Holmen AB (publ)

Good afternoon, ladies and gentlemen, and welcome to the year-end report presentation for the Holmen Group. My name is Henrik, and together with me is Anders. I think we are quite well known to most of you. And we do it in the usual way. We go through the presentation, and after that, we're happy to take any questions you might have. So starting off with the result for 2021, it's a historically high result, a good result, especially based on that wood products market has been exceptionally strong during the year. And in the light of the good result, today the board of directors of Holmen have decided to propose to the annual general meeting to decide about an ordinary dividend of SEK 750 and also an extra dividend of SEK 4 crowns. Just to remind ourselves where we are, we have a very strong balance sheet, good financial position. Anders, you will come back to the forest valuation in our books. And also, please note that we have a net debt situation of a bit over 4 billion crowns or a ratio of roughly 9%. And in 2021, we have... Paid also there an extra dividend and also invested quite a lot of money in our industries. If we then go to forest, a few words about the forest and the wood market before we talk about the value of the forest. We know that the saw mills have been running more or less full the whole year, which has created quite high demand for especially saw logs. That has been the situation, especially during the first half of the year when prices were extremely high when it comes to wood products. And in the second half, even though we have seen that sawmills haven't been running that full, still we see that there has been quite a good or stable, strong demand for sawlocks. When it comes to pulpwood, we've had a situation during the last few years actually where we have had a bit oversupplied situation of pulpwood. But that market has now started to dry up. And today I think we can say that the market is in fairly good balance. But with the industry actually consuming a little bit more than supply at the moment. And then we are happy to see that there is still a lot of people, Anders, who are interested in owning forests. And they pay more and more money for the forest lands. If you take us through what that has meant for our valuation, please.

Yes, as you saw from the previous graph, prices have steadily risen in all parts of Sweden. And as you probably all know, we use the three-year last transaction prices, the average of that, to value our own forests. That means that this year the value of the forest went up by 9%. All of this change in value has gone directly through equity and has not passed through P&L. So we take the next slide on the reported result. It was high in Q4, driven by a sale of a UK forest property. And this is some properties that we bought in conjunction with starting up the biofuel boiler in Workington to secure the raw material supply. It doesn't have a meaningful use for us anymore. So we have decided to divest it. So that impacted the profitability by slightly more than 200 million SEK. Underlying profit for the forest in this quarter was 300 million SEK.

Thank you. Then moving on to paperboard. Here the market has been exceptionally good. I shouldn't say exceptionally, but really good over the last couple of years during the pandemic. We see that demand from European customers is good. Deliveries from European suppliers to Europe is up some 6%. And for the first time in, we used to say 10 years, we actually not only talk about price increases, but we also see them materialize in the market. In our case, we see strong demand. And if you compare prices in the fourth quarter compared to the third quarter, our prices are up some 2%. And just to remind ourselves that we have multi-year contracts for roughly half our business where prices where it takes longer time to change the price. And going into 2022, we fall off the market with what is open in terms of our production that where we can increase prices in the same way. In our case, we have had two maintenance shuts during the year, which have limited our deliveries a bit. We have also reduced our stock levels during the fourth quarter, which means that we have not been able to increase deliveries during the year. We have kept it roughly on the same level as in 2020. And Anders, there is a lot of items that affect the financial result in the fourth quarter. Please take us through.

Yes, definitely. Fourth quarter reported result excluding the turbine that is out of operation in Workington was 281 million SEK. We were positively impacted by some price increases coming through, as Henrik mentioned, roughly 2% average price increase compared to the previous quarter. And we did also have some positive one effect of effects from bonus from green electricity and some repayments that we received in the quarter. Underlying result in this quarter was a bit above 200 million SEC. And if you compare the result year over year, it's a decline of two. That is explained by a lot more extensive maintenance shots this year compared to last year. Back to you, Henrik.

