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

Good morning, everybody, and welcome to the interim report presentation for the Holmen Group. My name is Henrik and together with me, I have, as usual, Anders, and we are going to go through the presentation. And after that, we are happy to take any questions you might have. First of all, despite quite challenging economic situation in general and also soft market conditions, we were able to perform a really good result also in the third quarter, which we're really happy about. And we will come back to a bit more details when it comes to the different business areas as usual. But just a reminder, when it comes to our balance sheet, today, if you look at the forest and energy, it actually makes up to some 80% of the balance sheet. So far this year, we have distributed quite a lot of money through an ordinary and extra dividend. We also bought back shares, and we have invested actually quite a lot in our industry as well. So, let's go into the different business areas, starting off with food forest or not so much to forest, maybe more the wood market as it is right now. And what we see is it's a couple of phenomena first of all. And if we start with timber or sawlogs for the sawmill industry. First of all, Sweden and the Nordics is normally place to go to find or to have access to raw material. Right now, we have the feeling that or feeling we see that the sawmills in Sweden, they are producing as much as they can, but they cannot really get hold of enough timber to run at 100% utilization rate, and that's something we normally do not see. When I say that, normally, you have access to fiber, we also saw other people coming in and investing in Sweden, like foreign investments, both when it comes to a couple of different sawmill companies in Sweden. And on the timber side, there is pressure. It's not easy to get hold of the timber. If you look at the pulp side, however, it's not as tight. On the other hand, it's a lot of new capacity coming. We have Ostrand, we have Ebola. We have the Kemi mill. We have Russia being out of play for the moment. And that all together, even though it's not as tight as the timber situation, we see this as a structural challenge going forward. You can look at the prices, and you see that they've been going up also during the third quarter. It was pressure on prices upwards. And where we are right now, we are roughly 30% higher than the long-term trend. But if you look at it from a 20-year perspective, I think we are more in line with inflation Anders and higher revenues from the forest means normally, it translates into a better result also for the Forest division.

Yes, indeed, it does. The profits go directly. All the costs have increased a bit. We now earn some SEK 100 million per quarter more than we did just 2 years ago, thanks to the quite steep price inflation. This year, we have not had any forestry sales, which we had in the past years, and that's why the step-up in earnings is lower than this SEK 100 million. What you can note is that Q2 is normally a seasonally strong quarter from a harvesting perspective, and it goes down in Q3, while we have been able to lift our profits in Q3, and that's thanks to us lifting log prices, but actually, we have been able to increase pulp wood prices to our external customers more despite, as Henrik mentioned, that this market is a bit more balanced right now. But people are prepared to pay more for the pulp board to be able to run their mills when they can. Back to you Henrik.

Thank you. I didn't mention that we are feeling that most of the customers we have, they never give up any positions even though the market is not as tight as the timber market.

