modernising production processes and improving the quality of products on offer and expanding the assortment thereof. In the period covered with this report, the Paper Mills and Pulp Mills carried out development works to improve production processes, in particular to shorten the idle time of paper machines as well as works aimed at improving the paper/pulp quality and extending the assortment and to improve quality properties of the products.

An important goal of development works last year was the development of new products, especially packaging and barrier papers. In the area of packaging papers, the work focused on obtaining a product with increased resistance to water and fats. The global trend of replacing plastic packaging with cellulose and paper packaging is expected, especially in the food packaging segment.

Labour matters

Matters concerning the Group’s employees are described in detail in the document “Non-financial information of the Arctic Paper S.A. Capital Group" published separately. – Social Responsibility Report 2021".

 

Environment

Our Group complies with environmental standards set forth in numerous applicable regulations and in administrative decisions. The standards are aimed at ensuring protection of soil, air and water against pollution as well as noise and electromagnetic fields. Below, we provide a description of how environmental regulations affect the operations of our Paper Mills and Pulp Mills:

Kostrzyn Paper Mill

Pursuant to a decision of the Governor of the Lubuskie Province of 8 December 2005, Kostrzyn obtained an integrated permit to operate a paper production installation with a fuel combustion installation at the facility in Kostrzyn nad Odrą. In the case of Kostrzyn, the need for such permit was due to its paper production capacity in excess of 20 tonnes per day. This permit has been updated many times, adjusting the plant to the applicable legal requirements. The last update took place on 17 December 2019 by the decision of the Marshal of the Lubuskie Province.

The condition for receiving the integrated permit is that the installation meets the environmental protection requirements resulting, among others, from best available techniques (BAT). In particular, the election must not exceed the applicable emission standards.

In order to comply with the requirements specified in the environmental permit and other environmental standards related to waste management, Kostrzyn has entered into a number of contracts covering collection and recycling of production waste.

In May 2008, an industrial wastewater treatment plant was opened at the Kostrzyn nad Odrą site. Pursuant to a decision of the Governor of the Lubuskie Province of 14 August 2007, Kostrzyn obtained a water law permit to discharge rainwater and melt water and to construct a discharge dock to the River of Warta (valid until 1 August 2017). In 2017, a new water law permit was obtained to discharge rain and melt water, valid until 25 June 2027.

AP Kostrzyn participates in the EU Emissions Trading System (ETS) for greenhouse gases. A permit to emit greenhouse gases was obtained by AP Kostrzyn pursuant to a decision of the Governor of the Lubuskie Province of 9 November 2016 for the paper production installation with the production capacity in excess of 20 tonnes per day located in the facility in Kostrzyn nad Odrą (as amended on 26.02.2019 and 14.04.2020). In connection with the permit, Kostrzyn is obliged to monitor the volumes of CO2 emissions and to file annual report on the emissions.
‎ On 10 June 2021, the Law of 15 April 2021 amending the Law on the greenhouse gas emission trading scheme and certain other laws was published in the Journal of Laws. Due to changes in the applicable provisions of the Act, Arctic Paper Kostrzyn SA applied for an amendment to the decision of the Lubuskie Province Marshal. This authorisation is pending.

In connection with environmental protection, Kostrzyn has made major investments, inter alia, into a gas fuelled heat and power plant that was opened in 2007 stage I and in 2009 stage II.

The fight against global warming is one of the greatest challenges for the future. Arctic Paper Kostrzyn contributes to positive change and the search for long-term sustainable alternatives to today’s energy solutions. In 2019, solar cell testing began at our paper mill in Kostrzyn. The first stage was a pilot PV installation in late 2019 / early 2020. The next stage was the expansion of the above PV installation completed in H1 2021 and the commissioning of another unit at the beginning of H2 2021. The results of the above will allow the selection of appropriate technological and operational aspects, the determination of the impact of the PV installation on the electricity grid and the knowledge of the estimated efficiency under our climatic conditions. Currently, Arctic Paper Kostrzn SA has started design preparations for the construction of further modules of the photovoltaic installation.

The Paper Mill in Kostrzyn nad Odrą holds compliance certificates with the following standards: ISO 45001, ISO 14001, ISO 9001 and EMAS. It publishes an annual publicly available environmental report, providing an assessment of the environmental impact of its activities. In addition, the paper produced here has been certified to meet the FSC® chain of custody and PEFC™ wood-based product supply chain certifications. The certificates are to document that the pulp used to produce the paper comes from forests used in a sustainable manner. The FSC (Forest Stewardship Council) certificate is a major certificate granted to paper producing companies. In 2006, the first FSC certificate was granted to the paper manufactured at AP Kostrzyn. Now, the Amber branded paper produced at Kostrzyn nad Odrą relies in 45% on pulp certified by FSC and 55% on pulp certified by PEFC (Programme for the Endorsement of Forest Certification).

Munkedals Paper Mill

The business of Munkedals is subject to environmental management systems EMAS and ISO 14001. EMAS (Eco-Management and Audit Scheme) is a voluntary system applied by the European Union which applies to enterprises outstanding for their constantly improved environmental protection level within their business. Companies registered with EMAS comply with environmental protection regulations, maintain an environmental management system and publish information on environmental protection in their business in the form of a separate verified statement on compliance with environmental protection regulations. ISO, International Standards Organisation, has been developing various standards. ISO 14000 is a group of one of the best known environmental management standards (i.e. activities undertaken by entrepreneurs in order to (i) reduce the harmful impact of their activities on the environment and (ii) ensure continuous improvement of the level of environmental protection).

Certain properties owned by Munkedals are located in the Natura 2000 area. Areas in the Natura 2000 constitute wild nature reservations established on the basis of a decision of the District Council of Munkedal (Sweden) in 2005. The objective to establish the Natura 2000 network was to preserve the natural habitats and vegetation and animal species most endangered with extinction all over Europe. The extent of the coverage and the restrictions concerning business operations are set forth in the Council Directive 92/43/EEC on the conservation of natural habitats and of wild fauna and flora (Habitat Directive) and in the Council Directive 79/409/EEC on the conservation of wild birds (Birds Directive) of 2 April 1979 and the applicable domestic regulations. The protection level of habitats and birds in Natura 2000 areas is subject to the occurrence of specific species and/or habitats that are protected.

On 24 June 2020, the entire range produced at the Munkedals factory was certified by the Cradle to Cradle Products Innovation Institute (C2CPII). The entire production process of the paper mill in Munkedal has been audited and has reached the bronze level which is the overall level of product certification. The Cradle to Cradle Certified ™ program is an internationally recognised standard for safe and sustainable development. It assesses the environmental impact of products throughout their entire life cycle. Cradle to Cradle design means not only minimizing negative impacts on the environment, but above all leaving a positive footprint.

Grycksbo Paper Mill

Paper production in the Paper Mill Arctic Paper Grycksbo AB has been carried out in compliance with the environmental permit of March 2007. The permit was issued by the Swedish Environmental Protection Tribunal for the production of up to 310,000 tonnes annually. Additionally, the Paper Mill holds a CO2 emission permit issued by the regional authorities of the province of Dalarna.

Since 1997 Arctic Paper Grycksbo AB has held an ISO 14001 certificate and our environmental activities are reported in compliance with EMAS. The core objective of EMAS is to encourage its member companies to enhance their efforts to protect the natural environment in a systematic and consistent manner, to an extent even beyond legislative requirements. This is achieved by establishing a programme composed of specific action plans and assessment of all effects for the environment resulting from the activities pursued. Companies are obliged to prepare annual reports on the results of their pro-environmental activities. Independent inspectors ensure that companies comply with their obligations.

