Svenska Cellulosa Aktiebolaget SCA (publ) (SCAB) Earnings Call Transcript & Summary

Welcome to this presentation of SCA's Second Quarter Results for 2021. With me here today, I have our President and CEO, Ulf Larsson; and CFO, Toby Lawton. Please go ahead, Mr. Larsson.

Thank you, Anders. Good morning, everyone. And also from my side, a warm welcome to the presentation of our results for the second quarter 2021. When I summarize this quarter, I'd like to start by saying that, in terms of results, the second quarter this year is the best quarter since the split in 2017, and we delivered an EBITDA margin of 47%. The strong market, strong demand, gradually increasing prices within all product areas of SCA have, of course, contributed to this. But the decision to wind up the publication paper business completely is perhaps even more important. In addition to price and mix, we have also had a good production level and a stable cost during the quarter. When comparing our EBITDA level for the second quarter '21 with the outcome for 2020, we note an improvement of 126%. And this is, as mentioned earlier, mainly due to increasing prices for wood, pulp and kraftliner, but also good production level, stable costs as well as our decision to exit publication paper. On the other hand, the currency development contracts to positive earnings development during the period and give a negative effect of more than SEK 200 million. Our turnover during the second quarter increased by 3% compared with the second quarter 2020, despite the closure of the publication paper business, together with the divestment of our wood distribution operations in U.K. Toby will come back to this, but we also see that we have an upward trend for forest value in general. And by that, also for SCA forest. And -- but Toby will come back to that later on. So last but not least important, I would like to conclude the summary of the second quarter by stating that the 2 major investments and growth projects in Obbola and Ortviken are progressing on time and budget. Turning over to some financial KPIs. We've had a very strong second quarter, as mentioned. We delivered SEK 2.26 billion on EBITDA level. And as I already also mentioned, this represents the best quarter since the split in 2017. Our EBITDA margin reached 47% for the quarter, which is, if you look to the right-hand side, you can see that this is substantially higher than previous quarters. When it comes to our industrial return on capital employed, in our case, calculated as a 12-month rolling average, that one amounted to 14%. But if we then look into the level for the second quarter, it was 31%. Our leverage decreased to 1.4 despite our ongoing investment program and despite the fact that we paid a dividend during the second quarter. And I'm really happy to say that we continue to finance our strategic investments with our operating cash flow. So I would now like to make some comments for each segment, starting with Forest. And here, we can state that we've had another quarter of stable supply wood to our industries. Sales was up due to high volumes whereas we have not a decrease in pulpwood prices, mainly due to our exit from publication paper. And by that, also reduced share of imported wood. And when it comes to sawlog prices, they are stable. And you can see the price development on the left-hand side in the graph in the bottom. EBITDA increased by 51% when comparing quarter-on-quarter, and this is partly due to a higher share of harvested volume from our own forest and partly due to revaluation effect of the biological assets equivalent to approximately SEK 100 million for the quarter. Wood. There is still a level of high global demand in the wood area. However, right now, we see declining CLS prices in the U.S. and certain restraint in China, while other markets, not least Europe, are still on a very, very strong level. The demand for wood products are still supported basically by the economic recovery post-COVID, with increased industrial construction and house buildings as well as the increased sustainability focus. When I presented the Q1 report, I estimated the price increase for the second quarter versus the first quarter to be between 15% and 20%. And what we know just now is that the actual outcome for SCA was a bit over 20% for the second quarter. At present, we forecast that the prices will continue to increase sharply. And I personally believe that the price increase for the third quarter compared to the second will be up to 50%. Sales was flat when comparing quarter-on-quarter. The rise in prices is counteracted by the divestment of Wood Supply UK. And when it comes to EBITDA, it was up as much as 339%, mainly due to higher prices, but also due to a very good production and a stable cost level. Today's stock level of solid wood products in Sweden and Finland is in relation to the average for the last 5 years, described at the top left on this slide. And we can note that the inventory volume are still at a very low level, 13% lower than the corresponding period last year. At the same time, the underlying consumption continues to be good. As can be seen in the diagram to the bottom left, the Swedish and Finnish saw mill production slightly exceeds the 5 years' average, and that production is now running at full capacity to meet the increased demand. When comparing the production rate year-to-date 2021 with the corresponding period last year, we can see that the production level is approximately 10% higher this year, a volume that is completely assimilated by the market. So when looking at the diagram to the top right, we note the steep increase in prices for solid wood products. And our estimate and, as I also mentioned earlier, the price development will be even stronger now during the third quarter and best guess up to 50% for the third quarter in comparison to what we've had in the second quarter. The pulp market is also still strong with a good demand and increase in prices during the second quarter, as you can see in the diagram to the bottom left. When we peak price-wise in the end of 2018, we had a fix price of USD 1,230 per tonne. We then reached the bottom during the first quarter 2020, as you can see. At that time, the fixed price had dropped to USD 820 per tonne. Then we had a rather flat price development during the major part of 2020, and the pulp prices started to increase significantly. And today, we have an official fixed listing in Europe at USD 1,340 per tonne. But of course, with a less favorable currency relation and also with a higher discount rate compared with 2018. We feel that the demand in Europe continues to be strong. However, the price levels in China and the U.S. are now starting to fall a bit. And we can note that today, the net price in China is approximately USD 50 per tonne lower than in Europe. And also in the U.S., the net price is somewhat lower in comparison with Europe for the moment. As you might know, we have also seen sharply increasing overseas transport costs, which impact the profitability on these markets negatively. Sales were up 43% and EBITDA 230% in the second quarter compared to the second quarter 2020, and this relates to higher prices and lower costs. For us, good and stable production volume also led to a better yield in terms of lower consumption of wood, chemicals, higher energy generation and so on. And finally, I can also mention that our ongoing project to build the CMTP line -- CTMP line at Ortviken's industrial site with a total capacity of 300,000 tonne is progressing according to time and budget. Inventories have now come down to normal levels, both for softwood pulp and for hardwood pulp, as you can see in these graphs. The lack of capacity in the logistical chain, especially to Asia, but also to U.S., still affects the supply situation, which results in increased distribution costs, but also some disturbances in supply. During the coming autumn, a number of planned maintenance shutdowns will be carried out. And for SCA, this means that Östrand will stop for a full 20 days at the turn of the months September and October. When we move on to business area, Containerboard, I would like to start by stating that our expansion and growth project in Obbola is progressing very well, and we are on time and budget. The sales and EBITDA for the Containerboard business are up 19% and 75%, respectively, in Q2 '21 when comparing with last year. And this is mainly due to increase in prices, but again, also due to good production level. Stable costs also contribute positively. We have also seen that prices for OCC have more than doubled since November 2020, and that will, of course, affect the result negatively. But at the same time, they also support the price development for testliner and thereby indirectly for kraftliner. And so all in all, this development is positive for SCA. The global kraftliner deliveries from Europe continued to increase also in the second quarter this year, and we can conclude that the demand for boxes has been very strong also during the second quarter and is now on a level above the trend line before the outbreak of the pandemic. And this has led to inventories being on a very low level for kraftliner, as you can see in the graph bottom left. Since the bottom position in terms of price Q4 2020, the price for unbleached kraft has so far risen by approximately 200 per tonne. And as of August 1, SCA have announced the EUR 50 per tonne increase for kraftliner grades. And these price increases will successively take effect during the third quarter and giving full effect during the fourth quarter. So with the present situation, the delta between kraft and testliner prices is approximately EUR 150 per tonne, and that is historically a rather normal level, I would say. So by that, I hand over to you, Toby.

