Holmen AB (publ)

Good morning, everybody, and welcome to the year-end report presentation for Holmen. We are the usual suspects. It's Anders Jernhall and myself, Henrik Sjölund. And we do, as always, we go through the presentation, and then we're happy to take any questions you have. But let's start with a comment about 2023 and the last quarter. Well, it's another really good performance and result if you look at the total year, despite some challenging market conditions during the year. Especially in the fourth quarter, we felt that market conditions were a bit tougher and also a rather big maintenance stop in the bore division. In those times, it's a nice feeling to have stable earnings, not least from our forest division and in the fourth quarter also hydropower, which we will come back to a bit later. Given the good performance during 2023 in our strong financial position, the board of directors in Holmen have proposed to the annual general meeting to increase the ordinary dividend from 8 to 8.50 and also to give an extra dividend of SEK 3. If we look just shortly on our financial position, in 2023, we have not only paid an ordinary dividend, an extra dividend, we bought back shares for a bit over a billion SEK. We also invested a bit over one and a half billion SEK in our industry. And still we have a net debt situation where we have less than two billion SEK of net debt. So the situation is very strong. And let's move into our business areas then. And starting off with our forest division. And a few words about the wood market. And I think we have shown this slide for a number of quarters now, Anders. And the situation is a bit the same as before, where prices are moving up. But in the fourth quarter, we do see that saw log prices are still increasing. And just a few number of days ago, we saw an announcement of another price increase in southern Sweden. But if you look at the pulpwood market, maybe it's more correct to say that pulpwood prices were more or less stable in the fourth quarter. If we then take a look at can the industry really afford those prices we have right now? Well, if we look at the sawmill operators and we take the market price for wood products net or less what sawmills pay for saw logs, we see that the margin left is more or less on line with what it has been historically. On the other hand, if we look at pulp mills and the structural change and what has happened in the pulp mill industry during a number of years and the price for pulp less the cost for pulp wood, we see that there is actually some margin left. They could pay even more for the pulp wood. Also looking at prices, where they are now, and if we go back some 20 years, we can see that prices have actually increased, not only in line with inflation, but a bit more than inflation over the last 20 years. So higher prices, Anders, that normally means more money when it comes to our forest division.

That's correct, Henrik. Over the last year, the higher prices have translated into a roughly 100 million SEC pickup in profit levels per quarter. And if we go back as long as Henrik did 20 years ago, the cash flow from the forest are more than double that they were 20 years ago. And of course, this higher price level have supported the transaction prices for forest properties in the market. And in our case, the value of our forest assets based on the forest transactions have increased another 8% to 56 billion. And since we introduced this market-based valuation method end of 2019, the value has increased by 15 billion SEC. And to make ourselves comfortable with the valuation we have in our books, we already at the start of 2019 asked an external valuation firm to travel through all our forest holdings and do an assessment of the market value in each district where we have our forests. So they have over a five-year period. traveled through the forest, looked at the quality of the forest, the forest roads, closeness to forest industry, and looked at the local market prices in each individual spot. And they have made an assessment of the value, which normally every year has arrived at a value a few percentage points above the value we have in our books. Last year, actually, for the area they researched, they arrived at a 20% higher value, but that was because in 2022, prices were a bit inflated in Sweden. Looking at our method, which we think is a good method, we have three years worth of statistics and transaction prices, which gives stability to our pricing. If you compare our three-year average, It's still below if you only would look at the last 12 months transactions. So if you look at the last 12 months transactions, which most market participants or the statistics that are published look at, that gives a higher value than the 56 billion SEC value we have in our balance sheet. Talking about forest transactions, it's actually a very transparent market in Sweden. We have a government agency, Lantmäteriet. They have developed a valuation model, and that's a DCF model, discounted cash flow model. And that model is used by all the market participants, buyers, sellers, and brokers. And the government agency also issues a guidance on the price levels in different parts of Sweden and the costs for different forestry management actions. Everybody inputs these data into this model and then they put in the price they are prepared to pay for the forest property and they get the real yield in return from the model. And for 2023, that real yield on average compiled by this government agency was 2.6%. It's actually the highest yield when buying a forest property for the last 15 years. And as you can see from the graph that we show right now, the real yield on forest properties in Sweden never followed nominal yields, nominal government bond yields down. They've rather been quite stable. And if you had the 2.6% real yield expectation for a forest property with the information Henrik gave you on a 1.5% price increase in real terms over the last 20 years, well, you could expect a 4% real yield when buying a forest property today. That's not bad, Henrik. It feels like the forest could be even more expensive. Yes. And can you earn any more money rather than just harvesting?