Arctic Paper Grycksbo AB participates in the EU Emissions Trading System (ETS) for greenhouse gases. 2010 was the first year when zero CO2 emissions from fossil fuels were declared. That was made possible as a result of a reconstruction of the boiler combined with an investment in equipment to handle biofuels, electrical filters for flue gas particles and reconstruction to turbine generating electricity from renewable sources.

In numbers, the switch to biofuels means annual reduction of CO2 emissions from fossil fuels by about 70,000 tonnes. The reconstructed turbine provides for 20% of demand for electricity by the Paper Mill with renewable energy sources that it generates itself which in turn results in reduction of CO2 emissions by another 4,000 tonnes.

The Paper Mill has implemented an energy management system in compliance with ISO 50001 (Energy Management System). Our products are verified within the “Chain of Custody” in compliance with FSC (Forest Stewardship Council) and in compliance with PEFC (Programme for the Endorsement of Forest Certification) as well as they meet the requirements of the standards of Nordic Ecolable (the Nordic Swan).

The paper mill received Cradle to Cradle certification in April 2021.

Pulp Mills

Environmental issues are central to Rottneros’ corporate culture and are part of the DNA of the entire Group. Products from the forest are part of the climate solution and Rottneros wants to be a leading player in the industry. Work to improve environmental performance is ongoing. The Group’s long-term goal is to eliminate fossil fuels altogether.

Rottneros is in the business of being part of the solution to global warming. A growing forest absorbs CO2 and is thus stored in the products made from it. In many places, intensive research is being conducted to develop new products that replace fossil raw materials with bio-based raw materials.

Rottneros does not own any forest, but contributes to sustainable forestry in many ways. Both of the Group’s sites have environmental management systems and are certified to ISO 14001. The environmental management system includes well established procedures for inspection, sampling and dealing with deviations.

Suppliers and raw materials are carefully selected. The Rottneros Group is FSC® and PEFCTM certified and has for many years purchased raw materials mainly from certified suppliers. Where suppliers are not certified, they are carefully assessed to meet customer requirements in accordance with our certifications.

The company’s efficient use of raw materials in production provides environmental and economic benefits. The Rottneros plant uses 95-98% of the raw material. At the Vallvik plant, approximately 44-47% of the raw material becomes pulp. Waste products from production are mainly used as energy.

To reduce the environmental impact of transport, the raw material is purchased locally. The Vallvik mill buys approximately 50% and Rottneros approximately 75% of its pulp from sources within a 100 kilometre radius. Through proper planning and coordination, we reduce transport distances within the Group and transport from other companies.

Rottneros’ production processes involve various risks that affect the environment. The Rottneros plant has a mechanical production process, and the biggest environmental risks are energy consumption and water emissions. Energy consumption is significant, and the focus has been on reducing dependence on fossil fuels through the design of more efficient equipment and product reformulation.

At the Vallvik site, where cellulose is produced using chemical processes, chemical treatment and emissions to water and air pose the greatest environmental risk. In order to protect the environment and prevent any violations of applicable emission regulations and requirements, the Group has a continuous sampling system with alarm functions linked to plant control systems. In addition, random hand samples are taken.

The Group’s long-term goal is to become free of fossil fuels. The plan is for production to be completely free of fossil fuels by 2030. The only challenge that remains is replacing the fossil fuels used to start production, especially at the Vallvik plant, combined with production interruptions and planned maintenance shutdowns. Another challenge that still remains is to ensure that the electricity purchased comes from fossil fuel-free sources.

Eliminating indirect CO2 emissions that occur outside the gates of operations is another long-term challenge to complete freedom from fossil fuels. This aspect mainly concerns vehicles used to transport deliveries to and from factories, which are used by subcontractors working for the Group, as well as our suppliers and customers.

In 2020, the Rottneros plant invested SEK 18 million in a methane burner as part of an initiative to achieve the goal of a fossil fuel-free production process. Methane formed as a by-product is collected during the biological water treatment process. It can then be used as an energy source for the cast dryers in which cellulose is dried.

The investment will result in both reduced fossil fuel consumption and lower variable costs. The plant has therefore largely achieved its goal of a fossil fuel-free production process. Through a series of investments in recent years, the plant has reduced its annual oil consumption by around 7,000 cubic metres while increasing production.

It is Group policy that all employees in relevant positions must have the necessary environmental knowledge. The Group’s senior environmental employees are constantly undergoing further training.

The Vallvik plant has been certified to environmental management standards since 2000. Rottneros Bruk also updated its energy management system in 2020 and obtained ISO 50001 certification. A key element of this effort has been the establishment of an energy management group that actively works on energy-related issues. The group conducted an analysis to identify everything that causes electricity consumption at the site.

 

 

 

 

 

 

 

‎  

Summary of consolidated financial results

Selected items of the consolidated statement of profit and loss

 

 

Revenues

In 2021, the consolidated sales revenues amounted to PLN 3,412,576 thousand as compared to PLN 2,847,450 thousand in the previous year and increased by 19.8% (PLN 565,126 thousand). Sales revenues from paper increased by 21.0% (PLN 417,556 thousand) while sales revenues from pulp increased by 17.2% (PLN 147,569 thousand) versus 2020.

The volume of paper sales in 2021 was 648 thousand tonnes (2020: 575 thousand tonnes) and was 73 thousand tonnes higher than in the previous year. This means an increase in sales volume by 12.6%.

The volume of pulp sales in 2021 was 392,000 tonnes (2020: 401 thousand tonnes) and was 9 thousand tonnes lower than in the previous year. This means a decrease in sales volume by 2.2%.

Profit on sales, costs of sales, selling and distribution costs, and administrative expenses

Profit on sales in 2021 was by 30.7% higher than in the previous year. Sales profit margin in the current year stood at 20.74% compared to 19.03% (+1.7 p.p.) in the previous year.

The increase in profit on sales in 2021 compared to 2020 was primarily due to an increase in revenues from the sale of paper and pulp due to both higher volumes and an increase in PLN denominated selling prices for paper and an increase in selling prices for pulp. The increase in profit on sales was also a result of the lower growth rate of production costs and partial reversal of impairment allowance to non-financial fixed assets in Arctic Paper Grycksbo AB.

In 2021, selling and distribution costs amounted to PLN 381,287 thousand and increased by 13.3% compared to 2020. The selling and distribution costs comprise particularly transportation costs.

In 2021, the administrative expenses amounted to PLN 103,080 thousand as compared to PLN 76,348 thousand in 2020 which was a growth by 35.0%. The main reason of the increase were higher costs related to consulting services rendered to the Group by third parties.

Other operating income and expenses

Other operating income amounted to PLN 73,749 thousand in 2021 which was an increase versus the previous year by PLN 8,469 thousand.

In 2021, other operating expenses amounted to PLN 52,741 thousand, which was an increase versus the previous year by PLN 16,784 thousand.

A major part of the other operational revenue and expenses includes revenues and costs of sales of sold energy and other materials. In addition, costs related to research work partly compensated by the National Research and Development Centre contributed to the increase in other operating income and expenses in 2021.

Financial income and financial expenses

In 2021, the financial income amounted to PLN 3,435 thousand and was by PLN 2,725 thousand higher than generated in 2020, mainly due to foreign exchange gains.

The financial expenses in 2021 amounted to PLN 24,890 thousand as compared to PLN 36,633 thousand in 2020. The lower finance costs in 2021 were mainly due to the value of foreign exchange losses amounting to PLN 10,429 thousand for 2020 (2021: foreign exchange gains of PLN 2,268 thousand , see financial revenue).

Income tax

In 2021, income tax amounted to PLN -47,208 thousand, while in 2020 it was PLN -18,734 thousand. The relatively low effective tax rate on gross profit in 2020 of 15% (2021: 21%) results from the use of tax losses for which a deferred tax asset was previously unrecognised within the Swedish tax group.

