Svenska Cellulosa Aktiebolaget SCA (publ) (OTCPK:SVCBF) Q2 2021 Earnings Conference Call July 23, 2021 4:00 AM ET
Company Participants
Ulf Larsson - President and Chief Executive Officer
Toby Lawton - Chief Financial Officer
Conference Call Participants
Linus Larsson - SEB
Robin Santavirta - Carnegie
Martin Melbye - ABG
Cole Hathorn - Jefferies
Oskar Lindstrom - Danske Bank
Justin Jordan - Exane
Johannes Grunselius - Kepler Cheuvreux
Mikael Doepel - UBS
Operator
Welcome to this presentation of SCA's, Second Quarter Result for 2021. With me here today, I have our President and CEO, Ulf Larsson; and CFO, Toby Lawton.
Please go ahead Mr. Larsson.
Ulf Larsson
Thank you, Anas. Good morning everyone and also from my side a warm welcome to the presentation of our result for the second quarter 2021. And also from my side, a good morning and a warm welcome to the presentation of our first quarter 2021.
When I summarize this quarter, I'd 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 EBITDA margin of 47%. A strong market, strong demand, gradually increasing prices within all product areas of SCA 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 stable costs 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 kraftliner, but also good production level, stable costs as well as our decision to exit Publication Paper. On the other hand, the currency development contracts to positive earnings development during the period and give a negative effect of more than SEK 200 million.
Our turnover during the second quarter increased by 3% compared with the second quarter 2020 despite the close of the publication paper business together with 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 SCA forests and but Toby will come back to that later on.
Last but not least important, I would like to conclude the summary of the second quarter by stating that our two major investments and growth projects in Obbola 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 SEK 2.26 billion on EBITDA level and as I already also mentioned, this represents the best quarter since the split of 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 12 months rolling average, that one amounted to 14%, but if we are 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 dividend during the second quarter and I am 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 have had another quarter of stable supply of wood to our industries. Sales was up due to high volumes, whereas we have noted decrease in pulpwood prices mainly due to our exit from Publication Paper, and by that reduced share reported Wood. And when it comes to sawlog 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 SEK 100 million for the quarter.
Wood, there is still a level of high global demand in the wood area; however, right now we see declining CLS [ph] prices in the U.S. and certain restraint in China while other markets northeast 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 housebuildings as well as the increased sustainability focus.
When I presented the Q1 report, I estimated a price increase for the second quarter versus the first quarter to be between 15% and 20%, and what we know just now is that the actual outcome for SCA was a bit over 20% for the second quarter. At present we forecasted that 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 15% [ph].
Sales was flat when comparing quarter-on-quarter. The rise in prices is contracted 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 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. We can note that the inventory volume of steel at the very low level 13% [ph] 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 year's 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 a steep increase in prices for solid-wood products and are 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 have 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 peak pricewise in the end of 2018 we had a peak price of U.S.12.30 per tonne. We then reached the bottom during the first quarter 2020 as you can see. At that time the peak price had dropped to a U.S.$20 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 peaks listing Europe at U.S.$13.40 per tonne, but of course we had a less favorable 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 U.S.$50 per tonne lower than Europe and also in the U.S. the net price is somewhat lower in comparison with Europe for a moment. As you might know, we have also seem sharp increase in 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 stable production volume also led to a better yield in terms of lower consumption of wood and chemicals, high energy generation and so on.
And finally, I can also mention that our ongoing project to build a CTMP line to Ortviken industrial site with a total capacity of 300,000 tonnes 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 SCA this means that Östrand will stop for full 20 days at the turn of the months September and October.
When we move on to business of our Containerboard, I would like to start by stating that our expansion and growth project in Obbola is progressing very well and we are on time and budget. Sales and EBITDA for the containerboard business are up 19% and 75% respectively in Q2, 2021 when comparing with last year and this is mainly due to increase in 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 of test liner and thereby indirectly for kraftliners. So all-in-all this development is positive for SCA.
The global kraftliner deliveries from Europe continued 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 back 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 kraft has so far risen by approximately €200 per tonne. And as of August 1, SCA have announced €50 per tonne increase for kraftliner grades and this price increases with successively take effect during the third quarter and giving full effect during the fourth quarter. So, with the present situation, the delta between kraft and test liner prices is approximately €150 per tonne and that is historically a rather normal level I would say.
So, by that I hand over to you, Toby.
