Good day, welcome to the Stora Enso Q3 2017 results announcement. 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. Good afternoon, everyone, welcome to Stora Enso Q3 results call. We will have it the same format. It will be our CEO, Karl-Henrik Sundström, making the presentation together with our CFO, Seppo Parvi, in the end, we will have a Q&A session. Kalle, please go ahead.
Thank you, Ulla, good morning or good afternoon, depending on where you are in the world. I would like to go through a couple of slides here. We actually had, for the third consecutive quarter, a growth in total sales of almost 5%. For the growth businesses, which is basically the four growth divisions which is excluding paper, we managed to get an 11% growth on top line. Operational EBIT of EUR 290 million. That's a margin of 11.6%, it's over 32% better than the same period last year. Cash flow better than last year, we reached a 13.9% return of capital employed compared to 10.1% a year ago. The balance sheet continues to strengthen, the net debt operational EBITDA ended at 1.8 versus 2.1 a year ago.
The EUR 50 million profit improvement program is delivering, we have in the results as of the third quarter, 30% of the savings included. We actually call this a step change in our transformation, I think this slide here describes it. You can see that of the profit improvement compared to last year, almost EUR 30 million is coming from Beihai. You are seeing in Packaging Solutions EUR 27 million. That is driven by good kraftliner prices, Varkaus actually came in on a run rate of 15% EBITDA, plus the strengthening of the restructured business in China Packaging. Looking at Biomaterials, we're more than doubling its profit compared to a year ago. It's due to sales growth of 14%. We had no maintenance in the quarter, plus that we have also been able to drive additional volume out of our mills.
Wood Products increasing EUR 8 million, that is because of its growth and a continually high profitability delivered basically through the growth of building components and systems and other high value-added products. You have paper 23% lower. It's a bit of temporary headwinds, but it's also the matter of the business. All in all, ending up in an 11.6% EBIT margin, which is a very high level for us historically. That is the reason why we call it a step change in our transformation. Today we also announced two investments of CapEx in sustainable growth areas. One in Enocell, where we increased the capacity in Enocell for dissolving pulp by 280,000 tons, and the investment is expected to be completed during the second half of 2019. The targeted return on operating capital employed is over 15%.
We are also increasing the compatibility of our Imatra mill by investing EUR 42 million in additional CTMP drying capacity, increasing the pulp capacity out of the CTMP pulp mill in Imatra by 80,000 tons. This will support the commercialization of MFC to a greater extent than we have today. The targeted ROC is over 20%, supporting the strategic targets. If you look on the transformation steps, I will not go through all of these on this slide, I want just to tell you that Beihai is supporting our growth, Varkaus LVL is supporting our growth, Murów is supporting our growth, the Varkaus kraftliner. We have also today announced additional two big investments, earlier this quarter, we announced that we are increasing the capacity and the quality in China Packaging.
Also in this quarter, we concluded the divestment of CulinaS AB as well as the Re-board in Sweden, as well as we concluded a negotiation of people reduction and securing EUR 12 million cost savings at Franzwehe mill. Beihai board continues to ramp up ahead of plan. We have already made production out of that mill of 413,000 tons since the start. In the quarter, we produced 105,000 tons, which is more than double a year ago production, we're expecting full production in the first half of 2018. The break even in Q4 2017 remains. Before handing over to Seppo, I just want to spend some thoughts and comments regarding our transformation. From being a 30% non-paper company in 2006, we are now more than 70% of the sales in the four growth divisions.
When you look upon the profits, it's now generated about 90% coming out of non-paper. That's doubling the amounts versus what we had in the second quarter, where it was 5%. The transformation continues, we have made a different level in our transformation. With that, I would like to hand over to Seppo.
Thank you, Kalle. I start on some of the key figures for the quarter that we have today reported. First of all, the sales line grew 4.8%, and like Kalle already mentioned, this was now third quarter in a row that we are showing growth, and the growth is accelerating. Growth excluding paper was over 11%. Operating EBIT increased 32.4% and was EUR 290 million for the quarter. Earnings per share increased from EUR 0.16 to EUR 0.24 a share compared to a year ago. Operating return on capital above the strategic target level of 13% at 13.9%. Cash flow from operations also continues strong, and it was EUR 430 million compared to EUR 390 million a year ago. This is over 10% increase.