Thank you, Ulf. Good morning, everybody. I will start off here with the income statement. And on the top line here with net sales, you can see that we have a net sales in the quarter of SEK 4.8 billion. We have actually lost around SEK 1 billion in net sales from both the exit of publication paper and the divestment of Wood Supply UK since the second quarter last year. But you can see here that that's more than compensated then by around SEK 1.2 billion of additional sales from the effects of price/mix, from the effects of the increased volume and then net of currency effects. So that SEK 1.2 billion underlying growth in top line has fallen down to the EBITDA in the next line, and that shows that it falls down to basically SEK 1.2 billion, SEK 1.3 billion increase in EBITDA, shows the good stable cost development that we have as well. And so the EBITDA has increased from SEK 1 billion in Q2 last year to SEK 2.26 billion in Q2 this year, with an EBITDA margin then of 47%, which is, of course, also a very good level. Then coming down, that falls through the same increase to EBIT. Financial items very stable on SEK 26 million for the quarter, stable in terms of interest rate and net debt, which I will come back to. Then we have a profit before tax of SEK 1.85 billion and tax SEK 372 million, which represents an effective tax rate of just under 21%, in line with the Swedish tax rate, which means we have also a strong net profit for the period of just under SEK 1.5 billion in the quarter and an earnings per share in the quarter, therefore, of just over SEK 2 per share. If I move on to give a little bit description per segment and starting on the left-hand side with the Forest, top left with the net sales, you can see we are trending slightly lower level of net sales than we were a year ago. And that's basically the effect of reduced wood supply due to the exit of publication paper, so reduced wood supply to Ortviken, which we don't have anymore in publication paper. And then on the bottom line, you can see a strong quarter from Forest. That's basically due to the fact that we are optimizing wood sourcing through exit publication paper, but the largest reason is also that we harvested a significant amount of own forest this quarter, and we have a seasonal pattern with harvesting our own forest. So next quarter, quarter 3, we normally don't harvest, and we won't harvest as much own forest. So we won't see a strong effect from that in quarter 3. Then moving across to the Wood segment. Here, you can see that we have a significant increase in sales this quarter despite the fact that we sold Wood Supply UK in quarter 4. Q2 is also a seasonally strong quarter for the Wood business, but obviously the very strong pricing development has a big impact here and especially when you come to the bottom line EBITDA where the margins really come from the very strong price development and also good production with a 36% EBITDA margin for Wood in the quarter. On the pulp business, you see the effect of both increased prices, but also increased volumes with increased production and delivery volumes this quarter. And the good performance, you can see also on the bottom line here with an increase in EBITDA margin to 38% in the quarter. We've now had 2 quarters, just to mention, quarter 1 and quarter 2, which are clean with good production with no maintenance stops. And as Ulf mentioned, we will have a maintenance stop at the end of Q3 and mainly in Q4. And then in containerboard paper, you see the impact we had. Publication paper, up until the end of Q4. So from Q1, we have -- it's a clean containerboard net sales and the containerboard EBITDA. And so the bottom line, you can now see is a clean containerboard margin from quarter 1. We have a positive price development in containerboard, which has led to the improved EBITDA picture. And here, we also had 2 clean quarters with no maintenance stops and also with good deliveries during quarter 1 and quarter 2. And then we will have a maintenance stop in both Obbola and Munksund in the quarter 3, which will have an impact. If I move on to the bridge of net sales. Here, you can see the significant impact basically on price, which is 25% quarter on -- the same quarter last year, a 7% impact from volumes. And here, in all areas, actually, but just to mention the biggest impact in pulp were the continued -- the Östrand ramp-up is now at a good volume level both in terms of deliveries and production, as I said, and then the 2 big impacts on the right-hand side here from the divestment of Wood Supply UK and exit publication paper. On the EBITDA bridge, yes, again, you can see the big impact from price/mix of SEK 1.28 billion, the improvement in volume of nearly SEK 200 million. And then the other largest part here is the effect of currency, which is negative versus last year due to a stronger SEK 200 million impact. Moving on to cash flow. And if I focus on the right-hand side here, where you can see the half year cash flow, you can also see the quarterly figures on the left-hand side. But the operating cash flow for the half year is SEK 1.6 billion, and this is including FX. We have an increase in working capital in the half year and the quarter. So in the half year, it's SEK 691 million. And that really is the impact of increased prices in working capital. So we've absorbed that effect in net operating cash flow. We've also had the restructuring costs from the exit of publication paper, which we funded in the half year, but we still come out with a strong operating cash flow of SEK 1.6 billion, which basically means, as Ulf mentioned, we're funding the strategic capital investments from operating cash flow. Coming on to the balance sheet, and maybe I'll start here on the bottom line. You can see the market price applied on Forest assets, and this is the 3-year average market price that we take from independent sources of market transaction prices and now including the data for the first half of 2021. And that means that the price level is now SEK 300 per cubic meter compared to SEK 291 per cubic meter at the end of December. So the increasing trend continues, and it's that price increase that leads to -- on the top line here, then the value of the Forest assets has increased from SEK 74.9 billion at the end of last year to a value now SEK 76.6 billion. Working capital in absolute values, as you can see, has increased, as I mentioned, due to the higher prices and seasonal higher sales in Q2 from some businesses, some wood business in particular. And -- but when you look at relative to net sales, we've come down from 18% to 17%. So good development relative to sales. Moving down, we have deferred tax and then we have other capital employed, which has increased mainly due to the ongoing construction of the new mill in Obbola. Net debt has increased versus the end of last year slightly from SEK 7.7 billion to SEK 8.2 billion. We also paid dividend, of course, this quarter, but we've delevered primarily due to improved EBITDA. But it deleveraged down to 1.4x debt-to-EBITDA. And then net equity has increased from SEK 72 billion to SEK 74.5 billion. Just to mention on the operating cash flow, we've had a strong period of delivery on operating cash flow. As you can see here, over SEK 3.5 billion of operating cash flow delivered in the last 12 months and not least in this first quarter, despite the fact that we've also increased working capital due to the higher prices. We funded the restructuring in Ortviken, and we've had the strategic CapEx of all. Despite funding all those, we've managed to deliver and reduce leverage down to 1.4x. So it's a strong delivery in terms of cash flow. And finally, just to also highlight, we issued a green bond in the quarter, the first green bond we have issued. And we issued SEK 1.5 billion at a 7-year maturity, which we're very happy to increase and have a long maturity on SCA's average debt with 4.8 years on average. So we have a very secure financing position. The green bond is well aligned with SCA's sustainability platform and especially helping to support the positive contribution to the climate that SCA brings. And then finally, the rating on the green bond is the best possible rating of dark green. So I think that's an interesting development in the quarter. And with that, I will hand back to Ulf for summary and Q&A.

