Good day, welcome to the Q3 2018 Stora Enso earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ulla Paajanen, Head of Investor Relations. Please go ahead.
Thank you, John. Good afternoon, everyone, welcome on my behalf also our Stora Enso Q3 2018 conference call. I will now hand over the call to our CEO, Karl-Henrik Sundström. Karl, please go ahead.
Thank you. Good morning or good afternoon or good midday, wherever you are in the world. I would like to go through a couple of highlights in the third quarter of 2018. I will hand over for some more deeper presentation by Seppo. Sales continue to grow. We almost grew 5%, if you exclude the divested Puumerkki, compared to a year ago. Operation EBIT came in at an important growth of 23% versus the same period last year, it's an EBIT margin of 13.8%. It's very much driven by favorable pricing, but also by an active product mix management from Stora Enso. Strong cash flow continues to be generated by the entities, we have continued to strengthen the balance sheet. Net debt to EBITDA is now at 1.1 versus 1.6 a year ago.
Operational return on capital employed is actually well above the strategic target of 13% reported in the quarter is 16.7%. If we go into a snapshot of the different divisions. We have had a Packaging Solutions having another record quarter. We have had Biomaterials with their EBIT record, we have had Wood Products coming in with the best third quarter result ever in the history of Wood Products. We have an impressive improvement from last year for the Paper, going up with 125%. If you look on Consumer Board, which are caught up in a situation where we are having variable cost increases going faster than we have been able to compensate the long-term pricing we're having in this division. If I talk about what happened in the quarter.
First of all, variable costs increased by over EUR 40 million in the quarter, of which 75% is coming from increased pulp prices as well as increased wood prices. We now see that that will be flattish going into Q4. On the good side, we have two things here. We have seen the first impact of small price increases that is going in the right direction. On the other hand, we have kept the fixed costs flat. All in all, I think this snapshot that you see in front of you very well demonstrates the strength of the portfolio we're having. One division is caught in a timing difference. We have a very good progress in all other four divisions. Third consecutive quarter with a return on capital employed above 13%.
That means that we basically have established a different level of return on capital employed, which I feel very proud of. Took us a long time to get here. Our intention is to stay here going forward. If I go into some of the transformation steps. We have announced that we are upgrading and expanding the corrugated packaging in Riga, Latvia, and that's a project that will be complete in 2019. We have two additions into our expanding biocomposite business, which is located in Sweden, in Hylte. One is that we are building up a competence center, and the other one that we are investing in additional production capability. Stora Enso and Gasum is actually investing together to build a biogas plant at Stora Enso Nymölla paper mill in Sweden. This is an interesting thing.
This means that outbound and inbound logistics can actually start to use biogas in the trucks. Bergvik Skog restructuring is ongoing. Due to the very complicated structure, we believe that we will be ready during the first half of 2019. This have no implication on anything on the wood sourcing. The wood sourcing remains with Bergvik as previous, going forward until we reach a final conclusion. Oulu conversion feasibility is ongoing, and we will probably come to a conclusion and a final understanding by the end of the year or beginning of next year. Before handing over to Seppo, we're coming back to this slide that we had for a couple of years now, describing our transformation journey.
As you can see, we are moving in the right direction and we are getting a more balanced portfolio and having this quarter, especially very strong performance coming in from wood products, biomaterials, as well as packaging solution. Also a good result coming from paper. With that, I would like to hand over to Seppo.
Thank you, Kalle. I start with some of the key figures out of the report that we published today. First of all, our top line sales increased 3%. And operational EBITDA margin was 19.4%. A big significant increase compared to a year ago when we had 17.2% operational EBITDA margin for the quarter. Operational EBIT increased 23.4% and was EUR 358 million. Operational EBIT margin at 13.8%. EPS earnings per share up 12.9%, and it was EUR 0.27 per share. Operational return on capital employed at 16.7% level, and like Kalle already mentioned, fifth consecutive quarter now that we are above the target is minimum 13% return on capital. Positive strong cash flows has continued, and net debt to operational EBITDA decreased from 1.6 the year ago to 1.1 at the end of Q3 2018.
