Holmen AB (publ) (HL9C.F) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the interim report presentation for the Holmen Group. It's me, Henrik, and it's Stefan, and we will take you through the presentation. And once we finalized, we are happy to take any questions you might have. So Stefan, let's start. Yes. Second quarter, we were able to deliver a bit over SEK 800 million, which I think is a decent result given the situation, especially when it comes to consumer products, which we will come into a bit later. We also -- if you look at only our industry, which is board and paper and our wood products, the industry where we always measure return on capital employed, we were able to deliver 15% in the second quarter; and if you look at the last 12 months, we have an average of 17%; over the last 10 years, even a little bit more. Our financial position is strong. We have also distributed SEK 2.8 billion to our shareholders during the first half of the year through dividend and buybacks. Let's change subject totally and go into the forest or more the wood market in Sweden. We have talked about increasing log cost, both sawlogs and pulpwood for many quarters. But I think now it's time to say that things are changing. But in the second quarter, especially sawlog prices continued to go up. And remember, when we buy, or what we buy today and last week, we will consume that in roughly half a year or even a little bit more. As I said, sawlog prices continue to go up, especially in South of Sweden, and also the difference now between South of Sweden and northern parts of Sweden when it comes to sawlogs, we had never had such a big price difference. Pulpwood, leveling off in the second quarter. And as we speak right now, there is some price pressure on pulpwood. That's quite clear, but we haven't seen it yet. And the same there. What we buy today, we will make use of it in our industry in roughly half year. Stefan?

Yes. The result for the Forest division was SEK 519 million during the second quarter. That is an increase by some SEK 30 million compared to the first quarter this year due to higher harvesting on our own forest. Despite this higher harvesting in Q2, we have still harvested less during the first 6 months of this year compared to last year and also compared to our long-term harvesting plan. That is all though due to timing issues. So that means that we will increase our harvest in the second half of this year compared to the first.

Thank you. Let's continue with Renewable Energy and a very strange situation in the second quarter. If we look at the energy market in Europe as such, we say that we have a seasonal effect. And what do we mean by that? Well, when there is a lot of sun in the system, especially in Germany, the price comes down, that we see this year. And we also see that it has an effect on south of Sweden. In our case, we use SE3 as the reference. That has, had quite a big effect, but it hasn't had any effect at all on the northern prices. They are simply historically low. We have to go back to 2020, one quarter, we had prices as low as -- in the second quarter, now the price was EUR 10 per megawatt. And obviously, a lot of electricity was simply locked in, in the northern parts of Sweden during the second quarter. A lot of water in the system, as we said, more than what we usually have, but there are also other effects with cables, flow-based, et cetera. Anyway, when we make use of our hydropower, we do get a premium, but Stefan, when the premium is on EUR 10, it doesn't help very much.

It does not, Henrik. And the Energy division is loss-making during the second quarter due to the very low prices that Henrik just explained. Can also add that when we compare the result with the first quarter this year, we had seasonally lower production in Q2 in line with normal seasonal pattern.

Let's continue with Wood Products. Let's start with the demand side. In general, right now, there is a weak market. The big 3 markets we have, United States, China and Europe, we see that demand is a bit slow. And I guess consumer confidence is not really there. If we take United States, just as a reminder, roughly 100 million cubic meters are consumed in the U.S. and 20 of them come from Canada and roughly 5 from Europe, as we also have some uncertainty about tariffs going forward. In China, well, we see there that the import of Wood Products is coming down quite a lot. And of course, the market as such, as I said, is weak. But also the supply side of the market has changed. Restrictions in terms of it's a scarcity of logs in the world in general. But if you look at Canada, especially British Columbia, production has come down a lot. And it's bark beetle infestation, it's forest fires and also political decisions that make the production in Western Canada to go down. We take Germany as an example as well. During the years when we had a lot of bark beetle infestation and the Germans had to take out a lot of logs from the forest, production went up, but we can see now that those days are a bit over, and also quite expensive wood together with other restrictions also here, bark beetles, et cetera, makes production come down. So demand is not very healthy, but supply is restricted as well, which meant that prices actually went up some 10% in the second quarter. But where we are right now, we feel that there is price pressure on the wood products in general and prices will come down during the third quarter. The question is how much. Stefan, prices up in the second quarter, did it help?

