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

Good morning, everybody, and welcome to the year-end report presentation for the Holmen Group. My name is Henrik. This is Anders, and we will go through the presentation and after that, we are happy to take any questions you might have. So let's start. First of all, if we look back at 2022, it has been a quite strange year characterized by energy crisis, lack of raw material, horrible war in Ukraine, et cetera. And for us as a company to have the base in our own forest land, good control of the raw material, but also our renewable energy situation has made it possible to deliver a record high result, historically high. And based on that, we have also had a discussion internally and the Board of Directors have proposed to give an ordinary dividend of SEK 8 and an extra dividend of another SEK 8. Our good result in combination with our good financial position, not the least that we have a very low net debt at the end of the year, SEK 2 billion, we feel that we can both do the ordinary and the extra dividend, but also have the muscles that we need to invest in our operations, in our different business areas. So it's a rather good feeling about the situation we have. If we then switch to the wood market in the forest, this will come back to the value of forest land. We have a situation -- I think we should actually be quite proud of what we have done in the last 50 years. We've been able to all years increase the standing volume of wood in the forest at the same time as we have been able to increase slowly, but safely at least the harvest, but we have also been able actually to improve the biodiversity index, which was introduced a few years ago at the COP15 meeting. It's a way to measure the status in the forest and how much it has been affected by human activity. In the case of Sweden, we have also been able actually to improve over the last say 20 years quite a lot. You know there's a lot of discussions about the forest. When we look internally or when we look at Swedish politicians, how we report to EU, et cetera, we get like one picture. And when other people look at us from outside, normally, we come out much better. Something we have to come back to in the future, but I think actually, we could be quite proud of what we have done. And the wood market, well, I mentioned the war initially and the situation we have now, if you look at not only Sweden, but surrounding countries and the Baltic Sea. We have a situation where we don't see any Russian pulpwood coming into Finland, which affects the market. And there is simply lack of raw material, especially pulpwood in Sweden right now. We have no wood coming from the east. We have actually lately seen the tendency that some of the pulpwood actually is going towards the east from Sweden, which, well, we have had that up in the north, but we haven't seen it further south before. That's the pulpwood sector and at the same time as the pulp mills are running, I would say, fairly full because you also need to have access to the raw material, which is not given in today's situation. And when it comes to the sawmills and the demand for sawlogs, it's more a balanced situation, even though sawmills in Sweden are operating at quite high operating rates and there is a quite high demand also for sawlogs still. And those higher prices should mean slightly higher revenues for our forest operations. Yes. As everything in the forest, it goes quite slowly, but if you look back 2 years ago, prices are now at 20% high level on average, which means that our underlying operating profit from the forest business have gone up from normally SEK 300 million a quarter to where we are today at SEK 360 million, SEK 370 million per quarter. Fourth quarter, we reported earnings slightly above SEK 400 million and that was due to us receiving compensation for creation of nature reserves. So the underlying results where we are trading at current prices are SEK 360 million to SEK 370 million. We have also -- if we changed slide, made the annual valuation. We do it only in the fourth quarter each year and where we look at the average transaction prices in the regions where we have forest, roughly 300 transactions per year in these regions and we take the 3-year average and may calculate and translate it into our forest holdings, which means that based on these transaction prices between private individuals, we are now at a value of our forest holdings at SEK 52 billion, up 11% compared to a year ago. A lot of people like the forest, obviously. Definitely. And you can understand why. Yes. Switching subject to paperboard and if we have a look at the market situation there, I think 2021 stands out as a kind of a artificial year. If we look at demand, we are today when we look in our own order books and we look at the market in general, we see that, well, things are coming back to maybe a more normal situation. And during the pandemic, most of the customers, they were almost in panic to get hold of material and when you are in such a situation, you have a tendency to order a bit more because lead times are long and now we have inventory levels that has to come down a bit and things are getting back to what we see as more a normal situation. Based on cost pressure, energy and raw material, there has been a number of price increases in the market. The situation we have now, if you look at the players not competing directly with us, but in white lined chip, well, then things are easing a little bit when it comes to fiber and energy. In our segment, we feel that we are in a good position. We have a good customer mix. We have a good market mix. We have a healthy order book. And I think we also -- we are more confident when it comes to expanding our business and selling slightly higher volumes to the right customers. And that has been really important when we have discussed internally what we can do and we come to the conclusion that let's start an investment program over the next 5 years. We have looked into actually a number of different options, but we have finally come to -- I think we've landed in a good decision. It takes a number of years, but we will be able to increase production on KM1 and KM2, the 2 board machines we have at the Iggesund Mill by roughly 25%. It takes some time, but slowly, we will be able to increase capacity. Anders, we had a quite huge maintenance stop or huge, but quite big.

