Good morning, everyone. This is Ulf Larsson, CEO of SCA speaking. I'm happy to invite you all to this press conference as SCA has earlier this morning announced that we are going to build a new paper machine for the production of kraftliner in Obbola. The annual production in Obbola will, with this investment, increase from current level of 450,000 tons of kraftliner up to 725,000 tons. This is, of course, in order to meet an increasing demand of renewable packaging materials. The investment amounts to SEK 7.5 billion. With this investment, we will continue to realize our profitable growth strategy consisting of two parts. First, to grow our forest asset, and secondly, to increase the value from each tree. When it comes to the growth of the forest asset, we like to continue to invest in our current forest with intense and silviculture management.
This is, of course, in order to increase growth, and by that, also step by step, increase the harvesting level. We will also continue to acquire forest land when and if we can. When we talk about increasing the value from each tree, we like to grow our pulp business. We also like to expand our kraftliner capacity. These two segments is segments where we can see a healthy long-term growth in demand. We also like to focus on renewable energy as a coming new segment. Last but not least, we will also continue to reduce our exposure to publication paper. When we look at our cash flow-funded growth opportunities, they first and foremost shall contribute to strong industrial return on capital employed.
At the same time, we also like to maintain a healthy balance sheet, and by that, we also like to keep our investment grade rating. Last but not least, all investments have to fit into our integrated value chain. In the staircase that you have in the slide, you can see that we now tick another strategic project when we have taken the decision to go for the kraftliner expansion in Obbola. Östrand and also Munksund are now up and running, and we also know that we will have more than 6.7 terawatt-hours of installed wind power capacity on SCA land in 2021. By that expansion in Obbola is the natural next step for us to take. Before I hand over to Toby for a financial summary of this project, I'd like to give you some investment highlights.
First, we understand the favorable trends drive long-term growth in this business. Here we think about renewable packaging, e-commerce, growing population, a growing middle class, and so on. This investment will also secure our long-term competitiveness. It will be, in fact, the biggest kraftliner machine in the world. By that, we will also strengthen our market leading position, we will improve our cost position, and we will, of course, use best available technology with future development potential. With our project scope, with the parallel startup of the new paper machine, we can get an EBITDA enhancement already from start. This set up will also substantially reduce our risk, both technically, but also in the market.
The investment will also contribute to the transition towards a fossil-free society by replacing plastics with fiber-based renewable materials. We will also replace an 8,000 cubic meter annual consumption of oil with wood pellets from our own production. Finally, this investment will contribute to profitable growth for SCA. Capacity will increase by 275,000 tons. The investment is expected to generate an annual EBITDA improvement of approximately SEK 800 million-SEK 1,000 million after the ramp up. By that, I hand over to Toby.
Thank you, Ulf. I would just show you here some of the key figures of the investment. You can see here on this page, on the left-hand side, the total investment project encompasses SEK 7.5 billion. Of this, you can see that SEK 2.5 billion replaces investments that we would have had to do within the next few years to extend the lifetime of the Obbola mill. If you can say that SEK 5 billion is an optional investment and the SEK 2.5 billion that replaces those necessary reinvestments is non-optional. We have an increase in the capacity of the Obbola mill. You can see, as Ulf mentioned, which goes from 450,000 tons today to 725,000 tons after the investment, so an increase of 275,000 tons.
The EBITDA effect is an increase from today's base level of SEK 0.8 billion-SEK 1 billion per year in terms of EBITDA. This is assuming a trend price going forward of EUR 600 per ton for kraftliner. We expect it to take a three-year time period ramp up to full capacity. Another important aspect here is also that we expect the mill to be profitable during the first year of operation, so that it's profitable from the start. With that, I will hand on to Mats.
Yes. Thank you. As Ulf said here in the introduction, we're investing into a growing market. It's a big market. The total paper and board market is 450 million tons, out of which the containerboard market is 160 million tons globally. If we look into the history of growth and we would look back 15 years, we have seen a very steady growth of 3%. Back in the crisis 2009, there was a dip. What was interesting there was to see how the growth path climbed back directly after. We have been on a continuous growth trend, very stable growth trend over the last 15 years. We see no reason why this trend would change for the coming foreseeable future. We're investing in a growing market. There are many mega trends supporting this growth.
Out of the 160 million tons, the kraftliner, the virgin fiber-based containerboard market, kraftliner, is 35 million tons approximately, out of which Europe is standing for 5 million tons. This is our core market, and it has been important for us in the project to make sure that we have a very competitive cost, quality, and offering position in Europe, where we assume and we are believing that we have the best possible position, a leading position in our core markets with this project. Kraftliner, as it is kind of a niche, but it's still 35 million tons globally, is focusing very much in segments. We are calling it industrial and fresh food segments, where you need the virgin fiber, you need the strong fiber, and you need the clean fiber in the fresh segment.
