CMD 2018

Sep 17, 2018

Morning, everybody, and most welcome to our capital markets webcast. My name is Christopher Casselblad, and I'm head of communications. With me today I have Petra Einarsson, our CEO, I have our CTO, Ulf Eliasson, and I have our new head of board division, Mikael Andersson. The agenda for today is that we will use approx one hour to go through our material and then open up for Q&As. With that said, I think we are ready to start. Petra, the floor is yours. Thank you, Christopher. Good morning, everyone, and welcome to our webcast, the Capital Markets Day. My name is Petra Einarsson, and I'm proud to be the CEO of BillerudKorsnäs. You have already met Christopher Casselblad, and later on during this presentation, you will also meet Mikael Andersson and Ulf Eliasson. I feel very comfortable to have them on board in my team, together with the devoted and talented people within BillerudKorsnäs. We are all ready to take on the future, and this webcast, of course. What if we would tell you that BillerudKorsnäs has potential to unlock? Well, we do. This webcast is all about telling you how we will do that. A brief update on BillerudKorsnäs in numbers. Last year, the turnover was SEK 22 billion, and the operating profit SEK 2.2 billion. We have 4,400 employees. Last Wednesday, it was announced that Dow Jones Sustainability Index, that we are still in the lead in Europe when it comes to container and packaging. We have also improved to the first position, the world-leading position in container and packaging. That was for sure a very proud day for all of us working for BillerudKorsnäs. I would say that everything we do is actually connecting sustainability to packaging. Packaging and the offerings that we make to our customers are very much containing a sustainable future. Packaging in form of the materials, packaging in form of the services and solutions. We truly believe that consumers will reward companies that takes responsibility for packaging. We also see that the value chain is tightening, where the brand owners involve to much larger extent as we speak into the relationship within the value chain. We already experience this change to a large extent right now for all our segments. We have four key market segments: it's food and beverages, industrial, consumer luxury, and medical. The largest one by far is food and beverages, and here you can find products such as Liquid Packaging Board, corrugated boxes for fruit, cups, and MG paper. Within industrial, you find a lot of applications important for our paper industry, and here you find products such as sack material, bags, and so forth. Consumer and luxury is very much concentrated on cartonboard. Here you find products for champagne, for also perfume and chocolate. I think this is actually my favorite segment. Also we have an important part of medical and hygiene. What you could say is the common denominator in all four markets is sustainability. If you add to that very strong trends in the market right now, where you see legislation steering towards banning plastic, we also see strong mega trends such as urbanization, e-commerce, an aging population. There are many trends moving in our direction. One important trend that is also a common denominator for all is the trend Just for Me, when it's much more important now for the consumer to experience the message from the packaging in the unboxing moment, and also for the brand owners to send the message that they take responsibility for the packaging. So here you can see some examples of our products. If you look at, you could ask yourself the question: what if these products could actually push the boundaries? I think to a very large extent, they can. I think that summarizes to a large extent what BillerudKorsnäs is all about. We challenge conventional packaging for a sustainable future, and by doing so, we also provide the innovative solutions to our customers so that they can be in the forefront in their industries. This is not only about innovation, I think it also concern to the same extent, operational efficiency. The packaging market is growing 3% yearly, and on top of that, we also see large possibilities from taking market share when plastic is moving over to more responsible packaging forms. Here we definitely have also potential to unlock in the future, both when it comes to the material part of the business, the solution part of the business, as well as services. With that as a brief explanation of what BillerudKorsnäs is all about, I would like to move more into exactly where we are right now and what we are focusing on. There are three things that are in focus right now, and that is first to secure a successful ramp-up of KM7 and to ensure that we have a competitive cost when it comes to wood supply. Secondly, improve safety and stabilize production, and thirdly, to accelerate innovation and capture the possibilities we have within solution sales. Looking at the first one, this has been my first and foremost attention since I joined BillerudKorsnäs in January, securing KM7 in Gruvön. We are now on a level where we monitor all risks in the project weekly, and based on that, we can set where we are heading when it comes to safety, when it comes to whether or not we are on time or not, or if we are at cost or not. The other part that has also been very much full attention since I joined BillerudKorsnäs has been the wood supply. As you all know, we have had quite a lot of disturbances when it comes to the wood supply during this year, and especially weather-related. It started with the mild autumn in Baltics, then we had the harsh winter in Sweden, and on top of that, the hottest summer ever. Who said that this was going to be easy? I believe that now we have the worst behind us, but it has been quite a troublesome start of this year, and it also set the direction that we need to have this very much secured, both from a short-term perspective and from a long-term perspective. Secondly, what we need to do, and that is very, very urgent and full speed ahead, is to stabilize production. In June, we launched the Production Excellence Program to capture an increased volume of 2% units every year as from 2019, and this Ulf will tell you more about within short. Third is to accelerate regarding innovation and solutions. I believe that this is truly our core competence and has been for the last 150 years. This is the area where we need to capture growth, and to do that with a little bit more speed, more focus, and to be delivering on our toes. As I said, we have a lot of potential to unlock within BillerudKorsnäs, and the window of opportunity is right now, and I would say that that window is absolutely widely open. It is very fortunate to be new on the job when the former management team have taken full responsibility to invest well for the future. In 2012, we made the acquisition from UPM, Pietarsaari and Tervasaari, and 2013 to 2017, we made several investments in capacity, where the investment in Frövi was the largest one. This year, September 5, we inaugurated the MG Centre in Skärblacka, the largest MG Centre in Europe, and these investments actually already contribute to the result. Starting next year, we ramp up the most modern board machine in the world, KM7, at Gruvön, and with an addition of 550,000 tons. The ramp up will definitely not be a walk in the park, but I have confidence that this will ramp up in a good way, and we have really scrutinized this project in risks from a safety perspective, on time perspective, and at cost perspective. Today, we feel confident that the project will start on time, but it might be so that it will be a bit more costly than we originally thought. This is very much driven from