Good day and welcome to the Q3 Stora Enso Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to the Head of Investor Relations, Ulla Paajanen. Please go ahead.
Thank you, Pauline. Good afternoon, everybody, and welcome to our Q3 Results Conference Call. I will hand this over directly to our CEO, Jouko Karvinen, who will make the introduction together with our CFO, Markus Rauramo. Please go ahead, Jouko.
Thank you, Ulla. Welcome, everybody, to our third-quarter conference call. I think we're going to go straight to the story, which will be short, and then we'll obviously have plenty of time for your questions and answers. We call it a solid quarter. As to the difference of an excellent, outstanding, or anything else, it was a solid quarter. We believe that the EUR 204 million operating profit, excluding NOIs and fair valuation, is a solid result. More so, I would like to call the strong cash flow after a CapEx of EUR 282 million a strong performance. It obviously already then is a significant part of the improved liquidity at close to EUR 1.2 billion. We make a very specific point about the fact that we have started curtailments and curtailment increases early in the second quarter, but also increased them in the third quarter.
That's the rhythm of the musical now also in the fourth quarter. We believe cash preservation in this situation is important. We believe that we have a good track record of making it happen. That means that we do not plan to produce stuff that our customers don't want, i.e., we will further improve our inventory levels. That's important. I'll throw you a number. The working capital that we're looking at now is about EUR 500+ million lower than it was three years ago when we all were facing a question about the short-term demand in that. That obviously is a huge benefit in addition to some of the other things I'll talk about in terms of fixed cost ratios. This is why we decided to start early and push inventory controls.
In addition to that, obviously, some of the further productivity improvements, like in fine paper, that we started in April, not in October. If you go to page two, the result chart, EBIT and EBIT margin, yes, I'm a bit upset that we broke the curve, but not too bad, in my opinion, in terms of Q operating earnings. Mission-critical, obviously, was the pricing improvements year on year, given the inflationary pressures that helped us EUR 142 million. The volumes driven by a conscious decision to curtail reduced the operating profit by EUR 31 million. The variable cost increase of EUR 92 million, obviously, is a big negative. I think we can say already now that as we have said all year along, from a year-on-year basis, that issue is diminishing rapidly as we speak, as you could expect in this situation.
If you go to the page number five, I believe, it shows you the working capital ratios and so forth. It doesn't actually show you the 2008 situation, but like I said, on total working capital, we're north of EUR 500 million lower starting point now than we were then. We plan to improve that further. If you go to page six, there is maybe a bit of a funny-looking chart, which is not only principal, but there's also a very strong point there. If you take the old Stora Enso logo, orange dot, the big dot, it basically says what our EBIT margin was in the third quarter of 2008 at operating rates of close to 95%.
You all know better than I do that if you start drawing curves of any existing business structure, the correlation is that operating rates rapidly improve earnings because you get to the contribution margin model. The message of the chart is that we think we've jumped the curve. If you look at the fact that even though we decided to do significant, in our opinion, significant curtailments in the third quarter and operating rates were down to 91%, our earnings margin was significantly better. Points. All the hard work that we've done with the team in the past three, four years is paying off. It also pays off when the tides turn and things get a little tougher. Next, page seven, part of the same story. We continue to improve our fixed cost-to-sales ratio. There's a million stories around that in terms of outsourcing or administrative functions of mill maintenance.
I think the more interesting part is that that is also a part of the musical now that the whole team understands that optimum cost with maximum flexibility is the new mantra rather than just lowest cost at maximum capacity. If I can then ask you to turn to page eight, especially because there seems to have been quite some speculation about past quarter, third quarter market demands and volume situations, so forth. I pick a couple of these here. Number one, if you take market pulp, we grew double-digit year on year and sequentially in market pulp. I don't quite understand what this demand-crash talk is. Now, we are long and long fiber pulp. We're simple people, so we're very consistent, long and long and short and short.
I claim, if you look at not even the price delta only, but the demand situation and inventory levels, there's dramatic differences in long fiber and short fiber pulp inventory levels. That did help us, I admit, in the third quarter. Financially, we've said it was pretty much the same level as it was a year ago. That obviously means that the price level, yes, was lower because the volume was higher. I understand there's going to be a global report out later today on pulp, and I assure you that I will read it as eagerly as you do. I can give you an early glimpse on the European situation that the European pulp inventories actually went a notch only a day, but they went actually down in the end of September, which I think is very interesting.
