Svenska Cellulosa Aktiebolaget SCA (publ)

Welcome to this presentation of SCA's second quarter results for 2021. With me here today, I have our president and CEO, Ulf Larsson, and CFO, Toby Lawton. Please go ahead, Mr. Larsson.

Thank you, Anders. Good morning, everyone. And also from my side, a warm welcome to the presentation of our result for the second quarter 2021. When I summarize this quarter, I like to start by saying that in terms of result, the second quarter this year is the best quarter since the split in 2017. And we delivered an EBITDA margin of 47%. A strong market, strong demand, gradually increasing prices within all product areas of SAA have, of course, contributed to this. but the decision to wind up the publication paper business completely is perhaps even more important. In addition to price and mix, we have also had a good production level and a stable cost during the quarter. When comparing our EBITDA level for the second quarter 2021 with the outcome for Q2 2020, we note an improvement of 126%, and this is, as mentioned earlier, mainly due to increase in prices for wood, pulp, and craft liner, but also good production level, stable costs, as well as our decision to exit publication paper. On the other hand, the currency development counteracts the positive earnings development during the period and give a negative effect of more than 200 million SEK. Our turnover during the second quarter increased by 3% compared with the second quarter 2020. despite the closure of the publication paper business together with the divestment of our wood distribution operations in UK. Toby will come back to this, but we also see that we have an upward trend for forest value in general and by that also for SA forest. But Toby will come back to that later on, so. Last but not least important, I would like to conclude the summary of the second quarter by stating that our two major investment and growth projects in Obola and Ortviken are progressing on time and budget. Turning over to some financial KPIs, we have had a very strong second quarter as mentioned. We delivered 2.26 billion SEK on EBITDA level. And as I already also mentioned, This represents the best quarter since the split 2017. Our EBITDA margin reached 47% for the quarter, which is, if you look to the right-hand side, you can see that this is substantially higher than previous quarters. When it comes to our industrial return on capital employed, in our case calculated as a 12-months rolling average. That one amounted to 14%. But if we then look into the level for the second quarter, it was 31%. Our leverage decreased to 1.4 despite our ongoing investment program and despite the fact that we paid a dividend during the second quarter. And I'm really happy to say that we continue to finance our strategic investments with our operating cash flow. So I would now like to make some comments for each segment, starting with forest. And here we can state that we've had another quarter of stable supply of wood to our industries. Sales was up due to high volumes, whereas we have noted a decrease in pulp wood prices, mainly due to our exit from publication paper, and by that of a reduced share of imported wood. And when it comes to saw log prices, they are stable, and you can see the price development on the left-hand side in the graph in the bottom. EBITDA increased by 51% when comparing quarter on quarter, and this is partly due to higher share of harvested volume from our own forest, and partly due to revaluation effect of the biological assets equivalent to approximately 100 million SEC for the quarter. Wood. There is still a level of high global demand in the wood area. However, right now we see declining CLS prices in the US and a certain restraint in China, while other markets, not least Europe, are still on a very, very strong level. The demand for wood products are still supported basically by the economic recovery post-COVID, with increased industrial construction and house buildings, as well as the increased sustainability focus. When I presented the Q1 report, I estimated the price increase for the second quarter versus the first quarter to be between 15 and 20 percent. And what we know just now is that the actual outcome for SCA was a bit over 20 percent for the second quarter. At present, we forecast that the prices will continue to increase sharply, and I personally believe that the price increase for the third quarter compared to the second will be up to 50%. Sales was flat when comparing quarter on quarter. The rise in prices is counteracted by the divestment of wood supply UK. And when it comes to EBITDA, it was up as much as 339%, mainly due to higher prices, but also due to a very good production and a stable cost level. Today's stock level of solid wood products in Sweden and Finland is in relation to the average for the last five years described at the top left on this slide. And we can note that the inventory volume are still at a very low level, 13% lower than the corresponding period last year. At the same time, the underlying consumption continues to be good. As can be seen in the diagram to the bottom left, the Swedish and Finnish sawmills production slightly exceeds the five years average, and the production is now running at full capacity to meet the increased demand. When comparing the production rate year to date, 2021 with the corresponding period last year, we can see that the production level is approximately 10% higher this year, a volume that is completely assimilated by the market. So when looking at the diagram to the top right, we note the steep increase in prices for solid wood products. And our estimate, and as I also mentioned earlier, the price development will be even stronger now during the third quarter. And best guess, up to 50% for the third quarter in comparison to what we've had in the second quarter. The pulp market is also still strong with a good demand and increasing prices during the second quarter, as you can see in the diagram to the bottom left. When we peaked price-wise in the end of 2018, we had a peaks price of 1230 USD per tonne. We then reached the bottom during the first quarter 2020, as you can see. At that time, the peaks price had dropped to 820 USD per tonne. Then we had a rather flat price development during the major part of 2020, and the pulp prices started to increase significantly, and today we have an official PIX listing in Europe at 1340 USD per tonne, but of course with a less favourable currency relation and also with a higher discount rate compared with 2018. We feel that the demand in Europe continues to be strong, however the price levels in China and The U.S. are now starting to fall a bit. And we can note that today the net price in China is approximately $50 per ton lower than in Europe. And also in the U.S., the net price is somewhat lower in comparison with Europe for the moment. As you might know, we have also seen sharply increasing overseas transport costs, which impact the profitability on these markets negatively. Sales were up 43% and EBITDA 230% in the second quarter compared to the second quarter 2020. And this relates to higher prices and lower costs. For us, good and stable production volume also led to better yield in terms of lower consumption of wood and chemicals, higher energy generation and so on. And finally, I can also mention that our ongoing project to build the CNTP line, CTMP line at Ortvikens industrial site with a total capacity of 300,000 ton is progressing according to time and budget. Inventories have now come down to normal levels, both for softwood pulp and for hardwood pulp, as you can see in these graphs. The lack of capacity in the logistical chain, especially to Asia, but also to U.S., still affects the supply situation, which results in increased distribution costs, but also some disturbances in supply. During the coming autumn, a number of planned maintenance shutdowns will be carried out, and for SEA, this means that Östrand will stop for a full 20 days at the turn of the month, September and October. When we move on to business air container board, I would like to start by stating that our expansion and growth project in Obola is progressing very well, and we are on time and budget. The sales and EBITDA for the container board business are up 19% and 75% respectively in Q2 2021 when comparing with last year. And this is mainly due to increasing prices, but again, also due to good production level, stable costs also contribute positively. We have also seen that prices for OCC have more than doubled since November 2020, and that will, of course, affect the result negatively. But at the same time, they also support the price development for test liner and thereby indirectly for craft liners. All in all, this development is positive for SEA. The global Kraftliner deliveries from Europe continue to increase also in the second quarter this year. And we can conclude that the demand for boxes has been very strong also during the second quarter and is now on a level above the trend line before the outbreak of the pandemic. And this has led to inventories being on a very low level for Kraftliner, as you can see in the graph bottom left. Since the bottom position in terms of price Q4 2020, the price for unbleached craft has so far risen by approximately 200 euro per ton. And as of August 1st, SEA have announced a 50 euro per ton increase for craft liner grades. And these price increases will successively take effect during the third quarter and giving full effect during the fourth quarter. So with the present situation, the delta between craft and test liner prices is approximately 150 euro per ton. And that is historically a rather normal level, I would say. So by that, I hand over to you, Tobbe.