the complexity and also a consequence that our priority is to ramp up KM7 on time. I would say that BillerudKorsnäs is braced for success, and we aim to capture the potential that we have. The cost of wood corresponds to 30% of our total spend, and it's a very important part to have a competitive edge, of course, and to make sure that we also add value to our customers. As we speak, we are finalizing with the parties of the letter of intent in the Bergvik deal. We are finalizing the deal, the initial stage of the deal, and we hope that this transaction will be completed before year end. Looking at the effect it will have on BillerudKorsnäs, it will influence the balance sheet by SEK 5 billion, where we plan to short-term finance that with bank debts. Long-term, it is too early to say yet what will happen, but that will continue. I do not foresee that we will change the strategy that we have now, that we want to invest in our business. We prefer to invest in the packaging business, and I don't see that we will move into invest in owning our own forest. To secure the ramp up of KM7 and to ensure that we have a competitive cost when it comes to wood supply has been my first priority since I joined the company. We have made quite many changes, both regarding responsibility but also regarding risk awareness. Today, I feel confident, both when it comes to ramping up KM7 and that we have ensured a competitive wood supply for the future. Moving over to steadily improve when it comes to safety and production stability. I think both production stability and safety go hand in hand. I am convinced that a safe company is a well-run company. What if a safe company is actually a competitive advantage? I believe it is. If you look at safety and the people working with full focus on never walk by, that is the same thing as equally to have the mindset that all accidents can be prevented, which equals the mindset of preventive maintenance, which also equals the mindset of Right First Time. If you truly believe in zero harm, you also believe that the prerequisite is diversity and inclusion. Knowing this and believing in this and looking at BillerudKorsnäs track record when it comes to safety, you realize that the lost time injury frequency rate last year was 7.7 per 1 million working hours. That is very, very far from zero harm. I would say that the correlation to the production instability that we have is quite obvious. Our priority is safety first, and we will make the journey towards zero by improving safety lost time injury frequency rate by 25% at least every year starting now. Looking at what we are doing when it comes to production stability. I'm not happy with the starting point when it comes to production stability, but I'm very impressed with the program that Ulf and his team has set up for the future. They have done some massive analyzing on the company level and on each mill level. They have also taken all these numbers, and they have triangulated the numbers, comparing with who on each segment and each machine, who is actually world-class, who actually is best in class in BillerudKorsnäs, as well as conducted a loss analysis on the difference between the availability that we target and where we are today. Based on that information, we have set the targets going forward to increase the OEE with 2% units per year. That is equivalent to roughly SEK 200 million in EBIT improvement, or you could say roughly 1% unit per year in EBIT margin. I would say that we have this program in place. I have absolutely full confidence that we will deliver on this, and Ulf will tell you more about this within short. Far, I have been quite inside out in my storytelling on where we are today at BillerudKorsnäs with the KM7, wood supply, and also safety and production stability. BillerudKorsnäs is an absolutely fantastic company with 4,400 extraordinary talented people. Now we have made up our minds to change. I'm absolutely certain that we will. The change has, of course, to start from the top. My third CEO commitment is to accelerate innovation and solution. Looking at innovation, it is very much the DNA of BillerudKorsnäs. We divide the innovation in four different platforms. It is formability, barrier, it is strength, and what we call new concepts. Looking at formability, it has, to a large extent, the ability to replace plastics in many applications. There has actually been some recent research theoretically shown that if you have an extensibility of 60%, you can actually replace almost all plastic solutions with paper. This is, of course, an extremely important platform for us. The other platform is barriers, and I would say that the big challenge here is to find a suitable barrier that you could include in the paper that is actually forest product based, so that you don't need other barriers to compile together with the board. This is also one of our top focused research areas. Strength is maybe the most important and has always been. I think that is very much the foundation of all products that we have today and will continue to be one of the absolutely most important property for BillerudKorsnäs in the products going forward. A good strength allows for lighter packaging and also to a large extent is connected to solution packages. New concepts houses the significant research that we do that don't automatically fall into one of the three, formability, barrier, and strength. Just to mention two of the projects that we are focusing on within new concept, I would like to highlight the paper battery and also transparent paper. There is absolutely no doubt whatsoever that this has been the focus area and the DNA for BillerudKorsnäs looking back 150 years, and it still is. The trick now is to ramp up the investments that we have for the next coming years with KM7 and to make sure that we can capture the growth within innovation at the same time. I think that is really to focus is the key word here. We do have all the prerequisites in place, I would say, that we need. Solutions, then. Let me just give you one example of solutions. We have a customer in the U.S. that sells barbecue grills, and that customer asked for our help transporting this product from China, where it is produced, to the customer in the U.S. They wanted help with the logistical setup, but they also wanted help with the unboxing experience of the customer. The customer did not want to have a feeling of that this transportation and this product is not based on responsible packaging. What we have done is utilizing all the expertise and the competence that we have within BillerudKorsnäs, looking at the corrugated box, making sure that utilize the knowledge of strengths that we have to make sure that this product could be transported from China to the customer in the U.S. without hurting the product in any way. We have also taken away all the EPS, or frigolit in Swedish, in this setup. When the customer open up and take out this product, you don't have to take away all the frigolit or the EPS first, and you have a much more sustainable experience. Only with one project, with one product for that customer, we have actually been able to reduce the need of EPS equivalent to one football field and 8 meters high need of EPS. That is only one example, one product in what we can help with being the solution provider with both material, with services, and with the solution. You can see here for yourself also some other examples. We have solutions within carton, within corrugated, formable solution, bag solution, and several other solution and services. The example that I provided is from Managed Packaging Solutions. I would say that we simply have to capture this opportunity. Looking at packaging solutions, we