Holmen AB (publ)

Good afternoon, ladies and gentlemen, and welcome to the interim report presentation for the Holmen Group. My name is Henrik Sjölund and together with me, Mr. Anders Jernhall. I think most of you actually know us and we do as we normally do. We go through the presentation for the different business areas. And once we finalize that, we are happy to take your questions. So let's start by summarizing the second quarter and the first half year. Despite an extensive maintenance shut in paperboard at our Workington mill, we are happy to deliver almost 900 million in the second quarter. To a very large extent, thanks to a very strong wood products market. But I'm also quite happy to see that our paper division was able to come back to full capacity utilization and also turn the figures from red into black. A good result has also materialized in good cash flow. And just to note that we have during the first half of the year, we have paid the dividend of 1.7 billion SIC. And at the same time, we have a very strong financial situation, which is necessary and a good base to further develop our business. And then let's move on to forest and a few words about the forest market and the wood market. We have a situation which you are familiar with where all sawmills are running full, thanks to the very strong wood products market. When it comes to competition for the saw logs in the forest, we can see that prices are on the rise and have gone up during the quarter. On the other hand, to be honest, the increase in saw log prices have been quite modest given the very strong wood products market. If we then look at the pulp wood market, the situation is different. The market is more in balance. And there are a few explanations. First of all, We come from a period where we had spruce bark beetle infestation and quite a lot of supply of pulpwood coming out of the forest during last year and also during this year partly. But we also have a number of closures. We have the Ortviken paper mill that closed down quite a lot of capacity in the first quarter. And we also know about the announcement that the Kvarnsveden paper mill in Sweden is about to close. For ourselves, you know, it has been quite a warm summer. There has been some fires. In our case, nothing strange and no big ones. We are looking now at the spruce bark beetle infestation we have to some extent also this year, but it's too early to say what it will develop into and we will come back to that a bit later. Anders, what about the financial result for the forest?

Yes, it's a pretty stable result compared to last year, roughly the same level. Looking at Q2, it was a bit soft due to higher costs, mainly relating to taking care of some storm falling from some local storms. And in the Q1, we were benefiting from a sale of the forest property.

Thank you. then moving on to paperboard it's actually a quite nice place to be in in the niche market in solid beach sport in folding box sport where we are what we see right now is that there is healthy demand it's good demand not only in europe but also in asia where we sell some our volumes We also see that there are some price announcements but remember that prices in this segment takes time both when they are on the way up and when they go down and also look at the history just to remember. In our case, not only our order book has been good and we look forward to healthy demand, but when it comes to our own performance in sales, well, we have a good sales mix and we are also happy with the products mix that we have. What we also have had in Paperboard, however, is, as I said in beginning, an extensive maintenance shut at our Workington paper mill. We plan to close down the board mill for roughly a week. We started up a little bit late, but since then the board production is running as normal. And then we also plan to shut down the bio boiler and the turbine for a bit over a month. And then when that part was starting up also a little bit late, we had an accident, which means that unfortunately, The turbine and the biobowler will be out of operation until early next year. This is unfortunate, of course, but I think I'll leave it to you Anders to summarize the financial aspects of the maintenance shut and also the division.

Yes, if you look year over year, we have a 100 million SEK lower profit this year. The maintenance stop, as Henrik mentioned, costed us roughly 170 million SEK. So the underlying performance in the paper wood division is actually better than previous year. And that's due to what we have been successfully lowering our production cost, especially in the Iggesund pulp mill. Looking at Q2, we're down a bit and quite normal production and sales performance, but we had a very strong quarter in the previous quarter. That's why we're going down a bit more than the purely the maintenance costs. And the Q3 will be affected by a maintenance stop at our Swedish mill, roughly 130 million SEK from lost production and higher costs. And our estimation is that the turbine accident at the working mill is covered by our insurance policy. and that we will have to incur the cost of the deductible of 35 million SEK, which will impact the Q3 result. Back to you, Henrik.

