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

Good morning, everybody, and welcome to the Interim Report Presentation for January-September for the Holmen Group. It's me, Henrik Sjolund, and Anders Jernhall. And we do the presentation together, and after that we take all the questions you hopefully have. But we know you have a busy day today, so let's get started. We were able in the third quarter to reach an operating profit over a little bit more than SEK 1 billion, which is in our view a good result. Thanks to Board and Paper especially, and also despite the challenging market situations and actually lack of wood to some extent as well. Our industry, Board, Paper and Wood Products. If you just take a look and see what we have done the last year, we have a return on capital employed of 16%. And over the last 10 years, we have been able to reach average 18%. And our financial position is strong. And remind ourselves that with the last couple of years, we have been able to give -- distribute back to shareholders through dividends and also share buyback program, including or amounting to SEK 6 billion. We have currently a net debt of 6% of equity, or SEK 3.5 billion roughly. But let's go into our different business areas and starting with the forest or more the wood market in Sweden. We have discussed this quite a lot last couple of years. And if you look at, say the last 2 years at least, there hasn't really been enough raw material to see the forest industry sector and the energy market as well, I should say. Same goes for the third quarter, where we again have seen increasing prices, saw logs and pulpwood, and we are now at the level which is record high or 50% higher than 3 years ago. We are also in a situation especially for saw logs, or for saw logs, I should say, where we see the prices in the northern parts of Sweden are on a different level than in the south of Sweden, where they are extremely high. I'll come back to that a bit when we discuss Wood Products. Higher prices, Anders.

Yes. These higher prices, of course, translate over time into higher profits. We've seen the cash flow from the forested activities increased by 60% the last 3 years. Q3, if we look at that isolated, that's always normally a quarter, where we've seen more and harvest less. And that was the case this year, which takes down the operating profit. But we also made the final harvesting a bit lower than seasonally normal for Q3, which took down cash flow a bit, and we had more silviculture actions in our forestry, which consume cash flow. And that's the reason why the operating profit is not really affected by much by that. But the distribution between change in value and cash flow, where we have lower cash flow than normal in the third quarter due to more silviculture and less harvesting than normal. Back to you, Henrik.

Thank you. Renewable energy, we like hydropower and wind, but I think we had a bit of headwind in the third quarter. We had so low electricity price, actually the lowest electricity price in Sweden in the last 20 years. And the question is, how could that be? Well, at least amongst the explanations, an important part of the explanation is that there were limitations in the transmission capacity from Sweden to other countries in the cables, other countries where electricity prices are higher than in Sweden. We could save a bit of water in our water reservoirs. But such low prices, Anders, it's not easy. Yes?

No, they were not sufficient to cover depreciation. And in addition to these low prices, to a large extent to the -- due to the fact that electricity was landlocked, also the revenue that we generated from support services went down in this quarter. That normally stabilizes our earnings, but they were quite small this quarter. Back to you, Henrik.

Changing over to wood products. Well, we discussed before that the log cost, especially in South of Sweden, has been very high in the third quarter, actually the last number of quarters. But now the difference is bigger than what we ever seen before. If we then start by looking at the general market view, well, there is a weak construction cycle. And even though during the springtime, we normally see that demand picks up a bit, it happened also this year. And with that prices came up a bit as well. But after that, now in the third quarter, we see that prices came down a bit again. And where we are right now, we see prices moving sideways at best. At the same time as we see that the log cost is going up and especially for our sawmills in South of Sweden. And again, the difference is so big that it's really a challenge to run the sawmills in southern parts of Sweden. And also remember that what we do is, in the third quarter, we consumed saw logs that were harvested, say, 6 to 8 months earlier. And when we buy saw logs today, we pay more than what we consumed in the third quarter. So it's a kind of a best on that, the Wood Products market will come back and with price increases, but we don't see it at current moment. Tough headwind.

Definitely. When you look at the margin per log that we use, that's the same level as a year ago. So we are in the same starting point, selling prices are a bit higher, log costs are a bit higher, but our volumes are a bit down. We don't run full in this kind of market, partly due to log constraints. And we're entering into the fourth quarter that is normally the weakest part of the year.

