Earnings Transcript for SVCBF - Q2 Fiscal Year 2023

Anders Edholm: Good morning and welcome to this presentation of the SCA Half Year Results for 2023. With me here today I have the CEO, Ulf Larson; and CFO, Andreas Ewertz. With that, Ulf, I hand over to you.

Ulf Larsson: Thank you, Anders, and also from my side a good morning and a warm welcome to the presentation address for the second quarter. When I summarize the second quarter, I can state that we have delivered stable results, not the least driven by a profitable growth in renewable energy, stable, performance in forests, but also resilience against cost inflation. The latter is of course partly due to our 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 containerboard. Prices for solid food products increased as expected during the second quarter in comparison with the first, but will come down again in the third quarter. Prices for containerboard 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 SEK1.7 billion by that healthy EBITDA margin of 37%. When I compare the second quarter this year with the second quarter of last year, I can note that 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 the positive currency effects. So, then I turn over to some financial KPIs related to the second quarter of the ’23. As mentioned, our EBITDA decreased 17% in comparison with last quarter, but reached SEK1.7 billion 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 one despite our almost finalized large ongoing investment projects in Obbola, Bollsta, Ortviken 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'll 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 increase in 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, Pulpwood prices have increased by almost to 35% somewhat more for birch and somewhat less for conifer. Corresponding figure for sawlogs is an increase of around 15%. Pulpwood prices in the Baltics continued 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 forests. Then I turn over to business area Woods. In general, we have had, we have a continued weak underlying market for solid wood products. DIY activities has had a seasonally positive effect on the 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 decreasing trend. I estimate that the 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 rather normal stock level prices will come down again in the third quarter, as we have no strong positive seasonally 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 EBITDA were substantially down due to price and cost of wood raw material when we compare 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 SCA 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 sawmills production has been on a rather normal level. Outside the Nordic countries, we have seen production containments, not the least in Germany and Canada. And today we can't really see any Russian or Belarusian wood in the European markets. I think that we can expect further production containments during the coming quarter not only maybe in Canada and Central Europe, but also in Scandinavia. We're 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 saw logs 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 have not lowered 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 forecast that the price bottom to be reached and a price level to be set in China during the second quarter and that also came in May. But on a very low level around US$610 to US$620 per tonne. Pulp prices in Europe and US are on high levels, but still in the decreasing trend. The European PIX prize for deliveries in Europe in July is now set to US$1200 per tonne, which is a price decrease of US$50 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 their 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 the positive turn in the market might take a while. So, moving over to containerboard. The ramp up of the new kraftliner paper machine in Obbola 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 Obbola 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 Obbola and that had a negative result effect of between SEK1,900 million. 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 destocking effect at box plants. We believe in a stronger demand for containerboard in the second half of this year, on the other hand, there is additional supply in testliner coming onstream in the next quarters, which will put some pressure on the supply-demand balance. Prices for Brown kraftliner have decreased with EUR30 per tonne in the second quarter this year. And that indicates in our price gap between kraftliner and testliner over EUR190 per tonne. Prices for white top also decreased with EUR30 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. Containerboard and especially Kraftliner 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 ‘23 and we would estimate production of containerboard to be 1250% 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 testliner. Today, its price is around EUR75 per tonne, which is EUR110 per tonne lower than peak in July ’22. Since we are seeing demand decline to level off and strong demand in second half of the year we can assume that the 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 increase in 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 lease agreements on SCA land has now reached 8.2 terrawatt hours in the second quarter and that is also in line with the our communicated plan. Our newly acquired wind farm Skogberget is also delivering according to expectations. Finally, the biorefinery in Gothenburg is on the construction and the first product to tank is planned to Q4 this year and we still see a strong market development for HVO and also for sustainable aviation fuels stuff. So by that, I think I hand over to you Andreas.