If you compare that to the total containerboard market where those segments are 25% of the total consumption, you understand that with those segments, our strong fiber from Northern Sweden is excellent to match the demands of the segments. We have a good fit from our fiber base, and we have a good know-how how to meet the needs of those segments. We also believe the underlying growth is very stable, and it's driven mainly by industrial production and consumer spending. That is forming the underlying growth. We are seeing no reason why this underlying growth would change going forward. We are also seeing that there are structural changes that gives opportunities going forward. There are favorable trends supporting kraftliner and containerboard going forward. We're seeing changes in the retail sectors.
E-commerce is taking a larger share of the market, and there is a demand for sustainable and renewable packaging materials. I think this is giving support to a favorable growth trend going forward. If we then look into the project, first and foremost, we are investing into a long-term good business for SCA. The containerboard business in SCA have been providing us with a good cash flow, good profit over the last 30, 40 years. We have a great history here, and we are investing into a good business. The paper machine here is from 1975 and is fully depreciated. Our total containerboard business, we have a sales of around SEK 5.4 billion last 12 months, and we had an EBITDA margin last 12 months of around 35%.
We're investing into a good business where we have a good position, and we are renewing our asset base in order to serve it and being competitive for the next 40 years to come. By doing so, when we are renewing our asset base, we are also able to increase our capacity, as we have heard. I think it's important here to remember that we are not adding a paper machine, we are replacing a paper machine. We have one paper machine today, being the biggest kraftliner machine in Europe, doing 450,000 tons, replacing that with one new doing 725,000 tons. I will show you later on what that means from a relative competitiveness structure. Here you see a slide. More or less explaining the main parts of the investment.
We're building in line, a new paper machine, a new paper machine building, in line with the old paper machine. This is also setting the timeline for the project. This means that we can run the old paper machine all the way up till the start of the new paper machine, and that secures our uninterrupted supply of goods. We will not have a big gap in between stopping the old paper machine and starting up the new paper machine. Of course, with this investment, we have to build a new huge paper machine hall to fit the new one. We're building a new lime kiln. That's where we are going to replace 8,000 cubic meters of oil with wood pellets.
We are improving the water treatment from the mill, and then debottlenecking several parts of the pulp mill, which we sequentially will start up and secure a good project start-up here. All of these start-ups doesn't require long stops either. This is a slide where you, from a model point of view, can see how we are strengthening our market leading position, improving our cost position, and how we're going to use best available technology, but also with future development potential. If you look on the model or the picture to the right there, we have plotted the new kraftliner machines globally since year 2000. They are not many, and most of them have been already, they are existing, but it has also been some announced coming machines. The machine that we are announcing today is coming on the top there.
I would say our investment today is setting a new benchmark in our industry. This is very important because, basically, it's the same fixed cost that we are using independent of the paper machine size here. You could almost make an index of fixed cost to the capacity, but capacity is also indicating the technology and the use of best available technology here. We are quite proud of our ambition level here. We are very confident that we can build that, and we will use some very interesting engineering concepts to achieve our targets here. The project approach that we have taken that is parallels construction of the new paper machine to ensure full production and no gap in cash generation or service to our customers.
The fiber lines, they will be switched to new machines, or we will be running it on the old machine, before we switch over to the new machine. With that, we also get a very short stop. We have a very proven project approach that we are feeling confident with. We have done a very extensive pre-project now to plan for this investment. The project organization is in place, and it's ready to go ahead immediately as of today. We have had good know-how, and I would say recent experience from the Östrand investment, how to run successful projects. We have gone through several bigger projects in Obbola as well. They have been executed with success as well. We are feeling that we have a good project approach to deliver on this investment.
As we have announced, we are expecting our start-up in Q1 2023, and start-up here for us means sellable production. As you can see on this slide also, the volumes that we expect to produce and supply in 2023 is just above the current volume. That's why we can say that we can achieve a profitability during the first year of operation. It takes three years to ramp up to full production, going from a production just above current level till 725,000 tons. Also with this, we have a good plan how to achieve this. Ulf? I think by that we can open up for questions. Please, operator, do we have any questions from the audience?
Thank you, ladies and gentlemen. We will now begin the question-and-answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. That is star one if you wish to ask a question. Your first question comes from the line of Linus Larsson. Your line is open. You may ask your question.
Good morning, and thank you very much for taking my questions. Maybe if I may start with your thinking around returns on this very significant investment and what hurdle rate you set and on what time horizon you expect to meet that hurdle rate, please.