Good strong cash flow is visible on net debt to last 12 months operating EBITDA ratio that is now at 1.8 compared to 2.1 a year ago. Moving to divisions and division of performance, I start with Consumer Board, where Beihai mill ramp-up continues ahead of the plan and is also reflected in the growth of the sales as well as improving profitability. Sales increased 7% to EUR 639 million, and operating EBIT was at EUR 86 million. That is 28% increase compared to a year ago. Beihai development continues in a positive manner, as Kalle mentioned, and power turbine is back in operation now after the incident that we had earlier this year. For this quarter, Q4 2017, we expect that Beihai operations operating EBIT is negative by EUR 7 million compared to EUR 38 million negative a year ago. EBITDA breakeven is expected during Q4, as we have earlier communicated. Operating return on capital was 17.7%, clear improvement from a year ago, 12.9%. This is now including Beihai. Excluding Beihai operations, return on capital was 14.5%. We have today announced an investment at Imatra Mills to add drying capacity for CTMP and expansion of the pulp warehouse. Moving to Packaging Solutions, where profitable growth continues, driven mainly by Varkaus kraftliner ramp-up as well as improving performance at China Packaging. Sales increased 23% to EUR 380 million, thanks to Varkaus kraftliner as well as favorable prices and increased deliveries. Operating EBIT was record high at EUR 48 million. That was driven by higher sales prices, better volumes, as well as operational improvements in China Packaging and Varkaus kraftliner, as mentioned.
In Varkaus, we are expecting to reach full production during the last quarter of this year, and we have already reached targeted operating EBITDA run rate of 15%. This is what we also promised when the investment was originally announced. We have also decided on an investment of EUR 16 million in China for capacity expansion and quality upgrade. This is our response to the increase in demand there. This investment is expected to be completed by mid-2019. Biomaterials, their favorable pulp cycle continues. Sales increased 14% to EUR 379 million, thanks to increased deliveries in addition to higher sales prices. Operating EBIT more than doubled to EUR 88 million. That was driven by higher pulp prices, increased volumes and lower maintenance costs. Good to notice that lower maintenance costs were mainly due to changed sequence of maintenance shutdowns.
In Varkaus, we are expecting to reach full production during the last quarter of this year, and we have already reached targeted operating EBITDA run rate of 15%. This is what we also promised when the investment was originally announced. We have also decided on an investment of EUR 16 million in China for capacity expansion and quality upgrade. This is our response to the increase in demand there. This investment is expected to be completed by mid-2019. Biomaterials, their favorable pulp cycle continues. Sales increased 14% to EUR 379 million, thanks to increased deliveries in addition to higher sales prices. Operating EBIT more than doubled to EUR 88 million. That was driven by higher pulp prices, increased volumes and lower maintenance costs. Good to notice that lower maintenance costs were mainly due to changed sequence of maintenance shutdowns.
Operating return on capital at 14.8%, almost at the level of the targeted 15%. Today, we announced an investment at the Enocell mill, pulp mill, to increase its dissolving pulp capacity from 150,000 tons to 430,000 tons. Moving to Wood Products, where solid performance continues. Sales increased 10.5%, excluding the transfer of Baltic Wood Sourcing. Baltic Wood Sourcing was moved to segment Other in our reporting. Sales growth in the strategically important building and component systems area was 14%. Sales increased mainly due to the increased volumes, higher prices and product mix. Also, operating EBIT was highest third quarter in 10 years, driven by higher wood costs that were more than offset by higher sales prices and volumes. Operating return on capital at 21.3%, above the targeted 18% level. Our CLT investment in Gruvön, Sweden that we announced earlier is proceeding according to the plan.
Here we are expecting to beginning the production in Q1 2019. In Paper division, some temporary headwinds affected profitability and cash flow negatively. Good to notice that sales of ongoing operations were stable, but we had some negative effects from Veitsiluoto mill PM2 incident and negative effects. Divestment of Kabel Mill and Suzhou mill site last year decreased sales by some EUR 55 million. Operating EBIT decreased EUR 24 million. That is due to higher cost of paper for recycle, energy wood and chemicals, as well as negative effect from foreign exchange rates. Cash flow of investing activities to sales for the first nine months were 5.2%, and Q3 only 0.8%. This was mainly due to the lower EBITDA normalized level for operating working capital during the quarter after a very exceptionally low level at the end of the previous quarter, second quarter this year.