Thank you, Ulf. Good morning, everybody. I will start off here with the income statement. And on the top line here with net sales, you can see that we have a net sales in the quarter of 4.8 billion. We have actually lost around 1 billion in net sales from both the exit of publication paper and the divestment of Wood Supply UK since the second quarter last year. But you can see here that that's more than compensated then by around 1.2 billion sec of additional sales from the effects of price and mix, from the effects of the increased volume and then net of currency effects. So that 1.2 billion underlying growth in top line has fallen down to the EBITDA in the next line and that shows that it falls down to basically a 1.2 1.3 billion increase in EBITDA shows the good stable cost development that we have as well and so the EBITDA has increased from 1 billion in Q2 last year to 2.26 billion in Q2 this year with an EBITDA margin then of 47 percent which is of course a very good level um Then coming down, that falls through the same increase to EBIT. Financial items very stable on 26 million for the quarter, stable in terms of interest rate and net debt, which I will come back to. Then we have a profit before tax of 1.85 billion and tax 372 million, which represents an effective tax rate of just under 21% in line with the Swedish tax rate. which means we have also a strong net profit for the period of just under 1.5 billion SEC in the quarter and an earnings per share in the quarter, therefore, of just over two SEC per share. If I move on to give a little bit description per segment and starting on the left-hand side with the forest, top left with the net sales, you can see we're trending slightly lower level of net sales than we were a year ago. And that's basically the effect of reduced wood supply due to the exit of publication paper. So reduced wood supply to Ortviken, which we don't have anymore in publication paper. And then on the bottom line, you can see a strong quarter from forest. That's basically due to the fact that we are optimizing wood sourcing through exit publication paper. But the largest reason is also that we harvested a significant amount of own forest this quarter and we have a seasonal pattern with harvesting of own forest. So next quarter, quarter three, we normally don't harvest and we won't harvest as much own forest. So we won't see a strong effect from that in quarter three. Then moving across to the wood segment here, you can see that we have a significant increase in sales this quarter, despite the fact that we sold Wood Supply UK in quarter four. Q2 is also a seasonally strong quarter for the wood business, but obviously the very strong pricing development has a big impact here, and especially when you come to the bottom line EBITDA, where the margins really come from the very strong price development and also good production with a 36% EBITDA margin for wood in the quarter. On the pulp business, you see the effect of both increased prices but also increased volumes with increased yields. with production and delivery volumes this quarter. And the good performance, you can see also on the bottom line here with an increase in EBITDA margin to 38% in the quarter. We've now had two quarters, just to mention quarter one and quarter two, which are clean with good production with no maintenance stops. And as I've mentioned, we will have a maintenance stop at the end of Q3 and mainly in Q4. And then in container board paper, you see the impact we had publication paper up until the end of Q4. So from Q1, it's a clean container board net sales and a container board EBITDA. And so the bottom line you can now see is a clean container board margin from quarter one. We have a positive price development in container board, which has led to the improved EBITDA picture. And here we've also had two clean quarters with no maintenance stops and also with good deliveries during quarter one and quarter two. And then we will have maintenance stops in quarter in both Obola and Mugsund in the quarter three, which will have an impact. If I move on to the bridge of net sales, here you can see the significant impact, basically, of price, which is 25% quarter on the same quarter last year, 7% impact from volumes, and here in all areas, actually, but just to mention the biggest impact in pulp, where the continued... The Erstrand ramp up is now at a good volume level, both in terms of deliveries and production, as I said. And then the two big impacts on the right-hand side here from the divestment of Wood Supply UK and exit publication paper. On the EBITDA bridge, again, you can see the big impact from price mix of 1.28 billion, the improvement in volume of nearly 200 million. And then the other largest part here is the effect of currency, which is negative versus last year due to a stronger SEC of 200 million impact. Moving on to cash flow, and if I focus on the right-hand side here where you can see the half-year cash flow, you can also see the quarterly figures on the left-hand side, but the operating cash flow for the half-year is 1.6 billion SEK, and this is including effects. We have an increase in working capital in the half year and the quarter. So in the half year, it's 691 million, and that really is the impact of increased prices in working capital. So we've absorbed that effect in that operating cash flow. We've also had the restructuring costs from the exit publication paper, which we funded in the half year, but we still come out with a strong operating cash flow. of 1.6 billion, which basically means, as Ulf mentioned, we're funding the strategic capital investments from operating cash flow. Just coming on to the balance sheet, and maybe I start here. On the bottom line, you can see the market price applied on forest assets. And this is the three-year average market price that we take from independent sources of market transaction prices. in now including the data for the first half of 2021. And that means that the price level is now 300 sec per cubic meter compared to 291 sec per cubic meter at the end of December. So the increasing trend continues and it's that price increase that leads to on the top line here then the value of the forest assets has increased from 74.9 billion at the end of last year to a value now 76.6 billion. Working capital in absolute value, as you can see, has increased, as I mentioned, due to the higher prices and seasonal higher sales in Q2 from some businesses, from wood business in particular. But when you look at relative to net sales, we've come down from 18% to 17%. So good development relative to sales. Moving down, we have deferred tax, and then we have other capital employed, which has increased significantly. mainly due to the ongoing construction of the new mill in Obola. Net debt has increased versus the end of last year slightly from 7.7 to 8.2 billion. We also paid the dividend, of course, this quarter, but we've delevered primarily due to improved EBITDA, but a deleverage down to 1.4 times debt to EBITDA. And then net equity has increased from 72 billion to 74.5. Just to mention on the operating cash flow, we've had a strong period of delivery on operating cash flow. As you can see here, over three and a half billion of operating cash flow delivered in the last 12 months, and not least in this first quarter, despite the fact that we've also increased working capital due to the higher prices. We funded the restructuring in Autviken, and we've had the strategic capex of all Despite funding all those, we've managed to deliver and reduce leverage down to 1.4 times. So it's a strong delivery in terms of cash flow. And finally, just to also highlight, we issued a green bond in the quarter, the first green bond we have issued. And we issued 1.5 billion SEC at a seven-year maturity, which – which we're very happy to increase and have a long maturity on SCA's average debt with 4.8 years on average. So we have a very secure financing position. The green bond is well aligned with SCA sustainability platform and especially helping to support the positive contribution to the climate that SCA brings. And then finally, the rating on the green bond is also the best possible rating of dark green. I think that's an interesting development in the quarter. And with that, I will hand back to Ulf for summary and Q&A.

