Holmen AB (publ)

Morning everybody. It's not afternoon this time and welcome to the interim report presentation for the Holmen Group. In this room, it's me, Henrik, and it's Anders, and we will go through the presentation as we usually do, and we're happy to take any questions you might have after the presentation. But to start off, I'm extremely happy, to be honest, that we have a business model to start with that also works very well in times with high inflation, lack of fiber and energy in the world, and also terrible war around us. This has meant that we have a very nice result, and it's two things standing out. It's high volumes from our wood products division. It's also very good prices from our paper division. We'll come back to that when we go through the different business areas. A good result in the first quarter also means that we have a very strong cash flow, and it has also reinforced our from the beginning already strong financial position and a very strong balance sheet. Then let's go through the different business areas, starting with our forest division, and as we usually do, try to put some flavor to the wood market where we currently are. I think wood is one of the few raw materials that have not changed really in a world where everything has become much more expensive and especially everything related to energy. If you look at the situation right now, you can see or during the first quarter, you can see that well, there is good competition for saw logs and prices have ticked up. But if you look at pulpwood, not much has happened. But where we are right now, things are a bit different. First of all, we see that, of course, the saw mills are running full. They are making a lot of money, but also the activity in the pulp industry has increased. At the same time, as we also see that supply is restricted, there is no pulpwood or wood chips coming from Russia, which has an effect on the market. At the same time, also, as we have seen that the pulp that we had, the pulp, the strike that we had in Finland, the upend strike has come to an end. So in the headline, you can see competition intensifying. That's not only for saw logs, that's also for pulpwood going forward. But that's about what happens now, Anders, during the first quarter, not so much happened.

No, it was a very stable and ordinary quarter for the forest business. We did not have any sale of forest land that we had last year, relating to the UK primarily. We have not so far seen very much of price increases that have gone through for the forest division. So it's a very ordinary quarter.

It is, and it should be normally. Then a few words about our paper war division, and not the least how we see the market. I think already last time we said that the market is quite strong. Customers are not maybe not crying for for board, but they are eager on getting as much as they can. And when we talk about Europe, we still see strong demand. And we also see deliveries from European suppliers going up to European customers by a couple of percent. But also this market in this market. Now we actually after 10 years, we finally see prices really going up. And prices are going up thanks to healthy demand, healthy market balance, but also from cost increases, especially for continental suppliers. And there's also a push from beneath. If you would look at the white line chip producers, the ones that base their production on recycled fibers, but they also have to buy gas to run their factories. You see that the cost pressure is even higher and that has materialized in price increases. But also in full and box board and solid beach board, prices are moving up. In our case, our order books looks fine. And also we are increasing prices. But we used to say, understand half of our production roughly is fixed in a bit longer contracts. And with the rest, we follow the market. We also had a period, Anders, with the turbine out of production for more than half a year, which has been quite a challenge for us. But can you maybe technically explain now how to see this?

Yeah, it's back in operation since the mid quarter. It was quite a complicated accident. So the insurance investigation took a long time, but now it's finalized and the insurance will cover this event. And which means that we have recorded an insurance compensation in Q1 and we have also had some costs since the turbine was out of operation for a month and a half. Net-net over this period, it costed us 64 million SEC, which we have treated as an item affecting comparability, both in second half of 2021 and the Q1 report that we released today.

Which means when we look at the result,

this is as if the turbine was in operation. And Q1, we have realized price increases, on average, 6%, but it's a mix of long-term contracts that have not moved. And the half of the portfolio where we can increase prices here now. Unfortunately, we see quite hefty cost inflation for especially chemicals, but also logistic costs are moving up and they have taken a toll on the profit. If you look at the bars, you see that Q1 bar is lower than Q4, but actually it's the underlying profit is better in Q1 than Q4. Q4 contains some one-off positive revenues and the annual green rock bonus that we received.