Yeah, I can say, Linus, that you can see we've given an EBITDAR effect, so 0.8 to 1 billion SEK of EBITDAR effect once we've finished the ramp-up. That's assuming we've taken basically a trend price. We've looked at the trend price over the history of kraftliner, and we believe a trend price is EUR 600 per ton for kraftliner as a trend price. Using that trend price, this is the EBITDAR effect that we expect. When it comes to return, you can see the figures here, but basically we expect this to contribute to our industrial return on capital employed, so contribute positively. We don't have a specific hurdle rate, and I think this is the most relevant information of the profit effect. You can see for yourself.
Mm-hmm. I take it when you say it will contribute to your return in your industry, it will quite obviously lower your capital employed in your downstream operations, right?
No, we don't think so.
On what time horizon?
After the ramp-up.
After the ramp-up, yeah.
Okay. On how many years are you depreciating this?
Yeah. By far, the majority of the investment is 20 years.
Okay.
Yeah. You can assume, if you like, over the reinvestments that we would have had to have done, it is SEK 5 billion, that would be an additional SEK 250 in depreciation.
Okay.
Yeah.
Okay. You're counting the hurdle rate on the SEK 5 billion. You're excluding the reinvestment portion of the investment in that calculation you just made.
We're not excluding it, but I think you have to understand that if we weren't to do this investment, we would have had to do the two and a half billion-
to extend the lifetime of the mill. Otherwise, the lifetime of the mill would not be extended.
Right. Also, could you please break down the CapEx first, maybe on a per year? Is it pretty linear time-wise? Then secondly, if you could also break it down, how much is actually the paper machine, how much is in the pulp, and so forth?
We don't have a more detailed breakdown. We expect it to be spread over some four or five years, so over the time of the investment. The cash flow will not come all day one. It will be spread over five years. I think you've seen the kind of spread of the Östrand investment as well. It's spread over time, and a significant portion also comes after we start up because there's commissioning and so on. That's the main part. When it comes to the breakdown, the paper machine and associated building is the largest part of the investment. There are a number of other parts, as Mats mentioned here, with the debottlenecking, the pulp and the lime kiln and so on.
When you make this investment, can you say something around how important it is to reinforce the value of the forest land? How important is that in this investment decision? And also how you expect wood consumption to increase on the back of this?
As we've said, I think we will increase the wood consumption by 0.5 million cubic meters. As we've also said, when it comes to the Östrand investment, we have been a little bit positively surprised about the support that we've got from local forest owners in the region. I think it's well appreciated that we continue to invest in the industry that we have in the northern part of Sweden. By that, we can also buy the absolute main part of the wood from the local market. In the calculation here, we have calculated to import the wood. That's fair to say. As I said, as we already see today in Östrand, we are able to buy the absolute main part from the region.
I can also say that we will side by side with this project, we will start to man up what we have in terms of procurement of wood from small private forest owners in Västerbotten. That process or project has already started.
Great. Thank you very much.
Your next question comes from the line of Oskar Lindström. Your line's open. You may ask your question.
Good morning, gentlemen. I want to ask some more questions on the profitability of the investment, just so that I get all this right. When you say SEK 800 to SEK 1 billion in EBITDA improvement, is that on top of what you're earning already? Or is it for the machine as such?
No, that's on top of what we're earning already.
Right. If I'm comparing the profitability or trying to get a feel for the profitability on the investment, I should be comparing this SEK 800 to SEK 1 billion versus the SEK 5 billion, which is sort of the incremental investment to get a much larger machine than what you have already?
Yeah, I think that's the fair way to look at it. Yes.
Right. Was it a realistic option to just maintain the old machine for SEK two and a half billion? Would that have maintained current sort of earnings capability?
That's the alternative, to extend the lifetime of the current machine, but have no changes in terms of both capacity or cost position.
That would've been SEK two and a half billion. Yeah.
All right, thank you.
Excluding the interrupted EBITDA during the stop.
Yeah.
Right. If I may ask about the CapEx level in absolute terms. Are you prepared to give any kind of guidance for what it would look like, let's say, in the coming two years? To what extent will you be able to put some of this seven and a half billion, replace other projects? What will be the total CapEx level per year?
What's important to state, that we will report this as strategic CapEx, like we did the Östrand project. It will come as strategic CapEx, and then we will have our non-strategic CapEx, which we expect to continue for maintaining the current operations, which is around SEK 1.2 billion per year. That's the level we still expect long-term. It goes up and down year to year, at a normal level of SEK 1.2 billion. This will come as strategic CapEx, and it will be spread out over five years. We haven't got a detailed breakdown on that. We don't have that today, but you can assume it will be spread out over five years.
