Ladies and gentlemen, thank you for standing by, and welcome to the Q3 twenty nineteen STORA ANSWER Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer I must advise you that this conference is being recorded today, Tuesday, 10/29/2019. I would now like to hand the conference over to first speaker today, Ms. Ula Payenan.
Thank you. Please go ahead.
Thank you, Marie. Good afternoon, everyone. I'm Ula Payen, Head of Investor Relations at Stora Enso, and welcome to our Q3 twenty nineteen conference call. I will hand it over now to our CEO, Karl Sundstrom that will be followed by our CFO, Seppo Parvi. And after that, we will be hosting a Q and A session.
Karl, please.
Thank you, and good morning or good afternoon depending on where you are in the world. Today, we published the quarterly results for the 2019. This is a quarter like previous quarter where we have focused a lot on cash and costs, and that is because of the kind of downturn that we've seen in the markets. As you can see, sales decreased by 7% versus a year ago and sales excluding paper decreased by 5%. Basically all divisions are negative in sales and it's basically only Consumer Board is kind of flattish.
We came in with an EBIT of €231,000,000 which is just below a double digit EBIT margin. We came in at 9,600,000.0 We have generated a strong cash flow of almost €490,000,000 which is better than previous year. And we have kept net debt to EBITDA flat compared to the second quarter of twenty nineteen. And it's obviously up compared to last year because of the restructuring of Bergvik Skog and the implementation of IFRS 16.
So
if you look upon what happened during the quarter, as you can see, we have had huge effects of sales and volume. We have seen some increased costs, but that has been more than compensated by the €41,000,000 of profit protection that is included in this quarter result. That means that we basically right now are having a cost base that is lower than a year ago. And that is a very important factor to have in your head when we are preparing for a change in the cycle that will come one day. And if you just add those €28,000,000 in less cost to having comparing that to what we had last year, you can see that we are moving the EBIT margin from 13,800,000.0 to 16,100,000.0 So we also announced in this quarter that we are increasing both the time and the scope of the profit protection program.
We are now increasing it from previous SEK 200,000,000 to SEK $275,000,000, but we're extending it by one year from 2020 to 2021. We have so far basically achieved year to date about SEK 100,000,000 of cost savings in the September 2019. We will reach approximately cumulative of 200,000,000 by the 2020 and the last 75,000,000 will come in 2021. We have now included also the effects of the marketing and the sales as well as of a distribution structure because of the Oulu conversion, which will greatly simplify the setup of the paper division. We will also consolidate the Finnish sawmills regarding Spruce to Warkaus, which means that there will have an integrated board machine with a pulp mill, one LVL machine and a spruce sawmill, which means that we are actually saving on sites.
And that is a part of the consolidation that we have done. During the quarter, we announced that when I'm leaving the company, I will be replaced by Annika Brezki as of the 12/01/2019. And Amikya is working within Storenze today and is leading the Consumer Board division. I am extremely proud to announce that my predecessor will come within the company. And I think that's showing our strength of the bench and the competencies we have built in Stora Enso.
We have had a number of important events during the third quarter. And as we published at the Capital Markets Day, we will now from the January 2020, we will have a separate forest division. This is to drive the transparency, but also focus the value creation of owning forest. This is a direct effect of the restructuring of Bergvik Skog And this gives us an opportunity to actually also demonstrate that we are the second biggest private forest owners in the world today but with $3,600,000,000 of biological assets. We have concluded the conversion of the Eanocell pulp mill to become a dissolving pulp mill and we are ramping it up during the fourth quarter.
We have sold our last paper mill in China, Daiwan. We have acquired a minority stakes in China packaging. We have launched a paperboard tube and that is an important part in our strategy to replace plastic or fossil based materials with a fiber substitute that is competitive as well as environmental friendly. With that, I would like to hand over to Sefo to give some highlights on the numbers.
Thank you, Karl. And I will start by looking at the key figures for the quarter that we have reported today. First of all, going to the top line, sales reached €2,400,000,000 that is reduction of 7.1% versus third quarter a year ago. Operational EBIT was €231,000,000 down from €358,000,000 in Q3 twenty eighteen. Operational return on capital employed 8.7 and cash flow from operations continues to be very strong and cash flow for the quarter was €488,000,000 that is up from €457,000,000 a year ago.
