Holmen AB (publ)

Good morning, everybody, and welcome to the interim report presentation for January-September for the Holmen Group. It's me, Henrik Sjölund, and Anders Jernhall, and we do the presentation together, and after that we take all the questions you hopefully have. But we know you have a busy day today, so let's get started. We were able in the third quarter to reach an operating profit over a little bit more than one billion SEK, which is, in our view, a good result, thanks to board and paper especially, and also despite a bit challenging market situations and actually lack of wood to some extent as well. Our industry, board paper and wood products, if you just take a look and see what we have done the last year, we have a return on capital employed of 16%. And over the last 10 years, we have been able to reach average 18%. And our financial position is strong. And remind ourselves that we, the last couple of years, we have been able to distribute back to shareholders through dividends and also share buyback program, including or mounting to 6 billion SEK. We have currently a net debt of 6% of equity or 3.5 billion SEK roughly. But let's go into our different business areas and starting with the forest or more the wood market in Sweden. We have discussed this quite a lot the last couple of years. And if you look at, say, the last two years at least, there hasn't really been enough raw material to feed the forest industry sector and the energy market as well, I should say. Same goes for the third quarter, where we again have seen increasing prices, saw logs and pulp wood, and we are now at the level which is record high, or 50% higher than three years ago. We are also in a situation, especially for saw logs, or for saw logs, I should say, where we see that prices in the northern parts of Sweden are on a different level than in the south of Sweden, where they are extremely high. I'll come back to that a bit when we discuss wood products. Higher prices on this.

Yeah, these high prices, of course, translate over time into high profits. We've seen the cash flow from the forestry activities increase by 60% the last three years. Q3, if we look at that isolated, that's always normally a quarter where we thin more and harvest less. And that was the case this year, which takes down the operating profit. But we also made the final harvesting a bit lower than before. than seasonally normal for Q3, which took down cash flow a bit, and we had more silviculture actions in our forestry, which consumed cash flow, and that's the reason why the operating profit is not really affected much by that, but the distribution between change in value and cash flow, where we have lower cash flow than normal in the third quarter due to more silviculture and less harvesting than normal. Back to you, Henrik.

Thank you. Renewable energy. We like hydropower and wind, but I think we had a bit of headwind in the third quarter. We had so low electricity prices, actually the lowest electricity prices in Sweden in the last 20 years. And the question is, how could that be? Well, at least amongst explanations, an important part of the explanation is that there were limitations in the transmission capacity from Sweden to other countries in the cables, other countries where electricity prices are higher than in Sweden. We could save a bit of water in our water reservoirs, but such low prices, Anders, it's not easy.

No, they were not sufficient to cover depreciation. And in addition to these low prices, to a large extent due to the fact that electricity was landlocked, Also, the revenue that we generated from support services went down in this quarter. That normally stabilizes our earnings, but they were quite small this quarter.

Back to you, Henrik. Changing over to wood products. Well, we discussed before that the log cost, especially in south of Sweden, has been very high in the third quarter, actually the last number of quarters. But now the difference is bigger than what we've ever seen before. If we then start by looking at the general market view, well, there is a weak construction cycle. And even though during the springtime we normally see that demand picks up a bit, it happened also this year, and with that prices came up a bit as well. But after that, now in the third quarter, we see that prices came down a bit again, and where we are right now, we see prices... Moving sideways at best, at the same time as we see that the log cost is going up, and especially for our sawmills in south of Sweden. And again, the difference is so big that it's really a challenge. to run the saw mills in the southern parts of Sweden. And also remember that what we do is, in the third quarter, we consumed saw logs that were harvested, say, six to eight months earlier. And when we buy saw logs today, we pay more than what we consumed in the third quarter. So it's a kind of a bet on that the wood products market will come back and with price increases, but we don't see it at the current moment. Tough headwind.

Definitely. When you look at the margin per log that we use, that's the same level as a year ago. So we're in the same starting point. Selling prices are a bit higher, log costs are a bit higher, but our volumes are a bit down. We don't run full in this kind of market, partly due to log constraints. And we're entering into a fourth quarter that is normally the weakest part of the year.