At the Kvarnsveden mill in Sweden, negotiations regarding the close of paper machine 8 were concluded. This affected 122 people, and annual cost savings are expected to be about EUR 12 million. Looking at the strategic targets, where the step change that Kalle just mentioned is also clearly visible. We are showing growth that is clearly faster than the relevant market in the growth businesses divisions that we are in, and that was 11.1% year-on-year in the third quarter of this year. Also, our debt metrics are looking better as a reflection of the positive, good, strong cash flow that has continued. Both net debt to operating EBITDA and debt-to-equity ratios are clearly below the maximum targeted levels in our strategy. The same with operating return on capital employed, clearly above the targeted level, both including and excluding Beihai operations.
When it comes to fixed cost to sales, there we are still above the targeted 20% level, and there the work needs to continue to bring it down from the latest 23.8% level that you can see on the table. Looking at the divisions and where we are standing there with the strategic targets. First of all, in the Consumer Board, operating return on capital at 17.7% for the quarter, including Beihai operations, a bit below 20% level. Excluding Beihai at 14.5%. In Packaging Solutions, positive growth, profitable growth continues, and we are now above the targeted 20% return on capital level at 22.4%. Biomaterials also clearly improving compared to a year ago when they were at 6.7%, now 14.8%, so almost at the targeted 15% level.
Wood Products continues the solid performance and return on capital is above 18% strategic target level, and it was 21.3% for the third quarter this year. In Paper, cash flow from investing activities to sales at 0.8%. As I said earlier, it was exceptionally low, mainly due to the correction of the working capital level that was extremely low end of the second quarter and a lower EBITDA level compared to previous quarter. Moving back to you, Kalle.
Thank you, Seppo. I will go through the guidance and some conclusions before opening up for Q&A. Sales are estimated to be similar to or slightly higher than the amount of EUR 2.509 billion recorded in the third quarter of 2017. Operational EBIT is expected to be even in line with or somewhat lower than the EUR 290 million recorded in the third quarter of 2017. The operational EBIT estimate for Q4 2017 includes the negative EUR 7 million impact of the ramp-up of the Beihai operation. Beihai Consumer Board machine expected to reach operational EBITDA break even in Q4 2017. The impact of annual maintenance shutdown is expected to be approximately EUR 10 million higher than in the third quarter of 2017, it's included in the above guidance.
I would like to point out that in Biomaterials, we will have both Veracel and Skutskär mill in annual maintenance, and we had no annual maintenance shutdown in the third quarter of 2017. I also would like to remind people that the seasonal pattern of previous years regarding Consumer Board will remain, which means it's a weaker quarter seasonally than the third quarter. As a conclusion, we call it a step change in our transformation. Sales growth for three consecutive quarter, the project in China, Varkaus and Murów are driving a sustainable, profitable growth. The sales growth almost 5% for the whole company and over 11% for the growth divisions. We reached a return on capital employed of 13.9%. This is the highest level than Q1 in 2001.
Solid cash generation, improved net debt to EBITDA, we're all moving, as you can see in the numbers, from asset transformation to innovation and sales transformation. With that, I hand over for the Q&A, Ulla.
Thank you, Kalle. We are ready for Q&A now.
Ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will take our first question from Mikael Jåfs from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, hello, everybody. It's Mikael Jafs from Kepler Cheuvreux. First of all, congratulations to a very good result. I have two questions.
Thank you very much.
The first one is, on paper, I know that this is not a focus area for you guys anymore. We've seen quite a lot of capacity closures, and you're closing SC magazine papers yourself. Could you say a couple of words on how you see the dynamics in that marketplace playing out now as we enter the year-end season with the usual negotiations? The second is more of a technical question on you are expanding the dissolving pulp capacity. Do you feel that you have enough reach to existing customers, or will you go out trying to attract new customers in that business? Those were my questions. Thank you.