Net debt to last twelve months of Russia EBITDA was 2.2 and that is slightly above the targeted maximum level of two point zero. Then I move to the divisions and I start by Consumer Board, where price increases are continuing. Sales decreased slightly to €640,000,000 that is a reflection of lower board deliveries and higher pulp deliveries as well as higher board sales prices achieved during the quarter and earlier. Strong operational EBIT for the quarter, EBIT increased by 45% and was €73,000,000 that is due to the higher sales prices, lower pulp costs and lower fixed costs. Also lower volumes had an effect on the profitability.
Operational return on capital employed improved around three percentage points and was about 13% for the quarter. We also made trials with Fiskebure Board in Sweden to recycle used paper cups into white line chipboard. These tests were successful and we could demonstrate utilization of used paper cups as valuable raw material without any investments or changes needed for the process conditions. Earlier trials were also done at Langebrikke to recycle used paper cups. We also received seven European Carton Excellence Awards during the quarter.
Then moving to Packaging Solutions division, where corrugated market is benefiting from lower containerboard prices. Sales decreased 9% and was €299,000,000 and that is due to significantly lower containerboard and kraftliner prices. Operational EBIT decreased €39,000,000 from last year's all time high level and was €29,000,000 driven by significantly lower port prices and higher wood costs. Positive effects from lower raw material prices for corrugated units could be seen in the result. Operational return on capital decreased to 12.1% driven by seeing the lower containerboard prices during the quarter.
And all the mill conversion into kraftliner production is proceeding as planned and construction works have started in all areas. Production is expected to be started by 2020. Moving to next division, biomaterials, and there we can start to see the Chinese market is showing positive signs. That was also confirmed by the latest index released earlier today. Sales decreased 20% from last year's record high Q3 to €331,000,000 That is mainly driven by significantly lower pulp prices.
Operational EBIT decreased €86,000,000 and was €39,000,000 But you have to remember last year's figure was at all time high level when it comes to operational EBIT. This was driven by things like the lower pulp prices and higher wood costs and also volume impact had on effect. Operational return on capital decreased to 5.9% in line with the lower profitability in the quarter. Next, look at the Wood Products, their successful margin protection continues. Sales decreased 5% to €380,000,000 due to lower classic zone prices and slightly lower deliveries.
Operational EBIT decreased €21,000,000 and was €27,000,000 And here again good to remember last year's Q3 was at record high level. This was affected by lower sales prices and volumes as well as higher depreciation impacted by strategic investments. Lower wood costs in Central Europe also had a positive effect in the result. And operational return on capital decreased to 15.8% due to lower profitability during the quarter. Paper division continues to generate good strong cash flow despite the challenging market conditions.
Sales for the quarter decreased 11% to €690,000,000 driven by significantly lower paper deliveries during the quarter. Also down on paper mill divestment in China had negative impact on top line. Operational EBIT decreased by €15,000,000 and was €50,000,000 There significantly negative effect from volume was seen. Good costs management, lower fixed costs due to profit protection program, lower variable costs mainly from pulp had positive effect on the result. And cash flow, like mentioned, after investing activities, the sales ratio increased to 14.4%.
This is second best ever in that division, very good cash flow. But that's thanks to good working capital management in the division. Taiwan mill divestment in China reduced annual paper capacity by 140,000 tons. We have also reduced or reducing over 1,000,000 tons paper capacity with all mill conversion next year. We continue to produce paper until September 2012 and then start the conversion.
And that is about 20% of our capacity. Then looking at the strategic targets, some of those already we have been commented in the divisional review. I will highlight couple additional ones, Our fixed cost of sales at 24.2%, so still remaining above 20% targeted maximum level, but work continues to reduce fixed costs continuously. And our profit protection program is one part of that. And net debt to equity ratio at 55% that is below the 60% maximum level defined.
Divisions, their Consumer Board like mentioned improved from about 10% level to slightly above 13 level Packaging Solutions coming down from record high 30.4% the year ago to 12.1% this year. And Biomaterials at 5.9% level when it comes to return on capital and Wood Products at 15.8%. And Paper like mentioned, very good cash flow during the quarter 14.4% ratio when it comes to cash flow after investing activities to sales. With that, back to you, Karl.
Thank you. The outlook for the full year for 2018, deteriorating trading conditions caused by geopolitical uncertainties related to trade wars and a possible hard Brexit are expected to impact negatively. Demand growth is forecasted to slow for Stora Enso's businesses in general and the decline in demand for European paper will continue. Due to the profit protection program, costs are forecast to remain roughly at the same level in 2019 as in 2018. Stora Enso is still implementing additional profit protection measures to mitigate the negative financial impact of the current situation.
