Hello, this is Ulla Paajanen from Stora Enso. You have now joined Stora Enso Q3 earnings conference call. I have here today with me our CEO, Annica Bresky, and our CFO, Seppo Parvi. Annica will start now. Annica, please go ahead.
Thank you, Ulla, and welcome to our Q3 report. We deliver a solid quarter under very challenging business environment. If you could just change slide, please. Our focus remains on cash flow and profit protection, and I think that is the important thing to keep focus on during these uncertain times. We see a strong performance from packaging materials, wood products and forest division. If I give you just an overview now of our group results, compared to last year, our sales decreased by 13%, but if we exclude paper, we see a 6% decline in sales. Our operational EBIT decreased to EUR 175 million. Excluding paper, our operational EBIT remained roughly at the same level as a year ago. Operational EBIT margin landed at 8.4%, and excluding paper, we reached 11.8%, a slight improvement compared to a year ago, showing also the resilience of our growth businesses.
We deliver a solid cash flow from operations close to EUR 400 million, and cash flow after investing activities was EUR 250 million. Our net debt to operational EBITDA is at 2.4x above our target of being less than 2x , but we have been able to decrease our net debt by over EUR 700 million. We continue to have a strong liquidity at EUR 2.4 billion, including cash and committed credit facilities, and we have good access to funding sources. Our operational return on capital employed landed at 6.7%, and this is of course below our strategic target of 13%. We also announced good progress in our profit protection program, and therefore we have increased our target from EUR 350 million to EUR 400 million for this coming period. The target for one-time savings remains at EUR 85 million. Next slide, please.
If we now look at our bridge for our EBIT result, we can see that our active cost management continues. The biggest decline has been in sales prices and mix and volume, but we have partly been able to mitigate that through good cost control in our profit protection program and lower fiber costs. Next slide, please. Market conditions continue, though, to be mixed for many of our products and businesses. Our primary focus is the health and safety of our employees, and that continues to be our key priority. Q3 has been a quarter with maintenance shuts in many of our mills, and we have taken extensive precautions to ensure the safety of both our employees and contractors. For the upcoming Q4, we have seven mills that we are doing maintenance shuts in.
I will just now give you a brief divisional overview before handing over to more details for Seppo on divisional level. Briefly, we can say that consumer board stayed strong while containerboard had a continued weak quarter. We can see a clear recovery in our corrugated volume sequentially. For our pulp business, we see on the market that the low market pulp prices and the global high inventory levels, they persist. In our biomaterials division, we had high deliveries for the quarter, the division was negatively impacted by the pricing level and of course, plant maintenance. For wood products, we have seen a very strong U.S. market and a European market. For our forest division, we have seen a solid and stable results continue.
We are working very hard here to make sure that we have good control of our working capital to support our cash flow. In paper divisions, we return to a positive cash flow. This is due to very good cost management and taking capacity adjustments to adapt to the decline in paper demand on the market. Next slide, please. We have chosen, after an evaluation, to change our valuation principle for our forest assets to reflect the market value. This was a natural time for us to review the valuation method. As you might remember, we created the new forest division in the beginning of 2020, and the acquisition of our Bergvik forest holdings in Sweden have significantly increased our assets in the balance sheet.
The changing market practices for valuating forest assets in the Nordics give us a better opportunity to be more transparent in the values that we have for our forest assets. As of Q4 2020, our forest assets will be determined by using market transaction-based valuation method. This applies to our Nordic Forest assets. They are currently held at cost but will be revaluated. Our plantations, they are a different asset class. They are excluded due to lack of sufficient transactional data and also shorter harvesting cycles. It takes about 6-12 years to harvest eucalyptus, but between 60-100 years to harvest our qualities in the Nordics. This valuation method provides better transparency and of course, is less subjective compared to DCF valuation method. Next slide, please.
As of Q4, we predict or estimate that the asset value of our forest will be between the range of EUR 6.5 billion-EUR 7 billion after the revaluation. We move to next slide, please. Coming back now to our Profit Protection Program. We have been progressing in a very good pace over all the divisions. We see that we have further opportunities. Therefore, we increased our target from EUR 350 million to EUR 400 million to be delivered until the end of 2021. As you can see here, in 2019, we delivered a little bit above EUR 100 million. For this year, we estimate around EUR 180 million annual savings, and for next year, around EUR 120 million. You can see here the distribution varies across the divisions. We move to next slide, please.