Toby Lawton
Thank you, Ulf. Good morning, everybody. I will start of as start off here with the income statement and on the topline here with net sales. You can see that we have a net sales in the quarter of SEK 4.8 billion. We have actually lost around SEK 1 billion in net sales from both the exit of Publication Paper and the divestment of Wood Supply UK, since second quarter last year. But you can see here that that’s more than compensated by around SEK 1.2 billion of additional sales from the effects of price mix from the effects of increased volume and then net of currency effects.
So that SEK 1.2 billion underlying growth in topline has fallen down to the EBITDA in the next line and that shows that it falls down to basically SEK 1.2 billion to SEK 1.3 billion increase in EBITDA, shows the good stable cost development that we have as well. And so the EBITDA has increased from SEK 1 billion in Q2 last year to SEK 2.26 billion in Q2 this year with an EBITDA margin of 47% which is of course a very good level.
Then coming down that flows through the same increase to EBIT. Financial items very stable on SEK 26 million for the quarter, stable in terms of interest rates and debt which I will come back to. Then, we have a profit before tax of SEK 1.85 billion and tax SEK 372 million which represents effective tax rate of just under 21% in line with the Swedish tax rates, which means we have also a strong net profit for the period of just under SEK 1.5 billion in the quarter and earnings per share in the quarter therefore of just over SEK 2 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 are 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 exit of Publication Paper so reduced wood supply to Ortviken which we don’t have any more 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 forests, 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 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 clean with good production with no maintenance stops, and as Ulf mentioned, we will have a maintenance stop by the end of Q3 and mainly in Q4.
And then in Containerboard paper you see the impact we had publication paper up until the end of Q4, so from Q1 we have a clean Containerboard net sales, and the Containerboard EBITDA, and so the bottom line you can now see as a clean Containerboard margin from quarter one. We have a positive price development in Containerboard 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 both Obbola and Munksund 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 they continued a strong 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, yes again you can see the big impact from price mix of SEK 1.28 billion, the improvement in volume of nearly SEK 200 million and then the other largest part here is the effect of currency which is negative versus last year due to a stronger of SEK 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 SEK 1.6 billion 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 SEK 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 came out with a strong operating cash flow of SEK 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'll 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 and now including the data for the first half of 2021, and that means that the price level is now SEK 302 per cubic meter compared to SEK 291 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 and the value of the Forest assets has increased from SEK 74. 9 billion at the end of last year to a value now of SEK 76.6 billion.
Working capital in absolute values you can see is increased, as I mentioned, due to the higher prices and seasonal higher sales in Q2 from some businesses and 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, mainly due to the ongoing construction of the new mill in Obbola. Net debt has increased versus the end of last year slightly from SEK 7.7 billion to SEK 8.2 billion. We also paid the dividend of course this quarter, but we've delivered primarily due to improved EBITDA with a deleverage down to 1.4 times debt-to-EBITDA. And then net equity has increased from SEK 72 billion to SEK 74.5 billion.
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 SEK 3.5 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 Ortviken and we've had the strategic CapEx rule, 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 bonds we have issued and we issued SEK 1.5 billion at a seven-year maturity, which we're very happy to increase and have a long maturity 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. So I think that's an interesting development in the quarter.
And with that, I will hand back to Ulf for summary and Q&A.
Ulf Larsson
Thank you, Toby. I will not start to repeat everything again, but we can state that we delivered our best quarter ever, 4% to 7% EBITDA margin, and 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.
Question-and-Answer Session
Operator
Thank you. [Operator instructions] Your first question comes from the line of Linus Larsson from SEB. Please ask your question.
Linus Larsson
Thank you very much and 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'd like the full year, what kind of level of harvest should we expect compared to last year, please?
Ulf Larsson
Good morning, Linus. Yes, we had a strong harvesting of our 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 but even slightly less than last year, but around the same level. And so therefore, yes, you'll see that in the second half of the year and then we'll have a -- normally have less in quarter three and then a bit more in quarter four.
Linus Larsson
Okay, thanks. And then on Wood, which was very strong and from the sound of things would be even fairly stronger in the third quarter given the price indication that you mentioned Ulf, but what's happening on other parameters like, how do you see sawlog costs developing for instance in the third quarter?
Ulf Larsson
Yes it is hard to say, but honestly I think we will remain on more or less the same level as we have just now for sawlogs, no big difference. I mean some small increases, but not any major.
Linus Larsson
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 supplier responses coming through? Do you see any signs of any softening in the order books or any type of other market indications?
