Holmen AB (publ) (HOLMB) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the year-end report presentation for the Holmen Group. We are, again, the usual suspects from the Holmen side. It's myself, Henrik Sjölund, CEO; and Mr. Anders Jernhall, CFO of the group. We will guide you through the presentation. And after that, we are happy to take any questions you might have. This has been quite strange here. Everybody has been affected by the pandemic we have had. But now when we are standing here, and we can summarize what has happened, we can say that we have had a rather -- I would say we came out through the year in a good way. And then operating profit for the whole year, which is close to SEK 2.5 billion, which is a good result. Partly thanks to better efficiency within paperboard. On the other hand, we also had a lot of headwind when it comes to our paper business. And later during the year, we also had quite big help from increasing prices for our wood products. We also ended the year in a fairly good way. And again, with help from really good prices from wood products. And despite that, we had a quite big maintenance stop at the Iggesund Mill, which we carried out, by the way, in a really good way. We ended up the year earning SEK 595 million. And also in the fourth quarter, we had a very tough situation when it comes to paper, and especially the prices were under a bit of pressure, which we come back to. If we go back a little bit and summarize what has happened during the year. It's clear that also we, in the beginning of the year, and especially during the spring time, we didn't know what to expect. We only knew we had a new situation with a pandemic. We thought for a while that maybe we can't keep our business going. We didn't know whether we could keep our mills running, et cetera. And after a while, we saw that things will not be that bad. Still, we were a bit afraid because there was a lot of insecurity. We decided not to give dividend first, and a bit later. After having taken measures like postponed investments to some extent, secured long-term financing. And also, we made sure that all people we have could go to the work in a fairly safe way. We also carried out a couple of really big maintenance shuts, which included hundreds of people, where, of course, we were quite scared that this could go wrong, especially in the middle of the pandemic. But it worked out fine. And now at the end of the year or beginning of the next year, we are standing here and looking at a good result in 2020, much better than we expected for a while. We came to the conclusion last year that we could give dividend of half what we planned from the beginning. But now when we look forward and we see what we -- the result we had in 2020 and also the financial situation we have, which is strong despite that we have also acquired Martinsons Group. We had a discussion today in the Board of Directors and came to the decision to propose to the Annual General Meeting to decide about an ordinary dividend for 2020 of SEK 7.25 per share, but also an extra dividend of SEK 3.50. Moving on then to our forest. I said last time when we had quarterly report that we saw some imbalance in the wood market. That situation came from quite high demand for sawlogs but not the same demand for pulp wood. Sawmills have been running full, I would say, all throughout the year, since late spring or the summer time. And we still see a really high demand for sawlogs in the market. But the paper business has been a bit tougher. We know from our own mills that we have not been running full, but also some other ones, which have not been running full. We also see from some neighboring markets that it's difficult to run even the sawmills course. It's tough to get rid of or to sell the pulpwood that comes with the harvest when you go for the sawlogs. So the market has stabilized. We don't see the same imbalance as before or is about to stabilize. So the situation in the wood market is a bit better. But Anders, it's also nice to see that still there is a lot of people who think it's nice to own forest, and they're prepared to pay more.

Yes. We have seen a great interest in the recent years, and especially in the recent year in acquiring forest assets. And as you are all aware, we, last year, introduced the new accounting methodology, where we booked the forest assets based on assessment of the market value of it, based on the forest transactions in the areas of Sweden, where we have our forests. And at the year-end, we made an update of this valuation. And it's based on the 3 year -- last year's transaction prices in those areas where we have forests. And that meant that we increased the value by 5%, up to SEK 43 billion. And this is an increase of close to SEK 2 billion. SEK 600 million of that increase is due to -- is by the accounting recommendations to be going through the P&L. Once the rest is actually not passing P&L, it's a profit that actually goes straightly to equity. So if we take the next slide, the full year result of SEK 1.367 billion for the forest division, and almost SEK 600 million of that profit is due to the change in value of the trees, I can say, and the rest is cash flow from the forest activities. The increase compared to a year ago in profitability is due to this new accounting methodology. Looking at the quarter, we have a pretty normal result for the forest division, just north of SEK 330 million. Back to you, Henrik.

