Good day, and welcome to the STORA Enzo Q3 twenty seventeen Results Announcement. Today's conference is being recorded. At this time, I would like to turn the conference over to Ula Payanan, Head of Investor Relations. Please go ahead.
Thank you. Good afternoon, everyone, and welcome to Stora Enso Q3 results call. And we will have it the same format. It will be our CEO, Karl Sundstrom, making the presentation together with our CFO, Stefa Parvi. And then in the end, we will have a Q and A session.
So Karl, please go ahead.
Thank you, Ula, and good morning or good afternoon depending on where you are in the world. So I would like to go through a couple of slides here. And we actually had for the third consecutive quarter a growth in total sales of almost 5%. We managed to 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 SEK290 million, that's a margin of 11.6% and it's over 32% better than the same period last year.
Cash flow better than last year and we reached a 13.9% return on capital employed compared to 10.1% a year ago. The balancing sheet continues to strengthen and the net debt to operational EBITDA ended at 1.8% versus 2.1% a year ago. And the 50,000,000 profit improvement program is delivering and 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 and I think this slide here describes it. You can see that all the profit improvement compared to last year, almost €30,000,000 is coming from Beihai.
You are seeing a Packaging Solutions, 27,000,000. That is driven by a good kraftliner prices and Warka has actually came in on a run rate of 15% EBITDA plus the strengthening of 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 SEK 8,000,000, and 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 11.6% EBIT margin, which is a very high level for us historically. But 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 2019. The targeted return on operating capital employed is over 15%. We are also increasing the compatibility of our eMatra mill by investing 42,000,000 in additional CTMP drying capacity, increasing the pulp capacity out of the CNCP pulp mill in Minu Matteo by 80,000 tons. And this will support the commercialization of MFC to a greater extent that we have today.
The targeted rock is over 20% supporting the strategic targets. If you look on the transformation steps, and I will not go through all of these on this slide, but I want just to tell you that, so Bayhai is supporting our growth, Warkaus LVL is supporting our growth, Murrow is supporting our growth, the Warkaus kraftliner. We have also today announced additional two big investments. And 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 Golar Shah as well as the Reboard in Sweden, as well as we concluded negotiation of people reduction and securing a EUR 12,000,000 cost savings at Point Wetter Mill.
Beihai Board continues to ramp up ahead of plan. We have already made production out of that mill of 413,000 tonnes since the start. In the quarter, we produced 105,000 tonnes, which is more than double a year ago production, and we're expecting full production in the 2018. And the breakeven in Q4 twenty seventeen remains. Before handing over to STEP, I just want to spend some thoughts and comments regarding our transformation.
From being a 30% non paper company in 02/2006, we are now more than 70% of the sales in the for growth division. When you look upon the profits, it's now generated 90% coming out of non paper. That's doubling the amounts versus what we had in the second quarter where it was 5%. So the transformation continues and we have need a different level in our transformation. With that, I would like
to hand over to Sefo. Thank you, Karl. And 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 Karl 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%. Operational EBIT increased 32.4% and was EUR $290,000,000 for the quarter. Earnings per share increased from EUR $0.01 6 to $0.02 4 a share compared to a year ago. And operational return on capital above the strategic target level of 13% at 13.9%.
Cash flow from operations also continued strong and it was €430,000,000 compared to €390,000,000 a year ago. This is our 10% increase. Also good strong cash flow is visible on net debt to last twelve months operational EBITDA ratio that is now at 1.8 compared to 2.1 a year ago. Then moving to divisions and divisional performance and 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 €639,000,000 and operational EBIT was at €86,000,000 that is 28% increase compared to year ago.
Beihai development continues in a positive manner as Karl mentioned and Power Turbine is back in operation now after the incident that we had earlier this year. For this quarter Q4 twenty seventeen, we expect that Peiha operations operational EBIT is negative by €7,000,000 compared to €38,000,000 negative a year ago. And EBITDA breakeven is expected during Q4 as we have earlier communicated. Operational return on capital was 17.7%, clear improvement from a year ago at 12.9%. This is now including Peihei.
