Ladies and gentlemen, welcome to the presentation of BillerudKorsnäs Quarter 3 Result 2017. My name is Per Lindberg. I'm the President and CEO up until year's end. We also have Susanne Lithander, our CFO, and we have a reinforcement from the board, Lennart Holm. He's the Chairman. Welcome, Lennart.
Thank you.
As mentioned, I'm leaving the company, as you all know, at year's end, and this is going to be my last presentation for BillerudKorsnäs, and I feel a little sad, to be honest, but I think we've done a tremendous journey, so actually, I'm quite happy with the development of the company. This picture, as you can see, if you haven't been to downtown Grums lately, this is now the new skyline of Grums. This picture was taken a few days ago, where the erection, of course, for the building of KM7 is happening, and it's very exciting project, no doubt. Also coming up now at the end of November is the five-year anniversary of BillerudKorsnäs, and I think, as I mentioned, I think we've had a tremendous journey.
We've had a growth of 3% on average over the five years, and we have a target of growing 3%-4%, so we have fulfilled that target. We have stable underlying earnings. As you can see by the bottom graph, of course, the earnings in terms of EBITDA tend to vary with quarter, depending on when we have our maintenance stops. Nevertheless, we have an upward trend over the last five years, and of course that's a good development, and we're certainly working hard to continue this development. If you have a sharp eyes and a ruler, I guess, you can also see that at the end of this curve, right there, it's actually the best EBITDA result ever for the company. We beat Quarter 1 of 2015 with SEK 1 million, but it's still the best result so far.
One should keep in mind that in this quarter, in Q3 this year, we had maintenance stops, and the cost was SEK 250 million, and we also had a fire in Karlsborg, so we're actually SEK 251 million better than Q1 of 2015. Things are improving. We have delivered an average total shareholder return of 23% over the last five years. Of course, this company is the function of M&A, a merger with Korsnäs and Billerud, and also the acquisition of UPM Packaging in Finland. I think we have a proven track record of positive and accretive M&A. Finally, also, of course, we are recognized as a leader in sustainability. We received in Q3 a recognition from Dow Jones, where we are considered to be in the top 10 percentile of the best sustainability companies in the world and the best in our industry.
I think we have a good track record. Of course, everything is not sunshine. We've had our fair share of issues when it comes to production, as you all know. Even if we've had a development of roughly 3% the growth in production over the last five years, we still have our issues. This year, the beginning of the year, we had quality issues. We also had Rockhammar in Q1. The cost for that was SEK 80 million. In Q2, we had a breakdown of a digester in Gruvön. The cost was SEK 25 million. In Q3, we had a fire in Karlsborg, cost of SEK 35 million. Of course, all of these are very difficult to predict, but nevertheless, there's plenty of things to do when it comes to achieving stability and availability in production.
Of course, one question could be, are we worse than the others, than our peers? I don't think there's any reason to believe that. I think we're actually pretty much on par with others when it comes to availability. But our structure is such that it's very visible. When we have an issue in a mill, you can immediately see that. We have five integrated mills, and every time we have an issue or a breakdown, it's immediately visible in production as well as in our result. I think one should be aware of that when you look at our company. We're also trying to be as transparent as possible when it comes to things happening and incidents happening in production. But of course, we need to do something about this, and we're basically working on three fronts.
The first one on this slide is occupational health and safety. We haven't been the best in industry when it comes to health and safety over the last few years, but this year we've made significant progress. We have introduced a program called TSF, Tillbud Skadefri in Swedish, and I think it's created a really good result. So we're actually on track to improve significantly when it comes to metrics, when it comes to health and safety, which is very good news. Of course, this is also baseline when it comes to availability as well as quality. Production stability is something, of course, that there may some question marks around that, and we have now decided to hire specialists to put them on corporate level, roughly 10 people.
The purpose of that is to work with the mills to install a systematic work around availability and maintenance, and also to create a very systematic approach towards our investment programs. I think that's going to give us good results for the foreseeable future. What we've done over the last few years is that we have installed higher nominal capacity, but we have not improved availability. The purpose of this is to increase availability of the installed capacity. The intention now is not to continue to make investments for new capacity, but to increase the availability. Of course, thirdly, we are working with quality, and the incident that we had end of last year, beginning of this year is something that we do not intend to repeat.