Thank you very much. Then moving on to paperboard. Also, here in the beginning of the pandemic, we didn't really know what to expect. But quite soon, we found out that people do spend money and buy things that need packaging. When we look at the demand situation, in Europe during last year and where we are today, we have a slight increase, not big, but a slight increase, which is nice. And also, when it comes to our own performance in terms of deliveries, we said a couple of years ago, we should reach a running rate of 550. It has taken some time. It has been some bumps, I would say, on the road on the way. But looking at where we are today, that's roughly what we deliver at the current state. And we have now 12-month running level of roughly 550. It's also nice to see that the investments we have made lately. We spent quite a lot of money, especially at the Iggesund Mill. It actually pays off. And when we look at the mill today, we see that there is higher efficiency, well done by our people. And as I said, the targeted CapEx we have spent has especially lowered the cost and maybe not so much production capacity but, hopefully, that is soon to be also materialized. This has also an impact on our profitability, Anders?

Definitely, the investments that have been targeted to the pulp mill have had a very positive impact on our production cost, as Henrik mentioned, and that's the main driver behind the -- us coming back to a profit level where we should be in this business. We have also, despite the pandemic, seen a very good development of the product mix that we have benefited from. And as Henrik mentioned, we were able to increase volumes, which added positively to the result for the full year. Looking at the quarter, it's, of course, a decline compared to the very high level last quarter. This quarter, we had a big maintenance stop, well executed, as Henrik said. But we were somewhat balanced by bonus revenue for the green electricity that we produce in Workington of roughly SEK 40 million. So the underlying result in the Q3, if we take out the bonus revenue, and this top is SEK 230 million. And, I of course, mean the Q4 results.

It's the first time, we're standing here, and we are happy to say that we had the maintenance shut that costed SEK 110 million, isn't it?

Yes. We have -- as we have mentioned, we have 2 major maintenance stop upcoming this year, one in the Workington in Q2 and another one in Iggesund Bruk in Q3 that, together, is expected to cost us roughly SEK 250 million.

Yes. Thank you. Moving on to paper. As I said in the beginning, in paper, we really had a headwind. And you can see from the next slide that demand development has been really harsh. It's tough to be in this business. It's like 20% drop in paper consumption. And as we speak, prices are under pressure, which is also seen from the chart we have here. On the other hand, we have some products which are doing better than the market. But as a player in this segment, of course, we're also affected by the general development, especially when it comes to demand. We have our products based on virgin fibers, and we try to produce products where it really makes sense, and we do compete with, especially recycled fibers in some segments, not in all. There in the market, we see now big changes when it comes to fiber supply to different regions in the world, which is -- it's too early to draw any conclusions, yet. But if you look at the price -- prices right now, actually, it's even tougher in Europe than in Asia, where there is a lack of fiber, and we will see what that will take us. In our case, we have been really keen on not building stock during this time. We have also taken market-related downtime as the rest, I would say, in this market. And even though we are producing a little bit and delivering slightly better than the last 2 quarters, we are far from running full, which is also seen in the result.

Of course, if you -- you can't run full, it's difficult to get the good result in this business. We have lost more than SEK 400 million compared -- in profitability compared to last year, 2/3 is due to declining prices and 1/3 is due to us not being able to run the mills full. Q4 was -- turned into a loss-making quarter. We had some extra maintenance stop in Q4 that burdened the result. But I think you should look at Q4, Q3, Q2 together to see, we are in these market conditions that prevailed during 2020. We were around at a 0 EBIT level, but clearly positive EBITDA level.

Correct. Thank you. Then moving on to something which I would say is a little bit easier to handle today, wood products. We have upgraded our total production capacity from 1.5 million to 1.6 million cubic meters. But what we have done, of course, is that we have grown organically through the ramp-up and the investments we have done at Braviken. It's not too long ago, and we said we will be adding like 150,000 cubic meters, and we are on our way to do that. And then it's the acquisition of Martinsons, which is a rather big step. And I think for us, as a company, also a very important step in the right direction. Looking at what we have now, we have 5 sawmills. And in all of these sawmills, I would say, especially maybe at Braviken, but we are also looking at -- we have a program for the Iggesund sawmill. We'll see what that will take us. But a good mix and also a good mix of products going forward because what we did when we acquired Martinsons is also that we broadened our product offering, especially with cross-laminated team, glue-laminated beams and also some exterior panels. That, together with what we already had, gives us also a better offering towards the builder merchant segment in the business. What we discussed mostly, of course, these days, Anders, that's not that, that's the price. And I -- we have been in this business for a long time. So we know that the prices, when they go up too much, they soon go down again. But this time, it will be totally different.

