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

Good morning everybody and welcome to the year-end report presentation for Holmen. We are the usual suspects. It's Anders Jernhall and myself, Henrik Sjolund, and we do as always, we go through the presentation and then we're happy to take any questions you have. But let's start with a comment about 2023 in the last quarter. Well, it's another really good performance and result if you look at the total year, despite some challenging market conditions during the year. Especially in the fourth quarter, we felt that market conditions were a bit tougher and also rather big maintenance stop in the Board division. In those times, it's nice feeling to have stable earnings not least from our Forest division and in the fourth quarter also hydropower, which we will come back to a bit later. Given the good performance during 2023 and our strong financial position, the Board of Directors in Holmen have proposed to the Annual General Meeting to increase the ordinary dividend from SEK 8 to SEK 8.50 and also to give an extra dividend of SEK 3. If we look just shortly on our financial position, in 2023, we have not only paid an ordinary dividend and extra dividend, we bought back shares for a bit over SEK 1 billion. We also invested a bit over SEK 1.5 billion in our industry. And still we have a net debt situation where we have less than SEK 2 billion of net debt. So the situation is very strong. And let's move into our business areas then. And starting off with our Forest division, and a few words about the wood market. And I think we have shown this slide for a number of quarters now on this. And the situation is a bit the same as before where prices are moving up. But in the fourth quarter, we do see that solar prices are still increasing. And just a few a number of days ago, we saw an announcement of another price increase in south of Sweden. But if we look at the pulpwood market, maybe it's more correct to say that pulpwood prices were more or less stable in the fourth quarter. If we then take a look at can the industry really afford those prices we have right now, well, if we look at the sawmill operators and we take the market price for wood products, net or less what sawmills pay for saw logs, we see that the margin left is more or less on line with what it has been historically. On the other hand, if we look at pulp mills and the structural change and what has happened in the pulp mill industry during a number of years and the price for pulp less the cost for pulpwood, we see that there is actually some margin left. They could pay even more for the pulpwood. Also looking at prices where they are now and if we go back some 20 years, we can see that prices have actually increased not only in line with inflation, but a bit more than inflation over the last 20 years. So high prices on this that normally means more money when it comes to our Forest division.

That's correct, Henrik. Over the last year, our price -- the price -- high prices have translated into roughly SEK 100 million pickup in profit levels per quarter. And if we go back as long as Henrik did 20 years ago, the cash flow from the forest are more than double than they were 20 years ago. And of course this higher price level have supported the transaction prices for forest properties in the market. And in our case, the value of our forest assets based on the forest transactions have increased another 8% to SEK 56 billion and since we introduced this market-based valuation method end of 2019, where we -- the value has increased by SEK 15 billion. And to make ourselves comfortable with the valuation we have in our books, we already at the start of 2019 asked an external evaluation firm to travel through all our forest holdings and do an assessment of the market value in each district where we have our forests. So they have, over a 5-year period, traveled through the forest, looked at the quality of the forest, the forest roads, closeness to forest industry and looked at the local market prices in each individual spot. And they have made an assessment of the value, which normally every year has arrived at the value -- a few percentage points above the value we have in our books. Last year, actually, for the area they researched, they arrived at the 20% higher value, but that was because 2022 prices were a bit inflated in Sweden. Looking at our method, which we think is a good method, we have 3 years' worth of statistics and transaction prices, which gives stability to our pricing. If you compare our 3-year average, it's still below if you only would look at the last 12 months' transaction. So if you look at the last 12 months' transactions which most market participants or the statistics that are published look at, that gives a higher value than the SEK 56 billion value we have in our balance sheet. Talking about forest transactions, it's actually a very transparent market in Sweden. We have a government agency, Lantmäteriet. They have developed a valuation model and that's a DCF model, discounted cash flow model. That model is used by all the market participants, buyers, sellers and brokers. And the government agency also issues a guidance on the price levels in different parts of Sweden and the costs for different forestry management actions. Everybody inputs these data into this model and then they put in the price they are prepared to pay for the forest property and they get the real yield in return from the model. And for 2023 that real yield, on average, compiled by this government agency was 2.6%. It's actually the highest yield when buying a forest property for the last 15 years. And as you can see from the graph that we show right now, the real yield on forest properties in Sweden never followed nominal yields. Nominal government bond yields down, they've rather been quite stable. And if you add the 2.6% real yield expectation for forest property with the information Henrik gave you on 1.5% price increase in real terms over the last 20 years, well, you could expect the 4% real yield when buying a forest property today. That's not bad, Henrik.