Thank you, Mikael. I just want to say that paper is less important profit-wise for us. It's still an important part when it comes to cash generation and support investments going forward. I believe that I have one of the best paper team there is, it is very important for us there. If you look upon paper, I think you have heard closures. There have been discipline in the way industry has taken down capacity. It's been recent announcement. When I look upon paper, I think the demand will continue to be weaker. We see prices going into Q4 to be more stable. You have to remember that Q4 is the strongest quarter historically for paper within Stora Enso. I expect that to be an important part of our Q4 result, like it's been in the last couple of years.
I hope I answer your questions on that one.
Yeah.
When it comes to dissolving pulp, we are, as we have previously announced, moving more to specialize our Northern pulp mills. Skutskär is now basically only fluff. Now we will make Enocell to basically only being dissolving pulp. You have Sunila, where we have the lignin production. For NBSK, where we are a marginal player in old mills, the competition will increase. That's why we are moving into areas where we traditionally have had a long and a strong relationship with very important customers on the dissolving pulp. The mill has been sold out throughout the period. The quality is good. Now we can offer them more to the existing customer base. We also have had contact with a number of customers over time who have actually asked us to supply. We have been supply constrained given the lower quantity.
If you look on the pricing and the profitability on dissolving versus NBSK, for us, it's a big difference. We're moving into a more profitable segment with also more stable customer relations. I hope I answered your questions on that one.
Yeah. Perfect. Many thanks.
Yeah.
We will now take our next question from Justin Jordan from Jefferies. Please go ahead. Your line is open.
Thank you, good afternoon, everyone. I've got a slightly interrelated question regarding, I suppose, paper and biorefining, because obviously in, I guess, well, I suppose in both the packaging paper and paper division, you called out increased OCC costs. Of course, the flip side is you're benefiting from increasing biorefining profitability. I guess my question is really just regarding National Sword in China, which, of course, is impacting the cargoes of mixed paper and OCC that are going into China at the moment. You're much closer to China than frankly any of us in Europe is.
I guess I'm just interested in your view as to what you think this ultimately resolves, or how it resolves, or does it resolve, frankly, in 2018, in terms of do we see some agreements on OCC cargoes importing to China and therefore some stabilization in European OCC prices, and equally, presumably at the margins, perhaps some less demand for pulp? How do you see the interplay between OCC and pulp prices going forward from China?
First of all, I think China as a nation are actually taking this with sustainability very seriously. Part of that is that by stopping the import of the unsorted, which in certain cases could be close to garbage coming into China, and they probably went a bit over the top when they basically even sorted was stopped. I think the sorted will be eased out, but maybe not to the same level as it was before. That will obviously make a choice for the Chinese board and paper manufacturers if they can afford to stay in business because then their only replacement is actually virgin pulp. That probably is not going to go over so fast as some people expect, because I think the quotas they will have on the imported sorted paper will be less than they were before. That's how I read the situation.
Okay. Then do you have a view on OCC imports in China? Because obviously European OCC prices are collapsing at the moment because of China's actions.
No, it's the same. You can use that-
Right, the same analogy. Okay. Just one follow-up question, just on very specifically, the CapEx announcements that you've made today, all very sensible stuff. Can you give us any sort of thoughts about guidance for 2018 CapEx for Stora Enso group, in relation to the EUR 600 million to EUR 650 million for this year? I know you've talked in terms of longer term CapEx trending down towards depreciation, but I'm assuming as you continue to announce new investments, that may be pushed back slightly into 2019 or 2020.
It's Seppo here. As you know, we don't give guidance for 2018 yet. We come back to that later. On general terms, in the big picture, the CapEx guidance we are giving earlier still stands that we are bringing CapEx towards, and we will keep it around the depreciation level also going forward. Plus what we have to replant in the plantations. Yeah, about EUR 100 million. It's about EUR 100 million, yeah.
Yeah. Thank you.
We will now take our next question from Lars Kjellberg from Credit Suisse. Please go ahead. Your line is open.
Thank you. Just a couple of questions, starting with Enocell. How should we see this? How much pulp are you taking out of paper pulp today? Are you going to phase that out or are you going to be an abrupt change from paper pulp to dissolving wood pulp? Second question is about China and how you view the situation in China. Of course, there is a lot of moving parts in terms of the fiber situation, of course. How does that translate into your pricing in China and demand for your virgin fiberboard? Do you find any opportunities in your system to raise paper pulp capacity, for example, in Montes del Plata? If so, do you have any plans to do so?
