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. My name is Henrik, and together with me is Anders. I think, we are quite well known to most of you. And we do it in the usual way, we'll go through the presentation, and after that, we have to take any questions you might have. So starting off with the results for 2021. It's a historically-high result, good result, especially based on that wood products market has been exceptionally strong during the year. And in the light of the good results, today, the Board of Directors of Holmen have decided to propose to the Annual General Meeting to decide about an ordinary dividend of SEK 7.50 and also an extra dividend of SEK [indiscernible]. Just to remind ourselves where we are, we have a very strong balance sheet, good financial position, and as you will come back to when it -- [ ForEx ] valuation in our books. And also, please note that we have a net debt situation of -- we have a net debt of over SEK 4 billion or a ratio of roughly 9%. And in 2021, we have paid over some extra dividend and also invested quite a lot of money in our industries. If we then go to forest, if you [indiscernible] about the forest in the wood market before we talk about the value of the forest. We know that the sawmills have been running, more or less, full the whole year, which has created a quite high demand for especially sawlogs. That has been the situation, especially during the first half of the year, when prices were extremely high, when it comes to wood products. And in the second half, even though we have seen that sawmills haven't been running that full, still we see that there has been quite a good or stable strong demand for sawlogs. When it comes to pulpwood, we had a situation during the last few years actually, where we have had a bit oversupplied situation of pulpwood, but that market has now started to dry up. And today, I think we can say that the market is entirely good balance, but wood industry actually consume a little bit more than supply, at the moment. And then we are happy to see that there is still a lot of people that are showing interest in owning forest, and they pay more and more money for the forest lands. If you take us through what that has meant for our valuation, please?

Yes. As you saw from the previous graph, prices have steadily risen in all parts of Sweden. And as you probably all know, we use a 3-year [ loss ] transaction prices, the average of that to value our own forests. That means that this year, the value of the forest went up by 9%. All of this change in value has gone directly through equity and has not passed through P&L. So if we take the next slide on the reported results, it was high in Q4, driven by a sale of a U.K. forest property. And this is some properties that we bought in connection with starting up the [indiscernible] to secure the raw material supply. It doesn't have a meaningful use for us anymore. So we have decided to divest it. So that impacted the profitability by slightly more than SEK 200 million. Underlying profit for the forest in this quarter was SEK 300 million.

Thank you. Then moving on to paperboard. Here, the market has been exceptionally good. I shouldn't say exceptionally, but really good over the last, say, last couple of years during the pandemic. We see that demand from European customers is good. Deliveries from European suppliers to Europe is up some 6%. And for the first time in, we used to say, 10 years, we actually not only talk about price increases, but we also see them materialize in the market. In our case, we see strong demand. And if you compare prices in the fourth quarter, compared to the third quarter, our prices are up some [ 2% ]. And just to remind ourselves that we have multiyear contracts for roughly half of our business, where prices -- where it takes longer time to change the price. And going into 2022, we follow the market with what is open, in terms of our production that where we can increase prices in the same way. In our case, we have had 2 maintenance shuts during the year, which have limited our deliveries a bit. We have also reduced our stock levels during the fourth quarter, which means that we have not been able to increase deliveries during the year. We have kept it roughly on the same level as in 2020. And unless there is a lot of items that affect the financial results in the fourth quarter, please take us through.

Yes, definitely. Fourth quarter reported results, excluding the turbine that is out of operation in Workington, was SEK 281 million. We were positively impacted by some price increases coming through, as Henrik mentioned, roughly 2% average price increase, compared to the previous quarter. And we did also have some positive [ one-off ] effect from bonus from green electricity and some repayments that we received during the quarter. Underlying results in this quarter was a bit about SEK 200 million. And if you compare the results year-over-year, it's a decline of -- that is explained by a lot more extensive maintenance shuts this year, compared to last year. Henrik?

