Holmen AB (publ)

Good morning everybody and welcome to the interim report presentation for the Holmen Group. My name is Henrik and together with me I have as usual Anders and we are going to go through the presentation and after that we are happy to take any questions you might have. First of all, Despite quite challenging economic situation in general and also soft market conditions, we were able to perform a really good result also in the third quarter, which we're really happy about. And we will come back to a bit more details when it comes to different business areas as usual. But just a reminder when it comes to our balance sheet. Today, if you look at the forest and energy, it actually makes up to some 80% of the balance sheet. And then we have during so far this year, we have distributed quite a lot of money through an ordinary and extra dividend. We also bought back shares. And we have invested actually quite a lot in our industry as well. So let's go into the different business areas, starting off with forest. Or not so much the forest, maybe more the wood market as it is right now. And what we see is a couple of phenomena, first of all. And if we start with timber or saw logs for the sawmill industry. First of all, Sweden and the Nordics is normally the place to go to to find or to have access to raw material. Right now, we have the feeling that... Or feeling, we see that... The sawmills in Sweden, they are producing as much as they can, but they cannot really get hold of enough timber to run at 100% utilization rate. And that's something we normally do not see. When I said that normally you have access to fiber, we also saw other people coming in and investing in Sweden, like foreign investments, both when it comes to a couple of different sawmill companies in Sweden. and on the timber side there is pressure it's not easy to get hold of the timber if you look at the pulp side however it's not as tight on the other side on the other hand it's a lot of new capacity coming We have Östrand, we have Obola, we have the Chemimil, we have Russia being out of play for the moment. And that all together, even though it's not as tight as the timber situation, we see this as a structural challenge going forward. You can look at the prices and you see that they've been going up also during the third quarter. It was pressure on prices upwards. And where we are right now, we are roughly 30% higher than the long-term trend. But if you look at it from a 20-year perspective, I think we are more in line with inflation on this. And higher revenues from the forest means normally it translates into a better result also for the forest divisions.

Yes, indeed it does. The profits go directly. All the costs have increased a bit. We now earn some 100 million per quarter more than we did just two years ago, thanks to the quite steep price inflation. This year we have not had any forestry sales, which we had in the past years. That's why the step up in earnings is lower than this 100 million SEC. What you could note is that Q2 is normally a seasonally strong quarter from a harvesting perspective and it goes down in Q3 while we have been able to lift our profits in Q3 and that's thanks to us lifting log prices but actually we have been able to increase pulpwood prices to our external customers more despite as Henrik mentioned that this market is a bit more balanced right now. But people are prepared to pay more for the pulpboard to be able to run their mills when they can.

Exactly. Thank you. I didn't mention that we have a feeling that most of the customers we have, they never give up any positions, even though the market is not as tight as the timber market. Okay, moving on to paperboard. What we experience right now is demand down some 20%, which is something we are not used to see. It's destocking amongst customers or end users, but it's also, I guess, for most players, quite high stocks also on the production side. This is something that we... The big question for us is to understand the underlying demand and what the underlying demand will be going forward in a bit longer perspective. Right now it's down quite a lot and it's affecting everybody, also us. We are not running at full utilization rate. We take some market-related downtime, which has an effect also on demand. Sometimes on efficiency in the mills. And the question is, if we go back some time, we saw that the demand increase was roughly 1 to 2% per year. And then during the pandemic, most people thought, well, maybe 2 to 3, maybe 4% is the new normal. Now it's very difficult to know exactly what it will be. And after having coming down some 20 percent, of course, it will bounce back. But we will see a bit later on what the real new underlying demand will be. If you look at the pricing situation in the market, remember that when it comes to our products, especially the solid bleach board, it's an odd product going a bit different than the rest of the products in the market. We saw that, for example, Whiteland Shift, Craftliner, Testliner went up a lot. During the pandemic and at the end of it, we did not increase prices as much. And when we look at the situation right now where there is some pressure, the same goes for especially solid bleach board and to some extent also fallen box board, that it's not moving as much. Our prices are largely stable. Also remembering that the cost pressure is there. It's not the same cost as before. We have both the cost for pulpwood. We also see that chemicals, they are not really coming down. Not much, at least. A little bit, but not that much. So, not running full, Anders, means... It translates...

to a lower profit. If we compare to Q2, we had a maintenance stop in Q2. In Q3, we have seasonally lower costs, some 40 million SEC lower costs due to the holiday period. What you can see if we compare a year ago, we have increased prices, as Henrik mentioned, but they actually have not fully compensated for the higher chemical costs and the higher wood costs. Chemical costs are coming down a bit, but not that much, while pulp wood still is becoming more expensive. And then in this specific business, you get quite poor efficiency in the machines when you can't really run them the way you want them. And that... is impacting profitability and, of course, loss of volume in this part of the cycle. It does.