Thank you, Toby. I will not start to repeat everything again, but we can state that we deliver our best quarter ever, 47% EBITDA margin and also that we have -- we can see a big positive effect from the decision that we took last year to leave publication paper. So I think by that, we can open up for questions.

[Operator Instructions] Your first question comes from the line of Linus Larsson from SEB.

Congratulations on a strong quarter. I'd like to start on the Forest side and with the high harvesting levels that you've had at least in this quarter. Could you please update us on the remaining quarters or, if you like, the full year? What kind of level of harvest should we expect compared to last year, please?

Linus, yes, we had a strong harvesting of our own forest this quarter. And as I mentioned, it is seasonal. We do have a high level in normally quarter 4 and quarter 2. For the full year, we expect harvesting to be around the same level or perhaps even slightly less than last year, but around the same level. And so therefore, yes, you'll see that in the second half of the year, then we'll have -- normally have less in quarter 3 and then a bit more in quarter 4.

Okay. And then on Wood, which was very strong and, from the sound of things, will be even clearly stronger in the third quarter given the price indication that you mentioned. But what's happening on other parameters? Like how do you see sawlog costs developing, for instance, in the third quarter?

Yes. It's hard to say. But honestly, I think we will remain on more or less the same level as we have just now for sawlogs. No big differences. I mean, some small increases, but not any major.

And so it's an extremely favorable market for saw mills in the current business environment. How do you see this playing out? I mean, do you see any supplier responses coming through? Do you see any signs of any softening in the order books or any type of other market indications?

