Good morning. My name is Björn Lyngfelt. Sincerely welcome to this press conference on SCA's report for the figures for the second quarter. The report will be presented by our President and CEO, Ulf Larsson, and CFO, Toby Lawton. After the presentation, there will be the opportunity to ask questions. Well, Ulf, please.
Thank you for that, Björn. I'm happy to summarize Q2 2019. In Q2, we've been impacted by slightly weaker market conditions during the quarter when we compare with Q1 2019. We've seen a reducing price trend in our product areas, except from kraftliner, where we have seen two consecutive months now without any price movements, and that is, of course, encouraging. We have also, in SCA, been focused on keeping a healthy stock level in all product areas, and I think we've been successful in that perspective, but it might have cost us something short-term in terms of pricing and mix. Long-term, I think it's good to be where we are in terms of stock level.
We had a strong sales growth of 12% during Q2 versus Q2 2018, and versus Q1 2019 we are slightly down, around 3%, and that is mainly due to price and mix. Östrand ramp-up support as well when it comes to growth, and I will come back to that. On the other hand, the divestment of SCA Wood France had a negative effect during the quarter by 2%. EBITDA was up 30% when we compare Q2 2019 with Q2 2018, and mainly due to successful ramp-up of Östrand, and also the fact that we had expansion stop in Q2 2018, which did cost us more than SEK 230 million during that quarter. On the negative side, we've seen lower selling prices and also higher cost for wood. I mentioned Östrand, and as I said, I'm really satisfied when it comes to the ramp-up of Östrand.
We've had another record quarter, with pulp volumes coming from Östrand increasing 22% during Q2 versus Q1 2019. We have also, during the quarter, completed the project in Munksund, aiming to increase the production of white-top kraftliner with 50,000 tonnes. The project has been performed on budget and time, and also, I think, with good timing for replacing volumes in unbleached kraftliner with white-top kraftliner in the market. We have, during the first half of this year, acquired 30,000 hectares of forest land in the Baltics, and we see this area as a natural part of our wood sourcing area, and we are aiming to increase our forest holdings further in this part of the region. We have also, during the quarter, sold our Rotterdam terminal, which did belong to our logistic company during the quarter, and that will reduce our net debt by SEK 575 million.
We then turn into our KPIs, we can see that Q2 2019 has been another strong quarter for SCA, with an EBITDA level of SEK 1.34 billion, that is up 30% in comparison with Q2 2018 and also gives an EBITDA margin of 26% for Q2. When we compare Q2 2019 with Q1 2019, we've lost 5% when we exclude one-time effects in the comparison, considering firstly the positive contribution of SEK 90 million during the Q1 related to the merger between SCA France and Groupe ISB in business area Wood. Secondly, we had a planned maintenance stop that we have performed in Q2, costing us SEK 63 million. All in all, SEK 150 million of the swing between Q1 and Q2 is explained by one-time effects.
Calculated as a rolling average for the last 12 months, we've had a strong industrial return on capital employed of 18% for the period. As you can see to the right-hand side, our EBITDA margin continued on a high level at 26%. I will now continue with some comments on each business segment, starting with the forest. As can be seen in the graph in the bottom left, wood prices have been increasing for many consecutive quarters. In the market just now, we feel that we have reached some kind of peak, and prices has also started to go down in some areas, and not the least when it comes to current price level in our import markets, which is for, in our case, mainly the Baltics.
As you might remember, we always have a longer time lag when it comes to prices in the forest compared with other areas. We have also, due to the start-up of Östrand, seen a higher pulpwood demand, and that increases the sourcing and the sales, but at the same time reduces the margin for forest as the additional volume comes from external sources, but the cost is just transferred to the industry without any margin gain for business area forest. In general, I can say that we have a good balance in our wood supply also this summer. We turn over to wood, and analyze the segment Wood, we can generally see that we have had a rather stable demand in the market, but still declining prices.
The weakest development we see in Europe and also U.K., probably due to the Brexit confusion. On the other hand, Scandinavia, U.S., and Asia are stable to good when it comes to demand. China is also running up again, but we're seeing our substantial volumes from mainly Russia, but also Canada are holding back prices in this region. As I think I mentioned when we did present the Q1 report, we lost around 3% in price between Q4 2018 and Q1 2019, and the prediction at that time was another loss of 3% between Q1 2019 and Q2 2019, and that one also came through. We now have done approximately 75% of the volume for Q3, and we know that prices will come down another 5%-6% during the third quarter. Also, in wood, we've been focused on keeping a healthy stock level, which we also have as we speak.
Sales was down 6% Q2 2019 versus Q2 2018, that was mainly due to the deconsolidation in Wood France, following the merger with Groupe ISB. EBITDA was down 18% due to lower volumes, slightly lower prices. When you look at the left-hand side in the graph, you can see that we more or less are on the same price level Q2 2019 as we had Q2 2018. The main reason for a decline in EBITDA was maybe the higher wood cost, the cost for wood in this business. As you know, 65%, 70% of the cost is related to the wood cost in wood. Due to that, it's also positive for us that we've been able to improve the yield quite substantially during the period, and that will have a positive effect, of course, on our cost level.
