Good morning, and welcome to the presentation of BillerudKorsnäs second quarter results. My name is Lena Schattauer, and I'm head of investor relations. With me here in Solna, I have BillerudKorsnäs CEO, Petra Einarsson, our CFO, Ivar Vatne, and EVP Communication and Sustainability, Christopher Casselblad. Petra and Ivar will hold the presentation, and after that, we will open up for questions. I would like to hand over to you, Petra.
Thank you, Lena. Good morning and welcome everyone to today's webcast of our Q2 report. I must admit that it is sometimes difficult to read the expectations purely by looking at the consensus perspective, considering the fact that the expected adjusted result this quarter varied a lot. On top of that, we also had the effect of KM7 ramping up the cost amounting to SEK 190 million affecting this quarter. The SEK 190 million affecting the ramping up of KM7 is not booked as impacting comparability, thus not excluded from adjusted EBITDA. The most important from my perspective is that we are transparent with information regarding the company and that we utilize this telephone conference to clarify the outcome of the second quarter.
I will start by presenting the key highlights of the quarter and then to invite Ivar to give a more granular update of the financials. After that, we will be happy to open up for Q&As. These are the key highlights of this quarter. I'm pleased to present a continued strong overall demand with a strong sales performance of 7%, where we have experienced growth compared to previous quarter for 11 quarters now consecutive. In total, the underlying result is solid, especially taking into consideration the KM7 effect of SEK 190 million and the high cost of fiber that has affected this quarter. The second quarter was characterized by two major events, the startup of KM7 now producing liner to customers and the successful sale of Bergvik Skog Öst.
The deal where we have secured a long-term competitive wood supply at the same time as it enables us to invest in future growth. Our safety initiative, as well as our program for production stability, are progressing according to plan. The production stability can be improved. During the quarter, we have had negative effects from a fire at the Gävle mill. Let's start by looking at the Bergvik Skog Öst deal. During the second quarter, we finalized both the acquisition of Bergvik Skog Öst at a negative cash effect of SEK 5.4 billion and the divestment of 89.9% of Bergvik Skog Öst to AMF for SEK 11 billion.
We have a 15-year wood supply agreement with a buyback option. The Swedish Competition Authority has approved the sale, and we anticipate the transaction to be completed by end of August with a positive cash effect of SEK 7.9 billion . The other major event for this quarter was the start of ramping up KM7. The ramp-up is now ongoing and progressing according to plan. We reached the milestone stock on wire on April 17th. In May, the focus was on test runs with dissolving pulp, and we reached paper on pope in beginning of June. The first commercial liner to customers was delivered end of June. We are now in the certification process of Pure Performance involving three customers.
Next vital step in the ramp-up is to open up the coating in August to start up the certification process of cartonboard and liquid packaging board in October. The inauguration of KM7 will take place on October 3 in Gruvön. Moving over to operational efficiency. We have improved. Looking at the production availability, it has improved very much, supported by the Production Excellence program. It was unfortunately somewhat offset by the fire we had in Gävle during this quarter. I'm really happy with the fact that we have the PEX tracker, Production Excellence tracker tool in place now. All mills are working in this tool. The process we have in place is to eliminate all losses and to make sure that it is not repeated and to follow up the program continuously. This has taken longer than I expected to ramp up.
If you look at a yearly basis, I believe that we will be in a range of reaching the yearly volume that we had last year if you adjust that number from the wood shortage. All in all, we are moving steadily towards increased availability. If we move over to safety, a safe company is a well-run company. Also here we see good traction, too slow to some extent. The most exciting that has happened this quarter is that we have conveyed a safety survey. We made the decision to use the DuPont survey so that we can compare with other companies. 70% of our employees participated in the survey, which is a very high number, I believe. We have received feedback loud and clear.
If you look at the, just to mention a few facts from the survey, we can see that one out of three employees at BillerudKorsnäs believe that injuries can be prevented. Or to paraphrase, two out of three believe that injuries are actually part of the job and not preventable. One out of four has an experience that injuries are closely monitored and followed up. Last but not least, nine out of 10 answered that they have not been rewarded for working safe. Change is coming rapidly. People pop up as ambassadors as we speak. I feel very confident regarding this cultural change that we are moving ahead with. You can also see that the numbers are improving. It's not in the level, in the range that I would like to see, still it is moving in the right direction.
