Holmen AB (publ) (HOLMB) Earnings Call Transcript

Okay. Welcome, everybody, and welcome to the interim report presentation by myself, Henrik, and Anders Jernhall. We do as we usually do, we go through the presentation, and then we're happy to take your questions after that. So let's start with the first slide, which is a very nice one for us this time. Another record quarter, which means that in an environment characterized by lack of raw material and energy, we've been able to perform, in our history, a fantastic result. Thanks to, first of all, really good control over the raw material when it comes to wood supply, favorable energy situation. And also, we've been able to raise prices in all our business areas. Earning a lot of money on this also means that our net debt, despite the fact that we gave an extra dividend, we also invested in half a wind farm and we bought some forests. The net debt after that is actually down a little bit, thanks to good cash flow during the first and second half of the year. A few words about the situation in the Forest market. We had had a quite long period now when sawmills have been running full, that we have seen that there is quite a competition for sawlogs in the market. But lately, and during the second quarter, we've also seeing that competition for pulpwood has picked up, which is not so strange after all. We also have the Russian situation where we know that Russian wood -- pulpwood is no longer coming into the rest of Europe. And pulp mills have been running quite full. And that also means that prices are up now, not only sawlogs, but also pulpwood, which has had some effect on the result, I guess.

Yes, we see that in the second quarter, we finally got the effect of increasing prices in the wood market. So it's quite a nice and good revenue that has been added to the Q2 result, coming in at close to SEK 350 million.

As expected.

Yes.

Then moving on to Paperboard. This is a market which have been developing quite favorable. We have seen last few years slightly higher demand or increased demand, a bit more than we're used to and lately also, maybe mainly thanks to -- or thanks to, depending on high cost for some producers, prices have also been able to be pushed up a bit. Where we are right now? Our order books are -- they are good. On the other hand, when we look at deliveries from European suppliers in the beginning of this year, we see that it is a little bit slower than it used to be, which is not strange in this market situation. If we look at the result after a quarter which have been also quite good when it comes to producing.

Yes, we see that we increased prices during the second quarter, and all the price increases have come through in quite a quick manner, which have improved the result in Q2. But we also see that cost for chemicals and logistics are rising, risen quite a lot this year and will continue to rise a bit. But we have been able to moderate the cost inflation by especially the very strong energy situation we have in our board division being self-sufficient.

Cannot be stressed enough, to be honest, in this situation where both mills are self-sufficient.

Yes.

Moving on to Paper. This is a market where it's really driven by cost. Prices are up. They were up in the beginning of the year, and they have continued to come up during the second quarter as well. Increasing prices a lot means, of course, that it has, sooner or later, some effect on demand. If you look at the slide, we know that over time this is a structural decline. And when prices are up as much as they are in this year, one could expect that we will see a bit more dramatic fall than what we see when we look at moving 12. It means that operating rates among the producers aren't fantastic or maybe mid-70s today. Still in the market, the cost determines what prices must be charged to customers. And in our case, we have been doing rather well. We have produced and have a good order stock and order level during the quarter. We also have good control of the raw material, the wood, thanks to our own forest and well done work in the Forest organization. But we also have a fairly favorable situation when it comes to energy in cost, in general. Maybe you can elaborate a little bit on that also when we look at the result, which is fantastic by the way.

Yes. It's -- there's no other word to it. It's a fantastic result in the second quarter. It's not only driven by market pricing going up, half of the improvement is actually to how we have been able to manage our mills. It's fascinating to see how quickly all our employees in the Paper division have adapted to the new energy situation where prices are volatile intraday, it's extreme volatility. But everybody, all the way out to mill operator and production planning, has adapted to the new way of running our machines and adjust power outtake during these days without sacrificing production efficiency or customer satisfaction. So it's a fantastic job done by our employees to contain energy costs. And we also have been favored by quite good hedging -- execution of hedging strategy. So it's a great result.

