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

Good afternoon, ladies and gentlemen, and welcome to the interim report presentation for the Holmen Group. My name is Henrik Sjölund, and together with me are Mr. Anders Jernhall. I think most of you actually know us. And we do, as we normally do, we go through the presentation for the different business areas. And once we finalize that, we are happy to take your questions. So let's start by summarizing the second quarter and the first half year. Despite an extensive maintenance shut in paperboard at our Workington mill, we are happy to deliver almost SEK 900 million in the second quarter. To a very large extent, thanks to a very strong wood products market, but I'm also quite happy to see that our paper division was able to come back to full capacity utilization and also turn the figures from red into black. A good result has also materialized in good cash flow. And just to note that we have -- during the first half of the year, we have paid a dividend of SEK 1.7 billion, and at the same time, we have a very strong financial situation, which is necessary and a good base to further develop our business. And then let's move on to forest, and a few words about the forest market and the wood market. We have a situation, which you are familiar with where all sawmills are running full, thanks to the very strong wood products market. When it comes to competition for the sawlogs in the forest, we can see that prices are on the rise and have gone up during the quarter. On the other hand, to be honest, the increase in sawlog prices have been quite modest given the very strong wood products market. If we then look at pulpwood market, the situation is different. The market is more in balance, and there are a few explanations. First of all, we come from a period where we had spruce bark beetle infestation and quite a lot of supply of pulp wood coming out of the forest, during last year and also during this year, partly. But we also have a number of closures. We have the [indiscernible] mill that closed down quite a lot of capacity in the first quarter. And we also know about the announcement that the Kvarnsveden paper in Sweden is about to close. For ourselves, it has been quite a warm summer. There has been some fires. In our case, nothing strange and no big ones. We are looking now at the spruce bark beetle infestation we have, to some extent, also this year. But it's too early to say what it will develop into and we will come back to that a bit later. Anders, what about the financial result for the forest?

Yes. It's a pretty stable result compared to last year, roughly the same level. Looking at Q2, it was a bit soft due to higher costs, mainly relating to taking care of some storm [ felling ] from some local storms. And in the Q1, we were benefiting from a sale of forest property.

Thank you. Then moving on to paperboard. It's actually a quite nice place to be in, in the niche market in solid bleached board and folding boxboard where we are. What we see right now is that there is healthy demand. It's good demand, not only in Europe, but also in Asia, where we sell some of our volumes. We also see that there are some price announcements, but remember that prices in this segment takes time, both when they are on their way up and when they go down and also look at the history, just to remember. In our case, not only our order book has been good, then we look forward to healthy demand. But when it comes to our own performance in sales, well, we have a good sales mix, and we are also happy with the product mix that we have. What we also have had in paperboard, however, is, as I said in the beginning, an extensive maintenance shut at our Workington paper mill. We plan to close down the board mill for roughly a week, started up a little bit late. But since then, the board production is running as normal. And then we also plan to shut down the bio boiler and the turbine for a bit over a month. And then when that part was starting up also a little bit late, we had an accident, which means that unfortunately, the turbine and the bio boiler will be out of operation until early next year. This is unfortunate, of course, but I think I'll leave it to you, Anders, to summarize the financial aspects of the maintenance shut and also the division.

Yes. If you look year-over-year, we have a SEK 100 million lower profit this year. The maintenance stop, as Henrik mentioned, costed us roughly SEK 170 million. So the underlying performance in the paperboard division is actually better than previous year, and that's due to what we have been successfully lowering our production costs, especially in the Iggesund pulp mill. Looking at Q2, we're down a bit and quite normal production and sales performance, but we had a very strong quarter in the previous quarter. That's why we're going down a bit more than purely the maintenance costs. The Q3 will be affected by a maintenance stop at our Swedish mill, roughly SEK 130 million from lost production and higher costs. And our estimation is that the turbine accident at the Workington mill is covered by our insurance policy and that we will have to incur the cost of the deductible of SEK 35 million, which will impact the Q3 results. Back to you, Henrik.