Of course.

But what we have seen lately, it's not only that it's good demand because the demand is good, but it's not good in all parts of the world, especially the do-it-yourself and -- sector is doing well. We see a lot of new starts in North America. And we also have the supply side of the business, which is lower than normal when prices are like they are right now. We see Canada not coming up in production levels like we thought they would, and we also see sawmills in Russia, Baltic states et cetera, where they simply cannot get rid of the pulpwood, which means that they have to restrict a little bit the volumes they produce out of the sawlogs. So it's a situation where, especially spruce is doing fantastically well, which is also seen in the result.

Yes. Definitely, it's seen in the result. Full year result was clearly higher than last year, but last year was a bit lackluster. We have seen higher prices throughout the year. And actually, low cost, if you look year-over-year, are at on a lower level still, but they are on the rise. Q4 was a fantastic result, SEK 70 million higher than the previous quarter, which was a good result in itself. And it's driven, of course, by price increases, but we have a fair contribution from actually ramping up the Braviken Sawmill. So the add-on on revenue, as you can see in the graph, you actually have SEK 100 million in organic growth in the Q4 based on the ramping up our own facilities. And we -- as Henrik says, we have potential to ramp up actually at all 5 sawmills. Of -- and in the Q4 result, of course, the acquisition of Martinsons added positively to the result.

Yes. Then moving on to renewable energy. Here, we've been standing the last few quarters, and we said that it's not of so much interest, course electricity prices are, in general, low, which means that we do not earn as much money as we would have liked to when it comes to our hydro and wind power. However, the last few days, I've been in media, I've said the prices are far too high. So how can we draw a conclusion from that, Anders?

Are you telling the truth, Henrik? Yes? No. It has been a strange share. The full year 2020, there was abundant supply of hydropower. At the same time as consumption was lower than normal, partly due to COVID situation. And then we had the added effect that the Nordic system didn't really work the way it should due to problems with the cables. And that has pushed down the prices for electricity for the better part of 2020. But since just [ 2 ] days after Christmas, this ample supply of hydropower has turned into a maybe a more normal situation, which means -- and that we have had cold weather. And so we are back to a normal situation where the Swedish electricity prices are determined by the fossil fuel costs. So -- but if we take the next slide, the 2020, when we look backward, we were negatively affected by the low prices in the Nordics for the hydropower division. If you take out the one-off positive effect we had last year, we -- the profit went down by SEK 40 million year-over-year, and that's due to lower prices despite a high production level. Q4, we did not experience the normal upturn in profitability. It was quite a muted result in Q4 due to the low prices. But as you mentioned, the situation has changed quite dramatically now in Q1, where prices have gone up a lot.