It feels like the forest could be even more expensive.

Yes. And can you earn any more money rather than just harvesting?

Yes, you're talking about the trees but you cannot only grow trees, as you know, you can also grow wind farms or windmills in the forest. But it all comes down to the possibility of getting environmental permits as we have discussed quite many times standing here as well. Now we have 2 permits. And those permits would mean that we could increase our production by 40% of renewables. The first one is Blisterliden, which comes up for decision in the Board during the first quarter, which could add on like 360 gigawatt hours. The question when it comes to windmills, I should say also that the other one, Stormyrberget would come up for decision roughly one year later. Everything we do in Holmen is almost a bet on the green transition in some way. Also, this is a bet that there will be a need for more green electricity in the future. And it makes sense to build it in the forest. As you said, it's not only the trees, you can actually combine trees and windmills in a very good way. It doesn't take -- it's no effect on forestry itself by having windmills. The question is, which is being discussed a lot also in media these days, will there be too much of electricity in north of Sweden and not enough consumption? If you look at what the players have said themselves in terms of how much consumption will be added during the next, say, 10 years, it's a lot. That says that it should not be too much of excess capacity at the same time as there also be built out of transmission capacity to other parts of Sweden, which means that the risk is not that high. And sooner or later, if green steel or hybrid wouldn't happen, I guess there will be other industries being interested in investing in some kind of industry projects where they need a lot of electricity as then prices will be cheaper for a while. But Anders, this is wind and in the fourth quarter wasn't much of wind. It was cold and the weather was something different.

Yes. Up in the Nordics, it was cold. On the continent actually, we had a very mild winter. We had very strong nuclear production in France, which pushed down prices on the continent to a lower level. At the same time, in the Nordics, very cold weather, problems in the nuclear industry or nuclear production, removed a lot of production in Nordics and pushed up Nordic electricity prices to the same level as on the continent. And we use that to run our hydropower mills. As you can see from the graph, it was very low during the autumn. We stored as much water as we could during the third quarter, held back production in the hydropower. And then we pushed full throttle ahead in the fourth quarter producing a lot which gave a good profitability in the fourth quarter, especially from the hydropower. And as you can see from this graph, hydropower is fantastic. You can time the production to when the market needs it. You get paid for stabilizing the grid and you get paid for adding green energy to the market. On average, the last 2 years, we've earned SEK 200 per megawatt hour more than if we had produced stable throughout the quarter.

Thank you. Hydropower is not bad. Changing to wood products, which is more of a rollercoaster and hydropower is quite more stable, to be honest. We have said many times that a lot there is a lot of interest in building in wood. But as you know, especially in Sweden, and this is Sweden, the housing market is really, really slow. But what we can see is that the interest for using wooden frames in different kinds of building has increased and wooden frames have taken market shares. We also see that during times when there is not so much or houses and homes being built out the woods because the market is simply slow when interest rates are high, we see industry and storage buildings taking market shares and adding up for quite substantial business for us. This is Sweden. It's interesting to note, but in general, of course, the construction cycle is really weak at the moment, which means that we have seen prices going down a bit, but we said yesterday, Anders, that actually we are almost on exactly the same spot in the fourth quarter 2023 as we were in 2022. And then, we know that in the spring, normally things pick up a bit and we are a bit more positive. And after the summer, we are normally a bit negative. What we know now at least is that we have come 1 year further or closer to the time when things will really pick up. When it comes, difficult to say. Price pressure means not so easy to make money.

No, and you just stole my line.

Oops, sorry.