Correct. Moving to something which is at least makes us a bit more happy at the moment. Board and Paper, a very good performance. Let's start with a few words about our Board business. If we start with a general view of the market, it's -- you can see on the chart that we said last year, there was a lot of destocking going on. That's over for sure. But you can also see on the moving 12 bar that we are not back to where we were a few years ago, at the same time as there is a bit more capacity in the market as well. However, seeing that in the third quarter, we did really well in terms of production, productivity, also deliveries, and also a favorable mix, which we cannot expect to have every quarter. Price is stable. When we look into our own order books, well, even though, as just said, that we did really well in the third quarter, at least the current moment, it's not really enough to run absolutely full. And so we'll see how that develops. If we then move on to Paper, after a quite big drop in demand in 2023, so far this year, paper demand has been more or less stable and moving sideways. But you know, in this market, it's always some overcapacity, quite a lot actually. We have done well also here. We have been able again to put forward or move forward a bit in our market position when it comes to the niche products where we want to do more. And overall, a good quarter. But also here, when we look into our order books, it's a bit of a challenge to see that we will be able to continue running on not 100% because we don't even aim at that, but roughly 90% is our aim. Also here, prices in the third quarter, and as we are today, they are more or less stable. Anders?

Almost getting tired of talking about the stellar performance from the Paper division. And now actually, it combined with a very strong performance of the Board part of this new division. As in the second quarter, half of the sales came from Paper and half from Board, and also they were equally weighted in contribution from EBIT, 50% from each part of this new combined business area. We commented in Q2 that we had a strong mix. Actually it was even stronger in Q3. So it was a very strong achievement. Both Paper, but especially the Board division, enjoyed a strong mix and good volumes. On top of that, we had seasonally lower cost, SEK 80 million, normally lower than the previous quarter. And taking this seasonally lower cost and good production efficiency and a strong mix, it took us up to a very quarterly number.

Maybe reminding on the maintenance shut we have in the fourth quarter and also the rebuild currently going on.

Yes. As communicated previously, we are in the midst of rebuilding one of the paper machines at the Braviken mill in order to produce packaging paper. And we're taking the annual maintenance shutdown as we speak in Iggesund as well. Taken together, these will -- are expected to impact profit in Q4 by SEK 250 million.

Thank you. That's all we had. We are happy to take on questions, please.

[Operator Instructions] The first question comes from the line of Ravi Ephrem, Citigroup.

Sort of 2 questions. Firstly, on the Board and Paper, very good sort of results in this quarter. But looking forward to Q4, you're calling out sort of demand for consumer paperboard lower than normal in Europe for the third quarter. And during the third quarter, some of your peers have kind of called for even lower demand sequentially in the fourth quarter. So -- and then on top of that, you got the maintenance shutdowns, basically impacting earnings by about SEK 250 million. So would you say that basically the outlook for Q4 in this particular division could be kind of back to the levels that we saw in the second quarter in terms of operating performance? And then in terms of the Wood Products business, as you pointed out, kind of your log input prices are now rising, but you're not seeing that in your end products that you sell. Typically, what would be the lag between log prices and kind of the end product prices for your wood products in terms of cost pass-through?

Should you take the Board and I have the other one.

Yes. You're right, we had -- we, as Holmen, had a very strong deliveries and mix, as I mentioned in Q3. Actually, we had good deliveries and mix in Q2 as well. And as Henrik pointed out, Q4, the outlook is a bit more challenging, and then there will -- should be headwind for Q4 on top of the maintenance stops.

I think you have read the same information as we have that -- and we feel it actually, that luxury consumption, and we are a bit dependent on that with our very nice Board, but it goes into that segment quite a lot, and it's not that easy. China is not consuming as they were before, and we are a bit dependent on that as well. When it comes to Wood Products and when we buy the saw logs and when we consume them, the lag is 6 to 8 months roughly.

The next question comes from the line of Robin Santavirta, Carnegie.