I mean, as it is just now, we see no signs of softening market. As I said, I mean, we've seen that CLS prices in U.S., they went down from -- yes, from an incredible level to something which is quite good. We are not too present in the U.S. market, but the U.S. market, of course, have an impact on all other markets. But still, the demand is strong also in U.S. We heard that Canfor, they will now take curtailments due to wildfires in British Columbia, and that might impact also the future needed wood in the U.S. China has been a little bit hesitant during the whole cycle, I would say. But still, I mean, we do some good volumes in China. But the driver just now is the European market. And I mean the third quarter, I would say, is we have done all agreements now, and we have -- both in terms of volumes and price, and that one will be close to where I said, I believe. Then always, you have a seasonal effect in Q4 and, from time to time, also Q1. But I mean, it seems to be rather -- continued rather stable market as it is just now.

And then just now that you mentioned seasonality, how do you -- how are you planning to run -- or how are you running production in your saw mills in the third quarter? What capital production compared to the second quarter given holiday seasons, et cetera?

Okay. But in SCA, we have -- since 20 years, we have always been running our saw mills at full capacity. So I mean, we will run also. Last year, we had some -- we took some curtailments during the summer due to, I mean, the COVID situation. But normally, we run saw mills as much as we can. I mean, you have to stop 5, 6 hours each night, depending on conditions for different mills and where you have bottlenecks and things like that. But I mean, we run them for full capacity.

Your next question is from the line of Robin Santavirta from Carnegie.

Now first related to the Pulp division. If I look at the ASP, the average sales price, you reach in Q2 is obviously up quite significantly by far less than the price statistics show. I do understand that there is a bit of a lag in the P&L impact from price statistics. But could you just remind us or explain the dynamics how it works? Is it all on a lag of 1 or 2 months to the ForEx price? Or is there some spot sales as well? And in what markets are you operating in terms of pulp? Is it only Europe or a bit of North America and China as well?

Yes. I mean, if we start with the market, price changes will be gradually implemented, and -- of course. And so that is one reason why you don't really see that, the result in the P&L follow the fixed price announcements and things like that. So I mean -- but we follow -- in many cases and in most cases, we follow the fixed price. Then again, you have currency effects, you have different discount rates and things like that. And you know the structure behind that. For us, we are very much focused on Europe as our main market, and we will continue to be there. And we also -- today, we feel that, that is a favorable place to be in. We -- yes, it was maybe better to stay in China during the first quarter and also during the fourth quarter. But just now, I think Europe is the best place to stay in. U.S. is a good market for us, and I don't know if we release how big volumes we do there. Toby?

We do have sales to the U.S., but very little to Asia.

I do understand the lag, but you don't have any sort of rule of thumb that could help us sort of understand the lag sort of compared to the fixed prices in Europe.

I mean, a rule of thumb, I mean, it takes -- it's probably 2 to 3 months in terms if time lag, yes. Overall, when you take into -- yes, compared to when maybe fixed is published or, yes, prices are published.

Good. That is helpful. And then maybe for you, Toby, two sort of financial question. First of all, the paper business. You still report some losses, some of the drag in the other division. What is the amount? And how long should we expect that to continue? And then number two, could you just give some kind of indication about CapEx levels for this year and maybe some indication for next year as well?

Yes. I mean, as we've described, we -- I mean, we don't have costs for the paper division anymore. That's -- I mean, at the end of Q1, that was finished, but we do have costs for maintaining the Ortviken site up until we start the CTMP, which are SEK 20 million to SEK 30 million per quarter, which we've guided for. And that's the same this quarter, so we're in line with that. And then the CapEx, yes, I think we -- yes, I mean, the guidance we've given before is we have an annual current CapEx level of SEK 1.2 billion to SEK 1.3 billion, and that's -- I think we stick with that guidance for the year. And then, of course, strategic CapEx is -- I don't know if you're interested in that as well, but we have the Obbola project. It's the biggest one and CTMP in Ortviken, and the 2 large strategic CapEx. And there, yes, we expect, as we said before, around SEK 3 billion to SEK 4 billion in strategic CapEx for the year.

For the year. And what about next year?

Just give me a moment. It's -- I mean, this year is the biggest year by far. So there's significant -- so I think it's around -- yes, more and more like SEK 2 billion to SEK 3 billion next year, depending a bit on the outcome this year.

Next question comes the line of Martin Melbye from ABG.

Regarding the transaction part on the Forest assets, you said 3-year rolling average and is now at 300. What is the last data point in that exercise?

I mean we give the 3-year average margin, but I mean it's been basically a steady development during those 3 years, which we've seen continue. We had data then for the first 6 months. I think it's also -- most of the transactions do happen in the second half of the year, so it's not that many transactions in the first half year, but we've seen the trend continue with positive price development. There are market statistics published also, so you can see Ludvig & Co., for example, published market statistics, and they follow the same. So if you want to see the public market statistics, that's a good place to turn.

Okay. And you gave the quarter-to-quarter price change on the saw mills. Could you try to indicate the same on pulp and containerboard please?

Yes. I mean, the answer is no. I mean, we know in pulp, as I said, I mean, the official fixed price today is USD 34 per tonne. And we are just now in negotiations for July, so we don't know really the outcome of that. But as I said, I mean, we feel it is a rather stable situation in Europe. It has been a little bit weaker in China and the U.S. Seasonally, you normally have a slightly weaker situation in the summer. But on the other hand, we also know that we will see a lot of maintenance stops coming onstream now. And as I said, also for Östrand, we will have a stop in September, October, more than 20 days. So that's quite a big one. In Containerboard, I said that we have seen a total price increase of EUR 200 per tonne. And we have another announcement now from August 1 of EUR 50 per tonne increase for kraftliner grades. And I think they will come through, and I think they will successively take effect during the third quarter, giving full effect during the fourth quarter. So that's my best guess just now.