see an increased demand in all kinds of different areas, and I think it is also very much involving connecting different parts of the world in a global setup that we do today in Managed Packaging. Today, we are focused on electrical goods and also on clothes and footwear, just to mention 2. We also reorganized BillerudKorsnäs with an organization that is effective from 1st of October, where division solutions will be a separate part of BillerudKorsnäs with very much ambition to grow. I don't have so much more to say about the progress yet, since we are in the recruitment phase of finding this person, Mr. or Mrs. Solution, and I hope to be able to tell you much, much more about these opportunities next time we meet. We don't sit and wait, as you see, we have a growing division already now, and this business grows roughly 15%-25% yearly. I believe that BillerudKorsnäs has an absolutely marvelous strategic direction. We challenge conventional packaging for a sustainable future, and that direction is still valid. I think it is absolutely anchored within the company and also with the customers to a very large extent. What needs to be added is, frankly speaking, some speed, accountability, and customer focus. It is hard to really live very close to the voice of the customer in a functional organization. I am convinced that the change that we are moving into as we speak with the new organization going live here October 1st, we will have an increased speed, accountability, and customer focus. We will have a decentralized organization with the 3 divisions and starting more or less in a couple of weeks. I'm also happy to say that I see no need to change the long-term targets. I think that they work as a very good guideline for the company, and I'm fully in line with the former management that this is the set direction of BillerudKorsnäs. Finally, we are on a journey to unlock potential, and I truly hope that this webcast has at least convinced some of you that you see things the way we do, and hopefully, we will provide you with some transparency, with some KPIs so that you can measure and decide for yourself what you think as we go along now quarter by quarter. Next on the webcast is a deep dive in Next and KM7, presented by Mikael Andersson. Thank you for that, Petra. Yes, I will provide a little bit more of a deep dive into the KM7 project, but I will make a deep dive into more things than that. To present myself, my name is Mikael Andersson. I'm the head of the Corrugated Solutions business area today. From October 1st, in our new organization, I will head the board division. That's the new organization from October 1st that Petra talked about. This picture you start to recognize now, and this is the picture that Petra showed, and it's the CEO commitments from her. This is the three areas secure, improve, and accelerate, and I will keep myself more to secure than anything else. Sorry. We strive towards helping our customers to fulfill their dreams and achieve their targets. This is what we do all the time. A lot of our customers are growing, and growing substantially, some of them. They're asking us all the time how we can help to fulfill their growth. Today, I will talk about how we will secure our growth going forward, and that means also helping our customers to grow. I will also talk about the rationale behind our decision to invest and grow. I will talk about a little bit more into detail around the projects that we have done, investment projects that we have done under the umbrella of Next Generation. I will finish off by talking about the growth targets for the solutions or the solutions business, the board business, and the paper business. Moving on to what we really do to secure our future growth. Here we have two major investment projects. The biggest one we have right now is KM7. In the green field of KM7, we're putting a new machine, or that's the machine KM7. It's a big building and a big investment that is called KM7. This machine is the largest and most efficient machine in Europe right now, and it will only produce high-quality, high-end products. This machine is going to produce 550,000 tons when it's up and running full speed in 2023. The net contribution to Gruvön mill at that time will be 250,000 tons. We have also done a lot of investments in the brownfield. We have done pulp washing investment, CTMP pulp dissolving, rebuilt of the recovery, and the fresh water and effluent water treatment plant. All this together is the investment around KM7. In Gruvön mill, we also have the PM6, and this is the machine that is producing the world's strongest fluting. Together, those two machines, KM7 and PM6, will make Gruvön mill the largest mill in Sweden at the time when it's up and running full speed. You can see on the pictures, on the top left side, you see Gruvön mill site in February 2017, where it was a parking lot. In August 2018, this is a big factory building, and it's not only the building that is big, it's also containing a big machine in there, which is the KM7 machine. When we come back to the investment under the program of Next Generation, we also have Skärblacka, where we have invested in a machine called PM10. That machine was moved from Tervasaari mill to Skärblacka, and that is a 90,000-ton machine where we're integrating the pulp that we were market pulp before in Skärblacka. We're integrating that now into more valuable refined product, high-quality MG paper. We're also creating, I think Petra Einarsson said, Europe's largest MG Centre. I think it's even the world's biggest MG Centre in Skärblacka. When it comes to brownfield in Skärblacka, we have done some investments on PM7, and the investments we have done here is to target new quality benchmark for medical and food packaging paper. That's another investment done under the same Next Generation program. Moving on. Really, why are we doing the investments we're doing? Why are we scaling up? Yeah, it is obviously because it's supported by strong market growth. If you look at the products that we are going to invest for, which is Liquid Packaging Board, cartonboard, white kraftliner MG, all of those high-quality grades are increasing in demand and also in growth in the market. If you look at the details around each of them, the Liquid Packaging Board market today is around 4 million tons, and it's a growth rate of 1%-2% annually. The volume we will have coming from KM7 will be quite small, and it will be absorbed by the market, and we will only grow according to the growth on the market from KM7. If you look at the cartonboard market, that's a bigger market. It's 15.5 million tons. The growth rate is also bigger, it's 4%. Here we also see the same trend, that the volume that we will add from KM7 will be easily absorbed by the market and the great growth that we see on that market. I repeat myself coming into white kraftliner because this is the same thing. It's a market of 4.3 million tons today, and the growth rate is 1%-2%. We are probably up on the upper level in that growth right now, and it's a well-balanced market. The addition that we will see coming from KM7 will also be absorbed by the market growth. For the MG paper, this is a market of 2.7 million tons. Growth rate is big, really big in Asia, like everything else in terms of growth in Asia. It's going to be 6%-7% forecasted. Then we have 2%-3% growth in Europe and U.S. as well. So short term, this market is well-balanced. Long term, this market is short of paper. So all in all, what I want to say through this picture is that the market is very strong. It was strong when we made the investment. It continues to be strong, and the outlook is really good for all those high-quality products. Coming back to