We continue with pulp and start with the ramp-up of Östrand. As you can see in the graph, we've had a very strong quarter production-wise. We did increase the production by 22% in Q2 2019 in comparison with Q1 2019. We still have a problem with leakage in pipes belonging to the old part of the recovery boiler. As I said also last quarter, that will be fixed in the planned extensive maintenance stop during week 41 and 42 in the beginning of quarter four. We will, at that point, stand still during 17 days, which is equal to 40,000 tonnes of pulp or SEK 150 million on EBIT level. As mentioned, we are in all areas focused on keeping a healthy stock level. In pulp, that means approximately one month's production in stock. That is also the level that we have just now.
As we have had a strong production in Q2, we've had substantially higher share of overseas volumes during the quarter, which has had a negative impact on our mix in the quarter, as you can see in the graph. Long term, we have a plan, of course, to deliver as much as possible to Europe and also to U.S., short term, we always have to balance the market. In pulp, we have a cautious market with lower prices. As you might remember, we had a price peak in November 2018 on $1,230 per tonne. Step by step, that level has eroded down to the current level of $950 per tonne, and that is equal to $670 per tonne as a net price. When we compare that with China, we can see that the current NBSK net price in China is $570 per tonne.
The delta today is around $100 per tonne. We see attempts in China to increase pulp prices, at the same time, we see a pressure downwards in Europe and U.S., sooner or later, I think these two markets will meet and create a more balanced market situation. Sales has increased 150% Q2 2019 versus Q2 2018. That is due to increased volumes and of course, due to the fact that we had extensive expansion stop in Q2 2018 when we started up the new mill in Östrand. EBITDA increased SEK 456 million in Q2 2019 versus Q2 2018. In Q2 2018, we had expansion stop that was already mentioned, which had a negative EBITDA effect of approximately SEK 235 million. On the other hand, we now see substantially lower prices in the market. Last but not least, a few words about the paper segment.
In kraftliner, we have seen substantial price decrease since the peak in November 2018, and that you can see also in the left-hand graph. For unbleached kraftliner, we have seen a drop of EUR 120 per tonne during this period, and for white-top kraftliner, minus EUR 30 per tonne. Anyway, we have now noticed the stable kraftliner prices two consecutive months. At the same time, as stock levels are reaching a more normalized level similar to what we had in 2018, in fact. In publication paper, the price went up since Q3 2017, as you can see in the graph on the left-hand side. We have a structurally declining market for publication paper, and we know that we will have a decline in prices for Q3 with between 2 and 3 percentage points.
Somewhat more for uncoated grades than for coated, that is a little bit of a difference if you compare with the past. The reason for that is that we see now substantial capacity closures ahead, mainly for coated grades. We are talking about Burgo, more than 400,000 tonnes, Plattling more than 150,000 tonnes. More or less between 10%-15% of the European capacity during the second half of this year. Sales was quite flat, Q2 2019 versus Q2 2018, while EBITDA was down 21%. The main reasons for this are lower kraftliner prices, higher cost for wood, and also higher cost for planned maintenance stops. On the other side, we've seen a positive price development for publication paper. With that, I think I hand over to you, Toby.
Thank you, Ulf. Good morning, everybody. I'll start with the income statement, and here you can see for the second quarter, we had a growth in net sales of 12% versus the second quarter 2018. That 12% is driven primarily by volume, so it's a 17% increase driven by volume, which is also primarily due to the expansion in Östrand, of course. Offset by a 5% decrease in price. That's really what's driving the net sales growth. On EBITDA level, we had an EBITDA of SEK 1.34 billion this quarter, versus last year, of course, as Ulf has already mentioned, we had a maintenance stop or expansion stop in Östrand, which cost some SEK 235 million . That's the main difference between the EBITDA in the two quarters.
If we go a bit further down the income statement, you can see financial items now on SEK 45 million for the quarter. This is higher than last year. Of course, we have the impact of leasing this year, which we didn't have last year. We also had a positive impact last year because we capitalized some of the interest on the capital investment in Östrand last year, which had a positive effect. Profit before tax, we're on just under SEK 900 million for the quarter, some 20%, 21% higher than last year. On the tax line, this quarter, we have the charge of SEK 194 million, which is an effective tax rate of 21%, very close to the Swedish tax rate.
Last year, here we had the significant positive one-off item from the changes in corporate tax rates, and the impact of that on deferred tax, which was SEK 551 million positive on the tax last year. That means that, when it comes to earnings per share, we have SEK 1 per crown of earnings per share, which is lower than the earnings per share last year because of this positive one-off item on tax last year in the second quarter. If I turn to the next slide, the contribution by segment and quarter, starting on the left-hand side with forest. You can see the steady increase in terms of top line net sales in forest, which is, of course, again, driven by the Östrand expansion and supplies into the Östrand mill of additional volumes.