The other thing which I'd like to kind of pre-announce to you is that the deliveries to China from Europe, which is 80%+ long fiber pulp, they were pretty much an all-time record high in September, above 100,000 tons, more than double May. I would plead that we wouldn't make too fast conclusions on what's going on in the pulp market. I stop, and I hand it over to my friend Markus here, who's going to talk about the financials.
Okay. Thank you, Jouko. From the financials on page nine, I'd like to first highlight our EBITDA, which was at the level of 339, and cash flow, a strong, strong one, EUR 282 million after CapEx. The balance sheet is in good shape at the end of Q3. We took a hit there from the NewPage provision, but the balance sheet is strong at the level of 0.45 gearing. If you look at the number of lost profits before tax, you will see the difference between the profits before tax of 111 and lost profit before tax of -1 7. The NewPage lease guarantee write-down is explaining that difference. Financial items were a total of EUR 193 million in the quarter, consisting of EUR 36 million of net interest expense, EUR 11 million of FX gains and losses, and then other financial items of EUR 146 million, including the NewPage lease provision.
I'll move over to our segments on page 17. A few highlights from there. Newsprint segment improved margin on a year-on-year basis from zero to 10. Magazine paper just slightly up a few notches from 8.4 to 8.6. Industrial packaging staying at the same level. Consumer board down, but return on capital at a good level of 17.5%. Fine paper, same thing down, but return on capital at 16%. Finally, wood products down to 2.4% margin, but still at 7% return on capital. Turning to page 11, our net debt increased by EUR 87 million. We are a notch above EUR 2.5 billion at the moment. Net debt to EBITDA is on a very good level of 2x .
One of the highlights from a financing point of view of the quarter was that Montes del Plata signed the loan package of $1.3 billion with 9 - 12 year maturities and very good rates. This gives us a very solid platform for growth and implementing our strategic agenda, both organically and potentially through acquisitions if opportunities arise. For the near-term outlook, I'll turn back to Jouko.
Thank you. If you turn to page 12, I believe, the color of the chart obviously is less pleasant than it has been in the past two quarters. Like I always say, we're not here to be the people who forecast the weather. We're the people who make money in all weathers. If we look at then by trade a bit and start with the demand development, the consumer board, I would say primarily driven by this implication that everybody's braking and everybody wants their inventories down.
We will have a bit of a challenging quarter in Q4 because we are going to take our inventories down. That means a production reduction for us, curtailments, but so will our customers. Therefore, I'd see that that's a short-term issue, meaning more a quarter issue than a trend. The underlying demand, as you well know, in liquid packaging, food packaging, and some of the others is, I think, pretty not cyclical compared with the others. Mixed picture, I think, in industrial packaging. Yes, there is some weakness, I think, in the demand, but also some of the inventory things and so forth.
The price development is actually very much relating to the board rather than the corrugated business, which, when we're short in balance, as you well know, in industrial packaging on the board side, it isn't necessarily only bad news. Newsprint and book paper, yeah, things that tend to go up and also tend to have a reducing impact. Part of it is also their customer inventory reductions and so forth. To prove or to demonstrate my confidence that this is at least partially customer inventory reduction programs is that we have told our customers actually very recently that we plan to increase pricing for 2012. I will not tell you probabilities of success or any numbers today.
We will obviously report then early next year what the success rate is, but it should give you a signal that we're relatively strong off the view that the demand-supply balance, significant thanks to the restructuring that a company called [Suzano] has done in recent years, is actually not so bad. Magazine paper, uncoated magazine paper, I'd say a bit of the similar story, flat pricing seen in Q4. This obviously, because it's Q4, not this fractional group, does not address the longer-term issues of digital and mobile media and social media and so forth, but I'm sure we'll talk about those another day. Quoted fine paper, specifically, this was one of the early signals we raised in July, I would dare to say, before anybody else. The nice thing to report is that the quoted fine paper demand has actually stabilized.
It was early, also in the game of inventory reductions and so forth. If you could go back to our delivery chart, we had a straight, pretty flat delivery in fine paper and specifically quoted fine paper was pretty stable there. The more important thing to me, again, is not being a weather forecaster, is that we have in April already initiated the programs to improve significantly our competitive position in fine paper, again, in Nymölla, Oulu, and so forth. Now looking at the cycle, we're doing another rethink program where we will basically maximize the opportunity to run our big super gun in Oulu with the Veracel pulp support at maximum speed going into the future. We will specialize more and more woods then. Wood products, yes, cyclical industry, construction, and obviously, how do I say, tough on the basics, sawmilling.