Coming back now to some key events driving our Q3 result and that might be of interest to you. The conversion of Oulu mill is continuing. We are now in the construction and machine construction phase. We stopped our paper production at end of September, and the packaging board production is estimated to start around the new year. We also made a decision to invest in new CLT production at Ždírec sawmill in Czech Republic, and this is to capture the growth in the wooden construction market in Central Europe. Ždírec mill is a very cost-competitive mill with good access to wood supply, and the production is estimated to start during Q3 in 2022. We also made the decision to shut down one of the newspaper machines in Hylte mill, and we have successfully completed the negotiations.
The machine will be shut down in end of 2020, and the inking plant at the same mill will be shut down in Q2 2021 to adjust for the declining paper market that we see. Regarding some of our innovation projects, we continue our efforts to develop new barrier technology. We have done an investment decision of EUR 10 million for new dispersion barrier technology at the Forshaga site mill in Sweden that can serve Skoghall mill with new barrier technology. These products will be adapted for a circular bioeconomy and commercially available during quarter two in 2021. In Hylte mill, we continue the ramp-up of our formed fiber products called PureFiber. This is the next generation of eco products to replace plastics in food service applications, and now they are commercially available and the demand for these are strong.
We will continue investing in Hylte and also looking at expanding our capabilities in Qian'an in China. In Fors mill, we are starting up a pilot facility for producing biofoam. Biofoam is based on pulp and is a material that is renewable and used as a protective packaging and cushioning to replace fossil-based materials such as polystyrene, which are very difficult to recycle. Last but not least, coming back to a previous investment in Launkalne sawmill in Latvia in saw and plane and pellet production that has been fully ramped up and operationally in the right position. With that, I hand over to you, Seppo, to give us a little bit more flavor on the financials.
Thank you, Annica. I will start by going through some of the key figures from the report that we have published earlier today. First of all, sales line was down 13.5% year-on-year or 1.7% sequentially and reads about EUR 2 billion and EUR 79 million sales. Operational EBITDA margin was 15.9% during the quarter and Operational EBIT 8.4%. Earnings per share EUR 0.11 a share. Operational return on capital employed 6.7%, and excluding forests, 8%. Cash flow from operations continued strong despite lower profitability and reached EUR 399 million. Very much thanks to good working capital management during the quarter. Net debt to last 12 months Operational EBITDA was at 2.4x. Moving to divisional overview, I start with Packaging Materials, where good cost control has resulted in improved profitability. Sales decreased by 4% and were at EUR 771 million.
That is a reflection of clearly lower containerboard prices, as well as an effect from closure of a small packaging paper machine at Imatra mill in Finland. Operational EBIT increased by EUR 25 million and was EUR 111 million. That is a result of clearly lower variable costs, especially pulp, chemicals, and energy, and positive impact from profit protection program actions implemented. Clearly lower containerboard prices had negative effect on the profitability. Operational return on capital increased and was 15.6% compared to 11.9% a year ago. Our conversion project at Oulu mill to kraftliner production is according to plan, and we plan to start production around new year. Designed capacity is expected to be reached by end of Q2 next year, and commercialization of product portfolio expected to be reached by end of next calendar year.
Oulu mill has been included now in Packaging Materials starting from Q4 onwards this year. In Q3, it was still included in Paper division. Moving to Packaging Solutions, where competitive market situation is affecting sales and margins. Sales decreased by 13% to EUR 145 million, you have to remember that last year was at record high Q3 level. Lower box prices in Europe were visible due to decreased raw material prices. Negative sales effects had an effect on the top line. We had somewhat lower deliveries in China packaging unit. Operational EBIT decreased by EUR 7 million and was EUR 8 million. Lower sales there due to lower box prices as well as negative foreign exchange rates, as well as lower deliveries in China packaging. As mentioned, also relating to top line. We are accelerating efforts in new business-related projects, that impacted operational EBIT negatively.