Excluding Peihei operations, return on capital was 40.5%. And we have today announced an investment at Imatra Milts to add drying capacity for CPMP and extension of the pulp warehouse. Then moving to Packaging Solutions, where profitable growth continues, driven mainly by Warkall's kraft burner ramp up as well as improving performance at China Packaging. Sales increased 23% to €380,000,000 thanks to Varkas kraftliner as well as favorable prices and increased deliveries. And operational EBIT was record high at €48,000,000 That was driven by higher sales prices, better volumes as well as operational improvements in China Packaging and Warkaus kraftliner as mentioned.
In Warkaus, we are expecting to reach full production during the last quarter of this year. And we have already reached targeted operational 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 €16,000,000 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-twenty nineteen. Biomaterials, the favorable pulp cycle continues. Sales increased 14% to €379,000,000 thanks to increased deliveries in addition to higher sales prices. And operational EBIT more than doubled to €88,000,000 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.
And operational return on capital at 14.8%, almost at the level of the targeted 15%. And today, announced an investment at the Enocell mill, pulp mill to increase its dissolving pulp capacity from 150,000 tons to four and thirty thousand tons. Then 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 Pillian Component Systems area was 14%. Sales increased mainly due to the increased volumes, higher prices and product mix. Also operational EBIT was highest third quarter in ten years, driven by higher wood costs that were more than offset by higher sales prices and volumes. And operational return on capital at 21.3% above the targeted 18% level. And our CRT investment in Gulve in Sweden that we announced earlier is proceeding according to the plan.
And here we are expecting to beginning the production in Q1 twenty nineteen. In Paper division, some temporary headwinds affected profitability and cash flow negatively, but good to notice that sales of ongoing operations were stable. But we have some negative effects from FX. And divestments of Tata Miller Sushumil site last year decreased sales by some €55,000,000 Operational EBIT decreased €24,000,000 That's due to higher cost of paper for recycle, energy, wood and chemicals as well as negative effect from foreign exchange rates. Cash flow after 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. And at the Gvansvenen mill in Sweden, negotiations regarding the closure of Paper Machine eight were concluded. This affected 122 people and annual cost savings are expected to be about €12,000,000 Then looking at the strategic targets, where the step change that Karl 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 operational return on capital employed, clearly above the targeted level both including and excluding Beihai operations. When it comes to fixed cost of 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. Then looking at the divisions and where we are standing there with the strategic targets. First of all, in the Consumer Board, operational return on capital at 17.7% for the quarter including Peiha operations a bit below 20% level and excluding Beihai at 40.5%.
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 about 18% strategic target level and it was 21.3% for the third quarter this year. And in Paper, cash flow of synergies in activities to sales at 0.8%. And 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.
Then moving back to you, Karl.
Thank you, Seppo. And I will go through the guidance and some conclusions before opening up for Q and A. So sales are estimated to be similar to or slightly higher than the amount of €2,509,000,000 recorded in the 2017. Operational EBIT is expected to be even in line with or somewhat lower than the €290,000,000 recording in the 2017. The operational EBIT estimate for Q4 twenty seventeen includes the negative €7,000,000 impact of the ramp up of the Beihai operation.
Beihai Consumer Board machine expected to reach operational EBITDA breakeven in Q4 twenty seventeen. The impact of annual maintenance shutdown is expected to be approximately EUR10 million higher than in the 2017 and it's included in the above guidance. I would like to point out that in biomaterials, we will have both Werra Cell and Skubtgart mill in annual maintenance. And we had no maintenance in the third annual maintenance shutdown in the 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.
So as a conclusion, we call it a step change in our transformation. So sales growth for three consecutive quarters, the projects in China, Warkaus and Murrow 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 02/2001.