Ulf Larsson
I mean, as it is just now we see no signs of a softening market. As I said, I mean, we've seen that CLS [ph] 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 come forward 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 driveway as of now is to 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 front will be close to where I said, I believe. Then always you have a seasonal effect in Q4 and then, from time to time also Q1, but I mean, it seems to be continued rather stable market as it is just now.
Linus Larsson
And then just now that you mentioned, seasonality, how do you, how are you planning to run, or how are you running production in your sawmills in the in the third quarter or what type of production compared to the second quarter given holiday seasons, et cetera?
Ulf Larsson
Yes, but in SCA we have since 20 years we have always been running our sawmills it at full capacity. I mean we will be able to 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, is what's happened I mean you have to stop for five to six hours each night and depending on conditions for different mills and maybe you have both mix [ph] and things like that, but I maybe run them for full capacity.
Linus Larsson
All right. Thank you very much.
Operator
Your next question comes from the line of Robin Santavirta from Carnegie. Please ask your question.
Robin Santavirta
Yes, thank you very much for taking my question and hello to everybody. Now, firstly 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 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 the sunspot 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?
Ulf Larsson
Yes, I mean if we started in the market, price changes will be gradually implemented, and of course, and so that is one reason why you don't really see that result in the P&L follow the fixed prices announcements and things like that. So I mean, but we follow in many cases and in most cases we follow the fixed 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 we will continue to be that and also today we feel that that is a favorable place to be in. Yes 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 really saw big volumes we do there. Toby?
Toby Lawton
But we, we do some sales to the U.S. but very little to Asia.
Robin Santavirta
Thanks, I do understand the lag, but you don't have any rule of thumb that could help us sort of understand the lag, sort of compared to the peak stock prices in Europe?
Toby Lawton
I mean a rule of thumb, I mean it takes, it's probably two to three months in terms of time lag, yes overall, when you take into yes, compared to when maybe picture is published or prices are published.
Robin Santavirta
Good, that is helpful. Then maybe for you Toby two of the financial questions, first of all the paper business, you still report some losses, some are drag in the other division. What is the amount and how long should we expect that to continue? And then number two, could you just give some kind of indication about CapEx levels for this year and maybe some indication for next year as well?
Toby Lawton
Yes, I mean, as we've described, I mean, we don't have cost for the Paper division anymore that's, I mean, after the end of Q1 that was finished, but we do have costs for maintaining the Ortviken site up until we start the CTMP which are SEK 20 million to SEK 30 million per quarter which we've guided for, and that's the same as this quarter. So we're in line with that.
And then the CapEx, yes I think we, yes I mean the guidance we've given before is we have an annual current CapEx level of SEK 1.2 billion to SEK 1.3 billion and that's 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 Obbola project is the biggest one and CTMP in Ortviken and another two large strategic CapEx in there, yes we expect as we said before, around SEK 3 billion to SEK 4 billion in strategic CapEx for the year.
Robin Santavirta
For the next year, and what about next year?
Toby Lawton
Just give me a moment, it's I mean this year is the biggest year by far, so there's a significant, I think it's around, yes here we go, yes more and more like SEK 2 billion to SEK 3 billion next year depending a bit on the outcome this year.
Robin Santavirta
All right, that is helpful. Thank you very much Ulf and Toby.
Operator
Next question from the line of Martin Melbye from ABG. Please ask your question.
Martin Melbye
Thank you. Regarding the construction parts from the forest assets, you said three-year rolling average, and is now at 300. What is the last data point in that exercise?
A - Ulf Larsson
I mean, we gave the three-year average Martin, but I mean it's been a 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 is 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 development. There are market statistics published also 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 is a good place to turn.
Martin Melbye
Okay, and you gave the quarter-to-quarter price change on the sawmills. Could you try to indicate the same on Pulp and Containerboard please?
A - Ulf Larsson
Yes, I mean, the answer is no. I mean we know impulse. As I said, I mean, the official peaks price today is U.S.$34 per tonne and we are just now in negotiations for July. And so we don't know really the outcome or that others have 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 Ostrand [ph] we will have a stop in September, October more than 20 days. So that's a quite big one.
In Containerboard I said that we have seen the total price increase of €200 per tonne. And we have another announcement now from August 1 of €50 per tonne 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 guess just now.
Toby Lawton
I could also add, Martin. You can I mean, within the graphs we give in the report, you can see especially for the last quarter the net mill price development for pulp and containerboard in those index graphs. So and the reason we, I mean the pricing is relatively public for containerboard and pulp, so and I think the other reason is also that when it comes to wood, we have relatively good visibility on the coming quarter, which you don't have quite the same level for, yes a bit longer out for containerboard and pulp.
