Holmen AB (publ)

Welcome everybody to the interim report presentation for the Holmen Group for the first quarter of 2020. My name is Henrik Sjölund and together with me I have also Mr. Anders Jernhall and we will go through the presentation for our company and once we've finalized the presentation we're happy to take any questions you might have. If we start with a very short summary, looking at our operating profit in the first quarter, we come out with 628 million SEK, which is actually a rather good result given the circumstances with COVID-19, etc. We can say from the beginning that... The coronavirus has had very limited impact on our business and our result in the first quarter. We'll come back to some comments regarding the different business areas later on. In a historic perspective, as you can see, the result is good. Also, the margins are stable and on a fair level. And if we then have a look at... The situation, given looking at our cash flow in the company, it has been also rather good in the first quarter and also on a stable level compared to the previous quarters. We have a very good financial position. 75% of our balance sheet consists of forest. And despite the very strong and good position we have when it comes to the finances, the board of directors, they have today decided to propose to the annual general meeting to not give dividend at the upcoming annual general meeting in June. However, we will see what we see when we come through the summer and after the summer, if we find it appropriate to give dividend or to propose that we will come back a bit later. Starting off then with our forest activities and especially looking at the wood market. The situation as it is right now is that there's quite good availability of wood actually. And of course also the forest is impacted a bit or the activity in the forest is impacted a bit of the coronavirus. And with lower economic activity and lower activity in the industry, There is more wood available, both pulpwood and timber, and that has given a bit price pressure, which Anders will come back to. Overall, though, if you look at this is a short-term effect, long-term still the Swedish industry consumes a lot more pulpwood than actually what can be sustainable harvested. Our own harvesting levels in the first quarter, they weren't a normal level. Going forward, if needed, and if we will need to go for slightly lower levels the next coming quarters, for us that's not a big problem as we just leave some trees to grow for a bit longer and become more valuable. Anders, what about the financials and the forest?

Yeah, it's a pretty normal quarter in Q1, 322 million SEC in operating profit. As Henning mentioned, prices are lower, and as you saw from the graph, it's roughly 5% lower selling prices than a year ago. What we see this quarter is that we have an effect of the new accounting principle for forest, which have positively contributed to the result by 40 million SEC. And that do explain the increase in earnings compared to the previous quarter. Back to you, Henrik.

Thank you. Then moving on to paper board. If you look at the market, we have a situation where actually demand is not bad. If you look at the market development in Europe, demand is roughly on the same level as last year, actually a little bit better. Deliveries from European suppliers to European customers. And also when it comes to prices, prices are relatively stable. When it comes to demand, however, we see quite big differences between different customer segments. If you are in food, drinks, obviously, and pharma, demand is really good. If you are in graphics, it's a bit less good. Our own performance and our own situation is that we had really good deliveries in the first quarter. 147,000 tons is actually on the record level when it comes to deliveries in one quarter. Also, our order book is on a healthy level, despite the situation with the coronavirus we have. And that is... thanks to good demand from some segments and a bit less good demand from other segments. If we look then at our financials, are we happy with what we have performed, not only the deliveries?

Financially, maybe that's not the top performance this quarter. 163 million SEC is better than a year ago, but you should recall that we had production issues a year ago that dampened the result. This quarter, as Henrik mentioned, saw very strong deliveries, but we also had somewhat higher costs connected to keep the production running at a high level and also solve some logistic issues. So the cost side was a bit on the high side this quarter. When comparing to Q4, you might recall that we had a bonus for renewable energy production that positively impacted the Q4 result. Looking ahead in Q4, we will have our annual maintenance stop at Iggesundsbruk, which is expected to take 120 million SEK toll on the Q4 result.

Thank you. A few words about paper. If you look at our paper business, I would say we were in a good shape at the end of last year before the corona struck us. The overall market in general, we know that demand is declining a bit. And the situation we have right now with falling demand and also with societies actually closing down, of course, then it has an impact on demand, which is it's not easy to know exactly where it's going. It's actually quite impossible. There is some price pressure. And we have, sorry. There is some price pressure in the market. When it comes to the first quarter, actually, our own performance was not bad at all. We had a good product mix. We delivered a good result and quite happy about the way we were able to run the machines as we were more or less running full. However, during the latter part of the first quarter in March, we see that the order book is shrinking and we will adjust our production capacity to the demand going forward in the second quarter. As I said, it's not easy to predict what is going to happen. At the end of the day, we are totally dependent on how markets, especially in Europe, are consuming and whether they are opening up or not. Anders, financials and paper.