Yes. Which is a different question. In Sweden, we have an energy system, which is fossil free. If you look at the situation in the rest of the world or in Europe, as such, it's not the case. And one can't help thinking of the decisions now being taken by the European politicians to increase the ambition a lot when it comes to how to decarbonize Europe, where the aim now is to reduce CO2 emissions, where the base here is 1990 to 2030 by 55% coming from 40%. Looking at the mix and thinking about the future, it's quite clear that over time, if we are going to get even close to achieving those targets, it will be more costly to emit fossil CO2. And I think it's a rather good idea to actually be close to -- for example, in our case, when it comes to wood products, close to products like concrete and steel, when they have to pay for the real climate cost, most probably, the prices will go up. Another thing which makes sense for us to think about is also, regardless how this is going to be made, we will need, in Europe, a lot more of green electricity as we see. Part of the solution is definitely to decarbonize through electrification. And many people also think about, especially in Europe and European politicians, point at hydrogen as part of the solution. And hydrogen to make sense over time means a need of green electricity. Maybe it will be natural gas over a number of years to make it realistic. But over time, we will need a lot more green electricity. And again, for a company like us, it's a -- I think it's more a question of timing when it makes sense to actually make use of the potential we have to expand when it comes to green electricity. In our case, it's wind power. And same goes, I think, for wood products to be close to concrete and steel and to -- in that case, more follow the cost for those products. We cannot save the world by producing houses and homes out of the wood, but I think it could be a rather nice right. Looking at our company. We are a climate-positive company. We are soon to finish our yearly report for 2020, where you, among other things, can read about our climate benefits, where we do -- we store a lot of carbon in our growing forest, that's no news. But we also store and especially we substitute -- the substitution effect from the products coming from the forest is rather big. We have acquired Martinsons. That adds on to wood and wood products. Wood products, both store carbon in buildings, and they also substitute other products like concrete and steel, which we talked about before. And also paper and paperboard makes some sense, even though it's slightly different than wood products. It's more that it actually replaces fossil fuels in a bio boiler somewhere. We also have, of course, the positive effects from our hydropower and our increasing wind power as we have cables to other countries as well most of what we produce if it's not consumed in Sweden, it will substitute coal-fired boilers or energy or gas in other countries. And we do have some fossil emissions also in our industry, even though we work hard to reduce, and we have reduced our emissions by roughly 85% during the last 10 years, which gives us a quite impressive figure of 6 million tons in the case of Holmen of positive climate benefits. That actually concludes our presentation, in a slightly different way than we usually do. But I think this makes sense. Of course, it's about sustainability in the long run, and we have to start thinking how to materialize on that when we go forward. And by that, we're happy to take any questions you might have.

[Operator Instructions] Our first question comes from Johannes Grunselius from Kepler Cheuvreux.

Yes. It's Johannes Grunselius here. Hope you can hear me.

Please go on.

Can you hear me?

Yes.

Yes. I was wondering about electricity because we've all seen that prices have spiked and you, Henrik, actually said something about this in the daily press. Could you remind us about -- I mean I -- of the 3,700 or so electricity consumption you have in terms of gigawatt. How much of that is Holmen paper? And can you sort of give us an update on how much you are hedging? And also on the electricity you are producing yourself, how should we see that? Are you selling that on long contract and so on?

You're lucky. We have the expert here.

90% of our consumption is within the paper division, and we have hedged 2/3 of our exposure for this year and next year and to slightly degree the year thereafter. And the electricity we produce internally, 2/3 of that we don't -- that we produce and sell externally, 2/3 of that, we have hedged against the paper division. So 1/3 of the energy division's exposure is to spot prices.

Yes. Because it sounded quite dramatic, what you said in [ log ] industry that you had shut down paper production because the hedging should offset this short-term volatility, right? But how are you thinking there?

No. But it does not, to the full extent, and it doesn't make sense to try to hedge all the consumption we have. And I think the big thing is when it comes to the electricity price and running process industry, and in this case, electricity-intensive industry. That industry is not made for running it with one hand on the hand brake. When you have too many spikes too often, and you have to reduce or stop the production, sooner or later, that costs money.

Yes. Are you able to sort of running the paper business in a flexible way here and have control over variable and fixed cost? Or is this impacting your operations right now, to a bigger extent?

Yes. It does have an impact. Every time you have to take a shot, you will incur extra costs. But when the prices are that high as they are during peak hours, it -- only the electricity cost for producing the paper exceeds the revenues from selling the paper. So it -- you can't produce on those hours.

It's an easy decision to try to stop during these hours. Also, we are becoming experts in starting and stopping, of course, but that's not the idea with the process industry.

Okay. I have a second question, and that's on the new forestry value. I think I read in your fourth quarter report and compare that to the annual report that the net growth of the forest -- standing forestry just below 1%, Am I right there? So the main uplift is coming from market prices and not the net growth. Can you comment on that?

Yes. It is based on market prices. The main -- the bulk of the uplift in value.

Our next question comes from Robin Santavirta from Carnegie.