And I think it's important here in an uncertain market situation, the only thing we can act on is on the cost structure and building a better company for when the cycle turns. Next slide, please. So the guidance for the 2019. Operational EBIT is expected to be in the range of 100,000,000 to €180,000,000 During Q4, there will be annual maintenance shutdown at Forch, Inge Reuss, Skogal, Varkaus, Montes del Plata and Skogt Kermils. The total maintenance impact is estimated to be at the same level as in the 2018 and in the 2019.
So we see continued deteriorating trading conditions going into Q4. We are focusing on cash generation. We are increasing the profit protection program in order to build a stronger company when the cycle turns. And we have also decided to go out with a Forest division from January 2020, focusing on increasing the transparency and the focus on value creation in our Forest Holdings. With that, I open up for Q and A.
All right. Thank you. Your first question comes from the line of Hari Pieten from Nordea. Please ask your question.
Yes, good afternoon Hari Pieten and Nordea. Well, should we go straight to the guidance because it's so meaningfully below Q3, about EUR 90,000,000. If you look at the midpoint of your guidance for Q4, roughly EUR 90,000,000 lower earnings from there. And I understand about EUR 20,000,000 comes roughly from the line other, but still we are looking at about 4% margin deterioration. And you mentioned that the trading conditions overall are weaker, but could you sort of break down a bit more on which part sort So of this comes
the main reasons for the lower guidance for the fourth quarter are coming from that the Biomaterials division. Basically prices are continuing down. And the second one coming from Paper division where we see demand and prices coming down. Do you want to add something, Sappo?
Well, I think you summarized it, Karl, particularly well. It's mainly driven by price development in paper and pulp markets. Relating to Arte, there were some like some past facing issues, if you look at the costs, how they accumulate during the quarter, so that has some effect between the two quarters. But it's mainly sales price driven.
And there are certain uncertainties because we are still having a quite a wide guidance range and that is because we don't know. But for biomaterial, we are pretty certain because it's usually about the ninety day turnaround between the orders and the deliveries.
Exactly, yes. Was just going to ask if you have like included some kind of contingency to the for the ongoing political uncertainties and whether that's something that you have kind of baked in the numbers for the coming quarter.
So what we have assessment and we guide on the total company, but the main reasons are paper and biomaterials.
Okay, okay. Maybe just a small question on the biomaterials and the maintenance cost, which sort of on a group level are probably going to be in line, as you say. But if you think that the Mondes de Plata and Skutsar will be kind of a sort of shut down in Q4 and Ennocell was done in Q3. And how much given that for Nocell, you probably took a bit extra downtime as part of the conversion. So is that division going to be kind of affected by negative delta from maintenance?
The division will be affected, yes. And remember also that we are ramping up Enocell after the conversion, which means that it takes some time, plus that you have Skuttgart and Montes Del Plata, yes. But also prices are coming down.
Yes, sure, sure, sure. Okay. Maybe the last question, if I may. I mean, on the Consumer Board, which has been doing well, but also the kind of the pricing outlook and that. I mean, you have been fairly positive about the pricing prospects next year for parts of the Consumer Board mix.
But I mean, with the current market environment being this weak and also pulp prices down, do you see risk to these sort of statements that you have made earlier on the general outlook for pricing?
For Consumer Board and the pricing going into next year, I am still positive, hasn't changed.
Okay, very good. Many thanks.
You can see that they are flat sales and the profit is up 45%. So I think the things we have talked about continue.
Yes, exactly. Thank you.
Thank you. Your next question comes from the line of Justin Jordan from Exane. Please ask your question.
Thank you and good morning or good afternoon everyone. Can I just return to biomaterial for a second? We're in a situation where clearly, it would appear like softwood pulp prices in China have troughed, but hardwood are still declining even today's data. And inventory is still clearly for hardwood needs some work. How long do you think that will take, if at all, for hardwood to reach some sort of stabilization?
And when we think about biomaterials' quarterly profit going forward, I appreciate the sort of forty five ninety day lag between agreeing a contract today and delivering. But how long how many successive quarters of impact do you think we have going forward until potentially we see some recovery in 2020 by refining EBIT?
I believe and I don't know, we are a player, but we are not the dominant player in any sense in the pulp market. I would say that I guess that the lowest point in the pulp prices are probably going to be Q4 this year and maybe going into next year's first quarter. But I am a believer that prices will recover during the 2020, but I don't know.
Yes, no one has the crystal ball. But it's good to remember what happened a couple of years ago when we were having a low point in the pulp prices and the change was quite fast when it started to move.