Yeah, you're talking about the trees, but you can not only grow trees. As you know, you can also grow wind farms or windmills in the forest. But it all comes down to the possibility of getting environmental permits, as we have discussed quite many times standing here as well. Now we have two permits. And those permits would mean that we could increase our production by 40% of renewables. The first one is Blisterleden, which comes up for decision in the board during the first quarter, which could add on like 360 gigawatt hours. The question when it comes to windmills, I should say also that the other one, Stormelberget, would come up for decision roughly one year later. Everything we do in Holmen is almost a bet on the green transition in some way. Also, this is a bet that there will be a need for more green electricity in the future. And it makes sense to build it in the forest. As you said, it's not only the trees. You can actually combine trees and windmills in a very good way. It doesn't take... It's no effect on forestry itself by having windmills. The question is, which is being discussed a lot also in media these days, will there be too much of electricity in north of Sweden and not enough consumption? If you look at what the players have said themselves in terms of how much consumption will be added during the next, say, 10 years, it's a lot. That says that it should not be too much of excess capacity at the same time as there will also be a build-out of transmission capacity to other parts of Sweden. which means that the risk is not that high. And sooner or later, if green steel or hybrid wouldn't happen, I guess there will be other industries being interested in investing in some kind of industry projects where they need a lot of electricity as then prices will be cheaper for a while. But, Anders, this is wind, and in the fourth quarter, it wasn't much of wind. It was cold, and the weather was something different.

Yeah, up in the Nordics, it was cold. On the continent, actually, we had a very mild winter. We had very strong nuclear production in France, which pushed down prices on the continent to a... a lower level at the same time in the nordics very cold weather problems in the nuclear industry or nuclear production removed a lot of production in nordics and pushed up nordic electricity prices to the same level as on the continent and we use that to run our hydropower mills as you can see from the graph it was very low during the autumn we stored as much water as we could during the third quarter, held back production in the hydropower, and then we pushed full throttle ahead in the fourth quarter producing a lot, which gave a good profitability in the fourth quarter, especially from the hydropower. And as you can see from this graph, hydropower is fantastic. You can time the production to when the market needs it. You get paid for stabilizing the grid and you get paid for adding green energy to the market. On average, the last two years, we have earned 200 sec per megawatt hour more than if we had produced stable throughout the quarter.

Thank you. Hydropower is not bad. Changing to wood products, which is more of a roller coaster and hydropower is quite more stable, to be honest. We have said many times that there is a lot of interest in building in wood. But as you know, especially in Sweden, and this is Sweden, the housing market is really, really slow. But what we can see is that The interest for using wooden frames in different kind of building has increased and wooden frames have taken market shares. We also see that during times when there is not so much of houses and homes being built out of wood because the market is simply slow and interest rates are high, we see industry and storage buildings taking market shares and adding up for quite substantial business for us. This is Sweden. It's interesting to note, but in general, of course, the construction cycle is really weak at the moment, which means that we have seen prices going down a bit. But we said yesterday, Anders, that actually we are almost on exactly the same spot in the fourth quarter 2023 as we were in 2022. And then we know that in the spring, normally things pick up a bit and we are a bit more positive. And after the summer, we are normally a bit negative. What we know now, at least, is that we have come one year further or closer to the time when things will really pick up. When it comes, difficult to say. Price pressure means not so easy to make money.