Profitability analysis

EBITDA in 2021 was PLN 327,756 thousand, while in 2020 it was PLN 271,368 thousand. The increase in EBITDA in 2021 is primarily due to higher revenues from the sale of paper and pulp and the lower growth rate of production costs relative to the increase in revenues from the sale of products. In the reporting period, the EBITDA margin was 9.60% versus 9.53% in 2020.

In 2021, the profit on operations amounted to PLN 244,570 thousand, while in 2020 it was PLN 158,242 thousand. The operational profit margin in 2021 was +7.17% versus +5.56% in 2020. The higher operating profit in 2021 was due to higher EDITDA and partial reversal of impairment allowance to non-financial fixed assets in Arctic Paper Grycksbo AB in 2021 compared to the previous year.

The net profit in 2021 amounted to PLN 175,907 thousand, while in 2020 it was PLN 103,585 thousand. Net profit margin in 2021 amounted to +5.15% as compared to +3.64% in 2020.

 

 

 

 

In 2021, return on equity was +14.2%, while in 2020 it was +10.0%.

In 2021, return on assets was +7.4%, while in 2020 it was +4.8%.

The growth of return on equity and return on assets in 2021 was mainly due to increased net profit generated in 2021 versus 2020.

 

 

‎  

Selected items of the consolidated statement of financial position

 

 

 

As at 31 December 2021 total assets amounted to PLN 2,389,266 thousand, as compared to PLN 2,136,646 thousand at the end of 2020.

Fixed assets

As at the end of December 2021 fixed assets amounted to PLN 1,301,750 thousand and accounted for 54.5% of total assets as compared to PLN 1,194,503 thousand as at the end of 2020 (55.9% of total assets).

The increase in non-current assets was primarily due to investment purchases, partial reversal of impairment allowance to non-financial fixed assets and the positive valuation of power purchase forwards.

Current assets

As at the end of December 2021, current assets amounted to PLN 1,087,516 thousand as compared to PLN 942,142 thousand at the end of December 2020. As part of the current assets, inventories increased by PLN 37,377 thousand and receivables grew by PLN 108,188 thousand, other current assets increased by PLN 87,445 thousand, while cash and cash equivalents dropped by PLN 87,635 thousand. Current assets represented 45.5% of total assets as at the end of December 2021 (44.1% as at the end of 2020) and included inventories – 16.9% (17.0% as at the end of 2020), receivables – 17.2% (14.2% as at the end of 2020), other current assets – 4.4% (0.9% as at the end of 2020) and cash and cash equivalents – 7.0% (12.0% as at the end of 2020). The increase in other current assets was primarily due to the positive valuation of power purchase forwards. The decrease in cash was mainly due to the refinancing of loans by AP SA and the redemption of bonds in SEK partly financed by a loan from the Rottneros Group.

Equity

As at the end of 2021, the equity amounted to PLN 1,242,996 thousand as compared to PLN 1,033,033 thousand at the end of 2020. As at the end of December 2021, equity accounted for 52.0% of total equity and liabilities (48.3% as at 31 December 2020).

The increase in equity was primarily due to the net profit for 2021 and an increase in the positive valuation of financial instruments treated as hedges of future cash flows offset in part by the dividend to AP SA Shareholders and to non-controlling Shareholders paid by Rottneros AB.

Short-term liabilities

As at the end of December 2021, short-term liabilities amounted to PLN 722,066 thousand (30.2% of balance sheet total) as compared to PLN 639,017 thousand (29.9% of balance sheet total) as at the end of 2020.

In 2021, an increase of short-term liabilities occurred by PLN 83,049 thousand, mainly due to an increase in trade payables offset in part by a decrease in short-term loans and bonds resulting from the refinancing of debt at AP SA and the Rottneros Group.

Long-term liabilities

As at the end of December 2021, long-term liabilities amounted to PLN 424,205 thousand (17.8% of balance sheet total) as compared to PLN 464,596 thousand (21.8% of balance sheet total) as at the end of 2020. In the year under review there was a decrease in non-current liabilities by 40,391 thousand.

The decrease in non-current liabilities was mainly due to a decrease in provisions for employee benefits and loans and bonds.

 

 

 

Debt analysis

 

 

 

As at the end of December 2021, the equity debt ratio was 92.2% and was lower by 14.6 p.p. versus the end of December 2020. The decrease in the ratio was mainly due to an increase in equity.

The ratio of fixed assets to equity stood at 95.5% at the end of 2021, 9.0 p.p. higher than at the end of December 2020 as a result of higher growth in equity than in non-current assets.

The interest-bearing debt to equity ratio was 23.1% at the end of 2021 and was by 14.6 p.p. lower versus the ratio calculated at the end of December 2020, both due to a decrease of interest-bearing debt than an increase of equity.

The net debt to EBITDA ratio for the last 12 months of 2021 was 0.36x, 0.13 lower than the ratio for 2020 due to both a decrease in net debt calculated as interest-bearing liabilities less cash and an increase in EBITDA.

The EBITDA to net interest expense ratio for the 12 last months of 2021 was 17.4x and it was higher by 3.7 versus the level of the ratio for 2020 as a result of an increase of EBITDA.

 

‎  

Liquidity analysis

 

 

The quick ratio at the end of December 2021 was 1.6x and was higher than at the end of December 2020 (by 0.1). The quick ratio at the end of December 2021 was 1.0x and was higher than at the end of December 2020 (by 0.1). The increase in the current and quick ratios was due to the faster growth of the respective current assets than the growth of current liabilities.

The cash solvency ratio was 0.2x at the end of December 2021, lower than the level of this ratio at the end of December 2020 (by 0.2) mainly due to the decrease in cash.

The cash conversion cycle for 2021 (28.6 days) shortened compared to 2020 (37.3 days) by 8.6 days mainly due to the extension of the rotation of liabilities.

 

 

‎  

Selected items of the consolidated cash flow statement

 

 

 

Cash flows from operating activities

In 2021, net cash flows from operating activities amounted to PLN 238,193 thousand as compared to PLN 211,464 thousand in 2020. The higher cash flow from operating activities in 2021 was due to the increase in gross profit.

Cash flows from investing activities

In 2021, cash flows from investing activities amounted to PLN -159,513 thousand as compared to PLN -141,239 thousand in 2020, and covered mostly expenses related to purchases of tangible fixed assets.

Cash flows from financing activities

In 2021, cash flows from financing activities amounted to PLN -162,068 thousand as compared to PLN -100,950 thousand in 2020. The increase in negative cash flows from financing activities in 2021 was primarily due to the repayment of debt mainly under loans and bonds as well as the payment of dividends to AP SA Shareholders and Non-Controlling Shareholders.

 

 

 

 

‎  

Relevant information and factors affecting the financial results and the assessment of the financial standing

Key factors affecting the performance results

The Group’s operating activity has been and will continue to be historically influenced by the following key factors:

  macroeconomic and other economic factors,

  demand growth for products based on natural fibres,

  reduced demand for certain paper types,

  fluctuations of paper prices,

  pulp price fluctuations for Paper Mills, timber for Pulp Mills and energy prices,

  FX rates fluctuation.

 

Macroeconomic and other economic factors

We believe that a number of macro-economic and other economic factors have a material impact on the demand for high-quality paper, and they may also influence the demand for the Group’s products and the Group’s operating results. Those factors include:

  GDP growth;

  net income – as a metric of income and affluence of the population;

  production capacity – the surplus of supply in the high quality paper segment over demand and decreasing sales margins on paper;

  paper consumption;

  technology development.

 

Demand growth for products based on natural fibres

The trend observed in developed societies concerning a reduction of man’s adverse impact on the environment, in particular reduction of use of disposable, plastic packaging that may not be recycled, offers new opportunities for the development of the pulp & paper sector. In many companies, work has been under way to develop new methods of packaging and production of packaging with natural materials, including pulp, so that it can be recycled. Arctic Paper is also involved in such research. In the near future, the product segment is expected to increase its percentage share in the volumes and revenues of the Arctic Paper Group.