the investments in, among other things, KM7, but the program around Next Generation then, which is then KM7 and PM10. You have already probably seen those numbers in a press release that we did last night. But if you come to PM10, that machine is already up and running. It's on the ramp-up. Everything have been quite well in that ramp-up, and we are doing well around PM10. Investment came to SEK 1.3 billion, and that investment is now closed and completed. When it comes to KM7, it's a little bit of another story. We have completed most of the civil today. The number I heard on Friday was 92%, rather than 90% we have on this screen. We're moving forward on that one. The machine is 40% or almost 45% completed within the building right now. The extra cost, though, that we haven't really talked about before, that we're releasing now, is that we have an extra cost for this project that is SEK 600 million. We have earlier said that the cost for this project will be around SEK 7 billion, but an additional SEK 600 million for this. If you look at the graph to the right around CapEx, the base CapEx for this company is around SEK 1.3 billion, and this is where we came from in 2015. The ramp-up we have had for those almost SEK 9 billion through PM10 and KM7. We are peaking now in 2018 at SEK 5.3 billion. We see the investments, then PM10 is out of the way. We have SEK 2.75 billion investment or CapEx in 2019, which is then the base CapEx, and then we also have that for the rest for the KM7. In 2020, we're coming back to the base, which is SEK 1.3 billion, and that is the normal CapEx we have in this company to do some improvements of quality and enhancements and growth. Most of what is on this picture I've already mentioned, but I just want to point out that this project was started in time, and we did really well on the project. It has been a successful project, and I'm not going to go back in time and look at this, but I want to mention that the positive contribution from 2018, it will be a positive contribution for 2018 because we're producing 30,000 tons of MG paper on this machine this year. We're ramping up this machine to 90,000 tons, which is the full capacity, and we're doing that during 2019. Moving on to the next picture, and here I want to stress what also Petra said. This project is on time, and that has been a priority for us. It came with extra cost, but it is on time and on schedule. We have been working in four different streams, which has been machine ready, mill ready, product ready, and business ready. All of those streams have been extremely important to get on time with this project. Obviously, the closer we get to the finish, or really not the finish, but the start of the machine, I would say, the more important product ready and business ready have become. All those streams are delivering really well in the project, and that means that we are on time with this project. I'm going to use the next picture to talk about the ramp-up of this project rather than this picture. I'm also going to say that we're committed to a stable ramp-up of KM7. The commitment is to the whole organization within BillerudKorsnäs. It is to our suppliers, which are a lot of them, but it's also obviously the most important also to our customers, because they need the product on time when we're up and running. The ramp-up here will be in 2019. We will do 240,000 tons on this machine, and that's obviously done for the last three quarters. In 2020, the number is 390,000 tons. That's the ramp-up we see, but that's for the full year. 2021, we're up to roughly 450,000 tons, this is the first year where we'll see that we will be EBITDA positive. I think the previous years we have in 2019, minus SEK 500 million, in 2020, SEK 200 million, that was also announced in the press release. You see the mix on the machine in the start of this is a lot of Liner. It will continue to be Liner on the machine because this is also a high-quality, valuable product for us in the long term. As we increase our production rate on this machine, we will also start to produce more Liquid Packaging Board and cartonboard on this machine. The good thing with this machine is that we have great flexibility, and all of the products that we will do on this machine is high-quality, high-end products. I already mentioned that we will have an increased volume in our company going forward, the majority of it is coming from the project KM7. I already mentioned during the first pictures that the increase will be net of 250,000 tons, meaning that the new machine will produce 550,000 tons, KM7, the closure of the current paper mill with PM1, PM2, PM4, and PM5, will then take away 300,000 tons. The PM4 is continuing to run right now, it will do for some years going forward. If you look at the total picture, we also have some efficiency improvement that my colleague, Ulf, will talk more about later on. Obviously, we see a total here that is higher, compared to 2017, is going to be another 400,000 tons, roughly up to 2023. Still, when we come to 2023, we're not reaching the permit that we have on all sites, there is still some headroom. I'm coming to my last picture for this presentation, which is the agenda for growth going forward in the new divisions that Petra spoke about. We have the paper division, which is we have chosen to talk about selective growth between 0% and 2%. The growth will come from growing in emerging market and growing markets, of course, but also to capture the full value of the products we have and make sure that our customers can capture the full value in the products we have, therefore also having the price leverage. When it comes to the board division, we have, as I said before, this is really high-quality, high-premium products that we have here. Obviously here we also talk about value-based selling. As we have mentioned before, we have growth in terms of volume into this business or division, the growth will be 4%-5% going forward. We're coming to the Solutions division, which is really the big grower in this company going forward. Today, we're serving the main market we have today in Solutions is Managed Packaging that Petra spoke about. We have seen growth close to 25% here over the last couple of years. This is service to brand owners that we'll do, solutions to brand owners, it's one step down the value chain, we have been very successful in implementing this into our company. We are confident that it's doable to do this growth of 15%-25% in this area going forward as well. This is the target we have set up. If I'm going to just summarize what I have been talking about today. We have invested a lot in our machines, PM10 and KM7, which is really good. We look forward to successful start also in Gruvön in end of quarter one, and we have a successful start already in Skärblacka. We see great demand for our products, our premium products that we're putting on the market from both PM10 but also from KM7. The demand is there, outlook is really good. We have an increased cost of the project KM7, which amounts to SEK 600 million, that's unfortunate. At the same time, I think what I'm looking for is that we anticipate really good growth, as we have shown in this last picture, also for the future in all business area, even though 0%-2% looks small, I think all of those divisions, not business areas, I'm stuck in the old, but we're moving forward to the new. I think that all divisions will deliver good, healthy growth into our company. With this, I want to leave over to our CTO, Ulf Eliasson, that is going to talk more about Production Excellence. Thank you. Good morning, everyone. My name is Ulf Eliasson, and I am the CTO of the company as of 1st of October this year. In my presentation, I will focus on the improve part of the CEO agenda that Petra Einarsson presented earlier. As Petra mentioned, we have a large EBITDA potential by improving our production stability and also increasing our overall equipment efficiency. In my presentation, I will guide you through how we will catch this potential in our Production Excellence Program, which is, in fact, a systematic approach and about mindset to reduce losses in our day-to-day work at our mills. Before I do that, I will give you a short introduction to our mills. In BillerudKorsnäs, we have 8 mills. 