If you look at the overall lost time injury frequency rate, mid the first six months, we ended up at 7.7, comparing with the full year of 8.4 last year. Safety is a journey that we have entered, and it will be continued from now on, even if it will be strongly accelerated. Moving from safety and production stability towards innovation. Our DNA for future growth is innovation, and we have experienced some good news during the quarter. Firstly, as previously announced, we have decided to embark on a joint venture to develop a fully biodegradable paper bottle in the joint venture with ALPLA, establishing the Paper Bottle Company. Secondly, during the quarter, we have announced to be the first to produce paper battery on a paper machine. There are several potential applications of the paper battery. One is, of course, internet of packaging or digitization of packaging.
Another application is also large-scale, cost-effective energy storage in the small grid field. Thirdly, yesterday, we launched the first U-Bend paper straw, 180 degrees, made out of paper, where we have filed a patent in cooperation with The Paper Straw Company, who will produce the straw. We look forward to share more good news in the next coming quarters to bring you along with us on our journey towards innovation. Before I ask Ivar to come in with the financials, outlook of the third quarter, the market conditions is expected to remain good for liquid packaging board and cartonboard. However, we see an increased uncertainty in the global container market. We have some weaker market conditions that has occurred during the second quarter, and this is particularly for brown sack paper.
The continued expectation of increased price pressure remains, we also see the same picture as the last quarter on the cost of fiber that we expect to flatten out on the current high level. We will, of course, continue to focus on operational efficiency and cost savings. With that said, I would like to invite you, Ivar, to continue with some deeper information in the financials.
Thank you, Petra. I think we can just go to the next slide. I just wanted to start by showing some of the key financial figures that I think most of you already have got familiarized with this morning. We will take them in pecking order through the presentation. Net sales is up 7%, which is a very strong number, and we are happy with that. If you look then into the profitability section, and starting with the EBITDA, we report SEK 579 million of EBITDA, adjusted being SEK 539 million. For the EBIT figures, we have the reported SEK 194 million and adjusted number being SEK 154 million. You see, I guess on both of them that there is a delta of SEK 40 million, that is the items impacting comparability. I just wanted to quickly run through that because you can say it's roughly of three buckets.
The bigger one is some provisions for staff changes and demolition of old buildings, which is at SEK 52 million. They are all provisions done in 2016 and 2018. We have as well SEK 40 million of educational program around the KM7 startup that we also have communicated earlier. There is a smaller item around Barrevik to round that figure off to SEK 40. A pretty small difference between the two. You can say and see for yourself that we are down in profitability versus a year ago. I'll go over the next couple of slides and also underlining with a very strong focus why we actually believe the underlying profitability is much stronger and in fact is growing. Let's start with the net sales, just giving a little bit more fact. Continued sales growth.
This is actually the 11th quarter in a row where we had a pretty significant net sales growth. You can see the red line, the average CAGR for the last three years of 5%. We deliver above that now for Q2. I guess also it feels pretty good from my side coming in and see how did we deliver those 7%. We are certainly not only relying on currency or some one-off items on this. It's pretty evenly spread between currency, volume mix, and pricing. We have the organic net sales then for Q2 2019, that's 5%. We also have a 5% underlying volume growth on that number. If I go into next page talking a little about the raw material cost, I know this is a hot topic for a lot of you guys and also for us.
We have seen the impact for Q2 2019 versus last year. It's roughly SEK 300 million, which is a combination coming then from wood, also from pulp. We also have an impact on chemicals. I think the difficult thing when you look into the outlook going forward is where does it go from now? You read the same report as we do. We are kind of conservative in the way that we expecting this now to flatten out on the current level. If it turns out that these numbers or the spot prices will go down, obviously that means we will have an upside. That will flow straight through. For our expectation and our view at the moment is that we are pretty conservative in expecting this trend to more or less continue going forward.
I think if you go into the next slide, I genuinely believe that this is probably the most important slide that I'm presenting to you this morning. These illustrates, I believe in a pretty good manner, what is the underlying performance when we're looking into our results. We do have some positive impacts. They are colored in the green staples, where we have the pricing. That is mostly pricing that was initiated during 2018. We now see the full year impact going into 2019. The FX is, I guess pretty straightforward. As I did mention, we do have a positive volume, which is helping our volume and mix quite a lot. There are a couple of negative items. The SEK 300 million that I did mention, that's the vast majority in the sense of what's labeled as the variable cost.