Martin Melbye
I see and say what is the key reason why there's so long the price has not been increasing in this dramatic so many markets, why isn't the forest owner getting paid?
Ulf Larsson
Yes, 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 I mean, we can secure safe and stable supply. And I think for all parties, it's 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, thinning, 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 the second quarter. And that has contributed well also. But we have a stable supply and…
Martin Melbye
[Indiscernible] that effect?
Ulf Larsson
Not really but I mean, it is a substantial effect, I would say.
Martin Melbye
Okay, thank you.
Operator
Your next question comes from the line of Cole Hathorn from Jefferies. Please ask your question.
Cole Hathorn
Good morning. Thanks very much for taking the question. Just following up on the wood products. 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 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 EU forest strategy and 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 the ability to harvest versus the forest think 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.
Ulf Larsson
Yes, 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 rule 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 5 million tonne per year.
And I mean, the reason behind that is, for every tree that we harvest, we replant two to three new ones and for each new generation that comes up, we will have a 30%, 40% higher growth and all that kinds 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 tonne 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 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. That will be discussed in a lot of I mean, nationally. It will be discussed in different working groups and things like that, then the devil will be in the details.
I mean, it's really important for us now to follow, I mean, what's inside special, yes. But 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 how can we handle that. I think Cole, so one important thing is to see that there is no basis for having to choose between the use of forests and the protection of biodiversity.
We can and we have balanced that in a good way in many years. And if you look into Swedish forests today, you have more dead wood, you have more broadleaf trees. It hasn't really disappeared and it's pieces from the Swedish forestry the past 20, 30 years, we have more than doubled the standing volume in Swedish forests 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.
Toby Lawton
Yes, should I, and I can add just on to clarify on the wood business Cole, we have around 70% of the sales from the wood businesses, the sawn products and 30% roughly is the what we call wood supply where -- so this where, which is more like a traded type business like you say, but with some, 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 much more 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.
Cole Hathorn
Thank you.
Operator
Your next question is from the line of Oskar Lindstrom from Danske. Please ask your question.
Oskar Lindstrom
Hi, good morning to you all. Three questions from me. The first one is on what's called forest measure. 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 causing sort of a shift from 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?
Ulf Larsson
No, can we start there? So yes, it's a very good question Oskar and I mean, we are, I think, all a little bit surprised about the cement plant. And it's really hard to judge what's going to happen there. But if it will be closed down, I think that will have a big impact on the Swedish building industry. And I mean, I heard some figure here that between 200,000 and 300,000 jobs were threatened if this will come through, but I don't, I cannot really believe that this will happen. It would be humps, and crazy of course, because you need to replace that cement with cement from places where you don't produce it in a, 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 yes, 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.
Toby Lawton
Not material. I mean, it has, yes, logistics is more problematic around, but its not material.
Ulf Larsson
No major things, no, so, so…
Oskar Lindstrom
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?
Ulf Larsson
No.
Oskar Lindstrom
Okay. My second question is on capital allocation. I mean, you're now in the middle of the Obbola 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, sort of once Obbola is completed in terms of strategic projects or acquisitions. So what's your thinking here about growth opportunities beyond?
Ulf Larsson
I lost you a little bit Oskar, but the growth opportunities was that question?
Oskar Lindstrom
Exactly, I mean, given how strong cash flow you are now getting more money in the bank usually sort of gets one thinking about what one could possibly buy with that money? That's, my question.
Ulf Larsson
I mean, the first thing yes now is that we are 100% focused on delivering on the two big growth projects that we are performing as of now. I mean, Obbola is a super big project and the CTMP project is also a big one. And at the same time, we are also performing a big billion SEK project in Bollsta. 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 and 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 2021 and now we have these markets. So I mean, of course, we will look into different opportunities and when we have something to talk about we will do that and announce that. Would you like to add something Toby or…?
Toby Lawton
No, I mean I think just that we are very focused on yes, 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…
Ulf Larsson
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 mill side. But from my perspective, if we reduce the size by 20%, we have to reduce demanding all over the place by 20%. 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. So I mean, we have been very focused on also delivering on that, let's call it an exit project. So we have had a lot of, we have a lot of things to do just now just to deliver on what we have promised.
Oskar Lindstrom
Yes, that sounds good. A final question, I mean, you're growing forest by and about 5 million tonnes 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?
