Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Stora Enso 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 session. To ask a question during the Q&A session, you will need to press star and one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Tuesday 29th of October 2019. I would now like to hand the conference over to our speaker today, Ms. Ulla Paajanen. Thank you. Please go ahead.
Thank you, Marie. Good afternoon, everyone. I'm Ulla Paajanen, Head of Investor Relations at Stora Enso, and welcome to our Q3 2019 conference call. I will hand it over now to our CEO, Karl-Henrik Sundström, that will be followed by our CFO, Seppo Parvi, and after that, we will be hosting a Q&A session. Kalle, please.
Thank you. Good morning or good afternoon, depending on where you are in the world. Today, we published the quarterly result for the third quarter of 2019. This is a quarter, like previous quarter, where we have focused a lot on cash and costs, and that is because of the downturn that we're seeing 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 flattish. We came in with an EBIT of 231, which is just below a double-digit EBIT margin. We came in at 9.6. We have generated a strong cash flow to almost EUR 490 million, which is better than previous year. We have kept net debt to EBITDA flat compared to the second quarter of 2019.
It's obviously up compared to last year because of the restructuring of Bergvik Skog and the implementation of IFRS 16. 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 EUR 41 million of profit protection that is included in this quarterly 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 the change in the cycle that will come one day.
If you just add those EUR 28 million in less costs to having, comparing that to what we had last year, you can see that we are moving the EBIT margin from 13.8% to 16.1%. We also announced in this quarter that we are increasing both the time and the scope of the Profit Protection Programme . We are now increasing it from previous EUR 200 million to EUR 275 million, but we're extending it by one year from 2020 to 2021. We have so far basically achieved year to date about EUR 100 million of cost savings in the nine first months of 2019. We will reach approximately cumulative of EUR 200 million by the end of 2020, and the last EUR 75 million 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 Varkaus, which means that there we'll have an integrated board machine with a pulp mill, one LVL machine, and a spruce sawmill, which means that we're actually saving on sites. 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 Annica Bresky as of the 1st of December 2019. Annica is working within Stora Enso 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 is 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 Market Day, we will now from the beginning of 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. This gives us an opportunity to actually also demonstrate that we are the second biggest private forest owners in the world today, with EUR 3.6 billion of biological assets.
We have concluded the conversion of the Imatra 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, Dawang. We have acquired the minority stakes in China Packaging. 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 Seppo to give some highlights on the numbers.
Thank you, Kalle. 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 EUR 2.4 billion. That is reduction of 7.1% versus third quarter a year ago. Operational EBIT was EUR 231 million, down from EUR 358 million in Q3 2018. Operational return on capital employed, 8.7%. Cash flow from operations continues to be very strong, and cash flow for the quarter was EUR 488 million. That is up from EUR 457 million a year ago. Net debt to last 12 months operational EBITDA was 2.2, and that is slightly above the targeted maximum level of 2.0. I move to the divisions, and I start by Consumer Board, where price increases are continuing. Sales decreased slightly to EUR 640 million.
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 EUR 73 million. 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 3 percentage points and was about 13% for the quarter. We also made trials with Fiskeby board in Sweden to recycle used paper cups into white-lined 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 the Langerbrugge to recycle used paper cups. We also received seven European Carton Excellence Awards during the quarter.
Moving to Packaging Solutions division, where corrugated market is benefiting from lower containerboard prices. Sales decreased 9% and was EUR 299 million, that is due to significantly lower containerboard and kraftliner prices. Operational EBIT decreased EUR 39 million from last year's all-time high level and was EUR 29 million, driven by significantly lower containerboard prices and higher wood costs. Positive effects from lower raw material prices for our corrugated units could be seen in the result. Operational return on capital decreased to 12.1%, driven by significantly lower containerboard prices during the quarter. Oulu mill conversion into kraftliner production is proceeding as planned, and construction works have started in all areas. Production is expected to be started by end of next year, 2020. Next division, Biomaterials, there we can start to see the Chinese market is showing positive signs.