Okay, paper. Also here, it's a challenging market situation, of course, because the supply-demand balance is not very good. On the other hand, we have been doing really well. We have been taking some market shares in Europe, and we have added on some sales also outside Europe, which has helped the result in the third quarter. When you look at the price graphs, and this is official statistics for both uncoated magazine papers, but also for pulp, we do recognize roughly that movement when it comes to us as well. However, we did not go up as much as it looks like here when you look at statistics, depending on that we have a slightly different product mix than only uncoated magazine. And, well, we will see where the pulp is going. Another thing which is really important for this market, even though the capacity utilization rate is low, the market balance is not really there, it has become a lot more expensive to produce. And when we look at... The continent versus where we are with our setup of our fibers and Swedish electricity prices, we do see that, well, it is more expensive to produce on the continent. And that has for sure also contributed to a very good result and some kind of a break in the system when it comes to pricing.

There is strong deliveries that Henrik mentioned, both in Europe, which partly is a seasonal uptick, but we've also been able to sell volumes outside Europe, good products to good customers at good margins. That has actually helped the third quarter result, as has a seasonally low personnel cost and maintenance cost, some 60 million lower than normal in third quarter, which is sort of the usual pattern. We see somewhat increasing electricity prices due to the structure of our hedges, but you can note that actually third quarter result, we didn't have any help at all from electricity hedges. And actually, if you look at Q2 and Q3 combined, it's very marginal help from hedges in our profits right now.

Yeah. What products? Well... Also here, it's a bit challenging. If you look at the different areas where we do business, first of all, Europe, demand is not very good. And there is a bit of price pressure in Europe. In the U.S., it's not bad, but it's not really taking off. And when it comes to volumes, at least in Middle East, Northern Africa, Far East, it's holding up a bit better. And when we discussed the wood market, I didn't mention, but the sawmills in Sweden are running as much as they can. We said that, but of course it has to do with the weak Swedish krona. But also that the sawmills in Sweden, they have more or less unchanged cost because they get well paid for the wood chips, but also for the byproducts being sold to the bioproducts industry. especially biofuels. And that has made the Swedish sawmills having fairly good cost position. And you can see on this graph also when it comes to pricing that you see the difference where the price is today compared to where it historically was if you take into consideration the depreciation of the Swedish krona. The question is, it's not only about demand, because demand is not so good. It's also supply. And you see a number of sawmills now running in negative cash flow. We talked about a situation in Sweden where... We do not have enough access to timber, and you have Russia out of play, and you have some difficulties in some other parts of the world, like Canada, with the weather, infestation, etc. So it's a challenging situation. Demand is not good. Supply could change, but not right now as we feel it. However, we do believe in this product. It makes sense to produce wood products as an alternative to concrete and steel, not the least when now the EU is taking another step to going towards a green transition and CBAM is slowly coming into place, which makes concrete and steel a bit more expensive in the future. Anders, bad demand or not as good at least?

Well, as you mentioned, a weak market, but we have been able to deliver what we have produced based on the logs that we can get hold of. In third quarter, prices eroded somewhat. It's not a big decline, but actually the big effect, the big impact is that we have been forced to sell it to markets. to markets that don't pay that well as our normal markets. But we have inventories under control. But of course, we're not happy with the profit level. But you have to take into consideration that the market conditions are very weak as we speak.

Yeah. They are. Renewable energy, or should we say rainable energy, maybe in this quarter. If you look at electricity prices... And you look at Sweden and continental Europe or Germany in this graph, you can see that there is actually decoupling, especially lately. And the Swedish electricity prices, they have been lower. And it's been a lot of rain, a lot of water in our water reservoirs, which means that electricity prices have been pushed down during the third quarter. But we do not only sell the electrons, we also sell support services. And that has paid off also in the third quarter and is something we try to develop as we go on in the future and see what we can do more. It's mainly the hydropower, but actually we also use the paper mills and to some extent even the sawmills. We have at least a couple of them. And that helps quite a lot now when we look at the result, doesn't it?

Yes. If you think about it, where we have most of our production in northern part of Sweden, average prices in the market during Q3 has only been 20 euros. In Germany, they have been 100 euros. So it's a big price gap. due to a lot of rain in the Nordics. Nevertheless, we earn almost 70 million SEK. A normal third quarter and second quarter is 20 to 30 million. And if you have these price levels, maybe you don't even reach 20 or 30 million. But it's these new revenue streams that has been established that we actually sell support services that helps the profitability in the current market.