Thank you. A few words about paper. I think this has been a year which has been the most turbulent year in my time at Holmen, which is quite many years, actually. What we see, first of all, is that especially our competitors have struggled with really high fiber prices. That's not the case for us, as we're 100% based on local wood in Sweden. And also in Europe, especially, but also partly in Sweden, really high electricity and power prices. In our case, we have not gone out and asked for electricity or electricity cost surcharge in the fourth quarter, because we felt this very late in the fourth quarter. But we do it when it comes to next year or this year in 2022, at least for the first couple of months in the first quarter, which I come back to in a minute. But this has been extremely turbulent, especially the... Recycled fiber prices and especially the availability of recycled fibers that can be used for the inking, which is not all recycled fibers at all. I think we should remember when we look at such a market that what we have, the combination of local wood, which we have perfect control over and where prices are fairly stable, and also over time, fossil-free electricity. Even though electricity also in Sweden is a bit expensive for the moment, I think this is a rather good combination, which will prove to be cost-efficient over our competitors in the long run. When it comes to how we have performed, we have been more or less running full during, I would say, the whole year in 2021. In the fourth quarter, we talked about it in the last report that we have a bit more maintenance. Normally, we have the maintenance in paper in the fourth quarter. And that was the case also this year. All in all, when you look at the market as such, the shortages of both fiber and the energy crunch has meant that prices are up a lot in the beginning of 2022 as we speak. You should just remember when it comes to us, also, we are increasing prices. And as I said, on top of that, we are also charging for higher energy costs at the moment. And that's for the next coming two months, roughly, at least for now. And if you think about our mix, remember just that we have one third of our production and deliveries is book paper, which is a market which is more stable, both when it comes to volumes, but also pricing. I think that's about the market. Anders trying to sum up what has happened in paper in these turbulent times.

Yeah, there is a lot of things that has happened. We encountered much higher electricity costs. As Henrik mentioned, it was mostly towards the end of the quarter in December. The electricity cost rose by 100 million SEK compared to the previous quarter. We had seasonally higher costs for personnel and maintenance, but also had some positive repayments that were improving the result or balancing these seasonally higher costs. Comparing the year over year, we have had a very turbulent year with lower prices, higher electricity costs that we actually have been able to offset by increasing volumes, improving mix and taking down costs, which meant that we achieved the same result year over year.

thank you and then the fantastic wood products market what to expect in the future starting off a little bit what we see right now as you know we had a fantastic market the first half of 2021 was good increasing prices etc and then the prices started to go down So what we feel now is that US is ahead of us. And what you see on the chart here is future prices, where you can see that prices have started to go up again. They have already reduced stock levels and customers are starting to buying. We should also know that there is supply restrictions or limitation, especially in Canada. where first it was flooding, too much rain, and then later on also really cold weather and logistic complications, which has meant that supply hasn't been that high and prices have started to go up. And then the other question is, where are we then when it comes to our deliveries to the European markets? And there we feel that right now we have bottomed out. And if you look at where we are price-wise today, we are slightly below where we were when we came into the fourth quarter. On the other hand, business we now do for February, March, we do them with slightly higher prices. So our feeling is that the market has bottomed out and is starting to take off again. Then the question is where it will take us, and that's too early to say. Nothing has changed when it comes to the interest for building in wood rather than in concrete and steel. And just a reminder that this also accounts for a lot of the CO2 emissions in Europe. It's no different here than anywhere else. And then also a reminder that we have decided to invest quite a lot of money in our Iggesund sawmill. Increasing output and value added, it's roughly 400 million SEK, which should also increase our production with roughly 20%. It's also a way to slightly change the product mix at the sawmill, being more adjusted to what we see will be the future demand, more construction timber. And this should be set up to be at full capacity somewhere during 2024 or at the end of 2024. But that's the future, Anders, if we then look back again about the result for the fourth quarter.