Correct. Moving to something which is at least makes us a bit more happy at the moment. Board and paper, a very good performance. Let's start with a few words about our board business. If we start with a general view of the market, you can see on the chart that we said last year there was a lot of destocking going on. That's over for sure. But you can also see on the moving 12 bar that we are not back to where we were a few years ago. At the same time as there is a bit more capacity in the market as well. However, saying that in the third quarter, we did really well in terms of production, productivity, also deliveries, and also a favorable mix, which we cannot expect to have every quarter. Prices, stable. When we look into our own order books, well, even though I just said that we did really well in the third quarter, at least at the current moment, it's not really enough to run absolutely full. So we'll see how that develops. we then move on to paper after a quite big drop in demand in 2023 so far this year paper demand has been more or less stable or moving sideways but you know in this market it's always some over capacity quite a lot actually we have done well also here we have been able again to put forward or move forward a bit in our market position when it comes to the niche products where we want to do more. And overall, a good quarter. But also here, when we look into our order books, it's a bit of a challenge to see that we'll be able to continue running on, not 100%, because we don't even aim at that, but roughly 90% is our aim. Also here, prices in the third quarter, and as we are today, they are more or less stable. Anders?

Almost getting tired of talking about the stellar performance from the paper division, and now actually it's combined with a very strong performance of the board part of this new division. As in the second quarter, half of the sales came from paper and half from board, and also they were equally weighted in contribution from EBIT, 50% from each part of this new combined business area. We commented in Q2 that we had a strong mix. Actually, it was even stronger in Q3. So it was a very strong achievement, both paper, but especially the board division enjoyed a strong mix and good volumes. On top of that, we had seasonally lower cost, 80 million sec normally lower than the previous quarter. And taking this seasonal lower cost and good production efficiency and a strong mix, it took us up to a very strong quarterly number.

Maybe reminding on the maintenance shut we have in the fourth quarter and also the rebuild currently going on.

Yes, as communicated previously, we're in the midst of rebuilding one of the paper machines at the barbecue mill in order to produce packaging paper. And we're taking the annual maintenance shutdown as we speak in Iggesund as well. Taken together, these are expected to impact profit in Q4 by 250 million SEK.

Thank you. That's all we have. We're happy to take on questions. Please.

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. The first question comes from the line of Ravi Ephrem, Citigroup. Please go ahead.

Thank you. So there's two questions. Firstly, on the board and paper, very good sort of results in this quarter. But looking forward to Q4, you know, calling out sort of demand for consumer paper board lower than normal in Europe for the third quarter. And during the third quarter, some of your peers have kind of called for even lower demand sequentially in the fourth quarter. And then on top of that, you've got the maintenance shutdowns basically impacting earnings by about 250 million. So would you say that basically the outlook for Q4 in this particular division could be kind of back to the levels that we saw in the second quarter in terms of operating performance. And then in terms of the wood products business, As you pointed out, kind of your log input prices are now rising, but you're not seeing that in your end products that you sell. Typically, what would be the lag between log prices and kind of the end product prices for your work products in terms of cost pass-through? Thank you.

Should we take the board and not the other one? Yes. You're right. We, as Holman, had very strong deliveries and mix, as I mentioned, in Q3. Actually, we had good deliveries and mix in Q2 as well. And as Henrik pointed out, Q4, the outlook is a bit more challenging, and there should be headwind for Q4 on top of the maintenance stops.

I think you have read the same information as we have, and we feel it, actually, that Luxury consumption, and we are a bit dependent on that with our very nice board, but it goes into that segment quite a lot, and it's not that easy. China is not consuming as they were before, and we are a bit dependent on that as well. When it comes to wood products and when we buy the saw logs and when we consume them, the lag is six to eight months roughly.

Thank you.

The next question comes from the line of Robin Santavirta. Carnegie, please go ahead.

Yes, good morning and thanks for taking my questions. In terms of the salt timber market, what are you seeing now in terms of demand going into Q4 and the winter? And also in terms of pricing, should we expect stable pricing despite the seasonal weakness given cost support or demand? Or is it the typical decline going into the winter? And the second question related to some timber is this, what you alluded to, the higher the increases still that we are seeing in log prices. I mean, are we now reaching the level where a lot of sawmills will need to stop producing in the south part of Sweden or even in the mid part of Sweden? How will this dynamic develop now this winter and in the spring in your view?