Thank you. Then just a reminder what kind of a company we are and how important it is when it comes to how we treat the forest, how we manage the forest. I think we've done it in a really good way, actually. Looking at three things, mainly, we've been able to... increase the amount of standing wood in the forest or doubled at the same time as we have been able to increase the harvest and not the least we also been able to not only reach a level where biodiversity is on on a really good level and actually the best in the world but also we have been able to to develop in a way that we have actually increased our biodiversity index during the last so some 20 30 years Our strategy to invest in renewable energy and wood products has paid off, not only financially, but also when it comes to our carbon footprint, which is positive, some 7 million tons. And if you look about that 7 million tons over the last few years, you can also see that step by step we have taken steps in the right direction. And that concludes our presentation, and we are happy to take on your questions. Thank you.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. First question from Robin Santavirta, Carnegie. Please go ahead.

Yes, good morning, and hello, everybody. Two questions I have. First of all, about pulpwood prices in Q3. Did they go up for you guys Q1Q? And if so, could you specify how much? and what is your expectations about pulper prices for you uh going forward in q4 and an early 2024 and we've seen the peak of prices already declining

If I start with that, as I mentioned, we increased selling prices of pulpwood to our external customers in Q3. It's still people are prepared to ensure that their mills are running full. And then, of course, we have the task of sourcing pulpwood to our own mills as well. And we buy quite a lot externally. We saw a slight increase in costs in Q3 compared to previous quarters. due to us increasing prices early periods, you have a six to nine months delay. That's sort of a slight increase ahead of us as well. It's not a step change, but it's a slight increase. And what will happen on market? As Henrik mentioned, there's a structural undersupply of wood in this market. And we don't believe pulp mills and board mills will take downtime forever. And when they start running full, there will... it's a good chance it will be or high risk that there will be a squeeze on this market again.

Remember that the pulp mills, they are not taking down time because they can't sell a pup. It's mainly that they are, to a large extent, integrated to products that's linked to the consumer market. And when that changes, that's what needs to be changed in order to make them run full again. But even though we find the market quite tight. And as I said, nobody's giving up their positions in the wood market right now, not even in pulpwood.

I understand. Thank you. Can I ask about the difference in development of standing timber and then the harvesting cost and the logistic cost to take that wood-drawn material to the mill site? I can see that the harvesting and logistic cost also have gone up over the past two years. Could we split that development going forward if oil price are... or interest rates start to come down so that the harvesting cost and transport cost could essentially start to decline while the standing team price would not.

If you add the harvest, the final felling, I'm not thinking about the thinnings, but the final felling, which is a majority of the harvesting cost, they represent 20% of the cost compared to the selling prices as they are today. And then you add logistics, another 10%. Of course, they have increased somewhat, but it's linked to salary inflation and fuel prices, if you simplify things. Okay. they have not risen in percentage-wise as much as selling prices have risen. We don't expect salary costs to go down, so you will not get tailwind from that, but we have reached much higher selling prices for wood that harvesting cost and logistics are not as important as they were in the past.

I understand. Thank you. And the second question I have is related to the paper segment. Now, again, excellent performance by you. And if I look at your ASP, so sales compared to the delivery volumes, I can see your ASP is almost 60% higher in Q3 compared to the average in 2019 and 2021. Then I can see your cost per tonne. only being up some just below 20% compared to those previous years. I can see sales prices are paper. So those statistics show they have come down quite significantly recently. What is the reason that your ASPs, is there something else you book in that revenue number other than pure sales? paper sales. And the same question about the cost. Is it related to energy?

No, the selling price, it's the revenues received from selling paper in our income statement. There's no change to that. And the cost side is costs. Of course, what we now have is We see higher wood costs, we see higher chemical costs. Electricity cost is where we are right now. Energy costs are maybe sideways. We have been able to take them down a bit by selling support services to the grid. But the numbers you see are the true numbers for our revenues and costs. But if you were to look at the continent and look at their cost side, you would see quite a substantial step up in cost for the continental producers. You have a steepening of the cost curve in this industry that is dramatic.

Remember also that now when the utilization rate is so low in general, there is a bigger or higher cost per ton produced. What we have done in the third quarter is that we have taken some market shares in Europe But we have also added on some other sales outside Europe, which has helped a bit when it comes to our cost position per ton.

I understand. Can I just check with this selling support services to the grid? Is that component a significant part of the earnings?

No, we treat it as a cost reduction, and it's not significant if you compare the development of the result. No, it's not significant. It's big numbers, but it's not significant in that context.