Reduced demand for certain paper types

Development of new technologies, in particular in the areas of information and communication, results in decreasing demand for certain paper types – in particular, this affects newsprint and to a lesser extent – graphic papers. However, despite the increasing popularity of e-books, the volume of book paper produced and sold by Arctic Paper has been stable in the recent years, less sensitive to changing market conditions. Nevertheless, in its strategy Arctic Paper has set a direction of activity so that within several years, the segment of non-graphic papers (that is technical or packaging paper) accounts for 1/5 of its consolidated revenues.

Paper prices

Paper prices undergo cyclic changes and fluctuations, they depend on global changes in demand and overall macroeconomic and other economic factors such as indicated above. Prices of paper are also influenced by a number of factors related to the supply, primarily changes in production capacities at the worldwide and European level.

Costs of raw materials, energy and transportation

The main elements of the Group’s operating expenses include raw materials, energy and transportation. The costs of raw materials include mainly the costs of pulp for Paper Mills, timber for Pulp Mills and chemical agents used for paper and pulp production. Our energy costs historically include mostly the costs of electricity, gas and rights to CO2 emissions. The costs of transportation include the costs of transportation services provided to the Group mainly by external entities.

Taking into account the share of those costs in total operating expenses of the Group and the limited possibility of controlling these costs by the Group Companies, their fluctuations may have a major impact on the Group’s profitability.

A part of pulp supplies to our Paper Mills is made from our own Pulp Mills. The remaining part of pulp manufactured at our Pulp Mills is sold to external customers.

Currency rate fluctuations

The Group’s operating results are significantly influenced by currency rate fluctuations. In particular, the Group’s revenues and costs are expressed in different foreign currencies and are not matched, therefore, the appreciation of the currencies in which we incur costs towards the currencies in which we generate revenues, will have an adverse effect on the Group’s results. Our products are primarily sold to euro zone countries, Scandinavia, Poland and the UK, thus our revenues are largely denominated in EUR, GBP, SEK and PLN while revenues from the pulp mills are primarily denominated in USD. The Group’s operating expenses are primarily expressed in USD (pulp costs for Paper Mills), EUR (costs related to pulp for Paper Mills, energy, transportation, chemicals), PLN (the majority of other costs incurred by the Paper Mill in Kostrzyn nad Odrą) and SEK (the majority of other costs incurred by the Munkedal and Grycksbo Paper Mills as well as the Rottneros and Vallvik Pulp Mills).

Exchange rates also have an important impact on results reported in our financial statements because of changes in exchange rates of the currencies in which we generate revenues and incur costs, and the currency in which we report our financial results (PLN).

Unusual events and factors

In 2021, there were no unusual events or factors.

Impact of changes in Arctic Paper Group’s structure on the financial result

In 2021, there were no material changes in the Arctic Paper Group’s structure that would have material influence on the financial result generated.

Effective 1 January 2020, the Group, through Rottneros AB, acquired control of Nykvist Skogs AB, which is further described in note 20 to the consolidated financial statements.

Other material information

Complete early redemption of the Bonds issued by Arctic Paper S.A.

On 8 February 2021, the Company’s Management Board adopted a resolution on the early redemption of all Series A Bonds (marked with ISIN code: PLARTPR00038), the issue of which the Company reported in current report No. 24/2016 of 30 September 2016.

The early redemption of the Bonds, was carried out on 1 March 2021. On the Early Redemption Date, the Company redeemed 100,000 (in words: one hundred thousand) Bonds with a total nominal value of PLN 58,500,000 (in words: fifty-eight million five hundred zlotys). The consideration per Bond amounted to PLN 585, plus accrued interest and a premium, calculated in accordance with the terms and conditions of the Bond issue. The redeemed Bonds were cancelled.

Conclusion by Arctic Paper S.A. of a material agreement related to the refinancing process and loan disbursement

On 2 April 2021 the Company signed a term and revolving facilities agreement (“Loan Agreement”) which was concluded between the Company as the borrower and guarantor, subsidiaries of the Company: Arctic Paper Kostrzyn S.A., Arctic Paper Munkedals AB and Arctic Paper Grycksbo AB, as guarantors (“Guarantors”) and a consortium of banks as follows: Santander Bank Polska S.A. (the “Collateral Agent”), BNP Paribas Bank Polska S.A. and Bank Polska Kasa Opieki S.A. (: “Lenders”), pursuant to which the Lenders granted to the Company a term loan divided into two tranches in the amounts of PLN 75,000,000 and EUR 16,100,000, respectively, and a revolving loan in the total amount of EUR 32,200,000 (collectively, the “Loans”).

In order to secure the claims of the Lenders under the Loan Agreement and the related financing documents, the Company and the Guarantors established, inter alia, the following securities: registered pledge and financial pledge on the shares of Arctic Paper Kostrzyn S.A., pledges on the shares of companies under Swedish law, i.e. Arctic Paper Munkedals AB and Arctic Paper Grycksbo AB, statements on submission to execution by the Company and Arctic Paper Kostrzyn S.A, registered and financial pledges on bank accounts of the Company and Arctic Paper Kostrzyn S.A., pledges on bank accounts of Arctic Paper Munkedals AB and Arctic Paper Grycksbo AB, mortgages established on real properties of Arctic Paper Kostrzyn S.A, mortgages established on real properties of Arctic Paper Munkedals AB and Arctic Paper Grycksbo AB, registered pledges on assets of Arctic Paper Kostrzyn S.A. and security of rights under property insurance policies of the Company, Arctic Paper Kostrzyn S.A., Arctic Paper Munkedals AB and Arctic Paper Grycksbo AB.

The agreements listed above constitute the acquisition of alternative financing and a change to the funding structure of the Company’s capital group.

In accordance with the Loan Agreement, the Lenders provided the Company with the following Loans:

(i) a Term Loan repayable in two tranches: the first tranche in the amount of PLN 75,000,000 (seventy five million) and the second tranche in the amount of EUR 16,100,000 (sixteen million and one hundred thousand euro) (the “Term Loan”); and

(ii) a revolving loan of EUR 32,200,000 (thirty-two million, two hundred thousand euro) (the “Revolving Loan”).

Subject to the relevant terms of the Loan Agreement, the Term Loan was made available to refinance the existing financial indebtedness of the Company and its certain subsidiaries.

Subject to the relevant terms and conditions of the Loan Agreement, amounts raised under the Revolving Loan may be used for general corporate purposes and to fund the working capital of the Company and its certain subsidiaries (including intra-group lending in any form).

In accordance with the provisions of the Loan Agreement interest rate is variable, based on the WIBOR base rate in the case of financing in PLN and the EURIBOR base rate in the case of financing in EUR and a variable margin, the level of which will depend on the level of the net debt to EBITDA ratio.

In compliance with the Loan Agreement, some Loans will be repaid by:

(i) in the case of a Term Loan, on the day falling five years after the date of conclusion of the Loan Agreement; and

(ii) in the case of a Revolving Loan, on the date falling three years after the conclusion of the Loan Agreement with the option to extend the terms of the Revolving Loan for an additional two years in accordance with the terms of the Loan Agreement.

The Term Loans are repayable in equal semi-annual instalments commencing in November 2021 and the Revolving Loan is repayable on the final repayment date.