Correct. Thank you. Let's hope we can do even better in the future. Okay, moving on to paper. I normally say that if it's a nice place to be in producing consumer packaging board, paper is really, really difficult because we have structural decline. If we look at that chart that we have ahead of us now, one can think what on earth happened. And of course, it's again coming back to the lack of energy and in this case also, lack of and very expensive fiber in combination with energy in continental Europe that has meant that has been quite expensive to produce graphic paper. It had also materialized in really big increases in the beginning of the year. And in our case, our model with the fossil-free electricity in Sweden and also as you saw on the slide before, when we looked at the wood market where pulp prices haven't changed so much yet, that has meant that we have had quite good cost competitiveness and we've had a good cost control in general in our paper division. So we've been running full and we have increased prices in line with the market, which means that Anders, it has also materialized in some money.

Definitely it has. As Henrik mentioned, costs have increased, chemicals and logistics are more expensive for paper as well, but that effect has been dwarfed by the very high price increases that we have realized, 30% plus in Q1. It's not that much to say about the result. It's extremely good given the market situation.

Absolutely. And it makes sense to underline that it's really cost driven for the most players in the market that makes the price come up the way it has now. Okay, let's switch to wood products, which is beginning of this year, but the markets look a bit different and there are also different parameters influencing the market as such. As you saw again in the beginning, we saw that the cost for saw logs for the saw mills in Sweden, well, the cost is up. Prices for saw logs are higher, but not that much yet, which means that it's a good start. But then the underlying demand, both in Europe and in North America, has been good in the first quarter. Prices in Europe bottomed out during the first quarter, while in the US prices peaked and started to come down when customers have filled up their warehouses and with a lot of wood products in order to sell during the really the good building season. But there were also other things affecting this market. If you take America first, well, there has been logistic challenges, especially for the Canadians. They have a lot of wood products at their saw mills, but they cannot get them out to the market in the same extent, to the same extent as we've been able to ship from here, which means that has had an effect on the market. And in Europe, we have the war again and we have Russia being a big player and its restricted supply of wood products, which also affecting the market. And to some extent in Europe also, we have continental Europe where Sprucebark beetle problems have made them harvest a bit more and they will probably also have to restrict volumes a bit going forward. We also had a lot of deliveries to the US in the first quarter, more than we normally have, which has helped us to a, I think we say a very strong result in the first quarter.

Definitely. We see a, as you mentioned, and the costs are moving up a bit, but they're relatively modest compared to the pricing momentum that we do have. Selling prices in Europe on average were lower in Q1 than Q4, but ended the ending price in the Q1 was higher of course than the beginning of the quarter. So the trend there is positive. In the US, we were able to triple our sales volumes. Almost 15% of our deliveries went to US in Q1 versus 5% in a normal quarter. And we did that in order to capture extremely good pricing in the US and that helped the result a fair bit in the first quarter.

Can we do that again in a second?

We have to go back to normal delivery pattern. This was more opportunistic to capture a very strong market environment.

I know. Thank you. And then finally, a few words about renewable energy. Again, we're coming back to the energy situation in Europe, which has, it was quite difficult before the war and now it has become extremely obvious that the way it works with so many countries dependent on Russian gas is not a good situation. And it's also, it's been reflected in the energy prices. When we look at this chart here, we also see that there is a difference between South and Northern part of Sweden. And remember that Hallman is a company. Unfortunately, when it comes to this, that we consume all our electricity in South of Sweden. We produce most of our electricity up in the North, but we also make use of hedges in order to come out better than what it looks like on this chart. And we have done that. We come back to that. But just a reminder where we are now, we are in Europe, which is, we have said it before, it dependent on fossil fuels, but now we also have to add that, well, one third of that is actually coming from Russia, which has become a great headache. Then it's nice to be a company which can contribute to reduce the dependence at least a little bit. As we have now in the first quarter, we have started up the Blobber's lead and Windfart and you have bought the shares that we didn't own before from Varsvik, which means that we now fully own also Varsvik, which has actually contributed a bit to the result in the first quarter, which is nice to see. But Anders, also please mention what we have done with our hydro power, which has had an impact on our performance as well.

Yes, as Henrik mentioned, the prices in Northern part of Sweden, where we have 90% of our hydro production was actually quite low in Q1, but we have been able to time our production towards at least a bit more, the times where the prices temporarily has been higher, but we also have had good hedges, which meant that we have really nice captured prices for hydro power in Q1. And on top of that, the additional wind power business have added 30 million SEC to our profit in Q1. And especially the acquisition of Varsvik was a good timing, has been a lot of wind in that Windfarm this quarter and at the same time as prices been all time high.