Yeah, the operating profit was 83 million SEK in Q1, which is at quite a good level, despite prices being lower, both compared to Q4 and Q1 last year. We had good deliveries, as Henrik said, quite a good mix. And if you compare to first quarter last year, we actually do enjoy some lower wood prices in the paper division. It has had very limited impact on paper, the lower wood prices. But in paper, we recognize a positive impact. Comparing quarter to quarter four, the good product mix and high delivery volumes were able to offset to a very large extent the price decline that we saw in Q1. Looking ahead, we have, which is not usual, we have a larger maintenance stop at the Braviken paper mill, where the mill will completely stand still for some major maintenance actions. And that is expected to impact the profit by 50 million SEC in Q2.

Thanks. Wood products. I would say the same as in paper, actually, when it comes to wood products. We were in much better shape coming into the year than we were during most of 2019. And we also saw that prices were coming up a bit and then the corona came. Where we are right now is, of course, a lot of uncertainty. There is a mixed or a split picture when it comes to the different markets. For example, in Sweden, we see that demand for wood products, especially do-it-yourself, is doing rather well. Some other segments, furniture, etc., is not doing that well. And if we go to other markets like, you know, England is important for us. It's totally depending on how they are going to treat society as such. If people are going to be allowed to consume in a different way than what we have right now. You have some other market like Middle East near Africa. It's okay. U.S. most probably slowing down. We know the situation in U.S. which is not easy. So very difficult to predict exactly what's going to happen when it comes to the wood products. We are producing at a quite normal level. We did that during the first quarter, but we will adapt our production during the summer period, during our own vacation period, and take down the production a bit. It's not only demand that's difficult to predict, it's also actually supply, because right now there is quite a lot of sawmills not running 100%. We're coming into a period where we have to take care of the spruce bark beetles down in continental Europe. We will do that in the south of Sweden as well, but it will have much less impact than the big potential spruce bark beetle problem that needs to be taken care of down there. last year i might remember that that led to a lot of wood available and a lot of sawmills running full and finally also a lot of wood products which had a negative effect on the prices in that year so so far fairly okay for us but very difficult to predict and there's in terms of money

Yeah, not much money left at the end of the quarter, 4 million sec in operating profit. It's quite a significant drop compared to a year ago, and that's completely due to lower selling prices. Compared to Q4, the profit bounced back slightly. Prices moved more or less sideways between the quarters, but we had higher deliveries and somewhat lower wood costs in this quarter. During the quarter, we also have finalized the investment in expansion for the Braviken sawmill, which will enable us to ramp up the production by 150,000 cubic meters. But that's, of course, on hold to ramp up until market conditions improve. In the meantime, we'll be able to take down costs slightly based on this investment.

Thank you. And finally, when it comes to our business areas, a few words about renewable energy. I think everybody is aware of the weather situation. We've had a mild winter, we had a lot of rain, which meant that we produced a lot, but prices were quite low. Still, we came out with 95 million SEK, which is actually a rather good result when it comes to our energy division, given the weather situation. We'd also like to highlight that our investment in the wind farm, where we have said that we will invest SEK 1.3 billion, is ongoing and still the target is to have this commissioned by the end of next year. Then coming back to in the beginning where I said we have a very strong financial position and there's just a few more, maybe more in detail when it comes to our debt and our maturity when it comes to our credit facilities.

Of course, when entering into a difficult situation, one thing you have to work with is to ensure that you have a very solid financial standing. We do have it, as Henrik mentioned. We have a good cash flow. The gearing is very low if you compare to our asset base. It's below 10% compared to a balance sheet. which is dominated by forests. And if you measure it against cash flow, we have a very low debt level. Nevertheless, we have chosen to prolong our maturity structure during the first few months of this year at quite good terms. We were quite early out in extending the duration. We have essentially moved all short-term maturities and replaced them with long-term bonds. And we have also extended the tenor of our committed facilities and added new committed facilities. So now we have 5 billion SEC in unused long-term credit facilities. 4 billion is a five-year tenor and 1 billion is a three-year tenor. So we are in a very strong liquidity position.