You can sense, that is also part why we see the margin has come down. We have been doing a lot of pricing, but due to nature of some of our contracts that are fixed longer term, et cetera, we have not been fully able to price up the 100% of the raw material impact. The fixed cost item there as well that you see of SEK 53 is mainly related to Gävle, where they had fire and there has been some production disturbances, and that is pretty much what is earmarked on that bucket. Adding those all together, you will arrive and end up at SEK 729, which is a higher EBITDA percentage versus the same quarter last year.
Very much, in our view, represents the true underlying performance and where we believe that the fundamentals of the business currently is. Last bucket related to the startup impact of KM7. I think we have talked this quite a lot in the past. It's very similar to the estimate we have previously shared with you, what we expect that to be. It's a combination of a volume mix impact and a fixed cost bucket. When we now go through the transition and getting this new and beautiful machine up and running, that lands then on the SEK 539 that you have seen in the past. I just wanted to emphasize also the point that Petra mentioned in the past, that we have had discussion around the SEK 190 million of KM7. If that actually is an item that should be put out and reported on their items impacting comparability.
Our view still is this is a number that probably belongs more in a bridge like this. It's still some operational items that can change over the quarters, although we do have a pretty good estimate. I can assure you that going forward, we will be very clear to calculate and show this as a separate building block, so we can ring-fence what are some of the impacts in a transitional period. I was just going to take Board division by division on some of the results and some of the highlights. We'll start with division Board. Board has had a phenomenal quarter. If you think about the 7% net sales that we talked about in the beginning, all of this is driven by Board.
We have a 12% net sales where the sales volume is 10%, obviously we have help as well from pricing and currency. If you also look at some of the segments, where is it coming from? The good news that is coming broad-based. We see several segments and several parts contributing to the growth. We have fluting and liners going up with 30%, cartonboard 13%, then we have the liquid packaging board up 3%. That is indeed very good news and represent a fundamental solid performance by Board. If you look then into the EBITDA number, it's down by 75%, very fast, I will come back to the point I just mentioned on the previous slide on the one time or the ramp-up effects of KM7. That's a very big part of explaining the delta.
We've had as well on Board, the same impact that I mentioned on the total group that the raw material impact cost has gone up, which has been partly offset by pricing, but not fully. This is very much linked to some of the contract dynamic we have with some of our strongest customers within the division. If you look at as well, this is a comment on the net operating expenses. Just a reminder, it also includes the raw materials, so that is part of it. A big chunk of this is also just explained by the volume growth being up 10%, as well as the KM7 cost that I referred to in the beginning. For paper, if you go into the next slide, please. It's a little bit different story.
It's flat on the net sales, actually if you look at the sales volume, it's down by -4%. There's no doubt that comparing Board to paper, we had a more challenging quarter on paper. Looking by the segments, we have sack paper growing by 4%. We've had kraft paper flat, but also pulp is down. Again, a little bit different dynamic of what's happening within that division. On EBITDA, you see a 50%ish decrease in the profitability. Again, main reason being the raw material inflation not fully offset by pricing. We have had as well in a mix effect by more of the pulp volume being sold at spot rates, which has not helped us this quarter. Last but not least, we have solutions. We are down on net sales by 4%.
It's a pretty conscious choice as well, because we are continuously making, you can call it a customer mix reevaluation, or certainly looking into some of the positions we do have with the different collaboration partners all around the world, optimizing our portfolio. In this case, it is down, but it's also something that consciously we take in part choice of. We do expect going forward to have a more solid growth within solution. It's definitely one of our main divisional footprints we want to expand. There's not too much to say around the profitability. It's pretty low numbers in absolute. Compare this to versus a year ago. You can say it's mainly related to higher pricing. We had some FX impact with cost control and also the customer mix is helping us on this side. Right.
Let's go into, I also know a topic that I think a lot of you have followed during the second quarter, where there has been a lot of action on the Bergvik site. You see for yourself on the graph what illustrates now the net debt versus the profitability ratio when we closed the Q2. SEK 12.7 is the net debt that we currently have. Main reason I think all of you know, at least most should know, is linked to the acquisition of Bergvik Skog that we did during Q2. We've also had a dividend, but that's not a big surprise. We already know what will happen when we come into the Q3.