And I don't think we can expect that we will be running totally full in the future. We have to follow the market and continue working this way. And then Wood Products or should we call it roller coaster products. A fantastic quarter, fantastic first half year, but we know that at the end of the second quarter, we see that prices are coming down in an environment, again, energy crisis, inflation, the whole construction side of the business waiting to see what is going to happen. And that's also the feeling we have right now as we stand here that customers have enough in stock and they are waiting to see what is going to happen. If we just give an indication where we are today, as we say that prices are on their way down, well, today, we are roughly 20%, 25% lower, but it's quite a big spread between different products and markets compared to average for Q1 -- Q2, sorry, of course. And it's chaotic market, not easy to say exactly where it's going, but as we are right now, prices are still falling a bit. Exactly where they will turn up again, very hard to say. But I think we have to keep an eye on something else as well. It's not only the situation we have in the next couple of weeks or months, it's also a long-term question, as we believe we have, first of all, it's an interesting business to be. Building in wood is still fantastic compared to some other materials and has the future ahead of itself. And also when it comes to cost position, we in Sweden, especially our company, we have a very strong position. And it's all about wood availability long term that will determine the winners and the ones struggling a bit more. If we just look at the chart here, we see that we know the situation in Russia, which is a huge exporter of Wood Products. We also know that during the war, and what will come after war we don't know for sure, but it's not easy to -- or we cannot expect Russia to increase or even be at a level we have seen historically. We saw in the market in the beginning when the war started that actually that came quite a lot of wood products out into the market, also into Europe. But since July, roughly, there is no more wood products or wood coming from Russia into Europe. Russia has its own problem. We move to Canada. Canada has also its own problem, especially in British Columbia. A lot of the forest is gone or too far away from the sawmills, cause of the bark beetle infestation we've had for many years. On the other hand, we have the east side of Canada where production is picking up, but cost level is not as competitive as ours as we see it. We also had logistical problems in Canada. But long term, I think it's more a question on, where are the sawmills, where is the raw material. And then we have Continental Europe, a lot of bark beetle infestation also in Continental Europe for some time. We have seen that they had to take out a lot of wood, of course, to not only produce Wood Products, but also to export simply sawlogs. Over time, that should mean that they most probably have to reduce a bit. And where the new level will be, we will see. It's actually only the Nordic countries, not least Sweden, and companies like ours where we have really good control of the raw material and also a good cost position, not only cost, we have a wood market that works in that way, but also that we have, in most cases, sawmills, pulp mills and other operations together in very efficient combination. To build a sawmill in Russia without having a pulp mill next door, it's not the same. It's not the same as you don't have anyone buying the wood chips and they sawdust in the same way as we can do here. So I think it's -- we have to stay cool, and I think we have very interesting opportunities going forward. But let's concentrate on the second quarter. This was a different quarter.

Yes. The second quarter was our best ever for the Wood Products. We benefited from the price increases in Europe. We had a very strong Q1, where we captured a lot of profits by exporting large volumes to U.S. We couldn't repeat that. It was a known fact before the quarter. We saw that log costs rose a bit in Q2 and are still on the rise, but we -- it's a very strong quarter, the second quarter.

Absolutely. And then a few words about Renewable Energy. In a world where we have an energy crisis and extreme electricity and energy prices, what have we done? Well, we have actually increased our production of Renewable Energy in -- through the start-up of Blåbergsliden Wind Farm. We also bought the shares of half of Varsvik adding up to now 1.7 terawatt hours of green electricity production in Holmen. And we have an extreme situation not only in Sweden but also if we look at Europe and different parts in Sweden and huge price increases. In our case, it's a bit -- it's not so good for Sweden and it feels like we could do a lot more when it comes to using our -- at least our hydropower, but also wind power. Most of it, as you know, is up north. But there is a lack of transmission capacity which means that, that electricity is, to some extent, much too much of it is locked in, in northern parts of Sweden. This is something that has to change. Otherwise, it will be extremely difficult to, first of all, have electricity-intensive industry in the south and to also have a situation that makes sense up north, building new capacity. But this is more a question for the politicians, but it's urgent. We can do a bit on this. We can run the hydropower as well as we can in order to capture good prices.

Yes. And as usual, we do run our hydropower towards the hours where it makes the most use for society and gives us most revenues. It adds nicely to our profit. Should our hydropower stations -- there had been free flow down to the southern part of Sweden, we have earned a lot more from our hydropower. So it's a, given the circumstances, a good result, but it can be better.

It could have been a lot better. It's also nice to note that our business idea to grow houses works very good also in extreme times of energy crisis, inflation, et cetera. And that's about it. So we're happy to take your questions. Thank you.

The first question is from Lars Kjellberg from Credit Suisse.