I am very happy with the engineered wood construction initiatives, which are already in the engineered wood, a very significant minority of our business and growing fast. Having said that, we also need to get through the cycle also in the base sawmilling business. The brilliant thing there is also that even more than anywhere else, I'd say, the starting point is so much better than it was in 2008 from an inventory and cost in inventory point of view and so forth. That is where I stop that. One more slide, and then we turn it over to you. Not an excellent, but a solid third quarter. We had some headwinds.
We can talk about it, not only the EUR 29 million currency negative, which we can't do anything about, but we also had a EUR 12 million hit due to a U.S. dollar long revaluation in Veracel, which obviously was a bit irritating. It is what it is. I'd say against that background, a solid earnings number, more important to me, strong cash flow, strong balance sheet. That's the rhythm of the music, so to say, going into Q4. With the strong balance sheet, we are executing on our growth projects. We are not planning to stop them, delay them, change them. We think the company is in a shape where we can execute on our growth strategy also when the weather turns a little bad. Thank you for your time. Time for your questions.
Thank you. If you would like to ask a question at this time, please press the star asterisk key followed by the digit one on your telephone. 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'll pause for a moment to allow everyone to signal. We will take our first question today from [Jesse Oscola] from Deutsche Bank. Please go ahead.
Okay. Thank you. A few quick ones. The first relates to your Q4 earnings guidance. I was just wondering, how do you see the split in this sequential decline? How is it between pulp prices, production curtailments in consumer board, and how much is something else? Secondly, as you started with the industrial packaging, I was just wondering how does it actually go in the existing environment? How is the pricing dynamics now as the containerboard prices are going down? Are you really able to offset the declining prices with your box price contracts, or is the pressure to push declining prices of the feedstock to the box prices, is that too high? Thanks.
Good. Thank you for the question. If I start with the last one, our view for Q4 is that the box pricing is going to be stable. You know it's a very short view, so I see your point, obviously, but that's the view we have. Especially because Ulla is next to me, I will be very clear first. I will not give you specific segment earnings guidance because it would get too detailed. I think what we can say is that, yes, I already said it, consumer board will have a bit of a ride in Q4 like they had a bit already in the third quarter. The fourth quarter, like I said, I worry less about that because I see the team addressing the inventory reduction efforts of the customers. I think that is so important.
I would say more than on the pulp side, like I've said before, until Montes del Plata starts in 2013, we are very much short on short fiber. The price reductions of short fiber pulp actually net help us, whereas the long fiber pulp hurt us. I would say this, let's see tonight the global pulp report, but a little longer term without getting specific because there's no new capacity coming online. I think we should not overreact or overestimate the pulp situation. Let's first see how what's going on also in China because you know the going from about 40,000 tons European deliveries to 110,000+ tons in September in this world, I thought that was a pretty interesting data point.
Absolutely.
Sorry, I will not be able to give you a split on the sequential. We said somewhat lower group earnings, and I can't break it down any further than that.
Okay. If I put the question another way around, how much closures are you planning for in the consumer board side right now?
Okay. No, we do not give you the curtailment percentages going forward.
Okay, at least I tried. Thanks.
No, no. Let's look at what we have told, which is if you look at the overall paper and board, we said we went from the 3% in Q2 to 7% in market curtailments or 6% - 9% in total Q2 and Q3. It's going to be more in Q4 in total. I would say I can say that the increase in curtailments in Q4 is significantly in consumer board. That gives you a flavor.
Right. Thanks.
We will move to our next question from Lars Kjellberg from Credit Suisse. Please go ahead.
Yeah. Coming back to the curtailment scenario, I mean, obviously, you're talking about seasonal weakness in the consumer board on top of a destocking phase. What gives you confidence at this stage that we are facing destocking? Do you expect that to be relatively short-lived as it appeared to have been in the coated fine side of the business?
Being consumer board, what gives me confidence? What gives me confidence? What I hear from our customers and my own consumer board people gives me the view that the underlying demand issue isn't there. The underlying demand issue at the end of the day is always the consumer demand. That's what it's based on, nothing more scientific than that. If you say, what is short term? I guess in our world, short term is a quarter. Specifically, obviously, like you hear from my comments, my confidence level is the highest in the liquid and food packaging because people will still drink and eat, less so in the carton board world. Like I said, I'm pretty positive.
On the magazine side, there's always an element of positive seasonality, but you're basically saying that would likely be offset by the need to remove inventory from the system on a sequential basis.