6 of them are in Sweden, 1 in Finland, and we have 1 in England. With the new organization, 4 of the mills will belong to Division Board, which is Frövi, Gävle, and Gruvön and Rockhammar. 4 of them will belong to division paper, which is Pietarsaari, Skärblacka, Beetham, and Karlsborg. All units produce premium packaging material to serve the food and beverage, consumables, industrial, and also medical high-end markets. All units except Beetham and also Pietarsaari are integrated to own pulp production. Could be either chemical pulp, semi-chemical pulp, or mechanical pulp. In fact, BillerudKorsnäs is the largest producer of chemical pulp in Sweden, with a production of about 2.2 million tons. We have large assets in the company, as Mikael mentioned, Gruvön and also Gävle, with a capacity of 700,000 tons per year, are 1 of the biggest mills in Sweden. If you take as an example, the Gävle mill. When the 2 board machines in Gävle mill run at full speed, they produce materials like this for liquid portion packs, material equivalent to 200 million of these in 24 hours. 200 million of these in 24 hours. It is a huge production that we have liquid packaging board in our large assets. In fact, Frövi, today with a capacity of 470,000 tons, and we are striving for high capacities. It is, in fact, the single largest machine for liquid packaging board production on a global scale, which is integrated to chemical pulp. Gruvön, with a capacity of 550,000 tons, will have a very cost-efficient infrastructure for premium production of liners and also consumer board. When Gruvön is running at full speed, as Mikael mentioned, it will be the largest mill in Sweden with a capacity of even more than 900,000 tons. Division Paper have specialized machines. As Mikael mentioned, Skärblacka will be the global leader with investments we have done in PM7 and also in PM10, in producing MG paper for the medical and also the food market. Our mills in Pietarsaari and Karlsborg are also specialized to production of kraft and sack paper. The strength of the BillerudKorsnäs asset structure is that we have large units for production efficiently of consumer board packages, and we also have specialized machines producing MG paper and sack kraft, and all of them, or most of them, are integrated to own pulp production. The production in the company has grown steadily, and if we take a look backwards to 2013 to 2017, production has increased about 2% CAGR, and that is equivalent to about 230,000 tons over the period. In fact, we made annual records in production in 2017 at Gävle, Frövi, and also in Skärblacka. When we announced the Q2 results, we also informed that we had reached high production levels or record levels, again in Gävle and Frövi, but also in Karlsborg and Rockhammar. In 2017, we made a record production also, but we expected to produce more. If you compare to the earlier growth, about 2% CAGR, we should have produced at least 50,000 tons more last year. We had some operational challenges during the year. If one categorizes the disruptions that we had into the four Ms, machine, material, man, and method, a majority of the reasons behind the disruption that we had was in man and method. That is what we are also addressing going forward now with our Production Excellence Program. If we compare ourselves to the peers 2014 and 2017, and we compare market valuation, our competitors have closed the gap and we had, in 2017, a lower valuation, about SEK 2 billion compared to 2014. The disruptions in production is probably one of the major reasons behind this loss in market value. One key target that we have with production excellence is to improve our overall equipment efficiency or the OEE, and with improvements in overall equipment efficiency, we can see significant potential to improve EBITDA. What is OEE then, and how do we measure OEE? Well, it is a core metric in production, and OEE measures the overall equipment efficiency or the total efficiency, you can say, of a machine. The value for OEE varies between 0 to 100%. If you run at 100%, then you do not have any time losses. All the time that is available is used for production. When you produce, you produce at full speed, you are always running at full speed, and all the material which is used will end up in sellable qualities. In our Production Excellence Initiative, we have deeply analyzed we can regain OEE, EBITDA, and also ultimately lost market value. 1% unit improvement in OEE is equal to 100 million SEK in EBITDA. For each improvement we can do, what are we then going to focus on in our Production Excellence Program? We have essentially four building blocks. We have the occupational health and safety, environmental performance, product quality, and production stability. As Peter mentioned, employees in BillerudKorsnäs should have that all accidents can be prevented. Today, we are at level, however, with the mindset that all accidents can be prevented, also to put up ambitious target, we will push ourselves to improve at a faster pace. Our vision is to be the company in this industry who's driving this. Focus on environmental performance is becoming more prominent every day. Our determination and commitment to the environment, our efficient use of resources, our focus on products and process is a real asset, which we will maintain. As Peter also mentioned, we are on the Dow Jones Sustainability World Index, we were there for the first time last year, this year, in 2018, we have even strengthened our position there. One of the reasons behind this is the resource which we have achieved in operations. We have, in fact, today, 97.2% of all the energies used in our mills are bioenergy. Going forward, our target is to reduce, take away the remaining 2.8% towards a fossil-free production in our units. Our ambition here is continue to be recognized an industry leader, which the Dow Jones Index is a way of measuring that. Customers value our product quality. Our business is in very complex product segments. We have, over the years, had a very close collaboration with suppliers and also with customers, which has put us into the forefront for many of our product segments. The demands on our products coming from our customers and also from our brand owners are continuously increasing. In fact, a lot of these demands come from increased demands from the value chain. Product development is at the core to develop our business. But it's of course also important here in production to produce the right quality with as little losses as possible. By doing that, we of course also will have good efficiency in operation, but also from environmental performance perspective, using less raw materials and also less energy. Securing production stability and increase overall equipment efficiency across all our mills is one of the key targets that we have in BillerudKorsnäs. In fact, by working structured, with the health and safety, with product quality, and with environmental performance, will of course also be beneficial when we work with production stability. It's all about mindsets. It's mindsets to work in a structured way to eradicate losses in our production. Here