Okay. Moving on to paperboard. What we experience right now is demand down some 20%, which is something we are not used to see. It's destocking amongst customers or end users, but it's also, I guess, for most players, quite high stocks also on the production side. This is something that we -- the big question for us is to understand the underlying demand and what the underlying demand will be going forward in a bit longer perspective. Right now, it's down quite a lot, and it's affecting everybody. Also us. We are not running at full capacitation or utilization rate. We take some market-related downtime, which has an effect also on sometimes on efficiency in the mills. And the question is, if we go back some time, we saw that the demand increase was roughly 1% to 2% per year. And then during the pandemic, most people thought, well, maybe 2% to 3%, maybe 4% is the new normal. Now it's very difficult to know exactly what it will be. And after coming down some 20%, of course, it will bounce back. But we will see a bit later on what the real new underlying demand will be. If we look at the pricing situation in the market, remember that when it comes to our products, especially the solid beach board, it's an odd product going a bit different than the rest of the products in the market. We saw that, for example, white line shift kraftliner, testliner went up a lot during the pandemic and at the end of it. We did not increase prices as much. And when we look at situation right now where there is some pressure, the same goes for especially solid bleach board and to some extent, also folding boxboard. That is not moving as much. Our prices are largely stable. Also remembering that the cost pressure is there. It's not the same cost as before. We have both the cost for pulpwood. We also see that chemicals, they are not really coming down, not much, at least, a little bit but not that much. So, not running full on this means it translates to a lower profit. If you compare to Q2, we had a maintenance stop in Q2. In Q3, we have seasonally lower cost, some SEK 40 million lower costs due to the holiday period. And what you can see, if we compare a year ago, we have increased prices, as Henrik mentioned, but they actually have not fully compensated for the higher chemical costs and the higher wood cost chemical costs are coming down a bit, but not that much, while pulpwood still is becoming more expensive. And then in this specific business, you get quite poor efficiency in the machines when you can't really run them the way you want them. And that is impacting profitability and, of course, loss of volume in this part of the cycle. It does. Okay, paper. Also here, it's, well, it's a challenging market situation, of course, because the supply-demand balance is not very good. On the other hand, we have been doing really well. We have been taking some market shares in Europe, and we have added on some sales also outside Europe, which has helped the result in the third quarter. When you look at the price graphs, and this is official statistics from or for both uncoated magazine papers, but also for pulp. We do recognize roughly that movement when it comes to us as well. However, we did not go up as much as it looks like here when you look at statistics. Depending on that, we have a slightly different product mix and not only uncoated magazine. And well, we will see where the pulp is going. Another thing which is really important for this market, even though the capacity utilization rate is low. The market balance is not really there. It has become a lot more expensive to produce. And when we look at the continent versus where we are with our setup of our fibers and Swedish electricity prices, we do see that, well, it is more expensive to produce on the continent, and that has, for sure, also contributed to a very good result and some kind of a break in the system when it comes to pricing. The strong deliveries that Henrik mentioned, both in Europe, which partly is a seasonal uptick, but we've also been able to sell volumes outside Europe, good products to good customers at good margins. That has actually helped the third quarter result as has a seasonally low personnel costs and maintenance costs, some SEK 60 million lower than normal, in third quarter, which is sort of the usual pattern. We see somewhat increasing electricity prices due to the structure of our hedges, but you can note that actually third quarter result, we didn't have any help at all from electricity hedges. And actually, if you look at Q2 and Q3 combined, it's very marginal help from hedges in our profits right now. Yes. What products? Well, also here, it's a bit challenging. If you look at the different areas where we do business, first of all, Europe, demand is not very good. And there is a bit of price pressure in Europe. In the U.S., it's not bad, but it's not really taking off. And when it comes to volumes, at least in Middle East, Northern Africa, Far East, it's holding up a bit better. And when we discussed the wood market, I didn't mention, but the sawmills in Sweden are running as much as they can. We said that, but of course, it has to do with the weak Swedish kronor. But also that the sawmills in Sweden, they have more or less unchanged cost because they get well paid for the wood chips, but also for the byproducts being sold to the bioproducts industry, especially biofuels. And that has made the Swedish sawmills having fairly good cost position. And you can see on this graph also when it comes to pricing that you see the difference where the price is today compared to what it historically was, if you take into consideration the depreciation of the Swedish kronor. The question is it's not only about demand because demand is not so good. It's also supply. And you see a number of sawmills now running in negative cash flow. We talked about the situation in Sweden, where we do not have enough access to timber and you have Russia out of play, and you have some difficulties in some other parts of the world like Canada with the weather infestation, et cetera. So, it's a challenging situation. Demand is not good. Supply could change, but not right now as we feel it. However, we do believe in this product, it makes sense to produce wood products as an alternative to concrete and steel, not the least when now the EU is taking another step to going towards a green transition and CBM is slowly coming into place, which makes concrete steel a bit more expensive in the future. Anish, bad demand or not as good at least. Well, as you mentioned, a weak market, but we have been able to deliver what we have produced based on the logs that we can get hold of. In third quarter, prices eroded somewhat. It's not a big decline. But actually, the big impact is that we have been forced to sell it to the markets that don't pay that well as our normal markets. But we have inventories under control. But of course, we're not happy with the profit level, but you have to take into consideration that the market conditions are very weak as we speak.They are.

Renewable energy, should we see reinable energy maybe in this quarter. If you look at the electricity prices, and you look at Sweden and Continental Europe or Germany in this graph, you can see that there is actually decoupling, especially lately. And the Swedish electricity prices, they have been lower. And it's been a lot of rain, a lot of water in our water reservoirs, which means that electricity prices have been pushed down during the third quarter. But we do not only sell electrons. We also sell support services, and that has paid off also in the third quarter, and this is something we try to develop as we go on in the future and see what we can do more. It's mainly the hydropower, but actually, we also use the paper meals and some extent, even the sawmills we have at least a couple of them. And that helps quite a lot now when we look at the result, doesn't it?

Yes. If you think about it, where we have most of our production in northern part of Sweden, average prices in the market during Q3 has only been SEK 20. In Germany, there have been SEK 100. So it's a big price gap due to a lot of rain in the Nordics. Nevertheless, we are on almost SEK 70 million. A normal third quarter and second quarter is SEK 20 million to SEK 30 million. And if you have these price levels, maybe you don't even reach SEK 10 million or SEK 30 million. But it's these new revenue streams that has been established that we actually sell support services that helps the profitability in the current market.