We actually have the same price levels that we had Q4 2022. We have the same net cost levels. Of course, log costs are higher, but we receive more revenue from the ships and the biofuels that we send for energy production. So the spread when sawing a plank is the same as it was a year ago. And in the fourth quarter, which is the seasonally weakest quarter, it's not enough to pay all the bills. In our case, we had the maintenance stop -- or not the maintenance stop, an investment stop at our Iggesund sawmill that took away some SEK 30 million from the profit. But we are, as you mentioned, Henrik, 1 year closer to a turnaround in the market.

We are, but not easy to know exactly when that happens. And then something, today is actually the first day of the work to merge 2 business areas into one. We will, as of today, merge our Board division, Paperboard and Paper division into one business area that we will call Holmen Board and Paper. It's a logic step for us to gather the competence we have within the process industry in one business area, but it's also a structural move to safeguard our long-term competitiveness in Holmen and our industries. At the same time, as we do this, we have also appointed Lars Lundin to lead the organization in the new Holmen Board and Paper. He was before in charge of our Paper division. I'm sure we will come back about what this means, but let's say a few words about the market situation for, first of all, the Board market. It's been a really tough year. Demand in Europe is down a bit more than 20%. I'm quite sure that the real demand is not down 20%, maybe half of it. And there has been a lot of destocking during the year. The feeling we have right now is that, well, the destocking is most probably over at least in discussions with our customers, most of it should be in the past. And when we look at our own order book, we can see that, well, things are picking up a bit, but it's not easy to know exactly where we are because the overall demand is not that great. Prices, well, if you look at folding boxboard, I'm sure there is some price pressure in the market, less so when you look into our niche product solid bleached board that we produce at Iggesund mill, but clearly it has been quite a lot of announcements and new capacity in the past when things were great and it will take some time before we have absorbed that in the market. If we then look at our Paper division, you know there is structural decline in the market. We take constantly market share, but still it's a challenge for us. We've done it well. We are really happy that we do so well in some segments like the book segment, for example. Here, well, it's a relative cost position and you know that when prices were skyrocketing, it was based on really high energy prices on the continent, but also quite expensive, recycled fibers for the ones producing on the continent. Our concept is our fresh fibers in Sweden together with fossil free energy, electricity in Sweden. It's a good concept, but as energy is a bit cheaper and recycled fibers are a bit cheaper, it's got a little bit tighter and there is -- there has been room for some price decreases in the market. Also, we have felt that still, Anders, we're not doing bad.

Not in Paper, but maybe in Board.

Yes.

In Board, we of course were hit by the maintenance stop that we had every year at the Iggesund mill. It costs us some SEK 180 million. Most of it direct costs, some is that we took production downtime. And that -- it's a weak market now with the deliveries we had this fourth quarter, underlying operating profit is only slightly positive. We need higher operating rates both to get revenues, but also this part of the business is very sensitive in terms of consumption rates actually goes up quite a lot when you can't run your machines in an efficient manner. Looking at the Paper, at still impressive earnings. We have a drop, of course of SEK 200 million quarter-over-quarter, 1/3 is due to prices declining, 1/3 is to energy costs going up and 1/3 is seasonally due to higher personnel costs in Q4, and we collect all our second half maintenance in the fourth quarter rather than -- and none in the third quarter, but still profitability for the fourth quarter at a very good level.

Shall we say something about how we will report in the future maybe?

Yes. From the first quarter, we will report the Board and Paper operations together and the 3 other segments will be the forestry, the hydro and wind and the wood products segment.

Thank you. All right. I think most of you have followed the article in Dagens Industri in Sweden when Frontline was here to trying to learn a little bit more understand how we do forestry in Sweden and how important the forest is. To some extent, actually, that was a success. For the first time almost, we hear also from Brussels that the forest is extremely important. And what we have done over the years, when we have increased the amount of woods standing in the forest at the same time as we've been able to actually do better than most in the world when it comes to preserving and enhancing biodiversity has been knowledged, which is really good news. We will see what comes after that, but we take it as a really good step in the right direction. And in our case, our business model is easy. We sometimes say we grow houses, but what we do is, of course, we always focus on making sure that 80 to 100 years later, we should harvest as much timber or sawlogs as possible and also take care of the rest. And by doing that and also do it in a sustainable way, we create a lot of climate benefit. Closing 2023, the climate benefit has increased somewhat from 7.2 million to 7.5 million tonnes. All right, that's it. Thank you very much. We're happy to take any questions you might have.