Yes. Thank you. A few words about paper. I think, this has been a year, which has been the most turbulent year in my time at Holmen, which is quite many years actually. What we see, first of all, is that especially our competitors have struggled with really high fibre prices. That's not the case for us, as we are -- we're 100% based on local wood in Sweden. And also in Europe especially, but also partly in Sweden, really high electricity and power prices. In our case, we have not gone out and asked for electricity or electricity cost surcharge in the fourth quarter because we felt this very late in the fourth quarter. But we do it, when it comes to next year or this year in 2022, at least for the first couple of months in the first quarter, which I'll come back to in a minute. But it has been extremely turbulent, especially the recycled fibre prices and especially the availability of recycled fibres being -- that can be used for the [ inking ], which is not all recycled fibres at all. I think, we should remember, when we look at such a market, that what we have, the combination of local wood, which we have perfect control over and where prices are fairly stable, and also over time, fossil-free electricity, even though electricity also in Sweden is a bit expensive for the moment. I think, this is a rather good combination, which will prove to be cost efficient over our competitors in the long run. When it comes to how we have performed, we have been, more or less, running full during, I would say, the whole year in 2021. In the fourth quarter -- we talked about it in the last report that we have a bit more maintenance. Normally, we have the maintenance in paper in the fourth quarter, and that was the case also this year. All in all, when you look at the market as such, the shortages of both fibre and the energy crunch has meant that prices are up a lot in the beginning of 2022, as we speak. Should just remember, when it comes to us, also we are increasing prices. And as I said, on top of that, we are also charging for higher energy cost at the moment, and that's for the next coming 2 months, roughly, at least for now. And if you think about our mix, remember just that we have 1/3 of our production and deliveries is book paper, which is a market which is more stable, both when it comes to volumes, but also pricing. I think, that's about the market. Let's trying to sum up what has happened in paper in these turbulent times.

Yes. There is a lot of things that has happened. We encountered much higher electricity costs. As Henrik mentioned, it was mostly towards the end of the quarter in December. The electricity cost rose by SEK 100 million, compared to the previous quarter. We had seasonally higher cost of personnel and maintenance but also had some positive repayments that were improving the result of balancing these seasonally higher costs. Comparing year-over-year, we have had a very turbulent year with lower prices, higher electricity costs, that we actually have been able to offset by increasing volumes, improving mix and taking down costs, which means that we achieve the same result year-over-year.

Thank you. And then the fantastic wood products market. What to expect in the future? Starting off a little bit what we see right now. As you know, we had a fantastic market. The first half of 2021 was good, increasing prices, et cetera, and then prices started to go down. What we feel now, is that U.S. is ahead of us, and what you see on the chart here is future prices, where you can see that prices have started to go up again. They have already reduced stock levels, and customers are starting to buy. We should also know that there is supply restrictions or limitations, especially in Canada, where first it was floodings, too much rain and then later on also really cold weather and logistic complications, which has meant that supply hasn't been that high, and prices have started to go up. And then the other question is, where are we then, when it comes to our deliveries to the European markets? And there, we feel that right now, we have bottomed out. And if you look at where we are price-wise today, we are slightly below where we were, when we came into the fourth quarter. On the other hand, business we now do for February, March, we do them with slightly higher prices. So our feeling is that the market has bottomed out and is starting to take off again. Then the question is, where it will take us? And that's too early to say. Nothing has changed, when it comes to the interest for building in wood rather than in concrete and steel. And just a reminder that this also accounts for a lot of the CO2 emissions in Europe. It's no different here than anywhere else. And then also a reminder that we have decided to invest quite a lot of money in our Iggesund sawmill. Increasing output and value-added, it's roughly SEK 400 million. It should also increase our production with roughly 20%. It's also a way to slightly change the product mix at the sawmill being more adjusted to what we see will be the future demand, more construction timber. And this should be set up to be at full capacity, somewhere during 2024 or at the end of 2024, but that's the future. Anders, if we then look back again about the results for the fourth quarter?