I could also add, Martin. You can -- I mean in the graphs we gave in the report, you can see basically for the last quarter, the net mill price development for pulp and containerboard in those index graphs. So -- and the reason we -- I mean, the pricing is relatively public for containerboard and pulp. So -- and I think the other reason is also that, when it comes to wood, we have relatively good visibility on the coming quarter, which you don't have quite the same level for, yes, a bit longer out for containerboard and pulp.

And so what is the key reason why sawlog prices not increasing in this dramatic saw milling market? Why isn't the forest owner getting paid?

Yes. I mean, we are the biggest forest owners. I think that is one reason. We are the biggest private forest owner in Europe, and we can -- I mean, we can secure a safe and stable supply. And I think for all parties, it's -- the best thing is to have a stable price on raw material because then you can plan your activities in the forest due to what's needed in the forest, thinnings, clear cuts and things like that. So I think that is the main reason. One good thing for us just now, as I mentioned, is the decision to leave publication paper. And by that decision, we haven't been forced to import any wood more or less during the first and the second quarter, and that has contributed well also. But we have a stable supply and...

[indiscernible] supply that effect.

Not really. But I mean it is substantial effect, I would say.

Your next question is from the line of Cole Hathorn from Jefferies.

Just following up on the Wood Products. You're calling out the kind of the sawn timber business potentially up as much as 50% quarter-on-quarter. Could you give us a little bit more color on kind of the trade side, where I imagine pricing will be up less than the sawn timber? Just so that we can understand the dynamics of that part of the market. And just remind us how much of the Wood division, your traditional kind of sawn for construction is versus other components. And then the European market has announced a number of things with the new EU forest strategy, the Fit for 55. Could you give us your initial thoughts on how you're thinking the new forest strategy will impact your business? Firstly, from ability to harvest versus the forest sink debate. And then secondly, the prioritization of the EU on using wood and construction because my outlook there is, of using wood in construction, is very positive.

Yes. If I start with the strategy from the European Commission, and Toby can say some words about the Wood business. I mean, first of all, we welcome, of course, the idea to achieve a 55% emission reduction, but we do not fully share the commission's view of the rule of the forest and the forest industry. I think the most important thing and the best contribution we can give from the forest side is to continue to manage the forest as active as we can. I mean it is a fact that it is the growing forest that can contribute with the net binding capacity of carbon. And for us, it's more than 5 million tonne per year. And I mean, the reason behind that is, for every tree that we harvest, we replant 2 to 3 new ones. And for each new generation that comes up, we will have a 30%, 40% higher growth and all that kind of things. But the other and even more important thing is that we can supply more raw material to the market when we increased the production in the forest and the growth in the forest. And by that, we can replace plastic with paper, we can replace fossil fuels with biofuels, and we can replace steel, concrete with solid wood constructions. And here, for us, it's only that give another 5 million tonne per year. And then, of course, we should all try to reduce our emissions from our industry, and that we also do every time when we look into new investments and things like that. So I think that is the basics. I don't like the idea that you can maybe see and read about -- when it comes to looking upon the forest as a carbon sink. That's not the right utilization of the forest. We have the best forestry in the world in the Scandinavian countries and let us continue to do that in the best way. And I think that is also -- what will happen now, we don't know really, to be honest. But I mean this is not a decision from the commission. Now it will be discussed in a lot of -- I mean, nationally, it will be discussed in different working groups and things like that. And the devil will be in the details. I mean it's really important for us now to follow -- I mean, what's inside special, yes. But when you say we started with clear -- with no clear cutting. But I mean that will not be the case, of course, but what kind of restrictions will occur and how can we handle that. I think also one important thing is to see that there is no basis for having to choose between the use of forest and the protection of biodiversity. We can and we have balanced that in a good way in many years. And if you look into Swedish forest today, you have more dead wood, you have more broadleaf trees. It hasn't really disappeared, the species from the Swedish forest the past 20, 30 years. We have more than doubled the standing volume in Swedish forest since 1950. And at the same time, we have more than doubled the harvesting level annually. So I mean that is a true success story. And I believe that we will -- when we start to discuss this into details, we can also show the good thing by actively continue to manage our forests.

Yes. I can add just on -- to clarify on the Wood business, Cole. We have around 70% of the sales from the Wood businesses, the sawn products, and 30% roughly is the -- what we call wood supply, where -- which is more like a traded type business like you say, but with some -- maybe some kind of additional conversion operations on the wood before it's sold. So the price development that Ulf mentioned is really applied to the sawn products, the traded products go much more lower trading margin, even though we have had strong Q2 from wood supply. It's normally quite seasonal. So we have a strong Q2, and then it tends to -- it has a weaker period in the second half of the year just due to seasonal reasons.

Your next question is from the line of Oskar Lindstrom from Danske.