Moving to our divisions, I start with the Consumer Board, where the sales growth continues. Sales increased to record high Q3, EUR 648 million. That is thanks to increased volumes as well as the first price increases that are visible now. Also, volumes and ramp-up of Beihai mill operations are improving the sales line. Operational EBIT decreased to EUR 50 million, and this is, as we have mentioned earlier, due to the significantly higher variable costs, especially pulp, chemicals, and wood costs, that have been so far only partly offset by improved sales prices and fixed cost management. Like Kalle mentioned, now that the unit is starting and the renewal of the contract has been started, we already see the first price increases visible. Demand continues strong, so we are confident that going forward we can also increase selling prices as planned. Operational return on capital, 10.3%.
Important step in our transformation and development of alternatives for plastics was a successful rebuild of the machine at Imatra mill in Finland for industrial production of MFC for barrier film production. Ramp-up is starting now during Q4 this year. Moving to packaging solutions, where we had another all-time high quarter. Sales increased 4% to record high EUR 230 million. Also operational EBIT increased to an all-time high of EUR 68 million. Operational return on capital also at all-time high level of 30.4% and clearly above the strategic target of 20%. We also announced investment in Riga, in Latvia, in our corrugated packaging plant there to upgrade the machinery and expand the capacity. It was EUR 9 million investment. We're moving to biomaterials, their strong pulp market continues. Sales up 9% to another all-time high of EUR 413 million.
Operational EBIT also at all-time high level of EUR 125 million. Both top line at all-time high and operational EBIT despite a maintenance shutdown at Sunila mill reducing the volumes. Operational return on capital increased to a new all-time high of 20.9%, which is clearly above our strategic target of 15% when it comes to biomaterials. Also our Lineo by Stora Enso, won Best Product Innovation at the ICIS Innovation Awards 2018. Another recognition for the innovation work we are doing in Stora Enso. In our wood products division, wood-based building continues to grow, sales excluding direct improvements, it increased 6.4%. Operational EBIT up 64% to record high Q3. Thanks to better prices and mix, as well volume growth supported our strategic investments at Murow sawmill and Varkaus LVL.
Operational return on capital continued at record high level of 31.6%, clearly above the strategic target of 20%. We also continued to develop our business portfolio. We announced EUR 7 million investment in [Sweden] competence center for biocomposites in Sweden. We also announced cooperation steps with Finnish start-up, TRÄ Group, to develop innovative digital services for wooden buildings. With Orthex, we launched a new range of kitchen utensils made from biocomposites. That's also a 98% bio-based material. Moving to Paper division, where solid profitability and cash flow continues. Sales increased 7% to EUR 779 million, operational EBIT increased 125% to EUR 65 million. Good market balance continues on the paper market. Cash flow remains strong. Cash flow after investing activities to sales was 8.3% thanks to better and improving profitability.
We also announced investment with Gasum to build a biogas plant at Stora Enso Nymölla paper mill in Sweden. This is total investment of EUR 5 million for Stora Enso. Looking at the strategic targets, where we are making good progress. Most of the targets are on green, as you know already the previous quarters. A couple of them remain on red. Fixed cost for sales coming down to 23.3%, still above the maximum 20% that we have defined as the target level. Consumer Board at 10.3%, below the 20% level. I think it's a reflection of the burden of Beihai mills still in the balance sheet in order to ramp up this moving ahead as planned and qualifications, the time lag between the cost increases that we have seen this year and selling price increases that have been started now.
You might notice that when it comes to dividend, we have changed the wording of it there. It states now to distribute 50% of EPS over the cycle. The policy itself is not changed, we are just more precise now instead of referring to net income, referring to EPS and linking it more clearly to dividend paid per share. With that, I hand over back to you, Kalle, please.