Thank you. Then just a reminder what kind of a company we are and how important it is. When it comes to how we treat the forest, how we manage the forest, I think we've done it in a really good way, actually. Looking at 3 things: mainly, we've been able to increase the amount of standing wood in the forest or doubled at the same time as we have been able to increase the harvest. And not the least, we've also been able to not only reach a level where biodiversity is on a really good level and actually the best in the world. But also, we have been able to develop in a way that we have actually increased our biodiversity index during the last some 20, 30 years. Our strategy to invest in renewable energy and wood products has paid off, not only financially, but also when it comes to our carbon footprint, which is positive, some 7 million tonnes. And if you look about that 7 million tonnes over the last few years, you can also see that step by step we have taken steps in the right direction. And that concludes our presentation, and we are happy to take on your questions. Thank you.

[Operator Instructions] First question from Robin Santavirta, Carnegie.

Two questions I have. First of all, about pulp wood prices in Q3. Did they go up for you guys Q-on-Q? And if so, could you specify how much? And what is your expectations about pulp wood prices for you going forward in Q4 and early 2024? Have we seen the peak?

Mentioned, we increased selling prices of pulpwood to our external customers in Q3. It's still people are prepared to ensure that their mills are running full. And then, of course, we have the task of sourcing pulpwood to our own mills as well, and we buy quite a lot externally. We saw a slight increase in costs in Q3 compared to previous quarters due to us increasing prices in early periods, you have a 6- to 9-month delay. As sort of a slight increase ahead of us as well. It's not a step change, but it's a slight increase. And what will happen on market, as Henrik mentioned, there's a structural undersupply of wood in this market. And we don't believe pulp mills and board mills will take down time forever. And when they start running full, is a good chance it will be or high risk that there will be a squeeze on this market again.

Remember that the pulp mills, they are not taking down time because they can't sell the up. It's mainly that they are, to a large extent, integrated to products that's linked to the consumer market and when that changes, that's what needs to be changed in order to make them run full again. But even though we find the market quite tight. And as I said, nobody is giving up their positions in the wood market right now, not even in pulpwood.

I understand. Thank you. Can I ask about the difference in development of standing timber and then the harvesting cost and the logistic cost to take that would raw material to the meal side, I can see that the harvesting and logistic costs also have gone up over the past 2 years. Could we split out of that development going forward, if oil prices are sort of, or interest rates start to come down so that the harvesting cost and transport cost could essentially start to decline while the spending payment price would not?

If you add the harvest, the final felling, I'm not thinking about the findings, but the final felling, which is the majority of harvesting cost. They represent 20% of the cost compared to the selling prices as they are today, and then you add logistics, another 10%. Of course, they have increased somewhat, but it's linked to salary inflation simplify things. They have not risen in percentage-wise as much as selling prices have risen. We don't expect salary costs to go down. So, you will not get tailwind from that, but it's sort of, we have reached a much higher selling prices for wood that harvesting costs and logistics are not as important as were in the past.

I understand. And the second question is related to the paper segment. Now again, excellent performance by you. And if I look at your ASP sales compared to the delivery volumes, I can see your ASP almost 60% higher in Q3 compared to the average in 2019 and 2021. Then I can see your cost per ton only being up some just below 20% compared to those previous years. I can see sales prices of paper. So, the statistics show they have come down quite significantly recently. What is the reason that your ASPs -- is there something else you book in that revenue number other than pure paper sales. I understand question about the cost? And is it related to energy?

No, the selling revenues received from selling paper in our income statement. There's no change to that. And the cost side is costs. Of course, what we now have is we see higher wood costs, we see higher chemical costs. Electricity cost is where we are right now. Energy costs are made sideways. We have been able to take them down a bit by selling support services to the grid. But the numbers you see are the true numbers for our revenues and costs. But if you were to look at the continent and look at their cost side, you would see quite a substantial step-up in cost for the continental producers. You have a steepening of the cost curve in this industry. That is dramatic.

Remember also that now when the utilization rate is so low in general, there is a bigger or higher cost per ton produced. What we have done in the third quarter is that we have taken some market shares in Europe, but we have also added on some other sales outside Europe, which has helped a bit when it comes to our cost position per ton.

I understand. Can I just sort of just check with this selling support services to the grid is that component significant part of the earnings in the quarter?

