Holmen AB (publ)

Good afternoon and welcome to the interim report presentation for the Holman Group. It's especially nice to see you actually on a Friday afternoon, Anders, it's 2.30 and I know you have had some other companies presenting before us. Anyway, my name is Henrik and this is Anders. We are the usual suspects going to do this today and we start as we normally do to go through the presentation and then we're happy to take any questions you might have. To start with, we have a very strong result also in the third quarter, a bit above 1.1 billion SEK, despite that we have had the maintenance shut. But of course, we have had a lot of help from really high wood products prices. Before we start to go through the different business areas, just take one step back and look at how we have come through the whole pandemic period. I'm happy to see that we have kept our net debt almost unchanged during the whole period, despite that we have given normal dividend or paid for normal dividend. We have bought Mattinsons and we had also paid for half a wind farm, roughly 700 million SEK. Roughly half at least, which is a very strong base for going forward in the future and develop the company further. A few words about the wood market. What we have seen lately, as you know, all sawmills have been running full, so there has been quite a lot of competition for the saw logs in the forest, actually a bit more up in the north than in the southern parts of Sweden. And we can also see that prices are on the rise, not so dramatically, but still that the price trend is up. If you look at pulpwood, on the other hand, the market is more or less in balance for a couple of reasons. First of all, there have been some closures and supply of wood has been quite high as well, partly driven by the spruce bark beetles down in the southern parts of Sweden. So, Anders, slightly higher prices. How does this compare to our financial results?

Well, the financial performance of the forest is quite dull, as it should be. Not much has happened. We see slightly higher result in the Q3 over Q2, thanks to the higher timber prices.

Thank you. Then moving on to paperboard. Our two mills, one in Sweden, one in England, where we produce a bit more than half a million tons of paperboard. The market is actually quite good. The market balance is healthy. I would almost say it's under stress. Also for some reasons. First of all, demand in Europe is up some 4% so far this year compared to last year, which is strong. Partly depending on that, somewhere our virgin-based board is also meeting recycled fiber-based board. That's white line chip versus folding box board. And there has been some substitution going towards more folding box board and less RCP-based products. Partly because the availability of RCP isn't that good. And there is in the market also a bit of cost pressure and together with good demand and the balance we also see as we speak right now a pressure on prices for paperboard up. We are currently negotiating, so we are not commenting on how this will go. And as you remember, we have always said that it takes time to change prices when it comes to consumer board, especially up in the niche where we are based. We have had... Maintenance shots, both in the second quarter and in the third quarter, even though we have roughly the same volumes or we have delivered roughly the same volumes, which means that we have reduced our stock levels a bit. But Anders, it's quite a messy quarter, to be honest. Indeed. It is. So if you try to summarize everything that has happened, including maintenance shots, energy costs, etc.,

Yeah, well, if we start with the year over year, the two major maintenance shots have taken a toll slightly more than 300 million sec on the profit. If you adjust for them, actually, we are performing slightly better than last year due to better production. as a result of a deep bottlenecking exercise we did in the Iggesund pulp mill. Looking at the quarter, both quarters Q3 and Q2 has been affected by maintenance shots. This quarter was an impact of 140 million sec. But we also had seasonal low personnel costs, roughly 30 million SEK positive impact in the third quarter. And then we have this turbine that is out of operation and it's expected to start during January next year. It has no effect on our ability to produce board, but we have quite a big impact on the energy cost side. We are not getting any green certificates and we need to buy electricity from the grid. That is very expensive. in the UK, as in most places in Europe. That had an impact of 150 million SEK as extra costs in Q3. The insurance investigation is still ongoing, so we don't have any result of it. And hence, we can't take anything in the books with respect to the insurance compensation.

Thank you. If we then move on to paper, This year has included so many changes, so it's almost unbelievable. We started the year with a totally different picture or view of the market than where we are today. And what we see in the market today is that there is a shortage of paper. for a few reasons. First of all, there is not enough recycled fibers to de-ink, to use to produce printing paper, or it's very expensive, as you can see on this chart. And that means that all in all, that both RCP prices are getting more and more expensive, and there is always some kind of relation between what we call de-inking, which is used for producing printing paper, And OCC mainly used to produce test liner and fluting. And that has also meant that prices of paper are on its way up. And we are also negotiating paper prices, but as we are negotiating, we can't comment much more on that now. What we have seen, though, is that our concept of local Swedish wood, which there is enough of and we have good control of the raw material supply and fossil free electricity. Well, electricity will come to that has become more expensive, but still that concept has proven quite successful today. And it has also meant that we have been able to actually run full since beginning of this year. As I said, we started the year with a totally different view, but slowly but safely during the year, we have come back to full operations. So what does that mean when it comes to financials, Anders?