Thank you, Seppo. Now I will go over the outlook for the fourth quarter of 2018. Sales are estimated to be slightly higher than the amount of EUR 2,585,000,000 recorded in Q3 2018. Operational EBIT i s expected to be in line with or somewhat lower than the EUR 358 million recorded in the third quarter of 2018. The EBIT guidance is in line with the normal seasonality that we've seen over the last years, it is also to be spelled out that the increase in variable costs will not continue. They will more be like flat-ish in the fourth quarter. There, in the estimate, a negative EUR 10 million impact on operational EBIT is expected due to production restrictions at the uncoated fine paper mill in Nymölla, Sweden.
This is because water at the nearby lake, which supplies the water for the mill operation, is at a very low level, and we have to actually stop production in one line. The impact of annual maintenance shutdown is expected to be similar to Q3 2018, and all these are included in the guidance. Just before going into the Q&A session, I just want to highlight some of the important parts in this quarter. It's the seventh consecutive quarter of sales growth, the fifth consecutive quarter of double-digit operational EBIT margin, fifth consecutive quarter of operational return on capital well above the target of 16%. The balance sheet continues to strengthen. If you compare full year 2018 and 2017, EBIT are expected to be clearly higher in 2018. Moving from asset transformation to innovation and sales transformation continues successfully.
I also think this quarter, we are demonstrating the strength of our portfolio while having one division being caught up in timing difference between variable cost increases and prices, the four others are more than compensating that downfall. With that, I hand over to Ulla.
Okay. Thank you, Kalle. Just a reminder that we will be hosting our Capital Markets Day here in Helsinki, 7th of November, and subsequently mill visits to Heinola and Lahti Packaging Solutions mills. Now, John, I think we are ready for the Q&A session.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will now take our first question from Mikael Jafs from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, hello. Good afternoon, everybody. A couple of questions from me. You point in your Consumer Board operations that you're aiming for price increases. Can you elaborate a little bit on the mechanics in that business, when you have longer term contracts, et cetera? What's normal to seek compensation for? Are these carton board prices linked to pulp? Basically, how does it work in that business? A second question on the packaging solution side, where you say that in RCP container board and corrugated, you see slightly weaker demand in Q3 Q on Q. Is this something seasonal or is it cyclical? Could you just talk a little bit about that? Thirdly, in your lignin business, it seems to be going well, however small. Do you have any further plans to expand that you could talk about? Thank you.
If I start with the pricing. Roughly about one third of the contracts are up for renewal within, basically FBB in Consumer Board. The negotiations are ongoing and have started. What we are working on is for increased prices because they are market-based. We are not unique in this situation that we have high pulp prices. The important thing is there is still a very big demand. The market will decide it, but we expect prices to go up in the beginning of next year for the FBB. You have all the long-term liquid contracts, which are negotiated during 2019, and will probably have effect more likely towards the end of 2019. Okay?
Yeah. Okay.
That was the pricing question. When you talk about the RCP-based container board, the test liner, we saw that there was a slightly lower demand. When we look into going forward, we think that's going to change a bit. It's going to be a slightly stronger demand in Q4 versus Q3. Regarding lignin, it's still very small volumes, but we are also now starting testing to use it more internally, especially on the LVL. This is going to take a couple of years before we get the volumes where it's actually something to really report here. We have good traction. If you look who gave us the prize, it was actually a fossil-based consortium. It's a petrol-based consortium.
Okay.
I feel very optimistic.
Yeah. Many thanks.
Thank you.
If you find that your question has been answered, you may remove yourself from the queue by pressing star two. We will now take our next question from Linus Larsson from SEB. Please go ahead. Your line is open.
Thank you very much, and good afternoon. I'd like to follow up on consumer board and maybe to continue on price. If I understand you right, you have one liquid packaging board price contract up for renegotiation in the second half of 2019. Could you please confirm that? The remaining part of the liquid packaging board business, when would that be up for price renegotiation, please?