Sounds good. Good. I said in the beginning, we're happy to see that, of course, we believe in our business model, but we also see that the model we have works fine also when times are a bit more difficult. Like now, when there is an energy crisis, it's not easy to get hold of raw material at all. And especially energy, especially fiber and having the base in Sweden with our own forest, good control of the raw material, also having the fossil free energy system in Sweden, and also having all our business areas contributing not only with profit, but also with climate benefits is a good feeling. I think it's also something that makes sense going forward. Before we take on the questions, just a little reminder that we would be extremely happy to have as many of you as possible with us on the 11th of May, where we have an investor day up in the north of Sweden, where we'll have a closer look at our operations up north, what we do and maybe our business model and also what to do going forward. So welcome, the ones of you who have also already shown some interest and maybe we have some space for some more ones, who knows. Let's try at least. And with that, we are happy to take on any questions you might have.

The first question from the phone comes from Lars Killeberg from Credit Suisse. Please go ahead.

Thank you and congratulations for an exceptional quarter. So a couple of questions there. And when you're looking at, you know, you called out, of course, your very solid cost base in Holmen paper versus continental and you really see, maybe we can call it windfall profits in the paper division. What are you seeing in terms of your incremental cost pressures and that may be also transferable into both the board business and wood products in terms of your wood prices? I mean, they tend to come with a lag. Nevertheless, they start to move up and then ultimately the P&L impact comes at some stage. So in essence, what are you seeing then in incremental cost pressures from wood? And in the paper business, now with UPM back or not yet, I suppose, by ramping up, would you envisage any shorting on the audiobooks? And then, of course, maybe then some thoughts about price elasticity in that business. Final question, which surprised me a bit, your capability to move a lot more wood products to US in an opportunistic way, considering what we're hearing about freight rates and lack of availability of shipping capacity. So how is that even doable? Thank you.

We start with the cost inflation. What we see actually the most cost inflation is chemicals. We have seen them moving up in Q1 and we see quite a step change going into Q2. 20% increase in chemical costs and two-thirds of the chemical costs are within paper board and one-third is in paper. We do also see some cost inflation on wood. It has not really started yet, but that they will go up somewhat in the second quarter. But most likely you will have cost inflation second half.

The last question you asked about how could we even ship that volumes to the US? Well, we took a bet quite early on and secured deliveries to the US. Paid a bit more at that time, but it paid off. Then it was about pricing power, was it? I think when it comes to paper and pricing, it's very difficult to know what's going to happen. Structural decline is most probably still there. That's what we expect. Nothing else. There has been a lot of closures in the market. Nobody knows exactly what will happen with more closures, conversions, because that has really contributed to the healthy market balance we have today. One difference now and some years ago when prices went up as well, not in the same way, is that now it's really cost driven. Then there was the how can we secure or control our own cost? Maybe

we could add something on when you look at the paper market, it's dominated by continental players with recycled fiber and fossil fuels in the base. They have a hard time covering the cost at the current price level. If prices go down, a lot of capacity will have to most likely close.

I'm sure you follow the index for recycled fibers. OCC for board producers is around 200 and today OMP, all newspapers and papers and magazines, is around 230, which is much higher than what we're used to. That's of course important for the cost competitiveness over time. Just a quick follow up on

the wood product side. You commented that you got a return to the normal 5% share to the US. What sort of profit impact or boost that we had to the opportunistic and speculative in a way, in a successful way, did the US impact have on your Q1? I would think about having carried through to Q2.

I understand that. It's nothing that we are able to comment, but it added a meaningful part of the profit improvement was our bet on the US in Q1.

I think we had a question about possibility to keep electricity prices under control, whether it's possible or not.

If we look short term, we have had the same electricity cost Q1 versus Q4. That's on an elevated level. We most likely will see electricity cost in paper coming down in Q2, but that will be countered by the increase of chemicals and logistic costs. So we don't see that much of a change for the paper division going into Q2 from a cost perspective.