This relates to formed fiber project that we are running, as well as biocomposites and Box Inc. Lower variable costs were there due to lower containerboard market prices having positive effect on the margins, and lower fixed costs mainly due to profit protection program actions were also visible. Operational return on capital decreased to 13.2%, mainly due to lower profitability during the quarter. In biomaterials, their profitability was still affected by challenging markets and plant maintenance stops. Sales decreased by 8% due to significantly lower pulp prices. Foreign exchange rates and higher pulp deliveries had positive effect, but that was offset by lower prices. Operational EBIT decreased by EUR 29 million and reached EUR 10 million. That is due to pulp prices despite higher deliveries. Lower production impacted by increased maintenance activity and additional costs related to COVID-19 precautionary measures.
These were partly offset by clearly lower variable costs and positive FX impact on the costs. Operational return on capital decreased and was only 1.6%, driven by clearly lower profitability in the division during the quarter. Moving to wood products, where we had second highest Q3 profitability this year. Sales decreased 10% and was at €341 million level. There were some negative effects from COVID-19 related delivery restrictions, especially in Europe, and lower classic sawn prices. These were partly offset by improved mix as well as very strong US market during the quarter. Also, structural changes related to Pfarrkirchen, Uimaharju, and Kitee sawmills reduced the sales. Operational EBIT increased by EUR 11 million and was EUR 38 million. Lower sales were more than offset by improved margins, especially thanks to strong U.S. market. Lower net raw material costs and good fixed cost control improved profitability third.
Operational return on capital increased and was actually clearly above long-term target of 20% at 25.2% level. Moving to forest, where expected efficiency improvements are coming through. Sales decreased by 12%. This is due to lower wood prices and clearly lower deliveries in Finland as a result of lower production volumes. Recent maintenance activity during the quarter as well as COVID-19 related market impact. Operational EBIT increased by EUR 13 million to record high Q3 level. This is thanks to improved profitability from our own forests holdings as well as Tornator. Profitability in the Finnish and Swedish wood sourcing units improved also due to increased efficiency and inventory management. Operational return on capital increased to 3.6%. Paper division. Their positive cash flow was visible in continuously difficult market conditions. Sales decreased by 32% to EUR 468 million.
There was visible still COVID-19 pandemic accelerated demand decline in all paper grades, as well as divestment of Dalian mill in China and discontinuation of paper production in Oulu mill in Finland. Those had a total negative impact of EUR 21 million on top line. Operational EBIT decreased by EUR 66 million. This is due to lower sales, partly offset by lower fiber costs and good fixed cost management in that division. Cash flow investing activities to sales ratio decreased to 3.2% due to lower profitability, but remained positive with thanks to good working capital management in the division during the quarter. One newsprint machine at Hylte mill, Sweden is to be shut down by end of the year and de-inking plant latest in Q2 2021. We are committed to support the employees who will be affected by the closure at the mill.
Summary of the strategic financial targets before I hand over to Annica. There we are pretty much on red due to challenging market conditions, as mentioned already earlier. To highlight couple key figures, net debt to operational EBITDA at 2.4x, about a 2.0x targeted level, but net debt to equity at 42%, clearly below the maximum target level of 60%. Look at the divisions, a very positive development visible, especially Wood Products, where we were at 25.2% return on capital level compared to targeted 20%. Also Packaging Materials improving clearly and being a bit of short of 16%. Paper, as mentioned earlier, positive cash flow is visible at 3.2% level, below the targeted level of seven, but positive. With that, I hand over back to you, Annica.
Thank you, Seppo. If we now take a look on some Q4 key events, it's fair to say that the market conditions continue to be exceptionally uncertain. Therefore, we continue not giving any guidance. If we look at Q4, as Seppo mentioned before, the Oulu mill conversion is planned to be completed by the end of the quarter. This has an impact of EUR 30 million-EUR 40 million negative impact on operational EBIT for Packaging Materials as the mill moves into that division as of Q4 this year. We are also taking, as mentioned, extensive precautions to limit the impact of COVID-19 in our operations and during annual maintenance shuts. We have seven mills of maintenance shuts during upcoming quarter, one mill more compared to last year.