Yes. Regarding the paper division, what is the price outlook now when you go into 2021? And could you also shed some light on the time spend, maybe the average time spend you have on the price agreement. So we get an idea sort of when we look at market prices and your price development.

When it comes to pricing, we do business every day. And you saw the statistics that I think that gives a pretty good idea roughly what has happened when it comes to price decreases because they are a bit lower now. But we are also currently negotiating prices. But it's also quite a big difference between different product segments one should remember. And then when it comes to, how long contracts do we do? Well, in a situation like this, we -- we try not to do yearly contracts or long contracts. We try to keep the door open for new business as the year proceeds. But as we don't know what will happen, that's a bit of speculating, of course.

All right. And then maybe -- I mean I hear what you say, Henrik, about prices, about cost of production in the paper business and about demand. Now you have previously said that it's not topical for you to look at capacity shots. But now it seems even more sort of rational to do something with your capacity. Anything you're looking at the moment related to the capacity or conversion, or shutdown or something like that?

No, it's not. But if you look at the level we are running our business, currently, you see that we do take quite a lot of production curtailment as well. In order to keep our inventories on a healthy level, et cetera, and then to follow what will happen in the market and work on what we have and what we believe is our comparative advantages when we do the business. But no, we have no idea -- we have no ideas to close down capacity at the moment.

All right. And then a final one on the energy part. That certainly looks quite attractive longer term and even this -- could you just give an update on the projects you have going on Blåbergsliden and some other ones? And could you also provide an update about the production cost of a wind farm, for example, in Blåbergsliden, megawatt power?

Yes. The -- that product is running well according to time plan and according to budget. We expect the first electricity start producing after this summer, and fully producing in the fourth quarter. Nothing has changed in terms of the cost of production. So -- and then we are working on the permits for other projects. But as Henrik said, it takes time to get permits, environmental permits in Sweden. So they are -- it takes some time.

Not only in Sweden...

Around the ballpark production cost, what is it? Is it SEK 100 per megawatt hour or...

You think about the variable cost?

Yes.

If you include grid connection, et cetera, et cetera, yes, that's where the ballpark figure is.

Our next question comes from Christian Kopfer from Nordea. Our next question comes from Linus Larsson from SEB.

You had a strong result in paperboard, like you said, in spite of the maintenance stop. And just bridging into the first quarter, if you could just spend a minute more on that. So the bonus payments in the U.K. They drop out to 0 in the first quarter. Is that rightly understood? And then also on the maintenance guidance for the full year, why so high? Why would it be SEK 250 million? It sounds higher than you normally would have -- even though you have 2 stops in 2021.

Yes. Can I start with the market situation? If it comes to -- when it comes to paperboard, first of all, I didn't mention perhaps, but our order books are fine. And prices are stable. And then...

The bonus, yes, this is an exercise that is done in the U.K. every fourth quarter, and it's happening every time. It can be 0 or it can be 70 or it can be 40. But it -- we will not have any bonus in the first quarter. And the maintenance -- it's actually Workington maintenance shut that is -- as you point out, it's much bigger than we normally have. And that -- it's because we have to do a inspection on the boiler. That is the first inspection we have done since we started up the boiler that is of this scale, and it's 8 years ago. And we have to take down the boiler for more than a month. And that's the reason for the hefty maintenance cost in Q2. And it's actually -- it's attached with a bit more on security on that number than we normally have in our maintenance cost.

But we don't close down the whole mill for a month.

No, but the boiler.

I see. And if you break that down, the Iggesund and the Workington stocks, respectively?

They are about the same size.

Okay. All right. Okay. And just on the bonus payment in the U.K., could you please remind us how big that was a year ago in the fourth quarter 2019?

Roughly the same. And SEK 40 million is the normal value of that bonus. That's what the government is aiming at, but they don't always succeed. So it's -- that's a normal value. It's a quasi-market, political-based system.

Exactly.

Great. And then just one more question, if I may. The wood product division had a very strong fourth quarter. And just to understand the various parts on an EBIT level, how much did Martinsons contribute to it?

Roughly SEK 30 million.

Okay. And how is that business developing? I understand it's very different from the other parts of wood products that you own from before?

It's not as volatile as what we do at Braviken, for example. So it normally -- a little bit more stable over time.