Thank you. Then moving on to paper. As I said in the beginning, it's nice to see that we are back into full capacity utilization. And also you will come back to that we're in black figures. The market as such, I think underlying, we have to remember that there's still structural decline in the market, but we took such a big hit going into 2020 during the pandemic. So if you look at demand in 21, we expect it to be on roughly the same level as in 2020. We, however, despite the fact that demand is down, we see that the market conditions, thanks to closures and also to lack of availability of de-inking grades, has improved quite a lot. And that has meant in our case that we have been able to come back to full capacity utilization. If you go to the next slide, prices moving up. shows prices both for our printing paper grades but it also shows the price for recycled paper both what we call old newspapers and magazine which is what i call the inking grades and OCC what you normally use for for different kinds of carton board Where we are right now, we feel that even though the operating rate in total does not look like we are totally in the driver's seat, the feeling in the market is that it's so difficult to get hold of enough of recycled fibers for the ones having the production based on RCP that not all capacity is fully utilized. And that is felt by the customers. And that's why even though theoretically not enough capacity has been taken out, the market is quite tight. And that had also materialized in paper prices moving upwards from 1st of July in most cases. We saw the tendency of slightly higher prices outside Europe a bit earlier also in the first and second quarter. And in our case, roughly one third of our volume has been or is being currently renegotiated at 1st of July. So from a difficult situation, good news, Anders.

Indeed. And the year-to-date result is around zero, roughly the same level as previous year. And that's despite a 10% drop in prices year over year. We have offset that by being able to produce and deliver more, as well as we've been able to actively lower our cost base. In Q2, we turned into black figures, as Henrik mentioned. The increase of production has contributed and we have also been able to improve our product mix, especially for our overseas sales, where we've been able to find customers that are prepared to pay more than we did in the previous quarter.

Thank you. Then moving on to today's topic, one can almost say. Wood products, a fantastic development when it comes to price increase. But let's start with there is an underlying high demand for housing starts and do-it-yourself in general has been, and especially in the US, which meant that prices were more or less skyrocketing. and also in europe prices and in other markets where we europeans export to prices have moved up quite rapidly spruce has been leading the increase and pine coming a bit later construction wood has led the way and other materials or other qualities has been a bit slower when it comes to the price increase However, the market is very hot. It's even overheated, especially if you look at the North America or U.S. Today, the market is overheating. That's also why we see quite sharp rebound. It's simply not enough. products or materials reaching the building sites, bottlenecks in the sourcing and its supply chain. It's not only wood, it's different kind of materials that is needed to build houses and homes. And that situation, if you look at where we are right now, the US price is roughly on the same level as the European price or slightly below as we speak. One should also remember that it's not so easy to reshuffle and move volumes between different continents. US is one market and you have to produce a special specification in order to fit that market. And Europe is a different one. Of course, there are possibilities to move some volumes, but just turn the line, it's not that easy. In our case, We have also been able to time our growth and expansion within wood products in a very good way. We invested quite a lot of money at the Braviken sawmill to organically grow our capacity. We bought the Lingham sawmill, which is smaller, but with a good development over the last year. And lately we also acquired Martinsson's. And of course that came at the right timing now, given the very good development of the wood market. So bigger volumes, higher prices. Anders, that has also materialized in good profits.

Yeah, the P&L looks quite nice for the wood products division. Slightly more than 700 million SEK profit this year. 200 comes from the acquisition of Martinsson and we have added another 100 million from the expansion Henrik mentioned where we built expanded the Braaviken sawmill that we started to ramp up last autumn quite well timed and we also been able to churn out more volumes from the small sawmill that we bought a few years ago so In total, that volume addition has added 100 million SEK and the rest is price increases. Looking Q2 over Q1, a fantastic improvement driven by 30% price increase. We're quite early in the pricing cycle. We have a lot of sprues and quite early movers in the pricing cycle. So we have benefited quite a lot in this quarter.

Thank you. Then a few words about renewable energy. And here we have a situation right now, which I would say it's almost not sustainable with very high electricity prices in continental Europe, driven by high marginal cost for cold fired power, electricity, and partly in connection to quite high price for emission rights. Also in Sweden, the prices, well, they are much lower than in continental Europe, but they are still on the high side compared to what we're used to. You will come back to that. But before, just a couple of words about our wind farm, which is currently under construction up in the northern parts of Sweden, where we will... So it's under construction now and during the autumn and maybe in the beginning of next year, we'll be finalized to increase our production of renewable energy by roughly 35%. Back to electricity prices and more hydropower than wind power for the moment.