That was also confirmed by the latest PIX index released earlier today. That is mainly driven by significantly lower pulp prices. Sales decreased 20% from last year's record high Q3 to EUR 331 million. Operational EBIT decreased EUR 86 million and was EUR 39 million. You have to remember that last year's figure was at all-time high level when it comes to operational EBIT. This was driven by significantly lower pulp prices and higher wood costs, and also volume impact had an 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 EUR 380 million due to lower classic sawn prices and slightly lower deliveries. Operational EBIT decreased EUR 21 million and was EUR 27 million.
Here again, good to remember that last year's Q3 was at a 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. 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 EUR 690 million, driven by significantly lower paper deliveries during the quarter. Dawang Paper Mill divestment in China had negative impact on top line. Operational EBIT decreased by EUR 15 million and was EUR 50 million. There are significantly negative effect from volume was seen.
Good costs management, lower fixed costs due to Profit Protection Programme , lower variable costs, mainly from pulp, had positive effect on the result. Cash flow, like mentioned, after investing activities to sales ratio increased to 14.4%. This is second best ever in the division. Very good cash flow. That's thanks to good working capital management in the division. Dawang mill divestment in China reduced annual paper capacity by 140,000 tons. We have also reduced or are reducing over 1 million tons paper capacity with Oulu mill conversion next year. We continue to produce paper until end of September 2020, and then start the conversion. That is about 20% of our paper capacity. Looking at the strategic targets, some of those already have been commented in the divisional review.
I will highlight a couple additional ones, like fixed cost to sales at 24.2%, still remaining above 20% targeted maximum level, work continues to reduce fixed costs continuously. Our Profit Protection Programme is one part of that. 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 before to 12.1% this year. Biomaterials at 5.9% level when it comes to return on capital. Wood Products at 15.8%. 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 2019. Deteriorating trading conditions caused by geopolitical uncertainties related to trade wars and a possible hard Brexit are expected to impact Stora Enso 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 Programme , 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. 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. The guidance for the fourth quarter of 2019.
Operational EBIT is expected to be in the range of EUR 100 million-EUR 180 million. During Q4, there will be annual maintenance shutdown at Fors, Ingerois, Skoghall, Varkaus, Montes del Plata, and Skutskär mills. The total maintenance impact is estimated to be at the same level as in the fourth quarter of 2018 and in the third quarter of 2019. We see continued deteriorating trading conditions going into Q4. We are focusing on cash generation. We are increases the Profit Protection Programme in order to build a stronger company when the cycle turns. 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&A.
All right. Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Once again, star one if you wish to ask a question. Your first question comes from the line of Harri Taittonen from Nordea. Please ask your question.
Hi, yes. Good afternoon. Harri Taittonen, Nordea. Should we go straight to the guidance because it's so meaningfully below Q3, about EUR 90 million. If you look at the midpoint of your guidance for Q4, roughly EUR 90 million lower earnings from there, I understand about EUR 20 million comes roughly from the line other. Still we are looking at about 4% margin deterioration. You mentioned that the trading conditions overall are weaker, could you break down a bit more on which parts this comes from?
The main reasons for the lower guidance for the fourth quarter are coming from the Biomaterials division.
Sure.
Basically, prices are continuing down. The second one are coming from Paper Division, where we see demand and prices coming down. You want to add something, Seppo?
Well, I think you summarized it, Kalle, pretty well. It's mainly driven by sales price development in paper and pulp markets. Relating to [Artay], there was some phase spacing issues. If you look at the costs, how they accumulate during the quarters, and that has some effect between the two quarters. It's mainly sales price driven.
Okay.
There are certain uncertainties, because we are still having quite a wide guidance range. That is because we don't know, but for Biomaterials, we are pretty certain, because it's usually about a 90-day turnaround between the orders and the deliveries.
Exactly. Yes. I was just going to ask if you have included some kind of contingency for the ongoing political uncertainties, and whether that is something that you have baked in the numbers for the coming quarter.
What we have done, it's a wide assessment, and we guide on the total company. The main reasons are paper and Biomaterials.
Okay. Maybe just a small question on the Biomaterials and the maintenance cost, which on a group level are probably going to be in line, as you say. If you think that the Montes del Plata and Skutskär will be sort of shut down in Q4, and Enocell was down in Q3. Given that for Enocell, you probably took a bit extra downtime as part of the conversion. Is that division going to be affected by negative delta from maintenance?
