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

Ladies and gentlemen, welcome to the Holmen Interim Report January-June 2024 Conference Call. I'm Iruna, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Henrik Sjölund, President and CEO. You will now be joined into the conference room. Thank you.

Good morning, everybody, and welcome to the interim report presentation for Holmen. It's me, Henrik Sjölund; and Anders Jernhall. We'll go through the presentation and then we take any questions you might have after the presentation. So let's start. First of all, a comment on the result, which was SEK 980-and-a-bit-more millions in the second quarter, which is actually a good result, we think, given the market conditions we have and the economic situation we have. And particularly happy about Board and Paper, actually. And if we look at our industry and how we have performed and we include also Wood Products and take a look also back some years, we can see that, well, in the first half year of this year, we performed some 16% return on capital employed. And if you look at what we have done over the last 10 years, we have reached an average of 18%. If you then look at our financial position, we have a very strong financial position also after having paid SEK 1.8 billion in dividend in the second quarter. And we have a net debt of 6% of equity or SEK 3.3 billion. Given the strong financial position, the Board of Directors in Holmen have decided to execute on the authorization from the AGM to buy back some shares up to a maximum of 3 million shares. And you might comment on that a little later. Changing subjects a little bit from financial position to our different divisions, starting with the Forest or, let's say, let's talk about the wood market. And we have had a situation now when it comes to the wood market in Sweden where simply, supply hasn't been enough to meet demand from the forest industry and the energy sector. We have seen prices going up for wood for some time. And also during the second quarter, prices continue to go up. We also see difference between northern parts of Sweden and southern parts of Sweden, which is bigger than normal, in fact, a historically big gap between these 2 areas in Sweden. And one can ask, can we pay or can the industry afford to pay these high wood prices? Well, if we look at the margin between the market price for wood products and pulp and the net cost for pulp wood and timber for the sawmills, we can see that if you look at the sawmill industry, first of all, well, the margin is more or less on a normal level, helped a bit by the pulp mills paying fairly good prices for wood chips and also for other residuals for energy purposes. If you look at the pulp side, well, the pulp mills actually also at these, pulpwood prices have a pretty good margin. Or when you compare pulp price versus net log cost, the margin is as big as it has been historically, not when we reached the peak, but not on a bad level at all. So Anders, we are talking about our Forest division, higher prices for wood means also higher revenues?

Yes. These price increases that we have seen in recent years have increased cash flow from the forestry operations from harvesting. We are at a level which is roughly 60% higher than we were 3 years ago when taking down the trees and transporting them to the industrial activities. And looking specifically at the second quarter, we always seasonally have a lot of harvesting of timber logs in the second quarter, which in the current price environment means that we get a boost to profitability of the Forestry division. We do also and you can note that we have a bit higher change in value in Forest. It's the higher wood prices that is translating into a higher change in value in our P&L. If we take the next slide, Henrik, we can conclude that the wood prices has risen or doubled over the last 20 years. If you take out inflation component, it means that wood prices have increased, on average, 1.6% per year in real terms, which is almost twice as high as the inflation rate has been. And just an illustration of the nature of the assets we have, it has increased 0.6% per year, the volume of trees we have standing at our Forest, and these 2 factors illustrate the real nature of our Forest assets. Back to you, Henrik.

So higher prices, higher revenues and also support the value of the Forest itself. Let's move on to Renewable Energy. If we take a look at the market, we can see that after a quite cold winter actually in Sweden and high prices in the first quarter, prices in Sweden, both in south of Sweden and in the north of Sweden came down to relatively low levels. In Germany, well, we have a lot of solar, we know that. So daytime, sometimes prices are even negative, but the cost for producing energy during nighttime based on quite high cost for fossil energy made that the gap between Swedish prices and German prices actually widened again in the second quarter. You will come back to what electricity prices means for the financial impact. We'll go through one more thing. You know that we are working hard to get environmental permits for wind farms on our own land. This is just an illustration to a little bit better explain where we are in the different stages of getting the environmental permits. Right now, we have 2 wind farms up and running. We are -- have one under construction. We have one more permit that comes up for a decision next year. And we have a number of projects in different phases. We also made a screening of our total forest land to see the potential, which is on the left-hand side of the slide. It's a huge potential, but as always, it depends on environmental permits to be able to take them to an investment decision. We have a couple of them up and running, as we said, same time as electricity prices are not that high. But what we have with the potential when it comes to the projects, that's a potential to long term be able to support emerging green industry we, at least, see coming in Sweden. The question is when exactly it will come and to what extent. This is the best forecast we have at the moment. But in a few years' time, of course, it should be a different situation with a lot more green industry coming into place. Okay, Anders, electricity prices and revenues.