Without going into too much detail, it's confirmed that we have one in the second half of 2019. That's correct. We have one that is basically starting now, end of this year, beginning of next year. The other one, if I remember right, is in 2020, for the big one.
Okay. One contract has been, do I understand that right? One price contract has been renegotiated, that has been settled but not yet reflected in your-
No.
Okay.
No.
No.
Nothing has been renegotiated on the liquid contracts. The improvements that we saw now in Q3 are [added rates].
Got you. When you say one third up for renewal by the start of 2019, that includes one LPB contract?
That is basically more around the area of FBB, which is not liquid.
Okay. I thought you just said that you had one LPB contract.
Yes. You negotiate. That's why I was clear when I talked about it. This is where you will see the effect is in a later part. You negotiate, and you set it, and then there are different timing when the prices start.
Okay.
That's what I said earlier. You will see towards the second half and the end of the second half of 2019.
Okay. Excellent.
The other one.
Sorry?
Yes. The one third that will be affecting is basically FBB contracts.
Excellent. That's very clear. Thank you. Just looking generally, if you look at EBITDA per ton in consumer board, it's under pressure while EBITDA per ton in biomaterials or many other businesses also are doing much, much better. What opportunities do you see to shift some of your volumes, which are now in less buoyant, less cyclical consumer board segments into somewhat, for the time being, more lucrative business segments?
First of all, we are obviously working on that one to get into others. At the same time, having these long-term contracts, we see it basically as a timing issue. I think it's very important to look upon it that way. Now we are in a situation where we have had, basically in one quarter, over EUR 40 million increase in variable cost, and now we see them flattening out towards the end of the year, being flat-ish. We are doing that on the margin. But it's also about what machines you can use to serve certain drinks and where you can actually swing. We are trying to maximize that. Absolutely.
I guess it can also be a bargaining tool in some of your price renegotiations.
Obviously, they also see our financial results. They'll see that the traditional, very profitable Consumer Board is not the most profitable any longer when you look on a number of parameters, and that's absolutely correct.
Mm. May I also ask about seasonality? As we went into the third quarter, you said that for reasons which weren't entirely clear to me, but for some reasons, seasonality, which historically has been very positive in the third quarter, didn't quite materialize in 2018. Could you talk a bit about seasonality in Consumer Board in 2018, please?
Yeah. First of all, I tried to explain that in the snapshot of the business. Basically, we're having a record sale for Q3 in Consumer Board. At the same time, we got over EUR 40 million of variable costs coming in. EBIT is going down. If you're comparing the seasonality between Q2 and Q3, you have to remember that, in Q2, we had very high in maintenance, and in Q3, we had Imatra and Ingerois. It's a little bit the shift. Then you have to remember, when we went into the third quarter, and we still estimated when we guided for Q3, that we were worried about the wood situation. We did take down the pulp production in the mills where we had to be able to deliver the board, which means that we have less pulp sales now.
Mm. Then the follow-up question then, how do you look at the fourth quarter in Consumer Board? What kind of seasonality do you see going into the fourth quarter?
Basically, we are having the two same mills being in maintenance. We expect the same, the only thing is different, we don't expect variable costs to continue up because what we see is the pulp prices we believe are stable going forward, and we have seen also that wood costs are going to be stable because during the first seven months of this year, due to the fact that there was very limited supply of it for various reasons, which meant that we and our competitors were buying on the margin to keep the pulp mills going and to be able to deliver the boards. Now we are more in a stable situation, and our inventory levels of wood for the mills are back to normal. We haven't seen prices go up, they are stable.
We see the pulp are stable, wood costs are stable, we also see that chemical seems to be more stable than previously. That's a little bit how we see it goes into Q4.
Okay. Thank you very much.
Thank you.
We will now take our next question from Lars Kjellberg from Credit Suisse. Please go ahead. Your line is open.