We have customers that put very high demands on us and increased demands on us when it comes to quality, and we recognize that. We are working very systematically in implementing quality approaches and production to make sure that incidents like the ones we had beginning of the year will not happen again. We take this very seriously, and we work very systematically to make sure it doesn't happen again. Now, to the real purpose of this presentation is Q3. We had net sales of SEK 5.5 billion and a growth of 3% again, which is again, in line with our targets. We had an EBITDA of SEK 1.051 billion, again, best so far, with a margin of 19%. I think I'm quite happy with the result, actually. Obviously, it could have been better if we didn't have the fire, but we did have the fire.
By the way, the fire was started in an evaporation of the oxygen preparation plant for the bleaching plant in Karlsborg. It was basically, I would say, a mistake from one of our suppliers. Unfortunately, we cannot force our supplier to pay for the damage. Nevertheless, I think there's no reason to believe that this would happen again. It did create significant damage on various cables, electric cables to other parts of the mill. That's the reason why the consequence was quite severe for the mill. We were up and running again after eight, nine days, and Karlsborg is now back on track and producing fully. In terms of key highlights, we do have very solid demand, and it's solid throughout. It's been solid for the last couple of quarters, actually.
When we came into 2017, we did not expect demand to be at the level it has been, especially when it comes to Packaging Paper, and Containerboard. We did expect the Consumer Board to be stable, and it is, but the development in the other business area is actually surprisingly strong, and it continues to be strong. Of course, I already mentioned the SEK 35 million in Karlsborg. I also mentioned the new organization for availability and quality. As you can see, we have stable earnings in all business areas. A 19% EBITDA margin in Packaging Paper, 23% in Consumer Board, and 27% in Corrugated Solutions. I think certainly that's both stable as well as very good. It seems like the development when it comes to demand will continue.
Of course, we do have our seasonality, end of year typically has somewhat of a slowdown around Christmas and New Year's, and certainly probably will happen this year again. It seems like the market is very strong, and we expect that to continue into 2018 as well. Financially, sales is up 3%, as mentioned. It's actually down from Q2 slightly, but we are constrained in terms of capacity. We've had maintenance stops, that's the reason why Q3 is actually somewhat slower in terms of sales than Q2 and Q1. The demand is there and production is our bottleneck. EBITDA is up 1%, as already mentioned. Again, this quarter is slightly better than Q3 of last year, but looking at the underlying result, it's actually significantly better than the previously best results. This really makes me happy.
I think this is also where we should be when it comes to earnings. Cash flow is negative, the reason is that we're investing, of course. The investment in the quarter was SEK 1.3 billion. Average investment typically is about SEK 325 million, of course, significantly higher. Average cash flow, operating cash flow is SEK 350 million, of course now negative SEK 200, obviously the explanation is that we're making investments. We also have a positive development on working capital, that also helps cash flow. In terms of return on capital employed, no drama at all. It's around 13%, this is our target, we are fulfilling that target as well. When it comes to leverage, we are slightly up when it comes to net debt to EBITDA, now at 1.41.
Of course, the reason is our investments, there's certainly a large headroom towards our target to stay below 2.5. I think the company is doing well. Stable results, best EBITDA result so far, financially also in good shape. Business areas, Packaging Paper, very briefly, we are targeting or working according to a strategy called selective growth. The consequence of that is that we are making the investments in Skärblacka to target more value-adding segments, also over time, we will reduce capacity in Gruvön as a consequence of the investment for the board machine. The intention is to increase basically the profitability within Packaging Paper when sharpening the focus on more profitable segments. We have very good position, number one or number two globally when it comes to kraft and sack papers.
Net sales, it is more or less unchanged versus quarter 3 of last year, EBITDA slightly down. The big impact there is actually Karlsborg with SEK 35 million, it's fairly straightforward to explain the reason behind that. We have also slight volume decline, actually, with -1%, that really explains the deviation from the last quarter. We're still at 19%. I think that's relatively good for Packaging Paper. It does vary over time, obviously, you should know also that this is the more volatile of our business areas. Not that this is now volatile at this stage in the cycle, over time, this is more volatile. I think 19% is where we should be, more or less, over a cycle. Consumer Board, different strategy. We're targeting volume growth. We expect to grow with 4% or 5%.