In terms of the sawn timber market, what are you seeing now in terms of demand going into Q4 and the winter? And also in terms of pricing, should we expect stable pricing despite those seasonal weakness given cost support? Or is it the typical decline coming, going into the winter? And the second question, related to swan timber, is just what you alluded to, the higher the increase is still that we are seeing in log prices. I mean, are we now reaching the level where a lot of sawmills will need to stop producing in South part of Sweden or even in the mid part of Sweden? Or how will this dynamic sort of develop now this winter and in the spring in your view?

Good question. It's not easy to answer, maybe. If we start just by what I said before, when it comes to where we are right now in terms of pricing of Wood Products, so it's -- we are moving sideways at best. And the other question?

It's an oversupplied market globally, but log costs are high everywhere, so everybody is struggling. And you have surely seen that even in the U.S., you're taking down time where log costs are lower than in many other places. So it's a challenging market. When it comes to our people taking downtime in the Southern part of Sweden, we don't see any signs on it. Actually, the production, if you can get hold of logs, even at high prices, on the margin, it makes sense. But sawmills in the Southern part of Sweden is heading for a loss at these price levels.

Now it's a bet on Wood Products prices coming up in not too distant future. But we don't see it yet.

Right. So maybe the first buying point could be the seasonal high next year at the earliest.

We need to see a change in the construction cycle to -- that's the best leading indicator for this market.

And finally, Anders, we had a good discussion earlier in our seminar. I think you sort of alluded to the point that softwood log prices are high in Sweden and in the Nordics. But essentially, they are not higher than what you can see in other parts of the world. Is that still the case at the moment? And does that also apply for pulpwood?

I can't really compare pulpwood, but you can look at the numbers of most people and we do the math, sometimes we prepare them. You still have quite a good margin if you run a pulp mill in the Nordics. And you don't -- normally, we don't see anybody stopping buying pulpwood because it's too expensive. You stop buying pulpwood because you can't sell the end product. So the Nordic producers, generally speaking, they can afford to pay these pulpwood prices, although they have in percentage terms increased quite a lot.

More challenging when it comes to saw log prices, of course. When we look at the statistics that we have available, then it looks like prices in Sweden today, well, slightly lower than in Germany, depending on where you are in Sweden on line with Finland. And then it's a different ball game, I guess when we look at United States.

Yes. Now you're mentioning and you're talking about saw logs. Yes.

Saw logs, yes.

So the point is we need demand to get prices up. That's the key problem, essentially not the wood raw material cost?

Yes, you need to have a resurgence in construction activity.

The next question comes from the line of Lars Kjellberg, Stifel.

So a couple of questions again on the wood side. Curious why you reduced harvesting considering the wood pressures you're seeing, and you called out Henrik potentially even lack of wood. So curious why you reduced your harvest? And the other question, of course, that comes into mind is when sawmill starting to take downtime as you kind of doing to a decree, what does that do to the pulpwood market again, because of course a lot of chips are coming from the sawmills. So curious how to think about that? And then you talked about good mix benefits in the Board business, which is interesting considering that you're more in the luxury segments if you like. And that market has been particularly poor and potentially getting worse. So interesting to see what has happened in that market that's giving you that benefit of a better mix?

Should I start with the harvesting, I understand, I agree with your question. But what we do actually half -- we -- we have 100 teams working -- machine teams working on harvesting and we send them to our forest half of the time and to others' forests half the time. This quarter we send them more to other forests and harvest on others' land more than normal. And in the summertime, they have to have vacation. It's more thinning and not as much final felling for a structural reason in Q3, because sawmills take down time during the summer holidays and they are driving the final felling. And then your second question, if sawmills start to take downtime, will that reduce available ships? As I mentioned, the statistics we see is that you produce as much as you can harvest in Sweden. So nobody takes down time, if you have logs. So we have not really seen...

If you have logs.

Yes. That's more, if you have logs.

And there was the product mix or customer mix.

There are different luxury segments, premium -- there are different types of premium brand owners. You're right. And Henrik mentioned that sort of the luxury goods segments, that has quite some headwind, and we see that, but we have different -- we have other applications that's not targeted or affected by this ban on extreme luxury.

It's a question for our order book going forward.

Yes.

Understood. So given what's happened generally to energy cost, I'm not sure if that's the same in the U.K. But your green energy credits that you normally get, I suppose, in Q4 in the U.K., how should we think about that this year versus last year and sequentially, what does it mean?