Yes. In a business where you face 20% price declines and you're only able to deliver 80% of what you produce, you would expect high [ throughput ] result. Of course, it's a decline, compared to Q3, but SEK 350 million in the fourth quarter is a really strong result, equivalent to 60% return on capital employed, annualized. And of course, this lower -- it's not only the lower prices that has taken its toll. Also, that we actually have been building stocks, and we have taken some time to manage inventory levels during the fourth quarter and year-over-year. Well, it's, of course, extreme price increases. We have seen, that have boosted the results, but also the growth that we have made, both by the acquisition of Martinsons and expanding the Braviken Sawmill, has contributed nicely this year.

Yes, definitely. And should contribute even more in the future, I hope. A few words about renewable energy. You know that in energy -- on the energy side now, we have an energy crunch in Europe, actually in the whole of the world. If you look at situation right now, actually, it's a lack of gas -- natural gas, which means that the gas price is actually the highest. If you compare to coal, even though we have to buy emission rights, actually, it's more expensive today to produce energy or electricity based on gas than on coal, which is a really strange situation. And well, to sum up the situation, of course, we come to -- we definitely need more renewable energy or at least fossil-free energy because also in Europe, we are extremely dominated by fossil, so far. And huge challenge, but also big opportunities for the ones that actually could supply the energy that we so desperately need. We take a little step in that direction, where we now finally -- actually, we will see our windmills turning soon. They are -- they have started that. At the end of the first quarter, we should be up and running at full capacity, which will increase our production of renewable energy by roughly 30%. And then a few words about the Swedish situation, when it comes to lack of transmission capacity and price development between different price areas in Sweden. We are used to a situation, where we are at the same price [ all over ] Sweden. What you see on this chart is that yes, prices are up, and there is a bit of a gap, which is bigger than normal between south and north of Sweden, but also quite a big difference between Sweden and Germany. And when you ask people and forecasters, the answer we get is this, that things should get back to a more normalized situation, with less difference between the different areas, quite a big difference between Sweden and other countries. Any further comments on that one?

No, but it can go both ways -- not both ways, but it's supported by both increasing transmission capacity as well as adding consumption up in the northern part of Sweden.

If you produce up in North, you have to be really good at making use of the hours, when electricity is a bit more expensive.

And we have been in the fourth quarter -- actually, average prices in the northern part of Sweden fell by SEK 100, compared to Q3, but we earned almost double on our hydro power because we were able to time the production, when the market needed it as most. And that means that we concluded the 2021 in a very strong manner, with a result of SEK 112 million in the fourth quarter.

Thank you. Then finally, a couple of slides. You know what kind of a company we are. We grow houses, and everything we do, we contribute with climate benefit. And actually, everything you see on this slide here, is also possible to see live because this is a little bit of a -- it's a [indiscernible] for what we want to do in May, a Holmen Investor Day up in the north, where you have the chance or will have the chance to have a look at what you can do with wood products, also building very nice houses like the [indiscernible]. Also, our hydropower sawmills and of course, in the heart of everything, we have the forest. So we'll come back on that one. And that concludes our presentation, and we're happy to take any questions here.

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

I just had a very quick question, when relating to the surcharges. Relative to what you've actually done to raise your contract prices. Can you shed any light on that? You said, surcharges for 2 months and then you kind of -- I suppose you give that back. How does that work? And again, how much did contract prices really move up?

You could comment that we do have high electricity costs in the first quarter. They were already very high in Q4. They might increase somewhat in Q1, and it's, by and large, compensation for this unusually high electricity costs that we incur.

There is an increase in the market, which is generally increase, and on top of that, we do this, but as electricity prices normally, it's during the wintertime that it's the most difficult time. And then we will see what happens. Not giving back the price increase, but we'll see whether it will be prolonged or what will happen after that.

So there's no formula per se, that is directly linked in to electricity costs, perhaps not the way it's structured?

No, but it's calculated to cover our extra energy costs.