We didn't grow 4% or 5% this quarter because of capacity restrictions. Of course, we're making the investments to enable ourselves to grow at that pace. We are number one when it comes to ambient Liquid Packaging Board, which is really long shelf life liquid packaging, and that's the area which has the more significant and higher growth. We're number two globally when it comes to liquid packaging overall. Of course, that's the basis upon we make our investment decisions. Demand-wise, it's still looking solid, and this is a very predictable market with a few players when it comes to Liquid Packaging Board. Certainly more players when it comes to cartonboard.
We did have the highest sales ever in cartonboard in the combination of Billerud and Korsnäs, and this is intentionally because we're intent to ramp up volumes as a preparation for the new board machine coming on stream in 2019. Net sales was up 2%, volumes was up 2%. We could have sold more if we had more volumes, but we didn't. EBITDA up 10% basically based on lower variable cost. I think continued stability when it comes to our Consumer Board, and 23% margin is also roughly where we tend to be, more or less, over time. Corrugated Solutions, again, a slightly different strategy where we focus on value. As you know, Containerboard is an area or a business which is the biggest when it comes to paper usage globally. We're a very small fish in a big pond.
Our strategy is very selective when it comes to niches, the intention is to extract maximum value out of these niches. I think we're doing a very good job. Actually, we did have, during quarter three, the highest EBITDA ever, both in absolute terms and in margins. SEK 269 million, I think, is a phenomenal result for Corrugated Solutions, especially when we are investing in Managed Packaging. Managed Packaging, I'll come back to that later, but that's now about 15% of turnover for the business area, with the growth of 50% so far in quarter three or in 2017. It's not a contributor to EBITDA. On the contrary, it's actually a cost during 2017, I'll come back to Managed Packaging a little later. Volumes are up 4%, and EBITDA is up 12% versus last year.
Also sales is now first time over SEK 1 billion for a quarter. Corrugated Solutions continues to perform really well. Now, what's our outlook? Well, as already mentioned, we expect the solid demand to continue into quarter four as well as into 2018. We've had some price increases in Corrugated Solutions for materials as well as for Packaging Paper during quarter three. We expect to continue price increases in quarter four as well as perhaps also into 2018. I'll come back to that. Now, we're not talking huge price increases. We're talking low single digits, nevertheless, we see price increases. Wood costs for quarter four we expect to be stable. We have maintenance stops also coming up this quarter. Roughly, the expectation is SEK 120 million. We also have a non-recurring cost of SEK 30 million for Gruvön in quarter four. That's briefly the outlook for the existing quarter.
We also made a decision not to have a capital markets day in November. The reason was pretty straightforward. I'm leaving the company, and it felt odd to be having a capital markets day while leaving the company. We decided to postpone that into 2018 instead, to allow for the new CEO to have a capital markets day of his or her own. We intend to give you some outlook for 2018 as a consequence. As mentioned already, we expect paper prices to increase. Again, not huge, but still, in local currencies, of course. Raw material costs. While we do have increased consumption of wood in Sweden, there is building capacity down south in the two mills. SCA is investing in Östrand. We also have investments in Finland, and this all contributes to increased consumption and demand on the wood market going forward.
We ourselves also expect to increase demand slightly, but still. This is a heads-up that we could see increase of raw material costs in 2018. Pulp pricing is always difficult. I was wrong for 2017. I think many were wrong for 2017 to predict pulp pricing. It came up instead of down. I think that was the view of most. One of the reasons, of course, is that the Chinese ban of imports of recycled paper have increased the imports of pulp as a consequence, as well as disturbances in some production facilities. Looking into 2018, expectation from us is that the disturbances will disappear as well as new capacity will come on stream. Prediction is pulp prices will come down.
Production capacity we expect to be marginally higher than 2017, and the reason is that we are actually shutting down Gruvön slightly a couple of weeks before year's end 2018, and that's the reason why we do not see the normal 3%, but slight downturn in capacity. If you're doing your spreadsheets, perhaps this is an indication of where we expect to be in 2018. Of course, given that we don't have any major disturbances. Capacity of PM10 in Skärblacka is expected to be 40,000 tons, starting up the machine in February of next year. Do not expect a ramp-up to 100% capacity directly. We expect to have a relatively moderate ramp-up curve.