Normally -- we normally -- the bulk of the energy credits we get throughout the year, and then there is a bonus paid out in the fourth quarter. This year, there's a forecast on this one. We don't have the final outcome. It's lower than normal. It could be -- it's lower than normal. That's all I can say.

The next question comes from the line of Gaurav Jain, Barclays.

So one is on the fair value gain on forestry this quarter. It was higher than in the first 2 quarters. So is our expectation for the full year changing or how should we think about this gain in fair value in the forest segment?

Our fair value is determined. If we take out -- if we -- this quarter we let more trees stand in our forest means that we took out less from the bank account. You can see it like that, which means that it take a step up in change in value because we took out less. And then we also put more money into the bank account by doing silviculture. So it's not a -- the higher -- the level was higher than normal, but it's because we took out less in terms of logs and we put in more in silviculture actions than we normally do in the third quarter.

Right. So in the fourth quarter, like, how should we think about this number? Like, should it go back to the 160, 170 number in 1Q and 2Q? Or this is...

It's not the new -- it should -- it will go -- definitely, it will go down because we will revert to normal harvesting and in the fourth quarter, there is little silviculture activities. So it will go down definitely.

Okay. Sure. My second question is on capital allocation. So, look, you are, I think, the only company in the entire sector which does some share repurchases, which is very good. So how should we think about that now and going forward, because your leverage is still sub 1x. And in that context, can you also touch on your CapEx plans for this year and next year? And are you continuing with your plans to have a SEK 3 billion kind of CapEx next year?

Share buyback is one of the tools we have. We have used -- we have had such a strong cash flow over the last few years. We've used extra dividends and from time to time we have used share buybacks, which we have seen as a way of increasing the forest holding per share at a good price compared to the alternatives that we have available. And on CapEx, for this year, we will be a bit above our forecast at least is a bit above SEK 2 billion. Next year, we will have a high level. If we will reach SEK 3 billion, we will have to come back on that.

Sure. And my last question is on forest holdings. So one of your peers is looking to sell a lot of their Swedish forest holdings. Is that a kind of asset you would be keen to look at?

We love forests and -- and we love forests that we can manage and where we have 2 perspectives on it. The ownership of it, getting a good value addition over time. And we also have use of the wood that you can harvest from the forest to support our industrial operations. And that's 2 key aspects of owning forest.

Okay. I think I would have loved some more color on this, but I will leave it at that.

The next question comes from the line of Christian Kopfer, Handelsbanken.

All right. Just a few follow up from my side. Firstly, a little bit on the sawmills. I understand that we are -- probably should be pretty close to, call it, breaking point for the sawmills. How much higher costs they can -- they can take without prices coming up. But just touching a little bit on what you see on saw log prices, sorry if I missed it, by the way. But if you see saw log prices coming up further during the end of the year.

So far, Christian, we have not seen any change when it comes to the saw log prices. I mean the trend just a week ago roughly sort of announced another price increase. So no change yet.

Right. And then -- okay.

But in South of Sweden.

It's an unusually large price difference within Sweden. They normally never persist. But right now it's a multitude price market where southern part of Sweden is as Henrik mentioned in line with Germany and Finland, while the northern part of Sweden is the step below.

So do you think that is it still the transportation costs are so high or is it that it is tough to find transportation opportunities enough to get down the price differences?

Most probably you're right, it's probably a mix of different reasons. But logistics resources is absolutely part of the game. And also you need people to be there, meet people, buying the plots, et cetera. It's not done like that. It takes some time, but over time normally shouldn't be that big difference, especially in the different parts of the country.

Yes. And then for -- I think you talked a little bit about it about frequency support services or ancillary services, what it is called. That -- those kind of prices in the market have come down quite a lot. And I just saw a report just recently that we are more or less not at 0, but we are at quite low levels, at least at the shortest I looked. So have you seen the effect fully on that in your numbers or would you expect further effect to come from lower prices from these kind of services?

In our Energy division, we have seen the full effect of that in the third quarter. If that's temporary due to -- we have had an extraordinary situation with the landlocked energy situation. We have never -- we have more downtime than normal this part of the year. So a lot of energy has been landlocked in Sweden. If that is part of the explanation or if we do have a new level of earnings from ancillary services for hydropower remains to seen.