We had the annual maintenance shut at Iggesund. Cost us slightly more than we expected, SEK 250 million and some things took longer time to work on than we had expected, but that's part of running this kind of operation. In this quarter, we also received the annual green bonus for producing green energy in the U.K. of SEK 50 million. Amount varies from year-to-year, but SEK 50 million is a normal annual revenue in Q4 for that contribution.

Then paper, how on earth can we do so well in paper? We have a declining demand for paper in general. Steel prices are going up at least during the fourth quarter and we have overall operating rates in the industry which are simply not sufficient driven by very high cost for fiber and energy, this is the development we have had. In our case, we've been able to control the cost in a very good way. We have also been able to run more full, meaning with a higher operating rate than the average in the industry and we have been able also to let's say follow the price development that has been determined, especially by the players in Continental Europe, having the cost based on recycled fibers and energy, which is mixed electricity, gas price. It has been quite successful. If we then look at the situation right now, when it comes to those 2 parameters, the cost for recycled fibers and also power prices in Continental Europe, things are changing a bit. Nobody knows. It feels like if we look at the weather forecast, we might know what the power price will be the next week, but as things are right now, the cost pressure is easing a bit. Talking about that because this is again between our way of doing it, which is our local wood and our fossil-free energy in Sweden, the electricity, we compete normally with people with recycled fibers and continental power prices as the base. One should remember though that we have actually a fair share of capacity, especially in Germany, the dark blue part here, which is also based on the same concept as we have TMP, meaning local German wood and local German electricity prices. And there, we have a feeling that I think we have a better position simply, which we have to make sure that we take care of in a good way going forward. Also, that has probably been the base why we have been running at such high operating rates over the last year. Anders, as said, the increased price as it said in the fourth quarter, it helps.

Definitely, it's a record year marked by good margin. Q4 was strong. Prices went up 7% or 8% due to price increases. We had some maintenance stops, but we -- also the negative effect of energy costs coming back to what you could say is a normal level. The energy cost was now in the fourth quarter in line with our hedge levels. In the previous Q3 and Q2, we were able to achieve energy cost below our hedge levels due to the active management of downtime. In the fourth quarter, our ability to take downtime was restricted by maintenance stops and also the pricing pattern on the electricity market were a bit different in the fourth quarter, which meant that we couldn't really gain as much as we gained in the third and second quarter on taking downtimes.

Exactly. And then a few words about wood products. It was a fantastic first half of the year 2022 and then prices came down, as you know, and the customers were a bit more hesitant to order and also a bit the question mark where is the construction cycle going. It's no secret that the demand has been a bit lower when it comes to demand for wood products in general, but I think what we have to remember here is also that actually supply has quite a big, huge impact on the market. And when I talk about supply, I mean, first of all, Russia, which seems to be more or less out of the game. In the beginning, we saw some volumes going towards the east, but not to Western Europe and now we don't see so much of Russian wood products at all. We have Canada where the trees are kind of in the wrong place. We have sawmills closing down or capacity is taken down and also slightly higher production cost level compared to us in Sweden. And then we have Continental Europe, which also has an impact. You know that harvests in Continental Europe has been driven by spruce bark beetle infestation and it's been on a -- that's a bit higher level than what is long-term sustainable. And as it looks now, that is coming down a bit and also the cost in Continental Europe is a bit higher than at least what we believe it is in Sweden. So in Sweden, most sawmills are still running at high operating rates, but we have uncertainty where the construction cycle is going. And the feeling is, as we have said here, that prices are stabilizing and maybe we have reached the bottom, but it's very hard to predict. But even though there are some uncertainty about short term, where this is going, we are firm believers in wood products and dealing in wood. And I think one should not forget that this is one of the biggest challenges we have for this planet, housing accounts for so much of global emissions and to be in a position where you are an alternative to concrete, cement and steel, I think it's a rather good position. We said that for some years. That's why we have grown quite a lot, both organically and through acquisitions. And when we look forward a little bit, what we have in the pipeline, we have an ambition to continue to grow, both value and volume, of course. We have a program going on in our Iggesund Sawmill, slightly bigger volume and also changing the mix a bit. It's quite a lot of money. It's like SEK 400 million. We are establishing also a hub in connection to the sawmill at Braviken for glulam beams in order to have better access to the market to be closer to the customers. And we're also investing in increasing the production of cross-laminated timber at our Bygdsiljum Sawmill by roughly 50%. And on top of that, we have said that before, we have discussions and we are right now evaluating together with SCA if we could build a jointly-owned sawmill at the Rundvik Sawmill in the future, which would be a very good fit for both of us because it's simply in the middle of our forest holdings. That's about the future, but we also have a fourth quarter.