Yeah. We give the demand on a year-on-year basis, and that's why our arrow goes down. You saw already in Q3 that one of the strong growth revenues was magazine, which is quite interesting. On a year-on-year basis, we do see that there is also a bit of an inventory reduction area and so forth. Like I said, the only proof point and proof point, I guess, demonstration why we think it's inventory reductions is also the fact that we're pushing pricing up for 2012. You know that Q1 has been a pretty slow season for publication guys.
Obviously, you're talking about diminishing cost inflation. Can you give any sense of what you're seeing? We've seen from various purchase organizations in Sweden that they're cutting pulpwood prices, SEK 15, SEK 20 per cubic meter, I guess. We've seen what happened to OCC, not so much yet on the de-inking grades. Can you give us any sense of what you're seeing in your system and how do you believe you'll enter 2012?
I will give it to Markus, but I think I'm trying to tell my people that I want to start talking about deflation pretty quick now. Markus, why don't you answer the question?
Yeah. I think Lars, thanks for the question. I think things have turned out very much as we anticipated already from the beginning of the year. The picture is exactly the same. Steep cost inflation at the back end of last year, and now quarter by quarter, very, very small inflation. Actually, now from Q3 to Q4, the variable cost change is zero or slightly positive. There are small ups and downs. You're right that we will be pushing, of course, as hard as we can on the different variable costs, but that varies then area by area.
Final question then for me. If you're looking into now a scenario that looks a bit tougher, have you made or will you make, do you think, any changes to your CapEx profile? If you want to give us some guidance, what do you expect to have in CapEx, including what you're putting into the pulp projects and, of course, the Polish project in 2012?
Okay. I would start the answer at least saying we believe we're in a shape from both cost point of view, working capital point of view, and balance sheet point of view that does not require us to delay, and there are true also diminish the returns of our strategic growth project. We'll try to execute on time, on cost. Maybe there is some improvement in the cost if the tide turns. That's not in the plan. If you look at the overall CapEx program, which is now revised to EUR 450 million this year, the only thing I can say there is that day by day, I think we're getting more disciplined on the returns and so forth. Sorry to take your time, but I'm actually talking to you from the Skoghall Mill of Stora Enso, Sweden, which is at you should come here. It's just a brilliant place.
We had a board meeting here. We walked our board through the whole mill. These guys said this is the best mill they've ever seen in their life. We're spending EUR 91 million to improve the logistics and the fiber supply of this mill. Very good returns. Don't ask me for the number, but my point is we need to get more differentiated, more focused. Yes, even in tough times, we need to be in a shape where we can invest to improve some of the brilliant businesses we have like Skoghall. Sorry for the advertising.
No, that's all right. I've been there. It's a great place. In 2011, you said EUR 450 million. What are we looking at in 2012 then?
We're not going to yet give the 2012 guidance as such, but like on a like-for-like basis, when we have Ostroleka and Montes del Plata now entering the most heavy CapEx year, on a like-for-like basis, 2012 ought to be somewhat higher than 2011. We'll come back to the specific guidance then in the next quarter.
Thank you.
We will move to our next question from [Markus Ammorun] from Morgan Stanley. Please go ahead.
Hi, Markus . I am here from Morgan Stanley. First of all, on the pulp volumes, which are increasing, you say that you don't see anything of this as some of your competitors are talking about a slight weakness in pulp volumes. You see the same demand going forward? Were you surprised about the comments that you have heard in the market in terms of demand for pulp?
Markus, this is Jouko. I'll respectfully not comment on my competitors unless you like comment on their comments. I think it's probably a good idea for them also not to do it for Stora Enso. I'll take care of that part. On the pulp market, yes, clearly, there are issues. The point I was trying to make is, and I'll make it even more clear now, in the last couple of years, there's been more than 5 million tons, more than 5 million tons of fine paper capacity being built in China that through some of the duty setups doesn't really spill over to Europe or North America, but definitely spills over to Asia-Pacific. I think, how do I say, we have a brilliant small mill in Suzhou in China, but I'm actually pretty happy at the small mill in China with long customer relationships.
The point of the story is we're very Europe-focused in paper, and I'm very happy about it. There may be issues outside Europe that are very different than Europe. I would stop my answer there if it's okay.
Okay. Can I just ask also, the market pulp volumes that you have in Europe, are they on contract, or do you basically sell them in market depending on where demand is?
I can answer that. We very much actually, our business at the end of the day is focused on Europe and our long-term European customers. In that sense, we try obviously to sell as close as possible to minimize also the logistical costs. They are with longer-term contracts, but to a large extent following the fixed prices.
Okay. Okay. Going on to China, I know that the September numbers are not out yet, but can you say anything about the paper demand in China and what you're seeing on the ground as of late?