The estimate, of course, there are still things that can change slightly, but we will be surprised to see not landing roughly 1.5 in terms of a new net debt ratio when we close our Q3 books in end of September. I think that also means we are significantly below our target of 2.5, and we should be very well-positioned with a strong balance sheet position to look for future growth and potential also M&A opportunities in the future. Just last couple of words then in terms of where do we stand versus our long-term financial targets. I did mention in the beginning, 7% net sales growth is a number we're happy with. We also demonstrated over the last 3 years that consistently we've been able to exceed that number. We know as well that the EBITDA margin of nine is not really where we want to be.
Adjusting that, as I did show for the KM7, one of where are 12, so that certainly improves the situation. It still means we have work to do in terms of looking into different items of price management, but also looks in terms of different efficiency, et cetera. That is a challenge going forward. I think the return on capital deployed has also been covered in some previous sections. We do now have an increased asset base with the KM7 coming into our books, and it will take some years before we see the EBITDA generation of KM7 really coming in where it belongs. So that is still a long-term, I guess, target we'd like to have, but it will take some time for that to be coming up where it belongs.
Net debt versus the EBITDA, I did mention this, it's very temporary being above, and we should see a very different number there as we close the Q3 in September. I think the dividend policy is something which has been consistently good, and also the numbers for last period has been certainly above the target. With that, I'm handing it back to Petra.
Yes. I just would like to summarize where we are from a more broad perspective. I think first things first, and that has been for us to ensure a successful ramp-up of KM7, and that is something that I'm very content with during this quarter. Also to make sure that we have a competitive wood supply going forward. Here I definitely think that the deal that we made with Bergvik Skog Öst is a step in the right direction. We need to steadily improve, and here we have definitely potential to unlock when it comes to stabilizing the production, and that is a continuous improvement journey. Then to speed up and accelerate innovation and new solutions for the company to reposition ourselves moving forward. Here I also believe that the second quarter was a step in the right direction.
With that said, as a broad summary on where we are moving, I would like to hand back to you, Lena.
Thank you. We will now open up for questions. We would appreciate if you limit yourself to three questions and then get back in line if you have more questions. Also, you are always welcome to call us afterwards if you have follow-ups. With that, we are ready to take questions.
Thank you. If you do wish to ask a question, please press 01 on your telephone keypad now and you will enter a queue. After you are announced, please ask your question. The first question is from Martin Melbye from ABG. Please go ahead, your line is open.
Good morning. First question on the Gruvön ramp-up costs, the SEK 190 million, is that entirely on the board segment, or is there something there on the paper segment as well? Linked to that, the depreciation, how will that change in Q3 versus Q2 regarding the Gruvön new machine?
Okay, I think maybe you can take that, Ivar, I think.
Yeah, I can take the first comment. That was SEK 190 million and the split. We operate with a 70/30 split between board and paper, so 70% board and 30% paper. It's a rough estimate, but it should be a pretty good estimate that we use as allocation key between the division. The second question was around the-
Scheduled depreciation-
Yeah
In the second quarter versus the third quarter.
Yeah. We have a rough estimate of SEK 30 million depreciation per month. That means we have three months of depreciation for Q3 scheduled, and we have had zero for Q2.
Okay, there's another SEK 90 million of depreciation for Q3 versus Q2?
Correct.
Yes.
Okay.
That's correct.
Good. One question on the Bergvik Skog transaction. Have you stated the gain you'll have in Q3? I reckon it could be like SEK 4.7 billion, have you given that number?
It's not a bad estimate, Martin. I can still say that we are working with the auditors just to get all of the moving pieces tied up. There's also some moving pieces in the Bergvik during the Q3, in particular with some of the dividends. I don't want to give you a more updated number than what you said now, but I can say it's not a bad estimate, and we will confirm this as part of the Q3 close.
Yes.
Okay. Good. Last from me, the price changes on sack kraft paper, I see that some newsletters are talking about 4%-5% lower prices. Is that relevant already from Q3, or is that coming in phases for you?
I think that differs, but I think if you look at sack and especially brown sack, here we can see the pressure from a price perspective and that a weaker market, definitely. I think that is something to be expected already from Q3.