Again, these are not increasing our harvesting level from our own forest, which is where the profit is derived from. The increased volumes are sourced mainly from third parties, which is then passed on at cost to the Östrand mill. The bottom line increase, which you also see a steady increase, is driven mainly by the increased price of wood. That's the main effect. We're not increasing harvesting, as I said. The margin, as Ulf mentioned also, you obviously see the margin go down because, as the top line goes up, and it's not having an impact on bottom line, then the margin goes down. When it comes to the wood segment, you can see the net sales increased slightly versus Q1, but is slightly down versus Q2 last year.
We have to remember we have the effect of the deconsolidation of our French business, which has an effect of around SEK 100 million per quarter in terms of top line. That's come in now in Q2. Q2 is the first quarter where we have that effect full out. On the bottom line, you should remember also in the first quarter, we had the positive impact from the transaction, in France of some SEK 90 million. Beyond that, we have the price of wood raw materials is increasing, which is partly offset by a better yield. Prices are clearly lower now than they were in the first quarter. As Ulf mentioned, we expect some continuation of that as well into the third quarter. When it comes to pulp, of course, the top line is driven by the expansion.
We had a 20% increase in volume in the second quarter versus the first quarter, so quite a significant volume produced and volume delivered impact. Of the increased volumes, basically a large proportion of that was sold to what we call overseas markets, which is mainly Asia, where there is a different price level, and that also means we have a worse mix, you could say, in the second quarter versus the first quarter. We have a significant price impact on the negative side offset by a good positive impact on the volume side. The bottom line is, of course, also impacted, well, both by the improved efficiencies from the high volume, but a significant impact from the price environment. That's why bottom line is slightly down on Q1.
Paper, basically top line, very similar to the first quarter, here you could say publication paper is pretty much flat. Kraftliner, we have improved volumes versus the first quarter, but lower price levels. On the bottom line, we had lower price levels in kraftliner, which have an impact, but also the maintenance stop in Munksund, which we have to remember, which had an impact in the second quarter. We didn't have any maintenance stops in the first quarter. Beyond these segments, I'll just mention here, I think on others as well, which we don't show here, but we have an others line, which for the first half year is on a normal level. We have some SEK 130 million for the first half year.
The share between the first quarter and the second quarter, it was much lower in the first quarter, at SEK 35 million and SEK 95 million in the second quarter. The main reason driving that is we have to provide for the profit in stock, which depends on the internal stock level. That swings. In the first quarter it was a positive effect, and in the second quarter it's a negative effect. That's the main effect in the others line. On the next slide, we come to the net sales bridge. Here, the net sales versus the second quarter last year, we have a minus 5% impact on price. Significant impact here from the pulp and kraftliner segments, especially it's a positive impact when it comes to publication paper.
Volume is, of course, driving the growth in top line and is significant at 17% growth in volume. We have a positive impact from currency 2%, this impact from the deconsolidation in France is -2%. If I just take the same bridge for EBITDA. The impact of the prices, and it's mainly driven by pulp and kraftliner here, is -25%. This is offset by the growth in volume, which is +24%. We have, when it comes to raw material, pretty much flat. We do have higher costs for wood raw material, the wood raw material that we source externally. This is offset by an improved yield. Energy, we have a slightly positive variance on energy, +3%. Currency is positive, +10%.
Other, we have +18%, which again, is this maintenance or expansion stop in Östrand that we had in the second quarter last year. Overall, EBITDA increased from 30% to SEK 1.34 billion, with a margin now in the second quarter of nearly 26%. If I just take the cash flow statement quickly on the right-hand side for the first half year, we had an operating cash surplus of SEK 2.6 billion . We have a change in working capital of SEK -651 million , which is really driven by the volume growth and the expansion. We have current capital expenditures in the first half year of SEK 516 million , which is in line with our expected annual level of around SEK 1.2 billion for the year.
We have a net operating cash flow of just over SEK 1.2 billion in the first half year or SEK 600 million in the quarter. On the next slide, the net debt bridge, just to show how the net debt moves from first quarter to second quarter. We ended the first quarter with net debt on SEK 9,150 million, which included an impact from the leasing change this year of SEK 1.2 billion. Cash flow, as I just mentioned, operating cash flow had a positive effect, reducing net debt of SEK 619 million. We have some strategic CapEx of SEK 156 million. We have the impact of acquisitions as well, which here represents the 20,000 hectares of forest land in the Baltics, which were closed in the second quarter. That's SEK 689 million.
We had a tax payment in the second quarter of SEK 300 million, and then some others of SEK 50, and that gives us the end of the quarter or the end of the half year. We end with our net debt on SEK 9,735 million, which is a net debt to EBITDA on a stable level of 1.6 times EBITDA. If we turn to the balance sheet, I think I won't go through every figure here, but the total capital employed increased from the end of last year at SEK 46 billion, just over SEK 46 billion to now SEK 49 billion. The impact of leasing is quite significant here. The leasing impact of SEK 1.2 billion affects the capital employed and the net debt, and also the expansion in Östrand.