With the drop in pricing that you mentioned, Henrik, of course, profitability goes down on the electricity division. We run this more or less fully unhedged. It doesn't really add value to hedge electricity prices. And you mentioned, Henrik, that we had prices that were 20% below the average for a second quarter in Sweden. And if we go back in history, pre-pandemic levels, normally, our division would earn some SEK 20 million to SEK 30 million in the second quarter. Now we earned it twice the amount, and that's due to we have added a lot of support services. We have increased the volumes we sell to the market. And if we show on the next slide, we show that we sell steadily at the premium first half this year, 30% premium to market pricing is our average selling prices. And we get that by being able to time our production to the market, the combination we have on hydro and wind and selling support services, and we also sell a green energy that the market is prepared to pay a premium for. And in the early days before the pandemic, the premium for our portfolio was quite small, 5% to 10%. Now we are at 30% with a high volume. Back to you, Henrik.

Thank you. Moving on to Wood Products. Well, if we look at the market for wood products, to be honest, demand for wood products is not very good. Actually, we cannot see anywhere in the world where demand is really picking up. The reason why we have been able to -- or let's say, during the spring, you always have a seasonal effect when demand picks up a bit, and we can also see that prices have gone up. But the reason behind it is not that demand has been really good; it's simply lack of supply, lack of wood and high wood cost. And the question is where it's going. We saw during the springtime that prices went up. But where we are right now, we see prices moving sideways at best. If we then talk a few, say, a few words about our quite big project up at Iggesund, it's about to be finalized now. And what we have done is that we have mainly made it possible to go for more construction wood, less joinery, which means a better product mix given what the market looks like today and also a better market mix over time. There is also potential to increase capacity, but that will not be discussed or we cannot do so much about that right now. It's something that we will have to make use of the potential when the market is there for it. On increased prices, Anders?

Yes. Well, increased prices has enabled us to pay more to those that own the forest. Log costs have risen quite a lot. If we look year-to-date, we have SEK 200 million higher wood -- log costs compared to the first 6 months last year. From financially, we have compensated that by -- half of that has been compensated by increasing the revenues from byproducts sold to pulp mills and not least energy facilities. And the other half is -- has been compensated by increase in the prices. And as Henrik mentioned, prices rose in the early days of this quarter, which meant that this quarter at least showed some profitability.

Yes. So move on to Board and Paper, our new business area. Well, starting off with the market situation for Board and then we take Paper separately when it comes to the market. Well, we said in the last quarter that we see that destocking was more or less over. That's the same feeling. Our order book is a little bit better or is better. Our deliveries in the second quarter is actually quite okay. And most of what happened in 2023 when consumption fell a lot, well not most, but at least partly, we have seen that we have recovered from that loss. At the same time that we should at least remember that there's also more capacity in the market. But things look better. And when it comes to pricing, well, there were some price announcement during the quarter. But in our case, we see that prices are stable at the moment. If we then look at the situation for paper, well, we know that in 2023, we had quite a huge drop in demand. This year, so far, demand has been stable. In our case -- or let's say, demand in this market is not enough to run the machines fully in Europe. Maybe operating rate is around 75% or something. Where you need to be really happy, I would say, you need 90%. We are running at roughly 90%. And our order books are -- they are also okay; they are even good. And what we have been able to do is to gain some market share. We saw prices coming down at the year-end. And where we are right now, prices are also in this market, they are stable. What we do both when it comes to Board and Paper is that we take advantage of what we have in Sweden, which is the Swedish local fiber and the fossil-free energy that we make use of. And that has become more and more important when we do business in the niches where we are, especially in the consumer board and book segment, for example, where we have a footprint which is quite fantastic compared to most of our competitors, especially in Continental Europe. Okay, Anders, I'll leave it to you.