But the difference in energy prices is important, Robin, when it comes to the cost for producing. It's not only the utilization rate, but also what we see now, our situation, our cost position versus continental Europe.

For sure, but I can see statistics that prices have gone down quite significantly, and that is not really visible in your numbers to the same extent that

By and large, we followed the market pricing, but we didn't follow the peak prices you see at the indexes. We didn't sell at those peak prices. We were never at that peak level that you can see in the index, but we followed the general pattern.

All right, thank you. That explains a part of it. Thank you very much, guys. Thanks.

Thank you.

The next question from Cole Hathorn. Jefferies, please go ahead.

Morning. Thanks for taking my question. Maybe just actually a follow-up on Robin. I mean, when we think about that graphic paper division into the future here, I mean, if you've got kind of the structurally better energy prices potentially and the cost curve steepened, should we be thinking about this as, you know, you're not going to go back to that historic margin level, but you should probably be slightly better margins versus history, you'd hope. Just kind of like your thoughts on the longer term on the graphic paper side. Then on the pulp wood dynamics across the industry, I mean, I take your point that we do have a structural raw material under supply in the region, but If we think about the cost competitiveness of the Nordic region versus other places globally, how do you think this shakes out with higher wood costs potentially squeezing a bit of the downstream versus closures potentially needed to balance that market? Thank you.

Can I start with the first question? I think you point out an important thing. Has the cost curve in paper steepened permanently? It very much boils down to the cost of energy in Sweden or Nordics compared to the cost of energy on the continent. And if you look at other players that want to build new green steel mills, they locate them in the Nordics because they think predominantly that energy prices is permanently lower in the Nordics compared to the continent. We do have a product where we sell electricity to the continent already today. We don't have to invest in new machines. And so we're taking advantage of that steepened cost curve today. There are things that point to that Nordics will structurally have a lower energy cost than the continent, and that could help in the long run our paper division.

And then it's not easy to understand what will be the development on the continent when it comes to how many machines will there be in a few years' time. And also access, if you do produce on recycled fibers, how much of the fibers you need to produce graphic papers, which is all newspapers and magazines, will there be in the market? And...

When you think about this as well, you can think that our energy division is actually hurt by this differentiation between the Nordics and Germany. And what we earn on paper, we lose on energy in relative terms. So different divisions win in different scenarios going forward. So there is an upside to energy if the cost differences evens out between Germany and Sweden. When you talk about the future of the forest industry in the Nordics, it's very difficult to answer such a question. But if you think that the valuable part of the forest and the reason why you plant a tree is that you are going to harvest it eight years later for it to become log, to be a building product, help the world to decarbonize, sawmills normally have a 5% to 10% EBITDA margin. and they survive on it. Pulp mills, I guess, would survive on five to 10% EBITDA margin as well, but they have normally had much a higher margin. So it's not a law of nature that you should have a very high margin on making pulp. So it's upside to pulp wood prices.

Did we lose them?

We'll take the next question from Lena Flarsson, SEB. Please go ahead, sir.

Thank you. Good morning, Henrik and Anders. I think I'll bring back the perspective a bit more to the short term, looking at the fourth quarter. And if you could just help us understand the cost bridge a bit better. So Q4 versus Q3 on variable costs, the maintenance cost bridge, and also if you could please repeat what you already said about seasonal costs if we compare Q4 and Q3.

The easier part is seasonal wise we had a 40 million reduction in paper board and 60 in paper and that should reverse into Q4 being headwind. Wood costs, it's not a material change. You see chemicals coming down a bit, wood cost maybe coming up a bit, but it's not material. Energy in paper division will come up somewhere in the region of 50 to 100 million sec versus Q3. And then we have the maintenance stop in our Iggison mill that we have guided should cost some 200 million sec in direct costs and loss of production volumes.

Great. Thank you very much. And then also maybe on On renewable energy and the new term outlook, how do you see the fourth quarter, the winter coming up? I guess a lot has changed since a year ago. Other things have not changed. If you could just please elaborate a bit on the outlook for the fourth quarter, including the support services that you discussed earlier.

I think if you start by what we said in the beginning when we discussed renewable energy was that we have a lot of water in the system. And then it depends, of course, on the weather in Sweden, as we have decoupled from Europe, as we saw. And as long as we have that, then normally the electricity prices are a bit lower. And support services... What can we expect?

It's a new, it's not one product, it's plenty of products and they are new, launched almost every quarter. We have seen quite a stable earnings profile on this. It's more that we have been able, especially in the paper division, to add more capacity into this market. and add revenues in that way. But definitely it's a service that is well needed in a more weather-driven electricity system.

And then we have the green certificates that contribute a little bit as well.