Did not, unfortunately. We have an operating profit of SEK 20 million in the second quarter. And as Henrik said, we had price increases of 10%, but that was completely offset by higher wood cost during the quarter.

And again, just to remind ourselves, a big difference between the log cost in South of Sweden and northern parts of Sweden, bigger than ever. Let's change and switch to Board and Paper. Starting with Board. Also here, our customers, you can see that demand is -- well, it's a little bit better than '23, but it's not back to where we were before the pandemic or not even close actually. Also here, consumers are a bit waiting and the confidence is obviously not really there. In this market, we also have some new capacity and also here some uncertainty when it comes to tariffs, who will deliver to the U.S., et cetera. Right now, what we deliver in terms of Board, well, we have the 15% tariff we have to take care of when we deliver into the U.S. Also some, not direct, but indirect effects, not big, but they are there. Prices are stable during the second quarter. In our case, our order book, I would say, is rather healthy. We are not running absolutely full. We do take some market-related downtime. Also depending on a bit that actually our production is going a bit better, so we can produce a bit more. But we can't sell everything, but most of it. So the position is quite good. When it comes to Paper, you know about the situation in the industry, very low utilization ratios. I'd say nobody is running totally full. Also here, we have to expect demand to come down a little bit over the years, but you can see moving 12 versus last year, it's no drastic change so far this year. Prices are also more or less stable. Some price pressure sometimes, but no big things. In our case, we run with higher utilization rate than the industry average. The industry average today is, it starts with a 7% or low 8%, 75%, 80%. We run roughly at 80%, 85%. And to be honest, running at 80%, 85%, that suits us rather well, because it also gives us a possibility to act on a volatile electricity price. And Stefan, that has some impact also on our result.

It has. First, I need to comment on the maintenance shut that we had in the Workington mill in Q2, which affected the result in Q2 by some SEK 150 million. We also had slightly lower delivery and production in Q2 compared to Q1. The positive side, as Henrik mentioned, is that we've been able to run our paper mills in a really efficient way in a volatile electricity market, and that meant that we have lowered our energy cost by approximately SEK 250 million to SEK 300 million during the second quarter compared to a normal level.

Thank you. That's about that. It took us 10 minutes. It's not so bad. We are happy to take any questions you might have, please.

[Operator Instructions] Our first question comes from Linus Larsson, SEB.

Maybe following up on what you just said about Board and Paper and the second quarter benefit that you saw from your optimization in terms of energy efficiency. I think you said SEK 250 million to SEK 300 million. What are you seeing in the third and fourth quarter in terms of such opportunities?

It's hard to predict, Linus. What we see in the market today is that nothing has changed compared to the first and the second quarter. But how well we will be able to execute on this in the same way as in the second quarter is hard to predict. But the market behaves pretty much in the same way as it has done in the last 6 months. So I think it's the best answer I can give you.

And would you say that, I mean, during the colder part of the year, you actually have better opportunities and higher volatility compared to what a second quarter typically looks like?

No, I wouldn't say that. And the volatility that we speak about is the intraday volatility. The price is set every hour or every quarter of an hour intraday, and that is the volatility that we can make use of. So it's not the big swings between weeks or months or so. It's rather short-term volatility.

Within the same day.

Within the same day.

Sure. And then maybe jumping to Forest and looking just at your harvesting both in the first and the second quarter, actually, it's down year-on-year, which has been a drag on earnings, all else being equal. What are you seeing for the remainder of the year and for the full year in terms of harvesting levels?

Well, as I said, we have had lower harvesting than normal during the first part of the year. We believe that we will increase harvest during the second part of the year, so that we will have approximately the same harvesting level as we've seen the last couple of years.

Great. I missed that. Thanks for repeating that. I didn't hear that probably the first time you said it. And then maybe just to finish off on Wood Products. Going into the third quarter, you already said that you're expecting lower prices. Maybe if you could elaborate a bit on that. Are you seeing a full reverse of the price increases that you saw in the second quarter? And also, are you expecting further cost increases sequentially in the third quarter from higher sawlog costs? And if so, to what degree?