And if you look also on the Chinese data, in the 2019, volumes were down of imported pulp into China with minus 15%, recovered to minus 1% by the mid year and it's around now by September, I would say it's like up 3% to 4% with very strong growth from August and forward. And it seems like they are emptying their inventories. And but at the same time, it's not a lot of new capacity coming out. So I think something will happen.
Okay. And just switching divisions in terms of the Ulu conversion. We're in a situation where we've got containerboard overcapacity globally, frankly, and subdued virgin containerboard demand in Europe, would it make sense to postpone the ULU conversion perhaps six to twelve months just given the soft demand outlook for containerboard?
I think it is because once it's built, we're going to ramp it up. And I'm a believer that mono material that is pure virgin is actually having a demand. This is like a 31,000,000 to 32,000,000 tons market growing with two to three percentage points, and which means that our 450,000 is basically roughly around half of that yearly growth. So I think we need to do the conversion as speed as we can and make sure that we can ramp it up because it will start to produce towards the 2020.
And also we have to keep in mind the decline in paper market and that's not getting any easier on the paper market. So in that sense, we are quite happy that we made the decision on moving the good speed ahead with the conversion. It's better to produce kraftliner than coated fine.
No, I don't dispute the decision to produce less graphic paper. I guess what I'm questioning is the logic of spending EUR $450,000,000 converting rather than closing.
EUR $350,000,000.
Sorry, EUR $350,000,000, okay.
Thank you. No, no, so I think and this can turn and I'm not so worried about that. It will be time to ramp it up as we know.
A growing market. It's a lot of has not changed. There's a good easy demand replacing plastics and other for such based packaging materials. And I think that's hitting the market at the right
And it is a new kraftliner that doesn't exist, which has its advantages.
Okay. And just one final question, just switching divisions again to Consumer Board. Am I right in thinking that you have a essentially a contract reset with your major customer as of January 2020 in terms of a positive pricing opportunity potentially that may bring?
Well, we have some major contracts still to be renewed end of this year, mean, the beginning of next without going too much into specifics. But we have the final stages at the renewal of the also the longer term contracts. And obviously, the folding related contracts are coming to renew. Those are more annual now towards end of the year again.
Sure. And then so can you give us any outlook for folding boxboard prices for 2020, which as you say tend to be annual contracts? I'm just wondering given that
I don't want to give any outlook on 2020, but I think economy is going to come back probably and that means that in 2020 that prices will also come back.
Okay. Thank you.
Thank you. Your next question comes from the line of Antti Koskivari from Danske Bank. Please ask your question.
Yes, thank you. A few questions from my side. First on Consumer Board and going to Q4 and the seasonality that typically is in Q4 there, should we expect kind of similar seasonality than in earlier years in this division? Or is this year somehow different?
You have to remember two things. We have two we have actually three mills in maintenance shutdown in Q4 twenty nineteen. We have Forsch, Ingeros and Skogal. Then you also if you look historically how we have and this has been a problem, we have usually had a little bit of a too high expectations of Consumer Board in the fourth quarter. Because in last year, we had only two of the Consumer Board mills in maintenance shutdown.
We have Skogal and Forsch. But now we're also having Inge Royce. I think you get what I'm trying to say.
Yes, absolutely. Very helpful. Then second question on costs. You talk talk a lot about taking down fixed costs, and then you have quite big plans on that side. But then on variable costs, what do you see from there coming in Q4?
And I guess, for a little bit longer period as well early next year? What's the outlook on variable costs?
Yes. Well, I would say in general that there is not a lot of pressure from costs. It has not been during the year or going forward. Sequentially, of course, look at the wood cost that is the key for us. We see that it's easing.
Of course, to year ago, they are still at the higher level on average for this year. So remember how it has developed. But that is, of course, key driver to us and the same for the other key inputs. Due to the same reasons markets have been soft and it's affecting all the markets and players. So no major pressures from there.
When it comes to cost improvement and cutting program that we are running successfully, roughly half of the savings are coming from variable costs and half from fixed costs. And there, of course, as I say, we do not take into account normal price changes in good or bad. But then if we include something for variable costs, it must be something related changes in recipes or changes in the materials themselves or reducing consumption in the recipes.
Or qualification of new suppliers. It has to be something that is sustainable
and active, yes.
Sure. Then thirdly, just on our net working capital, if you could give us a kind of indication what to expect on Q4 from that?