Okay. We shouldn't expect that you will be able to push down your maintenance CapEx level or your current CapEx level to something below 1.2, but you'll need those 1.2.
That's needed to maintain the current operations. That will remain.
Thank you. Just a final question. One of your peers or competitors recently announced that they would be buying back shares because they felt they didn't have, I guess, equally good opportunities in their industrial operations. Do you compare this investment to buying back your own shares?
I think we look to do what creates the most shareholder value, quite simply, we think this is the best way to create value for our shareholders, and is an attractive investment giving attractive returns. Of course, yeah, we don't exclude, we look at all options.
Right. All right. Thank you.
Your next question comes from the line of Justin Jordan. Your line is open.
Thank you. Good morning, everyone. Clearly you've had a very successful ramp-up so far of the Östrand pulp mill. That gives quite a lot of confidence regarding, I'd say, the team's ability to handle major infrastructure projects such as this. I'm just wondering, just in terms of environmental planning or other sort of planning requirements for this expansion, are there any major outstanding requirements before you can actually commence construction work on site?
No, we have all permissions in place.
Okay. Just with that in mind then, should we think in terms of CapEx for this project actually starting in 2019? When do we actually start thinking about this impacting operating cash flow of the business?
Again, it will be strategic CapEx.
Sorry.
Which we report outside operating cash flow, but it will be very little in 2019.
Okay. It's really from 2020 onwards, and clearly-
Yeah.
Okay. I guess the bulk of the CapEx probably would be in 2022, and maybe some in 2023 post-commissioning.
Yeah, there will be some. Of course, there's a chunk which is post-commissioning as well. It will be spread out, and there will be some post-startup when the commissioning is complete. We've seen that in Östrand as well, where we still have some outstanding, less than 5%, but still following commissioning in Östrand. That's quite normal.
Yep. Okay.
Yeah.
Thank you.
Your next question comes from the line of Martin Melbye. Your line is open.
Yes, good morning. Could you expand on this topic of kraftliner versus testliner? Is the case for kraftliner that you get rid of the product regardless, or is there better margins? Please expand on that topic.
I didn't get the question. Can you repeat the question, please?
Yes. You argue that kraftliner is better than testliner, yet prices tend to move in tandem. If testliner moves down, kraftliner moves down. Can you expand a bit on the greatness of kraftliner versus testliner, please?
We are not claiming that kraftliner is better than testliner. What we are claiming is that kraftliner is different than testliner, and they are partly addressing somewhat different end user segments. It's correct that the kraftliner, testliner pricing over the last, let's say, 15 years, where we have been studying it more carefully, have been following each other, sometimes with a time lag, sometimes very simultaneously. What we have seen during the last years is that the testliner price gap has been expanding, and it has been kept on a historically quite high level. That is correct. They are not totally independent of each other when it comes to pricing.
If you were to expand about the market balance of the two the next couple of years, kraftliner versus testliner?
The market balance of kraftliner, and that just means that we are looking into the operating rates of the mills, are on a more healthy and a better level compared to testliner. That argument would be positive if you believe that the current price gap would be kept on a high level whilst the testliner operating rate is on a little bit worse level, with a little bit more capacity coming on stream. If I would look into that, there are more arguments saying that the kraftliner, testliner pricing would be kept stable, the price gap as it is today. We have falling in the kraftliner sector, when we look into the inventory position, we have seen this year that the inventories has actually gone down 100,000 tons so far, which is a little bit different picture if you look into the testliner market.
Fundamentally, Mats, it's fair to say that we believe in a strong growth in the market for both kraftliner and testliner.
Yes.
I mean.
We see no reason why this underlying growth of 3% globally would change going forward.
Is that 3% different for kraftliner than for testliner?
The kraftliner growth globally has been limited with capacity expansion. When capacity has been coming on the market, the growth has been increased quite significantly. The kraftliner market has been limited with capacity.
Okay. One last question while I have you here. The kraftliner prices, they've dropped like 15, 17% from the peak. Has that stopped now? I see that there's been some commentary about that.
Yes. We are following the index prices, who is a good reflection of our actual prices as well from a trend point of view, and the index prices that we follow, and the most important one, has been stable for the last three months.
Okay. Thank you.
Your next question comes from the line of Barry Dixon. Your line is open. You may ask your question.