Thank you. Then moving on to paper. As I said in the beginning, it's nice to see that we are back into full capacity utilization. And also, you will come back to that red and black figures. The market as such, I think underlying, we have to remember that there is still structural decline in the market, but we took such a big hit going into 2020 during the pandemic. So if you look at demand in '21, we expect it to be on roughly the same level as in 2020. We, however, despite the fact that demand is down, we see that the market conditions, thanks to closures and also to lack of availability of de-inking grades has improved quite a lot. And that has meant in our case that we have been able to come back to full capacity utilization. If you go to the next slide, prices moving up. shows prices both for our printing paper grades, but it also shows the price for recycled paper, both what we call old newspapers and magazine, which is what I call de-inking grades and OCC, what you normally use for different kinds of containerboard. Where we are right now, we feel that even though the operating rate in total does not look like we are totally in the driver's seat. The feeling in the market is that it's so difficult to get hold of enough of recycled fibers for the ones having the production based on RCP that not all capacity is fully utilized. And that is felt by the customers. And that's why even though theoretically, not enough capacity has been taken out, the market is quite tight. And that had also materialized in paper prices moving upwards from first of July in most cases. We saw the tendency of slightly higher prices outside Europe, EBITDA earlier also in the first and second quarter. And in our case, roughly 1/3 of our volume has been or is being currently renegotiated at first of 1st of July. So from a difficult situation, good news, Anders.

Indeed. And year-to-date result is around 0, roughly the same level as previous year. and that's despite a 10% drop in prices year-over-year. We have offset that by being able to produce and deliver more as well as we have been able to actively lower our cost base. In Q2, we turn into black figures, as Henrik mentioned, we -- the increase our production have contributed, and we have also been able to improve our product mix, especially for our overseas sales where we've been able to find customers that are prepared to pay more than we did in the previous quarter.

Thank you. Then moving on to today's topic, one can almost say, wood products, a fantastic development when it comes to price increase, but let's start with -- there is an underlying high demand for housing starts and do-it-yourself in general, has been and especially in the U.S., which meant that prices were more or less skyrocketing. And also in Europe, prices -- and in other markets where we Europeans export to, prices have moved up quite rapidly. Spruce has been leading the increase in pine coming a little bit later. Construction wood has led the way and other materials or other qualities has been a bit slower when it comes to price increase. However, the market is very hot. It's even overheated, especially if you look at the North America or U.S., today the market is overheating. That's also why we see a quite sharp rebound. It's simply not enough products or materials reaching the building sites, bottlenecks in the sourcing and its supply chain, it's not only wood, it's different kind of materials that is needed to build houses and homes. And that situation, if you look at where we are right now, the U.S. prices roughly on the same level as the European price was slightly below as we speak. One should also remember that it's not so easy to reshuffle and move volumes between different continents. U.S. is one market and you have to produce a special specification in order to fit that market. And Europe, Europe is a different one. Of course, there are possibilities to move some volumes, but just to underline, it's not that easy. In our case, we have also been able to time our growth and expansion within wood products in a very good way. We invested quite a lot of money at the Braviken Sawmill to organically grow our capacity. We bought the Linghem Sawmill, which is smaller, but with a good development over the last year. And later, we also acquired Martinsons. And of course, that came at the right timing now given the very good development of the wood market. So bigger volumes, higher prices, unless that has also materialized in good profits.

Yes, the P&L looks quite nice for the wood products division, slightly more than SEK 700 million profit this year. SEK 200 million comes from the acquisition of Martinsons. And we have added another SEK 100 million from the expansion, Henrik mentioned, where we built -- expanded the Bravekin Sawmill that we started to ramp up last autumn, quite well timed. And we've also been able to churn out more volumes from the small sawmill that we bought a few years ago. So in total, that volume addition has added SEK 100 million, and the rest is price increases. Looking Q2 to -- over Q1, a fantastic improvement driven by a 30% price increase. We're quite early in the pricing cycle. We have a lot of spruce and quite early movers in the pricing cycle. So we have benefited quite a lot in this quarter.