We have the net debt, which increased including the effect of leasing of SEK 1.2 billion from SEK 7 billion to SEK 9.7 billion. That's a net debt to EBITDA ratio of 1.6 times. Net equity at the end of the second quarter is now on SEK 39.3 billion. Then, yeah, a final slide here I'll show too on a review of the forest valuation that we would like to inform that we're initiating now and reviewing the method that we use to value forest land in our balance sheet. It's been clear, I think to some of you and us for some time that the accounting practice that we use and other forest companies use has a significant difference when it comes to the level of market statistics that we also see primarily for smaller transactions.
Recently, in the last half year, it's also become pretty clear that it's not just smaller transactions, that recent larger transactions have also shown a valuation in line or even at a premium to these market statistics. You can see some of the figures on this slide. I won't go through the figures. With that background, we've decided to initiate a review of the method that we use to value the forest land, and we expect to come back in the second half of the year when we've completed that review, to present the findings and the outcome from that review. Okay, with that.
If we try to summarize the second quarter 2019, we can say that we have seen weaker market conditions when we compare with the peak in Q4 2018, but on the other hand, we've seen a stabilized situation now for kraftliner with two consecutive months with unchanged prices, which is encouraging, I think. Sales growth we had at 12% in Q2 2019 versus Q2 2018. EBITDA was up 30% for the same period, that is mainly due to the successful ramp-up of Östrand. Also in Q2 2019, we have seen that the production has increased 22% when we compare with Q1 2019. Still, we have to deal with this leakage in the pipes in the old recovery boiler, but that will be done in the beginning of the fourth quarter. We have increased the production of white-top kraftliner at Munksund.
The project is now finalized on time and budget. We think it's good to increase the share of white-top kraftliner, both long and short term. That will contribute in a positive way to our margin. We have, during the first part of this year, acquired 30,000 hectares of forest land in the Baltics. The ambition is to further increase our presence in these countries. Last but not least, we have sold out the Rotterdam terminal. By that we have also reduced our net debt with SEK 575 million. With that, I think that we can open up the line for questions. Please, operator, if you can help us.
Thank you. Ladies and gentlemen, we will now begin the Q&A session. As a reminder, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request, please press the hash key. Once again, it's star one to ask a question. Our first question comes from the line of Linus Larsson. Please ask your question.
Yes, thank you very much and a good day to everyone. I'd like to ask around the potentially changed forest valuation methods that you are talking about today. It sounds to me that M&A value- a central part of this potentially changed valuation approach. I wonder if you could talk more about that, how you could create a robust and transparent model based on that, given how few institutionally sized transactions there have been with maybe the exception of the recent history.
Yeah, I can say, Linus, without going into detail on the accounting, I think it's been obvious to people for some time that there's a big discrepancy between the market statistics that are out there, which are primarily for smaller transactions, and the book values that we and other forest companies have. The discussion or argument, if you like, has often been, well, the market statistics are for smaller transactions, and we cannot necessarily extrapolate that larger transactions would have the same value. I think that's where, while there's obviously not as many large transactions as small transactions, there have been more activity in the larger transaction area recently, and that's shown that actually the valuation for larger transactions is as good, at least as good, I would say, as for smaller transactions. That argument does not seem to be relevant anymore.
We should think again about how we include then the valuation in our balance sheet. We make, without going into detail on the accounting treatment, there are a number of accounting regulations. We value biological assets in our balance sheet, and we use a number of assumptions, and we can look at if those assumptions are really in line with how the market looks at valuing big assets. I think that's one of the main pieces when it comes to perhaps return requirements, when it comes to views on growth or views on income streams from forest land. We can also look at the land that we have in our balance sheet, where we value the land pretty much at zero, the value it was acquired many years ago. Clearly the land has a value higher than zero.
I think there's a number of different components to this. I think it's in everyone's interest that the value that we have in our balance sheet more closely reflects the value that we reasonably think is the value of that asset.
Now, just also here, just to be perfectly clear, is there a scenario where you would consider any structural real change to your forest ownership, in terms of selling or splitting or spinning or a sale lease back or any of that kind?
No, that's not part of this review or consideration. We're talking about the method used to value the forest in our balance sheet. We're not talking about anything else here.
Okay. May I also just ask on the wood cost side, what you see in terms of market pricing here and now and the trends ahead, and also for you specifically, taking into account your mix aspect of wood sourcing?
Well, as I said, we have now seen in the market that prices is starting to come down, and that goes, of course, mainly for import volumes, but we also see in our local market that prices start to go down. As you know, from the point where you buy wood from a private forest owner until you harvest it can last one year or something like that, as an average. You have a longer time lag when it comes to prices in the forest compared with other areas, that's for sure. We have seen lower prices in the market, no doubt about that now.
When do you expect to see sequentially lower wood costs in your own P&L?
Yeah, I can say, we expect the wood cost to be pretty flat for the second half of the year in our P&L. The time lag, yeah, means that we'll be pretty flat in the second half of the year. We don't expect any effect from these lower prices Ulf mentioned to have any impact in the second half. It'll be more into next year.