Before commenting the quarter, we are a bit -- I'm used to present this as a totality. In the second quarter, half of the turnover came from Board and half of the turnover come from Paper. And actually, 50% of the EBITDA was from each leg, Paper and Board. Given that 3/4 of the capital is in the Board division, they have higher depreciation. So Paper still contributes more than half of EBIT in this division. What we saw changing this quarter was that we saw higher Board volumes and we also had quite a good product mix, both in Board and Paper, which helped offset -- more than offset the high log costs. And hence, we saw a rising quarterly profit. Year-over-year, the year-to-date cost for wood has increased by SEK 200 million also in this division. We've been able to offset that by increasing volumes, better production efficiency and that we get more paid for our support services. The drop in profitability year-over-year is explained by lower paper prices and that we, last year, earned quite a lot of money on selling excess electricity.

Thank you. Then just a reminder what kind of a company we are. We do everything we can to extract value from the land we own, and we plant trees with 80- to 100-years perspective in order to get as much sawlogs as possible that we run our -- through our sawmills to produce houses and homes out of wood. And we do not only harvest the trees, we also harvest quite a lot of energy in the water running through the rivers in our hydropower plants and some -- making use of some of the energy in the wind blowing over the trees in wind farms, which we make use of when we take care of the rest from the forest and the sawmills producing board and paper. All of that together and our business concept as such means that we are already today beyond net zero, meaning that what we do in the forest when trees are growing a bit better every year and we make sure that when we look at the growth that stays in the forest, we every year store some a bit more than 1.5 million tonnes of carbon. And some of the carbon also stays in the planks, in houses and homes out of wood, which means that a bit over 2 million tonnes we store every year, and our own emissions are really, really low. That's everything for us, and we're happy to take any questions you might have.

[Operator Instructions] The first question from the phone comes from Christian Kopfer with Handelsbanken.

Firstly, on the Forest side, I just wonder, if I understood it correctly that EBITDA of almost SEK 500 million in the quarter on the Forest. Is that a fair base from hereon given current prices for sawlogs and pulpwood?

Yes, in Q2, there's a clean underlying result, a bit helped by a good mix with a lot of final harvesting. So it's a bit higher than normal in the second quarter for that reason. But on the other hand, wood prices are still increasing, so you should expect a bit higher sales prices in the third quarter.

Right. That's very clear. And for Board and Paper, you mentioned that you had a very favorable mix. So was that a onetime rabbit that you were able to pull out of the hat? Or how are you able to maintain this mix?

You always have fluctuations in the product mix. This was a good quarter which helped. Of course, our ambition is to maintain this high-quality product mix, but it's a bit dependent on how the market develops. The intention is to change the product mix over time, which we have done as well. But as Anders said, it's not even.

All right. Fair enough. So over time, you're not especially worried that mix should come down from these kind of these levels?

That's not the idea.

The next question from the phone comes from Ephrem Ravi with Citi.

Three short questions. Firstly, on the Paper and Board division, can you remind us how much was the profit from electricity sale last year, which was not repeated this year, just to get a sense as to the like-for-like profitability in that division? Secondly, a clarification on your comment that the Iggesund Sawmill upgrade will -- I think it will add another 100,000 cubic meters of capacity into the market. Given the weak market conditions, do you think you will be able to run it at capacity? Or will you focus mainly on mix improvement? I suppose it will be lower cost than your older sawmills in the system. So is there some way to optimize the system for higher profitability? And thirdly, on your comment on the release that the prices increased in the second quarter due to supply shortages, but obviously, Holmen's deliveries were also lower quarter-on-quarter. Are you planning on seeing higher deliveries in the third quarter given the shortages that you're seeing in the second quarter?

Should you start with the electricity hedges and...

Yes. Close to SEK 0.5 billion was the profitability we had in the first quarter previous year, that was sort of not repeated.

And you're absolutely right when it comes to product mix that it's a fierce competition for wood. And where we are right now, we will use the potential we have at the Iggesund Sawmill to improve product mix and market mix, first of all. If we increase, the capacity is there, but it will depend on the market situation. What was the third one?