The division will be affected, yes. Remember also that we are ramping up Enocell after the conversion, which means that it takes some time, plus that you have Skutskär and Montes del Plata. Yes.
Yeah.
Also, prices are coming down.
Yeah, sure. Okay. Maybe the last question, if I may. Just on the consumer board, which has been doing well, also the pricing outlook and that. You have been fairly positive about the pricing prospects next year for parts of the consumer board mix. With the current market environment being this weak and also pulp price is 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%. I think the things we have talked about continue.
Yeah, 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 Biomaterials 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. 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? When we think about Biomaterials quarterly profit going forward, I appreciate the sort of 45 to 90-day lag between agreeing a contract today and delivering, but how many successive quarters of impact do you think we have going forward until potentially we see some recovery in 2020 refining EBIT?
I believe, and I don't know, we are a player, but we are not a 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. I am a believer that prices will recover during the first half of 2020, but I don't know.
Yeah, no one has a crystal ball. 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.
If you look also on the Chinese data, in the first quarter of 2019, volumes were down of imported pulp into China with -15%. It recovered to -1% by the mid-year. It's around now by end of September, I would say it's up 3%-4%, with very strong growth from August and forward. It seems like they are emptying their inventories, but at the same time, it's not a lot of new capacity coming out. I think something will happen.
Okay. Just switching divisions, in terms of the Oulu 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 Oulu conversion perhaps six or 12 months, just given the soft demand outlook for containerboard?
I think because once it's built, we're going to ramp it up. I'm a believer that mono material that is pure virgin is actually having a demand. This is like a 31 million-32 million tons market growing with 2 to 3 percentage points, which means that our 450,000 is basically roughly around half of that yearly growth. I think we need to do the conversion as quickly as we can and make sure that we can ramp it up, because it will start to produce towards the end of 2020.
Also, we have to keep in mind the decline in paper market, and that's not getting any easier on the paper market. In that sense, we are quite happy that we made the decision on moving with 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 million converting rather than closing.
EUR 350 million.
Sorry, EUR 350 million . Okay.
Thank you.
No, 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.
It's a growing market. The outlook as such have not changed. There's a good in-situ demand replacing plastics and other fossil-based packaging materials, and I think that's hitting the market at the right time.
It is a new kraftliner that doesn't exist, which has its advantages.
Okay. Just one final question, just switching divisions again to consumer board. Am I right in thinking that you have 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 had some major contracts still to be renewed end of this year and into beginning of next, without going too much into specifics. We are at the final stages at the renewal of also the longer-term contracts. Obviously the folding box board related contracts are coming to renew, those are more annual now towards the end of the year again.
Sure. Can you give us any outlook for folding box board prices for 2020? Which as you say, tend to be annual contracts.
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 Koski-Väänänen 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? Is this year somehow different?
You have to remember two things. We have actually three mills in maintenance shutdown in Q4 2019. We have Fors, Ingerois, and Skoghall. You also, if you look historically, 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.
In last year, we had only two of the consumer board mills in maintenance shutdown. We have Skoghall and Fors. Now we're also having Ingerois.
Yeah.
I think you get what I'm trying to say.
Yeah, absolutely. Very helpful. Second question on costs. You talk a lot about taking down fixed costs, and you have quite big plans on that side. 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?
Yeah. 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, looking at the wood cost, that is the key for us. We see that it's easing. Of course, compared to a year ago, they are still at a higher level on average for this year. 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 softer, and it's affecting all the markets and players. 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.
There of course, as I say, we did not take into account normal price changes in good or bad.
Yeah
We include something for variable cost, it must be something related to changes in recipes or changes in the materials themselves, or reducing consumption in the recipes.
Qualification of new suppliers. It has to be something that is sustainable and active. Active, yes.
Yeah. Sure. Thirdly, just on our networking capital, could you give us a kind of indication what to expect on Q4 from that?