No, and you actually stole my line. We actually have the same price levels that we had Q4 2022. We have the same net cost levels. Of course, log costs are higher, but we receive more revenue from the ships and the biofuels that we send for energy production. So the spread when sawing a plank is the same as it was a year ago. And in the fourth quarter, which is the seasonally weakest quarter, it's not enough to pay all the bills. In our case, we had a maintenance stop, or not a maintenance stop, an investment stop at our Iggesson sawmill that took away some 30 million SEK from the profit. But we are, as you mentioned, Henrik, one year closer to a turnaround in the market.

We are, but not easy to know exactly when that happens. And then something, today is actually the first day of the work to merge two business areas into one. We will, as of today, merge our board division, paper board and paper division into one business area that we will call Holman Board and Paper. It's a logic step for us to gather the competence we have within the process industry in one business area, but it's also a structural move to safeguard our long-term competitiveness in Holmen and our industries. At the same time as we do this, we have also appointed Lars Lundin to lead the organization in the new Holmen board and paper. He was before in charge of our paper divisions. I'm sure we will come back about what this means, but let's say a few words about the market situation for first of all, sorry, first of all, the board market. It's been a rather tough year. Demand in Europe is down a bit more than 20%. I'm quite sure that the real demand is not down 20%, maybe half of it. And there has been a lot of destocking during the year. The feeling we have right now is that, well, the destocking is most probably over, at least relatively. But in discussions with our customers, most of it should be in the past. And when we look at our own order book, we can see that, well, things are picking up a bit. But it's not easy to know exactly where we are because the overall demand is not that great. Prices, well, if you look at folding box board, sure, there is some price pressure in the market. Less so when you look into our niche product, solid bleach board that we produce at Iggesund Mill. But clearly, it has been quite a lot of announcements of new capacity in the past when things were great. And it will take some time before we have absorbed that in the market. If we then look at our paper division, you know there is structural decline in the market. We take constantly market share, but still it's a challenge for us. We've done it well. We are really happy that we do so well in some segments, like the book segment, for example. Here, well, it's a relative cost position, and you know that when prices were skyrocketing, it was based on really high energy prices on the continent, but also quite expensive recycled fibers for the ones producing on the continent. Our concept is our fresh fibers in Sweden together with fossil free energy, electricity in Sweden. It's a good concept, but as energy is a bit cheaper and recycled fibers are a bit cheaper, it's getting a little bit tighter and there has been room for some price decreases in the market. Also, we have felt that still, Anders, we are not doing bad.

Not in paper, but maybe in board. Yes. In board, we, of course, were hit by the maintenance stop that we had every year at the Iggesund mill. It cost us some 180 million SEK. Most of it direct cost. Some is that we took production downtime. And it's a weak market now with the deliveries we had this fourth quarter. Underlying operating profit is... only slightly positive. We need higher operating rates both to get revenues, but also this part of the business is very sensitive in terms of consumption rates actually goes up quite a lot when you can't run your machines in an efficient manner. Looking at the paper, it's still impressive earnings. We have a drop, of course, of 200 million SEK quarter over quarter. One third is due to prices declining. One third is to energy costs going up. And one third is seasonally due to higher personnel costs in Q4. And we collect all our second half maintenance in the fourth quarter rather than none in the third quarter. But still profitability increasing. for the fourth quarter at a very good level.

Shall we say something about how we will report in the future maybe?

Yes, from the first quarter we will report the board and paper operations together and the three other segments will be the forestry, the hydro and wind and the wood products segment.

Thank you. All right. I think most of you have followed the article in Dagens Industri in Sweden when von Leyen was here to try to learn a little bit more, understand how we do forestry in Sweden and how important the forest is. To some extent, actually, that was a success. For the first time, almost, we hear also from Brussels that the forest is extremely important. And what we have done over the years when we have increased the amount of wood standing in the forest at the same time as we've been able to actually do better than most in the world when it comes to preserving and enhancing biodiversity has been knowledge, which is really good news. We will see what comes after that, but we take it as a really good step in the right direction. And in our case, our business model is easy. We sometimes say we grow houses, but what we do is, of course, we always focus on making sure that 80 to 100 years later, we should harvest as much timber or saw logs as possible and also take care of the rest. And by doing that and also do it in a sustainable way, we create a lot of climate benefit. Closing 2023, the climate benefit has increased somewhat from 7.2 to 7.5 million tonnes. All right, that's it. Thank you very much. We're happy to take any questions you might have.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch on 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. Our first question comes from Robin Santavirta from Carnegie. Please go ahead.