The wood cost, how is that changing quarter-over-quarter?
What we estimate, it is that it flattens out on a high level. That is as detailed as we can be. As Ivar, of course, stated that if something more positive happens, of course, we will be happy to see that development. As a guidance, we don't see anything else right now but the flattening out of the fiber cost for next quarter.
Excellent. Thank you.
Next question is from Gustaf Schwerin from Pareto Securities. Please go ahead, your line is now open.
Morning, Gustaf Schwerin, Pareto. Three questions from my side. Firstly, on the board division, can you say something about the negative mix effect, how big that was related to the KM7 ramp-up?
Yeah.
Did you understand the question? The negative mix effect of board on the ramp-up scale.
That is two-thirds out of 190, Gustaf.
133 million.
Yeah, I think that was the same question as Martin had.
As Martin had. Exactly. Is that what you're looking for, Gustaf?
Yeah.
Yeah.
Yeah. Perfect. Great. Thanks. Secondly, on containerboard. When you talked about a pretty stable situation both for fluting and kraftliner and now for Q3, I assume pricing should be a bit lower quarter-on-quarter, but looking at your volumes now of Q2 versus Q1, they seem to be holding up quite well. This uncertainty we're seeing in the market, do you actually feel that affecting volumes now going forward, or are inventory levels at a level where activity is still quite good?
We don't expect any big swings when it comes to volumes, especially talking about fluting and liner. It's definitely so that we have seen a weaker market situation also for fluting and liner, and the prices has come down somewhat. The biggest effect is what we see in brown sack. I would also like to add to that in white sack, the market conditions are much more stable. If the question is particularly regarding board, I would say that I don't see any major effects on the volumes as considering the market outlook that we give.
Great, very clear. Lastly from my side, if I remember this correctly, you still have some liquid contracts that are expiring this year which have not yet been renewed. If this is correct, have the negotiations for this started already? Do you have any feeling now for the possibility to further increase your average pricing in board?
It's correct that we have not yet renegotiated all contracts that we have in liquid packaging board. I don't want to comment any further on that as we speak. What we have communicated regarding the new contracts are still valid, of course, but we have not yet renegotiated all contracts that we have.
Okay. Thank you.
Thank you, Gustaf.
Thank you.
Next question is from Christian Kopfer from Nordea. Please go ahead. Your line is now open.
Thanks, operator, and thanks for the presentation. Just a couple of questions from my side. Firstly, can you just update us on the import of wood? How much you import from the Baltics on pulpwood?
I take that first. The import of wood from Baltic is.
20% out of the total comes from the Baltics, and it's mainly hardwood. birch.
Okay, that's about the same as previously then?
Yes.
Absolutely. It's exactly the same.
Okay. We have seen prices coming down in the Baltics. I'm a little bit puzzled to not hear you commenting at all on it. You don't see any prices lower on your imported wood?
I think that we don't guide on a specific level. I think the overall guidance that we can give is also included mix. It's the different mix that we have considering hardwood and softwood. On that sort of high level outlook, I would say that we are not confident to say anything else but a flattening out of the wood prices.
If mix is unchanged going into Q3 versus Q2, if everything else is unchanged, the only thing that has moved is the price level. You cannot see any lower prices overall?
I think, Christian, you have to see it like this. It's a mix effect. This quarter we have used more hardwood than previous quarters, hardwood is more expensive than softwood. That is the reason why we see a flat cost for fiber in Q2 versus Q1. That's the main reason.
How do you see the mix going forward then between hardwood and softwood?
That is too detailed. That is operational questions that we don't disclose.
Okay. You previously talked about the production targets, but it's impossible to follow those on continuous basis because you're not reporting this. Can you say anything about the delivery targets for 2019?
I think it is our ambition to report in a more granular way how we proceed with the Production Excellence program, and also invite you to see more what is actually happening in the Production Excellence tracker now that we have it in place. We actually planned to do it for this quarter, but we have decided to wait to make sure that we have top quality of the numbers before we disclose it. What I can say is that I'm really happy with the engagement and the ambition levels in the company where we still stick to the fact that we have the ambition to improve availability with 4% units by 2020. And I think we stated that already from the start, that this is not a linear journey.