No. Actually, I don't have the China numbers. The only thing I could tell you is, I can tell you one number, which is a pretty irrelevant number to me, to be honest. I'll tell you an interesting year to date, I think you may have seen the number in newsprint. There was a dramatic drop, dramatic drop in newsprint demand in China, which is against all the trends we've seen before. Everybody I talked to says that nobody really understands what happened, whether it's something serious or whether it's just a single incident. The only other comment I can make about China is that I think there is a pretty interesting fine paper situation in China right now with the very dramatic capacity utilization. I understand that both in fine paper and newsprint, the utilization rates are clearly below 90% in China right now.
You hear again why I'm happy not to be too big in China.
Okay. Going on to consumer board, are you seeing any impact at all yet from Embryo's ramp-up of their sample mill on the consumer board?
I couldn't tell. I don't know whether Markus has a specific comment on that. I don't. When I have had my business with the guys, it hasn't become actually a very big issue there.
Okay, that's good.
Good feedback. Nothing too.
I can say that some impact, but basically, that business is growing in Europe also. From our point of view, the market should, in the medium term, easily absorb the volumes that have been increasing.
Okay. And then finally, on coated, which you say seems to have stabilized, do you expect the same seasonal, you have a flat graph. I guess that means that you expect the same seasonal upturn as last year going into the fourth quarter because the summer has been weakish.
Yeah. On coated side specifically, if you're talking about coated fine paper, yeah, that's what we see.
Okay. Okay. Perfect. Thank you very much.
Thank you. Thanks.
We're going to move to our next question from Ross Gilardi from Merrill Lynch. Please go ahead, sir.
Good afternoon, gentlemen. Thanks very much. I had a few questions. First, your comments on pulp. Certainly, the softwood market has held up, but the price differential with hardwood, I don't think, has ever been larger here. The hardwood inventory situation looks very, very difficult. How sustainable do you really think prices on the softwood side are? Are you taking any downtime at all on the pulp side, or are you continuing to just run full out on the market pulp side?
There is a delta. I shouldn't, and I will never try to tell you that's no problem. There is going to be pressure and so forth and so on. The question is, I'm just trying to say that we should not oversimplify. The same way we don't talk about A paper, we talk about the different grades and different demands. We need to do that very specifically the same because of the different applications in softwood and hardwood pulp, including packaging, which is more stable in softwood and so forth. The pressure is there. To answer your question about curtailments, we don't have something that I would, I mean, obviously, we have a very good map on what's going to stop when in terms of which priority order. How do we control our volume so that the damage to the earnings is minimum?
We have some very good flexibilities specifically in both Finland and Germany if needs to be on that. On the pulp specifically, Ross, if you ever have time to go see a pulp mill in Finland, go see Sunila. That's about, I would claim, the most variable cost pulp mill in the world. That team is very strong in terms of understanding, as an example, because they had to do it in the previous round, which was really traumatic, that if the moment comes where we can't make good cash on the pulp, then we will stop. There is not an immediate plan to do that right now, looking at what we see in the pricing and in the inventories and so forth. That's all I can say.
You're still running your market pulp full out right now?
Yes. Absolutely.
Okay.
You remember, sorry, Ross, just to maybe.
I was unclear also, as I always. If you look at the fact that the deliveries grew double-digit in the third quarter of market pulp, essentially softwood pulp, and we said in the release that the earnings were at a similar level, it already tells you that the pricing wasn't as attractive as it was a year ago. It also should tell you that the earnings from that were actually pretty attractive. Okay, I'm going to give the number yet.
Sure. On the newsprint side, I see in your press release you flag that inventories in the industry are significantly higher quarter on quarter. What are you doing there? Are you taking much downtime in newsprint? You mentioned something about a price increase going to 2012. I didn't catch what grade that was for, but given where newsprint inventories are, where you seem to be staying, what do you think the implications are for newsprint pricing going into next year?
I can comment on that, Markus here. I can comment on the curtailment part. We have been taking a bit of downtime, 4% on newsprint in Q3, but not very much. I think, Jouko, you can comment on the pricing.
I mean, it will go up slightly in Q4 for us, a couple of reasons. Yes, there is, I think, an inventory reduction need in the industry. Let me say that our newsprint team, as much as I brag about the whole team, the newsprint team, again, in the end of third quarter was the best. We've never had so low newsprint inventories in tons as we had this year, which gives you just an example of that we're actually dead serious about managing cash in this situation and so forth. We see that others may have to take more curtailments to reduce their inventories because, hey, we've been working on this for the past six months. That would be that. The comment I made about pricing is, and I always very specifically make the point that I'm not telling you any news that my customers haven't heard.
