Svenska Cellulosa Aktiebolaget SCA (publ)

Good morning and welcome to this presentation of the SEA half-year results for 2023. With me here today, I have CEO Ulf Larsson and CFO Andreas Evert. With that, Ulf, I hand over to you.

Thank you, Anders. And also from my side, a good morning and a warm welcome to the presentation of the result for the second quarter. When I summarize the second quarter, I can state that we have delivered a stable result, not least driven by a profitable growth in renewable energy, stable performance in forest, but also resilience against cost inflation. The latter is, of course, partly due to a relatively high degree of self-sufficiency in our wood, raw material supply and also in the energy supply, logistics and so on. However, we see a continued weak demand for solid wood products, pulp and container board. Prices for solid wood products increased as expected during the second quarter in comparison with the first, but will come down again in the third quarter. Prices for container board have now stabilized, while prices for pulp are still decreasing in both Europe and US. EBITDA decreased in comparison with the second quarter last year, but reached 1.7 billion SEK and by that a healthy EBITDA margin of 37%. When I compare the second quarter this year with the second quarter of last year, I can note the sales decreased by 22% and the EBITDA by 46%, mainly due to lower prices. On the positive side, we have seen a high result in forest and energy combined with a positive currency effect. Then I turn over to some financial KPIs related to the second quarter of 2023. As mentioned, our EBITDA decreased 17% in comparison with last quarter, but reached 1.7 billion SEK for the second quarter 23, and that corresponds to 37% EBITDA margin. Our industrial return on capital employed came out on 20%, calculated as the average for the last 12 months. The leverage is stable, a bit over 1, despite our almost finalized large ongoing investment projects in Obola, Ortviken, Bålsta and also Gothenburg. and by that we continue to finance all our investments including strategic projects with our operating cash flow. I will now make some comments for each segment and I will start with the forest and during the second quarter we have had a stable supply of wood raw materials to our industries In general, we can note the continued high demand of wood raw materials and by that continued increasing wood prices and that you can also see in the graph in the bottom left. When we compare the second quarter 23 with the second quarter last year, pulp wood prices have increased by almost 35%. Somewhat more for birch and somewhat less for conifer. Corresponding figure for saw logs is an increase of around 15%. Pulp wood prices in the Baltics continue to fall, but they are still higher in comparison with average cost for Swedish supply, counted as free delivered to Swedish mills. When we compare quarter on quarter, sales were up 18% and EBITDA was up 25%, and that is mainly due to higher prices, but also due to higher harvesting level in our own forest. Then I turn over to business area wood. In general, we have a continued weak underlying market for solid wood products. DIY activities had a seasonally positive effect on demand in the second quarter, but will slow down in the third quarter. Professional building activities remained on an okay level in the second quarter, but new housing starts are in a decreasing trend. I estimated a solid price increase with high single digits in percent in Q2 in comparison with Q1 that was also delivered and we increased the average price by approximately 8% during the second quarter. The underlying consumption is as already said weak and despite lower production and also despite the rather normal stock level prices will come down again in the third quarter as we have no strong positive seasonal impact from consumption in the third quarter. So I guess that we will be back close to where we were in the first quarter in terms of prices in the third quarter. Sales and the EBITDA were substantially down due to price and cost of raw material when we compared quarter on quarter. So 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 top left on this slide. And one can note that the inventory volumes are now back on a normal level. SEA has also maintained normal deliveries during the second quarter and by that we have a balanced stock and also a normal stock level. As can be seen in the diagram to the bottom left, the Swedish and Finnish sawmill production has been on a rather normal level. Outside the Nordic countries, we have seen production containment, not the least in Germany and Canada. And today we can't really see any Russian or Belarusian wood in the European market. I think that we can expect further production containment during the coming quarter, not only maybe in Canada and Central Europe, but also in Scandinavia. When looking at the diagram to the top right, we can note that the price peaked in the third quarter 2021 on a historically high level. Prices have come down substantially since then. And at the same time, the prices for SOLOGS have increased with a major negative effect on the profitability. So then I turn over to segment pulp. But first, I'm happy to say that our CTMP expansion continues according to plan regarding production ramp up and also sales growth. In general, sales and EBITDA were down 9 and 55% respectively when comparing the second quarter this year with the same period last year. We note lower prices and higher wood, raw material costs on the negative side. while currency had a positive impact in this comparison. We have seen another quarter with a very weak demand for pulp. Europe and US are still slow, while we have started to see an improving demand in China since May. I forecasted the price bottom to be reached and the price level to be set in China during the second quarter, and that also came in May. but on a very low level, around 610 to 620 USD per tonne. Pulp prices in Europe and US are on high levels, but still in the decreasing trend. The European peak price for deliveries in Europe in July is now set to 1200 USD per tonne, which is a price decrease of 50 USD per tonne. We expect the pulp prices to continue down during the third quarter in Europe and US. I still believe that we will reach the price bottom in these areas in the second half of this year. High cost producers no longer cover the costs and therefore prices shouldn't stay on these levels very long. However, on the negative side, as you can also see in the graphs, inventories for both hardwood and softwood pulp are on record high levels. which indicates that a positive turn in the market might take a while. So moving over to container board. The ramp up of the new craft line and paper machine in Obola is running according to plan. The new recovered fiber line, which is a necessity to reach full capacity, is also progressing according to plan and the ramp up of this line has started successfully. And as earlier communicated, we expect to reach full capacity in Obola in 2026. Sales was down quarter on quarter by 19% due to lower prices, while EBITDA was down by 71%, mainly due to lower prices and higher wood, raw material costs. During this period, we had a planned maintenance stop in Obola and that had a negative impact. result effect of between 90 and 100 million SEK. Box demand has continued to decline in the second quarter, mainly related to lower retail sales and destocking effects. European demand of Kraftliner have decreased by around 15% in the first quarter this year, slightly higher than box demand of 11%, indicating a destocking effect at box plants. We believe in a stronger demand for container board in the second half of this year. On the other hand, there is additional supply in test liner coming on stream in the next quarters, which will put some pressure on the supply-demand balance. Prices for brown craft liner have decreased with 30 euro per tonne in the second quarter this year. and that indicates now a price gap between Kraftliner and Testliner of around 190 euro per tonne. Prices for white top also decreased with 30 euro per tonne in Q2. We have seen unchanged prices for both brown and white Kraftliner from May until today and probably we have reached the bottom in this segment. Container board and especially craft line inventories have been very well balanced by reduction of supply. Despite significantly lower demand, inventories have been stable or slowly decreasing in the first two quarters of 2023. And we would estimate production of container board to be 12-15% lower in the first six months compared to last year, same period. So the current stock level will support, I think, a rather sharp volume and price recovery when the demand comes back. Availability of OCC is still good because of historical high supply of corrugated boxes and lower current demand of test liner. Today's price is around 75 euro per tonne, which is 110 euro per tonne lower than peak in July 2022. Since we are seeing demand decline to level off and strong demand in second half of the year, we can assume that OCC prices will start to increase again based on limited supply. So finally segment renewable energy. In renewable energy we continue with another quarter of strong profitable growth and higher prices in comparison with the same period last year. And due to increasing prices and high demand the income were up 22% and the EBITDA level by 153% when we compare with the same period last year. The market for solid biofuels is estimated to be continued strong due to an underbalanced market. In wind power, land disagreements on SEA land has now reached 8.2 terawatt hours in the second quarter and that is also in line with our communicated plan. Our newly acquired wind farm Skogberget is also delivering according to expectations. Finally, the biorefinery in Gothenburg is under construction and the first product to tank is plant Q4 this year. And we still see a strong market development for HVO and also for sustainable aviation fuels SAF. So by that I think I hand over to you Andreas.