Yes. Good morning. It's Barry Dixon from Davy. Two questions, please. Firstly, when you look at the incremental EBITDA on the investment, it would suggest, if I take the midpoint of, say, SEK 0.9 billion, it suggests an incremental EBITDA margin of 50% versus your reported kraftliner margin of 35%. Is it your opinion that this investment will structurally improve the EBITDA margin of your overall kraftliner business closer to 40% from that 35% over time? The second question, and I suppose more theoretical than anything, if you were to build that machine, the new 725,000 machine greenfield, as opposed to using some of the existing infrastructure, how much do you think that would cost you in today's money? Thank you.
Yeah, I'll take the first part of the question, and I think maybe Mats takes the second part on the greenfield. Basically, the investment does two things. We both get the extra volume, we get the extra 275,000 tons, which adds margin. The other effect, which Mats mentioned in the earlier presentation, was around the fixed cost. Broadly speaking, you could say you have the same level of fixed cost, but you increase the capacity significantly on the machine. The fixed cost per ton improves, which improves then not just for the new tons, but also the existing tons. Thereby, if you like, the EBITDA margin on the investment, yeah, is higher as you mentioned and as you saw, which is affecting it, basically, obviously drives up the EBITDA margin of the kraftliner business as a whole. Then for the second part, Mats? Yeah.
Yes. Well, we have not done a pre-project on that alternative building a greenfield, but I think it's very safe to say that it's at least double the amount. That's one way, and then you're on the low end. Another way of looking upon it would be to say it's the Östrand investment plus this investment, then you would come a little bit north of this, or you would take some, I think some competitors are investing in greenfield and paper machines, and you would deduct one paper machine out of that, and you would come to something that I would say roughly in between SEK 16 billion-SEK 18 billion would be my best guess if you would do it greenfield.
Okay. Thank you very much.
If you want to do it safe, say double.
Yes. That includes pulping and captive power.
Yes.
Thank you.
Your next question comes from the line of Robin Santavirta, your line is open.
All right. Thank you very much. You highlight the fact that the current machine and mill is outdated. Still it's 5 years until the new mill machine will be up and running. Is there risk now that we will see some production-related problem, or is it basically increased risks? Do you need some kind of higher investment, there's a CapEx for the current machine to sort of hold up for the next 5 years?
To answer that question, there are always risks in operations like this. I would say we have a strategy of keeping our equipment in good shape. Our starting point before we take this investment decision is that we are starting with a machine that is well-maintained. We are not expecting increased risks on top of the risks that we have today. I think that's the simple question or simple answer to that one. There is always a risk in operating this one.
Okay, thanks. If I just may ask about the fiber blend, will it only be fresh fiber in the kraftliner you will produce in Obbola or any recycle blended in?
No. We have a mixed fiber base today. We will continue with that strategy going forward. That means more recycled fiber base going forward in Obbola. We see that as a strategic flexibility, that we have a flexibility in between the fiber bases here.
Okay. How much is that now? Is it 20% going up to one-third, or could you roughly sort of beat that up for us?
If you're looking into the fiber mix in terms of %, it's also dependent on the product mix. We have not the same fiber mix in % in all products. It's dependent on the product mix. Going forward, when the new machine is fully ramped up, the percentage point of OCC in the same product will go slightly up. Is that?
Okay.
Yeah.
Okay, I see. Given just with quick math, it's quite easy to see that this seems to be quite profitable in terms of EBITDA margin, as you both sort of commented or answered the previous questions. Is that only volume a fixed cost, or is it so that you calculate in something with this mix, something with the new machine, some new end products, end markets, or something else? Is it only more volume, less fixed cost per ton?
Yeah. Robin, it's basically is the volume and the fixed cost per ton. Maybe just to give a little bit more color on that, I think of the EBITDA improvement, you can say roughly two-thirds to three-quarters comes from the increased volume, and maybe 25% or so comes from improved fixed cost per ton. That's what generates the improvement. It's those two factors which drive the improvement.
All right. Thanks. That's clear. Finally, just three years of ramp-up of a brown kraftliner mill to full production seems it's a long time. Again, is this sort of a little bit of a cautious sort of estimate, or is it market-related that you expect three years? It seems like a long time.
It is market-related. We have, of course, followed the startup curves of all types of new paper machines. We have based this on a market-related startup curve. We, of course, hope and plan for better, but this is our basis for the planning and calculation.
Yeah. One important point to add, which we mentioned earlier, but because of the design of the project with the new paper mill parallel to the old paper mill, we expect it to be profitable from the first year. There's not a big stop between the old machine stopping and the new machine starting, which is a good thing in the project design.
Definitely.
Yeah.
Thank you very much.
There are no further question at this time. Please continue, sir.
By that, it's time for us to thank you all for calling in to this press conference, and we are, of course, looking forward to meet and discuss this exciting project further with you coming months. For now, I think we say thank you and goodbye.