It will actually be exponential so that we will have a bigger effect of this when we have all the tools in place. What we can say now is that we most probably will end on round about the same level as we had for 2018, and then you need to adjust for the wood shortage. It's unlikely to see the full effect of the 2% units already this year, since it has taken a bit longer to put everything in place than we anticipated. On top of that, we had the fire in Gävle this quarter. Our ambition is to make sure that you can follow this in a more granular level per division.
You mean on production levels, Petra, or?
Yes.
Are you also going to talk a little bit also about deliveries? Because at the end of the day, that is what also impacts earnings, I guess.
Deliveries. You mean the sellable volume?
The shipments.
Yeah, the shipments.
Yeah, exactly.
No, I don't think that is not something that we will guide in detail going forward.
Okay. All right. Thank you very much.
Thank you.
Thank you.
Next question is from Justin Jordan from Exane. Please go ahead, your line is now open.
Thank you. Good morning, everyone.
Good morning.
Welcome, Ivar. First of all, can I just walk through just the cash impacts of the Bergvik Skog transaction? I just want to be absolutely clear in terms of the resulting net cash benefit to Billerud group, as it were. Clearly, you purchased the assets for SEK 5.4 billion back in the end of May, and then you're announcing disposing it for a net SEK 7.9 billion at the end of August. Am I right in inferring that we should be essentially the net cash impact is a positive SEK 2.5 billion? And then I'm just curious, is there any tax implications of a capital gains tax or anything on that?
Yeah. Let me just find my previous slide. I think the best way to look at this is that it actually required this for SEK 6.4 billion. We sold at the same time 5% of Bergvik Skog Väst for SEK 1.2 billion. Some of the net impact for that is at SEK 5.4 billion. I guess the easier way to think about this is to say that our net debt now is SEK 12.7 billion, and the enterprise value, so the full 100% we did sell was SEK 12.2 billion, and that included a SEK 3.5 billion of debt, meaning the equity value comes to SEK 8.8 billion, and we get the 90% of that. The net proceeds is SEK 7.9 billion.
You would expect then from a net debt figure of SEK 12.7 billion, that this will come down by SEK 7.9 billion, around in the SEK 5 billion of net debt in Q3, and that explains the ratio. On this type of industry in Sweden, there should be no tax impact.
Great. Okay, thank you. Just specifically on Q2, switching entirely, can you just give us the impact in terms of both lost volumes and cash costs of the Gävle fire, please?
The lost volumes on the fire in Gävle?
Yes, please.
We had an effect of losing roughly in the range of 13,000 tons and affecting the EBIT for the second quarter of 29 million SEK.
Great. Thank you. I just want to be absolutely clear what you are saying in terms of production for 2019 now, because you have previously talked about production in 2018 of 2,835, including 50 million of lost volumes from wood shortage. You previously guided to 2,900 tons for 2019. What exactly are you saying now? Are you saying flat year-over-year on a 2,835, or should we be thinking flat year-over-year on 2,785? I just want to clarify what exactly you are saying, please.
Well.
Justin, we are expecting the guidance to be lower to around the same level as last year, adjusted for wood shortage to.
2,835.
Exactly.
Yes.
2,835.
Okay. That is incorporating the Gävle lost 13,000 tons in Q2?
Absolutely.
Yes.
That is one of the main effects why we do this right now.
Yes. Also the fact that we have a slower start than we originally anticipated of the Production Excellence program to be quite open. We don't back off of the original target of 4% by the end of 2020, but we see that 2.9 million ton will be hard to reach.
Sure. I appreciate that. Okay, just one final thing from me. Just on your sack kraft contracts, are they mainly a spot or are there some mix of quarterly or annual contracts? I'm just trying to understand the pricing impact that you're citing in Q3 and thereafter.
I think it depends if you call the brown sack or white sack. If you look at the market from our perspective of brown sack, we have a quite low market share and a quite competitive situation with a large influence of spot pricing. On the other hand, if you look at the white sack, we are one of the market leaders with an entirely different set of pricing.
Great. Thanks, Petra.
Thank you.
Thank you, Justin.
Next question is from Robin Santavirta from Carnegie. Please go ahead, your line is now open.