Good question. It's not easy to answer maybe. If we start just by what I said before when it comes to where we are right now in terms of pricing of wood products, I said we're moving sideways at best.

And the other question? It's an oversupplied market globally, but log costs are high everywhere. So everybody is struggling, and you have surely seen that even in the U.S. you're taking downtime where log costs are lower than in many other places. So it's a challenging market. When it comes to are people taking downtime in the southern part of Sweden, we don't see any signs on it. Actually, the production, if you can get hold of logs even at high prices – On the margin, it makes sense. But sawmills in the southern part of Sweden is heading for a loss at these price levels.

Now it's a bet on wood products prices coming up in not too distant future. But we don't see it yet.

Right. So maybe the first time point could be the seasonal high next year at earliest.

We need to see a change in the construction cycle. That's the best leading indicator for this market.

Thanks. And finally, we had a good discussion earlier in our seminar. I think you sort of alluded to the point that softwood log prices are high in Sweden and in the Nordics, but essentially they're not higher than what you can see in other parts of the world. Is that still the case at the moment? And does that also apply for pulp wood?

I can't really compare pulpwood, but you can look at the numbers of most people and we do the math. Sometimes we prepare them. You still have quite a good margin if you run a pulp mill in the Nordics. Normally, we don't see anybody stopping buying pulpwood because it's too expensive. You stop buying pulpwood because you can't sell the end product. So the Nordic producers, generally speaking, they can afford to pay these pulpwood prices, although they have, in percentage terms, increased quite a lot.

More challenging when it comes to saw log prices, of course. When we look at the statistics that we have available, then it looks like prices in Sweden today, well, slightly lower than in Germany, depending on where you are in Sweden, on line with Finland. And then it's a different ballgame, I guess, when we look at the United States.

Now you're mentioning and you're talking about soil logs. Soil logs, yes.

To the point is we need demand to get prices up. That's the key problem, essentially, not the demand. would draw material cost.

Yeah. You need to have a resurgent in construction activity.

I understand. Thank you very much.

The next question comes from the line of Lars Kjellberg. Stifel, please go ahead.

Thank you. Thanks for taking my question. So a couple of questions again on the wood side. Curious why you reduced harvesting considering the the wood pressures you're seeing and you call that even lack of wood. So curious why you reduced your harvest. And the other question, of course, that comes into mind is when sawmills starting to take down time as you come up doing two degree, what does that do to the pulpwood market again? Because of course a lot of chips are coming from the sawmills. So curious how to think about that. Um, And then you talked about good mixed benefits in the board business, which is interesting considering that you're more in the luxury segments, if you like, and that market has been particularly poor and potentially getting worse. So interesting to see what has happened in that market that's given you that benefit of a better mix.

Should I start with the harvesting? I understand, I agree with your question, but what we do actually, we have 100 teams working, machine teams working on harvesting, and we send them to our forest, half of the time and to other forests half of the time. This quarter, we send them more to other forests and harvest on other's land, more than normal. And in the summertime, they have to have vacation. It's more thinning and not as much final felling for structural reason in Q3 because sawmills take down time during the summer holidays. and they are driving the final felling. And then your second question, if sawmills start to take downtime, will that reduce available ships? As I mentioned, the statistics we see is that you produce as much as you can harvest in Sweden. So nobody takes downtime if you have logs. If you have logs. Yeah, that's more if you have logs.

And then it was the product mix or customer mix.

There are different luxury segments. There are different types of premium brand owners. You're right, and Henrik mentioned that sort of the luxury goods segments that has quite some headwind, and we see that, but we have other applications that's not targeted or affected by this ban on extreme luxury.

Got you. It's a question for our order book going forward.

Understood. So given what's happened generally to energy costs, I'm not sure if that's the same in the UK, but your green energy credits that you normally get, I suppose in Q4 in the UK, How should we think about that this year versus last year and sequentially?

What does it mean? Normally, the bulk of the energy credits we get throughout the year, and then there is a bonus paid out in the fourth quarter. This year, there's a forecast on this one. We don't have the final outcome. It's lower than normal. could be... It's lower than normal. That's all I can say.