Yes, that's fair enough. But do you have some -- you get some -- at least previously, I think you got some tailwind from these kind of services in the paper mill?

Yes, we -- but our business is a bit unique there, and we are -- we provide services that others can't really do, and batteries can't compete. So we still -- we provide value to the grid that they can't get from other actors.

You saw headwind from that as well even though Board and Paper showed a very strong result in Q2.

No.

Not yet.

Not yet. Okay. Okay. So that is still to come or how do you see that?

No.

It's a market that didn't exist 3 years ago. Very difficult to understand where it's moving. We change our product palate all the time. We don't provide the same services that we did a year ago and our operations are quite nimble and able to move into parts where the grid operators actually do really need the services and very few can deliver them. If other people will come in, we don't know.

The next question comes from the line of Pallav Mittal, Barclays.

So a question on the Board and Paper segment. You mentioned that destocking is now over. We know some of your peers have said that the market is weakening, and your comments also suggest that. We are seeing a lot of FBB capacity coming online over the next 12 months or so. How do you think that impacts the market and you next year?

To start with, you're right. Destocking we saw last year and this year it's over and things are -- demand is better, but it's not back to where it was a couple of years ago. We have had new capacity coming in. This is not the first time. I think it's more for us to understand how much and the big overcapacity is actually in Asia, it's not here. But we are dependent on exporting to Asia some of our business, that's clear. But exactly what it will mean, it's impossible to say as we are also in a niche where it's not so easy to get into. It took us some maybe 20 years to qualify. New capacity normally do not directly compete with us, but could be indirectly, of course, and that's still to be seen. It's about quality and more.

Historically we've had this situation before that it comes a lot of new capacity at once, 20%, 25%. We saw that 2016, '17. What happened then was prices didn't move either direction. A bit of pressure on pricing. This is a -- Consumer Board is a very high end product. It's not a commodity. You have a very strong relationship with your customers. It's very difficult to switch. But on the other hand, in a bit oversupplied market and that was the case then as well. Very difficult to pass on the cost increases to your end customers.

Like wood cost, for example?

Yes. And if you can't get enough volumes normally your productivity suffers and it's more that variable cost goes up. And that's normally the translation mechanism in consumer board.

The next question comes from the line of James Perry, Citigroup.

Just a quick one on paper pricing actually. We've obviously seen a significant drop in pulp prices. So to what extent are you seeing this drop through to lower graphic paper prices? I guess there is typically a lag, but paper prices didn't really rise much following pulp earlier in the year? Or would you expect paper prices to be driven more by the demand?

Our type of paper is more correlated to what's happening to the OCC and OMB rather than pulp, because the mechanical paper grades are not used -- normally not using much chemical pulp in the base. So it's a strong correlation, paper pricing versus recycled fiber prices.

And in Continental Europe, it's about recycled fiber price, it's also the cost for energy.

Yes.

The next question comes from the line of Cole Hathorn, Jefferies.

I've got 2 my side. The first on the Wood Products market. I'm just wanting to understand how you see the lead indicator. Do you think the lead indicator for the Wood Products market is actually going to end up being North America? And how do you see inventory levels? Is that what you're looking at? And I know you kind of traditionally sell about 10% of your products there. Is that what you're looking at the market for the first signs of recovery, interest rates coming through and they generally have lower stock in the chain and that drives price and hopefully Europe follows? That's the first one. And then the second one is, it's a bigger question. I'm not sure if you can answer it. But with the U.S. election, the increased talks around tariffs and implications on China and how that might impact luxury. I'm just wondering how that might impact the Board division in particular kind of luxury demand. If you have any thoughts there? Or any kind of tariffs on boxboard, how that might impact probably more your competitors, but just wondering how you see that playing out?

I can take the first one, if you take the second. No, but you're right about the U.S. market is important to see where things are going. House starts, very important. When we look at the price in the U.S. and also future prices in U.S., as you can see, there have been quite a lot up and down and almost week by week, but that's a very important indicator.