Thank you. I just wanted to start right where you ended about wood costs. When you say they're stable, most purchase organizations in Sweden during August and September hiked their prices between 20 SEK and 45 SEK per cube. Is that not real? Is that not happening? Or how should we read that? Also, if those numbers are right, when should we see that coming through as cost increases for you for that externally purchased wood?
Until the end of Q3, we have had quite significant increases in the wood prices, both in Finland, Sweden, and in the Baltic, the majority where we take up. Going into Q4, we see them being stable and the supply situation being stable.
Stable at that.
That's what we see.
stable at that elevated level?
Yes. We don't see additional effects coming in to Q4.
Just to be clear, are you paying those prices? Because typically in the past, you've had maybe three, six, or nine months of standing timber on your books, so to speak, right? You're not really seeing the clear input.
I will not comment on individual wood prices in Sweden. I will not do that. From what we see, we are in a situation where we don't see further increases on wood prices across our portfolio.
You also have to remember our portfolio is pretty wide. If you look at the total wood cost that we are looking at, we are also affected by the development in Finland and Central Europe, where we are sourcing as well.
Oh, absolutely. Also, I just wanted to.
25% of our wood supply in the total comes from Sweden, 36% from Finland, and then in a number of other places.
Just to confirm a bit on the very long-term contracts for liquid paper board. We of course, don't know the full duration of these things, but it sounds maybe like the three to five years, so in that range, if you can confirm? Do you not have any escalators in that for general cost inflation? Are they actually fixed fully for whatever the duration of the contract is?
They are fixed.
Understood. Turning page a bit on biomaterials. Of course, we've seen very strong pulp markets. We heard from UPM the other day that their delivery volumes are down 5%-6%. Your delivery volumes are down 8%. What is the reason for your volume contraction in pulp deliveries, and do you see that as a potential upside for next year to get those volumes back to where they should be?
In this quarter, we had a maintenance stop at Sunila. That's part of explaining the volumes. We obviously are going to make sure that we deliver as much as we can out of our pulp mills, especially since we see stable prices going forward for a couple of years since the demand and supply balance seems to be quite stable.
To be clear, though, you're down 8% year to date, which is obviously You had a similar amount of downtime, I suppose.
Okay. If you take year to date, 8% down, you have to remember that we took our pulp mills down when we had the problems in Q1 and Q2 with approximately 10%.
Right
all our pulp mills producing 5.8 million tons annually. There was not enough. We wanted to make sure that we could run boards and other things that will help in running them slower, basically. That we did in Q1 and Q2. That is part of that if you take year to date.
Yeah, that makes sense. Effectively, if you had normal harvesting conditions next year, you should be able to recover those lost volumes in 2019.
Yes.
Final point for me. There's an awful lot of noise from China, and it's been going on for some time, but it seems to be coming a bit to the fore now about slowing demand generally in China with UPM called out the other day, fine paper price pressure. We've seen from various sources that consumer boards are under some pressure, even with very elevated pulp costs. What are you experiencing in your business? Is top line an issue at all in Beihai or not at all?
What I would say is that Q3 was a bit of a special quarter because of all the uncertainties in the Chinese market with import of OCC or paper for recycling and the pulp and the whole permitting area around that. What we have seen is that when it comes to Folding Boxboard in China, we actually expect higher prices going into Q4, slightly higher. We are a small player in a huge market focusing on a certain niche on the very high, and that's what we're working on.
In terms of demand.
We are only virgin in China. Only virgin.
True. In terms of demand trends, any change directionally that we should think about, up or down?
Not that we have seen.
Very good. Thank you.
Thank you, Lars.
We will now take our next question from Mikael Doepel from UBS. Please go ahead. Your line is open.
Thank you. Hello, everybody. A couple of questions.
Hey.
Coming back to the consumer board business. Would you expect to recover the full cost inflation, which you're experiencing right now in that division, by hiking your own prices? Or will you also need to take your cost downs to recover the margins?