Solid cash generation, improved net debt to EBITDA and 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 and A and Ula.
Thank you, Carlos. We are ready for Q and A now.
We will take our first question from Michael Yas from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes. Hello, everybody. It's Mikael Joss from Kepler Cheuvreux. First of all, congratulations to a very good result. Then I have two questions.
The first one is on paper. I know that this is not a focus area for you guys anymore, but we've seen quite a lot of capacity closures and you're closing SE 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 usual negotiations? And then the second is more of a technical question on you are expanding the dissolving pulp capacity. Do you feel that you have enough sort of reach to existing customers?
Or will you go out sort of trying to attract new customers in that business? Those were my questions. Thank you.
Thank you, Mikael. And 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. And I believe that I have one of the best paper team there is. So it is very important for us.
But if you look upon paper, I think you have heard closures and they've been disciplined in the way industry has taken down capacity. It's been recent announcement. So when I look upon paper, I think the demand will continue to be weaker. And then we see prices going into Q4 to be more stable. And you have to remember that Q4 is the strongest quarter historically for paper within Stora Enso.
So 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. When it comes to dissolving pulp, we are, as we have previously announced, moving more to specialize our Northern pulp mills. So Skuttgart is now basically only fluff. Now we will make ENOCYL sell to basically only being dissolving pulp.
And then you have Sunilla, where we have the Lingning production. And for NBSK, where we are a marginal player in old mills, the competition will increase. So that's why we are moving into areas where we traditionally have had a long and strong relationship with very important customers on the dissolving part. And the mill has been sold out throughout the period and the quality is good. Now we can offer that more to the existing customer base, but we also have had contact with a number of customers over time who have actually asked us to supply, but we have been supply constrained given the lower quantity.
And if you look on the pricing and the profitability on dissolving versus NBSK for us, it's a big difference. We are moving into a more profitable segment with also more stable customer relations. I hope I answered your questions on that question.
Perfect. Many thanks.
We will now take our next question from Justin Jordan from Jefferies.
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, called out increased OCC costs. And of course, the flip side is you're benefiting from increasing Biorefining profitability. Now I guess my question is really just regarding national sword in China, which, of course, is impacting the cargoes of mixed bag for an UCC that are going into China at the moment. You're much closer to China than frankly any analyst in Europe is.
So I guess I'm just interested in your view as to what you think this ultimately resolves or how it resolves or doesn't 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? Or how do you see the interplay between OCC and pulp prices going forward from China?
So first of all, I think China as a nation are actually taking this with sustainability very seriously. And part of that is that by stopping the import of the unsorted, which in certain cases could be close to garbage coming into China has been 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 the only replacement is actually a virgin pulp. And 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. And 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. Like 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 Storrento Group in relation to the 600,000,000 to $650,000,000 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 Zepo here. As you know, we don't give guidance for 2018 yet. We'll back to that later. But on general terms in a big picture the CapEx guidance we have given earlier still stands that we are bringing CapEx towards and we will keep it around depreciation level also going forward. Plus what we have
to replant in the plantations. About 100,000,000. It's about 100,000,000. Yes. 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 Innocell. So how should we see this? What are you how much pulp are you taking out of paper pulp today? If you kind of 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's a lot of moving parts in terms of the fiber situation, of course. But how does that translate into your pricing in China and demand for your virgin fiberboard? And also, do you find any opportunities in your system to raise paperboard capacity, for example, in Montes Del Platte?
And if so, do you have any plans to do so?
So are you talking about additional investments in Montes Del Platte if I start from the back?
Well, if that's necessary or debottleneck 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. So we are constantly debottlenecking, and we have actually increased the capacity all the time during this year in Montes De Plata. And obviously, these are the type of projects that we like because it's on an existing site and profitability levels are extremely. So we were continuing doing that.