Thank you. First of all, I think what you are saying and guiding is roughly flat fiber cost Q on Q for Q3, and I guess a bit further out. At the same time, you are also talking a bit about a bit lower sales prices in sack paper and potentially in fluting and liner boards as well. If you combine that, the underlying sort of earnings outlook is possibly weakening a bit towards the end of this year. I was just wondering if there is any sort of offsetting impacts that you have planned or are already doing in terms of cost cutting or production improvement or something else?
Yeah, definitely. I think that I have been quite open with that several times in the past now that I see that BillerudKorsnäs have a lot of potential to unlock. I am really happy now that we have Ivar Vatne, the performance management expert on board. I think that I see in front of me that we do have the power we need to offset the slightly weaker estimate by pure cost saving, also working with operational efficiency, both when it comes to value-based pricing and with the lean manufacturing. It has taken a little bit longer than I anticipated, I do believe that we have the tools in place that we need now, and we also have the management team that we need in order to deliver on this potential going forward. Thank you for asking that question.
All right, thank you. That is clear. In terms of this divestment of the forest asset you had for a while. I know you talk about M&A and growth investments combined with that, and obviously your balance sheet is fairly strong now. What kind of M&A and growth investments are you looking at? Is it more of a bolt-on type of things or something major?
No, what we can say at this stage is, of course, that the deal that we made with Bergvik Öst enables us to look into this in a much more thorough manner, this is something that we are working quite extensively with right now, we are setting for a board meeting here to discuss the strategic direction for the company in September. Right now I cannot comment on our ambition level, it is definitely something that occupy a lot of our times right now.
All right, thanks. Finally, in terms of the new KM7. Did you deliver any second-grade volumes now in Q2? Could you provide some info on where you are, in what markets you are placing those additional linerboard volumes in the second half of this year? Finally, combined to that, I guess you're talking about a bit of a weak containerboard market, but also guiding for unchanged white kraft liner prices. What is the dynamics in that market?
Okay. Let me first start with what has been delivered during the second quarter. In the second quarter, we have been fully focusing on ramping up the machine and making sure the machine works. We have delivered second-grade liner material to customers, we have also delivered some materials for certification when it comes to liner. In the second quarter, it's a very small amount, it's not even worthwhile for you to calculate it and put it in your models. That has never been the purpose for us either. If we move forward in the outlook, I would say that what I worry most about, as I have said, is the brown sack development. The brown sack for us is more or less 20%-25% of the paper division. It's also a place where we have a very small market share.
Moving forward with KM7 and the plans that we have to certify materials for liner to also move into liquid packaging board, I'm not worried about the market situation in combination with the ramping up KM7. It's not at all on that magnitude. You also asked where we plan to deliver the material that we produce, in what areas. This is something that I think is too granular, I think it's also something that we need to have an option to act. Everything is not yet finalized.
Good. Thank you very much.
Thank you.
Next question is from Markku Järvinen from Handelsbanken Capital Markets. Please go ahead, your line is open.
Yes, good morning.
Good morning.
I just had a few last questions, out of some more detail on these issues that have been extensively discussed already. On the liner and fluting prices, I guess we've seen the NSSC and white liner pricing gradually decreasing during the first half. Did you see lower prices impacting your earnings or your P&L already in Q2, or are you expecting a more significant impact from that in Q3 compared to Q2, or how does it work for you?
We have seen the market price on fluting and liner, that it had come down somewhat. It's not on a major level. We have not been able to keep the price levels from last year. We have been forced to take some steps back, but it's not on a level that I think it should be disclosed in the second quarter affecting the result too heavily.
You don't expect it more significantly impacting Q3 compared to Q2, or is that too early to say?
I think it's moving back to the guidance that we have. We guide for an impact more considering the brown sack than when it comes to liner and fluting.
Okay, good. Just on the fixed cost, Q3, I guess, is seasonally lower fixed cost. Could you remind us
How much lower is the Q3 fixed cost compared to Q2?
What's that?
The fixed costs compared to the Q3 compared to Q2. It's the maintenance schedule, isn't it?
No, I mean the sort of seasonal holiday pay related issues, I believe.
Historically, it has been around SEK 100 million.
Yeah. Okay. Good. Thank you.
Thank you.
Thank you.
Next question is from Linus Larsson from SEB. Please go ahead. Your line is now open.