we have identified a 2% improvement potential of OEE per year for the coming years. How are we going to catch this OEE potential? To catch the OEE potential, we see essentially five areas to raise our performance. It is ambitious targets, leadership, teamwork, standards, and digital excellence. The improvement journey starts with ambitious targets to push ourselves to push change. As Peter also mentioned, we have started that journey by making extensive internal benchmark, external benchmarks, also make a deep dive into our losses. These targets will be broken down and made relevant to all our employees across our production units. We are also identifying initiatives to make sure to reach these targets, these initiatives will be tracked so we can follow our progress and our success. Leadership is at the core of the change. Our company is not an exception from that. We want our leaders to be role models here, being visible, being active, and being ambitious. That is also an area where we will develop our leaders going forward. Teamwork on all levels is about building engagement among all our employees. We really have here to move forward as one team, we want also that all our employees in the company should be confident problem-solvers with a zero loss mindset. We need to set, raise, and follow standards to achieve our ambitious targets. We need to act also on deviations to make sure that we eradicate our losses to create stability, to eradicate the root causes for our losses to obtain stability. Finally, BillerudKorsnäs have a long history of innovations in both products and processes. In an ever-changing environment where digitalization automation develops fast, we can really see a potential here to improve our operations by taking part of that journey. For us, digital excellence is about using all the data that we have in our company in a much clever way to get information to make better decisions with the right timing. Our work towards increased stability and increased OEE has already started. As I mentioned, we are now in a phase of locking in targets. We are identifying the initiatives that is secure that we will reach our targets, we are also now focusing on making these initiatives up and running in the beginning of 2019. We have huge potential to improve. Well, 1% OEE improvement is SEK 100 million in EBITDA improvement, we can see that we have at least a possibility to improve our OEE with about 2% annually going forward. There's a big reward for every improvement that we make in our day-to-day work. We are really thrilled and excited to get onto this journey now. You will be able to follow us now on the journey ahead through the KPIs, which we will introduce with OEE and also for LTIs. Thank you for your attention. Thank you very much, Ulf. Before we move into the section of questions and comments, I would like to take the opportunity to share with you the market outlook, the latest news that we have. We expect the demand and the order situation to continue to be strong and with normal seasonal variations. Possibilities to increase prices within selected areas in the market is also something that we foresee, and we also anticipate the demand-driven wood cost to increase and continue as it is right now. The financial impact the third quarter from the wood shortage is estimated to be 40 million SEK, As we have presented today, we expect the total impact on EBITDA from the KM7 ramp-up to take the EBIT down 2019 by 500 million SEK, 2020, 200 million SEK, and 2021, we will be EBITDA positive. Summarizing this presentation and this webcast, it is very much about unlocking the potential of BillerudKorsnäs, I hope that that has also been your main takeaway and that we have provided you with some transparency regarding following what is going to happen now with BillerudKorsnäs during this year, next year, and the year after, quarter by quarter, following KM7 and also the unlocking of potential when it comes to Production Excellence. It is very much about securing the ramp-up and the competitive cost for wood to improve the Production Excellence and to accelerate innovation and solutions. With that said, I think that we open up for questions and comments. Great. Operator, we are ready to take the first question. Mikael and Ulf, please join us. Gentlemen, if you do wish to ask a question, please press 01 on your telephone keypad now. The first question is from Linus Larsson of SEB. Please go ahead, your line is open. Thank you very much. Thanks for this very detailed run-through. I'd like to start with a question on the ramp-up guidance that you're providing for Gruvön, the SEK 500 million EBITDA impact in 2019. I wonder if you could, in any way, split that impact. For instance, how much of an impact do you expect from the removal of profitable machines, and how much is on the ramp-up of the actual KM7? Also, in relation to that, I wondered if you could share with us the additional depreciation charge that we should anticipate, and from what date please. Thank you, Linus. Let's start with the SEK 500 million that we have mentioned regarding the negative impact of 2019. If you look at that number, SEK 50 million-SEK 75 million is one-offs for 2019, the rest is mix and volume. This is concerning KM7 alone. Regarding the actual depreciation. Could you please repeat that question, Linus? Or did you pick it up, Kristoffer? I think the answer to your question, Linus, is that we will write off this machine in 20 years. Of course there will be an increase following the increased CapEx that we have disclosed here today. The depreciation will start as of what date? We turn the key, we will start to depreciate the machine. Okay. Thanks. Just, Petra, to the beginning of the question, the SEK 500 million, I assume, includes the negative effect from lost profits on the three machines that you will close. Could you please confirm that? Second to that, what is the run rate EBIT, or let's call it EBITDA, of those machines? Okay. I can confirm that that is the case, and that the SEK 50 million and SEK 75 million is the one-off, but the exact effect of the EBITDA of the machines that we will take out, do you have that number in your head? We never disclose any results from separate machines or mills. No, we cannot at this point. It was good that I didn't have it in my head then. Thank you, Linus. Was that an answer? Yes. I think that's good. Maybe if I can just put in one more question now that I'm on the line, if I may. You talk about Bergvik saying there's no change of strategy. You have been part owner in forest land, so that has been part of your strategy for quite a few years. Do you foresee yourselves being, or should I say, remaining forest owners in some shape or form after all Bergvik-related transactions have been completed? Looking at the strategy as we speak right now, I don't see that that is the preferred way forward for BillerudKorsnäs. We will prioritize to invest in the packaging business. That means that you will completely dispose of any shareholdings in forest land activities? I think we have to take that one step at a time. First we need to finalize the deal that we are in right now, then we need to move into the next step. Exactly what it will look like and how we will do that remains to be seen. The main target for us is to secure a competitive wood supply. How could that be done, do you mean, if you don't have any shareholding at all in these forest land assets? I think one way that it could be done is to elaborate and to develop a strong partnership with other companies that can actually be the owner of the forest land. Okay. Thank you very much. Next question is from the line of Gustav Steen from Pareto Securities. Please go