The next question comes from Robin Santavirta from Carnegie. Please go ahead.

Yes, thank you very much. First, a question related to the wood products segment and especially not particularly the sales in the US, but rather in Europe. What is the outlook for prices going into Q2 and the busy season? Any comments on that would be appreciated?

I think we already said that prices in Europe bottomed out during the first quarter, and the orders we are taking right now, they are on a higher level than the average we had in the it can change.

Yeah, it is depriving in line with what we saw last year during the summer.

Difficult for us to comment. We'll see.

All right, I understand. I related to the paper segment. I know some producers have used energy surcharges during the past half year, and I guess during Q4 you operated with contract prices. How about now in Q1, any such surcharges in your P&L, and if so, what is the outlook on those going forward?

First of all, during fourth quarter, yes, you're right. We honored most of contracts we had, or we tried to honor them as well as we could. Then we had just followed market prices in Q1 when it comes to the pricing we have done. If I

try it this way, do you have any price agreements that are shorter than one quarter in the case?

No, you can expect the same type of surcharges in Q2 as we have had in Q1. There is no change to that.

All right, I understand. Finally, related to renewable energy, I understand you have ramped up production in Blobby, how has that process gone? Is it now fully operative as of Q1?

Yeah, it was commissioned during Q1 in full, and it's up and running now.

All right, thank you very much. Thank you.

The next question comes from Cole Hathorne from Jeffreys. Please go ahead.

Morning, thanks for taking my question. I'd just like to follow up on the wood products division. Can you give any more color around the amount of Russian supply that has been reduced into the European markets and how that's impacting negotiations with customers is first question. Then the second one is also related to removed Russian supply, but on the raw material, the saw logs and the pulp wood into Europe. How is that impacting the demand for forest reassignment? You alluded to it in your statement and your comments earlier, but where could pulp wood and saw log prices go from here due to the restricted supply? Or is this just kind of a timing situation where it will be manageable and just drive a bit of inflation in pricing? Or should we be expecting a real step up in pulp wood and saw log pricing? Thank you.

First question on Russian, and you have to include Belarusian effects from the war, and it's maybe -8% of European consumption that is attributable to those kind of volumes. So it has a meaningful impact on some markets, but of course those volumes will be rerouted to other markets. Asia, North Africa.

That's not easy to follow. And then the Russians, well, they have had some imports, especially to, or they have exported pulp wood and wood chips to Finland. That's roughly 10% of the Finnish demand coming from there. It's not coming now. And at the same time as we have the UPM pulp mills starting up again. So some kind of effect that will for sure have.

And it's hard to see where those additional volumes to fill that gap should come. There's no obvious place to saw pulp wood.

I suppose, and then just following up from that, with that kind of backdrop of, I suppose, higher, slightly higher pulp wood and saw log prices. What segments of the business do you see this as truly supporting for Holmen? I mean, does this just give you conviction in kind of your forest ownership and supporting kind of forest being more of an inflation hedge from a value perspective longer term? I mean, how do you think about this dynamic impacting your business? Thank you.

Definitely, we are very happy to own such substantial forest holdings, but we're also very happy to run this very nice wood products operations that actually is a main contributor to wood supply to our board and paper mills. They are the engine in getting wood out of the forest. And we have a very strong position on the wood products market. That is a combination of our forest ownership, our saw mills, that is very supportive of making sure that our mills will get the pulp wood and not have to take stand still due to lack of pulp wood. What will happen to pricing? We are not, of course, we can't hedge that and wish from a pricing perspective short of pulp wood.

And remember the saw mills also contribute to the pulp mills with wood chips. But remember also so far, sure, saw log prices have increased a bit, but really determining whether we are money or not and how much in the saw mill business is really the wood products prices.

The next question comes from Martin Melby from ABG. Please go ahead.

Thank you. My questions have been answered now, but I could do a different spin. What is the difference now between the cash cost of the marginal producers in Germany and the paper price? Is it break even or is it making a margin now after prices have gone up 100%?

Then we have to include state subsidies and things. It's not so easy, but

we don't believe that there is that much cash earned at continental mills.