On 28 May 2021, the loan amounts were made available to the Company by the Lenders in accordance with the Loan Agreement. in connection with the disbursement of the Loans there has been:

i.  the full repayment of the Company’s existing indebtedness under the Term and Revolving Loan Agreement of 9 September 2016 (as amended) entered into between the Company, as lender, the Company’s subsidiaries: Arctic Paper Kostrzyn S.A., Arctic Paper Munkedals AB and Arctic Paper Grycksbo AB, as guarantors and a consortium of banks as follows: BNP Paribas Bank Polska S.A., European Bank for Reconstruction and Development and Santander Bank Polska S.A. as mandated lead arrangers and lenders, Santander Bank Polska S.A. as agent and BNP Paribas Bank Polska S.A. as collateral agent (the “Previous Credit Agreement”), the execution of which was announced by the Company in current report No. 20/2016 of 9 September 2016; and

ii.  closing and full settlement of the closing amount in respect of interest rate hedging transactions (irs) entered into in connection with the Prior Loan Agreement (the “Hedging Agreements”).

At the same time, with the repayment of the Company’s indebtedness under the Previous Loan Agreement, the Hedging Agreements and the early redemption of all of the Series A Bonds, as announced by the Company in current report No. 8/2021 of 1 March 2021, all collateral provided by the Company and the Company’s subsidiaries expired: Arctic Paper Kostrzyn S.A., Arctic Paper Munkedals AB and Arctic Paper Grycksbo AB in connection with an intercreditor agreement, under the English name – intercreditor agreement – concluded between the Company, Mr Thomas Onstad, Santander Bank Polska (formerly: Bank Zachodni WBK S.A.), Haitong Bank Spółka Akcyjna, BNP Paribas Bank Polska S.A. (formerly: Bank BGŻ BNP Paribas S.A.) and other parties (the “Intercreditor Agreement”). The Company reported on the conclusion of the Intercreditor Agreement and the establishment of collateral in connection with this agreement in current report No. 20/2016 of 9 September 2016.

Proceedings before the General Court of the European Union concerning the grant of emission rights to Arctic Paper Grycksbo AB

On 19 May 2021, Arctic Paper Grycksbo AB filed an application with the General Court of the European Union (the “General Court”) in Case T-269/21, seeking the annulment of European Commission Decision No. 2021/355 (the “Decision”), adopted on 25 February 2021, which is the formal means by which the European Commission (the “Commission)" approves the lists of installations and undertakings of individual European Union Member States under the EU Emissions Trading Scheme (EU ETS).

Pursuant to Article 1(1) of the Decision and Annex I, the application for inclusion of Arctic Paper Grycksbo AB in the Swedish list of installations admitted to the EU ETS that is the basis for receiving free allocation of emission allowances was rejected. The Commission’s reason for rejecting the application was that, in its view, Arctic Paper Grycksbo AB was using only biomass in its installation. The application for annulment concerns both the administrative errors made by the Commission in determining the level of biomass use by Arctic Paper Grycksbo AB and the legal interpretation of certain provisions of the EU ETS Directive.

The value of the free emission allowances that Arctic Paper Grycksbo AB could receive, calculated on the basis of the current market value, is approximately EUR 3 million per year for the period 2021-2027.

The General Court of the European Union has given the European Commission until 30 July 2021 to submit its position in the proceedings. The Court will then decide on the admission of third parties and whether an answer and rejoinder will be given by Arctic Paper Grycksbo AB and the European Commission respectively. The written part of the procedure will be followed by an oral procedure. The resolution of the proceedings is not expected until H2 2022 at the earliest. The judgment of the General Court may be appealed before the Court of Justice of the European Union.

Redemption of bonds issued by Rottneros AB

On 8 July 2021, the subsidiary Rottneros AB decided on an early redemption of all bonds issued under the bond issue programme of up to SEK 600 million( i.e. up to PLN 267.5 million), which the Company reported in current report No. 16/2017 of 28 August 2017. The early redemption of the bonds, was carried out on 19 July 2021. The redemption of the bonds was financed by a term loan granted to Rottneros AB by Danske Bank. The redeemed bonds are redeemable. In connection with the redemption, the bonds will be delisted from Nasdaq Stockholm.

Letter
of Intent on joint investment by Arctic Paper and Rottneros

On 21 October 2021, Arctic Paper SA and Rottneros AB signed a letter of intent regarding the establishment of a joint venture to build a moulded pulp fibre packaging plant. The new factory in Kostrzyn nad Odrą, Poland, is scheduled to be operational by the end of 2023. It is estimated that the value of the investment will amount to EUR 12-15 million (around PLN 55-70 million), of which the Issuer’s share will be 50%. The method of financing the investment is still being determined.

On 10 February 2022, the Supervisory Board of the Company has expressed its positive opinion on the actions taken by the Company to conclude an abovementioned joint venture.

The production capacity of the new factory is estimated at 60-80 million trays per year. According to the Issuer’s estimates, the investment will generate annual revenue of EUR 9-11 million (around PLN 40-50 million).

The new investment will utilise Rottneros Packaging AB’s expertise in pulp packaging. The planned products include both non-laminated and laminated trays for so-called modified atmosphere packaging with an oxygen barrier, which provides up to three weeks of shelf life for packaged items.

The investment is an important element of the implementation of the new Arctic Paper 4P strategy, which consists in expanding the Arctic Paper offer by new, fast-growing segments (packaging production, manufacturing and energy trading).

Conclusion of an agreement by Arctic Paper Kostrzyn SA

On 14 December 2021, the subsidiary company Arctic Paper Kostrzyn S.A. signed an agreement with MAZEL S.A. to execute comprehensive documentation and obtain relevant permits and approvals necessary to commence construction of a photovoltaic installation with a capacity of approximately 17 MW. This is the first stage of preparation for the implementation of a significant investment by the subsidiary Arctic Paper Kostrzyn S.A.

Construction of the plant is scheduled to begin in autumn 2022, with completion in mid-2023. The photovoltaic farm will be connected to the distribution network of Arctic Paper Kostrzyn S.A., which holds a concession for the distribution of electricity.

The construction of the photovoltaic plant is one of the projects implemented under the “4Ps” strategy, i.e. the Energy pillar of the “Arctic Paper Group Strategy for 2022 – 2030”. The Energy pillar addresses investments in energy to achieve higher profitability and business diversification for the Arctic Paper Group.

 

 

‎ Factors influencing the development of the Arctic Paper Group

Information on market trends

Supplies of fine paper

In Q4 2021, the Arctic Paper Group recorded a decreased level of orders versus Q3 2021 by 1% and a growth of orders versus the equivalent period of 2020 by 13.7%.

Source of data: Analysis by Arctic Paper

Paper prices

At the end of Q4 2021, average prices for high-grade papers were higher by respectively: 11.4% for UWF papers and by 12.6% for CWF papers compared to the corresponding prices at the end of 2020.

In the period from October to December 2021, the prices of uncoated wood-free paper (UWF) and coated wood-free paper (CWF) for selected markets: Germany, France, Spain, Italy and the UK, expressed in EUR and GBP, experienced an increase by: 7.2% for UWF papers and 8.4% for CWF papers respectively.

The average prices invoiced by Arctic Paper in EUR for comparable products in the segment of uncoated wood-free paper (UWF) grew from at the end of 2021 were higher by 20.5% versus the end of 2020 while in the segment of coated wood- free paper (CWF) the prices grew by 20.4%.

Source: For market data – RISI, price changes for selected markets in Germany, France, Spain, Italy and the UK in local currencies for graphic papers similar to the product portfolio of the Arctic Paper Group. The prices are expressed without considering specific rebates for individual customers and they include neither additions nor price reductions in relation to the publicly available price lists. The estimated prices for each month reflect orders placed in the month while the deliveries may take place in the future. Because of that, RISI price estimates for a particular month do not reflect the actual prices at which deliveries are performed but only express ordering prices. For Arctic Paper products, the average invoiced sales prices for all served markets in EUR.

Pulp prices

At the end of Q4 2021, the pulp prices were as follows: NBSK 1,260 USD/tonne and BHKP 1,140 USD/tonne. The average price of NBSK in Q4 2021 was higher by 53.1% compared to the equivalent period of the previous year while the price of BHKP was by 67.6% higher. The average pulp price in Q4 2021 was lower by 2.2% for NBSK and higher by 0.2% for BHKP as compared to Q3 2021.

