Svenska Cellulosa Aktiebolaget SCA (publ) (OTCPK:SVCBF) Q3 2023 Earnings Conference Call October 27, 2023 4:00 AM ET

Company Participants
Ulf Larsson – President and Chief Executive Officer
Andreas Ewertz – Chief Financial Officer

Conference Call Participants
Charlie Muir-Sands – BNP Paribas
Johannes Grunselius – DNB Markets
Martin Melbye – ABG
Oskar Lindström – Danske Bank
Linus Larsson – SEB
Christian Kopfer – Handelsbanken
Cole Hathorn – Jefferies
Alexander Vilval – Pareto
Andrew Jones – UBS

Operator
Good morning and welcome to this presentation of SCA’s Interim Report Presentation for the Third Quarter of 2023. With me here today, I have CEO and President, Ulf Larsson; and CFO, Andreas Ewertz. Now over to you, Ulf.

Ulf Larsson
Thank you, Anders, and also from my side a good morning and welcome to the presentation of SCA’s result for the third quarter 2023. So when I summarize the quarter, I can state that we have delivered a stable result with a strong cash flow, not least driven by a profitable growth in renewable energy, a stable performance in forest, but also resilience against cost inflation. And that that is of course partly due to our high degree of self-sufficiency in our wood and energy supply, but also in logistics. We see a stabilizing demand in the market for our products. Prices for solid wood products decreased as expected during the third quarter, but will as an average remain on current level also in the fourth quarter. Containerboard prices have been flat since May this year, while prices for pulp have bottomed and started to increase also as expected. EBITDA decreased in comparison with its third quarter last year, but reached SEK1.4 billion and by that a healthy EBITDA margin of 33%. So when I compare the third quarter this year with the third quarter last year, I can note that sales decreased by 14% and the EBITDA by 43% and that is mainly due to lower prices. On the positive side, we have seen a high result in forest, a high result in energy, and that is combined with higher delivery volumes due to commission strategic investments and also positive currency effect. Finally, I can remind you that we recently have announced an acquisition of a wind park, Fasikan, and the total cost is estimated to SEK1.7 billion and the yearly production will be around 0.33 TWh and the commissioning will be early 2026.

So turning over to some financial KPIs related to the third quarter. Our EBITDA decreased 17% in comparison with last quarter, but reached, as I said, SEK1.4 billion and that corresponds to 33% EBITDA margin. Our industrial return on capital employed came out on 12%, calculated as the average for the last 12 months. The leverage is at 1.4 and that is despite our almost finalized large ongoing investment projects in Obbola, Ortviken, Bollsta and also Gothenburg. And by that we also 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 like to start with forest. During the third quarter, we have had a stable supply of wood raw materials to our industries. In general, we can note the continued high demand for saw logs, while the demand for pulpwood has begun to weaken. As can be seen in the graph in the bottom left, prices for both pulpwood and saw logs have steadily increased during a long period. And we now feel that they even out on a historically high level in the Baltics. We also see that raw materials prices have started to decline. When we compare Q3 2023 with the same period last year, sales were up 17% and EBITDA was up 20% and that is mainly due to higher prices, but we also have a positive effect due to higher harvesting level in our own forest.

Turning over to business area Woods. In general, we have a continued slow underlying market for solid wood products. DIY activities had a seasonally positive effect on the demand in the second quarter, but have now come down as expected in the third quarter. New housing starts are in a decreasing trend with the U.S. as an exception. However, stock levels in the market are low, so demand in end-use market will create orders back to the saw mills. I estimate that the price should come down in the third quarter and reach the level we had in the first quarter. And that also happened and we have seen a 7% price decrease in the third quarter in comparison with the second quarter. I now feel that we have reached the bottom and expect unchanged prices in the fourth quarter. Sales and EBITDA were substantially down, Q3 2023 in comparison with Q3 2022 and that is due to price and cost of wood raw material. 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. We note that the inventory volumes are in the normal level. SCA has also maintained good deliveries during the third quarter and by that we have a balanced and also normal stock level. As can be seen in the diagram to the bottom left, the Swedish and Finnish sawmills production has been below normal level, approximately 5% less than last year, same period. Outside the Nordic countries, we have also seen continued production curtailments, mainly in Germany but also in Canada and we can expect further production curtailments during the coming quarter. While looking at the diagram to the top right, we can note that the price peaked in the third quarter 2021 and that was on historically high level. Prices have come down substantially since then and at the same time the prices for sawlogs have increased with the major, of course, negative effect on profitability.

So over to pulp. First, I am happy to say that our CTMP expansion continues according to plan regarding production ramp up and sales growth. Sales and EBITDA were down 14% and 80% respectively when comparing the third quarter this year with Q3 2022. We can note lower prices and higher wood raw material costs on the negative side while currency and also volume have had a positive impact in this comparison. We did start up the planned maintenance stop at Östrand in the third quarter with a negative result impact of approximately SEK50 million in the third quarter. We have seen a quarter with increase in demand of pulp in China and prices have also been rising lately, especially in China. Profitability has improved for Chinese deliveries. The increase in demand and turnaround of prices is an effect of low inventories by customers and also limitations of capacity from high cost producers for deliveries to China. The market in Europe has also improved in September. Customers are asking for increased volumes. Therefore, SCA has also announced a new base price of US$1,200 per ton that is defective from October. The global inventories are on a stable but somewhat high level. SCA inventories are on a medium to low level after the planned maintenance stop. And we are also expecting prices in the U.S. to start increasing as of November. The prices of CTMP have also increased with approximately US$75 per ton in Asia. The closure of the CTMP line at Östrand was accomplished early September as planned. And by that, all CTMP production has now been transferred to the new line at Ortviken. From competition, we note that Metsä’s new mill in Kemi has started up and Stora Enso’s mill and Sunila has been announced to be closed. We have also noted that substantial BSK pulp capacities have been closed in Canada. In total, we by that estimate that the market balance to be more or less unchanged.

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, as said before, 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 by 2026. Sales was down quarter-on-quarter by 18% due to lower prices…