Thank you, Ulf, and good morning, everybody. I'll start off with the forest valuation. Forest prices in northern Sweden declined slightly during the first half of 2023, from just below 420 SEK per cubic meter to approximately 400 SEK per cubic meter. Fewer than normal transactions were made in the first half of the year, and we have therefore left the three-year average price used in the forest valuation flat, at 366 sec per cubic meter. And by that, we maintain a healthy headroom to current prices. The forest valuation increased 1 billion to 99 billion, mainly driven by the growth in standing volume. If you move on to the income statement for the second quarter, net sales declined 22% to 4.6 billion, driven by lower prices. EBITDA reached 1.7 billion despite a weaker market, driven by growth in renewable energy and higher results in our forest division. The EBITDA margin was 37%. Depreciation increased to 471 million due to the activation of the new paper machine in Obola and the new CTP mill at Ortviken. The EBIT margin declined to 27%, and financial items totaled minus 103 million. With an effective tax rate of around 20%, bringing net profit to 0.9 billion, or 1.3 SEC per share. On the next slide, we have the financial development by segment. Starting with the forest segment to the left, net sales grew to 1.9 billion, driven by continued increase in prices. EBITDA increased to 870 million, driven by high prices and seasonally high harvest from our own forest compared to the previous quarter. In wood, prices increased in the second quarter compared to the first quarter due to seasonally stronger demand. Net sales increased to 1.35 billion and EBITDA increased to 201 million, corresponding to a margin of 15%. In pulp, prices continue to decrease and net sales declined to 1.8 billion and EBITDA decreased to 380 million, corresponding to a margin of 22%. Pulp wood raw material prices continue to increase while chemical costs are decreasing. In Container Board, craft liner prices are bottoming out, with stable index prices since May. In Q2, net sales declined to 1.4 billion and EBITDA totaled 217 million, corresponding to a margin of 15%. The planned maintenance stop in Obola had a negative impact of 94 million. In renewable energy, we had another strong quarter with EBITDA stable at around 180 million, despite seasonal lower volumes compared to the previous quarter. The EBITDA margin increased to 49% and was positively impacted, not the least by strong tall oil demand. On the next slide, we have the sales spreads between Q2 last year and Q2 this year. Prices declined 25%, with lower prices in wood, container board, and pulp. Volumes declined 5%, driven by a weaker wood market, which was partly offset by higher volumes in container board and pulp from the ramp-up of the new paper machine in Obola and the new CTP mill at Ortviken. And lastly, currency had a positive impact of 8%, bringing net sales to 4.6 billion. Moving on to tributar bridge and starting to the left, price mix had a negative impact of 1.5 billion and lower volumes, mainly due to a weaker wood market, had a negative impact of 167 million. High cost for mainly wood raw materials had a negative impact of 142 million, while energy had a neutral impact, which really shows our high self-sufficiency in both energy and wood raw material. with a positive impact from currency and a positive impact from lower distribution costs. In total, EBITDA decreased to approximately 1.7 billion, corresponding to a margin of 37%. We continue to have a strong operating cash flow, 650 million for the quarter and 1.85 billion for the first six months. And this means we're continuing to fund our strategic investments with operating cash flow. Look at the balance sheet. The value of the forest assets increased to 99 billion. Working capital stood at 4 billion, and total capital employed increased to 108 billion. Net debt was stable at around 11 billion, corresponding to 1.3 times EBITDA. And we have now almost finalized our large ongoing investment projects in Obola, Ortviken, Bolsta, and Gothenburg. Equity increased to 97 billion, and net debt to equity was 11%. Thank you. With that, I'll hand back to you, Ulf.