Yeah, it's mostly hydropower that we have in our production portfolio as we speak. It has been a good development. Pricing have moved. Last year they were on the low end and this year they have been on the high end of a normal spectrum of pricing. Q2 was strong. It followed a very strong Q1. Seasonally Q2 have always lower production. And pricing wise, market prices have gone down quarter over quarter. But we have been able to time our production in a very good manner on producer hydropower when prices have peaked in the market. And we have also earned quite a lot of money by helping Sweden to stabilize its electricity system at 50 hertz and participate in the balancing market. Together, these two actions have added 20 million of our profits and means that we are as a hydropower producer have the same average price in Q2 as we had in Q1.

Have we always been that good at that?

We are quite good, but the market has become more volatile and then hydropower have become a more valuable production source.

Thank you. Energy as such is a very interesting topic. And we all know that energy in the world, energy production is maybe the biggest challenge we have as such big part of the production is coming from fossil sources. Also in Europe. And we also know that there are so many targets now set to reduce our emissions of CO2 to 2030 and later. And that means that this is on the agenda everywhere. I think in this world... where most probably all products will have to pay the real cost for emitting CO2, I think our concept in Sweden is actually quite good. If you look at this chart, just to repeat for ourselves that having close to carbon-free paper in a world where we compete with suppliers having hopefully or most probably over time to pay for the CO2 emission. I think it's quite good base. Using the same logic on housing, I think it's a rather interesting position to have to be an alternative with wood products, to be able to build at least some houses out of wood rather than concrete and cement, which is also a position which is interesting to mention. Finally, I would also like to stress that our business model in our company is that we only grow trees in order to be able to build houses and homes out of wood. Leftovers are used and converted into renewable packaging and paper such as our Invercoating Kada, our magazine and books. And we also make use and harvest the energy in the wind that blows over our trees. And also, of course, since long, we take care of the water running in the rivers in our hydropower plants. All in all, that makes us a company with a quite astonishing climate benefit of a bit over 6 million tons. And I'm quite sure also in the future we'll find ways to expand our business and to increase that number. That's it from our side, and now we're happy to take on any questions you might have. No questions today. Thank you.

If you do wish to ask a question, please press 01 on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Once again, if you have a question, That's 01 on your telephone keypad now. There will be a brief pause while questions are being registered. Our first question comes from the line of Lars Kielberg of Credit Suisse. Please go ahead. Your line is now open.

Thank you. I'll just start with a centerpiece, as you put it, wood products, an extraordinary development, of course. You called out, I guess, already late last year, the benefit of the North American or U.S. prices surging and the benefit for the export prices. They've obviously since peaked and then gone down quite meaningfully. What are you seeing in those export prices relative to the the index you presented and also what are you seeing going forward in terms of demand trends specifically in Europe, which of course is the bigger component of your offering.

Thank you. The U.S. have always been a very volatile market going up and down. And as Henrik said, it's very little overflow between the U.S. and European market. So far into the third quarter, we have seen price going up on pine in Europe. What will happen in the coming months is very difficult to predict.

Quite a lot of parameters. They are difficult to know exactly where they will go. Remember also that partly what has been shipped to North America has been spruce bark beetle infested volumes from continental Europe. Got it.

In terms of the Workington incident, I understand the 35 million that you call that is deductible. How does this impact your green credit and is that part of the the sort of insurance coverage?

It is part of the insurance coverage.

So there's no incremental impact?

No, not that we expect today. But of course, to be sure, we need to finalize the insurance investigation.

Got it. And then finally for me, the paperboard market has, of course, strengthened. You also call the export to Asia, and specifically where we see pricing is, of course, with China that has been extremely volatile. What are you seeing in those export markets in terms of demand trends and pricing, and why do you think Chinese prices have dipped as they have?