In the, I think, past couple of weeks, we have informed our customers that we see that even with the overall weakening economy and all this other stuff, we will be asking for a price increase for 2012. The only other thing I said is, please don't ask me what the success probability is and how much, that I will report to you in early 2012. That's the intent that we've told the customers.
Which grade was that for, Jouko? Is that across the board or is that in one or two specific grades?
Newsprint specifically.
Your newsprint, you're expecting higher prices. Okay.
Yep.
That's fine. You're at least informing customers at this point. On your pulp mill in Uruguay, should we think of Stora as a company three years out that's long and additional? I forget how much additional capacity you'll get. I know you get 50% of it. As a company that's long, 1.5 million-2 million tons of pulp, or should we expect that you're going to shut down some Nordic capacity to offset that additional production and sort of stay at the million-ton long level, but just with more of a balance between softwood and hardwood?
No, I think what you should not expect is that we're thinking of pulp as pulp. In 2013, we were at an incremental 550,000 tons of short fiber pulp, market pulp, and specifically market pulp, which will basically make us very slightly long, I think, still, because we're now quite a bit short in short fiber pulp. It's a marginal long position. If you think about the long fiber pulp, we're not planning to build another long fiber pulp mill, so that means that we're going to be about what we are now in long fiber or softwood pulp. That's the plan. The net chase, and I think it's important to talk about short fiber pulp separately, is we go from being short to slightly long in short fiber pulp.
Right. That's maybe the one thing, Markus here, one thing I just wanted to add to the newsprint comment about the curtailment. We are 70,000 tons per quarter less capacity or more on a year-on-year basis. We talk about curtailments, but we also got to remember what was the starting point for the capacity. Last year, we had 0% return on capital. Now we have 14.5% return on capital on newsprint. You know that we're very committed to making sure that the businesses are profitable. They cover their cost of capital and meet our return target.
Right. Sure. No, that's great, guys. You've taken out a lot of capacity, but could you just give a little, just a little more color though, when you're saying that newsprint inventories are significantly higher in the third quarter? Can you give us any sense of the magnitude there? Given that we're going to a seasonally weaker period, do you have any sense as to how long it'll take to work that down?
I don't, to be honest, I see obviously the one line on the page, whatever, eight in the press release. I don't have a number to give you. We can follow up on that one. I'm sure Ulla can call you back and so forth. I thought it was more important to tell that we had an all-time lowest end of September inventory level in newsprint in our company, which is significant because if you believe, even though I don't get to give you the number of the industry inventories, that means that we've done through curtailments and other means already taking the actions for Q4 that the industry hasn't. We should be better positioned, I think, than some other people in terms of competing in Q4 and the coming quarters. I don't have a number for the industry inventory.
Are those comments that you provide, though, are there real numbers behind all those comments? Is this something you just do commission internally, or is this just sort of anecdotally how you feel about the market?
Oh, the inventory comment in the release?
Yeah, about all the specific grades, you actually have numbers behind all that.
Absolutely. I just don't have the number with me now.
Right. Got it. Okay, thanks very much.
Thank you.
We're going to move to our next question from Linus Larsson from SEB. Please go ahead.
Thank you very much and good afternoon. Maybe first a couple of questions on variable costs and specifically your wood cost. Do you at this point have an anticipation or any certain quarter when you will see sequentially lower wood costs or fiber costs in total?
Markus here, I can take that. We should be seeing already now from Q3 to Q4 very slightly lower wood costs. That trend we have seen already turning in our business.
Okay. On average right now, how many weeks of wood inventory do you carry?
A lot less than we had before. If three years ago we were in a situation where we had half a year supply, we are a fraction of that at the moment. I asked that question about seven, eight months ago to make sure that we can give you a positive answer now. We've been very tough on that because I thank you very much. One time was enough three years ago for me.
Today, like a rough guess would be one month rather than the six months that you had back then?
No, I wouldn't give you an exact, but let's say half of what we had or a little bit less than that. That goes to, I mean, that's what I'm especially happy about in this quarter, that in these circumstances, we're able to manage inventories very well, manage the whole supply chain very well, and totally the agility of the organization is on a very, very much different level. If people are not asking anymore how to do things, they just ask, "When do you want it done?" Our organization can move to all directions at the moment and do that quickly.
Are the fiber costs, are you seeing Q4 being the first quarter of sequentially low recycled fiber costs as well?