The average cost of pulp per ton of produced paper as calculated for the AP Group, expressed in PLN, in Q4 2021 increased by 8% versus Q3 2021 and increased by 58.6% versus Q4 2020. The share of pulp costs in cost of paper sales in Q4 of the current year amounted to 57% and grew compared to the level recorded in Q4 2020 (51%). 

In the four quarters of 2021, the AP Group used pulp in the production process in the following structure: BHKP 72%, NBSK 21% and other 7%.

Source of data: www.foex.fi Arctic Paper analysis

Currency exchange rates

The EUR/PLN exchange rate at the end of Q4 2021 amounted to 4.5994 and was lower by 0.7% than at the end of Q3 2021 and lower by 0.3% than at the end of Q4 2020. The average exchange rate in Q4 2021 was higher by 1.2% than in Q3 2021 and amounted to 4.6199 versus 4.5670. The average exchange rate in Q4 2021 was by 2.5% higher than in Q4 2020.

The EUR/SEK exchange rate at the end of December 2021 stood at 10.2528 against 10.1979 at the end of Q3 2021 and 10.0365 at the end of Q4 2020, implying an appreciation of the EUR against the SEK by respectively: 0.5% and by 2.2%.

For this pair, the mean exchange rate in Q4 was by 0.6% lower compared to Q3 2021. The mean exchange rate in Q4 2021 was by 1.3% lower than in the corresponding period of 2020.

The changes mean an appreciation of SEK vis-a-vis EUR in Q4 2021 which had an unfavourable impact on the Group’s financial results, primarily with reference to the sales revenues generated by the Swedish factories that rely on prices in EUR.

At the end of Q4 2021, the USD/PLN rate recorded an increase by 1.7% versus the end of Q3 2021 and amounted to 4.06. In Q4 2021, the mean exchange rate amounted to 4.0421 compared to 3.8740 in Q3 2021. That was a PLN depreciation to USD by 4.3%.

At the end of Q4 2021, the USD/SEK rate amounted to 9.0504 and was by 3% higher than at the end of Q3 2021. The mean exchange rate in Q4 2021 amounted to 8.8672 which was an increase by 2.9% compared to Q4 2020.

The changes of the USD/SEK exchange rates adversely affected the costs incurred in USD by the Swedish Pulp Mills, in particular the costs of pulp. For the Paper Mill in Kostrzyn, the changes of monthly average USD/PLN exchange rate also had an unfavourable impact on USD-denominated expenses, in particular the cost of pulp.

At the end of December 2021, the EUR/USD rate amounted to 1.1329 compared to 1.1604 at the end of Q3 2020 and to 1.2279 at the end of December 2020. In terms of percentage, that means a depreciation of EUR to USD by 2.4% versus Q3 2021 and a depreciation of the currency by 7.7% versus the equivalent period of the previous year. In Q4 2021, the mean exchange rate of the pair amounted to 1.1432 compared to 1.1790 in Q3 2021 (-3%).

The strengthening of the SEK against the EUR on a mid-month basis adversely affected the Group’s financial results, mainly due to a reduction in sales revenues generated in EUR and expressed in SEK. The depreciating PLN versus USD in Q4 2021 adversely affected the purchase prices of raw materials for the paper mill in Kostrzyn. SEK depreciating vis-a-vis USD negatively affected the costs in the Paper Mills in Sweden.

Factors influencing the financial results in the perspective of the next year

The material factors that have an impact on the financial results over the next quarter, include:

  Changes to demand for high quality paper in Europe during the COVID-19 pandemic and the anticipated related economic slowdown. Over the recent years there has been a major decrease of demand for fine paper in Europe (level of executed orders). Further negative developments in the market may adversely affect order levels to our Paper Mills. Cancelled international events, restrictions to free movement of people, intensified remote work – may additionally reduce demand for high quality graphic paper and thus adversely affect the financial results of the Group.

  Price changes of fine paper. In particular, the possibility to raise the prices of Arctic Paper products in local currencies in view of the declining supply/demand in Europe and in the context exchange rates fluctuations, will have a material influence on the financial results. Paper prices are going to be of particular importance for the Paper Mill of Grycksbo which – in connection with the market changes – experiences the greatest adverse impact of drop of sales volumes, prices as well as of exchange rate fluctuations.

  Price fluctuations of raw materials, including pulp for Paper Mills and electricity for all operational entities. In particular, financial results of Paper Mills may be negatively influenced by increasing pulp prices, particularly BHKP. On the other hand, dropping NBSK pulp prices may negatively affect the financial results of Pulp Mills. Fluctuations of electricity prices in Sweden may also have a material impact on the results generated by the Group. In future, such market changes may translate into changes of sales profitability in Paper Mills of
‎ AP Munkedals and AP Grycksbo as well as in Pulp Mills of Rottneros and Vallvik.

  Changes in currency rates, in particular, the appreciation of PLN and SEK in relation to EUR and GBP, the appreciation of PLN in relation to SEK, and the depreciation of PLN and SEK in relation to USD, may have an adverse effect on the financial results. However, our Pulp Mills may benefit from the appreciation of USD in relation to SEK.

 

Risk factors

Major changes to risk factors

 

In 2020, there was a new risk factor – the COVID19 coronavirus pandemic This factor will significantly affect the market situation and demand for paper in the second quarter of 2020. The lockdowns introduced in many European countries – the main sales markets of the Group – resulted in limited economic activity and thus a decrease in demand. The group adjusted the work organization to the reduced demand of those implementing scheduled downtimes. The priority was to reduce the risk for employees, therefore a new work organization was implemented in individual organizational units, and some employees worked in a remote system for many weeks and months. The measures taken have brought the expected effect and there have been no reports of numerous cases or factory closures for this reason.

Risk factors related to the environment in which the Group operates

The sequence in which the risk factors are presented below does not reflect the likelihood of occurrence, extent or materiality of the risks.

The risk related to intensifying competition in the paper market in Europe

Our Group operates in a very competitive market. The achievement of the strategic objectives assumed by the Group may be made difficult by operations of competitors, particularly integrated paper producers operating on a larger scale than our Group. Any more intensified competition resulting from a potential growth of production capacity of our competitors and thus an increased supply of paper to the market, may adversely affect the achievement of the planned revenues and thus the ability to achieve the underlying financial and operational assumptions.

Risk of changing legal regulations

Our Group operates in a legal environment characterised with a high level of uncertainty. The regulations affecting our business have been frequently amended and often there are no consistent interpretations which generates a risk of violating the existing regulations and the resultant consequences even if such breach was unintentional. Additionally, amendments to regulations relating to environmental protection and other regulations may generate the need to incur material expenditures to ensure compliance, inter alia, more restrictive regulations or stricter implementation of the existing regulations concerning the protection of surface waters, soil waters, soil and atmospheric air.

FX risk

Revenues, expenses and results of the Group are exposed to FX risk, in particular relating to exchange rates of PLN and SEK to EUR, GBP and other currencies. Our Group exports a majority of its produced paper to European markets, generating a material part of its sales revenues in EUR, GBP, PLN and SEK. Sales revenues of pulp in the Pulp Mills are subject to USD FX risk. The purchase costs of materials for paper production, in particular pulp for paper mills are paid primarily in USD and EUR. Additionally, we hold loan liabilities mainly in PLN, EUR and SEK. PLN is the currency used in our financial statements and therefore our revenues, expenses and results generated by the subsidiary companies domiciled abroad are subject to FX exchange rate fluctuations. Thus FX rate fluctuations may have a strong adverse effect on the results, financial conditions and prospects of the Group.