I think, first of all, remember that we are in a niche which is not always moving in exactly the same direction as more the mass market. And what we see right now is what I said before, we see good demand, not only from Europe, but also from Asia. And when it comes to pricing, you know what we have said many times before. For us, it's normally very, very stable over time. And it takes time to change the price, even though there are discussions about price announcements with higher prices right now. Got it. Thank you.

Our next question comes from the line of Johannes Grunzillas of Kepler Cheveux. Please go ahead. Your line is now open.

Yes, hello, everyone. I would also like to ask a question here on wood products. Could you maybe help us to indicate if your average prices will be higher in the third quarter compared to Q2, or is it difficult to say for you?

We normally don't give forward-looking guidances. You will be able to look what the price development will be in the indexes. But as I mentioned, coming into the Q3 quarter, third quarter, pine prices have been moving up.

Yes, thanks. I also have a question then on electricity prices. I know those are impacting your paper business the most. They are extremely elevated, of course, which you talked about here in the presentation. But how should we see the net effect from higher prices for graphic paper and also the escalating electricity prices? Could you help us to elaborate a little bit on the margins for the third and the fourth quarter for your graphic paper business?

We're quite well hedged when it comes to electricity. Of course, we have an impact on the spot price moving up, which will be negative. But it's not a major, it will, if prices stay at this level, it will have an impact. But it will not overshadow the price movements.

Okay, good to know, because I was thinking that, you know, spot prices are much below 50, 60 or something like that at the moment versus maybe 40 in Q2. So it's a pretty big step up. But you basically assume those will come down then and be upset by hedging if not.

the unhedged portion will cost what they will cost. But the magnitude of the movement, it's a big cost, as you know, but we are increasing prices.

My final question is on CO2 rights and maybe the certificate sales on renewable energy you have in the UK. I mean, could you help us? What sort of impact this will have for this year? I suppose you sell most of this at the end of the year because obviously CO2 rights are priced much, much higher now. How should we see this effect?

It's two questions. The renewable certificates in the UK, they are sold as we produce and that's actually a fixed price that the government is setting that is increasing by inflation every year. We will not be able to sell them during the second half but our expectation is that loss of revenue will be covered by our insurance. When it comes to carbon emission rights, we are selling them more or less as we get the allocation and proportion of that over the year.

Sequentially, basically no big moves here? No, not normally. Okay, thank you very much.

Thank you.

Our next question comes from the line of Robin Santorita from Carnegie. Please go ahead. Your line is now open.

Thank you very much. Good afternoon to everybody. First, just to continue on wood products, if we look at history, wood products and so on, timber prices, once they go up, if they go up steeply, they normally have come down steeply as well. Are there, in your view, Any strong reasons why, any structural sort of drivers why this shouldn't happen this time as well? I'm talking about Scandinavia and Europe.

That's really hard to answer, but I think... you ask us we are more positive when it comes to wood products in the long term given the need to do the green transition we have ahead of us where wood products as a very good alternative to concrete and steel which most probably have to pay their true climate cost but what will happen tomorrow in the next quarters that's very difficult to to forecast

We don't have any reason to believe that they will become less volatile. But as you know, they follow the trend line of concrete. And given the, as Henrik mentioned, the climate impact of concrete and when they will have to carry its cost, true cost, to damaging the climate, it's a good opportunity for wood product prices to rise in a quicker pace than historically.

So then related to paper board, if one cleans out the 170 million SEC, still it seems like you come a bit below on a sort of adjusted EBIT level compared to the past three, four quarters. It seems your costs are up a bit more than perhaps expected. Is this just sort of weaker productivity because of the maintenance shut or is there some other costs sort of rising? What should we expect for Q3 and Q4 related to costs?

We've had four very good production quarters, Q2 last year until Q1. If you compare to Q1 2020, we are ahead of that in Q2. It's a pretty normal production quarter. We know that we can produce better, but we can also produce worse than we produced in the second quarter. So it's a pretty average quarter.

So an expectation or then what is the production cost? Can you provide some color on that? And finally, what will your energy balance be once global energy is up and running? I mean, you consume lots of energy. You also produce a lot. So what is the balance after global energy? So those questions on energy. Thanks.