Yes, thank you very much and good morning, everybody. I have a few questions. First, they're related to the paper and paper board segments. Could you specify a bit what the outlook regarding sales prices for this year is in these two segments? You have surprisingly good profitability and ASP still in paper, especially we have seen prices decline in the market. And in paper board, you said there's some price pressure, but what are we talking about? What is the difference between FBB and SBS?

I think if we say a few words about paper first, utilization rate in the market is so bad. It's between, say, high 50s to low 70s. Normally, you need like 90 to have a good balance. It's not easy to understand exactly what that means for how people act in the market, but we can see that some kind of a handbrake or break we have by just having such ridiculous numbers when it comes to utilization rate. I think a lot comes down to cost. When you have a low utilization rate, you have a really high fixed cost per ton. But it doesn't make any sense to go for extra volumes with a lower price to try to cover the cost, because maybe it will not work. Very difficult to know exactly where it will go, but for sure there has been some price pressure in the paper market and decreased prices, but no collapse. prices are still on a level which we would have been extremely happy to have a few years ago on the other hand when pulp prices and some chemicals etc were on the lower level board prices i don't know if you want to comment

This market works as it usually does. It moves very slowly. A weak market puts pressure on people, but you rarely have these kind of radical movements. We can't escape the general price pressure in the market, but it's nothing happening that hasn't happened before. It works like it has always been.

We also have a mixture of long-term contracts and shorter-term contracts. And obviously, long-term contracts give some kind of stability.

Could you specify what is the average time length, the time span of those price agreements?

We have a bucket with long-term contracts and a bucket with until further notice contracts. And maybe the share is 50-50.

In paper, in general, they are short.

Sure. I was wondering about what you said about the cost per tonne. I understand if capacity utilization is low, then the cost per tonne is high. But is there also an element of higher energy prices in continental Europe that has kept the paper, especially prices, quite high? And now we have seen energy prices decline in continental Europe. Is that then in a way a risk that

lower energy price in continental europe could push down the paper board and especially paper prices i think you are right i mean that's part of what we have seen the the utilization rate or capacity utilization rate was not great even when prices were skyrocketing it was based on cost I said that we take some market shares. Remember also that we are running with a higher utilization rate in Holmen. If the average is really low, we are at least mid-80s or higher.

Right, thanks. And the last question I have is also related to the outlook, and that is on wood products. What are you seeing at the moment? Seasonally, of course, tough time now during the winter, Do you see a pickup in demand in any of your key areas? What do you see in terms of pricing going forward to Q1 and Q2?

We are entering into phase a few months from now, which is a seasonally strong period where we always normally have an uptick. There is very thin inventory levels throughout the market because nobody is expecting that the construction market will develop strongly. And that's all guidance we can give on.

That's why we said it looks like last year, because exactly that happened in 2023. That is true.

Thank you very much. Thank you.

Our next question comes from Oskar Lindström with Danske Bank. Please go ahead.

Yes. Good morning, everyone. Three questions for me. The first one is on the merger of paper and paper board divisions. Should we expect any costs now initially for this merger and any synergies a little bit longer term? So that's my first question. Should I go ahead with the other ones?

We can answer.

No, you should not expect any special costs on this. And of course, over time we will extract synergies, but that's not the goal with the movement that we're making.

Right, good. Moving on to looking ahead a little bit more here, investment opportunities going forward. As you said, you have a very strong balance sheet and we're hopefully at the trough of the cycle now and usually that's a good time to make investments. What's the status of the two bigger projects that you have on the industrial side, the Iggesund volume expansion and the potential yet undecided Rundvik sawmill investment. Is there anything else you see in terms of investment opportunities for you in your industrial operations?