No. We treat that it has a cost reduction, and it's not significant if you compare the development of the result. No, it's not significant. It's big numbers, but it's not significant in that context.

But the difference in energy prices is important, Robin, when it comes to the cost for producing. It's not only the utilization rate, but also what we see now, our situation, our cost position versus Continental Europe.

For sure, but I guess the statistics that prices have gone down quite significantly, and that is not really visible in your numbers to the same extent.

I think if we, by and large, we follow the market pricing, but we didn't follow it the peak prices you see at the indexes, we didn't sell at those peak prices. So, we were never at that peak level that you can see in the index, but we follow the general pattern.

All right. That explains a part of it a little. Thank you very much guys.

The next question from Cole Hathorn, Jefferies.

Maybe just actually a follow-up on Robin. I mean when we think about that graphic paper division into the future here, I mean, if you've got kind of the structurally better energy prices potentially and the cost curve steepened, should we be thinking about this as you're not going to go back to that historic margin level, but you should probably be slightly better margins versus history, you'd hope? Just kind of like your thoughts on the longer term on the graphic paper side. Then on the pulpwood dynamics across the industry, I mean I take your point that we do have a structural raw material under supply in the region. But if we think about the cost competitiveness of the Nordic region versus other places globally, how do you think this shakes out with kind of higher wood costs potentially squeezing a bit of the downstream versus closures potentially needed to kind of balance that market?

I can start with the first question. I think you point out an important thing, has the cost curve in paper steepened permanently. It very much boils down to the cost of energy in Sweden -- new green steel mills, they locate them in the Nordics because they think predominantly that energy prices is permanently lower in the Nordics compared to the continent. We do have a product where we sell electricity to the continent already today. We don't have in left, we invest in new machines. And so, we're taking advantage of that steepened cost curve today. There are things that points to that Nordics will structurally have a lower energy cost than the continent. And that could help in the long run our paper division.

And then it's not easy to understand what will be the development on the continent when it comes to how many machines will there be in a few years' time? And also access, if you do produce on recycled fibers, how much of the fibers you need to produce graphic papers, which is all newspapers and magazines, will there be in the market?

When you think about this as well, you can think that our energy division is actually hurt by this differentiation between the Nordics and Germany. So, what we earn on paper, we lose on energy in relative terms. So we're different divisions win in different scenarios going forward. So there's an upside to energy if the cost differences evens out between Germany and Sweden. When you talk about what the future of the forest industry in the Nordics, it's very difficult to answer such a question. But if you think that the valuable part of the forest and the reason why you plan to tree is that you are going to harvest it 8 years later for it to become log to be a building product, help the world to decarbonize, sawmills normally have a 5% to 10% EBITDA margin. And they survive on it. Pulp mills, I guess, would survive on 5% to 10% EBITDA margin as well, but they have normally had much a higher margin. So it's not a law of nature that you should have a very high margin on making pulp. So it's upside to pulpwood prices.

We take the next question from the Larsson, SEB.

Anders, I think I bring back the perspective a bit more to the short term, looking at the fourth quarter. And if you could just help us understand the cost bridge a bit better. So Q4 versus Q3 on variable costs, the maintenance cost bridge. And also if you could please repeat what you already said about seasonal costs if we compare Q4 and Q3?

The easy part is seasonal wise, we had a SEK 40 million reduction in paperboard and SEK 60 million in paper, and that should reverse into Q4 being a headwind wood costs, it's not a material change. You see chemicals coming down a bit, wood cost may be coming up a bit, but it's not material. Energy and paper division will come up if it somewhere in the region of SEK 50 million to SEK 100 million versus Q3. And then we have a maintenance stop in our Iggesund mill that we have guided should cost some SEK 200 million in direct costs and loss of production volumes.

Great. Thank you very much. And then also maybe on renewable energy and the near-term outlook. How do you see the fourth quarter, the winter coming up, I guess a lot has changed since a year ago, the other things have not changed. If you could just please elaborate a bit on the outlook for the fourth quarter, including the support services that you discussed earlier?

I think if you start by what we said in the beginning when we discussed renewable LG was that we have a lot of water in the system. And then it depends, of course, on the weather in Sweden, as we have decoupled from Europe as we saw. And as long as we have that, then normally, the electricity prices are a bit lower. And Support Services, what can we expect?

It's not one product, it's plenty of products, and they are new launched almost every quarter. We have seen quite a stable earnings profile on this. It's more that we have been able, especially in Paper division to add more capacity into this market and add revenues in that way. But definitely, it's a service that is well needed in a more weather-driven electricity system.