It was more or less the same. We are -- I would say we have low volumes in the second quarter. They are lower than normal. We are not as focused to maximize volume in this market because we were -- we don't think it adds so much to -- of course, it adds some fixed cost [ absorbation ], but that should not be our focus in this part of the cycle. It's better to be prepared when the construction cycle turns. So we are backing off a bit from volumes right now.

The next question from the phone comes from Robin Santavirta with Carnegie.

First of all, I have a question related to the Board and Paper segment. We can see that deliveries were up Q-on-Q and also year-on-year. But what is the current demand and order book momentum when it comes to paperboards and graphic papers? Is it an improving momentum still? Or do you see a stagnation in order intake momentum?

If you take paperboard, last year was quite tough with customers taking down stock levels. That's quite clear. And where we are now, we do see that the order book is better. I wouldn't say we are back to where we were a couple of years ago. We have also produced better and our deliveries are a bit better than the last couple of quarters at least. So things are improving when it comes to paperboard, but remember also that there is more capacity available in the market. When it comes to paper, well, we've been used to that demand is dropping all the time. Right now, we are in a phase where it's fairly stable. But as I said before, for the industry, operating rates are not enough. And it's extremely important also then to look at how you distribute your fixed cost when you can't run full. That, together with higher cost for recycled fibers on the continent, I think it has helped when we see that prices are now stable in paper. And as I said, our operating rate is higher.

Yes, for sure. Can I ask about the pricing interval in both paperboard and graphic paper, just to understand sort of what the direction when we go to H2 and maybe next year is. We have seen in paperboard some price increase announcement, and I would assume the best guess for your kind of paperboard pricing in the market is rather up than down. What is the interval -- the average price interval you have in the paperboard business, and what is it in the graphic paper segment?

When we comment on pricing as the same comment that we normally do on paperboard, it takes time to move pricing. The only instance when you actually move prices quite quickly was during the energy crisis, but that was cost-driven. Now we're more back to a normal situation where you have a mix of long and short contracts, but the market is very slow on changing pricing. It's not a commodity. Remember, it's very much a relationship, bilateral relationship where pricing is very difficult to move even if you have short contracts.

And in paper, contracts are shorter, most of them. But as I said, it's also there, you have the influence of the costs for recycled fibers and also wood, of course, for us being up here in the Nordics. And prices where we are right now, they are stable.

Right. When you say, Henrik, shorter in paper, is that quarterly contracts?

Most of them, yes.

Yes. A final question I have, you pointed out that, obviously, with higher log and pulpwood pricing, the cash flow in Forest is higher now, and we also have lower interest rates in Sweden and in Europe. Still it seems as the... [Technical Difficulty]

Gentlemen, it seems we lost connection with the questioner. I will announce the next one. The next question comes from Johannes Grunselius with DNB Markets.

It's Johannes here. My question is on your announcement today to buy back 3 million shares. If you could help us a little bit to interpret this commitment. Are you buying sort of at any levels? Or how should we see it? Are you very flexible in trying to sort of getting the shares on special levels? And why did you come up with 3 million as a specific number? Because your balance sheet is actually so strong, so you can do a lot more than that.

We have said that we will -- the Board has given us the authorization to buy back up to 3 million. And we used 3 million just as a guidance that we will not buy 10% of our shares. This is 2% of our shares. And we don't know how many shares we will buy back. We have a strong balance sheet, and we want to keep the balance sheet strong. We've felt that 3 million shares is something that we can do without affecting the balance sheet strength. Rates are coming down, it's cheaper to fund a share buyback right now, and it's also quite a good way of increasing the Forest holding per share. How many shares we will buy back, we can't commit to any number, but it will not be more than 3 million.

Okay, understood. But let's assume you buy back these 3 million shares, you can, I guess, come back to the market with a new announcement on a new commitment, right, because you have a bigger authorization from the AGM, right?

Yes, that's possible.

We have -- yes. Yes.

Theoretically.

Yes. Theoretically, yes, okay. And then I have a question on basically the business or operations. It's very clear that you're exposed to the spot market when it comes to your energy business, but your industry is also consuming a lot of electricity, obviously, and that's hedged. Can you help us a little bit on sort of the hedging levels you have and if you will sort of get more favorable electricity prices to your industry in the next few quarters given the weakness in electricity prices over the last few months?