Are you talking about additional investments in Montes del Plata, if I start from the back?
Well, if that's necessary or debottlenecking of what you can do. There's a lot of such projects around, of course, given the what seems to be very good returns on smaller investments in to squeeze out a bit more pulp from existing assets.
Yes. Okay. We are constantly debottlenecking, and we have actually increased the capacity all the time during this year in Montes del Plata. These are the type of projects that we like because it's on an existing site and profitability levels are extremely. We were continuing doing that. Montes del Plata is one of the ones we are looking on that too. At Veracel to see that we can get more out of that. When it comes to Enocell, now I go back to your first one. Today we are selling basically 325,000 tons of NBSK and 150,000 tons of dissolving pulp. Going forward, when this is ready, we will basically have, which is new, we will start with softwood dissolving pulp, about 245,000 to 246,000 tons.
We will increase the hardwood dissolving pulp from 150 to 184, basically meaning that the new pulp production will go from what we have today, 475,000 to 431,000. Obviously, when we start to take down the NBSK line, that will disappear from the market. Over time, until we have construction ready, the second line that will come out. Certain part of the NBSK will disappear. The question regarding China. What I believe will happen, if China will for various reasons limit the import of either recycled paper or OCC, there will probably be
Especially if they are going to go from mixed to more sorted over time, which I think, and even on the sorted, it will be lower. It gives an opportunity for virgin board. That means that obviously having our new nice mill in China gives an opportunity for additional business and also on a different value scale than before. I hope I answered your three questions with that, Lars.
Just if I may clarify, you mentioned creep at Veracel and Montes del Plata. Can you quantify roughly where you are today versus where you were a year ago in terms of volume?
3%-5%.
Okay. I didn't quite catch what you said about NBSK. Some will clearly disappear, but is this a phasing? When should we see the paper pulp component disappearing or start to disappear, and when should the NBSK basically cease?
Seppo here. Of course, there is timeline when it comes to getting the equipment and those to the site and get that implementation done. It will take a couple of years before we are there and can start fully with the dissolving pulp production. It will not disappear overnight. It will be a gradual reduction then during the project.
Understood. Thank you.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. We will now take our next question from Robin Santavirta from Carnegie. Please go ahead. Your line is open.
Yes, good afternoon. First of all, in terms of Consumer Board and your business in Europe, and your business in Folding Boxboard or carton board overall, what is the pricing outlook for 2018? I know some of your competitors, and I believe you as well, have announced price increases. What is going on? Is the market really as tight as the price increases implicate, or how should we view the pricing outlook for 2018 in carton board in Europe?
If you look on the demand, it's getting stronger, and if you look on prices, they will stay stable. You have to remember that in Consumer Board, most of the contracts are on a longer period. Especially if you take CUK, liquid, and you take CUK liquid and food service board, they are annual or biannual contract. That is basically 60% of the business. The pure Folding Boxboard is about 30%, and of that, I would say around 75%, 80% is actually on annual contract. It's very limited, which means that the prices are stable. That's what happened. We are capacity constrained right now, and we are trying to increase that partly by introducing more MFC or getting the pulp mill with getting more capacity out of Imatra. That's why we're doing the bottlenecking investment in Imatra.
Right. Thanks. Then in terms of Beihai-
Even if prices are announced, but the effect is not that big. It's stable. That's something that I think is good.
Good. That's clear. In terms of Beihai, you are reporting operating loss of EUR 13 million in the quarter. How much is from the actual machine, and how much is from the plantations? What is the depletion of the plantations per quarter?
We have not been specifically splitting the result between the mill and plantation. This is for the total. What we have been saying is that the mill, we expect to be EBITDA break even now during Q4. When it comes to depletion, that of course depends very much on the harvesting volume of the months and quarters. It is not one to one. It depends on that, because the more we harvest or the less we harvest, that has an effect on the depletion cost. I do not have now here me a figure for the previous quarter, but it is like I said, varying a bit between the quarters.
We did give in the guidance that for the total operation in Beihai, it is minus EUR 7 in the quarter. I think with this and the comments of Seppo, you are pretty well off.
Yes. Thank you. Finally, in terms of the paper business, I understand that you had some problems in Beihai too, what with, I guess, the PM2 now. Can you quantify what kind of earnings impact that had on that division in this quarter? What is the outlook now for Q4?