Yes. Contrary to the previous quarters, the result was -- actually was negative in the fourth quarter. And that's of course, pricing coming down to what we would characterize as a normal -- from a historical perspective, normal levels, but production costs have increased through higher log prices. They are slightly more than 20% more expensive today than they were 2 years ago, which means that you can't make ends meet at normal pricing levels. We did, in the fourth quarter, make a SEK 30 million impairment to finished goods values. That's what you have to do when you enter into negative territory. So the result is -- the underlying result is slightly better than reported. We are still positive on EBITDA level if you take that inventory write-down back. And it was a very good delivery quarter and we have now normal inventory levels.

Thank you, Anders. A few more words about the energy crisis we have seen in 2022. Lack of energy, we have seen a volatile energy market in the fourth quarter, but also during most of 2022 with very high prices, especially in Continental Europe. But in the fourth quarter, we also saw, I think for the first time almost, that the electricity prices in northern parts of Sweden, where we happen to have our -- all our hydropower and the majority of our wind power, well, the prices came up to the same level as in south of Sweden. And to be honest, more or less the same level as in Continental Europe. We know that Svenska kraftnat, they have done some things in order to increase the transmission capacity a bit, but it's very difficult to understand exactly what happened in the fourth quarter, but it's a very interesting trend if this is to stay or not. In any way, it helped us quite a lot and it showed the strength, both of the hydropower and the wind power. We have grown our wind power operations, especially with Blabergsliden up north, which now pays off a bit. And well, it's actually the best result ever, isn't it?

Yes, definitely by a wide margin in this case as well. Very strong results driven by the strong pricing [indiscernible]. The hydropower contributed, the wind power contributed nicely as well. And if we take the next slide.

Actually, what we have done with hydropower?

Normally, you earn SEK 20 per megawatt hour more from running hydro compared to running a production stable throughout the year. In the fourth quarter, we earned SEK 500 more per megawatt hour. And that's all -- you receive revenues from helping stabilizing the grid. But this effect in the fourth quarter was predominantly us timing the market, not only day and night, but also we moved production from October to November, December. October prices were not that great, so we took the decision to not produce that much, but store it in our water reservoirs to times when the society needed it better and the price was higher.

How much flexibility do we have?

You can go up and down. You can reduce production to a level of 50% of normal production. That's what we can do.

And if we summarize what we have said, we have not only delivered a record result when it comes to money. We have also helped the planet a little bit more to actually go through or come closer to a green transition by increasing our 7 million to 7.2 million tonnes of the climate benefit coming from us. Okay. That's it. And then we stop there and we're happy to take any questions you have.

[Operator Instructions] The first question is from the line of Kjellberg, Lars with Credit Suisse. Mr. Kjellberg, can you hear us? The next question is from the line of Grunselius, Johannes with DNB Markets.

Johannes Grunselius here. 2 questions. But the first one is on your announcement of expanding Iggesund with 25%. It seems like it's a 5-year period. How should we think about that in terms of CapEx? And how should we think about the new volumes kicking in over this period?

We today invest slightly more than SEK 300 million on average in our mill and now we're stepping up to level roughly at SEK 600 million, SEK 700 million per year in CapEx over this 5-year period.

And it's bottlenecks and that it's other things we do in order to make the mill ready to take on slightly bigger volumes. I think what's important for us is that we -- today we feel a lot more confident when it comes to our customer mix and where to sell the coming volumes we'll see coming in the future.

And we will work through the whole mill from the board machines all through to the -- the way out to the harbor because you enter into bottlenecks on the way. And that's why we have to do it over such an extended period.

Yes. Will you keep the mix pretty much unchanged? And am I right that it will imply a nice fixed cost [ observation ]?

Yes. We will -- yes, fixed costs will not change by this. If anything, it might be reduced a bit.