True. Which is a good thing to have in these days. Finally, a few priorities going forward. And especially when it comes to how do we manage actually the COVID-19 effects, etc. We have, as I said before, we have no problem to adapt our own harvesting levels if needed. To leave a few trees to grow a bit longer, they only get more valuable in the next year. That's not a big problem for us. When it comes to paperboard, maybe I didn't mention, but we... You have understood that production, keeping our production going, that should not be a problem as we feel today. Our order books are healthy, but we do have, I wouldn't say we're struggling, but it's a challenge sometimes to get logistics right. And sometimes it's also a little bit more expensive in order to make sure that we actually can deliver what we promised our customers. In paper, as I said, very difficult to predict exactly where demand is going. We have a healthy stock level and we will prioritize to have that level, keep it roughly where it is, which means we will adapt capacity going forward. And when it comes to wood products, it's a split picture, as I said, with different situations in different countries. What we can do is to redistribute a bit of the volumes, not too much, but some of it at least, to be able to run a bit more full than our competitors, hopefully. And that concludes our presentation. Thank you very much for listening, and we are happy to take on any questions you might have.

Thank you. If you would like to ask a question, please press 01 on your telephone keypad. If you wish to withdraw a question, you may do so by pressing 02 to cancel. That is 01 if you would like to ask a question. Our first question is from Christian Kottner from Nordea. Please go ahead. Your line is open.

Thank you very much. Christian Kottner from Nordea. A few questions from my side. Firstly, on paper board, I think, Anders, you said that you had a bit higher cost than expected perhaps. Is it possible to quantify how much costs were too high for you?

No, we don't quantify it. Just that it was a bit higher than normal to ensure full production and ensure that our customers got the deliveries that we had promised them.

You saw that I mentioned during the priorities also logistics, which is something we have spent a bit more on.

Okay, but formula this way instead. Do you expect cost to come down again?

Sometime, but it's sort of the first priority is to keep production running and to be able to fulfill our customer commitments. And if that costs extra, we will take those extra costs during Q2.

Okay. On the forest side, for example, on SCA, we had a quite big revision on the family volumes issue. Are you having a similar revision on your studying volumes?

We are stock taking our forests and we are in the middle of that exercise. We don't have anything that points into a direction that there will be any change to how much wood we have in our forests or that there is a reason to make a significant change of our harvesting plan. But we're in the middle of those calculations and we'll come back to you when they are finalized.

It's a huge Excel sheet we have to go through.

Okay. But do you expect to have that result before the second quarter results?

No, it will be during the second half of this year. But you might, at least from our plans are very long term in nature and that it's not, we don't expect any significant change to the plans themselves.

Right. On the paper side, did you see full price effects in Q1 or do you expect further price declines realized in Q2?

No, it's really, really hard to tell. I think right now we, of course, do whatever we can in order to fill our order books. As I said, we see that when markets are closing down, more or less, it has an effect. What it will mean for prices, we don't really know. Right now, prices have been fairly stable.

But, of course, not all contracts have been renewed during Q1. So from a... it did not have full, full impact in Q1. No.

Okay, fine. And then finally for me on electricity, obviously electricity prices have come down a lot. What's your net, I mean, are you hedging your net exposure?

Yes, we do have internal hedges in place between our energy division and paper division, which stabilize pricing for both business areas. And then we have external hedges in place for our paper division that also stabilize their electricity costs.

So in other words, you will not feel a direct, call it, cost decline for low electricity prices for the next few quarters?

No, no major effect from these lower electricity prices. It will be a lag effect on that.

Okay, thank you very much, guys. Thank you.

And our next question is from Robin Sarvitsita from Carnegie. Please go ahead, your line is open.