It's quite limited, because taking into account the insurance coverage, we only talk about a couple of million EUR affecting the financials. That's the deductible.
Good. Thank you. Finally, in terms of input cost inflation, you're talking in the paper division about that and that sort of hindering margins, burning margins a bit. What is the outlook now for the rest of the year and for the start of 2018? There must be a quite big difference between Europe and Asia, or am I correct?
In general, I would say that, yes, there are some inflation pressures and cost increases when it comes to especially fiber cost for both wood, like I commented in the Wood Products division comment on RCP, paper for recycling, and also for energy and transportation logistics costs. In general, I would say still, like we said earlier, that the inflation pressures as such are not very huge in total picture, but it's affecting some divisions more than others, and it's most visible in paper business today.
Okay, thanks. Finally, on RCP, if I may continue. What is the situation for you guys at the moment in Europe? I would assume RCP prices are going down with the China situation at the moment. Are you expecting lower RCP prices for the rest of the year? Are you actually seeing now lower? Are you buying with lower prices now compared to this summer, for example?
Like you see from the statistics also, the recycled paper market has been a bit under turbulence because of the China market or Chinese decisions on imports. That has meant that especially in the U.S., the recycled paper and OCC prices have been coming down. There has been a similar effect in Europe. Maybe not as strong as in the U.S., but it's becoming more and more visible. The next future depends, of course, very much on what are the next steps by the Chinese authorities on this area.
You have to think, Europe on RCP is an isolated market. I don't think the EU will ever allow import of recycled paper. Even though it's fluctuating and affecting China, because we are net exporter in Europe, I don't see the flow going the other way around with waste import into Europe. I think that is something that would probably not happen. Have that in mind.
No, definitely not. If export is restricted to China, then we will probably have some more RCP in Europe, and that will probably press prices down in Europe. That is probably what Seppo also meant.
Yes, that what he meant.
Exactly. That's what I meant that we see. It's also good to notice that still at the moment, year-on-year, prices are higher even though they have been declining.
Exactly. Thank you very much.
Thank you.
We will now take our next question from Mikael Doepel from Handelsbanken. Please go ahead. Your line is open.
Thank you. I would first of all like to drill a bit into the guidance for Q4. Just to start with and to make everything as clear as possible, what your guidance is basically saying, given the definitions of the wording that you have, is that the Q4 operational EBIT should be or could be either 25% below Q3 or 10% above Q3. Is that correct?
Absolutely, yes.
Okay, good. Then as a follow-up on that, I'm just trying to understand why earnings could drop as much as, say, 20%. If we look at on the delta going into Q4, we have Beihai which is a net positive. Varkaus should be a net positive. Pulp pricing is probably going to go up as will volumes. You have on the negative side, obviously, Consumer Board seasonality, which Kalle mentioned already, but also paper seasonality as a positive. You have the maintenance, of course. Net, I'm struggling to see how we could see such a big drop in earnings from Q3 to Q4. Is there any other specific things that we should be aware of when thinking about the fourth quarter?
The way I would think about it, Mikael, is that we have a set of rules that define the guidance with this wording, that's something we have gone through the board and everything with. That's how we talk about it. Obviously, that gives you a range of results. I don't think I need to say much more than that. Going down 25%, that we don't believe.
Yeah.
This is a way of giving you a guidance range where you will have certain assumptions about the midpoint.
Like also mentioned earlier by Kalle, and you mentioned yourself, we have higher maintenance costs during the quarter, especially, for instance, Veracel deal will be. There is seasonality. There is Christmas every year in Q4.
Especially for Consumer Board
That's good to remember and keep in mind. Quarter is a bit shorter than other quarters, and that has an effect also.
Okay. That's helpful. Thank you. A question on Beihai. Things seem to be going ahead there and progressing ahead of plan. I was just wondering, since you are saying, for example, for the Varkaus container board mill that you reached the planned EBITDA run rate of 15% in the quarter. When everything is in place in Beihai, and the mix and everything is perfect, and all the stars are aligned, what kind of an EBITDA margin would you expect to get from that mill?