Three questions from me. The first one is on, let's call it, force majeure. I mean, are you seeing any impacts from the threat of closure of Sweden's last cement plant due to not getting its environmental permit renewed or likely not getting it renewed? Or do you see any similar impacts in other countries causing sort of a shift from -- or an acceleration of the shift from cement to wood? And then also, any impact on either demand and/or supply from the flooding in Central Europe? That's my first question. Do you want me to take the other ones? Or...

No. Can we start there? So yes, it's a very good question, Oskar. I mean, we are, I think, all a little bit surprised about the cement plant. And it's really hard to judge what's going to happen there. But if it will be closed down, I think that will have a big impact on the Swedish building industry. And I mean, I heard some figure here that between 200,000 and 300,000 jobs were threatened if this will come through. But I don't -- I cannot really believe that this will happen. It would be 100% crazy, of course, because you need to replace that cement with cement from places where you don't produce it in the same environmentally friendly way that we do in Sweden. So I cannot really believe that this will come true. But if it comes true, I believe that it will have a negative impact, of course, when it comes to building activities, definitely so. Structurally, it's -- yes, I don't like really to speculate. We need, in many cases, a combination between wood and cement. And I think the important thing is to find the right balance and the right combination. So far -- and that was the last part of the first question, we haven't seen any negative effects of the flooding in Central Europe.

Not material. I mean -- yes, logistics is more problematic around , but it's not material...

No major things.

If I can just follow up here actually on this, are any of your sites facing renewed environmental permits that we should be aware of?

No.

Okay. My second question is on capital allocation. I mean you're now in the middle of the Obbola project CapEx. And CapEx is going to be high this year and then come down a bit next year, as Toby mentioned. But you already have a strong balance sheet. You have a very strong cash flow at the moment. You must be thinking about what to do with the money sort of once Obbola is completed in terms of strategic projects or acquisitions. So what's your own thinking here about growth opportunities beyond?

I lost you a little bit, Oskar. But growth opportunities, was that the question?

Exactly. I mean, given how strong cash flow, you're now getting -- more money in the bank usually sort of gets one thinking about what one could possibly buy with that money. That's my question.

I mean the first thing just now is that we are 100% focused on delivering on the 2 big growth projects that we are performing just now. I mean Obbola is a super big project, and the CTMP project is also a big one. And at the same time, we are also performing SEK 1 billion project in Bollsta. So I mean, we are 100% focused on delivering on these projects. And I mean, I think we are all a little bit surprised of the strong cash flow and the strong market situation that we have just now. I mean, last autumn, we were not really sure of what kind of market we should meet for 2021. And now we have this market. So I mean, of course, we look into different opportunities. And when we have something to talk about, we will do that and announce that. You would like to add something, Toby, or...

No. I mean, I think just we are very focused on, yes, delivering the projects and on time, on budget. And that's, I think, the important focus. They deliver a significant growth for SCA. So yes.

I mean it was also quite a big thing to do to divest or to close down the publication business. We had to take away 800 people in this region. And I mean, one thing, of course, the people at mill site. But for my perspective, if we reduce the sales by 20%, we have to reduce the manning all over the place by 20%. So that goes also for headquarters and staffs and everything. And we are just now -- we're just now doing that, and that is also what you can see in our figures. I mean, we have been very focused on also delivering on that, let's call it, an exit project. So we have had a lot of -- we have a lot of things to do just now just to deliver on what we have promised. And...

Yes, that sounds good. A final question. I mean you're growing forest, buying about 5 million tonnes of CO2 per year, as you mentioned. And then your products substitute as well. But what would be the level of sort of CO2 sinking every year if you stopped harvesting and stop replanting?

I think that would be negative because I think -- but this is an important part of the debate because, I mean, if you just stop harvest, short term, you will continue to grow and maybe add some more carbon in the forest for a short while. But if you then include the -- I mean, the product side, then it will be negative. Because if you cannot really supply the market with renewable -- the renewable fiber, then you have to increase the use of fossil-based materials and fuels. So I think it is already from the day 1 a negative thing. But I think we are lost in the debate. We don't have the ability to come through with our arguments. But the thinking and the debate in Brussels always stop at the forest side, which is not the right thing to do. You have to include the possibilities and the potential we have when it comes to substitutes. And so we have to improve in the communication here. So even short term, I think it's negative. And I mean the argument about -- again, about biodiversity, that's not an argument. I mean you don't have to choose between the use of forest and the protection of biodiversity. You can do it both. And I mean, we can always do things better, and we will always look into possibilities to do things better, but we can do it both.

Yes. That's an important debate, no doubt.

I think, Oskar, you had a very interesting article in Svenska or blog the other day written by [ Bjorn Hegland ] and who is -- he was the corners of the Swedish Forest University, but he's been the CEO of [indiscernible]. But I mean, that was very well written and well structured. So I think you have a lot of good facts in that one, so we will try to spread that article, really. I think that is the best one written in this field.

It was very good. Yes, I agree.

Your next question comes the line of Justin Jordan from Exane.

Well done to SCA for a very strong first half performance. I've got 3 separate questions. Firstly, just kind of follow-on from Cole's earlier question. We've now -- we're now 3 months on from, I guess, the first deliberations from the EU Taxonomy. Can you just give an update as to what that might mean for SCA and potentially the proportion of your revenues that may be taxonomy aligned? And then secondly, just on Forest, clearly, I know you're sort of constrained from being a purchaser of Forest assets in Sweden. But can you update us on where you are in, first, forest purchasers in Estonia and across Europe. And then I've got a follow-up question, please.