Oskar, I mentioned that we have two environmental permits to build wind. That's quite a lot of money, and we will see if we take the decision, but the first one will come up for decision in the board during the first quarter, which is roughly one and a half billion SEK.

And we have two developing investments going on. We're rebuilding a paper machine in order to both strengthen our book paper position, but also to enter the transport packaging market. And then we have the rebuild of the Iggesund sawmill, which will reposition that sawmill into more of a construction market in addition to the joinery industry. The other projects we are going through step by step are Regusund investments. In this part of the market or the face of the market, it's not so much focus on volume rather than more than on quality. And on Rundvik, we'll have to come back on that.

All right. And then my final question is on... forest land transaction prices. You mentioned how much you revalue your forests compared to last year. Of course, that's on a three-year trailing average. What would you say was the price change in the regions where you have your forests year on year? If possible, what's your feeling for the market looking into 2024?

First of all, there is not one market price. There's different methods of calculating the market price. Personally, I think our method is better than just looking at only one year's transactions. We look at three years' transactions, and we have different sources. So... But if you only use one year transactions, as I mentioned, you arrive at a higher number than we have when we use three years transactions. So we're not using the average market price for three years. We're using three years transactions to calculate the market price, which gives more stability and over time a better way of measuring where the market price is. didn't answer all your questions, but that's it.

Yeah, on your feeling for the market for 2024.

I can't comment upon that. If you look at the real yield when you buy a forest property, you have not gotten as much money as you have for the last 15 years if you put your money in and buy a forest property. That's maybe a good entry point. And the statistics at Henrik showed that over the last 20 years you have received one and a half percent real price inflation. Remember, that's in a 20-year period where the paper industry more or less have disappeared. And we are entering a 20-year period when everybody wants to build in wood. Steel concrete will be more expensive. And also the green steel mills, well, they might need pulpwood to become truly green. So there is a lot of demand for this rare and limited resource that we own. and limited not only in Sweden.

Good. All right. Thank you.

As a reminder, if you wish to register for a question, you may press star N1. Our next question comes from Linus Larsson from SEB. Please go ahead.

Thank you very much, and good morning, everyone. if we could maybe spend a couple more minutes on paperboard, just understand what happened in the fourth quarter. If I look at volumes, they were, you know, notwithstanding the maintenance impact, but I mean, shipments were the lowest since 2001. Exactly what's the explanation for that? And what should we expect for the for the first quarter and also on paper board pricing. We've touched upon it already, but just if we could spend a bit more time on that. I think it seems like the realized price declined sequentially by some 4% in the fourth quarter. Are we seeing an accelerating or decelerating price trend into the first quarter, please?

Where should we start?

You're right. And the maintenance stop did not affect the deliveries. It's only affected the production. And the deliveries was very weak. Fourth quarter is always seasonally weaker quarter. You don't have deliveries in the last two weeks of December. That's partly explaining the soft patch we are in. If you compare to the market statistics in general, the market has dropped 20%. We're in Q4 down some 20%. It's a very weak quarter from a delivery perspective, but I don't think you should read too much into it. And on the average selling prices, that's a, you could say it's a combination of currency effects that we have our Orkinton mill, the Gisson mill. It doesn't really reflect a true underlying price decline for paper board. It's somewhat some prior pressure on it, but the prices is not down as much as you can read out from the average selling prices you calculate in the report.

But are you still expecting some further sequential price decline in paper board on average in the first compared to the fourth quarter? No.

The direction is not positive, but it's not the big movement we're seeing on the whole product portfolio that we have.

Okay, great. And then also on paperboard, if you could please update us on your maintenance schedule for 2024 and 2021. the impact of such maintenance.

We have our usual maintenance stop in the second half of 2024 in Iggesund. In the same magnitude as this year, roughly 200 million expectations. We don't have a maintenance stop at our working ton mill. We only have it every second year. So the next stop at the working ton mill will be first half of 2025.

Great. That's it for me. Thank you very much.

Thank you. Ladies and gentlemen, this was our last question.

All right. If no more questions, thank you very much for taking your time listening to us and good questions, and I look forward to see you soon again. Thank you.