Yeah, in a business where you face 20% price declines and you're only able to deliver 80% of what you produce, you would expect quite a poor result. Of course, it's a decline compared to Q3, but 350 million SEC in the fourth quarter is a really strong result, equivalent to 60% return on capital employed annualized. And of course, it's not only the lower prices that have taken its toll, also that we actually have been building stocks and we have taken some time to manage inventory levels during the fourth quarter. And year over year, well, it's of course extreme price increases we have seen that have boosted the result, but also the Growth that we have made, both by the acquisition of Martinsson and expanding the Braviken sawmill, has contributed nicely this year.

Definitely. And should contribute even more in the future, I hope. A few words about renewable energy. You know that on the energy side now, we have an energy crunch in Europe, actually in the whole of the world. If you look at the situation right now, actually, it's a lack of gas, natural gas, which means that the gas price is actually the highest. If you compare to coal, even though we have to buy emission rights, actually, it's more expensive today to produce gas. energy or electricity based on gas than on coal, which is a really strange situation. And well, to sum up the situation, of course, you come to we definitely need more renewable energy or at least fossil free energy because also Europe, we are extremely dominated by fossil so far. And huge challenge but also big opportunities for the ones that actually could supply the energy that we so desperately need we take a little step in that direction where we now finally actually we will see our windmills turning soon they are they have started but at the end of the first quarter we should be up and running at full capacity which will increase our production of renewable energy by roughly 30 percent And then a few words about the Swedish situation when it comes to lack of transmission capacity and price development between different price areas in Sweden. We are used to a situation where we have the same price all over Sweden. What you see on this chart is that Yes, prices are up and there is a bit of a gap, which is bigger than normal between south and north of Sweden, but also quite a big difference between Sweden and Germany. And when you ask people and forecasters, the answer we get is this, that things should get back to a more normalized situation. with less difference between the different areas. Quite a big difference between Sweden and other countries. Any further comments on that one?

No, but it can go both ways. Not both ways, but it's supported by both increasing transmission capacity as well as adding consumption up in the northern part of Sweden.

If you produce up in the north, you have to be really good at making use of the hours when electricity is a bit more expensive then.

Yeah, and we have been in the fourth quarter. Actually, average prices in the northern part of Sweden fell by 100 sec compared to Q3, but we earned almost double on our hydropower because we were able to time the production when the market needed it as most. And that means that we concluded the 2021 in a very strong manner with a result of 112 million sec in the fourth quarter.

Thank you. Then finally, a couple of slides. You know what kind of a company we are. We grow houses and in everything we do, we contribute with climate benefit. And actually, everything you see on this slide here is also possible to see live because this is a little bit of a it's a teaser for what we want to do in May. A Holmen Investor Day up in the north where you have the chance or will have the chance to have a look at what you can do with wood products. Also building very nice houses like the Sara Kulturhus. Also our hydropower, sawmills and of course in the heart of everything we have the forest. So we'll come back on that one. And that concludes our presentation and we're happy to take any questions yet.

Thank you. And if you do wish 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. Our first question comes from the line of Lars Kelberg from Credit Suisse. Please go ahead.

Thank you. I just had a very quick question when relating to the surcharges. Relative to what you've actually done to raise your contract prices, can you shed any light on that? You said surcharges for two months and then you kind of, I suppose you give that back. How does that work? And again, how much did contract prices really move up?

You could comment that we do have high electricity costs in the first quarter. They were already very high in Q4. They might increase somewhat in Q1. And it's by and large a compensation for this unusually high electricity costs that we incur.

there is an increase in the market which is a general increase and on top of that we do this but as electricity electricity prices normally it's during the winter time that it's the most difficult time and then we'll see what happens not giving back the price increase but we will see whether it will be prolonged or what will happen after that so there's no formula per se that is directly linked into electricity costs that's not the way it's structured no

No, but it's calculated to cover our extra energy costs.

I understand. And then my second question also relates to pricing. You, of course, talked about 2% sequentially in Q4 in the paperboard segment. Can you share with us how we should think about the structure you have with long-term contracts and how you view average prices across your portfolio moving in 2022 versus 2021, where we sit today in terms of the more recent folding Voxport price increases?