Yes. We started to put extra effort and focus on working capital after Q1 and Q2 and have continued the same in Q3. Working capital came down SEK 100,000,000 plus in Q3 and we continue to work. We have set the project office to look at this and to keep the pressure on businesses and wood supply to ensure that we can push working capital different components. So I'm confident it will continue.
We have not set any targets and we are not commenting any targets when it comes to working capital levels where to go. But I'm sure that there are opportunities to knock out couple percentage points from the net working capital net sales ratio compared to where we are now. It came up somewhat some bit last year especially and now we are working to bring it back to the levels where we were earlier. I think it's totally realistic that we can and should be below 11% to net sales if you look at the ratio as such. So I think that gives you some perspective.
But of course, it's a long term action, so it's not such short term actions. But it's one of the key areas in addition to profit protection program that we are running now, because cash is very important in these times when economy is turning a bit sour. And it's important to take care of your balance sheet and cash flow.
All right. Thank you very much.
Thank you. And your next question comes from the line of Linus Larsson from SEB. Please ask your question.
Thank you very much and good day to everyone. The way you guide now for the fourth quarter actually takes us back to profitability level where we haven't been since 2013. While some of your key benchmark prices are actually somewhat higher than they were back then. So I wonder just is cost a very important part of the equation here? Is it so that variable costs have maybe started to decline, but they will decline only much slower than your product prices go down?
And if so, what's your anticipation for variable cost development in 2020? And maybe then, in particular, on the Woodraw Materials side, please.
Yes. First of all, I think it's worth to note this and remember that when it comes to pulp, pulp has been coming to historically low levels. And that is obviously having an effect on not only biomaterials, but store and so in general. When it comes to the variable cost, I think you hit the right point there Linus when looking at the wood cost. If you look at wood cost level this year, it has been and continues to come down sequentially, but it's coming through in the figures slower than you might expect.
And it's partly because of the structure of the market also that we have been obviously making wood supply deals from the forest owners over time. And some of those have been an audit of old prices, so to speak. And we have been harvesting those and it has been affecting the inventory values and the cost coming to the system. But that is of course continuous consumption of the wood. And like I said, we expect that positive trend from the wood market continues.
Positive means that wood prices come down and then that the effect starts to come through also more visibly in the results. It takes typically a quarter or so at least when the market moves and now it has taken a bit more. So I think that has been the key driver. If you look at the wood cost somewhat higher than earlier due to the last couple of years development, they are coming down now and historically low pulp prices especially. And also to remember that Consumer Board where we have been doing good work increasing prices, they effectively started to come through now.
It has been improving continuously, but now that almost the whole portfolio has been renewed. Some last contracts have still to be done with those have been with gold prices. So there are these kind of phasing and timing issues.
Right. And so when in earnest will we start to see a sequential wood cost decline, do you expect?
Sequentially, costs are declining already. But I think that early next year picking up next year, we would expect that it comes stronger through interference.
So it's slightly more than a quarter if we act fast.
Okay. But is that can you say that for basically all of your wood sourcing regions? Or is that just in certain regions? Or is it pretty much the same? I know you've had quite low priced sawlogs in Continental Europe recently.
But is there anything else to note on that? Or is it pretty broad based that you will see a cost decline on the wood input?
It's mainly Finland, which is roughly one third of the total volume and less in Sweden for instance, mainly Finnish phenomenon. In Central Europe as you saw because of the bulk beetle issues, the wood cost have been coming down and have remained relatively low. And plantation based wood that is more it's our own plantation. So there this kind
of effects are not so large. So Sweden, have a fast reaction time due to the Bayrek.
Exactly, exactly. Right. And then just one more question, if I may. If you could just provide any sort of update on how your day high operation is going within Consumer Board? What's the latest on the ramp up in terms of capacity and mix development?
And how are you affected by what's going on overall in the Chinese packaging board market?
So we are at design capacity and that we've been for a long time. And we are qualifying more and more. And what we see now is that the FBB demand is slightly stronger in China and the prices are stable. And I would say we are affected, but not as much.
And we are working on bringing higher premium grades to the market and launch their successfully new products and that they're improving the product portfolio and improving profitability moving forward.
But that is also a new way of how we work. So it goes according to a pattern. It doesn't happen overnight.
But if I put the question maybe somewhat differently, if we, for a second, remove the tailwind from cheaper pulp because the operation is buying pulp from outside the mill. Are you seeing profit progress at that mill?
Absolutely. With the lower chemical pulp prices that we have seen, that is absolutely helping them.
Yes. But I mean, except for that factor, are even adjusting for that particular factor, are you seeing underlying profitability progress at Beihai?