This year, we have had 0 -- the hedges have been a zero-sum game for us. We -- they saved us money in the first quarter and cost us money in the second quarter. But net-net, it has had no impact on the electricity cost so far, which gives you an indication of the hedge levels. And we -- for the rest of the year, we are hedged at roughly at the same level this year.

And almost fully hedged.

Yes, almost fully hedged. So spot pricing will not have any meaningful impact.

Next question from the phone comes from James Perry with Citigroup.

I'd just like to ask again about graphic paper pricing. I know you said that the demand is stable and that pricing is moving sideways, but how do you assess the environment for price increases in the coming quarters? Do you see any potential for positive momentum building in H2? Or do you think more closures are still needed? And secondly, just on the forest pricing, obviously, we've heard a peer that was reluctant to mark-to-market their forest due to limited data. But how do you view the current market, the number of transactions compared to normal? And do you have a sense of how forest prices are changing in H2?

If I start with paper and pricing, as I said before, we come from last year when prices came down a bit. When I say prices are stable, it's supported by also a higher cost for producers and also cost for distributing the fixed cost over not enough big volumes for most players. And I'm sure that has helped when I say that prices now are stable. And if cost is continue to go up, I'm sure more people than us are looking at, well, we should need a price increase. But whether it will happen or not, that's too early to say.

And on forest transactions, as you know, we only do our revaluation annually, and that's the philosophy we have. We think this asset is a bit slow moving in changing prices, and that is more relevant to look at multiyear transactions to get a good, sound base for the valuation that we use in our book. And it's an illustration of what the pricing is in the market for private forest land. I can't comment on the volumes. It's always thinner volumes in the first half of the year compared to the second half of the year. And it's quite natural for this kind of market to trying to find a new level after -- everybody knew, 2022, you had inflated levels with Akelius paying a premium. But that's also why we use 3 years' worth of transaction to get the stability in the pricing and more accuracy.

The next question from the phone comes from Linus Larsson with SEB.

My first question is maybe on some general note with regards to the cyclical development overall. We're halfway through the third quarter already. So I'd be curious to have -- especially given the recent macro news flow to hear your assessment of how you see potential cyclical recovery developing and hopefully progressing, what are your latest takes in your various market exposures in terms of recovery, demand, order intake, et cetera?

We can -- if you look at the statistics and take a step back, you can see that still, as Henrik mentioned, the board market is quite off from the '21, '22 levels. The consumers, we are not -- we don't see the demand that we had a few years ago. We are slowly on the way back, but it's difficult to comment. We need help by consumer spending more in our segments and back to the levels we were in the past.

Absolutely. And in Wood Products, I was quite clear that where demand does not look very good, it's supply that makes the price -- also helped the price to go up in the -- especially in the first quarter.

Right. That's helpful. And then maybe specifically on your Wood Products division, you said in terms of pricing, sideways at best. How do you see the other moving parts if you take, for instance, byproducts, how are pricing developing for byproducts? What's the raw material price trend into the third quarter?

What we have seen lately is that if we didn't had a period where the increase in by-product prices have been able to compensate for increasing log costs, it becomes more difficult to compensate and the increasing log cost hits P&L. And that's what we were seeing in the third quarter, that we would see a net increase in wood cost for Wood Products in the third quarter.

All right. Net of by-product sales?

Yes.

Yes.

Great. And then just finally, a detail maybe on the third quarter, you tend to have low fixed costs. Could you just give us an update on how you see seasonality in costs in the third and fourth quarters, please?

Seasonally, it will be the Board and Paper division enjoying lower costs, roughly SEK 70 million, SEK 70 million, maybe SEK 80 million, but that's a neighborhood. Wood Products also have lower cost, but also you see lower volumes. So net-net, it's not a positive effect for Wood Products in the third quarter. And the other divisions you -- I commented on that you have a bit negative effect on the Forest division because harvesting normalizes in the third quarter. It was very good -- or the mix is good in the second quarter.

The next question comes from Oskar Lindstrom with Danske Bank.

Three sets of questions from me. The first one is on the Board segment. You mentioned that there's more capacity in the market. Is this just from Europe? Or are you also seeing competition to your business from outside Europe? And I mean, either way, do you feel that you need to invest more in your production assets in Iggesund to safeguard your market share in face of the increasing competition or not? And what's your thinking here?