We have not been specific on the EBITDA. What we have said when we announced it is that in those days, we did not have the specific target for each division. What we have said is, over time, when we ramped up the machine and we get the real mix, because still, most of what we deliver out of Beihai is actually FBB, and we have been training the personnel on that. When we get into the desired mix, which is liquid CUK, as well as food service board, that should be around the level of 13%, which was the target for the total group. That's what we have said. If you do that, and you know that what we have invested, and you know the depreciation, you can go backwards and see what the targeted EBITDA is.
Just to remind us, the total investment, it's about EUR 1 billion, right?
The mill project itself was EUR 800 million and the plantation's about EUR 200 million. About EUR 1 billion, like you said, is a good working figure.
It's at least 13% return on that EUR 1 billion then.
Right.
Okay. That's clear. Thank you. Just a final question on pulp and the pulp market. We have obviously already touched a bit upon this, but the market seems to be extremely strong, and I guess one reason is the recycle import ban. There are, I guess, other things also at work there. What's your take on the market right now? What do you see happening there? Do you expect the prices to continue to move upwards as many producers have announced further price increases?
In general, if you look on the demand, we see in obvious softwood Europe, stable; hardwood Europe, stable; fluff Europe, slightly stronger; softwood China, stronger, yes; hardwood China, significantly stronger; and dissolving China, stronger. That's how we look upon the demand year-over-year right now. Going in, it's stable and higher prices going forward based on the announcement. The other thing you have to take into account is that they are closing down capacity in China. If you ask the Andritz and the Valmet of today, they have thin order books of new projects. That's what the CEO of Valmet just went out the other day and said. Actually today.
If you build a new pulp mill and announce it today, it earliest is 2020 or 2021 when they're up and running, which means that even if it's a commodity, will move in prices over time, but I think we will not see the same amount of new capacity coming in to the market as we've seen in the last four years. That's my view upon it.
Seppo here also, I think you're also aware that there has been some operational challenges in some of the paper mills, that is also having an effect on the market and availability of pulp. This has, of course, a positive impact on the balance. Pulp. I said mill. Pulp. What did I say?
Paper.
Paper. Sorry.
Yeah, you meant pulp. Yeah. Okay. Good. Okay. That's all from me. Thanks a lot.
Thank you.
As a reminder, ladies and gentlemen, to ask a question, please press star one on your telephone keypad. If you would like to remove yourself from the queue, please press 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, good day to everyone. Would like to follow up on Consumer Board, if we exclude Beihai for a moment, it looks as if you've had a year-on-year decline in your earnings in the remaining part of that business the past three quarters. Could you talk a bit about what's behind that, please?
All right. Seppo here. I think it's somewhat like I referred to earlier, that there are some inflation on cost pressure in certain like wood costs, chemicals, some energy, et cetera, related costs. Other than that, it has been rather stable run operations. As you know, the prices typically are fixed a bit for longer term, before we get fully compensated for the increased input cost, it takes a bit time. No drama as such otherwise in the business.
It's actually EUR 10 million down year-over-year when it comes to it. That's basically all coming from the increased input cost.
or variable costs. It will take time for us to work that through because of the long-term contract type of arrangement we're having. It's obviously also that we're addressing part of that in the profit improvement program, where we have now got 30% in. This was one of the reasons why we launched it in the early part of this year.
Right. Because it's an increasing year-on-year decline also, apart from being a decline over the past three quarters. What should we expect for the fourth quarter? Will it get even worse in such a year-on-year comparison before it gets better, or what's the situation in your mainly European business, I guess?
Like Kalle said, as we are now moving forward with the profit improvement program and expect that to kick in and have the effect on the operations, we think that will of course help to fight against the cost inflation. As you know, we don't give specific guidance for different divisions. We give the guidance for the whole group, all this is included in the guidance that we have given.
Let's talk about the group then. On the fixed costs that you touched upon earlier, you have a target to get to below 20% in relation to sales. Is there a timeline on that target, how will this materialize going forward?
If you look upon those targets that Seppo went through, these were first time published at the capital markets in May 2015. We have always said that they are realistic, but challenging. Now we have reached basically green or yellow of all except two, even though one of them has been just green when it comes to paper cash generation, we had over 10% in the last quarter. This one is something that we need to work over a longer period. I'm quite surprised if I reflect back to basically coming out of the first quarter of 2015, where we are today. I believe that is a achievable target. It's going to take some time, and we need to strive towards that when we got the sales coming up.