We do. Operationally, we have been running well almost since the beginning, very successful start up and good volumes and efficiencies reached already earlier. And like I said, when we are improving the product mix moving away from standard folding boxboard, the lower end of the range to higher quality of grades, there is clearly improvement in the profitability. Of course, as we all know, folding boxboard market is quite crowded, but there is overcapacity in China. And that is why it's extremely important that the team in China, as they have been doing, continue to move volumes to upper end of the range and that's exactly where we get
the profitability And also increase the direct sales to the end users using less and less of merchants.
Excellent. Thank you very much.
Thank you.
Thank you. Your next question comes from the line of Rovian Santavirta from Carnegie. Please ask your question.
Thank you very much. So just a bit more on the Q4 guidance now. I guess it's quite expected that the average pulp price is lower in Q4 compared to Q3. Also, paper price is lower in Q4 compared to Q3. So that's probably well known by analysts and the market.
But this other segment, seasonally, Q4 has been sort of higher earnings So Q on Crexepo could specify a little bit what is going on there? And what should we expect for the other segment now going into 2020?
First of all, you have to remember that this segment also includes also R and D costs and some project related costs that are always a bit difficult, especially for you looking outside in to understand the phasing of those. So that is one driver there why there is some phasing issues between Q3 and Q4. And then there has been some if you look at the phasing of the costs, especially again related to projects that some costs have been, let's say, moving from earlier quarters towards end of the year related to the finalization of those projects. So there's nothing extraordinary as such, but typical things that are there. Going forward, of course, you have to remember that today segment other includes all our forest operations in Nordic, meaning old that we are taking over wood supply Finland, Sweden, Baltics and Russia.
And starting from the beginning of next year when we separate those and start to report forest division separately, I think it is developing in segment also will be more clear to you when we look at the development. It will be easier to follow an estimate.
Right. But can you provide some kind of guidance on the earnings improvement, guess, from sort of you now reporting a little differently the forest assets you
have 2020 or 2020. When it comes to forest assets, cannot comment more than what we commented already in Forest Day in Stockholm. Right. Fair enough. Guidance, you know, we are guiding full group result next quarter and we don't go more into details when it comes to figures as such.
All right, all right. Then can I just ask on you touched upon maybe a bit better FBB prices in China, but what are you seeing sort of in terms of activity levels, volumes when it comes to biomaterials and Consumer Board in China?
Consumer Board is FPD and it's liquid, it's CUK and it's full service board. So when I if I start with the pulp, I would we have seen volumes now increasing and accelerating increasing in the second half basically from August towards today. And we have also seen like we've all seen today that the NBSK is moving up for the second week in a row even and we also see that eucalyptus based pulp has not really moved in the right direction yet. So that is one thing. We do believe that the inventories are coming down in China.
And China needs to increase pulp consumption every single year if they are going to continue with GDP growth. At the same time, we don't know what will happen with the importing of recycled paper, but the quotas are coming down for recycle. So if a Chinese economy, which needs to grow are going to grow, they're going to buy more pulp, they are going to need more packaging materials in general. And Chinese consumer are very, very eager to make sure that they have food safety. And food safety is an area where we basically are focusing the Beihai mill on.
All right. Thanks. That is clear. And then finally
And one thing more, which I think is important and that is there is a change in China. There is an increasing middle class that is growing and they consume more and more.
Sure, definitely. Just final question, some of your peers in Sweden are writing up the book value of their forest, which apparently is having a quite positive impact on the share price development. Now what are your thoughts? Guess, you have sort of said that you're fine with the way you book those forests at the moment, but I guess especially the Latin American forests are booked at very, very low levels. So are you still sort of are you looking into this issue or are you fine with the way you book the forest value?
Is that in your view reflecting market value well enough?
Well, obviously, we follow the situation and development what our peer group is doing in Sweden and globally also. Do remember a lot of companies outside Sweden also. Typically, are like we're using discounted cash flow models. Very few of our PSR using market prices because of the market big size deals not being done frequently. But let's see how it develops.
First of all, then if you look at Sweden and specifically our case, there you have to remember, we have recently done a big deal. And the value today in Parasit is reflecting prices that we have paid for the additional land in the case of Berrivik Skog and the land that we got as part of the de merging or splitting Berrivik Skog relative to our previously owned share is not far away from that. So in that sense, we think that it is sort of giving fair value. But obviously and we have also given out figures the latest time we did was in Stockholm at the Forest Day giving comparison to valuations based on the market prices paid in Sweden. And there you can recall that if you look at the book values today, it is about EUR 2,800,000,000.0 in Sweden and looking at tower fair valuation.