Understood. And then my second question also relates to [ pricing ]. You, of course, talked about 2% sequentially in Q4 in the paperboard segment. Can you share with us how we should think about the structure you have with long-term contracts? And how you -- average prices across our portfolio, moving in '22 versus '21? Where we sit today, in terms of the more recent folding boxboard price increases?

I think, to start with, it's roughly 50-50. Long-term contracts, half of the production, and open business, roughly half our production. And what's open that there, we increase prices in the line of the market, what happens in the market as such. And that's for, say, first quarter, and then well see what happens after that.

And the next question comes from the line of Martin Melbye from ABG.

You gave the underlying EBIT of forest packaging. Did you state the same on paper?

It's difficult because we do have extra maintenance as well. Should we take away that or not? But it's roughly [ SEK 50 million ] negative in Q4 underlying, including the maintenance costs.

Excellent. And you mentioned that 1/3 was book paper, but 2/3 will have a price increase? Or is there more that's not getting the price increase?

Now, I said that 1/3 is book paper. I'm not saying that book paper is not changing, we are increasing prices also for book paper, but not as much as the rest now. So 1/3 is a bit more stable, but it's moving up as well, but not as much as for the rest. It's quite big price increases now in January.

And last question, what do you foresee on price changes on the [ sawmill ] side, Q1?

We have very short contracts. And as Henrik mentioned, when we do business now for the next month, we increase prices, but we saw a decline during the fourth quarter. So it's difficult to say now what the average price change will be, quarter-over-quarter.

But the trend is, we have bottomed out.

Yes. The challenge for us, now, is not to get orders, it's to get -- be able to get out the deliveries from our sawmills.

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

I was wondering, related to your energy bill, apparently, you have hedged 85% of your energy consumption, 22% and 65% for '23. Is that correct for the Group? Or is this only for the Paper division? And secondly, at what price levels have you hedged?

We -- if I answer in a long way, historically, we have viewed our hydropower as a hedge to the paper business. When these bottlenecks in Sweden started to appear late autumn, we started to hedge up the full paper and viewed paper on a stand-alone basis and did -- have done external hedges. So we have 85% of papers consumption that we've hedged for 2022. Q1, when we started to hedge, they were still quite high. So it's roughly the same level as Q4, on average. Then we will go down to a normal level, maybe not completely normal in Q2, but Q3 and onwards are hedged at historically normal price levels.

All right. I understand. Then related to the Blåbergsliden Wind Farm, what kind of P&L impact should we expect, on an annual basis, once it's fully up and running, with the current prices we have? And have you hedged those sales prices in any way?

We have decided -- we have historically hedged our electricity of hydro production against internal, against our paper. That we have stopped doing. Now we're completely unhedged for both the hydro and wind power, and we'll get back to the financial effects on the Blabergsliden and depends very much on the price, of course, but the production cost for a wind farm is around SEK 100 per megawatt hour. And then you can do the math backwards from that.

All right. Good. Sounds attractive at these prices. A final question related to the forest assets. How should we view the current situation with pressure on higher -- or an outlook of higher interest rates? Will that impact the valuation of forest as -- what is your view? Normally, this kind of long-duration assets have -- are quite sensitive to higher interest rates. What about the forest sensitivity to interest rates? What is your view?

Very difficult to give a good answer to that. We book our forest values at prices, where our trade advices, that's predominantly between private individuals. We note that investment funds that, by far, they pay a higher price than the private individuals. Difficult to see how the private individuals will react. I don't think they are as sensitive to interest rates as institutional investors are, but at -- not even an educated guess.

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

A couple of questions for me. The first one is on wood products, and you say that the market has turned. I was wondering a little bit about your ability to deliver or maybe increase deliveries to the U.S., given that the price level there seems higher. That's my first question.

Yes. We delivered some 5% of our production to the U.S., and we can change a bit, but not that much.

And what was it -- because -- has that fluctuated over quarters? Or is it just steadily 5%, roughly?