If we look year over year, We have lower prices this year. We have actually lost 250 million second revenues due to lower prices. But we have been able to regain that thanks to high volumes and that we've been able to lower our costs. So essentially unchanged result despite the lower prices year over year. Q3 we see a good improvement in profitability. It's thanks to price increases on those contracts that we have renegotiated. and we have a better product mix as well. We do face higher electricity costs, but they have been balanced out by seasonally low costs for personnel and maintenance. They are roughly 50 million lower than a normal quarter. Thanks.

Wood products. Maybe we should have started with wood products today because it's the star of our company and other companies, of course, as well, if you have wood products. We have a market situation which is very interesting at the moment. We have had a period with price increases, extremely high prices for a while in the US and European prices has gone up quite a lot as well, or actually a lot. But where we are right now, we are in a situation where we see that prices in Europe, they have definitely peaked. The question is where they will be in the fourth quarter. We will see. But we also have a tendency in the US because the US is a few months ahead of Europe. And what we have seen there is that it bottomed out during the summer. And if we look at the future prices... For November, which is a good indicator for where prices are going currently, we see that they are at least slowly on their way up again. It's not easy to know exactly what will happen, but that's the tendency we see in the market right now. So you have Europe going down and you have US starting actually to pick up. Regardless, what we see is that the interest for building in wood has never been as high as it is right now. And a lot of discussions. And I think also we have a rather good feeling about being an alternative to concrete and steel. And especially it's expensive with energy now, but most probably it will be even more expensive in the future with materials like concrete and steel when they have to carry the true climate cost. Coming back to high prices, Anders, in the third quarter.

It's a fantastic result, both year to date and this quarter. If we look at the quarter, we benefited from quite good price increases. But on the other hand, we see that customers don't really take out the volumes. They're a bit wait and see mode. So deliveries are They are always seasonally a bit lower in Q3, but this quarter they are lower than normal. And then we have also had some downtime during the vacation period where we have lower production than normal.

Finally, a few words about renewable energy. I think we mentioned in the beginning that the energy situation in Europe, not only in Europe, is in most parts of the world. It's really energy crunch where we are right now. Prices are extremely high. They are volatile. And also we see that the cost for emission rights are on a very high level, which means that it's not easy to handle energy costs regardless what operations you're running. And just a reminder to ourselves, it's a big dependence on fossil energy worldwide, but also in Europe. And this is something we have to do something about. And maybe one of the best ways, at least the quickest way, is to build more wind power. Finally, I would say, Anders, we are actually on our way to slowly start up our wind farm up in northern parts of Sweden, close to Skellefteå, which will contribute with another roughly 35% of renewable energy production. But summarizing wind and especially hydropower situation during the third quarter.

We see a quarter with high prices, not as high in the northern part of Sweden as in the southern part, but still historically high. That has had a positive impact. But we do have some internal hedges that have countered that profit improvement. At the same time, we have it's a scarcity of water, which means that our production was lower than normal. And our levels in the water reservoirs are 20 percent lower than a normal year, as it is for the rest of Sweden.

Concluding again with our strategy or call it business model, which I think is becoming more and more important to make people understand, because it's actually quite beautiful. We grow houses. We never grow a single tree to burn or not even to produce paperboard or paper. But from the leftovers, of course, we do that. And they also contribute to the climate benefit. and more and more we should make sure that we do not only harvest the trees growing in the forest we should also make sure that we harvest the energy blowing over the trees and also the water running through the rivers all in all a sustainability and climate benefit which is fantastic i would say and that concludes our presentation and we're happy to take 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 your question, you may do so by pressing 02 to cancel. There will now be a brief pause while questions are being registered. The first question comes from Robin Santaviata from Carnegie. Please go ahead, your line is open.

Thank you very much and hello everybody. Now first related to the wood products segment, quite a significant drop in deliveries in Q3. You said a bit seasonal element also, a little bit of destocking. Could you describe what kind of inventory levels are you seeing Both for yourself and your customers and any particular segment or markets where you have weakness or is it across the board?

Our inventories are at a good level. That's not the problem. It's very difficult to assess how large inventories are in the chain to the retail customers. And they are shrinking by the day, but we can't give you any guidance on how large they are.