I think to start with, it's roughly 50-50. Long-term contrast, half of the production and open business, roughly half of our production. And what's open, there we increase prices in the line of the market, what happens in the market as such. And that's for, say, first quarter, and then we will see what happens after that.

Okay, that's fine. Fair enough. Thank you.

And the next question comes from the line of Martin Melby from ABG. Please go ahead.

Yes, good afternoon. You gave the underlying EBIT on forest packaging Did you state the same on paper?

It's difficult because we do have extra maintenance as well. Should we take away that or not? But it's roughly 50 million negative in Q4 underlying, including the maintenance costs.

Excellent. And you mentioned that one-third was book paper, but two-thirds will have a price increase. Or is there more that is not getting a price increase?

Now, I said that one-third is book paper. I'm not saying that book paper is not changing. We are increasing prices also for book paper, but not as much as the rest now. So one-third is a bit more stable, but it's moving up as well, but not as much as for the rest. It's quite big price increases now in January.

Thank you. And that question, why are you forcing your price changes on the sawmilling side, Q1?

We have very short contracts. And as Henrik mentioned, when we do business now for the next month, we increase prices. But we saw a decline during the fourth quarter. So it's difficult to say now what the average price change will be quarter over quarter.

But the trend is we have bottomed out.

The challenge for us now is not to get orders, it's to be able to get out the deliveries from our sawmills.

Excellent, thank you.

And the next question comes from the line of Robin Santavita from Carnegie. Please go ahead.

Yes, thank you very much. I was wondering related to your energy bill, apparently you have hedged 85% of your energy consumption, 22 and 65% for 23. Is that correct for the group or is this only for the paper division? At what price levels have you hedged the power consumption?

If I answer in the long way, historically we have viewed our hydropower as a hedge to the paper business. When these bottlenecks in Sweden started to appear late autumn, we started to hedge up the full paper and view paper on a standalone basis and did have done external hedges. So we have it's 85% of papers consumption that we have hedged for 2022. Q1, when we started to hedge, they were still quite high. So it's roughly the same level as Q4 on average. Then we will go down to a normal level Maybe not completely normal in Q2, but Q3 and onwards are hedged at historically normal price levels.

All right, I understand. Then relating to the wind farm, what kind of P&L impact should we expect on an annual basis once it's fully up and running with the current prices we have? Have you hedged those sales prices in any way?

We have historically hedged our electricity or hydro production internally against our paper. That we have stopped doing. Now we're completely unhedged for both the hydro and wind power. And we'll get back to the financial effects on the blåbärsliden. It depends very much on the price, of course, but the production cost for a wind farm is around 100 sec per megawatt hour. And then you can do the math backwards from that.

All right, good. Sounds attractive at these prices. Our final question related to the forest assets. How should we view the current situation with pressure on higher or an outlook of higher interest rates? Will that impact the valuation of forests? What is your view? Normally, these kind of long-duration assets are quite sensitive to higher interest rates. What about the forest assets and sensitivity to interest rates? What is your view?

It's very difficult to give a good answer to that. We book our forest values at traded prices. That's predominantly between private individuals. We note that investment funds that buy forests, they pay a higher price than the private individuals. Difficult to see how the private individuals will react. I don't think they are as sensitive to interest rates as institutional investors are, but that's not even an educated guess.

I understand. Makes sense, makes sense. Thank you very much.

Thank you.

The next question comes from the line of Oskar Lindström from Denske Bank. Please go ahead.

Yes, thank you. A couple of questions for me. The first one is on wood products, and you say that the market has turned. I was wondering a little bit about your ability to deliver or maybe increase deliveries to the U.S., given that the price level there seems higher. That's my first question.

Yeah.

We deliver some 5% of our production to the U.S. and we can change a bit, but not that much.

And what was it? Has that fluctuated over quarters or is it just steadily 5% roughly?

It has been fairly stable. We have decided to keep U.S. as a market even when prices in the U.S. were down quite a bit.