Just a couple of ones, starting with Paperboard, which seems to be the area where you're not that massively benefiting from your cost base. Is that relating more to long-term contracts? Are you not seeing the same sort of massive cost pressures for your competitors in Continental Europe? And what really explains that sort of not quite explosive numbers we've seen in the other parts of the business? You talked about Paper. It's interesting you're the first company who really talks about price elasticity which, of course, makes a ton of sense. But what confused me, you talked about a 70% operating rate, that seems very low. Does that suggest that demand has really started to come off in recent months, because we haven't really seen that big dive in available statistics as of yet? And then the final point on Paper, you called out today a strong operational performance, which is clear from the numbers you provided. Can you explain a bit what you've actually done? What is behind that extreme positive operational performance?

If I start with the Paperboard. Yes, our prices are to some extent or half of them are in fixed long-term contracts. And that mutes the price development a bit. But it's also we are competing, to a very large extent, with Nordic-based producers with not as bad energy situation as Continental Europe, where most of our competitors in Paper operate.

Yes. When it comes to Paper, I think, first of all, our own operating rates are better. But we do see that the decline in the market is, well, it's declining a bit faster, at least the last couple of months, which is not strange given the price increases we see in the market. But it's all theory, and I don't think that all paper mills that we have on the list have been running full for quite some time actually. So in reality, less capacity is there in the market. But this means finally that the ones with the best cost position will survive and some of them simply need to die. And that's a situation we have had for a long time. Our situation is that we have a very favorable cost situation. But not only that, we also have a favorable wood sourcing situation. So we are doing it a bit different. And as Anders explained before, it's also a way to -- the way we do it is really to start and stop, if needed, depending on the energy situation in Sweden, which is not easy.

We have invested in the past in ability to store pulp and go down in power outtake during the most expensive hours. So those are small examples. But there are also quite a lot of price differences within the Nordics between ours, between theirs. And we've been good at exploiting those price differences throughout our whole organization.

And the way the price is set in the market now is mainly based on the cost for energy in Continental Europe in combination with the cost for recycled fibers. And we have, as you know, a slightly different situation there.

Just one very quick follow-up on Paperboard. One of the major U.S. producers started to talk about the energy arbitrage, although being mainly on recycled paperboard. But they're also trying to qualify product for the European market given the extreme high costs in Europe. Are you seeing any tentative signs of any exports of consumer boards from the United States into Europe at all?

Not to my knowledge. Not in our segment, I would say. If you go down into lower segments, then maybe. But then I don't know, we haven't seen it.

The next question is from Linus Larsson from SEB Enskilda.

I'd like to continue on Paper. And if you could just give us some color on price expectations for the third quarter. What kind of opportunities do you have? What's your contract structures as of now? Are you still working with different kinds of surcharges? Is your whole portfolio potentially up for renegotiation? If you could just give some color on your pricing opportunities and flexibility.

I think, Linus, first of all, if you look back a few years or some years, we historically did yearly contracts or half year contracts, but now it's all changing. It's simply impossible to give long-term contracts in a situation where nobody knows what the cost will be the next quarter or even the next month. So when it comes to the contracts, it's changing much quicker than we used to do. We are down maybe next year to monthly contracts, in some cases already today. And then as you say, people use surcharges or not. I think it will simply be -- you have to set the price where you cover your cost. And at the moment, it's -- again, it's recycled fibers and energy on the continent that determine where the cost base is or what the cost is that you need to be able to produce.

And just to continue on pricing, you're alluding to your expectation of accelerating demand decline on back of the steep price increases. Could you give some picture of how the European customer base is doing, I mean your own customers, but also generally, publishers and so forth?

I think it's a bit too early. But of course, they are concerned about the cost. And it's also a big difference between a book publisher and the magazine and a retailer giving out leaflets. It's totally different way of calculating. If you take a book, for example, it's not much compared to what you pay for a book. But if you -- it's all costs to make people come into a shop, well, then it's different. And one can only expect that everyone is thinking carefully, where do I spend my money and do I get payback for my money? And normally, when you have things like the price increases we see, well, then it has at least some effect on demand. When I say the demand is -- the demand decline is accelerating, it's what we see in the last couple of months. It feels a bit softer than what the moving 12 says. So it gives a slightly different picture.

And then just finally, from my side, on Paper, you mentioned hedge gains in the second quarter. Going into the third quarter, what's your situation on energy hedging and maybe also the currency hedging in maybe specifically Paper?

We were very -- the outcome was very favorable in the second quarter. We have a good hedging level in the third quarter, but there could be some headwinds from increasing costs going into the third quarter. But it's a bit too early to tell, but...