Thank you. Then a few words about renewable energy. And here, we have a situation right now, which I would say it's almost not sustainable with very high electricity prices in Continental Europe, driven by high marginal cost for coal-fired power electricity and partly in connection to quite high price remission rates. Also in Sweden, the prices, well, they are much lower than in Continental Europe, but they are still on the high side compared to what we're used to. You will come back to that. But before just a couple of words about our wind farm, which is currently under construction up in the north -- in northern parts of Sweden, where we will -- so it's under construction now, and during the autumn and maybe in the beginning of next year, will be finalized to increase our production of renewable energy by roughly 35%. Back to electricity prices and more hydropower than wind power for the moment.

Yes. It's mostly, hydro power that we have in our production portfolio as we speak, it has been a good development. Pricing have moved. Last year, they were on the low end. And this year, they have been on the high end of a normal spectrum of pricing. Q2 was strong. It followed a very strong Q1. Seasonally, Q2 have always lower production. And pricing-wise, market prices have gone down quarter-over-quarter, but we have been able to time our production in a very good manner on producer hydropower when prices have peaked in the market. And we have also earned quite a lot of money by helping Sweden to stabilize its electricity system of 50-hertz and participated in the balancing market. Together, these 2 actions have added SEK 20 million of our profits and means that we, as a hydropower producer, have the same average price in Q2 as we had in Q1.

Have we always been that good at that?

We are quite good, but the market has become more volatile and then hydropower have become a more valuable production source.

Thank you. Energy as such is a very interesting topic. And we all know that energy in the world -- energy production is maybe the biggest challenge we have as such big part of the production is coming from fossil sources also in Europe. And we also know that there are so many targets now set to reduce our emissions of CO2 to 2030 and later, and that means that this is on the agenda everywhere. I think in this world, where most probably all products will have to pay the real cost for emitting CO2. I think our concept in Sweden is actually quite good. If you look at this chart, just to repeat for ourselves that having close to carbon-free paper in a world where we compete with suppliers having hopefully, almost probably over time to pay for the CO2 emission. I think it's quite good base. Using the same logic on housing I think it's a rather interesting position to have to be an alternative with wood products to be able to build at least some houses out of wood rather than concrete and cement, which is also a position, which is interesting to mention. And finally, I would also like to stress that our business model in our company is that we only grow trees in order to be able to build houses and homes out of wood. Leftovers are used and converted into renewable packaging and paper, such as our Invercote and Incada, our magazine and books. And we also make use and harvest the energy in the wind that blows over our trees. And also, of course, seems long we take care of the water running in the rivers in our hydropower plants. All in all, that makes us a company with a quite astonishing climate benefit of a bit over 6 million tonnes. And I'm quite sure also in the future, we find ways to expand our business and to increase that number. That's it from our side, and now we're happy to take on any questions you might have.

[Operator Instructions] Our first question comes from the line of Lars Kjellberg of Crédit Suisse.

I'll just start with the center piece as you put it, wood products, an extraordinary development, of course. You called out, I guess, already late last year, the benefit of the North American or U.S. prices surging and the benefit for the export prices, they've obviously since peaked and then gone down quite meaningfully. What are you seeing in those export prices relative to the index you presented? And also, what are you seeing going forward in terms of demand trends, specifically in Europe, which, of course, is the bigger component of your offering?

The U.S. is -- has always been a very volatile market going up and down. And as Henrik said, it's very little overflow between U.S. and European market. So far into the third quarter, we have seen price going up on pine in Europe. What will happen in the coming months is very difficult to predict.

Quite a lot of parameters there. It's difficult to know exactly where they will go. Remember also that partly what has been shipped to North America has been spruce bark beetle infested volumes from Continental Europe.

Got it. And in terms of the Workington incident, I understand the SEK 35 million that you called out as deductible. How does this impact your green credit? And is that part of the sort of insurance coverage?

It is part of the insurance coverage.

So there's no incremental impact that we -- there's no change to that?

Not that we expect today. But of course, we need to be sure we need to finalize the insurance investigation.

Got it. And then finally for me, the paperboard market has, of course, strengthened and you also called exports to Asia. And specifically, where we see pricing is, of course, with China that has been extremely volatile. What are you seeing in those export markets in terms of demand trends and pricing? And why do you think Chinese prices have dipped as they have?