Okay. For you as a group, as a net buyer of wood, 2019 is a year of higher wood costs, and 2020 is likely to be a year of lower wood costs?
I think the first part I can agree with. The second part is, I think we're not looking that far forward, obviously with the time lag.
Probably it will be so, yeah, because just now we are buying at a lower price, and that will be harvested during 2020.
Right.
Yeah.
Excellent. Thank you very much.
Thanks.
Thank you. Our next question comes from the line of Robin Santavirta. Please ask your question.
Yes, thank you very much. Could you just remind us of how you have calculated the value of your forest assets before? If I remember correctly, it's a DCF calculations with your view of the cash flow, and then you use a discount rate. Is this still how you have calculated the value until now?
Yes, that's correct. There's a note in our annual report which describes how we do it. Today, because the market statistics are not viewed as, and have not previously been viewed as reliable, it's a fair value calculation using a discounted cash flow based on future harvesting. We take a cost assumption and price assumption, which you can read also in the annual report, but based on an average of historical prices and harvesting costs.
Sure. If you would now, in fact, reevaluate the forest, does that then mean that basically the cash flows that you have been looking at now recently has changed the outlook of the cash flow from the forest has changed or is it the discount rate?
I think what you can say is we can look through the assumptions we use. Cost of capital is one assumption, as I mentioned, which we should closely reflect what we think the market uses for cost of capital. We also have assumptions regarding future growth. We also have assumptions regarding other income streams, which today we don't include, where we have more and more income from things like wind power, and some other items, which are not really a biological asset, so they're not included in any way today. As I say, we also have land underneath the forest, which is not valued at all today. We will come back when we've completed the review, but I think there are many different aspects that we can look at here to basically try and more closely reflect how basically the market looks when valuing these assets.
Sure. Thanks. In terms of the pulp business, how much are you now selling to Asia and how much to Europe? Could you just provide the geographical split and then if you thought about what the target that geographical split is?
A simple answer to that, Robin, is if you flick to slide 10 where you see these volumes, and this is not exactly the sales volumes, but for Q1 and Q2, it's not that far from the sales volumes from Östrand. In Q1, we had very small volumes to Asia. Nearly all the volumes were Europe and North America. The increase between Q1 and Q2 was almost all taken up by overseas or Asian volumes. You could say 40, roughly. We expect over time, we expect the bulk of our volumes, as Ulf mentioned, to be Europe and North America. Short term, the production increase, we've put most of that into Asia.
We always have to balance the market.
All right.
We always have to balance the market short term, and as you saw, the production has gone very well in the second quarter, and maybe a little bit better than we thought. We like also in this market situation to keep an eye on the stock level. That's the reason why we have decided to sell out the volumes and to keep the goal that we have set now to have one month's production in stock, more or less.
Yeah. I t's slide eight in the presentation pack. Apologies, I mentioned wrong. It's slide eight, not slide 10, I'm talking about.
Yeah.
Yeah.
Thanks. You've talked a little bit about what you're seeing in the pulp market at the moment, but did I understand correctly that you two are pushing for price hikes in China and then possibly prices still coming down in Europe?
I mean, as I said, the current price level, if you look at the fixed prices in Europe, we are on $ 950, which is equal to $ 670 when it comes to net price. Current net China price is $ 570. In China, we have seen prices coming up now for a while. As I said, we also see attempts in China to increase pulp prices further. On the other hand, we see a continued pressure downwards in Europe and U.S. We are there exactly as now.
Good. Thanks. That is clear. Finally, if I may ask about the Obbola kraftliner expansion project that you are planning. Could you update us where you stand on that and whether your plans have changed?
Yeah.
When can we expect a decision on that one?
We have now finalized the pre-project, and we've had all the environmental permissions that we need in order to start the project. I believe that we will take a decision now during the autumn.
All right. Thanks. That is clear.
Thank you. Our next question comes from the line of Mikael Doepel. Please ask your question.
Thank you. Good morning, everybody. I would like to come first back to the question about the mix effect in the pulp business. Toby, you said that the increase that we saw from Q1 to Q2, which is roughly 30,000 tonnes or so, more or less goes all into Asia. If you think about Q1, what was the mix then in terms of geographical split in the volumes? Just to get an understanding of the relative volume split there.
You could say Q1 was very little outside the Europe and North America. Really, the difference is the growth in 30 to 40,000 tonnes between Q1 and Q2 is what's going overseas to Asia. So Q1.
Okay.
Yeah.
I guess North America there in Q1 was still fairly marginal or is that not right?
North America, I don't have a figure for that, I would say the price level between Europe and North America is not such a big difference. It's really the Asian business where you have-
I think it was probably better in U.S. in the first quarter than it was in Europe in terms of net price.
Yeah.
We are striving to increase the volume to U.S. We have a distribution-wise and also it's good and efficient, and we also found good customers that do their stump production very well. That is one of our core markets.
Okay. In terms of the effect that this mix change has on your average selling price in the quarter, would you in any way be able to quantify that, how many percentage points negative effect do you get from this mix change? Also looking into, let's say the second half of this year, you mentioned in your presentation that long term, the plan is of course to direct the volumes back to the main markets. Should we expect the second half still to be in a way burdened by this shift in mix right now, or would you expect to see a change in that already in the second half of this year?