Thank you, Tobbe. I will not start to repeat everything again, but we can state that we deliver our best quarter ever, 47% EBITDA margin. also that we can see a big positive effect from the decision that we took last year to leave publication paper. So I think by that we can open up for questions.

Thank you. As a reminder, if you wish to ask a question, please press the star and number one on your telephone keypad and wait for your name to be announced. Your first question comes from the line of Linus Larsen from SEB. Please ask your question.

Thank you very much and a good day to everyone. Congratulations on a strong quarter. I'd like to start on the forest side and with the high harvesting levels that you've had at least in this quarter. could you please update us on the remaining quarters or, if you like, the full year, what kind of level of harvest should we expect compared to last year, please?

Good morning, Linus. Yeah, we had a strong harvesting of own forest this quarter, and as I mentioned, it is seasonal. We do have a high level in normally quarter four and quarter two. For the full year, we expect harvesting to be – around the same level or perhaps even slightly less than last year, but around the same level. And so therefore, yeah, you'll see that in the second half of the year, then we'll normally have less in quarter three and then a bit more in quarter four.

Okay, thanks. And then on wood consumption, which was very strong and from the sound of things will be even clearly stronger in the third quarter, given the price indication that you mentioned. What's happening on other parameters, like how do you see saw log costs developing, for instance, in the third quarter?

Yeah, it's hard to say, but honestly, I think we will remain on more or less the same level as we have just now for SOLOGS. No big differences. I mean, some small increases, but not any major.

And so it's an extremely favorable market for sawmills in the current business environment. How do you see this playing out? I mean, do you see any supply responses coming through? Do you see any signs of any softening in the market? order books or any type of other market indications?