We only captured your last question. I'll answer that, Robin, and I can repeat the others. We will, after Blåbergsliden is up and running, producing 1.6 terawatt hours of hydro and wind power, and we'll consume slightly more than 3 terawatt hours of electricity in our paper division. The board division consumes electricity, but they produce it themselves from biofuels completely.

And the first question was?

And the first question, when do you expect it to be up and running? And any comments on the return expectation of that product or that project or the production cost so that we can calibrate the profitability estimates?

We expect it to ramp up production during the fourth quarter. and it might reach full capacity utilization early next year. We have earlier said that production cost, including the return on capital, is around 300 krona per megawatt hour. And that gives us a decent return on that investment.

I understand. Just want to check, so after low-budget, you're still short some 1.4 terawatt hours in terms of energy?

Yes, although we don't view it as a position to be managed, we see it as two separate divisions.

Yeah, for sure. It's just when energy costs of our prices go up, so we can sort of get an idea of the group position. Thank you very much. That's all.

Our next question comes from the line of Oskar Lindström of Danske Bank. Please go ahead. Your line is now open.

thank you and good afternoon to you both um three sets of questions for me uh a more general nature i mean the first one is around the eu forest strategy and the other sort of legislative initiatives uh which have come from from the eu and i realize they're not all set and it's not all legislation yet but but still Given that it's early days, what's your first reaction to this? I mean, is this problematic? Will it be positive for the sector? How will it impact you as a forest owner? And I realize it's a broad question, so you can answer it however selectively you wish, of course. So that would be my first question. Should we go on to the other ones or would you like to answer that one first?

I think we start with the first one. It's quite a big one. Now, if you take the forest strategy and our first reaction came for quite some time now because there was a leaked version of the forest strategy that we did not like very much. But after a lot of hard work from us and other people in the industry, what then came in middle of July as the forest strategy, and remember it's a strategy, nothing else, looks much better. There are some challenges, of course, to overcome also when it comes to that strategy, but I think what we should take with us is that it looks much better. And then there were 11 legislative ideas where some of them indirectly also could be of importance for our business. Six of them actually, and maybe three, four more important than the other. And they need to be negotiated and discussed now during at least a year most probably. So it's too early to say what that will mean. Some of them are interesting like the ETS. And some of them are a bit more challenging like LULUCF, for example. But too early to say. We believe when you look at what we do, it's such logic and given the climate benefit we contribute within everything we do and the easy way of describing our business model should in the long run win. But it's hard work.

Yeah. Let's hope that logic wins in the end. Thank you. My second question is about Martinson. Great timing on that acquisition. Now, when you made the acquisition, I seem to recall that you mentioned something about evaluating the possibilities for a further investment into that business. Well, it would actually be a further investment into your own business, of course, now. What's the status on that?

Are you exactly sure what we're talking about?

It gives us opportunities to get to learn the market further with the construction market a bit better. And it can give us better opportunities to expand our operations and add value to it. But we're still in the phase of getting to know Martinsson.

Especially the building system part. We need to learn more.

Right. And just a final question also related to this sort of building systems part of your wood products operation. The environmental permit issues of the Swedish cement supplier, Cementa, that was a big topic and still is a big topic. Has that at all sort of impacted interest from building companies to move over to more wood-based buildings? Have you seen that already or is it too soon?

I think we've seen a much bigger interest to build in wood for quite some time actually. And that goes along with all the discussion about how to solve the climate crisis. But I can't say that we have had any extra offers being made just because of the cement discussion in Sweden. But it puts light on the issue, definitely.

All right. Thank you.

Thank you. Our next question comes from the line of Harry Taitonen of Nordea. Please go ahead. Your line is now open.

Yes, good afternoon. It's been a while, so good to be in touch again. So the one question on the paper business, and so it seems that the average prices went up a little bit in Q2, and you sort of explained that that was partly driven by the export market, but now there are recent comments about the sort of very strong market in Europe and lead times extending to October, November, and that there could be some price increases also for the Q4 or the fourth quarter. I mean, so for you, do you have volumes up for negotiation for Q4? That would be the first question.