Of course, if things fall into place very neatly, we will have a high capacity, but to be on the safe side, I think this is what you should be counting on when it comes to capacity from PM10. We're also going to build stock in Gruvön as a preparation for starting the board machine and also the shutting down the existing paper mill and starting the new machine. We'll have to build stocks of roughly 20,000 tons to be able to fulfill expectations and customer demands. One-off costs, SEK 150 million. This is not one-off costs, as I can explain that later perhaps in terms of where it ends up in our P&L. This is one-off project costs associated to the Gruvön machine in 2018. The net exposure market pulp will go down to 125,000 tons roughly next year.
Those are indications of some of the things that will impact our profitability and sales 2018. As for the investments in Skärblacka and Gruvön, first of all, Skärblacka is proceeding according to plan. We did expect to start the machine PM7, which was rebuilt in September, and yesterday. It did start yesterday according to plan, and right now it's basically warming up. We're warming up the systems, and we expect to have paper on the machine end of this week, which is according to plan. This is now PM7. PM10, which is the machine that we moved from Tervasaari, again, we expect to start up in February of next year. It's on track. The investment program in Gruvön is also on track with a slight delay when it comes to the building, as you saw.
We expect the project as such to be time-wise on track. We expect to start that machine end of 2018 as originally planned. Of course, you may have questions around CapEx, and this is exactly the same forecast and guidance that we have given previously. We expect our CapEx to be in line with previous guidance, with investments of SEK 4.3 billion during 2017 and SEK 4.7 during 2018, and then down again to more normal levels in 2019. As a guidance for, of course, CapEx. Another consequence of us not having a capital markets day is that we would give you some more flavor into what we're doing when it comes to solutions. We basically have three different areas that we define within the realm of solutions. The first one is packaging solutions, and within that, we actually sell ready-made packaging. We have two initiatives.
One is Managed Packaging, which was really the first one of its kind for us, and the other one is sack sales. Sack sales is basically the same concept applied in Asia for sack-consuming customers, typically cement plants, where we now sell ready-made bags, and we have a supplier for producing the bags for us. We supply the paper, our suppliers convert, we buy and then resell to cement plants. The background to that is that we are selling unique concepts, rainproof sacks and other concepts to our customers, and we feel we want to do that ourselves rather than have somebody else to be in charge of those sales. It's going to be interesting to see the development of this. There's huge potential, we believe, but right now the volumes are relatively small, so it doesn't have a material impact on sales of Packaging Paper.
There's still an interesting concept that we are implementing right now. The other area is system solutions. Basically, where we have a system, a packaging system, i.e. machinery as well as materials. The first one out, I would say, is Axello, which is a cooperation with Bosch, and that's the bag that you see. It's the first airtight bag, and it could be used for a variety of foodstuffs as well as other types of dry materials. The machinery, of course, is produced by Bosch, and we produce the material. Bosch has been, over decades, a leader in plastic-based packaging, and now they have decided to become sustainable, and we are their cooperation partner around the system.
We expect this to continue and when it comes to sales, and we're selling the system together with Bosch. The other one is formable solution, behind that is actually what we call FreeForm Packaging. It's a similar setup. We have a cooperation with Curti, which is an Italian producer of liquid packaging systems, supplying to Tetra Pak, among others. We supply the material, in this case, FibreForm. Together, we now are able to supply the market with very unique shapes when it comes to packaging for, again, dry foods, but hopefully in the future, also liquid foods. We've sold one system so far, and we have also a significant interest of further systems out into the market. Again, this is immature, but again, interesting developments. Third area, venturing, is where we make investments into small companies with interesting technologies.
We have now five investments in our portfolio. It's in the area of paper-based bottle. I think probably you may have seen this before. We have an investment in the Danish EcoXpac. The intention is to develop a fiber-based bottle that can directly compete with glass, plastics, or aluminum for liquids. The ultimate target is to do that for carbonated drinks. That is technically very challenging, but we are working on intermediate products in the meanwhile. I hope that we'll be able to relatively soon be able to launch that on the market. The intention is to be fully sustainable with bio-based materials. We also have made an investment in cold chain solutions, which is basically intention is to be able to supply packaging for food delivery to home, as well as, for example, medication. We made an investment in an American company called Vericool.
We think there's huge potential in supplying the market with these types of packages to make sure that the foodstuff, groceries as well as medication, is kept cool and safe in the transportation chain. We also have a couple of investments in Internet of Packaging, where we have track and trace solutions as well as serialization technologies in this portfolio. The intention, of course, is to aid the development of smarter packaging as well as the e-commerce solutions that are now coming into place. Briefly around solutions in our portfolio. The first one out, as mentioned, was Managed Packaging. This was actually based on an acquisition we made from the U.S.-based Paccess packaging. We did that acquisition back in 2011. Yes. The first thing we did was to reorganize and put things into place, and is now really taking off when it comes to growth.