And obviously, Montes De Plata is one of the ones we are looking on that too. But also at Veracel to see that we can get more after that. When it comes to Iain, no sell, now I go back to your first one. So today, we are selling basically 325,000 tons of NDSK and 150 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 two and forty five thousand, 246,000 tons.
Then we will increase the hardwood dissolving pulp from 150,000 to 184,000, basically meaning that the new pulp production will go from what we have today 475,000 to four and thirty one thousand. And obviously, when we start to take down the NBS line that will disappear from the market. And then over time until we have construction ready, the second line that will come out. So certain part of the NBSK will disappear. Then the question regarding China, so what I believe will happen if China will for various reasons limit the import of either recycled paper or OCC, that would probably be especially if they're going to go from mix to more sorted over time, which I think and even on the sorted it will be lower, gives an opportunity for virgin board.
And 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 Verasel and Montes de Plata. Can you quantify roughly where you are today versus where you were a year ago in terms of volume?
3% to 5%.
Okay. And I didn't quite catch what you said about MBSK. Some will clearly disappear, right? But is this a phasing? Should we see the paper pulp component disappearing or start to disappear?
And when should the MDSK basically cease?
Hi, it's Zeppey here. Of course, is time lag when it comes to getting the equipment and those to the site and get that implementation done. So it will take couple of years before we are there and can start with the fully with the dissolving pulp production. So it will not disappear overnight. It will be a gradual reduction then during the project.
Understood. Thank you.
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 cottonboard overall, what is the pricing outlook for 2018? I know some of your competitors and I believe you as well have announced price increases. So what is going on? Is the market really as tight as the price increases implicate?
How should we view the pricing outlook for 2018 in containerboard in Europe?
So if you look on the demand, it's getting stronger. And if you look on prices, they would say stable. You have to remember that in Consumer Board, most of the contracts are on a longer period. I would and especially if you take CUK, FA full liquid and you take CUK liquid and full service, they are annual or biannual contract. That is basically 60% of the business.
The pure tolling box board is about 30%. And all of that, I would say around 75%, 80% is actually on annual contracts. So it's very limited, which means that the prices are stable. So 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 debottlenecking investment in IMatra.
Right. Thanks. And then in terms of base highs, yes.
So even if prices are announced, but the effect is not that big. So it's stable. And that's something that I think is good.
Good. That's clear. In terms of Beihai, now you report an operating loss of €13,000,000 in the quarter. How much is from the actual machine and how much is from the plantations? And what's the depletion of the plantations per quarter?
Yes. We are not specifically splitting the result between the mill and plantation. So this is for the total. But what we have been saying is that the mill we expect to be EBITDA breakeven now during Q4. And when it comes to depletion that of course depends very much on the harvesting volume of the months and quarters.
So 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 don't have now hear me a figure for the previous quarter, but it's like I said varying a bit between the quarters.
And we did give in the guidance that for the total operation in Beihai, it's minus 7% in the quarter. I think with this and the comments I've set for you, you are pretty well off.
Yes. Thank you. Then finally, in terms of the paper business, I understand that you had some problems in Beitilwatu with I guess the P and two. Now can you quantify what kind of earnings impact that had on that division in this quarter? And what is the outlook now for Q4?
It's quite limited because taking into account the insurance coverage, we only talked about a couple of million euros affecting the financials. That's the deductible.
Good. Thank you. And then finally in terms of input cost inflation, you're talking in the Paper division about that and that sort of hindering margins burdening margins a bit. What is the outlook now for the rest of the year and for the start of 2018? And is there there must be a quite big difference between Europe and Asia?
Or am I correct?
Yes. Well, in general, I would say that yes, there are some inflation pressures and cost increases when it comes to especially fiber cost, both wood like I commented in the wood products, the division comments and RCP, paper flow recycling and also for energy and transportation logistics costs. But in general, I would say still like we have 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. And 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 China situation at the moment.
Are you expecting lower RCP prices for the rest of the year? And 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 China market or Chinese decisions on imports. And that has meant that in especially in U. S. Recycled paper and OCC prices have been coming down. And there has been any similar effect in Europe, maybe not as strong as in The U.
