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Healthy Q2 performance; paper improvements continue

  • 19 Aug 16

Holmen good Q2 16 results, wherein, despite a top-line miss, profitability remained robust and was largely in line with consensus estimates. Given that Q1 was an exceptionally strong quarter, some moderation was anticipated in Q2. Sales came in at SEK3.9bn (-4.9% yoy; +2.8% qoq) with weak harvesting (-11%), energy (-30%) and timber (-10%) volumes exerting yoy pressure. The sequential improvement was single-handedly driven by healthy paper deliveries (+25%) as Hallsta returned to full capacity after the fire accident in November 2015, more than compensating for maintenance shutdown-induced lower board volumes (-6.2%). Despite the top-line vagaries, adjusted EBIT was up 12% yoy to €488m – with paper earnings reviving at full-throttle (profit of SEK78m vs. a loss of SEK15m in Q2 15). Although, there was a sequential correction (17%) attributable to a series of factors: 1/ paperboard impacted by SEK40m of rebuild costs (guided earlier by management); 2/ forest’s earnings (-15%; accounting for 43% of total profit) impacted by seasonally-higher costs and reversion of timber trading to normalised levels; 3/ forex headwinds of SEK30m; and 4/ seasonally-lower energy production (-31%). Net profit came in at SEK364m (+13%; +64% qoq) with the sequential operating weakness being more than compensated by the absence of any one-off charges (SEK232m) recognised in Q1 16. Despite improving working capital efficiencies (release of SEK91m vs. SEK28m in Q2 15 and use of SEK213m in Q1 16), reported OCFs were down 1.2% yoy to SEK569m as taxes paid increased by a whopping 85%. Even though Holmen received SEK484m of proceeds from the Madrid mill sale, payment for the 2015 dividends resulted in a largely unchanged net debt position compared to Q1. Management guides for a SEK40m maintenance shutdown impact at the Braviken paper mill in Q3. Unlike Q2, the (negative) exchange rate impact is guided to be negligible in the current quarter.

Bottom-line marred by one-off expenses and paperboard disruptions

  • 09 Feb 16

Unlike UPM and Stora, Holmen’s Q4 and FY15 numbers failed to meet AV's (and consensus) expectations, although (resurfacing) material paper business weakness was the common thread tying these three European paper majors. *Q4 disruptions dilute 2015 top-line performance* Sales: Q4 – SEK3.7bn (-8% yoy; -8.5% qoq); 2015 – SEK16bn (flat; 2.5% behind AV estimates) Q4 sales were severely impacted by the paperboard maintenance shutdown (volumes down 4.9% yoy and 12% qoq) and loss of paper production (volumes down 1.6% yoy and 11% qoq) due to a fire at the Hallsta mill. Although for the full year, the strong paperboard contribution (sales up 7%) and materially higher energy volumes (+29%) helped offset weaker prices in paper, timber and energy. *A bigger profitability impact* Adjusted EBIT (excluding income from associates and JVs): Q4 – SEK369m (-20%; -25% qoq); 2015 – SEK1.7bn (-2.8%; 5.4% behind AV estimates) The paperboard maintenance shutdown had a SEK100m profitability impact in Q4. While this resulted in Q4 paperboard profitability correcting 34% yoy (and 47% qoq), overall group profits also came under pressure (despite cost rationalisation – especially in paperboard and forests) as paper and energy succumbed to difficult markets. Even forex tailwinds faded (gains of SEK50m in Q4 vs. SEK450m - o/w >50% were in paper – in 2015) during the course of the year. Attributable net profit: Q4 – a loss of SEK438m (vs. a loss of SEK4m in Q4 14 and a profit of SEK377m in Q3 15); 2015 – SEK559m (-38%; materially behind AV's estimates). Similar to Stora, Holmen too impaired its paper assets by c.SEK620m in Q4 on account of the continuous weakening in long-term paper market fundamentals. Additionally, >SEK300m of one-off charges were recognised in Q4 to create a provision for early termination of electricity contracts and the fire at Hallsta. These unanticipated charges took a toll on Holmen’s bottom-line – which had been resilient during 9m 15. *Surprising working capital release bolstered gearing position* Despite marginal weakness in operating profits, the company managed a working capital release of SEK443m in 2015 (SEK290m in Q4 alone) vs. use of SEK217m in 2014, resulting in reported OCFs increasing 16% to SEK2.5bn. Also with the unchanged 2015 capex, net debt declined to SEK4.8bn – the first time below SEK5bn since 2006. However, a (gradual) reversion of the working capital benefits should result in an increase in the net debt position. The full-year dividend was increased to SEK10.5/share (+5%; in line with AV estimates). Management guides for another SEK100m of maintenance/rebuild costs in H1 16 as the paperboard capacities are being ramped-up (especially at Workington mill by 20ktpa).