Ulf Larsson
I think that, yes, I think that would be negative, because I think that, 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, I mean, the product side, then it will be negative, because if you cannot really supply the market with renewable, the renewable fiber, then you have to increase the use of fossil based materials and fuel. So I think it is already from the day one a negative thing.
And, 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, even short term, I think it's negative. And I mean, there are arguments 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.
Oskar Lindstrom
Yes, that's an important debate, no doubt. Thank you. I mean, those were my questions.
Ulf Larsson
I think Oskar, you had a very interesting article in Svenska [indiscernible] the other day written by Bjorn Hagglund and yes, he was the cornice [ph] of the Swedish Forest University, but he has been the CEO of Stora Enso. But I mean, that was very, 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 that article really, I think that is the best one written in this field.
Oskar Lindstrom
Yes, it was very good. Yes, I agree. Thank you.
Operator
Your next question comes from the line of Justin Jordan from Exane. Please ask your question.
Justin Jordan
Thank you. Good morning everyone, good morning Ulf and Toby. And well done Toby, Ulf and for a very strong first half performance. I have got three separate questions and first, is just kind of pulled out from Cole's earlier question. We've now been a few 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 sort of constrained from being a - purchaser of forest assets in Sweden, but can you update us on where you are in the first forest purchases in Estonia and elsewhere across Europe? And then I've got a follow up question. Thanks.
Ulf Larsson
So I can take the first. I mean, obviously it's becoming some, 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 notice in the first stage we will be reporting what's, 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 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 a key how, 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 is really meets that target very clearly, the rest of the business is still unclear today.
The main, probably the main climate target, which is still to come around sustainability will cover our other businesses very clearly, but with the targets as they are today it is not clear whether they will cover the industrial businesses or not. But when they come, we expect them very much to be part of the circular the transition to a circular economy.
So I think it's still it's still hard to give clear answers I'm afraid, Justin, but I think in summary and I think we will expect to be reporting on basically only on eligibility, but clearly the forest will be part and we'll have to work through to see if the rest of the businesses is covered in this first wave or will be covered later on.
Toby Lawton
Okay, and then we have the question about, I don't know if I get you right, but was the question how much we -- where we are in our program for buying?
Ulf Larsson
Yes, can you sorry repeat, Justin?
Toby Lawton
Yes, can you repeat the question please?
Justin Jordan
Sure. So clearly you've been -- the largest Metro force [ph] center in Europe, you have completed from being a net first purchaser in Sweden, but surely you have, 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, to be a net first purchaser elsewhere across Europe?
Toby Lawton
Now, I think -- we have a plan to acquire 100,000 hectares of forest land in the Baltic states, so that's Estonia and Latvia, which are these, and we are at around 50 today, so we're on halfway.
Justin Jordan
Okay, thank you. And just one final question, third question from me, clearly SCA, anyone who's stuck 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 sawmill operator in Europe or North America right now, I'd be surely 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 4 billion [ph] in Q3, what's the stop there being less disciplined peers, adding more capacity to ultimately, I suppose, have a simplified response, as you said it would be SCA doing it, but not everyone else in the industry is interested ?
Ulf Larsson
Maybe I can take it first and then here, but I mean, it all comes down in the end to the raw material. If you can't, high capacity if you haven't got access to the raw material and that's why our, I mean, our sawmill businesses 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, yes everyone is making good money. And we are 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 sawlogs to be able to saw.
Toby Lawton
Yes, and I mean, I think also that that might be the big question mark going forward. I mean, to get access to sawlogs 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 yes, now I think why we cannot really, I mean, we're on at full capacity, but you cannot really add too much volume to the market as this just now.
Justin Jordan
Okay, Thank you both and best wishes for the second half of the year.
Operator
Your next question comes from the line of Johannes Grunselius from Kepler Cheuvreux. Please ask your question.
Johannes Grunselius
Yes. Hi, everyone. So most of my questions have now been answered, but maybe you can 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?
Ulf Larsson
Hi, Johannes. Yes, I can just update, so for current CapEx we expect SEK 1.2 billion to SEK 1.3 billion for the year and that's our normal level. And then for strategic CapEx, we expect 3 billion to 4 billion this year and that's the largest is the Obbola project of course, and then we expect SEK 2 billion to SEK 3 billion next year.
Johannes Grunselius
Okay, same as before.
Ulf Larsson
Same as before. Yes, no significant change.