Very well. Thank you.

The next question comes from the line of Gaurav Jain, Barclays. Please go ahead.

Hi. Thank you for taking my questions. Morning, Henrik. Morning, Anders. So one is on the fair value gain on forestry this quarter. it was higher than in the first two quarters. So is that expectation for the full year changing or how should we think about this gain in fair value in the forest segment?

Our fair value is determined. If we take out, if we, this quarter, we let more trees stand in our forest, means that we took out less from the bank account. And you can see it like that, which means that it take a step up in changing value because we took out less. And then we also put more money into the bank account by doing silviculture. So it's not a... the higher the level was higher than normal but this it's because we took out less in terms of logs and we'll put in more in in in silviculture actions that than we normally do in the third quarter right so in the fourth quarter like how should we think about this number like should it go back to the 160 170 number in one q and two q or this is It will definitely go down because we will revert to normal harvesting. And in the fourth quarter, there are very little silviculture activities. So it will go down, definitely.

Okay, sure. Thank you so much. My second question is on capital allocation. So look, you are, I think, the only company in the entire sector which does some share repurchases, which is very good. So how should we think about that? Now and going forward, because your leverage is still, you know, sub 1x. And in that context, can you also touch on your CapEx plans for this year and next year? And are you continuing, you know, with your plans to have a 3 billion kind of CapEx next year? Yeah, for sure.

Share buyback is one of the tools we have. We have had such a strong cash flow over the last few years. We've used extra dividends, and from time to time we have used share buybacks, which we have seen as a way of increasing the forest holding per share at a good price compared to the alternatives that we have available. And on CapEx... For this year, we will be a bit above, our forecast at least is a bit above 2 billion. And next year, we will have a high level. If we will reach 3 billion, we will have to come back on that.

Sure. Thank you so much. And my last question is on forest holdings. One of your peers is looking to sell a lot of their Swedish forest holdings. Is that a kind of asset you would be keen to look at?

We love forests and we love forests that we can manage and where we have two perspectives on it. The ownership of it, getting a good value addition over time. And we also have use of the wood that you can harvest from the forest to support our industrial operations. And that's two key aspects of owning forests.

Okay. I think I would have loved some more color on this, but I will leave it at that. Thank you so much.

The next question comes from the line of Christian Kopfer, Handelsbanken. Please go ahead.

All right. Thank you very much. Just a few follow-ups from my side. Firstly, a little bit on the sawmills. I understand that we are probably... should be pretty close to call it breaking point for the soul with how much higher costs they can take without prices coming up. But just touch a little bit on what you see on solar prices. Sorry if I missed it, by the way. But if you see solar prices coming up further here during the end of the year.

So far, Christian, we have not seen any change when it comes to the saw log prices. I mean, the trend just a week ago, roughly, Södra announced another price increase. So no change yet. Right. And then, OK. But in south of Sweden now.

It's an unusually large price difference within Sweden. They normally never persist, but right now it's almost a two-price market where southern part of Sweden is, as Henrik mentioned, in line with Germany and Finland, while the northern part of Sweden is a step below.

So do you think that... Is it still... transportation costs are so or so high or is it uh or is it um that that it is tough to find transportation opportunities you know to to get to get down the price most probably you're right it's probably a mix of different reasons but logistics resources is absolutely part of the game

And also, you need people to be there, meet people, buying the plots, etc. It's not done like that. It takes some time. But over time, normally, it shouldn't be that big differences between the different parts of the country.

Yeah. And then for, I think you talked a little bit about it, about frequency support services and or ancillary services, what it's called, that, you know, those kind of prices in the market have come down quite a lot. And I just saw a report just recently that we are more or less, not at zero, but, you know, at quite low levels, at least at the chart that I looked. So have you seen the effect fully on that in your numbers, or would you expect... further effect to come from lower prices from these kind of services.

In our energy division, we have seen the full effect of that in the third quarter. If that's temporary, we have had an extraordinary situation with the landlocked energy situation. We have more downtime than normal this part of the year, so a lot of energy has been landlocked in Sweden, if that is part of the explanation, or if we do have a new level of earnings from auxiliary services for hydropower remains to be seen.