Andreas Ewertz: 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 SEK420 per cubic meter, to approximately SEK400 per cubic meter. Fewer than normal transactions were made in the first half of the year and we have therefore left a three year average price to use in the forest valuation flat at SEK366 per cubic meter. And by that, we maintain a healthy headroom to current prices. The forest valuation increased SEK1 billion to SEK99 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 SEK1.7 billion despite weaker market driven by growth in renewable energy, and higher results in our forest division. EBITDA margin was 37%. Depreciation increased to SEK471 million due to the activation of the new paper machine in Obbola and the new CTMP mill at Otriken. EBIT margin declined to 27% and financial items totaled minus $103 million. With an effective tax rate of around 20% bringing net profit to SEK0.9 billion or SEK1.36 a share. On the next slide, we have the financial development by segment and start with the forest segment to the left, net sales grew to SEK1.9 billion driven by continued increase in prices. EBITDA increased to SEK870 million driven by higher prices and seasonally higher 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 SEK1.35 billion and EBITDA increased to SEK201 million, corresponding to a margin of 15%. In Pulp, prices continued to decrease and net sales declined to SEK1.8 billion, and EBITDA decreased to SEK380 million, corresponding to a margin of 22%. Pulpwood raw material prices continue to increase, while chemical costs are decreasing. In containerboard, Kraftliner prices are bottoming out with stable index prices since May. In Q2, net sales declined to SEK1.4 billion and EBITDA totaled SEK217 million corresponding to a margin of 15%. The planned maintenance stop in Obbula had a negative impact of SEK94 million In Renewable Energy, we had another strong quarter with EBITDA stable at around SEK180 million, despite seasonally lower volumes compared to the previous year’s quarter. EBITDA margin increased to 49% and was positively impacted not the least by a strong tall oil demand. On the next slide, we have the sales bridge between Q2 last year and Q2 this year. Prices declined 25% with lower prices in wood, containerboard and pulp. Volumes declined 5% driven by weaker wood markets, which was partly offset by higher volumes in containerboard and pulp from the ramp up of the new paper machine in Obbula and the new CTMP mill at Otriken. And lastly, currency had a positive impact of 8% bringing that sales to SEK4.6 billion. Moving onto the EBITDA bridge and starting to the left, price mix had a negative impact of SEK1.5 billion and lower volumes mainly due to a weaker wood market had a negative impact of SEK167 million. High cost for mainly Wood raw materials had a negative impact of SEK142 million, while energy had a neutral impact, which shows our high self-sufficiency in both energy and Wood raw material. We had a positive impact from currency and a positive impact from lower distribution costs. In total, EBITDA increased - decreased to approximately SEK1.7 billion corresponding to a margin of 37%. We continued to have a strong operating cash flow, SEK650 million for the quarter, and SEK1.85 billion for the first six months. And this means we are continuing to fund our strategic investments with operating cash flow. Looking at the balance sheet, the value of the forest assets increased to SEK99 billion. Working capital stood at SEK4 billion and total capital employed increased to SEK108 billion. Net debt was stable at around SEK11 billion, corresponding to 1.3x EBITDA and we have now almost finalized our large ongoing investment projects inObbula, Otriken, Bollsta and Gothenberg. Equity increased to SEK97 billion and net debt to equity was 11%. Thank you. With that, I'll hand back to you, Ulf.

Ulf Larsson: So, thanks. Well, if I try to summarize the second quarter, what I can say that I think in a challenging market we have delivered a very strong result SEK1.7 billion on EBITDA level with a margin of 37%. I think that we have seen a very strong result in a good growth in renewable energy. And here we have had a strong market, but we also continued to develop the business that we have here not only wind power, but also what we do in liquid biofuels. And of course, also strong result in the forest as wood raw materials continued 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 wood raw materials, but also in energy and last but not least, important also in logistics. So I think, by that that we can open up the line for questions please.

Operator: Okay. So we are going to take now our first question from Johannes Grunselius from DNB. So, you can go ahead now. Your line is open. Thank you.

Johannes Grunselius : Yes. Hi, everyone. It’s Johannes here. Sorry if I missed some ports in your presentation because of other reports today, but the results in renewable energy was really strong. Could you expand a little, or 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 a bit and maybe give us an update on perhaps pricing for biofuels here?

Ulf Larsson: Maybe, Andreas, later on can give you some more figures. But I think we have a strong development in renewable energy. And I mean, as you 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 now are doing in liquid biofuels with tall oil and things like that. So, Andreas, maybe you can give some more color on the figures.

Andreas Ewertz: Yeah. I think the biggest increase from last year is the tall oil and the fatty acids within 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 tall oil prices and fatty acids.

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

Ulf Larsson: I would say that you have a normal seasonality effects, usually Q1 and Q2 is, you know, Q 1 and Q4 is stronger in the biofuels and in wind power while I would say tall oil is more stable throughout the year.

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

Ulf Larsson: 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 in when we did the presentation in 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 season effect. Q2 is normally the strongest quarter, not least in our DIY business. But also now we see that, I mean, big bidding projects that are finalized of course, but we see some cancellations and we also see some delays in other big projects and that will have a negative impact on the demand coming quarters, 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've 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 SCA both in terms of qualities but also volumes. So, again, when the market - when it's always a question about supply demand and then the demand is coming back then I think we are rather well-prepared and I think that upturn will come quite fast when when it turns. But again, the demand must, of course increase before we can see some price increases. Is that it's an answer?

Johannes Grunselius : Absolutely. That's very helpful. Thank you.