Obviously, we're going to move on all these parameters. Since it's a very healthy market demand out there, customers have benefit from lower prices right now, it's going to be negotiation. This working on own cost structure is obviously one of the things that we need to do as well to make sure that we get those deals, because we are not alone, but it's not a very crowded market on the high quality. It's going to be both.
Market demand continues strong, as I said earlier. Even so that the renewal is during the Q4 when market is seasonally down, we are confident that we can push through and get through the price increases we need.
Even if we do that, we still need to work on our cost assumption.
Okay. Would you care to give any comments on what's happening in Beihai? Are you getting a positive on this contribution there right now?
Beihai is going according to plan. Q3 was a bit of a tough quarter because it was a bit unstable what the situation was going to be between virgin and non-virgin. Now, going into Q4, we see prices going up. We are still ramping it up, and we are qualifying new grades
Okay. All right, switching to the paper business. There are some comments out there of price increases for fine papers in Q4, and also some producers have voiced price hikes for the beginning of next year. What's your take on this?
Since we are in negotiations, in the beginning of the negotiation, I would say that we see prices being stable, and that's it. I don't want to go in any further. Obviously, it's actually very encouraging to see paper going up 125%, and it sounds good. Market demand remains good, yes.
Okay. You're seeing prices stable, you're referring to Q4 or 2019, or both?
Q4, when I say stable. When I look, being worse in paper. I think comfortable on a good price level in the first half of 2019. I think it's going to be good paper period.
All right. Thank you very much.
Thank you.
We will now take our next question from Robin Santavirta from Carnegie. Please go ahead. Your line is open.
Thank you. Just in terms of the consumer board division, could you just remind me what the net long position you have in pulp is, if you exclude Beihai? How much of that have you been able to deliver this year?
That one I have to, I don't have that in my head. That was related to consumer board, right?
Only to consumer board, right?
Exactly.
Beihai is using roughly 150,000-200,000 tons of chemical pulp. We are buying more otherwise, because we are selling less out because of what Kalle referred to earlier, that we have been slowing down pulp production during the first half, which means that there's been less market pulp.
Yes.
Excluding Beihai, we are talking something like a couple 100,000 tons probably that we have been buying net.
We will actually do that now. I think it's important to understand what did we miss this year because of the wood issues. What is it this year? I think you're not making a statement.
I recall a number that it would be 100,000 tons net long excluding Beihai. I was just wondering how much of that you have been able to sell to the market this year.
I think this year we are short because of that we were running the pulp mills some 10% lower for the first six months of the year. Let us, because usually we are probably excluding Beihai, in 2017, we were actually selling pulp long. You're absolutely right.
Sure. Okay. Thanks. In terms of Beihai, you stated last year at, I guess it was Q3 or Q4, I guess, that you have reached the EBITDA break-even. Is it fair to assume that given the surge in input cost there that the profitability is roughly at the same level? You stated that Q3, I guess, that it was a tough quarter for Beihai. Was that due to the slump that we saw in FBB prices during the summer, or was it something else? Finally on Beihai-
It was also the uncertainty regarding how FBB would grow in China depending on the import and non-import of OCC that has been hitting a lot of people. I will not talk about the profitability of individual mill. We decided we stop that at the end of Q4 last year when we reached design capacity as well as EBITDA break-evens.
As he has said earlier, we are fine at the pilot stage with the qualifications. Now we are moving. Of course, we still have some tail ends of the qualifications to be done. Now we are moving to mix optimization as the next step.
The expectation is that the mix will still improve significantly going into next year in Beihai.
Yes.
Is that correct?
It is part of the work now to commercialize those grades that we have qualified now. Yes.
All right. That is clear. Can you just confirm that I understood correctly that you expect group variable cost roughly flat quarter-on-quarter in Q4, and wood-
Yes
costs on a group level, flat quarter-on-quarter in Q4?
Yes.