I think when it comes to competition from other parts of the world, it's more a challenge for us in Europe to sell enough big volumes for us outside Europe. More than that, we see competition in Europe from other players. Roughly 20% in our segments should go somewhere else. And when it comes to our investments, Anders, I think we have invested quite a lot in our mills, especially at Iggesund Mill. But what we have as a potential ourselves is to work with our own production efficiency, volumes, deliveries. And we are in a niche where we should be able to run with a decent operating rate also without more investments than what we already have planned.

My second question is on the wood business area. I mean could you say something about the volume and potential earnings impact of the Iggesund Sawmill investments that you're doing for next year, of course? Does this sort of require improving market conditions to fully exploit? Or given what markets are now, should we still expect some kind of a positive impact from that?

What we can do with the investment in Iggesund, there is a potential to increase volume. If we don't do it, we can take down fixed costs. And right now, we are leaning to -- or we are taking down fixed costs instead. And then when markets improve, you also need to get hold of the logs. But when markets improve, we have the potential to ramp up production there. And this investment, we have had it on our minds for quite some time, and we've also been investing now for some time. But it's important for us to follow the market, which means more construction wood, less joinery and also that will have a positive effect on our market mix.

And could you quantify or would you be willing to quantify those effects, the lower fixed costs and the impact of the better mix?

No. It's difficult. And if we stay with -- this sawmill was built like 35 years ago. This investment program, which is the final phase of SEK 400 million, we have made some investments a few years before that, essentially means that the sawmill is as if it was newly built. So we have rebuilt the sawmill, and it's ready for the next 30 years of operations and in a very efficient manner with a better ability to address the rising demand for the construction market.

Good. And my final question is just on the Renewable Energy side. You mentioned the rebuild of the Junsterforsen Power Station, which had started already in March and would continue throughout the year. Now you mentioned, I think it was 90 gigawatt hours to be lost. How should we -- what was the impact in Q2? And what kind of impact should we expect in Q3 and Q4, respectively? Evenly distributed? Or -- yes.

If you make it easy, it's 8% of our production capacity. So you take out 8% of our hydropower earnings for this period.

Right. Okay, so evenly distributed. Those are all my questions.

[Operator Instructions] We have another question from the line of Cole Hathorn with Jefferies.

Firstly, you gave a nice slide on the margins relative for sawmills and pulp mills, arguing that sawlogs and pulpwood has risen, but to a reasonable level because people are still making money. However, on the pulp side, with pulp prices rolling over, do you expect the trend to effectively reverse? Now that pulp prices are coming down, could we see pulpwood pressure on the downside? Or is the market just so tight that it's just going to be the pulp producer margins that come down? And then shifting to the Wood Products side, have you seen any changes in the U.S. market? I know you export roughly about 10% of your supply there. I'm just wondering any color that you can give from the U.S. market would be helpful.

The first question, the -- there is such a tightness in the wood market in the Nordics. So you would need to see downtime to ease the pressure of the pulpwood market.

But you don't take downtime with those margins.

No...

So there is room for less margin, so to say.

Yes. And on the U.S. wood product market, I have signaled turnarounds like 7 or 8 or 9 times the last 18 months, but has been false signals. It's a -- we don't -- it's quite a soft market in the U.S.

And then maybe just following up on the Paper and Board margin, you called out that it's roughly 50-50 from an EBITDA perspective. I mean that's robust EBITDA margins for kind of the Board side of the business compared to some of your peers, I'd imagine. I'm just trying to understand, what's driven kind of your better relative performance? Is it kind of your premium exposure holding up well? I'm just trying to get a bit of understanding of the healthier margins on the Board side.

A lot of our Board business is quite niche-focused, focused on the premium niches. And when we get the whole system to work in a good manner and we have very efficient facilities and a lot of high self-efficiency of both wood and energy through our biofuel boiler, it gives a good profitability.

It's not only the market, it's our own performance in the mill as well, especially the Iggesund Mill in this case.

Gentlemen, there are no more questions from the phone.

No more questions, then thank you very much for taking the time and for good discussions, and look forward to see you soon again. Bye-bye.

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