Yes, thank you very much. It's Robert from Carnegie. So on the paper board, could you shed some light on the current order book length and that compared to average levels and also on the average price interval that you have in that division? I understand it's quite long.

I think if you look at the order book, first of all, the order book is on a healthy level. Of course, we don't know what's going to happen in a couple of quarters, but as things are right now, the order book is fairly normal. We see some changes between customer segments, but all in all, no big changes when it comes to our order book. And prices, you know that our prices vary a lot between different customers, and that's a quite big span. So, I mean, we are talking from, it's a 50% sometimes difference between different customers.

But I was wondering about the average length on how far you set prices, is that... Nine months on average, if you look at all of your customers, or is it shorter or longer? Just so I get an idea of what the price is, the visibility for you guys.

It varies a lot, Robin. And it also, as you know, our selling prices hardly move over time. It's sort of, they're very slow moving. We have a complete mix in duration of contracts.

If you look at our historic price development, you will see that it's very stable, actually.

Yes, indeed. Now, related to the harvesting plan, maybe just to follow up on the previous question, when did you do your last harvesting plan? And did I understand correctly that the sort of first indication for you guys is that the standing volume is the same. The forest has grown according to the plan you had back when you did the last study.

Our current plan is 10 years old. And at that point in time, we did increase harvesting quite a lot up to the level that we have been on the last 10 years. And we don't have any indications that that level was wrong, the harvesting level that we have had over the last 10 years. We have... harvested, what is the sustainable level, and we don't have any indication that the forest has grown in another manner or in another pace than we had expected 10 years ago.

And the standing volume we have today is as expected as well, and as we have informed about earlier.

Yes, good, thanks. And then just finally on the paper segment, really strong Q1. You have obviously the outlook is tough. Could you just shed some light on the outlook? What are we talking about? One of your competitors, we're talking about minus 30% deliveries in Europe in the summer. You're up year on year in Q1. You're in a little bit of different niche segments. So Roughly, what are we talking? What should we expect?

As you know, Robin, we never give any forward guidance and quantify those effects. It's not our principle. I don't know if you have anything to add.

No, no, but like I said before, we do notice that our order book is not as strong as it was before, and we are preparing to adapt our production to demand. But things are changing, can change, I wouldn't say overnight, but we need to find out and understand what's going to happen in continental Europe to understand our future order book.

I understand. Finally, just briefly on the Carpex level, any kind of... guidance for this year?

It will be slightly above 1 billion SEC. Part of it will be attributable to the wind farm.

Okay, so total just above 1 billion SEC. Yeah.

if it's 1.2 or whatever, but it's in that neighborhood. But the bulk of the wind farm will be, the capex for the wind farm, the bulk of it will be 2021 when the windmills are erected.

All right, all right. Thank you very much.

And just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad. Our next question is from Linus Larsson from SEB. Please go ahead, the line is open.

Yes, thank you very much. I noticed that the number of full-time employees declined by 141 in the first quarter compared to the fourth quarter. While personnel costs were flat, they were actually even up year on year. I wonder if you could talk a bit about that and also Talk about the background and where you are at the paper board restructuring cost savings initiatives and if this personnel cost is now going to go down in the second quarter or at some other point in time.

I guess that the numbers you're comparing is Q1 2020 with full year 2019. And that's more of a seasonal effect. We have more employees during the summer half. So we don't have an underlying change in personnel between Q1. And it's maybe slightly down, but not a significant figure of children.

And the restructuring at Iggesund, is that in the numbers by now, or is that to any degree still to come?

The bulk of it is in the numbers that we report.

Okay, great. And then just coming back to paper, I don't know if I missed anything there, but the volumes were... upped a lot in a falling market. If you can just talk about the drivers behind that. Did you benefit from the strike in Finland, for instance? And also on the price side, sequentially realized pricing was flat while market pricing was going down. So if you could also explain that, please.