I think it's what you see in the US is that they have done with it. They're already through that cycle and are slowly restocking again. In Europe, it's the opposite.

I understand. And looking at your market, any particular weak or strong markets, or is it similar development in all of your key markets, export markets?

I think it's a lot of waiting right now from the customers, the ones that can wait and order tomorrow instead of today because they don't know exactly what to expect. That's what we see in the market right now.

All right, thanks. Then in terms of the paper market, it seems to be a quite tight environment and costs are going up. you often speak about long-term pricing intervals in your business. Any potential now to renegotiate prices as apparently a lot of your competitors are increasing prices in the middle of the interval? So are you also doing that? And in the paper on the cost side, your cost per ton seems to go down. Could you explain how much is energy, chemicals, and logistics, and what is the outlook when we go to 2022 for those input costs?

Should you start by explaining the cost and then I take the price?

Yeah. What we see right now, we see an increase in energy prices. We will see a further increase in Q4, maybe 60-70 million sec headwind from increasing energy prices, but it's still a bit uncertain. on the other cost element and that cost situation we expect to prevail in Q1. And then we expect energy prices for us at least to go back to a normal situation. When it comes to chemicals and transportation, yeah, we see some cost inflation, but it's quite muted. It's not a meaningful number.

When it comes to pricing and paper, well, first of all, normally we always honor our contracts. On the other hand, we have a number of contracts kicking in from half year, fourth quarter, beginning of the year, but clearly the majority are renegotiated for first of January, but not all of them. And there was a difference in length. Some is a quarter, some half year, etc., And I know there is a lot of discussions about breaking contracts, but normally we do not do that.

I understand. Thank you. And then a final question on the paper board segment. What kind of maintenance schedule for next year are you planning? What should we expect?

We will have one major maintenance shot during the second half of the year and it will be at the Yggdrasil mill.

All right thank you.

Thank you Robin.

Thank you. The next question comes from Christian Kopfer from Handelsbanken. Please go ahead your line is open.

Thanks operator. Just one follow-up from my side. On the wood market, I think you mentioned, Henrik, that you see prices coming up a little bit in the US. I'm just wondering what you see on the prices in the US in relation to what you have in the Nordic market right now. Is it profitable to ship wood products from a pricing point of view now than the... When the prices have turned up or are prices still very much higher in the Nordics?

What you saw from the US that was futures for deliveries in November. And where we are right now, you know that prices aren't stable. They are changing all the time. And right now, Europe is coming down a bit and the US seems to go up a bit. But as we speak today, the levels are roughly on the same level, prices in Europe and in the US. It's no big difference. but U.S. is coming from a much higher level, as you know.

Right, I know. Okay, then finally, on the paper side, sorry if you touched upon it already, maybe I missed it, but on the price hikes, let's put it this way, are you expecting to compensate with the higher prices to the higher-ending price that you see?

Yes, we are. But normally we do it when the contracts are running out, when we are negotiating a new contract. We have no intention to change or to break all the contracts we have at the current moment.

Yeah. Yeah. Okay. Thanks, Chris.

Thank you. The next question comes from Johannes Grunzelius from Kepler Chevro. Please go ahead. Your line is open.

Hello, everyone. It's Johannes here. A question from my side on the CO2 credits that you get for free. The same goes with most of your peers. You're selling some of them at the end of the year, usually. Could you give some info how this could impact this year earnings? I suppose you will get much more profits from these CO2 credits this year than compared to previous years. Thanks.

We sell it gradually throughout the year. We don't sell it at one point in time. So we sell it gradually throughout the year. And you're right in pointing out that the income this year is higher than previous year because the prices of the carbon credits are higher, but the allocations are lower, reflecting the ambition of EU to lower the carbon dioxide, how the system is run. But we sell it throughout the year.

Okay, that's useful to know. I know from the annual report obviously what you made last year. Could you indicate what you expected to make this year of these credits?

No, it's quite at the detail level. It is in our results for the first nine months, the level we have.

Right, right. And maybe I missed this in the discussions earlier, But could you remind us about the hedging level for the coming quarter and next year in terms of energy, both on the volumes you are selling to the market and what you are buying in the market? Thanks.

As we disclosed in the quarterly report, on a net level, when we measure our net exposure, it's 65% hedged for Q4. It's fully hedged for 2022 and 80% hedged for 2023.

Okay, that's good to know. Thank you.

Thank you. The next question comes from Linus Larsson from SEB. Please go ahead. Your line is open.