I think, first of all, remember that we are in a niche, which is not always moving exactly the same direction as more of the mass market. And what we see right now is what I said before, we see good demand, not only from Europe, but also from Asia. When it comes to pricing, you know what we have said many times before, for us, it's normally very, very stable over time, and it takes time to change the price, even though there are discussions about price announcements with higher prices right now.

Our next question comes from the line of Johannes Grunselius of Kepler Cheuvreux.

Yes. I would also like to ask a question here on wood products. Could you maybe help us to indicate if your average prices will be higher in the third quarter compared to Q2? Or is it difficult to say for you?

We normally don't give forward-looking guidances. You will be able to look what the price development will be in the indexes. But as I mentioned, coming into the Q3 quarter, third quarter, pine prices have been moving up.

Yes. I'm also having -- I also have a question then on electricity prices. I know those are impacting your paper business the most. They are extremely elevated, of course, which you talked about here in the presentation. But how should we see the net effect from higher prices for graphic paper and also the escalating electricity prices. Could you help us to elaborate a little bit on the margins for the third and the fourth quarter for your graphic paper business?

We're quite well hedged when it comes to electricity. Of course, we have an impact on the spot price moving up, which will be negative. But it's not a major -- it will -- if prices stay at this level, it will have an impact, but it will not overshadow the price movements.

Okay. Okay. Good to know. Because I was thinking that spot prices are much below SEK 50, SEK 60 or something like that at the moment versus maybe SEK 40 in Q2. So it's a pretty big step-up. But you basically assume those will come down then and be offset by hedging, if not.

The unhedged portion will cost what they will cost, but the magnitude of the movement, it's a big cost, as you know, but we are increasing prices.

Yes. And then my final question is on CO2 rights and maybe the certificate sales on the renewable energy you have in the U.K. I mean, could you help us what sort of impact this will have for this year. I suppose you sell most of this at the end of the year because obviously, CO2 rights are priced much, much higher now. How should we see this effect?

It's 2 questions. The renewable certificates in the U.K., they are sold as we produce, and that's actually a fixed price that the government is setting that is increasing by inflation every year. That is, we will not be able to sell them during the second half, but our expectation is that loss of revenue will be covered by our insurance. when it comes to carbon emission rights, we are selling them more or less as we get the allocation and proportion of that over the year.

So sequentially, basically no big moves here?

No, not normally.

Our next question comes from the line of Robin Santavirta from Carnegie.

First, just to continue on wood products. If we look at history, wood products and so on timber prices once they go up, if they go up steeply, they normally have come down steeply as well. Are there, in your view, any strong reasons why, any structural sort of drivers why this shouldn't happened this time as well? I'm talking about Scandinavia and Europe.

That's really hard to answer. But I think -- If you ask us, we are more positive when it comes to wood products in the long term. Given the need to do the green transition we have ahead of us where wood products as a very good alternative to concrete and steel, which most probably will have to pay their true climate cost. But what will happen tomorrow in the next quarter, that's very difficult to forecast.

We don't have any reason to believe that they will become less volatile. But as you know, they follow the trend line of concrete. And given the, as Henrik mentioned, the climate impact of concrete and when they will have to carry its cost -- true cost to damaging the climate, it's a good opportunity for wood product prices to rise in a quicker pace than historically.

I understand. Then related to paperboard, if one cleans out the SEK 170 million. Still, it seems like you've come a bit below on a sort of adjusted EBIT level compared to the past 3, 4 quarters. It seems your costs are are up a bit more than perhaps expected. Is this just sort of weaker productivity because of the maintenance shut? Or is there some other cost sort of of rising, what should we expect for Q3 and Q4 related to costs?

We have had 4 very good production quarters, Q2 last year until Q1. If you compare to Q1 2020, we are ahead of that in Q2. It's a pretty normal production quarter we know that we can produce better, but we can also produce worse than we produced in the second quarter. So it's a pretty average quarter.