We've had a growth of average almost 30% over the last few years, and in 2017, 50%. This is a growth that's actually very difficult, because the reason that we exist in Managed Packaging is that we basically take care of complexity for our customers. We absorb that complexity. Growing with 50% absorbing complexity is complex. We do not expect to continue to grow with 50%, we expect to continue to grow as 25% and also to establish positive margins. Right now, we are investing, or we do have negative margins based on the very significant growth. Again, we'll stabilize growth at the lower level and we expect to go into EBIT margins of 5%-10% over time. I think this is a good example of what can be achieved thinking out of the box, so to speak, when it comes to packaging solutions.
That's pretty much it. I'll leave it up to you with questions and answers. You the questions and me to answers, I guess.
Thank you very much. It's Linus Larsson with SEB. I wonder if I could ask a few follow-up questions on the Skärblacka project. You say you will produce 40,000 tons in 2018. A few questions around that. When I look at your pulp net figure for the group next year is 125, it's slightly higher than what you guided previously. Is there a connection between those two? That's my first question.
Yeah.
The second question is relating to depreciation. What's the depreciation charge per annum, and as of what date? My third question would be whether you expect Skärblacka PM10 to be EBITDA contributing in 2018. Thank you.
The first question, is there a relation with pulp exposure and the capacity of PM10? Yes, it is. We're now being a little bit more cautious when it comes to the ramp-up curve, this is based on our previous experience when it comes to ramp-ups. We'd rather be safe than sorry in that sense, the consequence is that the net pulp exposure is increasing. When it comes to depreciation, Susanne, that's your question.
Yeah, I need to come back to you on that exact number for that machine.
As well as the EBITDA contribution as well. I think we need to return. I don't have that on top of my head, to be honest.
As of when will you be starting to charge depreciation?
No, the depreciations are ongoing. We've never stopped depreciating the machinery.
Yeah.
The machine is moved, and it depreciated on the way over. We have
There's no change
We have four more years to depreciate the machine that we moved to Skärblacka. The other parts of the investment, which is the larger part, is the investments in PM7, and that we're starting up right now. We're starting to pick up depreciations on that.
Excellent. Thank you.
Olof Grenmark, ABG Sundal Collier. You've had your share of production problems during, well, a couple of quarters or-
Yeah
more than so.
Yeah.
Now you say that you will establish company specialists to support an increased focus in our cross mills team.
Yeah.
Can you please explain that more? New employees, where will they be based? Can you explain how that will fix the situation, so to say?
Well, the improvement of availability is really about a very systematic job on many fronts in the mill. It is about details in the machine. It's about details in the pulp mills, in the recovery area, et cetera. We have pumps, we have cylinders, all kinds of stuff. The systematic approach, we need to have a very systematic approach. This has varied, to be honest, between the mills, the level of whatever you call a systematic approach. The intention with the recruiting specialist is twofold. First of all, to make sure that we do have this systematic approach, that we do have a common approach between the mills, both when it comes to working with maintenance as well as solving technical issues with one methodology. This is also related to quality. For example, we're producing for Tetra Pak in three mills.
If we have an issue around quality, which we do, we always have issues. What you have seen are bigger, of course, but everyone has smaller issues, and we also have a continuous discussion with our customers. We cannot have one approach in one mill, the second approach in another mill, and a third in a third mill. We need to have one common approach, and the intention of these specialists is to work with this systematic approach when it comes to maintenance, when it comes to problem-solving, and quality and quality communication. Also, we intend to look at the investment in our mills slightly differently going forward. We've had a bottom-up process where the mills have basically generated a set of potential investments, which they, from the mill perspective, have perceived to be for the good of the mill.
That's all fine, but not necessarily if you aggregate these and filter it upwards, as may not necessarily be exactly what we want to do if we want to stabilize and improve availability. We're going to implement more of a top-down approach when it comes to investments, and the intention of these specialists is to create a better overview of what is actually needed to be done in order to improve and secure availability. That's the explanation.
Thank you. Is this group up and running?
We have made most of the recruitments, yes.
Are they done internally, externally? How many people, roughly?