It depends, as I said, a little bit on the production. Q2 was really good and it is a continued stable situation in the East, which is of course positive. I've already said that the delta in price between Europe and China, net price is $100 per tonne. I think it's fair to say that we will continue with a larger volume in Asia for a while now if market conditions continue. As it is just now, we have a delta of $100 per tonne between U.S. and Europe and Asia.
Which most people think will reduce as well. I think the impact of the gap will-
Exactly. Prices in China have started to go up again, and I think prices in Europe might come down a little bit.
Yeah. Okay. Just a final question, again, coming back to Obbola, which you already commented on. Based on what the Umeå Municipality is saying, the total investment there would be about SEK 6 billion-SEK 9 billion. Could you confirm that at this stage already, or is it still a moving target for you?
I think it's better you wait and see our figures than trust Umeå Municipality. We will come back to that during the autumn, really.
All right. That's fair. Thank you very much.
Yeah. Thank you.
Thank you. Our next question comes from the line of Gustaf Schwerin. Please ask your question.
Morning. Thanks for taking my questions. Firstly, on your kraftliner of the deliveries in the Q2, which I thought was surprisingly strong, after some quarters of declining volumes now. Is there any sort of internal inventory effect here, or is this mainly related to restocking in the market? Perhaps a few words about how you see volume development for Q3 as well.
Yeah, I think we have a stable demand. As I said, we have seen prices on a stable level now for two consecutive months. As I said, also the stock levels are reaching a more normalized level, similar to what we had in 2018. Just now we feel a good demand in the market for kraftliner, and think that will continue during the autumn. As it is just now, we sell what we produce, more or less. As I said also, we have been very focused on keeping a good stock level in all product areas, not only kraftliner, but also for pulp and solid wood products and so on.
We've been successful in that perspective, and maybe during the second quarter, it might have had some negative effect in terms of price and mix, but long term, with the market conditions that we have just now, I think that is the right position to take just now. I'm pleased with that.
Perfect. Then secondly, a follow-up question on the situation for wood costs. Just in terms of market pricing in the Nordics now, what kind of a price drop are you seeing?
Sorry, what kind of a-
The magnitude of the price drop for wood costs, market pricing in the Nordics at the moment.
Yeah. Depends where you are. For import prices, as I said, there we have in some areas seen prices come down between SEK 100 and SEK 200 per cubic meter. For us, that is a minor part as we are big forest owners on our own. In the region around our industry, we haven't seen any decreases in terms of list prices, but as you know, we are not buying the wood exactly to the list price. We have also buyers out there, talking to small private forest owners, and we see that the practical price level has come down a little bit. We are talking about maybe SEK 30, SEK 40 or something like that, per cubic meter.
Okay. Thank you.
Thank you. Our next question comes from the line of Oskar Lindström. Please ask your question.
Yes. Good morning, gentlemen. Four questions from my side, three about forest revaluation, and the last one about CapEx. Maybe I take the first one about forest revaluation. If you were to increase the book value of your forest lands, I presume that would also impact your gearing. Would you be looking to take on more debt in that case?
No, I think you should not draw that conclusion. I think we're talking about the balance sheet valuation of the forest land.
All right.
I think we're not talking about the financial structure of the company here.
All right. A second question on forest land revaluation is, in your presentation, for example, you compared a number of transaction prices to your book value. Is the relevant book value in your case the one that is including deferred tax or after subtracting deferred tax?
Yeah. That's a debatable question as well. I think we look at it, basically, as the gross value. That's the SEK 136 we have. If you reduce with deferred tax, you actually come to an even lower value. Yeah, arguably, we have a tax effect in our valuation of today in our discounted cash flow. We reduce that value for tax, and then we take a deferred tax as well. I think what we view is basically the benchmarks we put here are the gross value.
Okay.
I think that's how the market values other assets as well is, the market value is more comparable when you look at it compared to the gross value, because then you look at valuing an asset with the income streams and the tax costs that that asset would have, which is what the gross value reflects, in theory. Then you see the different values. I think you know those as well as we do. We think it's relevant to look per cubic meter, is the most relevant indicator. I think some of these values even represent that larger transactions attract capital that's after big transactions, and even in many cases, attract a premium versus the smaller market transactions.
Obviously the big one is the recent sale of Bergvik Öst, which also had long-term supply agreements and so on, which imply basically a rebate versus market because it's not sold unrestricted as the smaller market transactions are. It's sold with considerable restrictions.
Just a follow-up on that. Did that price level for that transaction surprise you, or was it higher than perhaps you had expected?
I think we didn't have any particular predictions, but it certainly didn't surprise us.
Okay. A third question on forest land revaluation, or forests rather. You talk about your ambition to increase forest land ownership in the Baltics. Now, you've bought 30,000 hectares so far. What's the long-term ambition here? To sort of own several hundreds of thousands of hectares in the Baltics? Or is it another 10,000?