S, but it's becoming more and more visible. The next and it also depends of course very much on what are the next steps by the Chinese authorities on this area.
But you have to think Europe on RCP is an isolated market. I don't think the EU will ever allow import or recycled paper. So even though it's fluctuating and affecting China, because we used to be we are a net exporter in Europe, but I don't see the flow going the other way around with waste importing to Europe. I think that is something that would probably not happen. So have that in mind.
No, definitely not. But if export is restricted to China, then we will probably have some more RCP Europe and that will probably press prices down in Europe. But that is probably what that also meant.
Yes, that's what you meant.
Exactly. That's what I meant that we see. But 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. And 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. And then as a follow-up on that, I'm just trying to understand why earnings could drop as much as, say, 20%. Because if we look at on the delta going into Q4, we have Beihai, which is a net positive. Water costs should be a net positive.
Pulp pricing is probably going to go up as will volumes. Then you have on the negative side, obviously, Board seasonality, which Karl mentioned already, but also paper seasonality as a positive. And then you had the maintenance, of course. But net net, I'm struggling to see how we could see such a big drop in earnings from Q3 to Q4. So is there anything 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 defined the guidance. We cannot with this wording and that's something we have gone through the board and everything. That's how we talk about it. But obviously that gives you a range of results. And I don't think I need to say much more than that.
But going down 25% that we don't believe. So this is a way of giving you a guidance range where you will have certain assumptions about the midpoint.
But like also mentioned earlier by Karl and you mentioned yourself, you have higher maintenance costs during the quarter, especially for instance, Veracel will be and then there is seasonality, there is Christmas every year
in Q4. Especially for Consumer Board.
And that's good to remember and keep in mind. So quarter is a bit shorter than other quarters and that has an effect also.
Okay. Okay. That's helpful. Thank you. And then a question on Beihai.
Things seem to be going ahead there and progressing ahead of plan. And I was just wondering, since you are saying, for example, for the workhouse containerboard 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, then 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 targets 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 Bay High is actually FTD and we have been training the personnel on that. And then when we get into the desired mix, which is liquid, CUK as well as food service board, should be around the level of 13%, which was the target for the total group. That's what we have said.
And if you do that and you know that what we have invested, you know the depreciation, you can go backwards and see what this targeted EBITDA is.
And just to remind us, the total investment, it's about SEK1 billion, right?
The mill project itself was SEK800 million and the plantation is about SEK200 million. So about SEK1 billion like you said is a good working figure.
So it's at least 13% return on that SEK1 billion then?
Right.
Okay. That's clear. Thank you. And then just a final question on pulp and the pulp markets. 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, but then I guess other things also at work there. What's your take on the market right now? What do you see happening there? And do you expect the prices to continue to move upwards as many producers have announced further price increases?
So in general, if you look on the demand, we see in obviously, 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. Then 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. And then if you ask the Andriids 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. So and 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, it 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.
As said, but here also I think you're also aware that there has been some operational challenges in some of the paper mills and that is also having an effect on the market and availability of pulp. And this has of course a positive impact on the balance. Pulp, I said pulp, what did I say? Paper. Paper.
Sorry. Yes, you meant pulp, yes. Okay. Good. Okay, that's all for me.
Thanks a
lot. Thank you.
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 day to everyone. Would like to follow-up on Consumer Board. And if we exclude Beihai for a moment, it looks as if you've had 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?
It's Szepo 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, etcetera related costs. So other than that, it has been rather stable run operations. And as you know, the prices typically are fixed a bit for longer term. So before we get fully compensated for the increased input costs, it takes a bit time.
No drama as such otherwise in the business.
So it's actually 10,000,000 down year over year when it comes to it. And that's basically all coming from the increased input of variable costs. And it will take time for us to work that through because of the fixed or the long term contract type of arrangement we're having. But it's obviously also that we're addressing part of that in the profit improvement program where we have now got 30% in. And this was one of the reasons why we launched it in the early part of this year.