The total negative impact of maintenance is estimated to be EUR 10 million less compared to Q3 2020 and EUR 50 million less compared to Q4 last year. As we kind of end the paper business in Oulu, we are selling inventories, which will impact the result of Paper division on operational EBIT by EUR 5 million-EUR 10 million. If we move now to a summary, we have had a solid performance for this quarter with continued focus on cash flow and profit protection. Our result is based on a strong performance from Packaging Materials, Wood Products and Forest division. We could also see that Paper division delivered a positive cash flow, which is very well done during these very difficult circumstances.
Our forest assets will be valued between EUR 6.5 billion and EUR 7 billion as of Q4, based on a new market valuation method. That will give transparency for our investors. The market conditions continue to be mixed if we make an outlook for Q4. Then I would like lastly to welcome you all to our Stora Enso Virtual Capital Markets Day on 11th of November. Hopefully I will talk and hear many of you there. With that, I think we can open for Qs and As.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please the hash key. It is star and one to ask a question. The first question comes from the line from Alexander Berglund from Bank of America. Your line is open
Thank you very much. two questions from my side. One on forest revaluation and the second one on graphic paper, Maybe I start with the forest revaluation. Just got a couple of questions on the tax treatment here. I just wonder if you can clarify if this range of EUR 6.5 billion-EUR 7 billion, if that is net of the deferred tax or not. Then, what does your new assessment now apply for a price per hectare for the Swedish forest holdings, compared to the EUR 5,700 per hectare number that you gave us from the LRF consultants in your previous presentation? That's my first question. I will let you answer that one, and I will follow up with graphic paper.
Yeah. First of all, on the deferred tax question, the figure we are giving and the range we are giving is after netting the deferred tax effect away. It is a net value. When it comes to more details on the hectare prices, et cetera, we will come back to those details in our capital markets day in early November.
Okay. Can you give us anything on the deferred tax amount? If I want to do a gross value, so to say, on the forest, how much higher is that than the EUR 6.5 billion-EUR 7 billion?
Yeah. Deferred tax is about EUR 1.2 billion.
Okay, thank you. That's very clear. Appreciate that. Moving on to graphic paper. I just wonder what your current assessment is on the market if you think from a supply and demand perspective. Specifically then, do you think that the amount of capacity closures that have been announced so far is enough, or do we need to see more? Also, is there any specific grade where you think we really need to see more closures? Finally on that, how do you think about Stora Enso's role here? Have you done enough, or do you think that you might need to do more? Thanks.
If we see the demand, it's down by 18% compared to year-on-year for the full year. It's primarily standard newsprint, coated mechanical, and wood free coating, which is impacted the most. All of the grades are heavily impacted. Long term, we do expect a bounce back during 2021 between 3%-5%, but we have structurally had a long-term decline about 5%-6% annually. There is an overcapacity on the market. We estimate it's around 20%. I would expect that we would continue to adapt to a lower demand by either market curtailments or continued restructuring actions. If we look what we are doing, we were proactive with converting Oulu mill into packaging, by the decision we took last year.
The closure of Hylte is another step that we took this quarter, and that takes down our annual newsprint capacity by 26%, roughly, and the total reduction in paper capacity for us by 25%. This is what we have done.
Thank you very much.
Totally, if I may say, our sales after these actions will be 18% of our total sales revenue coming from Paper division and 82% from our other businesses.
Thanks.
Okay. Sorry, I have to correct my comment on this deferred tax treatment. Actually, it is a gross figure that we have given, not net of the deferred tax.
Okay. That would imply that actually your assessment now is a bit lower than the LRF consultants' EUR 5,700. Am I reading that right?
Well, I don't have the figures there. As I said, we come later back to those details in capital markets day.
Yeah, that would be very appreciated because we have a lot of questions on that.
Yeah.
Thank you. Your next question comes from the line from Lars Kjellberg from Credit Suisse. Your line is.
Yeah. Thank you. I just wanted to have a couple of questions on Oulu conversion, specifically. You're talking about incremental cost in the EUR 30 million-EUR 40 million range. I'm just curious how that works. I mean, the machine isn't up and running yet, so what sort of operational costs would you have? Wouldn't you capitalize those as you invest in the machine, and then you start to cost things as you ramp it up? Just some clarity on what those costs are. Equally so, how should we think about startup costs in the first quarter of next year? That's my first question.