Yeah.
What should we be thinking?
We have said that we should increase our presence in the Baltics. We have also said that at least as the first stage, we will reach 100,000 hectares. That is the first target, more or less.
All right.
We're not in hurry, but we think that the Baltics, that is a natural sourcing area for our industry, so we like that, and we also like the growth potential in that area. That's the reason. We have already present there with, let's say, purchasing companies. We already today buy several hundred thousand cubic meters from the Baltics, and that works well, and that's also the reason why we try to buy some land there.
Could you, in the future, imagine owning sawmills or more industrial assets in the Baltics as well to complement a more significant forest land ownership there?
Just now we are looking into buying some forest land, and that's what we're heading for.
Oh, sorry. My final question is on CapEx, actually. Given the weaker general market environment, what's your view on your strategic CapEx going forward? Do you feel that you can still focus on growth with a number of expansion projects, or are you more in the mode of taking down debt further?
We always have to keep an eye on the balance sheet, of course. On the other hand, strategically, we like the projects that we are planning, and sooner or later, we will perform them. It's always a question of timing. Still, for us, it's a very strong result, and we have a strong cash flow, and we don't foresee any catastrophe in the market. As I said, we were on a peak in November 2018. On the other hand, that was more or less all-time high for many product areas. We still have a rather strong market, and we also feel that we have a stable demand out there. We have a more normalized situation just now in comparison to what we had in the end of 2019.
I think just to add something to that, Oskar. We have a healthy, low level of leverage in the company. I think our integrated model means we have a relatively low volatility, even though we are subject, of course, to global market prices, which go up and down as we all know. We can manage that volatility, and we have a pretty conservative level of financing in order to support that. Yeah, we're not worried, if that's
All right.
Yeah.
If I just may ask on the Obbola project, I realize the board hasn't made a decision on it. What are the options? I imagine it's not only either we do nothing or we do a huge project. Are there shades of gray in between there, or what are the main options for the Obbola project?
I think I mentioned that when we did present the Q1 report. One option is just to reinvest, and that will cost us between SEK 2 billion and SEK 3 billion , and that we have to do anyway. The second option is to reinvest and also do some improvements in the old paper machine, and that will add maybe SEK 1 billion or so, but will also increase the volume. The third option is to build a complete new paper machine in parallel to the old one. You have pros and cons with all alternatives, of course, but you have these three options, more or less.
All right. Only do a minor reinvestment could be SEK 1 billion-SEK 2 billion.
The reinvestment will be a little bit over SEK 2 billion anyway.
Okay. I didn't quite hear the first option you highlighted, was a renovation, was that what you mentioned?
That is, yeah, you can call it a renovation. That's what you have to do to just keep up the status you have today.
Extend the lifetime.
Extend the lifetime, exactly. As we do in all industries that we have.
Okay. Yeah, that's great.
Thank you. Those were my questions.
Yeah, thank you.
Thanks, Oskar.
Thank you. Our next question comes from the line of Alexander Berglund. Please ask your question.
Thank you. Good morning. I think most of my questions have been answered. I have two left. First of all, just on the magazine, you're calling a bit weakness in the magazine prices into the third quarter. Just remind us, how much of this is locked in for the whole second half, and how much is just quarterly or monthly contracts? My second question is on your harvesting. It looks like you're a bit above what you did in the first half on your second year and also a bit above your target for the full year. I'm just trying to think if, should we kind of expect, I know a little bit lower kind of EBITDA effect from your own harvesting just in the second half versus the first half. Those were my questions. Thanks.
If we start with the magazine papers, as you said, we see now that we will have a price drop in publication paper in the third quarter in comparison with the first and second quarter, and I said two to three percentage points. Now it is a difference in the market. Now we will see some more for uncoated grades, improved news, newsprint and so on, and somewhat less for coated grades, and for us that means LWC. That is, for us, a little bit better as we produce, let's say two-third of what we produce is LWC and one-third is improved news and things like that. The reason for that is, as I said, that we will now see some substantial capacity closures ahead in coated grades. Otherwise, price-wise, normally we set prices quarterly, I would say. That is the normal pattern.
When it comes to the harvesting volume, I would say that it's more a seasonal effect. We keep the long-term harvesting level in good years and in bad years. Toby, maybe you can comment on that.
Yeah, I can say. Last year we were held back a little bit in the first half, we had a tough winter and a dry summer, which we haven't had this year. Our long-term plan is 4.3 million cubic meters per year, that doesn't mean we're exactly 4.3 million every year. We go up and down. I don't think there'll be a big change between the second half and the first half, in summary.
Okay, thanks. That's very clear. Thank you very much.
Thank you. Our next question comes from the line of Cole Hathorn. Please ask your question.
Good morning. You've always talked about your growing forests binding CO2, and I was just wondering, do you get any benefit in your valuation of your forest or any financial benefit for the binding of CO2 as your forests grow?
No, not really in that perspective. No.
Does that answer your question? Yeah, there's no kind of.
Trading system.