If you look use the figures from Pillar to Korsner, IMF deal, it's EUR 5,100,000,000.0, almost double. And LRF statistics, it's €7,900,000,000 almost triple compared to what they in our books. I think that gives, of course, some idea on the potential value and hidden value there in the balance sheet.
Sure, definitely.
It's Thank you, quite transparently communicated by us already, isn't it?
It is. It just seems that the impact on the share price if you do that on the book is hefty, but I agree with you. Thank you very much.
All right. Thank you. And your next question comes from the line of Mikael Doepel from UBS.
Coming back to the Consumer Board business. Just as a reminder, how big part of that business is liquid packaging board today?
45%.
Okay. And how big part of that 45% is now being renegotiated in terms of price contracts?
We have not communicated that kind of ratios. But like I said earlier, we are at the final stages now. So by end of this year more or less done with the exception of one or two contracts. They are we start to be there.
Okay. And would you say that during the year 2019, you're already seeing some effects of earlier price negotiations during the year?
We have communicated basically all quarterly reports that we have had, that we have been working with the whole portfolio from everything from FPD, SBS, Foodservice Board, we have achieved every quarter an increase in the prices.
And you can see those if you look at year on year result development of Consumer Board, they have been improving. And we have been also quite happy that I can say that we have been quite happy with the increases reached. Are where we have been targeting as well. So very successful work in the team in Consumer Board division.
Okay. And then just a follow-up on Beihai, which you talked about previously, but could you give a rough split how the mix in that Beihai mill looks today? How big part of the volumes are higher value products today compared to, let's call it, lower grades? Just to get a feel of what's the improvement potential there?
I would say that it's still quite big. We are like Annika said in the Capital Markets Day a year ago that we are halfway through in the portfolio development and ramp up in that sense. And we still need to continue. So it's too much still on low end of the folding boxboard. But like I said, we continuously work on launching new higher end of the range products and that will improve the profitability.
So we are moving there step by step. And also of course development of liquid packaging board is important there on top of changing and coming with the new grades.
Okay. And then just finally on the switching to the corrugated box markets. What do you see currently in those markets in terms of demand and pricing? I mean, we have seen containerboard coming down quite a lot. But it appears if corrugated box pricing has held up a bit better, what do you see now in that business?
Are you seeing increased pressure on the box prices or are they still holding up fairly well?
So with the kraftliner was come down, it gives a bit more leverage for the corrugated units. And the corrugated units was a positive contributor to us. At the same time, we see on the containerboard, the board going in there from Packaging Solutions that the demand is stable and also the prices are stable. And I think that was confirmed already today with the statistics and it's been there for a while. So that will mean over time that the game will probably change that the corrugated packaging might come under a little bit of pressure
going forward. But in general, if you look at the volumes of corrugated this year looking at Q3 or year to date, so there actually is a slight increase in the volumes during the year. So I think that's an indication if market is holding pretty well and the volumes are also pretty healthy.
And part of that is actually explained with the continuous growth of the e commerce that is driving a lot of corrugated material.
Okay. Thank you. And then just a final question on the pulp market. We've talked extensively about what's happening in China. But how would you describe the European pulp market right now?
Has there been any change in the last month or weeks or so? What do you see there happening going forward? I guess so far this year demand has been quite weak, declining clearly and inventories are very, very high. Do you see any improvements situation?
In the fourth quarter, no improvements. It's still under pressure.
But you have to also remember that in Europe, the prices started to decline later than in China. And like said, in China it starts to stabilize and probably Europe follows a bit later.
Yes. But in terms of demand, have you seen any changes or inventory levels in Europe?
Well, typically one leads to another.
And it is a bit the German economy, which is by far the biggest market in Europe, is in a way probably going into recession as it says, which obviously will affect the level of economy, which is the driving force between the box demand.
Yes, sure. Okay. Thank you very much.
All right. Thank you. And your next question comes from the line of Lars Kjellberg from Credit Suisse. Please ask your question.
Yes. Hi. Just a couple of questions. Consumer Board, if I can return to that. Just curious a bit what you're seeing in terms of demand trends.
I mean, we're seeing some stability actually in corrugated, which should be more cyclical. And this business, you're not seeing any volume growth. And this is an area where, I guess, there's been an argument at least you should be gaining some momentum in the pack substrate change from plastics, for example, right? So can you give us a bit of color on what you see is going on in the market in terms of demand trends generally and also in overseas markets?