I can take the first. I mean, obviously, it's becoming -- it's a moving picture and developing picture with taxonomy, but we do expect to have to then do some reporting from the beginning of next year. But I think one thing is important to note is that, in the first stage, we will be reporting what's -- how much of our business is eligible for taxonomy according to the 2 environmental targets, which have been worked through by the European Commission so far. So there's still 4 which remain, which will come in the future. And according to those 2, then we will -- as we understand, we will then identify how much of our company in terms of sales and OpEx and CapEx is eligible. That doesn't mean that they're aligned. It will come later then how much of that business is aligned. And that's really the kind of measure of whether you're environmentally sustainable or not in your operations. So the first stage is really just to identify eligibility. So it's not a key if more or less your business is eligible. It's just really how much of your business is covered by the parts which are established today. So I think it's important to recognize that in the first stage, and that's how it will be for the first 2 years, basically. And we expect with the 2 climate targets and particularly climate change mitigation, which is one of them. The forest is really -- meets that target very clearly. The rest of the business is still unclear today. The main -- probably the main climate target, which is still to come around sustainability, will cover our other businesses very clearly. But with the targets as they are today, it's not clear whether they will cover the industrial businesses or not. But when they come, we expect them very much to be part of the circular -- the transition to a circular economy. So I think it's still hard to give clear answers, I'm afraid, Justin. But I think, in summary, I think we'll expect to be reporting on basically only on eligibility. But clearly, the forest will be part, and we have to work through to see if the rest of the business is covered in this first wave or will be covered later on.

Okay. And then we have a question about -- I don't know if I get you right, but what's the question? How much we -- where we are in our program for buying?

Yes. Could you just sort, repeat, Justin? Sorry.

Can you repeat the question, Justin?

Sure, sure. Clearly, you've been the largest [indiscernible] center in Europe, [indiscernible] net first purchaser in Sweden. But clearly, you have really clear plans to expand elsewhere in Europe, particularly in Estonia. Can you just update us just on where you are on your previously announced plans to be a net first purchaser elsewhere this year?

We have a plan to acquire 100,000 hectares of forest land in the Baltic states, so that's Estonia and Latvia, which are the -- and we are at around 50,000 today. So we're around halfway.

Okay. And just one final question, third question for me. Clearly, SCA, anyone who track you as a shareholder or analyst for a number of years will know you're incredibly prudent in capital allocation. But if I was, I don't know, a private sort of operator in Europe or North America right now, I'd be solely attempted to run the maximum number of shifts I could or potentially add some more capacity to my milling production. I guess, given the strong demand we're seeing and what seems like exceptionally strong pricing outlook forward in Q3, what's to stop there being less disciplined peers adding more capacity to ultimately, I suppose, have a supply for response? I appreciate [indiscernible] SCA doing it, but not everyone else in the industry [indiscernible].

Maybe I can take it first, and then -- but I mean, it all comes down in the end to the raw material. You can't add capacity if you haven't got access to the raw material, and that's why our -- I mean, our saw mill business is very closely linked to the forest sourcing, the forest and the raw material sourcing we have. So of course, right now, in a strong market, there is -- yes, everyone is making good money, and we are optimizing our production, of course, to optimize. But I think, in the long run, there's no point building extra capacity if you haven't got saw logs to be able to, yes, saw.

Yes. And I mean, I think also that might be the big question mark going forward, I mean, to get access to sawlogs. And for saw mill, 75% of the cost is related to the raw material. So if you don't control that one, then you lost, definitely. And that's the reason also just now, I think why we cannot really -- I mean, we run at full capacity, but you cannot really add too much volume to the market as it is just now.

Your next question is from the line of Johannes Grunselius from Kepler Cheuvreux.

So most of my questions have now been answered, but maybe you could help me on the CapEx side, what to expect in numbers for this year and also 2022. Any changes from the last update there, please?

Johannes, yes, I can just update. So for current CapEx, we expect SEK 1.2 billion to SEK 1.3 billion for the year, and that's our normal level. And then for strategic CapEx, we expect SEK 3 billion to SEK 4 billion this year, and that's largely the Obbola project, of course. And then we expect SEK 2 billion to SEK 3 billion next year.

Okay, okay. Same as before.

Same as before, yes. No significant change.

Yes. And also on the cost side and the cost inflation theme, it seems to me that you will have quite stable cost here, Q3, Q4. Could you talk a little bit about this? Are there any sort of areas where you see a big cost inflation at the moment for you and also, if this could hit the industry, what -- in terms of your competition?

I mean, as I said, we had a very stable cost level of Q1 to Q2. Where we can see increases, of course, is in the logistic part. And there, you can see quite substantial cost increases. But then again, you have questions about mix and things like that. And the worst scenarios you've seen when you go overseas, and we are not too present overseas, so we have been a little bit protected from that one. Otherwise, I mean, I think we've done a good job in our -- we have a central purchase organization. And as I said, when we took the decision to leave publication paper, we also put very clear targets for each part of the company, and they have all, more or less, delivered on that. And one thing was, of course, to really keep an eye -- close eye on the cost side. And what is maybe a little bit -- yes, I think the biggest cost for us is, of course, the raw material. And I mean, we have, as I said earlier, a good situation when it comes to wood supply and which is good. We might see some small increases in sawlog prices and things like that, but no major things. I think we are in good control for the coming quarters now. I don't know if you'd like to add something, Toby, here.