Operator: Now, we'll take our next question from Oskar Lindström from Danske Bank. You can go ahead. Now your line is open. Thank you.

Oskar Lindström : Good morning. Couple questions from my side. I’ll take them one-by-one. I think, I mean, first on the, on the wood volumes, outlook, I mean, we talk about this just now with Johannes? But, I mean, you mentioned expectations of production curtailments in H2 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 has been driven by sort of a lack of wood or weak demand, or both and are you expecting to make significant production curtailments during the second half of the year?

Ulf Larsson: I mean, I think it's - with the markets you have today, we're already high cost for saw logs and 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 we will see some kind of effect of that in the third quarter. That's my best guess. When it comes to SCA, I mean we've been more or less run the production according to normal - a normal year. And I think the reason for that is that we are - we have a rather low cash costs in - as we have invested quite a lot of money in saw mill business. So I mean, we will not add extra costs, just to try to force the production to increase. But we will continue with the - let's say, normal pace, I would say, during the third quarter.

Oskar Lindström : All right. And on the pulp side, I guess a fairly similar 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?

Ulf Larsson: Yeah, so as I said, 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 SCA, I think that we are more or less on the normal level. And so, by that we will not take no containments. We will continue to run the mill. And again, it's a question of cash costs, of course. And we are again, well invested in the industry. When it comes to the CTP – 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 a 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. So, I mean we do - 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.

Oskar Lindström : Thank you. But my final question is on containerboard and the market outlook. And you talked a little bit about the - sort of a 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?

Ulf Larsson: I mean, that is hard to say. We - 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 short and fast return because the stock level is on the normal to low level. And in containerboard, 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 in 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.

Oskar Lindström : But you're not worried about the capacity outlook for Kraft - in your segments in Kraftliner or?

Ulf Larsson: I mean…

Oskar Lindström : Or you expect a spillover from the testliner capacity additions already coming up here?

Ulf Larsson: I mean, I think, we think that all Kraftliner produce is needed in the market. Of course, we see some increase in capacity now coming onstream 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 3rd – beginning of the fourth quarter and that will put an extra pressure on testliner pricing. And that will of course also help the pricing for Kraftliners. So I think we have reached more less the bottom-line in kraftliner 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.

Oskar Lindström : Very clear. Thank you very much. Those were my questions.

Ulf Larsson: Thank you.

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

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

Ulf Larsson: Yeah, it's hard to say and I mean, we are a little bit surprised ourselves because in rather tough market, we have seen steadily increasing prices for both pulp wood and saw logs. And, 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 sawmills today. And I think maybe we start to see some kind of balance in the in the pulp wood market. So - 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 - I mean, we see - we've seen increasing prices 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 price is not coming down. Still it's more expensive to bring food from the Baltics up to our mills when you calculate free delivered. But we started - we start to reach some kind of balance point here.

Robin Santavirta : All right. Thank you.

Andreas Ewertz: Or we have some lag – yes, Santa, we have some lag effects. You will see slightly higher pulp wood prices in Q3 while the chemical costs are decreasing.

Robin Santavirta : Right. The P&L impact yet online. The second question, I have related to the pulp market than it probably is true that pulp prices in Europe are still on a declining trend. But whether you see from that 1,200 list price Euro, where could we bottom? I know it difficult to estimate. So I want to keep you accountable for it. But I guess your view is better than anybody else’s. And related to that, how do you see high cost producers now acting? Are they still producing? Or how they curtail could tell production to those on pulp?

Ulf Larsson: 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 curtailments now. And I mean, when the - when because I think we will see a further price decrease then we will also see more of curtailments. And another thing that we now start also to see curtailments in Europe and also in Scandinavia in some areas. So, I mean, 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 still be this stock level we have to wait a while. And I think we have a short way to go in Europe. U.S. I think maybe prices in China might come up and when they meet, then of course we have a much more stable market then and I think that will happen in the second half of this year.

Robin Santavirta : Good. Thanks. And maybe if I can squeeze in a third one for Andreas related to forest transaction prices. Now that 400-level - do, I understand it correctly? You used three year average prices, when you sort of set your book value - at the book values and SEK366 of a cube. So, if the fall here now would be 400, I guess we're looking at the quite significant increase in the book value. What you didn't want to do that now already because a few transactions. Is that the case or?

Andreas Ewertz: Yes, that's correct. We left the price flat at SEK366 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.

Robin Santavirta : Yes. All right. Thank you very much.

Operator: We currently have no questions coming through. [Operator Instructions] As there are no further questions, I will hand you back to you, Nicholas to conclude today's conference. Thank you.

Ulf Larsson: Anders?

Anders Edholm: 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.

Ulf Larsson: Thank you.