I think for us, what you have to remember, I said in the beginning that we were doing rather well when we came into 2020. The fourth quarter of 2019, we felt good. And if you look at what we did in the first quarter, we took market shares and we took it in segments which improved our mix. And with the mix comes an effect on price. That was just before the coronavirus, Linus. And then it's very difficult to forecast exactly what's going to happen after that. But of course, the idea is to continue on that way and win business, which will improve our mix, which is the best way for us to go forward. I should also say when it comes to paper, there's a lot of uncertainty, of course, on the demand side. But it's also uncertainty when it comes to the supply side right now. Some of our competitors, they are running on recycled fibers. That system doesn't work for the moment, etc. So that's part of the uncertainty we have right now to handle.

Right. And you're taking a maintenance stop in the second quarter, you say 50 million. What is that? And is that some structural improvement that you're making at the same time?

It's installation. It's a mix. It's a mix of maintenance, but also some major installations at the Braavik and Mill, both replacing old worn down pieces and also building a foundation for improvements in product quality going forward. Those investments, it's part of a package. And these are the first steps that we're installing right now.

To stay ahead of competition, it's so important to also succeed in product development.

Great. Just one final question. And again, I might have missed it in the beginning, but this very strong paperboard volume development that you saw in the first quarter, could you break that down in any way in terms of end-use areas where... Where do you see the most of the strength?

I think we have to be a bit careful when we look at the deliveries we had and look carefully when we have the possibility to see what our customers are actually doing with the paperboard we deliver. There could be some stock building at our customers as well.

And there is also partly some volumes that moved forward.

Should have been later than 19.

Yeah, in Q4, that tripped over into Q1. But nevertheless, it's a strong number. Yes. It is, yeah.

Thank you very much.

Thank you.

And our next question is from Johannes Gamelius from Kepler-Chevron.

Hello everyone, it's Johannes here. Maybe I missed this one in the beginning, but I want to ask you about the harvesting volumes that you're taking down for this year and pushing that into the next year. Is it possible to sort of give an in number on how much volumes we're talking about? And then I was also wondering about, I mean, if one split in the forest or timber market into the wood output and the wood for soil mills, is there a very big difference in terms of how prices have developed over the last few months? That's my first question.

When Henrik mentioned that we can move our volumes to next year and that the trees become a bit bigger instead, it's as everything with corona, we have a preparedness to do it. And if we come into the situation, we will do it. So it's very difficult to quantify how much it will be. It's more that we have the ability to do it.

It's an example that it's quite good actually to be a forest owner. It's not that your products become too old. They just get a little bit bigger and more valuable in the future. As long as we don't change too much, of course.

Yeah, of course. But it sounds to you that you're pretty happy with the situation. I mean, it's no drama in this shift.

It's a difficult environment, of course, to maneuver. We have customers that have a very short planning horizon. Sawmills, paper mills don't really know how they will produce two months from now. Of course, that in the end creates uncertainty in the forestry division. We have the ability to move volumes. That's what we're saying. But we will not be unaffected, of course. And your other question was on pricing. And I would say it's rather stable right now because nobody really knows anything. What happens? What will happen a month from now or two months from now?

Yeah, okay. I think it's the same for us. Yeah, sorry.

No, please.

So if one would try to make a guess on the pricing for Q2 versus Q1 in your regions, it sounds that a good guess would be flat prices.

We can't comment on that.

No, okay, okay, okay. Then on your sourcing side, I mean, you're buying wood externally, obviously. You're not sourcing everything from your own forest. So I guess this could also be a positive for you as a company, am I right? Or should one predict any sort of tailwind for the industry division for the coming quarter because of lower prices on wood?

I think you have to remember that we have quite a lot in stock standing in the forest. There is a lag in the system of at least half a year.

And you should recall, when you look at this thing, when you can't plan, your costs increase. Because it's when you can plan for a longer horizon, you can plan your resources in a more efficient manner. That guarantees lowest cost. In this kind of uncertain environment, you add cost into the system.

And where we are right now when it comes to our own harvesting, we know that we have to take care of the spruce bark beetles in the south of Sweden. It's not massive, but it's something we need to do. And when you do things like that, then you also increase the cost a little bit.

Yes, yes. Then my second question here is on your wind farm, that you're investing 1.3 billion here into a new wind farm project. How should one look at electricity prices there? You're talking about commissioning it end of 2021. Have you hedged these prices, or will this be exposed to market prices back when you're up and running with the wind parks?