We started to put extra effort on focus on working capital after Q1 and Q2, and have continued the same in Q3. Working capital came down EUR 100 million plus in Q3, and we continue to work. We have set a project office to look at this and to keep the pressure on businesses and wood supply to ensure that we can push down working capital, different components. I'm confident it will continue. We have not set any targets, and we are not committing any targets when it comes to working capital levels, where to go. I'm sure that there are opportunities to knock out a couple percentage points from the working capital net sales ratio compared to where we are now. It came up somewhat, a bit, last year especially. 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. I think that gives you some perspective. Of course, it's a long-term action also. It's not such short-term actions. It's one of the key areas in addition to product protection program that we are running now. Cash is very important in these times when economy is turning a bit sour, and it is important to take care of your balance sheet and cash flow.
All right. Thank you very much.
Thank you. Your next question comes from the line of Linus Larsson from SEB. Please ask your question.
Thank you very much, a good day to everyone. The way you guide now for the fourth quarter actually takes us back to a 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. 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? If so, what's your anticipation for variable cost development in 2020? Maybe then in particular, on the wood raw material side, please.
Yeah. First of all, I think it's worth to notice and remember that when it comes to pulp has been coming to historically low levels, and that is obviously having an effect on not only Biomaterials, but Stora Enso in general. When it comes to the variable costs, I think you hit the right point there, Linus, when looking at the wood costs. 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. It's partly because of the structure of the market also, we have been obviously making wood supply deals from the forest owners over time, and some of those have been and are with the old prices, so to speak.
We have been harvesting those. It has been affecting the inventory values and the cost coming to the system. That is, of course, continuous consumption of the wood. Like I said, we expect that the positive trend from the wood market continues. Positive mean that wood prices come down. 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. 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're coming down now and historically low pulp prices especially.
Also have to remember the consumer part, where we have been doing good work increasing prices. The effect is starting to come through now. It has been improving continuously, but now almost the whole portfolio has been renewed. Some last contracts have still to be done, and those have been with old prices. There are these kind of phasing and timing issues.
Right. When, in earnest, will we start to see a sequential wood cost decline, do you expect?
Sequentially, wood costs are declining already. I think that early next year, beginning of next year, we would expect that it comes stronger through in the figures.
Yeah.
It's likely more than a quarter if we act fast.
Okay. Can you say that for basically all of your wood sourcing regions, or is that just in certain region, or is it pretty much the same? I know you've had quite low-priced saw logs in Continental Europe recently, is there anything else to note on that, or is it pretty broad-based that you will see a cost decline on wood input?
It's mainly Finland, which is roughly one third of the total volume. Less in Sweden, for instance, mainly Finnish phenomenon. In Central Europe, as you saw, because of the bark beetle issues, the wood costs have been coming down and have remained relatively low. Plantation-based wood, that is our own plantation, there this kind of effects are not so large. Sweden, we have a fast reaction time due to the Bergvik.
Exactly. Right. Then just one more question, if I may. If you could just provide any sort of update on how your Beihai operation is going within consumer board. What's the latest on the ramp-up in terms of capacity and mix development? How are you affected by what's going on overall in the Chinese packaging board market?
We are at design capacity, and have we been for a long time, and we are qualifying more and more. What we see now is that the FBB demand is slightly stronger in China and the prices are stable. I would say we are affected, but not as much. We are working on bringing higher premium grades to the market and launch there successfully new products, and that they improving the product portfolio and improving profitability moving forward. That is also a new way of how we work. It goes according to a pattern. It doesn't happen overnight.
Mm-hmm. 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. The lower chemical pulp prices that we have seen, that is absolutely helping them.
Yeah. Except for that factor, or even adjusting for that particular factor, are you seeing underlying profitability progress at Beihai?
We do. Operationally, they have been running well almost since the beginning, very successful startup and good volumes and efficiencies reached already earlier. Like I said, when we are improving the product mix, moving away from standard folding box board, the low end of the range to higher quality grades, there is clear improvement in the profitability. Of course, as we all know, folding box board market is quite crowded and there is overcapacity in China. 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. That's exactly where we get the profitability pickup. Also increase the direct sales to the end users and using less and less of merchants.
Excellent. Thank you very much.
Thank you.
Thank you. Your next question comes from the line of from Carnegie. Please ask your question.
Thank you very much. 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. The paper price is lower in Q4 compared to Q3. That's probably well-known by analysts and the market. This other segment, seasonally Q4 has been sort of a higher earnings quarter-on-quarter.