No positive surprise unlike peers

  • 06 Nov 15

Even though Holmen reported ahead of consensus Q3 15 results, they were lacklustre when compared with the Q3 performance of Stora and UPM. Sales increased 1.9% yoy to SEK4bn, driven by a continuously strong performance in paperboard (deliveries +5.6%; +8.2% qoq), and much higher energy production (+65%) and healthy paper volumes (+4.4%). Although weakness in paper, timber and energy prices has persisted. On a sequential basis, seasonally lower harvesting volumes (-14%) and weak timber deliveries (-24%; although impacted by a renovation at the Iggesund Sawmill), along with a weak price environment, resulted in a 2.6% top-line correction. Adjusted EBIT came in at SEK489m (-5.6%; +12% qoq) as an unrelenting weakness in paper (partly also aggravated by maintenance shutdowns) and higher costs in timber, overshadowed the cost optimisation achieved in paperboard and forests (Skog). Additionally, lower gains from the change in value of forest assets (unlike the hefty gains reported by Stora and UPM) disappointed. Similar to the last few quarters, again a big contributor to the overall profitability was SEK150m (SEK400m ytd) of forex gains. Although sequentially fading forex gains were more than offset by seasonally lower personnel costs. Thankfully somewhat lower borrowing costs (driven by a low interest rate environment in Sweden) resulted in net profit coming in slightly better at SEK377m (-2.1%; +17% qoq). Cash flows were partly impacted by a slowing pace in working capital release (SEK24m vs. SEK105m in Q3 14 and SEK28m in Q2 15), thereby resulting in 12% lower reported OCFs of SEK654m (+13% qoq). Management guides for another SEK80m profitability impact due to paperboard maintenance shutdowns in Q4.

Forex benefits mask operating weakness

  • 14 Aug 15

Unlike 2014 (witnessing a staggering profitability recovery), 2015 has so far been a lacklustre year for the paper sector. Holmen too has followed suit by reporting weak Q2 results – profitability in particular, which was behind consensus estimates. Even though Holmen posted double-digit operating profit growth (unlike UPM and Stora – where the reporting currency is euros), the key driver was more weakness in the Swedish Krona and not any material operating improvements. Sales came in at SEK4.1bn (+4.9% yoy; -0.4% qoq), largely driven by strong paperboard operations (+9%) and higher paper (+11%; due to a growing contribution of value-add paper) and timber (+6.1%; seasonally strong demand) deliveries; while lower third-party forest operations and continuously weak paper (particularly newsprint) and hydropower prices dampened some of the gains. Although adjusted EBIT was up 19% to SEK437m, it was attributable to SEK150m of forex benefits and somewhat lower paperboard costs. Even sequentially, 10% profitability growth comprised SEK40m of currency benefits and favourable comps (as Q1 was impacted by SEK130m of maintenance shutdown and paperboard and paper mill rebuilding costs). Further down, lower financing costs culminated in a net profit of SEK322m (+29%; +8.1% qoq). Profitability growth (even though forex-driven) along with marginal working capital efficiencies resulted in reported OCFs of SEK574 (+19%; +10% qoq).