It has been fairly stable. We have decided to keep U.S. as a market, even when prices in the U.S. were down quite a bit.

All right. And then you mentioned, I think, supply problems, maybe in Canada. But what is the supply situation from Central Europe, given the spruce beetle infestation that they have there?

We don't have any really good statistics, but we have a feeling that it's drying up a little bit there as well, availability of raw material, but it's -- that's a guess and rumors, more than statistics. When it comes to our logistics, it works fairly okay, that we feel also that it's a bit more difficult to get trucks, ships, et cetera.

To deliver to our customers, not to get the logs into our [indiscernible].

Okay. And then my second question is on paperboard. You mentioned, sort of -- you're finally seeing some meaningful price increases. I was wondering, are you -- when the demand is strong like this and when it's been strong for a while, are you able to improve your -- change your sales mix around to improve average realized prices?

We do not change the mix a lot, but we -- of course, we try to improve a little bit over time. But as you say, the market is really strong, and that's not the issue for us. It's more to increase the volumes. All the customer want is more.

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

I'm looking for an educated guess on renewable energy. The results were very strong, obviously, in the fourth quarter, but you say, it's not primarily to do with the higher prices, but rather with your way of executing with your hydropower in a good market. Will that benefit remain in the first quarter, do you think? Or how should we think around renewable energy profitability in the first, compared to the fourth quarter?

Educated guess.

Well, I looked at the weather forecast. But you can look, more or less, on the [ FC2 ] pricing on North [ fall ] and look at what the base earnings can be. And if there's a lot of volatility in that pricing, we will be able to benefit from that. But if it's flatlined, one price will be pretty much in line with the North [ pole ] prices in [ FC2 ].

[indiscernible] hydropower will prove to be more and more interesting, when we have more and more wind and solar in the system. It's a very good battery, at least for a number of hours and produce more, when prices are a bit higher and produce less, when they are lower.

Going back to history, we have over a year-earned SEK 20 per megawatt hour extra by being able to time production to the market. In the most recent quarter -- quarters, to be frank, it's more like the SEK 100 or above that.

When the price is more volatile?

Yes.

Okay. But no educated guess for what that contribution might be in the first quarter then?

No. I refrain from that. I've already guessed.

This is quite [indiscernible].

I'm trying. And then just one more, and that's probably an easier one, and that's on your effect, maybe also, on a sequential basis. What the FX effect is that, that you expect in your operating profit, Q1 and Q4?

Q1 is pretty flat. Maybe, if the krona stays at this [ weak ] level that we are, when -- as we speak, maybe a bit positive, but we are pretty much hedged for the [ fourth ] quarter.

[Operator Instructions] We have another question from the line of Christian Kopfer from Handelsbanken.

Just a few follow-ups on my side. Firstly, on wood products. You -- take a back a few quarters, you typically -- we believe there is something maybe around [ 290,000 cubic meters ] are good to quarter. You have been quite significant -- quite [ clinically ] below that for a couple of quarters now. So is that more where you want to be, historic numbers? Or it's a little bit too tough comparables, going into [ 2020 ] ?

The run rate of our production, as we speak, sort of normal is 1.5 million cubic meter per year, which is 375 per quarter. And over time, we can't deliver more than we produce. Our ambition is, of course, to increase our production, but as we are -- that's a normal quarterly-delivery level. Q2 is normally the strongest one. Q4 is weaker.

Okay. Good. So should be able to -- to come up a bit on the side, obviously, in 2022 from [indiscernible].

[indiscernible].

Yes. Good. And then finally, on the you have any updates, and we still even move forward, even after year or with regards to environment intermixed and [indiscernible]?

We're waiting.

We work in the final stages of our application, but it's a lot of red tape to be covered.

Now there are no further questions. I will hand it back to the speakers.

Okay. Thank you very much. Again, also this time, actually, it's a Friday afternoon. So extra thank you for taking the time so late in the afternoon and look forward to see and hear from you soon again. Thank you very much.

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.