And yes, could you quantify the hedge gains in Paper in the second quarter?

Not -- it's not correct to call them hedge gains, but it's a combination of how we have been able to run the mills together with the hedges that we have in place. And...

But you're expecting -- sorry. And you're expecting the same kind of favorable hedging in the third as in the second quarter? Or is there a sequential difference in any way?

This is -- I can't quantify it, but it could be some headwind, not significant, but some headwind.

But we continue to operate in the same way.

The next question is from Oskar Lindstrom from Danske.

Yes, a couple of questions from me. First on Paper, following up from the previous 2 people here on the call. You say you're managing your energy costs and...

You mean how is it possible?

Yes. How is it possible? You mentioned something about storing sort of pulp. Is this something which is possible when production is lower and that you, therefore, can sort of choose to produce the pulp when energy -- electricity spot prices are low? What are the sort of mechanics behind this managing?

You can do 2 things, Oskar. You can do 2 things. You can -- we have an ability -- we have an overcapacity on pulp, which means that we can produce when prices are lower, within limits. It's sort of -- and then you can take downtime on the paper machine as well. And we have been -- of course, we're using both tools to maneuver in combination with the hedges that we have, in combination with the production planning and the way we run our machines.

And the extreme price fluctuations we see also in Sweden.

And this was something which -- because there's quite a significant jump Q2 versus Q1. Was this something that sort of happened during -- that was implemented during this quarter?

But don't forget, we have increased paper prices quite a lot as well.

But it takes some time to learn how to do this, and you maybe have to have some luck as well. So that's why -- can we repeat it completely in Q3? You can't -- I don't take it for granted. It was extremely well executed in the second quarter.

All right. Following up on Paper also. I mean, one cost inflation factor for Continental European producers are gas prices, obviously. But the other one is recovered paper prices. What is the reason for the sort of significant shift up in recovered paper prices in Europe? And then do you see that as being a long-term shift?

When you produce printing paper or graphic paper down in Continental Europe based on recycled fibers, remember that you can only use old newspapers and magazines. You could use some wood-free as well. but nothing that's brown. So you have to either find clean sources or sort out the brown, which will be testliner and fluting. And if you look at the price development and also demand development, the less we consume in Europe, the less availability of these fibers there are, the more you have to pay for sorting out the brown and also to find it when it comes to logistics, et cetera. I think that's the reason why you see that the price for OMP, OMG has come from, let's say, EUR 200 to EUR 300 today. And then you have the yield effect. It's not only fibers in the mix. You also have to -- you have to take it by a factor of roughly 1.3 to come to the real cost for fiber. And then as you correctly say, you have to add on gas and logistics and some other things.

And don't forget, this is a consequence -- the -- as a consequence of a lot of virgin fiber production capacity that was closed during the pandemic. This was sort of quite clear that this should happen. The magnitude is larger than we expected, but that it should happen when you close down virgin fiber. You don't refill the system to -- the print and paper system with virgin fiber when you have closed down so much virgin fiber capacity. So it's quite natural what's happening right now.

It sounds like you're saying this is a structural shift which maybe might even get stronger. Third question for me is on Wood Products and wood supply in Continental Europe. I mean you mentioned this overharvesting which has been going on in Continental Europe due to sort of trying to keep ahead of the bark beetles there. Are we now seeing harvesting levels come down? Or are they going to remain sort of above-average levels or remain at high levels also this year and next year? When will we see the sort of the shadow effect from the overharvesting?

We don't know exactly, Oskar, but I think we can at least predict. When you look at the weather we have had this summer, it's unfortunately a huge risk that the bark beetle infestation has not come to an end yet. Even though a lot of old trees have been taken out, there is still plenty more that could be infested. So like in Sweden, we have to wait and see. But sooner or later, that will happen, that you have to take down the harvesting levels in order to come back to a sustainable balance in the forests.

All right. And my final question is on wind power. I mean you scaled back or down one of your projects in Southern Sweden here this -- before the summer. I mean do you see sort of opportunities to increase the speed of your build-out of wind power?

We see huge opportunities. But if we are going to be able to really do it, we are dependent on the permits. Oskar, that takes too long.

So I mean are you seeing like buying other people's projects? Or I mean -- or do you see opportunities to mitigate the sort of permitting issue and increase the speed of the build-out?

We stick to our strategy to develop wind farms where the majority is on our land and that we develop ourselves. We're filling up the pipeline, but it takes time to do it.