If you take the sawlog cost, first of all, yes, what we buy today is a bit higher than our average what we have that we will consume during the next half year. And that's for the sawmills down south in the southern parts of Sweden. We have also decided to take down production capacity at both Braviken and most probably also the Linghem Sawmill. I think we said at the last report. And when it comes to prices, we can just say that normally, during the springtime, there is a tick up in price, and that happened this year as well. But the market is not really there to support the prices we have. So right now, there is pressure. How far it will go, I can't really say. And if you look at the future prices in the U.S., they are up 1 week and down the next week. Right now, it's a bit up, but very difficult to predict. And also together with the tariffs, it makes it even more difficult to predict. That wasn't much of help I hear myself saying, but...

Our next question comes from Lars Kjellberg, Stifel.

I just wanted to continue a bit on first with wood cost. You said, Henrik, that there were some pressures coming through in the pulpwood market, but have yet to see it. So when should we expect to see market prices falling? And what sort of pressure are we talking about? I'm also interested to hear your thoughts on sort of the competitive environment in the global market, the Consumer Board, appreciating you have very niche, high-quality grade, but it feels as if commodity paperboard in general is under some pressure. And then of course, some of your peers have highlighted Asia as a real hotspot. So if you can talk us through a bit what you're seeing in your Asian exports and that competitive pressure and especially with the European excess supply that we're seeing. And now with tariffs coming in, if repatriation of overseas tons is already starting to become an issue?

The last question, we haven't seen that yet. And maybe also in our segment, we are, if not protected at least, it's a bit different. We don't have a lot of deliveries to Asia that we do with Asian customers. But I do agree to that it's very difficult to take spot orders in Asia today, even with the quality we have. The big volumes we have going to Asia, that's normally done with European or North American customers. You are right, there is some overcapacity in the market. It's been overcapacity in Asia for quite a long time. Recent investments also in Europe, for example, Stora Enso and, not too long ago also, Metsä Board. We will see what happens. But of course, there is some uncertainty now regarding how much can be sold into the U.S. and what tariffs will it be. So I feel quite -- I think our position is really good when it comes to doing it in a good way in such a difficult market given the segment we are in and the customers we have, but to grow and take new customers, spot orders, et cetera, difficult and also not very good prices. Did I miss any of your questions?

Another was the pulpwood prices.

Well, for sure, something I didn't mention before when we talked about pulpwood is that Russia, of course, had an influence on pulpwood and supply of pulpwood into our region before, and that's now not there. Same when it comes to sawlogs, of course, in total, Russian sawmills is not contributing to the supply. But going back to pulpwood, what we see is that customers that we have buying pulpwood from us are still keen on having the pulpwood, but we also see that the industry is not running full. And to be honest, there is enough pulpwood in the market in Sweden today. And we see price pressure. How far it will go and how long it will take? Difficult to say. But same for us as for most of the customers -- or our competitors as well, it takes a while. What we buy today, remember, again, we consume it in roughly half a year's time.

Yes. Understood. And final question for me is, your portfolio, when it comes to the paper side, seems to be performing better. It tends to do that. But also seeing some emerging pricing pressure on publication paper in general. Are you seeing the same in your more niche grades?

It's again the same that the business we have ongoing and the customers we have, especially in some niches, well, it's more stable, but we are also affected by what's happening in general in the market. And again, to take spot orders also in publication papers is very difficult today. So when we say that we're around 80%, 85%, well, we would have liked to be at 90%, but that's difficult to go from, let's say, 85% to 90%. And again, it suits us also when it comes to taking advantage of a volatile electricity market.

Our next question comes from Cole Hathorn, Jefferies.

I'd just like to follow up on the Wood Products market. I'd like to understand how you see the ability to manage your cost employees when the market is a bit softer and when the sawlogs between Southern Sweden and Northern Sweden are elevated. So just how you're managing the costs in a challenging environment? And then I'd also like your views on how the higher duties on Canada are potentially impacting the U.S. market and how you play in that space? How do you see the outlook there into the U.S. for single-family homes and how the Canadian import tariffs might impact the U.S. market?