So, thanks. Well, if I try to summarize the second quarter, one can say that I think in a challenging market, we have delivered a very strong result, 1.7%. billion on EBITDA level with a margin of 37%. I think that we have seen a very strong result and good growth in renewable energy. And here we have had a strong market, but we also continue to develop the business that we have here, not only wind power, but also what we do in liquid biofuels. And of course, also a strong result in the forest as woodrow materials continue to increase. And I think also that we can see in this rather challenging environment that we are favored by our strong integrated value chain with a high degree of self-sufficiency in woodrow materials, but also in energy and last but not least important also in logistics. So I think by that we can open up the line for questions. Please.

As a reminder, if you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keyboard. To withdraw your question, please press star 2. Again, you can press star 1 Okay, so we are going to take now our first question from Johannes Grunzelius from DNB. So you can go ahead now. Your line is open. Thank you.

Johannes Grunzelius Yes, hi, everyone. It's Johannes here. Sorry if I missed some parts in your presentation because of other reports today, but the results in renewable energy was pretty strong. Could you expand, provide some color on why this is a great consecutive quarter? I got the feeling that Q1 had some positive seasonality in it. But could you explain it and maybe give us an update on perhaps pricing for biofuels here?

Maybe Andreas later on can give us some more details. figures, but I think we have a strong development in renewable energy. And I mean, as I say, typically we should have a stronger Q1 than Q2, but the market is strong here for solid biofuels, as I said. Step by step, we increase the leasing fee from wind parks, but we also now see the effect of the wind park that we acquired in the last quarter last year. But maybe the most important thing is that we start to see some positive effects of the business that we're now doing in liquid biofuels with tall oil and things like that. Andreas, maybe you can give some more color on the figures.

I think the biggest increase from last year is the tall oil and the fatty acids. We've seen a good price increase this year compared to the last year. But we also see price increases on solid biofuels, as Ulf mentioned. I think it's a mix, but the largest contribution is from increased tallow prices and fatty acids.