I mean, as it is just now, we see no signs of a softening market. As I said, I mean, we've seen that the sales prices in the U.S., they went down from an incredible level to something which is quite good. We are not too present in the U.S. market, but the U.S. market, of course, have an impact on all other markets. But still, the demand is strong also in the U.S. We heard that Camphor, they will now take curtailments due to wildfires in British Columbia, and that might impact also the future need of wood in the U.S. China has been a little bit hesitant during the whole cycle, I would say. But still, I mean, we do some good volumes in China. But the driving us now is the European market. And I mean... The third quarter, I would say, is we have done all agreements now and we have both in terms of volumes and price. And that one will be close to where I said, I believe. Then always you have a seasonal effect in Q4 and from time to time also Q1. But, I mean, it seems to be a rather continued, rather stable market as it is just now.

And then just now that you mentioned seasonality, how are you planning to run or how are you running production in your sawmills in the third quarter? What level of production compared to the second quarter given holiday seasons, etc.?

In SEA, since 20 years, we have always been running our sawmills at full capacity. We will run also... Last year we had some, we took some curtailments during the summer due to, I mean, the COVID situation. But normally we run our sawmills as much as we can. It's 4-7. I mean, you have to stop five, six hours each night. And depending on conditions for different meals and where you have bottlenecks and things like that. But, I mean, we run them for full capacity. Great.

Thank you very much.

Your next question is on the line of Robin Santaberta from Carnegie. Please ask your question.

Yes, thank you very much for taking my question, and hello to everybody. Now, first related to the pulp division, if I look at the ASP, the average sales price you reach in Q2 is obviously up quite significantly, but far less than than the price statistics show. I do understand that there is a bit of a lag in the P&L impact from price statistics, but could you just remind us or explain the dynamics, how it works? Is it all on a lag of one or two months to the Forex price, or is this on spot sales as well? And in what markets are you operating in terms of pulp? Is it only Europe or a bit of North America and China as well?

Yeah, I mean, if we start with the market, price changes will be gradually implemented, of course. And so that is one reason why you don't really see that the result in the P&L follow the PIX prices announcements and things like that. But we follow in many cases and in most cases we follow the PIX price. Then again you have currency effects, you have different discount rates and things like that and you know the structure behind that. For us we are very much focused on Europe as our main market and And we will continue to be that. And we also today we feel that that is a favorable place to be in. Yeah, it was maybe better to stay in China during the first quarter and also during the fourth quarter. But just now, I think Europe is the best place to stay in. U.S. is a good market for us. And I don't know if we release a big volumes we do there, Toby.

Oh, but we we do. We do have sales to the U.S., but very little to Asia. Thanks.

I do understand the lag, but you don't have any sort of rule of thumb that could help us sort of understand the lag sort of compared to the peak prices in Europe.

I mean, a rule of thumb, I mean, it takes – it's probably two to three months in terms of time lag. Yeah. Overall, when you take into – yeah. Compared to when maybe Pix is published or, yeah, prices are published.

Good. That is helpful. And then maybe for you, Toby, to sort of financial question. First of all, the paper business, you still report some – some losses some of our drag uh in uh in the other division uh what is the amount and how how long should should we expect that to continue and then number two could you just uh give uh some kind of indication about cop x levels for this year and maybe some indication for next year as well thanks yeah i mean um

As we've described, I mean, we don't have costs for the paper division anymore. I mean, at the end of Q1, that was finished. But we do have costs for maintaining the Ortweken site up until we start the CTMP, which are 20 to 30 million sec per quarter, which we've guided for. And that's the same this quarter. So we're in line with that. And then the CAPEX, yeah, I think we, yeah, I mean, the guidance we've given before is we have an annual current CAPEX level of 1.2 to 1.3 a billion SEC, and I think we stick with that guidance for the year. And then, of course, strategic capex is, I don't know if you're interested in that as well, but we have the Obola project is the biggest one, and CTMP in Ortvik are the two large strategic capex, and we expect, as we said before, around three to four billion in strategic capex for the year. for the year and and what about next year um yeah just give me a moment um it's i mean this year is the biggest year by far so so there's a significant um so i think it's around um yeah here we go yeah more more like two to three billion next year depending a bit on the outcome this year so

All right. That is helpful. Thank you very much, Olaf and Toby.

Next question comes from the line of Martin Melby from ABG. Please ask your question.

Thank you. Regarding the transaction cost on the forest assets, you used a three-year rolling average and it's now at 300. What is the last data point in that exercise?

I mean, we give the three-year average margin, but, I mean, it's been basically a steady development during those three years, which we've seen continue. We add data then for the first six months. I think it's also most of the transactions do happen in the second half of the year, so it's not that many transactions in the first half year, but we've seen the trend continue with positive price developments. There are market statistics published also, so you can see Ludwig & Company, for example, publish market statistics, and they follow the same. So if you want to see the public market statistics, that's a good place to turn.

Okay, and you gave the quarter-to-quarter price change on the sawmills. Could you try to indicate the same on pulp and container board, please?

Yeah, I mean, the answer is no. I mean, we know in part, as I said, I mean, the official peak price today is $34 per ton. And we are just now in negotiations for July. So we don't know really the outcome of that. But as I said, I mean, we feel it is a rather stable situation in Europe. It has been a little bit weaker in China and the U.S., Seasonally, you normally have a slightly weaker situation in the summer. But on the other hand, we also know that we will see a lot of maintenance stops coming on stream now. And as I said, also for Östern, we will have a stop in September, October of more than 20 days. So that's a quite big one. In container board, I said that we have seen a total price increase of 200 euro per ton. And we have another announcement now from August 1st of 50 euro per ton increase for Kraftliner grades. And I think they will come through. And I think they will successively take effect during the third quarter, giving full effect during the fourth quarter. So that's my best prediction. Best guess just now.