What we have is that we move over, of course, the Oulu, the fixed costs that we have in the asset as such. Then, of course, we do the conversion and the machine building there. If we look at the Q1, we will come back when we see how the ramp-up looks like with more details on that.
When you talk about the commercialization of the product portfolio, not until the end of 2021, you're also saying that you expect to be ramped up fully by the second quarter? What does that really mean?
Well, if we look at the technical capacity of the mill to reach the capacity that we want, that is the work that we're doing the first quarter. Then since the product that we are introducing is targeting food end uses, that means that we need qualification period with customers, and then to reach the optimal quality that we want and develop the product range that we want. That usually takes a year to get to the best level.
Got it. Finally, on wood products, obviously very good progress, I just wanted to get some sort of color on how much U.S. strength was part of that significant improvement in earnings. What you're seeing into Q4. Also, if I may, just very quickly on China, it seems to be a better consumer board market as we speak. Are you seeing that as well in your particular segment, and what is driving that? Especially with the backdrop of you still seeing weak packaging markets in your China business.
If I start with wood products, you're right. The U.S. market was very strong, both in Q2 and Q3. We think that the U.S. market has reached a peak now, so it's normalizing, if we look forward-looking. European construction market also remained active. Of course, as pandemic is increasing, the uncertainty of that is increasing as well. If I look at the other key markets that we have in Japan, we see a slow recovery. Also in Australia, where the governments are supporting the recovery with quite a lot of financial support. If we look to China and Asia, that market for wood products is picking up, as well as Middle East and North Africa, which has been quite slow over the summer, but now coming back. It is really a mixed bag that we see in wood products.
Then if I go to your second question regarding consumer board, yes, you're right that the China market is picking up. There is a drive for consolidation in the folding boxboard area, where we have seen then price increases because of that, which is positive for us. The domestic market is strong in China or stronger and recovering. However, we still see from a China perspective that the export market is still lagging behind. For us, what is driving improvement is, of course, a better consolidation on the packaging market in China. I don't know if that was an answer to your question or?
Well, it kind of was. Just one final point on that. One of your customers, SIG, have highlighted a relatively sluggish return in beverage packaging, specifically in China. Has that in any shape or form been reflected in your product mix in China? Do you continue to drive a better product mix?
Yeah, I don't comment on specific kind of customers. We have more than one customer in our portfolio. We have not seen that for our liquid business. If we look then at totally and have an outlook of how consumer board is developing, we can see a slight decline in demand by end of Q3. How that develops in Q4 is uncertain.
Thank you.
Thank you. The next question comes from the line from Robin Santavirta from Carnegie. Your line is open.
Thank you very much. Looking at the packaging materials business in Q3, and especially the consumer board division, you're generating really strong margins despite of actually consumer board declining deliveries, EBITDA margin of 24.5% now in Q3 and 24% in Q2. Seasonally, normally Q4 is a bit of a weak quarter for you. I expect that to be the same pattern this year. Is there something exceptionally good in Q2 or Q3 in this division, and especially in consumer board this year?
We have had good cost control over all our divisions, and consumer board or packaging materials is not any exception to that. That is mitigating the small decline that we see in sales in that division. As you also know, the contract structure is that we have long-term contracts for our liquid packaging board business, which of course is good in these market conditions that we have right now. Some end uses have had a strong development during Q2 and Q3, such as liquid packaging board, to some extent, folding boxboard, whilst other end users like food service board have been weaker. I think that we have worked very well with our operational efficiency. We have made sure that we have a good control of our operating working capital, and then our situation in the end users that we have been favorable for Q2 and Q3.
All right. I guess you said that prices are increasing in the domestic market in China. What about the situation now in Europe going into the end of the year and then next year? I guess you have some annual contracts for next year. Is the market tightened up for higher prices, or is it stable, or lower? What is the pricing outlook in consumer board for 2021?
Well, I don't normally comment on prices, but we have about 1 million tons of negotiations that will start for the upcoming quarters. We do see price pressure in folding boxboard. That is what we see. That is what I can say at this point.
