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

Good morning, everybody, and welcome to the interim report presentation for the Holmen Group. It's me, Henrik and Stefan that will go through the presentation. And after that, we take questions like we normally do. Let's start with the results. In the third quarter, well, cautious customers and not a very strong market for construction. And on top of that, a maintenance shut made result land on roughly SEK 550 million. We will come back to the different business areas during the presentation. Before that, just to mention that we had a strong cash flow, and we are also having a very strong financial situation like before. Then let's move on to Forest and the Wood market. We talked about declining wood prices for some time. And when you look at the chart here, it's what we pay for the wood to our industry. And you have to remember when you look at the chart here that our prices are affected by the storm and how much we have harvested in the storm-affected areas during this period, especially this year. On average, wood prices are down roughly 10%. The big question going forward is to understand where wood prices will go from here. Right now, we have a feeling that they are more or less standing still. But when we look at especially pulpwood, for example, in the Baltic states, we do see that prices are actually ticking up a little bit. So again, the question is where will it be when we look forward. As you know, we have a situation in Sweden today where we actually have too much of industry capacity and not enough harvesting. It's a structural deficit of wood where we stand. Then we talked about the storm. For us, it has not a big effect on the result, Stefan. I think that's enough to say. We do reallocate quite a lot of our own resources. So we harvest a bit more in the storm-affected area also on other people's land, other forest owners' land. But in total for us and especially when you look at the cost, it's no big deal.

It's not, Henrik. And if we look at the results for the third quarter, we reported an operating profit of just above SEK 440 million. That's a slight decrease compared to previous quarters due to the lower selling prices for both pulpwood and timber, as Henrik mentioned. Also, harvesting costs were on the same level quarter-over-quarter, but they are a bit inflated due to the storm that we had, and we need to take care of these storm fellings on our own forest, which is a bit more expensive than normal harvesting. Finally, I can also comment on the harvesting levels, which was slightly higher quarter-over-quarter, but still, we anticipate full year's harvesting to be a bit lower than normal, also that's due to the storm that we had in the beginning of the year.

Thank you. Something totally different, renewable energy. I think we should start by comment a little bit about the situation in Europe. We are again coming into a period where we see gas prices on the rise. And of course, it has an impact on the European cost competitiveness in total. And well, we know that in the U.S., gas prices are on the same level as before, and we know in China, they are not even using the gas. They have the coal. But the situation for us as a producer of electricity, we had a period last year where prices in northern parts of Sweden were extremely low due to mainly too much water in the system. And now in the beginning of the year, we had, call it, a fantastic quarter if you produce electricity, but prices were extremely high. And right now, we are in a situation where, well, northern parts of Sweden, it's roughly half the price as in SE3, where we consume all the electricity. Still it's SE3 is roughly half the price as we see in Continental Europe. So for Europe, this is really a tough situation. But for us as a producer, well, we will see and it will not take that long before we will see new consumption of electricity coming also up in the North. And we also have new transmission capacity coming on stream. But it will take a bit. And that's not exactly where we are now, even though prices were a bit better in the third quarter. We talked about Europe, just to remind ourselves, SE3 is partly connected also to Germany. And I mean, Sweden and Norway, they are the only places in Europe where we actually have more electricity than what we consume at the moment. We export quite a lot. But what you see on this chart is that the industry in southern parts of Sweden, we do actually import German prices at daytime in the third quarter when the sun is shining. In the dark hours, so to say, well, we have a cost advantage in southern parts of Sweden versus Germany. But producing electricity up in the north, you can see we are not affected almost at all compared to SE3 and what happens in Germany. All right.

As Henrik just showed, the price for electricity is really volatile. Our energy asset has although contributed very well to the group's overall cash flow the last couple of years. On average, we have earned SEK 325 per megawatt hour in cash flow from these assets, and that's also where we trade currently on a 12-month rolling basis. Looking into the third quarter specifically, we reported an operating profit of SEK 42 million. That's lower than in the second quarter due to somewhat lower electricity price in the northern part of Sweden. The maintenance work that was conducted on the National Grid in the second quarter continued to some extent also in the third quarter, which took a toll on our production capacity.

Thank you, Stefan. Changing subject again to wood products. I said in the beginning already that the construction market is not very strong. Actually, if you look at infrastructure, it's not a bad situation. But when you look at house starts and building permits for homes, well, then look at U.S., it's not going in the right direction right now. It is rather weak. Interest rates are pretty high. Same situation in Germany. And this is, of course, demand. If we then have a look at supply, we can see that, well, in Western Canada, in British Columbia, it's been going down or production of wood product has been going down for quite some time, and it's on a rather low level. And in Germany, there is -- I'd say it's a hangover after the spruce bark beetle. This is supply in those 2 important countries. If we look at Sweden, we have said that it's only place in Europe where we still produce a lot of wood products that's in Sweden. But now we also see that during this year, production has come down quite a lot also in Sweden. If you look at prices then, well, more or less, I would say they are flat at best at the moment where we are right now. So it's not easy to make money, is it Stefan?

No, but a bit easier than it was a year ago. We now see that the loss is coming down in this division, and that's due to the lower wood cost that we have. Unfortunately, not enough still to report a positive EBIT, but it's moving in the right direction. As Henrik said, demand is not there. And therefore, we took a bit extended production shuts during the vacation period as we always do. But this year, we extended them to some extent. That also meant that our deliveries in the quarter were lower than normal due to the lower production.