Right. And because it's an increasing year on year decline also apart from being a decline over the past three quarters. And what should we expect for the fourth quarter? Is that 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, guess?
Like Karl 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. But as you know, we don't give specific guidance for different divisions. We give the guidance for the whole group and all this is included in the guidance that we have given.
But 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 time line on that target? And how will this materialize going forward?
So if you look upon those targets that Seppe went through, these were first time published at the Capital Markets in May 2015. We have always said that they are realistic, but challenging. And 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. But this one is something that we need to work over a longer period.
And I'm quite surprised if I reflect back to the basically coming out of the first quarter twenty fifteen where we are today. And but I believe that that is an achievable target. It's going to take some time and we need to strive towards that when we got the sales coming up.
And is this a general I mean, 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?
Well, of course, the target as such differs from division to division, because some divisions are in growth mode and there is more expenditure when it comes to R and D work, which is of course you should see it as an investment for future. And then in some other businesses where we are of course have to be more cost conscious because of declining volumes like in paper. They are of course the targeted level. And level where they are is different compared to for instance biomaterials where we are clearly putting money into R and D. That is also what Kalle was referring to that when you look at this long term target, 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. And we are working on both of them as you can see from the strategic targets that are green already. So we are creating the growth and we are getting the growth going forward. And that way, the investments that we are making through higher fixed cost on R and D, for instance, are going to pay off and improve the ratios going forward. And over the time, we can then reallocate the R and D expenditure, for instance, and that they also work on it.
So 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. So we are working on it.
Great. Thank you very much.
We will now take our next question from Henry Perkinen 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 I well, what kind of development you had regarding customer base during the third quarter?
And the second question is related to currencies that what kind of currency hedges you have at the moment in place and mainly regarding the U. S. Dollar, whether you made some changes during the third quarter? And what should we expect from the currency effects when going forward if we stay on the current level? Thank you very much.
So at this moment, we have three qualified liquid packaging customers and we are ramping them up. And if you look around, if you have three, you have basically you 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, but they are not as big as these ones. So it's progressing.
And 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.
Yes, thanks. On the currencies, the biggest currencies, first of all, for us U. S. Dollar, Swedish krona, British pound, where 10% strengthen of each in the case of dollar means SEK 115,000,000, Swedish krona 89,000,000 and British pound €31,000,000 And our policy when it comes to hedging on rough terms that we are about 50% hedged when it comes to coming twelve months cash flow. We of course move a bit around plusminus 50% depending a bit on the volume developments and the view on the market.
But in the case of Dowlo, we have not been changing the hedge ratio as such a lot. If then if you look at the FX effect for the quarter, for the quarter on group level, the effect was about EUR 20,000,000 negative. But when you think about the hedging, you also need to keep in mind that it's a dynamic market, so it's not black and white. And especially now since summer, yes, dollar has been moving to wrong direction. But 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.
So it has been compensating also for the currency development and actually more than compensated. So there are different drivers and dynamics. Like I always said, that sometimes even if you get positive from the currencies, then on the other hand, pricing dynamics is working in other direction and other way around. It's not, of course, one to one correlation, but there is some correlation on that.
Okay. 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.
Hi, 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?
So it's an old target, it's not long ago, if you take it in the history of Storenz, that we were above three. I feel very comfortable around two. And obviously, that's an area for discussion.
Okay. No, that's useful. Thank you.
Thank you.
There are no further questions over the telephone.
Okay. Thank you, everybody. And I want to say goodbye on my behalf, and then I will hand it over for the final words from Karl. Please, Karl.
No. 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. So thank you very much.
Thank you.
Ladies and gentlemen, this concludes the STORA Enzo Q3 twenty seventeen results announcement. Thank you for your participation. You may now disconnect.