Yeah, okay. Yeah, that's fair enough. But do you have some, you get some, about this previous day, I think I got some tailwind from these kinds of services in the paper making.

Yes, but our business is a bit unique there, and we provide services that others can't really do, and batteries can't compete. So we still provide value to the grid that they can't get from other actors.

You saw a headwind from that as well, even though the board and paper showed a really strong result.

No, not yet.

not yet okay okay so that is still become or how do you see that we know we it's very it's a market that didn't exist three years ago very difficult to understand where it's moving we uh we change our product palette all the time we don't provide the same services that we did a year ago and and the our operations uh are quite nimble and able to move into parts where the grid operators actually do really need the services and very few can deliver them. If other people will come in, we don't know.

Thank you very much.

The next question comes from the line of Pellev Mittal, Barclays. Please go ahead.

Good morning. So a question on the board and paper segment. You mentioned that destocking is now over. We know some of your peers have said that the market is weakening and your comments also suggest that. We are seeing a lot of SVB capacity coming online over the next 12 months or so. How do you think that impacts the market and you next year?

To start with, you're right. This talking we saw last year and this year, it's over and things are, demand is better, but it's not back to where it was a couple of years ago. We have had new capacity coming in. This is not the first time. I think it's more for us to understand how much. And the big overcapacity is actually in Asia. It's not here, but we are dependent on exporting to Asia some of our business. That's clear. But exactly what it will mean, it's impossible to say as we are also in a niche where it's not so easy to get into. It took us some maybe 20 years to qualify. New capacity normally do not directly compete with us, but could be indirectly, of course. And that's still to be seen. It's about quality and more.

Historically, we have had this situation before that it comes a lot of new capacity at once, 20-25%. We saw that 2016-17. What happened then was prices didn't move, either direction a bit of a pressure on pricing this is a consumer board is a very high-end product it's not a commodity and you have a very strong relationship with your customers very difficult to switch but on the other hand in a bit oversupplied market and that was the case then as well very difficult to pass on the cost increases to your your end customers like wood cost for example yeah And if you can't get enough volumes, normally your productivity suffers and it's more that variable cost goes up. And that's normally the translation mechanism in consumer board.

Sure, thank you.

The next question comes from the line of James Perry, Citigroup. Please go ahead.

Hi, thanks for the presentation. Just a quick one on paper pricing, actually. We've obviously seen a significant drop in pulp prices, but to what extent are you seeing this drop through to lower graphic paper prices? I guess there is typically a lag, but paper prices didn't really rise much following pulp earlier in the year. Or would you expect paper prices to be driven more by the demand?

Our type of paper is more correlated to what's happening to OCC and OMP rather than pulp because the mechanical paper grades are normally not using much chemical pulp in the base. So it's a stronger correlation paper pricing versus recycled fiber prices.

And in continental Europe, you know, it's about recycled fiber price. It's also the cost for energy. Yeah.

Okay, thank you.

The next question comes from the line of Cole Hawthorne. Jefferies, please go ahead.

Good morning. Thanks for taking the question. I've got two on my side. The first is on the wood product market. I'm just wanting to understand how you see the lead indicator. Do you think the lead indicator for the wood products market is actually going to end up being North America? And how do you see inventory levels? Is that what you're looking at? And I know you kind of traditionally sell about 10% of your products there. Is that what you're looking at the market for the first signs of recovery interest rates coming through? And they generally have lower stock in the chain and that drives price and hopefully Europe follows. That's the first one. And then the second one is, it's a bigger question. I'm not sure if you can answer it, but With the U.S. election, the increased talks around tariffs and implications on China and how that might impact luxury, I'm just wondering how that might impact the board division in particular, kind of luxury demand, if you have any thoughts there, or any kind of tariffs on box board, how that might impact probably more your competitors, but just wondering how you see that playing out. Thank you.

You can take the first one if you take the second one. No, but you're right about the U.S. market is important to see where things are going. How it starts, very important. When we look at the price in the U.S. and also future prices in the U.S., as you can see, they have been quite a lot up and down and almost week by week. But that's a very important indicator.