All right. Understood. And then finally, on energy, a few questions. First of all, when do you expect to start up production in [indiscernible]? And what is the return expectation? Or then what is the production cost? Can you provide some color on that? And finally, what will your energy balance be once Blåbergsliden is up and running, I mean, you consume a lot of energy, you also produce a lot. So what is the balance after developed? So those questions on energy.

We only captured your last question. I'll answer that, Robin, and then you can repeat the others. We will after Blåbergsliden has been -- is up and running, producing 1.6 terawatt hours of hydro and wind power and we will consume slightly more than 3 terawatt hours of electricity in our paper division. The Board division consumes electricity, but they produce it themselves from biofuels completely.

And the first question was?

And the first question was related to Blåbergsliden. When do you expect it to be up and running, and any comments on the return expectation of that product or that project or the production cost so that we can calibrate the profitability sort of estimates.

We expect it to ramp up production during the fourth quarter. And it might reach full capacity utilization early next year. We have earlier said that production costs, including the return on capital is around SEK 300 per megawatt hour. And that gives us a decent return on that investment.

I understand. Just want to check, so after Blåbergsliden, you're still short some 1.4 terawatt hours in terms of energy?

Yes. Although we don't view it as a position to be managed, we see it as 2 separate divisions.

Yes, for sure, it's just when energy costs or pulp prices go up, so we can sort of get an idea of the group position.

Our next question comes from the line of Oskar Lindstrom of Danske Bank.

Three sets of questions from me, of more general in nature. I mean the first one is around the EU forest strategy and the other sort of legislative initiatives, which have come from the EU. And I realize they're not all set, and it's not all legislation yet, but still given that it's early days, what can -- what's your first reaction to this? I mean is this problematic? Will it be positive for the sector? How will it impact you as a forest owner? I realize it's a broad question, so you can answer it, however, selectively you wish, of course. So that would be my first question. Should we go on to the other ones? Or would you like to answer that one first?

I think we start with the first one. It's quite a big one. Now if you take the forest strategy, and our first reaction came for quite some time now, of course, there was a leak version of the forest strategy that we did not like very much. But after a lot of hard work from us and other people in the industry, what then came in middle of July as the forest strategy, and remember, it's a strategy, nothing else, looks much better. There are some challenges, of course, to overcome also when it comes to that strategy. But I think what we should take away is that it looks much better. And then there were eleven legislative ideas where some of them indirectly also could be of importance for our business, 6 of them actually and maybe 3, 4 more important than the other. And they need to be negotiated and discussed now during at least a year, most probably. So it's too early to say what that will mean. Some of them are interesting like the EPS. And some of them are a bit more challenging, like [indiscernible], for example. But too early to say. We believe when you look at what we do, it's such logic and given the climate benefits we contribute within everything we do, and is also way of describing our business model should in the long run win, but it's hard work.

Yes. Let's hope that logic wins in the end. My second question is about Martinsons. Great timing on that acquisition. Now when you made the acquisition, I seem to recall that you mentioned something about evaluating the possibilities for further investment into that business. Well, it would actually be a further investment into your own business, of course, now. What's the status on that?

Are you exactly sure what we are talking about?

It gives us opportunities to get to learn the market further with the construction market a bit better, and it can give us better opportunities to expand our operations and add value to it. But we're still in the phase of getting to know Martinsons.

Especially the building system part, we need to learn more.

Right. And just a final question also related to the sort of building systems part of your wood products operation. The environmental permit issues of the Swedish cement supplier, Cementa. That was a big topic and still is a big topic. Has that at all sort of impacted interest in -- from construct -- building companies to move over to more wood-based buildings? Have you seen that already? Or is it too soon?

I think we've seen a much bigger interest to build in wood for quite some time actually. And that goes along with order discussion about how to solve the climate crisis. And -- but I can't say that we have had any extra offers being made just because of the cement discussion in Sweden. But it puts light on the issue, definitely.

Our next question comes from the line of Harri Taittonen of Nordea.

So one question on the paper business and sort of this seems that the average prices went up a little bit in Q2 and you sort of explained that, that was probably driven by the export market. But now there are recent comments about the sort of very strong market in Europe and lead times extending to October, November and that there could be some price increases also for the Q4 or the fourth quarter. I mean, so for you, do you have volumes up for negotiation for Q4? That will be the first question.