All right, thanks. Just on this Oulu conversion, how is it with the net position of pulp of that mill? I assume it has changed a bit now when you will produce far less of end product with the new machine.
Well, as you know, we have a pulp mill there that can support both this converted machine and if we would like to expand and take a second step for the second machine when the market conditions allow us. We have about 150,000 tons of unbleached kraft pulp that we would supply to the market at this point.
All right, thanks. Just finally on this forest valuation thing. There's two questions. First, you now again write up the value to EUR 5.4billion from EUR 5.1 billion. Why is that? Secondly, to just check EUR 6.5 billion- EUR 7.5 billion, is the gross value, it's not netted off deferred tax liabilities. That would have then imply a quite significantly lower price of the Swedish forest assets that you have shown before. Any comment on the reason behind that?
Of course, first of all, the increase from EUR 5.1 billion to EUR 5.4 billion, it's mainly driven by the fact that we included now the leased forest lands also in the total. They have been, of course, in the balance sheet earlier, and then there were some effect changes, minor, included in the new valuation. Yes, it is a gross value. Of course, earlier statistics have been more average prices in Sweden, in the region. Now we have more specific data that we are using and available. You should also remember that we have increased fair value over the past year already before this change by EUR 1 billion .
Sure. Thank you very much. Thanks.
Thank you. The next question comes from the line of Mikael Doepel from UBS. Your line is open.
Thank you. Can I come back to the graphic paper markets, just briefly a follow-up there. You mentioned you expect to see a slight rebound next year in volumes, given the quite severe slump this year, which is of course encouraging. Have you seen any improvement now as of late, right now in terms of the demand trends? I think your volumes were down by close to 30% year-over-year in Q3. Are you seeing a clearly improving trend already now in Q4, and then improving even more from there?
No, we don't see an improvement as of Q4. To be short.
Okay. That's fair. Okay. It's still down clearly double digits, I guess, then on a year-over-year basis.
Yes, it's going to be down compared to last year. Yes.
The question is how much? Is it down by 10% or 50%?
What we see demand, if we compare to last year, about - 16%.
Okay. That's very precise.
Yep.
In terms of the pulp market, what do you see there right now, both in Europe and China? How do you see demand and pricing tracking there? How would you describe the inventories in the value chain overall right now?
Let me start with inventories. They are still on a high level, even though we have seen some decline in some of the pulp qualities. We are about five days above the five-year average. Even though we have had maintenance shuts in many of the pulp mills around the world, we do not see a clear decline in the inventories. If I look at China pulp side, we see that there is a healthy demand, but depending on end users, of course, end users within paper or graphical end users also within retail are down.
The demand is down there whilst hygiene and tissue has seen growth, and packaging is more on stable. For us, we have about 40% of our supply towards end users within hygiene and tissue, for instance. That is up compared to last year where we had about 30% of our deliveries to that end use. We are shifting also to customers within the areas where we have a competitive advantage.
Okay. In terms of the European market, what are you seeing there in terms of demand and pricing? How is that tracking? I think there are a few price hike announcements out there, for example, on the softwood side. Do you see any traction there, or is demand still too weak for prices to gain in Europe?
I think the demand is too weak. We have seen some kind of attempts to increase prices, but I'm not sure that we will see any kind of major changes for Q4. We do believe still that the prices have bottomed out, and there are many producers out there that are running on negative performance. We would expect that restructuring also has to happen within the pulp side.
Okay. Just finally from me on the Capital Markets Day, which you already flagged there. I guess a lot of things were brought up there, but what would you say would be the key focus of the day?
I will spoil the surprise then. I think if we look at Stora Enso, we will talk about the growth businesses that we have. We will give more insight on the forest valuation, as Seppo alluded here, and how we work with our forest division. Hopefully it's also an opportunity for you to ask more questions on the long-term view of our business and our focus areas.
Okay. That's very clear. Thank you very much.
Thank you. The next question comes from the line from Harri Taittonen from Nordea. Your line is open.
Yes. Hello, good afternoon. On the pulp market, not so much on the market overall, but just looking at your division, there was a sort of big increase in volumes quarter on quarter and year on year. I understood that your intention, you sort of wanted to take down the inventories and could you just confirm that was that the reason why the average price came down so much for your segment and in that sort of outside, do you now have more normalized inventories so that you would be more selling to the market at sort of the market prices rather than below the market prices in Q4?