A second question. If you look at the board market as such, the European market is a regional market supplied by very high-quality producers. It's very little import that actually have any meaningful impact in Europe. But we export fair share to Asia into segments. We do definitely into niches, but most players where you don't have so much local competition. And that's the same way the U.S. producers do. They offload excess capacity in Asia, and that's where we meet. We haven't really given that much thought on a tariff war and the consequences of that, but it's more the balance in Asia that we think could be impacted by such a move.

Yes. Thank you. Hendrik, maybe just following up on the answer for the lumber product in North America. I mean, this cycle, we have seen quite a few closures in the southern states of the U.S. Do you think it'll be slightly different, the cycle, when demand comes back? You know, the price reaction might be more aggressive to the upside, or is this what always happens? There's capacity closures, and it'll just be a normal cycle. Just wondering if you think there might be more lever to the upside on price this time.

It's a good question, but very difficult to answer, to be honest. I think what we need to see is generally that the cycle is improving and activities are coming back. And then the big question, I think, will be, will there be enough raw material when that happens? The relation we have today between where we are price-wise and supply, it's pretty much restricted by availability of soil accessities right now. That will be extremely important to understand.

The previous 2021-22 super cycle on wood products, remember log prices didn't rise during that period. They rise after that period. And that will be a key question. How fast will log costs go up? Who will be gaining from a construction uptake? Will it be the sawmill operator or will it be the forest owner? Or how will they share that pie?

Thank you.

As a reminder, to ask a question, please press star and 1. The next question comes from the line of Linus Larsson, SEB. Please go ahead.

Thank you very much, and good morning to everyone. You value forest land on your balance sheet based on transaction valuation. And now that the year is drawing to a close pretty soon, I wonder if you could just give us an update on your thoughts on the transaction market in your relevant parts of Sweden and what broadly to expect in terms of revaluation at the end of the year, please.

Yeah, as a recap, and I know you know that, Linus, but we use three years of transactions and we use that sample size to get a good sample of where the market is in order to capture the big part of the value. And on top of that, you have microtrends going on. Like 2022, when you had one investor actually pushing up the price in the northern part of Sweden predominantly. When he left the market, it created a bit of a vacuum at the same time as you had the interest rates going up and people started to... Be a bit cautious. Should I buy forest land? Or if you're a private individual, then how should I price it? And that's a micro trend. The three-year transaction sample gives you a very good indication of the value of the forests in our view. If you read the latest transactions that have been made, maybe people are getting a bit less cautious right now. They have realized that wood prices have increased by 50% at the same time as transaction prices have increased. It gives you quite a good yield if you buy a forest property compared to history right now. So maybe you could have a bit more of an optimistic view on the local transaction market. Where the three-year average will land at the year end, can't tell right now. But the change in value will not filter through in P&L. It will go straight to equity.

But at least, I mean, at the beginning of the year, it was a very slow market, few transactions, lower prices. You've seen a gradual improvement during the course of the year, I take it. And is it so that you're expecting a higher price point in the market? 2024 data point or a lower one compared to the one that you're replacing in the three years series.

I refrain from giving that comment on it.

That's fair enough and then just a couple of maybe detailed questions but when you refer to mix in board and paper could you just Say, what is that when you've seen strong mix in Q2 and even stronger mix in Q3? Exactly what are you referring to, please?

Different end markets. End users have different profitability.

So it's the product rather than the geographies.

Yes. I think, Linus, the thing is it's not given that we can repeat it every quarter. No.

No, that's fine. And then just one final from me. Like you already said, in the fourth quarter, you will wrap up the PM52 rebuild in Draviken, and you've guided for the stoppage impact in the fourth quarter. But beyond that, what kind of a ramp-up should we be expecting, looking into the first quarter, 2025, etc.? ? Is this an easy startup that you're foreseeing, or will it have some dent on quarterly profits after the actual stop?

We've never done this before, have we?

No. You remember, we do this, we actually, we do increase the quality of our book paper production, but it's also an ambition to try to enter into a new market with a novel production concept in order to be, for the packaging customers to see it to low footprint and low basis weights. How that will be received by the market remains to be seen. We'll see.

Exciting.

It's a bit early, Linus. We have to get started and see how it develops.

Got it. No problem. Thanks.

Thank you.

There are no more questions at this time.

Okay. Thank you very much for taking your time and for good discussions. See you soon again. Bye-bye.