Listening to the market and customers and what suppliers say and the development when it comes to pushing up prices due to high cost, it cannot be that easy.

And you also have a problem of sourcing the raw material, getting recycled fiber to produce new papers is very difficult.

Okay, thank you.

The next question comes from Oscar Lindström from Danske Bank. Please go ahead.

Yes, good morning guys. Three sets of questions from my side.

First

off on wood products, you talked about price increases Q2 versus Q1. Did you say anything about the magnitude of those price increases in Europe for your business? Then I'm wondering also, do you see a possibility for European producers to increase production to compensate for the loss of previous Russian imports? Can harvesting levels in the rest of Europe increase further or are we looking at a possible timber squeeze? Also on that, is there any possibility for you to increase capacity in your operations? Then a question also on recovered fiber, which you mentioned several times as the lack of recovered fiber in continental Europe is one of the reasons for higher paper prices. Could you maybe just explain a little bit again the reasons why we're seeing this shortage of recovered fiber in continental Europe now? What has changed and how long term do you think that is? Those were my questions.

Shall we start with the last one? I remember that one. If you take the recovered fiber market, Oscar, remember it's like two markets but they are linked together. It's the paper that's suitable for de-inking, old newspapers and magazines. When first of all demand or consumption is going down and especially with closures of capacity up in the Nordic countries where we have the virgin fresh fibers and closing capacity as such means that it's more and more difficult to find the fibers suitable for de-inking. Another thing is important to understand as well is that when you produce test liner and fluting, if the mix from the household waste is containing not too much of graphic papers, you can take it all and use it for producing test liner and fluting. Step by step it will become more and difficult to get hold of fibers that you can de-ink. That's part of the market dynamics but on the other hand the price for OMP-OMG is also linked to the price for OCC. I have never seen that prices go totally different ways but there will always be surcharge for OMP-OMG because you have to sort out the whiter qualities suitable for graphic paper production.

Now you answered the bonus question. Should I try and make a go at the three questions from Oscar? No, we did not comment on the magnitude of the price increase. You have to look at the price indexes published by Skogsindustri and on that to get the guidance and how things develop. Then you had the question on can people start to ramp up supply? The price signal that we have had for the last 12 to 18 months have meant that people have ramped up production as much as they can and the question is not about having the machines, it's having availability of raw material. It might be so even that you have to decrease production in continental Europe because you have this problem with infestation so we have a hard time seeing that you have a supply shock coming or having that ahead of us. Our ability to grow is short term. We do it day by day but we do have ability to remove bottlenecks and we are making an investment at the Yggdrasil sawmill as we have announced etc. to increase production. We'll talk more about that at the investor day, our ability to increase production at our sawmills. But we will do that at a reasonable pace so that we actually have control over the raw material supply.

Just a follow up, you mentioned that figure, I think it was 8% of European supply coming from Russia and Belarus and the region. Were you referring to sawn timber or to timber?

Sawn timber.

Are there also significant timber imports?

No. Not that we are aware of.

Not to the western countries, that's already forbidden or forbidden. Also to the Russians themselves have stopped that.

There could be some volumes into the Baltics as you mentioned but it should not be that much. No. All right, thank you.

The next question comes from Linus Larsson from SEB, please go ahead.

Thank you very much and a good day to everyone and congratulations on spectacular earnings growth in the quarter. I'd like to come back for a minute to renewable energy which was very strong and you mentioned wind I think added 30 million. Could you break down the EBITS? Did I understand that right? 30 million was the wind total contribution. Maybe if you could say how much was from should we call it hydro related trading and other sources, if you could help us understand that 168 million, please.

30 million was the EBITS contribution from the wind. It's predominantly from Varsvik because Blåvärstiden was starting up and electricity prices were not that high in the northern part of Sweden and the price impact from our hedging was 40 million SEK in the first quarter that contributed to the result compared to selling on the average price in the northern part of

Sweden. Great and so I think you said 30 percent was hedged in the first quarter. What's Q2 looking like in terms of hedging levels and average realized pricing?

We have very modest hedging so far in the second quarter. The transactions we did for Q1 were quite good. Difficult to repeat them.

Definitely.