Interest rate risk

The Group is exposed to interest rate risk in view of the existing interest-bearing debt. The risk results from fluctuations of such interest rates as WIBOR for debt in PLN, EURIBOR for debt in EUR and STIBOR for debt in SEK. Unfavourable changes of interest rates may adversely affect the results, financial condition and prospects of the Group.

Risk related to increasing importance of alternative media

Trends in advertising, electronic data transmission and storage and in the Internet have adverse impact on traditional printed media and thus on the products of the Group and its customers. Continuation of such changes may adversely affect the results, financial condition and prospects of the Group.

The objectives and methods of financial risk management in the Group along with hedging methods of major transactions are detailed in note 35 to the consolidated financial statements.

Risk factors relating to the business of the Group

The sequence in which the risk factors are presented below does not reflect the likelihood of occurrence, extent or materiality of the risks.

Risk related to relatively low operational margins

Historically, the operational results of the Group are characterised by relatively high volatility and low profit margins on operations. Reduced revenues resulting e.g. from changes to production capacity, output, pricing policies or increased operating expenses that primarily comprise costs of raw materials (mainly pulp for Paper Mills) and energy, may mean the Group’s losses in earning capacity. Material adverse changes to profitability may result in reduced prices of our stock and reduced capacity to generate working capital thus adversely affecting our business and deteriorating our prospects.

Risk of price changes to raw materials, energy and products

We are exposed to the risk of price changes of raw materials and energy, primarily related to price fluctuations of pulp, gas and electricity. Paper Mills buy pulp under frame agreements or in one-off transactions and do not hedge against fluctuations of pulp prices. A part of pulp is supplied to our Paper Mills from the Pulp Mills of the Rottneros Group. The risk of changing prices of raw materials is related primarily to changing prices of paper and pulp in the markets to which we sell our products. A material growth of prices of one or more raw materials and energy may adversely affect the operating results and financial condition of the Group.

Risk of disruption to production processes

Our Group holds three Paper Mills operating jointly seven production lines with total annual production capacity of over 700,000 tonnes of paper and two Pulp Mills with a total production capacity of 400,000 tonnes of pulp. Long-lasting disruption to the production process may result from a number of factors, including a breakdown, human error, unavailability of raw materials, natural catastrophes and other that are beyond our control. Each such disruption, even relatively short, may have material impact on our production and profitability and result in material costs for repairs, liabilities to buyers whose orders we are not able to satisfy and other expenses.

Risk related to our investments

Investments by the Group aimed at expanding the production capacity of the Group require material capital outlays and a relatively long time to complete. As a result, the market conditions under which we operate may be materially changed in the period between our decision to incur investment outlays to expand production capacity and the completion time. Changes of market conditions may result in a volatile demand for our products which may be too low in the context of additional production capacities. Differences between demand and investments in new production capacities may result in failure to utilise the expanded production capacity to the full extent. This may have adverse effect on the operating results and financial condition of the Group.

Risk factors relating to the debt of the Group

Our Group mainly has debt under a loan agreement with a consortium of banks (Pekao SA, Santander Bank S.A. and BNP Paribas SA of 2 April 2021, loan debt with Danske Bank, Nordea Bank and under leasing agreements.

Failure by the Group to comply with its obligations, including the agreed levels of financial ratios (covenants) resulting from the agreements, will result in default under those agreements. Events of default may in particular result in demand for repayment of our debt, banks taking control over important assets like Paper Mills or Pulp Mills and loss of other assets which serve as collateral, deterioration of creditworthiness and lost access to external funding which will be converted into lost liquidity and which in turn may materially adversely affect our business and development prospects and our stock prices.

Risk related to insurance limits

In the context of deteriorating situation in paper industry and the results of the Arctic Paper Group, our suppliers, in particular suppliers of such raw materials as pulp, may have problems with acquiring insurance limits (sale on credit) and thus they may lose the possibility of offering deferred payment terms to the Arctic Paper Group. Such situation may result in deteriorated financial situation and loss of financial liquidity of operating units and as a result this may adversely affect the situation in the entire Group.

Risk of restricted supplies of natural gas

Polskie Górnictwo Naftowe i Gazownictwo S.A (PGNiG) is the sole supplier of natural gas used by AP Kostrzyn to generate heat and electrical energy for paper production (PGNiG). In this context, the business and costs of paper production at AP Kostrzyn is materially affected by availability and price of natural gas. Potential disruptions of supplies of natural gas to the Paper Mill in Kostrzyn nad Odrą may have adverse effect on production, results on operations and financial condition of the Group.

Risk of loss of tax relieves related to the operation of AP Kostrzyn

AP Kostrzyn has been using a major tax relief resulting from its operations in the Kostrzyńsko-Słubicka Specjalna Strefa Ekonomiczna. The relief was granted until 2026 and is subject to compliance by AP Kostrzyn of the applicable laws, regulations and other conditions relating to the relief, including compliance with certain criteria concerning employment and investment outlays. Tax regulations and interpretations thereof are subject to very frequent changes in Poland. Changes to the regulations applicable to the tax relief or breach by AP Kostrzyn of the applicable conditions may result in loss of the relief and have material adverse impact on the results of operations and financial condition of the Group.

Risk related to consolidation and liquidity of key customers

Consolidation trends among our existing and potential customers may result in a more concentrated customer base covering a few large buyers. Such buyers may rely on their improved bargaining position in negotiating terms of paper purchases or decide to change the supplier and acquire products from our competitors. Additionally, in the context of the deteriorating condition in printing industry, such customers as paper distributors, printing houses or publishers may not be able to obtain insurance limits (sale on credit) or have problems with financial liquidity which may result in their bankruptcy and adversely affect our financial results. The above factors may have adverse impact on the operational results and financial condition of the Group.

Risk related to compliance with regulations on environmental protection and adverse impact of the production process on the environment

The Group meets the requirements related to environmental protection; however, no certainty exists that it will always be able to comply with its obligations and that in the future it will avoid material expenses or that it will not incur material obligations related to the requirements or that it will be able to obtain all permits, approvals and other consents to carry on its business as planned. Similarly, considering that paper and pulp production is related to potential hazards relating to waste generated in Paper Mills and Pulp Mills and contamination with chemicals, no certainty exists that in the future the Group is not charged with liability for environmental pollution or that no event that may underlie the liability of the Group has not already occurred. Thus the Group may be required to incur major expenses in connection with the need to remove contamination and land reclamation.

Risk related to CO2 emissions

Our Paper Mills and Pulp Mills are provided with free carbon dioxide emission rights for each period. The emission rights are awarded within the EU Emission Trading Scheme. Should such free carbon dioxide emission rights be cancelled and replaced with a system of paid emission rights, our costs of energy generation will grow accordingly. Additionally, we may be forced to incur other unpredictable expenses in connection with the emission rights or changing legal regulations and the resultant requirements. Due to the above we may be forced to reduce the quantity of generated energy or to increase the production costs which may adversely affect our business, financial condition, operational results or development prospects.

Risk related to dividend distribution

The Issuer is a holding company and therefore its capacity to pay dividend is subject to the level of potential disbursements from its subsidiary companies involved in operational activity, and the level of cash balances. Certain subsidiaries of the Group involved in operational activity may be subject to certain restrictions concerning disbursements to the Issuer. No certainty exists that such restrictions will have no material impact on the business, results on operations and capacity of the Group to distribute dividend.

In connection with the Term and Revolving Credit Facilities and Intercreditor Agreement signed on 2 April 2021 (as further described in note 27 to the Financial Statements), the Company’s ability to pay dividends is subject to the Group meeting certain financial ratios in the period prior to payment (as that term is defined in the Term and Revolving Credit Facilities) and there being no event of default (as that term is defined in the Term and Revolving Credit Facilities).