They are external people. It's going to be 10 people, all in all. Organizationally, they will be reporting centrally, but they will not be placed in Solna. They're going to be in the mills. Yeah.
Thank you.
Yeah.
Oskar Lindström from Danske Bank. Two questions. First off, maybe just one on wood prices. You highlighted higher wood costs ahead of 2017. Maybe we didn't see so much during the first half of the year. What was the increase in percentage terms in Q3? When you say stable Q4, I presume that's sequentially stable.
Yes. We saw, I would say, probably a couple of % increase of wood cost, not wood price. The reason is, as I think I explained last time, is that since we are increasing the consumption, we're also increasing the catchment area, which means that the logistics costs are increasing, and that's the reason behind the cost increase.
When you say potentially higher wood costs in 2018-
Yes
is that on top of what we've seen so far-
Yes
Q3?
Yes.
Also there, your supply agreement with Bergvik Skog-
Yes
is that in the process of being renegotiated, and when?
The supply agreement expires the last of December next year, of 2018. We do have a negotiation ongoing with Bergvik for a possible continuation of the supply agreement.
Yeah. Thank you. Then a 2 type of question is more around strategy, and more of the big picture here. You've had a couple of different avenues, investing in your domestic mills, which is what you've done.
Yeah.
I think there's also, at least from our side, some speculation about expansion outside of your current Nordic region. Something which hasn't happened so far. The other area is sort of significant downstream expansion towards the direction of some of these ventures that you pointed out.
Yeah.
How do you evaluate these strategic options going forward? What kind of vision do you and perhaps also the board have for the strategy?
Well, as you say, you point out several potential directions, what we've said historically is that, yes, it could be potentially a good idea to move outside of Scandinavia for capacity based on, of course, the closeness to existing or new customer base. We've highlighted potentially going into North America. The reason behind that is both market but also wood basket. So far, the pricing of assets is very high. The multiples people tend to be willing to pay have not been where we want to be. We haven't really done anything due to that reason. Also, there's a lack of potentially interesting assets because what we've said also, we want to stay within Packaging Paper, Consumer Board, or Corrugated Solutions, and that's it. We don't want to go outside of that, of course, that limits the potential scope.
Of course, going forward, that remains to be seen, but that's how we've thought about this so far. When it comes to going downstream, the position that we have is we have a very strong position in liquid packaging, for us, going downstream in liquid packaging is just not possible, obviously. The question is, could we go downstream in Packaging Paper? Well, we're actually looking at it to a small extent, but still, when it comes to sack solutions. When it comes to Corrugated Solutions and Managed Packaging, this is actually what we do. We go downstream, not investing in physical assets, nor in a converting network. We are basically investing in what I just described in Managed Packaging, which is a totally different setup. That's what we've done so far.
The intention is to extract value and not to make investments competing with our customers. Competing with customers so far has been an avenue that we haven't pursued in that sense. That's why we are focusing our solutions, Managed Packaging, sack solutions in Asia. Would we do on a broad scale the same thing in, for example, Europe? It would be more difficult because here we have a different competition when it comes to our customers, basically. We're still looking at possibilities to do that, but we have to be a little bit more cautious in terms of how we do it. That's how we view this going forward.
We intend to continue to invest because basically, as far as I'm concerned, there's for the foreseeable future, not that big of a limit in terms of how much you can grow this type of business. When it comes to evaluating our solutions, basically we're looking at what's the potential value adding in terms of EBITDA in these investments. Of course, we just right now have five investments. Not all of these are as promising, but some of them are very promising, and of course, that's where we're going to continue to invest. When the companies need more capital injection, we'll probably go ahead and do that. While the others we just maintain or perhaps exit after some time.
Just one follow-up. Thank you for that answer. Following these investments, you will have no net pulp exposures. You'll be sort of fully internally supplied with pulp or in balance.
Yeah.
Should that be seen as a sort of a limit to organic growth, that going forward will you be sort of a net buyer of pulp or
Well, to be honest, structurally, I think it makes sense to be in balance. To be slightly long or slightly short on a shorter period could make sense, but I think my view of that would be stay in balance, which means that given the fact that we're looking at a capacity expansion in many areas in the Nordic region, there's going to be most likely higher competition for wood. For us to go ahead and expand in a major way our pulp capacity here probably doesn't make sense. Once we've done these investments, my prediction would be that we're probably looking at another type of expansion outside of the core that we have right now. That's the way we've been thinking all along, basically.