So what we see in general is that we have also been very clear that we have been fighting for making sure that we do value management and not taking bad deals. We see an increased interest and discussions with customers. But you have to remember to replace a lot of the packaging material from what is typical plastic doesn't happen overnight. And I think what we have seen is a bigger and bigger discussion with customers. A typical thing was that the board that we can make plastic tubes, that will be very small in the beginning and we see more and more.
And of all these Europe packaging awards that we got is actually a reflection of that the interest is there. It's not going to be orders in a quarter or so. It's going to take some time when we talk volumes. So I think the interest is there. It's going in the right direction.
And you have to remember, the single use plastic directive is not is implemented on the EU level, but hasn't gone into the local legislation yet, which will drive this even faster. So I think it's early days to talk about it, but the interest is there.
Okay. Looking at leverage, as you pointed out, Sapo, it's been up a bit. And of course, your guidance for the fourth quarter is quite a bit down. So I guess you're approaching some 2.5 times and you're stepping up CapEx spending. When are you getting concerned about the leverage and would reconsider some of your spending for which you guided for 2020 at quite high levels?
Yes, obviously, follow the balance sheet carefully and it's important to pay attention to it. Like we communicated already earlier this year when we announced the conversion project in all and increased the CapEx temporary above the earlier levels around 600,000,000 plus to 800,000,000 We already then said that we will focus on working capital. Also we plan to continue non core asset disposals to improve the balance sheet. And I think those are the actions that we have in pipeline and continue to implement to ensure that our balance sheet is not getting worse.
But you're not considering any actions specifically beyond what you talked about net working capital, etcetera, but no CapEx changes at this stage?
No, at this stage. I think we are confident that we can continue with the projects that we have in the pipeline. But obviously, if things get really sour and cash flow starts to deteriorate, then we need to look at other actions. And reducing CapEx is obviously one alternative. But at the moment, we don't see any reason to go that far.
Lars, don't forget that we have how much have we sold off of non core assets in the last
Probably five to six years, about CHF600 million. So roughly CHF100 million a year.
Got it. And the final question for me, and I asked the same question the last time around. Clearly, paper volumes are quite weak and and clearly, there's no doubt there's a need for capacities taken out. A question that I asked last time as well is how do you faring with customer retention at all? Is that a factor that comes into play?
Because your deliveries were down more than the market generally. How should we view this?
I would say so far so good that customers customer retention has been good and we have been able to keep the volumes relatively well.
Very good. Thank you.
But the whole competitive landscape is similar.
Of course, in general, we focus rather on value than volume.
Got it. Thank you very much and kind of all the best for your future. Thank you.
Thank you. And that was the last question, I think or not?
No, we still have.
Okay. We still have questions and we take them. Thank you, Lars.
Okay. Your next question comes from the line of Cole Hathorn from Jefferies. Please ask your question.
Good afternoon. Just following on actually on Lars' question around balance sheet. I just want to make sure on the dividend side of things, you're still comfortable on paying 50% through the cycle. So just the fact that we're probably going to a lower EPS number, you still feel comfortable with the dividend payment as is?
Dividend policy has not been changed. It's 50% over the cycle, yes. Okay,
perfect. And
then when you talk about your earnings into next year, a lot of the impact is around pricing, but you talked positively around potential opportunities for new areas of development in the next coming years. Has the softer macro environment changed your views on those type of projects or not at all?
No. I think given the trends that Lars also talked about that people want to replace fossil based materials, we need to speed up the innovation. Because when you launch a new product over time, that is a more profitable product than the previous one. Maybe not when you start it, but when it gains volume. And that's the reason why we need to be more innovative than anybody else because the demands from customers will increase.
And if you are first out, you get a bit of a time monopoly and that you it's always better margins.
Great. Thank you.
All right. Thank you. There are no further questions at this time. Please continue.
Okay. Thank you, everyone, for the lively discussion. And now before we end, I will hand it over to Karl, because he wishes to say some final words to
you. So first of all, thank you very much. This is my last quarterly report for Storansl. I would like to thank you all for bearing with us. It's been a great privilege to work for Storansl.
And I am very convinced about the future for Stora Enso. We are in the right business. We are doing profit protection program, which will make us an even better company when the cycle turns. And I'm extremely proud to be replaced by Annika, who will take over the first of December. So I think this is a lost farewell to you all.
And I thank you for being patient with me, and I have enjoyed this a lot. Thank you very much. Thank you.
Thank you.
Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.