Right. But that's interesting what you just said. Price-wise, it has been fairly stable, but you're ramping up. Is that still progressing, let's say, in the year ahead?

Yes, the national grid operator needs to implement more products in order to stabilize this system. But of course you add supply in terms of batteries coming, giving some of the services. So it's very difficult to forecast how price will develop. For most of these products you bid every day on them. And either you get, you sell the service or you don't. So it's very difficult to assess the price development. But we can see that the revenue streams has increased over the last two years and it's an established service.

Great. Thanks for that.

The next question from Oskar Lindström, Danske Bank. Please go ahead, sir.

Yes, good morning. Oskar Lindström from Dalske Bank. Just a couple of questions from me. First off, on the forest, usually forest land transactions in Sweden happen during the second half of the year. What are you seeing so far in terms of forest land transaction and pricing in the areas where you have your forest land? That's my first question.

We don't have an update on it. We received the statistics, but it's a lag before we received the statistics because you have to go through them by external parties to take away housing and stuff like that in these statistics. So there's a lag on it. So I can't comment on the recent months. But we will be back in the fourth quarter or after the fourth quarter.

All right. My second question is on the balance sheet. You had still very good cash flows or good cash flows in this quarter. I think net debt to equity is just 5%. What are you thinking about capital allocation in coming years? What levels and segments? You don't really have any big CapEx projects in the pipeline. You have a few which are undecided so far. Do you expect to have more projects than what you have talked about so far coming in?

You know, we have a pipeline of what we believe are interesting projects when it comes to wind power. But we have to evaluate carefully, especially in these times, before we take investment decisions. And that we will come back to. We have Blister Liden, which we have talked about, which we are looking at right now. We'll see what the figures simply look at and also to try to understand what the energy market will be like in the future. That's one part. And then we have said that we will slowly increase the capacity of making more board out of the pulp we have available at the Iggesund mill. But that will be over a five year period where we will increase investments slightly, not that much.

I think we have been quite generous on distributing back money to the shareholders. 7% of our equity we have distributed back to the shareholders during the first nine months this year. And that's on the back that we have had very good strong cash flow, not the least from paper, and every krona counts. And At the end of the day, we will distribute it back to the shareholders that we don't see need to support the business development.

All right, thank you.

The next question from Martin Melby, ABG. Please go ahead, sir.

Yes, good morning. Coming back to this discussion about the steepening on the cost curve. Has prices come down to the marginal cost of production for paper and cardboard, or is that yet to come?

Not for us.

It's a relevant question, Martin, but you should ask it to somebody else that have assets with high costs. But there are assets being closed, modern assets that are in the wrong location, which gives you an indication that at least part of the assets are at or below cash cost.

I think a lot of the... The discussions we hear and what we see in the market is actually coming back to the energy situation in different countries. And then, of course, it's the fiber also. If you look at the graphic papers again, it's our idea of using Swedish electrons, Swedish electricity prices together with fresh fibers. We believe that works, but of course we have to follow what happens in the market. And there is a quite big difference, especially on the energy side now, as compared to continental Europe.

And then I think you gave a comment about paper being better in Q4. What was the key reason for that? 50 to 100 million better on paper and energy?

No, then I expressed myself wrongly. We have headwind on energy costs for paper in Q4, between 50 and 100 million SEC.

Okay, thank you.

As a reminder, if you wish to register for questions, please press star and 1 on your telephone. We have a follow-up question from Cole Hedhorn. Jeffries, please go ahead, sir.

Thanks for taking the follow-up. Apologies, I was cut off earlier. I just wanted to follow up on the answer there. I wanted to ask if we do start to see the construction markets come back, hopefully towards the back half of next year, once it's 2025, What does that mean for wood costs to the wider region? Will wood chips increase and we see a lower ultimate cost to the pulp and your paperboard assets? How do you think about that missing element of your raw materials from the sawmill wood chips?

If the construction market recovers, the key question is how much can other countries step up and come back, gear up in production? What price lift is needed for selling prices for timber for them to come back into a normal production state? And then we're a bit back to you have a scarcity of forestry raw material in Canada. You have it in continental Europe. How will the sawmills be able to meet a growing demand for construction materials? The sawmills are running in Sweden as long as they can get hold of logs. So it's sort of nobody standing still because they take market downtime in sawmills. It's more a raw material question. It's difficult to get hold of raw material everywhere.

And then you have Russia, which is being out of the market for the moment, at least in the Western world.

Thank you.

For any further questions, please press star and one on your telephone. Gentlemen, there are no more questions at this time.

All right. Thank you very much, Dan, for interesting questions and a good discussion. And see you soon again. Thank you. Bye bye.