I could also add, Martin, you can, I mean, in the graphs we give in the report, you can see basically for the last quarter, the net mill price development for pulp and container board in those index graphs. And the reason we, I mean, the pricing is relatively public for container board and pulp. And I think the other reason is also that when it comes to wood, we have relatively low good visibility on the coming quarter, which you don't have quite the same level for. Yeah, a bit longer out for container board and pulp.

I see. And what is the key reason why the sole value price is not increasing in this dramatic sole milling market? Why isn't the first owner getting paid?

Yeah, I mean, we are the biggest forest owners. I think that is one reason. We are the biggest private forest owner in Europe, and we can secure a safe and stable supply. And I think for all parties, the best thing is to have a stable price on raw material, because then you can plan your activities in the forest due to what's needed in the forest, thinnings, clear cut, and things like that. So I think that is the main reason. One... good thing for us just now as I mentioned is the decision to leave publication paper and by that decision we haven't been forced to import any wood more or less during the first and second quarter and that has contributed well also but we have a stable supply not really but I mean it is a substantial effect I would say

Okay. Thank you. Your next question comes from the line of Cole Hutburn from Jefferies. Please answer your question.

Morning. Thanks very much for taking the question. Just following up on the wood product, you're calling out the kind of the sawn timber business potentially up as much as 50% quarter on quarter. Could you give us a little bit more color on kind of the trade side where I imagine pricing will be higher up less than the sawn timber, just so that we can understand the dynamics of that part of the market and just remind us how much of the wood division your traditional kind of sawn for construction is versus the other components. And then the European market has announced a number of things with the new EU forest strategy, you know, the Fit for 55. Could you give us your initial thoughts on how you're thinking the new forest strategy will impact your business firstly from ability to harvest versus the forest sink debate and then secondly the prioritization of the EU on using wood in construction because my outlook there is of using wood in construction is very positive thank you yeah if I start with the strategy from the European Commission and Toby can say some words about the wood business

I mean, first of all, we welcome, of course, the idea to achieve a 55% emission reduction, but we do not fully share the Commission's view of the role of the forest and the forest industry. I think the most important thing and the best contribution we can give from the forest side is to continue to manage the forest as active as we can. I mean, it is a fact that it is the growing forest that can... contribute with the net binding capacity of carbon and for us it's more than five million ton per year and and i mean the reason behind that is for every tree that we that we harvest we replant two to three new ones and and for each new generation that comes up we will have a 30 40 percent higher growth and and and all that kind of things but the other and even more important thing is that we can supply more raw material to the market when we increase the production in the forest and the growth in the forest and by that we can replace plastic with paper, we can replace fossil-based fuels with biofuels and we can replace steel, concrete with solid wood constructions and here for us only that give another 5 million ton per year and then of course we should always try to reduce our emissions from our industry and that we also do every time when we look into new investments and things like that. So I think that is the basics. I don't like the idea that you can maybe see and read about when it comes to looking upon the forest as a carbon sink. That's not the right utilization of the forest. We have the best forestry in the world in the Scandinavian countries and let us continue to do that in the in the best way. And I think that is also what will happen now. We don't know really, to be honest. But I mean, this is not a decision from the Commission. Now it will be discussed in a lot of, I mean, nationally, it will be discussed in different working groups and things like that. And the devil will be in the details. I mean, it's really important for us now to follow, I mean, what's inside special uh yeah when you say we started with clear with no clear cutting but i mean that will not be the case of course but what kind of restrictions will occur and and how can we handle that i think also one important thing is to see that there is no basis for having to choose between the use of forest and the protection of biodiversity we we can and we have balanced that in a good way in many years. And if you look into Swedish forest today, you have more deadwood, you have more broadleaf trees. It hasn't really disappeared any species from the Swedish forestry the past 20, 30 years. We have more than doubled the standing volume in Swedish forest since 1950. And at the same time, we have more than doubled the harvesting level annually. So, I mean, that is a true success story. And I believe that we will, when we start to discuss this into details, we can also show the good thing by actively continue to manage our forests.

Yes, I can add just to clarify on the wood business coal. We have around 70% of the sales from the wood business is coal. the sawn products, and 30% roughly is what we call wood supply, which is more like a traded-type business, like you say, but with maybe some kind of additional conversion operations on the wood before it's sold. So the price development that Ulf mentioned is really applied to the sawn products. The traded products go at a much lower trading margin, even though we have had a strong... Q2 from wood supply, it's normally quite seasonal, so we have a strong Q2 and then it tends to, it has a weaker period in the second half of the year, just due to seasonal reasons. Thank you.

Your next question is on the line of Oscar Lindstrom from Danske. Please ask your question.

Good morning to you all. Three questions from me. The first one is on what's called force majeure. I mean, are you seeing any impact from the threat of closure of Sweden's last cement plant due to not getting its environmental permit renewed or likely not getting it renewed? Or do you see any similar impacts in other countries as causing sort of a shift or an acceleration of the shift from cement to wood? And then also, any impact on either demand and or supply from the flooding in Central Europe? That's my first question. Do you want me to take the other ones?