Thank you very much. Good morning to everyone. Follow up on the market situation, you talk about a challenging market situation in sack and kraft papers. I think you also mentioned your need to adapt production. I am just curious if you could expand a bit on that. Have you been taking market-related downtime? Are you intending to increasingly take downtime for market reasons in your paper division as we move into the third and fourth quarters?
I think we are not planning to do any major actions when it comes to downtime. We are looking into mix-related actions and also cost savings. We have not made any decisions to take down capacity.
Okay. Relating to this, obviously, if we look at the realized price in the paper division in the second quarter compared to the first quarter, it was a decline of 3.5%. I think you did mention now on the call that part of it is mix and part of it is spot pricing increasingly. That aside, how much price declines have we seen in the second quarter, and how much more will roll in the third quarter, would you say?
I think that it's difficult to answer that. I believe to guide on that particular level, it's quite tough for us to do right now, considering the plans that we take, and also to see and monitor how severe the situation is. It's a lot of different things we can do to maneuver the situation, looking into the mix of the portfolio and also to add the pulp mix to this. Then it's the difference if you do it on contract or if you do it on spot price. Unfortunately, I think it's a too detailed question actually for us to answer, and also not that I don't want to answer, it's more that we are in the continuous planning regarding this and to see what to do specifically with the brown sack pricing and volume and mix as we speak.
Okay. Just using the second quarter 3.5% price decline as a reference, would you compare to that figure in any way guide on the third quarter whether we should see something similar of a realized price decline including mix or clearly less or even more than that?
I'm reluctant to guide on that, but I would say that considering the guidance that I have given so far, it's definitely on that level.
Okay, great. Thank you very much. Just finally, if you could update us on the KM7 impact. I might have missed it on the call, so it was SEK 190 million in the second quarter, what's your guidance for the third quarter?
The guidance for the second half of this year is we still stick to the SEK 500 million. We have additionally SEK 310 million then to add on. If you look at the quarters coming, I think you can divide it evenly between the two quarters coming. That is the same as we said last quarter, we still stick to that.
Great. Thanks for clarifying that. Thank you very much.
Thank you.
Next question is from Cole Hathorn from Jefferies. Please go ahead. Your line is open.
Morning. Just a clarification question. On your board division outlook, you note that customer inventory levels have normalized. Is this referring to your niche fluting and white liner market or the wider recycled and virgin containerboard inventory levels?
As I interpret the question, There's a market question or the comment is more from a market perspective.
Yes. I'm just trying to find out if it's inventory levels for customers for the wider market or just for your specific fluting and white liner segments.
It's for the wider market.
For the wider markets. Great. On sack and sack kraft paper, you talk about the brown grades being a bit softer, can you give a little bit more color of where you're seeing that weakness? Also if you're seeing any weakness between the various types of grades, between the low and high quality brown sack grades.
We see it like this. The brown sack is down, the reason for that is basically the Asian markets. The white is quite okay. The brown has come down.
The brown is also in the industrial segment.
Yes, it's industrial. It's the construction industry that has come down, especially in the Asian markets.
Asian market, yeah.
What we have seen this quarter is not that much of a price pressure, it's more of a volume pressure.
It's important to clarify.
Sure. Just finally on your kind of operational efficiency, you called out at the beginning of the year that you start setting targets for the various management segments. Have those been put in place and people are aware of their targets and those are being set for the full year and 2020?
Absolutely.
Are those still to come into play?
Absolutely. Everyone is aware of it, and we have a performance management system in place every month to follow. We follow each target. We have promised 4% increase of availability, and we have targets in place to take out the losses for all machines, all mills, all the machines. We also follow the targets on specific losses and where they are in the process to actually take out the loss. I feel very confident that we have everything up and running now. Now it's the execution part, and here we will have an excellent help from Mr. Vatne, too.
He's nodding.
Yes. I think you can pick anyone and ask if they are aware of the targets that they have on them in the divisions, in the management teams, and also in the management team for BillerudKorsnäs. Everyone is aware of the specific targets.
Great. Thank you.
I have full confidence in that, and I do believe that we have potential to make it also to the bottom line.
Thanks.
Thank you.
Thank you.
That was our final question for today. I'll hand the call back to the speakers for any closing comments. Please go ahead.
Okay. That concludes this conference call. Thank you all for participating, welcome back when we report our Q3 results, the 24th of October.