Okay, that's helpful. So, in other words, the Q2 is kind of representative for coming quarters?

I would say that... You have a normal seasonality effect, so usually Q1 and Q2 is, you know, Q1 and Q4 is stronger in biofuels and in wind power, while I would say tall oil is more stable throughout the year.

Okay. Then my second question is on wood products. And again, sorry, apologies for maybe missing the information that you called. But I mean, how do you assess the export market versus the kind of the domestic market? Maybe you can then repeat what you think about average prices there. But do you feel that you can, I mean, if you could give some comments on the order backlog and if you think you can still run the business with decent volumes despite of sort of local construction weakness and global construction weakness?

Yeah, I don't know what you heard. But again, I mean, we increased prices in the second quarter in comparison with the first quarter by 8%. And that was also my guess when we did the presentation of the first quarter report. And I said today that I think that the price will come down in the third quarter, maybe close to the level we had in the first quarter. And that is, of course, due to some kind of seasonal effect q2 is normally the strongest quarter not least in our diy business but also now we see that i mean big building projects there are finalized of course but we see some cancellations and we also see some delays in in other big projects and that will have a negative impact on the demand coming quarters no no no doubt about that On the positive side, I must say that we have seen production containments, maybe not too much in Sweden and Finland so far, but we have seen them in Canada, we have seen them in Germany, and by that we have a rather balanced stock level, and that also goes for SA, both in terms of qualities, but also volumes. Again, when the market, when it's always a question about supply demand and when the demand is coming back, then I think we are rather well prepared. And I think that upturn will come quite fast when it turns. But again, the demand must, of course, increase before we can see some price increases. Is that an answer?

Absolutely. That's very helpful. Thank you.

Now we'll take our next question from Oscar Lindstrom from Danske Bank. You can go ahead now. Your line is open. Thank you.

Good morning. A couple of questions from my side. I'll take them one by one, I think. I mean, first on the wood volumes outlook. I mean, we talked about this just now with Johannes. But, I mean, you mentioned possible expectations of production curtailments in H2 production. also in the nordics we've seen them in canada and continental europe so far but now also in the nordics do you see that as being driven by sort of a lack of wood or weak demand or both and and are you expecting to make significant production curtailments during the second half of the year uh i mean i think it's uh

With the market you have today, we draw a high cost for saw logs and a rather weak market for solid wood products. I mean, you don't really force the production to increase. You don't take extra costs in order to produce an extra volume. And during the summer, I think that many companies now they will stop for one, two, three or four weeks due to this market situation. And I think that we will probably see some kind of effect of that in the third quarter. That's my best guess. When it comes to SEA, I mean, we will more or less run the production according to a normal year. And I think the reason for that is that we are We have a rather low cash cost as we have invested quite a lot of money into our sawmill business. So, I mean, we will not add extra costs just to try to force the production to increase. But we will continue with, let's say, normal pace, I would say, during the third quarter.

All right. And on the pulp side, I guess a fairly similar situation. question. I mean, you mentioned the high global producer inventories as being something that's going to probably hold the market back for some time. What's your inventory situation on the pulp side? And how are you handling sort of the ramp up of the CTMP line in this tough market? I mean, are you going to be able to continue that ramp up and To which kind of markets are you expecting to or are you selling that CTMP?

Yes, I mean, in general, the stock level for pulp, both in short fiber and long fiber, is on a more or less record high level, which is, of course, challenging. For SA, I think that we are more or less on the normal level. And so by that, we will not take no curtailments. We will continue to run the mill. And again, it's a question of cash cost, of course. And we are, again, well invested in the industry. When it comes to the CTMP ramp up, I mean, we are at the very early stage. And by that, it's not a problem with the volume. But again, I think you... In the market that you have today, I mean, you stop and you do what you need in order to prepare for the future and no need to take extra costs just because you like to have more volumes. I mean, we follow the plan more or less and we are at an early stage, so to say. But the production so far has been, it is good both in terms of volume and also in terms of quality from the new mill.

Thank you. My final question is on container board and the market outlook. And you talked a little bit about the sort of relatively good inventories in the market, but also expecting new capacity to come on. And then you mentioned that you thought there might be sort of a situation where prices could recover. But did you mean that perhaps we could see this price recovery later this year already or is this something like further into the future?