Would you mind to comment about the wood cost? I mean, you must have some idea about what is going on during the winter as well, how the market looks. What is sort of the outlook that we see in sort of a steep increase in wood costs in 2019 due to various reasons? One obviously being you having been forced to import a lot more from expensive countries than before. What is the outlook sort of for you guys? Is it fair to assume that the flattish outlook would continue when we start going into 2019 in terms of group wood costs?
To group wood cost, this might be my famous last words, but what we see, and we have taken precautions of increasing the flexibility in our wood supply organization. We see at the moment, more stable prices compared to last year, and we don't see a huge pickup from the level that we're having right now.
All right. That is very clear. Finally, on this.
That is based on that we don't have [weather resource that we can't cope. We have adjusted most of the things to create more flexibility in the wood supply organization, but that's what we see right now.
Yes, of course. Finally, on BillerudKorsnäs, I assume you have quite favorable contracts, the ones that you had. Going into 2019 when this transaction is delayed, should we assume that you will continue with the same sort of contract terms in terms of procurement that you had before? How should we look at this now in start of 2019 before the split up of BillerudKorsnäs?
As a planning assumption, we see no change in the wood supply because until we have signed the deal. After the deal is signed, that is something else.
All right. Thank you very much. Thanks.
Thank you.
Except for your touch going back to this question about net position that you mentioned. I was doing some checking here offline, and it is 200,000 tons. 200,000 is correct for [pulp mix excluding AI] as discussed.
This year you have been short, you have been buying from the market excluding Beihai as well?
Yes.
All right. Thanks.
We will now take our next question from Gustav Sherwin from Pareto Securities. Please go ahead. Your line is open.
Hi, thanks. First of all, I'd like to try and understand your guidance for Q4 a little bit more. On operational EBIT, one thing we have a pretty wide range. I think it's roughly EUR 270-EUR 390, if I'm not wrong. When I'm accounting for everything you said now about maintenance and seasonality, we have this EUR 10 million item in Q4, pretty stable cost inflation, and I guess pricing should be quite stable as well. I think it sounds pretty conservative. Are there any moving parts I'm missing here?
Yes. You have to understand that the seasonality is similar to previous years, which means that you are having two big mills in maintenance, Skoghall and Fors.
When I look at the seasonality.
On top of that, you also have the sales pattern for consumer board. You have that in wood product. You go into different season. Wood product usually have a lower seasonality in sales in the fourth quarter, as well as consumer board. You have a sales pattern, you have main, and that's why we have the maintenance in Skoghall and Fors because of the seasonal sales pattern, and then you have wood product. The wide range is not a reflection that we are uncertain. It's more to get the midpoint where we think it's possible and what we're aiming at.
Okay. Fair enough. Secondly, this tax provision that you booked in the quarter, is this really a one-off item or is there risk of something like this coming back again?
No, I think it's just going to true out. The tax case is pending, and we see that we have a strong case, but to be prudent and following IFRS rules, we make the true out. It is a one time case.
Okay, perfect. Perhaps just lastly, the Sunila mill and the restriction you have to water levels there. Do you see this being resolved quite soon? Because I guess it won't go on for more than Q4, at least.
There has been a little bit rain there, a couple of milliliters, but we need a lot more rain there.
Okay.
We don't know. I cannot predict weather, unfortunately.
That's all right. Thanks.
We will now take our next question from Justin Jordan from Exane. Please go ahead. Your line is open.
Thank you. Just want to check on Biomaterials. The last time I checked, I think the Sunila mill capacity was less than 400,000 tons per annum, yet you delivered 91,000 less tons in Q3. Was the mill down for all of Q3, or were your deliveries down more than your production? Are there other factors in play? For example, one of your peers blamed bad weather in Uruguay for lower pulp production. Was Montes del Plata impacted in Q3 by weather, or were there other factors at play here in your lower production number?
It's like I mentioned that we had maintenance at Sunila mill in Q3, not the whole quarter, but quite long time. There might be some deliveries that are moving from one quarter to another, sort of typical timing issues when there are deliveries. That can play some part as well.
We did not have any weather problems in Uruguay.