We have a lot of negotiations going on as we speak. So I would rather not like to comment that. But I can say what I said before that roughly 30% of our volume is being renegotiated or was renegotiated at 1st of July. And then there is different development, as you know, for different products, like book doesn't move up, doesn't move down in the same way. And we will see as we go forward, what we try to understand and what we follow closely is, of course, not least the recycled fiber market. as it has such an impact and where a number of machines simply are standing without or with too high cost for the recycled paper. So they can't just not run the moment. We have -- in that sense, we have a very good position. As you saw in the beginning, cost for wood pulp has not changed very much. And we have a very good position in the wood market with good control over the raw material. And then as we discussed before, of course, electricity is a bit more expensive. But we are ready at least to take advantage if the situation stays, but it's too early to say.

Yes. Good. 2 quick questions. One is the -- I mean, it sounds like the energy projects are on track and about SEK 800 million remaining to be paid. Is that -- so that will be kind of CapEx outlay for those businesses for the rest of this year, I guess, so SEK 800 million from that. And do you have like -- what would be the other sort of CapEx items for the second half just to get to the full group level CapEx for the year? And the other question is about the forest asset sale you referred to earlier. Is that still kind of in cards and happening in the next sort of 9 months or so?

I'll answer that. The cash outflow for the wind farm is SEK 800 million, as you say, Harri, it will be -- mostly be this autumn or during the second half of 2021. Some money might spill over into the next year. And as for the remaining CapEx, roughly SEK 0.5 billion for the second half is a reasonable ballpark figure. And then my memory is good, but a bit short. What was your last question?

It was just a follow-up on this working on forest asset sale, which you...

Forest sale, yes. It's still in the cards, if it will happen this year or next year remains to be seen.

Our next question comes from the line of Linus Larsson of SEB.

Just a couple of follow-ups. In the previous couple of quarters, you've said what the P&L contribution has been from Martinsons. Do you do that for the second quarter as well in terms of EBIT and sales?

No, we have not given it for -- I mentioned SEK 200 million for the first 6 months in EBIT.

Got you, SEK 200 million on EBIT. I missed that. Excellent. And then on the third quarter, historically, you've had a strong seasonality, generally speaking, low costs, low fixed costs, that is -- could you remind us in the current setup, what to expect in terms of such potential seasonal Q3 on Q2, please?

Roughly SEK 50 million positive in our 2 industrial divisions, paper and paperboard. And normally, the wood products division, this year, we will have a negative seasonal effect because we have downtime as we referred to in the report, some 7,000 cubic meters loss of production in Q3, which at this price level means a lot of lost revenue.

Normally not.

But normally not, but it's a new seasonal factor this year, at least.

And because last year, you took more downtime than you in hindsight should have. But this is -- so I would assume that you're taking somewhat less seasonal holiday downtime in wood products in this year compared to last year given the strong markets.

That's correct. We're taking minimum downtime. We do have to take down time to do maintenance work, et cetera. And that's concentrated in the summer period when people want to be off and on the beach. But we take a minimum amount of downtime this year.

Right. And SEK 50 million that you said that was for paper and paper board combined altogether...

Combined.

Yes. Okay. And what's the negative seasonality at today's prices in wood products Q3 and Q2, would you say?

Depends on the price.

At this price level, it's a large number that we don't give in numerical guidance, you will have to do the math yourself.

And you said on the pine pricing, that's a sequential positive, at least at the start of the third quarter. Could you give any sort of magnitude on the input cost, the log cost development Q3 on Q2? Is that a meaningful figure on the negative, I mean?

As Henrik mentioned, it's quite a modest increase on the timber logs side. But it's an increase. But given the strength of the market, it's a bit -- it's on the modest side.

And you would say that on a sequential level, the net of price improvement on finished product versus room to cost changes is a net positive for you before this production downtime that is?

I can't comment on that.

[Operator Instructions] We currently have no further audio questions. I will hand back to the speakers for any final remarks.

Okay. Thank you very much. Good questions, as always, and look forward to hear from you soon again. Thank you.