Yeah, definitely. The OCC and ONP prices are coming down. That we also anticipated already last quarter. They have come down on a weekly basis. That said, it's good to remember that still from the beginning of the year, we are still slightly on a higher level with OCC and ONP.
Right. Yep, yep.
We are by no means, we're not out of the woods yet on that side.
Okay. You're making a remark somewhere. I read that Q4 will be negatively impacted by adverse FX. Could you quantify sequentially Q4 versus Q3, what you expect?
Yeah. The negative effect on the FX, that goes for also the Q2 to Q3. What we mean by that is that we're not trying to have a crystal ball or forecast where the currency rates are. The biggest item there is that two years back, when the krona was on a very good level for us, we did the longer and higher level of hedges than we would do by default. Now that these hedges that we did, that's about 10.5 against the euro, they're rolling off. As we go on, that positive impact will not be there anymore. The quantity is a meaningful number, but I wouldn't quantify it exactly per quarter.
Sorry to jump in, but I had this dialogue with somebody else an hour ago. This is not a surprise. The krona didn't get stronger yesterday, and we've known the hedging profiles and all that. This is one reason why we started the incremental productivity improvement program in fine paper already in April. Our Swedish mills everywhere, including Skoghall, they understand that we need to get better and better, lower cost, more productivity, more flexibility because the krona is going to burden us and so forth. I can't change the krona rate, but I can use that as the motivation for my good people to get better. That's all I can do.
If you look at just to dwell a bit on the currency situation, in the third quarter reported operating profit, how much hedge gains would you say that there were included in those numbers?
Let me see if I can dig up a number. The impacts that we mentioned there are including the hedging. I understand your question.
Okay. Finally, you will, of course, answer the way you choose to answer, but you are doing some temporary measures here. You're taking market-related downtime. You have flexibility built into your system. Are you evaluating, or when will you evaluate permanent further capacity closures? You have done quite a lot in the past. At what stage would you actually continue and close down more European paper capacity?
This is Jouko. It's a very fair question. Number one, what we have done in the past four and a half years doesn't count. That's history. I have to wake up every morning thinking about as this is day one. I think it would be fail for the company if I start saying, "Oh, we've done so much and so much." Forget that, to be honest, even though it was painful and so forth. Two, I also think about every day on where do we see risks where we cannot, through temporary curtailment plans or temporary layoffs included in Kurzarbeit in Germany or something else in Finland, ride the storm, and where do we have structural underlying issues. Obviously, I could not give you a list, but I can tell you that I think about that list every day. It's not limited to paper. It's every business, every country.
I can assure you that I, after the [school of four years], have not forgotten what's important. If that's what it takes to make this company successful in the future, also because there will be and are longer-term structural issues in the digital media world on magazine paper and newsprint, we will take care of what needs to be taken care of. That's all I can say today.
Okay, thank you.
Linus, I can just give you kind of a ballpark number here on the impact. It is about EUR 20 million for quarter three, and it was somewhat more in two and one. Logically, when the hedges start basically tailing out.
It will be a little less than Q4.
It will be a little less than Q4, yeah.
Perfect. That's very helpful. Thank you very much.
Thank you.
We'll now move to our next question from [Johan Seberg] from Carnegie. Please go ahead.
Thank you very much. Could you say something about your ongoing cost-cutting programs and also your rethink program here? What type of further cost-cutting would you see just for your own measures in 2012?
I wouldn't try to jump into 2012 cost figures now. If you join us in our Capital Markets Day, we can talk about more of those things. If I can give you a couple of examples only, which actually answer both parts of your question. They answer the question of rethink, and they answer the question of becoming more not just cost-efficient, but also more flexible. We launched a program, which we actually internally call a rethink program. This fine paper restructuring program that has been already agreed upon with the unions in Finland and is in the process in Sweden, including New Mola, quite significant.
With that, if you remember the older story of Uncoated Fine Paper, where we said that the new mantra is not lowest cost full capacity, it is minimum cost at real capacity, where we organized the combination of New Mola and Varkaus and Lidslåten in a different way than ever in the past. On the coated fine side now, I think we're doing pretty much the same thing, where we're with an accelerating speed. The fine paper team is specializing utter sand into special grades as fast as we can. Why? So that we can run the big gun, meaning OLU, very efficient at maximum utilization rate. We happen to think that's another example of how can we become not only more efficient, but also more flexible. There are other areas, and there are hundreds and hundreds of these stories from very little to bigger ones.