Thank you very much and a good day to everyone. I'd like to continue on the energy topic, if I may. And just for clarification's sake, what you said on the 60 to 70 million people Krona up on the fourth versus the third quarter, was that relating to the paper division alone or was it on the group level or could you just clarify that to start with?

It was on the paper division.

Great. And then on, if we look at paper board then, if you could give the corresponding And that, I guess, would be net of the energy bonus that you would at least normally have in the UK. And it's part of the question whether you will have any of that this year, given what's happened to the turbine at Workington.

Normally, in the paperboard division, we are self-sufficient in energy, so we don't see any effect between quarters. Right now, when we operate the turbine, or don't operate the turbine, we will have a negative headwind from that in Q4, buying electricity from the market. But I can't give any guidance on how much headwind we will have on it. But we will classify it as an item affecting comparability.

Aha. So on the adjusted EBIT line, it will remain a flat development.

That should reflect as if we run the turbine.

Great, that's clear. Thank you very much. Yeah, no, I think I'm fine. Thank you.

Thanks, Linus.

The next question comes from Martin Melby from ABG. Please go ahead. Your line is open.

Yes, good afternoon. Within sawmilling, when you say that prices are going down a bit in Europe, what does that mean in percent? Is that like 20%? Regarding the volumes, how much of the drop in volumes in Q3 is due to a willingly stopped production from your side? How much is coming back in Q4?

It's a very difficult question to answer, Martin. We are in the middle of where everybody's trying to figure out how much will the price drop? When will I as a customer start to buy?

Absolutely.

We don't.

Customers are simply waiting. If they can, they wait. And that affects our deliveries as well, of course.

But as Henrik mentioned, in the U.S., this destocking cycle maybe have taken three months, three, four months before buyers had to start buying again. And that's when we see this bounce back in prices in the U.S.

And regarding volumes, should volumes be getting back in Q4 or is it wait and see mode for the whole operation?

I think it is. It's very hard to predict. The volumes are going. Depends what we have in between.

The underlying demand in the market is good, but we have a destocking effect. But volumes should pick up a bit in Q4, yeah.

Okay. And then on the price negotiations for paper and paper board, will that have an effect at all in Q4 or is it next year?

Much more next year.

Thank you. That's all.

Thank you. The next question comes from Oscar Lindstrom from Danske Bank. Please go ahead. Your line is open.

Hi. This is Oscar. I'd like to continue a little bit on Martin's question there about wood products pricing. And you're saying it's a wait and see mode in your main European markets. Could you say a little bit maybe about what the situation looks like in your export markets? North Africa, what's the situation in the UK? Any more color on that?

It's difficult to give you much color right now, Oskar. It's essentially the same status. Some markets you have seen that they have started to buy, but it's early.

It's a lot of destocking, Oskar.

And do you have any feeling for how large their stocks are? Do they have a lot of sort of... stock that they can consume, or are they already hitting the bottom of the barrel?

Very difficult to tell. We don't have any good statistics on that. But as I mentioned, it took a few months for the U.S. to hit the bottom and go up again.

And when did this start here in Europe, would you say? So how many months into the three-month or so period are we?

I don't know. I think we're in the middle of it right now, actually.

Okay. I realize it's difficult to answer about the rather opaque wood products market. I have another question. Given the strong structural outlook and picture that you paint for wood products, Do you have any possibility to expand capacity in your operations or is it more attractive to expand downstream in that operation?

think we've done quite a lot lately haven't we expanded the bravik and sawmill we bought lingham and lately also martinson's including also actually the building systems sure we can do some things but no no major effect on volumes as we do take small steps every every day we try to at least but i mean would you directly have enough sort of access to timber and and

and so on to expand if you wanted to.

We are in a position where we do have a very strong position in the wood market. So that should not be the limitation. It's more what we want to do, what does make sense and the timing of it. Right now, we're sort of in a consolidation mode.

Right. Just a final question, maybe a little bit more general, but on that theme, I mean, you have a, you have a very strong balance sheet, great earnings at the moment, strong cashflow generation. The, the wind power park in Boba's lead in is mostly paid for already. I mean, where are you looking to allocate capital? I mean, do you have attractive growth opportunities in the company? Is it, returning capital to shareholders or acquisitions. Where do you see the opportunity?

We do have a good opportunity to develop our industry. We're interested in expanding the wind farms once we get permits. And we are not concerned of having a strong financial situation. Rather the contrary, we like to have it.

All right. Very good. Thank you. Thank you.

Thank you. The next question comes from Lars Schellberg from Credit Suisse. Please go ahead. Your line is open.