ahead, your line is open. A few, I think I'll take them one by one. Firstly, on the EBITDA impact for KM7, since you gave us the annual impact time for 2019 to 2021, how should we think about that on a quarterly basis? Should we assume more or less a linear decrease in EBITDA loss over the period? Any help on that would be great. Thank you, Gustav. I think I hand over that to you, Kristoffer. What do you think? We are not that detailed today. As we have said, we expect the negative impact on the results to be SEK 500. As Petra said, SEK 50-SEK 75 of those will be one-offs, but divided between quarters, we don't have today. Sorry. Okay, fair enough. Secondly, on CapEx, the ethics component that you mentioned today, what exactly is that? Is that increasing cost for some important materials? Then also on CapEx, are you confident in the number that you gave us today? How good is the visibility and the remaining 10% of the construction work that is going to be made? I think that the increased cost of KM7 is SEK 600 million. I think that the basic reason for that is the complexity that we are in when we are finalizing the civil construction at the same time as we are finalizing the machine, as Mikael said. We have targeted to be on time and ramping up this machine successfully to be our main priority. SEK 7 billion, SEK 600 million is an estimate. That is also including some contingency parts, of course. We don't know yet where this project will land, but we have indications that it most probably will be more expensive than SEK 7 billion. On top of that we are prioritizing to start up the machine on time with the successful ramp-up. That is the main reason for the increased forecast. There are also parts in this that are currency related, the main reason is to be referred to as complexity. I think that's correct. Yeah. Thank you. Lastly, on the wood sourcing impact, you quantified that for Q3. Do you see any of that spilling over into Q4 at this point? You mean the wood shortage? Yeah, exactly. No, I can't really say that, but I would say that if you look at our inventories and the way production is running as we speak, we are in a quite good situation. The costs indicated for the third quarter is mainly due to extra cost for logisticals and transportations that we have had during the summer to cope with the weather. We are still in a quite good shape when it comes to inventories. Right now, we don't see any spillover to the fourth quarter. Great. Just lastly, while I have you on the line, you set targets for the new divisions today. Do you know when we'll get some pro forma numbers for this to put in our models? Have we decided when to publish that, the pro forma numbers for the divisions? Internally, the new divisions are effective from October 1st, but we will make sure to change the full financial reports based on as from January 1st. Yes, exactly. We will, of course, send out the pro forma figures a good time ahead before we start to disclose according to the new divisions, which is from first quarter 2019. Yes. No date decided yet. Okay, perfect. Thank you. Next question is from the line of Cole Hathorn from Goldman Sachs. Please go ahead, your line is open. Good morning. If you could just clarify, the SEK 500 million you're guiding for in terms of cost in 2019, is that versus 2018 reported numbers or just the total cost you expect in 2019? Should I answer that? Yeah, please. What we have done is that we have made one scenario, not closing down the old machines and keeping everything as it is, and compare that with opening up the new machine and what we see in terms of capacity coming out of that. It's a mix and volume change that you see in those figures, plus the one-off cost that is related to babysitting and everything that is related to opening up a new large machine. It is the total cost in 2019. Yes. Next question is from the line of Robin Santavirta from Carnegie. Please go ahead, your line is open Thank you for taking my questions. Just finally to clarify this SEK 500 million that you refer as ramp-up cost for KM7, does that include or does it not include the financial impact of capacity closures in 2019? Including. It's included. Okay, good. In terms of KM7, could you provide some information or some guidelines about the ROC or return of this investment once it's finally up and running in 2023? I guess you have previously said ROC will be more than 13%, now with the new higher investments, could you provide some guidelines there? Do you know what- You're absolutely right. We have communicated the whole Next Generation program to be in the area of 13%. What we see is that this program, when it's fully ramped up, will contribute to the ROCE target that we have long term. That is what we have said. Your higher investment. It's total effects from all parts of the Next Generation program that will have that effect on our ROCE going forward, or when it's fully ramped up. All right, thanks. Then in terms of the balance sheet, you stick with this EBITDA below 2.5 times. Do you have any covenants? What are your covenants? If you then would take Bergvik Skog with bank loans, as Petra said, is there a risk that you may breach your covenants or? No, I don't see a risk for that, as it looks like today, considering that we do not put Bergvik into the balance sheet long term. Okay. I see. Thanks. In terms of dividends, you target the dividend payout ratio of 50%. How should we view it? Is it from reported net earnings or from the adjusted net earnings? That I'm not certain of. I'm not sure either. I have to double-check that and get back to you. Yeah. Could we do that? Yeah. Can we come back to you on that? Okay, no problem at all. Finally on the CapEx, this overall equipment efficiency program you have, does that require additional CapEx, or is it excluding additional CapEx? It doesn't require substantial additional CapEx. To some extent, it might require some, but I believe that it is within the room of SEK 1.3 billion that we have moving forward. Yes. You can say yes. Of course, the major part coming from the overall equipment efficiency work comes from working, you can say, with operational excellence or Production Excellence Program than CapEx, so to say. That's the way going forward. I see. Is this SEK 400 million EBITDA, is it mainly from then less time lost on the machine, higher speed, or less material lost? Right. To contribute most to that SEK 400 million. Correct. I assume you have been running the machines at quite high speed already. That is improving our overall efficiency, both in terms of production speed, also the uptime that we have and also the materials used. That is the three main components to increase the overall equipment efficiency and reaching this SEK 400 million improvement in EBITDA. All right, thanks. Finally, just your pulp position, the net pulp position, at the moment, then 2023, once Gruvön and KM7 is fully ramped up. Do you have an update on that? Today, we are exposed to 100,000 tons net exposure. Of course, one of the major, I can say, advantages with the projects now is that the integrated pulp that we have, both in Gruvön and in Skärblacka, will be integrated to our board machines. I don't have an update today about the net exposure. We can come back to that later. All right. Thank you very much. Next question is from the line of Oskar Lindström from Danske Bank. Please go ahead, your line is open. Thank you. Good morning. A number of questions that I've had have been reached slightly already. The main here is around the KM7 investment profitability long term, and I guess now you're talking about the next program, as such, which is the KM7 project in Gruvön and the PM10 and PM7 projects in Skärblacka together. You