This gap between reality and your target, is that the general situation across all your business areas or is it in particular one or two business areas?
Of course, the target as such differs from division to division because some divisions are in growth mode and there is, for instance, more expenditure when it comes to R&D work, which is, of course, you should see it as an investment for future. Then in some other businesses where we, of course, have to be more cost-conscious because of the declining volumes. Like in paper, there, of course, the targeted level and level that they are is different compared to, for instance, Biomaterials, where we are clearly putting money into R&D work. That is also what Kalle was referring to, that when you look at this long-term target, you need to keep in mind that there are two ways to do it. You, of course, need to be cautious on costs and continue to improve your cost structures, and then you need to build growth.
We are working on both of them, as you can see from the strategic targets that are green already. We are creating the growth, and we are getting the growth going forward. That way, the investments that we are making through higher fixed costs on R&D points, those are going to pay off and improve the ratio also going forward. Over time, we can then reallocate the R&D expenditure, for instance, and that way also to work on it. It's not impossible. It's challenging. Right now it seems like it's the most challenging, but if you would have asked me in 2015, I probably would have said some other goals were challenging. We are working on it.
Great. Thank you very much.
We will now take our next question from Henri Parkkinen from OP Financial Group. Please go ahead. Your line is open.
Okay. Thanks, and good afternoon. I have two questions, one additional question regarding Beihai. After your second quarter results in this conference call, you mentioned that what comes to liquid packaging board production, that you had three customers and a couple of customers at the test phase then. The second question is related to currencies. What kind of currency hedges you have at the moment in place and mainly regarding the US dollar, whether you made some changes during the third quarter? What should we expect from the currency effects when going forward if we stay on the current level? Thank you very much.
At this moment, we have three qualified liquid packaging customers, and we are ramping them up. If you look around, if you have three, you basically have most of them. It's not that many.
During the period, we have also qualified other customers on CUK and also on noodle cups, they are not as big as this one. It's progressing. I will still tell you that the qualification of three liquid board converters in about a year is a world record. With that, I hand over to the currency.
Yeah, thanks. On the currencies, the biggest currencies, first of all, for us, US dollar, Swedish krona, British pound. Where 10% strengthening of each. In the case of dollar means EUR 115 million, Swedish krona, EUR 89 million, and British pound, EUR 31 million. Our policy when it comes to hedging is on rough terms that we are about 50% hedged when it comes to coming 12 months cash flow. We, of course, move a bit around plus or minus 50, depending a bit on the volume developments and the view on the market. In the case of dollar, we have not been changing the hedge ratio as such a lot. If then you look at the effect for the quarter on group level, the effect was about EUR 20 million negative.
When you think about the hedging, you also need to keep in mind that it's a dynamic market, it's not black and white. Especially now since summer, yes, dollar has been moving the wrong direction. On the other hand, it's fair to say that partly the increases of the pulp prices have been driven by the fact that dollar has been getting weaker. It has been compensating also for the currency development, and actually more than compensating. There are different drivers and dynamics. Like they always say, that sometimes even if you get positive from the currencies, then on the other hand, pricing dynamics is working the other direction and other way around. It's not, of course, one to one, the correlation, there is some correlation on that.
Thank you very much. Very clear. Thank you.
We will now take our last question from Chris Ellis from Barings. Please go ahead. Your line is open.
Good afternoon. It's just on your strategic target. You spoke about the strength of the balance sheet, and leverage is now down to 1.8 times. Is three times net leverage still applicable, or is this something you might look to revise?
It's an old target, and it's not long ago, if you take it in the history of Stora Enso, that we were above three. I feel very comfortable around two. Obviously, that's an area for discussion.
Okay. No, that's useful. Thank you.
Thank you.
There are no further questions over the telephone.
Thank you, everybody. I want to say goodbye on my behalf. I will hand it over for the final words from Kalle. Please, Kalle.
Thank you very much for sharing your time with us. We feel that we had a solid performance, sales growth, profitability growth, and taking a step change in our transformation. Thank you very much. Thank you.
Ladies and gentlemen, this concludes the Stora Enso Q3 2017 results announcement. Thank you for your participation. You may now disconnect.