Maybe I could just give a little bit more. I think, as we've mentioned, the wood is -- wood supply is the main raw material. When it comes to other materials or chemicals, we do see increases, but we have relatively limited maybe compared to others more in publication paper and other segments that are more intensive in terms of other materials and chemicals. And then we also do have the logistics area where we have seen maybe around SEK 30 million higher logistic cost versus quarter 2, and we expect an increase also in quarter 3 from a bit restricted -- yes, restricted access to containers and higher container prices and so on, which...

But I think more disturbing in that perspective is the service level.

Yes, yes.

Okay. Understood. Maybe a final question from my side. I mean you have an interesting chart here on Page 11, showing that also the deliveries of kraftliner have increased pretty dramatically, I would say, over the last year in Europe. I mean, where are we now in terms of sort of capacity constraints in Europe? And at this point, are you actually seeing that there is a lack of material -- kraftliner material in the market? Is that something that you see now? Or is that something that could happen in the coming months? I mean, it seems that deliveries have come up so much, but I suppose there is a capacity constraint at some point in Europe. That's my question.

Yes, that's a good question because we don't really know. I mean what we saw when [ ULO ] came onstream and added 400,000 tonnes of annual capacity, that was immediately assimilated in the market. And we see less import to Europe from U.S. just now. So that can be one explanation. But I feel that when we add capacity in kraftliner, that is immediately assimilated in the market. And so maybe we don't know the real need. It's always a combination between kraftliner and testliner, and we use kraftliner for certain purposes and testliner for certain purposes. And many times, it's just a question of material efficiency, and that is also what drives prices and the mix between kraft and test. But in some areas, you need kraft and you need strength and you need wet strength and you need some other things, then you need to use kraftliner, of course. But we feel just now you could sell much more kraftliner from SCA, if we just had the production. And in 2023, we will add capacity. And today, we feel very confident that, that will be needed and demanded from the market.

Your last question is from the line of Mikael Doepel from UBS.

Just briefly following up firstly on the Fit for 55 M4 strategy. What's the time schedule there to take a decision for EC to make a final decision on that one? That would be my first question. Secondly, on sawn timber, I think everybody is scratching their heads a bit given the quite significant price increase that we have seen and continue to see. And I guess the question there is that, how much can the market take before it starts to impact demand negatively? Do you think we are close to that level in Q3 given the hikes? Or do you think there's still room for more? And then finally, on the pulp markets in Europe, in particular, as you pointed to, seems to be a good demand situation here. Prices have still gone up in June. At the same time, we do see China prices having come down quite a bit. Do you think that's going to have an impact on the European market, i.e., are the European prices coming under pressure now? Or do you see a situation where Europe can actually remain quite stable despite China coming down?

If we start with the market for sawn timber. I mean, it's very hard to say. As you know, normally, it's a volatile market, and I -- even if you, fundamentally and structurally, you see some positive long-term effects when it comes to sustainability and things like that, which is favorable for this material. But I mean short term, it's always a question of supply and demand. And as I said, I mean, for the third quarter, no doubt, we've already set prices and volumes. I also feel that I think it will be stable in the fourth quarter. Not too much happens in the fourth quarter. But I mean, after that, we don't know really what kind of -- I mean, will we have a fourth wave of COVID? What kind of support from governments will we see? And can we start to travel? Or do we have to continue to spend a lot of money on DIY and things like that? I mean all these kind of questions will have an impact on the sawn timber market. But structurally, I think it is a better step by step or better position for sawn timber for sustainability reasons and things like that. But short term, it's always a question about supply and demand. And yes, I cannot really give you a better answer than that, I think. Then, I mean, yes, you had some questions about Fit for 55. And I mean, the strategy that we have now been presented from the commission is not a decision. It's more like a vision or something like that. And after that, we will see more detailed suggestions. And I'm 100% convinced that we have to put in a lot of effort in that process. Otherwise, we will come out with legislation and things like that, that will not be positive for the industry. And much more important, it will not be positive for the climate because it will be -- yes, it will be negative if we have any big restrictions on how to manage the forest and how to provide the market with renewable materials from the Scandinavian forestry, then it's not good for the climate. And we will see different time lines in different areas. And as I said before, the devil will be in the details, and we will put in a lot of efforts from SCA side, but we will also do that from the industry -- from the Swedish forestry industry, but also from the European Federation, CEPI and so on. So I think it will be a couple of interesting quarters coming from now on.

And then you had a third -- I could maybe take the third one. Yes, on the pulp, you asked about basically the pulp prices, Mikael. I'm not sure we can give much more color. Basically, with the -- and Europe is now at $1,340 per tonne, as I've mentioned, and similar level to U.S. China, it's always a more volatile market with the spot prices, which go up and down. Sometimes there's more or less volumes also sold. And it's also sometimes reflects the logistics situation to China. But I don't think you can really draw any sort of directional conclusion, but the momentum in Europe is still up and is really catching up with the level in -- certainly in the U.S. and where it's been in China. So we have to see.

There are no further questions at this time. Please continue.

Okay. Thank you very much. And this concludes this presentation of SCA's second quarter results, and I would like to welcome you all back at -- by the end of October. Thank you for listening in.

This concludes our call for today. Thank you for participating. You may now disconnect.