[Operator Instructions] Our first question comes from Robin Santavirta from Carnegie.

I have a few questions, first, related to the Paper and Paperboard segments. Could you specify a bit what the outlook regarding sales prices for this year is in these 2 segments? You have surprisingly good profitability and ASP still in Paper, especially we have seen prices declining in the market. And in Paperboard, you said there's some price pressure, but what are we talking about? What's the difference between SBB and SBS?

I think if we say a few words about Paper first, utilization rates in the market is so bad. It's between, say, high 50s to low 70s. Normally, you need like 90 to have a good balance. It's not easy to understand exactly what that means for how people act in the market, but we can see that some kind of a handbrake or brake we have by just having such ridiculous numbers when it comes to utilization rate. I think a lot comes down to cost. When you have a low utilization rate, you have a really high fixed cost per tonne. But it doesn't make any sense to go for extra volumes with a lower price to try to cover the cost because maybe it will not work. Very difficult to know exactly where it will go, but for sure, there has been some price pressure in the paper market and decreased prices, but no collapse. Prices are still on the level, which we would have been extremely happy to have a few years ago. On the other hand, when pulp prices and some chemicals, et cetera, were on a lower level. Board prices, I don't know if you want to comment?

This market works as it usually does. It moves very slowly. A weak market puts pressure on people, but you rarely have these kind of radical movements. We can't escape the general price pressure in the market, but it's not a -- nothing is happening that hasn't happened before. It works like it has always done.

We also have a mixture of long-term contracts and shorter-term contracts. And obviously, long-term contracts gives some kind of stability.

Could you specify what is the average time length or time span of those price agreements?

We have a bucket with long-term contracted bucket with -- until further notice contracts and maybe the share is 50-50.

Paper, in general, we are short.

Sure. I was wondering about what you said about the cost per tonne. I understand if capacity utilization is low, then the cost per tonne is high. But is there also an element of higher energy prices in Continental Europe that has sort of kept the Paper, especially prices quite high? And now we have seen energy prices decline in Continental Europe. Is that then, in a way, risk that the lower energy price in Continental Europe could push down the Paperboard and especially Paper prices?

I think you are right. I mean, that's part of what we have seen. The utilization rate or capacity utilization rate was not great even when prices were skyrocketing, it was based on cost. I say that we take some market shares. Remember also that we are running with a higher utilization rate in Holmen. If the average is really low, we are at least mid-80s or higher.

Right. And the last question I have is also related to the outlook, and that is on wood products. What are you seeing at the moment? Seasonally, of course, tough time now during the winter, but do you see a pickup in demand in any of your sort of top key areas? What do you see in terms of pricing going forward to Q1 and Q2?

We are entering into a phase a few months from now, which is a seasonally strong period where we always normally have an uptick. There is very thin inventory levels throughout the market because nobody is expecting that the construction market will develop strongly. That's all guidance we can give on.

That's why we said it looks like last year because exactly that happened in 2023.

Our next question comes from Oskar Lindstrom with Danske Bank.

Three questions for me. The first one is on the merger of Paper and Paperboard divisions. Should we expect any costs now initially for this merger and any synergies a little bit longer term? So that's my first question. Should I go ahead with the other ones?

We can answer.

No, you should not expect any special costs on this. And of course, over time, we will extract synergies, but that's not the goal with the movement that we are making.

Right. Good. Moving on to -- looking ahead a little bit more here. I mean investment opportunities going forward. As you said, you have a very strong balance sheet, and we're hopefully, at the trough of the cycle now. And usually, that's a good time to sort of make investments. What's the status of the 2 bigger projects that you have on the industrial side, the Iggesund volume expansion and the potential undecided Rundvik sawmill investment? Is there anything else you see in terms of investment opportunities for you in your industrial operations?