Yes, we have taken down inventories for Q3.
It will be more like back to normal after this third quarter?
Yes, we have, as Seppo said, we are working a lot with our operating working capital to kind of have good control of our inventories.
All right.
We have also had in Q3 maintenance stops, and we have Q4 as well maintenance stops at the pulp mills.
Yeah, exactly.
That is also put down the inventories then.
Well, kind of related to that. Usually the Q4 is sort of a normally very good working capital wise, but now you have had strong development already. Is there some differences here compared to typical annual pattern, or do you still see scope for working capital reduction in Q4 in the same way as in the previous years?
Sorry, you take it, Seppo.
Yeah, we have the special working capital this year because of COVID-19 crisis, put extra effort on managing inventories, receivables, and payables. I still believe that there is potential for further reduction towards year-end. Maybe not as much as normally with the Q4, but still there is potential.
Great. Okay, thank you. Maybe just a last quick question on the wood cost, because at least looking at the list prices, it seems that prices have continued to come down in the Nordics. Where do you see wood cost inflation, deflation in the foreseeable future?
We see a stable kind of.
Okay
Situation.
Okay. All right. That's clear. Thank you.
Thank you. The next question comes from the line from Cole Hathorn from Jefferies. Your line is open.
Good afternoon. Please could you talk a little bit about what you're seeing in the containerboard markets. I know Oulu's ramping up next quarter, but what are you seeing on the pricing side and demand for the containerboard grades? On the paper business, how are pricing negotiations going into the new year? Is there any color you can give, particularly on the uncoated woodfree or fine paper market at the moment?
If I start with containerboard, well, demand in Q3 was down by 2% year-over-year. That is driven by, for instance, a stagnating retail area and also some lower agricultural activities reducing the need for corrugated boxes. On the other hand, we have had a strong demand from e-commerce side. Prices have been lower in Q3 compared to Q2, but we do think that they have bottomed out. If I look a little bit ahead, there is testliner and kraftliner new capacity coming on the market. Short term, there might be an oversupplied situation, but Central Europe and the growth that we see there will absorb the capacity increases that we have there. I think there is likely a positive kind of sentiment for Q4 regarding containerboard that we have bottomed out somehow.
The second question you had was, if you remind me.
Just looking into next year on uncoated woodfree or fine paper.
Oh, yes.
There's not much capacities being closed in the industry, and I was just wondering how you see that market developing.
I think for all the paper grades, it's going to be a tough year. Restructuring is needed in all the grades.
Thank you. The next question comes from the line from Linus Larsson from SEB. Your line is open.
Thank you very much. I'll start to follow up on the previous question. You say that 2021 will be a challenging year for paper and there will be restructuring needed in all grades. Is that how you see your activities as well within paper in 2021?
Well, we have been and will continue to work to make sure that we have a positive cash flow from our paper operations. That has been the way that we have worked throughout the last years, and that will, of course, continue. We look at if there are opportunities to convert to something else for a reasonable investment cost. If not, then we either divest or close down the mills, unfortunately. I think that if we look back to when there was a more balanced supply-demand situation in 2018, 2019, we saw that the competitive mills that were on the market, there we were able to push up the prices and have fairly good cash flow from our paper division. I think if we look at this quarter, we managed to get back to a positive cash flow, and that is the way we will continue to work.
You have no doubt that in 2021 and beyond, paper will remain a good cash cow business for you the way it has been over the past few years?
That is the way that we work, continuing to make sure that that is the case.
Linus, it's all about market balance, and we believe that with the actions we and the industry takes, we can balance the market and come back to situation we were before the crisis. Obviously, we have to wait and see how much of the lost demand is recovered now that situation hopefully starts to normalize in the coming months.
If I may ask, in what type scenario would you revisit or, let's say, review your strategy within paper and reconsider potentially whether to own or not?
This is something that we are constantly looking at, how our paper assets fit into our strategy as a whole. This is not something that I comment. We take it when we make a decision.