And then we have the green certificates that contribute a little bit as well.

Right. But that's interesting what you just said under surprise wise, it has been fairly stable, but you are ramping up volume. Is that still progressing in, let's say, in the year ahead?

Yes. The national grid operator needs to implement more products in order to stabilize this system. But, of course, you add supply in terms of batteries coming, giving some of the services. So it's very difficult to forecast how price will develop. For most of these products, you bid every day on them and either you sell the service or you don't. So it's very difficult to assess the price development. But we can see that the revenue streams has increased over the last 2 years, and it's an established service.

The next question from Oskar Lindstrom, Danske Bank.

Oskar Lindstrom from Danske Bank. Just a couple of questions from me. First off, on the forest. I mean usually, Forest land transactions in Sweden happened during the second half of the year. What are you seeing so far in terms of forest land transaction and pricing in the areas where you have your forest land? That's my first question.

We don't have an update on it. We received the statistics, but it's a lag before we receive the statistics because you have to go through them by external parties to take away housing and stuff like that in the statistics. So there's a lag on it. So I can't comment on the recent months.

But we will be back in the fourth quarter or after the fourth quarter. Right?

My second question is on the balance sheet. I mean, you have still very good cash flows or good cash flows in this quarter. And I think net debt to equity is just 5%. I mean what are you thinking about capital allocation in coming years? And what levels and segments? I mean you don't really have any big CapEx projects in the pipeline. You have a few which are undecided so far. Do you expect to have more projects than what you have sort of talked about so far coming in?

You know we have a pipeline of what we believe are interesting products when it comes to wind power, but we have to evaluate carefully, especially in these times before we take investment decisions, and that we will come back to. We have blister which we have talked about, which we will we're looking at right now. We'll see what the figures simply look at and also to try to understand what the energy market will be like in the future. That's one part. And then we have said that we will slowly increase the capacity of making more board out of the pulp we have available at the Iggesund Mill, but that will be over a 5-year period where we will increase investments slightly, not that much.

And I think we have been quite generous on distributing back money to the shareholders. 7% of our equity we have distributed back to the shareholders during the first 9 months this year. And that's on the back that we have had very good strong cash flow, not the least from paper and every krona accounts. And at the end of the day, we will distribute it back to the shareholders that we don't see a need to support the business development.

The next question is from Martin Melbye, ABG.

Coming back to this discussion about the sleeping on the cost curve. Has prices come down to the margin cost of production for paper and cartonboard or is that led to come?

Not for us. It's a relevant question, Martin, but you should ask it to somebody else that have assets with high costs. But there are assets being closed, modern assets that are in the long location, which gives you an indication that at least part of the assets are at or below cash cost.

I think a lot of the discussions we hear and what we see in the market is actually coming back to the energy situation in different countries. And then, of course, it's the fiber also. If you look at the graphic papers, again, it's our idea of using Swedish electrons Swedish electricity prices together with fresh fibers, we believe that works. But of course, we have to follow what happens in the market. And there is a quite big difference, especially on the energy side now as compared to Continental Europe.

Okay. And then you gave a comment about paper being better in Q4. What was the key reason for that? SEK 50 million to SEK 100 million better on paper in LG or...

No, then I expect myself wrongly. We have headwind on energy costs for paper in Q4 between SEK 50 million and SEK 100 million.

As a reminder, if you wish to register for questions, please [Operator Instructions]. We have a follow-up question from Cole Hathorn, Jefferies.

Apologies, I was cut off earlier. I just wanted to follow up on the answer there. I wanted to ask if we do start to see the construction markets come back hopefully towards the back half of next year or into 2025, what does that mean for wood costs to the wider region, our wood chips increase? And we see kind of a low ultimate cost to the pulp and your paperboard assets? How do you think about that kind of missing element of your raw materials from the kind of sawmill which?

If the construction market recovers, the key question is how much can other countries step up and come back, gear up in production, what price lift is needed for selling prices for timber for them to come back into a normal production state. And then we're a bit back to -- you have a scarcity of forestry raw material in Canada, you have it in Continental Europe. How will the same be able to meet a growing demand for construction materials, sawmills are running in Sweden, as long as they can get hold of logs. So it's sort of nobody standing still because they take market downtime in sawmills. And for a raw material question, it's difficult to get hold of raw material everywhere.

Then have Russia, which is being out of the market for the moment, at least in the western world.

[Operator Instructions] Gentlemen, there are no more questions at this time.

All right. Thank you very much then for interesting questions and a good discussion and see you soon again. Thank you. Bye-bye.