Thank you. Your production in Q3 has fallen by less than the 10.6% of deliveries fall.
Yeah, like I said, the deliveries are affected by different factors as well. We have no issues as such with weather-related issues.
Okay
this quarter.
Sure. I know obviously you talked about significantly weaker demand in China, in hardwood pulp in Q3. I just wanted to double-check your outlook for pricing. Is that stable or obviously we have stories in trade press of concessions to discounts to resellers of pulp in China. Is that something that you're having to also concede?
No. What we see in general, we see a stronger demand in own pulp and prices are stable.
Right. Okay. Just switching divisions. Can you just remind us in consumer board, the split of the business between Folding Boxboard, I'm sorry, liquid packaging board and let's just say other forms of board. I'm just trying to understand some of the pricing dynamics because I appreciate over 75% of contracts are annual plus. I'm just trying to understand specifically liquid packaging board, what proportion of consumer board is that?
To liquid, it's some 45%-50%.
Okay. Thank you. One final question just on the Bergvik Skog transaction. I appreciate it's being delayed into hopefully H1 of 2019, have the terms of the transaction, are they still as previously guided or are they in any way changing?
No, they are as previously guided. Until the deal is done, we live on the old contract with Bergvik.
Thank you.
Just a delay. It's not causing any issues with wood supply next year. Yeah.
Thank you.
We will now take our last question from Marko Karvonen from Handelsbanken. Please go ahead. Your line is open.
Yes. Good afternoon. Just a few more question. Maybe on the Beihai commercialization, you say that you're now moving to mix optimization, what products that you have now qualified, do those products fall under your long contracts or is this sort of a separate issue?
Some of them are and some of them are new. It's a mix.
Okay, good. On the container board pulp production issues, have those sort of now passed or does this still continue in Q4?
Can you repeat that? Container board?
Consumer board.
Consumer board pulp production
yes.
We are back to normal with the wood supply at the moment. Yeah. We are getting back to running at maximum soon. That was Q1 and Q2.
I suppose, on wood products and packaging solutions, you're now delivering return on operating capital in excess of 30% versus target of 20%. Do you see this as a result of a cyclical peak, or do you think that your targets here have been conservative, or how should we interpret this?
When we launched these targets in 2015, I think many of you thought we were a bit crazy. Now we have delivered it, and we are having very favorable situation, especially in biomaterials, packaging solution, and a continuously good performance on a high level in wood products. Wood products we've taken from 18% to 20%. I don't see maybe yet to change these targets, give us a couple of more quarters with good performance or a year, then we might consider it. I agree with you that it is a very good performance.
Okay. Good. Maybe the other side of the coin, in consumer boards for the European operations, you last year talked about return on operating capital of 35%-40%. I suppose that has now moved down. Was that performance a result of more favorable contract conditions and deflationary variable cost, or do you see a recovery of that type of returns?
You have to put this into a context. Part of the reason that we are coming down in the return on capital employed for consumer board is that we are going in the right direction in Beihai, but given that we are caught in long-term contracts, the timing effect of the price renewable means that I believe that we should be coming back in the right direction. If we're going to get to exactly the same number, I don't know. That's the only source now. By having very good returns a couple of years ago, coming down this year, and now we see that it's going to move in the right direction. Where we're going to end up, I don't know, but it's a very good business because it's very complicated and it's very few competitors in the area.
I think it's fair to say that over time, we should be able to recover
Yes
what margins we have lost. Because of contract structure, like Kalle has mentioned several times today, it takes a bit of time. We are also working on new product development where we can also improve our margins as well.
Yes. We are aiming at getting back.
Okay. Thank you very much.
That concludes the question and answer section. I would now like to turn the call back over to you for any additional closing remarks.
Okay. Thank you, John. I want to thank everybody for attending the call and giving us the good questions. We will be in touch next time, 1st of February, when we are out with our full year results. Thank you for everybody participating today.
This concludes today's call. Thank you for your participation. You may now disconnect.