We have a lot of negotiations going on as we speak, so I would rather not like to comment that. But I can say what I said before, that roughly 30% of our volume is being renegotiated or was renegotiated at 1st of July. And then there is different development, as you know, for different products, like book doesn't move up, doesn't move down in the same way. And we will see as we go forward. What we try to understand and what we follow closely is, of course, not least the recycled fiber market as it has such an impact and where a number of machines simply are standing without or with too high cost for the recycled paper so they can't just not run at the moment. We have, in that sense, we have a very good position. As you saw in the beginning, Cost for wood pulp has not changed very much. And we have a very good position in the wood market with good control over the raw material. And then as we discussed before, of course, electricity is a bit more expensive, but we are ready at least to take advantage if the situation stays, but it's too early to say.

Yeah, good, good. Two quick questions. One is the, I mean, it sounds like the energy projects are on track and about 800 million remaining to be paid. So that will be kind of capex outlay for those businesses for the rest of this year, I guess. So 800 from that. And do you have like, what would be the other sort of capex items for the second half, just to get to the full group level capex for the year? And the other question is about the forest asset sale you referred to earlier. Is that still kind of in cards and happening in the next sort of nine months or so.

I'll answer that. The cash outflow for the wind farm, it's 800 million as you say Harry. It will be mostly be this autumn or during the second half of 2021. Some money might spill over into the next year. As for the remaining capex, roughly half a billion for the second half is a reasonable ballpark figure. And then my memory is good, but a bit short. What was your last question?

Oh, it was just a follow up on this.

For a sale. Yeah, it's still in the cards. If it will happen this year or next year remains to be seen.

Yeah. Okay. Thank you.

Our next question comes from the line of Linus Larsen of SEB. Please go ahead. Your line is now open.

Thank you very much. Just a couple of of follow-ups in the previous couple of quarters, you've said what the P&L contribution has been from Martinsson. Do you do that for the second quarter as well in terms of EBIT and sales?

No, we have not given it for... I mentioned 200 billion for the first six months in EBIT.

Gotcha. 200 million on EBIT. Thank you. I missed that. Excellent. Thank you. And then on the third quarter, historically, you've had strong seasonality, generally speaking, low costs, low fixed costs. Could you remind us in the current setup what to expect in terms of such potential seasonality Q3 on Q2, please?

Roughly 50 million positive in our two industrial divisions, paper and paper board. And normally the wood products division this year will have a negative seasonal effect because we have downtime, as we refer to in the report, some 70,000 cubic meters loss of production in Q3, which at this price level means a lot of lost revenue.

Normally not.

Normally not. But it's a new seasonal factor this year at least.

And Because last year you took more downtime than you, in hindsight, should have. But this is, so I would assume that you're taking some less seasonal holiday downtime in wood products in this year compared to last year, given the strong markets.

that's correct we're taking minimum downtime we do have to take down time to do maintenance work etc and and that's concentrated to the summer period when when people want to be off and on the beach but we take the minimum amount of downtime this year right and the 50 million that you said that was for paper and paper board combined combined yeah in altogether

Yeah. Okay. And what's the negative seasonality at today's prices in wood product Q3 and Q2, would you say?

Depends on the price.

At this price level, it's a large number that we don't give a numerical guidance. You will have to do the math yourself.

And you said on the pine pricing, that's a sequential positive, at least at the start of the third quarter. Could you give any sort of magnitude on the input cost, the log cost, the development Q3 on Q2? Is that a meaningful figure on the negative?

As Henrik mentioned, it's quite a modest increase on the timber logs side. It's an increase, but given the strength of the market, it's on the modest side.

And you would say that on a sequential level, the net of price improvement on finished product versus run-to-cost changes is a net positive for you before this production downtime, that is?

I can't comment on that.

Fair enough. Thank you very much. Thank you, Linus.

Thank you, ladies and gentlemen. Once again, I remind you, if you do have a question for the speakers, please press 01 on your telephone keypad. We currently have no further audio questions. I will hand back to the speakers for any final remarks.

Okay, thank you very much. Good questions, as always, and look forward to hear from you soon again. Thank you.