Thank you very much.
Yeah.
Mikael Joffsen, Kepler Cheuvreux. Excuse me. A couple of questions. We've been talking about wood costs and wood pricing. Could you just remind us the size and sort of the importance of the wood cost? Do you have a sensitivity analysis 1% on the wood cost means X on operating profit or something like-
Yeah.
Yes, we do. We have a sensitivity for fiber, but that also includes bought pulp of 1% change is SEK 740 million, which is obviously too high for just the wood cost.
As you already mentioned, all the new projects that will consume pulp, and now we've been living, if I remember correctly, for several years with rather stable wood prices.
Yeah.
The last wood price peak I remember was it around 2006, 2007 with the Russian export stops. How should we think about this new capacity pulp increases? What kind of magnitude should we think about? Is it like the Russian issue back in 2006, or is it substantially smaller?
It's difficult to say. Our objective and our task is to maintain low wood prices and not to argue for the contrary, okay? This is what we will try to do. Again, if you look at the fundamentals, there is increasing demand. We did have a spike in 2006 and 2007, yes, the Russian thing. We also did have somewhat of a spike in 2011. That is, after that has come down. I don't know what we're talking about going forward. The only thing we see is that, yes, there is an increase in demand, and it could have an impact on pricing. That's all we know.
Thank you. Just two housekeeping questions. The financial costs were clearly lower in Q3 versus Q2. Was that just lower interest rates?
Basically, we have more very short-term commercial papers right now. We are guiding for SEK 150 for the year basically, we keep that guidance also for next year, even if we're increasing our loans quite significantly for the future. We see now that we are rolling out a couple of bonds in March, which will make up for the fact that we don't have much interest at all for next year. Approximately SEK 150 also for next year.
Okay. Thank you.
Follow-up on solutions, please. You have several times in the past talked about the challenges of keeping sparkling liquids within Liquid Packaging Board, now you said something about that we will have to work with intermediate products for quite some time. Could you explain that?
How do I say this without saying too much? The thing is to the two components. First of all, it is the structure, the structure has to contain a pressure of 12 bars. Structurally, we have basically a solution. We also need a barrier, in order to keep the liquid, the gases inside, how to apply that barrier into a bottle, that's the challenge. The intermediate product will not to be to apply that into the bottle, but to perhaps insert a barrier or a bag into the bottle. Okay?
What's the bottle made of?
The bottle is fiber.
Okay.
The bag would be bioplastics.
Okay.
Yeah. That's the intention. Now, are we ready and done? No, we're not. This is the intermediate product. Yes.
Got you. Thank you.
Yeah.
Do we have any questions on phone?
Thank you. Ladies and gentlemen, if you do have an audio question for the speakers, please press 01 on your telephone keypad and you will enter the queue. After you are announced, please ask your question. Our first question comes from the line of Martin Melbye from ABG. Please go ahead, Martin. Your line is open.
Yes, good morning. Two questions. First, these price increases that you point towards, can you indicate how much of price increases we have coming in Q4 just based on the price increases you have gotten through already? You had SEK 94 million there in Q3.
Well, I would say that certainly we'll keep the existing prices. We'll probably see for this year, quarter four, probably not so much, maybe 1% or so. The reason is that the biggest opportunity for changing prices is when we come into a new year, a new supply agreement, new price list, et cetera. Most likely, not so much more into quarter four than what we have achieved in quarter three.
Okay.
Yeah.
On Gruvön and these new project costs that you gave out. What about, say, 2019? If you lay out the entire schedule until it's up and running and making its own EBIT. Is this SEK 150 million going to last a couple of years, or is it over next year?
Well, the SEK 150 contains of cost for temporary employees and education that you're not allowed to input as investments. Part of it is also the fact that we need to have a longer stop next year. When we start up the machine, and we will probably have more guidance during next year, what the startup curve will be and what it would look like in 2019.
Yeah, we actually considered to give you some guidance from 2019 now. At the same time, we thought that there's many things going to happen from now and up until 2019, better to give guidance during 2018 for 2019 rather than do it now.
You've also said that this is fully up and running first in, say, 2022, 2023. That's why I'm asking, is this SEK 150 million also realistic for between 2018 and 2022?