Sure.
Kuisikko 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&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. That is one driver there why there is some phasing issues between Q3 and Q4. There has been some, if you look at the phasing of the costs, especially again with the projects that some costs have been, let's say, moving from earlier quarters towards end of the year relating to the finalization of those projects. 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 Bergvik Skog, that we are taking over wood supply Finland, Sweden, Baltics and Russia.
Starting from the beginning of next year, when we separate those and start to report forest division separately, I think this development in segment also will be more clear to you when we look at the development. It will be easier to follow and estimate.
Right. Can you provide some kind of guidance on the earnings improvement, I guess, from sort of you now reporting a little bit differently the forest assets you have 2020 over 2019?
When it comes to forest assets, I cannot comment more than what we commented already in Forest Day in Stockholm.
All right. Fair enough.
The guidance, as you know, we are guiding full group result next quarter. We don't go more into details when it comes to figures as such.
All right. Can I just ask, you touched upon maybe a bit better FBB prices in China, but what are you seeing in terms of activity levels, volumes, when it comes to Biomaterials and consumer board in China?
Consumer board is FBB, and it's liquid, it's CUK, and it's food service board. If I start with the pulp, we have seen volumes now increasing and accelerating, increasing in the second half, basically from August towards today. We have also seen, like we've all seen today that the NBSK is moving up for the second week in a row. We also see that the eucalyptus-based pulp has not really moved in the right direction yet. 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 the GDP growth. At the same time, we don't know what will happen with the import of recycled paper, but the quotas are coming down for recycle.
If a Chinese economy, which needs to grow, is going to grow, they're going to buy more pulp, they are going to need more packaging materials in general. Chinese consumers are 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.
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. What are your thoughts? I guess initially you have sort of said that you're fine with the way you book those forests at the moment, I guess especially the Latin American forests are booked at very low levels. 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. You have to remember there are a lot of forest companies outside Sweden also. Typically, people are, like we, using discounted cash flow models. Very few of our peers are using market prices because of the market. Big size deals not being done frequently. Let's see how it develops. First of all, then if you look at Sweden and specifically our case, you have to remember we have recently done a big deal, and the value today in balance sheet is reflecting prices that we have paid for the additional land in the case of Bergvik Skog. The land that we got as part of the demerging or splitting Bergvik Skog relative to our previously owned share is not far away from that.
In that sense, we think that it is a fair value. Obviously, and we have also given out figures. The latest time we did was in Stockholm, the Forest and Wood Products Day, giving comparison to valuations based on the market prices paid in Sweden. There you can recall that if you look at the book values today, it is about EUR 2.8 billion in Sweden looking at our fair valuation. If you use the figures from BillerudKorsnäs AMF deal, it's EUR 5.1 billion, almost double. LRF statistics, it's EUR 7.9 billion, almost triple compared to what they now book. I think that gives, of course, some idea on the potential value and hidden value there in the balance sheet.
Sure, definitely. Thank you very much.
I think in that sense, it's 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. I agree with you. Thank you very much.
All right, thank you. Your next question comes from the line of Mikael Doepel from UBS. Please ask your question.
Thank you. Coming back to the consumer board business. Just as a reminder, how big part of that business is liquid packaging board today?
45%.
Okay. How big part of that 45% is now being renegotiated in terms of price contracts?
We are not communicating that kind of ratios, but like I said earlier, we are at the final stages now. By end of this year, more or less done with the exception of one or two contracts. We start to be there.
Okay. Would you say that during the year 2019, you have already seen some effects of earlier price negotiations during the year?
We have communicated basically in all quarterly reports that we have had, that we have been working with the whole portfolio from everything from FBB, SBS, Food Service Board, we have achieved every quarter a increase in the prices.
You can see those if you look at year-over-year result development of consumer board. They have been improving. We have been also quite happy that I can say that we have been quite happy with the increases reached. They are where we have been targeting as well. Very successful work in the team in consumer board division.
Okay. 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 Annica 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. It's too much still on low end of the volume box board.
Yeah.
Like I said, we continuously work on launching new higher end of the range products, and that will improve the profitability. 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. Just finally on the switching to corrugated box markets, what do you see currently in those markets in terms of demand and pricing? We have seen containerboard coming down quite a lot, it appears as 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?