All right. And you mentioned, I think, supply problems, maybe in Canada. But what is the supply situation from Central Europe, given the, what is it, the spruce beetle infestation that they have there?

We don't have any really good statistics, but we have a feeling that it's drying up a little bit there as well. Availability of raw material, but that's a guess and rumors more than statistics. When it comes to our logistics, it works fairly okay, but we feel also that it's a bit more difficult to get trucks, ships, etc.

to deliver to our customers, not to get the logs into our soulmails.

Okay, thank you. And then my second question is on paper board. You mentioned sort of you're finally seeing some meaningful price increases. I was wondering, when the demand is strong like this and it's been strong for a while, are you able to improve your, you know, change your sales mix around to improve average realized prices?

We do not change the mix a lot, but of course we try to improve a little bit over time. But as you say, the market is really strong and that's not the issue for us. It's more to increase the volumes. The customers want more. Yeah.

All right. Thank you. Those were my questions.

And the next question comes from the line of Vinus Lassen from SEB. Please go ahead.

Thank you. Hello, everyone. I'm looking for an educated guess on renewable energy. And the results were very strong obviously in the fourth quarter, but you say it's not primarily to do with the higher prices, but rather with your way of executing with your hydropower in a good market. Will that benefit remain in the first quarter, do you think? Or how should we think around renewable energy profitability in the first compared to the fourth quarter?

Educate, I guess. Well, I looked at the weather forecast. But you can look more or less on the SE2 pricing on Nordpol and look what the base earnings can be. And if there is a lot of volatility in that pricing, we will be able to benefit from that. But if it's flat lined, our price will be pretty much in line with the Nordpol prices in SE2.

I think, Linus, in the long run, hydropower will prove to be more and more interesting when we have more and more wind and solar in the system. It's a very good battery, at least for a number of hours, and produce more when prices are a bit higher and produce less when they are lower.

Going back to history, we have over a year earned 20 sec per megawatt hour extra by being able to time our production to the market. In the most recent quarters, to be frank, it's more like 100 sec or above that.

When the price is more volatile.

Yeah. Okay. But no educated guess for what that contribution might be in the first quarter then.

No, I refrain from that. I've already guessed too much.

I think Linus is quite good at guessing himself, isn't he?

I'm trying. And then just one more, and that's probably an easier one, and that's on your FX, maybe also on a sequential basis. What the FX effect is that you expect in your operating profit Q1 and Q4?

Q1 is pretty flat, maybe. If the corona stays at this weak level that we are as we speak, maybe a bit positive, but we are pretty much hedged for the first quarter. Great.

Thank you very much.

Thank you, Linus.

And just as a final reminder, if you do wish to ask a question, please press 01 on your telephone keypad. We have another question from the line of Christian Kaffer from Hammersbanken. Please go ahead.

Thanks, operator. Just a few follow-ups on my side. First on wood products. If I go back a few quarters, typically we believe there's something maybe around 390,000 kilopeters of wood products per quarter. And we have been quite significantly, quite meaningfully below that for a couple of quarters now. So is that more where you want to be, the historic numbers, or it's a little bit too tough comparables going into 2020?

The run rate of our production, as we speak, sort of normal is one and a half million cubic meter per year, which is 375 per quarter per year. And over time, we can't deliver more than we produce. Our ambition is, of course, to increase our production. But as we are, that's a normal quarterly delivery level. Q2 is normally the strongest one. Q4 is weaker.

Okay, good. Should be able to come up a bit on the delivery side of 2022 from these levels.

That's the idea. It seems like.

Yeah, good. And then finally, on the removal energy side, if you have any updates on this, if things move forward, is that enough for you with regards to environmental permits? We are waiting.

We're in the final stages of our application, but it's a lot of red tape to be covered.

Okay. Thanks a lot. Thanks, Christian.

And as there are no further questions, I'll hand it back to the speakers.

Okay. Thank you very much. Again, also this time, actually, it's a Friday afternoon. So extra thank you for taking the time so late in the afternoon and look forward to seeing and hear from you soon again. Thank you very much.