Johannes Grunselius
Yes. And also on the cost side and the cost inflation theme it seems to me that that you will have quite stable costs here, Q3, Q4. Could you talk a little bit about this? Are they any sort of areas where you see a big cost inflation at the moment for you? And also, if this could hit the industry, what in terms of your competition? Thanks.
Ulf Larsson
I mean, as I said, we've had a very stable cost level Q1 to Q2, where we can see increases, of course, just 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 there was scenarios you've seen when you go overseas, and we are not too present overseas, so we have been little bit protected from that one. And otherwise, I mean 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 very clear targets for each part of the company, and they have all more or less delivered on that. And one thing was, of course due to really keep an eye, close eye on the cost side.
And what is maybe a little bit yes, I think the biggest cost for us is, of course the raw material and I mean, we have, as I said earlier good situation when it comes to wood supply and which is good, we even might see some small increases in sawlog prices and things like that, but no major things. So 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.
Toby Lawton
Maybe I could just to give a little bit more. I think, as Ulf mentioned, the wood is, 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 that are more intensive in terms of the materials and chemicals. And then we also do have the logistics area where we have seen maybe around 30 million higher logistic cost versus quarter two, and we expect an increase also quarter three from a bit restricted. Yes, restricted access to containers and higher container prices and so on, which…
Ulf Larsson
But I think more disturbing in that perspective is the service level.
Toby Lawton
Yes.
Johannes Grunselius
Okay, understood. Maybe a final question from my side. I mean, you have an interesting charter on Page 11 showing that also the deliveries of kraftliner have increased pretty dramatically, I would say over the last year in Europe. I mean, where are we now in terms of sort of capacity constraints in Europe? And at this point, are you actually seeing that there is a lack of material, kraftliner 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 deliveries have come up so much, but I suppose there is a capacity constraint at some point in Europe? That's my question.
Ulf Larsson
Yes, that's a good question because we don't really know. I mean, what we saw when Obbola 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 U.S. just now, so that can be one explanation. But I feel that when capacity, when we add capacity in kraftliner, that is immediately assimilated in the market and so maybe we don't know the real need. It's always a combination between kraftliner and testliner and we use kraftliner for certain purposes and testliner 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 kraft and test.
But in some areas, you need kraft when you need strength, when you need wet strength. When you need some other things then you need to use kraftliner of course. But we feel just now you could sell much more kraftliner from SCA if we just had the production and in 2023 we will add capacity and today we feel very confident that, that will be needed and demanded from the market.
Johannes Grunselius
Okay, got you. Thank you.
Operator
Your next question is from the line of Mikael Doepel from UBS. Please ask your question.
Mikael Doepel
Thank you. Just briefly following up firstly on the Fit for 55 and Forest a strategy, what's the time schedule there to take a decision for EC to make a final decision on that one? That will be my first question. Secondly, on sawn timber, I think everybody is scratching their heads a bit given the quite significant price increase that we have seen and continued to see. And I guess the question there is that how much can the market take before it starts to impact demand negatively? Do 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 it seems to be good demand situation here, prices have still going up being 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 any impact on the European market, i.e. are the European prices coming under pressure now or do you see a situation when where Europe can actually remain quite stable despite China coming down? Thank you.
Ulf Larsson
If we start with the market for sawn timber, I mean, it's very hard to say as normally it's a volatile market. And I, even if you are fundamental and structurally you'll 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 continue to spend a lot of money on DIY and things like that? I mean, all these kinds of questions will have any impact on the sawn timber market. But structurally, I think it is a better step-by-step a better position for sawn 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, yes, 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. Then after that, we will see more detailed suggestions and I'm 100% 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 importantly, it will not be positive for the climate because, yes 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 and we will see different timelines in different areas. And I said before the devil will be in the details and we will put in a lot of efforts from SCA side, but we will also do it from the industry, from 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.
Toby Lawton
And then you had a third, I could maybe take the third one yes, was on the pulp, you're asked about basically the pulp prices market and I'm not sure we can give much more color basically whether Europe is now $13, $14 per tonne, as I've mentioned and similar level to U.S., China. China is always a more volatile market with the spot prices which go up and down. Sometimes there's more or less volumes also sold. And it's also sometimes reflects the logistics 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.
Mikael Doepel
Okay, thank you very much.
Operator
There are no further questions at this time. Please continue.
Ulf Larsson
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.
Operator
This concludes our call for today. Thank you for participating. You may now disconnect.
- Read more current SVCBF analysis and news
- View all earnings call transcripts