Thank you. Just wanted to focus a bit on the paper board market, which is another somewhat opaque business, I suppose. What are you seeing in terms of I mean, clearly paper-based packaging has been in very good demand. Are you still seeing that good demand trend? And are you, as a company, obvious you're more in niche maybe, but are you seeing any wins from other substrates? Again, coming back to your thinking about your substituting and having a positive carbon effect, are you seeing any wins from fossil-based packaging materials? to you directly, or if you have any color in that, that'd be really helpful.

I guess you mean replacing plastics. I think we should be a bit careful also. There is so much done in the plastic industry as well to make it green. We don't know exactly where that will go, but we see a lot of interest and ways to cooperate with customers to try to find solution where we could replace a bit of plastic. Over time, I think that will happen, but no major effect on our business. But the underlying demand is nice. It's good. It's better than before, to be honest. If you look at Europe a few years ago, we did not feel or we didn't see the same increase in demand either. But I think you have to look a bit also at the white line chip and the recycled fiber-based side of the business. There is some substitution going on from recycled fiber-based to verdian fiber-based.

So it's fair to say that your order books today and your folding box port and SBS business is very strong.

Yes.

And no meaningful change from the strength you saw in the first half of the year just continued.

At the moment, they are really, really strong, yes. And then we have had our maintenance shots, as you know. So, of course, that has a bit of an effect of our delivery times as well. Push them a bit further away.

If I give some flavor Lars, early in the year, we saw that the Asian demand was very strong. Europe has come along nicely throughout the year and it has become quite a lot better during the year from the European side.

And then shifting to blueberries, Leiden, when do you actually expect to ramp this up? You're talking about the next few months. And how should we think about the ramp up of those facilities, the 26 turbines you're ramping up? How long will it take to reach that nominal capacity that you've been talking about?

The nominal capacity we should reach somewhere in Q2. We should have all of the mills producing during late Q1 and gradually from the coming weeks. So it will be a gradual ramp up.

We should potentially expect some contribution from this business already for them.

Yeah, some, but it's quite marginal.

Got it. All right, that's it for me. Thank you very much. Thank you.

Thank you. The next question comes from Cole Hawthorne from Jefferies. Please go ahead. Your line is open.

Good afternoon. Thanks for taking my question. The first one is just a clarification question. On the last call, you mentioned that there's going to be about a 30 to 40 million kind of one-off deductible for the insurance claim on the turbine. I'm just wondering, have you kind of recognized that as a cost and then the 151 that you mentioned kind of adjusting item, is that separate? That's just the first question. And the second question is looking at the wood products division from kind of a longer term perspective. I mean, you talked about multi-year demand trends and the benefits that you're seeing there. When you think about pricing, not near term, but on a longer term horizon, should we be thinking about pricing above kind of the pre-COVID levels and demand above the pre-COVID levels is the second question. And then finally, on renewable energy, You just mentioned that you should be at full capacity in the second quarter on the new wind farm. I'm just wanting to clarify, is that potential future capacity, well, that future capacity, is it hedged on the forward curve, that energy production, or will that be kind of open into the market? Thank you.

Should we take the 35 million first?

We have not concluded the insurance case. Hence, we have not been able to recognize any revenue and we have not taken any cost for deductible on the insurance. So the 150 million SEK effect we have in the report is purely from the extra cost we have had of buying electricity from the grid and not receiving green certificates. And then you speculate in the future prices of wood and the demand.

You saw that I said that I think it's a rather interesting position to be an alternative to concrete and steel. And partly why we believe that's interesting is that most probably just concrete and steel will have to carry quite a big climate cost in the future. We see emission rights right now where they're going, et cetera. And that maybe could mean that prices for building come up and we can then follow whatever the price will be for concrete and steel. But of course we do not know, but it's something we believe should happen in some way or the other. And then we had one more question.

And we have not hedged the Blåbergsliden wind farm production, so it's unhedged.

Yes.

And to add to your comment, during the last 15 years, wood products have tracked, although it has been volatile, it has tracked the cost of concrete. And if you have to capture the carbon dioxide in the concrete, that comes with a cost. and it should make concrete much more expensive in the future. Correct.

Thank you.

Thank you. Just a reminder that if you would like to ask a question, please press 01 on your telephone keypad. We have no further questions, so I will pass back to the speakers.

Thank you very much, Dan, for taking your time. Again, especially as it's a Friday afternoon, and have a nice weekend. Bye-bye.