Okay but it's rather that the second quarter will see more of a ramp up from Blåvärstiden. That's the delta that we should be looking out for then.

Yeah and depending on how the market prices pan out in the northern part of Sweden.

Right and with Blåvärstiden how much of a ramp up contribution volume increase should we expect in the second compared to the first quarter?

It's some increase but it's difficult to comment exactly how much.

Great maybe just on the paper board side one final question. Prices on a realized basis were 6 percent Q1 on Q4 and I think you've said previously that price increases have been unusually easy to push through. What's happening in the second quarter? Are we in for a similar sequential price increase?

It's never easy. It took us 10 years to manage but remember also that we discuss price increases with customers to take some time before they actually come through into the books and we get paid.

But do you think it's the delta if I say that the price realization was 6 percent Q1 on Q4 is it more or less Q2 on Q1?

The price increase we announced in September that's the one that actually gave the contribution by 6 percent Q1 over Q4. We have a price increase announced for May and there is always delays in pushing through the price increases in Q2.

Great that's helpful. Thank you very much. Thank you Linus.

The next question comes from Christian Kopfer from Handelsbanken. Please go ahead.

Thanks. Sorry I missed most of the presentation unfortunately. I had to call into other places so sorry if you have already mentioned this but on the paper side obviously exceptional development on the property generation but just to understand how much the production has been renegotiated on the paper side on the new price level.

Yeah almost all.

Right okay and when is the next call it price negotiations is it quarterly or is it half year?

Yeah but it's ongoing I would say. The market is quite turbulent as you have understood especially from maybe continental producers and discussions about cost and how that should be implemented in price slightly different for us but still we are following the market as well as we can and if things change this market has come to a situation where it can change rather quick both up and down as you have seen before but remember again Christian this is really cost-based what we have seen now in the market and also healthy balance.

Yeah I understand that and then you also talked a little bit on the renewable energy side. You previously have worked a lot with hedging and net exposure on the group level and are you expecting that to be re-established again in the short period or how does it look there?

Not in the short period right now we treat the paper divisions hedging separately from the energy division given that there is such big discrepancy between the prices in the northern southern part of Sweden. If they go back together again then we will look upon it as internal hedging again but until further notice we'll treat them as two separate positions.

Right and finally for me also on the renewable energy side if you can say something about new projects how does the project pipeline look for you?

The pipeline looks interesting but we are as always waiting for environmental permits and are totally dependent on that. I will come back to that when we have it.

Okay okay thank you very much.

The next question comes on Harry Taitonen from Nordia please go ahead.

Yes hi good morning. Well continuing from Christian really on the pipeline I was thinking that with this cash flow I mean it's time to start thinking how you use it and are there any investment projects that could be speeded up and I would imagine that permitting would be picking up in this sort of environment but are you seeing any of that? So the question is about like the cash flow and cash allocation between projects and something else.

I take the first one unfortunately it's not in our hands when we have the environmental permits. If it would have been we would have been doing things at the quicker and faster pace absolutely and we are awaiting an environmental permit for a wind farm next door to the Blueberg sliden but we don't have it so not yet and what should we do with the money in general?

Right now we're paying down debt, the very modest debt that we have and we're in no hurry to correct that situation. We're enjoying the situation right now.

Yeah no wonder. The other question if I may just on the paperboard delivery volumes and I mean it's flat quarter on quarter maybe a bit sort of low. I mean how do you see the volume development sort of for the year there's going to be less maintenance in it so just kind of reiterate the volume outlook.

We have one big maintenance shut at Iggesund mill in the fourth quarter except for that I tend to agree a bit yes we would have liked volumes to be a little bit higher and I think they could be as well.

How much would you say that when things are

kind of running? In this kind of market Harry the deliveries are determined by how much we produce. It's not that we have a very long order book so it's more how well production is going that will determine the delivery levels.

We have nothing in stock it's all delivered.

Yeah exactly what was it the turbine that was taking some if one thinks of the total delivery volume is that the reason why?

No it has not have any impact it's more these kind of normal disturbances that you can have from time to time in a bone mill. It's a complicated product.

Yeah yeah yeah understood many thanks. Thank you.

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