Then Board and Paper. We also said that in the beginning of the presentation that consumers are still a bit cautious. Well, demand in Europe is moving more or less sideways. It's not changing very much, not yet. You should be in different market segment than this one where you are totally dependent on people like us spending our money. And obviously, we are not spending that much. In our case, when it comes to our order book, it is -- actually, it's healthy. It's not bad at all. In our case, it was more production during the third quarter when we had a maintenance shut. Overall, for the industry in Board, still there is too much capacity. That's clear. So if you look at the capacity ratio, how we are making use of all the factories in Europe, it's still rather low. We are running at a better utilization rate, but -- and as I said, the order book is not bad. If you look at prices, well, there is a lot of discussions with customers right now. There is also announcements of price increases mainly from 1st of January. Also, we have announced price increases in this segment, but we are currently discussing with our customers. Look at Paper, well, it's pretty much the same basic situation that we have too much capacity, not enough demand. But also here, in our case, we are fairly happy with the level we are running. We are not running totally full, but that hasn't been the case for quite some time. Also here, order books are okay. And here, we discussed electricity prices before, which is energy prices in Continental Europe. And of course, it puts a burden on a lot of players right now as energy, it is expensive and it seems to stay expensive for some time. Also here, we discuss prices, of course, with our customers, but it's a bit earlier stage, and we will see where that lands. It's too early to say. Stefan?

Yes. The result in the third quarter was lower than what we saw in Q2, mainly due to the maintenance stop, as Henrik mentioned in the beginning of the presentation, that took a toll on our result of some SEK 150 million. Also, we saw deliveries were a bit lower in Q3 compared to the high levels that we saw in Q2. That's -- but it's in a normal range of deliveries, and it's also partly affected by this maintenance shut in the Iggesund mill.

Absolutely. Then last but not least, you might saw this morning that we also informed you together with the press release of the result that we are splitting our business area forest into 2, one for taking care of our own forest and the other part supplying the industry with wood. Thank you very much. And then we are happy to take on any questions you have.

[Operator Instructions] And we have the first question coming from Ravi Ephrem from Citi.

So 2 questions. Firstly, on your announcement today morning on splitting the forest division into 2 operations. Can you give us a sense as to how the SEK 10 billion of approximate revenue and the SEK 2 billion of EBIT kind of splits between the 2 divisions you are thinking of? And how does margins and returns look in these kind of 2 different businesses that you're talking about? And second question related to that, again, is this kind of a precursor for some kind of corporate activity? Is that how we should think about it in terms of selling a stake or kind of realizing kind of the value of the business in the capital markets?

Maybe I could answer the first one with the turnover. We report the turnover for the combined business area today, and we also show the turnover from our own forest. In the new business area, Holmen Forest, we will only report the turnover that is related to our own forest. So that will be no change if you look at that number. Also, the EBIT from the business area that's more or less purely from our own forest. So there will be no result in the new division. It can vary slightly between quarters going forward. But over time, it will be a zero game, so to say.

And we have absolutely no idea to sell off the forest or the industry. We simply do this in order to make sure that we have enough capacity to focus on where we think there is a potential for us, and that's in the forest. And then it's -- as a consequence, we move wood supply into a separate business area, we call it, but it's actually a cost center be carried by the industry.

The next question comes from Larsson Linus from SEB.

Yes. Maybe just a follow-up on the previous question. If you could just elaborate somewhat how you hope to capitalize on your forest asset and make the most of it. I understand this split is one step in that direction, but could you share some more thoughts on that, please?

I think the starting point is that it has been simply too big of a task to carry out both taking -- doing the absolutely best we can when it comes to our own forest and also making sure that we do everything perfect and as well as we can when it comes to supplying the industry with wood. It's a way to make sure that we can focus on our own forest and forest land. That's where it starts. Exactly what it will be, it's a bit too early to say when it comes to potential. But of course, there is potential in doing so. Do you want to comment?

No, I think you covered it.

Great. No, that sounds exciting. And then maybe on Board and Paper, and you did comment on the maintenance stop, which was, from what I can tell, very much in line with what you had expected and guided for, yet the result there was weaker than consensus had expected. So maybe if you could share some color on that as well. Historically, we have, for instance, talked about the dynamics of energy and how you have been very successful in managing and optimize your position in that part of the market. So if you could just drill down a little bit on the profitability aspects in the third quarter and how you see this aspect on energy maybe in particular?

Well, the energy situation was more or less on a normal level, Linus, as it has been for the last couple of quarters. Of course, when you compare to where we were 1 year ago, it's a different situation for us. And the result in Q3 was also affected, as I said, by the lower deliveries. They came down from a very high level in the second quarter to a bit lower level, which also took a toll on our results. But it's hard to comment on the deviation against consensus, but those are the main drivers for the profitability in the third quarter.

And then maybe if I may follow up just on what you said on volumes. So they were down, I think, 7% year-on-year. How do you see volume development into fourth quarter for Paper and Board, respectively?

Well, it's no drama when it comes to changes in deliveries. The change that you see compared to last year is mainly due to lower Paper deliveries. That is a declining market. But if you look quarter-over-quarter, the changes are quite limited, and it's very hard to anticipate the exact number that we will report for the fourth quarter. But we don't see any drama, Henrik. Our order book looks pretty much the same as they did in the end of second quarter.

The next question comes from Pallav Mittal from Barclays.