No, can we start there? So, yeah, it's a very good question, Oskar. And, I mean, we are, I think, all a little bit surprised – about the cement plant and and it's really hard to judge what's going to happen there but if if it will be closed down i think that will have a big impact on on the swedish building industry and and i mean i heard some some figure here that between 200 000 and 300 000 jobs were threatened if if this will come through but i don't I cannot really believe that this will happen. It would be 100% crazy, of course, because you need to replace that cement with cement from places where you don't produce it in the same environmentally friendly way that we do in Sweden. So I cannot really believe that this will come through. But if it comes through, I believe that it will have a negative impact, of course, when it comes to building activities. Definitely so. Structurally, it's... I don't like really to speculate. We need, in many cases, a combination between wood and cement and I think the important thing is to find the right balance and the right combination. So far, and that was the last part of the first question, we haven't seen any negative effects of the flooding in Central Europe.

Not material. I mean, logistics is more problematic around, but it's not material.

No major things.

If I can just follow up here, actually, on this. Are any of your sites facing renewed environmental permits that we should be aware of? No. Okay. Okay. My second question is on capital allocation. You're now in the middle of the Obla project, CapEx, and CapEx is going to be high this year and then come down a bit next year, as Toby mentioned. But you already have a strong balance sheet. You have very strong cash flow at the moment. You must be thinking about what to do with the money once Obla is completed. in terms of strategic projects or acquisitions. So what's your own thinking here about growth opportunities beyond?

I lost you a little bit, Oskar, but growth opportunities, was that the question? Exactly.

I mean, given how strong cash flow you're now getting, you know, More money in the bank usually sort of gets one thinking about what one could possibly buy with that money.

That's my question. I mean, the first thing just now is that we are 100% focused on delivering on the two big growth projects that we are performing just now. I mean, Obola is a super big project, and the CTMP project is also a big one. And at the same time, we are also performing big. billion sec project in in bolsta so i mean we are 100 focused on delivering on these projects and i mean i think we are all a little bit surprised of the strong cash flow in the strong market situation that we have just now i mean last autumn we were not really sure of what kind of market we should meet for for 2021 and now we have this market so So, I mean, of course, we look into different opportunities. And when we have something to talk about, we will do that and announce that. Do you would like to add something, Tobias?

No, I mean, I think just that we're very focused on delivering the projects and on time, on budget. And that's, I think, the important focus. And they deliver a significant growth for SCA.

So, yeah. I mean, it was also quite a big thing to do to divest or to close down the publication paper business. We had to take away 800 people in this region. And I mean, one thing, of course, the people at Millside, but from my perspective, if we reduce the sales by 20 percent, we have to reduce the manning all over the place by 20 percent. So that goes also for headquarters and staffs and everything, and we are just now doing that, and that is also what you can see in our figures. I mean, we have been very focused on also delivering on that, let's call it an exit project. So we have a lot of things to do just now just to deliver on what we have promised.

Yeah, that sounds good. A final question, I mean, Your growing forests bind about 5 million tons of CO2 per year, as you mentioned, and then your products substitute as well. But what would be the level of sort of CO2 sinking every year if you stopped harvesting and stopped replanting?

I think that would be negative because I think – But this is an important part of the debate because, I mean, if you just stop harvest, short term you will continue to grow and maybe add some more carbon in the forest for a short while. But if you then include the product side, then it will be negative because if you cannot really supply the market with the renewable fiber, then you have to increase the use of fossil-based materials and fuels. I think it is already from day one a negative thing. But I think we are lost in the debate. We don't have the ability to come through with our arguments. But the thinking and the debate in Brussels always stop at the forest side, which is not the right thing to do. You have to include... the possibilities and the potential we have when it comes to substitutes. And so we have to improve in that, in the communication here. So even short term, I think it's negative. And I mean, the argument about, again, about... Biodiversity, that's not an argument. I mean, you don't have to choose between the use of forest and the protection of biodiversity. You can do it both. And, I mean, we can always do things better, and we will always look into possibilities to do things better. But we can do it both.

Yeah, that's an important debate, no doubt. Thank you. I mean, those were my questions.

I think, Oskar, you had a very interesting article in Svenska Dagbladet the other day written by Björn Hägglund. And he was the colonist of the Swedish Forest University, but he's been the CEO of Stora and so on. But, I mean, that was very well written and well structured. So I think you have a lot of good facts in that one. So we will try to spread it. That article, really. I think that is the best one written in this field.

It was very good. Yes, I agree. Thank you.

Your next question comes from the line of Justin Jordan from X10. Please ask your question.

Thank you. Good morning everyone. Good morning all from Tobii and well done Tobii. I say aimfully for a very strong first half performance. I've got three separate questions. Firstly, just kind of following up from Cole's earlier question. We've now, we're now three months on from, I guess, the first deliberations from the EU on taxonomy. Can you just give us an update as to what that might mean for SCA and potentially the proportion of your revenues that may be taxonomy aligned? And then secondly, Just on forests, clearly I know you're constrained from being a purchaser of forest assets in Sweden, but can you update us on where you are in forest purchases in Estonia and elsewhere across Europe? And then I've got a follow-up question, please.