I mean that is hard to say. First we need to see the consumption is coming back and what I said was when we see an increase in consumption then I think that it might be a rather sharp and fast return because the stock level is on a normal to low level. And in container board, we have seen that many producers, they have taken curtailments. And that's the reason also, of course, why we have this balanced stock level. The consumption in the first quarter this year was 12-15% lower than the same period last year. But we have seen a good... let's say, reaction among producers. So the production has also been lower. So if that will happen next, this half of this year, or if it happens in the beginning of next year, I mean, it's hard to say.

But you're not worried about the capacity outlook in your segments in Craftliner? No. Do you expect a spillover from the test liner capacity additions already coming up here soon?

I mean, I think we think that all craft liner produce is needed in the market. Of course, we see some increase in capacity now coming on stream from test liner. And that might put pressure for a while, but by that we will also see increasing OCC prices. I think that we also will see increasing energy prices when we are coming into the late third, beginning of the fourth quarter. And that will put an extra pressure on test liner pricing. And that will, of course, also help the pricing for craft liners. So I think we have reached more or less the bottom now in in Kraft Liner for the moment being. And my best guess is that we will see increasing OCC prices and also energy prices. And by that, we might see a push upwards.

All right. Very clear. Thank you very much. Those were my questions. Thank you.

We'll take now our next question from Robin Santaviria from Carnegie. You can go ahead now. Your line is open. Thank you.

Thank you very much and hello everybody. I have two questions. The first question is related to wood raw materials or saw log prices and pulp wood prices. We have seen a quite significant increase over the past one to two years and we saw some price increase announcements still during the second quarter in Sweden. That obviously is good for your forest segment, but then burdens the cost for the industrial segments. How do you see the price trend, the market dynamics now for the remainder of the rest of this year when it comes to soil log prices and pulpwood prices?

Yeah, it's hard to say. And I mean, we are a little bit surprised ourselves because in a rather tough market, we have seen steadily increasing prices for both pulpwood and saw logs. Well, my best guess for saw logs is that I think they will maybe stay on this level and it is a high level and that you can also see when you look at the result for many saw millers today. And I think maybe we start to see some kind of balance in the pulpwood market. And again, it's a question of supply demand. So if that comes, then it might be so that prices start to come down again. We've seen increasing prices in in our part of sweden for a while and when we compare with the first quarter this year with what we had last year i mean substantially price increases as mentioned but in the baltics we have on the other hand seen that the prices is now coming down still it's more expensive to bring wood from the baltics up to our meals when you calculate free delivered but but we started we start to reach some kind of balance point here.

All right, thank you.

Robby, you have some lag effects. You see slightly higher pulp wood prices in Q3, while the chemical costs are decreasing.

Right, yeah, the P&L impact, yeah, some lag. The second question I have is related to the pulp market and It probably is true that bulk prices in Europe are still on a declining trend, but where do you see from that 1,200 least pricey euro? Where could we bottom? I know it's difficult to estimate, so I won't keep you accountable for it, but I guess your view is better than anybody else's view. And related to that, how do you see the high-cost producers now acting? Are they still producing or have they curtailed production to those on pulp?

To be honest, I think it's quite easy to forecast where we will land, but I will not give you the numbers because that you can guess yourself. But I mean, we have already now started to see that many producers, they are taking containments now. And I mean, when, because I think we will see a further price decrease. then we will also see more of curtailments. And I think that we now start also to see curtailments in Europe and also in Scandinavia in some areas. But again, we need to find a balance. With this stock level, it will take a while before the market can turn. The consumption might come back. I mean, when we look at some... reports from some customers i mean the demand is rather okay in the tissue business for example but but still with this stock level we have to wait a while and and i think we have a short way to go in in europe us i think maybe prices in china might come up and when they meet then of course we have a much more stable market and and i think that will happen in the the second half of this year

Good, thanks. And maybe if I could squeeze in a third one for Andreas related to forest transaction prices. Now, that 400 level, do I understand it correctly? You use three-year average prices when you set your book value, and the book value is 366 per cube. So if the full year now would be 400, I guess we're looking at a quite significant increase in the book value. But you didn't want to do that now already because of your transactions. Is that the case, sir?

Yes, that's correct. We left the price flat at 366. And if we hadn't done that, I mean, the prices would have gone up. So if the price stays at around 400 level, that everything else equal, the three-year average will increase.

All right. Thank you very much.

We currently have no questions coming through. As a final reminder, if you would like to ask a question, you can press star one now. As there are no further questions, I will hand you back to Nicolas to conclude today's conference.

Thank you. And that concludes the presentation of the half-year report for SCA 2023. Thank you very much for listening and contributing with questions. Thank you.