Yes. Then I had a question on what you think about the outlook for your publication paper price-wise because it appears that price is holding up well in the Q1. What are you seeing in terms of inventories and market tightness, et cetera? Is it fair to think that this stripping will carry over into the second quarter? And am I right that the newsprint grade is, in particular, the strongest within publication paper at the moment?

It's not easy to know exactly where things are going. But as I said in the beginning, we do see, theoretically, the operating rates for the industry is far too low to be sustainable. So there will happen things in the market. That's for sure. And you cannot run a mill at 50% operating rate. You have to be at levels where we have been, close to full or somewhere there. And this will play out in a way that I showed a slide where we said that, look, how much electric -- how much TMP production actually we have in Germany where you need to use a lot of electricity and it's slightly different than the rest in Germany where they have the base in recycled fibers, et cetera. I think that will have an impact on what will happen in the market. And price as well, we are negotiating every day right now. I can't comment on that, but it was cost-driven and it will be a cost gain, I think, also in the future.

Yes. I mean is it fair to assume that the much lower prices for recover paper and also at the moment, lower energy prices in Germany will then fall over to lower prices for paper in Europe, or I mean any comments on that?

That in combination with the operating rates, as I said.

It's a complicated game because you need to get hold of the raw material if you're going to step up production. And it's not that certain that there is actually recycled fiber available. And you don't really know what the electricity prices will be when you are going to produce. So it's not that easy if you work on the continent.

And remember, you have -- all of a sudden, you have 1 week of cold weather and prices are changing dramatically, which has an immediate impact on how people are -- what they do when it comes to this business.

The next question is from the line of Larsson, Linus with SEB.

Maybe continuing a bit on CapEx. And just following up on the remarks that you made on paperboard, but also in other parts of the group, what's your CapEx guidance for 2023? And also beyond that, what's the new normal or what should we expect annually in the next say 3 years after 2023?

We have a depreciation of close to SEK 1.4 billion. We will invest SEK 300 million, SEK 400 million more per year in the Iggesund Mill. And then we have interesting plans both in the sawmills and there is some potential in the paper. So we believe that we will be at a slightly higher CapEx levels in the next few years up towards SEK 2 billion a year in CapEx in order to expand the business and also [indiscernible]. But renewable energy expansion will come on top of that and that's more of a project-based expansion once we get approvals for new wind farms.

Okay. So for 2023, is that your guidance as well, around SEK 2 billion?

Up towards SEK 2 billion, yes.

Okay. And when at the earliest is the next wind park investment?

I thought it was last year, but it's very difficult to say.

It depends completely on the permitting, but it's not likely to be any meaningful capital outflows in 2023.

Great. And then maybe on renewable energy, you gave -- well, on energy, I mean, a bigger topic than that, I guess. But in the segment renewable energy, are you still hedged as you have been? And could you also talk a bit more about these extra revenues? I mean, it's spectacularly high in the fourth quarter. What's the stick -- what's the stay of that kind of new source of revenue, if you like?

We are hedged 20% in the hydro power -- or hydro and wind power. That's -- we don't go much beyond that and that's hedged for 2023. We -- by and large, we run the energy division unhedged. There was a very unusual market where we were able to move [indiscernible] from October to December and where the price was exceptionally high in December, so the SEK 500 margin, that's not a sustainable level, but in the previous quarters we have been between SEK 150 to SEK 200 and if we have this kind of volatile market, we will earn more hydropower. If the market is becoming quieter and then price levels come down, we earn less.

And then, Linus, the transmission capacity, will we have prices in the north of Sweden more in line with [ SE3 ] or it's south of Sweden or will it go different ways again?

So far in January, we have been quite close to SE3, but on a lower level than in December.

Great. And in your paper division, what's your hedging situation there? I guess it is in the report, but if you could tell us about your thinking? And your projection right now?

We have hedged 90% of our planned production for 2023. And the hedge price levels is roughly the same price levels we had hedged for 2022.

Okay. For 2024?

We are hedged 60%, but on a slightly high level.

Okay. Wonderful. And just finally if I may on the wood product side. I fully share your long-term vision, but in the near-term, I mean you have this SEK 30 million that you impaired in the fourth quarter that's balancing back presumably in a bridge to the first quarter. But apart from that, what are you expecting in terms of pricing cost? Are costs still rising? Sawlogs, are prices largely the same?

When it comes to the price of wood products, we simply don't know. We have a feeling that we might have hit the bottom. But as you rightly point out, the cost for sawlogs is higher today than it was a couple of years ago when we were on roughly the same price level for the wood products and the competition for sawlogs is still rather high.