 

 

‎  

 

Supplementary information

Management Board position on the possibility to achieve the projected financial results published earlier

The Management Board of Arctic Paper S.A. did not publish projections of financial results for 2021 and has not published and does not intend to publish projections of financial results for 2022.

Dividend information

The General Meeting of the Company held on 22 June 2021 resolved to pay a dividend from the Company’s net profit for the financial year 2020 and from net profits from previous years accumulated in the Company’s reserve capital, in the total amount of PLN 20,786,334.90, i.e. PLN 0.30 gross per share. The dividend was paid on 14 July 2021.

On 17 Fabruary 2022, taking into account the preliminary financial results of the Company and the Arctic Paper S.A. Group of 2021, the Management Board of the Company decided to recommend to the Annual General Meeting of the Company the payment of dividend from the Company's net profit of 2021 in the amount of PLN 0.40 gross per share, amounting in total PLN 27,715,113.20.

 

Changes to the bodies of Arctic Paper S.A.

As at 31 December 2020, the Company’s Supervisory Board was composed of:

  Per Lundeen – Chairman of the Supervisory Board appointed on 22 September 2016 (appointed to the Supervisory Board on 14 September 2016);

  Roger Mattsson – Deputy Chairman of the Supervisory Board appointed on 22 September 2016 (appointed as a Member of the Supervisory Board on 14 September 2014);

  Thomas Onstad – Member of the Supervisory Board appointed on 22 October 2008;

  Zofia Dzik – Member of the Supervisory Board appointed on 22 June 2021;

  Anna Jakubowski – Member of the Supervisory Board appointed on 22 June 2021;

 

On 20 May 2021, Ms Dorota Raben resigned as a Member of the Supervisory Board of the Company with effect from 22 June 2021.

On 26 May 2021, Mr Mariusz Grendowicz resigned as a Member of the Supervisory Board of the Company with effect from 22 June 2021.

On 22 June 2021, the Annual General Meeting of the Company, passed a resolution on the appointment of Ms Zofia Dzik and Ms Anna Jakubowski to the Supervisory Board.

Until the date hereof, there were no changes to the composition of the Supervisory Board of the Parent Entity.

The Management Board of the Parent Entity as at the publication hereof was composed as follows:

  Michał Jarczyński – President of the Management Board

  Göran Eklund – Member of the Management Board

Until the date hereof, there were no changes to the composition of the Management Board of the Parent Entity.

Changes to the share capital of Arctic Paper S.A.

In 2021 there were no changes to the Company’s share capital.

Remuneration paid to Members of the Management Board and the Supervisory Board

The table below presents information on the total amount of remuneration and other benefits paid or payable to members of the Management Board and of the Supervisory Board of the Parent Entity in the period from 1 January 2021 to 31 December 2021 (data in PLN).

 

Agreements with Members of the Management Board guaranteeing financial compensation

As at 31 December 2021 and as at the approval date of this annual report, Members of the Management Board are entitled to compensation in case of their resignation or dismissal from their respective positions with no valid reason or when they are dismissed or their employment is terminated as a result of a merger of the Issuer by take-over. The amount of such compensation will correspond to their remuneration for 6 to 24 months.

 

Changes in holdings of the Issuer’s shares or rights to shares by persons managing and supervising Arctic Paper S.A.

 

 

Management of financial resources

As of the date hereof, the Company held sufficient funds and creditworthiness to ensure financial liquidity of the Group of Arctic Paper.

Capital investments

The Group did not make any financial investments or equity placements in 2021.

Information on financial instruments

Information on financial instruments on:

a) the risks of: price changes, credit, material disruption of cash flows and loss of liquidity to which the Group is exposed; and

b) the entity’s financial risk management objectives and policies, including its methods of hedging significant types of forecast transactions for which hedge accounting is used, are disclosed in the consolidated financial statements in notes 35 and 36.

 

Information of sureties, guarantees and pledges

As at 31 December 2021, the Capital Group reported:

In connection with the term and revolving loan agreements signed on 2 April 2021, on 11 May 2021 the Company signed agreements and declarations pursuant to which collateral for the above receivables and other claims was established in favour of Bank Santander Bank Polska S.A. acting as Security Agent, i.e.

1. under Polish law – Collateral Documents establishing the following Collateral:

›  financial and registered pledges on all shares held by the Company and the Guarantors, registered in Poland, belonging to companies in the Company’s group (except Rottneros AB, Arctic Paper Mochenwangen GmbH, Arctic Paper Investment GmbH and Munkedals Kraft AB), with the exception of the Company’s shares;

›  mortgages on all real properties located in Poland and owned by the Guarantors;

›  registered pledges on all material rights and movable assets owned by the Guarantors, constituting an organised part of enterprise, located in Poland (with the exception of the assets listed in the Loan Agreement);

›  assignment of (existing and future) insurance policies covering the assets of the Company and the Guarantors (with the exception of insurance policies listed in the Loan Agreement);

›  declaration by the Company and the Guarantors on voluntary submission to enforcement, in the form of a notary deed;

›  financial pledges and registered pledges on the bank accounts of the Company and the Guarantors, registered in Poland;

›  powers of attorney to Polish bank accounts of the Company and the Guarantors, registered in Poland;

 

2.   under Swedish law – Collateral Documents establishing the following Collateral:

›  pledges on all shares held by the Companies and the Guarantors, registered in Sweden, belonging to group companies, except for the Company’s shares

›  mortgages on all real properties located in Sweden and owned by the Company and the Guarantors as long as such collateral covers solely the existing mortgage deeds;

›  corporate mortgage loans granted by the Guarantors registered in Sweden as long as such collateral covers solely the existing mortgage deeds;

›  assignment of (existing and future) insurance policies covering the assets of the Company and the Guarantors (with the exception of insurance policies listed in the Loan Agreement);

›  pledges on Swedish bank accounts of the Company and the Guarantors as long as such collateral is without prejudice to free management of funds deposited on bank accounts until an event of default specified in the Loan Agreement.

 

Material off-balance sheet items

The information regarding off-balance sheet items is disclosed in note 36 to the consolidated financial statements.

Assessment of the feasibility of investment plans

In view of the improved financial results and subject to accomplishment of the current financial objectives, the Company plans to carry out the investments in line with its financial plan. The core objective of the investments is to develop new products, minimise production costs, including the costs of electricity, and to improve the effectiveness of the production process. The Group intends to finance its investment plan for 2022 with its own funds and external funding sources.

Information on court and arbitration proceedings and proceedings pending before public administrative authorities

During the period under report, Arctic Paper S.A. and its subsidiaries were not a party to any proceedings pending before a court, arbitration or public administrative authority, the individual or joint value of which would equal or exceed 10% of a given entity’s equity.

Information on transactions with related parties executed on non-market terms and conditions

During the period under report, Arctic Paper S.A. and its subsidiaries did not execute any material transactions with related entities on non-market terms and conditions.

Information on agreements resulting in changes to the proportions of share holdings

Otherwise than stated herein, the Issuer is not aware of any agreements that may in the future generate changes to the proportions of shareholdings by the existing shareholders and bond holders.

Information on purchase of treasury shares

In 2021 and in 2020 the Parent Entity did not buy any treasury shares.

Information on remuneration of the entity authorised to audit the financial statements

On 20 January 2021, Arctic Paper S.A. entered into a contract with KPMG Audyt Spółka z ograniczoną odpowiedzialnością sp.k. for audit of the Company’s financial statements and consolidated financial statements of the Group for the year ended on 31 December 2020 and ending on 31 December 2021. The contract was concluded for the time required to perform the above services.

Other information on the entity authorised to audit the financial statements is provided in note 34 to the standalone financial statements.

Headcount

Information on the headcount is provided in note 38 to the consolidated financial statements.

Report on non-financial information

Apart from this report, the Group publishes a separate report on non-financial information for the Arctic Paper Capital Group.