Yes. And second question, if you look at the Board market as such, the European market is a region market supplied by very high quality producers. It's very little import that actually have any meaningful impact in Europe. But we exported a fair share to Asia into segments. We do definitely into niches, but most players where you don't have so much local competition, and that's the same way the U.S. produces, they offload excess capacity in Asia and that's where we meet. We haven't really given that much thought on a tariff war and the consequences of that, but it's more the balance in Asia that we think could be impacted by such a move.

Yes.

Henrik, maybe just following up on the answer for the lumber product in North America. I mean, this cycle we have seen quite a few closures in the Southern states of the U.S.. Do you think it will be slightly different the cycle when demand comes back, the price reaction might be more aggressive to the upside. Or is this what always happens? There's capacity closures and it'll just be a normal cycle. Just wondering if you think there might be more lever to the upside on prices.

It's a good question, but very difficult to answer, to be honest. I think what we need to see is generally that the cycle is improving and activities are coming back. And then the big question I think will be, will there be enough raw material when that happens? The relation we have today between where we are price wise and supply, it's pretty much restricted by availability of saw logs as it is right now. That will be extremely important to understand.

The previous 2021, '22 super cycle on Wood Products, remember, log prices didn't rise during that period, they raised after that period. And that will be a key question. How fast will log cost go up? Who will be gaining from a construction uptick? Will it be the sawmill operator or will it be the forest owner? Or how will they share that pie?

[Operator Instructions] The next question comes from the line of Linus Larsson, SEB.

You value forest land on your balance sheet based on transaction valuation. And now that the year is drawing to a close pretty soon, I wonder if you could just give us an update on your thoughts on the transaction market in your relevant part of Sweden and what broadly to expect in terms of revaluation at the end of the year, please?

Yes. As a recap, and I know you know that, Linus, but we use 3 years of transactions and we use that sample size to get a good sample of where the market is in order to capture the big part of the value. And on top of that, you have micro trends going on, like 2022, when you had one investor actually pushing up the price in the northern part of Sweden, predominantly. When he left the market, it created a bit of a vacuum, at the same time as you had the interest rates going up and people started to be a bit cautious, should I buy forest land or if you're a private individual and how should I price it? And that's a micro trend. The 3-year transaction sample gives you very good indication of the value of the forests in our view. If you read the latest transactions that have been made, maybe people are getting a bit less cautious right now. They have realized that wood prices have increased by 50% at the same time as transaction prices have. It gives you quite a good yield if you buy a forest property compared to history right now. So maybe you could have a bit more of an optimistic view on the local transaction market where the 3-year average will land at the year-end. Can't tell right now, but the change in value will not filter through in P&L. It will go straight to equity.

But at least, I mean, at the beginning of the year, it was a very slow market, few transactions, lower prices. You've seen a gradual improvement during the course of the year, I take it. And is it so that you're expecting a higher price point in the 2024 data point or a lower one compared to the one that you're replacing in the 3-years series?

I refrain from giving a comment on it.

That's fair enough. And then just a couple of maybe detailed questions. But when you refer to mix in Board and Paper, could you just say, what is that? When you've seen strong mix in Q2 and even stronger mix in Q3? Exactly what are you referring to, please?

Different end markets. End users have different profitability.

So it's the product rather than the geographies.

Yes.

Yes. I think, Linus, the thing is, it's not given that we can repeat it every quarter. No.

That's fine. And then just one final from me. Like you already said, in the fourth quarter, you will wrap up the PM52 rebuild in Braviken. And you've guided for the stoppage impact in the fourth quarter. But beyond that, what kind of a ramp up should we be expecting looking into the first quarter, 2025, et cetera? Is this an easy startup that you're foreseeing or will it have some dent on quarterly profits after the actual stop?

We've never done this before. Have we?

No. You remember, we do this, we actually, we do increase the quality of our book paper production, but it's also an ambition to try to enter into a new market with a novel production concept in order to be -- for the packaging customers to a -- I see it through low footprint and low basis weight. How much will be received by the market remains to be seen. We'll see.

It's a bit early, Linus. We have to get started and see how it develops.

There are no more questions at this time.

Okay. Thank you very much for taking your time and for good discussion. See you soon again. Bye-bye.

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