say that they're going to be ROCE 13% long term. If I put those two investments together, 7.6 and 1.3, that's SEK 8.9 billion in investment. If I depreciate that over 20 years, it's SEK 445 million each year, and then I say ROCE 13%. That gives me an EBIT of at least SEK 1.6 billion, or an EBITDA of SEK 1.6 billion. Is that what those two projects are going to add net to the company once they're fully ramped up 2023 or something? Can you take that, Kristoffer? Absolutely. Oskar, we have said before, we stick to that the Next Generation program will add SEK 1.2 billion to our EBITDA when fully ramped up. Okay, SEK 1.2 billion. Can you split that between KM7 and Skärblacka? Because those are two distinct investments. Yeah. We have said that approximately SEK 1 billion is related to KM7 and approximately SEK 200 million is related to Skärblacka. Now we're talking EBITDA? Yes. Gruvön and SEK 0.2. Okay, good. EBITDA. My second question is around this wood sourcing problems. You're saying now that the SEK 40 million in wood scarcity, well, the wood scarcity in Q3 is going to impact your results by SEK 40 million. You don't see wood scarcity as the new normal or the long-term problem, but it's more just these temporary factors, and that you should be back to a more normal supply situation in- I think that is definitely the case. It's not the new normal. I think the weather-related problems have been horrendous during the last year, with the mild autumn in the Baltic, and extremely harsh winter in Sweden, then the hottest summer ever experienced. I think that is what we are referring to when it comes to wood shortage. It's nothing else than that. All right. Well, finally, just on the balance sheet and the Bergvik Skog transaction. You say that you're going to be seeking bank financing for this. Have you already secured that, or? For short term? The short term, yes. Yeah. We have a plan for that. Yeah. We have, absolutely. You mentioned that the long-term plan is for this not to be on your balance sheet. For how long would you expect it to be on your balance sheet? I think that depends. We are in negotiations as we speak. That is something that I can't reveal right now. Could I ask you, I mean. The most important for us is to come to a conclusion where we have long-term contracts that really ensure a cost-competitive wood supply. I think that is in the interest of BillerudKorsnäs. How we utilize the fact that we will require Bergvik Öst and put it in our balance sheet short-term, SEK 5 billion, is something that we have to utilize in the best way we can to ensure a favorable long-term contract for the reason to have a competitive wood supply. Okay. That is where we are discussing right now. Okay. If I just may ask, when you say you are in negotiations, do you mean negotiations to buy Bergvik Skog, or do you also mean negotiations to secure a long-term supply contract? The main negotiation that we are in right now is to acquire Bergvik Skog, the Bergvik Öst. Okay. Also- That will be finalized by the end of the year. Okay. Well, thank you. Those were my questions. Oskar. Next question is from the line of Harri Taittonen from Nordea. Please go ahead, your line is open. Hello, thanks for taking the question. Many have been answered already. Can you just go through the mechanics of the closures of the three machines at Gruvön? What's the timeline for that? Is that happening all at the same time, and how long that will have to be before the KM7 starts? Therefore also looking at the volume development, you guided the volume development of 400,000 tons longer term. If we look at next year and year after, how would you see that developing? Okay. Is anyone volunteering, or? I can say a few words. Our plan is that we have four paper machines in Gruvön and also the PM6 for fluting. Our plan is to close down number 1, number 2, and number 5 when board machine number 7 is up and running. We'll keep board machine number 4. That we have said that it will be for the time being, and then when we see that we have not room or pulp supply to that machine, we'll suddenly close that down later on. That will be a decision we will make going forward, so to say. Number 7 and number 4, and also be able to produce pulp in Gruvön, and also number 6 will be the infrastructure that we have when KM7 is in place. Yes, sure. Basically 1 and 2 and 5, they close at 1 go, and then you'll have a short period when before the KM7 starts, obviously. Just to give a feel of how long that kind of shutdown period might be, or how quickly do you think you will close the gap between closing the 3 and starting the new 1? Well, that will be, I would say, we will make the change quite quickly after we have started number 7, because the pulp supply to the machine will not be enough for the other ones, and also from an energy perspective. We will close them down when we start up number 7. Do you give what would be the best guidance for volume development for 2019 and 2020 overall? You gave the 400,000 tons increase up until 2023, what for the next two years? If you look into the 2020, we estimate to have a production a little bit more than 3.2 million tons or close to 3.2 million tons. 2023. 2023, yes. 2023. Today we are at a level about 2.9 million tons, we will close down number 1, 2, and 5, keep number 4 and ramp up number 7. In 2020, we will be around 3.1 million tons in production. Okay. We should do the maths. Thank you very much. Thank you. Ladies and gentlemen, as a reminder, if you have any further questions, please press zero and then one on your telephone keypad now. We have a question registered from the line of Mikael from Kepler Cheuvreux. Please go ahead, Mikael, your line is open. Thank you, everybody. Thank you for this. Just a clarification. When I look on your slide there for securing competitive wood supply, you also say that you will balance the wood supply from remote areas. Really two questions. From Bergvik today, how large of your pulpwood supply comes from there? Then, a more open question. Wood costs, let's say a couple of years out from now, or when all of these weather issues have settled compared to the wood costs we saw, let's say, in 2016, will there be a big difference, or if you could say a couple of words on that. Thank you. To start with the last question, I would say that the wood costs that we guide also in the market outlook refers to the demand-driven wood cost that we see and has nothing to do with the wood shortage that we have experienced during the last months. We believe that we will continue to see tough demands on pulpwood during the next coming years. That is the main driver of the costs. When it comes to the Bergvik Öst part of how big that represents in our pulp production, I believe it is roughly 10% that is actually based all in all from the Bergvik Öst parts. Okay, many thanks. Thank you. We currently don't have any further questions registered, so I'll hand the call back to the speakers. Please go ahead. Thank you. Closing down the Q&A session then. Petra, would you like to say a few final words, or? Yes, thank you very much for listening. I hope that your takeaway from this webcast is not the fact that we have increased the cost of KM7, rather that it is the message that we have a big potential to unlock at BillerudKorsnäs, that it is positive news that KM7 is on time, and that we focus on a successful ramp-up. I think that is the main wish that I have, and also for your analysts, that we have provided you with some more extra information and that we have also provided you with some KPIs that you will be able to follow for yourself the performance we will have here during the next quarters. Thank you very much for your attention. Thank you