Yeah. For forest land absorbing carbon dioxide.
Is there any debate around that, whether you could potentially get, same as you have carbon credits for other areas of your business, carbon credits for locking in CO2 for your forest, or is that just kind of pie in the sky at the moment?
I think there is some level of debate. We don't see it as something that's going to come in the short term. I think it's becoming more and more a part of the public debate, at least the impact of forest ownership in terms of absorbing carbon. I think it's still some way off in terms of carbon credits or anything like that, even though we'd welcome that debate.
Great. Thank you.
Thank you. Our final question comes from the line of Marco Jarvinen. Please ask your question.
Hi, good afternoon. I still had a few questions. First, to start on the forest valuation, I guess for the biological asset, you can look at your assumptions. What's the mechanism to increase land value?
Well, we're getting into accounting regulation, but there are different ways. You can either value land according to the value it was purchased at, which is what we do today, which is zero, basically, because it was many, many, many years ago. You can also value according to a market value. We can also look at the income streams which are linked to the land but are not linked to the biological assets, which is where you'd categorize, for example, wind power. We get incomes for things like gravel and other things which are linked to land.
Hunting.
Yeah. Without going into the accounting mechanism, you can look at market value. You can take a market value for land and decide to value your land according to market value.
It's sort of a fair valuation, and then you drive that to your book value.
Yeah, you can basically, instead of using the original purchase value, you decide to have a fair value every year of your land, basically. Then how you do that fair value, you can include all these factors.
More accounting questions. If you do a valuation now on your land and your biological asset to your balance sheet value, does that go through your P&L?
Probably not. We have to come back on that. That's really a subject of the review. It would probably be something that would go straight to equity to a large extent, but there may be parts of it which go through the balance sheet. I think our view is that's really not the point, it's not the one-off boost to earnings from the revaluation. It's really about having the correct value in the balance sheet going forward.
Good.
Still on pricing. You said kraftliner is now stable for two months. Is the price still down sequentially in Q3, or how does that work?
We will probably see somewhat decreasing prices in Q3.
Yeah. You see, I think the EUWID and the PPI are stable in basically the last two months, but there is a time lag also in the way that that's implemented in the pricing going Q2 to Q3. We do expect a small decrease due to that time lag coming into Q3.
2% or 3%, maybe.
Yeah.
Okay, good. In wood, did you say pricing will be down 5%-6% in Q3 compared to Q2? I'm just wondering, your EBIT margin in wood was 7% in Q2. Do you think that Q3 is now bottom in pricing, or how does it look?
We don't do forecasts. As I said, we've done 75% of the volume for Q3, and yes, you're right, we will come down 5% in Q3 in comparison with Q2. Still, as I said, it's a rather special situation because you have a rather good demand out there. Stock level is on a good level, more or less, and we see a rather strong market in Scandinavia and also in the U.S. and so on. This is the situation. I think also the market has been a little bit impacted by the spruce beetle disease that has made a lot of low-quality wood available in the central part of Europe, but also in the southern part of Sweden. We are not directly impacted by that, as we don't have that spruce beetle disease in our area.
At the same time, if you add volumes in the market, that will have a secondary effect also on our business for a while.
Okay. The maintenance that you have in Q4 in Östrand, that 40,000 tonnes that you won't sell, is it fair to assume that that's Asian volume that will then be taken out, and that's included in the SEK 150 million estimate?
As I said, it's a question on the market. We try to place as much as we can in Europe and U.S., but if we have a strong production or a bad market, then of course we have to balance the market situation. A big part of it probably should be taken back from Asia, yeah.
I would just point out, Marco, that when we calculate though the impact of maintenance stops, was actually the cost coverage that we include in SEK 115 million. We don't try to estimate which markets and which the volume comes from. It's actually the fixed cost coverage we lose due to the maintenance stop. That's the direct impact, and the direct maintenance costs which go into that SEK 115 million.
Okay. On Obbola, I was just a bit unclear. Is it possible that you run both machines if you go with option three, keep the old one and run the new one as well?
If you take the third option, then at least probably you will have a short stop to connect the new paper machine. It is a big difference in that perspective between option one and option two, I would say, because in these cases you need a rather long maintenance stop or ramp-up stop. If we build a new paper machine, then you can just redirect the pulp, and then it will be a minor stop.
Would you close the old paper machine after starting the new one, or would you keep running both machines?
In that case, we will close the old one. In the startup phase, it will be, let's say, security and insurance, of course. We will keep it for a while, but then we will close it down.
Sure. The Munksund 50,000 tonnes, when do you expect to have that in your mix?
We have it already in the mix. That one is up and running, and it was a very well-performed project. I think we started to see the future share in the production already from day one, more or less. It's up and running now.
Okay. Good. Okay. Those were my questions. Thank you very much.
Thank you.
Thank you. There are no further questions at this time.
Okay. Thank you for all your questions and for the interest you have taken in our report on a hot, sunny summer day like this. Thank you for now. We look forward to hearing from you again at our next report, which will be on the 30th of October. Thank you, and have a pleasant summer.