You know that we've done the maintenance outsourcing as the first in the industry in Finland. I can assure you we're going to push ahead in other countries also, not only because we know it's going to give us cost benefits, but definitely because it gives us less fixed cost in addition of being lower cost. It's not like a big bang corporate program, as it may have felt in the past. It's more and more of programs of changing the business model by product line. It's also good things like investing a little money to make something more efficient. It's tough things with sometimes, and it includes also then restructuring and taking fixed costs out through restructuring. I think we'll have a little more structured story in early next year once we get to the Capital Markets Day on this whole rethink, what the impact is and so forth.
In addition, there is, Markus could tell you the exact number, but hundreds and hundreds and hundreds of programs that basically every year say, "This is where I can take cost out, energy cost, any cost," and so forth. I'd like to more have a movement in the company of every day improving costs rather than coming every two years to you and saying, "Oh my God, we got too much cost. We have to do something about it."
Yeah. I can say from my part that when going through, for example, the functional cost budgets for 2012, we see the same structural change continuing. We have truly fixed costs coming out on an absolute level. The understanding in the organization is very deep. We're not, and even right now, we're not looking only at 2012. We're looking already at changes we can do in 2013 as we have more capacity to do the changes. Clearly, the organization has turned into a totally different kind of learning mode. All the time, layer after layer, the more you learn, the more you can change, the faster you can change.
Yeah. Just coming back to your cost inflation also talk, I mean, 2011 is almost over now. I mean, you're seeing cost is starting to come down during the fourth quarter. I'm sure you're not going to give me any cost inflation targets for 2012, but if you assume the trends, I mean, assuming flat cost in or that the Q4 cost level will remain in 2012, I mean, just hypothetically, of course, would that imply that you will see a cost deflation in 2012 for you?
I think we'll let the quarter go and see where we are to start forecasting. I would say, though, that the environment is very different than it was 12 months ago.
Yeah, because I mean, the main cost rise that you saw in 2011 was by the end of 2010. You entered with a, you know, peak, okay, so since then, you've pretty much been running with flat costs, basically. Is that a fair statement?
Second half of this year, but already the change from Q1 to Q2 and then to Q3 was very moderate. The second half of the year is very flat, so turning down.
Yeah. Just two more questions. You're highlighting the growth that you have a strong balance sheet for growth. How active are you at looking at acquisition objects? Just to get a feeling for that, are there many acquisition targets out there? There are speculations of all different types of Italian paper mills. What do you see? Do you feel that prices or acceptance levels have come down or anything like that?
This is Jouko. Let me give you a couple of mantras. In a situation like this, where you know better than me, the economic uncertainty seems to be the popular term in Europe specifically, is huge. Yes, there are opportunities. We are looking and we'll look at opportunities, but the underlying theme is that whatever you would do, you would have to make the transactions such that even in a fairly traumatic economic scenario, you will get a good return on it. With that comes that, I go this far, I say, I believe in adding good things into good things. I happen to be, Stora Enso is a very good thing. I leave it at that.
All right. Final question. Tax rate for next year, what do you estimate? Also for the fourth quarter?
Yeah, I think what confuses now the tax rates a little bit is the new page number. Otherwise, I think a good proxy for this year, if you clean that out, is that the statutory tax will be somewhere around 24%, 25%, and actual taxes around 16%, 17%, and the same for next year as well. No big changes there.
Great, thanks a lot.
Thank you.
Thank you.
That will conclude today's question and answer session. I'd now like to turn the call back to Ulla Paajanen. Please go ahead, madam.
Thank you, Pauline. Thank you very much for the call and the good questions here. We'll speak the latest when we go out with our Q4 result in February. I will hand this call still over to Jouko for the final word.
Good. Thank you, Ulla. That'll be quick. Thanks for listening. I'll leave you with hopefully two thoughts. One is what I said already, but I'll repeat it. The spirit in the company is and will be, we've done the best we could in the past quarter, in the past years, but that doesn't count. We only focus on going forward, and you will never hear us saying, "Oh my God, we've done so much." That I think is an important spirit, competitive spirit we have in the company. The second thought I would like to leave with you is, which I also kind of hinted to, I keep telling my people very much that let's be very clear. We're not paid to forecast the weather. We're paid to be successful in any weather.
I think that's another important thing that I'd ask you to remember about Stora Enso because with that comes a bit that I hope that in addition to the views you may or may not have on our outlook in a very uncertain surrounding, you also will have a good look at the actual performance of the company in the surroundings we are in, both in earnings and especially in cash flow. Thank you very much for your time, and I'm sure we'll talk soon again. Thank you.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.