It should be. This is operator training primarily, it's also the early shutdown of some machines in Gruvön, that's not going to happen after 2018. It should be more or less that type of cost should be what we're looking at for that project, that's going to happen in 2018, more or less. When it comes to the ramp-up curve, there are various options on what that would be looking like, depending on the product mix in the machine. We're not done there. We have to come back to you, I guess, with that later on.
Lastly, on that whole project, how much of the costs are actually activated and how much is expensed, like this SEK 150 million? I'm thinking this feasibility study, for instance, has that been expensed two years ago, or is it included in the CapEx, for instance?
It's all included in the CapEx. Basically what we give you as the extra numbers, that's the part that is outside of the CapEx.
Excellent. Thank you.
Thank you.
Thank you. Our next question comes from the line of Harri Taittonen from Nordea. Please go ahead, your line is now open.
Thank you. Good morning.
Good morning.
Maybe sort of follow up Martin's question on the pricing and the timing, or the sort of pricing negotiations. I mean, how much of your volumes, roughly, just ballpark, is subject to negotiations at year-end? How much of the volume is sort of fixed on a longer term? Also related to the pricing, what's the situation in the Folding Boxboard side? Or what's your take? There's been at least one supplier communicated price increase sort of publicly. There are some other talk that others are also pushing for Folding Boxboard price increases in Europe. What's your stance on that? Thank you.
Yeah. Starting with the Folding Boxboard, that's correct. We are, of course, trying pretty much to do the same thing. Which is, of course, our term for that is cartonboard within Consumer Board. We will try to implement price increases as well. The magnitude of what we have seen on the market is not that large. We're talking 3%, perhaps 2%-3%. Still, it's a price increase. When it comes to which areas could be subject to price movements or increases in 2018. It looks like in Consumer Board, or sorry, Containerboard is still looking strong. Primarily Fluting, but also to a certain extent, Liner. When it comes to Packaging Paper, basically sack paper as well as MF grades.
I would not predict the same for MG because of our new capacity, both new products on PM7 as well as new volumes from PM10. Exactly where that's going to end up price-wise, don't know. The other is probably subject to some price increases. Again, we're not talking huge increases. Low single digits, that's where we are.
Okay. Thank you.
Yeah.
Just a sort of quick question on the working capital. You mentioned that you will see some sort of a tonnage increase in tying up working capital next year. Would you give an indication of how much, or what working capital assumptions you are using, or would you like us to calculate it?
No, we have the target of 10%, and we've communicated that before. Right now we're below the target due to the fact that we're investing so heavy and have very big payables, of course, to those suppliers. That will continue for quite a period of time, obviously, also for next year.
I guess there would be no reason to think that it's going to change significantly from where we are right now.
No.
No.
Okay. Excellent. Thank you very much.
Yeah. Thank you.
Thank you. Ladies and gentlemen, as a reminder, if you do wish to register for a question, please press 01 on your telephone keypad. Our next question comes from the line of Mikael Doepel from Handelsbanken. Please go ahead, your line is open.
Thank you. Just a couple of questions left from my part. First of all, coming back to the Skärblacka and PM10 there, where you're guiding for 40,000 tons volumes next year. Could you just remind us what kind of utilization rate would that be?
Well, the capacity of the machine is roughly 100,000 tons. To make it simple, of course, it's 40% of total capacity. On the other hand, we're starting it up in February, we have to adjust for that. Maybe it's like 43%, 44% or something like that.
I would guess that you're not EBITDA breakeven at those levels.
Probably not.
Okay. Great. Then just a question on the extra cost that you mentioned relating to Gruvön, both in Q4 this year as well as next year. How will these be divided among the divisions? Will it only show up in some certain division?
Can you repeat the question?
The question was on the extra cost that you mentioned for Gruvön in Q4 due to temporary staff and training. You also had some extra costs in 2018, which you are guiding for SEK 150. The question was that how is this, for example, the SEK 150 divided between the divisions?
Okay. The SEK 150, about approximately, let's say, half of it is for temporary employees, that will be affecting the other unit. We report that on others. That will not be affecting the business areas. The rest will be a longer stop, that will impact all of the business area in the same way that the normal stops do. We will add that to that matrix instead of having it as a one-off item for the future.
Okay. Good. That's clear. Thank you very much.
Thank you.
Thank you very much. As there are no further questions registered, I will hand back to our speakers.
All right. Ladies and gentlemen, thank you very much. Again, this is the last time in this context, so thank you for your patience. Maybe we'll see you at another context. Thanks.