I can take the first. I mean, obviously it's becoming, it's a moving picture and developing picture with taxonomy, but we do expect to have to then do some reporting from the beginning of next year. But I think one thing it's important to note is in the first stage we'll be reporting how much of our business is eligible for taxonomy according to the two environmental targets which have been worked through by the European Commission so far. So there's still four which remain which will come in the future. And according to those two then we will as we understand, we will then identify how much of our company in terms of sales and OPEX and CAPEX is eligible. That doesn't mean that they're aligned. It will come later then how much of that business is aligned. And that's really the kind of measure of whether you're environmentally sustainable or not in your operations. So the first stage is really just to identify eligibility. So it's not... It's not a key if more or less your business is eligible. It's just really how much your business is covered by the parts which are established today. So I think it's important to recognize that in the first stage, and that's how it will be for the first two years, basically. And we expect, with the two climate targets, and particularly climate change mitigation, which is one of them, that the forest really meets that target very clearly. The rest of the business is still unclear today. Probably the main problem climate target which is still to come around sustainability will will cover our other businesses very clearly but with the targets as they are today it's not clear whether they will cover the industrial businesses or or not um but when they come we expect uh we expect them very much to be part of the uh the circular the transition to a circular uh economy so so um so i think i think um It's still hard to give clear answers, I'm afraid, Justin. But I think in summary, I think we'll expect to be reporting on basically only on eligibility, but that clearly the forest will be part and we'll have to work through to see if the rest of the business is covered in this first wave or will be covered later on.

Okay. And then we have the question about, I don't know if, If I get you right. But what's the question? How much we are in our program for buying?

Can you repeat, Justin? Can you repeat the question?

Sure, sure. So clearly, you know, you're the largest commercial forest lander in Europe. You're, you know, concluded from being a net forest purchaser in Sweden, but clearly you have clear plans to expand elsewhere in Europe, particularly in Estonia. Can you just update us as to where you are on your previously announced plans, you know, to be a net forest purchaser elsewhere across Europe?

No, we have a plan to acquire 100,000 hectares of forest land in the Baltic states. So that's Estonia and Latvia, which are And we are at around 50 today, so we're around halfway. Okay, thank you.

And just one final question, third question from me. Clearly, SEA, anyone who's tracked you as a shareholder or an analyst for a number of years will know you're incredibly prudent in capital allocation. But if I was, I don't know, a private soul mail operator in Europe or North America right now, I'd be sorely tempted to run the maximum number of shifts I could or potentially add some more capacity to my milling production. I guess, given the strong demand we're seeing and what seems like exceptionally strong pricing outlook for wood in Q3, What's to stop there being less disciplined peers adding more capacity to ultimately, I suppose, have a supply-side response? I appreciate there won't be SEA doing it, but not everyone else in the industry is disciplined.

Maybe I can take it first. But, I mean, it all comes down, in the end, to the raw material. You can't add capacity if you haven't got access to the raw material, and that's why our I mean, our saw mill business is very closely linked to the forest sourcing, the forest and the raw material sourcing we have. So, of course, right now in a strong market, there is, yeah, everyone's making good money. And we are, you know, we're optimizing our production, of course, to optimize. But I think in the long run, there's no point building extra capacity if you haven't got saw logs to be able to, you know, Yeah.

And I mean, I think also that might be the big question mark going forward, I mean, to get access to saw logs. And for a sawmill, 75% of the cost is related to the raw material. So if you don't control that one, then you're lost, definitely. And that's the reason also just now, I think, why we cannot really, I mean, we run at full capacity, but you cannot really add too much volume to the market as it is just now.

Okay. Thank you, guys, and best wishes for the second half of the year.

Your next question comes from the line of Johannes Gramtelius from Crepro Chevro. Please ask your question.

Yes. Hi, everyone. So most of my questions have now been answered, but maybe you could help me on the CapEx side, what to expect in numbers for this year and also 2022. Any changes from the last update there, please?

Hi, Johannes. Yeah, I can just update. So for current CapEx, we expect 1.2 to 1.3 billion SEC for the year, and that's our normal level. And then for strategic CapEx, we expect 3 to 4 billion this year, and that's the largest is the Obla project, of course, and then we expect 2 to 3 billion next year. Okay, okay.

Same as before?

Same as before, yeah. No significant change.

Yeah. And... Also, on the cost side and the cost inflation theme, it seems to me that you will have quite stable costs here, Q3, Q4. Could you talk a little bit about this? Are there any sort of areas where you see a big cost inflation at the moment for you? And also, if this could hit the industry, in terms of your competition? Thanks.

I mean, as I said, we've had a very stable cost level Q1 to Q2. Where we can see increases, of course, is in the logistic part. And there you can see quite substantial cost increases. But then again, you have... questions about mix and things like that and and the worst scenarios you've seen when you go overseas and we're not not too present overseas so so we have been a little bit protected from that one and otherwise i mean in i think we've done a good job in our we have a central purchase organization and as i said when we took the decision to leave publication paper we also put um very clear targets for each part of the company and, and, uh, they have all more or less delivered on that. And one thing was of course, to, to really keep an eye close eye on, on, on the cost side. And, and what is maybe a little bit, um, yeah, I think the biggest, the biggest cost, uh, for us is of course, the raw material. And, and, and I mean, uh, We have, as I said earlier, a good situation when it comes to wood supply, which is good. We might see some small increases in saw log prices and things like that, but no major things. I think we are in good control for the coming quarters now. I don't know if you'd like to add something, Toby, here?