We have not hedged them. We are a net consumer of electricity, so there is no point in hedging them.

No, okay, sure, fair enough, fair enough. Then the question came up on electricity and so forth. And can you just remind us, maybe you have done some new hedging, but how should one think about the hedging level for electricity on the growth basis for this year? I mean, is it fair to assume that you are mostly sort of naked on hedging 2021 on electricity?

Sorry, we were a bit distracted here. Can you repeat the question on electricity hedging?

I know you're working with electricity hedging, but can you just remind us about the hedging level for this year on electricity and also the hedging level you have at the moment for 2021? I mean, as you can hear, we're up to a new hedging.

We are quite fully hedged this year, maybe 85%, and have a relatively high hedging level next year as well. So there will be some impact next year if the lower electricity prices are sustained, but we will not have the full impact of them.

Okay. Thank you very much for answering my questions. Thank you. Thank you.

And just as a final reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. Our next question is from Oscar Lindstrom from Amsterdam. Please go ahead. The line is open.

Thank you. Three questions from my part. The first one, I'll follow up on the energy theme here and ask about the oil price. Is the sharply lower oil price going to have any impact on your meaningful impact on your costs and what kind of magnitude should we think about and the timing of that? So that's my first question, please.

No, no meaningful impact. We hardly consume any oil. We have removed that many years ago.

That's transportation for us.

Sorry, you said something about transportation.

I said oil is mainly used in transportation.

Not something that would, for example, reduce operating costs in the forest harvesting operations in a meaningful way?

No, not at all. There are so many other factors, refining capacity, et cetera, that is in between the oil price itself.

All right. And then on paperboard, you highlight in the report that you're seeing sort of shifts between different customers and segments. Could you maybe talk about what types of shifts you're seeing between which segments specific segments. And then following up on that, as you mentioned, you've got a lot of different prices for different products in this segment. Should we expect any kind of a price mix effect in coming quarters from these changes?

There are no major changes, but we can see like for our paper division, graphic paper as such is taking a hit because people do not consume. Everything that goes for advertising is taking a hit. And graphics, when it comes to our paperboard business, is also down a bit. And the rest is doing fairly well. And we have been able to compensate by selling more of other, not graphics, but other packaging.

And in terms of pricing, I mean, is that type of shift with you selling less to the graphic sub-segment within Paperboard? Is that positive or negative in terms of price mix for you?

If you look at the profitability, if you look at both the selling prices and the cost associated with taking these volumes to the market, it's not a significant difference between our different product groups.

Right, thanks. My final question is on forest valuation. I mean, you revalued your forest lands at the end of last year so that your book values now match the market value. I realize we don't get sort of market price updates for forest land at a very high frequency, but let's assume... that if LRF Consult and others who compile these types of statistics for transaction prices of forest land in Sweden come out and say that forest land prices have come down, let's say 10%, would that be something that would then trigger a revaluation of your book values in a negative sense?

In Q4, we will do the revaluation of the whole forest holding. We look at three-year moving average prices on the forest land. We have different sources for this, but in the base of it, we have our own model based on all the forest transactions that have occurred where we have our forest. And then we look at other sources of market value. information and we compile it and of course if the prices have fallen significantly that will have an impact on the valuation we do in Q4 but we have to wait until Q4 to look at that and I'll just ask the question even though I suspect what the answer will be I mean are you seeing anything so far in terms of what's happening with the

forest land market in your regions and also are there opportunities for you in this market in our case to buy more forest land?

It's too early to tell if Corona have had an impact on pricing on forest transactions. They are a bit slow moving transactions. And as you know, we are as a legal entity limited to buy only from other legal entities. We can't buy from private individuals.

And would you be interested in buying forest land in other parts of the Baltic Sea region? Is it an opportunity or are you pretty happy with sort of buying in proximity to your existing forest land holdings?

We are looking at forest assets that we believe will add value to our shareholders. And so far we have our asset base in Sweden.

All right. Thanks. Those were my questions.

And as there are no further questions, I will hand that back to the speakers for any final comments.

Okay, thank you very much for good discussions and taking your time to listen to us. And have a good day and most of all, stay healthy.