Oskar, I mentioned that we have 2 environmental permits to build wind. That's quite a lot of money. And we will see if we take the decision, but the first one will come up for a decision in the Board during the first quarter, which is roughly SEK 1.5 billion.

And we have 2 developing investments going on. We're rebuilding a paper machine in order to both strengthen our book paper position, but also to enter the transport packaging market. And then we have the rebuild of the Iggesund sawmill, which will reposition that sawmill into more of a construction market in addition to the joinery industry. The other projects we are going through step by step, our Iggesund investments. In this part of the market or the phase of the market, it's not so much focused on volume rather than on quality. And on Rundvik, we'll have to come back on that.

All right. And then my final question is on forest land transaction prices. I mean you mentioned how much you revalued your forests compared to last year. But of course, that's on a 3-year trailing average. What would you say was the price change in the regions where you have your forests year-on-year? And if possible, what's your feeling for the market looking into 2024?

First of all, there is not one market price. There's different methods of calculating the market price. Personally, I think our method is better than just looking at only 1 year's transactions. We look at 3 years' transactions, and we have different sources. But if you only use 1-year transactions, as I mentioned, you arrive at a higher number than we have when we use 3 years' transactions. So we're not using the average market price for 3 years. We're using 3 years' transactions to calculate the market price, which gives more stability and, over time, a better way of measuring where the market price is. I didn't answer all your questions, but let's...

Yes, on your feeling for the market for 2024.

I can't comment upon that. If you look at the real yield when you buy a forest property, you have not gotten as much money as you have for last 15 years, if you buy -- put your money in and buy a forest property. That's maybe a good entry point. And the statistics that Henrik showed that over the last 20 years, you have received 1.5% real price inflation. Remember, that's in a 20-year period where the paper industry more or less have disappeared. And we are entering a 20-year period when everybody wants to build in wood, still concrete will be more expensive. And also the green steel mills, well, they might need pulpwood to become truly green. So there is a lot of demand for this rare and limited resource that we own.

And limited, not only in Sweden.

[Operator Instructions] Our next question comes from Linus Larsson from SEB.

If we could maybe spend a couple more minutes on Paperboard, just to understand what happened in the fourth quarter. If I look at volumes, they were notwithstanding the maintenance impact. But I mean, shipments were the lowest since 2001. Exactly what's the explanation for that? And what should we expect for the first quarter? And also on Paperboard pricing, we touched upon it already, but just if we could spend a bit more time on that. I think it seems like the realized price declined sequentially by some 4% in the fourth quarter. Are we seeing an accelerating or decelerating price trend into the first quarter, please?

Where should we start?

You're right. And the maintenance stop did not affect deliveries. It's only affected the production and delivery is also very weak. Fourth quarter is always seasonally weaker quarter. You don't have deliveries in the last 2 weeks of December. That's partly explaining the soft patch we are in. If you compare to the market statistics, in general, the market has dropped 20%, where in Q4, down some 20%. It's a very weak quarter from a delivery perspective, but I don't think you should read too much into it. And on the average selling prices, that's a -- you could say, it's a combination of currency effects that we have our Workington mill, the Iggesund mill. It doesn't reflect a true underlying price decline for Paperboard. It's somewhat -- some price pressure on it, but it's not -- the price is not down as much as you can read out from the average selling prices you calculate in the report.

But are you still expecting some further sequential price decline in Paperboard on average in the first compared to the fourth quarter?

The direction is not positive, but it's not a big movement we're seeing on the whole product portfolio that we have.

Okay. Great. And then also on Paperboard, if you could please update us on your maintenance schedule for 2024 and the impact of such maintenance?

We have our usual maintenance stop in the second half of 2024 in Iggesund in the same magnitude as this year, roughly SEK 200 million expectations. We don't have a maintenance stop, but our Workington mill, we only have it every second year. So the next stop at the Workington mill will be first half of 2025.

Ladies and gentlemen, this was our last question.

All right. If no more questions, thank you very much for taking your time listening to us and good questions, and I look forward to see you soon again. Thank you.