Maybe just to give a little bit. I think, as I've mentioned, the wood supply is the main raw material. When it comes to other materials or chemicals, we do see increases, but we have relatively limited, maybe compared to others, more in publication paper and other segments, more intensive in terms of other materials and chemicals. And then we also do have the logistics area where we have seen maybe around 30 million... a higher logistic cost versus quarter two, and we expect an increase also quarter three from a bit restricted. Yeah, restricted access to containers and higher container prices and so on.

But I think more disturbing in that perspective is the service level. Yeah, yeah.

Okay, understood. Maybe a final question from my side. I mean, you have an interesting chart there on page 11. showing that also, you know, the deliveries of cropliner have increased pretty dramatically, I would say, over the last year in Europe. I mean, where are we now in terms of sort of, you know, capacity constraints in Europe? And at this point, are you actually seeing that there is a lack of material, cropliner material in the market? Is that something you see now, or is that something that could happen in the coming months? I mean, it seems that, you know... deliveries have come up so much, but I suppose there is a capacity constraint at some point in Europe.

That's my question. Yeah, that's a good question because we don't really know. I mean, what we saw when Ulo came on stream and added 400,000 tons of annual capacity, that was immediately assimilated in the market. And we see less... import to europe from us just now so so that can be one explanation but i feel that when capacity when we had capacity in craft liner that is immediately assimilated in the market and and so maybe we don't know the real need it's always a combination between craft liner and test liner and we use craft liner for certain purposes and test line for certain purposes and Many times it's just a question of material efficiency, and that is also what drives prices and the mix between craft and test. But in some areas you need craft when you need strength, when you need wet strength, when you need some other things than you need to use a craft liner, of course. But we feel just now you could sell much more craft liner from SEA if we just had the production. 2023, we will add capacity, and today we feel very confident that that will be needed and demanded from the market. Okay, got you. Thank you.

Your last question is on the line of Mikael Doppel from UBS. Please ask your question.

Thank you. Just briefly following up firstly on the FIT455 and forest strategy, what's the time schedule there to take a decision for EC to make a final decision on that one? That would be my first question. Secondly, on sawn timber, I think everybody is scratching their heads a bit given the Significant price increase that we have seen and continue to see, and I guess the question there is that how much can the market take before it starts to impact demand negatively? Do you think we are close to that level in Q3, given the hikes, or do you think there's still room for more? Then finally, on the pulp markets, in Europe in particular, as you pointed to, Seems to be a good demand situation here. Prices have still gone up in June. At the same time, we do see China prices having come down quite a bit. Do you think that's going to have an impact on the European market, i.e. are the European prices coming under pressure now? Or do you see a situation where Europe can actually remain quite stable despite China coming down? Thank you.

If we start with the market for Zontim, I mean, it's very... hard to say as you know normally it's a volatile market and and i even if you're fundamental and structurally you see some positive long-term effects when it comes to sustainability and things like that which is favorable for wood as a material but i mean short term it's always a question of supply and demand and as i said i mean for the third quarter no doubt we've already set prices and volumes I also feel that I think it will be stable in the fourth quarter. Not too much happens in the fourth quarter. But I mean, after that, we don't know really what kind of... I mean, we have a fourth wave of COVID. What kind of support from governments will we see? And can we start to travel or do we have to continue to spend... a lot of money on DIY and things like that. I mean, all these kind of questions will have an impact on the zone timber market. But structurally, I think it is a better step by step, a better position for zone timber for sustainability reasons and things like that. But short term, it's always a question about supply and demand. And I cannot really give you a better answer than that, I think. Then, I mean, yeah, you had some questions about Fit for 55. And, I mean, the strategy that we have now been presented from the Commission is not a decision. It's more like a vision or something like that. And after that, we will see more detailed suggestions. And I'm 100 percent convinced that we have to put in a lot of effort in that process. Otherwise, we will come out with legislation and things like that. That will not be positive for the industry. And much more important, it will not be positive for the climate because it will be negative if we have any big restrictions on how to manage the forest and how to provide the market with renewable materials from the Scandinavian forest. Then it's not good for the climate. We will see different timelines in different areas, and as I said before, the devil will be in the details, and we will put in a lot of efforts from the SA side, but we will also do it from the industry, from the Swedish forest industry, but also from the European Federation, CEPI, and so on. So I think it will be a couple of interesting quarters coming from now on.

And then you had a third, I could maybe take the third one. Yeah, it was on the pulp. You asked about basically the pulp prices, Michael, and I'm sure we can give much more color. Basically, Europe is now at $13.40 per ton, as I've mentioned, and similar level to U.S. China is always a more volatile market with spot prices which go up and down. Sometimes there's more or less volumes also sold, and it also sometimes reflects the logistic situation to China. But I don't think you can really draw any, sort of directional conclusion. But the momentum in Europe is still up and is really catching up with the level in certainly in U.S. and where it's been in China. So we have to see. Okay. Thank you very much.

There are no further questions at this time. Please continue.

Okay, thank you very much. And this concludes this presentation of SCA's second quarter results. And I would like to welcome you all back by the end of October. Thank you for listening in. This concludes our call for the day. Thank you for participating. You may now disconnect.