With the kraftliner, what's 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. I think that was confirmed already today with the statistics, and it's been there for a while. 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.
In general, if you look at the volumes of corrugated this year, looking at Q3 or year to date, there actually is a slight increase in the volumes.
Yes
during the year. I think that's an indication the market is holding pretty well and the volumes are also pretty healthy.
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. Then just a final question on the pulp market. We've talked extensively about what happening in China. How would you describe the European pulp market right now? Has there been any change in the last month or weeks or so, or 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 in situation?
In the fourth quarter, no improvements. It's still under pressure.
Yeah.
You have to also remember that in Europe, the prices started to decline later than in China. Like I said, in China, it starts to stabilize and probably Europe follows a bit later.
Yes, in terms of demand, have you seen any changes or inventory levels in Europe?
Well, typically one leads to another.
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.
Yeah, sure. Okay. Thank you very much.
All right. Thank you. Your next question comes from the line of Lars Kjellberg from Credit Suisse. Please ask your question.
Yeah, hi. Just a couple of questions. Consumer board, if we can return to that. Curious a bit what you're seeing in terms of demand trends. We've seen some stability actually in corrugated, which should be more cyclical in 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? 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?
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. I think what we are seeing 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. Of all these Euro Packaging Awards that we got, it's 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.
I think the interest is there, it's going in the right direction. You have to remember, the Single-Use Plastics Directive is implemented on an EU level but hasn't gone into the local legislation yet, which will drive this even faster. I think it's early days to talk about it, but the interest is there.
Okay. Looking at leverage, as you pointed out, Seppo, it's been up a bit, and of course your guidance for the fourth quarter is quite a bit down. I guess you're approaching some two and a half times and just stepping up CapEx spending. When are you getting concerned about the leverage and would reconsider some of your spending which you've guided for 2020 at quite high levels?
Yeah. Obviously, we 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 Oulu and increased the CapEx temporarily above the earlier levels, around EUR 600 plus to EUR 800. 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. 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.
You're not considering any actions specifically beyond what you talked about, networking capital, et cetera, but no CapEx changes at this stage?
Not at this stage. I think we are confident that we can continue with the projects that we have in the pipeline. 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. At the moment, we don't see any reason to go that far.
Lars, don't forget How much have we sold off of non-core assets in the last couple of years?
Over the five to six years, about EUR 600 million.
Yes.
roughly EUR 100 million a year.
Got it. The final question from me, I asked the same question the last time around, because clearly paper volumes are quite weak, and clearly there's no doubt there's a need for capacities being taken out. Question that I asked last time as well is, how are you faring with customer retention at all? Is that a factor now 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 customer retention has been good, and we have been able to keep the volumes relatively well.
Very good. Thank you.
The whole competitive landscape is similar.
Yeah. Of course, in general, we focus right on value than volume.
Got it. Thank you very much. Kalle, all the best for your future. Thank you.
Thank you. That was the last question, I think, or not?
No, we still have.
Okay. We still have questions, then we take them. Thank you, Lars.
Okay. All right. Your next question comes from the line of Cole Hathorn from Jefferies. Please ask your question.
Good afternoon. Just following on, actually, on Lars's 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. Just the fact that we're probably going to a lower EPS number, you still feel comfortable with the dividend payments as is?
Dividend policy has not been changed.
No.
It's 50% over the cycle, yes.
Yes. Okay, perfect. When you talk about your earnings into next year, a lot of the impact is around pricing, but you talk 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. 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. That's the reason why we need to be more innovative than anybody else, because demands from customers will increase, and if you are first out, you get a bit of a time monopoly, and it always bets the 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. Now before we end, I will hand it over to Kalle because he wishes to say some final words too.
First of all, thank you very much. This is my last quarterly report for Stora Enso. I would like to thank you all for bearing with us. It's been a great privilege to work for Stora Enso, and I am very convinced about the future for Stora Enso. We are in the right business. We are doing Profit Protection Programme , which will make us an even better company when the cycle turns. I'm extremely proud to be replaced by Annica, who will take over the 1st of December. I think this is a last 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.