Okay. Starting with what we can do in order to take down cost. I said before that we have already taken down production capacity at our Braviken, the big sawmill in South of Sweden. And to be honest, it's not very difficult. It's possible. It takes 2, 3 months and then you have taken out most of the cost you have. It's salary cost mainly. That's doable. And what we do in order to understand which strategy to go for is that we have always to make a forecast for what wood products price will we have in 6 to 8 months' time from now when we buy the sawlogs in the forest. That's what we need to understand. And as I said before, we see some price pressure, and that's why we also see that sawlogs are extremely expensive in South of Sweden. So we do take down production a bit and wait and see. When it comes to the U.S., well, nobody knows exactly what will happen to the tariffs. We have 5% roughly of our production going into the U.S. right now, and we take measures in order to be able to stop if it's not possible to continue to deliver. But as I said before, you are absolutely right, Canada is extremely important, to understand what's going to happen between Canadian wood products going into the U.S. Will it be more Canadian export? Or will it be Europe having the upper hand? Well, that comes down to the tariffs finally and that we don't know yet. And we have to sort out also these 232 tariffs, especially for Canada before we know the situation, I think. You can also see it in the future prices.

And then maybe just as a follow-up on Russia, Ukraine. Obviously, the U.S. President's meeting today. I'm just wondering if you've got any thoughts there if there was a peace deal, how might a resolution impact any of your markets? Just some speculative thoughts if you care to give any.

I think if there will be peace, given both sawlog prices and pulpwood prices we see in Sweden today or Sweden, Finland, Norway, in our region, for sure, there will be wood coming into our system somehow and put pressure on prices. But we haven't seen peace yet.

Our next question comes from James Perry, Citi.

I'd just like to ask about paperboard again. You said demand is still below pre-pandemic levels. What are you actually hearing from customers on the ground? Do you have a sense as to whether there is any inventory build or even destocking or changing order patterns at the moment? Or should we really see these figures as reflecting underlying demand today?

2023, huge destocking. That was not the real consumption that we see in the statistics for 2023. Now I don't think there is any of that. But when you talk to customers, they're always optimistic, of course. But reality is that we are not back yet and the consumer confidence in general is not really that great. I think we need the overall economic cycle to improve a bit to make things look better. And we are not -- we are happy with what we have. We are doing well in this market, but it's a challenging market. And there is a lot of uncertainty, obviously, because quite a lot of -- quite big volumes were thought about being able to sell -- being sold into the U.S., and we don't know now. It's not mainly us, but our competitors.

Our next question comes from Oskar Lindstrom, Danske Bank.

Two sets of questions from me. The first one is on the Board segment. Have any of the recent tariff deals or changes impacted your markets? Or do you expect them to impact your markets? That's my first question.

Not yet. To be honest. But it's too early to say.

And do you have any expectations here?

I think it's too early to say what the final outcome will be. We have the 15% now, that we know, when we sell into the U.S. And there is ongoing discussions who should pay the 15%. But it's not finalized.

I realize what your position is. My second question is on forest land book valuation. First off is, have you seen any -- how has the forest land transaction market developed in the first half of the year as far as you can see it? I realize it's lower activity during the first half of the year compared to the second, but still the summer should be a fairly active season. What's your impression?

Yes. As you say, Oskar, it's very hard to draw any conclusions on the first half year's statistics. The samples are just too small to draw any conclusions. We don't see any major shift so far in the price level compared to last year. But it's quite early to say. And as you say, not that many transactions being done in the first half year.

And then I've been thinking around sort of methodology for setting the book value of the forest lands. And as far as I could read the accounting recommendations, I mean, the proxy or the first proxy should be sort of if there's any listed forest land that you can compare -- that compares to your forest land. Now there isn't in Sweden. So that's the reason why you look at comparable transactions. If we were to have a listed forest land, pure forest land company in Sweden, would the valuation of that company be the proxy that you would use for your book valuation?