Sure. May I also ask a couple of follow-up questions, firstly, on the forest revaluation, you say that you are now using market valuation, at least in the Swedish part of your forest holdings. How do you define market value? Is that on a three-year trailing basis, or is it on current, most recent quarterly market prices? What sources are you referring to? Any references that we could use there?
As one source, we are using Ludvig & Co, as I think other companies using the same method are using as one source for the data. When it comes to other details and periods we use, we will come back to those details in the Capital Markets Day, as I said earlier.
Okay, fair enough. Just one final question, and that's a follow-up too, on Oulu and the EUR 30 million-EUR 40 million that you are referring to in the fourth quarter, do I understand it right that part of that is depreciation and other fixed costs that are just being transferred from paper to packaging materials, i.e. no extra costs for the group?
Seppo here. Maybe I can take. Yes, it is sort of fixed costs that are inherited from paper to packaging materials.
How much is that? How much is depreciation to start with of the EUR 30 million-EUR 40 million, and how much is other fixed costs?
I don't have that detail now, but it's in total EUR 30 million-EUR 40 million. We have additionally, it is EUR 5 million-EUR 10 million in Q4 in paper when they are selling down the inventory costs.
Sure. Okay. Thank you.
The depreciation is relatively small part of the cost, this EUR 30 million-EUR 40 million. It's mainly fixed costs and personnel costs.
Okay. Thank you.
Thank you. The last question for now comes from the line from Markku Järvinen from Handelsbanken . Your line is...
Yes, hi. I just had a few more questions on the topics that have been quite a bit discussed already. The Oulu conversion, you're saying EUR 30 million-EUR 40 million for packaging materials and EUR 5 million-EUR 10 million for paper. Are you saying that it's sort of EUR 35 million-EUR 50 million negative impact compared to Q3, or how should we read this?
Yes, correct.
That's very clear. That's sort of for group in total?
Yes, correct.
Okay. Very good. On graphic paper, you've said that you expect Q4 not much of a recovery compared to Q3. I suppose that means that your deliveries for this year in paper will be roughly 3 million tons. Could you quantify how much coated woodfree is from that, roughly?
Oh, I don't have that number right now. Seppo, do you have it in your head?
No, I don't.
Can we come back on that?
Sure. Absolutely. Just a follow-up on that. I guess since you're exiting coated woodfree and after Oulu closure and the machine closure, you're still left with almost 4 million tons of paper capacity. Do you expect your paper deliveries to recover that much, that 4 million tons will be reached?
Well, it is an uncertain situation as we know. If we look at kind of what we expect for next year, it is a rebalance of about 3%-5% increase next year. Of course, we will adapt our operations according to the demand and make sure that the mills that we have, they are competitive on the market. Then, of course, if there is a big overcapacity, many players will need to take action. We are working on what we can influence by making sure that we have a very good cost control, that we drive down our working capital and have a very good inventory management and make sure that we manage our customers, that we don't have any risks there. This is what we can do, then we act as we see the market develop.
I guess you're basically saying that you're not planning to close any other capacity right now, but you see competition in a weaker position who may need to do so, and you can possibly gain some market share.
Yes
that has, in part, already happened with UPM and SCA taking out capacity. Do you expect to gain some of those volumes?
We are working on the market, and we are very active on that, of course. We are a good option for customers that want to have our products. If I come back to your question, we found the number now for coated woodfree, it's about 20% of our capacity, so roughly 20% of the deliveries.
Okay. Finally, still on Oulu, you already alluded to the plan that you could possibly convert also the other line there. What's the sort of situation with that now? What are the key decision-making criteria on that for you right now?
I think, first of all, we need to make sure that we have a successful ramp-up of line 1 before we take any such step. Oulu mill is an integrated mill with its own pulp supply and very good logistic situation. When we look ahead, when we have done the ramp-up and have a good quality position for the kraftliner, and depending, of course, how the market develops, which long-term is growing, we see that we have a very good position for Oulu mill. The second step, that we need to come back to when it's closer to implementation.
Very good. Thank you very much.
Thank you.
Thank you. There are no further questions. Please continue.
Okay. Thank you everyone for joining our earnings conference call. Hope to see many of you at our CMD as Annica already wished during the presentation. Thank you for today.
Thank you.
Thank you. Bye.